Can someone explain to me why an investor would want to invest in a foreign debt and currency from a country that has capital controls and a history of undervaluing its currency?
You give someone a billion dollars, and they promise to give you back your billion plus another 210 million three years later.
Probably wouldn't want to put your only billion there, but if you had say 160 billion sitting around, put one there and the other 159 billion in US treasuries you have added 30 basis points of upside to your return at a risk of 29 basis points.
Interesting line re: this from last year's moviee Crazy Rich Asians:
"There is a Hokkien phrase, 'Gar gee nang.'
It means, our own kind of people. And you're not our own kind."
"Because I'm not rich? 'Cause I didn't go to a
British boarding school, or I wasn't born into a wealthy family?"
"You're a foreigner. American. And all Americans think about
is their own happiness.
"Don't you want Nick to be happy?"
"It's an illusion. We understand how to build things that last. Something you know nothing about."
Funny thing is that I feel like it is indeed rare for cultures-countries to think about building things that last. But the US is actually one of the few countries that does---whereas China can't float this level of debt at attractive rates because it is NOT long term focused. It keeps doing insane, credibility-destroying things. Yet always talks about how it is a long term actor.
The PRC is playing a long game with the Belt and Road initiative as well as incrementally building and claiming islands within the South China Sea laying a real claim to the waters there-round. The PRC inroads in Africa are significant. With a minimum of grandstanding China as moved quite far geopolitically over the last decade and more.
China likes to project an aura of inevitability brewing for eons and now thundering forward, but the ruling party is very aware of how tenuous its grip truly is.
The short term economic decisions highlight how much they fear a downturn could upend the party's control.
It was the same thing in the movie. Immediately after that exchange, Rachel explains how she turned down Nick because it would mean cutting him off from his family, at which point Eleanor berates her for turning down a winning hand. For as much as Eleanor talks about the importance of suborning happiness for things that last, Eleanor is just as quick as she accuses the Americans of being of pandering to happiness.
To be fair, it's a Hollywood movie based on a book written by a Chinese author based on his childhood in Singapore. So not entirely without legitimate cultural insight.
It's written for the western audience. And I think you just made my point for me. At best it reflects the rich Chinese people's attitude - since when is HN rampant with small sample generalizations?
> since when is HN rampant with small sample generalizations?
Since always. I can't count the number of generalizations I've seen which begin with "in my experience," for which the poster's experience likely includes a sample of one at least, or half a dozen at most.
And to be perfectly fair, it seems to happen a lot when China or Japan come up.
Given that the UK & USA has a habit of showing up with a Navy when someone refuses to trade (thinking of the perry expedition, the opium wars) I'm left wondering what a good trade actor looks like.
Is your claim that good trade is not possible? I think in the 150 years since your examples there have been many positive examples of trade beneficial to both parties, and hardly any that are harmful, though there should be a handful.
You can look at their neighbor North Korea for a counter example, that has established hostile relations with most other countries and has a juche philosophy that frowns on trade.
> Is your claim that good trade is not possible? I think in the 150 years since your examples there have been many positive examples of trade beneficial to both parties, and hardly any that are harmful, though there should be a handful.
More like 70 years. It was only around WWII that the US kicked the theme of trade-or-death running its foreign policy. The early 20th century has several wars you don't read about in history books where the US basically sends in the marines to topple a government that's antagonizing US commercial interests.
US "interventions" in Honduras, Mexico, Haiti, Cuba, and probably some other countries I'm forgetting. Even the entry in WWI is largely a trade-or-death policy move, as it was predicated in large part on Germany's hostility to American shipping interests.
You're taking a lot of liberty with the term war here :) And in none of your examples was trade even remotely as great a consideration as were strategic regional rivalries between global powers, e.g., Germany in pre-WWII mexico and carribean, the Soviets for the rest of the century...
The United States' entry into WWI had nothing to do with forcing Germany to trade. Literally nothing. I'll let you refresh your own memory regarding events at that time, including Germany's unrestricted submarine attacks on American civilians.
To be fair, the US was smuggling guns and other aid to Germany's enemies, so it makes sense for them to put an end to that. The US was already involved in the war, they just didn't have the full military on the ground, which needed a declaration of war, which the attacks on the transport ships allowed.
But I definitely agree that it has pretty much nothing to do with the OP's point.
Not all of these were hot wars, but the point of overwhelming force is, best case scenario, you don't have to shoot anyone. Hawaii, Panama, Nicaragua, Honduras, Haiti...
Did you know that USA and allies attempted to keep the Tsars in power against the Soviet Revolution of 1918? I didn't until now...
The US/Allies were fine with the March 1917 revolution--the Karenski government kept shooting American/Allied bullets with American/Allied guns against the Germans on the eastern front. The Allies weren't happy with the Bolsheviks making peace with the Germans and then taking those guns and bullets and fighting other Russians with them.
Edit: In fact, the American president was more than pleased that in his request for the US to declare war that, with the "democratic" Karenski government, the war had become Democracy vs Autocratic and it was ok to enter at that point on the side of Democracy.
I think not getting involved is usually the better choice. In hindsight, perhaps we could have prevented the USSR, but that would've required foresight that we didn't have. These days, we seem to make things way worse when we get involved, so we should just not get involved most of the time (beyond restricting trade, that is).
My claim wasn't about trade being good or bad, rather, if an entity working out of self-interest is a good or bad actor.
I'm also not entirely sure the ends justify the means when it comes to threatening war. Having the power to write the constitutions of other countries costs the US economy a pretty penny.
And we often get ourselves into additional conflicts because of that intervention. We basically created Osama bin Laden by funding the Mujahideen (under bin Laden) against the USSR, where he gained a lot of notoriety and power. If we didn't get involved in a proxy war with the USSR by funding terrorist organizations, I think it's likely bin Laden wouldn't have gotten powerful enough to create al-Qaeda.
There are a bunch of other cases where our involvement has made things decidedly worse, to the point where a policy of non-intervention would probably have had a better net result.
The purpose of the US Navy is to keep trade routes open. When countries close their ports we have an absolute conniption.
The entire 20th century was a war between globalization and the self-sufficient dream of communism (I don't know why they couldn't find a happy compromise myself, but alas) -- a fight to keep "trade" flowing -- this often manifests in the west extracting resources from less powerful countries (not saying Soviet Russia never extracted resources from poorer countries)
I don't have all the answers but USA is out for itself just the same as everyone else is.
> The purpose of the US Navy is to keep trade routes open.
That's an important function of every blue-water navy, but it's hardly their sole purpose.
> When countries close their ports we have an absolute conniption.
You're still on this? When has this happened? Please give us even one example that's less than 150 years in the past. Forget the conniption part; can you even point to an example of a country "closing their ports" to all trade?
The U.S. (along with every other powerful nation in history) has a long and storied history of military aggression in service of its own economic good, and American military policy has often been plainly captured by corporate interests.
But the assertion you're making here, based on something that happened two centuries ago, is complete nonsense, and makes light of the ills that actually do afflict American foreign policy.
When countries erect barriers to trade with the U.S., our government's reliable response is... wait for it! ...to erect reciprocal barriers in the form of quotas or tariffs, and then relentlessly work toward free trade agreements, preferably under the auspices of an international trade organization. Is that perhaps what you mean by having a conniption?
I think you’re conflating topics, concepts, and history. I was talking about international trade and macroeconomics - primarily the last 30-50 years. The Churchill quote seems relevant as well but still off topic: “democracy is the worst government except for all the other governments tried through time.” (Paraphrased.)
Every international trade has an associated international currency exchange. China’s manipulated its global position through exchanging more of its currency for USD than the market clearing rate for decades. This had the affect of setting their entire economy on “fire sale” prices, also for decades. They only acknowledge the existence of Chinese IP rights owned by Chinese companies. Etc,etc,...There are books on these topics.
During that timeframe the US government has worked unilaterally and internationally to combat the dotCom bust, the S&L crisis of the 80s, and the Great Recession, amongst other things. A good trade actor has many things, including a relatively stable currency and financial system. The US isn’t some paragon of perfection, but they have done some identifiably good international trade measures.
A possibility is that they believe that country no longer has much to gain from undervaluing its currency as its neighbors are starting to be real competitors in manufacturing, and now they're more interested in building up a consumer class.
On the contrary, the market is signaling that Chinese consumers are reducing their spending, choosing to save even more.
> [These sales] will help finance the deficits without running up a dangerous amount of debt in foreign currency.
That's why they're selling!
The arbitrage, really, is that sales of this nature are very technical and not well understood by consumers. They signal bear market like a yield curve inversion does. But because it's so technical, the average person's confidence isn't impacted the same way that a headline, "China is Hunting for Foreign Buyers of its Empty Apartments" would.
Even though both have similar macroeconomic effects, given enough scale.
Capital controls don't apply, you buy the bonds through HK.
Devaluation is always a risk, in any country. USD can fall too, look at historical USD exchange rates to the world currency basket. Foreign bond investors have to live with that risk; I assume they don't expect a large Yuan devaluation. also see https://www.bloomberg.com/news/articles/2018-11-16/the-world...
"China’s government bonds were among the world’s best performers in 2018, returning 7.7 percent, while U.S. Treasuries earned 0.8 percent, ICE Bank of America Merrill Lynch data show. That gain is in yuan terms, however, and the yuan dropped 5.4 percent against the U.S. dollar."
As I understand it, when goods are trades the opposite sides each accumulates the others foreign currency. They can use this currency to buy things in the other's country, in this case their debt.
Like garbage mortgages? While I'd really like to believe companies will act appropriately for their own long-term success, in reality the people working there look out for themselves and are just a job hop away from a fresh start at a different finance company. I see this in tech all the time where developers at agencies pound out horrible code with no long-term care for what they deliver, just that they meet the request in the here and now.
Any reputable investment firm will have risk management reports. If you don't like your fund pouring significant money into A+ rate bonds of a country with potential headwinds then pull out or sue.
They undervalue their currency by pinning it to the dollar. So investing in RMB is equivalent, in terms of risk, to investing in the USD. And there's plenty of demand for investing in USD.
I wonder if China is seeing any impediments due to people being loathe to invest in a country where personal freedoms are very restricted and millions of their citizens are swept up in re-education camps. I would be hesitant from a personal standpoint but most larger wealth funds are probably not so restricted. By the same token neither are most manufacturers.
Sort of, but that's not why. Modern authoritarian governments, historically, are volatile. The Soviet Union lasted about 75 years, and that's pretty much a record for stability. The PRC is just getting to that age now.
Who's going to buy a 30 year bond from a government that has about even odds of surviving to maturity?
You're right about the level of political risk. But even when there's a revolution or secession, the successor state is still legally liable for the debt. So investors might still get some of their money back.
Maybe, but they'll likely default. Revolutions are messy and often result in a poorer country. How can a country's government repay its debts when the country is rebuilding? Look at post-WW1 as an example of what could happen if they're forced to pay those debts.
Even if they do get their money back, it'll be late. Who wants that kind of risk?
Not only can you not move money out of China if you have some invested there, you can't even leave! => The US government is warning Americans that if they visit China they may not be able to return home https://www.businessinsider.com/us-china-travel-advisory-201...
Which is sort of part of my concern. If you visit to sort out some sort of issue concerning your large bond investment, what is to stop them from just disappearing you. No rights for the citizens generally means no rights for investors or visitors either.
By the time it gets repackaged into derivatives and index funds, who will really know. Investor's aren't amoral, just creating plausible deniability via complexity.
Complexity really is incredibly powerful. With it you can bury unspeakable evils in plain sight.
It has wide applications too: you can obfuscate everything from financial issues to political events. For example, pretend the article of the Charleston white supremacist mass murderer said the following:
"Roof was involved in the controversy of the events of June 17, 2015. After a flurry of media attention, he became the lead defendant in the trial United States v. Roof (2:15-cr-00472), which was noted for the request for a bench trial..."
The above is entirely correct, and written in a neutral, flat tone, but it completely misrepresents the situation. By noting tiny, irrelevant details like the request for a bench trial and the criminal number, the article both becomes uninteresting and hides the truth. If you read the snippet you wouldn't get the idea that he was a mass murderer.
I read something earlier by James Risen about the CIA covering up a number of horrible things. One quote I found very interesting:
"But after I filed the first story, it sat in the Times computer system for days, then weeks, untouched by editors. I asked several editors about the story’s status, but no one knew.
Finally, the story ran, but it was badly cut and buried deep inside the paper. I wrote another one, and the same thing happened. I tried to write more, but I started to get the message. It seemed to me that the Times didn’t want these stories."
They didn't even have to threaten to not publish it - all they had to do was obfuscate it! Throw in a few complex words and kick it off the front page and behold, nobody will read it, even if it contains explosive information.
You can. You can also sell derivatives on something you do own. If you get involved in human trafficking futures, you are still involved in human trafficking because your contacts could be taken to maturity, which means someone will have to provide the humans.
That's pretty much the definition of "complexity hides evil".
Index funds are a bit more direct since you're owning pieces of things you may not like instead of owning a contract that could be converted to something you don't like.
really massive ones probably have a pretty good relation with the host country government/politicians and can rely on state political tools for leverage
Communism isn’t exactly know for prioritizing the rights and well-being of investors. Why would you engage in capitalism with a country that says capitalists should be lined up against the wall and shot?
China's leaders have historically shied away from this policy, so as to protect itself from the whims of foreign investors, and maintain maximum control over its economy. This reversal may point to a crisis beneath the surface, as it's probably not their preferred path...
I'm not sure exactly what you're asking, but there are probably an untold number of factors when analyzing risk on sovereign debt. Probably amongst the forefront would be history of payment on bonds, currency stability, GDP, tax collection, and government stability.
For instance, I wouldnt buy an Argentine bond - they've failed to make bond payments to such an extent they had a warship seized as collateral in a foreign port. Likewise, Greece has had trouble making payments. GDP is poor, and tax evasion rates are high. To boot, because Greece is on the Euro, it cant even devalue its currency to lessen its debt burden.
Of course, this is not in question. It is very typical that bond yields are inversely correlated with risk. Higher the rating, lower yield. Lower rating, higher yield, but increased risk of default.
