<When all is said and done the big rally in US financial markets could not have happened without such support. The Asians have in essence financed the US war effort.>
Absolutely Correct. However, China has tried to avoid a South East Asian type blow-up by isolating its capital account. But its trade account is wide open, and the more China sells to the rest of the world, the larger the foreign sums of money that flow into China through its trade account. I expect the Chinese credit bubble to burst around March/April 2004.
As you know, US Secretary of Treasury Snow, has recently travelled to both China and Japan. The problem is the loss of US manufacturing jobs, 2.7 million over the last 37 months. Snow desperately wanted China to re-value its currency, the Yuan. But China has said no, at least not yet.
The Yuan has been nailed to the US Dollar since 1994 at around 8.3 Yuan to the Dollar. Given its accelerating trade surplus with the US, China has been piling up an ever larger hoard of US Dollars. Now, the US wants China to re-value, which is the same as asking the Chinese to take a HUGE loss on its current US Dollar holdings! Also, as the Chinese rationally pointed out at this meeting, China's currency followed the US Dollar upwards all the way as it climbed drastically between 1995-2000. When the South East Asian crisis exploded in 1997, China did nothing, it did not devalue its currency as South East Asia did to revive their export industries.
China sees itself as being very hard done by in getting criticized from the US, since China religiously sends its US trade surplus Dollars right back to the US, placing them in Treasury and Agency paper. If China were merely to slow down this flow, let alone stop, internal US interest rates would climb.
The Chinese told Snow that if the US really wanted fast climbing internal consumer prices as Chinese exports to the US diminished because of a higher Yuan, as well as fast climbing internal US interest rates, China could certainly accommodate them. But if the US did not want any of this, it had better not ask China to revalue the Yuan. To this Chinese argument, made in public, Snow had no response.
There is this economic/historical constant in all credit expansions. By the time the Central Bank realizes that one is underway, it has already gained a self-sustaining and accelerating momentum. Minor moves to stop it or even slow it down always fail. In fact, they often have the effect of starting even more and desperate borrowing, as borrowers get "theirs" now before interest rates REALLY start to climb.
China is in this situation now. The Chinese Central Bank is going to raise "reserve requirements" from 6.0% to 7.0% on September 21, but there are already persistent rumors inside China that this move won't be enough and the Central Bank will have to raise rates. New loans in the first seven months of calendar 2003 are already higher than the total for ALL of 2002. The thing to look for is when the Central Bank of China DOES raise interest rates. That will puncture the bubble, after which China will have to sell its US foreign reserves.
Won't that be fun to watch, especially if one is long that precious yellow shiny "barbaric" metal? |
