China Telegraphs Major Internal Problems
When reading Chinese tea leaves, never take them at face value
By blackhedd Posted in Economy — Comments (31) / Email this page » / Leave a comment »
There have been several updates to this piece in the London Daily Telegraph, written by the perceptive Ambrose Evans-Pritchard. China is rattling sabers in an attempt to dissuade the geniuses in the US Congress from starting a protectionist trade war.
There are a lot of reasons for you not to take China's statements at face value. And that goes way beyond the fact that the Chinese are so bad at English-language PR that the vast majority of their public statements are obvious lies to start with.
A lot of things are changing in the global economy. At lightning speed.
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China is loudly whispering that they may start selling off some of their holdings of US Treasury debt. The last I heard, they have about $1.3 trillion in dollar-denominated instruments, up from about $1 trillion last fall. About $400 billion of this is in long-dated debt like notes and bonds.
As Evans-Pritchard notes, the intention of these statements is to raise the fear of a collapse in the value of the dollar. The last time China's top central bankers (the Ladies Who Bank™) made these noises was last December. At that time, everyone expected the Federal Reserve to lower interest rates, and pressure was rising inside China to find better-yielding investments for their dollar reserves.
Now, of course, the Fed is talking tough on inflation and no one expects lower rates in the US any more. However, it's a political season, and Democrats and Republicans alike are floating warnings of trade war against China.
Now the real problem here is that China's threats are empty. Forget about the threats to the stability of the US economy. The last time the Chinese talked about diversifying out of US Treasuries, Fed Chairman Ben Bernanke went on record saying that he would simply sterilize and/or monetize any large Chinese sales of US debt. Don't underestimate his willingness to follow through on this, and don't underrate the Fed's ability to keep the resulting inflation under control without significantly disrupting the US economy.
But even more to the point is that there just aren't any asset classes in the world, apart from US Treasuries, that are liquid enough to soak up $400 billion or more should China go shopping for them. Again, the Chinese threat is empty.
Whenever I hear China lashing out about Western bad-faith and malfeasance, my very first question is: uh-oh, what did they screw up this time? Here's the answer: inflation.
The big elephant in China's room is inflation, caused by a combination of too many dollars, not enough domestic economy to soak them all up, and the currency quasi-peg that is the cause of the whole political ruckus.
China is caught in a box, and at the worst possible time.
Global markets for nearly every asset class, including commodities, are now in an extremely unsettled state. A secular change is taking place in everyone's attitude toward any kind of risk-taking. This is the very worst time to go to the markets looking for a new home for half a trillion dollars. And the Chinese are very well aware of this.
You can certainly contest what I'll say next, but I think the stage is set for a global slowdown. I'll give only one of my many reasons for thinking this: the price of oil, which has fallen from a recent peak above $78/barrel to about $71. And this is in the face of continuing supply and geopolitical concerns. The energy markets are discounting a global recession.
This raises the deepest question about the global economy right now: What is the true role of the United States? Before I spell it out, I'll confess I don't know the answer, and I'll also say that anyone who tells you they do know the answer is either deluded or trying to sell you something.
Is the US economy the demand driver of the rest of the world? Or is it just one player among several?
If it's the former, then China is in far more trouble than they're letting on, and they absolutely can't diversify out of their dollar holdings as the US slides into recession. There simply is no place else for them to go. Look for signs of panic from China in the next few months to confirm this interpretation.
If, on the other hand, significant final demand is actually now building in Europe and China for the first time since before World War II, that changes everything, and China will be able to find ways to diversify away from their dependence on the US economy. However, they do NOT have the investment banking skills needed to make this happen.
Now do you see why Treasury Secretary Paulson is so obsessed with venting off the pressure in the China relationship without causing an explosion? He's not only a former investment banker. He's also a future investment banker.
The true challenge for us is to find a way to exploit the weakness in China's position. China cares about nothing more than their prestige and standing in the world community. Not only is this deeply ingrained in the Chinese character, but it's also one of the keys to the current government's tenuous hold on legitimacy. They'll probably be willing to trade away a good deal in order to avoid being seen as having messed up their transition to a globally-dominant market economy.
The proper focus for our China foreign policy is to find a way to keep China permanently dependent on us for increases in prosperity, while forcing them to give American investors a considerably larger stake in what is the biggest growth-engine in the world. If I can figure out how best to do that, I'll let you know.
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China Telegraphs Major Internal Problems 31 Comments (0 topical, 31 editorial, 0 hidden) Post a comment »
The Chinese economy is about as agile and responsive as an elephant seal trying to do a pirouette. Might be an interesting sight for a few moments, but you don't want to be anywhere the heck near it when it comes back down to earth.
"I don't understand why the same newspaper commentators who bemoan the terrible education given to poor people are always so eager to have those poor people get out and vote." - P.J. O'Rourke
I have no fear whatsoever Bernarke will ever have to collateralize our obligations to China. The ruling elite own those bonds and use them the way paranoid Americans use precious metals. It's the emergency wealth stash they keep around in case the world really does end tommorrow. At least that's one paranoid blogger's theory....
"Scott Thomas" - The New Republic's Winter Soldier
We should also consider the domestic politics of this China problem. Duncan Hunter has made China's "unfair" trade a cornerstone of his presidential campaign. Last night the Democratic presidential wannabees took turn bashing China's currency manipulation. Is there any domestic political downside to this China Bashing? I don't see any.
This is pure surmise on my part, but: America has vast export businesses of our own. If the morons geniuses in Congress decide to touch off a trade war, there will be global repercussions, and a lot of Americans will suffer.
Not least of which would be the Boeing Commercial Aircraft division. And don't you think they'd want to call their US Senator and warn him not to mess with their business?
Their headquarters are in Chicago. The Senator getting the phone call would be Barry Obama.
(also known as the Dreamliner). A prime mover in this decision is that "8" is considered a lucky number in China.
A prime mover in this decision is that "8" is considered a lucky number in China.
Sorry to burst your bubble, but the "prime mover" in this naming decision is that 787 is the next number in Boeing's 40 year old numbering practive for their commercial aircraft. Sometimes a cigar is just a cigar.
John
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Why would God invent something like whiskey? To keep the Irish from ruling the world of course
have:
The model designation followed the company-announced orders from the People's Republic of China for 60 Dreamliners. Boeing incorporated the 8 at the time of the China order because in many Asian cultures, the number 8 represents good luck and prosperity.
The previous series of Boeing commercial aircraft are the 707, 727, 737, 747, 757, 767, 777 in that order (the 717 was not originally used for some reason but was adopted for the McDonnel-Douglass DC-9 family after Boeing acquired that company.). The Dreamliner was the next aircraft introduced AFTER the 777 and was logically 787. So you, and Boeing PR, expect anyone to actually believe that they were going to adopt some other nomenclature for this aircraft?
Now Boeing may want to do some feel-good PR cr*pola to suck up to the Chinese but the next number in the naming series is 787 and the Dreamliner was going to be 787 long before the Chinese ordered it no matter what their press release says the reason is. The 747 is widely used among Asian carriers, as I recall JAL operated the largest single fleet of 747s in the world, and no one ever worried about the "meaning" of the number "4" in Japanese culture.
Just pure unadulterated PR cr*pola. You are, of course, entitled to believe it if you chose. But it isn't borne out by history.
John
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Why would God invent something like whiskey? To keep the Irish from ruling the world of course
They could have skipped a series and called it the B797, just like they went from the 707 to 727. They could have gone up by 10 and called it the B787. They could have broken with the 7x7 designator as they launched their first aircraft of the 21st century. They could have labelled their new twin jet an extension of the B767 series and called it the B767 NG (Next Generation), like they are doing with the B737.
Fact is, they called it the Dreamliner for years and didn't decide on the designator until they landed that China order. Call it PR, but PR sells. And they DID have a choice.
and Boeing could have given up commrcial aircraqft and gone into competition with Ben & Jerry but they didn't do that either.
The Chinese didn't care when they bought 747s a while back, what with "4" being a death number and all. It was some PR guy's BS designed to create a cute press release guaranteed to be picked up by the fawning numbskulls in the press.
Like I said, if you choose to believe some cutesy PR suck up to China then please continue to do so. Just don't expect all of the rest of us to sign up for it. At this point I'm going to abandon this threadjack. It isn't that important and it certainly isn't that interesting.
John
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Why would God invent something like whiskey? To keep the Irish from ruling the world of course
As a relative works for Boeing in Seattle, and it was named the 7E7 to indicate a complete break from Boeing's past in plane design. It was the 7E7 Dreamliner until relatively recently. And the decision to change was in large part based on the Asian Market as well as to return to return to the regular number sequencing.
However, when it started it wasn't "secretly" decided behind closed doors to call it something 787 and in front of cameras and everyone else something different.
You could also point to a different leadership team at Boeing making different decisions.
But how quick this was taken snarky.
If Harry Reid and Nancy Pelosi get their way, while China is building a power plant every month or so, we will soon be rationing windmills.
The new globull warming strategy of the left is to decrease the number of new power plants, raise electricity rates and limit demand by raising price. Whoi says liberals don't understand market driven economies.
As mining company executive Robert E. Murray, chairman of Murray Energy Corp., owner of the Crandall Canyon mine said, the current Congressional energy bills are deadly, to the US economy that is. 50+% of our electricity is generated from coal, the lefties want to use natural gas. As if a molecule of CO2 from natural gas is better than a molecule of CO2 from coal. NAtural gas will raise electricity costs, and by the way, where do we get natural gas? Can't drill in the Destin Dome, so I guess we will buy it from our friends in the middle east, at a nice premium in cost.
Remember when that other Clinton made a national monument of our clean coal so that we could import what we needed from his pal in Indonesia? Of course, it costs a lot more to import from Indonesia what we have right here, but hey, we don't need the efficiency to compete, right?
Higher electricity costs directly impacts US competitiveness.
Check this out ... Democrats on energy, walk and use windmills.
The US consumer market is absolutely essential to China's export-driven economy. The EU and Japan, with their stagnant populations and protectionism, can't take up the slack. The developing world isn't developed enough. Russia, although somewhat recovering, is still a mess.
China also has its own immigration problem - from country to town. There are millions and millions of Chinese workers constantly on the move, seeking work. A disruption of the Chinese economy would drive them into destitution and provide dynamite potential for social unrest.
Also, if China dumps our Treasury Notes and drops the U.S. dollar, doesn't that make Chinese goods more expensive in the U.S.? Wouldn't that hurt China's exporters as much, if not more, than any proposed trade sanctions?
Presumably they will be selling treasuries for something other than dollars.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
As I said, I don't think China is going to be selling anything, and the whole thing is baloney. Keep in mind, though, the other motivation that has been at work here: they want to get a higher yield on their foreign-exchange reserves.
But if they were serious, there's no way to just sell hundreds of billions of dollars worth of debt. They would engage in derivatives transactions or long-term asset swaps, possibly involving commodities.
If the world really is in the process of repricing risk upward, there's not going to be anyplace China can go to get a higher return.
As far as alternate currencies are concerned, there's only yen and euros. Yen already pay an essentially zero rate of interest. Comparing the depth and liquidity of the risk-free euro debt market with the dollar debt market is like comparing Mickey Mouse to Godzilla.
... is ofcourse how long the Chinese can make their boom last. When it collapses, the result won't be pretty and the regime may have to use repressive tactics that will make their economy only worse - if the regime survives at all. When that happens, you'll actually be glad if you haven't invested serious cash in Chinese factories.
On a broader scale, I wouldn't recommend looking at oil markets as an economic predictor these days. For all we know, crude may hit 80 dollars next week. There is juist too much noise in those prices at the moment.
...larger trends. The action in global credit markets is much more convincing (to me at least) that there are bumps in the road ahead.
Crude oil is down again this morning, by the way, even as all other US markets are looking good. (US Treasuries are down sharply, but I'm reading that as a signal that cash is moving back into equities and thus it's a positive.)
...that the Chinese boom is lasting no longer. Their economy has overheated, and their central bankers are now in a position of having to overreact to compensate for their prior inaction. I guess one can call it a "Wizard of Oz" economy... as in "pay no attention to the man behind the curtain". They have constructed a massive artifice to project an aura of economic invincibility, but it's a wobbly behemoth replete with fissures that no amount of political posturing can ameliorate. By threatening their so-called "nuclear option", they seem to want us to think that they're in control of us, when their economy is one good hiccup away from the reverse being true.
"I don't understand why the same newspaper commentators who bemoan the terrible education given to poor people are always so eager to have those poor people get out and vote." - P.J. O'Rourke
.. is that they probably don't know what's going on either. One thing communist economies and booming economies have in common is that the data is often unreliable as prices are not reflecting supply and demand. With a 10% growth rate you can be pretty sure things are growing (and probably overheating), but let the growth drop to what appears to be 5% and what's really happening becomes anyone's guess.
Good info.
I meant what I said and I said what I meant. An elephant's faithful 100 percent.
I second that, y'all are quite up on this stuff.
I couldn't keep most of this straight in figuring it out much less trying to tell others about it.
I wonder if China has the ability to surpress any serious economic catastrophe with cash on hand and their ability to control output versus a more traditional market based/democratic country could?
All I know is that China has less than a year before they host the Olympic Games and I don't see them letting anyone see any flaws in the image they wish to project.
Never underestimate the power of economies awash in cash. China’s large investment in Blackstone shows that someone is at least thinking about how to achieve better returns than parking it in T-bills. China is already reportedly involved in the Barclay’s-ABN deal via that arrangement. If they start to understand Blackstone’s playbook, things could get interesting.
I would have to agree most of the Chinese blustering and Democrat Party nonsense is posturing. While I believe the Chinese are manipulating their currency and the sheer product volume across our industry sectors is threatening, a trade war or overstepping US government intervention should not be the guiding principle. Our industries are always best at responding to free market competition. However, I worry that some industries may never recover, which is distressing especially if unfair advantage is used to achieve a dominant position. Let’s not forget in China industry is the government and in most other sectors that would be seen as anti WTO subsidizing; yet everyone treads somewhat lightly.
Overall, I believe the Chinese will moderately decrease their T-bill holdings as they learn how to diversify (reversing the trend thus far). You have also made a good point about Europe. Given the increase in US companies issuing Euro denominated debt and growing government instrument yield growth, it seems that market may provide some surprises.
"Dulce et decorum est pro patria mori"
Contributor to The Minority Report
residential real estate. And mortgage backed securities. And a mortgage bank or two. Or three. Or four.
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CongressCritter™: Never have so few felt like they were owed so much by so many for so little.
Chinese factory makes goods.
Americans give cash to buy goods.
Chinese factory receives cash.
Chinese factory owner puts cash into economy.
Chinese central bank takes cash out of economy.
Chinese central bank gives cash to buy US bonds.
US Treasury receives cash and puts it into economy.
Aren't we the ones with the cash here?
They don't have the nimbleness that real free market economies do. ( I am not patting the US on the back here our economy is nowhere near as free as it should be)
China's Oligocapitalism is going to cost it big time. They just don't seem to have the desire to move away from it.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777