Ooh, the posturing is getting interesting. As we noted in Links last night, Timothy Geithner has already climbed down from his “currency manipulator” saber rattling by pressing the G-7 to deliver a much more China-friendly statement on what they’d like to see it do with the yuan (the original version urged letting it appreciate. the watered down one merely called for “a more flexible exchange rate”.)
China seems to be pressing for advantage in advance of the upcoming G-20 meetings. From Bloomberg:
China, the U.S. government’s largest creditor, is “worried” about its holdings of Treasuries and wants assurances that the investment is safe, Premier Wen Jiabao said.
“We have lent a huge amount of money to the United States,” Wen said at a press briefing in Beijing today after the annual meeting of the legislature. “Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried. I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”
China should seek to “fend off risks” as it diversifies its $1.95 trillion in foreign-exchange reserves and will safeguard its own interests, Wen said…
Delegates of China’s legislative advisory body suggested that the biggest foreign holder of U.S. debt diversify away from Treasuries into more risky assets at the annual meeting that started on March 3.
Jesse Wang, executive vice president of China Investment Corp., said on March 4 that his $200 billion sovereign wealth fund may invest in “undervalued” commodity assets. Zhang Guobao, head of the National Energy Administration, said China should invest more in commodities instead of hoarding the U.S. dollar, the official Xinhua News Agency reported on March 7.
Now on one level, this verges on silly. The problem is that the Chinese carried a national strategy on blindly and are now stuck with unforeseen consequences. Remember, in the wake of the 1997 Asian crisis, the harsh IMF program imposed on Thailand and Indonesia left spectators in the region resolving never to get in the position to suffer a similar fate. The cause was hot money inflows, which led currencies to rise. When it left, the currencies plummeted and borrowers in foreign currencies suffered and often failed. The solution was therefore to build up big foreign exchange reserves so as to fight a sudden fall, which was done by pegging currencies cheap (which of course also buffered them from a further decline). The choice of Treasuries was by default, as the safest and most liquid place to park funds.
And as much as buying hard assets like commodities sounds like a good idea, those markets are small compared to the Treasury market. China cannot deploy all that much there without distorting prices, which would put it back at square zero, save buying underlying operations (mines, agricultural land) rather than commodities themselves.
But China persisted with the strategy as it got hooked on export-led growth. If it had bothered thinking about it, China HAD to know its Treasury holding would be worth less down the road. It was pegging the currency cheap, and when it eventually rose to a more normal level, dollar holdings would be worth less. Perhaps the officials believed the day of reckoning would never come.
But Wen is pointing at a completely different issue, that of the ability of Uncle Sam to honor its debts. This would seem remarkable to some until you consider the following:
Moody’s warned of the risk of a US downgrade in the next 10 years BEFORE all the emergency expenditures and financial firm emergency operations started
Standard and Poor’s said consolidation of Freddie and Fannie might impair the US’s rating (um, we aren’t going to let them go, so the distinction between consolidation and what we have now looks largely cosmetic).
Credit default swaps on US 5 year debt, last I saw, was 100 basis points. Not all that long ago, it was 2, assuming you could even get a quote, the idea of a CDS on govvies seemed ludicrous. The US now seen as far from a risk free credit
And in case you think the credit risk is exaggerated, consider. The US already partially defaulted on its debt.
Recall how Bretton Woods operated. Rather than go back to a gold standard at the end of World War II (its defect is a deflationary bias, which made the Great Depression worse), the US instead pegged its currency at $35 an ounce and other countries set rates of conversion in dollar or pound sterling terms. By 1965, the value of dollar claims by foreigners on America’s gold reserves at the $35/oz. rate were greater than the actual supply. The US defaulted on its $35 par value when Nixon cancelled Bretton Woods by suspending the convertibility of dollars into gold. As Michael Hudson noted (hat tip reader Rajiv):
The $75 billion that the U.S. Treasury [would owe] to the world’s central banks at 1968‐1972 prices and exchange‐rates would be repaid with the equivalent of perhaps less than $40 billion in purchasing power as measured by the original debt. To the extent that gold was revalued and part of this $75 billion repaid in bullion, the gold tonnage price of this dollar borrowing would be written down to less than one‐fifth of its original value as measured by the year‐end 1974 price of almost $200 an ounce
And if you don’t buy the gold valuation (remember, it had been the value peg until broken), consider that the resulting floating rate regime saw a big depreciation of the greenback against most major currencies.
In other words, the idea of a US partial default is far from a loony line of conversation; we did it less than 40 years ago.
And in light of that history, why is Wen asking for assurances? None can be made. So what concession might he be looking to extract instead? Now that China’s trade surpluses have fallen sharply, it has no particular reason to buy Treasuries at anything like its recent volumes.
As we said, this message is most likely to be posturing for domestic consumption, but China could also be putting stakes in the ground. Watch for the next move in this gambit.
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Everyone understands there will be price inflation for dollar assets in the medium term and no one wants to pay that tax. It’s natural for the Chinese to go for commodities that retain their value somewhat against inflation. I don’t see it so much as posturing as merely stating the obvious.
“As we noted in Links last night, Timothy Geithner has already climbed down from his “currency manipulator” saber rattling …”
Not so fast, at least thinks U.S. Trade Representative-designee Ron Kirk.
Check out this Reuters story, from YESTERDAY.
“US to review if China yuan actions violate WTO”
http://www.reuters.com/article/usDollarRpt/idUSWAT01113120090312
Beijing is still at stage of “observing”(观察） Obama administration. From what they saw, the sign is not encouraging.
A creditor demand…Watch for more.
American industry and production is not as strong as it was, even since 1980, and the dollar should reflect that. Instead, it’s too high and the country has been hollowed out at the expense of capital and Wall Street. The US dollar needs to devalue if there will be a substantial middle-class in the future. Americans can’t all be in banking, finance, or have Phd’s.
China has indeed been buying underlying commodity production operations, more than one metal mine that I know of.
Yves is exactly right, China should expect dollar devaluation. China should also note that the US has no obligation to bail out private US corporations like Citi, BAC, etc. Their bondholders are entitled to no government protection and have gotten far too much already.
I guess with all the weasel-wording and spinning that has been going on in the US, China just decided to push their own agenda. Nothing wrong with their saying it, it’s to be expected, but we must say no and that too should be expected.
That's a good point re: commodities, Yves. The market is small compared to the reserve volume in China. The amount of underlying assets which come on the market will also be limited, at least in relation to the trillion dollar scale of those reserves. Commodities are a good diversification play, but no more than that, and one with a long horizon, too. There is no alternative for China to getting a stable currency framework.
I'm not so sure that the Chinese were blind to the implications of their policy. It was good when their dollar-trade surpluss was in the high eleven figures. But no more than anyone else did the count on the _scale_ of credit distortions from the recent Securitization Bubble. They didn't adapt when that surplus ballooned to the low 12 figures, and etc. In the end, I don't suppose it matters much if they were blind or blindsided; the fix they're in now is the same.
I, too, think this verbiage—Geithner, Wen, et. al.—is posturing for the G20. So what is the REAL problem for China? It's not devaluation of their assets; not really. Yeah, that might cost them, and politically it would be damaging domestically, even more of a problem. It would partly be offset by a rise in purchasing power of their own currency. To me, the real problem for China is meaningful protectionist positions in the US and EU. That would come close to scotching their existing strategy, with immediate and midterm problems in their domestic macroeconomic development/employment/social peace schema. I suspect that China is talking tough on things it might, ultimately, concede some room for, so as to give up as little as possible on trade.
Of course, the macroeconomic strategy of _every_ large economy is, ahhh, messed up by present global deleveraging. All nation-level decision makers are tremulous over this, to me. There appears far too little preparation for G20 London. Ideally, they would meet and announce the basis for a 'Bretton-Plaza Accord IIIa,' or whatever. Doesn't look like they're ready. I think rather than getting a glimpse at the final, common balancing we are more likely to see the 'initial negotiating position' of most major players. There is no choice, NO CHOICE, to generating a common agreement; the question is how much pain, folly, and time will have to pass before we get there? I see little global leadership from any quarter, regrettably, so that sum of Jeers & Tears is probabaly middling rather than small.
London calling . . . . [And wouldn't it be just tooo chill if they played The Clash as the lead-in music to the news coverage on all this? There's some REAL anti-globalization comin' attcha.]
Lets say China wants to sell its 2 trillion in treasuries. What will it most likely get in return? Right, 2 trillion freshly printed greenbacks from the Federal Reserve. Call it quantitative easing. Wouldn’t be any different from what happened 40 years ago. And, as China would want to spend this money for hard assets, it would bring us the rain(inflation) we have been begging for. Aint that beautiful?
Many other “surplus countries” have aggressively invested their fx in foreign equity stakes. Hasn’t served them well, has it? Singapore’s Temasek and GIC are prime examples: The market value of their various overseas investments has plummeted.
Compared to that, China can (so far) be very happy with the performance of its treasury bond portfolio…
Yves,
Thanks for the posting and your insight gathering, spendid.
I agree with Richard Kline about the lack of potential for a solution from the G20 meeting. It may more be a clarification and hardening of positions experience.
We need to see one or more countries (if not our own) in serious financial crisis before the end-of-the-world bluff of the American financial fascists is called. I was hoping that the rest of the countries could force Obama to confront the excesses of the fincial industry but it doesn’t seem to be time yet.
I know that I was concerned enough about the value of Treasuries to move from Treasuries to GLD a few months ago so I totally understand Wen’s position…..You don’t poof howevermany trillion dollars into the economy in a short period of time without inflationary consequences.
What China and the rest of the world needs to do is stop buying our debt and stop the American dollar from being the Reserve Currency. I don’t see the rest of the world being as complacent about paying for American financial industry excesses as we seem to be. What do they have to lose? I suspect they would see it as cutting their losses.
To all your excellent points, Yves, I would add that the Chinese economic modell was in effect debt financed just like the US. Chinese might complain now that their piled up treasuries are apt to loose their percieved value. But how about the tons of stuff Americans bought to finance Chinas trade surplus. How much worth is that now. So the Chinese might be ending up trading rapidly depreciating goods against rapidly depreciating greenbacks. That sounds not so unfair, does it? Lets turn it this way: US guarantees the value of her debt to the Chinese for 30 years in exchange for the Chinese guaranteeing for the goods sold to the US to last 30 years. (Just kidding, of course). Would Premier Wen like that idea :=?
Austraila=comoditys+Rudds background=future/friends
skippy…going to be intersting eh?
As China is the U.S. government’s largest creditor is “simply” forcing a margin call which means a) honor you debt b) show your commitment to solve the problem c) no more credit will be available without assurances on a) and b).
Hmm, don’t they still need to roll over all that debt as it matures, even if they aren’t adding to it.
Could it be related to the UK quantitative easing, and the assumption the USA might go the same way? QE is may be interpreted by them as a kind of default. First guess.
Then, the Chinese for cultural reasons may just not buy the US fiscal stimulus program. That is the USA going into more debt just seems crazy in the East Asian context. He’s talking to people on the China side who are questioning the wisdom of so much money stored away in dollars and snapping the whip a little bit.
Lastly, maybe they’re just talking up interest rates a bit. If they’re lending all this money, well, why not turn the screws a little bit and make a little more.
Whatever was the motivation behind China’s lending all that money is beside the point. The question should be what are we going to do about it now. We can say they were stupid to lend us as much as we want, it does not change the fact that the borrower has contractual and moral obligations to repay. In case of US default, whether actual or through currency debasement, China will lose all that “money”, but US will suffer a catastrophic loss of prestige and standing in the world, what on the street is popularly known as respect.
Well if China or Saudi unpeg their currency, US$ is devaluing by definition.
1. China economy has large enough impact against US economy to be considered essential trading partner.
2. Saudi = oil.
So if Walmart and gas pump price climbs, it’s pretty much dollar devaluation.
The fact that Wen did a quick trip around Europe earlier in the year possibly garnering support and the UK’s chancellor is making noises in support of talk about global regulation rather than stimulus, I think the battle lines are being drawn for the G20. Since the UK chancellors tack seems to be in contrast to its current actions we must assume that either this has been planned and is a neat trap or the UK has been given the same ultimatum (I suspect the later).
The US wants to talk about more stimulus, Europe wants to talk about regulation and this is just notification that actually China holds a strong hand and is threatening to play it. The US need to come up with answers on how it is going to manage their debt and economy going forward instead of fire fighting with bailouts all the time. I expect the US to rattle the sabres by making more of the accusation that china fixes it currency to regain some initiative, but it won’t gain much traction. It looks to me like US politicians have been out manoeuvred and either the US will back out of the G20 or just stall so nothing is achieved.
Wen might like the States to back up the value of Treasuries. Take gold, for example.
Note that the “free market” solution which is to buy more American made products, is off the table.
The blind spot in the arguments of all contemporary economists is the absolute failure of their prescriptions to lead to equilibrium, ie balanced trade. Just a minor detail.
The non-productive financial services industry has become the largest sector of the US GDP. Throw in government and the hollowing out of the US economy is nearly complete.
How can financial services sustain the highest income level and grow in an economy whose productive base is dying ? Steal the national savings, that’s how.
Export driven countries like China have no plan B, so as Richard commented this is more about maintaining the status quo. The world is awash in manufacturing automation the problem is still what to do with all the stuff these machines spew.
Read this comment in the context of geopolitical tensions.
That is not a good sign.
YS:
Wen just made a mistake. From here on out he should keep his mouth shut and buy gold. As to the US defaulting on its debt, you’ve made my argument. In 1933 we “devalued” the dollar. In 1964 we took the silver out of our money. In 1971 Nixon “closed the gold window”. We “default a little” every year through inflation. Imagine, there are still people bearish on gold. Here I go again: Got gold? Get more. Got bonds? Why?
Why is it so strange for one to be worried about once hard-earned saving when so much of one’s well-being depends on it? The number of insinuations(while possible but not necessarily true) expressed here just show the number of biases one has.
Marking to market requires good discernment skills, an ability to see the world, not as you think it is, but as it really is …
It is no longer a world where contractual and moral obligations to repay are honored. Scamerican justice is a global joke. Chinese justice is the same. The pretzel prez who is responsible for killing one million Iraqis – and displacing and impoverishing millions more — walks the planet a free and wealthy man while one of his countless victims, who threw his shoes at this odious scum bag in a press conference, will go to jail FOR THREE YEARS!
Reflect on that a moment.
Let it seep into, and mingle with, your reality assessment skills …
The global ‘rule of law’ is a selectively enforced scam just as is the domestic scamerican ‘rule of law’.
The profit motive in the world of ‘finance’ is now just another illusionary decoy (like ‘free markets’ and ‘capitalism’) set out for all of the world’s marks. It masks the real motive which is pure raw mean ass enslavement control and population reduction. China’s Treasuries are the Chinese people’s chains of enslavement.
Wen knows this. Wen now plays and furthers the fear game as the music of this generations illusions fades into the ether. The gang leaders now vie for the few remaining chairs of consolidation which will go to the best actors.
Wealthy elite white guys own the big guns and the minds of the citizens who control the triggers.
Deception is the strongest political force on the planet.
i on the ball patriot
With this latest shot across the bow, the writing is on the wall for all to see. Selective default and monetization is inevitable especially at the pace we’re racking up the debt burden. Those who still do not see this are willfully blind, disingenuous at best.
P.S.
Note to Wen: Stop your incessant belly aching and do something about it. Stop throwing good money after bad. Daddy, Daddy, my hand hurts. It’s on this hot stove. Daddy, my hand hurts, aren’t you going to do anything…
It’s comments like Wen’s that have me thinking that countries are pretty scared of a global economic melt-down that they see as entirely possible. I see inflation coming on by end of the year and I’m not the only one. People like Schiff and Grandich are also seeing it. They’re advocating getting some assets in the precious metals because of it. And China has been making moves like that. So has the middle east. Right now the ExactPrice widget shows gold and silver trading at $927.40 and $13.18 and ounce each. I think that’s probably a good buy, particularly when it comes to silver.
Whatever happens, you can bet China is willing to do whatever it takes to find ways to feed their people and that may mean taking over some new land.
A common line of defence is “China won’t sell their Treasuries, as it would harm the vakue of their investments”. I am afraid that this overlooks the point that China is not a capitalist country. The Chinese government may very well decide to sell a chunk of their UST’s, just to show that they do not mind losing a few billions of dollars. Money is a very powerful strategic weapon. Much more efficient than, say, an aircraft carrier. For the same amount of investment, you have negative maintenance costs (interests and perhaps dividends, instead of having to spend money on maintenance, naval staff, exercises and so on), and it can be deployed at any spot on the globe in a matter of hours, instead you having to send your fleet to some inconvenient location.
And if the Chinese have a sense of humour, they will have insured the risk of their holdings losing value with a large insurance company of good standing. For instance, AIG.
Wen realizes he’s in the wrong business.
His 1 billion+ proletariat had to toil for years to earn one trillion in foreign reserves and Bin Lackey with a snap of his fingers can create more that and Obama is handing out just as much to banks who have not earned that. Can you blame comrade Wen for being a little envious?
Another thing. Ambroise Evans-Pritchard did a very bad thing the other day. He wrote that US was still the sole superpower and militarily we could support whatever our monetary leaders wished and basically dared the Chinese to come and try to collect their money. Bad move. Now, they will be alerted to spend that trillion dollar foreign reserves to buy up all the nuclear weapons, which are unlike naval fleets and can reach the homeland in matter of hundreds of mintues, the starving Russians can sell.
From 19th century colonial history as it related to China and western imperial powers, one learns that after losing the Opium Wars, China incurred enormous amounts of foreign debt, which the debt owners collected by asking for territorial concessions like Hong Kong, Mccau and a piece of China’s customs collection action. More recently, in the late ’80s, to be exact, some bureaucrat in Japan floated the idea of forgiving the debt we owed them by having us hand over California, presumably along with all the stars and starlets of Hollywood (which really wasn’t and still would not be such a bad thing. But like a shrewd NBA general manager, I would ask that they also take on additional bad contracts such as investment bankers and econom…check that, dismal scientiests). So, I suspect China has something similarly clever up her sleeves – perhaps they want Alaska, the Philippines or Puerto Rico, 100% control over all pasta making business in Italy and also piece of our ‘central banking, money out of the thin air’ action.
I think the issue is not so much if China is going to sell existing Treasury holdings, rather, are they going to continue to buy. More and more this seems unlikely at least at the scale of past purchases.
With warnings such as this coming out of such an influential leader prior to the G20 meeting, it seems clear that these comments as well as the comments of other leaders recently are all skirting, politely, the issue of challenging the sustainability and suitability of US dollar hegemony going forward given the amount of debt the US govt amassing and is likely to further accumulate in the years to come.
@ haljett said… “Whatever happens, you can bet China is willing to do whatever it takes to find ways to feed their people and that may mean taking over some new land.”
For your infor, throughout its 5000 years of civilisation, even when at its peaks and most powerful, China is not known to own colonies, empires(in fact China was a victim of the western powers as recent as in the last century) and also it does not have deep sea navy and military bases all over the world to do what you suggest. China’s life philosophy, learned through its long history and sufferings, has always been living in a sustanable manner with it’s environment and within its means. I think the look out should be on the western world that has consistently always need to prosper only on plundered wealth in their last glorious 500 years. First plundering by military force and now global financial PONZI schemes and the PONZI world monetary system.
@Anon 12:46. How is it possible to forge a nation of over a billion people and that much land without being colonial and acquisitive? I think you may want to expand your world view to understand that China became “China” by homogenization over centuries and centuries of conflict, acquisition and agglomeration. Focusing solely on its travails in the last two centuries is incredibly narrow-minded.
Anon @ 12:46
HA! I guess Xinjiang, Tibet, Vietnam, and Korea just don’t count as imperial possessions- all of them have at one time or other been ruled directly by or were puppet states of a Chinese regime. You also clearly have never been to China (or outside of Shanghai/Beijing) if you really believe the Chinese philosophy is to “live in a sustainable manner with its environment”. The environment in China is in a disasterous state. Wake up.
Wen can now afford to make such a statement now, without causing the US dollar to crash. He must likely has been dying to say this for five or six years. If he made the statement even eight months ago, the US$ dollar would have lost 3-4 cents in a day. Right now the US dollar is the least ugly option of liquid investment options. At least for the Chinese its good time to start selling the US$ or stop buying so much.
In addition, because the US dollar is the world’s reserve currency it is supported by anyone who uses US$. If someone from Africa wants to buy Chinese goods he converts his local currency to US dollar then pays the Chinese supplier in US$. Ironically we in the West seem to underestimate the importance of the US$ in world trade particularly in developing countries. You go to places like Indonesia, Nigeria and Argentina in time of economic uncertainty people start banking their savings in US dollars, merchants starting quoting expensive imports like computers and cars in US$. In a sense it is not just the Chinese government propping up the US Treasury market. But anyone who uses US$ is helping the US governments finance its debt.
The US dollar is comparable to a beauty contest winner in a leper colony.
Why shouldn’t China demand that future Treasuries it buys be denominated in Yuan instead of dollars? This would solve the devaluation (but not default) problem. For that matter, the ME oil countries could ask for Treasuries in Euros since the EU is their primary trading partner – although this would probably screw up security agreements but would make sense economically.
Jim
I wonder if this is going to make the Chinese any more inclined to buy our debt.
China condemns US warship deployment as tensions mount
March 13, 2009
Jane Macartney in Beijing and Tim Reid in Washington
Chinese Navy officers reacted with annoyance today when it emerged that the United States had sent a destroyer to back up a surveillance vessel in the South China Sea after it was harassed by People’s Liberation Army (PLA) sailors.
The decision by President Obama to send an armed escort for US surveillance ships in the area follows the aggressive and co-ordinated manoeuvres of five Chinese boats on Sunday. The vessels harassed and nearly collided with the unarmed USNS Impecccable.
One unidentified officer quoted in the China Daily newspaper said that the decision was disproportionate. While China’s Foreign Ministry has so far kept tight-lipped on the latest development, the decision to run such a comment so swiftly in the state-run English-language newspaper was a signal of Beijing’s concerns.
One naval source said the PLA had taken note of the latest US move and was watching developments closely
Another described the deployment of the USS Chung-Hoon, armed with torpedoes and missiles, as a signal of the Pentagon’s intention to “keep on pressing” China in the South China Sea.
He added: “The timing and the extent have gone beyond what you could call proportionate.”
I wonder if this is going to make the Chinese any more inclined to buy our debt.
China condemns US warship deployment as tensions mount
March 13, 2009
Jane Macartney in Beijing and Tim Reid in Washington
Chinese Navy officers reacted with annoyance today when it emerged that the United States had sent a destroyer to back up a surveillance vessel in the South China Sea after it was harassed by People’s Liberation Army (PLA) sailors.
The decision by President Obama to send an armed escort for US surveillance ships in the area follows the aggressive and co-ordinated manoeuvres of five Chinese boats on Sunday. The vessels harassed and nearly collided with the unarmed USNS Impecccable.
One unidentified officer quoted in the China Daily newspaper said that the decision was disproportionate. While China’s Foreign Ministry has so far kept tight-lipped on the latest development, the decision to run such a comment so swiftly in the state-run English-language newspaper was a signal of Beijing’s concerns.
One naval source said the PLA had taken note of the latest US move and was watching developments closely
Another described the deployment of the USS Chung-Hoon, armed with torpedoes and missiles, as a signal of the Pentagon’s intention to “keep on pressing” China in the South China Sea.
He added: “The timing and the extent have gone beyond what you could call proportionate.”
Anonymous @ 12:46, China had always been an empire, though they didn’t always sent religous missinaries or occupying soldiers. Sometimes they did; somtimes they didn’t. What they always did though was to exact tributes from their imperial possessions and in the case of Korea, apparently many a Son of Heaven preferred virgins – something to do with cultivating the yan energy. There is Ming dynasty novel, called The Carnal Prayer Mat, that eluded to that Taoist philosophy of immortality through sex with young virgins.
Sorry, that should be ‘…a Ming dynasty…’
And it should be alluded, not eluded.
@Anon 1:22 PM. “How is it possible to forge a nation of over a billion people and that much land without being colonial and acquisitive? I think you may want to expand your world view to understand that China became “China” by homogenization over centuries and centuries of conflict, acquisition and agglomeration. Focusing solely on its travails in the last two centuries is incredibly narrow-minded.”
I have no big issue with what you descriped above. China is not a homogeneous nation, it has some 50+ ethnicities. The so-called Han people are people whose original ethnicities could not be traced any more due to wars, migrations, famines and other disasters and inter-marriages. So you can say that China was formed the way many old countries are formed. THe way China was formed was not the same as Americas,Australia, NZ, Carrebians, South Africa,Falkland as part of British…you know what I mean). What I was trying to explain is that if any one wants to insinuate a country as the most prone to invade other country for lands and resources, that person should look at the West who fought 2 WW within a span of less than 50 yrs and countless wars amongst themselves at the cost of tens of millions of lives. All these over you guess what: power, supremacy, geographical dominance, security and control over vast expanse of land and resources. The same contests are still on, albeit less violent and more civilised.
Anon @ 1:40 PM
“HA! I guess Xinjiang, Tibet, Vietnam, and Korea just don’t count as imperial possessions- all of them have at one time or other been ruled directly by or were puppet states of a Chinese regime. You also clearly have never been to China (or outside of Shanghai/Beijing) if you really believe the Chinese philosophy is to “live in a sustainable manner with its environment”. The environment in China is in a disasterous state. Wake up.”
I have no big issues with what you said above. What I am trying to point out is that China does not rank any where near the top as one of the most aggressive countries in the world as the history showed nor am I suggesting China is flawless as a country and people. It just occurred to me that it is funny that the West always insinutate China is an aggressive monster when compared to countries of the West when their history says otherwise. In fact, China probably would not be able to qualify for the final for the gold medal.
Please see response to Anon 1.22pm
@MyLessThanPrimeBeef 2:33 PM
“China had always been an empire, though they didn’t always sent religous missinaries or occupying soldiers. Sometimes they did; somtimes they didn’t. What they always did though was to exact tributes from their imperial possessions and in the case of Korea, apparently many a Son of Heaven preferred virgins – something to do with cultivating the yan energy. There is Ming dynasty novel, called The Carnal Prayer Mat, that eluded to that Taoist philosophy of immortality through sex with young virgins.”
I have no issues with what you said above. I just want to clarify that China does not rank any where near the top as one of the most aggressive countries in the world as the history showed, whatever criteria one may want to use.
The cost of PRC loans to the US is cheap on a monetary basis.
However, the total cost (price) to the world will be the “peaceful” assimulation of Taiwan by the PRC with the world powers(borrowers) looking on.
As was once said in the Economist “Money talks, wealth whispers” or as was quoted in the Godfather ” a man with a briefcase can take more than a man with a gun”.
Somewhat hilarious that they view (and tell their countrymen to think of) this as an “investment”. Most of the $ assets were bought for the purpose of currency manipulation. Expecting a payback is equivalent to trying to make money from trade slippage.
Also, the implicit future deterioration of these assets reflect the fact that they were paying to acquire a significant fraction of US production capacity, knowhow, and current and future market access. Of course, in the simple “open trade” model of trading cocunuts and canoes between islands, where everyone is happy with their lot and cocunuts and canoes always in demand, these problems are never discussed, so not surprising this pops out now.
The problem is that even if the chinese governing class begin to realize this tradeoff, spouting this rhetoric to the local populace can lead to some nasty tensions in the future.
Yves
Got this which is part of an interview with Wolfgang Meyer who heads the Beijing office of the Konrad Adenauer Foundation.
(published 2/09)
“Sebastian Heilmann, a sinologist from Trier, once differentiated between the “normal mode” and “crisis mode” of politics in China. In the normal mode, political decisions are reached in lengthy processes of compromise, allowing leeway for gradual reforms or experiments. By contrast, in crisis mode, the party leadership once again seizes all power, severely constricting others’ room to manoeuvre. At the moment, the leaders of the party and the state are striving for centralisation, but they are not yet in crisis mode – as they were, for instance, during the crackdown on pro-democracy protests in 1989 or even during the Olympic Games. Right now, the situation in China is relatively calm, so consultation on how to deal with the financial crisis domestically and internationally is feasible. Liberalisation, up to now, has always been closely linked to economic reforms, with the state slowly retreating from society in general. That had an impact on people’s everyday lives, and the reforms towards a market-led economy will continue, no doubt.”
http://www.inwent.org/ez/articles/086156/index.en.shtml
I do think that Wen is being pushed into a crisis mode.
Both the China Sea confrontation and the demand for treasury bond guarantee are a response to a (present or potential)hard right push.
I have wondered why Wen did not have a second stimulus round and if it were his choice. Perhaps those on the Right see the $2T nest egg as a real potential weapon against the US. And did not want to sap its strength.
Unlike them and many in the West, I do not see it as a major threat. It is sort of the Fred C.Dobbs problem. Gold in the desert does you no good (OK Treasure Sierra Madre Bogart’s role).
What will China buy if it sells its Treasuries? And will others not again rush into dollars as a flight to safety?
Finally If pushed too hard Obama can restrict sales or redemption of Chinese owned Treasuries
As far as getting export production rerouted to Chinese consumers, I am doubtful
Though TVs fridges washing machines and maybe autos may sell well if subsidized.I think that nonCadre Chinese will rush to buy the 1001 trinkets Walmart’s sells to us.
Anecdotally I have heard that middle-class Shanghainese are moving money into the West. And those worst scarred by the Cultural Revolution are thinking of sending their kids out.
In short Wen has fewer options then Obama, and China’s economy is more at risk.
BTW what was behind Clinton’s selling out the Tibetians whilst in Beijing? Was it to protect us or protect Wen??
plschwartz
“And in light of that history, why is Wen asking for assurances? None can be made. So what concession might he be looking to extract instead? Now that China’s trade surpluses have fallen sharply, it has no particular reason to buy Treasuries at anything like its recent volumes.”
Yves, Wen(and the party) are thinking ahead, past the current crisis.
They know China will be the next engine of consumer growth.
They want to move China Inc west and keep their manufacturing cartel intact.
This means nipping in the bud, Geithner’s “manipulation exhortations”. China wants to revalue on it’s own terms. In a year or 2, hot money will really start to flow in again and THAT will put pressure on the Yuan.
That is what Wen is thinking about. Gavekal has shown that China’s reserves have had about 25% “borrowed reserves” (hot money offset beyond the trade imbalance)
Bottom line is China wants to control their own destiny when it comes to the international value of the rmb.
They will take advantage of the US fiscal “weakness” to further their agenda.
Yves, those comments by the chinese Wen sure were silly. America is the geratest nation on earth, we have the most brilliant economists, bankers and scientists and the greatest war machine ever built. Why would we give any assurance when all we were doing, as bernanke “alluded” to, were acting as the world’s last consumers absorbing cheap and junk chinese goods to help them create jobs. If anything I consider the $2t as America’s weapon not our liability. When we choose to default, the world financial system and the chinese would go down while America would still be standing with bankers like Bernanke and Summers and Pandit and Lewis running this great country.
I have a renewed respect for CDS and the ratings agencies after the recent clinton visit on the issue of uncle sam defaulting. It was leaked in a japanese and a korean newspaper after Clinton’s asian visit that the topic had been broached several times during her visit and various levels of support or push-back were voiced as a possible last outcome to america’s financial problem, including a massive US dollar devaluation, hence the comments from the chinese now after their own crisis meeting in response to clinton’s suggestion. Apparently no conclusion was reached so clinton left urging everyone especially the chinese to continue buying US treasuries. Within days, the CDS market had priced in the scenario of uncle sam defaulting, and the rating agencies had picked up the strory line (after some hick-ups in translation from the Korean papers).
I recall hearing that Paulson said something to the effect that for China to dump too much US paper would be an act of war. Does anybody else recall that or am I imagining things?
China will be lucky to get 40 cents on the dollar for these ‘assets’ that the US is unable and, worse, unwilling, to pay back.
@Richard Kline: Cheers, always appreciate your participation and couldn’t agree more with your comments above:
“I’m not so sure the Chinese were blind to the implications of their policy…. But no more than anyone else did [they] count on the _scale_ of credit distortions from the recent Securitization Bubble.”
“London Calling” would be cool, but I’d prefer this recent version of “Straight to Hell” by Lily Allen.
http://www.youtube.com/watch?v=MGL5EtYGGDM
My view since long has been that a major devaluation of the $ is inevitable _and_ desirable. Inevitable because the size of $-denominated debt is simply to large relative to our economy. Desirable because the substantial _overvaluation_ of the $ is exactly what has allowed us to borrow our way to poverty while avoiding questions of our productive base.
That said, the possibility of outright is quite real. It was amazing from the standpoint of Reinhart and Rogoff’s study how prevalent sovereign default has been, even by ‘major’ economies. And it is a real slippery slope. A devaluation at a severely weakened point in the economic cycle could well tumble into de facto default. Or a ‘partial default,’ say rescheduling all those GSE securities which are in effect sovereign now.
The real issue with a devaluation, to me, is that this be done by negotiation with other major sovereign actors; set a level, and try to defend it, while buying in other players in a wider schema. A ‘dirty deval,’ i.e. a tacit one with minimal coordination with other stakeholders is a very, very poor alternative. A head-in-the-orifice, “No problems here, folks” do-nothing until the $ implodes is madness. Gues which policy seems to be linked to the Paul-Ben-Tim-Sum Bank Stealout policy held in place by the present US Admin?
Lily A.’s got it goin’ on. I generally don’t do video, friend, but I may give it some eye-time.
I wonder if China’s contingency plan is to discount their $1.7trn treasury portfolio holding by the 100bps US CDS. Oh boy. In general, I dont think the recent widening was in any way a fundamental way… more of a catch up with other systemic risk indicators and financials backtop risk.
More fleshed out here:
http://www.acredittrader.com/?p=81