CYB>China's Shifting Economic Stance: How Will It Change the Country's Place in the World?
by: John Lounsbury February 10, 2010 | about: CYB
Zero Hedge reports that China will be selling U.S. Securities. Here is a quote from the article:
Asia Times Online is reporting that an explicit directive by the Chinese government has notified reserve managers to sell all risky US assets, including asset backed and corporates, and just hold on to explicitly guaranteed Treasuries and Agency debt. (See Asia Times)
This is quite the opposite of the possible action that has been widely discussed for many months, namely that China could reduce its holdings in U.S. treasuries.
From Bloomberg News comes a report that China could raise pay to address its balance of trade surpluses. Higher pay would make Chinese exports more expensive and reduce exports while increasing internal consumption and imports. This would be an entirely different approach to balancing trade than allowing the yuan to appreciate, action that the U.S. and others have been pushing.
From Bloomberg:
“Wage increases are a better option because they largely benefit Chinese workers,” Tao Dong, a Credit Suisse economist in Hong Kong who has covered the Chinese and Asian economies for more than 15 years, said in an interview yesterday. “Currency appreciation will only result in Chinese exporters losing out to competitors in countries such as Malaysia and Mexico.”
“Beijing will continue to resist pressure from the U.S. and other nations and look for ways that will benefit its own economy when it seeks to contribute to global rebalancing,” Tao said. “Higher wages will aid policy makers’ aim to boost domestic consumption and move away from depending on exports.”
China has accumulated a record $2.4 trillion in foreign exchange reserves. This gives them tremendous flexibility in formulating economic policy. The 2008 increase in reserves was $453 billion, 84% coming from trade surpluses. In 2009, that declined by 35% to $284 billion due to the global recession reducing exports. According to Nation Master.com, China has a per capita personal income of $865. In a nation of approximately 1.2 billion people, that is a total national personal income of just over $1 trillion.
The annual foreign exchange surplus for 2009 was well above 40% of total personal income (2008) and well over 25% in 2009. China could increase average annual income by 10% a year for several years before they would start to decrease the accumulated foreign exchange reserves. This would produce a more gradual adjustment of trade than would result from a large one-time currency adjustment and would probably result in more (and sustainable) internal growth. China's internal consumption grows imports should increase, creating favorable conditions in the rest of the world to start increasing the markets for China's exports.
Hans Rosling, a professor at Sweden’s Karolinska Institute, has estimated that China will surpass both the United States and Great Britain in per capita income by 2048. Rosling discusses how climate and agricultural capacity may limit growth in China (and India, as well). The implication (my deduction, not stated by Rosling) is that agriculturally abundant countries such as Brazil, Canada, the U.S. and the Ukraine may derive economic growth by feeding the people of overpopulated and "under farmed" China (and India) as the wealth of those countries increases.
Many see the increased tensions between countries in the global marketplace. Some are previewing an economic war. Some (Prof. Rosling is one) have speculated about the possibility of military war. But can't arguments also be made for detente?
Hat tip to Ilene at Phil's Stock World.
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