One of the largest components of the global financial order was the US consumes/ China produces, relationship. A relationship whose return loop was China buys US debt. Smaller parts of this machinery were the off-shoring of US jobs to China and the sucking in of every sort of raw commodity (metals and coal) to fuel the production machine.
But this happy marriage of needs between China and the US has broken. The basic problem is that the US and the EU are not consuming at the volume China is geared to supply. This is more of a problem for the US than the EU. The problem for the EU is ameliorated by the weak Euro. The US has a strong dollar. Essential in some ways. But in this instance a killer.
The US would really like to kick start US consumption. But short of shooting reluctant shopers to encourage the others, stimulus policies are simply not working. The other approach for the US, identified by Congress and the Obama regime is for the US to concentrate less on consumption and more on production. For the relationship with China, however, that means less importing from and more exporting to China.
But this is where the formerly happy partners are finding it diffcult to agree. American wants to have the Chinese devalue their currency relative to the dollar, in order to make US exports to China more competative. The Chinese have firmly said, “not a chance round eyes.”
The reason is that such a change would help the US but not the Chinese. The Chinese may have joined the World Trade Organization but that doesn’t mean they accept any of its principles. You see the WTO is all in favour of open markets. The Chinese couldn’t give a stuff for the principles. WHy should they care about principles, when everyone’s markets are already open to China, because her products are so cheap? So why does China need to agree to open her markets? What does she get out of it? Nothing. So she won’t. Neither will she devalue her currency. China has alreayd said her currency will NOT even be discussed at the G20.
What threats does the US have? Few. They can slap some tarrifs on Chinese goods. And China can move her hand towards the tap marked, “funds for buying US debt” or even toward the hot tap of the pair, which is marked “Sell US debt”. And the US will have to back down. I doubt it will even come to that. A few of the hardest-of-thinking congressmen may have to have it explained to them slowly, but even they will get it eventually.
The problem for the US is that China has moved on. “It’s not you. It’s me.” As the saying goes.
China has quite sensibly decided that a more sustainable and less volatile path towards even greater global power, is to move away form total reliance on exports and develope instead, a domestic market. To that end the central Chinese authorities have been slowly trying to get some measure of control over the spending and lending of Regional governments. One of the last and important steps is to stop regional governments being able to lend out any underspend on their budgets. This has been a massive source of funding for property speculation. Rules are coming in to place to make this harder to do. We’ll see what effect they manage to have. Could rock Australia’s housing bubble.
The other part of China’s strategy now coming in to view, I think, is to allow wage increases. It is notable how hands off the government and its offical unions have been, in the rash of strikes for higher wages at FOREIGN factories. Taiwanese, Japanese and US conglomerates and their Chinese partners have been hit by a wave of strikes. Plants have been closed, production stopped. New wage settlements have been 30% to over 100% increases. This is already having an impact on profit. Honda profits may be cut by over $100 million due to the strikes and wage settlements at its factories and suppliers in China. Toyota’s shares lost 1% due to it’s strike worries.
Why is China allowing this? Well if you want to build a domestic market you need workers who have some cash to spend. Where better to get that cash than from wealthy foreign firms and ultimately foreign consumers. Honda has built plants in China and desperately wants good relations with China. So Honda will not rock the boat. They will settle with the work-force and stay. No matter what. Other foreign firms will do the same.
China is giong to build a domestic market and we are going to help pay for it.
"But short of shooting reluctant shopers to encourage the others, stimulus policies are simply not working. " &
"Well if you want to build a domestic market you need workers who have some cash to spend."
…This is one of the things that grates with me. It seems to me, and I've no idea about economics in general, that a lot of the excessive credit lending over the past decade was necessary to compensate for stagnant wages due to outsourcing and increasing prices (in terms of food, fuel, housing, etc, but at least there were cheap flat screens and flip-flops) , at least in Europe. The boom wasn't a boom for your average Joe, unless he already had or found access to property, or maybe benefited indirectly through work. But you keep squeezing, through inflation, stagnant wages, outsourcing, etc, and then panic because no one is consuming. Yeah, well, you see, you took all their money and left them without work. Blood and stones, etc.
Anyway, just wanted to say that I really liked that mental image of riot police marching people into shops at gun-point: "YOU SHALL CONSUME!", pour encourager les autres, etc.
The Chinese position is not fully co-ordinated; remember, everyone knows the Chinese are inveterate gamblers.
Inveterate means they can't help themselves, and it is not just gambling with their loose change, it is in everything they do. They are gambling on minerals, exports, property, currencies, jobs.
I am sure China is busy making similar (but different) catastrophic mistakes just like us in the West.