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Problems in Big China
Old 09-20-2007, 04:23 AM   #1
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Problems in Big China

I am an investor in them as an emerging market. I buy cheap products from them (not much choice now day). But.... they are a communist government... totalitarian @$$h0!3s. I can't help but smile a little.

Now that the party is really going strong, is the fun part over? Time to sober up? Heh Heh Heh. Let's see how they deal with this one. Price controls. Nice! Next step, price support for exports, everybody at home tighten the belt. They wouldn't want that trade imbalance to get outta whack. I believe the best thing we could do is pay them back for those T-Bills in original YUAN. I wonder how we can use their inflation to our advantage.

Or maybe we can present them with a trillion $ bill for software piracy and freeze their assets.

I will make no bones about it. China (the government) is not our friend. They may be a trading partner but that is about it.

My only concern is how it might spill over and affect us.


Chinese Government Freezes Some Prices: Financial News - Yahoo! Finance
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Old 09-20-2007, 07:29 AM   #2
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I must admit that I perked up when this China news item of double-digit inflation came up on the radio on the commute home yesterday. My first thought was how will this affect our uncomfortable arrangement of China buying our T-bills to fund our excesses while we will buy their cheap exports?

I get completely befuzzled thinking about how the money flows. To wit, China buys our T-bills. OK. How do they pay for them, in dollars or yuan? Let’s assume it’s I dollars to make it “simple”. We buy their exports, then the affect on China is simply the lower value in yuan to the dollar, right? This is what congress has been posturing about for several years, so the market takes care of it for them. But the net affect to us is higher prices for imports from China, which you could assume would alter the quantity of goods imported from China also. This would have an impact on how much China has available to invest in T-bills. Uh-oh.

I can see how this might have an affect on our interest rates. We’ve spent ourselves into a requirement to sell T-bills to fund the government deficit. T-bill demand goes down from China, so we have to raise the interest rate to attract other buyers. Higher interest rates affect business growth here at home because money begins to flow to less risky T-bills, and then… Whew, this gets complicated in a hurry. I don’t see how anyone can sort it out. Maybe that’s why they call Economics the dismal science.
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Old 09-20-2007, 07:48 AM   #3
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China is having trouble reining its economy in with little steps like raising interest rates. Reaistically, they need to let the Yuan appreciate draatically if they are going to do more than (gently) tap the brakes, but they are afraid of what the effects might be on their own economy and the world. They need to show they are doing something, so they retreat to a communist economy staple just before a big party pow-wow: price controls. Won't work because it never does. Bottom line: look for the Yuan to keep rising and China to keep bumpin rates, but it isn't likely to make much difference. China will continue to overheat and India will start doing so too. It will all end in tears, but what doesn't?
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Old 09-20-2007, 08:36 AM   #4
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China produces cheap stuff and exchange for T bill. This will keep going for a while. The reason is simple, china is far away to finish its infrastructure. It may takes another 20 years. In this period, it will need oil, copper, iron, all the resources. All of them are valued by dollar.

But one day, the sellers will accept YUAN instead of dollar since china is the biggest buyer. The transition from dollar to YUAN, maybe not very smooth.
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Old 09-20-2007, 08:55 AM   #5
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Quote:
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China is having trouble reining its economy in with little steps like raising interest rates. Reaistically, they need to let the Yuan appreciate draatically if they are going to do more than (gently) tap the brakes, but they are afraid of what the effects might be on their own economy and the world. They need to show they are doing something, so they retreat to a communist economy staple just before a big party pow-wow: price controls. Won't work because it never does. Bottom line: look for the Yuan to keep rising and China to keep bumpin rates, but it isn't likely to make much difference. China will continue to overheat and India will start doing so too. It will all end in tears, but what doesn't?
The question that we should pose is...

Will the overheating of the Chinese economy have inflationary effects here in the good ole' USA ? And What is the downside to the US for an overheated Chinese economy ? Also what will be the magnitude of the inflationary pressure here ? Will prices 1 percent, 10 percent or more a year ?

Perhaps a more interesting question would be...

If the world economy goes through an inflationary cycle, what should I invest in so that my personal situation isn't adversely effected as much ?
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Old 09-20-2007, 09:02 AM   #6
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The question that we should pose is...

Will the overheating of the Chinese economy have inflationary effects here in the good ole' USA ? And What is the downside to the US for an overheated Chinese economy ?
Hard to say. If we are talking about a steady smolder, then it will have some back-up to US inflation, but will be mollified by India, Viet Nam, etc. jumping in with lower cost labor. If it is a sudden im/explosion, I would expect it to be messy. My best bet is on the former, since the Chinese and everyone else will be working against the latter.
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Old 09-20-2007, 09:09 AM   #7
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brewer,
I doubt labor cost is decisive factor. Labor cost in India/Vietnam is cheaper than that of china now.
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Old 09-20-2007, 09:12 AM   #8
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Well if nothing else the prices for all of those lead-based toys will have to rise !

Besides rising import prices.... At some stage the Chinese will want to spend some or all of those trillion or so US dollars that they have stashed away. When that happens it will compete against domestic consumption and raise prices. When a significant portion of the US workforce ends up supporting Chinese purchases then the prices for things that we buy here will almost certainly rise dramatically.
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Old 09-20-2007, 09:22 AM   #9
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I listened to a podcast about China recently - basically stating the easy part of the econimic reforms and benefits have been accomplished. The problems now are starting such as
1. No oversight entities - banks, auditors, government,
2. The large balance of trade surplus is part of the cause for inflation
3. China needs to create about 20 million jobs a year just to maintain its current unemployment rate in the 20s% range
4. Communist party causes ineffiencies in the marketplace by forcing successful companies to take over failing ones to keep unemployment low.
5. China fears inflation - when it ocuured in the past it caused great upheavals in the country.
6. Let's not forget curruption in high levels of the Communist party.

We might see some manufacturing come back to the USA because of this.
The pendulum may be swinging the other way.
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Old 09-20-2007, 09:25 AM   #10
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We here will feel the inflation pressure from china soon. I doubt other countries could replace china as low cost production hub.

One of my indian coworker told me one story, that the camcorder cable he bot at India is $15, but same stuff is 15 cents at Shenzhen china.

So china's competitor need good infrastructure, a comprehensive industrial system, good educated labor, friendly investment environment, big local economy, high domestic saving rate. I look around, see no one.
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Old 09-20-2007, 09:57 AM   #11
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brewer,
I doubt labor cost is decisive factor. Labor cost in India/Vietnam is cheaper than that of china now.

Sure, but their infrastructure is even worse than China's. But they are improving...
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Old 09-20-2007, 10:07 AM   #12
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I agree the other countries are catching up. But with high oil, india gets a hit, same thing applies to china's other competitors.

The point is whether china could transfer the price to consumer(check walmart) and keep the job. I think they could do it. In the last three years, with a commodity bull, china's export is even more crazy.
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Old 09-20-2007, 10:12 AM   #13
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Hmmm - Given our fiscal policies at home in combination with things abroad, I expect some form of adjustment ala post Vietnam period.

Anybody save their Whip Inflation Now button from ?1975.

It's the rate at which change/adjust occurs that could throw a moneywrench into World markets.

Pontification - don't cha love it?

heh heh heh - just checked my closet - the same style cheap flannel shirts made in different time periods - Bangladesh, Pakistan, Vietnam, Ukraine - this winter
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Old 09-20-2007, 10:15 AM   #14
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Go further, the big question for china is whether it could climb the ladder higher. From a toy maker to a TV maker to a car maker. From a maker to a brand seller.

Now china is between TV and car. And we know they are still a toy maker.

In fact, china is a car maker already. The car production is 10M this year, comparing US 17M. I think it will take over in five years.

To the world, the puzzle is there is no country like china. When its head moves up, its feet are still on the ground.
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Old 09-20-2007, 06:28 PM   #15
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It's interesting to theorize about China and the U.S. and the world economy. But at the end of the day you still have to have a game plan, no? China's move reminds me of Nixon's in the early 70's -- didn't work then but how do you compare a centrally planned economy to a capitalist one? I agree with a lot of the sentiment of the posts above.

Anyway my answer to inflation is to buy plenty of TIPS at good rates and hold those Ibonds if they were bought at good rates (>2.5% real). TIPS also do great in flight-to-quality as in July/August and part of this is because you can hold 10yr TIPS whereas I wouldn't want to hold 10yr treasuries in an inflationary environment. I'll bet the Chineese don't issue inflation protected bonds.

As far as the dollar is concerned, who knows but the best way I've found is to have a big helping of international equities.

Polished off those two, next question ?

Les
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good book
Old 09-20-2007, 08:43 PM   #16
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good book

I saw the author on Charlie Rose and bought the book. I thought it was very informative.

Amazon.com: The Elephant and the Dragon: The Rise of India and China and What It Means for All of Us: Books: Robyn Meredith
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