Wednesday, March 25, 2009

The Chinese are coming!

You know the US is screwed when China is lecturing us on capitalism. 

Luo Ping, a director general at the China Banking Regulatory Commission, gave a speech in NYC decrying the upcoming depreciation of the dollar and proclaiming that China has no option other than to continue to buy US credit. 

Mr Luo, speaking at the Global Association of Risk Management’s 10th Annual Risk Management Convention, said: “Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”

Mr Luo, whose English tends toward the colloquial, added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”

However, Mr Luo said Chinese officials would encourage its banks to finance domestic mergers and acquisitions rather than provide rescue finance to distressed financial companies in other countries: “There will be no bottom-fishing of financial institutions, particularly in the US, because there is a lot of uncertainty about the quality of the books.”

Luo goes on to decry the repeal of Glass-Steagall and posits that additional regulation in the financial industry may not be the worst thing.

Reading this, a lot sticks out. Why can't the Chinese buy British, Japanese or European debt? Currency exposure isn't a concern anymore. Why can't they reinvest domestically? China is clearly trying to defend it's massive stash of US government IOUs but look for them to quietly move away going forward. 

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28 comments:

Anonymous said...

My impression was that the Chinese were going to buy up lots of commodities and put those dollars to work and let the people they're buying from worry about currency risk. I've seen variations on this theme in a few places now.

greenewable said...

What would you pay to sit in the White House? It only cost Obama about $1 billion. What would you pay to gain massive leverage over American foreign policy? That valuation has not been considered in much of the debate on China's ownership of US debt. Let's be real, China is in Pole Position for the 21st Century, and its ownership of the US is an ace in the hole. http://greenewable.wordpress.com/2009/02/10/he-who-owns-the-mortgage-owns-the-house/

Anonymous said...

its all bs posturing.

"Why can't the Chinese buy British, Japanese or European debt?"

Because those countries mentioned are heavily export-dependent and would not tolerate currency manipulation to the extent that the US does.

The CPC is just trying to keep the spotlight away from them, b/c if the chinese really knew how much they are being screwed by having a permanently depressed currency, they would be pissed. (the CPC is intentionally keeping them poor)

Anonymous said...

The Chinese government absolutely hates this situation. They have spent the last 10+ years keeping the yuan week vs. the dollar to generate 8% or higher annual growth through exports, mainly to the US. All those dollars they get paid can't get converted back to yuan without strengthening it, so they have to keep them in dollars (not sure why currency exposure is not an issue anymore).

The depreciation of the dollar throws a massive monkey wrench into the very structure of the country; the Chinese people have put up with the Communist regime because they are paid with outsized, export led growth. A collapse of the dollar would result in a total collapse of Chinese manufacturing (already underway), taking away the Communist's main support mechanism. Of course they hate it!!

Ha! so, in a perverse way, printing all those dollars is good foreign policy!!??

Anonymous said...

The last time the PRC warned us, they crossed the Yalu in force.

Cornelius said...

The currency exposure is a comment on their cash going forward - not on converting existing paper back to yuan.

Anonymous said...

this speech is weeks old

Cornelius said...

Yup, pre-ZH for me though - it's good to resurface with Geithner's reserve currency gaffe.

Anonymous said...

One view is that the Chinese don't have the skills to allocate capital to different industries, therefore they keep their savings in dollars/Treasuries which gets recycled into foreign direct investment in the industries that U.S./Japanese/Korean companies see China as having a competitive advantage. I.E. the Chinese specialize in manufacturing and developed companies specialize and capital allocation and technology transfer.

Anonymous said...

i think the dilution of the dollar is a great way to unwind the US/China imbalance...besides, at this point, china hasn't bothered to acknowledge that their $ manipulation is a problem, so will they ever?...that pretty much is forcing the US Treasury/FRB into taking matters into their own hands with dollar depreciation.

It will be interesting to see if china chases the dollar lower. that would be the equivalent of them passing smoot-hawley

Yossarian said...

China needs the US Financial system because the bond market is big and liquid and they have to buy $ assets using RMB so that the trade surplus doesn't force their currency up. This is the system they chose to develop their economy. Both China and Greenspan should have understood this dynamic and how a "savings glut" was really just the other side of US credit creation.

Anonymous said...

Hey Jethro,

This is very old news. Like 3 - 4 weeks old if memory serves me. Why don't you serve us up something fresh, hot, and tasty? Like the newest foreclosure deal of the day. Give me something of interest!

Tyler is going to be pizzed!

Anonymous said...

once the financial system is stabilized (be it a year or two from now), the US will force china's hand harder by depreciating the dollar. as the yuan appreciates, china will be screwed as they never developed anything that people are willing to pay a premium for. then its Great Depression time for them.

Anonymous said...

Hey @ 5:02 PM,

You're a fool. China can unload all of it's holding in US Treasuries right now and bring us to our knees.

I may be more accurate calling you an American genius. How do you red-necks find this web site anyhow??

Anonymous said...

~

Yea, I agree with the guy calling you Jethro.

Why not write a speculative article to find the US version of Daniel Hannan from the UK. Who is going to be that one person willing to stand up and voice what everyone is feeling?

The devalued Prime Minister of a devalued Government

Anonymous said...

Oh please - the largest example of crony capitalism is lecturing us on the repeal of the Glass Steagall Act? Maybe if they didn't artficially devalue their currency while allowing wholesale intellectual property infringement we would take them seriously. Until then, STFU and take it.

Anonymous said...

Cornelius,
Just a word of advice. When Tyler writes something that is unpopular he will immediately follow it up with 5 - 10 other vanilla articles, in effect pushing the bad article out the back door.

Best of luck.

Anonymous said...

@ 5:43 PM.
Again a remark from an idiot.

Bit torrents are the largest IP thieves in the world. China copied a few CD for a few years but was in no way the single largest IP thieves on the globe. Try Russian, Mexico, and organized crime right here in the USA.

Open your eyes and take a strole in your local hood. Da brothers be serving bootleg Chris Brown CD out of the trunk of their whips at every intersection, yo. IP Law enforcement? Not within the borders of the USA...

And the US is the only country that is allowed to control it's currencies value? Ha... Do YOU feel a little threatened?

Anonymous said...

Anon 513...you speak of mutual assured destruction in your scenario. Obviously everyone wants to avoid that. Once it is avoided and the proper fx rates prevail, China will have trouble adjusting to the reduced spending habits of the west. So that's when China falls into a great depression, forcing the population to adjust...bc the cpc are the last ones to admit they have a problem.

Anonymous said...

@6:47 PM

What you do not understand is that China had a very robust internal economy with a population that dwarfs any county in the world. They could close their doors to the world and survive for 10+ years, and prosper doing so.

Don't forget the hardships that fell upon them during Mao Zedong's rein. They are net savers, prefering a cash economy, and are infinitely more resilient than the Dr. Phil dependant whining crybaby nation that we have become.

China could mop the floor with our spoiled welfare punk asses. Period.

Anonymous said...

Re: strong internal economy of china...So did the US in 1920s...and they didnt even have dr phil.

Exports from china have risen 3x yet the yuan has appreciated 20% vs the dollar. That's got smoot hawley written all over it.

Anonymous said...

"Protectionism doesn't achieve even its own false goal of increasing exports..." China knows this. they are not a bunch of wetback aliens who just landed on this rock.

Too, they have been here as a populous for far longer than you and I and team USA. Contrary to go-go USA policy they have a much longer planning horizon.

What makes me laugh and at the same time feel sorry for, are the Ivy League armchair QB's who think they have been schooled in the ways of the world.

There is LONG history in that country and the recent decoupling of the USD-Yuan peg may have caused unintended shifts in their currency. But I would not begin to argue this as I have never tried to control a major currency for a country with 1.3 Billion people who "don't do credit".

Anthony said...

China's gonna miss its chance (we'll take them down with us) and in 2050 India will be top dog.

So STFU Sino/American homers, you're both wrong.

Anonymous said...

~

India will be wallowing in their slumdog lifestyles as they know nothing else.

Innovation has never come from that wasteland, and it never will. Indians have been bred to service the people of the UK, USA and to a lesser extent Singapore.

Best regards.

Anonymous said...

there are no virtues in economics. over-saving is just as damning as over-spending. China doesn't get it. that is why they are going down.

Anonymous said...

Don't be fooled! The Chinese do NOT have to continue to buy US debt. On the other hand, they can't publicly announce their offloading it. Today, with stock prices dropping in the afternoon and Bernanke buying Treasuries, yields ROSE! That meant somebody was selling into Benanke's open arms, and I'd be willing to bet it was not a domestic source.
JT

Anonymous said...

The dude lives under a totalitarian regime but understands the folly of repealing Glass Steagle - I suppose it makes sense; concentrating power among too few large financial institutions can lead to a volatile demise - same way concentrating political power upon a single government entity can yield disaster. In China, the former may cause the latter.

Anonymous said...

Billionaire Li Ka-shing Says China Will Lead Global Recovery

Bloomberg Link

How right he is. Get ready to eat some crow. The world is about to vote for a new reserve currency.