Ken Rogoff of Harvard cheekily characterised the vast Chinese accumulation of US Treasury bonds over the past five years as the biggest foreign assistance programme in history. Why not push that further? Here is a thought experiment.Wait a minute, let me try to reason this one out.
The Chinese government could offer to lend up to $500bn (from its current stock of $1,800bn) to the US government for the rescue of its financial sector. Its previous assistance – buying US bonds – was indirect and unconditional. Not so in this case.
China's loan offer would be direct to the US government to be spent in the current financial crisis. More important, it would come with strings attached. Tied aid, the preferred mode of operation of western donors since the postwar period, would now be embraced by China.
Subramanian is suggesting that China ("Japan" might just as well be inserted here) bailout the U.S. financial sector with its currency reserves...which are held, for the most part, in the form of U.S. Treasuries and Agencies (i.e., bonds issued by Fannie Mae and Freddie Mac)...meaning that China will be lending to the U.S government...the I.O.U.s of the money it has already lent the U.S. government.
I do not understand this at all.
I guess this is why I am not smart enough to write Op-Eds for the Financial Times.