What is Plan B if China Dumps its U.S. debt?

With the Chinese President's visit to the White House, some experts have begun wondering if government officials have a Plan B in case Beijing decides to dump its holdings of U.S. treasuries.

From Reuters.com:

China is officially the United States' biggest foreign creditor, with roughly $900 billion in Treasury holdings -- or over $1 trillion with Hong Kong's holdings included.

That means it could do severe damage to U.S. debt markets if it suddenly started selling large amounts.

Most experts say if there were signs of this happening, the U.S. government would go for a combination of persuading Americans to buy more U.S. debt, the same way they did in World War II, and finding friendly foreign governments to make additional purchases.

Banks could be called on to increase their holdings of treasuries, and as a last resort, the Federal Reserve could also be called on to fill the gap, though this could risk turning any dollar weakness into a slump.

"The U.S. government should have and maybe still could call on the people of the U.S. to invest in U.S. debt," said David Walker, a former U.S. comptroller general who heads an advocacy group calling on the government to curb the U.S. budget deficit and borrowings.

To be sure, the idea that China would suddenly sell its U.S. debt holdings is almost unimaginable to some.

After all, any weakening in the U.S. debt markets and the resulting global markets turmoil, including likely weakness in the dollar, would bounce back on China and could hurt its economy badly, especially as the United States is such a huge Chinese export market.

Continue reading at Reuters.com...

Economists Foretell of U.S. Decline, China's Ascension

According to many prominent economists, the short and long term outlook for the U.S. economy isn't looking good. Who do they think will become the next economic super power? China.

Reuters reports:

Leading thinkers in the dismal science speaking at an annual convention offered varying visions of U.S. economic decline, in the short, medium and long term. This year, the recovery may bog down as government stimulus measures dry up.

In the long run, the United States must face up to inevitably being overtaken by China as the world's largest economy. And it may have missed a chance to rein in its largest financial institutions, many of whom remain too big to fail and are getting bigger.

On the one hand, Harvard's Martin Feldstein said he believes the outlook for U.S. economic growth in 2011 is less sanguine than many believe.

First, the boost to growth from government spending will be drying up this year, he said. Renewal of expiring tax cuts is no more than a decision not to raise taxes, and the impact of one-year payroll tax cut is likely modest, he said.

"There's really not much help coming from fiscal policy in the year ahead," he said. Woes from the dire situations of state and local governments may actually be a drag on growth, he said.

Read more here

China Raises US Debt holdings as Others Offload

While other countries are dropping US debt holdings like a hot potato, China and Japan are buying them up. Beijing increased its US holdings to almost $884 billion. Is it time to start learning Mandarin yet?

From Yahoo News:

The United States' top creditor China increased its stockpile of American debt in September, official figures showed on Tuesday, even as other nations slashed their holdings.

Both China and Japan bucked the trend of foreign investors cutting their exposure of US assets.

Overall holdings -- known as net long-term capital inflows in financial jargon -- fell 37 percent from elevated levels in August.

Amid political sensitivities over the level of US bonds held by Beijing, the emerging market giant -- excluding Hong Kong -- increased its holdings by 1.7 percent to nearly 884 billion dollars.

Japan meanwhile raised its Treasury holdings to 865 billion dollars, a more than three percent increase.

"The strong interest in Treasury bonds and notes points to a still-high level of risk aversion in global financial markets," said Tu Packard of Moody's Analytics.

GM's Auto Sales in China Top US for First Time

From CNBC.com:

General Motors' first-half sales in China, the world's biggest auto market, exceeded sales in its home U.S. market for the first time, according to data released on Friday.

GM's China auto sales jumped 48.5 percent to 1.21 million units in January through June, compared with the 1.08 million light vehicles it delivered in the U.S. over the same period, company data showed.

China overtook the U.S. as the world's top auto market in 2009, helped by government incentives and a 4 trillion yuan ($590 billion) economic stimulus package.

GM's June China auto sales rose 23.2 percent to 176,486 units.

Sales of Shanghai GM, the Detroit automaker's flagship car venture with SAIC Motor, came to 71,782 units, up 18.9 percent on a year earlier.

Google or China—Who Has More to Lose?

On Monday, Google closed its Internet search service in China and redirected users to its uncensored search engine in Hong Kong.

In an article I adapted from the New York Times today, “Behind the Free-Market Veneer (Google or China—Who Has More to Lose?)” it asks the questions, “Should Google take a harder stance and withdraw from China completely? Should multinationals like Google play a greater role in challenging China’s policies?” The article reads, "Google’s showdown with China is over censorship and now leaves the company with few choices". But did we really think it would be any different?

Ai Weiwei is an artist and political activist based in Beijing feels Google has set a different example. It has shown that it values decency and integrity, even when that means standing up to the Chinese government. The Chinese government has always been arrogant in dealing with protests of any kind when it comes to censorship or judicial reform. Google’s departure now teaches millions of people how much is at stake. What the Chinese government doing is suicidal.

Oded Shenkar is the Ford Motor Company Chair in Global Business Management and professor of management and human resources at the Fisher College of Business at Ohio State University. He is the author of “The Chinese Century.” Whether Google should take a harder stance is not really up to Google anymore. The company might have thought it could continue to have a presence in the search business in China from Hong Kong and elsewhere and keep other businesses like online ads sales and operating system/smartphone programs, but China does not work like that.

To an extent, this is a government-to-government dispute, since the U.S. is holding the flag of Internet freedom and has a stake in ensuring that American firms, particularly those in a field where the U.S. has a competitive advantage, are allowed to compete in a major foreign market.

See the full article here.

China's Sovereign Wealth Fund to Buy U.S. Mortgages

From MarketWatch.com:

China's $200 billion sovereign wealth fund, China Investment Corp., is preparing to invest up to $2 billion in U.S. mortgage securities under the U.S. Treasury-backed Public-Private Investment Plan (PPIP), according to a media report Monday.

The Beijing-based fund, which is funded by cash from China's foreign exchange reserves, is in talks with at least a dozen PPIP managers and sub advisors, according to a Reuter's report, which cited sources it did not identify.

The report said CIC has yet to select any companies but is likely to finalize a decision before the end of August.

China Investment Corp. was eager to participate in real estate securities because it believes the U.S. property market will start to recover later this year in a gradual fashion, the repots cited its sources as saying.

Will Obama Raise Fuel Taxes?

From the Guardian:

China's decision on Friday to link domestic fuel prices to the international price of crude oil, but increase consumption taxes on gasoline and diesel sharply to spur more efficient use of energy in the medium term, raises the question whether the incoming Obama administration might be tempted to do the same.

China is taking advantage of a cyclical pull back in energy to push through a permanent structural increase in taxes and prices. The aim is to combine a short-term boost to the economy with longer-term and more consistent incentives for improving energy efficiency.

By consolidating a series of tolls and administrative charges into a single, easy to collect consumption tax, the government is simplifying the tax system, creating a new source of revenue, and ensuring the change will have no impact on the politically sensitive inflation rate.

More importantly, it creates a fairly simple mechanism for raising energy costs further in future to spur additional efficiency gains, irrespective of cyclical changes in the crude oil price.

Once short-term economic weakness is past, the government can easily raise the consumption tax progressively over the next few years.

In effect, the tax breaks the link between the government's energy efficiency program and short-term oil-market movements.

Next Big Thing for Major League Baseball: China

According to this article, Major League Baseball has billions of reasons to play ball with China, and its international business chief says the sport's owners are ready to pitch. MLB is hoping to increase efforts to expand Chinese interest in Baseball, similarly to how the NBA courted the Chinese market nearly 20 years ago. Nowadays, the NBA Chinese affiliate accounts for over $2.3 billion of revenue.
"Whether you're a sport, consumer product or any other business, everyone is now interested in China to grow," claims MLB's international senior vice president Paul Archey, who is set to visit Beijing on Wednesday.