China's Statements About U.S. Debt Are Overblown 36 comments
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There has been a lot of noise in the last few months about the Chinese being concerned about the US defaulting or even using a de facto devaluation (money printing) to get out of its debt.
The Chinese are panicked not so much because they are worried that their currency reserves are in danger of being devalued, but because they really don't have much of a choice. As the rhetoric has reached a bit of a fever pitch, Chinese purchasing of US treasuries is as high as ever.
The problem is given the artificial support China gives its own currency to stimulate exports and jobs so they can opiate the masses (I think that's a word). Think about the choices they have:
1) They can realize the treasuries are overvalued and then move into a more diversified basket of currencies. This pushes the dollar down though which makes it more difficult for them to sell to the United States. So they either take the hit in the valuation of their current holdings which are much larger than their annual capital flows, or they take it in lower exports.
They need these exports to stimulate their export dependent economy and produce jobs. Political unrest is a significant issue for China and the Chinese social contract now seems to be a bargain of jobs for stability. As long as the Chinese government provides wealth to its emerging middle class and immigrants from the rural parts of China, the Chinese people will allow the one party system to continue.
1b) I think a lot of the move in long term treasuries is precisely because the Chinese have moved into shorter term treasuries, but in the back of my mind lingers a question-- Where is the next move? Do THEY know what they are going to do next? I don't think they do.
2) They could try to move into gold, but there isn't that much gold. Really if you bought up all the gold in the world it would be a fraction of the float of money out there of any major country. Gold would have to go much much higher to accommodate this strategy. Any move into gold alone would cause more damage then they might receive if they just stuck it out in short term treasuries. The problem with that strategy is that if you never actually move out of the dollar, you are still losing a tremendous amount of yield by not being in longer dated instruments. Additionally, the more you move out of the longer dated items, the larger the losses you take. Very sticky.
3) The Fannie (FNM)/Freddie (FRE) Debt. Really amazing to me just how much of this there is. The defaults on the Wall Street sourced debt here are much higher than the Fannie/Freddie paper but it's unbelievable how much of this there is. Paulson at some point last year edged the US from an "implied" guarantee a bit closer to a genuine guarantee of this debt. In my fantasy world, we could find a way to somehow get out of this. Just looking at the numbers here shows what a huge stake America has in a rising real estate market. One way or the other, real estate prices need to start rising or this debt can cause huge system problems. Lots of Chinese paper here and a big source of their concern.
All of this is reflective of the world's second largest economy being the only major economy that is not on a free floating exchange system. In the last 10 years it has created a huge macro imbalance and will take some years to walk off. At some point, the Chinese currency needs to start floating.
It's a really difficult problem. But at the end of the day it's a problem solved by letting their own currency float and consuming more. In turn, it means the US must export more and save a whole lot more. We need to learn to produce and provide a more welcoming environment for our own industries. We need the jobs to work off all this debt.
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The purpose of politicians is to make laws/policies to maximize the welfare of the people. elections are by products of this objective.
Perhaps an existing problem with democracy is that reelection is ALL that some congressmen has ever done!
On Jun 01 04:44 PM Prudent Man CFA wrote:
> Chinese politicians don't run for reelection.
We should be soooo lucky to only split the difference and end up at $10 an hour. Here's a worse scenario that is still not bad enough but it gives you an idea of what would be more likely to happen if the wage differential between Chinese and American workers were to equalize:
USA - 200 million workers making $25 an hour
China - 900 million workers making $5.55 an hour
(I chose these numbers because in this highly idealized scenario the total payroll for the Chinese workers is equal to that of the US workers, not a chance, but it's a thought experiment)
The total payroll for each country is 10 trillion dollars for a year. Imagine if you can that the 20 trillion dollars in total payroll for both countries suddenly ends up split evenly between all the workers in both countries. The Chinese end up making $9.09 an hour, so they're feeling rich -- they just got a 63% raise.
The American workers, on the other hand, are not so happy. They are now making $9.09 an hour, but coming down from $25 an hour, that translates to a 63% paycut.
Try paying that $3,000 a month mortgage on those kind of wages. Not a chance!
On Jun 01 03:46 PM infp wrote:
> On a very simple level, I never understood how globalization could
> be broadly beneficial for a wealthy country like the US. If an average
> US worker is making $20/hour and an average Chinese worker is making
> $1/hour, eventually I would expect them both to make $10.hour. I
> do not offer this extremely simple observation as an indictment of
> globalization, I simply offer it as my expectation that some sort
> of global salary equilibrium is inevitable in a global economy.
"China "needs" the American consumer, because ..."
I know CNBC loves using this point, but did anyone bother to double check this "fact" before they spin it?
China's export as a % of GDP is smaller than some data suggests, and exports to USA is probably much less than most thinks. For one, GDP is usually calculated on a value-added basis, while exports on a gross basis. Last I heard, exports to USA constitutes 5% of China's GDP or there abouts.
On Jun 01 12:49 PM pslater wrote:
> As for Fannie and Freddie debt, I wouldn't rule out BHO doing
The private-consumption share of developing Asia's overall GDP fell to a record low of 47% in 2008, down from 55% as recently as 2001. In other words, Asia remains an export machine. Developing Asia's export share rose from 36% of pan-regional GDP during the financial crisis of 1997-98 to a record 47% in 2007. And recent research by the International Monetary Fund shows that Asian exports continue to be underpinned by demand from consumers in the industrial world, especially from the U.S. Despite a surge of trade within Asia, the bulk of these intraregional flows have been concentrated in parts and components that go into finished goods eventually consumed by developed economies.
When the international market shrinks, China shrinks no matter how much artificial stimuli sugar they through at the problem.
Analyst Michael Pettis has recently proclaimed that "future historians will mark 2008 as the year that the development model that has driven much of Asia’s rapid growth for the past two decades went bankrupt." He argues that China is not making the difficult structural changes needed to its economy in order to develope internal consumption...
China's consumers account for about 35 per cent of GDP and just over 3 per cent of the global economy. By contrast, U.S. consumers still account for two-thirds of the vastly larger U.S. economy and about 17 per cent of global GDP. “The mathematics are daunting,” said David Rosenberg, chief economist and strategist with Gluskin Sheff + Associates in Toronto. “For every 1 per cent decline in U.S. consumer spending, Chinese consumer spending has to grow by 5 per cent just to keep things where they were.”
seekingalpha.com/user/...
On Jun 01 07:12 PM a5fung wrote:
> I hears lots of
> "China "needs" the American consumer, because ..."
>
> I know CNBC loves using this point, but did anyone bother to double
> check this "fact" before they spin it?
>
> China's export as a % of GDP is smaller than some data suggests,
> and exports to USA is probably much less than most thinks. For one,
> GDP is usually calculated on a value-added basis, while exports on
> a gross basis. Last I heard, exports to USA constitutes 5% of China's
> GDP or there abouts.
On Jun 01 07:12 PM a5fung wrote:
> I hears lots of
> "China "needs" the American consumer, because ..."
>
> I know CNBC loves using this point, but did anyone bother to double
> check this "fact" before they spin it?
>
> China's export as a % of GDP is smaller than some data suggests,
> and exports to USA is probably much less than most thinks. For one,
> GDP is usually calculated on a value-added basis, while exports on
> a gross basis. Last I heard, exports to USA constitutes 5% of China's
> GDP or there abouts.
World Bank says China's growth rests on US, Europe recovery.
Approximately 45% of China's exports go to the US and EU. Exports to the US and EU comprise over 15% of Chinese 2008 gross domestic product at official GDP and exchange rate. A third of Chinese GDP is derived from exports. All major trading partners are presently contracting.
China's economic relations with the EU, its largest trading partner last year, are similar to those with the US. In 2008, the EU exported approximately $104 billion in goods to China and imported $330 billion in goods from China. THERE IS MASSIVE AND RISING CONCERN IN THE EURO-ZONE ABOUT THE SIZE OF THE DEFECIT AND THE MARKET ACCESS FOR EUROPEAN FIRMS.
China is screwing the EU just the same.
So they really do need us.
> I think you and anyone else who believes this garbage are the >ones on opiats. The world could easily decouple itself from the >USSA (United States of Socialst America) and still survive; Hell, >they're doing it now, and what's more, thriving.
One of the oddest trends of this debate is the cranky right wing view that weirdly looks forward -- with apparent approval-- to how the Chinese are going to give the "United States of Socialist America" our come-uppance
Have you missed that China is still ruled by the Communist Party? Or that many of their leading corporations are either state owned or prosper through the protection of the state? However unfortunate the current Federal interventions are, they are clearly an exception in the American system-- they're "the rule" in China.
Its an odd American who hates Obama so much that he roots for the rest of the world to do us dirty . . .
I do. They are driving tought bargains with Geithner right now, making sure promises are made now and then hard to get unhooked from later.
On Jun 01 03:52 PM nobby73 wrote:
> Well, it is like this. The US corporation can close the factory
> and move the production to China, where the worker gets paid $19
> per hour less. Then the CEO can tell the shareholders how he has
> boosted profits and award himself a $100mm bonus and cash in his
> options for another $100mm. With this money, he can buy a place
> in Aspen and another in Florida and everyone can say that America
> is the land of opportunity.
On Jun 01 03:55 PM Dave Wrixon wrote:
> Yes, the Chinese cannot survive unless they give us all their money
> to squander. Lucky they got us, eh?
On Jun 02 04:50 PM junkyarddog wrote:
> Nice try, but where did I say China needs the US? Last I checked
> they exported to many other countries. The question is: can they
> consume internally all what they produce and still be a strong economy?
> Lucky we got your analysis, eh?
>
> On Jun 01 03:55 PM Dave Wrixon wrote:
On Jun 01 01:08 PM Donald Ingram wrote:
> First;
> The Chinese don't mind "taking the hit" as you put it. However it
> will be at a time of their choosing. Get ready for the rug to get
> yanked!
Very true. The Chinese central banks (or the ruling regime) may be less concerned about the yield on their fx reserves. The main agenda is the value of the RMB (to keep its factories humming and provide continued employment). However, the Chinese are giving up current consumption by accumulating these reserves -- they should want to consume them at some point as the bulk of their population moves through its productive years into retirement (20+ years down the road) with a much smaller workforce to support them (1-child policy). Low US inflation and safety of principal is not totally irrelevant to them.
> Second;
> "Need these exports"? They would be nice to have, but they really
> don't "need" them to survive and prosper.
Sure they do. Tiannenmen Square happens when you have hundreds of millions of unhappy people. Rising standard of living is what keeps people happy. Pissed off Chinese workers agitating for a revolution is a key "black-swan" event in my play book. It is likely that risks of violent conflict between nations rise in that case to build up nationalist sentiment and deflect attention from domestic problems (Taiwan, Japan look to be the main sufferers in this case. It is not lost on me that many major economic crises have been followed by wars. It is also an important point that in the thousands of years of history -- China and Japan have never shared regional power and there is considerable latent hostility in china towards the former imperial power, which by all measures is collapsing under the weight of demographics.)
However, the export-policy is not sustainable. They need to increase _PRIVATE_ domestic consumption. Stockpiling commodities or growth in state-sponsored behemoths is not the answer. The commodities are only as valuable as the strength of the buyers that the Chinese will want to sell their exports to. And related to domestic civilian growth projects -- someone should _need_ and want to occupy the building complexes that are getting built. It is not clear to me that spending on infrastructure mega-projects in China is the need of the hour. They have a terrible history of inefficient use from a cost-benefit perspective (Three Gorges for e.g.). Growth in China has come entirely from its coast -- I want to go further and cautiously add that it can primarily come only from its coast (interior of china is parched, relatively sparsely population though I am unfamiliar with the availability of other natural resources...). China needs to spend on education, healthcare (with pollution levels having exploded in the past 20 years, its only a matter of time before the piper will need to be paid), social safety nets (domestic harmony -- despite the cultural norms, it is unlikely in the long run that 1-2 productive adults will not be stressed about supporting an additional 4 non-productive adults+kids).
> Third;
> They know EXACTLY what their course of action is and where it's going.
> To assume otherwise would be to underestimate them. Big mistake.
The Chinese government is indeed far-sighte--more so than a democratic one would be--but precisely for that fact, it is also constrained by the politics of their situation. But it would be folly to assume that the decision-makers are not narrowly self-interested.
>
> Fourth;
> They are moving into gold in a big way. The central bank of China
> has already put in a reserve bid for the upcoming IMF 403 tonne gold
> sale. All of it! Good way for them to unload some their US dollar
> holdings!
As pointed out in the article, the supply of gold is very limited and it is not possible for any central bank to accumulate meaningful amounts of gold without moving its price. (And higher gold price implies inflation...something the Chinese do not necessarily want, if they want to maintain Chinese competitiveness).
> Fifth;
> Real estate prices are a fore gone conclusion, they will be in the
> tank for years to come.
While very true that it will take years to recover and may not "bubble" again for decades, "they dont make land anymore". But a growing population will still need to be housed, construction still depreciates and in an inflated future, real estate does maintain its value. Speaking of which, do you think the Chinese central bank will want to buy Las Vegas from us?
> Sixth;
> The Chinese Yuan (Renminbi) will be the next worlds reserve currency.
The reserve currency status is mainly determined by military strength. China, undoubtedly growing in this regard, has a lot of distance to cover before it can lay claims to this. It needs to float its currency to become a reserve currency (causing it to rise and lower competitiveness of Chinese exports). Rationally, the time when China will want to do that is when it is cashing in its claims on world productivity (when its aging population causes a trade deficit and it is no longer accumulating $ and has much weaker _economic_ growth prospects). Remember, the TIC data shows that China even now is accumulating US $ reserves (at a pace not too far removed from the frantic one we saw in 2008)
> This is what the Chinese are working towards. Yes, it will take years,
> but what are years when you plan in generations?
> Seventh;
> This is the most asinine presumption of all - "Work off the debt?"
> Your children, your grandchildren and their children will thank you!
> The only way the debt will be paid is with dollars that are worth
> pennies!
The only two ways to pay off our debts (private or public) is to either inflate it away (very likely in the long run but unlikely in the short run) or to grow into it. I think the combination is the most likely scenario.
Waxing a little philosophical: growth due to technological shifts should not be underestimated -- take any snapshot in time (20 years, 50 years, 100 years) and its amazing to me the exponential explosion in knowledge. Average quality of life is still on a upward trajectory. And the US is on the forefront of such growth. We may not feel that way because expectations of what "average" std of living have been rising faster than the actual rise. I am very optimistic about the future of the US -- by far, it is the one nation that is most open to progress, the most innovative and the most welcoming and nurturing of raw talent. And a part of the "hostility" that Americans sometimes feel abroad is somewhat traced to this I think -- with 24x7 info flows (CNN and American pop culture exports), people in repressed regimes often ask: 'Why do we not have that?' The answer accepted (and sometimes given by their ruling regimes) is not often based on self-evaluation but by deflecting blame onto Americans.
Life is mean-reverting in the very long run but we still struggle to maintain our relative advantages.
I dont buy that trade is a zero-sum game. While we export jobs to China, China exports goods to us to raise our std of living (supposedly... those $10 flying choppers ARE terribly entertaining... who would have thought even 10 years ago that you could buy a sophisticated flying toy with a microchip for $10!), Net-net, China has future claims against the US and hopefully will exercise them in the future when they run a deficit and provide employment to a new generation of Americans.
On Jun 01 03:46 PM infp wrote:
> On a very simple level, I never understood how globalization could
> be broadly beneficial for a wealthy country like the US. If an average
> US worker is making $20/hour and an average Chinese worker is making
> $1/hour, eventually I would expect them both to make $10.hour. I
> do not offer this extremely simple observation as an indictment of
> globalization, I simply offer it as my expectation that some sort
> of global salary equilibrium is inevitable in a global economy.