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China's Real Economy

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PostPosted: Sun Jan 03, 2010 1:31 am    Post subject: China's Real Economy Reply with quote

China needs the U.S. more than the U.S. needs China, and it's not a threat to the U.S. economy.

In 2008, the U.S. trade deficit with China was a record. The U.S. exported $70 billion to China and imported $338 billion from China, or a $268 billion trade deficit. This is in the context of a $14 trillion U.S. economy.

Most of U.S. exports to China were capital goods (e.g. inputs for its exports), while most of U.S. imports from China were consumer goods. So, much of China works for the U.S., like Japan before it. If China stops working for the U.S., another Third World country, or the U.S., will take up the slack.

China can't dump its $2 trillion in dollar reserves without severe consequences. If it did, its currency, the yuan, would appreciate, and the dollar would depreciate. The exchange would cause China to receive fewer and fewer yuans per dollar, while its production would implode and U.S. production would increase.

China is not in a good economic situation. It produces heavy goods. So, it needs (expensive) commodities, e.g. oil, copper, steel, etc. It also produces goods with declining prices, which developed countries no longer want to produce.

So, China is in a much weaker position in the global economy than people believe. It needs to maintain acceptable levels of employment, in exchange for smaller gains of trade.


PeakTrader | October 25, 2012

It’s political rather than economic.

Both Romney and Obama want to spur U.S. exports to create jobs, given there are still about 25 million unemployed and underemployed Americans in this weak and expensive “recovery.”

However, the U.S.-China relationship is more than trade, including cyberattacks (also from Russia) and stealing technology or secrets.

China’s living standards will rise slowly, because of its “growth-at-any-cost” policy to prevent political upheaval. I stated before:

China’s GDP is an illusion. The private sector is small (consumption fell from 45% to 36% of GDP in the past decade). Basically, China is a giant assembly plant.

What the Chinese do best is corruption, crony capitalism, misallocate resources, cause negative externalities, prevent creativity, create inefficiency, and export much of its GDP.

Y = C + I + G + NX

GDP = Consumption + Investment + Government + Net Exports.

If you take away China’s investments and net exports, you have consumption and government, and we know consumption is low and malinvestment is high.


Marmico says: “But there is a $100 billion current income (output) loss in the domestic economy…The net effect on a capital basis is a long run domestic income transfer from all to the foreign entity.”

If I sell you a commodity worth $10 for $8, you’ll buy it, and if I lend you $8 for free, you’ll borrow it.

Moreover, instead of producing that commodity for $10, you can now produce something else, e.g. for $15, to consume or export.


Also, Windchaser says: “I’d prefer that China not distort the $ market. The entire global economy will be healthier without it, and in the long run, that’s healthier for the US, too.”

So, the U.S. will be healthier paying higher prices and higher interest rates for Chinese goods and dollars, while more Americans work in older industries.


What’s “unhealthy” is when U.S. consumers buy Chinese goods, the Chinese buy U.S. Treasury bonds, and the U.S. government spends those dollars rather than “refund” them to U.S. consumers.

Here’s what James Fallows said about China:

James Fallows studied American history and literature at Harvard, where he was the editor of the daily newspaper, the Harvard Crimson. From 1970 to 1972 Fallows studied economics at Oxford University as a Rhodes scholar.

January/February 2008

Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China.

Any economist will say that Americans have been living better than they should—which is by definition the case when a nation’s total consumption is greater than its total production, as America’s now is. Economists will also point out that, despite the glitter of China’s big cities and the rise of its billionaire class, China’s people have been living far worse than they could. That’s what it means when a nation consumes only half of what it produces, as China does.

Neither government likes to draw attention to this arrangement, because it has been so convenient on both sides. For China, it has helped the regime guide development in the way it would like—and keep the domestic economy’s growth rate from crossing the thin line that separates “unbelievably fast” from “uncontrollably inflationary.” For America, it has meant cheaper iPods, lower interest rates, reduced mortgage payments, a lighter tax burden. The average cash income for workers in a big factory is about $160 per month. On the farm, it’s a small fraction of that. Most people in China feel they are moving up, but from a very low starting point.

This is the bargain China has made—rather, the one its leaders have imposed on its people. They’ll keep creating new factory jobs, and thus reduce China’s own social tensions and create opportunities for its rural poor. The Chinese will live better year by year, though not as well as they could. And they’ll be protected from the risk of potentially catastrophic hyperinflation, which might undo what the nation’s decades of growth have built. In exchange, the government will hold much of the nation’s wealth in paper assets in the United States, thereby preventing a run on the dollar, shoring up relations between China and America, and sluicing enough cash back into Americans’ hands to let the spending go on.


Here’s a population map of China:

And earth at night:

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