10 ms·

China Is Hunting for Foreign Buyers for Its Sovereign Debt

77 points by spking 8y ago

wonderwonder 8y ago
I wonder if China is seeing any impediments due to people being loathe to invest in a country where personal freedoms are very restricted and millions of their citizens are swept up in re-education camps. I would be hesitant from a personal standpoint but most larger wealth funds are probably not so restricted. By the same token neither are most manufacturers.
- projectramo 8y ago
  I think most large wealth funds would have an issue too. That would be my guess.
  - zawazzi 8y ago
    By the time it gets repackaged into derivatives and index funds, who will really know. Investor's aren't amoral, just creating plausible deniability via complexity.
    - coughupalung 8y ago
      When you say packaged into derivatives, what do you mean? I can sell you all sorts of derivatives today without ever owning the underlying.
      - beatgammit 8y ago
        You can. You can also sell derivatives on something you do own. If you get involved in human trafficking futures, you are still involved in human trafficking because your contacts could be taken to maturity, which means someone will have to provide the humans. That's pretty much the definition of "complexity hides evil". Index funds are a bit more direct since you're owning pieces of things you may not like instead of owning a contract that could be converted to something you don't like.
    - owenversteeg 8y ago
      Complexity really is incredibly powerful. With it you can bury unspeakable evils in plain sight. It has wide applications too: you can obfuscate everything from financial issues to political events. For example, pretend the article of the Charleston white supremacist mass murderer said the following: "Roof was involved in the controversy of the events of June 17, 2015. After a flurry of media attention, he became the lead defendant in the trial United States v. Roof (2:15-cr-00472), which was noted for the request for a bench trial..." The above is entirely correct, and written in a neutral, flat tone, but it completely misrepresents the situation. By noting tiny, irrelevant details like the request for a bench trial and the criminal number, the article both becomes uninteresting and hides the truth. If you read the snippet you wouldn't get the idea that he was a mass murderer. I read something earlier by James Risen about the CIA covering up a number of horrible things. One quote I found very interesting: "But after I filed the first story, it sat in the Times computer system for days, then weeks, untouched by editors. I asked several editors about the story’s status, but no one knew. Finally, the story ran, but it was badly cut and buried deep inside the paper. I wrote another one, and the same thing happened. I tried to write more, but I started to get the message. It seemed to me that the Times didn’t want these stories." They didn't even have to threaten to not publish it - all they had to do was obfuscate it! Throw in a few complex words and kick it off the front page and behold, nobody will read it, even if it contains explosive information.
  - cat199 8y ago
    > large wealth funds really massive ones probably have a pretty good relation with the host country government/politicians and can rely on state political tools for leverage
- diplo24 8y ago
  Yes and no. For example, a lot of asset managers offer products like "environmentally responsible" portfolios which are supposedly pretty popular. But, if there's money to be made, we all know how the world works - there will be a guy willing to make it
- ajross 8y ago
  Sort of, but that's not why. Modern authoritarian governments, historically, are volatile. The Soviet Union lasted about 75 years, and that's pretty much a record for stability. The PRC is just getting to that age now. Who's going to buy a 30 year bond from a government that has about even odds of surviving to maturity?
  - nradov 8y ago
    You're right about the level of political risk. But even when there's a revolution or secession, the successor state is still legally liable for the debt. So investors might still get some of their money back.
    - beatgammit 8y ago
      Maybe, but they'll likely default. Revolutions are messy and often result in a poorer country. How can a country's government repay its debts when the country is rebuilding? Look at post-WW1 as an example of what could happen if they're forced to pay those debts. Even if they do get their money back, it'll be late. Who wants that kind of risk?
- unioncalia 8y ago
  Not only can you not move money out of China if you have some invested there, you can't even leave! => The US government is warning Americans that if they visit China they may not be able to return home https://www.businessinsider.com/us-china-travel-advisory-2019-1?r=UK&IR=T https://www.businessinsider.com/us-china-travel-advisory-201...
  - wonderwonder 8y ago
    Which is sort of part of my concern. If you visit to sort out some sort of issue concerning your large bond investment, what is to stop them from just disappearing you. No rights for the citizens generally means no rights for investors or visitors either.
  - dcposch 8y ago
    > The new China travel advisory is a level two advisory which urges increased caution. > Other countries or regions with a level two advisory include Algeria, Burma, Antarctica, Belgium, France, Germany, Denmark, and the United Kingdom. Sounds not particularly serious. Also lol at Antarctica
    - oyashirochama 8y ago
      Any travel advisory is pretty serious since it implies a risk, that itself will cause diplomatic issues due to tourism loss.
- pishpash 8y ago
  Yet Saudia Arabia is considered fine.
- closeparen 8y ago
  Communism isn’t exactly know for prioritizing the rights and well-being of investors. Why would you engage in capitalism with a country that says capitalists should be lined up against the wall and shot?
cm2187 8y ago
Can someone explain to me why an investor would want to invest in a foreign debt and currency from a country that has capital controls and a history of undervaluing its currency?
- pstrateman 8y ago
  Investors with other peoples money receiving fees based on annual return. What do they care about the risks?
  - coughupalung 8y ago
    Any reputable investment firm will have risk management reports. If you don't like your fund pouring significant money into A+ rate bonds of a country with potential headwinds then pull out or sue.
  - hermitdev 8y ago
    > What do they care about the risks? Plenty. You dont last long in finance if you take outsized risks and lose your clients money. Various firms and investors have varying risk tolerances, but any finance firm worth anything has a risk team that is daily monitoring these things.
    - codycraven 8y ago
      Like garbage mortgages? While I'd really like to believe companies will act appropriately for their own long-term success, in reality the people working there look out for themselves and are just a job hop away from a fresh start at a different finance company. I see this in tech all the time where developers at agencies pound out horrible code with no long-term care for what they deliver, just that they meet the request in the here and now.
- projectramo 8y ago
  They might do it for 3x the return: "China’s government bonds were among the world’s best performers in 2018, returning 7.7 percent, while U.S. Treasuries earned 0.8 percent, ICE Bank of America Merrill Lynch data show. That gain is in yuan terms, however, and the yuan dropped 5.4 percent against the U.S. dollar." So 7.7 - 5.4 = 2.3% which is almost 3x 0.8% return on US Treasuries.
networkimprov 8y ago
China's leaders have historically shied away from this policy, so as to protect itself from the whims of foreign investors, and maintain maximum control over its economy. This reversal may point to a crisis beneath the surface, as it's probably not their preferred path...
- cm2187 8y ago
  If the debt is in yuan and under chinese law, foreign investors don't have much say on their economy.
  - seppin 8y ago
    if they stop buying once they start, they certainly do
    - beatgammit 8y ago
      Like they did...
fratlas 8y ago
What would the risk analysis look like for sovereign debt?
- hermitdev 8y ago
  I'm not sure exactly what you're asking, but there are probably an untold number of factors when analyzing risk on sovereign debt. Probably amongst the forefront would be history of payment on bonds, currency stability, GDP, tax collection, and government stability. For instance, I wouldnt buy an Argentine bond - they've failed to make bond payments to such an extent they had a warship seized as collateral in a foreign port. Likewise, Greece has had trouble making payments. GDP is poor, and tax evasion rates are high. To boot, because Greece is on the Euro, it cant even devalue its currency to lessen its debt burden.
  - kmonsen 8y ago
    This is why there are different rates for bonds, if you only want the safe ones the return will be small as well.
    - hermitdev 8y ago
      Of course, this is not in question. It is very typical that bond yields are inversely correlated with risk. Higher the rating, lower yield. Lower rating, higher yield, but increased risk of default.

77 points by spking 8y ago

I wonder if China is seeing any impediments due to people being loathe to invest in a country where personal freedoms are very restricted and millions of their citizens are swept up in re-education camps. I would be hesitant from a personal standpoint but most larger wealth funds are probably not so restricted. By the same token neither are most manufacturers.

projectramo 8y ago
I think most large wealth funds would have an issue too. That would be my guess.
- zawazzi 8y ago
  By the time it gets repackaged into derivatives and index funds, who will really know. Investor's aren't amoral, just creating plausible deniability via complexity.
  - coughupalung 8y ago
    When you say packaged into derivatives, what do you mean? I can sell you all sorts of derivatives today without ever owning the underlying.
    - beatgammit 8y ago
      You can. You can also sell derivatives on something you do own. If you get involved in human trafficking futures, you are still involved in human trafficking because your contacts could be taken to maturity, which means someone will have to provide the humans. That's pretty much the definition of "complexity hides evil". Index funds are a bit more direct since you're owning pieces of things you may not like instead of owning a contract that could be converted to something you don't like.
  - owenversteeg 8y ago
    Complexity really is incredibly powerful. With it you can bury unspeakable evils in plain sight. It has wide applications too: you can obfuscate everything from financial issues to political events. For example, pretend the article of the Charleston white supremacist mass murderer said the following: "Roof was involved in the controversy of the events of June 17, 2015. After a flurry of media attention, he became the lead defendant in the trial United States v. Roof (2:15-cr-00472), which was noted for the request for a bench trial..." The above is entirely correct, and written in a neutral, flat tone, but it completely misrepresents the situation. By noting tiny, irrelevant details like the request for a bench trial and the criminal number, the article both becomes uninteresting and hides the truth. If you read the snippet you wouldn't get the idea that he was a mass murderer. I read something earlier by James Risen about the CIA covering up a number of horrible things. One quote I found very interesting: "But after I filed the first story, it sat in the Times computer system for days, then weeks, untouched by editors. I asked several editors about the story’s status, but no one knew. Finally, the story ran, but it was badly cut and buried deep inside the paper. I wrote another one, and the same thing happened. I tried to write more, but I started to get the message. It seemed to me that the Times didn’t want these stories." They didn't even have to threaten to not publish it - all they had to do was obfuscate it! Throw in a few complex words and kick it off the front page and behold, nobody will read it, even if it contains explosive information.
- cat199 8y ago
  > large wealth funds really massive ones probably have a pretty good relation with the host country government/politicians and can rely on state political tools for leverage
diplo24 8y ago
Yes and no. For example, a lot of asset managers offer products like "environmentally responsible" portfolios which are supposedly pretty popular. But, if there's money to be made, we all know how the world works - there will be a guy willing to make it
ajross 8y ago
Sort of, but that's not why. Modern authoritarian governments, historically, are volatile. The Soviet Union lasted about 75 years, and that's pretty much a record for stability. The PRC is just getting to that age now. Who's going to buy a 30 year bond from a government that has about even odds of surviving to maturity?
- nradov 8y ago
  You're right about the level of political risk. But even when there's a revolution or secession, the successor state is still legally liable for the debt. So investors might still get some of their money back.
  - beatgammit 8y ago
    Maybe, but they'll likely default. Revolutions are messy and often result in a poorer country. How can a country's government repay its debts when the country is rebuilding? Look at post-WW1 as an example of what could happen if they're forced to pay those debts. Even if they do get their money back, it'll be late. Who wants that kind of risk?
unioncalia 8y ago
Not only can you not move money out of China if you have some invested there, you can't even leave! => The US government is warning Americans that if they visit China they may not be able to return home https://www.businessinsider.com/us-china-travel-advisory-2019-1?r=UK&IR=T https://www.businessinsider.com/us-china-travel-advisory-201...
- wonderwonder 8y ago
  Which is sort of part of my concern. If you visit to sort out some sort of issue concerning your large bond investment, what is to stop them from just disappearing you. No rights for the citizens generally means no rights for investors or visitors either.
- dcposch 8y ago
  > The new China travel advisory is a level two advisory which urges increased caution. > Other countries or regions with a level two advisory include Algeria, Burma, Antarctica, Belgium, France, Germany, Denmark, and the United Kingdom. Sounds not particularly serious. Also lol at Antarctica
  - oyashirochama 8y ago
    Any travel advisory is pretty serious since it implies a risk, that itself will cause diplomatic issues due to tourism loss.
pishpash 8y ago
Yet Saudia Arabia is considered fine.
closeparen 8y ago
Communism isn’t exactly know for prioritizing the rights and well-being of investors. Why would you engage in capitalism with a country that says capitalists should be lined up against the wall and shot?

cm2187 8y ago

Can someone explain to me why an investor would want to invest in a foreign debt and currency from a country that has capital controls and a history of undervaluing its currency?

pstrateman 8y ago
Investors with other peoples money receiving fees based on annual return. What do they care about the risks?
- coughupalung 8y ago
  Any reputable investment firm will have risk management reports. If you don't like your fund pouring significant money into A+ rate bonds of a country with potential headwinds then pull out or sue.
- hermitdev 8y ago
  > What do they care about the risks? Plenty. You dont last long in finance if you take outsized risks and lose your clients money. Various firms and investors have varying risk tolerances, but any finance firm worth anything has a risk team that is daily monitoring these things.
  - codycraven 8y ago
    Like garbage mortgages? While I'd really like to believe companies will act appropriately for their own long-term success, in reality the people working there look out for themselves and are just a job hop away from a fresh start at a different finance company. I see this in tech all the time where developers at agencies pound out horrible code with no long-term care for what they deliver, just that they meet the request in the here and now.
projectramo 8y ago
They might do it for 3x the return: "China’s government bonds were among the world’s best performers in 2018, returning 7.7 percent, while U.S. Treasuries earned 0.8 percent, ICE Bank of America Merrill Lynch data show. That gain is in yuan terms, however, and the yuan dropped 5.4 percent against the U.S. dollar." So 7.7 - 5.4 = 2.3% which is almost 3x 0.8% return on US Treasuries.

networkimprov 8y ago

China's leaders have historically shied away from this policy, so as to protect itself from the whims of foreign investors, and maintain maximum control over its economy. This reversal may point to a crisis beneath the surface, as it's probably not their preferred path...

cm2187 8y ago
If the debt is in yuan and under chinese law, foreign investors don't have much say on their economy.
- seppin 8y ago
  if they stop buying once they start, they certainly do
  - beatgammit 8y ago
    Like they did...

fratlas 8y ago

What would the risk analysis look like for sovereign debt?

hermitdev 8y ago
I'm not sure exactly what you're asking, but there are probably an untold number of factors when analyzing risk on sovereign debt. Probably amongst the forefront would be history of payment on bonds, currency stability, GDP, tax collection, and government stability. For instance, I wouldnt buy an Argentine bond - they've failed to make bond payments to such an extent they had a warship seized as collateral in a foreign port. Likewise, Greece has had trouble making payments. GDP is poor, and tax evasion rates are high. To boot, because Greece is on the Euro, it cant even devalue its currency to lessen its debt burden.
- kmonsen 8y ago
  This is why there are different rates for bonds, if you only want the safe ones the return will be small as well.
  - hermitdev 8y ago
    Of course, this is not in question. It is very typical that bond yields are inversely correlated with risk. Higher the rating, lower yield. Lower rating, higher yield, but increased risk of default.