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The Love And Hate Relationship With China

First of all, I am a Chinese native. I was born and raised in Shanghai China until teen age and came to US before Clinton took office.

Although on the political front, China and US have never been portrayed as "allies", the economical dependency between the two countries have never been so great. Each country needs the other to do well to survive. And each country is also the biggest threat to the other country's economic state. Hence, the current love and hate relationship.

Ever since the US and China established these trade policies, Corporate America has outsourced millions and millions of jobs to China and other emerging markets to reduce its cost and increase profit margin. These jobs, mostly in manufacture will never come back to US. The trade policies have enabled Americans to consume cheap goods, thus stretching our dollars far and further to consume as much as we could, hence providing China with great opportunities to achieve phenomenal economic growth in the recent decade.

But this phenomenon has put both countries in a very dangerous spot.

US has since lost a tremendous amount of capability in self production. We are completely relying on foreigners to produce the goods we need. If we have money to buy, that's great! We can spend our energy and resources on other stuff like technologies and innovations. Looking back in history and that's exactly what we have done. But what if we don't have money to buy? Don't forget we have been borrowing through the roof on every different level from federal to municipal to individual. This can't last forever. One day, the debtor is going to ask for money back or stop or reduce lending. What do we do then? The American people have already felt this pain by not able to refinance their mortgages. Their credit card applications are constantly denied. I am sure a lot of us have felt that pain already on an individual level. But what if it happens on a much larger scale?

Think about this. Let's say a community has 10 families with one dominating the other 9. The big strong family used to be able to produce a lot of goods and be self-sufficient. But as this family grew richer, it got lazy and started having the other 9 families to produce goods. So instead of producing, the rich and strong family buys goods. When things are good, everybody benefits. But when things are really bad, the rich family has no money to buy and no skills to self-produce while the other 9 can at least survive on their own self production.

Of course, this is a very simplistic analogy which hints the real danger of the dismissing production capability. Relying on imports long term requires a country to have strong currency and robust economy state to import. When we have lots and lots of money, that's great! But when our purchasing power starts to damper, this will send shockwave through our economic system. A likely scenario will be a devalued dollar through intentional inflation by the Fed to control our debt situation. The middle class who currently enjoy the cheap goods and resources we import will suffer greatly when this happens.

For China, relying on exports is also alarming. That explains why China puts so much more emphasis on growing its own consumer basis. US is China's largest customer. If Americans are spending and consuming goods, China will do well by selling goods to us. Unfortunately, the funds fueled the recent US economic boom was largely funded by the cheap credit to enable US consumers to use their homes as cash machine. When the party ended, so did China's growth rate. China has been very bullish on encouraging their own citizens to consume. Hint, the ever growing large Chinese middle class population is evident that the government is trying to be self-sustainable without relying on foreign trades.

To take this issue further, China has been stocking up on US dollars and US treasury bonds for a while. China is the largest foreign debtor of United States. Right now, China got no better option but to keep buying US assets whether they like it or not. And I can tell you that they don't. That's why China issued warning in 2009 to warn US to be fiscally responsible and sort out our financial mess. They can't sell our bonds without devastating their own economy. They can't stop lending to us without crushing their best customer. They are in a very difficult spot. We are betting on it and that's why we are not concerned about China dumping our bonds. But for how long? For how long will China finally realize that this game is going no where and they finally bite the bullet and dump their irresponsible fat lazy customer? Unless US starts to pick up pieces and become sober and convince the foreign countries that we are on a better path to prosperity and there is going to be a light at the end of the tunnel, the foreigners will dump us eventually. Whether when they find better customer than us, or whether when they finally had enough, I don't know. But the bottom line is, we have to make fundamental changes at the political front to keep the foreigners in the game.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.