Saturday, May 12, 2007
Oh, Look, China Is About To Correct It's Economy...
... and absolutely not the way we've hoped it to work out (mainly, in our favor, and at our order). China is, after all, sitting in the catbird seat, with billions of dollars of our debt, much of our manufacturing contracts, and nothing really to lose. I say that that because it's true.
China has been China for over 4000 years. This correction just might bite them a little, but, they are CHINA. They have suffered through much worse, and they are, at this time, flush beyond flush. Economically, they are doing better than they have ever imagined, with only a handful of "economic free-trade zones" within their borders. For them, considering any other country beyond their borders is historically secondary at best. Frankly, to them, their rising manufacturing-level middle-class Proletariat is rather a political threat. Putting a stop to that is actually in their (Maoist) best interests. Call this Tienanmen 2.0.
via Asia Times
China will have to choose between the lesser of two evils, namely the protection of employment in its export-dominated industries or the safety net being created by investments in property and stocks by millions of its citizens. I believe it will choose to protect people's wealth more than lower-end manufacturing jobs; therefore a sharp revaluation of the Chinese currency, the yuan, is certain in the next few weeks.
In its aftermath, the economic cognate will have to shift from production to consumption; therefore we should see the stock prices of exporters falling even as those of companies servicing domestic demand will increase. Banks will have to absorb billions of yuan in defaults from the export sector, particularly to the many inefficient state-owned companies in northern China. That will cause a sharp decline initially in their stock prices, but I expect the outlook to improve rapidly thereafter.
For the rest of Asia, a yuan revaluation would set off increased volatility as investors try to take profits and other Asian countries adjust their currency values. In turn, their holdings of US and European government bonds as part of foreign-exchange reserves would diminish, sending up bond yields globally. That is how the adjustment in China would likely set off broader stock-market declines globally as investors come to terms with both higher interest rates and lower Asian appetite for Group of Seven assets. Sharp declines in stock prices would necessarily follow in most major Asian markets.
This correction would prove cathartic to the performance of Asian economies in the decades to come, but in the short term, pain is unavoidable.
I DO hope that Asia Times is in error, but, in reports like this, they seldom are. This situation is rather like the Spanish Inquisition... Nobody expects it. Meanwhile our liquidity crisis is only just beginning, and the threat of China's correction would be crushing. This is very worth keeping an eye on. Make plans accordingly.
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Labels: Bush Economic Policies, China, FUCT, Global Economy, US Dollar, US Economy, WalMart America
