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The American media seems to jump at any opportunity to dismiss China as an economic threat. It makes us feel more secure but leads to a public informed only ab
by jcoffland 11y ago
The American media seems to jump at any opportunity to dismiss China as an economic threat. It makes us feel more secure but leads to a public informed only about one side of China's story. Namely the part our ego can handle. China has regularly surpassed the US in number of cars sold since 2009. China also holds more US debt than any other country. Another way to put that is the US government owes China over 1 trillion USD. This, I believe, is the real reason the American media trips over themselves to write stories that sooth away the nagging fear that China is, or even already has surpassed us economically.
Edit: more interesting facts.
- China's percent GDP growth is more than twice that of the US. (7.4% vs 2.4% in 2015)
- China's government has $3.9T in cash reserves vs the US' $434B.
- China has twice as many children enrolled in primary and secondary school and 50% more undergrads than the US.
We can only say but, but, but for so long.
- fasteddie 11y agoUS treasuries are at historically low rates -- if China dumped 'em all it probably wouldn't move the needle that much. And the reason they hold so many is not as some control play against the US -- its because it was the best way to devalue their currency enough to support exports.
- jcoffland 11y agoHow it looks depends a lot on your bias. The fact remains that China can soak up $1T of US liquidity.
- Golf_Hotel_Mike 11y agoYes, they 'can' soak up $1T of liquidity the way I 'can' lock myself into my house and set it on fire. Common sense suggests they will never actually do so.
- abduhl 11y agoI'm not very familiar with this issue but could you please explain how China can soak up $1T of LIQUIDITY when most of this $1T is, as I understand it, in bonds. Wouldn't this debt being in bonds mean that 1) there is a schedule of payments that have already been accounted for in the budget and 2) that they cannot "call in" the debt? Certainly China could refuse to buy additional bonds that we put out which may impact liquidity but there are always buyers for US debt - Japan was the largest foreign holder of US debt just last year.
- jcoffland 11y agoChina can sell US bonds to buyers for slightly less than the US government. This would actually create more liquidity in the US bond market but effectively reduce the US government's ability to finance more debt. The US government would have to sell bonds even cheaper to finance more debt. Whether this would have a big effect would depend on a lot of other factors but it's a significant playing card in the Chinese hand.
- foxhedgehog 11y agoReplied above, but the secondary bond market is liquid enough to absorb this event over the time period required.
- venomsnake 11y ago$1T is a joke for US economy. The fed pumped how many more than that with QE programs?
- rahimnathwani 11y ago"US treasuries are at historically low rates -- if China dumped 'em all it probably wouldn't move the needle that much." Rates (i.e. yield) and price have an inverse relationship. If China were to sell their bonds, this should reduce the price of bonds (i.e. increase their yield). So, regardless of what we think about the likelihood of this happening, or the magnitude of the impact, 'historically low rates' do not provide any backstop.
- hueving 11y agoHistorically low rates means people are buying up us bonds even at crap returns. If China dumped us bonds and depressed the price, it would only make the value proposition that much better for the current bond investors so they would gobble them up and push the price right back up.
- foxhedgehog 11y agoThe research that I did on this for my grad school project with the GAO suggested that there was generally enough liquidity in the secondary bond market to absorb even a mass sale from China over the time period required to do so.
- jcoffland 11y agoThat may be true in the current environment, or in that which you measured in your study, but might be totally different in a struggling economy. Say they decide to have a massive sell of at a strategic moment. Combined with other factors it could have a larger effect. The value of one play matters in checkers but in chess it's the combined value of your moves that win the game.
- forgetsusername 11y ago>Say they decide to have a massive sell of at a strategic moment. You can't sell into a vacuum. Hence, if they are "selling-off" at a strategic time, then there is someone "buying up" at the same strategic time.
- Retric 11y agoFed can buy all the bonds it feels like so there is no way to 'flood' the market with T-Bills. Net result would be China selling off it's reserves at a huge discount which would be good for the US.
- snowwrestler 11y agoA struggling economy is when demand for U.S. Treasuries is the highest, because people flee to safety in troubled times, and financial instruments don't get much safer than U.S. Treasuries. There would be no shortage of buyers if China decided to sell off in a struggling economy. China chose to put their own wealth into U.S. Treasuries, and therefore China will do everything it can to ensure that it can extract at least that much wealth out of U.S. Treasuries. They don't have a $1 trillion of free money that they can burn up just to hurt the U.S. by selling low. They need that money back! The amount of U.S. debt held by China is often viewed as a negative thing, but it actually does a lot to stabilize our relationship with them. They want us to succeed financially, so that they can get their money paid back, and so that they have a place to sell the products they make. Strong economic ties are the major reason we do not have a Cold War with China the way we did with Russia. Neither country wants to change that. Edit to add: This is why there is so much U.S. reporting on China's economy. Not because Americans want it to fail, but because Americans want it to succeed, and have concerns.
- wobbleblob 11y ago> And the reason they hold so many is not as some control play against the US -- its because it was the best way to devalue their currency enough to support exports. Can you explain how that devalues a currency? Isn't a simpler explanation that the reason they hold so many is because US government bonds were and still are the safest way to invest your money?
- mamon 11y agoTo buy US bonds you need dollars to pay for them. So you have to buy dollars, paying with your own currency. Which changes the exchange ratio in favor of dollar by means of the supply/demand law. That's how buying bonds devalues juan.
- skybrian 11y agoChina exports a lot to the US, and exporters get paid in dollars. To use that money in China, they need to exchange it, increasing demand for yuan. There aren't enough imports into China to counterbalance this. Buying treasury bonds instead means they don't need to exchange the money and can keep on exporting. It also happens to be a very safe investment. You could worry that someday the Chinese might want to cash in on this investment, but increasing US exports to China isn't actually a problem. Increased demand for US exports would improve the US economy. People like to try to figure out which side is exploiting the other, but both sides are largely getting what they want out of this deal.
- cubano 11y agoSure...we would just print more money and pay them back. QE programs have been propping up Wall Street for years now, and it would be just more of the same.
- jonknee 11y agoNo need, there are so many others looking for yield who would buy the bonds.
- mmanfrin 11y agoChina also holds more US debt than any other country ... except the US and domestic sources, which hold 2/3rds of all our debt. In other words, domestic sources hold over 9x the debt that China does.
- jcoffland 11y agoIt's pretty typical for institutions to buy their own government's bonds.
- Gibbon1 11y agoI don't have any formal education in economics, but... The reason that a bank holds government bonds is different than the reason a private investor would do so. Government bonds are the strongest type of reserve a bank can hold. Less safe reserves require a discount from face value. So for a bank there is a balance of risk between cheap and safe reserves like Treasuries and more expensive but better returning paper. A bank is always going to hold a mix of paper as a reserve[1]. China? China hold's US debt in order to be able to stabilize their currency against the dollar. And to backstop the value of their currency on the world market. I don't see anything abnormal about any of this. [1] For a bank, if the ratio of loans outstanding vs reserves in hand gets too low they can't loan out any more money. And since a bank makes money on fees inability to make loans is bad bad bad.
- cylinder 11y agoeveryone touts this as if it makes a difference. as if the US defaulting would be fine because it's defaulting to US based creditors vs. foreign ones.
- draw_down 11y agoI don't really know whether the media is biased against China, it's certainly plausible, but in any case you said literally nothing about the actual situation the story is describing.
- jcoffland 11y agoOther posts in this thread refuted the arguments in the article quite well I didn't see a need to repeat them.
- carboncopy 11y agoThose are strange metrics of success you chose: number of cars produced annually, amount of public debt held. I'd have gone with GDP, military strength, set of advantageous alliances, or some other measure of economic, military, or political power.
- jcoffland 11y agoYou read it wrong. It's cash in hand not public debt they have more of.
- carboncopy 11y agoNo, I read it right. It's American public debt they hold. They don't have 1 trillion dollars in cash sitting in a vault. They are holding U.S. Treasury bonds. And again, I don't understand why having 1 trillion dollars in a reserve bank is a useful measure of economic power. The Chinese economy has a GDP of $10tn compared with the U.S. economy of $17tn. That is an example of a meaningful metric of power. ^^^ the parent commenter edited his entry after I submitted my original comment, which changes the relevance of my comment.
- jcoffland 11y agoThey have $3.9T worth of cash reserves sitting in a vault in addition to holding over $1T in US debt.
- rosser 11y agoChina can do things at a scale the West in general, and the US in particular can't even fathom. I was in Tibet with some friends in October. At one point, our tour bus was detoured, because the bridge on our scheduled route wasn't big enough for it, so we drove a couple hours out of our way, and just happened to pass a 10MW solar plant. In the middle of Nowhere, Tibet. A thing we wouldn't even have seen if we hadn't had to detour down a dirt track road, still under construction (to the point that we had to stop and wait for the equipment that was carving the road bed out of the mountain face to clear enough room for our bus to pass). Who knows how many other such hidden infrastructure gems there are, down other roads that tourists don't get permission to use? Later, we passed a seemingly endless convoy of dozens of fuel tankers and flatbeds loaded with construction equipment — all military green — headed south, as we were returning to Lhasa from Mt. Everest base camp. Doing some digging, it turns out this materiel was all accumulating at the Nepalese border. See, just a week or two previously, Nepal had passed its new constitution, which favored closer ties with China over India. India, used to being Nepal's big brother and pushing it around, subsequently closed their border with Nepal — the border which, by treaty, was the only route through which Nepal could import fuel. Consequently, Nepal was starting to experience a ridiculous fuel shortage. (Talking with a taxi driver in Kathmandu a few days after having seen this convoy, the petrol rationing was down to 7L per family per week. Our flight from Kathmandu to Lhasa — about a 90 minute flight, going the long way, so people could get a view of Everest — was on an Air China A340, because they needed to send a plane that could carry enough fuel for the round trip, as there wasn't enough Jet A at KTM for the return.) These convoys of fuel and construction equipment were waiting for a new treaty to be signed between Nepal and China, allowing emergency fuel imports from China. The purpose for all the construction equipment? The Nepalese side of the road that runs from Kathmandu to Lhasa was still destroyed from the Gorkha earthquake. The estimates I was reading suggested that, once the border was opened, the Chinese would be able to rebuild the road from the border to Kathmandu in about three days, and have fuel continually running down the repaired road as long as Nepal needed it. China just happened to have the materiel on hand, in Tibet, to respond within days of India closing the border and Nepal going into crisis, with sufficient manpower, equipment, and fuel to rebuild a hundred-odd kilometers of mountain road in a few days and keep a city of a million people, and who knows how much of the rest of Nepal, from collapsing. But they're completely backwards and corrupt, and have no idea what they're doing.
- apeconmyth 11y agoAfter years of jumping at any opportunity to build up China as an economic threat.
- TheLogothete 11y agoBelieving China's GDP growth rate blows all the credibility out of your argument.
- forgetsusername 11y agoPlease provide the estimates for its GDP then. Dismissing the work done by others (which provides an actual figure, right or wrong) is lazy.
- TheLogothete 11y agoOh god, if you want concrete numbers, buy a report from a market research firm. Believing the official numbers for their growth is like believing in Santa Claus. The consensus among professionals is that they haven't hit their 7% target since the beginning of this century.
- eva1984 11y agoChina's GDP is misleading, everyone including the government themselves doesn't trust it fully(see keqiang index), but odd enough, anyone else's method is more problematic. Then again, it is not reliable, but doesn't mean it is blatantly lying, you need to decide yourself to which degree you would bet on it.
- dangerpowpow 11y agoeveryone's gdp is slightly misleading.
- chvid 11y agoIf anything the GDPs of relatively poorer countries are underestimated.
- agumonkey 11y agoI'm wary of such massive growth, they might not reach a stable structure. Also shit happens. But maybe mass trumps everything else and they are massive.
- legulere 11y agoAlso China had a positive current account balance of 347 billion dollars in 2015, while the US ran on deficit each year since 1989 and had one of 460 billion dollars in 2015. https://www.cia.gov/library/publications/the-world-factbook/rankorder/2187rank.html https://www.cia.gov/library/publications/the-world-factbook/...
- lmm 11y agohttp://www.factcheck.org/2008/02/the-budget-and-deficit-under-clinton/ http://www.factcheck.org/2008/02/the-budget-and-deficit-unde...
- legulere 11y agoWhat you linked is about the federal budget not the current account, which is something totally different: https://en.wikipedia.org/wiki/Current_account https://en.wikipedia.org/wiki/Current_account
- mathattack 11y agoOriginally I was going to question your math - I thought your trillion was off by three zeroes. Then I did the math myself and realized that you're right. :-) If you count US mortgage debt that they hold, the number may be even higher. A couple quick comments: 1 - We'll feel the economic threat of China when they have a crisis. The world was less interconnected in the 90s, yet troubles in Mexico, Thailand and Russia caused global damage. 2 - The GDP growth #s are suspect, and off of a smaller base. Hard to make an apples to apples comparison. 3 - Hard to compare absolute #s of cars or people in school - given that it's a country of a billion people, they should have a lot more cars and people in school. (If anything, it should be 3X)
- vkou 11y ago> (If anything, it should be 3X) More then half of china lives in very poor farming villages - and the government intends for them to continue living that way. The fair comparison you want to be making is the American urban vs Chinese urban population (Which is now close to the total population of America).
- mathattack 11y agoTrue. It's very tough to make apples to apples comparisons across countries and cultures.
- karmacondon 11y agoIt's interesting that all of the numbers in your post seem to be significant, but really aren't. The US "owes" China a trillion USD because the Chinese, investing on a national scale, need a safe investment that can support trillions and trillions of yuans. And in that regard right now, the US is the only game in town. China's GDP growth is high, but that's because they're starting from a GDP that's much lower than that of the US. As with any logarithmic curve, growth starts quickly and then becomes harder over time. China has a ways to go. The number of cars sold and the number of children enrolled in school are indicators that China does indeed have a much larger population than the US. Almost all of the BRIC nations have large populations, but are still in the process of turning that into wild economic growth. We'll see. Other than the missing context for the numbers you provide, I agree with your general sentiment. There is a bit of schadenfreude among the US media whenever China struggles economicallly. This is probably because China is the US's biggest economic and military rival now that the Soviet Union is gone. It's natural to cheer for your team and boo the other team. I wouldn't take too much offense.
- idanoeman 11y agoWhy would growth be "logarithmic"? Growth is exponential, with rates that yes, probably decrease over time. It's not logarithmic.
- BookmarkSaver 11y agoAre you serious? As they start reaching the upper levels of wealth the ability to keep catching up decreases dramatically. When they are an impoverished country and a wealthy partner throws money at and around them, they will start catching up fast because that amount of wealth is massive compared to what they had.
- idanoeman 11y agoLogarithmic growth would literally be sub-linear growth. Historically countries growth looks something like a piecewise-linear growth in a log-log graph.
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- AJ007 11y agoIt only seems like that because journalists like to write the same things as every other journalist. For almost 20 years I read stories about how China would surpass the United States in both economic and military power. There are a lot of underlying facts to China's investment driven growth cycle that can be explained in math and global trade balances. Their reserves can be spent very fast. GDP growth doesn't matter so much if it's being spent on infrastructure that won't be maintained and will fall apart. In the past year or two, a giant piece of the GDP growth may have been from financial tricks as insolvent companies try to shift money around, offering high interest rates in the process (continous economic growth for a really long time mean no recession to shake out the leveraged companies which are surviving by finance alone, or outright scams.) In the very long term, I think what will matter is the messed up demographics (shrinking population off balanced by too many males) and lack of diversity. Japan had a similar death of growth situation after their investment driven model ran out of steam and their demographics shrunk. The big difference being their population was nearly all living a first world lifestyle by that time. China's isn't. China can still be an important country. They can make a ton of stuff. They can wield outsized military influence globally thanks to nuclear weapons.
- kesselvon 11y agoWhat does lack of diversity have to do with economic growth?
- AJ007 11y agoThe suspicion is that diversity of ideas and experiences allow groups to more easily evolve and solve problems. Even in a room full of males, if some come from different industries, they may more easily be able to pull together best practices each other had never heard of. Does this also apply to age, gender, ethnic, and cultural background? May be it doesn't. At the least I believe that this gives the US a huge advantage in attracting talent because the best from around the world can feel more at home here. This needs to be observed through long term economic endurance rather than measurements of shorter term investment-driven growth like China, Japan, or Brazil experienced.
- diogenescynic 11y ago>Bass, whose Hayman Capital Management LP has a multibillion-dollar bet that the yuan and Hong Kong dollar will fall, told clients in a letter that his firm estimates that China’s liquid foreign reserves are $2.2 trillion at most. That compares with the $3.23 trillion reported by the People’s Bank of China, the central bank, for the end of January. >Bass said in his letter that some of China’s reserves already are tied up in institutions such as policy banks and one of its sovereign-wealth funds. >“The view that China has years of reserves to burn through is misinformed,” Bass wrote. “China’s back is completely up against the wall today, which is one of the primary reasons why the government is hypersensitive to any comments regarding its reserve levels or a hard landing.” http://www.marketwatch.com/story/kyle-bass-warns-chinas-foreign-cash-reserves-below-a-critical-level-2016-02-10 http://www.marketwatch.com/story/kyle-bass-warns-chinas-fore...
- StreamBright 11y agoNot to mentioned they dedication to green energy. http://grist.org/climate-energy/china-is-totally-crushing-the-u-s-on-renewable-energy/ http://grist.org/climate-energy/china-is-totally-crushing-th...
- cylinder 11y agoAnother thing is Americans have very little understanding of their own history; particularly how America went through the same type of tumult as China in its early economic development. Financial crises were the norm (and still are) and it was a wild place with loads of corruption and vast ungoverned / autonomous regions. Yes, soon China will have a financial crisis. It will have to undergo restructuring and debt forgiveness. It isn't going to evaporate from the earth. As an interesting side note, the US has the largest shadow banking sector (as % of all financial assets) in the world: https://www.imf.org/external/pubs/ft/gfsr/2014/02/pdf/c2.pdf https://www.imf.org/external/pubs/ft/gfsr/2014/02/pdf/c2.pdf
- stevendaniels 11y agoOne big difference: there's been a lot more research on economic matters since America's early tumult. There have been warnings about China's debt issues since the issues started.
- dtornabene 11y agoHey thanks for the link.
- coliveira 11y agoThe biggest economic lie is the idea that somehow the US owns China something because of treasury bonds. When you sell bonds you are making a financial exchange at a particular interest rate. It is a trade where each side is getting what they need. And a treasury bond is very favorable for a country that issues bonds as the USA, because the US controls the value of the currency. In other words, in this case the US has far more control over the financial transaction.
- known 11y agoOPEC oil is sold exclusively in US Dollar, not Chinese Yuan;
- yongers 11y agoJust to let you know, that rule does not apply for Iran (an OPEC producer). Not surprising given US sanctions, but there are exceptions to the rule.
- rm_-rf_slash 11y agoThose are some nice metrics you have there. Shame if something were to...happen...to them... You simply cannot trust Chinese government statistics at face value. Every level of government lies to make itself look better, because they are not accountable to the people but instead to punitive development goals that could have moderately successful bureaucrats uprooted and replaced in a nanosecond if they fall short anywhere. China is the Titanic of nations: huge, ostentatious, and easier to snap than it looks.
- rconti 11y agoExcept for all of the times we see articles going on and on about how China's growth and dominance is a threat to us. I agree the articles we see are biased, and there's an undercurrent of fear in trying to downplay China's rise. That said, I feel that the forces trying to explain away or ignore China's outright fabrication and lies about its growth are more, how shall I say, insistent.
- cvwright 11y agoInteresting interpretation. I hadn't thought about it that way. Instead, I got a very different impression from the article -- more that this is the next big scare for the global economic system. Like the US subprime mortgage crisis in the previous decade, or the Russian/Asian debt crisis that sank Long Term Capital Management in the late 90's.
- jpeg_hero 11y ago>If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem. >J. Paul Getty we have powerful enough printing presses to print $1T USD.
- petermcd 11y agoA few points to ponder: - Money spent counts toward GDP, even if the money comes from a bank loan that will never be repaid (Example: big real estate project in a third-tier city that will never sell for its listed price) - China's foreign reserves can not be used to pay back debt denominated in Chinese Yuan (foreign currency reserves are the result of people/institutions giving the Chinese government foreign currency in exchange for Chinese Yuan -- you can't do the conversion twice) - China has a shrinking workforce due to demographic shifts. Specifically, they have moved from an agrarian birthrate to an industrialized one. You are correct that China has a huge population and workforce. Their wages are rising (which is good for China!) which makes them less competitive as the factory to the world. The Chinese are making progress at moving up the value ladder to help justify those higher wages, but they aren't quite at the top yet. And the workers are very much getting squeezed between high living costs and soon-to-be higher costs to service all that debt and pay benefits to those not in the workforce. These are some reasons why experts are suggesting that China needs a new and more sustainable growth model. The Chinese government will not allow the Chinese banks to fail the same way the USG did for Bear Stearns. They will likely buy the bad loans from the banks at face value and put them in government-owned asset management companies who will attempt to restructure them. The cynic in me expects it will probably go worse than Japan since the '90s.
- duaneb 11y agoI don't understand why a "real reason" is necessary when we may have shared interest. Why not report on China? There are just as many—like you—eager to report how invested we are in each other.
- serge2k 11y ago> China has regularly surpassed the US in number of cars sold since 2009 OH MY GOD THE WORLD IS ENDING. oh wait, a country with a much higher population is able to sell more cars. Carry on.
- 0xCMP 11y agoNot sure what you mean. People are trying to explain this down turn (e.g. Jan 1 to Feb 17; SPY -5.21%) and the possibility of a recession on the horizon and Oil/China are currently big reasons for that. China not having imploded yet means that right now the movements in the market are mostly speculative and psychological factors at play. This article is saying "Yes the down turn is coming. And yes it's because china is in trouble. And yes it will be big. And yes it'll happen soon enough because it's getting to critical mass."