China Launches Salvo Against Dollar Hegemony (Updated)

We have seen reports on various China-focused blogs and even in the US media that China is increasingly chafing over the US dominance in financial affairs, and is particularly unhappy about the role of the dollar. Consider this quote from an August New York Times article:

Victor Shih, a specialist in Chinese central banking at Northwestern University, said that when he visited the People’s Bank of China for a series of meetings this summer, he was surprised by how many officials resented the institution’s losses [on dollar assets].

He said the officials blamed the United States and believed the controversial assertions set forth in the book “Currency War,” a Chinese best seller published a year ago. The book suggests that the United States deliberately lured China into buying its securities knowing that they would later plunge in value.

“A lot of policy makers in China, at least midlevel policy makers, believe this,” Mr. Shih said.

This is one reason I am perplexed at Bush having a financial summit that includes China and India next month. It is guaranteed that the role of the dollar and the US’s abuse of its sovereign privilege will be a major topic. Do we really want to provide a forum and mechanism that could accelerate a move away from the dollar as reserve currency? If you doubt such a move is underway, consider: international shippers are increasing their use of other currencies for invoicing (see here and here).

Today, Reuters reports that the Chinese have launched a frontal attack (hat tip Ed Harrison):

The United States has plundered global wealth by exploiting the dollar’s dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said on Friday.

The front-page commentary in the overseas edition of the People’s Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies.

A meeting between Asian and European leaders, starting on Friday in Beijing, presented the perfect opportunity to begin building a new international financial order, the newspaper said.

The People’s Daily is the official newspaper of China’s ruling Communist Party. The Chinese-language overseas edition is a small circulation offshoot of the main paper.

Its pronouncements do not necessarily directly voice leadership views. But the commentary, as well as recent comments, amount to a growing chorus of Chinese disdain for Washington’s economic policies and global financial dominance in the wake of the credit crisis.

“The grim reality has led people, amidst the panic, to realise that the United States has used the U.S. dollar’s hegemony to plunder the world’s wealth,” said the commentator, Shi Jianxun, a professor at Shanghai’s Tongji University.

Shi, who has before been strident in his criticism of the U.S., said other countries had lost vast amounts of wealth because of the financial crisis, while Washington’s sole concern had been protecting its own interests.

“The U.S. dollar is losing people’s confidence. The world, acting democratically and lawfully through a global financial organisation, urgently needs to change the international monetary system based on U.S. global economic leadership and U.S. dollar dominance,” he wrote.

Shi suggested that all trade between Europe and Asia should be settled in euros, pounds, yen and yuan, though he did not explain how the Chinese currency could play such a role since it is not convertible on the capital account.

A two-day Asia-Europe Meeting (ASEM) of 27 EU member states and 16 Asian countries was set to open on Friday. Though few analysts expect much in the way of concrete agreements, Shi said it could prove momentous.

“How can Europe and Asia grasp each other’s hands and together confront the once-in-a-century global financial crisis sparked by the U.S.; how can they construct a new equitable and safe international financial order?” he said.

“The world is waiting for this Asian-European meeting to achieve big results in financial cooperation.”

While this is clearly not an official statement, the fact that the commentary was given such prominent placement suggests that is a sanctioned view.

The obvious impediment to any serious action being taken at this meeting is the massive plunge in the markets on Friday. As much as the Chinese may want to take a dramatic move, it is highly unlikely that any other participants will want to take action to undermine the dollar now, with international markets in a panic. Any news that might worsen stability, and putting the dollar in question, is not going to get much traction. The US temporarily (and we stress temporarily) has the upper hand via providing unlimited dollar swap lines to stressed advanced economy central banks and bailing out AIG, which was providing guarantees to European banks that helped them circumvent minimum capital requirements (in other words, if AIG collapses, a whole slew of Eurobanks would be below minimum capital levels, which would have worsened the conditions in interbank markets. Yes, the equity is basically phony, but stripping that away would still have made matters worse).

The Chinese will now be able to have a second go at the US in November, and they seem determined to push their agenda, even thought there could not possibly be a worse time to rattle the international financial framework.

Update 11:20 PM: Reader Chris sent us a link to a report from Jiji which put a different spin on the dollars. Note the emphasis on dollar decline. The dollar fell 3% versus the yen yesterday, and only 0.1% against the RMB.

Leaders of Japan and China agreed Friday that the two countries will cooperate to stem the dollar’s further plunge and overcome the U.S.-originated global financial crisis.
Japanese Prime Minister Taro Aso, in separate meetings with Chinese President Hu Jintao and Chinese Premier Wen Jiabao, confirmed that the two nations will strive to maintain the current monetary system with the U.S. dollar playing the role of the world’s key currency.

Aso told Hu that the further deepening of the current financial crisis would undermine national interests of the two countries. Aso stressed that world countries must take their respective measures to stabilize their financial systems.

Hu replied that countries must cooperate in dealing with the current crisis including in an emergency summit of the Group of 20 countries in Washington next month, which will be joined by the two countries.

After meeting with Hu and Wen, Aso told reporters that Japan and China are not hoping for a further plunge in the dollar and a meltdown of the dollar-based currency regime, adding the two countries should contribute to maintaining the currency regime.

The dollar, which dived to a 13-year low below 91 yen in London Friday, made China and Japan nervous because they are the world’s top two holders of foreign exchange reserves. The nations are believed to have invested massively in dollar-denominated securities.

In a move to beef up the mutually beneficial strategic relationship, Aso and Hu agreed that they will hold telephone talks frequently. They confirmed that Japan and China are permanent neighbors and are in mutually beneficial ties.

In the meeting with Wen, Aso stressed the importance that China pay attention to consumers’ worries about and distrust in Chinese food products and wipe them out, referring to a string of problems caused by Chinese foods, including those tainted with melamine, a toxic chemical.

Our big creditors are now developing a joint strategy. Stay tuned.

Update 1:00 AM: According to the Wall Street Journal, currencies are not on the agenda for the November international meeting:

Persuading China to change its currency policy would be a worthy goal for a new Bretton Woods conference. But currency reform is low on the agenda of the summit that the Bush administration plans to host on Nov. 15. (The administration styles this gathering a “G-20 meeting,” ignoring the European talk of a Bretton Woods II.) The British and French leaders who pushed for the meeting want instead to talk about financial regulation — how to fix rating agencies, how to boost transparency at banks and so on. But many of these tasks require minimal multilateral coordination.

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  1. Anonymous

    So what does the removal of the U$D do to a country? It immediately makes them miserable on many different levels and the country regresses immediately. However, most of these countries have come from dirt and shacks, and know how to deal with it and it will get better in the future. They will be more dominant on a global scale without U$A’s involvement! And guess what, they aren’t our friends nor were they ever. When the $hit hit$ the Fan! don’t think they won’t cut off their arm to let the U$A fall into the abyss face first! I am scared!

  2. Anonymous

    Bush knows the the reign of the dollar is ending and him and his Wall Street cronies are outright stealing as much as they can and offloading their bad debt from this last bubble/financing orgy to the American public….oh, and they don’t get prosecuted for War or other crimes.

    Looks to me like their plan is and has worked well for them the past X+ years. When the time comes to do a factor of ten devalue on the dollar, a lot of people are going to be hurting, the rich, not so much.

  3. Anonymous

    “The U.S. dollar is losing people’s confidence. The world, acting democratically and lawfully through a global financial organisation, urgently needs to change the international monetary system based on U.S. global economic leadership and U.S. dollar dominance,” he wrote.

    Written on behalf of a regime that greets dissent with machinegun fire. This is the very acme of Chinese arrogance.

    No one serious is going to trust the Beijing regime with the role they’re now promoting themselves into, least of all any of their neighbors.

    Bretton Woods I was conducted after the decision on the battlefield was determined. A BW 2.5 or 3.0 of this scope will only be conducted in similar circumstances.

    They’re welcome to try their luck on the blue water and in the air above, and particularly in Africa which the Chinese have deluded themselves into thinking they’re going to conquer and exploit as a resource area.

    We’ll see how arrogant they are 120days after the last tanker of imported oil has arrived in a Chinese port. Or if a unitary regime is even still standing in Beijing.

    Oops. External oil dependency on the Chinese scale looks a lot different when you forgot to build a fleet larger than the next 17 navies.

    They have no complaints. They produced worthless junk and poisoned products for the world and got toxic financial instruments in return. Looks like a very fair trade to me.

    Rotsa Ruck, Charlie.

  4. Chris

    How would not having a conference affect what is going on in the rest of the world around the dollar?

    It might help to think of these gatherings, like the AISEM conference as meetings to organize a Creditors Committee for the reorganization of the US.

    It is the recent rise in the dollar which destabilized this lengthening list of debtor countries, Iceland, Pakistan, Hungary etc. Why should they not look for alternative arrangements?

    Watch out for news out of the upcoming Russia China meetings on oil and gas where ministerial level pre-meetings seem to be finalizing medium term supply agreements (up to 15 years) involving Rosneft and Gazprom and their Chinese counter-parts. It is likely that these agreements will not involve the dollar, and that OPEC would be privy to the discussions. These things can be found easily in Russian, Chinese and Indian english language outlets.

    Thinking about these kinds of strategic developments, noticing that they do exist and are happening, and involve countries which represent billions of people, with raw material resources, and financial surpluses seems to be particularly hard for American trained professionals because of the ingrained shibboleths about how the markets
    which have collapsed around us are supposed to function.

    But these things are going on. There will be more surprises coming. Insolvent debtors, like beggars, cannot be choosers, and will, in time listen to what their creditors have to tell them.

    Moving trade in major commodities and investment goods off the dollar where even commercial paper no longer clears efficiently, makes a lot of sense, and will eliminate a lot of financial overhead in futures and swaps and interest rate markets quite quickly. It will make for more efficiency in economic transactions and should help eliminate some of the clogging in the inter-bank markets.

    Over the slightly longer term, trade within Eurasia will go by rail, not by ship, and what now take weeks will take 10 to 12 days to move from Paris to Beijing. The Baltic Freight index will probably be affected by this.

  5. EEngineer

    This is the other shoe that I’ve been waiting to hear drop.

    I think that politics may trump economics on this issue. Nov 15 is the perfect time to pounce from the Chinese perspective. You have the “drowned it in the bathtub” crew in lame duck mode and the new crew won’t be in any shape to put up a fight yet.

  6. thomas j


    You are joking, right?

    Just when the rest of the world is scrambling to raise dollars, China is proposing a move to another reserve currency. Sure, pull the other one.

    The only possible alternative is the Euro. And the reality is that the Euro will probably not survive the current crisis. Besides the time to propose making a move to alternative currencies was during the expansion phase. Not now during the credit contraction when dollars are dear.

    The fact that some Chinese bureaucrats are crying only serves to demonstrate how badly the Chinese allowed themselves to get ensnared by dollar hegemony. Are the Chinese really going to kick out all the foreign owned multi-national corps responsible for earning most of their foreign exchange? In that case they certainly wouldn’t have to worry about dollar hegemony anymore. But overthrow of the government due to a lack of jobs and total economic collapse would certainly become a major issue.

    The Chinese will be screaming for more dollars soon enough as they deplete their exchange reserves bailing out their own financial system. Demand for Yuan is about to take a serious nosedive as demand for Chinese exports crashes. Then we’ll see a very different attitude emerge among the “bureaucrats” about the dollar.

  7. mb

    china will scream if us defaults, so will other countries.

    they are hostage now, thats cwhat they dont like.

    pull the plug on the dollar, and they all are screwed.

  8. Anonymous

    Maybe the Chinese are trying to give a bit of help to the euro in its time of need. If they fail, I can’t see that they lose anything by this.

    Seems like a reasonable strategic move at this juncture, a continuation of their efforts to knit relationships around the US.

  9. Anonymous

    As I recall from several months ago, we thought the Chinese expected dollar devaluation. They did not expect all those dollars to be paid back in full value.

    They are now in a very respectable, creditable position with respect to this issue because they are not speaking from immediate self interest. If the dollar strengthens, that helps their reserve position, yet they promote alternatives to the dollar on more general principles.

  10. Stuart

    The fastest way to get the Chinese to pull the plug on the dollar is to ridicule their stupidity in buying, point out that you think they are trapped and dare them not too.

    Got gold? You better.

  11. Anonymous

    So if the dollar wasn’t the world’s reserve currency, it would drop in value, with all sorts of repercussions–one of which would be a very positive move in our trade deficit, with increased domestic investment. Seems like China would be hurt both by the drop in asset values and declining purchases from one of its best customers. Less FDI as well. Maybe I’m missing something, but that doesn’t sound so bad for the average family here, so what if they don’t buy as much plastic from China… or am I missing something?

  12. Yves Smith

    Thomas J,

    My issue is more immediate. China has takes a very aggressive stance at some past international confabs, most notably on climate change. Shi is not part of any delegation, but the Chinese often use academics to present official views. And the NYT piece indicates Shi represents an attitude held by a significant minority.

    The problem is if they get loud and noisy again, even if no one is prepared to follow their lead, it could serve to further rattle the markets.

    And the NYT article (if you click on the link to the related post) reveals very inconsistent, almost incoherent thinking, and this is from the Chinese central bank and finance ministry. To give you an idea of how bizarre their thinking is, Dean Baker wrote a post on the same article titled, “‘Is China’s Central Bank Run By Morons?” The logic, or lack thereof, is pretty scary.

    Even though the dollar rose sharply against most other currencies, the yen rose even more. From what I can tell, this was a massive flight to liquidity. I am told a lot of currencies had huge bid-asked spreads.I suggest you read the update to the post, which talks about a FALL of the dollar. The dollar rose only 0.1% against the RMB yesterday, for instance.

  13. Independent Accountant

    I have been following the Chinese situation for at least a year. The Chinese are saying EXACTLY what Charles DeGaulle said in 1966! I remember. The only difference is: the Chinese may have big enough cojones to stop fiddling around and give up on the dollar and, drumroll please, BUY GOLD! Could the Chinese be stupid enough to substitute one piece of paper, Euros for Dollars? I don’t think so.
    Now for my version of Cathago delenda est: Got gold? Get more! At $736 it’s on the bargain counter.

  14. Anonymous


    When would be a good time to rattle the international financial framework?

    China doesn’t need the rest of the world. All they have to do is demand payment in yuan.

  15. Anonymous

    I’m shocked by some idiotic comments above on China. Well, I would say, you guys deserve this mess, stupid lazy greedy Americans. Literally, the American parasites are at the mercy of the Chinese now, and some folks are still thinking like BUSH, what a joke.

  16. Charles

    unfortunately, both the US and Europe are going the Japanese route ie straight into 20 years of economic deleveraging and bouts of recession, followed by killer inflation after this rounds of money printing, per Marc Faber’s prediction. If only people in the western world are honest enough to acknowledge that the same mistakes and sins (except on a scale of 5x compared to Japan) would bring similar results, clearly the fast action of the FED only accelerate things by a year or 2, still you have at least 2 decades of pain ahead of you.

    The chinese have often been taken for economic dwarfs with communist tendencies and little sophistication, dumb to buy US Treasuries like the rest of Asia and oil exporters. But they don’t need to be smarter than the average american Joe to realize that the only way out is to quit the dollar on the first sign of dollar strength (which is coming in the next 12 months). If they and Europe fail to achieve a BW2 (due most likely to US resistance) then they will go GOLD. There are plenty of smart folks like Soros and Jim Rogers who regularly advises the Chinese regime on macro issues like the dollar and Treasuries. I cannot see the US winning this economic waterloo this time.

  17. Matt Dubuque

    Please keep in mind that originally Bush did not want to invite the Chinese to the November “summit”. He just wanted it to be a do-nothing G8 “Westerner” fest, with Japan.

    Sarkozy and the markets forced Bush’s hand and he has now included the G-20, which includes of course the BRIC nations.

    Also, the fact that this article was on the front page of the People’s Daily pretty much means it IS the official line of the Communist Party, or at least a highly respected strand of thinking within the highest levels of the CCP.

    Also note that in the last few days China contributed a few hundred million dollars, significant in relative terms, to the Latin American Development Bank.

    The Latin Americans are sick and tired of the brutality of the Monroe Doctrine that has killed millions, directly and indirectly, since 1823. The Chinese are now stepping into that breach.

    Sarkozy is playing a very interesting role in all of this. He is a right wing politician in many ways (he is an immigrant basher for example) who is taking on a unique “globalized populist” role here.

    He supports coherent and tough regulation on investment banking with strict limits on leverage on the NATIONAL level, but is also working furiously behind the scenes to replace Bretton Woods with an architecture that includes the Asians. And Merkel is stepping right into line with his emerging vision, trying to stave off her resurgent Bavarian left wing.

    Sarkozy seems to be a brilliant lawyer in many respects. The best lawyers are ARCHITECTS of social relations and this is what Sarkozy is becoming on the global stage.

    If Obama is elected, he, Paul Volcker and future Treasury Secretary candidate Tim Geithner will be where the REAL action is, with the USA delegation in making arrangements that are coherent and long lasting.

    Bush, Paulson, Cox and their crew of out of touch free market jihadis just don’t have any credibility with anyone, not even the British and certainly not the Fed.

    And a LOT is very likely to happen between now and the 15th of November. The next three weeks are likely to seem like an eternity in real market-time. It seems more likely than not (i.e. greater than a 50/50 chance) that the ENTIRE landscape of international finance will change dramatically in the next three weeks before the summit.

    Stay tuned and stay away from gold.

    Matt Dubuque

  18. Yves Smith


    I don’t disagree. We are headed down the Japan path, but not having their huge savings rate, and the world having lots of other borrower nations in over their head, it is not clear how deflation and inflation play out. I suspect we have deflation and debt write-offs, then inflation but recession level growth at best.

    As for China, there are a couple of huge question marks. They are very export dependent and the world is going into a tightly synchronized recession. China does have the latitude to ramp up government spending without turning to international capital markets. But the flip side is if trade falls off and they are not getting the bennies of internationalization, why should they play ball? And another risk is domestic instability if growth falls sharply.

    That is why I wonder if the Shi article ran for a completely different reason. The Chinese see trade volumes dropping off a cliff. Much easier to set up the US as scapegoat than acknowledge how their mercantilist policies helped create this mess.

  19. Anonymous


    Why are you negative on gold? The dollar is strong now versus most currencies, gold is cheap compared to where it was a few months ago, and Faber, who is the king of the gloom and doom crowd, recommends it.

    The dollar seems certain to weaken, maybe not immediately, but in the next 18 months. So why not gold? It is already too late to buy the yen

  20. Anonymous

    The dollar as the world reserve currency is long in the tooth. the abuse by the US government which has lead to a concentration of wealth of about 60,000 individuals bring economic ruin to the rest of the worlds population needs to come to an end. The rest of the world would do it’s self a favor possibly by dumping Bucky but only if it is done right.

  21. k

    How many of you here can read Chinese, eh?

    I can read Chinese, and I go back and check that article in People’s Daily.

    In the fourth paragraph, it includes sentences accusing the US exploiting dollar hegemony and suggesting bilateral trade with other Asian and European countries settled by Euro, Pound, RMB and Yen.

    IN THE THIRD paragraph, it states, “Earlier this month, Europe has expressed a unified voice. Leaders from twenty-seven countries in the E.U. advocate drastic changes to international financial systems, INCLUDING SETTING UP NEW BRETTON WOODS SYSTEM, tighter regulation on the global financial markets to avoid a repeat of current financial crisis. (较早之前,欧洲已发出了共同的声音。欧盟27国领导人已在本月16日结束的首脑会议上呼吁对国际金融体系进行大刀阔斧的改革,建立新的布雷顿森林体系,通过加强全球金融市场的监管避免当前的金融危机重演.)”

    That’s the whole paragraph.

    Reuters is a U.K. based news service.

    China INCREASES its treasure holding $22.3 billion this August, the largest in 2008. Japanese treasure holding was $1 billion less at the end of August than the beginning of 2008.

    So “China Launches Salvo Against Dollar Hegemony,” and EU and Japan are staunch US allies and here to defend last bastion of hope of mankind.

    Yeah, right.

    (Matt,the article is here, )

  22. Matt Dubuque

    In terms of gold and Faber, he also talked at the end of September about an “October rally” in stocks. That was a patently ludicrous position at the time and remains so.

    In terms of my rationale, feel free to search this blog for my views on the subject. I’ve given up on explaining “why” to an American audience. They just don’t get it. Also a youtube search under “Crash of 2008” will bring you to my videos.

    So now, instead of wasting my breath as to why I am bearish on gold to the Americans, I merely point out my clear views and refer them to the archives for my discussion of the surging possibility of a strong deflationary burst.

    On a DIFFERENT NOTE, here is a nice piece from Bloomberg on Sarkozy’s central role in bringing Hu Jintao on board:

    Asia Backs EU Push for Financial Revamp in Victory for Sarkozy

    By Jennifer M. Freedman and Jonathan Stearns

    Oct. 25 (Bloomberg) — Asian and European Union leaders called for an overhaul of the global financial system, lending support to French President Nicolas Sarkozy as he presses the U.S. to join the initiative amid the credit crisis.

    The heads of more than 40 Asian and European governments “pledged to undertake effective and comprehensive reform of the international monetary and financial systems,” according to a statement released at a two-day meeting in Beijing. Chinese President Hu Jintao, Japanese Prime Minister Taro Aso, German Chancellor Angela Merkel and Sarkozy are among the participants.

    The summit, which ends today, is the first gathering of Asian and EU leaders since bank failures, sinking stock prices and weakening currencies stoked fears that the world is headed for a prolonged economic decline.

    Sarkozy is leading the 27-nation EU’s push to respond by revamping a financial system established after World War II. Leaders from around the globe will meet Nov. 15 in Washington to assess the turmoil at the urging of the EU, which has floated ideas including more bank supervision, stricter regulation of hedge funds, new rules for credit-rating companies and changes at the International Monetary Fund.

    The “IMF should play a critical role in assisting countries seriously affected by the crisis, upon their request,” the Asian and EU leaders said in their statement.

    The Washington-based IMF is considering an emergency program to prevent a collapse of emerging markets by almost doubling borrowing limits for members and waiving its standard demands for economic austerity measures. Investors are pulling money out of Asia, Latin America and Eastern Europe on fears vulnerable countries may also default on debt.

    `Unanimous Consensus’

    “There is a unanimous consensus to push forward reform,” Kazuo Kodama, a press secretary at Japan’s Ministry of Foreign Affairs, said in an interview today. No agreement has been reached on the details of that reform, he said.

    Sarkozy’s campaign for an overhaul threatens to expose differences with the U.S. over global financial governance. That may provoke tensions and bog down talks while individual countries continue to act on their own to limit the fallout.

    The credit crisis is choking off money to companies and people, undermining business and consumer sentiment. Economists at Deutsche Bank AG expect the Group of Seven economies to contract 1.1 percent next year, the worst since the Great Depression, and global growth to be the weakest since the 1980s.

    Stock markets around the world have tumbled this year amid growing concern that governments, central banks and finance ministers are powerless to counter eroding corporate earnings and job losses.

    $10 trillion

    More than $10 trillion has been erased from the market value of equities so far this month, accounting for about one- third of the total value wiped off stocks this year. MSCI’s index of developed and emerging stock markets plunged 48 percent in 2008 and is heading for its worst year on record as credit- related losses topped $660 billion.

    Last Updated: October 25, 2008 00:04 EDT

  23. Anonymous


    I am not convinced Reuters got it wrong. The article made it clear they were quoting the English language version. China People’s Daily is responsible for its own translations. I looked for the article on the English website, but the search bot does not appear to read archives beyond August (even a search under “dollar” produced no more recent articles).

    Sp given that Reuters quotes the English version of the article, you need to reference that to prove your contention that Reuters engaged in misleading reporting.

  24. Anonymous


    Frankly, your response is just plain rude. I read this blog pretty regularly and have seen no discussion of the kind here. This “I’ve given up explaining to you morons” when we have heard no such explanation is patronizing and insulting.

    Yves, I hope you are taking note. I think you keep tabs on commentator behavior. This sort of thing is not called for.

  25. k

    I did not say “Reuters quotes the English version of the article.” Reuters TRANSLATES People’s Daily itself, and accidentally (or incidentally) omit the leading paragraph which explains it is the EUROPEANS who first advocates Brettonwoods II(or III).

    People’s Daily is a Chinese newspaper, printed in Chinese. The paper has NO ENGLISH version. (People’s Daily website, however, hosts reports in multiple languages. But it’s mainly for entertainment purpose. Seriously, you can find all sorts of allegations against communist party on its discussion forum.)

    I include the link for Shi’s original article in my last post. It’s in Chinese. You can check it out yourself if you are interested.

  26. Anonymous

    I strongly encourage the Chinese to stop buying US treasuries, as well as depegging their currency from the dollar. Would be fascinating to watch the results.

    Dr. Kevorkian

  27. Anonymous

    Haha, basicaly America is saying: How dare you dump me.

    Once the most powerful nation in the world is behaving like a 40 year old woman desperately ensnaring men after she lost her luster.

    So much for Land of the Free and Home of the Brave.

  28. Demand Side

    Does anybody think the US HASN’T exploited the dollar as reserve currency to fund its various deficits? On the other hand, the high-priced dollar has led to a de-industrialized nation.

    In his comments at the Women’s Economic Roundtable the other day, Paul Volcker mentioned an alternative exchange rate system he was working on twenty-five years ago, having to do with, as I understood it, using reserves that grow too big to trigger currency revaluations.

    Whatever the economics, the politics are enormously bad for the U.S. An equitable exchange rate system is absolutely essential. The US would be wise to work hard to make it work. It could symbolize a new, more cooperative world order, or something idealistic like that.

  29. Anonymous


    I still am not convinced. You confirm that the article does indeed “includes sentences accusing the US exploiting dollar hegemony and suggesting bilateral trade with other Asian and European countries settled by Euro, Pound, RMB and Yen.” That is inflammatory, particularly on the first page of the state newspaper. Reuters is right to highlight it.

    And as far as “Bretton Woods II” it appears, as indicated by the Bloomberg extract provided by Matt D, that the Europeans, who pushed for it, do not have currencies on the agenda. Look at the list:
    “Leaders from around the globe will meet Nov. 15 in Washington to assess the turmoil at the urging of the EU, which has floated ideas including more bank supervision, stricter regulation of hedge funds, new rules for credit-rating companies and changes at the International Monetary Fund.”

    They appear to be using Bretton Woods to define an international order, as opposed to a currency regime. The author of the People’s Daily article may have been aware of this and chose to spin the piece differently, or may not have been so well informed.

  30. Max

    They appear to be using Bretton Woods to define an international order, as opposed to a currency regime.

    These things are inseparable – one implies the other. How can a new order keep honest accounting if the reserve currency does not?

    It’s funny, all this hoopla, and to think of it – we are just barely half way through the crisis.

  31. Don

    A hunch: countries with current account surpluses such as China will in the not too distant future begin to use those reserves for domestic purposes – in attempting to stimulate their national economies.

    With a significant decline in international trade now underway – with exports/imports decreasing – the role of the dollar will gradully become less hegemonic. As China, for instance, sees its exports to the US decline, so will there be less recycling of dollars.

    On the flip side, by using its dollar reserves to stimulate it’s domestic economy, China (as well as other countries with a surplus), will have less and less reason to purchase US Treasuries.

    This will come at a time when the US is flooding the bond market with Treasuries to fund its bailout programs, and to fund likely future attempts to stimulate its national economy. The result: lower bids for Treasuries, and higher yields, with the consequence of further damage to the US economy as a result of tighter credit conditions.

    Increasingly, as more and more countries focus on stimulating their domestic economies, the result will, in a feedback loop, further impede the system of international trade as a national focus begins to take precedence on a global scale. Countries will increasingly take on more introverted approaches (and to a degree regional approaches), thus speeding up the process of de-globalization – set in motion with the beginning of a global recession.

  32. Anonymous

    I’m a first time poster, so excuse me if I state the obvious…

    Given that the majority of the US economy is generated by knowledge workers in the form of intellectual property, how far would China’s economy developed had we enforced international intellectual property rights? Seems to me that the entire Chinese economy has benefited from a major subsidy of IP from the US. There are articles/books on this topic, but I am unable to lay my hands on them at 3:00 am.

    China is quite adept at issuing bellicose tirades in response to perceived “exploitation” by the International community. At times it seems she revels in historical victim-hood. The issue of dollar hegemony sounds like a distraction to take the focus off of bad economic policy by China

  33. CCT

    I also read Chinese, and I can confirm that the story is getting top billing in China. It’s the headline, and has earned its own special topic at… the Chinese media doesn’t highlight stories arbitrarily. This isn’t simply one academic speaking out of hand, this is a meaningful expression of Chinese intent. Note that strategic intent does not equate to irrational short-term tactical behavior. China isn’t going to forward any policy that disrupts the system on the hear and now, but it clearly is pushing this issue to the forefront while the world’s attention is focused on the matter.

    A statement released from the Asia/Europe meeting on Friday, originally linked from Bloomberg, by the way:

    “7. Leaders pledged to undertake effective and comprehensive reform of the international monetary and financial systems. They agreed to take quickly appropriate initiatives in this respect, in consultation with all stakeholders and the relevant international financial institutions. “


    I think you’re misunderstanding Dean Baker’s editorial. He’s not suggesting that China’s central bank is actually populated by morons, but rather that for the NYT version of events to be true (re: “surprise” in Beijing), they’d have to be. The more reasonable explanation is that the NYT is wrong, and Beijing isn’t surprised at all.

    Those who think China’s economy will fall off a cliff because the export market shrinks doesn’t really understand the dynamics of the domestic Chinese economy. There are approximately 400 million Chinese living in wealthy coastal provinces, and their income growth over the last 8 years has significantly lagged GDP growth. I think that parameter is going to change quickly as the Chinese government is going to take advantage of its HUGE budget surplus (government revenues growing at 30%+ every year this decade) and cut taxes extensively.

    I think 400 million Chinese consumers will do at least a mildly respectable job of picking up the slack for 300 million American ones. It’s not going to be the golden age it has been, but the Chinese economy will likely maintain its balance just fine.

  34. Anonymous

    NEWS FLASH: Paper Currencies Worthless. China sells trinkets in exchange for indebted paper. Threatens global thermonuclear war for being stupid.

    So, can anyone name anything that China sold us that we can’t do without?

    I gotta get more popcorn as soon as the cargo ship can deliver

    The USA (its debt) will try to be isolated leaving the next trustworthy banking scheme to give it a go.

    Russia? I think three persons own all the cash and assets there. China? Who knows what their currency is really worth and they are not saying, ever. Euroland? Lacking cohesion. Japan? Yeah right. All of them? To disconnected.

    We always said, take the $750b start a new Treasury bank. Let the Federal Reserve carry the bad debt for a couple of lifetimes until paid off and abolish them.

    It’s going to happen anyway, you know, some new world monetary system destined to failure in short order. Even one back by gold.

    When the thief (US) is the most honest one in the room………

  35. Yves Smith


    Thanks for giving your input on the original version of the article.

    You are correct that I did not characterize the Baker post correctly, but we were also perplexed by different issues in the NYT article. Baker’s point was that it was ridiculous (and I am not distorting his tone here, he was unusually dismissive) for the Chinese to have bought dollar assets and not expected them to depreciate given our large, continuing trade deficit.

    But in fact, now that the FX reserves are so large and the losses have become politically sensitive, it now appears the officialdom is having trouble explaining just that. Therefore it is hard for outsiders to tell if the seeming contradictions in the infighting over the dollar level is a function of posturing, or whether some of the bureaucrats are starting to believe the spin.

  36. SilverDollar


    You raise some good points. I wonder if it’s really a question of time. Can Chinese internal demand really replace export driven surpluses quickly enough without serious dislocations? Good point about the Chinese perhaps lowering taxes. This will certainly help domestic consumption. The Chinese dilemma is certainly complex. How wealthy are those 400 million you cite, though, and what wealth effect does the closing down of 10’s of thousands of factories have on their local economy? Seems China is now ensnared in the global deflation spiral as well.

  37. baychev

    it seems alot of american posters simply do not get it: china never purchased treasuries as an investment. it was to industrialize the country, stave off riots, and enrich the elite. they do not care if they will be repaid or not, but with somewhat archaic thinking they care quite a bit about writing off agency debt and thus reducing the notional amount of their reserves.

    with shrinking global trade (inevitable) it seems quite possible to see BRIC formimg some sort of an alliance as they have mutually complimentary strengths and together can weather the dependence on dollars/euro to promote trade inbetween. this is what the russians are pushing for, the brazilians achieved with argentina, so i would not be surprised if that happens.
    that would lead to what another poster noted: more and more trade will be concluded on bilateral or multilateral agreements that circumvent the ‘market’ as americans know it and therefore reducing the dependency on the dollar which now seems to wreak havoc in those countries with its appreciation that is not tied with its fundamentals but the levered up western financial system.

    asia and latam are riping to the european idea that stability is more beneficial and suitable than us hegemony so they will take actions to wean off the dollar dependence. and eventually it will plung in value due to the structural problems in the us economy and the heavy weight of the debt. but again, do not expect actions from the chinese that will lead to write offs of their us denominated debt.

    sarkozy is indeed a populist. he is clueless and strives for relevance but seems to be still attracting attention. any agreement even tacit for future trade between EU/Asia that circumvents the dollar would involve de-peg of the yuan, so i do not see this meeting producing any immediate or near term results.

  38. Anonymous


    The FX reserves have come to be seen as an investment by the public and some, perhaps a lot, of bureaucrats. The losses on them are controversial. You can say they weren’t intended to be an investment, but times and perceptions change.

    You are also wrong re China and the dollar. China has been talking up a fixed currency regime. They think a floating rate regime is destabilizing. They don’t have to be pegged to the dollar. Richard Kline has some very good comments on the next later post on this matter. They don’t need the dollar per se if they have other means to keep their currency within a reasonable range with their major trading partners.

  39. baychev

    i will elaborate on the subject of the November BRIC meeting: conducting multilateral trade in the currencies of the members.

    those countries are beyond the stage where they feared each other’s instability and realize that it would be in their best interest if they can use their own currencies for trade rather than the dollar. how is this going to benefit them?
    in times of scarce external currency liquidity, commodity prices plunge more than demand/supply suggest due to the scarcity of the medium of exchange. this in turn hurts their economies by lowering receipts, destabilizing budgets, creating political pressure, shrinking the economy etc.
    all this is due to an external factor that has nothing to do with their internal demand and supply, but with a medium of exchange whose supply is controlled by outsiders. for that reason i expect to see some tangiable results.

  40. Anonymous

    It is inexcusable for China to now complain about dollar hegemony when for the last five years or so she has been constantly urged to correct imbalances and revalue the Yuan. She refused, then bent, made painfully slow adjustments and still procrastinates. In this procrastination she was supported by many foreign bankers & economists who claimed China needn't/shouldn't/couldn't revalue. Those who follow outrageous mercantilist policies must suffer the conseqences.

  41. thomas j


    I think you need to keep the importance of China in its trade relationship with the US in proper perspective.

    Total trade between China and the US in 2007 was $386 billion. This trade constitutes less than of 3% of 2007 US GDP of $13.7 Trillion.

    As a comparison, trade between US and Canada was $565 billion in 2007. And trade between US and Mexico was $346 billion.

    Of the total global trade involving China, approximately 60% involved trade between foreign owned MNCs and their foreign subsidiaries in China.

    So how exactly is it that the Chinese government is going to be in any position to dictate what the world’s currency reserve should or shouldn’t be?

    The problem that China now faces is that as the US consumer reduces its consumption of imports primarily from US owned subsidiaries in China, China’s ability to earn foreign exchange vis a vis its trade surplus with the US will be significantly impaired. That augurs for a reduced ability on the part of the Chinese government to determine currency flows not more control. Perhaps that is the reason the PBOC bureaucrats are squealing like stuck pigs. The Chinese suddenly realize they are facing their own currency crisis in the not to distant future.

  42. Max

    thomas j,

    you are delusional if you think the second largest economy by its PPP, is going to have a currency crisis, especially given their enormous trade surpluses and forex reserves.

  43. thomas j


    It is you who are delusional if you think that those “enormous trade surpluses and forex reserves” are not going to reverse in the very near future.

    Recent events in Russia and Brazil have amply demonstrated trade surpluses are wholly insufficient when governments are suddenly and unexpectedly forced to bail out large segments of their financial system just as prospective foreign exchange earnings start to drop off a cliff.

    You are obviously incapable of perceiving the unfolding of economic trends in other than a linear fashion. Not to mention a failure to grasp the potential for the dramatic geopolitical shifts that are underway.

    Wait until MNCs begin folding up operations and withdrawing from China just as social unrest from hundreds of millions of unemployed rural workers camped in urban shantytowns bubbles over.

    Or maybe you still believe, along with the PBoC, that the US government’s guarantee of Agency debt is explicit? Or is that effective?

  44. SilverDollar

    thomas j,

    You raise some interesting points and figures. Can you tell us where you got your trade data? If true, perhaps China is not the monolith we all fear.

  45. baychev

    thomas j,
    you have totally ignored in your scenario the impact of velocity of money and the 30% real economy 70% services based economy anomaly.
    those 70% services just redistribute the wealth created by the 30%. on top of that 4% of GDP is imported and another 6% is borrowed. the REAL GDP if the trade and budget are balanced could easily be only 1/2 of the nominally reported.

  46. thomas j


    You clearly have no idea what you are talking about.

    The velocity of money is the relationship between a measure of the money supply such as MZM or M1 and the overall GDP. This relationship can be expressed simply as MV=PQ.

    If anything, the recent dramatic drop in the velocity of money (not even reflecting recent Fed expansion of the base monetary supply) actually only serves to bolster my point that the debt driven US consumer demand upon which China’s export dependent economy has relied on to date to generate its foreign exchange earnings is now coming to a screeching halt.

    As far as the other points you are attempting to make, they are simply too unintelligible to decipher.

  47. Ben

    I was at a talk last week with a high ranking individual in the Chinese government’s equivalent of the Treasury Department and it made clear just how bi-polar the Chinese attitude towards the dollar is. One thing that you have to keep in mind is that the Communist Party represents a huge variety of opinions within it and the People’s Daily reflects only the most hardline views. There are hundreds of other government newspapers. The Chinese are desperately afraid for themselves right now. They have a huge potential for stagflation as their real estate bubble bursts and their export economy crumbles. Much more so than in the US, an economic downturn in China–especially one accompanied by heavy inflation–will lead to alarming social unrest. The Chinese government is therefore petrified and desperate for anything that can temporarily get Americans purchasing their exports again. Second, the Chinese are very aware that if it had not been for US restrictions, they would have invested more in Blackstone and other securities and lost more. Nor have they locked themselves into their losses–they are still invested. Third, they know that inflation would be the easy way for the US to get out of its debts to Asia and they are fighting that. And finally, they are coming to the realization that their export-oriented economy (using borderline slave labor to produce cheap items for export) has left them vulnerable, mired in an ecologic catastrophe, and developed in a deeply imbalanced manner. What the Chinese need (and want) to do is increasing the percentage of their GDP based on their own consumption. As someone who knows much more about China than about the economy, I have no idea how they will accomplish that goal. But it is important to keep in mind the situations that the Chinese confront and to contextualize these articles in the People’s Daily. My guess is that many in China would like to use this crisis as an opportunity to take the US down a peg and rid themselves of dollar hegemony, but that many more are realizing that they are not in a strong enough position yet to do that.

  48. Richard Kline

    So thomas j, brother you are sooo not in this universe that I’d have to crank it up to Warp Factor 5 just to keep your receding tail lights in view. If you think that China’s ‘teeming shanty towns’ will rise up against the government _after supposed US MNCs_ jerk the rug, it ain’t happenin’. That country is profoundly nationalistic: the biggest single political problem for the CCP is _keeping the lid on nationalism_ as a rival political focus to their own. If _Western_ foreign capitalists pull out, they would be blamed for harming China, and the poor would line up behind their leadership—against us. That doesn’t make it into your scenario, which tells me where you are coming from: you appear to see things not in this reality if they favor a perspective you find desirable.

    I don’t suggest that China has a unified policy; their timidity in proceeding suggests that they have a clearly defined goal, but are uncertain of the policy course to reach it, and are inherently cautious given their experience of concerted international hostility in the past. The potential for unrest internally is real, which is why China will look to blame those abroad—so we’d be ill-advised to give them cause, right? If and as China accepts a bit of domestic growth in consumption, something they have actively resisted, they will solve many of their problems; the principle obstacle to such a policy change is their current over-dependence on exporting to the US with the consequent problem of managing dollar surpluses. It’s easy to see where this is going, right? We play the trade war/capital flight card, they blame us: that’s a win for them, especially if their other trade partners take up the slack.

    The bulk of foreign investment in China that matters is from the Chinese diaspora, and convergently with that from Taiwan. The US _contracts_ many purchases, but we control the investment flows and production capital inputs far less. We buy what they sell, but we own outright much less of the productive capacity deployed: China kept it that way just against the prospect of exactly the day you would propose to dawn upon them. The real investment in China’s industrial development is non-Us and in fact non-Western, is in it for the long haul, and want’s nothing better than to stay there and sell to that 400M market that will only increase; they aren’t going anywhere. Yes, downturns in the export trades hurt them badly, they have had to close marginal enterprises, and will have retool into other products. US capital flight from China is a marginal issue. Shadow banking capital flight is a much larger issue to be sure, something closer to what I suspect your substantive point might be.

    —And China has been preparing for this from the first, they have always known that they might be subjected to punitive political squeezes. China trades more with the EU than with the US; you knew that, right? China has been working very hard to build up alternative markets, such as in Latin America and Africa. In volume they are small, but they are a long term bet. You’ve noticed, too, that they negotiated a broad political rapproachement with India now, so that the US can’t play them off against each other? Their economies don’t mesh that well, so it will be slow for them to grow each other, but still.

    Brad Setser’s numbers on capital inflows to China are quite different from the numbers you offer up, and given your weak synthesis presented here I have every reason to trust his numbers and their interpretation more than yours, even before taking into consideration his close command of the issue. Some of that is hot money—but the hot money was a major problem, so having less of it is more desirable. Definitely swings in capital of massive proportions can not happen with ongoing deleveraging of the dollar-yen network. Your analogy with Russia’s fix is ludicrous, though. Russia had major extrenal debts denominated in euros, but also rather foolishly in dollar exposure, their major reserves their notwithstanding. China has relatively small external debt, tiny external debt compared to its reserves. They face currency loss, but debt calls aren’t their problem. Where, then is this sudden drawdown on their reserves which you propose supposed to come? Oil and iron prices?? Which of course are dropping like a stone. Where is China’s exposure to a run?

    There is one issue, at least, that you pose with which I concur, but I draw different conclusions from it. China _alone_ is not a menace to the reserve status of the US dollar, short of a Samson scenario of dumping it in bulk. They are not going to do that. In fact, I seriously doubt that China has any direct designs on either ‘overthrowing the dollar’ per se, far less supplanting it with the yuan. China needs a world currency arrangement which is NOT RIGGED AGAINST CHINA. Their economy is yet too small to dominate, and they know it, and their goals are for a stable system which they can use to grow their share. I strongly believe that they would continue to accept and actively support the dollar if it was stable and managed in a mutually beneficial way: it is neither, there’s the nut which now must be cut. This is why China is looking to line up with other major players on a ‘re-stabilization’ plan. This recent EU-China summit is a major, major coup for their mid-term position.

    The US has been absolutely incontinent throughout this crisis on developing or promoting such a plan. Any credibility or leadership we ever had we’ve abdicated in present abject incompetence. That is why the other players are drawing up a gameplan. I suggest you think about the implications of that.

  49. Ben

    Richard, One thing that you overlook is that nationalism in China is much strong amongst the young and educated and sometimes surprisingly absent amongst the very poorest rural citizens, especially the migrant workers in the cities. Everything month, reports of at least two or three major riots by these “民工“ and other poor urban dwellers make it into the national Chinese media–much more goes under the radar. It’s a serious–perhaps the primary–concern of the ruling party.

  50. Grant Case

    Always most humorous when the country that has benefited the most from Dollar Hegemony comes squealing about it. Interdependence can be a real b*tch. You built your entire economy on exporting to the US at the expense of trying to build your own. Of course exporting is the easy money and that’s why China pursued it.

    Welcome to 18th and 19th century colonial economies. Instead of sending resources you are sending finished goods. Of course now that the home country isn’t buying, China’s wondering what it got itself into this time. If China had let the yuan rise it would have devalued the dollar and made exports more expensive further eroding the Chinese economy and creating civil unrest. Eastern China is largely an agrarian society that in many respects has yet to benefit from the China boom and is already jumpy with tens of millions of young males who are either unemployed or underemployed. Now China can’t let the dollar fall because all the US dominated assets it owns and again if the yuan rises it destroys Chinese industry and now all the dollar assets.

    If China does not like this marriage, tough – be ready to give a whole bunch of your wealth. Of course, the children (the Chinese economy) always get caught in the middle of any divorce.

    For better for worse,
    For richer for poorer,
    till death do us part

    China brought itself willingly into this marriage. China benefited from this marriage as it was living in utter squaller prior to it. Instead of trying to raise itself up, it decided that’s tough and married up instead. Now that it got a taste for the good life it doesn’t like the terms. Well there’s the door, but the pre-nup is bullet proof and you are headed back to the shack. While China could hurt the US right now – it could hurt itself, its economy, and its citizens a lot more by breaking up this marriage.

    For better for worse,
    For richer for poorer,
    till death do us part

    Interdependence can be a real b*tch.

  51. Anonymous

    China’s current squawk about dollar hegemony could be simply an effort to go on record. Since China has demonstrated it’s patience it might be that they want to have the benefit of saying ‘I told you so’ when the West screws up next time.

    I do not think that China expects any meaningful change to come from the Nov meetings.

    RE: Gold…Much depends on one’s time horizon. Short term gold might not fair so well. Long term gold is one of the few assets worth having. Gold will always maintain it value in relation to other commodities that are vital to life. Gold is money, not an investment.

  52. Independent Accountant

    I have been following the “China-gold” situation for at least a year, on 2 Ocotber 2007 I posted Various lower level people in the Ministry of Finance and People’s Bank of China have given “off the record” talks about China dumping the dollar and buying gold for at least a year. Eventually, if it has not already happend, China will realize it must reorient its industry to production for domestic consumption, not export, when it realizes the US can’t pay its debts. Be patient. The Chinese will act. Charles DeGaulle complained about the dollar and was ignored. Old timers will remember in 1968 we devalued the dollar. In 1971 Nixon closed the gold window. What will China FORCE on us? Stay tuned. Got gold? Buy more.

  53. Anonymous

    China’s current squawk about dollar hegemony could be simply an effort to go on record. Since China has demonstrated it’s patience it might be that they want to have the benefit of saying ‘I told you so’ when the West screws up next time.

    I do not think that China expects any meaningful change to come from the Nov meetings.

    RE: Gold…Much depends on one’s time horizon. Short term gold might not fair so well. Long term gold is one of the few assets worth having. Gold will always maintain it value in relation to other commodities that are vital to life. Gold is money, not an investment.

  54. Richard Kline

    So Ben, I don’t doubt there’s a bunch I’ve overlooked.

    I am aware of the low level but continuous agitation you describe. I’m quite sure that it is a major, perhaps the major, concern of China’s ruling caste. The issue is, what of it? How to manage it? Growth will help. Stagflation, the real bugaboo, will hurt quite a lot. Can different constituencies be played off against each other? Will a political focus or opportunitic leadership develop to coalesce such discontent? The authorities there have done everything possible and even much unfair to dissipate such foci.

    The real instability scenarior in China, to me, is the fear that the elite fragments into factions which play to different constituencies, particularly to dissident ones. I don’t see that in the cards, in this situation, or in the near term. On the other hand, the leadership does not look like they are able, quite, to settle amongst themselves on a consensus policy, and so their internal propaganda/sales job is not as tight as it needs to be.

    So from my perspective, I would watch whether their leadership fissures or their propaganda tightens its focus. The one or the other will tell you how rural discontent will play. I’ve mapped what I see, here.

  55. patrick neid

    Yves stated:

    “That is why I wonder if the Shi article ran for a completely different reason. The Chinese see trade volumes dropping off a cliff. Much easier to set up the US as scapegoat than acknowledge how their mercantilist policies helped create this mess.”

    And that my friends is a wrap.

    Everything that emanates from China be it a satellite, Olympic team, Taiwan abuse, Trade show, economic symposium you name, it is all for internal consumption. They are faced with the unenviable task of moving 800 million people from the middle ages to the early 20th century, not the 21st. That process of building 10 Chicago’s a year is about to grind to a halt. With it the potential for unrest rises dramatically.

    Because of the Chinese DNA imprinted need to save there is no hope of a consumer led charge to take over what will be the major slowdown in export trade should the pundits prove right about the coming worldwide recession. If and when their GDP drops below 8% the troubles begin.

    Chinese officials are now laying the groundwork for the fingering pointing that is to come. As to the Dollar blather, unless their is some dark Marxist Mao plot afoot to bring down international capitalism, it is just postering. I think the same can be said about removing the Dollar as the world’s currency. Good luck with that. We are almost 23% of the world’s GDP, we have the largest capital market and on and on and on.

    The Dollar is staying king because everyone else is a liliputian. In the interim Ministers have to pretend they have something to say, so let’s have a conference! Out of which will come a Plan. Trumpets please. And we already know how good those are.

    Happily this all ends well. Despite the best efforts of Paulson and crew the markets will purge themselves of all the bubble aftermath, oil, commodities, housing and the deviative dominoes leaving behind tremendous values. Short of a depression, where ammo will be king in these times, the markets will be back at the old highs within a few years continuing the trading range since 2000.

    And never forget the old saying, recessions/depressions exist to return wealth to its rigthful owners!

  56. baychev

    thomas j,
    i would suggest you to work on improving your intelligence.
    you can start your intellectual musings from here:
    – how a country with 800bn money stock can turn in 15tn GDP?
    – how when the Fed injects 2tn liquidity through various acronym soups, everything tangiable loses value?

    and if you reach the point of enlightment, you will understand that the 15tn GDP is simply a mirage: levered up economy with real value at least 3 times less.

  57. OldChinaHand

    This is interesting.

    I am wring this while looking at the brightly lit Changan Avenue in downtown Beijing, which is occasionally blocked by police to make room for the motorcades of those “Asian and European” leaders who are winding down their conference tonight.

    This story is interesting because indeed, while talking to banker friends in Beijing over the last week, they

    a.) All predicted that the Chinese Yuan should get cheaper soon against the dollar
    b.) They predict an end of the unprecedented run-up the dollar had in the last few month against most currencies (except for the yen, but that’s a different story, it’s the unwinding of the carry trade.)

    Yesterday, one EUR bought 1.25 dollar, in July, a Euro fetched 1.60 dollars. In buying power, the EUR is already undervalued. If the EUR continues its drop, not too soon a euro will buy 1.16 USD, the lowest its ever been.

    Now please have a look at the chart at


    A graphic tale of the euro, the dollar, and the remninbi.

    EUR/RMB had been relatively stable over the years, one Euro got you anywhere between 9.5 and 11 RMB, with a solid sideways pattern. After the RMB/USD peg was pulled in 2005, the Euro started getting stronger and stronger against the dollar.

    Happenstance? Possibly.

    As the dollar got weaker, it lost ground against the RMB also. When politically expedient, this was spun as “the Chinese government gradually raising their value of their currency,” but of course this was BS, the dollar had dropped.

    No matter what uninformed or brainwashed people may say, the Chinese government actually liked that their currency was getting stronger. The export market overheated. They took other more drastic measures to stop the overheating export market, such as not refunding parts of the VAT, and discouraging low value add processing trade. Because the decline of the dollar, and because of these measures, the export trade actually started slowing in the beginning of 2008, largely unnoticed by the world, but reflected in the Chinese stock market which since then dropped by more than 60 percent.

    The Chinese government still liked it, because they are everything but stupid and knew that double digit growth rates are unsustainable, that inflation and unrest will follow. A crisis was barely averted in Spring and Summer, when food prices shot up in two digit rates. Pork up 55%, cooking oil up 34%, vegetables up 30%. Until a few months ago, anything that cooled down the overheating economy was welcome.

    Look at that chart again. When the dollar started shooting up beginning in July, the remninbi got more expensive in euro terms. But did the remninbi get cheaper against the dollar, as it should? Barely. The Chinese government pretty much held it against the dollar. A dollar could be bought for 6.82 RMB in July, when the greenback was obscenely cheap against world currencies. Today, a dollar costs 6.84 RMB. That’s no change at all in times when currencies fluctuate in a day as they usually fluctuate in more than a quarter.

    Now it gets really, really interesting. The world economy suddenly tanked while the Chinese government was still pushing the brakes on their own economy. Brakes were put on a car that ran out of gas. Exports are really shooting down (we’ll know how much in a few months.) Factories close. It’s getting ugly.

    What’s a government to do? They have to pull pout the stops. They are already undoing the VAT measures. What’s next? The currency. In Euro terms, Chinese goods became more expensive as the Euro fell and the RMB was held steady against the dollar. Not good for export. The Euro broke out of its 9.5 – 11 RMB range, one Euro now buys only 8.65 RMB. That’s gotta change to improve exports. The dollar, despite it’s meteoric rise against most other currencies, barely has moved against the RMB. That really has to change to improve exports.

    Anyway, the above scenario isn’t mine. It’s been discussed for weeks in Chinese banking and industry circles. If I made mistakes in retelling the tale, don’t be mad. I’m no economist. I tried as much as I could.

    Now the sudden “Salvo against Dollar Hegemony” makes strategic sense. The dollar’s “hegemony that plunders the world’s wealth” is for consumption of the other leaders who are in Beijing tonight. With a rising dollar, the Chinese have all reason in the world to adjust their currency. If the dollar goes to 1.16 against the EUR, the dollar could also bring 8 RMB. When this happens, exports will go up, China could repatriate their US bonds they bought for 6.80 to the dollar, and get 8 plus interest. Then, as Chinese money is pulled out of the dollar, and as the USA cranks up the printing presses to finance wars and bailouts, the dollar will go in a tailspin. American won’t complain, it will be needed to make American exports cheap. The money the Chinese dumped into America when the dollar was high was pulled out just in time. Case closed.

    Nothing appears at the front page of People’s Daily without the government’s say so. Especially when dealing with sensitive matter such as exchange rates. For that last two years, China did everything not to wake up the American bear, everything to avoid quotas, tariffs, import bans. Now, America is rattled. The world is even more rattled. China coming to the defense of “the world” ( sans U.S.) , urging that Europe and Asia should use their own currencies instead of the dollar for trade (has happened anyway to a large degree) will sit well with the other nations. A professor of Tongji University wouldn’t have dared to say that “the United States has used the U.S. dollar’s hegemony to plunder the world’s wealth.” Something fundamental has changed.

    We’ll see it soon. If you have dollars and need yuan, keep your dollars. They will buy more yuan soon. If you have dollars and need Euros, watch the greenback with an itchy trigger finger.

  58. thomas j


    Instead of waxing idiotically on something about which you clearly know less than zero, perhaps you should actually do some research on the level of conflict between the rural poor and the urban elite in China.

    “Under the banner of development, China has witnessed an unprecedented growth of its economy at the cost of social justice.8 This contradiction has ushered in a new stage of social resistance whereby the increasingly marginalized workers and peasants are standing up for their rights. The frequency of social conflicts is testimony to this growing trend, with the number of incidents of peasant/worker unrest rapidly increasing since 1999. China experienced 8,709 such incidents in 1993 but by 1999, they had exploded to over 32,000. The figure for 2005 was in excess of 87,000.9”

    Dr. Jianrong from Beijing doesn’t seem to share your faith in the government’s ability to unify the working rural poor under the banner of nationalism.

    But, of course, we should just believe your simpleton explanation that the rural population of China will blindly accept the West is at fault for their job losses and economic collapse.

    And equally quaint is your notion that the rural poor will let the government off the hook as the simple minded peasants are suddenly taken over by patriotic, nationalistic fervor.

    How did that nationalistic movement against the rural peasants work out for Chiang Kai-Shek? Oh yeah, that’s right they ended up on a little island called Taiwan.

    Apparently you are questioning my balance of trade numbers taken from the US census bureau website regarding the balance of trade between the US and China. Pray tell, specifically what balance of trade numbers are you offering as a more accurate alternative? Perhaps the fact that China does about the same trade with the US as Mexico shook up some of your assumptions.

    And I guess you are arguing that China can just rely on trade with Europe to offset the loss of foreign exchange earnings from the US. Or better yet Latin America and Africa.

    Sounds like the decoupling argument that just went RIP over the last couple of weeks. I thought even GFM Steinbruck figured out how idiotic a notion that is.

    Good luck with your buy Renminbi trade. You are certainly going to need it. Oh that’s right, the Chinese government doesn’t allow Renminbi to trade freely in the currency markets. And according to you that’s clearly a sign of strength in a nation’s currency and its overall financial markets.

  59. DD

    Richard Kline—I don’t get it:

    In paragraph 1 of your post, you state: “…the biggest single political problem for the CCP is _keeping the lid on nationalism…”

    Then, in the very next paragraph no less, you state:”…The potential for unrest internally is real, which is why China will look to blame those abroad–…”

    Do you not see the contradiction?

    The best part about this, is not only your blissful ignorance of your own thinking…but that you manage to achieve this oblivion in the span of 2 short paragraphs…while saracastically throwing in a Star Trek reference—of all things—of a warp drive that will allow a man to “boldly go where no man has gone before”…to the edges of a wide-spanning universe.


    “Beam me up, Scottie!”

  60. baychev

    thomas j,
    can you offer anything more than comments on others’ intelligence?

    when Richard Kline said you are from another world he was spot on. I do believe that too.
    Velocity of Money according to you applies to M0/M1.

    have you ever visited the US? people there buy cars with HELOCs, they trade commodities on margin with collateral stocks marked to market, banks use commercial paper as collateral before other counterparties. i can go on an on.

    on the real economy side, insurance, health care, education are times more expensive than Europe which has similar living standards, although much smaller GDP. apparently you do not grasp that either.

    come out of the library and get a life, see how people live, interact with them, and only then pass on your judgements.

  61. S

    “So how exactly is it that the Chinese government is going to be in any position to dictate what the world’s currency reserve should or shouldn’t be?”

    Leaving aside the esoteric debates about what the ultimate outcome is for China (Pettis and Sester have a better read on the abking system and overheated fixed asset investment running at 20% plus clips) I think your statement fundamentally misses the core economic point that prices are developed at the margin. The FCBs are the marginal buyers of US debt and we don’t appear to be in a position to increase savings with the current debt service.

    I must have been channeling the China People’s Daily yesterday in my comment about the US exploiting its hegemony which by the way is a perfectly rational action on its behalf.

    The idea that the world would end if the dollar was not in command is about as simpleton as house prices don’t fall or if you don;t pass this bailout the markets will crater. The world will move on and the US is in the process of being downgraded. This afterall is perfectly consistent with our sacred cow (maybe its dead) creative destruction. The theory apparently holds for geopolitics / geoeconomics as well.

    Maybe China mistakenly bought into Blackstone instead of blackwater.

  62. MethodMan

    This is about the best debate on the Web I’ve seen on the issue. I think all of you have valid points. I do believe, as OldHand indicates, China has formulated a move.

    Now, China’s leader are not stupid, but neither is the US’s (just below the top, anyway.) So the US currenly holds the high ground. They know what’s up here. Is this checkmate for the dollar in 4? Or are we really acting against this? Higher interest rates would kill the housing market and economy further, yet a weaker dollar would create much needed export jobs. Possible to have both?

  63. thomas j


    It is very possible that at some point in the future, the US dollar will lose its reserve status. It is certainly not sacrosanct.

    But I happen to agree with Roubini who posits that any change in the dollar’s reserve currency status will play out over decades not months.

    The idea being bandied about by certain people on this board that there is some viable alternative monetary arrangement that can be immediately instituted without US approval is totally ludicrous.

    These are the same people who have been betting on a dollar crash. And are now in utter shock as a deflationary collapse in the world’s reserve currency actually results in the value of the reserve currency skyrocketing while other currencies relentlessly devalue.

    What I find even more amusing is the notion that central policy planning can stop inexorable market forces from playing havoc with the best laid plans whether they originate in Europe or America.

  64. Anonymous

    This thread is interesting and full of assumptions and personal beliefs with very high-level data to back is up. Debates using that high-level data are meaningless.

    Maybe it is time to invite someone who really knows about the Chinese economy: Arthur Kroeber.

    Please also read the following to understand the Chinese economy from a near-term historical perspective.

    Chinese economy

  65. OldChinaHand

    Little bit of trivia:

    That professor’s former boss and colleague, Dr. Wan Gang, is now Minister of Science and Technology. From 2004 until he received the cabinet post, he was President of Tongji. Dr. Wan is no Economist. He’s a car guy. He lived in Germany since 1985. From 1991 on he worked for Audi before returning back to China in 2000.

    Tongji is mainly an Engineering school, China’s MIT. It was founded in 1907 by a German doctor and was the the window of the cultural, technology and science exchanges between China and Germany. Dr. Wan’s old workplace, the Anting Automotive College, sits right next to Shanghai Volkswagen, the birthplace of China’s modern automotive industry.

  66. CCT

    I think the criticism of Chinese currency policy “over the last 5 years” is as myopic as any 5 year time-frame must be.

    Before these most recent 5 years, China was being applauded for sacrificing its short-term economic interests by holding the dollar peg, even while the rest of Asia depreciated their currencies. In other words, the Chinese leadership is comfortable with taking short-term trading losses in order to support long-term strategic growth. And I think that’s exactly where things lie today, as well.

    I completely agree with much of what OldChinaHand said above. I also believe the RMB will depreciate versus the USD in upcoming months/years. I don’t think this will be dramatic, however.

    I mostly disagree with what thomas j had to say above. I don’t think he has much understanding or insight into Chinese society. The recent decimation of these smaller exporters in coastal provinces is “irrelevant”, as long as it doesn’t happen too quickly, as it actually follows the long-term goals of the Chinese government.

    China also has a large bag of potential policy tools for stimulating the Chinese economy for the next 2-3 years. There’s no realistic scenario I can see for a “falling off the cliff” outcome. The blog post linked above re: Kroeber’s opinion sounds about right to my eyes.

  67. Anonymous

    “instead of wasting my breath as to why I am bearish on gold to the Americans”

    Sure US is going into a deflationary depression domestically.
    So cash is king.

    But the USD is so overvalued in the international market, thanks to being the reserved currency.

    When the dollar devalues internationally, it will take a lot more dollars to buy the same amount of gold. So if you buy gold now, you will be able to sell it for lot more dollars in the future.

    Its that simple…

  68. Anonymous

    What’s with all the anger towards China here?

    To illustrate, blaming China is like, “Your son sexually assaulted a girl, but you are blaming the girl instead, saying it’s her fault cause she’s too coquettish.”

  69. Houghtie

    The Chinese and Japanese have been complicit in maintaining the value of the dollar in the past decade or more. This has been to allow them to maintain their exports at a competitive level to the US. That games up now, as the US collapse has put the kybosh on both their exports and the purchase of US assetts.

  70. Anonymous

    “…come out of the library and get a life, see how people live, interact with them, and only then pass on your judgements.”

    I know I’m taking the above quote out of context, but I’ll give you kids a little insight into “the little folks” out there trying to make a living in the USA.

    In my ‘hood, kids as young as 13 are working at coffee shops, delis, bodegas and pizzarias, actually a young girl of about 6 rang up my soda the other day, her mother instructing her from behind. She took a break from her drawing to do so, may I add…

    At a local fine restaurant, a chef lamented about the price of food, noting that he wanted to make fish soup, but made potato soup instead. “Until people get their faith in the system back, I have to do what I need to keep this place running.”

    Just this morning, people were lined up for a food pantry at 9am, waiting for the doors to open at 10am, they were loud, and anxious.

    A woman with a small child boarded a bus, paid her fare, then dug up change for her own…came up short. The busdriver noted, at least you’re trying, put what you have in, and have a nice day…

    A day in the life…China? People on the street aren’t even thinking about China. They want the faith to be restored…

    Brooklyn, NY october 2008

  71. S

    thomas j,

    Argentina devlaued overnight. FDR devalued overnight. Nixon broke the gold window overnight. Soros broke the pound overnight. Russian devalued the ruble overnight. Brazil devalued the real overnight.

    The idea that something would happen over a decade is ludicrous. Disruptive change is exactly that.

    Agree with poster the US isnt stupid. The rational action by the US in the extreme is to simply devalue – which they will try to stealth do with inflation – before the treasury funding window closes. China says it will not tolerate the inflation game. Perhaps it has no choice. So they lose on the reserve front. But the US still faces the bigger problem. its entire busness model is broken and this would be a dagger through the heart. Plus the future constraints in impaired goodwill might be terminal. There is simply no way out for the US other than having a grown up step up and force some tough medicine on the US. We already got the recession, why not drive rates up blow up the big banks and as volker says build from the bottom up. This seems logical and thus will never see the light of day. Jesse crosing has a great chart of the derivates positions across the big banks. Surpise JPM is at the top.

    Tak on a war bond / R&D like structure sucking up domestic saving as a stopgap to realign costs structure. Morgan Stanley weasal on CNBC was proposing such a structure – he must read naked capitalism – but ewith something like a 4 handle. What an idiot. It would have to be higher but it is actually an idea.

    Consequences, the equity markets will become a backwater through shrinkage. So what. Good riddance. Let it whither as capital goes elsewhere. Gamblers die broke.

  72. john bougearel

    1971 Treasury Secretary John Connally’s quip about the dollar being “our currency, but your problem” should be amended to “the dollar may be our currency but it’s everyone’s problem” while it still remains the world’s reserve currency.

    Stability in the US Dollar is clearly not an option. Foreign and Domestic policies that push and pull on it keep it wildly volatile.

  73. Anonymous

    The CCP are clearly as clueless as everyone else about the current crisis. Do they seriously think that their mercantalist policies could continue forever with the US acting as importer of last resort. At the root of the current economic unravelling is a broken world trading system where reciprocal exchange is a dirty word and some countries would rather bankrupt the planet than see their exports go down. Of course, in this respect the Chinese are latecomers to the scene since it is the Japanese who are the real masters of kamikaze economics. Having exploded their own domestic bubble at the end of the 1990s they decide it might be a good idea to replay the whole recording for the rest of humanity at 78 rpm by adopting a 0% interest rate policy for over a decade. The net result was the carry trade explosion and all its associated credit madness. It is this sort of nonsense which led to tiny economies such as Iceland becoming the recipients of huge inflows of cash in search of higher interest rates. This in turn led to the crazy scenario of Icelandic entrepreneurs trying to buy up huge chunks of the UK economy in leveraged buyouts etc. It was bloody obvious that it could not last. Now the money has gone and the system is broke. Thee world is about to engage in an orgy of blame storming that is likely to lead to trade wars if not outright conflict.

  74. the buggy professor

    Not by any means a China specialist as some of the posters here are, but a few fast, top-skimming comments might be useful:

    1)Are the growth rates of China’s GDP — double-digit for a decade until last spring — really reliable?

    Back in the late 1990s, the statistics reported by the provinces to China’s central statistical bureau — the equivalent of our BEA (Bureau of Economic Analysis) — were so dubious that Premier Zhu, a former economist (I believe), publicly attacked them as beefed up by the local CP big-wigs on provincial and local levels.

    He even tried to have the Chinese statistical office send its own personnel out to the provinces to gather more reliable data . . . only for them to find it impossible even to know there way around the localities and provinces.

    And the Economist and others argued, repeatedly, that the problems of accurate growth stats were made further unreliable by too low a GDP-deflator. They said that we should subtract about a third from the reported growth rates in that decade.


    2) There is the further problem of exactly what the total Chinese GDP is these days, compared to the way it was reported before 2008.

    As in the early 1990s, so again in late 2007, the World Bank found that PPP conversions had badly under-estimated price levels in China compared to the US. The result? China’s total GDP in PPP terms was reduced 40% (starting in 2005).

    The figure of around $7.1 trillion (end of 2007) reflects this 40% downgrading.

    3) In the upshot of that revision — which found about 300 million more poor people in China these days than had been assumed with the use of the early PPP conversion-rates — China’s percent of World Output was reduced from about 16% to 11%.

    It’s still the 2nd largest national economy in the world, but its percentage is half of the US’s share of World GDP.

    And China’s expected overtaking total US GDP — even assuming 8-9% GDP growth in real terms — would be delayed, it seems, for at least a couple of decades, and maybe more.


    4) A lot has been made by some posters about reoriented domestic growth.

    But about half of China’s GDP growth in 2005 and 2006 came from exports (about 36-37% of GDP) and government expenditures. (Imports were about 5-6% lower).

    To reorient the Chinese economy toward domestic-led growth, what will happen to all the factories geared for massive growth yearly in exports?

    They already suffer from a rapidly growing excess capacity, and large layoffs have been reported in the regions where the export factories are located.


    4) A further problem is that while 1.4 billion people is very large population, the average Chinese income in PPP terms is about 1/10th of the American average. Credit facilities are also very backward. And the huge savings rate — 35-40% of GDP — is reflected in an astonishingly low 37-38% share of household consumption that goes into GDP.


    5) Then there are the banks.

    A few years ago, the big state-controlled banks were reported to have had up to 50% of non-performing loans.

    Even if that percent has come down, the banking system — which channels most of the national savings into investment purposes related to export industries and propping up the still large number of state-own enterprises — doesn’t look to solvent for outsiders, does it?


    6) For a country to have a large reserve-currency role in the world, it needs — as the US has and the EU collectively has — a large range of investment outlets, not just government securities.

    More to the point, most countries in the world — certainly those in East Asia but also elsewhere and even in parts of the EU (in Germany, exports contribute to about 40% of its very large 80-million populated economy)— want export-led growth.

    Exactly how would a Chinese economy heavily dependent on export-led growth since the mid-1980s — even if its largely multi-stage production for foreign multinationals operating there — accommodate such desires from the rest of Asia, the oil-rich Russians and the Middle Eastern oil-gangster states, Latin America, and parts of the EU?


    7) As the recent surge in the $US shows, moreover, whenever major economic or political uncertainty — or political warlike strife in the world occurs of an important sort — governments and private-holders of lots of capital seek a refuge in the US not just for economic reasons, but political ones . . . this, however much the governments and the media abroad might complain about dollar hegemony?

    Can China really be politically and economically relied on as a safe haven?

    Can even the EU, fragmented as it is and entering a perilous economic recession without the centralized decision-making that the US has?


    9) As for the reserve-role of the US, it seems to have largely favored financial and certain other related services — by attracting large inflows of capital (whether autonomously or as banking balance-sheet adjustments to our debits in current account) — at the expense of US goods production and exports. (That happened, incidentally, to Britain by 1900 too.)

    Other than over-stimulating private consumption thanks to relatively cheap imports — and keeping US interest rates lower than they otherwise would be: both resulting in huge leveraged debt for businesses and households alike (not to mention the Federal government’s huge deficits since 2001) — what would be the disadvantages of a cheaper $US in exchange-rate markets that facilitated a difficult enough adjustment to a less debt-ridden, more good-producing economy even as open-trade was maintained?


    Sure, a possibility of imported inflation might occur, but that hasn’t been a problem when the dollar was at low-ebb even a few months ago, and if there is any problem that faces this country on the price-level front, it seems to be a matter of deflation, not inflation.


    10) Finally, for those who do think that preserving a key reserve-currency role for the US, why not urge an Obama administration to insist that the Chinese stop managing their currency within a fairly narrow margin, and instead — if they dislike the reserve role of the dollar — let their currency freely float as the US has generally since the early 1970s except for the mid- to late 1980s when the Reagan administration worked with Japan and Germany to bring about roughly a 50% depreciation of the explosively high dollar exchange rate vis-a-vis their curencies by 1985?


    Michael Gordon, AKA, the buggy professor


  75. Edwardo

    The Chinese have had to roll their surpluses into Treasuries when they have not been able to use their dollars to buy others assets. You all may recall how they were blocked from their purchase of a major U.S. energy concern not too long ago.
    That state of affairs alone was the death knell for a the continuation of the status quo.

    Make no mistake, even as the Chinese have their own very serious internal problems to contend with, they clearly have made up their mind that a major revision in the international currency order must be brought about , and they are now part of a formidable effort, which will ultimately be successful at establishing a new order with respect to global currency regimes, amongst other things.

    And with all due respect to the estimable Mr. Roubini, the prospective changing of the guard will not take anything like decades. In fact, I’d say that Mr. Roubini’s prognostication on that score may well go down as his least successful. Things will move much faster than that for what I would have thought would be obvious reasons such as the massive deterioration of the U.S. as a viable international economic entity. The FIRE economy has just seen the F fatally undermined, and the RE is already on life support.

    The only reason the dollar is rallying at present is because so many entitities are now meeting margin calls. THAT IS THE ONLY REASON! Gold definitely has a future. How can it not as the dollar is worthless. If the Chinese are smart they will, at some point, partially back their currency with PMs.

    The future is theirs not ours. Sorry!

  76. Anonymous

    US dominance will never be subverted from the outside, as China is currently trying to do. It is our game no matter how well someone else plays we rigged it.

    They are like a dog with a bone now, and they have to face the choice of dropping what they have (export-driven growth) to try to grasp something better (nebulous ambitions of being some sort of hegemon)…they are playing like nouveau riche, not like leaders.

    If the Chinese were smart, they’d send their corps. to the USA to set up shop and employ the disaffected, laid off ex-employees of Western MNC’s, sowing political goodwill and picking up valuable IP for pennies on the dollar.

    Think of what Toyota and Honda did with their US plants albeit on a vastly grander scale across every industry, and especially industries like IT, aerospace, biotechnology and finance..

    So far they appear to be too busy pounding their nationalist chests to make a real power play.

  77. Edwardo

    It’s not just the Chinese that want a new regime. This is the mistake that some people are making when looking at this issue. The U.S. hegemony and the dollar’s concomitant reserve currency status is profoundly unpopular amongst nations that can and will effect major change. No pun intended, but bank on it. And it won’t take one decade let alone several.

    And Whether China is handling its emerging status as a super power with aplomb isn’t terribly relevant. The U.S. has, since its emergence as the world’s most powerful nation in the aftermath of WW2, handled things inelegantly many times. It hardly mattered, and it won’t matter much for the Chinese either.

  78. Juan

    Whether China’s GDP is accurate or not, it has been declining since second Q 2007 but, more interestingly, yoy rate of export growth has been slowing since end 2003 while that nations trade balance with _rest of world_ peaked 4Q07 at a not particularly astounding level (roughly $80 billion). (RIETI, CEIC Data)

    Michael Gordon, how do you see the process of capital deepening proceeding in China? I’ve a notion that it must become blocked by the need to create sufficient employment, which then contradicts competitiveness.

    Further, what about the new property rights in land (which may result in greater efficiencies but also drive millions more into the ‘floating population’)?

  79. Anonymous

    This is just chinese propaganda. China has over a trillion dollars. Do you think they want to see the value of that money decline? I don’t think so.

    The US is China’s biggest customer. The idea that they were somehow tricked into buying all those treasuries is ridiculous. They poured the dollars they got from exports back into the US to keep the party going.

  80. VVi11y

    Sure, the Chinese will lose on the trillion that they have now. But what about the next trillion, and the trillion after that, and the trillion after that….

  81. bena gyerek

    i think people who view the recent dollar rally as a “flight to quality” and therefore confirmation of the dollar’s role as reserve currency are making a big mistake.

    i agree with the view that the dollar’s current rise is very technical in nature. it is not just because of margin calls in predominately dollar-denominated derivative contracts. it is also because it is impossible to short the dollar during the current liquidity crisis, and indeed most existing short dollar positions are being forcibly unwound.

    this technical squeeze explanation is consistent with the relatively mediocre performance of gold, and the outperformance of the yen.

    once the crisis is over (but the global recession just beginning) and speculation against the dollar can resume, i think it is inevitable that the dollar will plummet because the us economy will be worst hit by collapsing domestic demand due to its severe household indebtedness.

    now, if i put myself in china’s shoes, my question is not simply “why should the dollar be the reserve currency?”, but rather “why do we need a single reserve currency at all?” any currency that is highly liquid, and that is backed by a central bank with a credible inflation record and a government with a aaa rating can act as a reserve currency.

    the prevailing view in asia and europe seems to be that we are moving from a world of a single hegemon to a multi-polar world. it is logical for reserves to do the same.

    so if i were china, i would use the current technical dollar rally as an excellent opportunity to sell some of my dollars (but by no means all of them), to buy euros, sterling, swiss francs, and indeed any other currency that is currently stupidly undervalued, that will help diversify my reserves portfolio, and with whom i do a lot of trade (korean won, brazilian real, etc).

    i do also note the important point that prices are set at the margin. for china and others to move the bulk of their existing reserves out of dollars would presumably move the dollar too much against them. instead the focus may be to start building new reserves in other currencies. all the same, and such move to diversify reserves away from the dollar would significantly weaken the dollar going forwards.

    i also note the important point that this is not just a chinese issue. taiwan and others may seize the current opportunity to rebalance their reserves, and in doing so they may force the hand of china.

  82. Richard Kline

    So bena gyerek, that is a very shrewd point on the technical issues in the present rise in the dollar. I don’t particularly do currencies, so I appreciate the insight. I’ve been sure that ‘flight to quality’ is a tertiary issue, while margin calls and other unwinds are a primary issue, but technical points, especially the impossibility of shorting in a turbulent environment, fill in what had seemed a missing part of the puzzle.

    I broadly agree with all your observations here, but there are further considerations. The present push on currencies, to the extent to which any situation this radical and fluid can be ‘mocked up,’ seems to be as you say a move to a currency basket. Consider the old currency schema in Europe of the 80s. The real problem with that is that multi-polar arrangements are just not stable. It’s a long argument as to why, but I don’t see them as being successful, nor do historical examples on this, whether economic or political, support multi-polarity over well. Part of that is simply the simplicity of a primary currency: It’s value is easier to track over time, and fewer hedges need to be laid in to keep ones own position within a range. Multi-polarity requies _constant_ intervention by multiple parties to hold their targets; such attempts are expensive, wearisome, and create their own secondary ripples. Etc., etc., but eventually a Favored Coin is found.

    —But this needn’t necessarily be a _sovereign_ currency. One solution attempted with modest success in pre-modern Europe was the currency of account, an artificial conversion rating based on the price of a range of holdings. In some respects, this is what the posited ‘Asian euro’ looked like it might be. Something like this will _not_ be Plan A attempted by an international currency reweighting; it will probably not be Plan B. But after struggles with a short-term multi-polar approach are experienced, I wonder whether it will be the eventual Plan C tried. Sovereign currencies are typically exploited for issuer advantages, which in turn make imbalances. How the globe would manage a currency of account is harder to say. If we don’t get this, it will be the euro once oversight on the euro is tightened up. And I’m with S above, currency valuations and currency regimes tend to change all at once _within a background with long term directionality_. Re: the dollar, we know how this is going to end.

  83. the buggy professor

    “Michael Gordon, how do you see the process of capital deepening proceeding in China? I’ve a notion that it must become blocked by the need to create sufficient employment, which then contradicts competitiveness.

    “Further, what about the new property rights in land (which may result in greater efficiencies but also drive millions more into the ‘floating population’)?” –Juan

    1) These are key questions, Juan — along with the huge imbalances and problems that cut to the core of the Chinese developmental model, especially since the early 1990s.

    And, truth to say, only a specialist in China who also is a specialist in comparative developmental theory and empirical knowledge — I'm better at the latter (not the Chinese stuff) — could answer with more authority than me.

    That said, here are a few quick, off-the-top-of-the-head remarks:

    (i.) The huge over reliance on investment in China for two decades on manufacturing (as opposed to rural development in the initial 6-7 years of the post-1979 reforms) — especially investment in multi-stage production for the export-market as part of multi-national implants — has created a huge dependency on BOTH vigorous, 20%+ annual growth, in exports.

    And the volume of these exports has already been dropping rapidly in the last year, even before the EU and now the US enter into recession.

    That leaves huge over-capacity in an increasing number of Chinese factories, with big layoffs already under way. (How big only a Chinese specialist could say.)


    (ii.) Simultaneously, the huge surge in Chinese imports in this decade — a doubling as a percentage of GDP (roughly from 16-17% in 2000 to 32% or so today) — mirrors that pattern of export-led production, with Chinese labor really serving still as a finishing platform for multinational imported inputs . . . plus, more and more a need for imported oil and natural resources.

    The consequence?

    Capital deepening has been increasingly inefficient. At some point, if not right now, diminishing returns will be setting in to the mass pool of cumulative capital. Unless, of course, there can be a shift more to qualitative-driven growth . . . the "leap upward" on the technological ladder toward the high, high technological peak-frontier.

    And that, especially as export markets in the world move into recession — especially the EU, North America, and Japan — will not be easy or allow for a smooth transition up that ladder.


    (iii.) Note, in this connection, that there is really nothing new in the proclaimed CP-goals to leap up that ladder rapidly . . . a scramble that would bring Chinese manufacturing in leap-frog manner to the peak-frontier.

    Those goals were proclaimed in the late 1980s, to rationalize, among other things, the growing arrival of multinational implants in China.

    It hasn't worked out in the past, not to a large degree anyway. And it would take a lot of time and a different sort of legal system, technological know-how, and R&D work at or near the frontier by Chinese firms not dependent on foreign technology and inputs to achieve.

    That time is being compressed by the new pressures on Chinese production as their export markets start drying up.

    That leaves China stuck with a lot of low-tech production for the domestic and export markets that are fully Chinese in nature — including the R&D.

    All of this at a time, please note, when wages in the coastal areas and around Beijing are rapidly growing. With, to boot, inflationary pressures looking more menacing.


    (iv) A related imbalance to this over-investment in manufacturing — both low-tech and multinational high-tech production — has been the backwardness of the service sectors in China.

    Oddly, it's almost the opposite of the India developmental model of the last 15 years or so: too much reliance there on services, at the expense of manufacturing.


    (iv.) All this is quite apart from the massive and increasingly severe problems of:

    * Very poor infrastructure, which will require more and more diversion of the huge pool of Chinese savings from mfg. into roads, bridges, dams, highways, schools, universities, hospitals, and the like.

    * Then, too, there's the real estate boom of the last 20 years that has left the country with shoddy, high-risk buildings — whether office- or residential- or public.

    They are environmentally unsafe and will require more and more restructuring — especially in the light of what has happened when floods or other disasters occur.

    * And of course there's the giant imbalances between a) rural and urban development, b) fast-growing and backward regions, and c) rich and poor to deal with.

    (v.) That leaves the whole environmental problem at its core to be mentioned: the health of the Chinese people seems increasingly threatened by the neglect of these above problems.

    Note again here that the Chinese CP and top technocrats don't have a lot of time for dealing with these pressing problems and challenges.

    Not least for three reasons:

    1. A swiftly aging population, which is making China the oldest country in the world. Assuming there isn't a health crisis that kills off a large percentage of the +55-year olds in China, the active-worker/dependent ratio will shoot up steadily in the next decade . . . and on and on into the future.

    2. The pressures to reorient Chinese growth to deal with these problems are intensifying as the global economy and Chinese export markets enter into a period of recession and slow growth.

    Expect, then, far more layoffs and growing unemployment — the official figures for the latter ludicrous anyway.

    3. And — something downplayed by too many posters here (specialists, it seems, in finance and currency and not, like me, a political scientist: with, admittedly, a Ph.D. in economics as well) — there will almost certainly be more and more social unrest and strikes and protests as unemployment increases.

    The only question, really — or so it seems — will be the magnitude of that unrest and its fall-out.

    So far, it's been contained in the rural and backward regions, as well as in the rust-belt areas of the North by China's fast growth (how fast is uncertain). Add to this unrest, of course, a realization of how shoddy food-stuffs, medicines, and infrastructure and buildings are (the latter when floods, fires, and earthquakes occur).

    With a decline in the more dynamic coastal areas as the global economy absorbs fewer Chinese exports, the growth of unemployment and the imbalances in Chinese economic life and society grow more blatant, China's model of economic growth may be entering a period of dislocation and slow-growth soon.

    And reorienting a giant country's economy in new directions is not something that can be ordained by big-shots at the top of the CP and state-bureaucracy.

    To repeat, I could be wrong about some or many of these observations. What does seem to me to be sound is that Chinese prospects in the next decade or two aren’t as glowing as many of the posters in this thread seem to think. That’s the case whatever goes on in the global economy — and especially the pace of economic growth in Japan, North America, and the EU. Slow-growth there, however, will likely accentuate the scope and virulence of these inlaid Chinese problems.

    Michael Gordon, AKA, the buggy professor

  84. Edwardo

    Gyerek wrote:

    “now, if i put myself in china’s shoes, my question is not simply “why should the dollar be the reserve currency?”, but rather “why do we need a single reserve currency at all?” any currency that is highly liquid, and that is backed by a central bank with a credible inflation record and a government with a aaa rating can act as a reserve currency.”


    And let me pose these questions somewhat differently with the idea that it will get to the heart of the matter.

    From the vantage point of China:

    1.) Why should there be only one reserve currency, since, as we know, profound benefits accrue to the nation whose currency is bestowed such a privilege?

    2.) What impediments, if any, exist such that we could not, in a relatively brief period of time, construct a monetary regime that garners sufficient trust, respect, and size to elevate our currency into reserve status.

    Bold action via the formation of a (partially) precious metal backed currency would dramatically enhance the chances for Chinese success in this regard.

    2.) Why, when the engine of economic activity in the U.S., John and Jane consumer, are well on their way to assuming a supine posture, would we want to continue to invest in U.S. sovereign debt?

  85. Skullbiscuit

    To the Chinese Hegemon proponents. Having no formal training in economics since college over 25 years ago, not a finance type either; I have nonetheless greatly enjoyed this blog and the comments. It’s been quite an education so far. However, those of you obsessed with the one leg of the power triad (economic) and projecting a global shift in power because Uncle Sam is flat on his financial _ss at the moment would do well to consider that there are two other legs to the tripod. Military and Political (diplomatic). As a recently retired career Army officer I can tell you that militaries are cultural products. You cannot create a military with US-like sophistication, in terms of technological and operational practice, overnight. There is a large component of culture to the operational practice part. Therefore, when you believe that the Chinese are looking extremely good in current accounts and future economic prospects and are tempted to conclude that they will be a near term challenger to US hegemony. But pause and consider the other two legs of the power tripod, and I think your projections for China challenging the US’s current hegemonic position will come up significantly short.

  86. Anonymous

    very nice discussion. however, a few points are being overlooked:

    1) there exists a caste system so to speak in the world where the privileged have the luxury of borrowing in their own currency.

    2) I am sure that the BRIC nations dont like this.

    3) what about bi-lateral trade? If japan and china agree to price mutual trade in say GBP/JPY/RMB or a basket of Asian/BRIC currencies?

    4) I dont think it is possible for USD to lose its reserve currency status overnight without WW3 going down – hence a gradual phased reduction of its role in international trade is best for all.

  87. Anonymous

    Any sensible people would give Standard & Poor's and Moody's a D- rating because these two fraudulent rating agencies simply don't have any qualification to rate craps. Who in their right mind would give the US treasury bills a triple A rating? A nation that kept running double deficits and kept debasing its currency to wash off its debt obligations has no business earning a triple A rating on its government debts.

    As far as I can see, the US government and the entire American financial industry are just bunch of frauds that sucks blood out of every country around the wolrd. And you guys wonder why America is losing its soft power? LOL

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