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EJ
08-07-07, 06:56 PM
http://www.itulip.com/images/CCP-USA50.gifWill China Sell?

Place your bets: The temporal rationality of Congress vs the ruthless rationality of the Chinese government.

We all knew it would come to this eventually. Over the years as the goods made in China piled up in U.S. homes and a mountain of U.S. agency and treasury paper piled up in China, the following idea was proposed by nine out of ten economists with no accountability for their theories, and accepted as expedient truth by U.S. economic policy makers: China will never be so foolish as to sell U.S. Treasury Bonds and crash the U.S. economy, the main source of demand for its goods, and the U.S. Congress will not be idiotic enough to impose trade sanctions on China to force China to devalue its currency and, as a consequence, slow the torrid growth of the Chinese economy, upon which the Chinese government depends to maintain political legitimacy. (Note: Two items comprise the entire list of deliverables that maintain an unelected government in power: domestic economic success or heavy handed domestic repression.)

As we mentioned over a year ago in Economic M.A.D. (http://www.itulip.com/economicMAD.htm), miscalculation is not rare in international affairs, and is especially likely when the calculations are being made by people who have a well established track record for error.

There is little in the past behavior of the Chinese government to encourage the belief that it will initiate a mutually destructive economic exchange with the U.S. The Chinese government is nothing if not ruthlessly rational. Instances of Congress behaving irrationally and self-destructively, on the other hand, are legion.

Most famously in the area of economically devastating legislation, the signing into law of the populist Smoot-Hawley Tariff Act in June 17, 1930. While proving politicians responsive to the will of millions of unemployed voters the law helped turn a bad recession into The Great Depression. At the time, nine out of ten economists warned of this result, but Congress wasn't listening. Economists warned that it would invite retaliation by European powers. The unpopular Hoover signed the tariff into law anyway, perhaps hoping to score a few political points. Turned out the economists were right that time and that the European threat of retaliation was no joke. We doubt the Chinese are joking, either.

More recently, Congress stood by as a massive housing bubble developed. As we enter the inevitable collapse-and-hearings stage that marks one of the final stages of a bubble, the extent of Congressional economic know-how is revealed. Not easy to watch on a full stomach.

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Video Created by Friend of iTulip john67elco (http://www.youtube.com/user/john67elco) on YouTube

Apparently, the Chinese are worried that Congress will behave like Congress, and are making an effort to instill some rationality.
China threatens 'nuclear option' of dollar sales (http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/07/bcnchina107a.xml)
August 7, 2007 (Telegraph - Ambrose Evans-Pritchard)

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.

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 (Ł658bn) 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.
On the U.S. side of the table, we have the political think tankers taking the position that the problem is China's policy of maintaining an artificially undervalued exchange rate. The advice is music to your congress-person's ears, because it means they can avoid the more politically difficult question of why their constituents are unable to save enough income to fund the government via taxation and why thus the U.S. is out hat-in-hand borrowing from China in the first place.
A Slow-Moving Chinese Train Wreck (http://www.aei.org/publications/filter.all%2CpubID.26616/pub_detail.asp)
August 7, 2007 (American Enterprise Institute)

As U.S. Treasury Secretary Hank Paulson ends yet another round of Strategic Economic Dialogue talks in Beijing with very little progress to show for his efforts, one cannot help feeling that one is watching a slowly unfolding Greek tragedy. For all the main protagonists of this drama play their parts seemingly oblivious to the very unhappy end towards which their actions are inexorably leading them. And they certainly pay no heed to the growing chorus of Cassandras warning of the grave dangers to the global trade system that lie ahead.

Among the leading protagonists in this drama are Chinese President Hu Jinato and Vice Premier Wu Yi, who represent the Chinese Communist Party in these talks. Filled with hubris, they never seem to tire of reminding Mr. Paulson of China's 5,000-year glorious imperial past. Nor do they tire of making it quite clear that a country of China's historic importance is not about to change its exchange rate policy under pressure from the United States, a relative newcomer on the international stage. Rather, they insist that the Chinese government will set its exchange rate policy exclusively in China's own national economic interest.

The Chinese also make it quite clear by their actions, if not by their words, that they view China's economic interest as that of maintaining an artificially undervalued exchange rate. They do so with a view to allowing China's exports to grow each year by a staggering 30 percent, which they see as the only realistic way that the Chinese economy can absorb the 10 million workers who leave the Chinese countryside for the cities each year.
The question of "who is right," is academic. The questions are, Will Congress push the plunger? And if it does, will China sell?

If Congress does anything to significantly damage China's economy, and this the domestic political position of the Chinese government, you can count on it. They will have to, just as the Europeans did in the 1930s. That is the unforgiving logic of the economic and political relationship between the U.S. and China. What is not known is the strength or fragility of the Chinese government in the eyes of its population, and whether a seemingly minor political move by the U.S. might precipitate an economic and then a political crisis there.

Will Congress push the plunger? Can they behave that irrationally and self-destructively?

It's an election year. Anything is possible.

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Uncle Jack
08-07-07, 07:09 PM
Will China Sell?

Will Congress pull the trigger? Can they behave that irrationally and self-destructively?

It's an election year. Anything is possible.

Yes. I believe Congress will pull the trigger. Oddly enough, just when you think you're not getting representation by your government, they're going to crack down on the Chinese as a result of the pain and suffering their constituents are feeling; a transference of "please do something." That "something" will be to punish the Chinese without realizing, even if told of the consequences, that those consequences will be to punish themselves.

Like Aykroyd in Ghostbusters when told to choose his destroyer, he said he thought of the most harmless creature he could imagine from his childhood, the Staypuft Marshmallow Man. Boom, in walks the 100ft version of your dream.

Yes. They have before and they will again. They are a representation of the stupid herd.

Not only possible, but likely.

zoog
08-07-07, 08:14 PM
Yes. I believe Congress will pull the trigger. Oddly enough, just when you think you're not getting representation by your government, they're going to crack down on the Chinese as a result of the pain and suffering their constituents are feeling; a transference of "please do something." That "something" will be to punish the Chinese without realizing, even if told of the consequences, that those consequences will be to punish themselves.

Like Aykroyd in Ghostbusters when told to choose his destroyer, he said he thought of the most harmless creature he could imagine from his childhood, the Staypuft Marshmallow Man. Boom, in walks the 100ft version of your dream.

Yes. They have before and they will again. They are a representation of the stupid herd.

Not only possible, but likely.

I agree. Not only is it a way for them to show the voters that they're doing something, but it makes China the bad guy instead of the US Government, Fed, Wall Street, etc. Shifting blame is always politically advantageous.

slackful
08-07-07, 08:58 PM
How many times has Paulson been to China? He's obviously involved in some protracted negotiations. Looks to me like the Chinese aren't getting some things they want, and are creating a negotiating position with these threats. Doesn't necessarily seem like a big deal to me. I'm guessing that the Chinese are very well aware that Congress is going to take a few swings at them, they're trying to minimize the inevitable damage. And I don't expect it to be much damage, since reality is on the Chinese side. Nothing will stop the worldwide labor arbitrage no matter what Congress does, no matter how painful to e.g. residents of North Carolina formerly building furniture or making towels.

Sapiens
08-07-07, 09:51 PM
What do you think Paulson has been doing in China? Of course he needs the Chinese to sell!

What happens after the MBS,CDO implosion and re-pricing? Deflation. They [the U.S.] need China to monetize those bonds in order to rob them of their future purchasing power.

The Chinese aren't stupid, they know their USD came from the monetization of real estate, they know it is in their interest to hold on to the Treasuries.

In my opinion, I suspect that there is artificial market support in order to get the Chinese to play, but time is running out. I don't think Joe and Jane Sixpack can hold for another year.

Beautiful chess game at hand people.

-Sapiens

The Outback Oracle
08-07-07, 10:08 PM
Given that in modern Economic "wisdom" "Deficits don't matter" - does the U.S. Congress and Government even see the danger?
I have been amazed that, while trying to project military power all over the place, successive Governments have allowed the nation to be white-anted from the inside with poor policy.
I am aware that as an Australian I am living in a glass house!!

Darin
08-07-07, 10:49 PM
http://www.itulip.com/images/CCP-USA50.gif

Will Congress pull the trigger? Can they behave that irrationally and self-destructively?


As usual, awesome graphic.

Greenspan was a phenomenal politician. He garnered consensus among central bankers, Congress, and the White House. Bernanke, on the other hand, may not realize that it's his job to talk, convince, schmooze, and otherwise advise Congress in a less academic way.

While EJ frames it as what will Congress do, I think the more pertinent question will be what will China respond with. Obviously, selling 1.2Trillion would be quite the nuke. But what about selling 200Billion. It's a 1/6 nuke that would make a significant scare. Jong Il Kim exploded a couple of nukes in a mountain and all the necessary parties came to negotiate, and quickly. China is different from Korea in that they already have the upper hand and I would imagine they would extract even more pain from us. We continue to export worth to them. To make a twist on an old phrase, it makes no sense for them to cut off our nose to spite our face. But, if it gets us to cooperate and work harder to give them more wealth, they just might.

On the other hand, oil is denominated in US$, China will just posture.

If oil becomes denominated in a basket currency or euro, I contend that China will use us to wipe their floors, build their railroads, and tailor their clothes a la 1800's. How? Maybe they'll buy less bonds, sell the ones they have, open the flood gates at the wrong time, whatever will keep them leveraged and still keep exporting wealth.

As for the original question, Congress, thankfully, is neutered. As such, Bush will likely veto anything because Paulson tells him to.

zoog
08-07-07, 10:54 PM
Given that in modern Economic "wisdom" "Deficits don't matter" - does the U.S. Congress and Government even see the danger?
I have been amazed that, while trying to project military power all over the place, successive Governments have allowed the nation to be white-anted from the inside with poor policy.
I am aware that as an Australian I am living in a glass house!!

White-anted... that's a new one to me. Aussie slang for termites, from what I gather.

I'm of the opinion that most of our politicians are about as well-informed as Joe Sixpack when it comes to economic issues (or anything else, frankly). After all, they are lawyers, not economists. Most do not forsee the consequences of sanctions against China, and any that do are likely beholden to powerful interests who want them to ignore those consequences.

It all comes down to who is bluffing in this game of chicken. The US may have the sportscar that could swerve away at the last second, but China has the freight train loaded with consumer goods.

http://www.itulip.com/images/crash.gif

metalman
08-07-07, 11:33 PM
I'm of the opinion that most of our politicians are about as well-informed as Joe Sixpack when it comes to economic issues (or anything else, frankly). After all, they are lawyers, not economists.

whatever do you mean, zoog? you aren't encouraged by the crack job our political leadership did steering us around the mortgage debacle?


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zoog
08-08-07, 12:11 AM
whatever do you mean, zoog? you aren't encouraged by the crack job our political leadership did steering us around the mortgage debacle?<object height="350" width="425"></object>

"It was the best of times, it was the worst of times" :rolleyes:

I have a dismal view of politics and politicians. With that perspective noted, I hope that somewhere in my lifetime we have some real leadership from the people pretending to run this country. Thus far I have yet to see any.


If Congress does anything to significantly damage the domestic political position of the Chinese government, you can count on it. They have to. That is the unforgiving logic of the economic and political relationship between the U.S. and China. What is not known is just how strong or fragile that standing may be, and how even a seemingly minor political move by the U.S. might precipitate a political crisis in China.

This is an intriguing question. My speculation is that the Chinese government is in a strong position domestically so long as their economy continues to boom. Especially while their stock market continues to shoot for the moon, sucking in the sheeple along the way. I have read arguments on either side of the debate of whether a crash in their stock market would crash their economy. I say, it doesn't matter. When it crashes, and so many average Chinese have lost their life's savings, their homes, etc., the government will be facing a potential uprising. They will take whatever measures necessary to maintain stability and power, no matter what it does to the US or the rest of the world.

idianov
08-08-07, 01:31 AM
In my opinition, China is dead serious about protecting the value of the accumulated cash reserves and will do everything to ensure their value is not shrinking with falling dollar and inflated asset prices.

Selling US bonds will raise borrowing costs to slow US dollar depreciation by borrowing. The US dollar will be supported by higher rates and lower financial asset prices.

The recent liquidity disruption in US credit market could be a warning message to US caused by massive yuan-denominated bond offering at the end of June. The US should take China seriously. China government seem to follow through on their promises.

c1ue
08-08-07, 05:53 AM
My view on China is much more prosaic.

I actually believe that the government in China is much more likely to act a la Putin than to change into a 'democratic' or euro-socialist government.

Putin has demonstrated that it is possible to (at least short term) use governmental power to secure geostrategic resources for government geostrategic empowerment without upsetting the military portion of balance of power. There are other examples such as with Venezuela.

I suspect the only reason China has not done so is that they do not yet recognize that their production cost advantages can amount to the same thing - or at least that any public acknowledgement of this would eventually lead to the population realizing that they are collectively, permanently, going to be poor relative to those who consume Chinese output.

I base this belief on official China white papers even from 5 or more years ago which have talked about how it will be impossible to achieve Western lifestyles, but which explicitly fail to explore the corollary that then that strictly speaking, the allure of capitalism as a whole is complete fiction for the overall populace.

Of course, this is likely because no one has any clue as to how far China can improve their economic situation given that they are much larger than any other nation.

It could very well be that China is only using capitalist/mercantilist policies as far/long as they are able to, after which there will be some other plan.

The money accumulated in this process is only a tool, and tools can be discarded or broken in order to achieve higher goals.

Charles Mackay
08-08-07, 10:33 AM
Losing our manufacturing capability is a national security issue. Once it's lost it's difficult to get back because the expertise has disappeared and is not passed on to the next generation. The time to have done this was when China's USD reserves were only $200 B.

How does Germany keep her manufacturing capability even at 1.38 Euro and we can't keep ours with a dollar breaking down thru .80 USDX?

mlg120856
08-08-07, 11:05 AM
The Chinese do not have to sell treasuries. They can use their trillion dollars of forex reserves to buy yen. This would result in the yen strengthening and an end to the carry trade with huge damage to US investment banks (Paulsen's Goldman Sachs), hedge funds, etc. This would fit in nicely with the demand from Iran that they want to be paid in yen for oil--another reason for the Japanese to "let" the yen strengthen against the dollar.

lobodelmar
08-08-07, 11:25 AM
My view on China is much more prosaic.

I actually believe that the government in China is much more likely to act a la Putin than to change into a 'democratic' or euro-socialist government.



I'd actually argue that Putin is the one who learned from China...they were the ones who have been able to enable economic growth while so effectively preventing civil liberties and personal freedom from getting in the way.

Either way, it is clear that the interdependence is a good thing and a bad thing. They need us as much as we need them. Better that way rather than an imbalance which could result in military agression rather than just trade policy bickering...

I expect there will be Congressional rumbling but lack of real destructive action. Election years are great for whipping out the flag, blaming economic hardship on those poor quality Chinese manufacturers, who we can't trust, who clearly stole American jobs, and who are irrationally holding a financial club over our heads. Well, we won't stand for it Mr. and Mrs. America...Vote for me and we will protect you and bring jobs back to the US. But then more of the same, and it will all just be posturing.

I do think the threat of a 200bn bond sale is a real one though. Despite my b-school finance classes, I still don't feel comfortable trying to make bets in the bond or options markets...all that price/yield and put/call stuff makes my head spin.

lobodelmar
08-08-07, 11:28 AM
How does Germany keep her manufacturing capability even at 1.38 Euro and we can't keep ours with a dollar breaking down thru .80 USDX?

Socialism. Hard to liquidate and move companies out of a country if you could no longer sell in that market afterwards.

Ishmael
08-08-07, 07:54 PM
Well this is all nice but status quo is not going to cut it. Should we just continue allowing their foreign currency reserves to increase? At some time the music is going to have to be faced. It was insane to allow it to have gone on this far so that this conversation is even taking place.

At some time you have to jump off of the tiger. Problems only grow bigger the longer they are not addressed. China has been a crutch to keep the US from facing its problem.

Standard of living will decrease no matter what is done. That is a fact jack! We have lived beyond our means for quite a while and borrowing from the future to do so.

stumann
08-08-07, 11:10 PM
Where will you find the deep pocket fool willing to buy China's US$ holdings which decline in value as a result of the sale?

This seems a clear case of disinfo planted in the media in order to scare small investors into overseas diversification - meaning, going more heavily into foreign, high risk mutual funds. Those already overseas (the smart money who recognize China's "miracle" is about to implode) wanna get back into US$s and leave Ma & Pa "Investor" holding the bag again, yet again. Just like the JFK assassination was a US black op come home to roost, so this is an Asain Currency Crisis being plotted against the average US "investor".

I still say the kaboom will be felt MAINLY overseas, but not really so much in the US. The US is now the center of the financial world. Recall that the UK had been the center during the 30s, and it was WW2 rather than the Depression which caused them the most harm.

Why do you think only the US is the only one feeling the effects of the housing bubble? Why not the UK, not Australia or New Zealand? They zoomed much higher on far less wealth. That's one big red flag - these weak currencies are being set up to implode. The big US banks are taking their lumps now so that they'll be ready for the huge wave of capital about to flood back into the US.

US Dollar about to collapse??? Don't buy the hype.

c1ue
08-09-07, 02:44 AM
I'd actually argue that Putin is the one who learned from China...they were the ones who have been able to enable economic growth while so effectively preventing civil liberties and personal freedom from getting in the way.

SeaWolf, (and yes, I do read Spanish)

Unfortunately in this case, your argument could be sensible but wrong.

After Putin left the KGB sector in East Germany, he went back to school.

Guess what his doctoral thesis was?

How Russia should regain control of its energy resources as a path to empowerment in a post Soviet world.

This was 1997 - back then it was much too early to see where China would be today.

This is the blueprint for Putin's rise to power - the suppression of the press and what not is an extension of this policy and not the reverse.

Additionally from a pure argument standpoint - China has been acting as a collaborator with the US and Europe.

I do not see Russia acting in this role in any way outside of 'antiterror'.

While China did demonstrate an anti-satellite weapon and also shot some unarmed missiles into Taiwan, Russia has cut off supplies from several neighbors including EU zone members, has publicly and explicitly come out against US policies in Iran and other places, as well as publicly questioned US hegemonic military behaviors among many other examples.

c1ue
08-09-07, 02:58 AM
I still say the kaboom will be felt MAINLY overseas, but not really so much in the US. The US is now the center of the financial world. Recall that the UK had been the center during the 30s, and it was WW2 rather than the Depression which caused them the most harm.

I do agree with this statement, with the caveat that only those overseas countries exhibiting the same behavior as the US (i.e. current account deficit, failure to increase internal value creation via manufacturing, invention, etc) are going to suffer as credit dries up.

See the
Michael Hudson interview regarding Latvia.

However, those countries which have monopoly pricing power in commodities such as energy - the opposite will occur.


Why do you think only the US is the only one feeling the effects of the housing bubble? Why not the UK, not Australia or New Zealand? They zoomed much higher on far less wealth. That's one big red flag - these weak currencies are being set up to implode. The big US banks are taking their lumps now so that they'll be ready for the huge wave of capital about to flood back into the US.

The UK has a very clear housing bubble, so does Australia. NZ I don't know, but NZ does have very high interest rates as their CB is trying to keep people from using the kiwi for the carry trade. High interest rates are explicitly different than what caused the housing bubbles in the US and UK.

Furthermore the UK has set itself up as the big extra-judicial country just outside of Europe - in the financial sense.

Why suffer from needless over-regulation from the socialist governmental model in the EU zone when you can list in London? London is to EU companies in stock markets as Liberia is to ships.

Australia is a commodities country which has benefitted from the Asian growth boom. Irregardless of their economic policies, overall the AUS economy has been growing and in turn reduces the negative effects of housing lack of affordability. This somewhat also describes NZ as a food supplier.

The benefits seen by UK, AUS, and NZ above don't apply to the US.


US Dollar about to collapse??? Don't buy the hype.

I'm not buying the hype, I'm buying outside of the US and other currencies :rolleyes:

Tet
08-09-07, 10:47 AM
SeaWolf, (and yes, I do read Spanish)

While China did demonstrate an anti-satellite weapon and also shot some unarmed missiles into Taiwan, Russia has cut off supplies from several neighbors including EU zone members, has publicly and explicitly come out against US policies in Iran and other places, as well as publicly questioned US hegemonic military behaviors among many other examples.

China bought $40 billion of South American debt three years ago freeing Brazil and Argentina from the IMF/World Bank. China is the largest lender in Africa right now and that doesn't involve the $$ either. Russia has not turned off gas to the EU, they've shut down pipelines that require d0llars for a transit fee and had countries take their deliveries by tanker. Ever wonder why France and Germany spent all the money on $200 million Super LNG tankers if they could get all the gas they wanted by pipe? Why does Germany want to spent $10 billion on an underwater Baltic pipeline if they can get all the gas they want from Polakistan? Russian oil and gas exports are soaring out of the Baltic and have almost increased by a factor of Four in just the last four years.

SCO holds military exercises next week, looks like it's more than just Russia or China fighting back. It's going to be an interesting year, and certainly China won't be selling and in fact will most likely be buying as much US debt as they can find, only they won't be requiring the D0llar as the currency to be paid back in after they buy up the debt. This is what China has been doing for the last five years. IMF debt which is the IMF assets have fallen over 85% in just the last three years alone. Paris Club and World Bank have similar problems.

lobodelmar
08-09-07, 02:29 PM
SeaWolf, (and yes, I do read Spanish)

Unfortunately in this case, your argument could be sensible but wrong.

Now you sound like my girlfriend...:)


After Putin left the KGB sector in East Germany, he went back to school.

Guess what his doctoral thesis was?

How Russia should regain control of its energy resources as a path to empowerment in a post Soviet world.

Interesting...its like he wrote a job application to the illuminati.


This was 1997 - back then it was much too early to see where China would be today.

Yes, ok, I concede your point, but China has been working this for a while...so I would argue that for decades they were just sitting back and giving us all the rope we needed to hang ourselves, and our dumb pols obliged them as predicted.

c1ue
08-09-07, 06:48 PM
China bought $40 billion of South American debt three years ago freeing Brazil and Argentina from the IMF/World Bank. China is the largest lender in Africa right now and that doesn't involve the $$ either.

All quite true - and you left out the China anti-ship missile sales to Iran.

However - it is not clear to me that this is poking the US' eye so much as spreading China's influence into areas which can benefit China via resource sales in the near future.

China needs lots of resources - I explicitly exclude demand due to need for materials for export needs - and there is no reason not to use their foreign currency surplus to buy it.

In fact, one item I'm adding to my list of 'keep an eye out for' is just how much 'capital property' owned by US companies exists in China, plus that owned by Taiwan.

It is conceivable that this number would in some way counterbalance the amount of money the US owes China.

c1ue
08-09-07, 06:52 PM
Yes, ok, I concede your point, but China has been working this for a while...so I would argue that for decades they were just sitting back and giving us all the rope we needed to hang ourselves, and our dumb pols obliged them as predicted.

In any government, hence bureaucracy, there are many people working on all types of wacky ideas, so almost certainly you are right.

However, 30 years ago China was busy with the Cultural revolution and Mao had just kicked the bucket.

I'm pretty sure China was busy until at least the early 80's recovering from Mao's last actions and also sorting out who would run the show.

I visited China in 1994 for the first time, and while certainly the capitalist door had opened a crack, it was definitely very tentative. China still had the 2 currency system then, and also 1 Hard Rock restaurant. I still have the denim jacket I bought then :cool:

Tet
08-09-07, 07:01 PM
China needs lots of resources - I explicitly exclude demand due to need for materials for export needs - and there is no reason not to use their foreign currency surplus to buy it.

In fact, one item I'm adding to my list of 'keep an eye out for' is just how much 'capital property' owned by US companies exists in China, plus that owned by Taiwan.

It is conceivable that this number would in some way counterbalance the amount of money the US owes China.
China constantly claims that the trade isn't entirely their's and in fact China runs close to a surplus with the US, the imbalance is actually caused by US companies operating in China. So who's imbalance is it really and how if ever will these US companies repatriate their earnings back to the US, especially with a Yuan pegged to the D0llar, which explains why Paulson wants that to change.

c1ue
08-10-07, 04:19 AM
So who's imbalance is it really and how if ever will these US companies repatriate their earnings back to the US, especially with a Yuan pegged to the D0llar, which explains why Paulson wants that to change.

Yes, I should have explicitly included cash in the 'capital property' bucket.

China is like the roach motel of FDI(Foreign direct investment): it goes in, but it can't get out! Profits booked in China is the same way.

Thus any stupid games which result in a trade war would likely be Pyrrhic for the US, even beyond yuan strengthening causing inflation.

Tet
08-10-07, 01:25 PM
Yes, I should have explicitly included cash in the 'capital property' bucket.

China is like the roach motel of FDI(Foreign direct investment): it goes in, but it can't get out! Profits booked in China is the same way.

Thus any stupid games which result in a trade war would likely be Pyrrhic for the US, even beyond yuan strengthening causing inflation.

I like it and seeing that you didn't take the time to copyright this I'll be using this same comparison as my own. :D

The globalists are coming to the conclusion that China has them surrounded. I guess China wasn't supposed to be paying attention when these same globalist pulled the same stunt on Japan and then ten years later pulled the same stunt on the Asian Tigers. Where's Soros today? How come he's not raping China right now?

c1ue
08-10-07, 05:41 PM
I guess China wasn't supposed to be paying attention when these same globalist pulled the same stunt on Japan and then ten years later pulled the same stunt on the Asian Tigers.

Japan got 20+ years of growing nearly solo before the axe came down, and even then I would argue that there was little or no actual suffering.

Japan has become the 2nd largest economy in the world, only fair they pay back a little.

China, however, is a long ways from achieving either the per person prosperity of Japan or the economic relative size...although the size is coming.

Soros could not have succeeded if the government of UK (as opposed to just the CB) had determined he wasn't going to succeed.

China doesn't have this internal division.

And feel free to use the metaphor!

unlucky
08-10-07, 07:50 PM
Faith in Chinese rationality is misplaced. This is a bubble on both sides. China's refusal or inability to allow the Yuan to rise will badly hurt China in time. Their economy is badly over-heated, driven by their export sector. They are awash with cash and their politicized banking sector is likely making many bad loans which they will end up supporting for many years. Most of these will again be in the export sector which is where all the money is. Meanwhile they are paying over the odds for imports and imposing price controls to limit inflation.

Their position, just like the US side of the position, is unsustainable. The best hope for unwinding (if there is still hope) is exactly what Paulson says: allow the yuan to gradually appreciate. Why won't the Chinese do this? In the early days it was possible to argue that they placed a premium on exports and employment. That's not tenable now.

China's policies are not rational and will end in tears when the global economy falters. With the US heading towards recession, that can't be far away.

FRED
08-10-07, 08:09 PM
Faith in Chinese rationality is misplaced. This is a bubble on both sides. China's refusal or inability to allow the Yuan to rise will badly hurt China in time. Their economy is badly over-heated, driven by their export sector. They are awash with cash and their politicized banking sector is likely making many bad loans which they will end up supporting for many years. Most of these will again be in the export sector which is where all the money is. Meanwhile they are paying over the odds for imports and imposing price controls to limit inflation.

Their position, just like the US side of the position, is unsustainable. The best hope for unwinding (if there is still hope) is exactly what Paulson says: allow the yuan to gradually appreciate. Why won't the Chinese do this? In the early days it was possible to argue that they placed a premium on exports and employment. That's not tenable now.

China's policies are not rational and will end in tears when the global economy falters. With the US heading towards recession, that can't be far away.

Intriguing comments from Craig Paul Robers:


China's Threat to the Dollar is Real (http://www.counterpunch.org/roberts08102007.html)

Consider also, that as revaluation causes the yuan to move up in relation to the dollar (the reserve currency), it also causes the yuan to move up against every other traded currency. Thus, the Chinese cannot revalue as Paulson has ordered without making Chinese goods more expensive not merely to Americans but everywhere.

Compare this result with China dumping dollars. With the yuan pegged to the dollar, China can dump dollars without altering the exchange rate between the yuan and the dollar. As the dollar falls, the yuan falls with it. Goods and services produced in China do not become more expensive to Americans, and they become cheaper elsewhere. By dumping dollars, China expands its entry into other markets and accumulates more foreign currencies from trade surpluses.

Now consider the non-financial costs to China’s self-image and rising prestige of permitting the US government to set the value of its currency. America’s problems are of its own making, not China’s. A rising power such as China is likely to prove a reluctant scapegoat for America’s decades of abuse of its reserve currency status.

c1ue
08-10-07, 11:54 PM
Interesting point.

There are a lot of people who have said that the Tiananmen riot put-down was so brutal simply because the government had strayed too far from its strong-arm position.

This school of thought posits that the government in China is actually only keeping control by leading the herd - i.e. keeping to the mandate of the people.

Thus China's inability to constructively deal with the Taiwan question even though any actual military confrontation with Taiwan would surely deal a massive blow to China economically.

I remember the incident with the US spy plane colliding with a Chinese fighter - there were a lot of angry voice in China ready to kick some US butt.

Being seen as an economic stooge to the US would almost certainly fall into this same category, especially if accompanied by real decreases in growth and/or standards of living.

bill
08-11-07, 11:02 AM
Intriguing comments from Craig Paul Robers:



China's Threat to the Dollar is Real (http://www.counterpunch.org/roberts08102007.html)

Consider also, that as revaluation causes the yuan to move up in relation to the dollar (the reserve currency), it also causes the yuan to move up against every other traded currency. Thus, the Chinese cannot revalue as Paulson has ordered without making Chinese goods more expensive not merely to Americans but everywhere.

Compare this result with China dumping dollars. With the yuan pegged to the dollar, China can dump dollars without altering the exchange rate between the yuan and the dollar. As the dollar falls, the yuan falls with it. Goods and services produced in China do not become more expensive to Americans, and they become cheaper elsewhere. By dumping dollars, China expands its entry into other markets and accumulates more foreign currencies from trade surpluses.

Now consider the non-financial costs to China’s self-image and rising prestige of permitting the US government to set the value of its currency. America’s problems are of its own making, not China’s. A rising power such as China is likely to prove a reluctant scapegoat for America’s decades of abuse of its reserve currency status.



China will more than likely keep the peg within a tight range, keep the dollar holdings and take the tariffs. Another option would be asset ownership in the US , which was one of my questions http://www.itulip.com/forums/showthread.php?p=13273#poststop for EJ to ask Martin Mayer. Any update as to when that interview will be posted?
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unlucky
08-11-07, 07:25 PM
There's another theory which I haven't seen mentioned in polite company. We don't get to see the political infighting behind the decisions made in China, but the infighting assuredly occurs just as it does in any other nation. There's a lot of influential people there right now who have made their fortunes in exports. These people earn money in dollars or other foreign currencies and owe money in Yuan. Given the ample supply of cash, a lot of their investments are likely marginal. They won't want to a strong Yuan, even if that is what is now required to rebalance the economy towards the domestic sector. There's nothing in it for them.

Think about the political influence such people would have in the US in an analagous situation, especially if the voice of consumers was completely silenced.

Maybe China is politcally unable to act to prevent a serious economic problem which is foreseeable but not yet realized. Maybe they are not that different from the US after all...

FRED
08-12-07, 02:05 AM
China will more than likely keep the peg within a tight range, keep the dollar holdings and take the tariffs. Another option would be asset ownership in the US , which was one of my questions http://www.itulip.com/forums/showthread.php?p=13273#poststop for EJ to ask Martin Mayer. Any update as to when that interview will be posted?
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We're shooting for Monday.

c1ue
08-12-07, 03:35 AM
There's another theory which I haven't seen mentioned in polite company. We don't get to see the political infighting behind the decisions made in China, but the infighting assuredly occurs just as it does in any other nation. There's a lot of influential people there right now who have made their fortunes in exports. These people earn money in dollars or other foreign currencies and owe money in Yuan. Given the ample supply of cash, a lot of their investments are likely marginal. They won't want to a strong Yuan, even if that is what is now required to rebalance the economy towards the domestic sector. There's nothing in it for them.

Think about the political influence such people would have in the US in an analagous situation, especially if the voice of consumers was completely silenced.


It is true that there are people with money in China, and also true that the Party is listening more to them than before.

It is not true, however, that the wealthy have any influence on important issues.

Because if this were so, then China would long since have lifted their currency restrictions - allowing these rich and influential people (as well as foreign corporations' profits) to be able to take some or all of their money out of China.

At the end of the day, power is still held by the Party with the PLA as armed backup.

If China is willing to risk making martyrs out of unarmed and mostly non-violent students at Tiananmen, do you really think the suffering of the rich would really be a concern?

Don't confuse US/European style oligarchy with the autocracy in China.

It may be enlightened, but that is just a bulldog wearing a dress.

BiscayneSunrise
08-12-07, 08:28 AM
Will China use the Nuclear option?

It depends on whether they see themselves at "war" with the US in order to achieve economic and political supremacy around the world.

Remember, wars are won by the country with the most determination coupled with the most robust economy.

A Chinese Ronald Reagan could win the "war" against the US and never fire a shot by just applying economic pressure on the US.

This would happen slowly so the Chinese could develop other export markets so as not to displace Chinese workers in export oriented industries, thereby creating civil unrest in China, potentially overturning the Communist leadership.

c1ue
08-12-07, 03:28 PM
Will China use the Nuclear option?


My own opinion is actually that China will use it in steps if China gets cast as the bad guy by US politicians.

I actually believe that keeping the workers in factories happy is less of an issue than the massive rural unrest presently occurring.

After all, the Communist revolution did not start in the cities in China, it started in the countryside.

In some respects you could say that a US created manufacturing recession could benefit the rural China population; trade wars usually benefit internal inefficient producers.

Rajiv
08-13-07, 02:15 PM
Good article by Mike Whitney - "The Grim Reaper Pays a Visit to Wall Street" (http://www.dissidentvoice.org/2007/08/the-grim-reaper-pays-a-visit-to-wall-street/)


That ought to stop congress in a hurry. China has $1.3 trillion of US paper they can toss into the jet-stream and crash the greenback whenever they choose. That’s why they’ve stockpiled dollar-backed assets for the last decade — not because they like us. They don’t. They intend to use their massive FOREX reserves like a cattle-prod to keep us in line. That’s how bankers always do it. And China is now America’s banker. That’s why it pays to run the country the old fashioned way; by strengthening the manufacturing sector, increasing exports and building up national savings. Debt is just the fast-track to slavery.

China is now calling the shots. If they even get a whiff of US-imposed tariffs, they’ll bring the US economy to its knees. And there’s nothing congress can do about it either. They’d be better off just pulling up a lawn-chair and watching as US jobs and wealth go chugging off to the Far East.

But China is probably the least of our worries. The looming credit crunch is a much bigger immediate concern.

medved
08-13-07, 03:19 PM
My own opinion is actually that China will use it in steps if China gets cast as the bad guy by US politicians.

Here is my scenario:

1. The politicians get spooked by the current financial crisis.
2. Paulson and Co organize a new round of negotiations with China, this time with the congress out of the way (or, even, supporting the Administration).
3. FED, Chinese and other CBs negotiate the compromise: China gets to dictate the pace of yuan devaluation, US congress stops the demagoguery, and so do Europeans. Nomo pressure on China. Maybe, China even gets to buy some oil companies.
4. China uses its funds (through Blackstone and other proxies) to provide liquidity for the credit markets (e.g., buying a few failed institutions or just a ton of MBS pools).
5. Confidence returns, markets go up and so does bonar. Dollar bears get squeezed. Gold did not rally at the time of panic, so it's a useless barbaric relic. Big sell orders are placed in the gold markets, gold drops.
6. At the same time long term rates go up, because China buys less Treasuries. The spreads go down.
7. Slowdown continues at a measured pace. Fed expresses concern about "the real economy" and drops the rates by 0.25%, bonar rally stops.
8. Within half a year everything goes back to normal, the Ka stage is over, the new Poom begins.

So, this time some of our black helicopters will bear signs "Made in China".

http://www.usatoday.com/money/world/2007-08-08-china-investments_N.htm

m.

c1ue
08-14-07, 02:39 AM
1. The politicians get spooked by the current financial crisis.

Possible, but honestly do you think the Democrats are all that eager to right the ship during a Republican lame duck presidency?

There is a lot of jockeying going around for Presidential and congressional elections next year, and helping the 'average guy' via trade restrictions seems to be more on the Democratic agenda.



3. FED, Chinese and other CBs negotiate the compromise: China gets to dictate the pace of yuan devaluation, US congress stops the demagoguery, and so do Europeans. Nomo pressure on China. Maybe, China even gets to buy some oil companies.
4. China uses its funds (through Blackstone and other proxies) to provide liquidity for the credit markets (e.g., buying a few failed institutions or just a ton of MBS pools).

The question I have is just how much of these questionable MBS/CDOs are actually held by China? and Japan and Taiwan?

I cannot believe that only Americans and Europeans were stupid enough to buy stuff without reading the fine print.

If there are a significant number of these types of investments already held with corresponding losses, I can only presume that the country(ies) holding the bag would be less cooperative of efforts to get them to buy MORE bad investments.

unlucky
08-14-07, 07:58 AM
Well, looking over the wikipedia articles on government and politics in China, I would actually think that "oligarchy" is a fitting description.

Be that as it may, I'm just not willing to bet money that these people have a plan. Especially not a cunning, devious plan. Faced with difficult decisions, they will most likely do nothing for as long as possible.