Thursday, March 31, 2016

[3rd_CB] Are we experiencing global financial power redistribution from U.S. to China?

One of major global financial issue was establishment of AIIB (Asian Infrastructure Investment Bank) under China's leadership. Many economists offer their thoughts that China starts to show its power towards global economy as one of two largest economy countries. The reporter at Reuters claimed that "Chinese President Xi Jinping launched a new international development bank seen as a rival to the U.S.-led World Bank at a lavish ceremony on Saturday, as Beijing seeks to change the unwritten rules of global development finance." For further reading, please refer to the following link (http://goo.gl/UH4dvB).

China reveals its influence in U.S. securities market. According to CNN.com (http://goo.gl/bBBzI4), last year "China owned $1.3 trillion of U.S. Treasuries as of June, making it the biggest holder of U.S. debt". The article said that "China is not trying to sink U.S. economy". However, it sounds to me that China has abilities to shake U.S. economy, if they want. One obvious thing is that China can also put the United States in difficult situation. China can raise borrowing costs of U.S. If the U.S. national debts increase with current rate of speed in the future, China's small movement towards raising borrowing costs would be detrimental to U.S. economy. Possibly, such movement may cause the crash of U.S. securities/bonds market that Robert Shiller estimates in a different context.


What do you think about current amount of U.S government securities/bond? Do you expect China will take over the U.S. title of the biggest economical power? Are we experiencing global financial power redistribution from U.S. to China? Do you see AIIB as a first step of China to move towards the largest economic power? What is your thought about China's financial influence towards the United States? What should the U.S. government do? Please feel free to share your thoughts and other sources.

7 comments:

  1. The U.S. does not have much to fear, in fact, it should embrace the AIIB. Yes, China has a poor track record in loaning money, but the AIIB has many checks in place to make sure that there is no sloppy loaning. I think that the U.S. fears losing its status as the financial hub of the world, which it holds only because it just so happened to own the most gold after WWII. Dozens or countries hold U.S. dollars as reserve currency and unless the AIIB can disrupt the Bretton Woods system, it is unlikely that the U.S. will lose any economic influence. China holds a lot of our debt, however so does Japan and let us not forget that the public holds the most. China and other debt holders are hesitant to do anything to destabilize the U.S. financial system because it would jeopardize their own investments. U.S. bonds are regarded as the most stable securities in the world, and the AIIB does not have the potential at this point to change this.

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  2. I am not sure about the long term outlook of China selling off its U.S. debt. But it appears from the article that I have read that there has not really been any effect in the short term. Compared to the ultra-low or negative interest rates of other large economies such as Germany and Japan, the demand for U.S. debt is still relatively healthy.

    Link: http://money.cnn.com/2015/09/10/investing/china-dumping-us-debt/

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  3. China actually started selling off its US debt last year. But the "safe haven" status of the US meant that others bought the debt readily. As long as the US is the safest investment home, albeit at lower interest rates than many other places, we should be okay.
    Link: http://www.bloomberg.com/news/articles/2015-03-13/central-banks-sell-treasuries-as-everyone-else-buys-u-s-debt

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  4. I'm inclined to agree with Anthony's last point. Even if China could crash the securities/bonds market, they wouldn't want to. Yes they hold a lot of our debt, but they have so much invested in the US economy and financial system that it would likely be just as detrimental to their own economy for them to do so. They say the tide raises all ships. When the US economy does well, Americans have more money to spend on Chinese goods.

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    1. I also agree with Lucas particularly his last point, why would China want to hurt the U.S economy, and is there any incentive for them to truly do so? Other than possibly gaining the title "The most powerful economy in the World", I am unsure what else the Chinese would gain by crashing the market. Most of the economies in the world are dependent on the U.S economy and the Chinese market is no different. As seen as recently as the financial crisis in 2008, if the U.S market suffers, it will have far reaching effects on many international markets, due to the presence and power of the U.S dollar.

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    2. I agree with Lucas as well. China is currently experiencing their own problems with the closing of the stock market earlier this year. Investors are still cautious about China and their future is unknown. I can see how China would want to go to unique measures to bring their economy back up since they are the second largest economy in the world. However, the world is so interconnected that if the bonds market in the United States does crash, China will take a hit, hurting their economy in a different way. This would not be beneficial for anyone and is not worth the title of "largest economy in the world"

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  5. Building off of Lucas and Anthony, I believe it's fair to assume that given the fragile state of the global economy, any major market crash whether it be in the US, China or Europe would have distastrous consequences around the world. Although China's economy is slowing down, it continues to grow to levels that rival the US and the EU. It's difficult to tell how economic power will shift. A few years ago economists predicted China would overtake the US in nominal GDP by 2020, now it's 2028. Obviously, China and Japan are very different nations in most every aspect, but this is looking very similar to the 1980's.

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