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A Tale Of Two Exporters
China and Germany: Twin Export Bullies
June 17, 2010
By John R. Taylor, Jr.
Chief Investment Officer
Over the past few years, many analysts have noted the enormous growth of the Chinese manufacturing and export machine. The Chinese economy has absorbed an increasing percentage of the global supply of industrial raw materials and the growth of its own internal steel production has dwarfed that of the rest of the world. China has become an export powerhouse, pushing the country into the modern world at a very rapid pace. Exports of finished manufactured products have expanded rapidly and the Chinese current account balance has ballooned, allowing the country to accumulate a $2.5 trillion hoard of currency reserves. As China can produce the most technically complex goods at a minor fraction of the cost of producing the same things in the United States or in Europe, its export surge has spread deflation into the rest of the developed world. As China grows, most of the G-10 suffers. At the same time, the recycling of global reserves has meant an explosion in global liquidity and a drop in interest rates. The US and European authorities are not happy as both countries are worried about their own manufacturing base and the global financial imbalances that China’s strategy has created.
Although the Chinese situation is widely regarded as a global problem with many applying pressure on the Chinese state capitalists, the bigger problem actually lies within Europe as Germany occupies much the same position within Europe that China occupies in the global economy. Because of the constricted corset of the euro, this problem is totally contained within the Eurozone. The countries seeing their manufacturing bases hollowed out and their current accounts collapsing are the fellow members of the Eurozone. Although Germany can not see the explosive growth in their currency reserves, instead its banks are seeing an explosive growth in their holdings of other Eurozone government debt securities. The debt mountain is not just that issued by the PIIGS (Portugal, Ireland, Italy, Greece, and Spain), but includes the debt of all the countries bound within the euro. These holdings are more dangerous than China’s holdings of dollars because the European banks have
liabilities against these dubious assets, while the Chinese reserve hoard is free of those liabilities – marking its value down by 50% wouldn’t really hurt anyone, but even a small haircut in Europe would precipitate a system-wide banking crisis.
Within the current global economic structure, the Chinese, and those that are buying their exports, have multiple levers that they can manipulate to alleviate the Chinese dominance, but within Europe there are either no levers available or the German government and populace seem to have ruled them out. China is trying to expand its domestic economy by helping its consumers by building more infrastructure and by building more adequate housing for its people. Domestically, it has been expansive, but Germany has done the opposite. First, it passed a constitutional law saying that the government accounts must be in balance and then recently it tightened fiscal policy to offset the cost the recent euro rescue plan. These moves are deflationary. Chinese labor is beginning to demand a higher pay level that would represent an inflation adjustment in the cost of Chinese exports and it seems that the authorities, as good Communists should, are looking kindly upon this movement. Germany’s rigid labor structure is pushing wage increases lower. The EU does not allow restrictive tariffs against German goods, but the US and Europe can certainly threaten the Chinese with them. Finally the Eurozone does not allow currency devaluations or revaluations, something that would definitely clear the air. With all the safety valves, the Chinese issue will probably not prove fatal to the world economy, but the rigidities of Europe will probably upset the global applecart in the year ahead.
h/t Teddy KGB
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"while the Chinese reserve hoard is free of those liabilities – marking its value down by 50% wouldn’t really hurt anyone, but even a small haircut in Europe would precipitate a system-wide banking crisis"
I suspect the Chinese would have something to say about that as last I checked they were classified as assets not liabilities
"Exports of finished manufactured products have expanded rapidly and the Chinese current account balance has ballooned, allowing the country to accumulate a $2.5 trillion hoard of currency reserves".
The question is, is this THEIR currency?.Why would they print this much in their currency?.........
Or, are they US,Euro's,etc?.
If not the Yuan, their sitting on a pile of steaming dodoo.
A lot of their reserves are actually in USD, but I think you missed the point.
I believe what happens with their exports is their people are paid in US dollars for exports to the USA, and then the government prints RMB and gives it to the people in exchange for dollars. Perhaps a good future opportunity for the USA to hyperinflate that reserve away.
So, China prints money and gets word dominance or so for it??
How did that work out in Japan 20 years ago?
The oh so terrible deflation has happened on a relative basis since 1971 in Germany; the Mark lost less value then most other fiat currencies. The cost pressure sucks but that is nothing new.
For net-savers mild deflation is not that bad, under a gold-standard it was normal.
As far as I know, US bonds are a liability of the US Government; US-Dollar cash is a liability of the Federal Reserve. What debt is more sub-prime remains to be seen.
In a worst-case scenario the foreign savings of both countries will be devalued, be it by partial default or currency devaluation.
There are rumours of a new Mark that do not go away; if those rumours would be false, why does no official come forward and denies them credibly?
The German labour structure is rigid in the unionized area; outside of that is not a lot of regulation.
If something really needs to be done that can happen with surprising speed in Germany; bank bailout an rescue package for Southern Europe 1.0 and 2.0 were decided quite fast.
China has already won. We just don't know it yet. And it wasn't because they just printed money, as you said. They're just less corrupt. Their bankers, for example, whose banks are larger than ours, make salaries with fewer zeros on the end.
They are also the largest gold producers in the world now, and their government actually advertises and encourages citizens to own gold and silver. It almost brings a tear to my eye.
I don't know about China already having won thesapein. China has a lot of problems:
-- lots of pollution
-- lots more young single men than women
-- dictatorships are typically unstable
Someone once said: "China will get old before they get rich."
...
They do have that gold policy right though.
Pollution? Have you seen our gulf lately? I do like that they're building nuclear plants and wish we'd get real about nuclear, too.
Single men? in China might be more of a problem for us. They've got more to prove as rice-winners and if there is ever a war...
Dictatorship? That's just a poor label we use to stigmatize our enemies. It's about as bad as fighting for American democracy. Isn't it true that the US imprisons more of its own people than any other nation? We tell ourselves we live in a "free country," until the SWAT team busts in, shoots your dogs, and kills anyone who defends themselves from such pillaging thugs, all because your neighbors DICTATE that if you grow your own medicine you should have your life utterly destroyed.
and if there is ever a war...
In a country with no social security, sons are your primary source of support when you're too old to work. If China ended up at war with anyone larger than the Grand Duchy of Fenwick, the rioters would all be old farts terrified at losing their old age pensions.
Right, they should totally trade their personal savings for our rad social "security" because it works so awesomatically.
The implication here is that they will be competing for customers.
In a Euro centric model the EU would want to limit Chinese imports...
"The US....worried about their own manufacturing base"
And why was NAFTA shoved down America's throat then? GHWB could not get it to pass so he threw the '92 election ("it's the economy stupid") and mandated that Billy C do it (GHWB says that Billy C reminds him of his son W., Billy vacations with the Bushes...he is in la familia). This of course after Billy promised us Health Care on his campaign. He also ran on a platform of "change". hMMM....
And why does anyone take Gore seriously???
Good question.
Hahaha! Good question indeed.
But for the time being, Germany bolsters its position curtesy of the lower EUR.
What BULLSHIT! A 2-3% import tax vs 30% income tax in places like Michigan. No wonder manufacturing was chased out only to benefit corporations and those with an early inkling.
Also, China can demand all they damn want. Their demand is subjetc to ours ofcourse.
except we owe them a lot of money and they owe us a middle finger.
china is overhyped..who has any info about the health of the banking system in China or what is going on with bank balance sheets..the credit growth in 2009-and so far in 10 was kinda scary...plus excluding may figures which came out of nowhere, china is on its way to becoming a trade deficit country..china with its manufactured GDP numbers will slow down dramatically over the next 6 months..domestic demand will not carry them this year..
China is over-hyped? I guess that depends on where you live. Here in the US, we have a huge debt that might not be serviced, continual deficit spending, a large trading deficit, negative growth, no one saves, gold is a myth, public schools are a joke, and need I go on? Where do you live that beats China?
I was not comparing to US buddy..but one thing I can say is China will have all those problems very soon..sooner than you expect..with 1.3-1.5bn population, we will see huge budget deficits soon...you dont think social security will be a problem in China...unemployment, low wages are not current problems..2.5 trillion with that population is pretty much peanuts...
Lest we forget, the U S Mfg base(blue collar), was chased out by none other than the U S Gv't.
They could have stopped it, but then that would have been in direct conflict with their goals.( Globalization, at US workers expense).
Give China some credit, too. They took our dated manufacturing and created something beyond what we remember. It's really pretty kewl, almost like magic to us Americans, the way generic robotic factories can be customized to make just about anything you design. Got a new iPad design? Send it to China. They know how to actually build new things. We can barely keep our old stuff from falling apart and instead like to throw more money at stuff, then lawyers, then counselors and therapists, and maybe some soldiers too, with lots of middlemen in between, none of which actually do anything productive or add value along the way.
Another excellent article by Martin Hutchinson about how the coming Chinese and Indian cost inflation will affect us and our living standards in the next 6 to 12 months:
http://www.prudentbear.com/index.php/thebearslairview?art_id=10391
Thanks for the Hutchinson link.
Shhh. Don't talk about the rising wages in China. Let's just keep talking about inflation vs deflation in an isolated market.
What is with this notion that nothing bad can ever happen to the Chinese economy? Government interference in the economy always ends badly. And China is no different. They are going to crash and burn, they've tried to mask the export pain with a massive binge in construction and real estate spending. People just can't afford that shit. Their investment decisions are to create overcapacity and overproduction in everything. Return on Investment be damned, just build, build, build.
The last time I was there, construction quality was pathetic. 3-year-old buildings literally falling apart on the inside. I think it's the whole communist thing, where you get a paycheck whether you do a bad or good job, so why not just hangdog it? In any case, Chinese citizens have bought investment properties there, just as has happened in the USA. Unless quality has improved, buying investment properties is insanity there. By the time it's worth anything more, it's dilapidated.
I'd be interested to hear anyone else's take on that - it's been over a decade since I was there.
We're just talking relative to the really bad nations, like the US.
Take your example. They've admitted to overly inflating their commercial real estate market and are now taking step to deflate it, so they say. Important to note, they actually zeroed in on the problem and stated it publicly. Most importantly though is the incredible lack of debt. We borrowed to stimulate. They actually still have reserves even after inflating both of our economies.
Myths
China is Cheap - Nah, you just pay for corrupt officials, IP theft, increased competition etc instead.
Germany is fighting for financial sanity - who is going to buy the BMW's then?
Yes, fully automated factories are wonderful. Don't know how the employ people but I guess they're wonderful???
On a rather simplistic, but probably overlooked note, there is a simple analouge.
Germany, for all intents and purposes IS the Industrial revolution. Most of the things that dominate came out of there. I'm talking of true history, not the US version. Germany is the Old man. Creaky, stiff and in-flexible. Perfectionist, but old.
China, youthful (20 years old? tops?), can turn on a dime, will steal with nary a blink (youngsters have weaker moral fiber, it takes time to develop), can run the extra mile, tireless.
German hegemony, of which the US hegemony was a mere extension, is bound to die.
But China grew too fast, too soon.
I think an unknown, silent lurker will emerge. Maybe I even know who!
Teaser teaser.
But let us deal with the on-coming war first, Germany is no going to go quietly.
Once the dust settles, it'll all be clear.
The answers are always between the lines. ;-)
ORI
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