China is Not Going to Bail You Out
BEIJING: A flurry of stories have circulated the past few days speculating about how China could be the savior of the global financial mess. While it is a bit of a stretch to think the West will go cap in hand to China, it's an even greater one to think China would dole out a significant portion of its nearly $2 trillion in foreign reserves.
Without economic or political concessions from the U.S. and Europe, China isn't going to budge from its position of relative strength. More likely it will use some of those reserves to buy into assets in its own backyard to give itself a more powerful position in Asia. There's already talk of a bailout fund being established in Asia to boost investor confidence here shattered by the falls on Wall Street and fears of what a recession will do to exports. It will be interesting to see how much China puts into this fund if it turns to reality.
Another area to watch is if China turns its focus to major economies of Japan and South Korea (and in its territory of Hong Kong) as places to snatch up cheap stakes in institutions that would give them economic and political leverage. They may look to solid economic assets in the U.S as well, but probably not on a grand scale. China seems to already be testing the waters this way in Europe, though Europe has its problems too.
All said, China is in an advantageous position thanks to its $1.81 trillion in foreign reserves and could emerge as a provider of loans to governments and institutions struggling with budget problems, but it's hard to foresee any messianic bailouts. More likely it could follow Russia's example with Iceland and loan struggling periphery countries bailout packages in return for greater access to their markets or political leverage.
China is putting on a confident public face about its economic health amid the global financial crisis, and it rightly should. For the most part, the global credit crunch has bypassed China.
After years of double-digit growth, China could slow to a rate as low as 9 percent toward the end of the year and perhaps a bit lower next year. Even with slowing growth, China accounted for one-third of worldwide GDP growth in the first half of 2008. Growth next year will likely be kept above 8 percent and fiscal stimulus plans by the government - tax cuts and investment in infrastructure development - will help it stay there. China's large and increasingly educated labor pool and potentially vast domestic market provide great hope for the future of China's economy.
But most important to China at the current moment is shoring up its position at home. There are a number of "inherent contradictions and problems" with the Chinese economy that are putting its rulers on edge. High energy costs, inflationary pressure, a drop in export volumes, a deflating property market, slowing industrial growth, recent drops in auto sales - all of these are areas of concern. There have been signs that even consumer demand is slowing (what the government hopes will help it ride out the storm) and the 64 percent decline of the CSI 300 Index over the last year is another worrying trend.
China is trying to boost domestic demand to ward off the ill effects of the global economy turning sour. But Chinese consumers need to save a little less and spend a bit more for that to happen, and economists are urging the government to tell people to loosen their grip on their yuan. While they may be spending more, Chinese are still not at the consumption level of their Western counterparts. Current domestic spending is only about one-third of GDP. If there is a significant slow of exports, consumption would have to rise by around 25 percent to make up the difference. It would take a dramatic, almost impossible change in consumer attitudes for that to happen.
Neither will China cave in to U.S. demands to let the yuan appreciate at a much faster rate. Recent signals from the government have been that they might even reel in appreciation even further so it doesn't erode export profits more than it has.
Another factor is that China has its own property worries to contend with. After its boom year in 2007 that saw the highest rise in residential property in the world, property sales in some major cities have dropped by 50 percent and prices have been dropping between 10 and 30 percent. Some analysts say that this doesn't mean China is facing a nationwide property meltdown, though it is certainly in for a slowdown. Others do believe that China faces a significant sub-prime crisis of its own, and if that bubble bursts, the impact could be huge.
The good news is that banks in China aren't as affected by a slowing property market largely because Chinese homeowners aren't mired in debt (household debt is 13 percent of GDP in China, compared to 100 percent in the US), though there could be impacts if property developers go bust or if banks made large numbers of risky loans to new homeowners that are currently hidden due to a lack of transparency in the system.
A global recession will hit China's exports hard, though they'd already been slowing over the past several months. In the third-quarter, orders for overseas shipments dropped to their lowest level since July 2005. With the US economy going south for what could be an extended period, China's economy might be in for significant long-term structural changes.
China's export centers in the south are a place to keep a particular eye on. Over half of the toy export companies have had to close this year. Exports slowed, material costs rose by about 40 percent on the year, salaries doubled in the past four years, and appreciation of the yuan ate away from 3 to 4 percent of profits. Guangzhou Customs statistics show that about half of shoe exporters became insolvent in the first half of the year and garment exports dropped by 31 percent year-on-year over the first seven months.
These are real economy woes hitting an area far from the center of power in Beijing - a region where political unrest in the past has helped spark revolution. Rebounding inflation, widespread job losses and increased poverty that could lead to political tensions are all at the top of the government's list of situations to avoid.
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While nations, including the USA, won't like going to China to borrow or to sell paper, changing conditions could force some nations to seek Chinese aid. Who, save China, has the money needed to fund immense future bail-outs & other expensive measures the world will need to recover from the melt-down & the depression which is now starting? China can expect to see borrowers who've tightened their belts as tight as their belts will go. We can expect China, not the borrowers, to set the terms of China's loans. Borrowers will have a choice accept China's terms or try to do without financial aid in its struggle to recover from the world wide depression. Like it or not, China is in the drivers seat.
Actually, your entire post raises a much bigger point.
You state that the Chinese, one of only a couple of sovereigns to whom we have provided the fruits of our largesse, hold only $2TRILLION in $USD reserve currency.
Our "whatever it takes" commitments have been growing by that amount on an almost quarterly basis, with the hedge funds and derivatives markets getting very near to implosion.
So, the REALLY BIG question, with a nod to Ed Sullivan, is either "Who the f*#k IS going to bail us out?", or, "How can ANYBODY, or group of anybodies, ever bail us out?"
In other words, there ain't enough money in the world, let alone China, to repay the bets that have already been made.
And, ALL new money, to be used to repay those debts, is created as debt.
The jig is up.
The Bretton Woods debt-based, fractional reserve money system is a-coming crashing down around our collective ears.
Get ready for Bretton Woods II.
And, hang on to your Constitution.
In a world awash in debt, power will flow to those with cash.
Whatever the state of a bailout, China holds the aces.
Just like we did when the Soviet Union had their economic meltdown.
I wonder what walls will come crashing down this time?
China has bigger problems on their hands. Their shares also dropped while they have to deal with milk and food tainted with melamine. Practically the whole of the Asian market has lost confidence impoting China food products.
In a country of over a billion people, over half of which are still living in near poverty the melamine crisis is not even worth mentioning. It's a big deal for the media but for the Chinese it's nothing. They have bigger problems.
You won't see much of an economic fallout. How much milk and milk product were the Chinese exporting to begin with? These exports were to Yemen, Bangladesh, Myanmar, Gabon and Burundi. What does that tell you?
China is mostly a milk importer, not an exporter.
You missed Singapore, Taiwan, Japan, Malaysia, Indonesia, the Philiphines, Thailand...
In these countries there is a phobia on consuming foodstuff from China. Melamine is found in baking powder and powdered eggs imported from China. Factories from these countries imported these tainted products as a cheaper alternative for the making of biscuits. At the moment tests is being carried out to check for further melamine tainted products in these more advanced countries. There are fear that this problem may spread to health drinks and medicines.
This is the disasterous result of trade agreements that give away the American market with no guarantee of balanced trade. Now Bush/McCain will have to go to China with hat in hand to get the dollars back.
Exxon and other US companies will be forced to sell their international assets to China and their surrogate companies. Evntually Obama will have to mandate balanced trade with adversarial countries. The alternative is unbalanced trade/cash flow causing a crash of western economies.
I like it when liberals just bring Exxon in every discussion. Looks like some of these liberals need a trip back to business school.
Exxon is one of the best run companies in the world. If you want to pick on companies there are better candidates.
Start with airlines & auto. Lousiest companies out there possible. Hope all of these go bankrupt before you start picking on healthy, well run companies like exxon and others.
I don't envy Exxon. They have less and less access to their raw materials and are forced to find it at higher and higher costs. All the while their competitors have a negligable cost of production and can increase or decrease oil production as they see fit, completely changing the return of any long-term major investment by Exxon.
And to top it off, the demand for their finished product is declining.
When one country help others, it usually end up helping itself: if other countries get richer, they are more likely to be able to buy what they need from you, that in turn will make you richer. therefore, if China help others, it will end up helping itself.This is true for any other country, but you have to know your limits. For example, if some one falls into a river, if you are not a good swimmer, you jump into the river and died, you did not help the other person at all. If China tries to save the world now, it will most likely end up hurting itself.
Why help bailout the USA when they allready sucked us dry. China is many things, but not global. I expect them to toss us out like a rine of a cantelope. Silence certainly doesn't mean love, and they are quiet now. China is loyal to themselves, always has been. We might get a clue and stop running after this global goat, that will butt us in the tush in the near future. Let Europe experience, and try out their farce, before we even consider anything so devastating as a global arrangement. Billy Boy, got us into nafta, billions of dollars lost demoralizing our country. America the Beautiful is now America the land of overlords, with lots of tax payer poverty slaves. The world gov. thinks were up for grabs, and that we will go quietly herded to serve and slave, they better think again......
China posted the biggest trade surplus ever in the month of September and foreign trade so far this year was up by about 21%. If certain sectors of the chinese economy were contracting, other sectors must have expanded. However, China's economy is not big enough to save the world even if they want to. China's foreign reserve of 1.91 trillion is large by itself, but if the world equity market lost 25 trillion the last few months, China has to be carefull. China has to just look after itself and stay healthy and in the long run, will help the world.
The world equity market did not lose a dime. Money does not get destroyed and markets create no value. What we lost were simply perceived gains, but those are always virtual and one can not rely on them. OTOH, China's reserves are real. Unless we enter hyperinflation, it will allow them to buy real things. Whether they will go on a large spending spree is questionable. The Chinese can still make any number of investments in their own country that are highly profitable and where they control the game. Not so in countries like the US where they will encounter very harsh criticism and a lot of scrutiny.
The Chinese yuan increased in value 10% from October 07 to this October, so that brings down the 21% increase in exports down to 11% since its measured in dollars.
You are completely missing the point by measuring the arbitrary value of one currency against another currency. The real question to ask is how many new buildings the Chinese have erected in that time? How much have they increased their energy production capacity? How many grad students did they graduate? How many science parks did they fund? And once you look at those numbers, you should have cold sweat on your forehead.
Pretty much the whole world is depending on China to keep the global economy advancing. Some analysts believe their economic policies are leading them up a dead end street while others believe there will only be a mild slowdown. My major concern is whether the Chinese society can weather whatever is coming without major social disruption. With the Wall Street implosion, a big problem in China would be devastating to near term global recovery prospects. It is the difference between a recession and a depression.
You will be disappointed to hear that the Chinese position is to advance China and not the global economy. To China the global economy only matters as far as they can sell to it. Otherwise they Chinese are trying to be self sufficient and are only working on making their own people better.
Which, if you think about China's position in the world as the most populous country that still suffers from the economic and social trauma of WW II and a century of foreign meddling, is quite understandable.
Chinese society does not suffer from social disruption. I don't know where you got that from. Would his first name be Rush?
China can not and will not pull this one out of the swamp. And why would you expect a nation with less than $3000 per capita average income to save your tail to begin with?
China has been looking out for the greater good of the global economy in many ways and has been helpful throughout the financial crisis by continuing to buy US treasuries and putting Chinese investment funds into some of our financial institutions. About the global economy, growth in China has supported the economies of Austrailian and Brazilian, for example, over the last several years by buying up their natural resources - China consumes a large percentage of the worlds steel, copper, zinc, nickel, coal, aluminum, lead, etc - and they've propped up the Japanese economy as well as China has now replaced the US as the biggest destination for Japanese exports.
"Pretty much the whole world is depending on China to keep the global economy advancing."
The same could have been said about the U.S. at the end of WWII. In other words, we have been eclipsed.
Thank you neocons.
The line about China looking out for number one is on point. The Chinese have always been insular (not to say the U.S. hasn't), so this will astonish nobody. But they have built their economy on an export basis, so they have no choice but to try to keep things lubricated or they will eventually go down with us.
The same is true of Japan. The Japanese are notorious savers, so if we get an economic cold, Japan will get pneumonia and that will kill off any trade with China as consumers cut back. Farmers, who are overrepresented in the Diet, are already crying long and loud about Chinese imports, too, and in a crunch, MITI cannot but help to react to that to China's detriment.
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