Bo Peng

China's First Step Towards Bilateral Currency Swaps

Stephen, good point on the potential competitive devaluation. But if it happens, for example triggered by Japan/Switzerland/ECB doing QE, I think USD would only strengthen before world economy stabilizes, for the same reason why USD has strengthened after the Fed's QE announcement. If Yuan still holds on to the dollar peg under this scenario, then it'd create some very intriguing dynamics.

USD will remain strong for the duration of the depression, even though JPY collapsing is a distinct possibility. I don't know for how much longer Japan can bear the pain. Their decision yesterday to do practically nothing was very surprising to me.

China's First Step Towards Bilateral Currency Swaps

Over the time horizon of 10-20 years, I think the end of USD as the sole reserve currency is almost a certainty. Rather than putting up a futile fight or staying in denial, US could instead try to prepare for and take advantage of it. For example, a devalued USD can have many positive effects on US economy -- jobs, export. But it's something we're not used to, thus appears scary. It takes a change in mentality to adapt to it.

The UN, China Want to Ditch the Dollar

The next shoe to drop is China & Russia settling a trade with IMF SDR, even if it's a small trade. This could be the last snowflake that starts an avalanche.

The upcoming G20 may actually be interesting, judging by the posturing and positioning so far.

The Geithner Plan FAQ

It could be a gain for taxpayers who don't understand arithmetic of inflation. Who win? Those who swap the assets for cash now. They'll use the cash to make bets, make a spread over inflation, or at least buy gold and commodities, and come out ahead of the above-mentioned winner taxpayers.

See? Everybody's happy.

The Lurking China Money Deal

beenburnedtwice, in theory, yes, the Chinamerica co-dependency could be broken without severe withdrawal reaction.

Americans need to save more, break out of the entitlement culture, and do more real work -- like make some shit, more than just hi-tech. A society with 60% middle class hiring people to mow the lawn and vacuum the floor is simply not sustainable without systematic, sustained exploitation of the rest of the world. But the rest of the world is waking up, smarting up, and catching up. We started with slaves. We're still living on slaves, only the plantation owners are now "middle class", labor unions, and big corporations (and that slavery is soft, indirect, and more subtle). But the world is beginning to run out of slaves.

Chinese need to continue transforming their economic structure, expand the service sector and become more innovation-driven.

In short, they need to become a little more like each other. But it takes time -- years, maybe decades. In China, I at least see the political will to continue transforming, easing out of the addiction. In US, I really doubt we have the will to do the necessary. We just want to prolong the high. Life without slaves and entitlements is like, so, third-worldly. As if.

Co-dependency per se is not a bad thing. It prevents us from hurting ourselves by screwing the other. But this particular one is just not healthy, not sustainable.

The Lurking China Money Deal

What'd happen if all deficit countries start monetizing their own debt at the same time? No impact to fx (as zeroth-order approximation) among the deficit currencies. Surplus countries are screwed. So they'll start monetizing their own debt, too, just to keep their currencies low (in sync with deficit ones). This is what Japanese just did. I think Chinese may do it soon. Whereas monetization of debt used to be the third rail, it'll be standard practice before you know it.

Everybody's happy. Problem solved.

Then it becomes a race to the cliff -- see who can monetize more debt.

The Lurking China Money Deal

Interesting perspective. Chinamerica is a perfect union of convenience for now. They supply the perfect dope for each other in a classic co-dependency. China's addition is growth in manufacturing through export. US' is reflation through consumption and credit. Both sides surely realize it's not a sustainable marriage. Yet, just to survive the day, or so they think, they must keep feeding each other the dope.

If this co-dependency is not rehabilitated willingly, it'd get ugly: US will default, either technically or through a combination of USD devaluation and inflation. China will get burned badly and become increasingly suspicious and indignant. USD will not be able to maintain the reserve currency status.

Today's official onset of monetization of debt is an ominous turn of event. It's the last resort, a desperate measure. The US gov is dead set to continue the addiction. For how much longer can they monetize debt before the world find an alternative reserve currency, or at least a basket of them, or perhaps gold + leverage?

Buy gold and TIPS.

The Risk Biggest Source: Government

Sorry if I misread you, Econ101. As I said in the previous post, I don't think the relative stability of Chinese economy amidst this crisis has much to do with the Chinese government's wisdom or foresight. But I do find it troubling that some in the west are blaming Chinese savings for this crisis. Global imbalance is a real problem that must be addressed but this kind of finger-pointing, which borders on shameless, is definitely not a solution. US and China are more inter-dependent than many people in either side of the pond would care to admit, especially during this crisis. I wish we could own up to the facts and work together.

The Risk Biggest Source: Government

Yeah, kill the chinks.

Unfortunately, I'm not sure your Japanese "friends" will jump in joy about the fate you designated to them.

Call somebody stupid, evil, or different. It always rallies the ignorant in time of crisis.

China's Economy Isn't in the Same Boat as the 'Developed' World

mr freddo, the Chinese gov hasn't been "communist" for decades, and very few true-to-the-color communists among the general population or the elite. And it's not because they played the capitalist game so well. They happened to be conservative and prudent in a right area (financial reform) at a right time (and it doesn't mean they're right in all areas).

As I said in the post, it's not all about luck however. There're a few fundamental differences, primarily due to recent history and current stage of socioeconomic development.

China's Economy Isn't in the Same Boat as the 'Developed' World

Last two day's markets have been interesting. Yesterday worldwide equity markets rallied on rumor of additional stimulus from Chinese gov. Today everything tumbled on second-thoughts on that.

To me, both are over-reactions. China will not be able to single-handedly turn world economy around, not with the massive debt in US, massive leverage (still!) in European banks, and near collapse of most all of eastern Europe in both currency and debt. And I very much doubt the 8% 09 growth "prediction" from Beijing would bear fruit. But, I stand by my view in this post: China has a good chance of staying economically sound and socially stable in 09, thus providing some support to world economy.

But if world economy stays in constant crisis mode beyond 09, then the game may need reset again.

China's Economy Isn't in the Same Boat as the 'Developed' World

User 360916, do you have a point or are you arguing for argument's sake?

Again, this is not the place to argue about trade policy and global imbalance and social structure and political philosophy. If you'd like to talk about it, let's move to my blog and we can drill down to it. Here I'm talking about investment opportunities. Are you trying to say big US banks have yet to pull their big stakes out of China, or are you saying they're done?

My point is beyond this, however. What the US big banks have or have not done with their China stakes is irrelevant on this regard. What I'm saying is China is in a fundamentally more sound footing at this juncture. Let's stick to this here. Anything else, move over to my blog and we can talk about it.

China's Economy Isn't in the Same Boat as the 'Developed' World

Ricard, you raised a good point. Unfortunately, I have no anecdotal evidence to say either way on it, not to mention data, which I doubt anybody has. I guess we'll have to wait and see.

Billy Gee, I tried to stay away from anything that might be used to stoke protectionist sentiment but I have to make an exception for you because your comment on Chinese government bureaucrats involved in "import stifling" goes beyond ignorance. One important factor in chronic trade imbalance between US and China is the fact that US government prohibits export of many hi-tech products to China. This is xenophobia thinly veiled behind phony ideology arguments that have been outdated since 30 years ago. National security can be a valid concern. But it needs balance and scrutiny. The list of prohibited export to China was arbitrarily drawn up by politicians two decades ago with no public debate. It has denied many American businesses tremendous opportunities and caused a lot of distrust and suspicion towards US among certain segments of Chinese society. This is stupidity beyond comprehension as far as I'm concerned.

China's Economy Isn't in the Same Boat as the 'Developed' World

Ricard, your point about the strength in rural social structure in sustaining the unemployment surf in a valid one. But the number is still tiny in percentage. I'm not seeing any sign of stress, though admittedly I'm talking from the 500,000 ft level.

User 360916, do you have any evidence showing the extend of unwind of China stakes from the banks you mentioned? I know Buffet and BoA already pulled out big chunks, but nothing concrete about other significant moves. Judging by the dramatic drop in Chinese stock market since late 07, they would not have done their homework if they had been sitting on it all this time.

China's Economy Isn't in the Same Boat as the 'Developed' World

Socialism cannot compete! :
>>Then a) you admit China isn't a "developed" country? And b) why would I invest in an undeveloped country right now?

Whoever told you China is even close to a developed country was pulling your legs. ;> Parts of the few modern urban centers look are fantastic, even authentic in many ways. And the improvement in overall living standard as well as the general sense of satisfaction/content over the past 20-30 years -- and yes, even the political scene -- is nothing short of astonishing. But no, it'd take more than a generation to transform a country of 1.3B people from an almost complete lack of industrial foundation into a "developed" country, no matter how you define "developed".

As paultaut answered above, this (plus my basic stability view) makes China a potential outperformer in investment. Even today, 1.5 years into the subprime crisis and full half year into the global crisis, only the R in BRIC looks somewhat shaky. BIC is still burning strong.