Thursday, April 06, 2006

El-Erian Interview

I was reading an interview in Smart Money magazine with Mohammed El-Erian, formerly with PIMCO and Harvard's new endowment money manager, and I found some interesting insight about why China has been such an aggressive buyer of low-yielding Treasurys that I hadn't heard before. Most "experts" argue it's because US Treasuries are so safe, and what have you, but El-Erian had this to say:
[The Chinese] are not doing it out of charity; they're doing it out of self-interest. they know three things: One is that their export machine creates jobs, and they have a tremendous amount of people coming off the farms and coming out of state-owned enterprises. So there's a social need to create jobs, and exports are a good way of doing that. The second is that they are great students of history. International trade history tells you something very simple: once you capture market share, it's very difficult to lose. So there's the long term benefit to building their export business. The third issue is that once you've become an export machine, every single multinational will desperately want to set up a factory in your country. Suddenly, instead of paying for technology or paying for capital, it's all moving to you very cheaply. So China's view is, "Yeah, buying a 5-year Treasury at 4/3% may not make much sense, but look at what I'm getting in return,. I'm getting things that will contribute to my long-term development"

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