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Thursday, August 09, 2007

Economic War: China v US

Once again China is threatening to sell those U.S. Treasury notes it holds. China holds almost a half trillion United States dollars this way. If China were to sell all the Treasury certificates held in Beijing, the United States could plunge into a recession. Many other nations of the world would quickly follow the U.S., causing a global recession.

There are a few major roadblocks that will prevent China from holding such a fire sale. First, China would not get far along in such a sale without the return on U.S. notes diving even faster. That could present a very slippery slope for China indeed. The Chinese could stand to make a great deal less money in the short run. It would be more profitable if they sold the U.S. notes slowly over many years. Unfortunately for China, the interest paid on U.S. debt is quite low. China can earn far more money in investments other than U.S. Treasury Notes.

Seoul Korea Congestion

That is just a small roadblock before the sale.

Chinese economists will quickly tell their leaders to pipe down or else. The U.S. in a recession would mean fewer trips to WalMart. Chinese factories all over that vast nation would begin closing up soon after the start of a U.S. recession. Out of work Chinese citizens could get real angry with their government.

There are so many nations that depend on a robust U.S. economy. Just look at all the products the 50 states are constantly importing from countries all over the world. Lumber, oil, electricity, natural gas, gold, diamonds, automobiles, ships, shall I continue? Some of you were just thinking about imported beer, wine, and cheese, weren't you? Admit it, you probably buy a lot of expensive and cheap foreign stuff. We all do.

1. The impact of a U.S. recession on the Chinese economy
2. The impact of a U.S. recession on the global economy

That's just two reasons why China would be shooting itself in the foot if it decided to shove the United States into a recession.

All the other countries in the world would get rather angry if someone turned over the apple cart in their biggest marketplace. Germany and Japan might not like it if China deliberately hurt their major trading partner. Even Russia and France would be offended if someone else offended the U.S. It's all about money. Those who fail to anticipate all the implications of disrupting any marketplace could be the first ones to starve for lack of a morsel to eat.

Finally, once China sells the U.S. debt it holds, exactly what would it do with that big pile of yuan? Many markets like South America and parts of Asia are pretty well saturated with investment dollars. China could invest the money in Africa but that would take time. It could invest the money in Europe but the EU has no shortage of wealth. To get the best return on investment, The Chinese government would probably need to increase the amount of U.S. and Emerging market stocks it holds.

China's money would simply go out the door of the U.S. Treasury and in the door of public or private U.S. corporations. Such a huge influx of investment dollars would drive down the cost of borrowing. U.S. executives would spend all that Chinese investment making U.S. corporations even more profitable.

You cannot expect to win a fight with a 400-kilo gorilla. You would be lucky to escape with your head still in place. The leaders of China need to think long and hard about that possibility.

1 comment:

Anonymous said...

http://businessmirror.com.ph/0320-222008/opinion05.html

US waging economic war against China


Outside the Box
By JOHN MANGUN




Why have the prices of commodities like oil and gold risen so dramatically in the last year? Why has the dollar fallen so much? Normal business cycle? Bad management from the world’s financial institutions? And why hasn’t the world’s largest and strongest economy, backed by the most powerful government, been able to change the course of the situation?
Perhaps the larger picture is that the United States is waging an economic war against China.




The New York stock market rallied some 400 points Tuesday night, prompting an increase in prices across Asia. Even the Philippines participated a little. US stock prices reacted favorably to the news that the Federal Reserve lowered interest rates. Bloomberg: “The Fed has cut the benchmark lending rate by 2 percentage points this year, the most aggressive easing since the federal funds rate became an explicit target of policy in the late 1980s.”

But don’t get too excited because you must look not just at the “big” picture, but the “whole” picture.

Conventional and common wisdom talks about the recession facing the United States and the potential that an economic slowdown is confronting the globe. There is little indication that a “normal” economic slowdown is happening; normal meaning that production is dropping. It is not so much that production is going down but that the end-result of production, buying, is dropping. If you look around the world at virtually every country in every economic and wealth group, people are wealthier today on the average than at any other time in history. But if people are wealthier, why aren’t they purchasing? One word: inflation.

Prices are going through the roof around the world. Well, that is obviously the fault of high oil prices, right? For example, Kuwait reports that inflation is at a 15-year high. China is very worried and the United States is ignoring the issue in favor of trying to keep the financial system sound.

World inflation has been in a downtrend since 1990, but prices are expected to show heavy increases in 2008, potentially reversing a 15-year movement. Traditionally, high interest rates were a strong indication of inflation trends. In the last 20 years, inflation was best illustrated by a weak dollar and strong gold and commodity prices. And we now have the dollar at historic lows and gold at historic highs, with both of these trends showing little likelihood of changing.

Then we must ask, why is this happening? Why have the prices of commodities like oil and gold risen so dramatically in the last year? Why has the dollar fallen so much? Normal business cycle? Bad management from the world’s financial institutions? And why hasn’t the world’s largest and strongest economy, backed by the most powerful government, been able to change the course of the situation?

Perhaps the larger picture is that the United States is waging an economic war against China.

The United States could strengthen the value of the dollar. It has not. China is hurt because now Chinese products are very expensive in the United States, and this will reduce the US trade deficit with China. China must import huge amounts of oil and strategic metals which are very much more expensive now. China holds hundreds of millions of physical dollars, the value of which is now much less.

China has refused to revalue its currency to a realistic level to improve its trade position with the United States. China has used its huge dollar reserves as a sword against the United States by threatening to sell those dollars, and thereby causing the dollar to drop in value. In effect, the United States is using China’s strength against China.

In order for China to maintain the levels of its trade with the United States, it will be forced to lower the value of its currency. However, if it does that, it faces two major problems. Foreign direct investment (FDI) into China would become less expensive, and China is worried that more and cheaper FDI would spur China’s inflation. Further, a devalued currency would reduce the profit to China for its exported goods.

If China keeps it currency at its present levels, the United States will buy less. The United States wanted a stronger yuan to reduce trade, which China was unwilling to do. That objective is now achieved by a weaker dollar.

China’s dollar holdings are worth much less when buying goods like oil and metals that China depends on for its development and growth. Further, China has been talking and trying for some time to diversify its foreign-reserve holdings form dollars to other currencies and gold. Now, their dollars are worth much less when buying gold, yen and euros.

The current crisis hitting the financial institutions looks to me like a normal business-cycle shakeout not unlike the dot-com IPO fiasco of the 1990s, the savings-and-loan and foreign-country debt crisis of the 1980s and the personal credit crisis of the 1970s.

Back then, the US government bailed out Wall Street, Mexico and the banks, among others, without receiving much in return. This time, the “crisis” is being used to further the US economic position, long-term position, particularly with regard to China. From Sun Tzu: “All warfare is based on deception.” -- Business Mirror