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Source link: http://archive.mises.org/10371/can-bubbles-also-be-made-in-china/

Can Bubbles Also Be Made in China?

July 30, 2009 by

Despite all of the shimmering skyscrapers and industrial output, unless market forces are allowed to truly dictate economic exchanges, today’s Chinese megacities and their residents will merely be facades and actors within a 21st-century Potemkin village, and growth will remain stagnant for years to come. This is due in large part to continual state intervention through centrally planned investment.

What was intended as a means to boost infrastructure improvements has been used instead to continue erecting villas and skyscrapers — with little productive value — in an already oversaturated market created by the previous boom. FULL ARTICLE

{ 9 comments }

Ben Ranson July 30, 2009 at 1:21 pm

I always enjoy the Mises.org articles on China.

Mr. Swanson claims that, “if the Chinese unloaded their foreign reserves, they would destroy their own currency, which is pegged to the US dollar.” But he contradicts himself in the next sentence with, “Furthermore, because their currency remains pegged to the dollar, any yuan appreciation will squeeze exporters that are already reeling from the large drop from overseas.”

Micah Killian July 30, 2009 at 1:35 pm

Couldn’t China unpeg from the dollar and peg to gold and silver? I imagine that would likely create a bubble initially, but after the market adapted it would have all the positive effects pegging to gold has, without the nasty side-effects of putting the future of your country’s economy in the hands of a foreign government.

BioTube July 30, 2009 at 5:34 pm

Mr. Ranson, those don’t contradict each other at all, though it might well be easy to miss: by selling dollar denominated assets for yuans, China reduces the value of dollars and increases the value of its currency compared to the dollar. Since the high yuan:dollar ratio was the driving force of China’s bubble, pegging its currency to anything but the dollar is unlikely to resurrect its trade surplus.

Abhilash Nambiar July 30, 2009 at 6:15 pm

BioTube

China’s economy is dependent on trade surpluses. But if and when the Chinese bubble bursts, they can direct the same infrastructure towards building their own country, funded by their huge savings. But what about the US. We cannot suddenly start exporting to China can we? Infrastructure takes time to be developed and the US is mostly a service economy. Services are not as easy to export as products.

BioTube July 30, 2009 at 6:33 pm

The Depression will hurt like hell: the depleted US manufacturing sector will have to be rebuilt(and the Dems are busy setting that up for failure – again). It’s probably time to start taking bets on where the next genocidal dictator will start a world war from.

A. Viirlaid July 30, 2009 at 7:08 pm

Gordon Chang recently noted that unfortunately for policy makers in Beijing, the large foreign reserves that China holds cannot be used to any large degree to fend off the ill effects of the current financial order. Chinese agencies such as SAFE [State Administration of Foreign Exchange] are at the complete mercy of the United States, because there is no [realistically-achievable?] exit plan with Treasuries.

http://www.forbes.com/2009/06/25/world-bank-china-decline-opinions-columnists-no-recovery.html?feed=rss_opinions

[Possibility 1] Despite the recent flurry of eye-popping headlines, if the Chinese unloaded their foreign reserves, they would destroy their own currency, which is pegged to the US dollar.

In the event they continue gobbling up commodities, they will simply “inflate” those asset prices too.[20]

[Possibility 2] Furthermore, because their currency remains pegged to the dollar, any yuan appreciation will squeeze exporters that are already reeling from the large drop from overseas [orders].

Thus in order for them to [prudently] sell any substantial portion of the Treasuries, the Chinese will have to wait until real growth begins to take place in the United States.

To Ben Ranson,

I don’t see the contradiction you see.

What I see is a listing (made by Tim Swanson) of mutually exclusive possible outcomes.

I have put the relevant sentences into separate paragraphs in the quote above.

You do however make some implicit points that I can agree with.

Namely, is Tim Swanson making the (unwritten) assumption that the Chinese have the actual ability to maintain a peg to a relatively more-quickly depreciating American greenback and is that assumption (if it’s being made by Mr. Swanson, as I surmise) valid?

I might have re-written Mr. Swanson’s last scenario as having the American dollar appreciate instead of the yuan, which with ‘currency-pegging’ would cause the yuan to appreciate as well:

Furthermore, because their currency remains pegged to the dollar, any …[American dollar] appreciation will squeeze exporters that are already reeling from the large drop from overseas [orders].

Arguably, the Central Bank of China [CBOC] was depreciating their money as quickly as America was its own during the last decade or so.

Please see http://blog.mises.org/archives/008983.asp

I happen to think that if they wanted to, the Chinese could indeed competitively devalue their own currency as fast as, or faster than the FED, the American Central Bank, can. After all, their ‘printing presses’ can run as ‘red-hot’ as ours can.

The fact is that it is not entirely clear that the Chinese would want to continue doing this. Great harm is attached to this policy, most especially for the Chinese people.

Would they also maintain an artificial peg to the American dollar, if the Chinese Central Bank (CBOC) were to ‘destroy’ the American currency by dumping U.S. Treasury bonds? Or if the FED did that ‘destruction’ job for them?

For one thing as their export industries start to contract, there will be fewer reasons to tie their own currency’s value to the declining American one. There will be fewer reasons to try to protect their exporters if the Americans aren’t going to be buying as much.

Furthermore, the CBOC and the Chinese government are afraid that the FED is up to a hidden policy of intentionally depreciating the American dollar. They have made it clear that they will not stand idly by.

That is one reason they have their “SAFE”:
http://sufiy.blogspot.com/2007/03/china-has-created-safe-way-agency-to.html

Let’s think of some possible scenarios.

If the CBOC sold all of its U.S. Treasury bonds tomorrow, and to try and mitigate against market disruptions, the FED (Federal Reserve) stepped in and bought up all those offered bonds (with printed U.S. money), what might happen?

What if the CBOC, with the received American dollars, offered those to Chinese holders of yuan? At whatever rate the market accepted?

Which currency would suffer?

What we’ve just done is a thought experiment in converting from American currency (dollars-in-bonds) reserves held at the CBOC into Chinese currency held mostly by Chinese citizens.

We know that the above action will not help the value of the American dollar. But we also know that such an action will not hurt the Chinese currency. It might even help.

But it will only happen if the Chinese were to give up on their somewhat-failing export model; such a policy-flip-flop is highly uncertain.

And thus it remains highly unlikely that the Chinese government and the CBOC will totally desist from keeping some American Treasury bonds in their foreign currency reserves.

So some of this goes a little against what Mr. Swanson wrote when he claimed that Chinese foreign currency reserves could not be used to help defend the Chinese currency. Because the ‘pegging’ is entirely voluntary. No one but the Chinese themselves enforce this peg.

Of course, Tim Swanson somewhat qualified his statements by implying (IMO) that there is no current ‘exit plan’ by the CBOC for the held Treasuries which might be true for all I know. Or is it just a ‘reasonable’ exit plan that is thought to not exist?

The problem that the Chinese have is that they are hurting themselves in the effort to help themselves in such a manner.

When they today print Chinese money to acquire American money earned by their own exporters, they create incipient inflation and an artificial boom not to mention that they cheat their own workers out of their justly earned monetary reward.

Using up human capital in such a manner is far worse IMO than using up plant and equipment and energy in such a manner. After all, isn’t the intent of having a vibrant economy to help all the people, the whole society? Or is it all for the glory of the homeland? When anyone forgets that it is the economy that is to serve the people and instead imagines it is the other way around, then they have stopped being human IMO.

All the Keynesian models say this artificial ‘stimulation’ is not a bad thing during bad times and during declining demand. One has to ‘stimulate’ the demand artificially.

The problem with this, as Mr. Swanson so colorfully writes, is that a huge part of China will end up being an Economic Potemkin village for some time to come. And the people will have happy faces that are happy Potemkin faces.

This policy IMO is disastrous because it is leading to a collapse bigger than 1929 was for America.

Sure China will eventually climb out of even this mess made by its own hand, but what of the untold suffering in the meantime?

Until the economic assets China is building can actually be economically utilized, that country is destroying its capital.

It is like building tanks and then promptly sinking them in the ocean or nearest lake.

There is no payback. At least not any time soon.

This is completely unsustainable.

But hey, we should not blame them for this crass stupidity — our FED and Treasury hold the same mindset, sing the same song, follow the same path.

They got it from us and from the Japanese and from a songbook written by a guy named Keynes.

In Mr. Swanson’s words:

However it is the unseen details, the unseen consequences, the unseen opportunity costs that currently dictate and bedevil the economic growth of the world’s most populous country.

And despite the three decades of reforms, the effects of socialist planning, even the “lite” variety, will still generate business cycles — with prolonged corrections and purges.

Curious July 31, 2009 at 2:21 am

“…20% of the stimulus funds have ended up in the domestic stock bourses…”

For every buyer there is a seller.

If 20% of the stimulus went into the stock market, the exactly same amount was also taken out.

Where is the money?

ganpalou August 1, 2009 at 7:38 am

I find no quibble with Mr. Swanson’s analysis, if, but only if, the Chi-Coms are willing to continue to play the game as agreed to. I watched the Chi-Com channel on TV during the runup to the Olympics. When the Sechuan earthquake occurred, I was impressed by a press conference given by some minister of the interior. While lauding the efforts of the military to save lives, clear rubble and rebuild the area, he gave a definition of “inflation” that sounded like it was given by a Harvard MBA. I was much more impressed with the ability of the government to exact pysical labor from the military, than I was the definition of “inflation.” We couldn’t do that during Katrina.
In Bush 41′s “New World Order,” HW noted that the major governments were agreeing to one concept. “A contract is a contract is a contract, treaties included.” I have been extremely impressed by the adherence of all the major players to this standard during the current crisis. Maybe I am naive, but I havent noticed the major players resorting to the “comparative prosperity” politics of the “beggar thy neighbor” actions which characterized colonial Europe.
But China has its own history and culture. About 25% of the Chinese workforce died building the “Great Wall.” Mao’s “Great Leap Forward” resulted in the death of about 10 million people. I had the priviledge of working with a Chinese immigrant, who explained to me that there is no concept of “citizen rights” in China, merely “citizen responsibilities.” It does not appear that the Chinese government has the internal constraints on government which we enjoy in America. It would be easier, internally, for them to toss out the “contract standard” of economic activity, and substitute the “gold standard” or even the “gun standard.”
While I wont quibble with Swanson, he limits his frame of reference to only those events which can occur by loyal adherence to contracts.

Ball August 3, 2009 at 12:12 am

All China would have to do is either revalue the renminbi or let it float. The Dollar is headed for zero, so they’re only delaying the inevitable. At the very least they could stop accumulating more of this fancy paper.

China can always sell goods to chinese, who have a habit of saving rather than spending. The dollar is doomed and so are our promises to pay, so they may as well stop trying to fund our spending binge of Chinese goods.

Soon, chinese goods will be sold for chinese currency. Amazing that, eh?

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