"That's always been a danger looming like a shadow over everything we've built here. But things have developed that will insure security. I've just made a deal that will keep the Empire out of here forever."The UK Telegraph reports that China is dropping hints that it may attack the dollar's stability if the US doesn't do its bidding.
The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.There seem to be about as many opinions of what would happen if China decided to flood the market with its dollars? as there experts. Being a natural pessimist, I am pessimistic about what it would mean for the US. But before you break out into a cold sweat over this, the writer of that article also has a blog, in which he comments trenchantly:
Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.
Shifts in Chinese policy are often announced through key think tanks and academies.
Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.
It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.
Xia Bin, finance chief at the Development Research Centre (which has cabinet rank), kicked off what now appears to be government policy with a comment last week that Beijing's foreign reserves should be used as a "bargaining chip" in talks with the US.
"Of course, China doesn't want any undesirable phenomenon in the global financial order," he added.
He Fan, an official at the Chinese Academy of Social Sciences, went even further today, letting it be known that Beijing had the power to set off a dollar collapse if it choose to do so.
The longer the euro stays near $1.40, the more severe the coming crisis a year or eighteen months hence -- as the lagged effects of over-valuation turns boom to bust with even greater violence across Club Med. Sooner or later, the markets will twig in any case. The screams coming from southern Europe will be too loud to ignore. Worth noting that Goldman Sachs has begun to recommending "shorting" Italian and French bonds, expecting them to diverge further from German Bunds. This is exactly how the unravelling begins.
It will become obvious at some point that the euro-zone is just a glorified fixed-exchange rate system, not a sacred union. The euro is an orphan, stateless currency, lacking the mechanisms (a debt union, pension union, a shared treasury and fiscal transfers) that makes a currency union work over time.
Contrast that with the dollar, the currency of a nation forged by wars and the ancestral chords of memory (Lincoln's words) - all for one, and one for all. America is a country. (Again a Lincoln sentiment, but now a truism). That massive historical fact makes all the difference.
Ah, but there is the Japan, at last breathing again after its near-death brush with deflation. Now, I don't doubt that the yen will at some point snap back violently as interest rates (now 0.5pc) return to a semblance of normality. As soon as global risk appetite fades again, the yen carry trade will doubtless unwind - perhaps brutally as in 1998 - and some of that $500bn shipped overseas will come home.
That said, anybody who follows the rhythms of Tokyo's stock market must suspect that a sharp appreciation of the yen will cause the Nikkei index to plummet - bringing Japan's fragile expansion to a swift halt. The "Seven Samurai" exporters -Honda, for example, which earns 70pc of its revenues in America - will take a battering. As month after month of disappointing retail data this year keep showing, Japan lacks the demand growth to take the baton from America. Wages have fallen for the last five months in a row.
Japan is already the oldest society in the world, shrinking since 2005. The population peaked at 128m in 2005 and is expected to fall below 100m by the middle of the century. If - as expected - Japan's aging grannies and housewives raise the share of foreign assets in their portfolios from 3pc to 12pc over time, the yen must weaken further. It is the dying currency of a dying country -- albeit a most charming one.
Which brings me to China, a country that is growing old before it ever becomes rich. The working-age population peaks in 2015 - just eight years time. China then dives into the steepest demographic decline ever known by any nation in peace-time. As for China's current boom, you need only know three things so see where this is going: credit is being channelled for political purposes through Communist state banks that are not subject to market discipline; almost half of GDP is going on investment, leading to a glut of factories; return on that investment, measured by the incremental capital output ratio, is 4.4. Much of it is being wasted. Compare that to Japan (3.2), South Korea (3.2), and Taiwan (2.7) during their growth spurts. China is not going to take over the world economy, now or ever. The window will close shut before they get there.
No, the 21st Century will be the American century, just like the 20th Century. Americans may have to tighten their belts a bit after all the sins of Alan Greenspan and the Clinton-Bush debt generation. But the dollar will still be the world's reserve currency long after the euro has disappeared and the yen has been forgotten... Now, the Indian Rupee? Hhm. Another day.
Recently the Council on Foreign Relations released a new report outlining how the Establishment reads China: badly, according to Arthur Waldron. It's difficult not to reach for comparisons of the English elites and their acceptance of Nazi Germany as a normal state, with only a smattering of British right-wingers, like Churchill, grasping what Nazi Germany really was.
Just for fun, enjoy Dennis Kucinich's witty comment about our China policy at Crooks and Liars:
some of my friends here up on the up the stage actually voted for Most Favored Nation...now as President my most favored nation is America. Now I want to say that when I was growing up in Cleveland there was a myth that if you dig a hole deep enough you'll get to China.
We're there. [LAUGHTER]
And we need to have a president who understands that and is ready to take a whole direction on trade with China. Thank you.....
[Taiwan] [US] [China]
If China dump US $, US can embargo on Chinese goods to US. Can China survive without export to US for six months?
ReplyDeleteIf China dump US $, US can embargo on Chinese goods to US. Can China survive without export to US for six months?
ReplyDeleteThat's why it is called nuclear option. Btw, I think the Chinese is trying to tell us, there are two ways yuan can go up against dollars. One is yuans valuate at the cost of Chinese people or dollars devaluate at the cost of American people.
Chinese government is actually very smart at fighting yuan valuation unlike Japan did in the 90s listening to the US and force the valuation of yen, and guess what happened to Japan. It is a trap set by us asking Japan and now China to pay for our expensive life style.
Btw, Chinese government is actually making money on the scheme it uses to hold its currency steady. Whoever thought of that is a genius!
Arty, you have no clue about economics.
ReplyDeleteChina is artificially keeping the value of their currency low relative to the dollar by essentially loaning huge amounts of dollars back to the US to buy Chinese goods. If they stop doing that, the US doesn't need to embargo China because Chinese goods will become very expensive to buy in dollar-terms and people will stop buying.
Distortions to the economy of China is certainly not doing Chinese any favors. It's leading to over-investment in manufacturing at the cost of an underdeveloped service economy and suppressed domestic demand.
Taiwan's economy on the other hand has become heavily service oriented, and though domestic demand isn't quite where it ideally should be, unlike China's, is not in a bad spot.
Arty, you have no clue about economics.
ReplyDeleteYes I don't, and you do. I just hold a B.A. economic degree from one of the top 20 world universities according to almost every ranking. My worse grade is 3.7 out of all my economic classes. Btw, I also hold a B.S. (duel dipolma with my econ degree), a master, and a Ph.D. in a science field.
What you have mentioned in your post are elementary believes. Do you know China is actually making money out of its currency controls. Since you are the expert (I do not believe in experts because even the smartest experts make mistakes), can you tell me how do China's central banking doing that? I give you a hint, the cost of controlling currency is offset by the differential interest rate.
Arty, I have a BA from a top 10 school, and actually in my experience very intelligent people having science backgrounds actually gives them very little intuition with regards to economics.
ReplyDeleteIn any case, the embargo idea (which to your credit wasn't originally yours but you responded to it incorrectly) was wrong because of what you disdain as "elementary" principles. Let's get things right in the first order before we think of marginal second order effects shall we?
It is an open secret that China has very weak financial institutions, and they have been unsuccessfully and very awkwardly trying to slow down an overheated economy for at least the last year. I see nothing intelligent about the monetary policy of the Chinese. The "elementary" principles (and the burden would be on you to show why these core macroeconomic principles do not apply to China) argue that China is subsidizing US borrowing (i.e. it should be more expensive than it is, selling the "stuff" and "labor" of the country at a discount to the world), and it's over-investing in manufacturing, leaving it ill-prepared for a transition to a service-oriented economy when even the ridiculous valuation of the RMB can't keep prices low. Already, many labor-intensive factories are moving to Vietnam and other even lower-cost centers.
The problem with China is that it could hit a wall before it's rich. And that'd be a shame, because there are no winners in a world economy with a weak China.
Arty, I have a BA from a top 10 school.
ReplyDeleteIn Economics? English major doesn't count (you can fool others but some majors in US have standards and you have to apply to get in). Let me guess, you are teaching in Taiwan or China. I know many science majors who has either MBAs or a law degree. Just look at all major Universities' technology transfer offices. Caltech technology transfer guy has a Ph.D. in Chemistry and got his law degree after that passing the bar without problem, or just look at all the patent law firms, they all have at least a Ph.D. in science plus a law degree.
embargo idea (which to your credit wasn't originally yours but you responded to it incorrectly)
Enbargo? Who is talking about embargo? Clearly you either can't read or you don't know how China keep its currency afloat against dollars. Go read Economists or Wall Street Journal (they have a very detail analysis a few weeks ago).
It is an open secret that China has very weak financial institutions
That maybe true. Because a weak fiancacial institution need some definition. Euro and US banks are not much better especially after the US banking de-regulation after the late 90s that abolishes the divide between the finacial banks and the investment banks. Did you even read the US news? For example, two of Bear Stern Hedge Fund went from "we can save it" to "sorry it is worthless." New Century Fiancial Corp went from "we has 150 something billion cash credit line," to "we have 56 billion cash credit line," to "oh well we may suffer serious losses." And after all these, the so call experts in the states still saying it won't impact the main banking industry. D'oh, do you know who loan the money to those mortage companies (btw, over 100 of them went BOOM!) Here is a counter for it.
http://ml-implode.com/
Btw, I know many people are shorting major US banks. They put their money where their mouths are.
Sure China banks have their problems but just like all business cycle, sh@t happens. Ever heard of "Bulls make money, Bears make money, pigs got slaughtered." Btw, I sold all my US stocks last week of July. Not making much money now but sure is not losing it (cashing in yea baby).
China is subsidizing US borrowing (i.e. it should be more expensive than it is, selling the "stuff" and "labor" of the country at a discount to the world)
Btw, I don't agree with China is subsiding US borrowing. US T-bond yield is still one of the highest in the world. It looks more like Americans are mortage their expenses to their future generation. Since T-bond is of a fix value (do you know how T-bond work and how the % yield is calculated?), it could only turn into a bad investment if US currency devaluates badly, hence the "Nuclear Option." China really doesn't want to do it but we, Americans, shouldn't push our luck. Btw, only US thinks RMB is under-valued, just like they told Japanese during the late 80s and early 90s. Trust me, as long as Chinese currency control works (btw it's not embargo; it's more like playing the market and I am still waiting for you to tell me how China is doing it), it will stay where it is, and it is the market value.
http://bubbletracking.blogspot.com/2007/07/not-fair.html
Just like this vido, whatever it is valued on the market. It is THE MARKET value. Oh it also tell you how bad US housing market is.
it's over-investing in manufacturing, leaving it ill-prepared for a transition to a service-oriented economy when even the ridiculous valuation of the RMB can't keep prices low. Already, many labor-intensive factories are moving to Vietnam and other even lower-cost centers.
First, I intentionally left this part of your argument out. Second, do you even know how service-oriented economics come into being? When we say a economy is service-oriented it does not mean it has lower manufacturing activities. It simply means the cost of labor is a greater part of the production cost including the need of hiring a lawyers and having a robust financial system (stock brokers cost a lot of money), and it has nothing to do with monetary policy. For example, Fed controls US monetary policy but it does not control fiscal policy known as capital investments and infrastructures (last time I checked Fed didn't build the Hoover Dam). Fiscal policy is control by the executive branch i.e. the President. Btw, the largest company in the US is still GE and GM, so they don't produce any real products?
Btw, if you look at the figures, China still doesn't have over capacity problems. In addition, China is not only investing in physical developments. It has very strong capacities at chemical, biological, and electronic high-tech fields plus their heavy and military industry. China is launching a minimum of 20 commerical satellites for other countries and their own this year (they are taking away US' bussiness). I can even tell when I walk into my lab. All the Gibco growth medium that we are using today is made in China. A biotech company that my lab is working with ordered all their drug library compounds from a company outside of Beijing, and they people who is working on these are actually very high income ones (the head on the chemistry is at US pay scale). So do you still think China is ill prepared? For your information, I know American edcuated Ph.D. in science who can get higher paying job in China then Taiwan (they get US payscale if not more for living in China). Maybe Taiwan should be the one you really worry about.
All I can tell you that there will be no Cold War like situation between China and US or a real conflict becuase we are join to the hip. If we fall China falls and vice versa. So now let's talk about what do you think we will do when China come knocking at Taiwan's door (joking, let's leave it to another post).