Anbang's Starwood Hotels Bid Is Just The Trade Deficit Coming Back

by: Tim Worstall


There's more economic misinformation about trade than there is any other part of the subject.

The HOT bid is just the flip side of the US having a trade deficit.

As far as the American economy is concerned it's just great.

To the trained economist the general public reaction to trade is mystifying. It seems obvious that trade makes all those who partake in it better off: why would anyone buy or sell anything if they thought it was going to make them worse off? And there's no special magic applying to sales and purchases within the boundaries of one country as opposed to across them. So, to the economist, trade is good and is always good.

As the nomination campaigns of both Donald Trump and Bernie Sanders are showing that's not how people tend to think in general.

There's also a certain amusement to the idea that those opposing trade in general start to shout about how everyone should "Buy American" abut then complain that a foreigner does buy American by trying to buy up a company or some real estate. Which brings us to the big from Anbang, a Chinese insurance company, for Starwood Hotels (HOT). There is bound to be at least some people complaining that a foreign company shouldn't be allowed to purchase quite so much real estate in the US.

There are actually some reasons to be ever so slightly worried about Anbang. It's not actually entirely obvious that it has the finance to both this and buy the other assets from Blackstone that it's just decided to purchase. There's definite worries that it might be floating "investment" products in China with entirely unrealistic returns promised and that such are flowing through into the financing of this deal. But that's all a problem for the insurance regulator in China, nothing to do with whether they should be allowed to buy over here.

And in the larger economic sense of whether they should be allowed to, yes, of course they should. For this is just the flip side of the trade deficit which the US runs with China.

Another thing the general public don't really get about trade being that the balance of payments does balance. Yes, we can have a goods trade deficit: we buy more than we sell over the nation's borders. And we should also consider the service balance: for the US that's always in healthy surplus, offsetting perhaps 30% or so of that goods deficit. But what's left of that goods and services deficit means dollars flowing out of the country. And those dollars will all come back: the only country where dollars work is the US (Ecuador and Panama, both use the dollar, but they're waaaay too small to matter in this sense) so indeed they all do come back. And if they don't come back in people buying goods and services then they must come back as capital.

For decades now people have been complaining that China buys up Treasuries with those export dollars, thus pushing down the value of the yuan. This means the money comes back to the US government of course, which uses it to pay for whatever. Given that China has largely given up such currency manipulation, they're not doing that any more and are in fact running down their stocks. But the dollars still need to come back and Anbang is showing how they will. Chinese entities will be buying capital assets in the US like companies and real estate.

This is just what has to happen because the balance of payments really does balance. The only way to stop foreigners buying more of America is to stop Americans buying foreign goods.

We might then ponder whether this is a good thing. But as the New York Times points out this has happened before:

When the Japanese began buying trophy properties like Rockefeller Center in the late 1980s, there was an intense reaction. David Letterman began his show one evening with the announcer saying, "From New York, a subsidiary of Mitsubishi, it's 'Late Night with David Letterman.' " A New York Times Op-Ed was titled, "An Economic Pearl Harbor?"


Then there is the question of whether these deals will turn out to be a success or follow the losing path of Japan. Nearly all the trophy buildings that Japanese companies acquired at stratospheric premiums in the late 1980s were sold at a steep loss within the decade.

The losses those Japanese companies made were a pretty interesting method of financing that trade deficit of those days. For the US got those assets back and also kept a good chunk of the money originally paid for them. And yes, in national accounting that does count as financing that trade deficit.

The actual question about whether this is a good idea or not is thus really reduced to whether Anbang is making a good deal or not. And that's a question for Anbang's owners, no one else. From the point of view of the American economy it looks like a great deal. Especially given the foreign preference (or at least general experience of) overpaying for domestic assets.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.