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"In economic theory, China's currency should rise in value since it has such a big trade surplus and currency reserves. That would make its goods more expensive and cut the trade surplus. But China's economic growth is highly dependent on exports and investment, with relatively little coming from domestic consumption.

So the Chinese government wants to keep the value of its currency, the yuan, fixed at a rate tied to the US dollar (with a 3% variation allowed). This helps boost foreign investment but makes it more difficult to control inflation. In the long term, China wants to switch the emphasis in its economy to domestic demand. But that will take time - and in the meanwhile the currency reserves could double to reach $2 trillion in a few more years.

[A]Some economists argue that the pattern actually benefits both the US and China. The US gets a cheap and stable source of funding for its trade deficit, allowing the economy to continue to grow as consumers purchase cheap foreign goods - whose low prices keep inflation in check. And China is able to maintain its export-led economic growth, generating jobs for its growing urban population, while continuing to attract foreign investment.

[B]But others argue that it may not be sustainable - and the attempt to unwind these huge imbalances could destabilise the world economy. Brad Setser believes that unless China rapidly revalues its currency, it will face increased pressures on its domestic economy - with over-investment (now approaching 50% of GDP) eventually collapsing, putting pressure on the banking system.

Fred Bergsten of the Institute of International Economics argues that the problems of adjustment - and the huge trade imbalance - will generate growing protectionist pressures in the US and Europe, undermining support for free trade. The IMF and the OECD also see this adjustment as the central problem of the world economy.

And unless it is tackled, the prospects for future world economic growth might well be derailed."
Source: http://news.bbc.co.uk/2/hi/business/6106280.stm


I couldn't had worded my thoughts on the economic situation any better, and sadly I am far more convinced that scenario [B] is more likely to occur. As the U.S. Dollar tanks so does the pegged Chinese RMB exascerbating inflation concerns

I can't even begin to express how poor the lending standards likely are in China, and the international relationship between both nations is "fascinating." As bad as the current sub-prime meltdown in the U.S. is, the lending & borrowing practices in mainland China seem reminscent of 1980's Japan and have likely been worse. Both nations have been financing each others activities with bad debt. In 2006, it was estimated that the Bank of China held over $900B in NPL(non-performing loans) greater than their currency reserves. The ratio of NPL's has lessened in recent years due to increased foreign investments, lending and loan repurchases (good money chasing after bad). The actual amount of NPLs is likely to accelerate in coming years.

    If the Bank of China choses to raise interest rates to combat inflation it will make existing loans more difficult to repay, make exports more expensive, impairing their export-based economy and thus likely increasing the amount of NPL's among businesses(this is the likely scenario). On the other hand, if the Bank of China choses to leave interest rates unchanged this would eventually lead to historically high inflation rates and would undermine their goal of domestic growth. 

 




[1]* Sources:
http://www.ft.com/cms/s/0/337447e4-da70-11da-aa09-0000779e2340.html
http://seekingalpha.com/article/65851-chinese-banks-non-performing-loans-rising
http://www.theaustralian.news.com.au/story/0,20867,19067992-36375,00.html

 

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The trade relationship between the US and China can be summarized in one brief formula: we pretend to pay them, and they pretend to believe us.
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That is a different topic...

I should have entitled this post: Economic Struggle for Resources

As large as the current credit crisis is. The greatest economic threat facing the U.S. in the world is still and currently is... China. Their economic growth over the past 20+ years has finally reached a level that is threatening developed nations and their claims for natural resources. 

China has been buying raw materials [ especially industrial metals such as iron ore, copper] at a clip higher than their share of world population, similar to the oil consumption of the U.S.

   With 6.5 billion human beings the sad reality is we all can't eat beef and use toilets filled with fresh water unless we make great progress technologically.

If you read the following article from the Council of Foreign Relations you will find that China's interference in global affairs is beginning to alarm policy makers. Their global footprint of controlling precious resources is disturbing the U.S. and Europe by maintaining their presence in foreign matters.



China, Africa, and Oil 

"As global demand for energy continues to rise, major players like the United States, European Union (EU), and Japan are facing a new competitor in the race to secure long-term energy supplies: China. With its 2006 GDP growth hitting 10.7 percent, China is intent on getting the resources needed to sustain its soaring economy, and is taking its quest to lock down sources of oil and other necessary raw materials across the globe. With the Middle East mired in long-term instability, China has turned toward another major oil producing region whose risks and challenges have caused it to be overlooked by much of the rest of the world: Africa.

How extensive are China's oil interests in Africa?

China's voracious demand for energy to feed its booming economy has led it to seek oil supplies from African countries including Sudan, Chad, Nigeria, Angola, Algeria, Gabon, Equatorial Guinea, and the Republic of Congo. The U.S. Energy Information Administration says China accounted for 40 percent of total growth in global demand for oil in the last four years; in 2003, it surpassed Japan as the world's second-largest oil consumer, after the United States...."

Source: http://www.cfr.org/publication/9557/ 

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Hey thanks for the lazy comment. I hope you laughed. Here is another laugh. I had FXP at plus 20 yesterday, I kind of followed your lead to watch it and earn some points. Too bad I couldn't get out yesterday. 

$1 trillion in non-performing loans? No government could ever oversee the population China has amassed. It is almost scary to think that the county, even with its 1 child mandate, keep growing at 12.79 million ( yearly average ).

Consumers In China Deal With Inflation Their Own Way. Forbes.com Nov.15 

 "Beyond the notoriously expensive pork, Chinese consumers are increasingly upset about the high price of cooking oil. A stampede to take advantage of a 20% discount on a promotional jug of cooking oil going for 39.9 yuan ($5.39) at a branch of French hypermarketCarrefour (other-otc: CRERF - news people ) in Chongqing on Saturday resulted in three deaths and 31 injuries. Hoarding of peanut oil, whose retail price now exceeds 100 yuan ($13.51)for a 5-liter bottle, making it is the most expensive among the commonly used cooking oils in China, is particularly severe." 

If this can happened for cooking oil, I don't want to see what happens when it really really gets bad.  And yes I know I know. I am a lazy less computer savvy person than you.

Thanks for the links on China 

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