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China slows U.S. bond purchases

Speaking with the New York Times, a top Chinese economist explained why China is cutting its holdings of U.S. bonds by quoting John Maynard Keynes: “If you owe your bank manager a thousand pounds, you are at his mercy. If you owe him a million pounds, he is at your mercy.”

With that reasoning in mind, China sold U.S. Treasuries and other foreign bonds in the first two months of the year; it returned to buying them in March. Around two-thirds of China’s foreign reserves are held in dollars.

That bulk holding has complicated relations between the two economic super-powers during the Great Recession. Chinese Premier Wen Jiabao and the central bank governors have expressed concern about the U.S. economic situation and their exposure to it -- though the resumption of  purchases in March suggests they may believe the outlook is better.

Still, numerous economists and policy experts have suggested careful, controlled, slow draw-down would be a good thing for both countries. 

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Pirate drama ends... so what now?

The hostage drama of last week's pirate hijacking ended yesterday, with the American captain free, three pirates dead, and one in captivity. As I've written many times... we can assume that this is not the end of the Somali pirates. But this incident -- and the attention it recieved -- seems transformative. What now? Here's my predictions:

1) First, expect more interest and resources than ever to go into pirate fighting in the Gulf of Aden. The U.S. "beat" the pirates this time... but if another attack on a U.S. ship occurs, the American public is likely to grow impatient. Many are already in awe that the Navy didn't just blow the pirates to smithereens (from the looks of comments on news articles...)

2) Other Navies are likely to up the ante, as well. Fighting pirates is one of the most politically uncomplicated missions that one can imagine. No one is defending the pirates, here. So expect this to be the military bonanza of the decade.

3) Having said that, it will start to become very awkward very quickly if the world's Navies don't start winning the battle on pirates. This brings me to my next prediction: a changing perspective towards the world's approach to Somalia. While that country's internal anarchy has been ignorable to a point, it may soon become impossible to ignore the fact that instability on land is pushing the chaos into the seas.

4) In the shipping world, my guess is that we'll see higher insurance rates -- and, as the Wall Street Journal reported this weekend -- a growing debate about whether crews should be armed. The peril there is an escalation of the conflict -- from polite hostage taking (if such a thing exists) to confrontational standoffs. Remember too that volatile cargo and non-bullet-proof ships further complicate matters. Not sure that I'd want my sailors carrying firearms on, say, an oil tanker.

5) And finally from the pirates, we might expect one of two responses: either further hubris (as happened after the hijacking of a Saudi tanker last year), or some measure of fear. The first case is already a worry -- as the pirates vowed "retaliation" today for the killing of their fellow buccaneers. In the latter case, one might prefer to think of the pirates' going after a U.S.-flagged ship as a gamble that the pirates lost -- three of them with their lives. No doubt that others will soon think twice about the nationality of their vessels before the hijacking begins.

In short, Somalia just got a lot more important, the world's navies just got a lot more business, and the shipping industry just got a lot more expensive.

Photo: Roberto Schmidt/AFP