China: House Poor Country with a trillion dollars in the bank

US Debt

Chinese Power

As most folks know, China owns a large portion of US Debt.  China is in effect a holder of 1.3 trillion of US Debt.  That is, it owns treasuries.  It holds approximately 20% of all foreign owned US debt, but only about 10% of overall US debt.  That should tell you right away that China’s leverage over the USA is really pretty small.  Not nonexistent, but small. 

Why does China own US Debt?  Well, it’s a good safe investment.  And that’s really pretty much it.  However, while China does have a deliberate policy of buying American treasuries to (so it thought), gain leverage over America, it has now come to realize that “strategic” thinking has been misplaced.

The well known phrase “when you owe the bank so much money, that you in effect own the bank”, comes into play here.   China can only, as it has been doing recently, slowly, very slowly cash in it’s chips and takes it’s money back home.  To sell it’s treasuries too quickly would only hurt China.   (I doubt you very often are able to read that side of the equation in China)

China, having now realized that’s it’s over trillion dollars of investment in the USA is “stuck there” for the time being, has since been buying Gold.  Lots of it.  Lots and lots and lots of Gold.  China is now the worlds  2nd largest hoarder of Gold. 

But it begs the question:  what if China never spent over a trillion dollars to buy US debt? 
What if China had simply kept is money home and used it for domestic use?

One begins to understand for all the wealth China has, it is really nothing more than a “house poor” country.  That is, while owning a nice house itself, the interior is nothing to brag about.  No nice furniture, and with only a threadbare carpet.  For China, appearances are everything.

All of us that have lived in China, spent time there, have wondered over the past decade in particular why China, with so much money stored overseas, has yet to fix some of it’s most basic things at home?

Don’t get me wrong.  China has without question come a long, long way since 改革开放。 In fact, no country  in recorded World History has come so far, so fast, and brought more people out of poverty any quicker than China. 

So should we cut China some slack?

No, we should not.

Not when you have over a trillion dollars in the bank.   And the livelihood of a billion people to worry about.

Mind you, that’s only counting treasuries held by China in the USA.  Not foreign currency  holdings held in England, or Euro holdings in general, or the value of its Gold.  Indeed, in future, one will begin to hear more and more about the importance of China’s Gold Holdings.  It is very strategic in nature. 

Let’s try and understand why China is able to have accumulated so much in foreign currency holdings to begin with.

In it’s most brutal essence, it comes down to Culture. 

The Chinese Culture places a premium on Prestige.  Face.  As such it places a very high value on National Power, on a world stage, at the expense of Individual Power.     

Certain laws are in place to this effect:
Chinese are only allowed to trade within their individual bank accounts $50,000 a year.  (I have a post related to this coming up)   This greatly restricts the ability of the Chinese individual to use his or her money as they wish. 

Want to buy Foreign stocks?  Good Luck.

Want to buy Foreign land?  Sorry.
China, at the expense of the individual and to the advantage of the State, has pretty much made it impossible for the “average”(pay attention here) Chinese to own foreign currency, much less figure out how to invest it.

I am talking about Chinese owned banks, on the Mainland. 

Why do so many Chinese have the money to buy foreign real estate?  Well….should I just say they’ve gotten the money through nefarious means?   Millions of Chinese(remember there are billions of them), have figured out how to get their money squirrelled away into Hong Kong banks.  

And once it gets to Hong Kong, it’s free game.

We once sent a wire to a large Chinese supplier of ours.  It was a large payment in USD.  At the time, we were being invoiced for about 1.5 mln usd per month.    The very first payment we sent our supplier went directly to his Shenzhen bank.   Over 1 million dollars.  Were we breaking a law?  No, we were not.

Was the Chinese supplier breaking a law by having so much money sent to its Chinese account?  

No, it wasn’t. 

So why did our supplier throw such a fit afterwards?  Simple.  As soon as the money hit our suppliers local account, the bank automatically confiscated the funds, switched them out for local Chinese currency, and kept the USD for itself.   Simple as that.

Now our supplier suddenly had a bundle of Chinese rmb it both did not want, and at the time had no use for. 

After that, we always sent our USD payments to it’s Hong Kong account.   Beyond the “reach” if you will, of Beijing.

But what if Beijing just kept the rmb for itself, rather than confiscating the USD?  Really, what use is the USD itself?  You cannot use it all(if it could, why go out of it’s way to buy all those treasuries?)

My point is because China feels it is more important to throw it’s money around on the Global Stage than to continuously take care of its people at home, glaring inconsistencies in how China lives vis a vis it’s “wealth” are all too obvious.   In other words, how China is “house poor”.

Here are a few examples of how China can better spend it’s money, rather than chasing Prestigefor the betterment of it’s own people:

Running water….drinkable tap water

Am I the only one that thinks it strange not to be able to drink the tap water in a 5 star hotel in China? Don’t you know what all that bottled water is for? 

Why China cannot create a reliable infrastructure of safe drinking water is beyond me.  People are forced to drink hot water from a thermos, or buy those big plastic barrels of water that you put on top of a water dispenser.  

The funny thing is I’m sure Chinese themselves don’t realize how strange it is…until they go overseas.  Thus there is no great clamor for such.   If you’ve never had it, it’s never appreciated. 
I don’t know about you, but I think having runnable, drinkable tap water is a basic right for people that clamor for superpower status.

Internet

China’s internet infrastructure is notoriously slow and quite frankly…backward.  Yes, it has gotten better.  But only a year and a half ago I was still stuck on a 2g network.   China could’ve upgraded more quickly, but again, China would rather have it’s own homegrown network, than shell out the investment required to foreign companies.   Backward and insular(are we talking about China?) as it may sound, the bureaucracy….that mysterious unaccountable army of mid level government officals that will make or break China’s future(all of whom have Hong Kong bank accounts) have decided that if it’s being sold by the West, than it must be too expensive.

 (I hate people that think that way.  I’ve come across a few Westerners whose rule of thumb when buying parts that originate from China is to never buy them via another Westerner.  They’d rather buy “direct”.  Alas, to my joy, those shortminded folks are now out of business.)

Fuck it.  Fuck the People, too.  They can continue to wait, and wait they will, until our own organically grown internet infrastructure is in place. 

I bought the “3g” package last year.    This allows me to stop asking for the wi-fi password at restaurants or wherever I am.    And I am here to tell you it is quite frankly a waste of money.  It is dreadfully slow(and cheap…mine only cost 100 rmb a month for 2gb of data….you get what you pay for)

Word has been that China simply does not want it’s citizenry to have fast, easy and convenient access to information.  That it is not a priority.   Yet isn’t this just akin to cutting off your nose to spite your face? China’s lack of an advanced internet infrastructure(and I’m from America, and our internet wifi is Neanderthal) greatly inhibits entrepreneurial zeal. 

Sewage Systems

Even within my “pricey” apartment in Shenzhen(where I paid 7500 rmb a month), our sidewalks were constantly flooded after a hard rain.  Or even a mid size rain.  Why?  There were no sewage systems in place to handle the water.  And there still are not.

I’m not talking about why sidewalks are flat, as opposed to slightly curved to allow for the water flow to the pipeline….there are no pipelines.   Rather, China still has this quirky habit of digging 6 inch trenches with a iron grill on top, for water flow.  And of course the water stays there, and is eventually taken over by rats and everything else. 

An Environmental or Civil Engineer would love this place.

It’s even funnier(sadder?) when China spends all it’s time hacking into Defense Companies for the latest weaponry…..and copies the design of the newest top secret plane.   Why there is no news about China hacking into Western Water Utility companies for the latest environmental designs???
What would it take to simply hire a Western (or even Hong Kong) civil engineering firm to redesign a city’s sewage system?  I think China could afford it.

It’s a bit silly to see a rat scurrying around in front of the entrance to one’s palatial villa don’t you think?

(I could add something here about doing something as simple as putting a dumpster on every corner, but that might by “piling on”….so I won’t)

Quality of Housing

All of us that have lived in China have wondered at the poor quality of housing.  Yes, it has improved. No, it has not improved by very much, unless you live in the cities.  (China’s strategy has always been to improve the lives of Urban China first, and take it’s time with the peasantry) Because of the humidity, it’s far worse in the South.  Mildew is everywhere, along with peeling paint.  But what about the overall quality of housing?

I guess the recent earthquakes in both the USA and China make for a fair comparison.  This one telling event, similar earthquakes of size and very different consequences, did more to impact the ordinary Chinese person’s view of life in America vis a via China than anything else in recent memory.   

It was more powerful than a speech, or a movie or millions of gallons of black ink.  While the comparison was unfair, the perception is everything.  

One had several hundred deaths, the other zero.  The prime factor in the discrepancy of the deaths?  The obviously poor quality of construction of housing in China.    One can argue persuasively that the San Francisco area has some of the most stringent earthquake proof codes on the planet.  Fair enough.  But there are many earthquakes in Southwest China, ok? 

Does China have an organized plan in place to earthquake proof it’s future construction? 


If so, is it enforceable?  

China’s problem is simple:  too many people.  (The Ghost of Mao will never fade).   Too many people means too many buildings to inspect….or to raze.   And that takes time and…..money. 
The next time you hear a government official say China doesn’t have the money, ask him about that 1 trillion USD parked in America. 

China does have the money,  but for strategic and prestige purposes, decided to exchange it for USD, and in the name of  National Power, use it to embarrass foreigners rather than help it’s own people.    China just loves poking America in the eye, and tells everyone that will listen about how much US Debt it owns.   Nevermind that money is stuck in America for generations to come.  

Meanwhile, the specter of poor quality Chinese housing beyond the foreign press enclaves of Beijing and Shanghai will continue to hinder China’s people for the foreseeable future.   China will say nothing is a quick fix, and China will be right.  But it’s a hell of a lot easier to improve upon a situation when the money is readily available.

Tax Systems

What if China simply wanted to continue hoarding gold, and buying foreign debt?  No problem.  But where is the revenue going to come from?   Why not from it’s own people?  If only they paid taxes.

Half of my Chinese friends do not pay tax.  Most of the Chinese entrepreneurs that I know…ditto.  China loses a trillion renminbi in revenue every year because it’s people don’t like paying taxes.   Worse yet they simply have no fear of getting caught.   So few people pay tax that China now uses it as a “catch all” crime when they simply want to get rid of somebody.  I’m thinking sooner or later the Peoples Daily will have a front page article about a foreign company that was lazy enough not to deduct taxes from it’s Chinese employees income.  The thrust of the article will be to hide how hideously inefficient China’s own tax collection system is. 

It seems to me if you want to go on a spending binge that it would first make sense to have a tax collecting infrastructure in place before you start throwing money around.  Having an efficient tax system in place would probably keep a lot of people from simply transferring money overseas with impunity.  And keep the spotlight off the savings the Chinese government keeps overseas.
In America the IRS receives an automatic notice everytime I transfer or receive a wire of $7,000.  My bank in turn has an internal rule of $5000.  That means every wire I receive or I transfer of $5000 triggers a notice to the IRS.   Does China have a similar rule?  I seriously fucking doubt it.  

This is probably one area where China could use a bit more foreign expertise. 

You knew I was gonna talk about the trains.

Fancy trains are nice.  I admit I’ve yet to ride on one, as all I do is cross the border into Shenzhen with my feet.  And I admit China has enough people…more than enough….to fill up it’s new bullet train system.   It’s the newest Pride of the Chinese People.  Until you want to go home for CNY.  Than everyone starts to criticize China’s still lax rail infrastructure.

What the Hell is going on? 

Only a country with no Free Press can spend money as it pleases.  Here is the result when that happens:


China’s Railway Bureau has debt 100 times it’s profit.   Why?  From building all those fancy trains that only upper middle class Chinese can ride.

Why China did not spend all those funds on expanding the infrastructure for the 99% of the Chinese that cannot afford High Speed Railway is….a good question.  But the money it has stashed overseas for a rainy day that will never come could really be put to good use right now.

There’s a lot of stuff I did not bring up.  China’s medical system, and it’s Social Security System. 
All this leads me to believe that China, despite its massive investment in subways, airports, and roads, will remain a “House Poor” Country for a long time still to come.


  

Comments

  1. This is a good summary of the disconnect in public policy in China. However, these days the US is not much better on most of these points; expect the water quality, and housing regulations. There are places in the States were sewer lines have not been replaced in 100 years, and look at the bridges that collapsed (like I-35 in MN a number of years ago). Both countries need to learn from places like Singapore on how to run infrastructure policy.

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  2. Absolutely. My point though is that China, without the need for transparency, or local "hearings" on budgets, really has carte blanche say in how to spend the money as it pleases. Because it is carte blanche, with no Free Press to serve as watchdog, inefficiencies run rampant.

    As for the USA....well pls do not get me started.

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  3. Chinese treasury purchases are better thought of as the inevitable result of their currency policy, rather than savings. To hold down the value of the RMB they needed to purchase USD at unlimited amounts at their target price (otherwise the RMB would be forced to rise). After the purchase (typically from a Chinese exporter), they give the Chinese company printed RMB which they need to borrow from the Chinese market lest it create inflation at home. So far from being a 1 trillion dollar savings account, it's more like a record of the borrowing that they've already done.

    And since their market manipulation was to keep the value of the RMB lower the losses on that currency exchange are already baked into the pie, so if they decided to reverse the trade they'll simply be recognizing losses that they're pretending aren't there now (you may notice a continuation of a theme in the Chinese economy).

    Also they are very limited in what they can spend those dollars on. It's not legal tender in China- try buying your next bowl of noodles with a stack of dollar bills and you get a sense of the problem they have. They need to spend them on USD-denominated assets from willing sellers. Currently the only way to invest in the massive quantities they require is US treasuries. They could theoretically buy mines, real estate or factories, but that's really, really hard at that volume. The Chinese themselves estimate that 80% of their foreign mining deals have failed. And you've seen for yourself how well they target spending at home.

    It's a sticky problem they have- if they stop buying USD assets, their trade surplus would massively contract or go negative. But the surplus is an expensive subsidy policy to the already over-expanded export sector which is a major growth engine in a time when growth is getting harder and harder to come by.

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  4. Yes, Folks, we have very smart readers here at the MyChinaKanfa....

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