I hope you can read this link from the Wall Street Journal...

http://online.wsj.com/article/SB1000...725486082.html

The article describes the Bank of China's profits up 28%, big increases in loans to Chinese businesses, a strategy of reducing exposure to foreign governments, and a reduced rate of bad loans. It pretty clear that their strategy is to invest in Chinese businesses, which they now believe to carry less credit and foreign exchange risk than lending to sovereign governments (like the U.S.).

Just a note on "credit risk". Basically, credit risk has two components--the business risk that a borrower can't or won't repay his loans. The other component is currency exchange risk. A lender can lose substantial amounts of money if a borrower repays his loans in currency worth less than when the loan was made. That's what's happened to China as the dollar has weakened over the last few years. Their loans to the U.S. are being repaid with dollars worth substantially less than when the loans were made. That's very important to China because they use those dollars, as well as those they get from us by selling products to the U.S., to buy commodities such as oil.

The dollar will weaken more as the result of the Fed's strategy to hold interest rates low for two years. The primary way that's accomplished is by increasing the money supply ("printing" money), resulting in further de-valuation of the dollar.

The Chinese can attempt to hedge their exposure, but with the announcement by the Fed that they intend to keep interest rates low for two years or so, the dollar will continue to de-value, making the purchase of hedge contracts very expensive, if you can even find counterparties to take that risk for trillions of dollars.

So in the case if the Chinese or other prospective buyers of U.S. debt simply not buying any more is a reasonable strategy for containing credit risk, regardless of S&P ratings, which measures only a borrower's ability to repay loans.

Good article.
Would it not be refreshing to see a bit of business acumen utilized in American politics?
For example, applying a return on investment criteria on loans/grants/aids to non US entities that requires evidence of advantage to the well being and advancement of the needs of the USA...or it does not fly.

We do need to introduce some of the protectionism that many countries utilize today...like China. And wouldn't it be helpful to find a country that the USA could lend money too that would in turn provide us with monetary aid....like we do with China
Until such time as politics as the basis for decision making changes there will be no improvement.

btk