The List

Untangling the Chinese Bond Knot

Five ways that Beijing could get rid of its dependence on U.S. debt.

U.S. Vice President Joe Biden's trip to Beijing this week was overshadowed by tensions arising from China's announcement of its air defense identification zone, a wide swath of the East China Sea, which includes territory administered by Japan. But increased Sino-American tension also has profound economic dimensions -- perhaps the most important being China's ownership of U.S. bonds, an arrangement that fundamentally links the two major economies yet could soon be the root of future discord.

In June 2006, before the global financial crisis, China owned only $699 billion in U.S. securities. Back then, they were still a decent investment -- returns on U.S. bonds were above 5 percent. Now, however, the returns are essentially zero and the risk is higher, yet China keeps buying more. As of the end of September, China's foreign exchange reserves stood at $3.66 trillion, with approximately $800 billion more at state banks. Why does China park so much of that money -- more than $2 trillion -- in U.S. bonds? A lack of alternatives.

But this can't last forever. So the more important question is when Beijing will seek to climb out of the box it jumped into when its holdings of U.S. bonds began to soar. An even more critical question is just how China will go about divesting. The Communist Party has five options to ease dependence on U.S. bonds. Each is unpleasant.

1. Sell U.S. bonds.

Several times a year, an advisor to the Chinese government espouses selling U.S. bonds and buying alternative investments such as assets denominated in other currencies or gold, among others. In an Oct. 15 Financial Times op-ed, for example, Chinese economist Li Daokui suggested Beijing could purchase as much as 5 percent of the shares of multinational companies operating in China and listed on stock exchanges worldwide, as well as up to 5 percent of the shares of public utility companies in mature market economies, and could increase its holdings "of all non-US sovereign bonds rated higher than double A plus."

This plan has at least two glaring problems. What country wants to sell China hundreds of billions of dollars in bonds, pressuring its currency higher? In 2010, Japan called out China for doing so with far smaller purchases. Chinese outward investment in 2012 hit a record $87.8 billion, but even at that level included multiple large-scale setbacks. Will dozens more major companies step forward to offer China large stakes in their business? The scope for a quick expansion is sharply limited.

Meanwhile, the problem is growing. In the third quarter of 2013 alone, China added $166 billion to official reserves. To reduce the percentage of U.S. bonds in the reserves, the State Administration of Foreign Exchange (SAFE) would have to find a different investment for an additional $100 billion on average every new quarter.

But even before SAFE, the agency that manages China's foreign exchange reserves, invests this money, it needs to find a buyer for its existing U.S. bond holdings. This will be difficult because Washington is already selling hundreds of billions of dollars in bonds annually to the same buyers China will seek. To make the sales, SAFE will have to offer steep discounts. And it will likely receive mostly U.S. dollars in return -- because that is what buyers will want to offload if they are purchasing more U.S. bonds.

2. Open the capital account.

A common misconception concerning Chinese reserves is that the Communist Party can and should spend the money at home. It should -- but it cannot. Controls on the movement of capital flowing in and out of the country separate the financial books of all actors, from the central government to households, into domestic and foreign ledgers. This limits domestic Chinese entities' ability to use dollars, which cannot be used on bills or wages, or be freely sent overseas. Because they have little use, the overwhelming majority of dollars distributed in China would be exchanged for renminbi (RMB), China's currency, at the only place authorized to conduct foreign exchange -- the state banking system. And official reserves would go right back up.

If Beijing lifted capital controls, foreign exchange reserves would have far greater uses domestically. In the Chinese court of public opinion, this is the most palatable option, as it would allow Beijing to more easily spend the money domestically. Talk in 2011 of a Chinese bailout of the European Union foundered quickly, for example, over the reaction at home.

But Beijing is unwilling to allow domestic capital free exit from the country. It appears to fear a nightmarish scenario: Formerly captive deposits pour out, forcing the People's Bank of China, the central bank, to frantically redeploy reserves to patch state financials. This would undermine, at least temporarily, state control of the financial system. Yes, it seems impossible that enough money could leave to override the benefits of perhaps $2 trillion spent domestically. Nonetheless, this fear has paralyzed the Communist Party since it began seriously considering liberalization after China joined the World Trade Organization in 2001. November's important Third Plenum meeting offered the same vague promises on capital account opening, but still no timetable. The safe bet is that controls remain.

3. Reverse course on the renminbi.

The huge quarterly increases to China's foreign reserves are due in part to Beijing's purchases of foreign currency, especially dollars, on the open market in order to cap the RMB's value. If the People's Bank were to let the RMB move unimpeded, China's accumulation of reserves would slow, perhaps dramatically. While this would make it easier to avoid buying additional U.S. bonds, it would not affect the bonds already held. That would require a full reversal, with the People's Bank selling foreign currency and buying RMB, drawing down its excess reserves in the process.

In principle, this is entirely reasonable. A more valuable RMB would have massive benefits: It would hedge against rising global energy prices, for example, and provide a major boost to the transition to the consumption-led growth that the Communist Party claims to want. No longer a small country seeking to export its way to growth, China has aspirations to global leadership -- and sustained economic leadership requires a strong currency.

But in practice, this is very unlikely. Because the RMB is still pegged to the dollar, movement of the RMB against other currencies is still explained almost entirely by the movement of the dollar. It would be far easier for Beijing to de-peg the RMB and stop accumulating reserves than to try to reallocate current U.S. bond holdings. Yet Beijing has steadfastly refused to do so because it does not want to directly subject the RMB to market forces.

4. Reverse course domestically.

Besides the unpalatable task of strengthening the RMB, Beijing has plenty of other tools for internal restructuring. Cutting subsidies for domestic production, for example, would help, as would reforms aimed at rebalancing consumption and investment.

At the November plenum, Beijing announced steps in this direction; if implemented, they would gradually limit the accumulation of reserves. Unfortunately, the problem is immediate, not long term. As with the exchange rate, stopping further increases in China's foreign exchange reserves would require transformative reform. And it would still leave current reserves unaffected.

For domestic restructuring to ease dependence on U.S. bonds, it would have to be at the level of the reforms of 1978, when Beijing granted farmers property rights, or 1993, when many state-owned enterprises lost their protected status. In contrast to these previous rounds, led by Chinese leader Deng Xiaoping, President Xi Jinping and his colleagues have not shown the will or the capacity to move so quickly and decisively.

5. Hope for a massive new country to enter the global economy.

Drawing on government holdings of foreign currency, state institutions like China Development Bank have funded development projects around the globe, from dams in Laos to refineries in Latin America. This has barely made a dent in reserves, but it serves as a model.

Few international opportunities are big enough to make it worthwhile for SAFE to sharply reorient its portfolio despite the costs of selling U.S. bonds. Another financial crisis could be an opportunity, depending on how much the afflicted countries would pay for Chinese help. An internationally rehabilitated Iran would have a good deal to offer in return for large-scale Chinese investment.

Size-wise, the preeminent possibility is North Korea. Even peaceful Korean reunification would require hundreds of billions of dollars for imports, fiscal support, and development. South Korea would want help, and China would not want heavy involvement from the United States or Japan. The timing of Korean reunification is unclear, of course, but it would suffice to draw Beijing out of the U.S. bond trap.

Yes, waiting for the unification of North Korea is not an ideal investing strategy, but neither is waiting for U.S.-China tensions to dissipate. Mutually assured economic destruction cannot last forever in a dynamic global marketplace. And Beijing needs to pursue one of these options, soon.

Photo: ChinaFotoPress/Getty Images

The List

The World’s Most Jaw-Dropping Reality TV Shows

Live sex, human Tetris, baby giveaways, and more.

The late fall doldrums are a dull time for fans of American reality television. Juggernauts like "American Idol," "The Bachelor," and "Here Comes Honey Boo Boo" are on hiatus until January; fans looking to get their fix must sustain themselves on lesser fare, like "Storage Wars: New York" or "When Ghosts Attack."

But instead of slogging through yet another iteration of "The Real Housewives," why not venture out of your reality TV comfort zone? FP has compiled a list of the most jaw-dropping reality TV shows we could find from around the world. Settle back into those couch cushions -- this YouTube hole is going to be a deep one.

1. Norway: Hours of live knitting.
The NRK TV network, which previously brought Norwegians minute-by-minute coverage of a crackling fire, a seven-hour train ride, and an even longer boat ride, recently aired a live program chronicling the creation of a sweater. It's the latest in a phenomenon called "slow," in which very ordinary events are broadcast in real time. But the latest show, "National Knitting Evening," was actually more action-packed than its predecessors: Over the course of 12 hours, viewers experienced every step of the sweater-making process, from the shearing of the lamb to the knitting of the garment. It was an attempt on the part of the network to break an obscure world record for knitting currently held by Australia.

Ironically, Norway's penchant for the slow but steady ensured its downfall, as the knitting team not only failed to break the world record but took more than twice as long as expected to finish their sweater. The show still got pretty decent ratings: More than 1.2 million Norwegians tuned in.


2. Zambia: From working girl to wife.
"Ready4Marriage," a Zambian reality competition show, ordinarily pits couples against one another for the chance to win a wedding sponsorship and a cash prize, but producers decided to change things up during the third season. They brought on a cast of 18 sex workers with the purported aim of readying them for marriage. "A woman who is ready for marriage is a woman who can manage a home," said the show's host, Master Chimbala, in a network interview. He added that successful contestants should be able to "lead a family, lead a business, [and] manage finances from budget constraints to making investments." Accordingly, the contestants had to sweep floors, clean toilets and iron shirts for the chance to win $9,000 and a wedding sponsorship. Reviews of the show were mixed, but plenty of viewers applauded the contestants' participation. In the end, the grand prize went to 25-year-old Precious Amukusana, who said she had turned to prostitution to provide for her sisters after their mother had died. (Zambia struggles with low GDP and development levels.) After winning, Amukusana told the Lusaka Times, "I've been turned in[to] a real woman, I will never get back to the old life."


3. Pakistan: Holiday baby giveaway.
During Ramadan, Pakistanis are treated to a religious game show called "Amaan Ramazan" (aired on Geo TV) that rewards audience members for correctly answering questions about the Quran. Prizes include kitchen appliances, electronics, motorbikes -- and, during the most recent season, babies. The show's host, Aamir Liaquat Hussain, presented two unsuspecting couples this year with baby girls supplied by an NGO that rescues abandoned babies. One of the newly minted mothers told CNN that while she was "really shocked at first," she was also "extremely happy" to receive the child. The baby episode has been widely criticized as a ratings stunt, but Hussain maintains that the giveaway was a charitable act. Though Pakistan has no legal framework for adoption, both sets of parents who received children were reportedly vetted by producers and the NGO responsible for the infants. A follow-up report by the BBC found that both families were happy and the babies cared for.


4. Britain: Sex in front of a live studio audience.
A new British talk show invites couples to have sex on television in front of a live studio audience. Alas, it's not as racy as it sounds: The couples copulate in an opaque, soundproof box, and then emerge to discuss the experience with a panel of sexperts. The show, straightforwardly named "Sex Box," is part of a Channel 4 campaign that aims to combat a culture of rampant pornography by promoting dialogue about "real sex." The show aired in tandem with another series, "Porn on the Brain," the first episode of which examined how teenage girls reacted to pornography in contrast to their male peers, finding that the images "provoked emotions of fear, confusion and anger in girls," while boys "mainly felt excitement or happiness." In the clip provided here from "Sex Box," a male couple enters the box, hoping to shatter misconceptions about gay sex.


5. Venezuela: Live-streaming socialism.
Every week for ten years, former Venezuelan President Hugo Chavez hosted and starred in a live talk show called "Alo Presidente," in which he frequently sermonized, ranted about America, forcefully communed with common people, and made sweeping, off-the-cuff policy decisions affecting millions. Each broadcast began at 11 a.m. on Sunday and ran for up to eight hours.  One New York Times reviewer described the program as "like a ‘Daily Show' parody" and "the most real reality TV I'd ever seen." The reviewer also noted her unease upon realizing that "anything [Chavez] decides or does or says on the show instantly becomes the audience's reality, in a tangible way, regardless of whether they are watching." The last episode aired Jan. 29, 2012.

In this highlight reel, Chavez eats a cookie from inside a child's mouth, refuses to answer "stupid questions," and tells American "yanquis" to "go to hell."


6. China: Teaching women to be "perfect."
"Beauty Class" is a Chinese game show in the vein of VH1's "Charm School" -- except sillier and with more nudity.  In it, a group of allegedly "ugly ducklings" competes in a series of bizarre challenges that are supposed to transform them into the "white swans" they are inside. "Are you afraid to don low-cut tops?" a promotional post asks. "Scared to wear mini-skirts? No problem -- let me teach you to how to develop a sinuous physique and charming personality, and you'll become a perfect beauty in the blink of an eye." The series is web-only, as Chinese television doesn't allow such raciness on-air. As one Sina Weibo user remarked, "The most daring [show] in the country is indeed Beauty Class. I sit here waiting for it to be banned."

In the clip here, lingerie-clad women are tied to a bed and tickled with feathers by the show's male hosts. What this has to do with cultivating the contestants into "perfect beauties" is anyone's guess.


7. Australia: Virgins for sale.
"Virgins Wanted" is a six-part series following two young people -- one male, one female -- as they attempt to auction off their virginity to online bidders.  Twenty-one-year-old, Brazilian Catarina Migliorini scored the higher bid of $780,000 (from a 53-year-old Japanese millionaire calling himself "Natsu"), while 24-year-old Alex Stephanov earned a comparatively meager $2,600. The controversial project raised questions about the legality of the transactions. Last year, Australian authorities threatened to file sex-trafficking charges against director Justin Sisely if he conducted the auction within the country, while the Brazilian attorney general's office declared that it would investigate Sisely. The director argues that the participants were their own agents, but in light of the attention, Migliorini has since claimed that she never had sex with her auction winner. She is also, once again, trying to auction off her virginity.

"Virgins Wanted," which takes the viewer from casting to (alleged) consummation, reportedly premiered at an entertainment convention in France this fall. According to Sisely, it will air in Australia next year.


8. Cambodia: Reunited and it feels so... gut-wrenchingly emotional.
Between 1975 and 1979, a cultural revolution imposed by the Khmer Rouge regime left 2 million Cambodians dead and tore apart countless families. Almost 40 years later, a reality show called "It's Not a Dream" started reuniting those families in front of TV cameras and a live studio audience. Initially, more than 1,000 people applied to be on the show, most looking for family members they'd lost decades before. Those selected are brought on stage and interviewed by host Moung Ramary, who at some point reveals that the long-lost relative is actually standing backstage. This being entertainment, the host goes out of her way to wring tears from every guest that crosses her stage -- but the reunions themselves are profoundly raw.


9. Japan: Every game show you could possibly imagine.
Japanese reality television, infamous for transforming acts of humiliation and physical punishment into culturally sanctioned entertainment, usually dominates lists like this one. While we can't go into every weird Japanese game show that's ever blown up on YouTube, there are a couple of standouts worth mentioning. For instance, "Gaki No Tsukai ya Arahende" ("This is No Task For Kids") is somewhere between a reality competition and a comedy show, in which hosts and guests compete in a variety of games, contests, and ridiculous bets. Losers are punished severely and creatively: They have been spanked, whipped with a riding crop, and forcibly touched by other contestants' genitals.

And let's not forget "Human Tetris" (known in Japan as "Brain Wall"), which became such a sensation on YouTube that it has since been adapted in 45 countries. The premise is absurd. But the execution? All you might have hoped for: Contestants must fit their bodies through increasingly ludicrous wall cutouts. And the wall is moving. And the contestants wear metallic spandex unitards. Enjoy.

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