Risk Management Plan: What the Chinese can teach us
Create a risk management plan if you want to be a successful investor. Not sure what a good risk management plan looks like? Try the Chinese way.
Last March, Chinese Premier Wen Jiabao called for the U.S. to "guarantee the safety of China's assets." Now there's a straightforward, simple risk management plan. Wouldn't it be nice to get a guarantee on your investments?
Of course, you can understand the concern on the part of the Chinese government. The Chinese are the biggest foreign holders of U.S. treasuries. And they're not happy about potentially losing money. Hence the call for a guarantee.
China's Central Bank holds over $768 billion in U.S. treasuries. The dollar has been falling, after a rally of several months. Interest rates on treasuries have spiked up. Like any other bond, when interest rates go up, the value of the bond goes down.
Now that Treasury Secretary Timothy Geithner is winding up his visit to China, you have to wonder what they talked about. One thing I suspect is that the Chinese Premier's comments are not being ignored. I don't think he would have said what he said off the top of his head. I think they're dead serious.
The Chinese comments didn't stop there. On June 2nd Geithner met with Yu Yongding, and advisor to the Chinese Central Bank. In the past, he has said "You should try not to inflate away your debt burden." He has also said, "The borrower should keep their promises."
So the Chinese clearly believe that the U.S. will turn to inflation to deal with the crushing debt we face. Given all the debt being created right now by the U.S. government, it would seem to be a reasonable conclusion.
As far as a risk management plan, the Chinese don't pull any punches. Give them a guarantee. But what would that look like? How do we guarantee their investments? Aren't treasuries already guaranteed by the "full faith and credit of the U.S. governement? What more do they want?
More thougthts to come...
Last March, Chinese Premier Wen Jiabao called for the U.S. to "guarantee the safety of China's assets." Now there's a straightforward, simple risk management plan. Wouldn't it be nice to get a guarantee on your investments?
Of course, you can understand the concern on the part of the Chinese government. The Chinese are the biggest foreign holders of U.S. treasuries. And they're not happy about potentially losing money. Hence the call for a guarantee.
China's Central Bank holds over $768 billion in U.S. treasuries. The dollar has been falling, after a rally of several months. Interest rates on treasuries have spiked up. Like any other bond, when interest rates go up, the value of the bond goes down.
Now that Treasury Secretary Timothy Geithner is winding up his visit to China, you have to wonder what they talked about. One thing I suspect is that the Chinese Premier's comments are not being ignored. I don't think he would have said what he said off the top of his head. I think they're dead serious.
The Chinese comments didn't stop there. On June 2nd Geithner met with Yu Yongding, and advisor to the Chinese Central Bank. In the past, he has said "You should try not to inflate away your debt burden." He has also said, "The borrower should keep their promises."
So the Chinese clearly believe that the U.S. will turn to inflation to deal with the crushing debt we face. Given all the debt being created right now by the U.S. government, it would seem to be a reasonable conclusion.
As far as a risk management plan, the Chinese don't pull any punches. Give them a guarantee. But what would that look like? How do we guarantee their investments? Aren't treasuries already guaranteed by the "full faith and credit of the U.S. governement? What more do they want?
More thougthts to come...
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