China Lights Up.

Two bewildering stories relating to tobacco have come out of China recently, and both make me glad to live in the USA:

1. The Gongan county government of central China has ordered civil servants in the area "[...] to puff their way through 230,000 packs of local Hubei-produced cigarettes over the year," or face a fine. Contradictory to the central government's policies intended to curb smoking, this edict is an effort to stem losses of tobacco tax revenue to non-local cigarette producers. The edict has since been put "under study" to determine if it should be in place or not.

2. Tong Liangliang, a two-year old from China, now holds the unofficial record of being the youngest chain-smoker in history. Liangliang (pictured above) was pushed to smoking by his father, who believed that the cigarettes would numb the pain of the boy's hernia until he grew old enough to have an operation for the condition. Liangliang's smoking began about six months ago, but he is already smoking a pack a day and "[...] resists all his father's attempts to take away his only pain killer."

Dammit

At least I was clear about rescinding my post, but this didn't take long: China doesn't like our debt anymore.

Is China Going to Call in our Debts?

(So, I wrote nearly this whole post before completely undermining it at the very end.  But I didn't really feel like throwing it away, so even if I'm basically an idiot here, at least it could bring about some discussion.  But keep in mind that, somewhat ironically, I no longer stand by some of what I've written here.)

With the economy tanking one of those comments you hear from time-to-time is that China, whose holdings of US debts amount to $585 billion, or over 4% of our entire economy, will suddenly call in our debt, crushing our economy.

Is this scenario plausible?  Might China actually do this?  I can't say it more strongly: no.

Unless I'm missing something, I can base this conclusion on two three things.  For one, "China" is not one entity.  There's about 1.5 billion people there right?  Now sure, the debt is likely to be pretty consolidated among more powerful actors, but it's not like there's one guy in the government who sits in front of two buttons all day that say "hold" and "call," just waiting for the moment to trash the economy.  So for "China" to call in our debt, that would mean that some circumstance would have to change that would result in the many different Chinese debtholders simulateneously wanting to call in that debt.

OK, I'm going to kind of gloss over number two because I did not follow this in my intermediate macro class, but I'm pretty sure this issue of debt is tied into trade deficits.  So for China to call in the debt would mean that China would also not be able to continue selling us more than we sell them.  And I don't think they want to do that.  (If anyone can correct me on this one, please do)

But the third one is also pretty key.  Let me add here that Japan holds almost the same amount of debt that China does, and combined they hold about 9% of our debt, or $1.15 trillion.  So, I was going to assume that the treasury rate was about 4% returns on this debt.  Unfortuantely, I just looked it up and realized it's closer to 0.4%.  This really kills my argument, but I'll keep going anyway.  So, 4% of $1.15 trillion means a return of $46 billion per year on this investment.  By contrast - think about how much fuss there was over the $25 billion for the automakers.  Even at today's rate of 0.46%, this results in annual interest of $5.29 billion.  And that's not a bad take.  OK, you're right it kind of is.  Dammit.

Let's make the best of the bailout...

...by letting China do it for us!. The author goes on to point out that any offer from a Chinese firm could put US legislators in a tough spot where they must decide between: 1. Denying China something it really wants while at the same time ignoring a legitimate bid for a company in a capitalist market in favor of either bankrupting the company or financing it with taxpayer money; and 2. Allowing the Chinese to acquire some of the American Brand. Tough spot for them. It should be interesting to see how ideology holds up with the Chinese making a play along these lines.