China Crisis Watch (2)

Image via WikipediaWhere is the money, especially Americans wonder when they look at the US$ 1.8 trillion in foreign reserves China has been saving from its trade deficit with the rest of the world and especially the US. Why is China not spending that money, to save the world and its financial institutions, some ask.
Well, one of the reasons China does not spend that money is because it has already spent that money, on the US economy to be precise and mainly on government bonds. It might be news for many US credit addicts, but you can only spend your money once.
Most of China's money is already invested and although it has been taking on more risky investments than US bonds, those investments have not yielded a huge return to put it midly. But even if China is not sitting like an uncle Scrooge on a huge pile of money, there is still new money coming in. Unless you would expect the export to come to a complete standstill, most early signs show a downward trend, but certainly no standstill of China's export. So, what can it do?
Spending more on US bonds, despite all verbal and written guarantees, does not seem the way to continue.
China does not seem to be in the mood to join any kind of fire-sale of financial institution, nor has it the regulatory climate that would allow its banks and insurance companies to do so. So, China has a problem, but it seems like a luxury problem. What to do with its money? A better health care system, better education, a better environment would be some solid investments that would return more money than US bonds. But that would mean a very different approach of the very conservative uncles Scrooge's in Beijing.

Links
Bloomberg: China's Trade Surplus Widens to Record $29.3 Billion
Bloomberg: China to Double Rural Incomes to Boost Consumption
Time: Can Chinese Cash Save the World's Banks?
The Age: Communists hope China will ride out global crisis
Caijing: AIA for Sale, Chinese Investors Are Interested

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