Maklo

The Death of the Asian Development Model

@ Michael Pettis: Great article as always. A few comments/observations.

1) I agree that there is strong likelihood of a shift, or reset, in U.S. consumption patterns which will affect the demand side have an negative impact on Chinese growth rates. However, demand may not grow as fast or even decline, it has not and will not evaporate completely, and I would not jump to the conclusion that the "Asian Development Model" is dead. Arguing that it is dead is basically arguing that globalization will reverse and go back in time by 10, 20, 30 years and I just do not see that happening, nor do I think that is the intended outcome of the current Obama administration.

China continues to increase its comparative advantages in manufacturing with its combination of low cost and high productivity. On the cost side, China is improving as labor costs and wage pressures that were at double-digit growth rates from 2003 to 2008 are now stable or even going down in some areas. On the productivity side, I have not seen any declines and would on the contrary expect further improvements due to the near-term effects of shutting down or paring back capacity. It is clear, however, that going forward China will need to move up the value chain in order to sustain growth. And the law of large numbers means that the growth rates in the next stage will certainly not be in the 10-11% annualized range of the past.

2) The "export/production-foc... policy calls for support of the manufacturing sector, largely through increased bank lending. As I understand it, bank lending will continue to be disproportionately focused on domestic firms and SOEs. The primary funding source for exporters, dominated by "Asian Tiger" enterprises, has been historically dominated by equity in the form of FDI, and these firms have already sharply curtailed their investment activities - capitalism is working extremely well in the export sector! So I do not think over-capacity will necessarily be due to increased bank lending. Said differently, exporters are not building new factories these days. I think they are more likely trying to figure out ways to re-tool products and distribution to the domestic markets.

3) Nevertheless, there are other drivers of over-capacity, not just fiscal stimulus. Tax holidays, favorable regulation/enforcement and cheap land, among others, have been provided to the export industry to spur growth. Oftentimes these decisions are made at the provincial or local level, and may vary significantly. I am not as up-to-speed in this area, but these are the policies to investigate further with respect to how perverse incentives may lead to over capacity in the export sector.

Wells Fargo Earnings: What's Real, What's Not?

The author makes some serious analytical mistakes and uses numbers out of context. I almost stopped reading after the author made a comment on WFC's "incredibly complex financial documents" - WFC's financials are the simplest out of the big banks. The author cites a "$24 billion [write-down]" against a portfolio "between $90 and $100 billion. Let's say $95 billion". The actual numbers, which are not at all difficult to find (are 10Ks hard to find?), are a $37.2 billion discount against a $93.9 billion portfolio. The $24.3 billion cited by the author is only against the $59.8 million Pick-a-Pay Mortage portfolio, which I will elaborate on below:

Prior to closing, WFC wrote off $24.3 billion against Wachovia's (formerly Golden West's) option ARM portfolio that had current face value of ~$59.8 billion, or a 41% discount. As of closing on 12/31/2008 these particular loans were carried in a separate liquidation portfolio. For WFC to "use up" the $24.3 billion reserve, they would need a foreclosure rate of around 75% with losses of around 50%+ per foreclosed loan. In real world terms, 50% losses means that ...

... loans were originated at an average 80% LTV, ALL at the peak with no assumption of paydown
... housing prices have fallen 46% peak to trough and WFC unloads these properties only at trough pricing.
... an additional 10% foreclosure charge to cover rehabilitation, agent fees etc.

Remember, WFC bought Wachovia in December 2008, not July 2007. Given their track record, and at that particular point in time, there is very low probability in my mind that they would have under-estimated the coming wave of Option ARM resets, which people had started to wail about in 2006.

U.S. Big Banks: Survival of the Simplest

Good article with excellent points.

I would only add that Wells Fargo did not require TARP funds nor any government support to consummate the Wachovia transaction (unlike Citigroup, which needed a government guarantee to get the deal done). The deal was funded purely with shares of WFC - so no cash out the door. Given Wachovia's distressed circumstances, WFC got it for a great price, after factoring in very conservative mark-downs on the troubled loan portfolio (which came primarily from Wachovia's acquisition of Golden West).

In fact, contrary to what many out there believe, the Wachovia deal more likely improved Wells Fargo's financial position. It doubled the deposit base and significantly increased the earnings power, extended the retail banking network to be a true coast-to-coast network and increased WFC's competitive positioning in a number of profitable areas of finance such as asset management (A.G. Edwards). Meanwhile, WFC took very conservative markdowns on Wachovia's book, and still paid less than 30 cents on the dollar (in stock). In fact, I think they inherited a significant amount of balance sheet cash as a result of the merger, in effect getting the operations for free.

Prior to the acquisition, Wells Fargo was already in the strongest financial position compared to the major banks and had the lowest need for additional capital. A lot of this has to do with how they fund. WFC (and Wachovia in fact) rely more than any of the other major U.S. banks on deposits from its retail banking network, which, with the help of the FDIC, turns out to be much more stable than other funding sources, like the commercial paper market. In fact, as troubles arose in the banking sector, there was a "flight to quality" to Wells Fargo, which shows up in double-digit increases in their deposit base.

At the end of the day, Wells Fargo's rationale to accept TARP funding was more from a competitive perspective. If the competition had access to this low-cost, (relatively) non-restrictive capital, they would be at a disadvantage if they did not take it. And in fact, we are better off that WFC took TARP funding, as they have written by far the most loans by far. They probably would have written fewer loans if they had not taken the TARP funding. Meanwhile, other banks are still scaling back their overall exposures, despite having taken TARP funding, because that funding was needed just to keep them from going down the drain. I also do not believe they would argue with government intrusion on compensation practices, as their business model and compensation culture is different from that of, say, Goldman Sachs.

Roubini's Forecasts for Asia Recovery Are Flawed

William - land ownership policy in China under long-term leases is not dissimilar from the system in Hong Kong or the U.K. Even here in the U.S., you only "own" the land as long as you can afford the property taxes.

Suggesting that *only* democratically elected governments have incentive to work for the people or that only with free and protected speech can you lend any credence to the numbers ... is idealogical and blinds one to reality.

Roubini's Forecasts for Asia Recovery Are Flawed

In China, the export industry is dominated by foreign enterprises. To encourage FDI, there was a concerted effort for the past 20 years by central, provincial and municipal governments to provide tax incentives, cheap land, established infrastructure, etc. to re-locate their factories. These foreign enterprises were the usual suspects -- Taiwan, South Korea, Japan, Hong Kong etc. -- who were merely leveraging several decades of success exporting to the West. North American and European multi-nationals tended to focus instead on selling to the Chinese consumer.

While there are 100 million or so middle class (by global standards) consumers in China, the vast majority of Chinese still cannot afford the level of quality that developed economies demand. Meanwhile, the distribution channels into these consumers are complicated and difficult for outsiders to understand. As a result, this market is primarily served by domestic firms, including state-owned enterprises.

So the exporters are now coping with this huge demand destruction in developed countries for their goods. That is why factories are shutting down by the hundreds. There is obviously too much capacity in the system.

At the same time, as we speak, some of these exporters are trying to figure out how to crack into this base of Chinese consumers that they have never really tried to break into. Over-capacity leads to lower prices and lower prices means you can reach another segment of the population heretofore unreachable. So one impact I would predict is that some of these exporters break into new markets in China.

Meanwhile, domestic manufacturers have been steadily improving their production methods, quality, processes, etc. They are learning from their competitors - a natural component of capitalism. And now they are seeing more competition trying to break into their markets, so they need to also "step it up".

Eventually, there will be less of a distinction between domestic firms and foreign export-oriented firms. There are clearly signs of that today with domestic firms like Haier and TCL breaking into overseas markets, as well as foreign brands making further inroads into China's hinterlands. But overall, the implications for both the domestic and foreign firms in China are to adapt or die. And I would predict that some will adapt and some will die, with the net result being ... more competitive survivors, better quality and overall improvement in living standards for the vast majority of Chinese and a net reduction in the demand destruction from the developed countries.

I am not arguing that there will not be short-term pain. The shutting down of thousands of factories is clear evidence of that. I am arguing that policies might change, but China's economic development path is going to continue forging ahead in pretty much the same trajectory as before.

There is significant evidence that the Chinese habit of favoring state-owned enterprises is decreasing. This makes sense, as the SOEs make up an increasingly smaller share of production and employment (twenty years ago it was 80%+, today it is less than 50%). Recent government actions included more available bank lending for exporters and other private sector firms. The rules and laws around property ownership were re-vamped in the last couple years to make it easier for individuals and businesses to own land. The establishment of national social security and healthcare plans are top of the agenda for the government, which should ease the need to save and encourage more domestic consumption.

Is China Today the U.S. of 1929?

More than anything, low penetration in Indian markets has more to do with India's own import restrictions, which stem from the historical animosity and as well as holdover policies from India's "self sufficiency" period. The other explanation would be that Indian consumers demand higher quality than American or European consumers ... I think it is pretty clear today that this is not the case.

On a PPP basis, the IMF lists India's GDP at $3.0 billion. In non-PPP terms, it is $1.1 billion.



On Mar 31 11:11 AM Amitabha Mukhopadhyay wrote:

> There is no way one can compare Chinese economy with that of American
> economy. In order for China to emerge as major economic and military
> superpower it has to change its society to a democratic one and make
> trillions of dollars of investments in human resources in the area
> of education, health, housing and intellectual aspirations.
> At present it is only a country of enormous labor resources and so
> lots of MNCs have crowded to make maximum profit by utilizing cheap
> labor. In many cases the quality of the products are also not comparable
> to international standards resulting low penetration in Indian markets.

Is China Today the U.S. of 1929?

Paul, I think you can point to some similarities but overall is not a good comparison. The U.S. was already a rich country by 1929, and already the world's largest economy (excluding imperial holdings). It was amongst the leaders in manufacturing productivity and fixed investment. It also had very ample natural resources.

China today is middle of the pack in terms of per capita GDP on a PPP basis and its industry focuses primarily on lower value-added industries relative to the rest of the world. It does not have a lot of natural resources.

What that means is significantly less ability to dictate the global economic order than the U.S. did on the eve of the Great Depression. Their success lies very much in the success of other countries; as a result, I would expect policies that are more accomodating to fostering world trade vs. protectionism.

Twilight of Autocracy: China, Russia and the Financial Crisis

User 270430: I hope you are just being sarcastic. But even then, your facts are wrong. The Mongols were usurped by the Ming in 1368.

Twilight of Autocracy: China, Russia and the Financial Crisis

I also have respect for Paul but I do not know what value he adds to the conversation on China and Russia in this article.

Artful - your young investigator is correct. The migrants are going home to the countryside and moving back in with the 'rents. A lot of the Chinese growth has just come from putting this excess labor to work. So things will not just suddenly fall off a cliff in terms of the people rising up. However, they have also tasted a different life from their farmer parents and are certainly more restless as a result. In fact, many of these migrants are starting up local businesses, which has the effect of improving life outside of the Tier I and Tier II cities.

China and Russia are different and need to be analyzed separately. Critically, Russia's rise came on the back of higher commodity prices. They may be marginally better at getting that stuff out of the ground, but if anything, Russia's intrinsic ability to produce other types of goods and services has not improved, or even gotten worse because they are so dependent on natural resources.

China has risen because it has just gotten a lot better and efficient at making things. Productivity has increased significantly, in many years outpacing labor costs. This is real improvement, not masked by higher commodity prices. Exports were nice and while demand destruction will cause painful adjustments, there are benefits to those adjustments. For example, what is all of that excess export-oriented manufacturing capacity going to do. Well, after a while, it is going to try to figure out how to break into domestic markets, which has the net effect of improving the quality of the products and goods consumed by the average Chinese consumer. It will likely spur the domestic focused exporters to improve their standards and quality.

In summary, China's rise is real improvements in productivity which has enhanced their competitive position and led to improved quality of life. While there may be adjustments, the long-term momentum is pointing in a positive direction. Russia's rise is almost entirely due to commodity prices, and that is a less stable kind of rise. Their productive capacity relative to other countries has not improved, and probably declined. Under-investment in non-natural resources sectors means this relative decline is more likely to continue than not.

China: Why It Can't Be a Global Leader

Patrick,

Comments on "The Bottom 80%": I have heard many definitions of "middle class" and "poverty", but never one based on the qualifier "metro areas that wow westerners". Striking ethnocentricism notwithstanding, just because you do not live in the top 40 cities, does not disqualify you from qualifying for the middle class. I'm not saying China is a rich country by any stretch, but it is somewhat misleading to compare them ($6,100 per capita GDP, PPP) to Laos ($2,100), Congo ($3,800). [Later you also try to make the comparison to Cambodia ($2,100) and Kenya ($1,734)]. That the bottom 20% of China is around the same level as the average in Laos or Cambodia isn't all that meaningful to me. That's like trying to draw some sort of conclusion by comparing America's lowest 20% (~$10-12k) and Kazakhstan ($11,563), Iran ($11,209), or Bulgaria ($12,372).

"No Domestic Demand": It is misleading to use non-PPP figures in China and try to put it in the context of the U.S. standard (and then label it "peasantry"). Again, middle class is not defined as being able to purchase an iPod. The majority of chinese cannot afford one. But they can purchase a Aigo MP3 player for a lot less. Does that disqualify you from the "middle class" or make you "poor"? I personally don't think so.

"A Manipulated Currency": You call it a "manipulated currency", I call it a managed currency. The goal here is to provide stability to encourage investment and development. Most export-oriented investment has come from the big exporting countries and entities, and disproportionately so the once with ethnic links: Hong Kong, Taiwan, Japan, South Korea, etc. Most U.S. and European investment is geared towards selling into the domestic market.

Its currency reserves, while not insignificant, do not represent the vast majority of the wealth of China. The vast majority of the wealth of a country is its domestic productive capacity, which is a function of many variables like fixed investment, education levels, natural resources, legal processes etc. While China certainly manages their currency to maintain a stable environment, in the long-term it is improvements in the productive capacity of the country that will drive global competitiveness. China today is not just cheap labor. It is relatively inexpensive labor combined with the latest fixed capital investment and production processes that is driving its competitiveness and market share gains in a variety of industries.

"The People's Party": I would disagree here. Over the last decade and change, the Communist Party has really been all about the top 20%, not the bottom 80%. That is one of the major sources of unrest. Today, people join the party to be successful in business. It is the 80% who have been getting shafted. They lost their SOE jobs in the 90s. Until food prices started to recover in the mid 2000s, the farmers were all but forgotten - incomes in the countryside had been stagnant for years. And the migrants have only recently been recognized as a critical piece of the economy.


In your treatise on why China cannot lead today, you actually failed to mention the most significant hurdles China faces over the next twenty years: demographics and environmental degradation.

If you are trying to make the point that China cannot lead today, I will not disagree with that statement. Their actions, direct statements and policies clearly indicate that they are not trying to be the leader. However, it is clear to me that China's role as a leader is increasing with the size of their economy. That is almost inevitable in our lifetime (next 50 years).

We Should Be Fighting a Trade War with China, Not Mexico

Try again. I stated that the savings rate is driven by demographic and social considerations as a more plausible explanation than your conspiracy theory.

And yes, you are ***forced*** to buy U.S. Treasuries when you run out of domestic investment opportunities, foreign investment opportunities, Euro-denominated government bonds, Yen government bonds etc ... the U.S. dollar is the world reserve currency and as a result, soaks upwards of 75% of China's excess savings.

Btw, this is a fantastic situation for the U.S. to be in, but instead of borrowing cheaply and investing in their future, we consumed too much.

**

In the 2003 to 2008 growth cycle, China actually practiced loose monetary policy ("easy credit") until late last 2008, which directly contradicts your statement that they are "intentionally restrict[ing] access to credit among their own people".

Michael Pettis discusses this in an article from June 2008:
seekingalpha.com/artic...

That China's lending surged in January and February also directly contradicts your statement about restrictions on credit.

online.wsj.com/article...

**

Regarding currency manipulation and its impact on the trade, the RMB/USD rate fell from 8.3 to 6.8 from 2005 to 2008 and had no impact on the U.S./China trade surplus. The RMB has continued to appreciated significantly against the Euro and other currencies since Q3 2008, but China continues to maintain its trade surplus. Appreciating the Chinese currency has had little effect on trade, also in direct contradiction to your theory.

We Should Be Fighting a Trade War with China, Not Mexico

Howard,

Let's go back to the beginning. Your argument, if I may paraphrase, is "China's export/import ratio to the U.S. is 3x that of Mexico's, therefore we should fight a trade war with China instead of Mexico."

I replied -- also paraphrased -- "Actually Howard, because China is re-exporting goods from Japan, South Korea and other countries, your figures are significantly over-stated which debunks your proposal to go fight a trade war with China. At the very least, you should be arguing to fight a trade war with everyone who uses China as a re-export zone. And by the way, trade wars are stupid."

I never stated anywhere that China would not have a trade surplus with the U.S. if it weren't for other countries' exporters. There's no "admission" here as you point out. I was merely arguing the magnitude of the surplus, and the magnitude of that surplus is an important factor in drawing the conclusion you made. After all, Germany exports about 2x more to the U.S. than it imports (www.census.gov/foreign...) - does that make it a candidate for a trade war as well then?

**

Then you brought up China's "intentional policy to sterilize the dollars earned from trade, lending them to the United States SO THAT THEY ARE NOT SPENT BY CHINESE PEOPLE TO BUY AMERICAN PRODUCTS" (emphasis mine).

I disputed the second part of that sentence where you let it be known your position on the intentions of the Chinese government. I explained that China's trade surplus is not the result of the "intentional policy" you claim, but due to demographics and social considerations indigenous to China, such as the lack of a functional social security system, widespread healthcare and the "one-child, two parents, four grandparents" phenomenon. And further, economics 101 tells us that savings = investment, and because there are 1) not enough domestic investment opportunities 2) certain restrictions on foreign investment opportunities, the one place they can put their surplus is back in U.S. government bonds, even if they are yielding negative real interest rates.

**

Howard, it is clear to me that you believe strongly in some conspiracy theory where the evil Chinese government is trying to take over the world through a sinister form of mercantilism. I think you are the victim of your own confirmation bias, as shown by your use of a research paper from 1997 that discusses mercantilism (written by a Chinese professor!) as an actual point in supporting the assertion that the Chinese government intentionally follows said policies. It seems ridiculous to have to state, but existence of a paper (even when written by a Chinese professor!) does not prove Chinese government policy! It's pretty transparent to me that you are merely throwing out a red herring, to mask your ignorance of the U.S. Chinese economic relationship, trade and economics in general; and this is not inconsistent in my limited but illuminating exposure to your writings in general.

We Should Be Fighting a Trade War with China, Not Mexico

James,

Liberalization of its economic policies has lifted at least 400 million people out of abject poverty in China and created a vibrant middle class in a period of 30 years. If you think that these people want to go back to the old system, you really need to talk to the people you profess to live among today.

Do not talk of Chinese migrant labor as if they are being exploited. In their minds, they are being granted an opportunity that their parents back on the farm never had. They are not being forced by anything but pure economics, to work hard so they can save up and give their children a chance to move up one rung on the economic ladder.

**

You, James also like to slap the “mercantilist” label on China. To answer this question, James, you need to let us know which of China’s trade policies you consider “mercantilist” or “unfair and unbalanced”, and view them relative to others (like Japan). Some links I provided earlier discuss the WTO’s view on this topic.
Here is the bottom line. The vast majority of jobs that China is taking on today … ask yourself if you, as a patriotic American, wish it upon your children to be in those positions? I for one am glad someone else in the world is willing to take on backbreaking, repetitive labor at one-tenth the cost, so my children can focus on more valuable responsibilities.

**

James writes: “The Chinese love foreign goods because they know they are far superior. But there is certainly more protectionism placed on US goods than other countries goods.”

Sorry I am not aware of this, please expand. In fact, I am really confused by your whole German vs. U.S. favoritism example. Are tariffs higher for U.S. vs. German cars? What are you referring to here?


On Mar 21 07:03 PM James Lewis wrote:

> It seems like many people arguing in this forum don't actually understand
> what is truly happening. Most probably have not spent any significant
> amount of tme in China and most do not truly understand that the
> USA and China are at war and have been for at least the past 9 years.
> This is a very complicated affair and our feelings around it are
> influenced by how we look at the world and the brain washing we have
> all been subject to. I always try to take a step back.
>
> It is not a war in the conventional sense. It has been mainly fought
> out in the economic arena. But China's overiding goal in everything
> they do is to become the richest and most powerful country in the
> world. Regardless of the consequences and impact upon the rest of
> the world, the enviroment and so everyone is clear on my objectivity
> the Chinese people. The chinese people as a whole are not benefiting
> from China's rise. They are being paid nothing to work, have very
> poor standard of living and can not even eat for fear of the food
> being contaminated.The air they breath is toxic and they have very
> little freedoms or social safety nets. Having lived in China for
> 4 years and travelled all over China I can tell you I feel very sorry
> for the Chinese people and feel the CCP have let them down greatly,
> they are not better off and certainly not happier. Be very clear
> that the chinese workers are being exploited for the good of Chinese
> export competitiveness and for the good of making a select few very
> very rich. This is not a new phenomina in China or the west but should
> not be happening at this time of evolution. I have to say this but
> policies that keep the poor without rights/healthcare/decent standard
> of living is part of the overall economic strategy.
>
> China's trading policies are mercantilist and they are so because
> they want economic and political dominance in the world. However
> lets be very clear the USA is not an innocent party and many innocent
> men, women and children have died in pursuit of their power dominance
> in the world. I think there are some differences and the USA's principles
> and objectives overall are better (but only very slightly). But let
> me go back to the point that many people lives have been made hell
> because of the USA's rise to global dominance. Lets be fair though,
> people in power are very rarely spiritually whole doing their life's
> work for the better of man kind. Which is something that greatly
> upsets me on many levels.
>
> I would for the record argue that the political system in China is
> not something that I want colonialised around the world (which is
> a desire of many in the CCP and I believe the USA political system
> of democracy should be a reason that we all hope China does not become
> the dominant power in the world. Of course we have to remember that
> George Bush fraudelently became the president of the USA through
> voter fraud orchestrated by the cia and other secret services in
> order to allow Dick Cheeny to pull the strings and wage the next
> stage of war with Iraq as part of his 20 year plan. Saying this the
> 'War Cronies' were over-thrown in the latest election wich would
> not have happen in a closed political system.
>
> I would like to comment on the trade balance arguement between Mr
> Richman and Maklo. Japan and other asian exporters as well as USA
> companies do use China as their assembly base and therefore the figures
> are skewed. However there is no doubt that China's mercantilist policies
> have created a very unbalanced and unfair trade regime between the
> USA and China. Which was not part of the agreement set up between
> Deng Xiaoping and Jimmy Carttyer. And also lets not forget that if
> all trade was fair that some of these Japanese/USA companies who
> are based in China would be making more of their goods in the USA.
> Which would have a positive economic effect for the US. Really it
> could be argued that the trade figures should not be watered down
> in meaning because they contain exports from Japan being re-exported;
> because China is still gaining from the assembly trade at the expense
> of the USA and other trading partners.
>
> I would also like to share my experience in China with regards to
> US products. The Chinese love foreign goods because they know they
> are far superior. But there is certainly more protectionism placed
> on US goods than other countries goods. And it is done on purpose.
> In all fairness USA made goods (except technology/ medical and military/aerospace
> products) are not that great as compared to lets say germany. Cars
> for example. And the chinese know this, but it is much more ameniable
> to let imports of german goods prosper rather than US goods. This
> protectionism is very apparent and there is certain rivarly between
> USA and Chinese companies and in business-business exchanges.
>
> The Chinese have a lot more respect for germans than americans, And
> I do get the sense that they are more xenophobia towards amercians
> than other foreigners. Of course maybe that is justified based on
> past historical developments. This dislike of americans (especially
> in business) is subtle but certainly present. One could argue that
> many different countries dont like amercians because of their 'arrogance'
> and their governments past activites in medling with the politics
> of their countries. However for the record I think that the amercian
> people are very generous and caring on the whole and are very friendly.
> From my experience they are also the most respectful tourists in
> China towards the chinese culture. Even though a lot of the times
> this is exploited, because they can be a little naive.
>
> China needs to be held to account for its mercantilist policies,
> especially as the people of China as a whole are not benefiting and
> people in other countries are losing their manufacturing jobs. It
> also worries me that China's financial development has been made
> at the expense of developing in other areas. And with continued devlopment
> of prosperity comes justification for political policies that make
> me sick to the stomach (Tibet to name one)
>
> But China is not the only country that needs to do some soul searching.
> Indeed the USA and Mr Richman, Israel have also got some developing
> to do. Indeed you know what the whole world has a lot of work to
> do.
>
> China is the Tiger in the East, but the USA is not the dragon.<br/>
>
>
>
>
>
>
>
>

We Should Be Fighting a Trade War with China, Not Mexico

Howard, I will assume after reiterating three times that you do not address my original point, because you have no real response. Have a good day.

We Should Be Fighting a Trade War with China, Not Mexico

I see the reference now. I took issue with the statement that this was an "intentional policy" to keep the Chinese from buying American products. That is you theorizing about conspiracies, merely speculation on your part. As I responded earlier:

"And there is no conspiracy theory as to why China is buying U.S. debt. The Chinese wish it were different. They wish there were more domestic investment opportunities - but they are already spending too much on domestic infrastructure as it is. They wish that Italy or Austria's euro bond market could soak up enough liquidity without driving up interest rates (this happened last year during the credit crunch). They wish there were more foreign coal mins to buy or invest in, and barriers/risks to foreign investment in "strategic" companies (example: CNOOC/Unocal in 2005) were not so high. The simple fact is that the U.S. government bond market is the the only securities market in the world that is liquid enough to soak up this excess savings, so that is where the majority of their savings goes."

China is not buying U.S. debt because they have a deeper intention, as you theorize. It is because they must. Nobody in their right mind would lend at a 2% return to a foreign government if they did not have to. The Chinese are the ones at risk here, as the U.S. can (and is, clearly) printing more dollars to dig itself out of future obligations.

What is China doing today, that prevents their people from buying from the United States? The RMB has decreased from 8.3 to 6.8 over three years yet the trade deficit increased over the same period. Could it be, perhaps ... just perhaps, Howard! ... that the average Chinese consumer, given their average income (US$3,000/year) and their desire to save money for their own retirement or just a rainy day (because they do not have social security or Medicare) just cannot ***right now*** be in the market for a $12,000 Harley Davidson, $79.95 boxed DVD set of CSI:Miami or a $199 3G iPhone with a 2-year $69.99/month contract commitment from AT&T. This has little to do with currency manipulation ... or tariffs ...

You ***still*** have not addressed my original point: China's trade deficit with the U.S. represents trade deficits with not just China, but other nations that use it as a port of final assembly. This is an important point to address, because you build your entire argument on your belief that China is a sinister mercantilist that must be dealt with by starting a trade war. It is dangerous to draw conclusions about who to fight a trade war with, as you did, with limited understanding of international trade flows.

In your mind, China gets blamed for everything. It was their fault that American consumers spent too much. It was their fault that some people took out mortgages they could not afford. It was their fault that banks over-leveraged themselves.

Yes, the United States needs to cut back its spending. And it is. By doing so, it will get trade more balanced. The answer is not starting a trade war, because that is not the cause.