I’ve been wondering how that works. Mabe you can help me out. Suppose, for the sake of argument, the dollar and RMB were valued the same on the open market. I buy a tv for 100 dollars from a chinese merchant. How does that work? My guess was that I send 100 dollars to the chinese government and they send 100 RMB to the merchant. Now suppose the RMD doubles in value but the chinese government keeps the exchange rate the same. The tv should cost 200 dollars but I can still buy it for 100 dollars. I send 100 dollars to the chinese govt and they send 100 RMB to the merchant. Is that how it works?
Assuming that’s how it works and the chinese govt is printing the RMBs to give to the merchant why did the RMB double in value?
I think I see what you are saying but I still question whether a country could sustain the level of exporting like china over many years without having true productive capacity to back it up. You see what I’m saying? There has to be some meat in there somewhere. It can’t be all government smoke and mirrors magically creating exports.
Building an empt city with money on hand is not a bubble.
Usually when you speculate you speculate based on facts. Speculating about something which you do not know about is called guessing. You need to demonstrate some knowledge of conditions within China beyond the rudimentary to be able to convince us that you are not just guessing.
BTW, I am curious about their “parasitic relationship”. It is actually the US which is the “parasite” in that relationship so its coming to an end can only aid China.
Yeah, but that is not a bubble.
Obviously the point is that competitiveness of their exports, and the ability of their industry to satisfy domestic consumer needs means that actually their fundamentals are sound and a far cry from the Soviet Union which was not even able to overcome domestic shortages much less export anything anyone would want to buy (other than military armament).
This is not so say there is not some malinvestment, obviously there is, just look at the giant public works projects, but you are going to have to do better than that to show how their whole economy is structurally a bubble.
I have just returned from China and Vietnam in the last few weeks. While there is certainly many problems, I can state from an “on site” point of view that there is REAL growth and wealth creation going on, both in the PRC and in Vietnam. Both outside companies, such as my own and domestic companies are contributing in this.
I am not going to say that everything in the PRC is sound. But much of what you see is real growth and wealth creation.
Yes it is. You’re playing semantic games here. But say we differ on the definition of what constitutes a bubble. You still cannot deny that there is significant malinvestment in China, that much of the economic growth numbers are based on that malinvestment, and that many other components of GDP (most importantly C and G) will necessarily have to fall once the malinvestments become liquidated.
The RMB never goes up in value, it just goes up relative to the dollar. Why that is is a good question, as China’s government / central bank (one and the same as far as I can tell in terms of ownership) is not exactly tight with their monetary policy. It’s reflective of the tremendous growth and gains in productivity in China’s economy, which keeps the RMB from falling much further than it would with a stagnant economy.
The real prices of many electronics and other exportable goods is about the same inside of and outside of China. So in your hypothetical where the dollar and RMB are at parity, if the TV was worth $200 in the US, the merchant would sell it for about 200 RMB in China.
The way in which China’s government stimulates exports is similar to how the Federal Reserve (indirectly, but the concept is the same) stimulated the housing market - the newly created money is received by exporters first, which they get to spend before anyone else, before its value drops. Most of this is spent in expanding and maintaining their business, of course, and that is the primary means in which exporting is stimulated in China.
But there are other ways China’s government subsidizes export. Many exporters receive refunds from the government on VAT-like taxes they paid, based on the amount of goods exported.
You are absolutely right that there are no government smoke and mirrors creating exports. To the extent that China’s government stockpiles dollars and otherwise directly subsidizes exports, they deprive the Chinese people of that much.
The goods being exchanged for promises of future goods (dollars and the bonds bought with them, as opposed for the sizable amount of trade in real goods that takes place between China and the US each day) are really taken from the hands of Chinese consumers, who could afford them if not for the government constantly interfering in ways that devalued their purchasing power.
It takes real capital and savings to create goods. That capital and savings today comes mainly from Chinese people (although a large portion of it is still funded by FDI), not from little pieces of paper accumulating on the books of China’s central bank.
Why don’t you define a bubble for us so we will know.
I already adressed this.
BTW, I could not care less about the growth numbers. I do not even know them. Of course they are phony. But no or only small growth is something entirely else to anticipating an implosion.
The biggest example would be with my own company, a large privately owned agricultural corporation, and their extensive involvement in China. We do most of our work far out of the big cities, in the rural areas and far backwaters of China. We have helped modernize China, from primitive and inefficient agriculture to modern agricultural methods and modern processing facilities.
The biggest point that I would make is that everything going on with us and the other companies involves true free market investment and wealth building and most of all, a major increase in the standard of living for the Chinese people themselves. Very little interference from the Chinese government. In fact, most of our involvement with the government is our ongoing training of government inspectors in the proper performance of their job.
There is malinvestment, but not nearly on the scale of the United States.
They need the U.S almost as much as the U.S needs them. The gluttonous American consumer buys Chinese products at prices much too high for the average Chinese citizen. China gets to peg its currency to the dollar, keeping it continuously undervalued, stimulating exports and inflating spurious GDP figures.
They don’t satisfy their domestic consumer needs. They force their consumers to save in order to finance the American and global capital structure. The prices are artificially elevated due to American consumer demand for their products. If they began selling such goods at home, the prices would collapse. The price of stimulating exports is the utter impoverishment of their people (though there are many who enjoy this parasitic relationship, and have become quite wealthy. With the CCP’s permission of course).
You’ve chosen to define bubbles in a very peculiar way (credit bubbles created in quasi-capitalist economies). So in order to avoid further confusion, I will say that the Chinese government cannot have an accurate price mechanism coordinating production, suffers massive malinvestments, and relies on the U.S. consumer for much of its growth (as well as an artificially devalued currency). Does this mean that China is doomed without the American consumer? No, but it does mean that this current system of Chimerican privilege must come to an end.
There is no way to say this. The fact that they don’t have accurate price mechanisms, that they devalue their currency, and that their banking system is owned/controlled by the government, makes it impossible to separate malinvestment from warranted investment. I’m sure there’s plenty of both.
I have not read all comments yet, I am just quickly replying to the original post while I am on, so don’t ridicule me for repeating something lol.
Anyway, China has government interference that is creating some bubbles to build up, which is bad as you probably know, because when it busts, the people suffer badly. It is all artificial wealth; it was never real and never will be.
China does succeed in this way though; they actually produce. China has SEZs and do lots of labor for cheap without the government objecting. Production is the only real form of economic success, and since China is doing the most of it, they are getting the most return, and are benefitting from outsourcing companies. This gives them the wealth, and countries that regulate and print and do not produce real commodities must borrow from them, which is also stupid. China’s production = their success.
That China is a socialist commonwealth is a myth. China should be viewed more as a mixed system with the government playing a much more intrusive and decisive roll in the economy (and in the personal lives of individuals in general) as compared to other industrialized nations. Another way of saying it is that there is a greater degree of property rights violations as compared to other nations. That is all.
China is currently ranked #140 according to the Heritage Foundation. That is not so good.
The peg indeed stimulates exports in place of domestic consumption, but you fail to explain how this forcing of exports is something that China “needs”, when it is a clear cut impediment.
Also you reveal a lack of understanding. Chinese exporting has nothing to do with the prices “the gluttonous American” buys at. On the market the prices are the same for everyone. The real issue is that the export-driven policies push the Chinese manufacturers into producing less-essential goods (like computers) which form the bulk of demand in the US in place of more-essential goods (like washing machines) which form the bulk of demand in China.
And please do explain to me how at the same time that the US needs China, China also needs the US? How can it be that you can have two sided parasitical relationship (and you do not deny it is parasitical) that is beneficial for both parties? A parasitical relationship has to be detrimental for one of the sides, so for which one is it?
No? What is causing the constant growth of Chinas middle class then? Divine intervention?
There is a huge number of indicators that life is getting better in China. For example the sale of pet food doubled in the last decade. Instead of using dogs for food, the Chinese are becoming so prosperous they now buy food for dogs.
No, the prices are artificially lowered, because the peg which undervalues the RMB artificially increases the purchasing power of the Dollar. This is basics. It is hard to take your opinions seriously when you say something like this.
If they let the Yuan float the artificial incentive to export would be abolished since it would become harder to sell to Americans but easier to sell to the Chinese. This would mean the manufacturers would turn towards the selling of goods at home. They would find this somewhat easy due to the increased purchasing power of the Chinese, who would now be no longer burdened with having to pay a subsidy to the American consumer. However before this really took off in earnest the manufacturers would need to clear the malinvestment created by the export driven policies and retool a significant part of their capacity from making of less-essential goods into more basic, more-essential goods - the sort there is a demand for in a per individual less wealthy society. But seeing they have a high savings rate, finding the funds needed for the retooling (aka correction) would be child’s play.
Everyone who has visited China has been pleasantly surprised about at the level of prosperity its populace enjoys now as compared to twenty years ago jet you insist on talking about fantasies about some “utter impoverishment”.
The peg is costing Chinese consumers, but it is not costing them an utter impoverishment. It is costing them precisely to the rate that the Yuan is undervalued. That is what, about 10-15%? So without the peg the earnings of your average Chinese would be 10-15% larger in real terms. Compounded over twenty years this is a significant part of their potential growth, but it is not something that is causing utter impoverishment, it is merely something that is halving their economic climb from where it could be. But which is still impressive regardless.
I do not count public works funded with money on hand as bubbles else we could talk about even GULAG labour camps as bubbles, but this would render the word devoid of practical meaning.
Yes indeed, China is a mixed bag. In some areas government intervention is very radical and heavy handed. But at the same time in other areas the level of freedoms is just incredible. The often quoted examples are the almost complete lack of labour and environmental regulations. The last time I heard there were no labour unions in China.
Therefore I do not trust this sort of rankings like the one you quote, I think they are skewed. Lewrockwell.com carried one or two articles about these sort of indexes and why they are deficient a year or two ago. I will try to dig them up.
The average Chinese citizen is trapped in utter poverty and cannot pay the market prices established on the current international market. Chinese savings is forced.
Fine, a symbiotic relationship. Happy? China keeps its currency fixed to the dollar by financing American Debt. If the CCP allowed the Yuan to fluctuate, it would rapidly appreciate in value, destroying its illusory comparative advantages, and devastating its export industries (what America feared after WW1).
What middle class are you talking about? The ones they show you on Chinese TV? China has a real unemployment rate of around 25% (but we can never know because it’s an oppressive and opaque communist regime). God, you sound like Samuelson.
If they let the Yuan float, the international monetary system would collapse. The international economic system has the dollar as the world reserve currency. This means that America floods the world with dollars and runs massive current account deficits, facilitating international current account surplus’s. This leads to dramatic capital flow into the U.S, as foreign nations use the excess dollars to buy bonds, securities, and invest in America (buying property, FDI, ect). This would also end the Dollars privileged status as the vehicle currency (they would stop buying and start dumping U.S bonds, extinguishing the value of Chinese owned American debt, which is around 3 trillion dollars). Of course, this would hurt the U.S. a lot more than China, but to say that China is in a good economic position right now is pure lunacy. And we haven’t even touched upon the calculation problem. How can China possibly structure capital with so much intervention and without a functional price mechanism? The central bank is controlled by the CCP.
Yes, and domestic prices would collapse.
Ted Kennedy was extremely impressed with the Soviet union.
Who knows? It’s impossible to tell how undervalued the Yuan is.
Over-investment in durable goods, and continuous capital allocation towards remoter more capitalist productions, without an adequate supply of real capital = malinvestment.