China Translated

The question of whether China should buy Greek sovereign debt has been in the news this week, and has prompted some reflections from Fudan University’s celebrity economist Sun Lijian.  This is my translation of the main points from his recent blog posting:

‘A few considerations on whether we should invest our precious foreign exchange reserves in Greek debt:

First, if there is no double dip downturn in the US and EU, investment will naturally start to move away from low yielding and liquid products, into higher yielding products.  Buying undervalued products, like this Greek debt, fits in with the spirit of post-crisis investment.  This is especially true as the US dollar will continue to fall in value, and low yields on US Treasury debt will not make up for the exchange rate loss on our holdings of dollar debt.  Investing in Greek debt would help maintain the stability of the value of China’s FX reserves.

Second, if trade surplus countries don’t recycle their surplus back to trade deficit countries, they won’t support the spirit of free trade, and might encourage trade deficit countries to adopt protectionist policies.  Considering the overall interests of the Chinese economy, some diversification of reserves away from just one trade deficit country - the US, toward trade deficit countries in the EU, make sense.’

Of course, Sun’s view is not necessarily the view of the State Administration for Foreign Exchange.  The guardians of China’s USD2.3trn in foreign reserves continue to play their cards close to their chests.  But it’s interesting to hear his views on the importance of protecting the value of reserves by seeking out higher yielding investments, and the relation between recycling reserves into trade deficit countries and maintaining trade partners’ tacit support for China’s export-based growth strategy.

You can see Sun’s original posting, in Chinese, here.

EU-China Relations, Exchange rate, Trade, US-China Relations