James Fallows, always one of my favorite columnists, does the impossible, simplifying some terribly complex issues about China’s dollar-surplus and providing answers that actually can be understood by those who are MBA-less. The chief question he sets his sites on is this:
Why should the Communist Party of China countenance a policy that takes so much wealth from the world’s poor, in their own country, and gives it to the United States? To add to the mystery, why should China be content to put so many of its holdings into dollars, knowing that the dollar is virtually guaranteed to keep losing value against the RMB? And how long can its people tolerate being denied so much of their earnings, when they and their country need so much?
Fallows’ answers are cogent and depressing. The bottom line is that China ends up with a much better deal than the US, even if it’s sitting on all that money that can’t be used for the good of its own people. China holds most of the cards, and they’ve reaped the most benefits. We’ve reaped benefits, too – it’s allowed us to borrow all we wish, and to live well while consuming more than we produce. But as Fallows makes gloomily clear, that situation cannot last forever, and it is probably about to end sooner than most of us imagine. And it won’t be pretty.
Sorry for the huge gap in posts. A combination of working/sleeping offsite and not feeling I had much to say recently.
1
By Wesley Tanaka
Wouldn’t a more accurate summary be “Using US dollars to keep China’s poor poorer, America’s rich richer?”
On the one hand, it makes sense to buy dollars now that the value is decreasing. On the other hand, the situation does seem a lot more beneficial to the U.S. than it does to China.
January 22, 2008 @ 6:45 pm | Comment
2
By richard
Yes, you’re right about the summary, Wesley, but I only had so much space for the title. I tried to make that point in the post, about Americans getting richer. But then, if you read more deeply, the Americans getting richer part is a fantasy – there comes a time to pay the piper. That’s where the Chinese have the upper hand. They can pull the plug.
January 22, 2008 @ 9:13 pm | Comment
3
By Matthew Stinson
Wesley, it makes sense to buy those dollars now, but China’s been buying those dollars for ages now, and unless the dollar rebounds dramatically, they’re facing a giant net loss. But they’re still making “progress” by securing market access, I suppose.
January 22, 2008 @ 9:58 pm | Comment
4
By Jack Sideburns
I agree with the article’s views on the cost to the US but feel Fallows missed or understated a further aspect.
Rent seeking behaviour by the Chinese government has a cost, which its foreign counterparts are unwilling to pay, so the laobaixing have to pay up, in lower quality schools and environmental degradation. It is a further form of control, as it gives credence to the Big Lie that “we China are still a developing nation so we can’t have democracy”, if you can point to the sub standard schools.
January 22, 2008 @ 10:53 pm | Comment
5
By snow
Yeah, well, the CCP is always playing ticks and cheating and doing whatever for it’s own gain. I dont think it cares about people at all. I think it just wants to use people prop itself up.
Anyway, It seems to me that people will eventually stand up for survival cause things cant continue like this. There are such and such economic foctors, quite depressing. But there are also social foctors that play a big role, hopefully.
This is a good article that says what I have been thinking for a long time, that is, people dont really know whats going on cause too many factors are repressed and sometimes wilfully ignored… Theres plenty interesting social phenomena that will play a big role in the unfolding of history, not just numbers.., but numbers are neat too…
http://www.feer.com/articles1/2007/0704/free/p036.html
January 22, 2008 @ 11:30 pm | Comment
6
By nanheyangrouchuan
@Richard;
China can’t pull any plugs, it has to buy US debt to maintain its currency peg on the global markets (or now, a basket of currencies). That is the reality of an export dependent economy.
January 22, 2008 @ 11:56 pm | Comment
7
By Dan
@nanhe
Yes. Also, don’t forget that when China wants to use their dollars the only place that can suck up that kind of money is the US.
January 23, 2008 @ 1:00 am | Comment
8
By ferin
That is the reality of an export dependent economy.
China’s GDP growth is mostly driven by domestic growth; and almost all of its foreign investment comes from ethnic Chinese, with a good chunk of the remainder coming from South Korea and Japan. The exports to the U.S help; that is, help corrupt CCP officials milk their impoverished and displaced peasants and work them to the bone so they can buy European luxury goods and feel so superior to their countrymen.
China wants to use their dollars
That’s right; China should simply spend a good chunk of their dollars in the U.S. It’ll work out well for both sides.
That is unless you want a constant stream of peasant slaves dying to foreign pollution who will never see a good life in 3 generations because of collaboration between corrupt officials and foreign fat cats.
January 23, 2008 @ 4:04 am | Comment
9
By nanheyangrouchuan
“China’s GDP growth is mostly driven by domestic growth; ”
@ferins:
Oh yeah, China’s economy is soooo big. Oh, it just got down graded by 40%. Most of China’s domestic consumption is home staples, foreign or domestic brand, food (now at a much higher price), home energy (also much higher) and knock off products, the manufacture of which does support employment but at very low wages and bad working conditions.
January 23, 2008 @ 12:17 pm | Comment
10
By ferin
That and an increase in efficiency. Without exports China’s GDP growth would have been around 9% last year (rather than 11.6 or whatever). Though, they’d have less pollution and income disparity.
Almost all of that goes into displacing peasants with pollution so they’re forced into slave labor, their slavemaster earns some profits at the cost of broken or severed limbs. Then foreign companies can increase exec paychecks without passing the savings to the consumer, and the CCP stooges blow all their money on conspicuous consumption.
Meanwhile, disgusting expats settle in in Shanghai or Beijing like bacteria in an anal fissure.
China’s peasants should line up and bow down to you for your generosity.
January 23, 2008 @ 7:27 pm | Comment
11
By ferin
http://zonaeuropa.com/20041225_1.htm
Thank you America. Now these 800 peasants can go work in a factory or die, because some scumbag who probably got rich selling Chinese land to foreign speculators pulled CCP connections to brute-force them off of the fields they’ve fed their families with for 8,000 years.
All this man needs is several really cool European foreigners to make him look super classy.
January 23, 2008 @ 7:31 pm | Comment
12
By Si
I am confused ferin – didn’t you just say that most of the foreign speculators are in fact chinese?
isn’t really a case of the chinese simply screwing each other?
January 23, 2008 @ 11:02 pm | Comment
13
By nanheyangrouchuan
@ferins:
Yeah, from 11% to 9% based on those always reliable Chinese statistics.
January 23, 2008 @ 11:51 pm | Comment
14
By ferin
Yeah, from 11% to 9% based on those always reliable Chinese statistics.
At least they don’t “find evidence” of “WMDS” and goof off while 1-2 trillion dollars vanish. Whoops! I got the numbers from reports by U.S and international agencies btw. Then again 9% with tons of pollution and corruption is nothing compared to what could be done with a competent government.
P.S, Americans are fat and dumb. Neener neener.
didn’t you just say that most of the foreign speculators are in fact chinese
They allocate their money differently. The overseas Chinese have kinda been sending money back since the early days of the ROC; American firms not so much.
January 24, 2008 @ 3:35 am | Comment
15
By nanheyangrouchuan
“At least they don’t “find evidence” of “WMDS” and goof off while 1-2 trillion dollars vanish. Whoops! I got the numbers from reports by U.S and international agencies btw.”
Trying to change the subject? The money didn’t vanish, we all know where it went. And the US and international agencies get their numbers from Beijing.
Bad China.
January 24, 2008 @ 9:07 am | Comment
16
By ferin
http://www.economist.com/displayStory.cfm?story_id=10429271
10% of GDP. Doesn’t sound too bad.
And the US and international agencies get their numbers from Beijing.
I guess I should just trust you instead, someone that’s blinded by hubris and racial/cultural supremacism. That’s fine by me; I find it amusing.
BTW it wasn’t Beijing that was talking about China’s economy growing larger than the U.S’ in 5-6 years. They more or less stuck to the new figures in policy. So there’s one thing they haven’t been wrong on, I guess.
Speaking of 40%, your beloved India also shrank by that much. So much for the proxy of your (very) thinly veiled supremacist notions.
January 24, 2008 @ 11:12 am | Comment
17
By Peter Kauffner
Fallows has been doing this “yellow peril” stuff for a really long time. This looks like one his old columns from the 1980s, updated by searching for “Japan” and replacing it with “China.” Here’s a little secret Fallows doesn’t seem to know: international investors put their money in the country where they think they can get the best return. They’ll pull their money out of the US when they find another country where they can get better returns with the same security of investment, and not before. Not only that, but US investors will be leading the charge. The way to keep foriegn investment in the US is to make the country foriegn-investor friendly, get rid of Sarbanes-Oxely and so forth. Where are Chinese supposed to put their money, anyway? China is way overinvested as it is and has some the highest P/E ratios in the world.
As far as the heating in the classrooms goes, Fallows is just such a clueless dweeb. The students open the windows!! They like the cold and “fresh air.” I once stayed in Meijo, Hakka hill county, for Chinese New Year. It was cold, cold, cold! But my hosts kept EVERY SINGLE WINDOW open. It’s some Chinese medicine thing I don’t try to understand. But it has nothing to do with money.
January 25, 2008 @ 10:57 pm | Comment
18
By Peter Kauffner
Fallows has been doing this “yellow peril” stuff for a really long time. This looks like one his old columns from the 1980s, updated by searching for “Japan” and replacing it with “China.” Here’s a little secret Fallows doesn’t seem to know: international investors put their money in the country where they think they can get the best return. They’ll pull their money out of the US when they find another country where they can get better returns with the same security of investment, and not before. Not only that, but US investors will be leading the charge. The way to keep foriegn investment in the US is to make the country foriegn-investor friendly, get rid of Sarbanes-Oxely and so forth. Where are Chinese supposed to put their money, anyway? China is way overinvested as it is and has some the highest P/E ratios in the world.
As far as the heating in the classrooms goes, Fallows is just such a clueless dweeb. The students open the windows!! They like the cold and “fresh air.” I once stayed in Meijo, Hakka hill county, for Chinese New Year. It was cold, cold, cold! But my hosts kept EVERY SINGLE WINDOW open. It’s some Chinese medicine thing I don’t try to understand. But it has nothing to do with money.
January 25, 2008 @ 10:58 pm | Comment
19
By rumour
But my hosts kept EVERY SINGLE WINDOW open. It’s some Chinese medicine thing I don’t try to understand. But it has nothing to do with money.
Ha ha ha…that is funny and could in fact be true!
Just recently, a good Chinese friend of mine gave me a small matchbox size box containing two capsules in it. On the box it says all natural Traditional Chinese herbal medicine. My friend told me they work like Viagra but without the side-effects of western medicine. Guess what. Suffice to say, I called my friend the next day to help get more. Now I’m a believer in TCM.
January 26, 2008 @ 5:49 pm | Comment
20
By JXie
Richard, Fallows’ piece is sophomoric at best, if you don’t mind me being brutally honest.
First, money isn’t always wealth. Let’s imagine a scenario that the Chinese government decides to give out most of its foreign reserve to its citizens — let’s say US$1000 to each Chinese citizen, quite a princely sum for many — and China’s foreign reserve will temporarily be $1.3 trillion smaller. What will happen next? Most of the money will quickly be converted back to RMB to be spent, and the PBoC will be stuck with the foreign print money again. Moreover, China will face some tremendous inflationary pressure with the excessive money supply in the system.
There is little doubt that RMB is undervalued. But if you think steps ahead like a good chess player, what would you do if you are the one who is in control? A maxi-reval? Will it create some massive misallocations in your system? Do you have the financial infrastructure and tools to manage it? China seems to be doing 2 things simultaneously: building the necessary financial infrastructure, and speeding up the pace of RMB appreciation. My game plan is, when China feels that it’s ready, don’t be a USD bag holder.
January 28, 2008 @ 2:50 am | Comment
21
By Jon Warcup
With China grabbing the american jobs away , and this United States having a hard time .
now the Good news, the best part is china’s getting it all back. where the americans have stop buying products where the sign says ” made in China” . so lets make sure China suffers.
January 31, 2008 @ 6:47 am | Comment