Re:China's Subprime Crisis Is Here
by Gibbon1 on Wednesday February 17, 2016 @04:00AM
(#11116364)
I don't have any formal education in economics, but...
The reason that a bank holds government bonds is different than the reason a private investor would do so. Government bonds are the strongest type of reserve a bank can hold. Less safe reserves require a discount from face value. So for a bank there is a balance of risk between cheap and safe reserves like Treasuries and more expensive but better returning paper. A bank is always going to hold a mix of paper as a reserve[1].
China? China hold's US debt in order to be able to stabilize their currency against the dollar. And to backstop the value of their currency on the world market.
I don't see anything abnormal about any of this.
[1] For a bank, if the ratio of loans outstanding vs reserves in hand gets too low they can't loan out any more money. And since a bank makes money on fees inability to make loans is bad bad bad.
The reason that a bank holds government bonds is different than the reason a private investor would do so. Government bonds are the strongest type of reserve a bank can hold. Less safe reserves require a discount from face value. So for a bank there is a balance of risk between cheap and safe reserves like Treasuries and more expensive but better returning paper. A bank is always going to hold a mix of paper as a reserve[1].
China? China hold's US debt in order to be able to stabilize their currency against the dollar. And to backstop the value of their currency on the world market.
I don't see anything abnormal about any of this.
[1] For a bank, if the ratio of loans outstanding vs reserves in hand gets too low they can't loan out any more money. And since a bank makes money on fees inability to make loans is bad bad bad.