Berkshire Hathaway 2009 Annual Meeting Audience Question # 34

Is Berkshire looking to invest in China?

(there was a gap in the recording that resumed with Warren in the middle of answering the question)

Warren Buffett:

… China. We would be restricted by that ownership limitation.

But it’s very hard to imagine that we won’t find more things to do in China over time. I mean, it’s a huge market. We do a lot of things. And some of those are exportable.

And there will also, perhaps, be opportunities to buy more businesses there. We would’ve bought more than 10 percent of BYD, if we could’ve. But, that’s all that they wished to sell us. So we hope that comes about.

In terms of the Chinese dollar holdings, you know, in a way, they can’t get rid of owning more dollar assets. I mean, the nature of it is, if we’re going to run a, as we did a few years ago, or a year or two ago…

If we’re going to run a $250 billion trade deficit with China, I mean, if they’re going to send us goods… and we want those goods… to the tune of $250 billion more than we sell to them, they end up with $250 billion of little pieces of paper.

And they can convert those pieces of paper, called U.S. dollars, they can convert them into… U.S. real estate, into U.S. stocks, U.S. government bonds. They can do all kinds of things.

They can even trade them to the French, you know, and get euros or something in exchange. But then the French have the problem.

So the… Chinese dollar assets are going to build as long as there’s a significant trade surplus with China. And then they have the choice of what to put those dollars into. And they have elected, so far, to put a significant amount… into U.S. government bonds.

And… I think… a major official, about a month ago or so in China, said he wasn’t too happy about the prospect of what’s going to happen in terms of the purchasing power of that money that’s been put in U.S. government bonds. And I would say he’s right.

I mean, he… it… he… anybody that owns dollar obligations outside of this country is, if they hold them a long time, is going to get less back in the way of purchasing power than existed at the time that they took on those dollar obligations.

And it’s a major problem, not the world’s worst problem, but it’s a major problem for a finance minister or a government in China to decide what to do with this buildup that comes about, because they are running a trade surplus.

And… they’ve set up the Chinese Investment Corp, which has a couple hundred billion dollars in it… in terms of deciding to make investments around the world, but…

It’s an interesting question, if you made me the finance minister of China, what I would do with the trade surplus, the funds that came in because of the trade surplus.

And I think it’ll take it over to Charlie and ask him what he would do, if he were the finance minister of China.

Charlie Munger:

Well, I (the audio in this part of the video is inaudible) that is a very easy question. I would do exactly what they’re doing.

I think China has one of the most successful economic policies in the world. And China has advanced more rapidly than the rest of the world. And, I would say their policies are exactly right.

And their rate of advance is so great and so meaningful that if they lost a little bit of purchasing power on their dollar holdings, it’s a trifle in the big scheme of things from the viewpoint of China.

So I’ve got nothing but admiration for the way the Chinese have been running their own affairs. And they’re going to be very hard to compete with all over the world. And that is exactly the correct policy for China. That’s the way you get ahead fast is to be very hard to compete with all over the world.

So I think they’re doing it exactly right. And I think that the United States and China should be very friendly nations. Because we’re joined at the hip.

Warren Buffett:

So you’d suggest they keep buying U.S. Treasuries at…

Charlie Munger:

You bet.

Warren Buffett:

… practically no yield?

Charlie Munger:

Whatever the yield. They’re not no-yield. Because they can buy longer.

Warren Buffett:

OK, we’ve got some advice for the Chinese government.

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