Sometimes old advice is good advice
China today owns a very large amount of US Gov’t debt on which it receives interest payments in US$. But something I read not long ago persuaded me China has another and better option…..
In Britain, corn may refer to various cereal grains, so a farmer going to cut his corn may be heading for a field of barley, wheat, oats, rye, or other grain. ..When Adam Smith writes of corn in his famous book The Wealth of Nations, he could have been referring to any of those, but most often he meant wheat. In Chapter Five of Book One, about a third of the way in, he observes that: (paraphrasing)
|| “Rents paid in corn have preserved their value much better than those paid in money. A law of 1576 required that one~third of the rent paid on college leases [land rent going to some college] be in corn — or its money equivalent basis the current price at the nearest public market — the rest in money. ..The corn rent, originally but a third of the whole, was by 1776 nearly double what arose from the rest. So the old money rents had sunk to a fourth of their ancient value.” ||
That is: __ In 1576 the corn brought in half a pound for each pound of money rent, while by 1776 it was bringing in nearly two pounds for each pound of money rent. Corn here being wheat. __So Smith drew the obvious lesson that payments on any perpetual lease, or long~term payments of any type, would be better for the recipient if specified in some commodity rather than in money. __Even truer when two currencies are involved, as this also avoids fluctuations in their relative values. …As instance, the British pound exchanges for far fewer US dollars today than it did some decades ago.
China being a creditor state is relatively recent. This came about due to the sheer stupidity of policy makers in western developed nations, who foolishly agreed to basically unfettered trade with China despite knowing its workers were being paid but a small fraction of the labour rates prevailing in their own countries. Idiots! ..They should at least have insisted on quotas to keep the amount of trade in check.
Of course, companies then contracted with factories over there to supply western markets. Of course, China does not import anything like the amounts it exports, so it enjoys very large trade surpluses with the more developed economies with their much higher wage rates. And of course, in order to balance the money flows arisen in all this trading, China must buy assets abroad — hence its large holdings of US Gov’t bonds, among other things.
At some point the trading currency of China will have to rise relative to other currencies, including the US dollar. ..This will immediately devalue their holdings denominated in the US$ as translated into that of China. Which understandably makes them reluctant to revalue their currency. Yet, doing so seems inevitable.
China would be well-advised to stop buying the usual sort of financial bonds denominated only in money, and insist on bonds whose annual interest payments consist of some sort of commodity, even when the principal amount might still be stated in money.
In respect of US Gov’t bonds, they might take: _say, one metric ton of wheat as the annual interest on a $10,000 bond, the wheat ex the spout at a port elevator in the Pacific northwest.
Then when its currency is rising relative to others, the payments in grain would retain their value to the Chinese. And if those payments run thirty or more years, so much the better for them. Why, after all, should the Chinese be so foolish as to accept interest payments in US dollars? __Even Adam Smith would have advised against it.