China will experience market share erosion in the US and anywhere they sell cheap goods because their currency is bound to rise (the natural consequence of a strong economy). There are other reasons for China’s market share erosion, but this is the main one I was discussing and more relevant to this discussion. China’s goods will become more expensive as its currency strengthens causing less people to buy their goods, therefore further slowing its economy. China perpetuates its own market (in the US and other places it has a competitive advantage of selling cheap goods) by tying the Yuan to a 3% variance to the dollar (last time I checked), artificially depressing the value of the Yuan, and at the same time buying more USD to keep the currency down, here and here. The first link better articulates the real world consequences of what the Chinese are doing and why other Asian banks are careful not to compete.
Because the US dollar is free floating (something that I urge all countries to do), and because China has been propping up demand for it, the interest rates here in the US have been low. Low interest rates mean cheap borrowing/credit. People took that cheap money and created the housing bubble. China diversifies its US holding by buying CDOs made up of these loans, thus providing the basis for the economy we have now.
China’s stock market is in a downturn as noted by the article I posted in my last post and as also evidenced by my stock portfolio that tracks the Chinese market :smack: like the one I have that tracks the Dow Jones. :smack: :smack: (if I hit 12% loss I’ll probably do a post in the Pit or something). China’s market share in the US market and globally will definitely slow and erode when the Yuan rises in price. The falling US dollar means that US exports are cheap, thus again, crowding out same or like goods in the global markets.
It is in China’s best interest to keep or retain their market share, but I’d rather have them do that by being more competitive and adding value (thereby increasing wealth) than by monkeying around in the markets. They’re trying to take the easy (or Authoritarian) way out and I hope it bites them on the ass and teaches them a lesson. The more they monkey around with the economy, the more distortions and dislocations they will create and the more problems and unintended consequences (usually pretty bad ones) they will create in their society.
No, but you get to declare bankruptcy. I just found out that one of my friends did that exactly, but it wasn’t like she purposely spent money. Though, on the other hand, she is now in a better position and will have her debt wiped away in two years, and she still owns her house. China on the other hand will be left holding the bag. Though, they much rather not have the US default, but they will be suffering from the rise in their currency and the shrinking of their markets, not to mention some heavy inflation and ultimately large unemployment. They will probably look back through a weepy tear and see their half-ass attempt to modernize their economy and their society stagnate.
They made their own bed, they should sleep in it. Here’s a thought for them: why not free up the markets and let people choose to do as they please? Oh, but that’s too contrarian for the old communists.
In the long run, and in the nexus where economics meets politics meets sociology, free markets and free people is ultimately desirable. If they let their market cool down, they can focus on heading off wealth-crushing inflation and focusing on the needs of their society, like diversifying the economy away from manufacturing, creating a strong infrastructure, getting the other like 90% (or whatever percentage it is) of their population out of subsistence farming. The state run businesses that are at a loss will shifted to more productive areas. They can stop gas subsidization and encourage conservation, alternative fuel development, increased public transportation and clean up the pollution they toil in. In the long run, another large free market will make a more harmonious global economy.
They’ll seek out other buyers by offering higher interest rates. This will mean the end of cheap money, but it will force people to save and get their individual financial houses in order. This will normalize and stabilize prices, and head off inflation. Foreign banks (as well as people) should have diversified portfolios as a matter of minimizing risk and identifying other hot areas for investment.
See the first two cites in this post. That’s why there has been a flurry of discussion of other countries holding US debt. There is a minority position out there that it was influx of cheap money set by Alan Greenspan that set cheap interest rates, but that does bear out with the facts at hand. I think it was Paul Krugman (who I respect, but don’t always agree with) who popularized this notion, but I’ve been hearing about it since 2005.
Ok, chillax.
Japan was at something like 150% debt to GDP ratio last year (a surprise from the estimated 175 or 180% from the year before.) On top of that, they tried to liquidate/spend their way out by setting the interest rate at like 0%. Clearly, the Japanese market is not the American market, but even the US can’t do that. If it isn’t obvious by now, Japan’s time during their recessionary period has not been well spent.
You said you weren’t seeing a hot economy in the US. True, the US isn’t a hot economy (though relatively stable, which is very attractive). China is the hot economy. They had something like 8.6 or 9.5% growth, they can’t keep that up without a slow down or inflation. Inflation aversion should be China’s (and most country’s) number one goal. But, the trick is not to completely stave off inflation as inflation (often called healthy inflation) is needed for an economy to grow. (too simply put for an otherwise complicated concept). As China’s economy slows down, it allows the US to strengthen. It’s a win-win situation.
There are other ways to fight inflation. China’s example clearly isn’t the best way to do it. In fact, what China is doing with their currency monkey games is exasperating the current situation. IOW, they reap what they sow.