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How long will China finance America?

Robert Peston | 08:20 UK time, Wednesday, 15 July 2009

China's foreign exchange reserves have soared.

In the second quarter of the current year, they rose by $178bn to $2.132 trillion to exceed $2 trillion for the first time.

According to Bloomberg this is a record increase.

On this occasion, the primary cause is not the great surplus of China's exports over its imports.

It's the result of overseas investors identifying China as the strongest of the world's major economies and pouring money into property and into shares: the Shanghai Composite Index has jumped 74% this year.

Man walking past stock price monitor in Shanghai

To put it another way, if international investors want to take an equity risk in these recessionary conditions, they go to China - because its economic stimulus package seems to be working (the annual growth rate in China in the three months to the end of June is said by forecasters to have been not far off 8%; we'll have the official stats, for what they're worth, tomorrow).

Now, the really interesting question is how much of that increment has been reinvested by the Chinese authorities into US government debt, or holdings of Treasury bonds and bills.

China is the largest foreign lender to the US government. At the end of April, China's holding of Treasury securities was $763.5bn (Japan was the second biggest holder, with $686bn).

However, between March and April there was actually a slight fall in the dollar value of Chinese lending to the American government - though that fall was trivial compared with the $261.5bn increase over just a year in the amount of US government bonds held by China.

Zhou XiaochuanA recent speech by Zhou Xiaochuan, the governor of the Chinese central bank, conceded - in a slightly elliptical way - that China would have to lend more to the US, to see it through the current economic and financial crisis.

He said: "in the short run, the US may need more capital inflows to deal with the financial crisis".

So China will continue to fund the growing gap between America's public expenditure and its tax revenues, by recycling to the US the cash of overseas investors who prefer to invest in China's real assets.

Mr Zhou is clear that allowing America to live beyond its means is profoundly unhealthy for the global economy in the long term.

As he said: "over the long run, large capital inflows are not in its best interest of making adjustments to its economic growth model".

Or to put it another way, the US public, private and financial sectors all have to reduce their indebtedness: Americans have to save more.

But there is huge self-interest on the part of the Chinese in not forcing America to go cold turkey - in breaking its borrowing addiction - too quickly. China's exporters, squeezed savagely over the past year by the global recession, would hardly relish another lurch downward in US demand for their stuff.

The interdependence of China's great production machine and America's army of consumers remains the great fact of the global economy.

So although the Chinese authorities would love to hold their reserves somewhere other than in dollars (and Mr Zhou is a great proponent of enhancing "the status of the SDR" - the IMF's virtual currency - as an alternative to the dollar), it won't be quick or easy for China and America to reform their uncomfortable relationship of dealer and user.


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  • Comment number 1.

    China will finance America for as long as it suits them. They will not imperil their export market and growth record.

  • Comment number 2.

    China will continue to fund American excess, but it will be asking the question, "At what point does this become so unsustainable that it would be far more detrimental to China to continue lending than not?"
    So at what point do people think America will not be able to afford its debts as they fall due? For the moment many see this as NEVER being an eventuality, (I think NEVER meaning in "investment terms," so not in the next 30 years?)

  • Comment number 3.

    It makes sense for China to support the US but it also makes sense for them to talk tough to get the best negotiations for themselves. Remember Geithner talking tough against China when he was new in the job? Only a few months later he was praising them.
    We are in for business as usual for a while but after this crisis has passed and after sufficient time the Chinese will push for a new reserve currency. No doubt about it. That will be the full shift of power from the West to the East.

  • Comment number 4.

    USA = worlds leading consumer.
    China = worlds leading manufacturer.

    Therefore it's in China's interest to protect their largest market.....for now!!!

  • Comment number 5.

    Yes it is not in China's interest to make the US go cold turkey but it will have to put US in rehab. It will mean China's reserves lose value but that will be the it has to price to pay for a more healthy global economy. The US will find it's standard of living and it's position in the world falling. The really big Q is how will the US react to a (lets take a guess) 20% reduction in average living standards. The truely wealthy will remain so as will the truely poor but the majority will see a big hit whern the US finds it's biggest export (ie dollars) in less demand.

    You're all doing very well !!

  • Comment number 6.

    Until it suits them not to.

  • Comment number 7.

    While commodities such as oil and gas,precious metals etc. are traded in US$'s and the US is open to cheap imported products the Chinese will continue to support the USA.
    A much darker side of the Chinese investment strategy is the vast amount of investment they are making in Africa and Asia where much of these valuable commodities they desparately need come from.
    Once the Chinese have colonised Africa and Asia and buy the commodities in any currency they want their relationships with the US will change and probably return the acrimonious times of adverse trade relations between to two countries.

  • Comment number 8.

    I'm probably being overly simplistic, but could this perhaps not be a strategy for china to 'defeat' the US as 'the' 'World Superpower' without firing a single shot?

  • Comment number 9.

    China will not need USA demand for ever - it appears to be USA's personal IMF but as the population as a whole generates its own expanding demand for goods and services the days of warm turkey for America are numbered (possibily in the hundreds)

    China's economic success (as opposed to their social failure) has not been brought about by solely playing with interest rates or indulging in monetary reprographics so maybe they can teach the West something about economic management

  • Comment number 10.

    The USA needs to review how they do business,it is simply unhealthy for another (Communist) country to hold some much debt and even worse have the expectation they will keep buy more debt for ever more.The UK has similar issues and needs to get real on balancing the books.Unfortunately this government has no plan,except investing(SPENDING).

  • Comment number 11.

    For as long as the West supplies technology to and buys the manufacturing output from China.

    This is why a globalisation policy set by G20 or may be G50 is required we need a shared understanding of how nations can work in harmony for the benefit of all mankind.

    Two sentences that sadly will take our politicians too long to realise and to long to act on to our detriment.

  • Comment number 12.

    The USA as we know it is coming to an end. What will Amercia offer as collateral for the loans that they cannot repay? The land beneath their feet?

    May you live in interesting times.

  • Comment number 13.

    China only invest in the US because it needs the US market , at some point the US is going to realise that it does not need to import from China when it has the capability of huge industrial production itself. Sooner or later the US will drastically cut imports from China and perhaps the Chinese economy will go belly up. Do not underestiate the US, the Japanese did this in the forties and learned a salutary lesson.

  • Comment number 14.


    a wholely owned subsiduary of the Chinese Economic Empire.

  • Comment number 15.

    It's China's problem is that it relies almost entirely upon America for its reliable store of wealth. Having so much of Chinese savings tied up in the USA makes for a more peaceful world. And especially as China needs that huge American store of value to pay for the growing numbers of Chinese pensioners.

    Isn't that growing inter-dependency of the world's super-powers, one of the benefits of globalisation that we should celebrate? Now they both have to live in peace!

  • Comment number 16.

    The retoric has been building momentum for the us$ to lose it's status as the world's reserve currency. I think it is particularly pronounced that Timothey Geithner has gone to the Middle East to bolster support rather than the far east. I suspect that this has more to do with the risk that if oil were no longer priced in dollars then other commodities would follow suit. Should that happen the dollar's days as the reserve currency would be numbered.

    Meanwhile I see no reason why China could not be placing a number of forward contracts to sell dollars as and when their T bills mature, or when they are in a position to sell them on.

    Technically this will cause the dollar to fall and a loss of competitiveness for China. However, the pain will be temporary, and if we learn nothing else from the current mess, we need to learn that it's cheaper and less painful to deal with the issue early than to let it build up in the misguided hope that it will self correct.

    The downside for all of this is that the US would be left with an inflationary set of circumstances requiring them to raise interest rates and accept the pain that that would cause. Once they get through their pain though the US would be in a much better position in the world economy by being more balanced.

    Ultimately it is the only way the US can survive.

  • Comment number 17.

    China only invest in the US because it needs the US market , at some point the US is going to realise that it does not need to import from China when it has the capability of huge industrial production itself. Sooner or later the US will drastically cut imports from China and perhaps the Chinese economy will go belly up. Do not underestiate the US, the Japanese did this in the forties and learned a salutary lesson.


    Yes, but the US moved out most of their industrial production capabilities to places like China because it was so much cheaper! The US' capitalistic ways are essentially its own downfall here - not to mention that the only way they'd be competitive is to place, say, import tariffs on a whole new scale on chinese imports, thereby making us-produced products competitive, but the pricing on that would still end up being, say, 2x the "RRP" of a product.

    Its like the US agriculture industry - that's only supported at the moment by huge government subsidy and exceptionally high taxation on imported food from countries where it costs a hundredeth of what it costs to produce the same food in the US.

    China don't need the US that much - the EU is opening up as a very interesting and competitive alternative to the USD, as well as having quite a large consumer market (albeit not quite as consumerist), and with China taking steps to acquire shell-importation companies in Africa (to get around import tariffs and limits on Chinese goods) then expect them to quickly divert over to the EU.

    On the flipside - look at the chinese market. With all this incoming wealth, the chinese market is opening up to these extreme consumerist attitudes - albeit there's not going to be as much profit in it (as you'd have to sell goods cheaper), but there's a significantly larger market, and also less costs for companies (don't have to ship things!)

  • Comment number 18.

    "the Shanghai Composite Index has jumped 74% this year"

    Ah, so another asset price bubble appears.

    I hope the fallout from the pricking of this particular bubble is not going to be too severe. What is the exposure of Goldman Sachs (and the other banks) to this asset price bubble? Are they going to need more state aid when it pops?

    I don't know who is more stupid, the bankers or the taxpayers who have been suckered into supporting their recklessness.

  • Comment number 19.

    The other side is that if the US did decide to abandon chinese goods for some reason, then China could always - at a huge loss, but arguably worth doing - sell its 2 trn USD reserve, and move it all into euros. You can be sure people would snap it up - if it was cheap then you'd be getting the currency on the low, there's room for mid-term massive profit off it, etc.

  • Comment number 20.

    China 'allowing' says it all. Prosperous economies make things. Oldest truth in the world. It's just a question of time. Debt is dependency. Sure local loan sharks get relatively wealthy and can go to the casino but in the long run.....

    China (like Japan, Korea et al) have always had one big advantage. What Michael Wood used to call the 'habit' of civilisation in its social structures. That is why Africa, unfortunately, will never make it. China is fundamentally homogeneous (750 million Han) with relatively few minorities which enhances cohesion unlike fracured multicultural societies.

    China's century is about to dawn.

    Napoleon described China as the 'sleeping giant' How right he was.


  • Comment number 21.

    There's only one way out for the economies of the US and the UK, debt reduction through inflation. China are not the blameless industrious nation that Peston so frequently portrays. They have manipulated their currency for years to enable growth in their economy through export, they will have to pay for the consequences through the deflation of their investment in US debt. The US do not target inflation as a criteria for monetary policy, this is key. This is going to be painfull for all parties, but it is the inevitable outcome of this unhealthy relationship.

  • Comment number 22.

    It's the ultimate version of "If you owe the bank 100,000 dollars, you've got a problem-if you owe the bank 10 trillion dollars, the bank has a problem"!

  • Comment number 23.

    In a truly free market situation the imbalance in trade between China and the west would be corrected by a revaluation of Chinese currency. The Chinese authorities have resisted this in order to have terms of trade which favour Chinese manufacturing.

    I suspect that investors have bought into the Chinese economy, not only to take advantage of its rapid growth, but also with an eye to the exchange profits they will make, when the Chinese authorities decide that to remain in power they must allow more domestic consumption. They will do this by revaluing their currency.

  • Comment number 24.

    Saying the Chinese reflation package 'seems to be working' is a bit like the bloke passing the fiftieth floor on his way to the pavement, shouting 'so far, so good'. 'They will revalue their currency' is also a bit random as a conclusion if the massive stimulus package produces what it probably will:rampant inflation following overheated demand.
    The Chinese attitude will change radically when the West finally wakes up to the fact that they don't want any more Chinese throw-away rubbish - but they DO need to start selling high-ticket added value items back to the newly rich Chinese middle class. Or if the Chinese up the rate of their imperialist expansion, and the West kicks up a fuss. Then they will start to call in the debts big-time.
    People who were already realise this

  • Comment number 25.


    wrong way around,
    The US will revalue, they have to, to pay for the massive pension blackhole about to drop on them!
    The financial crisis is just the smoke screen to allow this to happen.
    The UK will follow suit along with the Euro.

  • Comment number 26.

    A previous blogger observed that should US decide not to import Chinese manufactures China would be in trouble. Sure. But that is not going to happen. Where will all of Walmart's stock be sourced at the prices that US consumers expect?

    Also simple comments (backward looking) about US making things for themselves. They can't for the following reasons.

    1. Where's the capital. It's not there. Only debt.
    2. Where are the cheap, compliant workers with the skills.
    3. Even dismantling the massive defence budgets will not release the capital because it is all in hock.
    4. It would take years to retool.

    ie. annoy China and you create social dislocation on a massive scale.

    To counter, China just does more of what it's doing now as Robert describes.

    As for China, already trading in local currencies (Brazil, Russia for example) and investing heavily in South America, Africa and Asia., where's the surprise in that. Building a 'string of pearls' set of naval bases. That's what emerging super powers do.

  • Comment number 27.

    Robert, you said:

    "Or to put it another way, the US public, private and financial sectors all have to reduce their indebtedness: Americans have to save more."

    But that is completely and totally 'off the radar' of the Anglo-American, Harvard Business School, gun-ho, quick-buck, way of doing business. For them, there is but one god, the god of credit, who makes all things possible and makes them - with a bit of luck - wealthy.

    So how could any such shift in the underlying belief and value systems of the American business community ever be achieved that would lead Americans to save more?

    A big chunk of the problem is that the US financial belief and value system is maladaptive to 'bad times', whereas the Chinese financial belief system is not thus hindered.

  • Comment number 28.

    I wonder if the average Chinese "peasant" will ever see a penny of this money?
    Come to that, I wonder if the average British or American "peasant" will ever see a penny of this money?
    Is this not "magic roundabout" money, sloshing back and forth between East and West, largely for the amusement and benefit of one group.....City bank staff?
    Let's hope that the Chinese leaders are not part of the same gigantic banking "con" that is going on in the West.

  • Comment number 29.

    The question that investors need to ask should be is China a safe bet? Investors seem happy to turn a blind eye to the facts.

    China is still a communist state with major trade restrictions and is booming because of state interaction with the economy. Companies are not allowed to cut production or lay off staff or reduce wages by law. All that is happening is that China is becoming another bubble with no brakes and when this one bursts there will be the mother of all crashes.

  • Comment number 30.

    23 stanblogger

    Great post. Currency manipulation is the key fundamental to all economics. That is why the only true trade is in gold.

  • Comment number 31.

    The Chinese attitude will change radically when the West finally wakes up to the fact that they don't want any more Chinese throw-away rubbish


    A little bit racist, no? And a bit of a stereotype? I'm sure if you actually looked into it, a very large amount of your "western high end products" are.............. DRUMROLL............. made in China.

  • Comment number 32.

    stevewo --

    A small group of Chinese businessmen have made a fortune out of this - and of course that affects the areas in general, there's a MASSIVE and very new "middle class" of millionaires, and that in turn generates jobs - farmers from the countryside frequently commute in to the cities to get work.

    Its a filter through effect - yes of course naturally this 2 trillion isn't equally distributed across the population, to the tune of 1000 USD each, but most people, if not nearly everyone, in general is benefitting from this 'industrial export' revolution

  • Comment number 33.


    Oh come on, Gold is no more a commodity than Iron, Oil, etc.

    The value of it has gone through the roof since the credit crunch, your point is completely rubbish

  • Comment number 34.

    We want the best of everything we can get for the least we can pay for it, so the economy with the lowest wage and poorest people will always make what the wealthiest want taking the money from the wealthy to the poor who then become rich and buy from the new poor who are now producing the cheapest - simple market economics.

    Until politicians, economist and greedy bankers intervene and support the wealthy who dont like to lose anything but other peoples money that is where we are today.

    Technology the speed of communication has taken the practicalities of Adam Smith, Keynes and Friedman into a re-evaluation period.

    Time maybe to re evaluate how we achieve parity across the world of instant communication and finite resource. Without becoming 21st century nomads

  • Comment number 35.

    30 -

    In addition to my previous comment...

    So what about diamonds, platinum, rubys, silver? Are all these irrelevant? Is there some rational divine reason for gold being so awesome that I'm unaware of? I will admit that it has been fairly stable (though not of late becaseu... as stated) and it has always been regarded as a tradeable object - but then - why not swords, a yard of silk, a rolex?

    Very very very silly point, imho.

  • Comment number 36.

    Well done Robert, you spotted that China may not finance America forever. Some of us have been talking about the implications of just that for five years now.

    You have to marvel at the irony of a communist country allowing the bastion of capitalism to play its games for so long. Did anybody consider just how bad things will get if China does just pull the plug on us (and let's not pretend it's only the US that would be affected)? Or what happens if China decides that all its mass-produced stuff has just gone up significantly in price because it really doesn't want or need any more dollars? We in the west have abandoned manufacturing and it will take a long time to restore our former capacity.

    The key difference between the cultures, of course, is that we in the west look forward three months to the next quarter's results whereas in the east they take a much longer term view.

  • Comment number 37.

    25 darkhairedlord, Interesting,

    Exactly how will this happen?

  • Comment number 38.

    Chinese throw-away rubbish, indeed!
    So American (and British) consumers have maxed out on credit to buy a couple of trillions worth of tat?

    In the 1890's Germans produced 'tat' (And diesel and otto..petrol..engines) and developed chemical and steel industries. Little Englanders didn't like that.

    In the 1950's and 60's Japanese industry produced 'cheap plastic' (as did Hong Kong and Taiwan. Look at their hi-tec now.

    Sniffy attitudes will not fill the British ricebowl. I suggest we get down and dirty and compete.

  • Comment number 39.

    Chinese leaders must be wondering what on earth is going on in the Western financial industry.
    Now is probably a good time for the Chinese to warn the West of the need for stronger regulation in banks and in bank-pay.
    Western governments will not listen to their own population, but they will not ignore the Chinese government.
    This would be in the Chinese interests, because in the end, reckless greed in Anglo-saxon banking will greatly damage the Chinese economy.

  • Comment number 40.

    #30. truths33k3r wrote:

    "Currency manipulation is the key fundamental to all economics. That is why the only true trade is in gold."

    The only true trade is in gold? Nonsense.

    Gold is merely another commodity, whose value rises and falls against currencies and in comparison to other commodities.

  • Comment number 41.

    If China has this vast amount to invest overseas, why isn't The Duke of York over there with a begging bowl. The huge black hole we are developing in our public finances will take a bit of filling over the coming months and years. Our shops and supermnarkets (as in the US) are filled with Chinese exports which used to be bought very much on the cheap - sadly not so much now, adding further to our difficulties, so a little help from our Chinese friends wouldn't go amiss.

  • Comment number 42.

    #35 Henry. With respect you forgot to add liitle sheets of paper with numbers on them to your list.

    Gold is finite. Until we get fusion or go to the asteroids you can't make it. That is why it is the traditional home of the rattled investor. All about confidence.

    Gold is being repatriated out of the US storage at a huge rate. Bit of a run , but below the radar. I wonder why?

    Seems that a lot of cash rich folk prefer portable wealth to American bonds.

  • Comment number 43.

    These reserves are one of the reasons for the economic collapse - it just represents demand taken out of the world economy - It's the flip side of the over-borrowing in Western Governments and non less of a problem.

  • Comment number 44.

    Further to my point at 42.

    Why was private gold possession made illegal by Roosevelt in 1933?

    Why was Gold confiscated by the US Government?

    Answer is to be found in Wiki.

    America might just decide that the Gold that is currently sitting 'on their patch' could be handy if things deteriorate (Nationalise). Cash rich Mid Easterners and Indians know that. Funny stuff gold. Never heard of a run on rolex watches. Tulips, yes, but watches no.

  • Comment number 45.

    #27 good post.
    #32 I don't understand why there are still people who believe the Robber Barons' view of "trickledown".
    No one seems to have noticed RP's reference to dependent drug use, except the rehab comment.
    Boxer rebellion and opium war anyone?
    We are involved in the poppy production regions where control of production (surely Marxism can't be rearing it's ugly head here) is being wrenched from the unconnected. Having just secured the oil production in the Mid East, this looks just like a profit and loss account. Politician's, while bright, are not very clever.
    All behaviours are reinforced or extinguished by the cost / benefit rules, except when delusion and psychosis are present.
    Seems there's a lot of "it" about.
    Especially on here where people try to ressurrect their own redundant views of what they believe will work.
    All of the people. all of the time!

  • Comment number 46.

    Hmm. I wonder if the UK has borrowed heavily from China also (with the obvious intention of borrowing even more).

    Acting in our best interests? I think not.

  • Comment number 47.

    The Spanish are trying a novel way of funding their deficit - salvaging sixteenth century treasure galleons. Perhaps we could rob the salvage ships before they return to Cadiz. The UK could be the North Atlantic's version of Somali pirates. Bring back Sir Francis Drake's privateers.

  • Comment number 48.

    You are quite right about money regulations in China.
    I was on a business trip to China last year initially in Beijing followed by a trip to Urumqi and Karamay in West China.
    The only way you could get local currency was to change US$'s,that you had to declare on entry into China,and then go to a Government Bank-fill in a few forms and attached a duplicate of your form to your passport before you got your money
    Credit cards dont work outside Major Cities and only in western hotels or banks.
    So the Chinese version of Alistair Darling really does control the purse strings.

  • Comment number 49.


    I defend your right to an opinion.

    Gold has been money for 5,000 years. It's value has not changed, merely the value of the fiat currencies has changed in relation to gold.

    The other commodoties you mention also have value.

    My point is that fiat currency, which can be manipulated by bankers, is not a true exchange. I do however need lots of people with opinions like yours to keep the price of gold down for a while, whilst I buy some more with my tokens with the Queen's head on.

  • Comment number 50.

    "China's exporters, squeezed savagely over the past year by the global recession, would hardly relish another lurch downward in US demand for their stuff." That is nonsense - It is like saying - when business is slow - you cannot afford to turn away broke customers who want to take your goods on credit. How could any country possibly be dependant on US credit notes?

  • Comment number 51.

    "He said: "in the short run, the US may need more capital inflows to deal with the financial crisis".

    So China will continue to fund the growing gap between America's public expenditure and its tax revenues, by recycling to the US the cash of overseas investors who prefer to invest in China's real assets.

    Mr Zhou is clear that allowing America to live beyond its means is profoundly unhealthy for the global economy in the long term."

    FalmouthBoy (#8) "I'm probably being overly simplistic, but could this perhaps not be a strategy for china to 'defeat' the US as 'the' 'World Superpower' without firing a single shot?"

    Looks that way to me too. It's good political leverage. Chinese democracy is Leninist-Stalinist Democratic-Centralism, as can be seen by reading their constitution. It can have no truck with liberal-democracy, as that's ideologically classed as exploitative/predatory anarchism, something it puts down internally as subversion. They're hardly going to support that in the end are they? Does anyone still not understand what was really going on over there in June 1989? Most were protesting about corruption of policy by Deng Xiaoping's 'glasnost', which is pretty much what, allegedly (unless one follows Golitsyn's 1984 line), led to the Sino-Soviet split decades before aftre Stalin's death and the 1956 speech. Are we victims of demographic/economic warfare at our own hand? Have we had our narcissism turned against ourselves?

  • Comment number 52.

    Marx must be crying in his grave or celebrating with champagne. The largest capitalist country is now beholden to the remaining communist super power.

  • Comment number 53.

    China's biggest long term problem is it's cheap 'made in china' brand. The other is that the Chinese workforce will not forever put up with third world working conditions and wages. Revolts are a high probability leading to costly investment in infrastructure and higher wages and eventual parity with western wage structures and economies.
    In the medium term they may blatantly seek to colonise African nations and take advantage of their cheap work force, but this will not last forever and Africa is an unpredictable and unstable state because of climate and general living conditions. can the Chinese Control the Africans. Only with money and that will eventually be the precurser to bringing the cost of production back up to Western cultures.
    Whatever way you look at it Cheapness comes at a human cost and that is not acceptable.
    The answer, all countries and the businesses within should be forced to buy home produced goods using predominantly home country residents wherever they are both available using wage structures that enable the workers to live above the poverty line. Prices will then fairly reflect local economies.
    Countries should only be allowed to import products they are unable to source locally.

  • Comment number 54.

    45 -

    I know the trickledown is working in China because I'm fortunate enough to have lived very near it, and seen the influences of Chinese wealth. Like I said, all the hypothetical and philosophical augmentation aside, my evidence for it is exactly that - empirical evidence.

    I don't deny that MOST of the money still stays at the top level, but the fact is, some of it has filtered down.

  • Comment number 55.

    In your artcile you use the phrase "living beyond their means" in relation to the Americans. That is the problem for any individual, organisation or state that must eventualy be rectified.

    Anyway, the point I was going to make was that in about 15 or so years time China will be able to use their economic lending power as a weapon (and get away with it). They are in for the long term not the short term like us. They were probably laughing in 1897 (or whenever precisely it was) as they were 'defeated' into handing the British a 100year lease on HK. And now where are they? On the historical edge of global domination.

  • Comment number 56.

    China will finance the US as long as it can continue to print the money to do so without it affecting the value of its currencey.

    This is something the US will have to ween itself off as well as the rest of the West.

    There is going to be a long hard road getting back to companies being prepared to manufacture their own goods in their own country with all the standards and costs that go with it and buyers who will have to accept that the cost of such goods comes with a high price tag.

    It will create jobs and prevent the vast wasting of the earth's resources on the cheap.

    The only alternative is China owning and ruling the rest of the world.

    We know what a big bang that would cause.

  • Comment number 57.

    47 - great post

  • Comment number 58.

    And how ironic is it that the worlds' greatest communist nation should have the worlds' greediest capitalists by the b***s?
    China should insist on sweeping reforms in the West, so that our corrupt financial industry should be of more benefit the general public, and not just the "elite few" in the City.

  • Comment number 59.

    #40 rbs_temp So "Gold is merely another commodity, whose value rises and falls against currencies and in comparison to other commodities"

    Unlike you to directly challenge the establishment order. The British SAS, for example, habitually issues its soldiers with gold sovereigns should they be deployed behind the lines.

    Larry Summers wrote an academic paper on the link between interest rates and gold. He concluded that if you can manipulate the price of gold then you can manipulate interest rates.

    Still, why let facts get in the way when you have an opinion to express, no matter how ill informed. It is, however good to see that you have the courage to sneer at the SAS no matter how obliquely.

  • Comment number 60.

    49 -

    Defend away, but you're completely wrong.

    As I've said, and as you've completely failed to address, how is gold any different from any other commodity?

  • Comment number 61.

    China's foreign exchange reserves of $2.132 trillion, of 1 billion people, is about the same as the national debt of UK, with 60 million people.

    And who got us into this situation ?

  • Comment number 62.

    The other thing to think...

    If currency A devalues with currency B (for sake of argument lets say currency B is gold), then this scenario is COMPLETELY identical to currency B strengthening to the value of currency A. Gold fluctuates as any other currency does, I really really don't see where you seem to have gotten this idea that it is placed on some sort of financial pedestal of glory and linearity.

    Just because it is - possibly - one of the longest lasting commodities, and has kept a fairly even keel value over that time - doesn't mean it isn't susceptible to changes as other things are.

    Again, in a point you failed to address, the value of gold - and this doesn't necessairly mean the USD price of - has risen dramatically, as people have looked to move their wealth away from currency into gold. Even if you take into account, say, inflation and similiar things, the value of gold - due solely to supply and demand - is increasingly drastically.

  • Comment number 63.

    China, the great exporter of cheap goods, has suffered losses with the global econmoic downturn, yet reports that it has a growth rate of nearly 8%...I guess they still do magic. With polluted rivers and industrial waste, drinking water is becoming a problem for China. Poverty in Western China remains a constant and university students are being sent to rural libraries to be employed while entire cities are distressed because of the economic model that made them one factory towns. China looks more like it did 100 years ago. Major Western companies are creating a foothold in China and if the forumla holds true all of this will turn around and Western "concessions" will dominate the Chinese economy. The current political rulers of China seem to have adopted the style of the Manchus and will probably suffer the same fate. China is not static and change will come but unfortunately, as in the past, Western investors will support the ruling class until appropriate deals can be made with a new coalition.

  • Comment number 64.

    hmmm, well sadly, it seems to me that our 'clever' self-congratulatory western nations only notice these big issues about 10 years too late to do anything about it

    like climate change

    the baton of world economic leadership has effectively passed from the US to China already

    we're now just hearing the rolling thunderclap after the lightning has struck

    China is gradually using it's mountain of US$ to buy up resources and production facilities all over the world; not just in Africa

    at some point when our short-sighted politicians in the US and EU realise that China has gained the economic upper hand, a self-destructive bout of protectionism will plunge us all back into a more severe recession

    that could be anytime between 2011 and 2020 IMO; and severe climate change by 2020 will finish off any optimism for an improved quality of life in not only the US and EU but China, India and Brazil as well


    how's that for a good dose of pessimism fellow Pestonites?

    my tomato and potato patches are coming on very well BTW

  • Comment number 65.

    59 -

    Gold is much easier to trade for shelter and clothing behind enemy lines, than pounds or us dollars.

    That's also completely irrelevant to the actual valuation of gold - if the SAS issued goats (which would probably be quite tempting if it wasn't for the practicalities of carrying them around) would you suddenly consider "1 goat" the standard unit of currency?

    Another aimless post.

  • Comment number 66.

    Hmmmm It's Absolutely Deafening!
    The lack of comment from the Business Editor on the largest quarterly rise in unmployment since 1971(When records began).
    Now, I wonder why.
    From PMQs today, RP will be talking about the number of Whirlybirds in Afghanistan, before he comments on the rise in unemployment and how it's effecting the whole economic recovery.

  • Comment number 67.

    Out of interest, lets take an example.

    Gold costs 300 USD to buy an ounce, a TV costs 200 USD.

    There's a stock market crash, lets say 50% inflation

    So now the tv 'costs' 300 USD, but as people move money over to gold, the supply and demand takes it up to 300 usd + 50% inflation = 450 USD + the supply/demand effect, for sake of argument, lets say the final price of gold is 700 USD

    Does this mean you think the actual true inflation rate is 700/300 e.g. 133%?

  • Comment number 68.

    Oh, sorry, another thought to my post on 65....

    I'm pretty sure the SAS don't issue gold coins out of concern of their inflation over the course of a mission, or in case there is a sudden stock market crash and the money the soldiers are carrying becomes worthless................

  • Comment number 69.

    #65 henry - Aimlessness is in the eye of the beholder. Why do you not read the inanity of your own words? Why should gold be easier to trade than GBP or US$?

    Answer that question and many things will be revealed to you.

  • Comment number 70.

    Its aimless because you are referencing the SAS as a great world leading financial institution.

    For the points I posted in 68, they clearly are not.

    I'm quite well read up on these particular SAS method of operations, and like I said, it's because gold is quite nice and easy to pay off some desert nomad with - good luck shifting GBPs.

    This doesn't mean, however, that Microsoft should/will ever start selling their software for gold, or that it is anywhere near a "universal standard", "best currency", just that it is the easiest thing to give a guy in a desert.

    You could turn up with 5000 Euros, they wouldn't have a clue to the monetary value of it - USD perhaps, but certainly not Euros or more elusive currencies. Gold, however, they will definitely know.

    Try again

  • Comment number 71.

    Another counter-example using your point.

    You'd be much easier to trade goats, and similiar live stock (camels, etc) in this sort of scenario - presuming there was some method of moving it around - does that mean the world economy should adopt these as the base unit? Or that a goat is a much more stable currency than the USD?

  • Comment number 72.

    #47 lordgreenshoots thanks for the mention; we are looking forward to the great naval power of GB completing construction of its QE class aircraft carriers so that we can play tag with you out here

    #65 the goat IS the standard unit of currency here in my part of Somalia and it works very well

  • Comment number 73.

    #68 henry - You are correct the SAS does not issue soldiers with gold out of concern that the domestic currency will suddenly become worthless.

    So...there must be another reason.

    By the way - perhaps you can point me in the direction of an accepted academic article whereby someone has claimed that by cornering the market in goats manipulation of interest rates will be possible.

    Maybe, just maybe, gold serves a different function to goats.

  • Comment number 74.

    The dollars in the Chinese coffers are IOUs. As long as the US seems creditworthy, the Chinese (and any other sensible people) will keep them.

    How long?

    You can't durably consume more than you produce. You can't pay back your IOUs with more of your IOUs for decades.

    Sooner or later the US will have to produce more than it consumes to pay back its debt.

    This can be done by producing more, if you have the facilities and the natural resources and the competitiveness, or by consuming less.

    The US will have to consume substantially less, lowering the people's living standards, before it can compete. It can't replace cheap labor with cheaper and/or more effective technology because its technology is not so much cheaper or more effective than China's.

    Things have changed for good. What are now the US' (or Europe's) competitive advantages, enabling Westerners to live better than the Chinese or Brazilians or Russians? Foor for thought.

  • Comment number 75.

    The tragic death of 23 cockle pickers in Lancashire gives us an indication the way the Chinese capitalists operate in the West.

  • Comment number 76.

    #59. armagediontimes wrote:

    "Still, why let facts get in the way when you have an opinion to express, no matter how ill informed. It is, however good to see that you have the courage to sneer at the SAS no matter how obliquely."

    What a bizarre post. How on earth can my disagreeing that "the only true trade is in gold" possibly be interpreted as "sneering at the SAS"?

    Only in the world of anonymous internet forums...

  • Comment number 77.

    Isn't all this arguement about gold vs goats a little academic? The "value" of something is determined by a number of factors - gold, money etc were just put into play to give a discernable value and a quantum for exchange if no direct barter was possible (eg A wants B's goats but only has maize, B doesn't want maize but C does. C has barley that B wants. So rather than A exchange the maize for barley and then for the goat an agreed single unit of exchange was agreed upon (gold) so that A can trade with B without going through C (now the complexity becomes how much of this unit of exchange will the maize, barley and the goat be worth). Gold itself (or money or whatever the unit of exchange it is) only has value for what it can be traded for.

    Other than use in jewelry and electronics I am not aware of a massive use of gold in many walks of life - its value is only attributable to the desire to have it or use it as this means of exchange. In terms of VALUE - well, ask a thirsty man in a desert what he would consider to have value - a glass of water or a whole room full of gold!

  • Comment number 78.

    74 - good post

  • Comment number 79.

    77 - Quintessentially my point, just better articulated.

    People on here seem to be assigning gold some sort of higher status - a currency above other currencies, as if God came down here and handed out gold coins saying "this will always be worth the same amount, this is your financial baseline"

    Ludicrous, I know!

  • Comment number 80.

    For every $ the manufacturers get, many $'s are made by the middlemen
    (exportors, importers, wholesalers, governments, banks, ...).

    I am sure for every $10 I pay for goods made in China, India, Africa, South America, the producers/makers probably received no more than $2.

    Who have got the missing, dark $trillions and $trillions?

  • Comment number 81.

    It seems that almost all commentators are agreed on an answer to the question as to how long China will continue to fund the US - just as long as it suits them. What would I do if I were being paid in something that might go crash but was still being used by others? Why I'd convert the fiat money into long lasting or hard commodities. No. 7 does mention that China is buying up lots ( but how much?) of these in Africa and Asia. I suppose it is doing it at a rate which keeps other countries lulled to the fact that the rug is about to be pulled sooner or later. I'm afraid the US got caught out in its belief that greed is good.

  • Comment number 82.

    Soon the tumbleweed will blow again across US.

    The world's strongest society/nation changes regularly and it is ridiculous to think that US & UK(??????? to a much much lesser extent) can remain at/near the top - it is cyclical.

    When China becomes rich and we are poor over the next 100 years we will work out where we do have some advantage and eventually we will become strong again - or we may disappear to the bottom of the wealth list forever. US probably has more chance of finding a way to recover its position due to its size - but rather like GM itself, there is no wa this can happen until it has first fallen from grace in a massive way.

    The Venetians/The Romans/the Greeks/The Phoenicians/The Chinese themselves etc etc - once strong - now gone/back again. Perhaps the next countries to look at are the Scandinavian countries who seem to be stealing a march on the rest of the world when it comes to Environmental/Green policies and renewable energy.

  • Comment number 83.

    ..until they can have Taiwan without a fight, that's how long


  • Comment number 84.

    It's funny that everyone is referring to China as the communist state and the US are the capitalists. I guess if you give them two different names, then the public naively overlook the fact that China, the US, and Britain for that matter, are all socialist states. YES WE LIVE IN A COMMUNIST REGIME! For all intents and purposes, that's what we have been for as long as I can remember. Central bank? Welfare/benefit system? NHS? If these aren't socialist ideals, then I don't know what is. The fact is that we are all at the mercy of a few elite bankers who run the central banks, who own most of the large corporations and dictate worldwide policy in secrecy using puppet governments to do their bidding. Debt and inflation are just the tools these bankers have used to control the Monopoly money that we now call currency. They print the money so any given currency is only worth what they print and what they put into circulation. This system only benefits the elite few who are already rich beyond belief. The consumerist culture they have set up in the western world is to take any remaining wealth from the middle classes and keep the poor, well poor, through debt. The Chinese engine has played it's part as the manufacturing hub of the world and the western world has gobbled up what it has produced and generated mountains of debt in the process. We have to stop this incidious habit and start a movement to bring back real manufacturing to this country and generate real wealth and not paper money as we have been doing. Our government sold us down the river by scrapping our manufacturing industries and moved us on to service industries. However, even the service jobs are going as outsourcing to cheaper countries is pretty much the norm now. We seem to have become numb to the fact that people are being axed by the thousands daily and the government have no real strategy in place to generate the necessary jobs to accomodate the unemployed. The government has systematically destroyed our capability as a workforce by underinvesting in education and industrial infrastructure. We do not have the means nor the know-how to compete in the global job market. I'm afraid the unemployment levels are going to continue to rise. But sadly nothing will change when our government is controlled by the elite few who don't care where they get their wealth from, as long as it's the most profitable, that's where they will move their investment. This is the new world order people and we are in it now and quite clearly it is saying that British workers aren't needed.

  • Comment number 85.

    Puzzling -

    Say if you pay 20 USD for an item, and 12 go to the manufacturer of the item, 4 to the distribution/shipping process, and the other 4 as profit to the store...

    The shipping company who brought it over (though these are sometimes integrated into the same company nowadays) will take that money - so if you ship it via a Chinese company, its money in China, essentially..

  • Comment number 86.

    Chinese growth is driven by manufacturing and will continue until living standards in China approach those of America.

    When are we going to realise only Manufacturing and Exports can increase standards of living. Germany have long since learnt this lesson.

    Britain needs to value manufacturing industry before it has gone for good.

  • Comment number 87.

    Great dummies explanation of current account financing - if only I had Peston as my A-Level economics teacher back in the day.

    You should write a text book, you'd make a killing. Mind you you prob already do!

  • Comment number 88.

    #52. srebliss

    'Marx must be crying in his grave or celebrating with champagne. The largest capitalist country is now beholden to the remaining communist super power.'

    Ha! I like your thought! Though I think the truth is Marx would not regard the modern China as very communist at all. If it were, perhaps the US market wouldn't be quite so critical to it. It is very much a commecial two way relationship for the moment at least. I suspect China is investing in the US in that it is only putting in what it suspects it can get out with profit. It will be telling to watch how far it will go...

    On another issue, do we really need this forum to turn into another tit-for-tat thread on the value gold? The internet's full of them at the moment. It's a bit like arguing over whether or not God exists... Those convinced of the omnipotence of gold are no more likely to change their opinion than the Pope is to convert to Buddhism.

  • Comment number 89.

    And who said that Communisism could not work alongside Capatalisim! Just count all the hypocrits that are now investing their exploited gains from all corners of the world! Funny thing though in my time I've witnessed many a ex-pat chinese lose a fortune in the casino's, including loads of bust take away business's. They all hide the truth from accountants etc for years, but eventually what goes around comes around!

  • Comment number 90.

    In a decent caring nation the news that unemployment had hit record levels would have resulted in a fall in the stock market.

    Not here: the FTSE rose by over 100 points. How disgusting is that?

  • Comment number 91.

    88. Robiati wrote:

    "On another issue, do we really need this forum to turn into another tit-for-tat thread on the value gold? The internet's full of them at the moment."

    I've not seen them. Has anyone pointed out that, so long as enough people think that gold has a privileged position, it's a self-fulfilling prophesy and gold has a privileged poistion?

    The thinking goes: "I don't need this shiny stuff, but I'm happy to take it because I know somebody else will exchange it for almost anything else I may want later on - and if they will only exchange it because they know they too can trade on, so what."

    Goats catch diseases, other metals tarnish, foodstuffs perish (except Honey - there's a tip for you speculators out there), but gold is useless but dependable (or near useless - in relatively recent history, it's been found to be a better conductor than copper FWIW).

    Of course, if a huge new supply is found (or expropriated, as by the conquistadors), then the value of gold falls (as indeed it did in Spain).

    BTW Good to see Mr. Pirate is still occasionally aboard the good ship Presonblog. And nice to hear that that vegetable patch of yours is doing fine (even aboard ship!). I'm sure spuds are a better store of wealth than gold, but I'd suggest that you get a few bee hives as well so you can diversify back into a non-perishable commodity.

  • Comment number 92.

    #88; #89 Read the beginning of the PRC constitution carefully./ Constitutions are legal documents and should be read as one would read a computer program, albeit written in looser, Natural Language. They see themselves as politically evolving and are pragmatic. The PRC is a socialist country led by a commmunist party.

  • Comment number 93.

    The longer this Global Crisis Game continues, the less power to the Debtors (America) and more power to those in surplus (China)

    Their are no power brokers yet, the UK is a busted flush, but China will choose its Partners soon and they will not be Western.

    The Chinese know that Capitalism is based on fear and greed, hopefully sometimes balancing risk with responsibility. China truly believes in its own destiny and Brand of Nationalism, where the US and the West are deluded, dropping in confidence and have no future vision. The Chinese have not only their vision but a strategy too.

    We are witnessing the biggest global power play for a Century and the East is making all the main plays. The West is stuck in the headlights and the train is coming.

  • Comment number 94.

    gold? ... pays no interest and so its value has to approximately double every decade or so merely to stand still, as against cash

  • Comment number 95.

    #64 - too right. History tells us that all nations tire of industrial revolutions and industry eventually moves elsewhere. The air quality in Beijing deters Jim Rogers, who is a self confessed Sinophile (have just made that word up) from living there. The Chinese are currently developing a 'not in my backyard' mentality and moving industry to Africa. BTW I have just grown my first courgettes and cabbage - spinach omelette and cabbage with spaghetti tonight. Let me know when your tomatoes mature - I have none at the moment, but the plants are growing.

  • Comment number 96.

    90. At 7:57pm on 15 Jul 2009, Wee-Scamp wrote:

    "In a decent caring nation the news that unemployment had hit record levels would have resulted in a fall in the stock market.

    Not here: the FTSE rose by over 100 points. How disgusting is that?"

    Now that does say more than an American Express card ever could about the chaps in the City!!!

  • Comment number 97.

    Henry is right, right and right!

    Gold is only valuable because people think it is - another confidence trick. Things of real value are things we need like food, fuel, shelter, clothing and transport. If most of the gold in the world were turned to seawater, it would not change the capacity of the human race to provide for its needs. A few parasites might be wiped out though.

    For a rational view of gold/money, read Galbraith (Money ... etc). For an amusing one, read Terry Pratchett: (Interesting Times). The conclusions are similar, and the logic is impeccable.

  • Comment number 98.

    Oct 2000 gold price 263.8 USD = do the maths.

    To those who think that the gold debate is not relevant to the China debate MY VIEW is that with a gold standard managing the money supply we would not have had the boom that led to bust. Without the boom individuals would not have borrowed so recklessly leading to massive overseas trade inbalances. Sometimes you have to join the dots - newsnight will not do it for you.

  • Comment number 99.

    PS Copper is more valuable to me than gold: my potatoes doing well too, thanks to Bordeaux mixture - there's blight about!

    Manure is also most valuable: onions v-poor: not enough; BUT I've a mad melon in the greenhouse, in a giant pot with manure and seaweed.

    In fact, we could all happily exist in a world without gold, but not in a world without manure!!!

  • Comment number 100.

    With every dollar China increases in reserve holding; does with each dollar does the USA decrease in economic stature. What is really the joke is the joy such news is greeted by Wall St. Turkeys and Christmas come to mind.

    What will be truly pitiful, is when the power, both political and economic, has moved to Beijing and Shanghai, the wailling is heard from Washington and New York... but we never saw this coming , we couldn't have seen this coming... it's not our fault!

    PS Mr Goldman, Mr Sachs; how many $X thousands will my bonus be this year? Why, thank you Mr Sachs, thank you Mr Goldman.


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