An old joke about banking: Borrow $1,000, the bank owns you; borrow $1 million, you own the bank. There’s more than a grain of truth to that joke. People worry that China owns the U.S. because it holds trillions of our government debt. Not so much.
China has accumulated roughly $3 trillion of foreign-exchange reserves. With that kind of swag, you would think China could buy just about anything it wants. And, theoretically, it could.The Economist reports in its current issue that China could buy 88% of the globe’s oil output for a year. It lists some other possibilities:
Perhaps China should buy some exclusive Manhattan addresses. Hell, why not buy all of Manhattan? The island’s taxable real estate is worth only $287 billion, according to the New York City government. The properties of Washington, DC, are valued at a piffling $232 billion. China is accustomed to being Washington’s banker. Why not become its landlord instead?
The punch line is what might be called a paradox of seemingly limitless wealth. The more money China accumulates, the harder it will be to find places to put it to work without distorting the market. Here’s the way the Economist puts it:
These frivolous calculations illustrate the vast scale of China’s reserves but also the great difficulty it faces in diversifying them. Any purchase big enough to warrant China’s attention will also move the market against it. China can buy almost anything for a price—but almost nothing for today’s price.