US Financial Crisis/Bailout, China's Role

FugitiveVisions said:

Crobato, you really make some good points. I think that we agree that there is going to be a hard landing at some point for the US economy, especially if the US continues to pursue this fiscal policy of cutting taxes and increasing benefits by borrowing more and more. But where we disagree is how hard the landing is going to be and how it will impact China. I just don't see China, where domestic consumption still makes up less than 40% of GDP, can really pick up the slack without a catastrophe for the manufacturing sector. That's just a function of the slow transition of moving from a manufacturing based economy to a service based economy and great disparities in wealth between one half of the population and the other half. And for that reason alone, I see China taking measures like this recent one where a group of nations came out to promise holding on to T-bills.

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China's exports to the US constitutes roughly about 1/4th of all China exports. So where does all the 3/4ths go? IMO, the US market is important, but it is well over rated by many watchers.

And another thing, if the US economy declines, the first thing to suffer are higher end products and luxury goods. Except that this isn't where China's best known at, but rather the Europeans and the Japanese. People are not going to buy that high end $300 Japanese DVD player, but they will still pick up that $30 made in China player from Walmart. So the sales of BMWs and Mercedes Benzes will be impacted, but these are not Chinese products, aren't they?

You need to be so seriously poor before you can stop affording products even from China. With China's exports to the Third World booming, it shows you that kind of income level will still be enough for cheap Made in China products.

The Americans needs to go down below Third World levels before they will stop buying Chinese products. Consider this, use China's GDP per capita as a measure of the individual's income before he can stop to afford products Made in China. Perhaps even lower.

The more Americans are forced to thrift, the more they will be forced to buy in the low end. The real threat to the Chinese export markets would be even cheaper products made somewhere else. However, not too many third world countries can match the combination low costs with efficiency. The thing that is going to change would be the disposition of the products.

And I also disagree that foreclosures were caused by people losing their jobs. We gotta look at the cause and effect. When Greenspan began to gradually increase interest rates back to the 5% range, that dramatically increased the adjustable rate for a lot of home buyers. And since then it's been a vicious cycle of main street dragging down the banks' balance sheets, which in turn tightens the credit on main street. There will come a point when rent and purchase prices converge, and like previous bubbles, this one will bottom out where it started.

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Let's say I beg to disagree that its a mere interest rate that caused the foreclosure crisis. I believe that foreclosures, much like bankruptcies and the unemployment rate, are direct measures of the health of the economy, and when all three indicators are up in a record breaking sustained month after month way, something is seriously wrong at the core. After all, what causes a bank to foreclose on a mortgage? Its not because the surrounding values become cheaper than the mortgage. Its because the mortgagee fails to make his payment to the bank. What causes him to stop his payments? Take a guess. Its all cause and effect.

FriedRiceNSpice said:

You could export to those other regions, but demand will be very low since those regions do not possess developed, consumption-based economies nor high incomes. The rest of the world combined has far less purchasing power and demand for Chinese goods than the US + Europe.

Btw its Chongqing

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Nope. Your describing the kind of consumer society that can buy a Lexus or a Louis Vitton. Which are not Chinese products save for the imitations. It just happens to be the low end, less purchasing power society that can best afford cheap Chinese products. And I think you need to fly around the world, to see exactly what kind of consumer societies that you are missing.

This is a post earlier in the year looking at China's degree of dependence on exports.



So far with what we see with growth still at 8-10%, I see no need to change my opinion thus far that China can manage to decouple from the situation in US. Of course, that's different from saying it'll be totally immune.
As I said in an earlier post, China may even use this as a relieve/opportunity with regards to the high resource prices.
I see China picked up some smallish oil/mining stocks in Aust/Canada/Norway recently. These looks to be much better deal than beaten down financial stocks unless the financials can offer China significant safety net for taking on the risks like what GS gave Buffet recently.

Speaking of Buffet, I see he's taken a bet on China's BYD. Looks to me like a long term winner.

Hahaha, I see people here are still missing the point.

Why would China want to sell ANYTHING to the USA?

Pray tell, what can Americans give IN EXCHANGE for the goods China is sending over here?

Are you Keysian #*ores thinking yet?

Seesh daveman, calm down.

Another point I want to make. It may be in the interests of China's domestic economy to quickly decouple so that it is less affected by the US's economic crisis. However, it may be in China's geopolitical interests to stay as necessary as possible to the US. Why? The best deterrent to a Sino-US war is the economic interdependency. It is China's deterrent for all of the US's high tech toys. As long as the US dominates militarily, it may make sense for China to make itself indispensable to the US. The loss of value on debt holdings or whatever economic consequences are the necessary price to pay for the deterrent.

crobato said:

People are not going to buy that high end $300 Japanese DVD player, but they will still pick up that $30 made in China player from Walmart. So the sales of BMWs and Mercedes Benzes will be impacted, but these are not Chinese products, aren't they?
.

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Actually , I would even venture to suggest that BMWs & Mercs biggest markets will be China , so to a large extent , the demise of the US market will be cushioned by the Strong China domestic market .

( And sales margins per car in china are better than the US)

RedMercury said:

Seesh daveman, calm down.

Another point I want to make. It may be in the interests of China's domestic economy to quickly decouple so that it is less affected by the US's economic crisis. However, it may be in China's geopolitical interests to stay as necessary as possible to the US. Why? The best deterrent to a Sino-US war is the economic interdependency. It is China's deterrent for all of the US's high tech toys. As long as the US dominates militarily, it may make sense for China to make itself indispensable to the US. The loss of value on debt holdings or whatever economic consequences are the necessary price to pay for the deterrent.

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I beg to differ IT is illogical and morally bankrupt for Poor country like China to lend money to to rich country so that they can go on spending binge and speculate on House price Worst still allowing the rich country to buy a gun and pointed it right back to China. Just doesn't make sense

Eventually those high defense spending need to come down Because there is no need for it Just like Gates said the other day and warning about "next war itis syndrome"

China's dependence on Export is wildly exagerated as this report clearly show

China's economy is driven not by exports but by investment, which accounts for over 40% of GDP. This raises an additional concern: that weaker exports could lead to a sharp drop in investment because exporters would need to add less capacity. But Arthur Kroeber at Dragonomics, a Beijing-based research firm, argues that investment is not as closely tied to exports as is often assumed: over half of all investment is in infrastructure and property. Mr Kroeber estimates that only 7% of total investment is directly linked to export production. Adding in the capital spending of local firms that produce inputs sold to exporters, he reckons that a still-modest 14% of investment is dependent on exports. Total investment is unlikely to collapse while investment in infrastructure and residential construction remains firm.

An American downturn will cause China's economy to slow. But the likely impact is hugely exaggerated by the headline figures of exports as a share of GDP. Dragonomics forecasts that in 2008 the contribution of net exports to China's growth will shrink by half. If the impact on investment is also included, GDP growth will slow to about 10% from 11.5% in 2007. This is hardly catastrophic. Indeed, given Beijing's worries about the economy overheating, it would be welcome.

The American government frequently accuses China of relying excessively on exports. But David Carbon, an economist at DBS, a Singaporean bank, suggests that America is starting to look like the pot that called the kettle black. In the year to September, net exports accounted for more than 30% of America's total GDP growth in 2007. Another popular belief looks ripe for reappraisal: it seems that domestic demand is a bigger driver of China's growth than it is of America's.

The best deterrent to a Sino-US war is the economic interdependency. It is China's deterrent for all of the US's high tech toys. As long as the US dominates militarily, it may make sense for China to make itself indispensable to the US.

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Are you implying that China must get on its knees and grovel before the all mighty US of A!?!?!
Are you saying China does not possess the military means to defend herself?
Are you saying China is powerless before the might of the United States military??
If you are, then you are very, very mistaken. War is not about high tech toys. Short of the usage of the strategic nuclear arsenal, the US cannot threaten Chinese sovereignty. Sure, the US can deny China its strategic interests abroad using military means, and make things difficult for China far beyond her borders. But as long as Chinese territorial integrity is not at threat, which the US can NEVER even HOPE to threaten without resorting to nuclear means, it should not get on its knees. Hell, I'd rather see China lose Taiwan than to lower itself to the status of America's vassal.

China has many, many reasons for economic cooperation with the United States. Both nations stand to benefit from mutual trade. Yes, there are good reasons for China to finance American purchases in the past; but fear of the US military is not among them. Yes, increased trade should be encouraged so that the two nations will be so dependent upon each other economically that war will lead to economic MAD, but the reason being for the best interests of both nations and world peace and stability at large; not because China is under America's thumb.

There are some good points here and there throughout the thread.

First off, exports are about 10% of China's GDP, not 40%. The loss of income that would happen from a collapse of exports is actually quite imaginary since China was never getting much value from these activities anyway.

An unemployment problem that would result from a collapse of exports would only be temporary. Workers will find new jobs. Wages would readjust and since labor will actually be used for productive economic activity and not make-work schemes like the current export industries are, GDP growth will increase.

Secondly, the US would never allow China to actually buy anything valuable. So strike that idea right away. The only allowable role for China is to buy dollars and hold them while dollars are printed. This results in a redistribution of wealth away from China to the US.

Thirdly, China has been playing this role for a while now -- from around 2003. The value of the dollar has decreased by about 15% since then. Judging from how much dollars China has been holding, it loses roughly $30 billion per year.

How does it do it? By undervaluing the RMB of course. Without an undervalued RMB, printing of dollars would be redistribute wealth away primarily from citizens and corporations to the US government. Now China foots a big part of the bill.

Fourthly, why does China do this? China's leaders are convinced that paying roughly $30 billion per year to the US would influence important US policies affecting China. It's just like a payment for services, and it amounts to about 1% of GDP. It's also about 1/2 of the military budget.


Now with the whole crisis, the question is ultimately how much is China willing to cough up. Right now there is probably no consensus. Certainly, one faction will believe that China should pay more and maybe the influence China would have will be worth it. Perhaps another faction will argue that China can deal with its affairs on its own and US policies toward China are not that important anymore -- so paying for influence is no longer essential.

I don't see why China should intervene when 2/3rds of the Republican congresspeople and 1/3rd of the Democrats and all their constituents won't want to intervene with the bail out bill. It would only be taken as an unwanted intervention and people will not be grateful.

If China should intervene, it should be in a way that the money should go directly to the Main Street banks rather than the US government and Wall Street. That way it serves the American middle class directly.