Friday, October 30, 2009

Why Didn't China Invest In China?

I've wondered why China invested so much money in America for a long time now. If you're the Chinese government and you've got a lot of investment capital, it seems like you'd do well to invest in China. You aren't afflicted by the kinds of problems that face foreign investors in emerging markets like "What if the government makes a policy change that screws me?" since you are the government. You're better positioned than any foreign investor to capture positive externalities that spill over from your investment, since they mostly spill into your country. Plus, China looks like a place that's ripe for investment that allows it to become more productive.

My thought is that you'd want something countercyclical that wouldn't lose tons of value if the global economy tanked, and US Treasury bonds can work that way, so that's a benefit. I don't know how well that works when you've made such a big investment that it's tough to get out, though. Matt's view is that this is a result of IMF failures from the 1990s. There's probably a bunch of things going on here, and I'd be curious to hear more thoughts on this.
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