Spending on China's credit card
National holidays this week in China (1 October is the anniversary of the 1949 revolution which brought the Communist Party to power).
The holidays mean that the Shanghai stock exchange is closed. So, we won't know how the markets here will react to the US non-bail-out till the exchange opens again on 5 October. But this country is keeping a close eye on the financial crisis currently hacking its way through the United States and Europe.
As it stands right now, the first wave of this crisis doesn't appear to have hit China too badly. Chinese banks didn't get hugely involved in sub-prime mortgages. Reports say that this country's financial institutions have stacked up about 4.3 billion dollars in losses (out of more than $500bn worldwide).
But, in the longer term, the crisis is bound to affect China much more directly. One simple reason explains it: if the world's biggest consumer, the United States, can no longer afford to buy as much, China will no longer be able to sell as much.
That's important, because China's recent growth is based on its exports and on its engagement with the world - the United States in particular. If the world scales down what it can buy, that will have a huge impact here.
If people in Pennsylvania can't afford new DVD players or new microwave ovens, manufacturers in China will have fewer people to sell to and may have to shut down. The downturn in the States has already affected businesses in Shenzhen in southern China which would normally export in bulk to the US.
And there's another, crucial way in which China and the US are locked together. In simple terms, America's been having a great time spending on China's credit card. Consumers in the US have been able to buy homes, cars and occasional yachts partly because China's been willing to invest its own savings in US debt.
The background: China has huge amounts of foreign exchange reserves - or what you or I would call savings. China didn't want to keep all of it under a mattress, so it scouted around for a place to keep it safe. It chose US Treasury bonds - low yield, but low risk - based on the belief that the US economy is its safest long-term bet. So far, China has invested several hundred billion dollars in these bonds.
But now - because of the financial crisis - America's having to look pretty closely at its spending. And it's uneasy with the fact that so much of its buying has been financed by a country which may become its greatest global rival. The subject was mentioned by both presidential candidates during their first debate...
"One of the major reasons why we're in the difficulties we are in today is because spending got out of control. We owe China $500bn." - Senator John McCain.
"We've got challenges, for example, with China, where we are borrowing billions of dollars. They now hold a trillion dollars' worth of our debt." - Senator Barack Obama.
(It may be slightly worrying to find that the two men differ by $500bn as to how much the US owes China - one would imagine that China's keeping a slightly more accurate count of its money.)
I haven't come across any suggestion at the moment that China will stop investing its savings in the US economy. But here's a question for the future - what happens if China decides to invest its money somewhere else?
PS. I'll be away during October. Please have a look at our Asia-Pacific index for news about China. See you back here in November!
I’m 
© MMIX~RS~q~RS~~RS~z~RS~50~RS~)
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The recent financial crisis is yet another evidence to shatter the illusion that the unbridled capitalism has 'invisible hand'.
It is the interactions between those people in power who decide the flow of money, shrewedly or recklessly, that are the real problems behind seemingly 'free' global economy.
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I agree up to a point with the argument that a downturn in the American economy would led to less demand for Chinese products, and thus affect China's economy which is very much exports-driven.
However, I say up to a point because it's becoming apparent that China's economy is much more immune to world economic shocks (affecting China's level of exports) because of the strong inherent demand for goods and services within China. That's one of the advantages of having more than a billion people in your country, because somebody from Pennsylvania cannot afford a new DVD player, then someone from Guangzhou probably can.
On the broader issue of Balance of Payments between the two nations, it would help the American economy tremendously (by reducing its budget deficit) if the American government were to allow certain products (here I'm thinking of high technology civilian products) to be exported to China.
P.S James, have a good time in October. I look forward to more of your blog entries, and the forensic questioning that result thereafter.
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A decent standard piece here which is unusual for you James. No condescending view on China here for you to focus on? By the BBC's own account a while ago, the debt is in the region of 1 trillion dollars.
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Nice blog James, and have a lovely time off.
The Chinese economy is hugely reliant on exports and a simple example doesn't prove or disprove that point. Chinese social stablity relies the ability for China to maintain its growth, and the only way for China to be self-reliant is to shift its focus back to the highly demanded Agricultural economy.
China is a nation with over 1.5 billion souls and have vast fertile farmlands, that are un-modernized and badly managed. A great deal of migrant worker and social cohesion issues can be tackled by investment in farming rather than lunar landings. This will also pave the way to better environmental policies in rural China and a buffer against the economical crisis in US.
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Regardless of a common urban myth, the American economy does *NOT* rule the world. Just because someone in Pennsylvania cannot afford to buy a DVD, it does not follow that someone else in Singapore, India or Latin America also cannot buy that same item too !!
As this article stated so clearly, the reason that someone in Pennsylvania could afford that DVD is very likely because he borrowed beyond his means to repay just so he could show off to his friends. When the reckoning came, he could not afford the repayment and he is pushed to the wall. In macro terms, this is what happened to the US economy !!
If the US does nothing to re-instill trust in its debt instruments, the Chinese (and others) might well insist that any future trade with US companies be paid for in cash !! This will result in either (a) the US printing masses of paper money and, thus, greatly devaluing the greenback, or (b) the US finally allows some of its assets/companies to be made available for purchase by the Chinese, or (c) the rednecks take over and America becomes a Third World banana republic !!
Meanwhile, the Russians are getting richer (witness Roman Abramovich and his ilk) and the Chinese will happily sell them all the DVDs that they want in exchange for oil and gas !!
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Look, if reports are not predicting doom and gloom because of China's economy overheating, then it's predicting doom and gloom because of China's economy slowing down. Well, James, you can't really have both, can you?
A little diversity in where China invests will do it a world of good, but ultimately, this slowdown will be good because many China shares were over valued anyway and needed to adjust. And devaluation because of US market woes is much better than devaluation because of primary reasons related to Chinese businesses themselves.
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US military spending is $480 billion each year twice more than the rest of the world combined. If America stop wasting money on the military and use the fund to revamp is economy it wont be in the mess today.
What we have witness in recent days is the start of the decline and fall of USA as a superpower and the next US president may very well be the one who announce China as the dominant world power taking over USA.
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First things first, I hope you have a great vacation James. You badly need to take a break away from the firefight raging on your blog's comments.
I agree with most the the people here that the cancelled bail-out plan will not have that much of a big impact on the chinese stock market, and while its best to leave these discussions to the economists, it doesn't take an expert to say that the chinese economy will still be affected by the situation happening in the US.
And even there is a declined in exports to the US, there really is the presence of a great market to the north, which is the ever-progressing economy of Russia. If NATO ever gets around to passing trade sanctions to Russia, China will profit greatly by becoming Russia's new trading partner.
Now, I believe that Chinese businessmen will handle this affair smoothly, after all, they've been in the business industry for more than 2000 years.
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The Financial Crisis in America started in America. The Republicans and Democrats wasted money on an unwinnable war which is Iraq and Afghanistan. The Republicans and Democrats [in collaboration with Wall Street] mixed the state with business. Another factor were the people who made purchases in houses and autos without reading the fine print in the contracts or finding a lawyer. The last factor was unscrupulous bankers in the USA who made immoral business measures. The solution lies in voting out the Republicans and Democrats, replacing them with Libertarians and Greens, and being responsible for one's own action without blaming the People's Republic of China.
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Well, if US can't absorb Chinese goods anymore, then it is time for China to focus on Asia and other emerging markets in general, and its own domestic market specifically. As where to invest all those savings? Where else if not your own country and countries that are friendly to you?
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China's foreign reserves are accumulated mainly from current account and capital account surpluses. According to Wikipedia, China's holding of US Treasury bills as of April 2008 amounted to USD502b, very close to McCain's figure quoted above. Japan was holding USD592b. Actually some Chinese economists did suggest China diversifies its foreign reserves investment. But it doesn't mean that China would stop investing in USD assets.
China's exports to the US are mainly lower-value goods (textiles. household appliances, electronics). In a recession, US consumers spend less. But when they do shop, it's also likely that they would switch from the more expensive non-Chinese products to China-made ones.
China can boost domestic consumption and investment to maintain its GDP growth.
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For those of you who wants to hear another side of the story, or to hear first hand from the leader of the Chinese government, please go to CNN and find the Zakaria-Wen Interview.
Part 1
http://edition.cnn.com/video/#/video/bestoftv/2008/09/29/gps.intv.zakaria.jiabao.part2.cnn?iref=videosearch
Part 2
http://edition.cnn.com/video/#/video/bestoftv/2008/09/29/gps.intv.zakaria.jiabao.part2.cnn?iref=videosearch
Transcript:
http://edition.cnn.com/2008/WORLD/asiapcf/09/29/chinese.premier.transcript/index.html
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just try
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There was a revolution in China in 1949?!
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Nice blog James!
I hope you have a nice time away...See ya in November.
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China won't put its money elsewhere as long as US is still the world's number one economy. Although markets have up and downs in the short term, but in the long run, US dollar will hold its value as long as the economic supremacy of US holds. And China believes the depreication of US dollar is not in the long term national interest of US either.
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The Chinese have officially stated that they will reduce their holdings of US$ debts. This has got the Bush administration in general, and Hank Poulson in particular, wearing brown trousers. If this $700 billion bail-out fails to satisfy the Chinese, I predict that there will be a run on adult incontinence nappies in the Washington area !!
The rising wealth of the average Chinese persons mean that they can absorb much of the manufactured goods that were once exported. This would go a fair way to ameliorating their fall in exports. With foreign tourism to China on the rise, this will go some way to helping their balance of trade, too !!
By the way, James, were you miffed that you were not invited to their space launch because you insinuated support for the Tibetan separatists ??
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The other side of the story is the demand from domestic market in China. Before this, a lot of the firms produced goods for export only to take advantage of certain tax exemptions. The huge demand of the domestic market was met with a rising inflation. The potential collapse of the US market will force or incentivise those firms to refous on the domestic market. Hence it could create a sustainable economy within the country itself.
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Hi:
DO NOT GO!!! James!!!! People from the rest of the world needs your blog...
Could you please become a 24 hour nonstoppable solider!! please!!please!!!
P.S. hey...i think you should be charged for providing online addictives to the rest of the world....so the penalty is: You need to keep writing to satisfy us
Anyway, just miss you for one month! but i will remember the exact date... u said 'one month'...so dont be late for next blog
:)
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I don't think China will slam the brakes on its investemt in the US however it (along with the oil rich arab counties) may well look at introducing greater diversity in where it invests. The US will remain an important part of China portfolio but there will be a relative increase in the importance of other Asian countries, S Amercia, Africa and even Europe.
It must make more sense if money is chaneled towards investing in enterprising Brazillians and Cambodians than (as has been the case) to the "no income, no job, no assets" westerners who could not have been expected to repay.
You're all doing very well !!
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James:
You only see one side of the coin. The other side is that if people in US do not have much money to spend, they will buy cheaper goods more than luxury things. Where the cheap things come from? China. If you can not afford American or European cars buy Chinese made. You will see a lot of Chinese made cars next year. This is also apply to Europe. Chinese will be fine this time.
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You must be joking if you think China has no credit issues with it's banks. They have had an even bigger credit and property bubble than the US and all of it is good? Why do you think that because a dictatorial, communist government says so?
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#25
Yes, China has a property bubble too but you must be joking to say that its bubble is even bigger than that of the US. China's property loans totalled RMB4.62 trillion (USD675 billion) as of September 2007, which is lower than the total credit card debt of the US which stood at USD790 billion as of December 2007. Total bailout in the US thus far has already reached USD1.5 trillion and according to Marc Faber, the total rescue package could reach USD5 trillion.
No, there is no credit crunch in China. Like any other banks, all Chinese banks have non-performing loans. But all major Chinese banks are profitable, solvent and liquid. That's according to their audited financial statements, not what their government says.
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China should invest all it can in WMDs and in enlarging it's military.
the US just sold Taiwan another $7 bn in weapons.
maybe US selling some weapons to Tibetan monks are in the works too.
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"That's important, because China's recent growth is based on its exports and on its engagement with the world - the United States in particular"
According to the Economist, China's GDP growth is due mostly to domestic investment, not manufacturing. Liberalization is, of course, essential as well. As far as I know, the state has an effective monopoly on retail banking. These banks pay low interest rates to savers, which frees up an awful lot of money for investment in roads, bridges, power stations, and olympic stadiums. Apparently, manufacturing is secondary to all of this, although probably not unimportant.
Which version is it?
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Interesting. Let's talk about the market.
Market rumor yesterday was China just pledged to underwrite another upcoming $200bn US treasuries.among the $700bn new debt created by the Bush administration's rescue plan. It's a great relieve for the Fed, it will keep the vital treasuries' borrow interest rate low so forth the market lending rate. You know how difficult it is to raise new fund in today's sell sell sell screaming market.
See it from another side, despite all the deputes, Sino-US are partnering up. After all, money rules.
BTW, WSJ's figure last month was US debt $510 bn own by China, second to Japan's $539bn.
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During latest months, I could feel the crisis in China. I could feel export was not as vigorous as before and there was less job opportunities. However, the feeling is not so strong anyway. Although export in China is invetibly affected, we still have a very strong domestic consumption. It's a good chance to develop our own market, which has still a much larger space.
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9. At 4:05pm on 30 Sep 2008, hizento wrote:
US military spending is $480 billion each year twice more than the rest of the world combined. If America stop wasting money on the military and use the fund to revamp is economy it wont be in the mess today.
For a theft, weapon is their tools to make a living.
For the last few decade,people from developing countries worked hard and spent less (already below standard) to build some savings, those "greedy devils" borrowed most of these savings to spend, to satistify their "never-enough desires".
And while they are spending other people savings, they kept complaining on their lenders for their behaviors on all issues.
So what will be next? "Freedom" is one of the values for the U.S. "Greedy" and "Arrogant" are the others. The best guess for their next move, is they wiil promote "Free to rob other countries with their weapons"
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China depends to a large extent on exports to America. If America's economy crashes as seems a real possibility now, China's will go down with it. The US economy is 28% of the world's GDP and is two thirds driven by consumer spending. Discretionary spending on "junk" discretionary items like TV sets, clothing etc will most likely dry up as Americans tighten their belts to survive the economic storm. That party is over for awhile. Look out below China.
I also think the US should reduce its military spending. It can start by withdrawing all of its troops and bases from Europe, quitting NATO, and leaving the Far East. Let Russia and the Europeans fight it out if they want to at their own expense. And if Japan feels threatened by China, it is sitting on the world's largest mountain of plutonium. In five or ten years it could have a nuclear weapons arsenal comparable to America's and Russia's. Would China prefer that to having the US Navy in the region to reassure Japan? Would North or South Korea? I would.
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nice done James.
Enjoy your days off.
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#35
America's economy will definitely crash (no 'if'), but China will not come down with it. China will slow down to around 8% growth.
IF Japan feels threathened by China, and IF the only people on earth having being nuked before want to develop nuclear weapon, then Uncle Sam should look out too.
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Will China be able to take advantage of this situation somehow?
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here's something else to chew on. china already has plenty of homegrown economic problems, including excess off-balance sheet leverage and bad loans, as well as a consumer confidence crisis.
see michael pettis' comments:
http://piaohaoreport.sampasite.com/default.htm
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Why all the build up of comments awaiting moderation?
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#40
Name me a country which is free of economic problems. China has many challenges even during "good" times, not to mention now when the world is having an economic meltdown.
No, there isn't any consumer confidence crisis in China right now and the major banks' NPLs are manageable.
Five Asian countries most at risk are Pakistan, South Korea, the Philippines, Indonesia, and India.
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As the USA makes demands on countries as venezuela, cuba,iran, The china appoarch is to do business, and get along. thus far a nation of respect for others way of goverment.I do think goverments as companys should steal each others ideas to enrich them selfs.
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Chinese goods are becoming less fashionable in the US, because of their abundance. There is a feeling that some of these goods should be consumed by the Chinese internally, for the benefit of their own people. I live in a very large house in the US and even I have reached a level of saturation. You can only have so much! I have stacks of DVDs I haven't watched, video games I haven't played, guns I haven't fired, cars whose batteries go dead, because I have't driven them, it is kind of maddening! I have more dog toys than most people have toys for their children. Christmas is right around the corner and friends and relatives are plotting to give me more. Stop the insanity. I would rather go hunting with my dog Skipper. There is no such thing as a DVD as interesting as a nice fire on a cold day in the Missisippi woods or the beauty of a Wild Turkey. Since when did this consumer garbage become the American dream. Personally, Sunday when Skipper sits on my lapp and I read the Bible has become my favorite day. It took Chinese Communists to make me appreciate the natural beauty of America, the wisdom of my Bible, the love of a good dog and the satifaction of an Iron sighted, 45-70 Govt. Marlin 1895G, leaver action loaded with Hornady Bear ammo.
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