Timing is key, as China party leadership head into their fall meeting. Expect some face-saving "reset" rather than outright default. But still, very bullish for dollar vs emerging markets. And adding to already deflationary picture for global macroeconomy.
Kyle Bass' original analysis of the China credit bubble is also worth revisiting.
The $34 Trillion Experiment: China’s Banking System and the World’s Largest Macro Imbalance
I want people to remember US in late sixties. If somebody has good enough memory, he will recall that US citizens were legally forbidden from owning gold and even simple golden jewelry until 1974 (Nixon struck the gold standard just 3 years before).
The schizophrenic policy was "We redeem FX dollars in gold, but not let any of our own citizens have it. Instead, the treasury will own your own gold for you."
China tries to do the same trick with savings and assets of its citizens and companies.
Except that for gold and silver, we have luxury apartments, lumps of jade, exotic industrial commodities stockpiles, bitcoins, FX certificates, and other novelties.
gold jewelry was not illegal until 1974. It was "hoarding" of gold coins or bars worth over $100 (1933 dollars = ~$2000), and rarely enforced. any actual use of gold as a part of something was exempt.
>actual use of gold as a part of something was exempt.
Certainly not in its entirety, the same "articles containing gold clause" was used very creatively by courts to issue confiscation orders for jewelry for sure. That was my BLAW101 essay subject, something I spent few hours on digging court records.
The "rarely enforced," does not mean that it had no effect. Effectively, people were forced to sell their trinkets, and buy stuff on the market with that money if they didn't want to loose all of the value of their savings.
I don't see why not. There's plenty of 'collectors' items that do hold actual value - A copy of many first-run comics, for example, make good display pieces but are also valued in hundreds of dollars by collectors, and only go up as they get farther from first printing.
A good book on a similar topic was “The Chastening” by Paul Blustein. This was about the currency disasters of the late 90’s, which interestingly also took place at a time people thought we were in a tech bubble (we were).
This time period was also known as the “Southeast Asian Financial Crisis”. To this day there are still empty 60 story skyscrapers in Bangkok because of how bad it was.
A big lesson from that event are that foreign currency reserves are never enough.
Korea had something like $300 billion in foreign currency reserves and was wiped out in days. $3 trillion is a lot, but adjusted for China’s population, and the fact that they will need to use those reserves to last 1 year maybe 2, and they start to look much smaller.
Also this kind of a crisis would not be like a tech bubble. Tech Bubbles are bad, but they do not invoke the banking system. If the banking system falls, the general rule of thumb is a minimum 10 year recovery.
It’s worth noting that this is the position adopted by George Friedman in his book “The Next 100 Years” where he predicts the fall of China and also North Korea by 2030 at the very latest.
Also check out “This Time Is Different: Eight Centuries of Financial Folly” by Carmen Reinhart from Princeton University Press.
Now do you understand why the Chinese government is attempting to ban Bitcoin? Chinese people are scared of their currency and want an easy way to convert theirs into a non-traceable one in case the country descends into a depression.
Why does anything and everything has to do with bitcoin? There are hundreds of trillions of CNY in circulation compared to ~1 billion USD worth of bitcoin being traded everyday. Compared to forex the volume of all cryptos combined is a drop in the bucket.
>Chinese people are scared of their currency and want an easy way to convert theirs into a non-traceable one in case the country descends into a depression.
There is a lot of talk of potential deflation cycle coming in, and in that case holding fiat is clearly the wiser option.
Legally a Chinese citizen can only move up to $50k USD out of China per year (and they have to report those expenses) [1]. There are various techniques wealthy Chinese use to get around this but BTC had the ability to be the one of the easiest and least-traceable. Not everything traces back to BTC but it is a telling sign of a larger trend.
As someone who has lived in China I can testify that this is a falsehood.
The issue is getting the money out of the bank into some other asset in the first place. If you have that much purchasing power in a Chinese BTC exchange you probably already have a number of other means by which you can extract your money.
The hard part isn't what to do with your money -- it's what to do with your money to get it out of the bank and get it into another asset.
AFAIK it is not trivial to purchase that much BTC in China, so the level of attractiveness isn't as you assume.
So the Chinese students running around in $80000 luxury cars are all beneficiaries of criminal parents. Funny how the party doesn't crack down on such blatant corruption.
The principal mode of Chinese capital flight is through Hong Kong- and Macau-based invoice factories. A lawyer in those jurisdictions writes an invoice for $50 million and the Chinese firm “pays” it. Bitcoin is irrelevant to Chinese capital controls.
Disclaimer: I am not a lawyer. This is not legal advice, nor advice of any other kind. Do not launder money.
”A lawyer in those jurisdictions writes an invoice for $50 million and the Chinese firm “pays” it. Bitcoin is irrelevant to Chinese capital controls.”
...all of which is easily traceable by the government. Do enough of it, and you’ll eventually be disappeared for a friendly conversation with the police. It’s also expensive, and has a central point of failure (the lawyer).
That is why bitcoin is the up-and-coming escape mechanism for yuan. Obviously, not everyone was doing this, but it was becoming a trend, hence the crackdown. It was absolutely not “irrelevant”.
(Aside: I love the way that bitcoin people are incredibly imaginative when it comes to visions of borderless, regulation-free financial systems, but can’t see their way past even the most trivial of fraud incentives involving their system.)
> all of which is easily traceable by the government
This goes back to my original point regarding capital controls: previously discreetly tolerated, their violation is now openly acknowledged. If you stroll through Hong Kong you'll find invoicing services being openly advertised.
Why they're tolerated is more murky. My guess is it's a vital tool for China's movers and shakers. In that regard, one could argue that hiding under their bulk is a safer bet than flagging oneself as politically impotent by using outside channels.
> It’s also expensive, and has a central point of failure (the lawyer)
I haven't heard of any big frauds in the invoicing business, though there's no incentive to publicize it. These lawyers are typically providing other services to the capital providers, so it's--all in--probably less expensive than trying to surreptitiously purchase and dump large numbers of Bitcoins. From what I've heard, they're typically associated with internationally-reputable firms.
There's an interesting conversation about the strengths and detriments of invoicing versus Bitcoin for purposes of laundering money. But this isn't that conversation. The reality is most capital flight occurs through the former, to the point of making the latter numerically irrelevant. Capital controls were almost certainly not a significant factor in China's moves against Bitcoin.
Disclaimer: I am not a lawyer. This is not legal advice, not advice of any other kind. Do not launder money.
”This goes back to my original point regarding capital controls: previously discreetly tolerated, their violation is now openly acknowledged. If you stroll through Hong Kong you'll find invoicing services being openly advertised.”
Like all other forms of rule enforcement, things are tolerated until they aren’t tolerated anymore.
You’re trying to extrapolate a story far beyond the evidence — just because “most” laundering happens another way doesn’t mean that bitcoin isn’t significant. It’s obviously significant to the government: they’ve cracked down on it.
> It’s obviously significant to the government: they’ve cracked down on it
It's significant in that ICOs have lots of fraud. The motive is important because if capital controls were the motive, the greater Bitcoin community has nothing to learn from it. If it's fraud, introspection is required. Barring that, non capital controlled countries should pay attention.
I'm a little confused by your comments. Bitcoin does not have a trusted party system, unlike Ethereum. Why does the Bitcoin community have to learn about fraud?
I agree that some ICOs are clearly fraudulent in nature. But it's no different than the early days of Kickstarter. Hell, look at Juicero. I think the advent of ICOs as an alternative vehicle for fundraising is making certain entrenched interests very nervous.
> Bitcoin does not have a trusted party system, unlike Ethereum. Why does the Bitcoin community have to learn about fraud?
It does have a small group of people with disproportionate influence (case in point: the adoption of segwit) and who are incentivized to perpetuate the system. It is in their interest to find a solution to the fraud. The "capital flight" excuse is cute, but it won't convince other countries' regulators. Particularly if nothing is done and a bunch of moms and pops get defrauded on a significant scale by an ICO.
There is now a daily restriction on the amount of cash you can withdraw in Macau (if you are from the mainland) in addition to your yearly withdraw and currency exchange caps.
These modifications were made earlier this year to prevent capital flight.
There certainly is but the downside is that often these high-value, small goods come at an extreme markup compared to anywhere else in the world.
Take, for example, Tiffany & Co. whose products are on average 30% more expensive when paying in RMB vs USD. This means that at best you will make 70% of what you are trying to extract.
It's for this reason that this is not very attractive since there are many other schemes/methods by which you can get a better extraction rate.
>Take, for example, Tiffany & Co. whose products are on average 30% more expensive when paying in RMB vs USD.
Naturally, China has high VAT. But if you are just a small time criminal who just wants to secure his "koosh of a lifetime" that he will never be able to earn even if we will spend multiple lifetimes working?
> Now do you understand why the Chinese government is attempting to ban Bitcoin? Chinese people are scared of their currency
The People's Bank of China is loosening capital controls [1]. The yuan is overheating and the PBoC wants to weaken the currency.
Capital controls weren't the reason behind China's move. Fraud was. Constraining the problem to China-specific characteristics appears to be why this "China banned Bitcoin because of capital controls" meme has taken root.
You've linked to that six-month-old article in two different discussions now.
The article provides virtually no details concerning what capital controls were loosened and in any case, whatever these measures, they were one-time event that doesn't prove a trend. China certainly wants to say it's loosening capital control and it's perfectly capable of showing the wire services some measures.
If you want to argue a trend, show us an analysis from a respected outside observer.
It's simply impossible for me to believe that they would try to ban Bitcoin for any other reason than to prevent capital flight. Any Chinese national with a significant amount of money has already shipped most of their assets overseas, or is in the process. Getting money out of the country with Bitcoin is effortless, and thus an easy target for regulators. The articles you've linked to don't touch on the clampdown on capital flight. Here's a recent one about that:
> It's simply impossible for me to believe that they would try to ban Bitcoin for any other reason than to prevent capital flight
Fraud? Massive amounts of fraud occurring through ICOs? American investors, even retail ones, are markedly more sophisticated than Chinese investors for having generations of cultural knowledge of conmen and securities.
Capital flight is happening, but from what I can tell the PBoC is currently encouraging it. Over the last 2 weeks, many screws have been loosened in a bid to (a) appease dealmakers and (b) push the yuan back down. The number of Chinese investors I work with who, over the last month, for the first time in years, were able to once again stage capital is massive.
TL; DR I am thoroughly convinced the "Bitcoin was banned in China because of capital controls" argument is being pushed by people who stand to gain from ICOs. Framing it as a China-specific problem, as opposed to an issue the Bitcoin community must address, sequesters the problem (for the time being).
Note: not saying you're doing this. I bought the argument for a bit. The facts, however, speak decisively one way.
I guess it comes down to the question of do you think China is more concerned about its people losing money, or China losing its people's money (that the state views as its own). I don't think you'd find too many Chinese people that would argue for the former, although it's a nice facade.
Mass fraud amongst people who can't afford it is a concern to any political entity. If millions of Chinese lose their savings to fraudulent ICOs, just like when million of Americans lost their savings to fraudulent mortgage-related products or S&L products of pre-Securities Act hucksters (to whom we've come full circle with ICOs), that becomes the elite's problem.
They are mostly easing, but they've also put new restrictions on Chinese businesses buying up foreign companies, since they've been on a bit of a spree recently.
Edit: in Jan 2016 the yuan really was going through the floor and people thought the sky was falling in. These latest actions just mean the PBOC is more comfortable with the range the currency is trading in.
thank you for the contrarian view. this is helpful in finding truth.
while bitcoin historically was not the main instrument of capital flight, would capital flight not be much easier with bitcoin, especially for the average user?
one example cited elsewhere requires a lawyer to draft a $50M "invoice." it seems like the average chinese citizen would probably not have such connections.
is it possible the government is pre-emptively preventing flight among the masses? one way to disprove this theory would be to analzye the impact the masses could have on capital flight -- perhaps the majority of capital flight actually would occur among the rich and elite, who don't need bitcoin to move capital.
> is it possible the government is pre-emptively preventing flight among the masses?
China lets its citizens export up to $50,000 a year [1]. I think the typical bank's receivables financing [2] minimum is about $100,000 to $1 million. Lawyers, invoicers, et cetera might take a further 1 to 10%, so let's say $200,000.
On one hand, we have the argument that people exporting between $50,000 and $200,000 a year is a problem (but people exporting $50 million is not). On the other hand, we have concerns about rampant fraud.
your article is from 6 months ago, and is only talking about short term measures they had implemented a few months beforehand.
In 2017 china has has:
Enacted laws that lowered yearly money per person taken from china from $64,000 to $9000[1]
Seen foreign outflow investments drop off a cliff in 2017 (almost 50%!) [2]
Massively restricted allowed classes of foreign investment such as real estate, traditionally one of the few ways private citizens and companies were allowed to take money out of china [3]
Cracked down heavily on bitcoin, an excellent currency exfiltration tech.
Its clear that this is part of a broader trend, please stop reposting this misinformation laden comment.
Not only bitcoin, China is trying to clamp down different types capital flights. Recently had also limited or banned foreign investment by Chiense companies.
You do realize CNY is one of the most robust currencies out there right ? I'd be more worried about the USD at this point (esp. if the petrodollar starts collapsing); but then there are enough Asians (Japan, China included) who'd not want to see this happen.
I was hoping that is was an action that would put pressure on North Korea. North Korea has been trying to use Cryptocurrencies to circumvent sanctions.
Lots of people in this thread failing to understand why the US has a higher credit rating. The US has had a stable political system for 200+ years (leaving aside the Civil War), and has a court and political system that investors have confidence in can respond to financial crises.
It's not even about the US government's assets which it could sell, it's about the awesome ability of the US government to raise revenues by raising taxes.
For example, US taxes as as a percentage of GDP have mostly fluctuated between a ~22-17% window. Right now, they're at 17%. They were almost 20% during WW2. That 3% respresents a half-trillion of revenue it could collect per year. Current US interest payments are $266 billion per year. There is ZERO chance of a default and everyone knows it. The situation with China is way more opaque. No one knows what their long term ability is to make continuing payments, nor does anyone know if what would happen to their political stability if there were a financial crisis.
And as a last resort, since most world debt and trade is conducted in US dollars, the US government can literally print money to settle its debts, both domestic and international.
If US tax receipts went to 25% of GDP, that's $1.4 trillion per year of interest payments, or paying off the debt in less than 20 years.
Now, the common response would be to claim that raising taxes would reduce GDP growth, but the data doesn't show a strong correlation (higher growth has occurred during times of higher taxes and vice versa) and in any case, it's a lagging signal. All in all, US fundamentals are reasonably good, and the country is well equipped to deal with its debt relative to other aging social democracies. Moreover, if the Trumpsters don't screw up immigration with their xenophobia, the US fertility rate and immigration rate protect it against the kind of demographic inversion you seeing in other countries which poses a huge problem for entitlements.
I have optimism for China's long term outlook, but there's way too many unknowns from lack of transparency to trust investing money in it.
I think the point is that they rely on foreign lending to help fuel economic growth by flooding institutions with money, a practice that is unsustainable in the long term, and that their rating is being downgraded because their growth numbers are artificially inflated in this way.
This explains why there aren't external forces that can check the growth in credit.
But there has been an explosion in debt within China, financing ultimately non-productive investment. Even with a positive external debt outlook, you can get wild economic imbalances within a country via uncontrolled credit creation. The hangover could be profound.
To put it another way: why do you think centrally-planned economies are frequently outpaced by capitalist economies? Misallocation of resources. Debt binges are similarly distorting.
What specific misallocation of resources are you referring to? The housing developments? I'm not convinced those are wasteful, yet, even if the developers go under.
The fact of the matter is, having a dirty float exchange regime and beggar-thy-neighbor trade policies will eventually come back to haunt the country that engages in these practices.
I think there is one fundamental point people should understand when pondering macro issues: for a closed system the amount of savings is equal to the amount of debt. Every dollar of debt is a dollar of savings for the debt holder and vice versa (the first part is always true; for the second part to be true we can either take a narrower view of what savings are or we can view "debt" a little more expansively to mean all financial assets -- the key is that claims are always matched by obligations). So China having a lot of debts is equivalent to Chinese having a lot of savings since most of the debts are held domestically. With that in mind maybe people can get a better perspective on the "what if" the credit boom stops.
"A lot of the extra liquidity is being sopped up directly into real estate"
It doesn't really work that way. People who buy lose liquidity but people who sell gain liquidity. Cash just changes hands. The question is what are the side effects of these transactions. In this case lots of apartments get built. Many of them empty. You may not regard that as the real economy. But is digging up gold to put in a vault or mining bitcoin any more real?
No, they aren't. It isn't doing anything useful, just acting as a speculative asset. It isn't developing the economy so that production is increased later on. Gold and bitcoin mining similar don't create value either (for gold's usage as a speculative asset).
With their real estate boom people will eventually live in larger and more modern housing units. The process to get there may be more wasteful than necessary but it can be eventually productive even from a very utilitarian perspective.
During the dotcom boom much more fiber capacity than needed were built but they were eventually absorbed. It was a misallocation of capital at the time and companies went bankrupt for that. But it was eventually not all waste.
Ha! The last time I looked at apartments in Beijing (late 2015) was depressing. Rents for 10k RMB/month, sells for $1 million USD, has one bathroom with a crappy wet floor shower (rental, the for sale places were completely unrenovated of course). Those buildings are also not meant to last more than 20 years without extensive maintenance (Chinese overbuild on concrete to take adavantsge of unskilled migrant labor, this leads to serious maintenance problems, but the CCP sees it as a feature rather than a problem), they start looking depilated after 5.
My wife owns a villa in a tier 88. It is a nice place, but the standards are so different, the lack of indoor heating makes me wonder how it could ever be livable.
Also, China lacks a property tax, so housing is seen as a speculative asset. It is really just like gold or bitcoin. Lots of house aren't even lived in (e.g. See ghost cities that have completely sold out but no one wants to actually live there).
Right. And keep in mind that Chinese GDP per capita is about one fifth of the U.S. If everything in China were up to US standards Chinese GDP would be 3 times that of US.
Wait, we are talking about a $1 million apartment here, even in SF that would get you something ok, but in Beijing, you would hardly get anything at all, it is just insane.
China already has developed world real estate prices even in tier 3s, while the quality is still developing world. it is definitely in a huge bubble that will pop eventually.
How much of the $1 million apartment is the price of the land? How much of the land price can be accounted for by things like very large investments in infrastructure such as the subways and preferred access to top universities that are still relatively low cost?
Anyway yes if they overbuild then one day they will have to build less. Remember the labor supply that are willing to do construction jobs will also be decreasing rather quickly. Right now they still have a generation of construction workers who are relatively skilled and who are still cheap to hire. Overbuilding now is not super stupid considering the demographics.
These are all tall apartment blocks, so land is involved, but is amatorized ofer many units.
Construction workers are unskilled by design (farmers from the country side, not even high school educations, construction is basically a jobs program for them). The techniques they use to compensate will result in higher maintnence costs later on down the line. It isn't stupid considering what they have, but the resulting buildings become dipilated rather quickly, why pay $1 million for that? And if I can rent that place for a cheap 10k rmb/month anyways, why would I bother buying?
I agree it is not a good investment based on the cap rate, unless the rent will be rising quickly to much higher levels. But as Keynes has pointed out long ago, investment for most people is like the beauty pageant. "It is not a case of choosing those [faces] that, to the best of one's judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees." (Keynes, General Theory of Employment, Interest and Money, 1936).
What I found interesting is that many bubbles have some rational elements otherwise they would not have formed in the first place. Take Beijing real estate: do apartments with convenient access to subways sell for a lot more? do apartments in districts with better ranked schools sell for a lot more? If yes you see people are still pricing utilities and the market is functioning at the micro level. It is just hard to pin down why the overall price level is so high:
- for most people who live in their own apartments, the price is quite irrelevant (they don't want to sell as they need a place to live);
- people who hold empty apartments probably subscribe to the "beauty contest" theory of investments (they may rationally think the price high but they couldn't think of a better way of investing);
- as far as the government is concerned the wealth redistribution caused by the high real estate price is in the right direction esp. when compared to a stock market bubble: high land auction price means more money to build infrastructure; high ownership ratio means older people who are less educated with lower income benefit more and while the young suffer they are more educated and can expect their income to rise rather quickly.
Despite the high real estate price Beijing population had been increasing rapidly (would have been even higher growth if not for government control in place). If China on a whole eventually stalls out at Taiwan's level (where Taipei suffers from similar real estate phenomenon) China would have succeeded beyond what most people expect.
Except that here it's kind of frightening to see the quality standards that are being followed (or rather: not followed) when putting up all of this housing, especially in non tier one areas. Housing gets build. Stays empty. After a few years look likes it's ready to be bulldozed and reconstructed from scratch again. In most cases, this is indeed exactly what happens, but it's hard to see any long term benefit from this sort of approach once the economy slows down.
If one sees a shanty town in the developing world one may wonder who would want to live there. What one does not see is what the conditions were before people moved into the shanty town. China actually completed rural electrification (and road coverage, cellular coverage etc) but still just having running water and indoor plumbing is a positive change for many.
Right that is the process of money creation. However it does not change the accounting identity that asset and liability are the flip sides of each other.
Except that means that if the debtor defaults, then the creditor loses all their savings. And the problem here is that what you have in large nations is a gigantic, interlocked network where every creditor is a debtor to many other lenders.
The result is that a limited number of debtor defaults can start a chain-reaction that freezes the whole system. Then you have a financial crash, and history shows these usually take a decade or more to get out of. Or is it your view that there is something special about the Chinese such that that couldn't possible happen there.
I wouldn't say that it is impossible. The tendency is though to double or triple count negative things. Chinese economy has lots of inefficiencies. Very true. That is reflected in the low per capita income. People could live a higher standard of living given the amount of effort they put in if the system were more efficient. People's lives are a lot less free. Capital control for example. Bitcoin was okay and then it is not. Inefficiencies in the economy can brake contagions though. What is negative in one aspect can be a saving grace in another. Check out how coal price behaved. The party wanted to shut down capacity and they did. Even as coal demand dropped the price shot back up. Difference between coal and oil? Coal is much more local while oil is international.
> Does it have anything to do with the fact that Russian, China and other BRICS are banding together to have Oil sold in Chinese currency?
No. If there's an industry S&P has a conflict of interest with, it's bankers. Derivatives, how Wall Street mostly trades commodities, don't care what their underlying asset is denominated in.
I believe your question arises from what I refer to as the petrodollar fallacy. The U.S. dollar is used, globally, because Americans buy lots of stuff. Exporters who sell to Americans naturally end up with U.S. dollars. They could sell those dollars for their own currency, or they could invest them in U.S. dollar denominated assets. (Or they could hold them to further buy stuff from other people.) Our deep, liquid and largely politically indifferent financial markets, huge base of consumers and lack of capital controls underwrite the U.S. dollar's global popularity [1].
Given the United States is, again, a major oil producer, what other people trade their oil in is largely irrelevant to American financial interests. Would certain 3-letter agencies prefer Iran have to sell for dollars? Sure. Is that of even the most vanishing concern to Wall Street? No.
[1] Historically, the U.S. dollar supplanted the pound sterling after World War II. The U.S. Treasury, through Harry Dexter White, hard coded the dollar into the Bretton Woods system [a]. He could do this because the United States was the only industrialized power untouched by the war. (We also had a nuclear monopoly.) Either way, nothing to do with oil.
What you forget in your analysis is that oil producers are not necessarily happy to exchange oil for dollars. They do that out of necessity, for the lack of an alternative. After all, any holder of wealth would be more than happy to diversify their holdings instead of "trusting" on the miraculous power of the dollar. The petrodollar is just the canary in the coal mine. Once countries are able to create an alternative to the dollar in that very crucial market, other industries will follow, especially at a moment when China is becoming the number one market and offsetting the industrial production of the US.
> oil producers are not necessarily happy to exchange oil for dollars. They do that out of necessity, for the lack of an alternative
The U.S. dollar is not the world’s sole reserve currency [1]. At 65% it’s dominant, but Euros, pounds, yen and francs are also used and freely traded. Nobody has to accept dollars. It’s just the easiest [2]. (Because we consume a lot and have deep, reliable financial markets.)
In any case, who do you think is pushing for more reserve currencies? Hint: the people who make money when people have to convert between reserve currencies.
[2] Anecdote: friend, former treasurer for a major European airline, found it easier to buy planes from Airbus in U.S. dollars than Euros. They would sign a contract denominated in euros and settle in dollars. Even if that meant swapping euros for dollars and then back again. Why? Because everyone had loads of dollars and is this familiar and comfortable with dollar mechanisms for moving large sums. Nobody forced anyone to do it this way. It was just, strangely, easier.
This is not different at all from the situation of the pound sterling at the beginning of the 20th century. Of course it is easier to deal with US dollars, this doesn't mean anything for the health of this currency in the long term.
Excellent, as an American I wish them all the luck in setting up an alternative currency standard.
The US has been hurt by the 'exorbitant privilege' of having its currency be an international reserve standard. Dollars that pile up on balance sheets and central banks' books get recycled into US assets and debt. This is part of the dynamic that drives the trade imbalance, which (on net) imports unemployment into the US, via lack of competitiveness.
Yes, the dollar would drop in value if the world's banks used a basket of currencies instead of large, dollar-denominated holdings (often T-bills). And that would be good for the US.
RMB is not even convertible. Why would oil producers be happy to hold a currency that can't even be freely traded? Dollars are easy to exchange once obtained, RMB is not.
Hasn't the S&P credit ratings lost all credibility? They were the ones lableling worthless deritatives triple A ratings during the financial crisis? had
So let me get it, China, the biggest producer in the world and with a culture of saving a lot of money by it's citizens get a downgrade to A+. While at the save time, the US government's debt passed 20 trillions and American in debt with no savings got AAA rating.
If trade with China stopped today, how quickly can the United States re-tool up to supply the enormous demand for PCBs, basic electronic components like SMD resistors and capacitors, microcontrollers, transformers, chokes, cables, wifi chips, antennas, power transistors, PLAs, LCD displays, OLED displays, solar modules, and the myriad other goods on which our modern society increasingly relies?
"Sneakers" is a cute little jab, but A GDP predicated on the consumption of televised football and mocha lattes is qualitatively different from one predicated on the production of goods upon which reliance the profligate NFL viewers are blissfully unaware.
At some point, even if that point is measured in centuries, the producers and savers eventually win over the gluttonous consumers. China is playing a long game with a long-term vision, securing rights over natural resources around the world, acquiring critical control over global supply chains, and artificially pegging the Yuan down to fool us into thinking that the value of passively watching Netflix is (as measured by GDP) greater than that of the construction of ever-faster pick-and-place machines.
Meanwhile, we look only to the next quarter and goose our EPS with low-interest stock buybacks, and realistically believe that mindless consumption of pixels is a more solid foundation for an economy than producing the "picks and shovels" used to deliver those pixels.
the majority of people in the west, the US especially, thinks all china does is make cheap walmart crap. it's perfectly fine to say horrible, racist things about the chinese. nobody seems to care.
what's really happening is the chinese government runs the show and facilitates the dumping of cheap stuff into the west to manage expectations/anxiety about their rise, and to fund the real manufacturing and mineral extraction empire. if your competition doesn't take you seriously, that's a net asset, not a liability.
well sure, you can falsify my statement by simply not classifying anything as racism. i think the gleeful enthusiasm shown by people relentlessly china-bashing is telling, especially since they seem to do it all the time, as if they've found a loophole to freely express their hatred.
if nothing else it's a great little vehicle for racists to hop onto guilt-free.
This is a good point and reading it gave me the shivers. Let's not forget that for most of Civilized human existence, China has been the world's foremost economic and cultural power (except perhaps the Roman Empire). Chinese leaders are pretty well aware of that and yearn to put modern China back in its original place. And unlike the US, they don't have to deal with meddlesome democratic system in their march to economic and military supremacy.
US imports less than 1/10th as much from China as it manufactures.
Overall, US manufactures more stuff today than at any point in it's history. Clothing, Cars, CPU's, Candy, Cosmetics, Cameras, etc.
The DoD has done a great job of having US suppliers for every good it needs which demonstrates the US can still manufacture all critical goods independently. Even if it would have to ramp up production of various things.
As mind-blowing as it might seem the US has minimal dependence on China. In part because it exports several times more $ worth of goods ~1.3 trillion to the world than it imports from China ~0.46 Trillion.
The United States is host to the most semiconductor design firms, the second most manufacturing facilities. TSMC is mostly in Taiwan and the United States; and they seem to manufacture a lot of microcontrollers, WiFi chips, and things that you mention.
Scaling up capacity for almost anything you mentioned would be a bit expensive, but ultimately not crippling.
US manufacturing output hasn't declined overall, it's just manufacturing employment that has declined. The US can make all of the things you mentioned, though it's often more expensive.
“FROM today, China has the world’s fastest bullet trains.” 21st Sept 2017
“China on Thursday officially began the world's fastest commercial train service with a top speed of 350 kilometers per hour between Beijing and Shanghai.” Intend to export technology. Numerous articles. http://www.globaltimes.cn/content/1067646.shtml
China has the world's fastest bullet trains but a terrible safety record.
Sure, some ghost cities might pan out but I wouldn't hold my breath. If this were 2006, my position would be "it doesn't make sense that fat women with crappy entertainment jobs can afford luxury houses" and you'd retort "but the houses appreciated, even if she can't afford it, it's more valuable now than it was so the bank wont take a loss on it".
“Chinese companies’ share of global electronics production, meanwhile, rose from 30% in 2012 to nearly 60% in 2016, and this share will rise to 87% by the end of the present year.”
> American in debt with no savings got AAA rating
> The Federal Government has tremendous assets
That's interesting, because if the crap hits the rotating blades and if the US has to sell even 10% of those assets the effects on the global economy are anything but obvious
Who can pay 10trillion dollars? What's the economical effect of such a big transaction? What if there's not enough liquidity in dollars for the purchaser? Would the US accept GBP/CNY/EUR?
GDP does not measure production and should not use as a measuring stick of how productive a country is.
US government spending is 1/3 of the US GDP. If you accounting for state and local government, the number is much higher. This level of spending is unsustainable.
No, the US government cannot just auction it's assets to the public to pay off debt. If it is that easy, the Federal Reserves can just print 20 trillions and pay it off
Debatable. GDP probably measured production better in 1920s America than 2017 America.
and should not use as a measuring stick of how productive a country is.
If you have to compare the relative size of two economies on a single dimension, GDP is probably your best KPI.
US government spending is 1/3 of the US GDP. If you accounting for state and local government, the number is much higher. This level of spending is unsustainable.
But most of that money isn't ultimately spent by the government. The money goes to Boeing, hospitals, the elderly, etc. A lot of our GDP is ultimately spent by consumers.
I have serious concerns about America spending too much on its military and healthcare but I'd think we spend our money better than China.
No, the US government cannot just auction it's assets to the public to pay off debt.
Why not? It holds the assets, it can write titles to the assets, it can conduct auctions.
If it is that easy, the Federal Reserves can just print 20 trillions and pay it off
If you don't see the difference between printing 20 trillion dollars and exchanging valuable things for mutually agreeable prices, then I'm sure you're set in your way of defending the wise policy decisions of the Chinese Communist Party.
Government spending is just another way that the productive resources of society are funded, and that people receive the benefit of those resources.
As a thought experiment, we could lower taxes, and have the services provided by government instead paid for through private transactions. Why is this more sustainable?
The value of land and spectrum would 'fly to the bottom' if they sell one hundred billion of it?
The last spectrum auction ended with a winning bid of 19.6 billion. The initial subscription was 86.4 billion. You're telling me that 84 mhz of spectrum represents 85% of the entire world's willingness to pay for American spectrum?
http://www.reuters.com/article/us-usa-wireless-auction/fcc-s...
You're right, it does make sense, given that the USA also experienced similar credit downgrades over the past decade when it went through its own credit crisis:
While we're being snarky, let's not forget that China also regularly steals, copies, hacks, and sources much of their "production" innovation from the USA while simultaneously impeding the United States' ability to enter Chinese markets in just about every category of good or service. So we'll just call this one even and leave it at that.
In fact it does make sense. China has undergone the greatest debt binge in world history in the last 10 years. In fact, there has never been a debt accumulation even remotely close to what they've done.
Tens of trillions in publicly known and shadow debt has been taken on by the Chinese economy. Compare their GDP to debt growth:
I don't think your analysis is sophisticated enough to capture the actual underlying dynamics.
Rating of debt is largely a question of future ability to repay. The concerns of the rating agency, I imagine, is that much of the debt in China is being created for non-economic investment, that ultimately won't be able to pay for itself. And someone will have to foot the bill, whether it's the lender (via a write-down or write-off of nonperforming loans) or someone else (the central government, by assuming the loans directly or some other mechanism).
Yes, the Chinese central government has a lot of capital to play with, due to a very high household savings rate and positive trade imbalance. But the magnitude of the internal debt, and the degree to which it's likely misallocated and ultimately nonperforming, should concern anyone who's paying attention.
S&P? the one which repeatedly offered triple-A ratings to those junk securities before the GFC? It was sued by both US federal and state governments, eventually had to pay $1.5 billion fine for its wrongdoings.
Maybe S&P should fix its own credibility debt first?
How do you think they should do that, and why are you responding so defensively? It seems to me that the only way for them to build up credibility is to never repeat the mistake they made last decade - but you seem to think that they should respond to their mistake by ... never downgrading a credit rating despite seeing issues? That doesn't make sense.
You're wrong. Look at the comments below - you're reacting emotionally and not doing your research properly. I apologize if I'm mistaken, but I'm guessing you're Chinese. I've seen a lot of Chinese people get defensive over little things like this and respond with knee-jerk attacks, but it's really unnecessary. As your country gains influence worldwide you'll only see more articles like this - best get used to it and try to respond in a more useful way.
From where did you get $20 trillion? The data I see show $3.5 trillion for the United States versus $5.4 trillion for China [1]. U.S. depository institutions hold over $9 trillion in savings [2]; this doesn't count savings held in stocks and bonds, the majority of Americans' savings.
In any case, private savings aren't really relevant to a country's credit rating. Ability and willingness to pay are. If the U.S. Treasury defaults, one can sue. If China defaults...you're just screwed.
The Sydney Morning Herald article you cite [1] measures “deposits”. The comparable figure in the United States is $12 trillion [2]. The comparison is misleading, however, since few U.S. institutions, financial or non-financial, “save” in deposit accounts. (This is true in a China, too.) All this comes down to the murky definition of “savings,” which are in the end largely irrelevant to national credit concerns since “credit” is trying to quality their probability of seizure (through default, expropriation or other means).
You're right: judged only by those facts you give, this would seem to be absolutely insane.
And that's why you must be wrong. S&P may have made their fair share of questionable decisions, but they just aren't completely stupid.
I'm not saying that these ratings are gospel, now. Or that S&P isn't succumbing to, for example, political pressure in their ratings of the US. But presenting your case in such a way only damages your credibility, not theirs.
Kyle Bass' original analysis of the China credit bubble is also worth revisiting.
The $34 Trillion Experiment: China’s Banking System and the World’s Largest Macro Imbalance
http://im.ft-static.com/content/images/42972ca8-d72e-11e5-88...