[FoRK] Why the Chinese might prefer wall paper to value
johnhall at isomedia.com
Wed Mar 17 12:05:13 PST 2004
> From: DELETED
> johnhall wrote:
> > The questions are: why are we asking [the Chinese to devalue the
> > and why are they refusing?
> That's the part I don't get; why *are* they refusing? Sure, the
> order economic effects, especially as regards Chinese exports to the
> United States, would seem to provide a reason for them to keep the
> currency artificially undervalued. But a devaluation would also
> lead to a decrease in the real price paid for oil by Chinese firms,
> individuals, and government agencies. A 10% decline in the value of
> Chinese currency would lead to a 10% decline in the real cost of oil;
> expect that to more than offset any loss of exports to the US as
> energy would help to accelerate the industrial buildout of the Chinese
> All I can guess is that the leaders of China don't believe they have
> reached a point in their industrialization where internal growth and
> demand can sustain the necessary investment flows.
IIRC the Chinese are sitting on about $300Billion in US reserves. A 10%
adjustment means they take $30Billion on the chin, immediately.
China paid $16.5Billion for oil in 2003 (and in 2004 there are
indications that rate has slowed). 10% is less than $2Billion per year.
I read an article several months ago, and have been kicking myself ever
sense for not saving. The argument was complex, but amounted to a
description of how in many ways the Chinese economy was very artificial.
A simplified version goes, IIRC, something like this (and these are my
numbers which are chosen for illustration only):
Suppose we have a Chinese company with $1 in capital. They get a
contract with a US company for widgets. The Chinese bank loans them
$10, of which $7 goes to Chinese labor, $2.50 for materials and $.50 for
Problem is, the US company only agreed to pay $9, which they do.
Oops, our Chinese company is broke having lost $1. Or is it? A loan is
bad only when the bank says it is, and that is especially true in a
The Chinese bank is on the hook for $1, but the workers at that company
deposited 68% of their salary ($4) into the bank. They did so for
cultural reasons, because there wasn't enough to buy, and because they
have no other outlets to invest their money.
Not only can the bank carry the $1, but it can loan additional funds for
the company to expand production and hire more workers and make even
more widgets (at a loss).
This can continue as long as the workers loyally put high savings into
the banking system that more than compensate for the real losses
involved and as long as production continues to expand.
Making the Chinese currency convertible in such a system would cause it
to collapse. Exports would decline and the workers would have other
alternatives for investment. And when it comes crashing down the
workers won't only have lost their jobs, but will find their savings are
a phantom as well.
Boy are they going to be pissed.
If such a story models any part of the reality of the Chinese economy,
it would certainly explain why elderly Chinese leaders would prefer to
continue taking wallpaper and pretending it had value.
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