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CNN naively wrong about China

A CNN report on August 14th by Fareed Zakaria badly missed the mark on accuracy concerning the USA credit rating and China investments into the US Treasury.

In the article “China’s not doing us a favor“, Zakaria basically stated that China and America are economically tied at the hip.

This is one of the great misconceptions in America right now. Most of the people making this claim have not been to China. China is a booming economy of 1.3 billion people. That is 4 times the size of the United States. To say that China needs America economically is like saying that America could not survive if Illinois left the Union.

Less than 3% of China’s GDP is a result of business with America.

Zakaria’s article has a string of misconceptions that are widely held by uneducated Americans.

1) “…That would in turn hurt the U.S. economy, which is China’s number one export market.”

China manufacturers are no longer focused on America. Five years ago you could walk into any factory with a suggestion of selling to America and the factory would stop everything just to talk to you. Now they are more excited about sales in the Middle East, India and the EU. I spoke with a factory last week who said that America has two problems. Number one, they do not sell as many items as before (our retail market has died). Number two, Americans all use the Internet to buy small lots directly so all the profit is gone.

2) “…not a good idea if you are the Beijing government trying to keep workers occupied in factories across China.”

If you know anything about China it is that the government has NEVER had a problem keeping its people busy. This is a socialist state with a long standing communist government. Their idea of welfare is employment by the state. They have the worlds most efficient management of their workforce. It is not like the US workforce where the private sector (small business) is responsible for the bulk of employment. Keeping workers employed has ABSOLUTELY NOTHING to do with the exports to America.

3)”China is addicted to a strategy of export-led growth, which requires that it keep its goods cheap. This means keeping its currency undervalued. That’s why it buys dollars.”

Again, this is old news that no longer applies. China used export led growth to change it from a 3rd world country to the world leader in developing infrastructure. If you have seen China in the last year, you know that the cities are being rebuilt to be the most modern and efficient cities in the world. This is where China’s growth is concentrated. In short, China is its own economic boom. Now that its citizens have disposable income they are just starting to realize the new economy. Their greatest concern now is not the inflow of American dollars, but the outflow of RMB being spent on foreign goods.

4)”The reality is that China is trapped into a cycle of buying our T-bonds. No matter what any ratings agency says, no other bond market is as big or as safe.”

This is the biggest and most dangerous misconception of all. China is not trapped into buying our T-Bonds. It is just the easiest way to use surplus US cash from trading. A more difficult way, but certainly the most obvious way to spend that cash in the future is through the purchase of commodities from America.

If you get past all these misconceptions about China, you have a clearer view of the future relationship between China and the US Treasury.

The recent history of buying Treasuries had only one purpose. It was to keep the dollar from sliding further in its valuation against the RMB. Now that we have been downgraded to AA+, (with a negative outlook), all hope of avoiding the devaluation of the US dollar is gone.

The basic reason for China purchasing Treasuries his gone!

China will now look to divest itself of Treasuries at a rate that does not cause a rapid crash of the dollar, but at the same time it realizes that it is holding on to a devaluing asset.

China will look towards purchasing hard assets with surplus US capital. Look for increases in the purchase of durable items like coal, steel, and other minerals, and increases in consumable foodstuffs.

China has more cash on US cash on hand than it has in Treasuries. It has more to worry about than just dumping the Treasuries.

The good news for America is that this will stimulate a move towards a more balanced trade with China. The bad news is that they are still buying all of our assets (natural resources) with inflated money from manufacturing. This is a bad long term trend, but it will be seen as a great solution because of the short term stimulus in the economy.

Itia (Abroad)

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