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Thread: weekend commentary - China's Dollar Strategy ?

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    Default weekend commentary - China's Dollar Strategy ?

    (snip)"China has amassed a stockpile of U.S. dollars and Treasury bills for both short-term and long-term reasons. In the short-term, it keeps their exports cheap and increases their trade surplus, fueling their manufacturing base and helping them to also control and even to some extent intimidate financial markets in the U.S. It is in the long-term, however, where the real danger lies.

    Now that China is diversifying their currency holdings into euros and other currencies, they can do significant damage to both the U.S. and Japan's economies. By dumping their dollars and Treasury bills, they can send the value of the dollar spiraling downward and seriously weaken confidence in Treasury bills and perhaps spur a dumping of those bills by other nations such as Japan and Saudi Arabia. Interest rates will shoot skyward, property values will soar, inflation will take hold, and the U.S. economy will screech to a halt, already stumbling along due to unemployment and low manufacturing statistics and high energy prices (not to mention a ballooning deficit and the war in Iraq). As goes the U.S. economy, so to goes Japan's financial markets. The combination of a bad economic downturn in the U.S. and Japan, coupled with China using all the amassed U.S. currency to purchase euros and send that currency skyrocketing, and finally added to Iran's already seriously strained relations with the U.S., could all tempt a handful of OPEC nations -- Iran and Venezuela, perhaps more -- to dump petro-dollars for euros. That could possibly be the straw that breaks the camel's back, and the U.S. might actually fall into a full-blown depression.

    China, meanwhile, would see the value of their large currency reserves increase substantially in value as the euro rose even more in value once some OPEC states made the currency switch. By tying their own currency (the yuan) closer to the euro and away from dollars, China is ensuring that they are not in as much danger of losing their role as manufacturer of cheap imports. Even though a weakened dollar and U.S. economy would mean a serious decrease in imports from China, the increased imports into Europe due to the strength of the euro against the yuan could make up the difference -- and Europe has a population roughly 50-percent larger than the U.S. Any short-term negative impact against the yuan and Chinese exports would be negligible and not very long-lived, and the long-term gains would be potentially enormous. And in the context of peak oil, this part of China's strategy may be a gamble they have no choice but to take. For China to make a move against Siberia and secure the oil reserves they will need, the U.S. must be weakened and unable to respond either economically or militarily. The damage China could do using this scenario could achieve that result."(snip)

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    Default Re: weekend commentary - China's Dollar Strategy ?

    The dollar will be devalued because most americans don't understand that. It will eventually show up as inflation on imported manufactured goods, except those imported from China. I could be wrong but this could show up as massive inflation in about ten years. With Japan pulling out if it's fifteen year recession/depression they will have to raise interest rates. This will force the US to raise rates higher than theirs to get people to invest in US treasuries. We may need a real wizard to get out of this one. It will be a very slow developoing crisis, and perhaps can be mitigated...perhaps.

    Watch commodity prices, watch gasoline and natural gas prices. Watch manufactured prices on equipment stay static. This will heavily impact the midwest in a negative fashion.
    For the first time will hit parts of the old south with manufacturing plants.

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    Default Re: weekend commentary - China's Dollar Strategy ?

    Someone forgot to tell the author that the Chinese would basically have to go drive through the US Rockies from the Mexico border to Alberta in -40 degree weather (for 2/3rd of the year) with no interstate highways, through a terrain occupied by a third of the Russian army. All the while, the remaining 2/3rds of the Russian Army has to go from Philadelphia to Albuqueque over the interstates.
    map (big)
    http://www.ig.utexas.edu/research/pr...dfc367000e6f78

    Now if you had $400 billion to play around with would you do that or bribe some technocrats in Indonesia with $2 billion and pay the going rate for 50 years. I find it hard to get worked up aboout a $2 billion dollar deal in Nigeria when the local gas utility put itself up for sale for $6 billion and all they own is a distribution network (keyspan).

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    Default Re: weekend commentary - China's Dollar Strategy ?

    The Monday Feb. 20 2006 Wall Street Journal will have an article on the Treasury accusing China of manipulating currency. While I agree, at this time, it is not the most opportune time to make this a big issue with all the oil instability due to politics in the world. As I write this it is Sunday night, but the electronic editions of the WSJ have the preview story. China did a moderate adjustment early in 2005 and that's the best you can expect. I think it makes us americans always look like we are in a hurry, and China is usually not in a hurry on anything. The time to do something about this was in early 2001 when the present administration came into office. Have they been asleep for five years?

    I would advocate caution, and not make a big deal of it right now. The increased loss of jobs and basic industires (including perhaps GM and Ford since Mr. Bush has publically stated he will not offer loan guarantees or any assistnace to Ford or GM from the federal government) is past and can not now be reversed without great economic pain.

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    Default Re: weekend commentary - China's Dollar Strategy ?

    Well, there was no print edition of the WSJ Monday because it was a federal holiday.
    Tuesday's print edition buried the story... so here it is from the electronic edition.
    WSJ--- Feb. 21, 2006 U.S. Weighs Harder Line
    With China on Yuan

    As Trade Gap Mounts,
    Pressure Could Spur
    'Manipulator' Label
    By ANDREW BROWNE in Beijing and MICHAEL M. PHILLIPS in Washington
    February 20, 2006

    Frustrated by the slow pace of China's appreciation of its currency, the Bush administration is sending signals that it is ready to take a harder line with Beijing.

    The shift comes as U.S. data show its trade deficit with China ballooned last year to $202 billion, more than one-quarter of the total U.S. deficit. That has added to political pressure on the administration from members of Congress, who say American jobs are being lost to the tide of inexpensive Chinese imports and the flight of manufacturing to China.

    Last week, U.S. Trade Representative Rob Portman announced a task force to take up complaints about unfair Chinese trade practices. U.S. politicians allege that China deliberately keeps its currency weak to make its exports cheaper in dollar terms and U.S. imports more expensive.

    Now, the U.S. Treasury, which has so far sought to avoid confrontation with Beijing over the currency issue, is preparing the ground for a possible decision to label China a "currency manipulator," in a regular review scheduled for April, although the semiannual report often is issued well after the scheduled release date. The Treasury has been sounding out Wall Street investors about such a move, which would require the U.S. to open formal talks with China on the issue.

    All this comes ahead of a visit to the U.S. in April by Chinese President Hu Jintao. The visit gives the Bush administration some leverage to extract concessions from Beijing, which will be anxious for Mr. Hu's trip to go as smoothly as possible.

    In testimony to the U.S. Congress last week, new Federal Reserve Chairman Ben Bernanke sought to play down what many consider a grave risk in any trade confrontation with Beijing – that China may decide to sell its huge holdings of U.S. Treasury bills. That could force up U.S. interest rates and add to the cost of borrowing by consumers and businesses. He said U.S. capital markets are "sufficiently large and liquid that the impact of such changes would be mostly transitory and could be managed."

    But Mr. Bernanke advised caution when asked about pending legislation that would impose a 27.5% across-the-board tariff on Chinese imports if Beijing fails to do more to strengthen its currency. "It's not a good idea to break down some of the gains we've made in terms of freeing trade in the world economy," he said.

    Also, Mr. Bernanke made clear he saw no quick fix to the U.S. deficits, saying it could take a decade to shrink them to more sustainable levels.

    U.S. Treasury officials had hoped to avoid a battle with Beijing, believing that the threat of a protectionist backlash in Congress might be enough to persuade Beijing to pick up the pace of currency appreciation. They showed sympathy with Beijing's arguments that it needed time to put in place more sophisticated trading systems and to expand domestic consumption to wean the economy off exports.

    However, the Treasury has little to show for its patience. After a 2.1% appreciation of the yuan against the U.S. dollar in July last year, China's currency has since strengthened by less than 1%. It closed Friday at 8.048 against the dollar.

    But as the Bush administration struggles to fend off protectionist legislation, it has to weigh any aggressive action against Beijing carefully, and it is far from clear that the U.S. Treasury will raise the stakes by labeling China a currency manipulator.

    The Treasury, as evidenced by recent decisions to avoid citing China for manipulating its currency, has substantial leeway in what to say in its next report, and the decision is largely one of tactics and political judgment. A determination that China is manipulating its currency doesn't have any immediate tangible effect, but is supposed to trigger talks between Washington and Beijing -- and such talks have been underway for sometime, anyway. It is too early to tell whether the talk of citing China in the next round is jawboning to put pressure on Chinese leaders before Mr. Hu's visit in April and to calm China-fearing members of the U.S. Congress or a sign of Bush administration frustration with China.

    Wall Street represents a spectrum of opinion on the currency issue. Retailers like Wal-Mart Stores Inc. would face severe disruption if a trade war cut off supplies of Chinese products that fill its shelves. Trade friction also could rebound on many U.S. multinationals, which see the huge Chinese market as among their most attractive investment opportunities.

    Nor is it obvious that forcing China to appreciate its currency would result in the return of U.S. manufacturing jobs from a country where factory hands often work six days a week in return for less than $100 a month and a dormitory bed.

    Many economists say that if Congress choked off imports from China, low-end manufacturing would simply migrate to countries like Mexico or Vietnam, and the net effect on the U.S. deficit would be insignificant.

    Still, currency appreciation fits in with China's strategic goal of making its economy less dependent on exports. So while Chinese leaders remain adamant they will move on the currency at their own pace, they have laid the groundwork for a possible change of tempo.

    Mr. Bernanke offered few alternatives for prodding China to change, other than persuasion and technical assistance.

    Also last week, U.S. Treasury Secretary John Snow said the U.S. isn't satisfied with the progress China made after the initial revaluation last year. "It's time for more movement," he told Bloomberg television. "We will hold them to their commitments."

    --Greg Ip and David Wessel in Washington contributed to this article.

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    Default Re: weekend commentary - China's Dollar Strategy ?

    There is precisely zero surprise in the fact that China manipulates its currency. The United States is about the only major world economic power who does not manipulate its currency very often. Korea and Japan do it extensively, and the cost of it brought down a Prime Minister. We do on rare occasion though. China manipulates it currency by making the Faustian bargain to trade holding US bonds (because of their trade surplus) for GDP growth, capital formation, and a conversion from a strict Communist power to some form of capitalism while absorbing a massive influx from the fields to urban areas.

    I called it a Faustian bargain (deal with the devil) because once you start the process it is almost impossible to stop it. People away from home which undergo hardship tend to become political, the last thing an almost totalitarian goverment wants. China is more vulnerable politically than 10 years ago, and if Tienamin Square (sp?) happened today, there could well be mass revolution, especially with all the available information to the mass consumer in China/

    Wanna know who I would bet on for 15-20 years down the road. India over China by 3-1, because it is already a democracy with 45 years under its belt, and has emerged from its isolationist /socialist ways, having learned the hard way that "social justice" is more likely to make everyone poor together.

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    Default Re: weekend commentary - China's Dollar Strategy ?

    India also has massive amounts of English speakers, and basically is part of the English speaking world as a former member of the British Empire. (independent 1949). Also has English Law (read influenced by old Roman Law) on contracts, bargains and property.
    It is largely non muslim, and while not liking christians, has apparently decided they aren't so bad by comparison. India is still a member of the British Commonwealth, which is more of a cultural social club, but has some gtrappings of the old empire and it's value system.

    Basically I agree with you. I do think China will be fine in the long run, as a disorderly, non technical, impolite world run by and extremist religion of Muslims is alien from their culture and communist idealolgy. Again, by comparison, Christianity isn't so bad to their way of thinking. On China this makes me strangely an optomist.

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