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Janet Yellen Discusses The China Paradox
Janet Yellen, who in mid-November completed a "fact-finding" trip to Hong King and China, provides some insightful observations into the closely tied monetary fates of China, Hong Kong and the US, as well as China's Catch 22 paradox of overcapacity. As Yellen points out, US monetary policy is a critical factor for both Hong Kong and the mainland "both Hong Kong and the mainland are currently pegging to the dollar, they are both to some extent stuck with the policy the Federal Reserve has chosen to promote recovery." In essence, and in confirmation with Zero Hedge's "vassal theory" of the Sino-US relationship, China has a "considerable interest" in the Fed's exit strategy. Yellen demonstrates that while China is forced to look to growing its own internal economy now that the export-led, current account surplus model is over, the transition will require yet more stimulus, thereby further inflaming the asset bubble, spurred by the massive overcapacity already in place in the country, and further pushing the country into a monetary-fiscal zone of disequilibrium. This would be exacerbated by any move to strengthen the Yuan, which is what has to happen for the US to keep inflating its troubles, yet won't happen so long as China continues being in denial about its bubble conditions, thanks to a phenomenal precedent set by none other than the Federal Reserve itself. Yellen won't go so far as admitting it, but all the ingredients for a massive Chinese (and thus, U.S.) crash are now in place.
The problem for China as it struggles to readjust from an export-led economy, is that admitting a need to focus more internally, would suggest even more stimulus is needed to prop up precisely the sectors where immediate job creation is greatest. For China keeping its population employed and happy is critical which is why "given the difficult in winding down the engines of job creation will make a transition toward a less trade-oriented growth strategy" to take place slowly.
Yellen then highlights some of the critical flaws in the economic model and makes a full circle to what Hugh Hendry was discussing yesterday about substantial Chinese overcapacity (and why he took some not so friendly jabs at Jim O'Neill):
To hold down the renminbi’s value in the face of continuing trade surpluses and sizeable capital inflows, China’s central bank has had to buy dollars at a rapid pace. The result is that China’s foreign exchange reserves have now swelled to over $2.25 trillion dollars (see Figure 3). China’s money supply has also increased rapidly. Inflation in China has turned up, and most analysts with whom we met recognized that the renminbi will need to be revalued and monetary policy tightened to avoid inflation. Even though future exchange rate adjustments seem all but inevitable, they are unlikely to resume until at least the middle of 2010 because of lingering concerns about the pace of economic recovery among China’s major trading partners.
Alas, it is dangerous to confuse wishful thinking with reality. And China is more than likely going to need a persistently weak currency even as it struggle with increase price pressures which will demand that the Yuan rate be let loose again.
And, at the very bottom of it all, is the problem which Hendry highlighted so well - massive overcapacity.
Household consumption is already growing at a robust double-digit pace. The problem is that investment is growing at an even faster pace, so the household consumption share is likely to continue to decline. Moreover, the stimulus packages introduced to counter the global recession have had the unfortunate side effect of acting against reform, since the bulk of stimulus was in the form of increased investment, which primarily found its way into the export-oriented and state-owned sectors, or into infrastructure projects that supported these sectors. The consequence is that the stimulus has exacerbated overcapacity in Chinese manufacturing and increased pressure on Chinese firms to export.
Bottom line - China is screwed, and every false move performed by the Fed, whose actions by implication reflect in China's broader monetary policy, will be amplified and make the bubble increasingly worse, as the right move here, which is for China to cut down on its stimulus and to focus on the growth of its own economy, will likely not occur before it is far too late. One should just look to the US to see how eager politicians are to step away from a tenuous and ultimately destructive status quo and proceed to do the right things needed to fix a broken system, which however would result in significant popular revolt and most likely a near-certain loss in any future political elections/referendum. This is precisely why the economic system, from a physical system perspective, is teetering on the balance and is about to break.
Full must read FRBSF Economic Letter.
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This still doesn't change the fact that she's an idiot.
+1,000,000
The first thing I thought when I read the headline was: "Who cares what she thinks? I might as well ask my cat to do differential equations."
+1
I have the answer - she needed a 6-star vacation. Bankers in Asia know how to show you a good time, even for an old rubbery old lady.
was wondering why david bonderman of TPG had to jump in his $70 million Gulfstream jet for an emergency meeting with finance in beijing, last thurday.
her mistress was with John Terry non?
While one can only image his travel to China was for investment business, for the record (we wouldn't want any inaccuracies to appear here, would we?) it's a Falcon 900 jet, of which TPG owns two.
Everyone is waiting for some kid to yell out, "Mao and Uncle Sam aren't wearing any clothes!"
and the only thing worse is when they're naked together, behind closed doors.
David Carradine was going to tattle. Big mistake.
Go to this site to see why you should be investing in Precious Metals.
http://www.youtube.com/watch?v=WcoZDQrIdGU
I am anxiously awaiting the "Murtha Is Dead" thread.
bugs_: Is she gellin'?
nigaz: Like a felon.
I'm assuming you've read In the Jaws of the Dragon and that accepting the CW on China and how what happens there fits into neoclassical economics theory needs to be taken with a grain of salt.
Have not. So someone please elborate.
How does this figure into the china calculus?
GOLD - China's End Game (video):
http://www.brasschecktv.com/page/800.html
If Bernanke were out she'd be on the short list.
I am glad that hendry is there to set all these boys straight: Rodgers, Soros, etc. Anyone who seriously believes that the Chinese "miracle" is going to pull our rabbit out of a hat is severely naive.
It just can't happen.
Where does China purchase these currency reserves? Does this mean that the US is holding $2.25 trillion worth of Renminbi? Are all the reserves in USD or a bunch of different currencies?
Treasuries...they give us back these reserves in exchange for treasuries.
US buys tons of Chinese exports, pays in dollars. Chinese government requires exporters to turn in dollars to China central bank, gives them renminbi in return at government determined exchange rate. Central bank saves some dollars as reserves, gives other dollars over to government investment agencies who use them to buy dollar-denominated assets, buy oil, etc. So Chinese gov gets to completely control value of yuan, and spend whatever US dollars it wants on whatever.
China's currency reserves are from trade surplus (in USD) which are converted to US T bills, Bonds and Notes obviously priced in dollars. The PBoC then distributes Yuan to their people in exchange therefore "maintaining the peg.
As for other currencies in their reserves....
http://www.imf.org/external/np/sta/ir/hkg/eng/curhkg.htm
I resent having to pay for her to traipse off the China. Furthermore, I resent maintaining 12 regional Federal Reserve “banks” all with huge staffs originally conceived as being no more than a one-day rail journey apart so paper check could be readily transported.
How about 7 Fed Governors on conference calls from their home offices?
Or ten treasonous governors that have no problem with broad language:
http://beforeitsnews.com/story/11712/FEMA_Regions_What_Section_Are_You_I...
But who cares! Who dat! Who dat! Where'd you party last night?
http://images.huffingtonpost.com/gen/139362/BOURBON-STREET-NEW-ORLEANS-S...
There is no such thing as overcapacity. There is such a thing as malinvestment, which Federal Reserve policy has created in this country in spades.
The thing about China is that they spend more of their money on investment than they do on consumption, meaning that they will witness an ever increasing amount of goods for ever cheaper prices (priced in gold--real money). Economies built on consumption are like houses built upon the sand. Economies built on capital investment are built upon the bedrock that reaches down to the foundations of the Earth. Ours is the former, theirs is the latter.
They may experience some growing pains as they shift away from supporting the US, but the vast majority of the change will be for the better. Some may lose their jobs, but more will be created, and their vast savings will buy more in the meantime.
+1,000!
Infrastructure expansion/improvement labor for flow from the export manufacture labor market in China as a tenet for them being 'screwed'?
Fear based nonsense came across much more effectively in the 2009 film
'Paranormal Activity'
Hey, did you guys catch Yellen as an extra in "District 9"? She was perfect for the role.
Zero Hedge's comment and conclusion that "China is screwed" is way, way too definitive. A very typically armchair opinion of a western fella reading third hand stuff.
Please remember these facts:
1. China has 800 million poor peasants waiting in the wings to buy stuff that the factories cannot export to the West. Yellen's report fails to mention this very important part of the economy. In the last two years, Beijing has been pushing for the development of its rural economy. Farmers are now seeing real increases in their takehome pay, and are starting to buy stuff like TVs and fridges.
2. The Chinese govt is pushing hard to reduce dependence on exports.
3. China is not involved in any expensive military adventure like the West. Wars are very expensive undertakings.
Once again, comments like this prove that white people should just stick to commenting abt their own stuff.
Too short.
China has indeed a large population requiring little to be turned into consumption mode.
The big issue is that it would be done at the expense of US consumers who are now used to cheap produced chinese goods. The social balance in the US has been built around this supply which warrants domestic rest.
The more the Chinese are going to consume their own production, the more they will endanger US internal peace.
Better for China to start to project its military all around the world to protect supply lines because the US will not like. And the US has guns. Usually, naked people with guns are easy to anger and dont like you point at their nakedness.
Problem with your domestic Chinese consumer argument is that China has 800 million poor peasants. Why are they poor peasants? Because of the consistent and deliberate debasing of the yuan. Have you seen the inflation rates China has incurred in the past decade? They are in the double digits. This is why the Chinese consumer cannot take up the slack of foreign consumer demand. So yes, China is screwed in the short term. For every Yuan they printed the poorer they have made their own citizens. Were the Chinese to allow the Yuan to appreciate then the east-west imbalance would correct. The yuan would rise, inflation would fall and THEN the Chinese consumer could step in and take up the fall in demand from foreigners. The correction phase can last quite some time. However, when the Chinese stop the currency FX games and actually allow their middle class to grow and become wealthier, then consumer spending will increase in China. Also, consider the amount of factory closures that will take place as Chinese exports become radically more expensive for the US consumer. With rising prices in USA, more retailer defaults and closers thus higher unemployment. With that, defaltion grows in China as more factories close. Unfortunately, this has to occur before the world can return to some semblance of a normal functioning economy. As TD says, do politicians have the guts and willpower to do the right thing, which will be so painful in the short term?