By David Kestenbaum

Forbes' Gady Epstein writes in his latest dispatch from China about a lawsuit over an investment buyers now call "I-Kill-You-Later." Check the article for the details, but it was basically a complicated derivative with a particularly harsh provision that kicks in if things went bad, which they did.

Sellers pitched the investments as "accumulators," for what they would earn in good times.

"In Hong Kong, where most of the selling takes place, regulators estimated there were $23 billion in still outstanding accumulator positions in April of last year; add in leverage, and the real amount at risk was much higher."

Epstein writes that Citigroup and Goldman Sachs were among the banks selling these things.

At least the economy over there seems to be recovering. Or maybe not. Epstein writes that even some top officials worry they're just re-inflating the bubble.

By Laura Conaway

U.S. Treasury Secretary Tim Geithner just unveiled the results of the Stategic and Economic Dialogue with China. The prepared statement includes commitments to shoring up global financial institutions and regulations and allowing more foreign investment in China. Geithner also writes:

"In the United States, the current account has fallen and private savings rates have risen to historical average levels, and we will take steps to sustain and reinforce these trends.

"...

"China will rebalance towards domestic demand-led growth and increase the share of consumption in GDP."

Translation: China will get its citizens to spend more, and the U.S. will try to close the trade gap and get its citizens to save more. An accompanying fact sheet says China will loosen wallets through measures like "strengthening the social safety net."

Foreign wealth, in U.S. billions, parked at the Federal Reserve. (Brown Brothers Harriman)

By Laura Conaway

China's President Hu Jintao and U.S. President Obama are meeting today and tomorrow for another Strategic and Economic Dialogue. In his opening remarks to the press this morning, Obama addressed the trade gap between the two nations, saying, "[A]s Americans save more and Chinese are able to spend more, we can put growth on a more sustainable foundation -- because just as China has benefited from substantial investment and profitable exports, China can also be an enormous market for American goods."

What Obama didn't get into just then is Washington's continued charge that Beijing manipulates its currency, letting the yuan stay weaker than the dollar so Americans will continue to buy Chinese goods.

Much has been made of China's lending to the U.S. -- the poor nation lends the richer one money by buying its U.S. Treasury bonds and agency bonds from Fannie Mae and Freddie Mac. China funded the American consumer boom, and it's using the proceeds to industrialize its own economy. At the current pace, economist Brad Setser estimates that China's holdings of U.S. Treasurys should top $1 trillion in about a year.

After the jump, charts!

Continue reading "China Keeps Piling Up U.S. Dollars" >

The National Bureau of Statistics of China says the country is on track to hit 8 percent GDP growth this year. According to the NBS, the economy grew by 7.9 percent in the second quarter of this year compared to the same time last year. The year over year increase is 7.1 percent.

The government credits the growth to a number of factors including increased industrial production, higher incomes among urban and rural residents and improved retail sales. Retail sales reportedly increased by 15 percent in the first six months of the year, thanks to government incentives like rebates.

Continue reading "China Reports GDP Growth Up Near 8 Percent " >

Where growth still = recession. Brown Brothers Harriman

 

This is what counts for a recession in China: an economy growing at only six percent. In the U.S., financial types are warning of a recovery in which gross domestic product tracks upward at just 2 percent, compared to the old norm of 3 percent.

But for China, which remains at once a poor nation and a trillion-dollar creditor for the U.S., growing at a quite high rate is the only way to provide jobs and a decent standard of living for all its citizens.

China has signaled that it intends to pull out of its slump in part by supporting its export sector. Key to that is keeping the yuan weak against the dollar, so Chinese goods remain attractive for consumers. China's State Council is welcoming a visiting Treasury Secretary Tim Geithner this week with news that it intends to keep the yuan "basically stable."

"In other words, China is warning Geithner not to make a big stink about the exchange rate when he comes," Thin says. "And to serve notice, China tweaked the exchange rate weaker this week."

Click to enlarge. Brad Setser/Council on Foreign Relations

 

Remember when Chinese Premier Wen Jiabao warned the U.S. to be careful with his country's investments in America?

As you can see from Brad Setser's rough chart, the U.S. is paying an increasing amount of interest to China. That's because China has loaned more than $1 trillion to the American economy in the form of Treasury bills and Fannie Mae and Freddie Mac bonds.

But, just as Wen worried, the overall rate of return is falling. The U.S. is paying less interest on the dollars it's borrowing. That's a result of the U.S. decision to lower the benchmark interest rate nearly to zero. It's supposed to get the economy going, but it also unnerves players like China with the prospect of inflation. China has been worried that its dollars won't buy as much when the U.S. pays it back; now Chinese leaders can worry about falling returns, too -- but as Setser argues, that's the risk they took.

Source: Brown Brothers Harriman

 

The U.S. Treasury today posted its latest figures on China's holdings of American government debt. Those holdings went up again in February, by not quite $5 billion.

And as you can see from the chart after the jump, China's overall foreign reserves -- meaning the assets it holds from other countries, whether in the form of cash or bonds -- have stopped growing nearly as fast as it once did. The New York Times' Keith Bradsher reported this week that in the first quarter of 2009, the reserves rose by $7.7 billion, compared with a "record increase of $153.9 billion in the same quarter last year."

Here's the rub: The Times also reported that the Chinese government "sold bonds heavily in January and February before resuming purchases in March." The idea that China would suddenly sell off its U.S. bonds has been a nightmare scenario, one with catastrophic implications for both nations. The currency folks at Brown Brothers Harriman have fired off a couple of notes this week refuting that Times article.

Continue reading "Chart War: China's U.S. Holdings" >

Also, while we're talking about China, take a look at this from the New York Times: "In Downturn, China Sees Path to Growth." The Times reports:

The country is using its nearly $600 billion economic stimulus package to make its companies better able to compete in markets at home and abroad, to retrain migrant workers on an immense scale and to rapidly expand subsidies for research and development.

Continue reading "An 'Even Stronger' China" >

Watch that dollar: Chinese Premier Wen Jiabao Feng Li/Getty Images

 

Here's what Chinese Premier Wen Jiabao said at a Beijing press conference today:

"We have lent a huge amount of money to the United States. I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China's assets."

Here's what China expert Brad Setser, an economist with the Council on Foreign Relations, tells us he heard:

"China is starting to think like a creditor, and it is starting to care about the long-run value of all the money that it has lent to the U.S."

Continue reading "What's Wen Jiabao Saying?" >

Growing, but more slowly.

NPR

 

Today's Planet Money indicator is 9. That's the percentage rate of growth in the Chinese economy last year, down from 13 percent in 2007. Nine percent may sound like boom times, but you have to remember two things: First, the Chinese population is large and poor and needs every new job it can get. Second, by some estimates, every percentage-point drop in China means 2 million jobs lost.

The real-world indicator of this comes from James Hervold, who works in Beijing. He writes:

I'll note the recession is hitting us here too. My company had moved into a new building shortly after it was built in May -- we were the 2nd office on our floor to move in. After some months, by the end of summer, it became quite frustrating to use the elevators -- we are on the 9th floor and routinely used the stairs to exit the building. By November, enough offices had closed down and moved out that this was/is no longer a problem.

Win Thin/Brown Brothers Harriman

 

Over the months at Planet Money, we've talked about the role China has played in fueling the consumption boom in the United States. China has been a key investor in the U.S. economy, holding something like $1 trillion in American debt. More recently, economists have worried that China would redirect its considerable financial might inward, choosing to boost its own slowing economy directly rather than help fund President-elect Barack Obama's stimulus plan. That stimulus plan depends on deficit spending, and that borrowed money has to come from somewhere.

This morning Win Thin, a currency analyst at Brown Brothers Harriman, presents a slightly different view. Thin sends the chart above, and writes: "China's purchases of US Treasury bonds may in fact be slowing. However, this is a much different story than recent media stories that suggest China may be shunning dollar instruments altogether. That is simply not true."

I'll drop the full, and somewhat technical, note after the jump.

Continue reading "Another View Of China" >

Got this from a Chinese Facebook pal:

These days are really frustrating for our graduating students in China; though we're busy delivering our CVs, the response is sort of like "a stone dropped in the sea". Literally fewer job are provided than the past few years, and particularly the application for Big 4 auditors, which is usually considered as a pretty choice for new grads, is becoming even harder.

Continue reading "Like Stones In The Sea" >

By Kohei Nawa, on display at Pekin Fine Arts in Beijing

 

I just got back from a week in China, and have I ever got tape for you. For now, let me just say that the weirdest day I spent ended with this taxidermy rooster. The artist who made it, Kohei Nawa, wants us to consider and reconsider what we think is real -- for me, a perfect metaphor for the planet's rapidly changing economy.

More on the rooster later, I promise.

Also, I've thrown a few photos from the trip into the Planet Money Flickr pool. Come play. We need your pictures of this economy, in all the ways you see it.

I'm off to China today. Just this second I'm sitting in the Newark airport with 400 renminbi and a bite-sized Kit Kat in my pocket. The old greenback's not buying what it used to -- until just lately, a dollar got you seven or eight RMB. Just now, I got more like five RMB and change.

Also, I stopped in at the airport bookstore to buy little gifts for my hosts. I was hoping to get a few small I [Heart] New York pins, but they were all made in China and schlepping them back just seemed too absurd.

Gotta run. They're lining up to board.

NPR's Louisa Lim checks in from Shanghai with this invaluable report: "Economic Slowdown Hits Chinese Industry Hard." One manufacturer tells her that everything now costs more, but he hasn't been able to raise prices on his products.

"It's an economic tsunami," Mr. Su says. "America's problems are washing over Asia and the whole world. It's like an economic world war. It's an economic catastrophe."

I'm about to go pick up my visa for a China trip next month. I'm very curious to see what people there have to say.

At a recycling drive in Brooklyn, Chinese goods piled up.

Bob Sacha

 

Debt, to most of us, is something you pay. But to creditors, it's also something you sell. Mortgage agencies like Fannie Mae and Freddie Mac issue so-called mortgage-backed securities to investors -- including, notably, China. Roughly put, we buy tons of Chinese goods, and the Chinese loan us the money back through securities so we can buy more.

Got it?

The numbers involved here are enormous, billions mounting into trillions. Brad Setser, an economist with the Council on Foreign Relations, has spent the last years obsessively researching China's buying of American debt.

What scares him is the idea that China would stop buying the debt -- meaning it would stop financing American mortgages and our general standard of living. An extra jolt: Setser says the Chinese can't go on buying this way forever.

He explained this all to us in a way I could almost completely understand. It's so good, I'm going to listen twice (click above or download).

The new China meets the old one.

Liu Jin/AFP/Getty Images

 

A new economics paper is getting attention and looks quite interesting.

China was a major world power and technologically advanced nation until the late 1200s. Then, its technological edge disappeared until, well, 1979.

The answer, according to this author: trade. When China was open to trade, its technology advanced. When China wasn't open to new inventions and new ideas, it retreated.