Will China Cause the U.S.’s Next Financial Debacle?

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At last week’s TD Ameritrade Institutional’s national conference last week, there was much discussion about China. Is China’s growing economic might good for the U.S.? For the world? Is China, given its despotic government, something to fear? Can China wreak havoc with the U.S. economy, interest rates and the value of the dollar?

Everybody luv, luv, luvs China. Even Burton Malkiel, the eminent Princeton finance professor and author of A Random Walk Down Wall Street, is getting into the action, having launched a hedge fund to invest in China. (Incidentally, a couple of years ago after publishing BOOK TITLE, Malkiel said in a speech that China was an inefficient market—the actual Chinese equities that foreigners can’t buy—and, unlike in developed markets, there was alpha to be won. Funny, he used to say the hedge fund industry had gotten to big.)

In an opinion piece today in the New York Post, Arthur Herman argues that because China buys so much American government debt (and because Obama’s Administration is issuing so much debt) that China will have dangerous leverage over us. China is now our biggest lender ($789 billion) and now is the world’s largest holder of foreign-currency reserves.

Arthur Herman, a Pulitzer Prize finalist last year, is most recently the author of, "Gandhi and Churchill.” Herman writes:

“Many at the Pentagon are starting to realize that, thanks to our growing fiscal irresponsibility, we may be surrendering control of America's destiny to a rival superpower—and all without a shot being fired.”

Herman adds, “Last March, the Pentagon held its first-ever economic-warfare war game, with China as the putative opponent and with economists and bankers (including from UBS) helping out.” The results of this are classified.

I do understand people’s fears, and I certainly am skeptical of a despotic country’s ability to create real wealth. (It raises the cost of capital. Think about how China had been stealing Microsoft’s intellectual property and that, if the government wished, it could seize a foreign company’s Chinese assets. (Look what Chavez is doing in Venezuela.) And I do wonder if China isn’t somewhat richly priced. But, I reckon that it’s as J.P. Morgan once said (am paraphrasing here): “If you owe the bank $1 million, the bank owns you. If you owe the bank $100 million, you own the bank.”

If you are bullish on China—and the investing orthodoxy seems very bullish, Chanos or no Jim Chanos—here are some mutual funds that we have profiled.

I think I’d rather buy an India fund though. TD Ameritrade FAs, who number 1,200 at last week's conference, were also interested in India. Here are a few ETFs that we have profiled.

What do you think? Am looking for advice on how to invest if China starts playing games over slights, real and perceived, by the U.S.

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