I want to break this down for the person who doesn’t pay attention to global finance.
#1 – What happens to China is a big f#cking deal and has enormous consequences in terms of how countries manage their economies
#2 – China is on the verge of experiencing a “hard landing” more easily understood as similar to what America experienced during the Bush financial crisis of 2008 that President Obama inherited
#3 – There is actually a direct correlation between America’s slow recovery and China’s “hard landing”
#4 – America has been engaging in economic warfare with China for some time now and you probably didn’t even know that
Manipulated Currency ~> Lower Exchange Rates ~> More Economic Growth ~> More Inflation ~> Stagflation
China has been manipulating the value of it’s currency the renminbi for quite some time now; the Chinese have intentionally maintained a lower exchange rate with the U.S. and Euro currencies in order to maintain a manufacturing edge. The lower the exchange rate – the more goods they are going to export since in relative terms….goods are cheaper to buy from countries with lower rates. People work for less in relative terms etc. China does this because they want to employ people…the more goods they export – the more people they employ and raise out of poverty. Unless – they reach a tipping point.
Often times you will hear China referred to as America’s banker or someone will push this fear that somehow China owns a vast majority of America’s debt when it really only owns approximately 8% of America’s debt; the vast majority of American debt is held by Americans i.e. we pay ourselves back. What is important to understand about this is HOW China manipulates their currency. China doesn’t buy America’s debt because they want to; THAT is how they manipulate their currency.
The less they own in American debt or “foreign currency reserves” – the more their currency reaches a natural state of exchange i.e. the less they manipulate it. The problem is how China buys American and European treasuries or “foreign currency reserves”; it gets complicated but essentially…they print more money and use that fiat currency to buy American treasuries thus preventing the American currency from losing value and affecting the exchange ratio between the two countries. The Brookings Institute explains more HERE.
Paul Krugman wrote about the impact China’s manipulation has on the U.S. economy in Holding China to Account in October 2011:
The United States, given its special global role, can’t and shouldn’t be equally aggressive. But given our economy’s desperate need for more jobs, a weaker dollar is very much in our national interest — and we can and should take action against countries that are keeping their currencies undervalued, and thereby standing in the way of a much-needed decline in our trade deficit.
That, above all, means China. And none of the arguments against holding China accountable can stand serious scrutiny.
Some observers question whether we really know that China’s currency is undervalued. But they’re kidding, right? The flip side of the manipulation that keeps China’s currency undervalued is the accumulation of dollar reserves — and those reserves now amount to a cool $3.2 trillion.
Anyone who understands history or economics will understand what happens in the vast majority of economic scenarios when you print money…you create inflation. Some inflation is ok but if not carefully managed – it becomes stagflation…prices increase beyond the rate of wages and normal items like food, real estate, cars, clothes become more and more unaffordable for the average family. There is this balance between growing jobs and the fear of inflation growing beyond the rate of growth essentially.
“If you look at the Chinese data, you should stop debating about a hard landing. China is in a hard landing. Car sales are down, cement production is down, steel production is down, construction stocks are down. It’s not a debate anymore, it’s a fact…One should be concerned about what’s happening in the China property market.”
(JPMorgan Chase & Co.’s chief Asian and emerging-market strategist)
Well – one of the things that is not talked about has been a combination of the monetary policy established by the FED and the fiscal policy managed by the Obama administration and the impact on China. Right now – America is spending about $1 trillion in credit i.e. deficits per year above and beyond the U.S. budget which is still significantly larger than China’s economy. For China to continue to maintain it’s manipulated exchange rates…it has to continue to purchase American treasuries or the exchange rates start to normalize and American goods become cheaper again…thus increasing exports in America and thus jobs. Conversely – if America had actually tried to balance it’s budget – not only would it have slit it’s own throat…China would have been able to dominate the American economy into submission for the foreseeable future.
At the rate that America has been increasing it’s deficits funded by tax cuts…China has had to print more money. This has created huge inflationary pressures that China has decided to ignore despite the warnings signs for the past several years. Now – China could be at the tipping point. And the only way to stop the crash that is probably inevitable at this point is to stop buying American treasuries…and this will ease the inflationary pressures in China and make goods “Made in America” cheaper to buy thus providing American workers with a chance to do what we do really well – produce and export goods extremely efficiently.
And wouldn’t ya know…as Businessweek - just reported:
The pace of reserve accumulation will “first and foremost” impact Chinese demand for U.S. government debt, Goncalves said.
China’s currency reserves declined 2.8 percent in November and December to $3.18 trillion, according to China’s National Bureau of Statistics.
This chart from the Economist shows that China is still growing significantly but due to the fundamentals of Chinese markets – the 11% decrease in employment growth or employment slowdown will have a pretty heavy impact. The U.S. and Japan by comparison are growing in the employment market vs. prior year’s results.
In the Fall of 2010 – International Economy magazine asked 30 experts about the impact “If the China Bubble Bursts”. They nail it when they ask:
Certainly Chinese authorities might succeed in their effort to safely slow the pace of rapidly rising asset prices. Yet assume this scenario: The authorities fail and sometime over the next several years the asset bubble suddenly bursts. What happens then for the Chinese economy?
George Soros said in June of 2011 that China risked a “hard landing” if it didn’t take the necessary steps to stem inflation and a housing bubble.
The NY Fed gets in the weeds relative to preferred exchange rates with China in July 2011:
Paul Krugman wrote about it in his column Will China Break in December 2011:
Do we actually know that real estate was a bubble? It exhibited all the signs: not just rising prices, but also the kind of speculative fever all too familiar from our own experiences just a few years back — think coastal Florida.
And there was another parallel with U.S. experience: as credit boomed, much of it came not from banks but from an unsupervised, unprotected shadow banking system. There were huge differences in detail: shadow banking American style tended to involve prestigious Wall Street firms and complex financial instruments, while the Chinese version tends to run through underground banks and even pawnshops. Yet the consequences were similar: in China as in America a few years ago, the financial system may be much more vulnerable than data on conventional banking reveal.
Now the bubble is visibly bursting. How much damage will it do to the Chinese economy — and the world?
The Economist just wrote about it – China’s Economy: Fears of a Hard Landing. The video below is a newscast from China talking about what’s going on there; you’ll have to read it in subtitles but it is very reminiscent of the American real estate bubble that went POP.
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