China has been a huge growth engine for the global economy in recent years. Exports to America are a big reason for this. America is now in recession. And China is slowing dramatically. So maybe China should send Americans stimulus checks that we can spend money on their stuff. Hey, they are dollar heavy, after all. Obama should get Geithner on that one right away. Or maybe, more seriously, China should buy U.S. stocks. At least, that is the idea of Jonathan Parker, a finance professor at Northwestern University:
So my proposal is that the Chinese start to sell Treasuries and buy a broad index of U.S. equities. For China, this has several advantages. First, this would raise the U.S. stock market, and help to cheer up the American consumer while increasing Chinese exports. Second, if this “stock market stimulus” starts a rally or spreads to the confidence of global investors, there may well be a multiplier effect to the global economy, helping Chinese exports to much of the world. Third, the yield on Treasury debt is very low, partly due to its convenience yield or liquidity. China does not need this liquidity, so why pay for it in terms of lower rates of return? Finally, the U.S. stock market is actually a pretty good buy right now – both Warren Buffet and myself have invested heavily based on the idea that returns will be strong just from the underlying dividends given such low prices.
Are there downsides or complications? Yes, I see two. First, the Chinese would increase their exposure to some U.S. risks. While holding Treasury debt exposes them to inflation risk, holding equities means their government wealth declines when the U.S. does poorly, which is exactly when China might need money to prop up its economy in the face of falling exports. Second, the U.S. could get nervous about the scale of foreign government control rights over its own corporations. This could probably be circumvented by buying index mutual funds, perhaps with special low fees, or worked out at high levels.