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The Three Toughest Questions For China Bulls

Tyler Durden's picture


Whether you believe China is an economic miracle - or a government-sponsored fraud; and can ignore the broken growth model or believe that the CCP can bailout the world; Michael Pettis, of China Financial Markets, provides a much-needed dose of reality for bulls and bears when it comes to the future of the global growth engine. After summing up (and laying-waste to) the three mainstays of China bulls' arguments: he asks the three toughest questions any China bull must be able to answer. Analogizing China's position perfectly he cites Mills: "Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works." Simply put, the bull argument cannot ignore the hidden bad debt.


Via Michael Pettis, China Financial Markets: How To Be A China Bull



There seems to be a worried resistance to the idea that we may have reached a major and difficult transition. The unwillingness to acknowledge the difficulty of the transition, however, can only make the transition all the more difficult.




[The Bulls] are largely constrained themselves to three arguments, which are the same three very unsatisfying arguments that we have heard many times before.


First, they presented historical data showing rapid Chinese growth rates in the past three decades and proposed past growth rates as evidence of rapid Chinese growth rates in the next two decades. I probably don’t need to explain why this is a very weak argument.


Second, they asserted (many times) that since past predictions of failure have all turned out to be wrong, future predictions must also be wrong. If this were true it would, of course, be irrelevant, in the same way that people who predicted in 2002 that the Spanish real estate market was out of control might have been early but they most certainly weren’t wrong. Rudiger Dornbush once said: “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought, and that’s sort of exactly the Mexican story. It took forever and then it took a night.”


But this argument, that past predictions have always been wrong, isn’t true. There have been predictions of failure in the past 20 years that were in fact correct – for example the claim in the late 1990s, made first, I believe by Nick Lardy, that China was going to have a banking crisis. The fact that China didn’t “fail”, however, doesn’t mean that Lardy was wrong. China did in fact have a banking crisis, but the growth impact was more than offset by a surge in lending which simply set the stage for the next banking mess.


It is as if you saw a middle-aged man in terrible physical shape running a marathon, and you predicted that after five or six miles he would be forced to quit. If however he took out a syringe and shot himself up with crystal meth, he would be able to continue running a few more miles, but this doesn’t mean that your analysis and prediction were wrong. It means that in a few more miles he will be worse off than ever (or will have to take an even bigger dose of crystal meth).


And third, they produced a number of what seem to me largely circular arguments – for example the claim that urbanization leads to growth and growth to urbanization, and so the process must continue, or the claim that since productivity has soared, past investments in the aggregate have been justified, even though the data “proving” the increase in productivity implicitly assumes that past investments have been economically justified. Except for reports of capital fleeing China, one could easily get the impression that even senior Chinese non-economists really don’t understand why the likes of Wen Jiabao, Li Keqiang, and now Xi Jinping seem so worried.




Externally funded misallocated investment is subject to “sudden stops”. Domestically funded misallocated investment may or may not be, depending on the structure of the domestic financial system.




The bull argument cannot ignore hidden bad debt


So to say that China has already set aside the resources to pay for the losses is, I think, meaningless, especially if it implies that somehow the impact of this wasted investment is in the past and not in the future. China has no more set aside the cost of the losses than Brazil had done so at the end of the 1970s, prior to its own lost decade. The losses are simply buried in the debt.


But an unrecognized past loss must be recognized at some point in the future, no matter how it is funded. On this point I think neither Hayek nor Keynes would disagree. In the end, the strongest indication about whether or not the current Chinese growth model is no longer providing sustainable growth is whether debt is rising faster than debt servicing capacity. This is where the debate must focus. Or to cite John Mills in his 1868 paper “On credit cycles and the origin of commercial panics”


"Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works."


If capital has been destroyed in the past, and that destruction is currently unrecognized, it must be recognized in the future, like it or not. This recognition can occur in the form of what Mills called a panic, and we would call a financial crisis, but given the stickiness of deposits in the Chinese banking system I don’t think this is likely to be the case in China. It can also occur in the form of many years of much slower growth in GDP, as those losses are ground away through excess debt repayment. But it will occur.


So if anyone wants to continue to be very bullish about Chinese growth prospects over the next decade, it seems to me that he must address and answer these three questions:


  1. How much debt is there whose real cost exceeds the economic value created by the debt, which sector of the economy will pay for the excess, and what is the mechanism that will ensure the necessary wealth transfer?
  2. What projects can we identify that will allow hundreds of billions of dollars, or even trillions of dollars, of investment whose wealth creation in the short and medium term will exceed the real cost of the debt, and what is the mechanism for ensuring that these investments will get made?
  3. What mechanism can be implemented to increase the growth rate of household consumption?

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Sun, 10/07/2012 - 18:38 | 2866107 I am more equal...
I am more equal than others's picture

Heading to China on Tuesday.  Will be fun to explore this on the ground

Sun, 10/07/2012 - 19:44 | 2866211 Tango in the Blight
Tango in the Blight's picture

I won't be taking any bets that you will make it out alive.

Sun, 10/07/2012 - 20:11 | 2866250 Totentänzerlied
Totentänzerlied's picture

Bring a respirator. No, really. And don't drink the water or eat the fish.

"Only 1% of the country’s 560 million city dwellers breathe air considered safe by the European Union, because all the China's major cities are constantly covered in a "toxic gray shroud"."

Sun, 10/07/2012 - 21:02 | 2866337 helping_friendl...
helping_friendly_book's picture

Try the Dan Dan street noodle and the spicey wonton!



Sun, 10/07/2012 - 21:07 | 2866346 hannah
hannah's picture

i second the dan dan's.....! impossible to find in the ussa

Sun, 10/07/2012 - 21:37 | 2866427 helping_friendl...
helping_friendly_book's picture

How about a good ole' hot pot?

Have to go to Flushing to find the hot pot!

Mon, 10/08/2012 - 12:55 | 2868398 jonjon831983
jonjon831983's picture

negatory - dandan's are more northern Chinese - Shanghaish.  Look for those types of restaurants and they should have it.


Though, perhaps not as good.... but the yumminess may be due to a crapload of MSG crystals.

Sun, 10/07/2012 - 21:04 | 2866339 aint no fortuna...
aint no fortunate son's picture

"3. What mechanism can be implemented to increase the growth rate of household consumption?"

Ooh, ooh, I know - helicopters!

Mon, 10/08/2012 - 01:18 | 2866867 FreedomGuy
FreedomGuy's picture

Theoretically, consumption can only increase with increased prodution and productivity. Monetary "tricks" attempt to increase consumption without any real productivity growth...or faster than real productivity. Inasmuch as China practices Western monetary policy they will get a similar result. Just like the West, they enjoy the bubble as it inflates and like the West they will try to reinflate it.

Mon, 10/08/2012 - 00:25 | 2866783 Dr. Bonzo
Dr. Bonzo's picture

Well, I've been "here" (in China) now for close to 10 years and I can assure you're not going to find whatever it is you're looking for. To any Westerner everything in Asia looks like spectacular growth. If you're trips are to a city you' ll see the Chinese 1%, and their spending habits are stupendous. You'll come back crowing about all the Gucci Vitton Lamborghini touting brats barreling down the splendid new roads. You'll go Wow look at these shiny new airports, and wow look at the doodad buying mobs thronging the streets. And none of that means jackshit. It doesn't tell you about the land stolen from rural peasants and the theft and graft and fraud. You can't measure which apartment block is a shoddily erected wreck waiting to crumble and which officials were bribed to build it. Nothing you see will tell you which money is clean and what's being laundered and what glitzy sportscar was bought from hard earned cash or some sleazy lending deal. So before you go leaping to any broad conclusions on your little trip check your opinions at the door. As for me, i've never seen a country where scamming and The Scam was practiced on such an epic scale. In China, literally everythng from cardboard dumplings to Googleified Ph.Ds and every ripoff and fraud in between. Trust no one and nothing. Stamp Caveat Emptor into your skull right now cause brother, you are gonna need it.

Mon, 10/08/2012 - 01:29 | 2866881 FreedomGuy
FreedomGuy's picture

Not fully sure what the point of your post is but I give it credibility based on the fact you live there and my observations are similar. I have taken a few trips and I have a son who lives there and is marrying a judge.

It is my theory that a lot of this is a function and legacy of living under Communism. Under communism lieing becomes part of survival. It starts with "We love the dictator!" to "Yup, that concrete has all the required rebar and is not watered down, comrade." These are the essentials of survival. The black market badguys were the goodguys.

It is also why I warn anyone to beware of anything important made in China. It is one thing if it is a shirt that falls apart. It is another when your heparin is bad, dog food contaminated or your kid's toys covered in cheap lead paint.

I actually like most the Chinese people I've gotten to know and I admire their energy but there is a legacy they must work out to gain sustained prosperity and even liberty. Their government is also adopting the worst of Western economics and monetary policy.

Mon, 10/08/2012 - 03:53 | 2866988 onebir
onebir's picture

Unfortunately the 'legacy [?] they must work out to gain sustained prosperity' is exactly what's being destroyed in much of the west at the moment.

I do like China & esp most Chinese people, having lived there for a few years. But don't forget the 2008 melamine milk baby death toll. And the high speed railway system:

(I still think it's probably safer than domestic flights though :P )

Mon, 10/08/2012 - 20:35 | 2869535 FreedomGuy
FreedomGuy's picture

Yes, I was making only a partial list of publicized problems. I have been on the high speed rails several times. I love them but they do not run at full speed. They are having to reconstruct a lot of the railways. Lieing and corruption are built into the culture. it is humorous in a dark way that the most ruthless capitalists who actually do sacrifice safety, quality and even gouge are the former collectivist state citizens. There is some lesson in here that will be ignored by the people pushing the USA exactly i the direction you mention. The same system will produce the same results anywhere in the world.

Mon, 10/08/2012 - 20:35 | 2869536 FreedomGuy
FreedomGuy's picture

Yes, I was making only a partial list of publicized problems. I have been on the high speed rails several times. I love them but they do not run at full speed. They are having to reconstruct a lot of the railways. Lieing and corruption are built into the culture. it is humorous in a dark way that the most ruthless capitalists who actually do sacrifice safety, quality and even gouge are the former collectivist state citizens. There is some lesson in here that will be ignored by the people pushing the USA exactly i the direction you mention. The same system will produce the same results anywhere in the world.

Mon, 10/08/2012 - 09:22 | 2867328 I am more equal...
I am more equal than others's picture

Thanks.  I'll be flying into Guangzhou and be there for 5 days, then onto Chonhqing for 5 more days then I believe the tourist thing kicks in when I go to Beijing for the last 4 days.  Bottled water is all I'll be drinking except when its 'Miller Time.'  A friend used to import french wine into the country but the chinesse have no taste for it and cut it with Coke of all things.  He found counterfiet products all the time.  It was horrible. 

Mon, 10/08/2012 - 13:05 | 2868441 jonjon831983
jonjon831983's picture

Ppl should keep in mind:

Say 1 billion people and 1% are super elite rich and are willing to spend = 10,000,000.  Broaden that out to say top 5 or 10% who are rich and well off and that is a staggering number of wealthy people who can spend.


Say the only places foreigners and rich locals would want to shop or flash some bling are limited to a few key centres and you'll see the throngs of people there with similar mentalities, because those are the desired locations.

Mon, 10/08/2012 - 03:50 | 2866987 BiggerInJapan
BiggerInJapan's picture

French/canadian/italian water all the way lol

I sometimes I think even the carlsberg and heineken are fake in China.

good luck eghhehahaha

Sun, 10/07/2012 - 18:48 | 2866119 PUD
PUD's picture

China is the real time test tube that will prove the folly of perpetual unlimited exponential growth. Put a billion cars on the road, a billion steak eaters at the table, a billion shoe shoppers filling a billion closets and get back to me as to how long you'll survive breathing the air, drinking the water or eating the food.

The rule of 72's is a bitch

Mon, 10/08/2012 - 01:32 | 2866889 FreedomGuy
FreedomGuy's picture

I never saw a sunny blue day in any of the half dozen cities I have been in. Always gray like forest fire ash or fog.

Mon, 10/08/2012 - 02:31 | 2866936 fourchan
fourchan's picture

best post of the year pud.

Sun, 10/07/2012 - 18:53 | 2866127 TheSilverJournal
TheSilverJournal's picture

Keynseianism = the practice of keeping malinvestments from becoming exposed by creating even more malinvestments.

Sun, 10/07/2012 - 19:18 | 2866172 HD
HD's picture

Can't help but like that definition...

Sun, 10/07/2012 - 19:00 | 2866142 q99x2
q99x2's picture

You could take everything China manufactures out of the US and bury it into dumps and the economy of the US would see a 7 year boom that is except for the greedy rat faced middle men.

Sun, 10/07/2012 - 19:05 | 2866150 Jason T
Jason T's picture

China was so far behind in the productivity side of things, they are playing catch up... fast.  They still have a ways to go.  All their GDP growth is gains in productivity. 

2011, they spent 46% of GDP on gross fixed capital formation.. US spent 14%, closed a few refineries and what have you.. china built refineries.

China is already starting to whip our asses, 10 more years of this, we'll be the ones with hte cheap cooly labor.

Mon, 10/08/2012 - 02:47 | 2866951 Bodysurf
Bodysurf's picture

Nah.  Almost all the so-called fixed capital formation isn't needed.  They're building enormous towers all around me in Shanghai as I type this, even though thousands of them are empty. 

A good example is in the car industry.  They're determined to triple auto production, and will be there in the middle of next year, with dozens of new factories coming online.  But current demand is insufficient to move the cars sitting in showrooms right now.  Traffic in the major cities is awful.  America built its cities around the automobile.  China just paved over dirt tracks.  Driving a car is an enormous hassle.  And they think they're going to be putting tens of millions more onto showroom floors?

The author is 100% right.  Capital formation needs to have a rate of return.  Using debt, it has to be a function of your borrowing rate; with just equity, you need to have an opportunity cost measuring stick to use instead.  And either way, the Chinese are throwing money away. 


Sun, 10/07/2012 - 19:11 | 2866160 Peter Pan
Peter Pan's picture

Capital has clearly been destroyed by creating excess capacity which is exacerbated by imbalances between nations and resource constraints. China shot for the stars and will be brought to its knees before resuming its upward and more considered ascent.

The West however needs to understand that it does not need growth. What is needs is for wasteful expenditures to be replaced by productivity enhancing expenditures. This will generate much needed future savings which will enable more to be done with less.

For example, the reduction of war spending (defence spending is not an appropriate term) and the reduction of America's waist line will bring greater savings and opportunities than any level of QE or ZIRP. We need to stop including war expenditures and gambling expenditures in GDP.

So we need to remember that the China equation cannot be looked at in the absence of the western world.

Sun, 10/07/2012 - 19:17 | 2866168 nmewn
nmewn's picture

And third, they produced a number of what seem to me largely circular arguments...

Chinese citizen citizensim is eternal. 

Sun, 10/07/2012 - 19:58 | 2866221 akak
akak's picture

Trulywise, the consumptionalistic, hypocritizenistic blobbing-up nature of Chinese Citizenism is eternal.

"American' resource consumptionism?  Make me laugh!

While it does exist, it can hardly hold a candle to the explosive nature of the resource consumption trend of China over the last ten years.

But when self-indictment is impossible for those involved (i.e., certain dishwasher trolls), denial rules the roost and blame-placing must desperately be shifted onto others, so ....

Sun, 10/07/2012 - 20:13 | 2866253 Totentänzerlied
Totentänzerlied's picture



Sun, 10/07/2012 - 21:36 | 2866425 TheFourthStooge-ing
TheFourthStooge-ing's picture

Confusious say:

"Sure, when you have a long history (compary to your own history of course) of stealing other people so you can stash your own people (turning them de facto into non US citizens by the way, so Chinese citizenism will keep working), well, you might grow oblivious to the contextual framework to deal with predictable issues that mature in the future, trying to avoid self indiction at all costs round the clock, 24 out of 24, 7 out of 7, 365 out of 365, so maybe we should eat the grasshoppers. That is if the ants embrace US citizenism."

Sun, 10/07/2012 - 20:13 | 2866254 nmewn
nmewn's picture

It was an incredible thing to observe.

At first, I thought he had to be an MDB-ChiCom clone variant. But as time went on, I realized he was actually serious. Golden hordes, Tibetan monk beating, Vietnam invading and "native resource depleting" in the Gulf of Mexico be

But at least they are a heavilly regulated society and very respectful of "green concerns" and ALL individual rights so no planetary harm can come from any of their ambitions ;-)

Sun, 10/07/2012 - 21:56 | 2866471 Apostate2
Apostate2's picture

My first take was that he/she/it was an American eco-fascist Van Jones acolyte. My second, an LSE student. My third, a Belleville hairdresser who snorted too much hairspray. I've run out of takes for Mr Wu. Now window cleaning is not the worst one can do when the laundry folds.

Sun, 10/07/2012 - 20:15 | 2866256 Yen Cross
Yen Cross's picture

IQ infinity, "between akak and nmwen" , I would highly urge any smart Z/Hers to listen "well"!

Sun, 10/07/2012 - 21:44 | 2866444 Apostate2
Apostate2's picture

I'd say more like a slinky, like their historical world-view.


Sun, 10/07/2012 - 19:33 | 2866191 dbTX
dbTX's picture

Rule number 1; what goes up must come down.

Mon, 10/08/2012 - 08:20 | 2867174 Ralph Spoilsport
Ralph Spoilsport's picture

Why does the Porridge Bird lay its eggs in the air?

Sun, 10/07/2012 - 19:38 | 2866197 Tango in the Blight
Tango in the Blight's picture

Trust us, we will soon make contact with an alien race which will bailout the world.

-- signed Ben S. Bernanke & Paul R. Krugman

Sun, 10/07/2012 - 20:13 | 2866235 Miss Expectations
Miss Expectations's picture


"Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works."

This is so analogous to the phone call my friend received. 



"Who is this?"

"I'm the husband of the woman your husband is having an affair with.  It's been going on for a year and a half.  I just found out and I thought you should know."

Let me tell you, this call caused complete panic.  But, it wasn't the phone call that destroyed the marriage, it merely revealed the extent to which it had been previously destroyed by betrayal into hopelessly "unproductive works."

So, you can have  lots of denials and circular arguments, but actually the suspicious wife might just be correct.

EDIT:  Wait, there's more.  A few weeks later she found out that her husband had HELOCed the house, there was NO equity left after 15 years of paying the mortgage (he'd forged her name on the paperwork.)  A few months after that she found out she had herpes...she found out because she needed to go to the hospital to be catheterized and had to wear a bag strapped to her leg for a week. 



Sun, 10/07/2012 - 21:20 | 2866375 Mentaliusanything
Mentaliusanything's picture

Miss Expectations - The Thai Woman have a cure for this - they get a rusty clever and exercise their rights over the dangling bits. Problem forever over.

Sun, 10/07/2012 - 21:26 | 2866405 helping_friendl...
helping_friendly_book's picture

A Bobbittectomy.

Sun, 10/07/2012 - 20:01 | 2866239 Encroaching Darkness
Encroaching Darkness's picture

There's no mention here of the trillion-plus reminbi money printing / injection over the last couple of years - this also will prove a short-sighted measure. Printing money to stay in power works - for a little while. Then the rampant inflation and currency devaluation will prove problematic.

Seems rather sad - printing up all that money, and malinvesting it - ghost cities, empty shopping malls and highways. I sure wish some humans, somewhere, understood what they were doing.

Sun, 10/07/2012 - 20:16 | 2866261 nmewn
nmewn's picture

The ghost of Keynes looms large across the globe this Halloween.

Sun, 10/07/2012 - 20:20 | 2866265 klwilly
klwilly's picture

good analogy.  sorry for your pain Miss.

Sun, 10/07/2012 - 20:33 | 2866286 disabledvet
disabledvet's picture

i was under the impression that it was the Chinese STATE that was hiding all the bad debts...not Chinese business interests. I could be wrong of course but it seems to me there is a lot to offer the United States should these Chinese Tycoons wish to be provided a safe solid return without fear of a political backlash...ideally here in the United States. I did take note Canada is thinking about torpedoing that huge energy deal the Chinese business interests were talking about. The same cannot be said of the real estate fire sale currently going on in the USA of course. Anywho they are formidable competitors...and of course offer great opportunities. I fail to see how the collapse of Communist Government in Beijing...should it be happening of bad for US business or sales. Obviously they've done a better job of keeping the jobs where there own people are of course...

Sun, 10/07/2012 - 21:34 | 2866421 RockyRacoon
RockyRacoon's picture

Do not mention "fire" and "real estate" in the same comment.  It will get you disappeared into a black SUV some night.

Sun, 10/07/2012 - 20:51 | 2866307 helping_friendl...
helping_friendly_book's picture

More China bashing.

I don't know if any of you guys saw the 60th anniversy parade or are hip to the fact the USA owes China 1.5 trillion dollars?

China is not in unsustainable debt. THE USA IS IN UNSUSTANABLE DEBT!

China is not bankrupt fighting wars of aggression in multiple wars. THE USA IS BANKRUPT FIGHTING WARS OF AGGRESSION IN MUTIPLE WARS!

I don't think the author understands that it is the West which is financially and morally bankrupt.

I see China doing well dispite all the articles trying to make comparisons of China to the West.

We are BROKE. They are STRONG!

What the heck does the author know about China's printing policy?

China saves 1/2 of all US dollars brought into China by buying Western debt and spends the other half, internaly, on infrastructure and the military.

The USA is a bunch of broke bitches that can't even agree on a budget and lets a banking cartel print money and buy US Treasury Debt. 70% of ALL U.S. Treasury debt. 

China signed a 50 billion EURO trade agreement with Germany last year so there will be plenty of Western currency flowing into China.

The USA seems to think they are the only country on Earth and the world and the heavens revloves around the USA. Well it doesn't.

The author is full of and doesn't know diddly-squat.

Sun, 10/07/2012 - 21:02 | 2866336 nmewn
nmewn's picture

"I don't know if any of you guys saw the 60th anniversy parade or are hip to the fact the USA (government) owes China 1.5 trillion dollars?"

lol...they'll just print em up and send them over tomorrow.

Problem? ;-)

Sun, 10/07/2012 - 21:13 | 2866361 helping_friendl...
helping_friendly_book's picture

Do you think that will solve the ecomonic disparity in the USA?

I don't think 1.5 trillion will break China but, the USA monetary cabal printing up 1.5 trillion dollars to continue their currency debasement might not be to good for us. I don't want to pay $10/gallon of petrol.

Sun, 10/07/2012 - 21:38 | 2866428 RockyRacoon
RockyRacoon's picture

$10 a gallon for gas?  No problemo.  Gold at $3,500+ /toz means that gas is the same price as today.

Don't have gold?  Oh.  So solly.

Mon, 10/08/2012 - 00:43 | 2866811 lasvegaspersona
lasvegaspersona's picture

$10/gal sounds about right when Bobby Triffin's little 'dilemma' (paradox if you prefer) is finally resolved. China knows what it has in those $1.5 trillion in treasuries...NOTHING!!! they can't spend them, they are not allowed to invest in the USA to any extent....they will just hold them to keep the books in order until they have enough gold...and like most CBs are getting ready for some kind of major monetary policy change which seems to involve gold.

I don't understand how Geithner (and now Romney) think it is ok to taunt the Chinese unless they just figure that soon it won't make a difference so why not rack up a few points here in the US with a little boosterism.

Mon, 10/08/2012 - 20:16 | 2869498 helping_friendl...
helping_friendly_book's picture

Timmy does it because he is in league to trash our currency. Romney does it ???????....because he belongs to a crazy underwear cult?

You fucking idiots will, probably, elect the magic undies douche bag which will lead to the ultimate destruction of, what is left, of a country we stole from Native Americans and then promptly destroyed.

Well done you stupid, cracker, motherfuckers!

We killed 10 million buffalo in ten years. 

Hitler ain't got nothing on you killers!

You make him look like an amatuer!

Sun, 10/07/2012 - 22:40 | 2866548 jimmyjames
jimmyjames's picture
What the heck does the author know about China's printing policy? China saves 1/2 of all US dollars brought into China by buying Western debt and spends the other half, internaly, on infrastructure and the military. ******** Likely because half of that money is hot money and it can flow out of China just as fast as it flowed in-as we seen in 08- ie: it does not belong to china and they hold USD's because they are the most liquid and accepted currency (so far) What does the author know about Chinese printing policy? Probably what anyone who bothers to look knows-
Sun, 10/07/2012 - 23:22 | 2866686 helping_friendl...
helping_friendly_book's picture

China pegs their currency to the dollar. To keep the exchange rate stable with the USD China must print currency to peg to the USD to maintian the 6:3 rmb :1 usd. The Chinese GDP was double digit for years requiring more currency to be in ciculation. This is the mechanism by which they peg the dollar.

**** Likely because half of that money is hot money and it can flow out of China just as fast as it flowed in*****

My point is valid. the usd flows in a disiplined way. Chinese exporters must change their USD for RMB. The PBOC sets the rate, peg to the USD, by buying and selling RMB. That has nothing to do with the PBOC policy of saving 1/2 of incoming USD, obtained by exchanging for rmb to Chinese exporters, and buy UST Bonds. They spend the other 1/2 of USD inflow on infrastructure and military spending.

They don't hold USDs. They buy treasuries and buy hard assets, in USD, from world markets. 

China does not really need the USA. They have their own internal economy and other trading partners. The Peoples Liberation Army is extremely professional considered carreer positions and well equipt. 

There are a naive segment of the US Population and Congress ries to oversimplify and playdown Chinese sophistication world political power.

If they started selling Treasury bonds on the Secondary market tomorrow there would be a run on every bank tomorrow.

People just don't get it.

Sun, 10/07/2012 - 23:43 | 2866725 jimmyjames
jimmyjames's picture

They don't hold USDs. They buy treasuries and buy hard assets, in USD, from world markets

People just don't get it.


By the sounds of what you just said--the only one who doesn't get it is you-

China holds USD/EUR/JPY and every other major currency to accommodate hot money flows because their banks are too immature yet to handle these flows--so when foreign investment money is called back-they simply reverse the flows and it works well-as we seen in 08-they do not convert to Yaun-

They cannot go to the currency window with Yaun and exchange for foreign currencies fast enough to accommodate hot money demands because (so far) the Yaun is not liquid enough - btw..did you see on the chart i posted China's money expansion-priced in USD's?

3 1/2 times  more than the US--they make the US look like they're fiscally responsible in comparison-

Mon, 10/08/2012 - 08:11 | 2867157 helping_friendl...
helping_friendly_book's picture

You people seem to, ,completly, ignore one crucial fact:

China might have slowing GDP BUT, china doesn't have unsustainable debt.

The Treasury's ONLY buyer, it appears, is the FRBNY! China has stopped buying and is NOT rolling their Treasury's upon maturing.

I have stopped trading and save in rmb denominated account w/ the Bank of China on Madison Ave. in NYNY.

I plan to make money in USD:RMB arbitrage.

You guys have fun buying tugsten, I'll keep buying currency of the Gov't that , ravoneously, buys the most gold each month i.e. China.

Mon, 10/08/2012 - 07:24 | 2867101 ballafun
ballafun's picture

If you remove the floor under your customer, he will die taking you along with him.

China has created its own dependency, in case they decide to sell 1.5 T$, US will die, so would they be. So better acknowledge that.


Mon, 10/08/2012 - 03:13 | 2866955 Element
Element's picture



jimmyjames " ... What does the author know about Chinese printing policy? Probably what anyone who bothers to look knows ..."

Hardly surprising given they're pegged to USD. What the hell are thy supposed to do?  Allow the US to devalue?  The Chinese were as aggressive as hell in 2009 trying to wreck the Japanese economy and slow Japan's and Korea's recovery from the 2008-2009 recession. There was no way they were not going to at least proportionally mirror USD printing, to gain or maintain an advantage in Asia and to make USD printing ineffective, when they were willing to (and actively looking for) find ways try and strangle Japan's recovery, in order  to cement their own geopolitical and economic ascendancy.

Didn't work out so well though, they showed their hand, intents and tactics too early ... kinda jumped the shark.

Mon, 10/08/2012 - 00:31 | 2866789 andrewp111
andrewp111's picture

Yes, we owe China 1.5 trillion dollars. Those are US dollars, which the US Government issues. China is 100% certain to get their dollars back. There are no promises as to what those dollars will be worth when China gets them, but they will get their dollars.

China's real problem is running into physical limits on resources. They can print money and manipulate their financial system better than we can (their system is 95% government controlled as opposed to merely ~80% here in the US), but in the end real food, real energy, and real metals are the limiting quantities. China already has serious food inflation, and this fact limits the ability of the Chinese Government to bail out banks and debtors. Inflation is always the fundamental constraint on a autonomous sovereign currency issuer. Right now, the USA has high food inflation as well, so all those US dollars owned by China are probably worth a lot less than the Chinese thought when they acquired them.

Mon, 10/08/2012 - 03:15 | 2866967 Element
Element's picture

They give us mouse-click digital promises and we give them ship loads of iron, coal and grain. It's worked out pretty well for them from a resources access perspective. Can't really see what value we are getting out of it though, especially since they did everything the could to coerce us in 2009 to drop our requirement on the number of mouse-click promises we required, per shipment.

Eventually we'll realise we're feeding the voracious carnivorous plant in a Little [Chinese] Shop of Horrors, which isn't going to be able to honour the mouse-click promises it's been making as bids on our industrial and food commodities.  Eventually we'll require something more substantial, with a redeemable trade-reconciling value.

Until then we'll continue to believe (pretend) they are good for it, that their GDP and currency mean something, and that they will be civilised, mature and statesman-like about what happens from there.

In a Pig's-ear they will!  The rest of Asia all know this now.

Mon, 10/08/2012 - 02:45 | 2866946 Element
Element's picture


"... The author is full of and doesn't know diddly-squat."

Dude you need to read Michael Pettis before you go saying shit like that, you apparently do not know who he is or what he has been writing about for the past few years.  There is not much that he doesn't know about China's economy, financial structure and economic dilemmas, plus the money system and its international and domestic flows.  He's a go to guy for all that stuff, and definitely worth reading.  There's a simple reason why his blog is on Tyler's blog role, he knows his shit.

Sun, 10/07/2012 - 21:10 | 2866349 hannah
hannah's picture

if china cant independently feed itself, it will eventually collapse again into civil china's case, history does repeat and repeat and repeat.

Mon, 10/08/2012 - 03:25 | 2866973 Element
Element's picture

They need to buy food from excess food production countries (Australia, USA, Canada), they just need a medium of exchange that we can trust for such a trade, because their products are crappy quality, their system is corrupt as, Beijing is full of arrogant idiots who don't understand market forces, their natural resources are depleting, and their fiat is USD in drag, only it's backing is even more dodgy and opaque, because they themselves are actively trying to undermine and destroy what it is in fact pegged to!

LOL! Just awesome!  Let's trade!!!

Sun, 10/07/2012 - 23:34 | 2866707 tony bonn
tony bonn's picture

this article was one large entirely polemical turd with no substance.

Mon, 10/08/2012 - 00:53 | 2866828 strangewalk
strangewalk's picture

Dr. Bonzo is spot on. I've been in China for 10 years on and off and can exactly verify his observations. However, since China opened up the whole world has been profiting from the Wisdom from the East. They thought they'd bring democracy and the rule of law to China, and instead China gave what it has to them--Ha Ha! So, no need to come to China, China will come to you.

Mon, 10/08/2012 - 07:15 | 2867098 Zero-risk bias
Zero-risk bias's picture

The irony!

Mon, 10/08/2012 - 09:10 | 2867290 Grand Supercycle
Grand Supercycle's picture

WILE E.COYOTE overdue sell off...

Has taken longer than expected but SPX & GOLD etc daily chart
bearish topping process strengthens further.

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