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Whither China's Vassal State
2010 will be a year of major transformations, punctuated by the following key escalating divergence: i) on one hand, the ongoing contraction of the US consumer will accelerate, because even as the stock market ramps ever higher (and on ever decreasing trade volume a 2,000 level on the S&P while completely incredulous, is attainable, but will benefit only a select few insiders who continue selling their stock at ridiculous valuations), household wealth will at best stagnate (as a reminder, an increase in interest rates "withdraws" much more household net worth, due to implied house price reduction, than any comparable boost to the S&P can offset), ii) on the other hand, China, which is faced with the ticking timebomb of continuing the status quo and hoping that US consumers can keep growing the global economy, or alternatively, looking inward at its own consumer class, and shifting away from its historical export-led model. The one unavoidable side effect of this prominent departure would be a renminbi appreciation, and a logical drop in the US currency, once the US-China peg if lifted (a theme opposed recently by SocGen's Albert Edwards, who sees the inverse as likely occurring). The main question for 2010 and beyond is whether this will be a gradual decline or a disorderly drop. And behind the scenes of all the bickering, jawboning and posturing, this is precisely what high level officials from both the US and China are currently negotiating. This will be one of the major themes that defines the next decade. Another phrase to describe this process is the gradual drift of US into a nation that is aware it is no longer the primary economic dynamo of global growth as China eagerly steps in to fill that spot.
Looking at the aftermath of the financial crisis, the two major consequences that will define US economic trends for an extended period of time, are the increasingly more frugal US consumer, whose savings rate is likely to increase gradually to the long-term low double digit average, and an ongoing outflow from equities into safer assets such as municipals, bonds and loans, as the maturing baby-boomers finds the volatility of the engineered equity market far too risky as they enter retirement age.
So with US consumption-led growth entering its twilight days, courtesy of assets that simply do not provide the kinds of returns that allowed for a savings-free lifestyle, what does this mean for Asia, and China in particular? Bank of America provides a good and succinct overview of the major historical themes that have defined Asian economics, and what the next decade will likely bring.
The essence of the Asian development strategy is to build manufacturing capacity for global demand. High savings rates allowed the needed investment in plants and infrastructure to be financed domestically. This strategy was pioneered by Japan in the 1950s and 60s, copied by the Asian “Tigers” (Hong Kong, Korea, Singapore, and Taiwan) in the 70s and 80s, and by a host of other Asian countries in the 80s and 90s. What changed the game was China’s adoption of the same strategy. Exports have increased nearly sixfold since China joined the World Trade Organization (WTO) in 2001. This had a profound impact on the global economy – but it had an even more profound impact on the China’s own economy and labor market. We estimate that 150 million Chinese workers joined the global labor force and began producing internationally traded goods. (As a contrast, the US labor force is 154 million people.)
The integration of China’s vast workforce into the global economy is what tipped the balance. The transfer of jobs and production from the US, where personal and corporate savings rates were low, to China, where savings rates were high, gave rise to huge imbalances. Within a few years after WTO entry, China’s current account surplus became the world’s largest, mirrored by an even larger US deficit.
Currency appreciation would have reduced wages, profits, and the flow of savings, but China was unwilling to allow market forces to play out. Thus, thePBoC (China’s central bank) intervened in unprecedented amounts, and the vast flow of Chinese savings was channeled abroad in the form of foreign exchange reserves – mostly short-duration government debt and bank deposits. Essentially, China was financing its own exports by purchasing short-term debt. The bulk ofthat found its way into US markets, keeping interest rates low and setting the stage for the housing bubble.
And herein lies the rub:
The financial crisis delivered a clear verdict, in our view, on the limits to the Asian growth model. It no longer makes sense to pursue double-digit growth by lending cheaply to the US consumer.
Yet change would require less reserve accumulation or – put another way – allowing the currency to appreciate against the US dollar, to which it is now effectively pegged. China needs to manage this “exit” carefully. Moving too fast risks a dollar crisis, with a disorderly drop in the US dollar and a spike in US bond yields. Moving too slow risks a boom-bust cycle in China, with capital inflows and strong monetary growth rates putting upward pressure on asset prices and inflation.
As noted earlier, the transitioning from the status quo, which worked for many years, but is now no longer relevant for the PBoC, will be likely even more critical than Bernanke's decision on when to finally begin raising rates. Because while the latter is mostly concerned with asset-price inflation (and stoking it every chance he gets), the Chinese decision will determine not only interest-rate policy for the US for decades to come, but will decide how soon the US should prepare to accept the consolation prize of first runner up in the global economic leader category. While on an absolute basis the US Economy is still a clear outlier, the rate of growth exhibited by China makes it a virtual guarantee that the days for US economic hegemony are numbered (even more so with GDP determination which is whatever the Central Committee says it is). The only open question is when will China decide it is finally time to shift away from the export-led growth model to one which prefers its own consumers as the source of growth. This transition will likely be of historical importance: just as the inception of the US vassal relationship with China lead to a historic and unprecedented boom in household net worth, doubling to $60 trillion in the span of a decade, so shall the unwind have a comparable impact to the downside.
It is merely this moment that Bernanke and the administration are doing all they can to prolong as much as possible. Alas it may be too late, as China seems to have finally realized that in the global prisoner's dilemma game, it has taken the constant US defections for far too long enough. And with the benefits of perpetuating the charade at this point outweighed by the detriments, 2010 could just be the year when China decides it has had enough.
For much more observations on the US-China relationship, and what lies in store for both the dollar and the renminbi, below is the most recent China FX roadmap analysis from BofA.
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The primary relationship of Islam to China is that the Islamic world gives the investment bankers an enemy to corral the masses into patriotic subservience and China gives the international bankers a place to transfer their money and power. These are the popular stories of 2009--the so-called rising threat from Israel’s enemies in the Middle East and the rising legitimacy of the Beijing government.
Don't confuse the politics with the religion. Islam has certainly brought a lot more than just the zero. Eye surgery, lenses, quarantining, domes, astrology, arts etc. Whilst Europe plunged deep into the dark ages, the Islamic Empire was thriving. Take a look at Cordoba for instance.
BTW, although it was heavily corrupted towards the end, it did last over 700 years. Did it do it by force? That's disputable but I doubt there are any empires without blood on their hands.
http://en.wikipedia.org/wiki/Ottoman_Empire
Perhaps you should do some further study. The Islamic / Caliphate gained vast knowledge from the Library at Alexandria and it was the Ptolmaic Empire under Ptolomy that true Muslim knowledge was derived from. In those days the East had still very much western tradition until the Arab Caliphates using a religious cover set out to gain wealth , knowledge and power the old fashioned way... Plunder!!
Really? Didn't the library burn down 400 years before Islam? Again all I'm trying to do is distinguish the religion from the politics and Islam from the Arabs (less than 20% of Muslims are Arabs). Besides, lord only knows what abominations "Christians" have brought.
Yes it was burned ... but twice. Check the dates. The Caliphate gathered the books , still existing , and then burned the structure.. politics. I'm Not Christian so I don't defend them either, but when push comes to shove I'm a western blood , so my alliance falls there.
Thanks, I'll check but my point is clear. Hitler was no more Catholic than Saddam Hussein was Muslim or Zionists being Jewish in that matter.
I'm not sure were this is going , Hitler was endorsed by the Catholic Church , never was he a member his cause was in other places. Saddam was a clever user of his culture , maybe not a text book Muslim but nevertheless he did command and send his Muslims into battle the result is the same... power. The Zionist are the result of 1500 years of Christian and Hebrew doctrine under the same book cover.
Both wrong, check out Jericho, where modern civilization got its defensive tactics as well as religious rituals.
Remember to inform the ignorant that Alexandria was the nominal center of Christianity before Christianity was stolen and perverted by Rome.
Don't confuse the Ottomans and modern day secular Turks with the Islamic thugs led by the likes of Bin Laden. Islam needs to come out of the Dark ages, but that is not going to happen.
"Islam is still a religion founded in murder and the breeding of ignorance". Something like... the Roman Catholic Church!
Christians are just much more experienced at it, they had a 700 year headstart.
Hey Zina
We have something we can agree on. Good on you !
Hindu Indian scholars discovered zero.
It is far likely to be all over for the US first, the difference is that the US is also more likely to literally breakup in the coming revolution.
Hopefully this can be done faster to China than it has been done to Japan, preferably within a generation.
China simply is a house built on more cards; their inevitable collapse should be hastened in every way possible.
China is not a house of cards, the US is. The US economy collapsed. China's economy did not even with shrinking exports. The chinese still live far better than even 20 years ago. By the way those chinese migrants actually have families to go to. They have farms in the countryside. Whereas the poor american has nowhere to go. The revolution will occur oh yeah, but in america not china.
zero came from India, read up on your fact, gold-bugs.
US is China's vassal state? Wait -- I thought that the world wide Jewish bank conspiracy was in charge of the whole world?
I wish Zerohedge would make up its mind as to who is the new overlord of the world.
Incidentally, if this was 1987, would you be printing the same thing about Japan? "Oh if only they will unleash that inner domestic demand, they will crush us!"
Quick, clear delta city before Yoshida-San gets here.
+1
Looks like other Anon's that review these message boards find the hysteria amusing.
USA (S is for Suzerain)
"It no longer makes sense to pursue double-digit growth by lending cheaply to the US consumer."
I see no evidence to support this claim. China will continue the same policy that has turned itself from a backward third world country to a superpower in just 15 years, as long as it continues to enjoy a large trade surplus, which it still does.
They still are a backward-thinking third world country and always will be one.
Hopefully there's some willingness from the First World to force their hand.
The First world is bankrupt whereas china is growing, that is the difference. The chinese were literally all peasants a few decades ago, whereas the first worlders were quite wealthy. You think the first worlders are going to take lightly to becoming peasants? Once the dollar/pound totally collapses. The Euro will disintegrate as well. China survived the GLF and the CR it is not going anywhere.
Without stealing technology, selling inferior junk (with a life-span of a fruit fly), without Chinese Wallmart, and the American consumer there would be no "modern day" China.
The Communist Fascists shamelessly sucked up to the U.S. and now they dare lecture America....
China's fatal flaw is that it is not a democracy. Free markets require Freedom.
The U.S. and the rest of the West will be over this mess far sooner than China can dictate its way to revolution-free future.
The chinese are only using you americans for tech transfers and technical expertise. Once the Chinese are finished with you they will let your currency collapse, and let you have fun with your riots and tea parties. LOL
The US is a democracy huh? Care to share this "democracy" with the natives?
Thee free market is a myth. A "socialist" military is required to preserve any nation.
That is why the west is collapsing, whereas china is still growing lol.
Oh ye of little faith. This too shall pass. Humans have been protected from their suicidal instincts by their creators who unseen and largely unknown have kept the species alive from its beginnings as the offspring of simians and aliens. Every human advancement has been the gift of the creators who are providing the engineering knowledge of cold fusion as we speak under the supposed auspices of the U.S. Navy. Worry not. The seed of our destruction is not rooted in earth's soil but in the will of the creators.
BEIJING (Reuters) - Beijing will not relax its efforts to sell Chinese products overseas in 2010 and seek a bigger share in the global market, China's vice trade minister said on Sunday.
China
China, which may have replaced Germany to be the world's largest exporter in 2009, is a "big trading nation" but not yet a "powerful trading nation," vice commerce Minister Zhong Shan said.
"China's exports in 2010 will grow, and there's no doubt about that," Zhong said, declining to provide detailed forecasts.
China's exports were hit hard by the global financial turmoil, falling 18.8 percent in the first 11 months from a year earlier.
But the market share for Chinese products has increased in 2009 as sales from other countries have fallen even more deeply, Zhong told a forum at the University of International Business and Economics in Beijing.
Other countries have blamed China's unofficial policy of repegging the yuan to the dollar since the summer of 2008 for making its products artificially competitive.
China will feel pressure on its yuan policy but will maintain "basic stability" Zhong said, in a reiteration of long-standing government policy.
He said export growth is vital for China to drive economic growth and create jobs at home.
For example, Zhong said exporting 30 million shirts benefits the Chinese economy more than exporting one Boeing 747, referring to a domestic debate over how much China should support existing labor-intensive export industries versus how much it should move up the value chain.
"Exporting 30 million shirts means we can create jobs for 10,000 people," Zhong said. "With the 10,000 people employed, their families, or 30,000 people, can have a well-off life."
China is under pressure from its trading partners to balance its outsize trade surplus, and Beijing has also listed trade balance as one of its key economic policy targets.
But Zhong said that does not mean a reduction in exports.
"Obama has told China to import more and export less, to save less and spend more, but what is United States doing? It is trying to expand its own exports," Zhong said.
"I don't want to say whether the United States is wrong or right," he continued. "But we can't say easily that China has been exporting too much."
(Reporting by Zhou Xin and Lucy Hornby; Editing by Sugita Katyal)
Talk about double standards. The US should stop worrying about what China does ; if American leaders , business and even those so-called statemen/women ever get over the fantacy of profit at any cost mentality , the US workforce can beat any central planned state. The Communist( CCP) like still to pretend that China is Capitalist , but the state is still ruled by the few( non-elected) for the interest of those few. The last thing the world needs is a China system at center of the world stage. .
The Great Planet Eating USofA will do what it has historically done...move on to the next planet, after it has probed, built up, and then consumed to its delight. China being a much bigger host to feed on, than the USofA's chosen 'hosts' of the past... is immaterial. Just WAIT for it.................
Let's simplify this a little further....
In 2010....the US needs another $2 Trillion minimum.....
Real Estate and corporations are going to be competing....
Who is going to fund this ????
And if there is no more than $400 Billion that is
available....
What happens ....exactly ????
"Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.” -Andrew W. Mellon
Having been on a part-liesure part-business trip to China this summer, and visited most parts of the country to get a perspective not just as i would from Beijing which is as industrialized a city as Detroit, i can attest that the middle class in China is a grey area.
Yes, there IS a middle class. Except only in the richer provinces (closer to the coast, to HK). In rural China and anywhere in the Eastern parts where youre getting closer to Kazakhstan or North to Russia, they are basically still living in the 19th century.
So yes, a middle class exists that is bigger than the middle class in America (believe count was ~157MM) but its only due to the fortunate few cities, which in reality arent that fortunate due to their smog which is unbearable.
In the end, return to triple-digit oil prices is whats going to let us stop worrying about how the Chinese keep exporting more and more to us in N.A and stealing our jobs. We won't be able to pay for the shipping to buy our cheap widgets from Asia soon as the economy starts up again (i mean the real economy, not SPX at 1500 bullshit)
You should have seen China during mao's time, trust me it has come a very very long way up. Whereas the us has come down.
The descriptions of Islam and the Catholic Church here, considering their years of development, service and leadership, are patently false. Using the exceptions of radical elements is to paint the picture in false colors.
Now, at this time with America’s role in the world, the fanning of war against Islam by the false patriots of this country has led and is leading to the destruction of millions of innocent people. The talk here helps the millions of people among us, ignorant of the facts, to join in the holocaust fever. Already the voices would say: let’s kill them all. And the “all” they are talking about are the innocent villagers who know nothing of you or me, but who will taste the fire from the unmanned drones, helicopter gunships and F-15s.
Because of the strong faith of our Founders, America became a beacon of humanity and protection for individual rights and for freedom and truth. This was primarily the result of the Founders’ belief in Christ. As a result, Americans are free to express any opinion they may have—even falsehoods—but they need to recognize how dangerous an accumulation of false propaganda can be. The developing tyrants who rule in this country are anxious to have this false patriotism to support their drives for power and treasure.
The Constitution of the United States would not have the Bill of Rights, including freedom of speech, without men such as Patrick Henry. Said Henry: “It cannot be emphasized too clearly and too often that this nation was founded, not by religionists, but by Christians; not on religion, but on the gospel of Jesus Christ. For this very reason, peoples of other faiths have been afforded asylum, prosperity, and freedom of worship here.” [May 1765 Speech to the House of Burgesses]
It's this same christian faith that just so happened to also encourage the genocide of the native americans and enslave blacks. Funny how a middle eastern religion based upon abraham's fairy tales prompts white man's burden.
I'll take SocGen's view and root for another China collapse. BofA just seems too eager to be Benedict Arnold and side with Asia.
You can only take so much from the junk-building, job displacing thugs in China before the remaining options start to get nasty.
Wishful thinking. LOL look at the disaster looming in america first. During Mao's time china was literally an a agrarian society for the most part, it has come a very very long away in a few decades.
China is going to be the engine that pulls the globalists’ world economy? The New York Times believed Stalin’s Five Year Plans worked, now they want you to believe China’s. LOL. The globalists offshored America’s manufacturing base to China, and now they want to retain the USA as an unemployed consumer base!
So, some say here, Americans must give up their standard of living--not because of unavoidable disaster--but because the international bankers stole it and offshored it. Not only that, but Americans now must make good on Obama’s pact with the big bankers-- for their fraudulent dross, for their trillions in packaged scams that went bad where up to ten mortgages were written on the same house.
When the globalists Kissinger and Rubin made pacts with the Red Chinese to replace “Made in the U.S.A.” with “Made in China” they forgot to insist on democracy for the Chinese people. Pseudo capitalism can never give the spring to invention that our Founding Fathers gave to Americans when they included in the United States Constitution the provision “to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”
This right of inventors is uniquely American and from it America reaped the spectacular results that are now being made in China and unloaded off her ships onto our shores. A 1997 study of the inventors honored in the National Inventors Hall of Fame in Akron, Ohio, revealed that 91% of the world’s greatest inventors worked in America and only 9% in other countries. Freedom and America’s superior patent system are what gave men the incentive to burn the midnight oil for a chance to own a property right in their own invention.
The so-called founding fathers loathed democracy first of all.
How has the derivatives bubble without planning worked out by the way?
A five-year plan doesn't sound too bad right about now. Most of the founding fathers followed the american system of economics otherwise known as the national system. The Chinese are following this national system to an extent and they have done well fundamentally, whereas the americans have abandoned it and are more interested in the chicago school/keynesian ponzi schemes that has occurred post-1971. By the way you should update your data, about now half of all us patents come from foreigners and/or foreign companies. There has never been a fully capitalist nation, the US in the 19th century never was, it was a mixed economy that followed the national system. As for freedom, LOL tell that to the native americans.
yes but we owe all of that to the hindus and muslims and chinese.
The strange paradox of history is why all the airplanes and computers were invented here and not there, when we all owe them everything.
The muslims were so advanced, why didn't they invent the steam engine? The hindus didn't invent the laser or nuclear fission. The chinese didn't invent vulcanization of rubber or the automobile. Go figure.
That is like calling the ancient egyptians and mesopatamians stupid for not developing the locomotive.
The east set the template, which the west then copied and expanded upon.
How did the west raise the funding for their investments into new tech and equipment anyhow?
By robbing and raping the native americans.
The east did not have that luxury.
Unpeg the yuan? Would you shoot yourself in the foot? Keep this in mind: Export earns money denominated in foreign units, money that buys raw materials from nations stupid enough to sell them. Where did China learn that lesson? From US. Smoke that for a while... In the next decade they will also emulate another US lesson: how to transform the economy from the manufacturing model and into the financial model. That would be the time to unpeg, and become the numeraire currency. Then will come the next decade and the third lesson: that of the gendarme to the world. Yes, Virginia, when two argue, it is the third one who wins. And all it takes is a little patience... Yes, Jimmy Rogers was right to teach his daughters Chinese.
Deng Xiaoping himself said that trade with the west was for china to obtain western tech and expertise.
Once china has all of that, there is no reason for china to hold worthless treasury toilet paper. As for another decade, well it really all depends upon when the 700 trillion derivative ponzi scheme collapses. Whether its one year or 5-10 years a la marc faber that is another question entirely. China cannot bailout the US, the US economy is mostly fluff, but yes they still do have a real manufacturing base, however that is not enough to sustain current living standards. When the dollar collapses and americans can no longer afford their suvs, mcdonalds and xboxes you think they will take it lightly?
Just take a look at what happened during the rodney king riots, you think even the military can handle something like that on a nationwide scale? LOL