Twofish's Blog

January 21, 2009

Thinking bad thoughts

Filed under: china, finance — twofish @ 10:26 am

I think that much of the capital flows are due to “pull” rather than “push.” It’s not that people in China are trying to convert RMB to dollars (i.e. capital flight), but rather Western banks are trying to gather every penny that they can find, and if they can find a way of pulling dollars out of China, they are.

The other thing is that any sort of sustained economic slowdown in China could lead to a political crisis, and I haven’t seen anyone publicly think through how a political crisis in China would affect the world economy (most likely because thinking about this is too depressing and scary). The last major political crisis in China was in 1989 when it had nowhere the world impact that it does now. I can think of situations in which political crisis -> Chinese government crackdown -> US human rights reaction -> China dumps Treasuries to sink US economy. There are a lot of outcomes for a political crisis, but I can’t think of any scenarios in which a political or economic crisis in China would cause China to buy more Treasuries or be good for the world economy.

Some other things that can be done:

1) I think that the situation is much too fluid to say whether Chinese purchases of Treasuries will go up or down. It may be more productive to just list the factors that influence that decision so that you have a framework for seeing what happens as things evolve.

2) The other thing to do is start at the end. What is the “very bad thing” that you are afraid of happening, and then work backwards to see how you get to that very bad thing.

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