From an article by Satyajit Das
Every lender knows Keynes’ famous observation: "If I owe you a pound, I have a problem; but if I owe you a million, the problem is yours." Almost 40 years ago, John Connally, then the U.S. Treasury Secretary, accurately identified China’s problem: "it may be our currency, but it’s your problem."
The Chinese used to refer to dollars affectionately as mei jin, literally "American gold". Chinese investments may not be the real thing – merely iron pyrite, fool’s gold.
China’s position is like that of an unfortunate who has stepped on a type of anti-personnel mine, known as a ‘bounding mine’. The mine does not explode when you step on it. Instead, it trips when you step off it as a small charge propels the body of the mine into the air where the explosive charge bursts and sprays fragmentation at a height of around 3 to 4 feet (1 to 1.3 metres).
China, in building and investing its massive foreign exchange reserves in dollars and U.S. Treasury Bonds, has stepped onto the mine and it cannot step off without serious damage!
Full article here
© 2009 Satyajit Das
Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006, FT-Prentice Hall).