Tainted products have been flooding out of the US and China. You have heard both stories. You have not heard it presented this way. We have been selling the world trillions of dollars
worth of tainted structured financial products and home mortgage backed securities. China has been selling compromised toothpaste, dog food, toys and pajamas. The Middle Kingdom's production miracle economy has been pressured by greed and razor thin profit margins. The American financial innovation machine and consumer binge has given in to spiraling credit need and excessive greed. Both engines of the global jet economy are showing some troubling signs. Such times are delicate and can be inflection points, or moments when trajectory/direction changes. The present housing and financial debacle -- just beginning to come to light -- further stresses the environment.
Domestic and international economic momentum has been carried along by the emergence of Chinese production/export alongside American financing/import. This is a real oversimplification but, is not untrue. The US has specialized in financing and borrowing to consume. According to IMF Statistics, the US borrowed 64% of total internationally available funds in 2006 [pdf]. We have the globe's largest GDP and 70% of that GDP is consumption. Our massive trade deficit, around $800 billion in 2006, speaks to this. China has experience export growth of 500% across the last 17 years. In late 2007 or 2008 China is set to pass the US as the second largest exporter on earth. Our GDP is 5 times the size of China's -- at official exchange rates. Chinese and American economic vitality -- despite what many claim on both sides of the Pacific -- are intertwined. There are obvious examples of this -- Wal-Mart -- and subtle examples -- cheap credit and consumer goods.
America is lent to at staggering levels. Our banks, investment houses and financial firms have driven financial product innovation and revolutionized the ways that debt is traded, valued and structured. China has grown from a bit player to a manufacturing behemoth. Much of the export operation of China is guided by foreign multinationals into markets they know and have operated in for years. 2006 estimates suggest that over 55% of Chinese exports are done by non-Chinese multinationals. Wal-Mart alone accounts for about 10% of Chinese export final retail sales. Multinational financial firms from the US-dominant -- Europe and Asia thrive off of global finance. At the start of 2006, 80% of global financial assets were owned in and by the US, the EU and Japan. Finance is concentrated and the US remains central. Manufacturing has become more concentrated around China. From South America to Africa and the Middle East, the global economy relies on China and America for imports, exports, capital markets and investment opportunity. America and China represent two sides of the same unbalanced coin.
The two nations rely on each other ever more. As of July 2007 China and Hong Kong together held $465 billion in US Government debt- second only to Japan. From April to June 2007 China -- including Hong Kong -- bought $37 billion in American mortgage backed securities. Across roughly the same period we had pet food, toothpaste and toy import scandals. All of this occurs as the US imported $83 billion worth of Chinese goods and services in the first quarter of 2007 and exported $19 billion to China. Despite recent fears about Chinese product quality and accusations about American beef and soy beans, the nations' economic futures can not detach without great disruption and loss.
The growing discord -- expressed in traded threats, recalls and bluster -- between the US and China is threatening to the entire international economy. The increasingly suspicious and tainted reputation that American financial and Chinese manufacturing products are attaining is an international issue of the utmost importance. America's economy relies on cheap imported credit and vast earnings from finance. China's economic growth, employment and future rest on vast manufacture for export. In lock step, both look to be taking overly long walks down fairly short piers.
This is not a doom and gloom report. I just wish to call readers attention to the fragile state of the global economic architecture at this moment. In so doing I hope to introduce some basics into an often emotional and reality detached conversations about China. Our firms make goods and look to China for growth. China's vast savings and the hundreds of billions in dollars they accumulate from exporting to the US are loaned back to us. China is presently sitting on $1.34 trillion in reserves. In return we take their products. They support the dollar, provide us with savings to borrow and don't really mention that we pay low interest. As the US Dollar falls and Renminbi rises, China will experience tens of billions in losses. We offer to pay them back in a declining dollar and use much of the money we borrow on military hardware, with which we threaten them. They need to employ millions and millions of people seeking to move to cities, industry and modern service employ. The Chinese political situation requires new opportunities, jobs, incomes and modernity be offered to hundreds of millions of people. The migration and modernization occurring in China 1990-2010 will be larger than the entire European industrial revolution! It would be fair to say that the two nations are co-dependent. There are many groups benefited and hurt by the present arrangement, that is another article.
The Chinese growth story and the American position in the world are fragile and are two sides of the same coin. They form a major part of the structure of the world economy and its recent vitality. As you read this article, many increasingly fear tainted US financial products and Chinese exports. If confidence and growth are slow to return, or increased hostility emerges, it could mean an inflection point in the global economy?
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I wish you would do a complete dissection as to the underlying causation of both debacles. I know greed is undoubtedly a component in both cases, but I think the comparison stops there. China lacks maturity and discipline in their eagerness to excel while we tend to rely on sophistication of the financial instruments to diversify risks that are changing by the day. I think both problems are correctible and the damages limited.
At least 10 years ago, I got sick of buying Chinese (because the damn things broke and I was throwing away my money). So I tried to buy a cheap alarm clock produced in ANY other location. I was willing to pay 2 to 3 times as much, which would have been about $10 or $20 at that time. There were NO clocks from anywhere else. That is when I gave up with buying from other production locations.
I am willing to pull back my consumption, and pay $100 more for that washing machine, or $200 more for that TV, if they would just bring back the manufacturing and jobs to America.
I took an economics course specifically on this, and that is what we could, even with a decent wage, do that because our quality control is better, and we wouldn't have shipping charges.
Isn't paying $100 for that washing machine more, when one will use it for an average of ten years enough for us to do to save our middle class? Ditto for those jeans...pay $20 or $30 more and buy one or two fewer every year.
But I'm floored that you don't consider this a doom and gloom report.
That shared coin is, at the present, one very risky investment.
Sure, the entire world has a lot invested in us already.
And they're nervous enough to prop us up for that very reason.
But, at the same time, they're seriously considering other means of protecting those interests. They'd be negligent in their duties if they weren't.
Ultimately, that's going to mean dumping dollars.
Added to the lack of money that's already shaking things up and, well, we've got a very gloomy future indeed.
We're in deep doo-doo, Max.
Us and China and every other country in the world that holds our currency.
It really can't get much more doom and gloom, can it?
The view that China and the U.S. economies are somehow permanently intertwined is far too simplistic:
1. China does not have outstanding debts with their trading partners. They have a positive trade balance. Therefore, China does not NEED to hold large sums of foreign exchange reserves. (Positive balance on their books)
2. Chinese exports to the U.S. account for approximately 10% of China's GDP. As China's internal economy continues to grow at a pace approaching 10% GDP per year along with other export markets, the U.S. market becomes less critical.
3. China is developing their own internal economy that is estimated to eventually grow to four (4) to five (5) times the size of our own.
4. An analysis of China's VAT (Value Added Tax) and rebate system indicates that China has already begun to concentrate efforts on their internal economy. Exportation of raw materials, certain commodities, and energy intensive products are being discouraged by higher VAT levels and reduced rebate percentages.
5. China does not allow their currency, the Yuan (RMB), to be traded in currency markets. Furthermore, they artificially peg the Yuan's value to the U.S. dollar. Thus, China experiences limited foreign leverage on their currency. As the dollar declines so does the Yuan. But China can change their peg if needed, we can't.
6. Wal-Mart products are strictly commodity - non-essentials, anybody can produce them (except the U.S. because we gave away our manufacturing technology and expertise). If the dollar tanks, Wal-Mart will become a high-end retailer overnight. This will cut into the Chinese export machine, but it will not stop it.
7. As the dollar continues to decline, China's US dollar denominated assets continue to depreciate. In other words, how long does China continue to buy our debt for decreasing returns and increasing depreciation just to maintain a positive trade balance?
China is in the driver's seat and are going to take us for a ride.
Deep doo-doo is right Raven.