Thursday, December 4, 2008

The Joker in the Inflation / Deflation pack – China

1930s beggar-thy-neighbour fears as China devalues

China showed restraint during the Asian crisis in 1998, holding the line against domino devaluations across the region. It may yet hold the line this time. However, this crisis is more serious. The manufacturing sector has seen the steepest decline since the records began, with devastation sweeping the textile, furniture and toy sectors. Civil unrest has begun to rock the Guangdong and Longnan regions.

Posted by andrew @ 11:23 AM (861 views)
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14 thoughts on “The Joker in the Inflation / Deflation pack – China

  • China has some excesses in its economy with house prices and too much reliance on manufacture for export economy. So they will go into recession too. But if anyone is going to achieve a U-shaped recession then it is China, unlike the UK and USA who will get a L-shaped recession.

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  • gardeniadotnet says:

    “Does China really intend to step in to prop up global demand? The jury is out.”

    If China thinks it is not in its own interests to support global demand, it won’t. It’s not rocket science.

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  • China has never been a trading partner of the US or Europe. All is towards geo-political goals. The reason we are in so much trouble now is, mainly, because China has never fulfilled the implied obligations of a trading partner i.e. they have never bought anything back and we have never had the opportunity to work off our debts.

    If this had been the case, then the inflation during the 1998-2007 boom would not have been suppressed, and we would perhaps not have assumed so much debt.

    The civil unrest is due to workers receiving much less than they should for the work they are doing, which has contributed to the slow improvements in China’s internal consumption. China still threatens Taiwan, China still threatens Japan.

    How is flooding the UK market with goods sold at a loss favourable for the UK? Simple, it isn’t. If China makes any moves to devalue then a suitable response would be to introduce our own currency and trading restrictions, which I imagine would be a fairly popular move.

    China has been the beneficiary of misguided Western attempts to pacify through trade. Time to give up on that idea.

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  • @gardeniadotnet

    Exactly that. The Chinese have no interest at all in successful western economies, they are not a friendly partner in trade. Obviously. We forget now, but around the time slightly before the crunch went mainstream the Chinese had made veiled threats about dumping their dollar holdings. We do not get subsidised petrol from China, we don’t get subsidised copper or anything that could be considered a bargain, all we really get is a decline in our own industry.

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  • Stillthinking – “How is flooding the UK market with goods sold at a loss favourable for the UK?”

    They are not making a loss. How else would they have just overtaken Japan as the biggest holder of dollar foreign exchange reserves?

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  • gardeniadotnet says:

    @ 4. stillthinking
    Two informative posts. Thanks.

    My argument, as usual, is very simplistic – when times are tough, the basic human response is ‘Charity begins at home.’

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  • @mg,
    Having artificially held down the value of yuan, the amount a Chinese worker receives is less than the correct amount. The same strategy for the UK would be as follows;

    Devalue sterling. Put various barriers up on foreign goods. Sell UK goods abroad, when the government receives the foreign currency as payment, keep it and print more sterling and hand that over instead to domestic workers. Over time, the UK government obtains vast currency reserves, and domestic workers obtain loads of sterling.

    We can’t do this successfully because obviously the outcome is huge domestic inflation. The reason why the Chinese can is because their economy is expanding from an original start of pretty much nothing, the expansion (15% every year!) soaks up the inflation. Even so they have overdone it and have inflation problems now, hence they -must- continue to expand for the strategy to continue working.

    Or, to look at it from a different angle, those workers who are rioting, presumably they aren’t rioting because they have too much stuff. Make a list of what they want, send the list to the UK, we make the stuff and send it over direct to them. In return, we receive payment in Chinese Sterling reserves. Fantastic. Two problems solved. We get a manufacturing boost, our foreign liabilities go down and the Chinese workers get their stuff which actually they -already- earned.
    But that won’t happen of course because the goal is not the wealth of the rioting workers.

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  • China has a huge vested interest in the stability of the world economy. Having lost its way politically, the only justification for continuing CP rule is the delivery of economic success and continued social cohesion.

    The bargain China made with its people after Tianenmen Square in 1989 was to provide economic progress – which could ONLY be achieved through trade with the rest of the world.

    China’s national interest (as defined by its leadership) is essentially a single issue: maintenance of CP rule, which will only be secured by delivering two subsidiary things, 1) face and 2) growth and prosperity. This is why it can’t give up on Taiwan (which is sees as unfinished business in its own Civil War between Mao’s communists and Chiang’s nationalists – ignoring the complication of the 50 years of Japanese occupation that followed the first death-knell of the Qing dynasty, the Sino Japanese War of 1895) or on Tibet (similarly, a fiefdom of China until the great upheavals that followed the final demise of the Qing in 1912).

    China’s trade with the world is not a new thing, China was at the heart of globalisation in the Victorian period and became, in a similar way to today though on a lesser scale, the workshop of the world even at that time. So long as it doesn not lose face in doing so, China will support the global economy because this is the only way to achieve the growth that will keep its people passive, and the tacit bargain with the CP intact.

    If it doesn’t manage to do that, the consequences for us all are horrendous, as the west (for the most part) has forgotten how to make things. Successful manufacturing depends hugely on machine tools and experience, something we gave up on in the 1980s.

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  • But they aren’t supporting the global economy, haven’t in the past, and show no signs of doing so. I disagree with you.

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  • Stillthinking – you have a point about unfair practices but not with your last point. China is a huge consumer of raw materials for example. These are imported from Africa, Australia etc. These are paid for, this is supporting the world economy.

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  • @stillthinking –

    Trade barriers are never a good idea. They just encourage your industries to become less competitive, instead of either becoming more competitive to compete, or closing shop and shifting your workers to do something else.

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  • Little story of China and unfair trade. I was in South Africa when the quotas on China’s linen trade changed. Chinese had opened a factory in Swaziland to produce T shirts or something to avoid the “made in China” restriction. A month or two before the quota change on a weekend the Chinese owners stripped the factory and returned to China not warning or paying local workers. Could be a bad apple but in some ways does typify Chinese attitudes to commerce.

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  • @stillthinking

    China not supporting the global economy? not buying US treasuries (thereby keeping Uncle Sam afloat), not bailing out banks, not using their huge sovereign wealth fund to invest and prop up prices in some sectors? Of course they are.

    Then they have been soaking up raw materials (and also buying services like shipping & insurance), as well as making investments in things like machine tools & mining equipment.

    So .. in what way isn’t China supporting the world economy?

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  • Whatever the ins and outs of geopolitics regarding China, I foresee one thing – China will have severe economic problems as a result of the current slump, to the extent of civil unrest. There is no welfare safety net for Chinese workers laid off – it could be a rerun of the 1930s for them, but without a democratic govt to do anything about it. I worry what the Chinese might do in order to utilise all the surplus manpower that they will have soon. The only thing that got us out of the last Depression was a world war – if there is another big war in the pipeline my guess is China will be involved somehow.

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