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| Why Would the Chinese Knowingly Make Bad Investment Decisions? | ||||
| Why would they recycle their hard earned savings into US government interest bearing securities, which stand a very serious chance of suffering a loss from currency depreciation and a rise in US interest rates?
Since 2000, China's US dollar reserves have skyrocketed from US$165.6 billion to nearly US$519 billion today. China also owns over US$191 billion of US government debt providing a massive pool of capital to help the United States to fund its Current Account deficit. So why would the Chinese continue to pursue a policy that at first glance may appear be utterly self-destructive? Chinese have long-term interests that far outweigh any potential short-term risks. China's primary political and economic goal is to modernize and industrialize the country as quickly as possible. To that end, Chinese must establish an enormous industrial base that could provide its population with the tools to become an economic powerhouse. China can accomplish that goal only by generating huge streams of export income in order to acquire and build additional productive capacity. Amongst the advanced industrialized countries, United States, serves as China's best customer. Furthermore, Americans unlike Europeans or Japanese have shown little hesitation to spend beyond their budget and have therefore become the assumes that the primary goal of the Chinese is portfolio gains. In fact it is not. China may be willing to absorb enormous capital losses in return for continued growth of their economy. To truly understand Chinese end game it helps to look at another Asian success story - South Korea. Four decades ago South Korean GDP per capita was comparable with those of the poorer countries of Africa and Asia. Today the South Korean GDP per capita is equal to some of the |
economies of the European Union. Only ten years ago Korean goo ds were considered cheap and low quality - think of the Hyundai or KIA automobiles of yesteryear. Today, most US consumers do not have look much beyond their belt clips to find examples of Korean production prowess and sophistication. Almost all the latest models of cell phones are all predominantly Korean. These marvels of technology sport color screens, built-in digital cameras, sophisticated operating systems, and wireless web access all in a size that fits the palm of your hand. Recently, Samsung, one of premier Korean manufacturers spent billions of dollars on chip factory equipment and has impressed the engineering community with its manufacturing research. The company has now positioned itself to challenge US chip manufacture leaders like Intel and Texas Instruments. - ADVERTISEMENT - |
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| biggest buyers of Chinese products. In short, United States buys Chinese goods and services and provides China with capital to procure commodities (China is the 2 nd biggest importer of oil, as well as the biggest importer of steel and copper in the world). China can then utilize the commodities in a myriad of productive processes to manufacture value added goods. Finally, it converts part of the profits into US government Treasury notes enabling United States to finance the Current Account deficit and balance its books. To an outsider, this strategy may appear risky at best and foolhardy at worst. After all, if the Fed raises rates as expected, the fed funds rate could increase by as much as 77% from present 225bp to 400bp by year end 2005. Under such a scenario US bond prices will plummet causing the Chinese billions of dollars in capital losses. However, this line |
It is precisely this speedy path from of reasoning modest industrialization to world leading sophisticated engineering that China seeks to emulate. Chinese authorities have set themselves the monumental task of rapidly modernizing a technologically backward, still partially agrarian society into a highly sophisticated, extremely productive market of 1 Billion consumers and producers. In order to achieve their goal of building a critical mass of production infrastructure, the Chinese are more then willing to essentially subsidize the American consumer. In short, they are willing to provide US the means of consumption in return for continually creating an ever more sophisticated stock of production for themselves. Thus, the "longest cycle of vendor financing" as some economists have called it, may continue for some time to come. | |||
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