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Don’t Underestimate China

29 July 2010 4 Comments

When it comes to the relationship between America & China, it can be summarized as follows:  We buy cheap goods from China with money we borrow from China.  Essentially, we consume more than we should be able to because we fund our consumption with borrowed money – much of which comes from China.  China accepts this arrangement because it employs a gazillion Chinese people who produce goods to export.  China underconsumes and exports more than they should be able to because they’re loaning us money as stated above.  Make no mistake – this arrangement is changing and it is a major, major restructuring in the global economy.

Many people when I tell them that this arrangement is slowly changing are quick to tell me that China needs America as much as we need them.  This is true, but like I said, it’s changing and China isn’t stupid.  China knows how to shift away from funding our consumption in a manner that will not raise alarms and will keep the world thinking they like the arrangement. Here’s a question to ponder:  Would you rather be the economy full of over-leveraged, lazy individuals who have essentially had their standard of living peak or would you rather be the economy full of hard-working, productive savers who have nowhere to go but up in their standard of living.

A quick side note… many are quick to point out the issues with the Chinese economy and I agree with many of them.  The property bubble is what first comes to mind.  Yes, these are real issues, but I believe they will be ironed out over time.  Remember, the changes I’m discussing here are gradual changes.  The Chinese have serious patience.

Now, allow me to bring up the issue of the American debt that China holds.  China while taking some shots at the American currency has still essentially affirmed continuously that it intends to buy Treasuries.  Americans view these statements with too much confidence.  If you held a significant amount of a type of security and you wanted to unload it, would you announce that you wanted to unload it?  Of course not.

Furthermore, the Chinese in my opinion will continue to buy up resources around the world with dollars (while the dollars still have value).  The Chinese do not have a special allegiance to the US Dollar.  They see the writing on the wall and that is that the dollar is repeatedly being questioned as the world’s reserve currency.  They will continue to play the game while continuing to diversify into real and hard assets including minerals, commodities, businesses, and yes, even gold (for monetary reasons).

The Chinese are patient.  They plan decades out.  Americans want their best life now.  We plan months out in accordance with the election cycle.  The Chinese does have some major hurdles and challenges to work out.  Transitioning from a primarily-export economy to some degree of internal consumption will take work.  Working out its property bubble will take work.  Creating sophisticated capital markets that will drive future growth will also take work.  Regardless of how much work is required, they will diligently and patiently work towards these goals.  Do not underestimate the Chinese.

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