China devalues US buying power by 30%, Protects US Treasury Holdings

Jack H Barnes's picture

The
trade imbalance between the US and China, a hot button between the
nations for the last decade or so, is finally going to start to
stabilize in the summer of 2011.  However, it is doing so with a de
facto devaluation of the US dollar and its buying power.  The average
American will see a spike in the price of everything from their favorite
jeans and T-shirts, to the cost of some electronics.

The Chinese have decided to devalue the US dollar’s buying power,
without devaluing the US Treasury holdings they hold.  It is an elegant
solution to their issues.  It will be interesting to see if they can
pull it off, while they try to prop up the European Sovereign debt
markets at the same time.

The Chinese are attempting, successfully so far, to introduce the
Yuan as a global currency in which to settle international trade.  China
is pumping into its own internal currency markets so much liquidity,
they need an export market to develop for the Yuan or their own internal
markets will overheat.

So China is going to start offering Yuan based savings accounts,
to westerners as a vehicle in which to park capital.  While this is a
test case only, one might expect Yuan based accounts to be offered
around the world sooner rather than later.

If western investors take to Yuan based cash accounts as a way to try
and gain an increase in value, the transition will drive the western
banks to be more proactive in adding convertibility into their systems. 
To start, they are offering these Yuan accounts at three US based branches.

The US Dollar devaluation will come in the form of an increase in the prices of all products.  In reality it will represent the uniform cost push effects of inflation
The US can expect it on all Chinese based products of one form or
another.  The timing of the change is set to arrive with the products on
the US shores in the summer of 2011.

“They’re going to go home with 35 percent less product
than for the same dollars as last year,” particularly for fur coats and
cotton sportswear, said Bennett Model, chief executive of Cassin, a
Manhattan-based line of designer clothing. “The consumer will definitely
see the price rise.”

China has no choice at this stage, but to pass on the cost of raw
inflation to its customers.  The era of cheap Chinese imports is over. 
The real impacts of higher commodity costs are going to push into the
economy at different levels.

The
weather impact on Australia has not hit the Chinese manufacturing
capacity yet, but you can expect that diesel will increase significantly
in the coming weeks, as China draws upon the world’s spare capacity to
fuel their economy this spring.

The US had warned China to adjust its currency peg
with the US, or suffer the consequences.  Those consequences are now
being going to be return to the US shores as expensive imports of
dubious quality.

However, not all nations or economist agree with the stance the US is
taking.  Robert Mundell, Nobel Prize winning economist, and the
proverbial father of the Euro, feels that the US is pushing China too
hard in this regard.

Robert Mundell, Professor of Economics, Columbia
University, said: “It’s a mistake to have China change the exchange
rate. This is a bad way of changing something.

“A big appreciation in China would create deflation, aggravate
poverty in the western part of the country, in the rural areas. It would
be something that would in the long run come back to haunt China.”

Channel News Asia

China has no choice but to push the cost of the rising raw commodity
prices onto their end consumers.  The dirty secret of the runaway
commodity bull market that started in the summer of 2010 is how much
real inflation is raging inside of the Chinese economy in 2011.

“Four percent, China can bear it — beyond 5 percent,
people will complain a lot,” said Huo Jianguo, president of the Chinese
Academy of International Trade and Economic Cooperation here.

The Chinese people are reported to be experiencing painful levels of
internal inflation on food staples.  The hard reality is that in the
global trade in fresh produce, requires that energy inflation is quickly
pushed through to food prices.  The Chinese government has reacted to
these increases by rolling out Nixon like price caps on staples.

“Given that food prices are spearheading immediate
inflationary pressures, supply-side measures should be more effective
than rate hikes,” Qu Hongbin, the co-head of Asian economics research at
the international bank HSBC, “There’s no need to panic, as Beijing has
more than enough effective policy options to combat inflation.”

The real mark up of inflation will be higher, and across the board
for buyers of Chinese products in the spring 2011 for the next Christmas
buying season.  This is going to introduce expectations of inflation in
the US by the spring of 2012.

Victor Fung, the group chairman of Li & Fung in Hong
Kong, a 35,000-employee trading company that supplies most of the
world’s big retailers with Asian goods, said that contracts signed late
last year would produce a jump of 10 to 20 percent in the import prices
of consumer goods arriving at American ports by the second quarter of
this year.

“By the middle of this year, you’ll see considerable diversion of
trade away from China,” which will start to bring down the United States
trade deficit with China, Mr. Fung said in an interview.

New York Times

The Chinese – US bilateral trade will show signs of leveling at a new
lower rate, just as the European mess grows worse.  This is the
Catch-22 China now finds itself in.  Europe has grown into China’s most
important export market, just as the economy of Europe shudders from the
fiscal and monetary policies of the area.  China can handle the market
adjustment to one of its major export markets, but can it handle both?

The Chinese could find themselves in a situation in 2012 where their
largest two export markets have radically changed on them.  This leaves
their government open to domestic issues concerning the support they are
providing to bankrupt western nations.

The
US purchasers for organizations like Wal-Mart are international
mercenaries.  They will look to relocate their international low margin
purchases to nations like Vietnam, the Philippines, and Africa, and to
the Mexicali factories, once again.

The Chinese are going to find themselves priced out of the low end of
the cheap product market.  While their factories are the largest in the
world and they employ armies of workers, the scale of large numbers is
starting to work against the Chinese as a whole.

The increase in prices from most if not all world sources, will drive
new changes to the US business models in the near future.  It will be
interesting to see where China and its exports are in that make up.

Confessions of a Macro Contrarian www.jackhbarnes.com

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Lotta B. Essen's picture

Hmmmm... out of a job? Learn to make T-shirts, knick nacks, and toys with lead paint. Sell them locally for cheaper than the Chinese imports. 

Cheap American knockoffs of cheap Chinese knockoffs.

no2foreclosures's picture

Jack:

While what you said is true, the reality on the ground is a bit different:

"China has no choice but to push the cost of the rising raw commodity prices onto their end consumers."

China is stuck between the proverbial rock (letting their yuan appreciate by not printing zillions of newly minted yuan to sop up the billions of USD that they have accumulated through trade imbalances) and a hard crash (losing their razor-thin profit margins if the yuan does appreciate by more than 7-10% and thereby decimate a lot of their manufacturers and exporters).

China is going to do everything she can to NOT pass on those rises in commodity inflation through the export market with the same vigorous stance as China is following the USD falling off the financial and economic cliff.

In the end analysis, the cause of both commodity inflation and the situation of the yuan is due to the United States pissing on its currency by printing out zillions of them at a single key stroke.

Orwell was right's picture

My money is on social unrest in the US.   The average US citizen is spoiled, has high unrealistic expectations, and suffers a too short attention span and complete intolerance for solutions that require more than 3 months start-to-finish.    We've spent the the last 35+ years getting rid of manufacturing.....a problem that can't be fixed quickly no matter how much we might want to.    Big corporations are firmly in control of the election process....and both parties insist on arguing over silly social issues and pursuing the wrong problems.           

sharonsj's picture

We already have two wars going and it's not benefitting anyone except the military industrial complex (and their lackeys in Congress who get kickbacks and cushy jobs when they leave).  All it gets the average soldier is disabled, dead, or screwed for a small amount of pay.  The best money goes to the private contractors and I don't see them passing on the money unless they're buying a bigger yacht or a $10,000 shower curtain.

Guy Fawkes Mulder's picture

My money is on war.

And also on social unrest.

DisparityFlux's picture

Can China, with its massive and diverse population, develop a broad economically viable continuum of labor categories, while the US devolves into three predominant categories -- impoverished lower class service laborers, tax burdened middle class bureaucrats and technocrats, and elitist upper class financiers and corprocrats?

The US government and corporations such as Wal-Mart, Apple, Boeing, Caterpillar and GE think so.

Will China exhaust its supply of cheap labor -- defined as work not being compensated at a level to meet living costs -- before the US reaches its capacity to support the underemployed?

Global markets and US finances say no.

Which occurs first, social unrest in China due to inflation or social unrest in the US
due to inflation?

The people will decide.

AnAnonymous's picture

The US government and corporations such as Wal-Mart, Apple, Boeing, Caterpillar and GE think so.

 

All these corporations are in China for one reason: competiting over chinese manpower to prevent the Chinese from developping a chinese version of those corporations.

That is why they are in China: they do not want to compete with world scale chinese corporations.

The US government, by the way, draws a lot of its power from US corporations,  and  does not want it either. 

Drag Racer's picture

good, I am sick of China's crap product. I see it as a temp. slam to purchasing power but will give US manufacturing a boost due to the ability to be more competitive. This can help employment in actually making stuff so purchasing power will catch up and pass current levels. Fixed incomers (SS recips) will see a long term bite in price but possible get better products that last longer. Hope they last long enough for it to make a difference...

 

Anyway, Ben shut those fukn printers down now. We need no more flation...

AnAnonymous's picture

Man made  manufacturing no longer has a place in the US.

grunk's picture

Inflation as a foreign policy tool/weapon.

Hillary and the Ben Bernank are evil geniuses.

It works as long as you are the reserve currency.

Reese Bobby's picture

You make some good points but if you lived in China you would be hanging by your thumbs with a cattle prod up your ass, indefinitely.  Which gives pieces of crap like Hu a great deal of spin control.  Hey, let's throw him another fancy dinner!

Logans_Run's picture

Sovereign default cures all evils, including involuntary devaluation! Fuck em!

JW n FL's picture

gettum Jackie!

Thanks for the read...