China Threatens to Crash US dollar

[Makalakumu]

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/07/bcnchina107a.xml

The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.

This would be very bad for the US. Thoughts?

 

[Flying Crane]

I guess I've been sort of wondering when this would happen...

 

[Ping898]

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/07/bcnchina107a.xml



This would be very bad for the US. Thoughts?

It is all just posturing....it won't happen, at least not anytime in the near to mid-term future...China can't afford to crash the america dollar. As it is, China still falls behind America in technology and innovation. In China, the scientists are treated like superstars and there is a reason Chinese companies buy products made by america companies and reverse engineer them. I think something like this will not happen until China in its own right is truly a superpower and can stand on its own without the US buying so many of the products it makes and needing to reverse engineer US products to make leaps and bounds ahead technologically.

 

[Brian R. VanCise]

It is all just posturing....it won't happen, at least not anytime in the near to mid-term future...China can't afford to crash the america dollar. As it is, China still falls behind America in technology and innovation. In China, the scientists are treated like superstars and there is a reason Chinese companies buy products made by america companies and reverse engineer them. I think something like this will not happen until China in its own right is truly a superpower and can stand on its own without the US buying so many of the products it makes and needing to reverse engineer US products to make leaps and bounds ahead technologically.

I think you are right on this. If the US dollar is devalued by the Chinese then China will face an economic collapse because a trading partner will no longer be buying it's goods ever!

 

[exile]

I think you are right on this. If the US dollar is devalued by the Chinese then China will face an economic collapse because a trading partner will no longer be buying it's goods ever!

Plus, the US can, and under the devaluation scenario, most definitely will find other places to outsource its industrial production to. US companies have been falling all over themselves to take advantage of ultracheap mainland labor as its onetime outsourcing staples—places like India, Korea and Taiwan—rapidly overtake it in terms of average wages for industrial workers. But if China devalues the US dollar, there will be enormous pressure for retaliation, and one thing that will happen is that a lot of places perceived as now much friendlier to the US, places like Malaysia, will start being the beneficiaries of `exported' jobs, and US business will find it a lot harder to set up production in China. You can see the political line: we're gonna reward places which are trying to put us in the red by giving them American jobs???

And my impression is, China has been counting on doing a lot of business with US firms anxious to cut their labor costs. So it would be pretty nuts-oid on their part to do something along those lines—especially when you consider the fact that it's a big mistake to slap a military ultrapower in the face...

Look for a lot of sabre-rattling and then some careful backtracking on all sides, is my guess...

 

[Steel Tiger]

And my impression is, China has been counting on doing a lot of business with US firms anxious to cut their labor costs. So it would be pretty nuts-oid on their part to do something along those lines—especially when you consider the fact that it's a big mistake to slap a military ultrapower in the face...

This is the biggest and best argument for the Chinese not attacking the US dollar. It would be shooting their economy in the foot. On the other hand, past Chinese governments have implemented policies that have been bad for China, so who knows.

 

[terryl965]

It will never happen in our lifetime, they have just as much as we do to loose if this happens.

 

[exile]

This is the biggest and best argument for the Chinese not attacking the US dollar. It would be shooting their economy in the foot. On the other hand, past Chinese governments have implemented policies that have been bad for China, so who knows.

Right, that's the sticking point. The history of the 20th century is littered with examples of horrific outcomes which followed on distinctly self-destructive decisions by national governments. Massive political bureaucracies have their own internal agendas which often reward extraordinarily stupid-seeming actions. That's why economics and political science are so different in their predictive power from physical sciences: predictions in the former depend on assumptions about rational calculation of outcomes... and we've got plenty of evidence that those don't always occur.

The really hard part of it all is that they do sometimes occur. So you can't count on perfect self-serving rationality and you can't count on consistent irrationality either. It's like trying to base a hypothesis on a set of lab results where you know that 20% of the data is seriously tainted, but you have no idea which data constitute that 20%...

Let's hope that the Chinese leadership (or the US leadership, for the matter) doesn't do anything really stupid. The world is dicey enough as it is, eh? :uhohh:

 

[Makalakumu]

My guess is that this "Mystery Trader" is on to something...

http://www.financialnews-us.com/?page=ushome&contentid=2448565379

All of these put options are bets that the market is going to crash. If China dumped all of the US dollars it holds, it may just be doing so in order to hold on to their current value.

Sure, it would be bad for them in the short term, but imagine just how much they would have to lose if they went down with the ship?

There are always other people to trade with, other relationships to build.

 

[CoryKS]

If they're going to do it, they'd better do it soon before their one-child policy catches up with them and their own economy implodes.

 

[Ray]

If they're going to do it, they'd better do it soon before their one-child policy catches up with them and their own economy implodes.

The quantity of a population is not necessarily a indicator of economic strength. Do a correlation of population with economic strength for the 20th century and see what you turn up.

 

[CoryKS]

The quantity of a population is not necessarily a indicator of economic strength. Do a correlation of population with economic strength for the 20th century and see what you turn up.

It isn't strictly an issue of quantity, but of composition. China's population will age rapidly and its workforce will shrink. They will have more dependents and fewer workers to support them.

 

[Ray]

It isn't strictly an issue of quantity, but of composition. China's population will age rapidly and its workforce will shrink. They will have more dependents and fewer workers to support them.

You're right in that it's not an issue of quantity in the work force. I'm not sure whether China has a program to let the aged retire (or if they take care of them the same way they enforce the 1 child per couple thing).

 

[CoryKS]

You're right in that it's not an issue of quantity in the work force. I'm not sure whether China has a program to let the aged retire (or if they take care of them the same way they enforce the 1 child per couple thing).

According to this article, not. Which seems like an rather large oversight for a communist country.

In just 30 years, people aged 65 or older are projected to make up 22 percent of China’s population. These older adults will have been counting on the fortune from their children's hard-earned schooling to provide for their retirement. With only one child and no national social security plan, this responsibility will likely fall on the shoulders of a generation unable to fulfill it. In addition to borrowing the First World’s most profitable fertility and education patterns, China may find itself inheriting the First World’s inequalities, frustrated aspirations, and social welfare struggles.

What's really interesting, though, is the gender-based birthrate disparity, which is almost certainly an unexpected consequence. Of those single children born under this policy, a rising number of the males won't be reproducing at all due to a shortage of females.

I'm sure China will reverse this policy once they've reached the "Oh, *****" moment when they realize what a big problem they have on their hands, but by that time a lot of damage will have already been done.

 

[Phoenix44]

I'm not an economist, but it seems to me that if the US stopped buying Chinese products, they could still sell to Europe and the rest of the world.

 

[Ping898]

I'm not an economist, but it seems to me that if the US stopped buying Chinese products, they could still sell to Europe and the rest of the world.

You need to remember it is not just the Chinese products the US buys, but also the raw materials and the outsorcing of making the items and the reality of it is a lot of that is done by companies headquartered in America. So if the companies suddenly stopped outsroucing manufacturing to China then there would be a lot less Chinese-made products to buy and the loss of all that money would not be made up the rest of the world, at least not at this time...