Only if lending to the sovereign govt. of the world’s reserve currency at negative real interest rates, funding its military adventures, and claims against the future salaries of it’s citizen’s, risky.

Mmmmm now come to think of it maybe you are right!! What are the dollar and the national debt doing and going to be doing!!

If you look at the structure of CIC, it looks similar to the way the Calpers board is structured. Also the interesting thing is that one agency that is not at the table is the State Asset Supervision and Administration Council. This nicely divides up the states “ownership” and “regulatory” roles.

ABC is going to get a cash infusion, but ABC’s problems are part of a bigger problem which is that farm incomes are not increasing. There are also huge problems with the rural credit cooperatives. Also, I don’t think that Central Huijin should be buying any of the city banks right now. What it should do is to have cash on hand so that if any of the JSCB’s do go under, Huijin can buy the bank, fire the management, and fix the problems.

I had strongly objected before to making Huijin part of CIC, but I withdraw my objections after seeing that they are going to be putting the National Social Security Fund in charge of all of this. NSSF has a very, very strong incentive to make sure that the companies it owns are managed profitably and professionally (lots of old people who are going to want their money).

If the banks need money, then can go out and issue stock, and doing that way encourages the banks to be profitable. I don’t think that three of the big four banks are shaky. What happened in 1998, was that three of the four banks, got their bad debt exchanged for good debt, and the bad debt got warehoused in another company where it is being dealt with by the government. Ultimately the government will have to pick up about 80% of the bad debt, but by not having the transfer go directly to the bank, the government was avoiding throwing good money after bad.

If anyone of three of the four banks get themselves in trouble with post-1998 deals, then the entire upper management needs to be fired before we even talk about new money coming in.

The difference between Blackstone and the Chinese banks was that Blackstone was supposed to be better at investing Chinese capital. It was an experiment that doesn’t seem to have turned out well.

The end is to boost the capitalisation of the banks. The example of transferring a US treasury was just to show you that no extra dollar purchases, foreign exchange transactions or government indebtedness need be involved. I do not know whether that is how such an operation would actually be done.

The Chinese government have already established a state entity to do something like this, called Central Huijin Investment Company, which I believe was financed from the reserves.

You keep changing the story.

Now you’re doing a treasury swap, converting the capitalization currency, forcing a currency mismatch into the bank, and creating an RMB asset on the books of PBOC.

To what end I don’t know.

The banks should raise capital in the market, but if they are shaky, then that will be expensive. That is why the government are helping the banks by doing this.

Guest on 2007-09-25 08:19:13:

The government is no more indebted than it would have been if it had used the dollars to buy treasuries, and the same amount of dollar assets are acquired by China. One way of doing such an operation that might make this clearer would be for the government to simply swap US treasuries with a bank in return for an equity stake. The bank’s capital is increased, and the dollars remain invested so that no market transaction is involved. If the bank’s equity is denominated in renminbi, the bank has an increased exposure to the dollar and the government has a decreased exposure to the dollar, but this does not really matter, since this is not an profit-making transaction anyway; it is about helping the bank, by allowing it to run with less capital raised and remunerated at market rates.

Also, foreign held dollars are ultimately captive to the US banking system. All dollars held globally ultimately clear toward the Fed - consider the mechanics of US dollar nostro accounts.

So US flexibility enables the symbiosis of foreign saving with US consumption. But I don’t see the unidirectional implication of a net saving glut, especially one that is categorized by Bernanke as global. It takes two to tango.

The difference is that Blackstone is an outbound destination for investment of fx reserves. Putting this money into Chinese banks just passes the problem of recycling dollars to another domestic entity. The Chinese banks are an intermediate source of the fx that’s sold to the reserve fund in the first place. If they’re capitalized in dollars, and can’t use the dollars, they may put the cash right back to PBOC. (They have to do something with the US cash from the capitalization.) If so, the net result is that the capitalization would have to be financed ultimately by more government indebtedness.