The media is abuzz with China’s central banks decision to allow the RMB to float a bit more freely, but no one is asking the more important question, which way will they let the currency float? Everyone and by everyone I mean certain U.S. Senators and some White House officials, claims that the artificial weak currency has cost Americans their jobs. The claim is it has cost millions of Americans jobs, but the it utter nonsense and political posturing.
A weak currency definitely gives China an advantage, it gives any country an advantage, but at the end of the day China had their currency pegged to the U.S. dollar, so perhaps our political officials should have been looking in the mirror while throwing criticism towards China. In other words, if our currency was stronger it stands to reason that China’s currency would be stronger as well. However, we all know that the intention of the U.S. government is not to have a strong dollar, but to have a weak dollar. That would mean a weaker RMB which would give China an advantage, in the eyes of those living in the land of the blind, in world trade.
How do we know the U.S. wants a weak dollar? Simple, Obama told us. He wants to double exports within 5 years, but we have the most expensive workforce in the world and are largely viewed as inefficient because of our pesky workers rights laws. That makes producing goods in the U.S. for export very difficult with the exception of complicated financial instruments, bombs, military hardware and some technology items. Let’s look at producing hammers, a hammer made in the U.S. would cost about $10, but a hammer made in China would cost about $5, why? Labor costs. The steel is going to be about the same and they are shipping the steel to China and the final product from China to the U.S. at half the cost. They pay the same amount of money for transportation, energy and raw materials, but they pay less for labor. My point is that we cannot export more without severely devaluing our currency or our standard of living.
Which brings me to my next point, China’s willingness to let their currency float more freely, great, but which way? One of China’s major manufacturers, the one were all the people are killing themselves, you know, Apples plant, is raising their workers’ salaries by 14%. Now, forget that 14% on $2 an hour only means another $.28 an hour, but that is a significant increase in labor costs, but are your iPad and iPhone costs going up? No, as an aside, this is just one more reason that I feel good about not owning an Apple product. I have also said that the Euro’s collapse is a significant issue for China, it still is, and a further decline in the Euro means China’s #1 importer of goods will import less, much less from the big red giant. What I am saying is it is entirely likely that China will float their currency lower and now they can claim it is the free market doing it, smooth move if you ask me.
It is not possible for China to have a rising currency, a weakening Euro, a weakening USD and higher wages for its workers with most manufacturers maintaining profit margins of 3%. It just doesn’t work for China and we all know the ruling party wants to maintain its power and in order to do that it must make the people happy. Without plus 8% GDP growth unemployment will increase and discontent will grow threatening the powers that be. In other words, the RMB will go lower unless other currencies increase in value. I realize this is an outside the norm view, but if one steps back and looks at the bigger picture it makes sense.
I could be wrong and perhaps every firm is out there hedging their currency, but that is highly doubtful. Even if they did it would not stop the slowdown in exports and all the bubbles in China will pop at roughly the same time, in the next few months. It is funny that the same people who said the U.S. was not in a real estate bubble in 2006 are saying China is not in bubble territory now, they are. Any slowdown, even a minor hiccup is extremely dangerous and has worldwide ramifications. We are talking about the engine of the “worldwide recovery story” here, not some small corner of the world that does not matter. If their currency appreciates and the slowdown is bigger than anticipated, they always are I might add, there are no more surpluses, no more U.S. debt auctions to show up at and prices will head higher on products.
It also means that they may become net sellers of treasuries instead of buyers, that is not good news, if their currency does appreciate. However, it won’t happen, it will go lower and everyone will be surprised when it happens, except for me. It is clear as day that the Chinese economy is showing extreme signs of stress, look at their markets, they are way off their highs and have been for some time now.
From my lens the entire system is in major trouble and it is evident when we try to find scapegoats for our problems, bankers, the Chinese with their cheap currency, etc. The system needs to reset itself and it cannot happen with all of this intervention and additional debt. Everything needs to be restructured and debts need to be purged from the system, but this will never happen as it means everything goes to zero. Instead we will carry on blaming others, inflating our way out and causing much more pain than by having an absolute reset.
Everyone is on bubble watch nowadays, me included, as central banks flood their respective countries with mountains of money. While the US has done a ton of printing of dollars it is often overlooked that the Chinese have also printed a ton of Yuan as well. While there are definite differences in the economies of the US and China, we could argue those difference all day long, the one thing we could all agree on is that China a lot of flaws in its system. I would counter by saying their flaws are probably pretty severe, but no worse than the US.
Regardless, I have been reading a lot about the bubble in China, especially in their real estate prices. I do not doubt that as property values have gone parabolic in the country, some areas make the peak price increases in the US look like pathetic in comparison, but is it the same bubble that the US had? The answer is, no one really knows for sure because the data is spotty at best. My guess is that the price bubble is probably worse than the US, but I am willing to bet that mortgage fraud, home equity loans, securitization and the host of other issues that basically collapsed the world economy are not the same, at all.
So, at the end of the day, we will see a price collapse in China which will lead banks to have losses on their books, but it will end there. It will likely be as bad as the early 1990’s in the US banking system compared to the 2008 collapse that the US had and it will more than likely not spread globally like the US credit collapse did. However, it is problematic for the world to have the second, it surely has beat out Japan by now, largest economy approach a huge bubble so early in its quest for world domination, especially when it is the manufacturing center of the world.
If the bubble pops, which it will, it will take capital to fix which means that money will not be loaned out to manufacturers. When that happens the cost of capital will increase driving up prices which means your trip to Walmart will not be as cheap as it once was, especially if Washington forces the Chinese to strengthen its Yuan as well. That will be a problem for us and the rest of the world as China led the world out of the recession, if you believe it is actually over that is, so if China contracts it will lead the world right back into a recession, or make the one we are in even worse.
It is just interesting that Americans always assume that everyone acts like they do and spend all of their money. The Chinese are fanatical savers and it is highly unlikely that they would leverage their home, i.e. home equity loans or lines of credit, to buy junk they simply do not need like Americans do. I remember when Lay’s potato chips were trying to make headway into China and one women interviewed said why would I spend that kind of money on that when the same money can buy me potatoes for a month? That is their mentality and they do not spend what we do not have and pay for it later like what we do, that is what I admire about their culture. This is why if or when the bubble pops it will be a major problem, but nothing like what we saw here or in Europe.
With that in mind I am not crazy about investing in China because I believe that the bubble will pop and it will slow their growth down dramatically. Depending how the government handles the issue it could be a nonevent or a huge problem with, believe it or not, political instability. Plus, so much money has flowed into China through BRIC’s it is kind of crazy to keep money there right now. I am way more interested in India and Russia than China and Brazil, but all emerging markets have me a bit nervous because when everyone agrees that is where you should be, well, you know, do the opposite. Regardless, I believe the bubble will pop, but before the China bubble pops the US equity bubble will pop first.
As I talked about yesterday there is a trade war that is quickly heating up. Contrary to what the experts in the Whitehouse think, we desperately need China to help us fund our ever increasing deficits. The Whitehouse said that they do not believe a trade war will erupt, but what do you call the actions of the Chinese over the past 2 days? It is a trade war that has consequences we cannot comprehend.
As stated yesterday, Obama, in order to appease his labor union friends, instituted a 35% tariff on tires from China. China immediately filed a complaint with the WTO, which I am sure we will win since we usually never lose those fights, but today the Chinese are claiming ‘dumping’ of auto products and chicken products. Those are serious accusations and also an indication that China is not going to back down and why should they?
Frankly, we need them more than they need us as they fund our deficit spending and provide us with cheap products, that we really don’t need, but hey we like to buy stuff. Yes, we provide China with a market, but we are no longer their largest market, Europe is. Not to mention that their population could, theoretically, support itself or they could just sell more products to India or other large populated countries. I believe in the decoupling theory and we might just be at this point as China gets fed up with the amateurs in the Whitehouse, who insist on fiscal irresponsibility and embrace crony capitalism to benefit the unions instead of America as a whole.
If you do not think this is a big deal, think again. They have two ways to really engage us on this issue and rattle our cage.
Net sell dollars they hold, in a bigger fashion than they are already doing; or
Not buy at the treasury auctions in the near future
I know that we Americans think we can do anything, and we put that to the test daily, but right now we desperately need the Chinese to fund our deficit. If they do not fund us we are going to feel a world of pain because Helicopter Ben will simply print the money to quantitatively ease our way into hyperinflation. Not to mention that the Chinese could hurt us one other way that most people do not realize exists, they could stop buying our financial products which account for a large portion of our exports.
China has already said their banks do not have to honor derivative contracts they own and are, as far as I know, forbidden from entering new derivative contracts, which presumably started this incident. Whether they started it or not is irrelevant because we did not need to escalate it. I firmly believe that the Obama administration has shown its arrogance and inexperience with this situation. From what I see it is clear that they do not understand how money works and that they think printing money is just fine, it is not. This trade war, if it escalates, has the potential of crushing our currency which is already struggling.
Looking at this from the Chinese perspective, I can see why they would be upset. Their dollar holdings are worth less than 12 months ago and they were probably sold some MBS, CMBS, CLO’s and whatever else Wall Street could pawn off to them which they surely lost money on. Now the Chinese are funding our deficits and we go and throw a tariff on one of their products, which makes no sense. I think they have played our game for too long and lost, to a certain extent. Now, they want to play by their rules and we are in a predicament because we need them more than they need us.
I fear this will grow out of control and make a tenuous situation into a dangerous one for the US. We need to get our budget under control so we will not be subject to, for lack of a better term, blackmailed. What I mean is that if the Chinese called up Geithner and said remove the tariff or we will sell $200 billion US dollars tomorrow, what do you think would happen? Exactly. The other issue is the only one who truly pays for higher tariffs are the US citizens because they are now denied a lower cost product and forced to buy a more expensive product, no matter who they buy it from, the US or the Chinese.
Once again the average American loses because of Washington’s idiotic behavior.
This is major news. You can forget China’s talk on supporting the dollar as the reserve currency. It is clear that they are saying on thing and doing another so this may mean they are going to send us a message, probably through a treasury boycott. What is surprising, kind of, is France is backing them on this statement.
You have to ask yourself if you blame them? The dollar has slipped in the last few years so all those treasuries central banks bought are worth less to them now. Why would they wish to continue to lose money? The long-term slide of the dollar is clear and will continue, based on the technicals and fundamentals.
We are stuck, there is nothing the Fed can do to strengthen our currency at this point. Well, that is not 100% true, they can raise interest rates, but that would crush our economy. We have too much debt and we are going to issue more and without higher interest rates the dollar will slide downwards.
There was only 2 ways the US could get out of this debt anyhow. They could be honest and default, not make interest payments or they could print their way out. They chose option 2 which is a huge problem. Now we will have a deep recession, may be a depression, with higher prices. This is nuts and a major problem for us.
Here is the CNBC story:
China called on Thursday for reform of the reserve currency system at a meeting of world leaders in one of its most direct attacks on the dollar’s global dominance.
Chinese State Councilor Dai Bingguo did not specifically name the dollar at talks between the Group of Eight rich nations and G5 emerging powers, but he was unequivocal in calling for the world to diversify the reserve currency system and aim at relatively stable exchange rates.
France also unexpectedly called for a currency discussion and moving toward a “multimonetary” system, though Britain warned any debate should be reserved for the long term to avoid destabilizing markets in the midst of a global recession.
China’s ideas for changing the system had previously been mentioned in reports by its central bank, but had never been voiced in a speech by such a high-ranking political leader.
“We should have a better system for reserve currency issuance and regulation so that we can maintain relative stability of major reserve currencies’ exchange rates and promote a diversified and rational international reserve currency system,” Dai told the summit in Italy, according to a statement read by Foreign Ministry spokesman Ma Zhaoxu.
Dai made his statement to a meeting including British Prime Minister Gordon Brown, U.S. President Barack Obama and the leaders of Japan and the European Union, whose currencies are often held as part of countries’ foreign exchange reserves.
There is no question on whether the comments represented those of of China’s top leadership, the spokesman said.
“China’s position on reserve currencies has had different interpretations, but I can tell you that what I have just quoted is the most authoritative standpoint of the Chinese government,” he said.
According to Bloomberg, some in Vietnam will no longer accept US dollars and prefer the Chinese Yuan. This in itself is not huge news, it is only Vietnam, but you add that to the rhetoric from China, India, Russia and the fact that China is allowing 6 major corporations to settle trades in the Yuan versus the US dollar it is troubling.
This is how it starts, countries want settlement in different currencies other than the reserve currency and it spreads from there. The primary reason they want the Yuan, in this case, is because they feel it is less risky than the dollar. That is scary when communists are afraid of the risk of the dollar and want to settle transactions in their own currency.
Huang Xinyuan, who sells mining equipment and pesticides to customers across China’s border with Vietnam, says he no longer wants payment in U.S. dollars and prefers the yuan.
Sales using the greenback at Guangxi Jinbei Group, where Huang is vice president, dropped to 30 percent of contracts in 2008 from 87 percent in 2007. The yuan, which has gained 21 percent since it was allowed to strengthen against the dollar starting in 2005, offers greater stability, he said.
“In recent years, the dollar has gone in only one direction and that is down,” said Huang, 45, in his second- floor office in Pingxiang, a town set amongst karst limestone hills and sugar-cane fields in China’s southwest Guangxi Zhuang Autonomous Region, three kilometers (1.9 miles) from Vietnam. “Settling our orders in yuan removes a major risk.”
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