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Jeremy Frommer, CEO of Hedge Fund LIVE Jeremy Frommer has 20 years of industry experience and is currently responsible for general management and leadership of the General Partner. Previously, Mr. Frommer was a Managing Director and Head of the Global Prime Services Group (“GPS”) at RBC Capital... More
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  • American Bear, Chinese Bull  0 comments
    May 6, 2011 9:15 AM

     The International Monetary Fund (NYSE:IMF) has released its World Economic Outlook, and by 2016 China’s economy is projected to exceed that of the United States by $200 billion.  I read an article that described our relationship with China as if China were Bill Gates, and America represented the jocks that bullied him in high school (1980’s).  China has done all of the work, evident in the over abundance of ‘made in China’ products that have became commonplace in the United States.  While it is easy to sit back and criticize their government’s authoritative position through population control and internet censorship; we simply can’t deny the facts from a fiscal perspective.  The US debt is spiraling, and we’ve passed $14 trillion at a record pace.  At the end of December the total foreign holdings of US Treasury debt was at a record high $4.44 trillion.  China holds over 26%, roughly $1.16 trillion invested.  China has been in negotiation with Russia to instill a channel for the two currencies to trade against each other in the spot inter-bank markets.  This is a clear indication that they are seeking to move away from the U.S. Dollar World Reserve that the markets currently use (the U.S. Dollar is the monetary unit used to price gold and oil).  If the global economy were to devise another Reserve Currency system America would NOT be able to print money at the rate we do.  This is horrible news for America given our spending habits.  Still, I am not sure of the reality of the threat when the economic conditions are coupled with military strength and the impact that has on behavioral economics, however that will be addressed and analyzed much further in coming blogs.  Nevertheless, it is undoubtedly a bad sign for America that the people who have ‘invested’ in us so heavily are seeking new methods to avoid our currency. 

    In China’s most recent 5 Year Economic Plan (12th) they were not hesitant to discuss plans for increasing consumption and reducing savings.  Historically China is a nation that has saved almost half of its Gross Domestic Product, leaving an astronomical cash reserve for ‘consumption increase’.  Harvard economist Martin Feldstein reported saying, “China will have to sell dollar bonds or other sovereign debt from its portfolio…the net result would be higher interest rates on US bonds and other bonds across the world….a clash between China’s lower savings rate and a continued high fiscal deficit in-the US could drive up global interest rates significantly.”  The 5 Year Plan also spoke of plans to drastically increase investment in select industries; next-generation information technology, clean-energy vehicles, biotechnology, high-end manufacturing, energy saving and environmental protection.  China is aiming for these industries to comprise 15% of their economy by 2020, up significantly from the 3% that they currently total.  In China majority of the companies emerging within these industries will be government-owned (the Chinese way), whereas the vast majority of their American competition are privately owned.  Not a bad position when you think of China as a corporation, and their enormous current-asset pool as investment potential.  Ben Warren is an Environment and Energy Infrastructure Advisory Leader for Ernst & Young who has done extensive research on China’s position going forward.  In a recent report released by Ernst & Young Mr. Warren was quoted saying, “China’s steady rise to pole position has been underpinned by strong and consistent government support for renewable energy….This, together with substantial commitment from industry and the sheer scale of its natural resources, means that its position as top spot for renewable energy investment is well merited.”  All of this paints a very clear picture in my mind, so much so that I’ve taken on Mandarin Chinese as an additional minor.  I will be studying abroad at Sichuan University this summer, and look forward to observing this situation from the other teams bench in an attempt to obtain a more accurate and holistic view of the complex global economy.  Thank you to all who have taken the time to read this, I look forward to further exploration and reporting on topics briefly discussed.

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