Chinese Economics Thread

[Schumacher]

The drug use analogy by both of you is a bad one as drugs are always bad while cheap loans, which China is accused of providing, can mostly be used for good.
It's quite simple really, no need for analogy at all. If the recipient had simply used those loans for good investments like tech, education etc instead of wastes like stock/housing gambling & military adventures etc, it would be enjoying the returns now instead of drowning in this crisis caused by bad debt.
So all in all, another shallow article with more to do with finding blame for China than common sense.

Happy Spring Festival & welcome the year of the Ox everyone.

 

[AssassinsMace]

The drug analogy is correct since many try to figure out who's to blame more. In this case... the drug user is the American who has always lived in a culture (long before China started buying treasuries and exporting goods) that accepts spending money he or she doesn't have. The drug pusher is the financial system whose only concern is to make as much money as it can without regard to the consequences making it easy for people to take loans beyond their means. Is it the drug user or the drug pusher to blame for an epidemic of drug abuse. Here they've added another facet. Let's blame a third, forth, or fifth party for the problem. It's like blaming an oil company because it their was gas in the car of a drunk driver who hit and killed a child playing on the sidewalk. If the oil company didn't provide the gas, the drunk driver wouldn't have been able to drive a car and kill the innocent child. Why not blame the person who sold the car to the drunk driver? Why not blame the parents for letting their child play on the sidewalk unsupervised? This is a case of selectively choosing "anybody but me." In this case... There are those who placed a lot of their bets on the Western system being the best. They just lost big time. In order to distract people from the gigantic faliures of that system, they want to direct attention where denial can be more accepting to blame. China didn't put a gun to the US's head and force Americans to let China buy their debt.

 

[crobato]

A very negative scenario

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Hyperinflation Will begin In China And It Will Destroy The Dollar

Excerpt:

"I view hyperinflation in China as absolutely guaranteed. Zero doubt. China is dismantling all the measures it has put in place over the years to fight inflation. It is dropping restrictions on purchasing property, eliminating price controls, getting rid of loan quotas, lowering interest rates, ceasing its sterilization efforts, etc… It is also pulling out all the stops to boost government spending and new loan creation.

Meanwhile, China's 40 billion dollar trade surplus means that its base money supply looks set to double in 2009. There is also the fact that China's money supply is frozen due to cash hoarding and will cause inflation to increase when it accelerates. Finally, the commodity bubble has finished bursting, and China's economy looks set to shrink.

Every economic factor in China suggests an enormous wave of hyperinflation will begin early this year. While I have written about the threats facing the dollar, this will be the event that finally ends the US's borrowing binge and destroys our currency.

Hyperinflation in China will be a monumental event

Because China makes most of the world cheap consumer goods, it will export its hyperinflation around the world. This means that no fiat/paper currencies will survive this with its purchasing power intact. Some will lose all value (dollar) while others will survive while experiencing a loss of purchasing power (yuan, euro, yen, etc...). The only money that will retain its full value in the face of Chinese hyperinflation is gold.

China will sink the dollar to save the yuan

Once hyperinflation kicks into gear, Chinese authorities will find it impossible to bring it under control without sacrificing the dollar. Since hyperinflation would hurt Chinese exporters as much as losing their US exports, China will face a clear cut decision. By dumping the dollar peg and selling its USD holdings, China will help contain domestic inflation in many ways:

1) China will no longer be printing massive quantities of yuan to support the dollar.
2) By selling dollars in exchange for yuan, China will be able to take those yuan out of circulation, shrinking its monetary base.
3) Since the yuan will strengthen enormously again foreign currencies, Chinese exports will fall and that means there will be a lot more goods available for domestic consumption.
4) Since the yuan will be stronger against foreign currencies like the dollar, Chinese imports will rise. That means cheaper commodity prices across the board.
5) Dropping the dollar peg will make the yuan a major reserve currency. That means lower interests rates in China as foreign central banks build up yuan reserves.

Those expecting deflation are in for a surprise

Western nations who are lowering interest rate very sharply, without fearing inflation, are mainly concentrating on the domestic dynamics of their economies and the value of their currency. My bet is that no one is even considering the possibility that inflation could be imported from China, and, when cheap Chinese imports stop being cheap anymore, it will catch everybody completely by surprise. "

 

[bladerunner]

China didn't put a gun to the US's head and force Americans to let China buy their debt.

Ok they didnt but where would they have parked, earlier artices posted by members have suggested that at the Time of accumulating such surplus. Chinas banking structure and regulatory bodies , would have been too immature to handle it, perhaps thats another reason why they are looking at overseas acquisitions

 

[bladerunner]

Interesting article crobato but how much credibility can you give the site.

There was another article which suggested China wasnt the biggest purchaser of T Bonds

The US placed about $1.3 trillion of Treasuries with non-Chinese investors in 2008
Posted on Saturday, January 24th, 2009
By bsetser

Yes, China probably bought close to $400 billion of Treasuries too. My top secret model says China bought exactly $374.571 billion of Treasuries in 2008, a record. China certainly bought far more Treasuries in 2008 than in 2007. My model, which accounts for flows through London, suggests that China added $120.3 billion to its Treasury portfolio in 2007.

But the big surge in demand for Treasuries in 2008 didn’t come from China. Other investors increased their holdings of marketable Treasuries by $1310 billion. That is a huge increase from the (estimated) $127 billion increase in their holdings of marketable Treasuries in 2007.

It stands to reason that investors should be debating whether this surge in non-Chinese demand can continue [it can’t], not whether China will keep on buying Treasuries.

Relatively speaking, the big change in 2008 was the emergence of non-Chinese demand for Treasuries. And not all of that demand came from central banks either.

 

[crobato]

Actually, the largest share of US Treasuries have been traditionally held by US institutions and individuals. A lot of it are in intraovernment institutions like Fannie Mae. Still in relative proportion to others, US has the largest debt owned by foreign concerns. This foreign share of the pie has grown larger and larger each year.

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"A traditional defense of the national debt is that Americans "owe the debt to themselves", but that is becoming increasingly less accurate. The US debt in the hands of foreign governments was 25% of the total in 2007[35], virtually double the 1988 figure of 13%.[36] Despite the declining willingness of foreign investors to continue investing in US-dollar–denominated instruments as the US Dollar has fallen in 2007,[37] the U.S. Treasury statistics indicate that, at the end of 2006, foreigners held 44% of federal debt held by the public.[38] About 66% of that 44% was held by the central banks of other countries, in particular the central banks of Japan and China. In total, lenders from Japan and China held 47% of the foreign-owned debt.[39] This exposure to potential financial or political risk should foreign banks stop buying Treasury securities or start selling them heavily was addressed in a recent report issued by the Bank of International Settlements which stated, "'Foreign investors in U.S. dollar assets have seen big losses measured in dollars, and still bigger ones measured in their own currency. While unlikely, indeed highly improbable for public sector investors, a sudden rush for the exits cannot be ruled out completely."

Next to Gold, Treasuries is considered like a safe haven. The more people fear the fall of the US dollar, real estate, bonds and stocks, the more people will flock to Treasuries in the short term as a safe haven.

However, the next great economic crisis may see this as its linchpin.

 

[AssassinsMace]

Ok they didnt but where would they have parked, earlier artices posted by members have suggested that at the Time of accumulating such surplus. Chinas banking structure and regulatory bodies , would have been too immature to handle it, perhaps thats another reason why they are looking at overseas acquisitions

The outgoing Treasury Secretary Paulson blamed China too for the financial crisis but for saving too much money. To which China responded the US holds restrictions on high technology China can buy so it can only basically use its surplus to put it into treasuries. Meaning going against the rules of capitalism, China is restricted to buying from the West what it produces itself and at a lower cost. Saving too much... not buying US goods... a result of US trade policies. A problem of their own making.

 

[bladerunner]

Next to Gold, Treasuries is considered like a safe haven. The more people fear the fall of the US dollar, real estate, bonds and stocks, the more people will flock to Treasuries in the short term as a safe haven.

However, the next great economic crisis may see this as its linchpin.

From my recollection on what I listen to on Utube 'Peter Schiff interview

He has a opposite view

 

[crobato]

That's true. That's why he says, along with a few others, the next economic crisis will hinge on the Treasuries. Basically he says, a lot of people are not going to buy it because they have their own internal concerns, and by this he means foreign investors like China and Japan. This will cause demand for securities to drop and in order to get more buyers, you need to raise the interest rates.

 

[bladerunner]

Cap/Trade/ Carbon Emissions Trading

I wasn't to sure whether the topic would have enough interest to justify its own thread, but heres a question from some who has a complete lack of understanding on the topic..

Wont this business over time suffer from the same mess we have seen in currency and commodities speculation. Seems like another scheme where some people can make a lot of money from bits of paper again as they clip the ticket along the way, and we might see it as a another source of rather strange but speculative and sophisticated investment instruments
I cant see what was wrong with direct taxation or incentives at source, and run by our respective govt depts.