CautiousInvestor

China Wants a Global Currency? Here's How

When Nixon unilatterally terminated the Bretton Woods agreement and closed the gold windown in1971 had to do with twin deficits, an unwillingness to increase taxes and the ever increasing cost of Vietnam. There were simply too many dollars sloshing about.

To a degree, China's surpluses and are current account deficits are mirrow images but to suggest that it was strictly China's imbalances that brought us to today's crisis is disingenuous and ignores our low interest rates, unsustainable growth in private credit, failure to develop alternative economic growth models and a belief all was well.

It was glaringly obvious what was taking place and prattle about China's imbalances and currency manipulation should have preceded the crisis; it did not both parties were happy with the arrangement until the bubble popped.

China's Economic Growth Claims Lack Credibility

In addition to growth inconsistencies noted by the author, there is a mounting fear that China is taking on unmanageable risks in stimulating its economy.

The fiscal stimulus plan is being accompanied by a state directive to increase lending and investment. And in a command economy, its pretty straightforward to expand lending and investment through state controlled enterprises.

The concern has to do with the investments and whether they add capacity where needed...........or whether they duplicate previous efforts and simply create excess capacity. A related, and equally serious, concern has to do with the quality of the loans being made and the prospect of high default rates.

While not the focus of global attention, many believe China has its own banking problems.

Late Year Recovery Seems Unlikely

I think patience is the order of the day as there are still many unknowns, particularly regarding the time required to recover from a financial crisis and the interrelated issue of health of the global economy.

Studies of previous financial crises document the extensive loss of wealth through erosion of equity and home values. There is also much lost through contraction in manufacturing and the attendant losses in employment. Employment recovery takes place over four or more years.

To the extent a sustainable recovery in the US economy hinges upon a global recovery, there is much room for doubt. Japan just announced its growth would contract 3.5% this year after contracting at a 14% annualized rate in the first quarter.

Just months ago, Japan though growth this year would be flat after exports declined less in March than they did in February and overall confidence was on the increase. Second derivatives are not enough and green shoots can quickly disappear.

China Investor Update

Chinese corporations and the state owned sovereign wealth fund are striking keen deals across the globe and and are securing long-term access to needed resources at bargain prices.

The Chinese have what nobody else has at the moment: cash. This gives them tremendous leverage as does their willingness to strike deals with countries that have strained relationships with the US, e.g. Venezuela.

They appear to be focusing upon oil and minerals, both essential to the Chinese economy. In the literature there is a debate of sorts whether these deals will expand supplies or simply give China secured access at the expense of other buyers such as the US, Europe and India.

However it unfolds, China is doing whats best for China..........and I wish the US would follow its example.