News & Analysis
The China Dilemma
Chinese bank lets U.S. customers buy, hold yuan ... A state-owned Chinese bank says its New York City branch has begun offering accounts denominated in China's tightly controlled yuan in a move to expand the currency's global reach ... "They are trying to expand the scope of people who can hold renminbi (yuan) and that increases demand," said Daniel Hui, a foreign exchange strategist for HSBC in Hong Kong. Economists say the process of making the yuan an international currency on the level of the U.S. dollar, euro or yen will take years and depend on factors such as how many foreign companies want to use it. China's central bank governor, Zhou Xiaochuan, called in 2009 for a new global currency managed by the International Monetary Fund to replace the dollar for trade and storing reserves. Economists say such a change is unlikely, but the comments reflected Beijing's unease about the dollar, which it uses for the bulk of its trade and to store an estimated one-half of its $2.5 trillion in reserves. – USA Today
Dominant Social Theme: Watch out West – China's a-coming. The Biggest Tiger is on the loose.
Free-Market Analysis: In a problematic global economy, China is being cast as the ultimate Asian Tiger. It is seen as challenging America from a military standpoint and even, eventually, of challenging the dollar's tottering role as the world's reserve currency.
We have, of course, pointed out that the Chinese economy is not nearly so healthy as it is made out to be in the mainstream press; today we wish to revisit this position based on China's increasingly willingness to be a banker to the world. On the surface, for instance, the willingness of China's leaders to ameliorate Europe's indebtedness is the act of a powerful and confident country. But perhaps this apparent strength may mask considerable weakness.
There is no doubt that China is attempting to take on an economic-leadership role, and its leaders are trying to make the yuan more liquid as a matter of policy. (See article excerpt above.) They are signing trade deals that facilitate yuan liquidity, most notably with Russia and Brazil. With the recent announcement that China is going to use some of its massive reserves to purchase euros, China has actually been cast as the protector and savior of Europe.
The mainstream media has acted as a vast echo chamber for this new view of China – call it "China resurgent." Just yesterday, a Reuters article carried the upbeat message once more. China, with its great dollar (and euro) reserves and mighty 1.3 billion population was surely capable of strapping a tottering Europe on its big back and carrying both civilizations to greater heights. Here's an excerpt from the Reuters' piece:
Europe can "definitely" solve its debt problems and China will continue to support the euro's role as an alternative to the dollar in global financial markets, a Chinese central bank adviser said on Wednesday. Xia Bin, an academic adviser to the People's Bank of China, told Reuters on the sidelines of a forum that no one wishes to see the euro disappear ... "In the long run, it is not a problem. Europe will definitely solve the problem," Xia said. "We don't want to see the euro disappear." He also said that global financial markets are better off with a balance between the dollar and euro, as opposed to having only dollar dominance. "Walking on two legs is certainly better than walking on one leg," Xia explained.
There is wisdom here of a certain variety. Xin Ban comes across at once as a comforting fellow, reassuring Western audiences that with China's help, "Europe will solve the problem." With a deft rhetorical twist, he fashions a Chinese proverb – "walking on two legs is better than one" – and in doing so presents a Chinese persona that is technocratic, paternal and folksy all at the same time. Some rhetoric – and great PR for the ChiComs and their system (such as it is) as well.
Yet, there are dissenting voices. Much as the European Union itself has begun to be seen as a failing program, so increasingly the Chinese are being perceived as promising more than they can deliver. This perception admittedly is more prevalent on the blogosphere than in the mainstream press, but the level of skepticism is increasing. Here's a different take on China and Europe from the International Business Times:
Can China save euro? Answer is ‘no' ... On Thursday Spanish daily El Pais reported that China has offered to purchase Spanish sovereign debt worth about $7.89 billion. There is euphoric expectation that China, armed with its $2.6 trillion reserves, will emerge as the ultimate white knight for Europe. Is that belief founded on facts and substantiated by strategic thinking? Analysts at Capital Economics have said "China is unlikely to be able or willing to do much to solve the debt crisis in the euro-zone," even though the popular perception is that it will. "China's leaders naturally want to be polite to foreign hosts and visitors, but their actions frequently fall short of the expectations raised by their words," writes Julian Jessop, chief international economist and Mark Williams, senior China economist, in a note.
We would tend to agree with this. The crisis in Europe is systemic and has to do with congenital overspending, especially among the Southern PIGS. While "austerity" cutbacks may have had made a difference, the societies themselves are intertwined with state welfare and pensions in such a way that the market itself will likely have to impose the necessary discipline. Will the Chinese have the stomach – or resources – to mediate between the various unionized factions of, say, Spain and Italy, to help provide the appropriate solvency? No matter what China does, it may lose and be cast in a bad light besides (perhaps even an anti-worker one). At some point, we would imagine, Chinese patience will lapse.
China has growing problems of its own. We've long-charted the real-estate distortion in China and while officials regularly downplay the idea that there is any fundamental problem in the Chinese economy, we find more and more evidence to disagree. Most notable was the startling series of Google earth photographs that purported to show a variety of empty cities and vast, uninhabited developments throughout China.
China may (or may not) be the savior of Europe but there is something amiss on the home front. More and more of the Chinese middle class is invested in "real estate" – empty Chinese apartments owned by the government and offered to buyers via long-term leases. These empty apartments – often in empty cities – should be a red flag to anyone looking at China realistically. Real estate distortion is a fundamental signal of something amiss. Even Bloomberg is beginning to cover it:
Is There A Property Bubble In China? ... "Bloomberg's Paul Allen reports from Dongguan, [touring] the South China Mall, originally conceived as the world's largest mall, and finds retail space that has been largely vacant since 2005 ... "The reality at South China Mall is ... shuttered shops, unfinished, never occupied by a single tenant. The few retailers that are here have favorable leases, but little profit." Allen also states that despite obvious problems, the mall's owners plan to expand to more than one million square meters of retail and residential space will be available.
The video report is available on the Internet and shows both the vastness of the mall and its relative failure to attract shoppers even five years later. The population surrounding the mall is working-class, with little disposable income for the kinds of goods a mall is supposed to provide. The workers come to give their children rides at the mini-amusement park but don't venture inside where some 1,500 empty shops drearily await leaseholders that have never arrived.
The emptiness of the mall some five years later provides further evidence that the current Chinese perspective regarding construction – build it and they will come – is not a viable one. They have NOT come to this Chinese mall and one would question whether they will "come" to the increasing inventory of empty Chinese cities. The faith that both Chinese technocrats and Western investors have in the vitality of the Chinese economy and its teeming population may eventually prove misplaced.
What surely WILL come is a downturn. It is strange to us that people cannot see this authoritarian system for what it is. In free-markets, cities are built gradually as people gather together to trade. There are no "empty" cities in a free-market environment. It makes no sense economically. These empty cities – and malls – are obvious evidence of the authoritarian nature of Chinese society.
Behind the mask of the market is the Communist party itself, dictating where people should live, work and shop. The great banks and other financial institutions doubtless report directly to Communist party functionaries. It is a kind of Potemkin village writ large – and the inflation pouring out the Chinese central bank will eventually displace the facade. The market always pushes back – as authoritarian leaders eventually discover to their dismay.
Currently, the ChiComs continue to fight the market. They build great, empty cities to keep workers occupied. They offer to buy euros to keep bankrupt countries viable, and buying Chinese goods. But ultimately it will make little difference. The more that Chinese – and Western – technocrats do to organize and manage their societies the more the market itself performs in unexpected and eventually ruinous ways. For every action, there is a reaction.
Is the Western leadership aware of China's liabilities? We would have to think so. However, the Anglo-American power elite always seeks to create adversaries (or at least powerful challengers) and China is obviously the next candidate in this regard. The contest is not perhaps to be as overtly military as the one with the USSR, but certainly China is being cast as a rival to Western (American) hegemony.
It has been the intention, no doubt, of the Anglosphere to manage the current downturn in such a way as to encourage further internationalization; but this economic episode in our view has been far more severe than anticipated and has taken place under Internet's merciless gaze. Summoning China (as world-power and rival) to help may only compound the problem, especially if China's relationships with Europe grow more complex as its own economy begins to tumble.
Conclusion: Can a handful of aging men in Beijing run a country of 1.3 billion? To open up the Chinese economy to real competition would probably entail a severe contraction; thus, the Chinese leadership may believe it has no choice but to continue to support an increasingly distorted domestic economy and to help the European Union as well. Time may show this larger union is no stronger than the individual players involved.
Edited on date of publication.
l 
|
You must be a site member to submit suggested edits or post feedback. In addition to submitting edit suggestions and posting feedback, your Free Membership to The Daily Bell gives you access to our Member Zone where you will discover a plethora of other member benefits. Want to learn more? click here |
|||||
|
|
||||
 |
Posted by Gavin on 01/19/11 08:02 AM
DB, Don't let my amateurish musings get in the way of any story you were going to write.
On the topic of the invasion from space meme, the video below which was posted yesterday supposedly shows a ufo above Moscow. If it's not a hoax then I would venture to say that it's a test, and a good example. As someone wrote: Looks holographic to me. Right before it "disappears" there is a blur. Possibly a rendering error. And it's too fuzzy around the edges.
Click to view link
|
Posted by Gavin on 01/17/11 09:55 AM
Possibly but that would seem like a mad act of desperation since too many people in Europe are aware of what's going on now, or they at least have their suspicions as you've pointed out before.
I might be overly optimistic but going by the strife seen already I don't think they are that gullible or willing to put up with any more centralisation of power now.
Perhaps as a backup the PE have the alien promotion prepared to help push it through at the last minute? If you didn't catch it the Guardian had another story on it the other day.
Click to view link
"Earth must prepare for close encounter with aliens, say scientists"
"UN should co-ordinate plans for dealing with extraterrestrials ' and we can't guarantee that aliens will be friendly"
Reply from The Daily Bell
We were going to write about this story! You beat us to it
|
Posted by Gavin on 01/17/11 08:23 AM
@WuYeYouMin
Interesting, I hope you're right.
@DB
Although I understand that China is challenging the West is most likely a Dominant Social Theme how would you explain the following Telegraph/ZeroHedge article as part of this promotion?
The European Union is supposed to be a major pillar for the PE's goal of world governance but if the following story is true then it would *seem* that the Anglo-American PE is being undermined by the Chinese, especially if it leads to further trouble for the European Union and/or Euro. I would have thought that's the last thing the PE want at this time.
~~~
"China's purchase of euro bonds might not be a sign of confidence in Europe, but a prelude to a sell-off"
"ZeroHedge carries a fascinating report to the effect that China is in fact swapping its euro holdings for dollars. If so, its support for the euro, far from being the sign of confidence that Mr Van Rompuy thinks, is simply a way of nudging up the exchange rate so as to get the best possible price for its euro-denominated holdings.
For an investment of ‚¬1.1 billion ' an investment which is, in any event, effectively guaranteed by the ECB ' China has increased the short-term value of its euro reserves by ‚¬11 billion just as it plans to offload them."
"If ZeroHedge is correct, China's intervention in the markets is not a sign of optimism about Europe's economy, but its precise opposite: a prelude to a euro sell-off. (...) The wannabe mandarins of Brussels have been wholly outclassed by the real ones."
Click to view link
Reply from The Daily Bell
Here is another thought: What if a destabilized EU gives rise to MORE pressure for increased global governance, IMF interference, etc. These strategies run three or four levels deep and seem to be fungible as well (changing quickly with the times), though always intended to support the ultimate global destination.
|
Posted by Radek on 01/16/11 11:29 AM
Dear DB,
There are many aspects where I would agree with you. However, I think you seriously underestimating the current and future power of China.
First, yes for certain the Real-Estate bubble in China will hurt a lot. However, it will not crash their economy. China is not USA where RE inflated places is considered wealth and the main driver of consumption. In China, I would guess the main driver are exports and the proceeds are invested in RE. Therefore, the RE bust will have different/less severe effects on Chinese economy than American one.
Second, you talk about systemic problems in Europe. I fully agree that China will not be able to help Europe, but nobody can except the Europe itself. You are keen on pointing out the problems in Europe but do not see aspect of Chinese economy which are just plainly amazing. The willigness of Chinese people to educate themselves, to save money, their drive to store wealth in gold, no dependence on state in terms of financial well-being, etc.
It is the people which will be the main factor behind China power. The state is just an obstacle in making the chinese people achieving their full potential. However, I think that Communist Party realizes that their ability to retain their power depends on the free economy. Probably what they overestimate is their ability to retain power when the powerfull and large middle class becomes a reality in China.
Unless China loses militarly I do not see much of other factors that could set back this country back to miserable past of the communist China.
|
Posted by WuYeYouMin (æ— ä¸šæ¸¸æ°‘) on 01/16/11 07:50 AM
@Gavin
Regarding the appearance of a statute of Confucius in Tiananmen Square, this could be a sign of the coming demise of CCP's rule of China.
According to Mao Zedong's nephew Mao Yuanxin, a close confidante of Chairman Mao, his uncle had written a poem in 1973 criticising Confucius, which had only recently been released.
In a private conversation between the 2 regarding the poem, Chairman Mao was reported to have said that the day the CCP had to 'invite Confucius back' into the political discourse, the end of days for the CCP would be near.
:-)
 |
Posted by Zenbillionaire on 01/14/11 11:59 PM
@ Bob
"It will have great consequences for North America."
Thanks for the link. I can't hep but remember the situation in Hawaii and parts of Northern California during the early 80's shortly before the Japanese economy exploded. Could we be seeing an echo? They say the market never repeats itself, but sometimes it rhymes...
|
Posted by Bob on 01/14/11 11:32 PM
Click to view link
It will have great consequences for North America.
|
Posted by Bob on 01/14/11 11:11 PM
Zenbillionaire,
you got a very interesting point. Specifically, the Federal Reserve and the US Treasury were exporting inflation to other countries. As long as the major US creditors were "reinvesting" their money in America, it kept US inflation at a bay.
It appears that one of these creditors can panic in losing their US$ reserves and will start spending indiscreminately. Chinese started doing it already in commodities markets but these expendatures were so far very limited.
What does China need from the rest of world? Commodities and high-tech. Europe has no commodities but it has high-tech. If China becomes a "European banker", it will gain very strong influence over European political processes and economies. Something what America was doing in Europe in the last almost 100 years.
|
Posted by Zenbillionaire on 01/14/11 10:47 PM
@ DB
"China has offered to purchase Spanish sovereign debt worth about $7.89 billion. There is euphoric expectation that China, armed with its $2.6 trillion reserves, will emerge as the ultimate white knight for Europe"
Here is where I think you miss a cue. We frequently and vigorously criticize the Federal Reserve and the US Treasury for printing money, thereby devaluing the currency. But we neglect to consider the effect of US creditors "de-saving" the dollar. As long as China holds its dollar reserves those dollars don't contribute to inflation; they represent "dead money". As soon as China (and Japan BTW) begin to spend their dollars in a very large way, as is we are witnessing with the bailout of Spain, the currency goes live. This is the immediate threat. Nobody seems to be talking about this.
|
Posted by Bob on 01/14/11 10:39 PM
Just little bit of history:
- 30 years ago, The Soviet Union was at its top. There is no Soviet Union anymore.
- 20 years ago, everybody thought that Japan was unstoppable and its economic miracle will last forever. Now, Japan is a basket-case of problems (a demographic disaster, economic stagnation, a geopolitical catastrophe living under China and N. Korea guns, etc.,)
- 10 years ago, America was the only world superpower at a peak of its glory. Now, it is financially and economically bankrupt country.
- For centuries, Switzerland was a neutral country attracting for safekeeping deposits from all over world. It is not a case any more. I definitely will not consider keeping my money in Swiss banks.
Well, things change very fast. I expect a very different world in just 5 years from now.
PS
I even said nothing about Argentina...
|
Posted by Gavin on 01/14/11 10:06 AM
"It is simply meant to polarize but is likely not a reality and won't be. It is merely another promotion of sorts."
Oh, I see, thanks.
|
Posted by Gavin on 01/14/11 09:33 AM
"As for Simon Johnson ... well, we have written about him before. Look into his background ..."
Yes, Harvard professor, ex-IMF employee and mouthpiece for the elite as I recall. Didn't he also suggest a month or two ago that the IMF and/or World Bank might move to Beijing. Maurice Strong must be working overtime.
In the article you say: "[China] is seen as challenging America from a military standpoint and even, eventually, of challenging the dollar's tottering role as the world's reserve currency."
I admit I was a bit surprised to see talk of the Yuan as the world's future reserve currency. I thought the plan, difficult as it is, was to move to SDRs and/or a basket of currencies and then transition to the Bancor rather than having one single currency as a reserve again? I must have missed something along the way.
Probably a naive question but is this talk of the Yuan as the new reserve currency a fairly recent development, like from around the time when China offered to help out Greece (initially) and then the other struggling European countries (more recently)?
Reply from The Daily Bell
Didn't he also suggest a month or two ago that the IMF and/or World Bank might move to Beijing.
You misunderstood. China challenging the West is, in our view an emergent "dominant social theme" of the power elite. It is simply meant to polarize but is likely not a reality and won't be. It is merely another promotion of sorts. Sorry if we confused you.
|
Posted by Vauung on 01/14/11 03:48 AM
... and a provocateur might suggest that two decades of welfarist democratization has done more damage to the HK economic environment than PRC political overlordship. The best thing the Brits ever did was as near nothing as possible, which they did best in HK.
|
Posted by Vauung on 01/14/11 03:36 AM
@Wayne
While agreeing with the importance of Hong Kong as a model of free-markets in action, I think there has been some decay since 1997 (compromising its near-perfect laissez-faire business climate) -- although far less that absorption into a 'communist' mega-state would suggest!
It is a simple fact that the Anglo-Chinese frontier has produced the capitalist cutting-edges of the world -- HK, Singapore, Shanghai. That seems to merit some recognition and reflection from both sides, and beyond.
 |
Posted by Wayne on 01/14/11 03:25 AM
A 2007 article hailing HongKong as a model of economic freedom ahead of many, including Switzerland .
Click to view link
Reply from The Daily Bell
You will not convince us that Communist China is a beacon of liberty and freedom. Sorry.
|
Posted by Wayne on 01/14/11 03:19 AM
That proves that the Chinese know very well how to govern a territory in a way that maximizes freedom, and prosperity.
Reply from The Daily Bell
Hm-mm ... in between harvesting organs from dying prisoners?
|
Posted by Wayne on 01/14/11 02:45 AM
What about the extremely competent way that China has managed HongKong? China certainly has managed HongKong better that many western governments have managed their countries ...
Reply from The Daily Bell
And this proves ... what?
|
Posted by Gavin on 01/14/11 02:17 AM
Looks like the leadership is trying to nip the public's discontent in the bud before it gets out of control.
China Promises To Kill The Rich
"January 12, 2011: The Chinese government is publically threatening to execute corrupt judges, as well as members of the security services, who are caught taking bribes.
The government leadership is getting desperate about stopping the growing public anger against corrupt officials, and the threat of rebellion, or just widespread unrest, that it implies.
"(...) Much is still for sale, like promotions. Lower ranking officers and NCOs can still be found selling weapons and equipment that is reported "destroyed" or "missing." Commanders who are not doing so well, can pay to have reports of their performance upgraded. Senior government officials still have doubts about how effective the military would be in another war.
It was noted, usually by journalists, that the army response to several recent national disasters (which usually employ troops for disaster relief) had problems. This is not supposed to be reported, but the journalists discuss it among themselves, and some of this knowledge gets onto the Internet and outside the country. People love to gossip, especially in a police state like China.
"But for the government, gossip against them is the first stage of revolution. And the biggest topic of this gossip is the unrelenting complaints about government corruption."
Click to view link
~~~
Confucius shows up on China's Tiananmen Square
"Placing the statue at China's political heart is the authoritarian government's most visible endorsement yet of the 2,500-year-old sage and, selectively, his teachings. Confucius is enjoying a revival, in books and films, on TV and in classrooms. His message of harmonious social order and deference to authority is unthreatening to the party, while his emphasis on ethics resonates among Chinese coping with fast-paced social change on the back of torrid economic growth.
"So far, the government hasn't made any overt proclamations pushing Confucianism, though one of its favorite recent slogans is "harmonious society." It has backed the creation of hundreds of Confucius Institutes to spread Chinese language and culture abroad. A proposal to amend the law on protecting the rights of the elderly would make clearer that children have the duty to visit and care for their aged parents."
Click to view link
~~~
Simon Johnson: "The age of America is over; Chinese Yuan will be the world's reserve currency within 2 decades"
Click to view link
Reply from The Daily Bell
Thanks. Great stuff. As for Simon Johnson ... well, we have written about him before. Look into his background ...
Reply from The Daily Bell
Thanks.
|
Posted by Vauung on 01/14/11 01:25 AM
This Gary North article is relevant (to the topic of robust historical momentum and state fragility), and typically brilliant.
Click to view link
|
|
