Thread for Fredd (Catchy, eh?)

[bigross86]

Freddie can't open a thread yet, so he asked me to help him out. Here's what he's looking for, perhaps he can go into a little more detail now that the thread is open?

Hi all

I am writing a short paper on the economic relationship between China and the U.S.

My Purpose statements is:
"In this paper I want to examine important aspects of the economic relationship between the USA and China, focusing on possible problem areas".

I have tried to delimit the synopsis, firstly by explaining the current relationship which also includes a brief discussion on disagreement and possible problems, secondly by looking at what Obama plans on doing in the future, which leads to the third step where I will be looking at how this subject was elucidated in the third presidential debate in the 2012 election. Fourthly, I will conclude on my synopsis on the behalf of my purpose statement.

For now I have been writing about that Chinas rapidly growing economy and the export (worlds largest exporter with U.S. as there biggest export-country) and that China is the biggest banker to the U.S. - hence a mutual economic dependency between the two countries is a reality.

Does anyone has anything to add or correct? Or just throw in a comment. Maybe on WHY these two points are so important etc.

Thank you all for help

Have a great easter

Best regards
Frederik, Denmark

[snapper]

On the surface the relationship looks symbiotic, both countries have fundamental problems; the US with debt and China with a lack of internal demand particularly in the housing market according to some (see China's Property Sector, Just Before The Crash - Forbes). If a currency war IS in the making - and it certainly seems to be in terms of Japan/China - then gold will increase in value (though at present the gold market is being rigged) or another way to judge it is the real inflationary effect of the US Fed's QEternity programme - then the apparently stable relationship can easily become unstable. A full blown currency war would turn into a trade war with import tariffs etc imposed. This could get very nasty... one 'worst possible' scenario is here;

The other factor Frederik should consider is a collapse of the euro, which would also have knock on effects on China's exports and to a lesser extent also to the US. In a way the relationship is three ways. Doubtless Astralis and Cyp will have slightly or radically different views but just remember when considering the currency war situation how many times the US has accused China of keeping the yuan artificially low. Good luck with your paper!

[Skywatcher]

On the surface the relationship looks symbiotic, both countries have fundamental problems; the US with debt and China with a lack of internal demand particularly in the housing market according to some (see China's Property Sector, Just Before The Crash - Forbes). If a currency war IS in the making - and it certainly seems to be in terms of Japan/China - then gold will increase in value (though at present the gold market is being rigged) or another way to judge it is the real inflationary effect of the US Fed's QEternity programme - then the apparently stable relationship can easily become unstable. A full blown currency war would turn into a trade war with import tariffs etc imposed. This could get very nasty... one 'worst possible' scenario is here;

The other factor Frederik should consider is a collapse of the euro, which would also have knock on effects on China's exports and to a lesser extent also to the US. In a way the relationship is three ways. Doubtless Astralis and Cyp will have slightly or radically different views but just remember when considering the currency war situation how many times the US has accused China of keeping the yuan artificially low. Good luck with your paper!

Umm, you are aware that the U.S. gov't has acknowledged that the yuan has been appreciating?

[cyppok]

Today is gold expiration day it had to be pushed below the expiration(by those that sold calls)... very obvious kinda. But yes extremely manipulated, the problem is settlement with gold manipulated or not the put up or shut up is the gradual eating away at available bullion supply.

The yuan has to either appreciate or inflation will explode either way the U.S. is winning because the cost of doing business for the Chinese goes up. (This is not my idea Jim Rickards book "Currency Wars" from the G20 chapter)
Because the U.S. is printing money and the world holds dollars monetary inflation is pushing raw materials and other goods up, if China keeps the peg they eat inflation which destabilizes their society far more than here since they are more sensitive to food and other prices fluctuating. If they revalue by removing the peg (6.22 or so to the dollar) they will increase costs of their products and their goods prices on world market making exports less competitive.

Yuan has been appreciating but very slowly and is still pegged to the dollar.

The reality is by forcing interest rates so low internally, asset prices in China for real estate or anything else that can be financed are at extreme velocities. Think about this in the following way imagine you are the first person whom can finance something in relation to your competitors in a market, lets say iron ore. You would be willing to bid for it as much if not more then them due to your purchasing power being marginally higher due to finance ability. Since prices are formed on the margin the initial price increases will be of higher magnitude early on rather then later when everyone can finance their product in a market. The other aspect is margin change for those products which creates higher velocities of change as leverage expands. Say first you could only finance 10% of iron ore then 20, 30, 40, 50 and so on. Bidding up to the limit because past outcomes partly directed by increased ability to finance and leverage buying showed that it was the right decision. At the end point of that bid up when nobody has any purchasing power anymore you get a collapse and everyone is screwed (unless banks roll over debt by government fiat) which they have. The problem China has is rationalizing all of this inefficiency without letting losses come out (which is not gonna happen). Someone somewhere has to eat the loss for stupidity to come out of the system, and if they can't eat it, it passes to someone who can, ergo if bank financed someone whom is insolvent the bank eats it because you cant squeeze money from a rock.

What China should have done was to gradually allow the transition of enterprises to control their own surplus forex so they could venture out and buy assets on world markets (they would be more efficient at it). Here you have the control issue at hand. The way to unwind it was to follow in the footsteps of Japan which let their companies keep the foreign exchange. By the time they came to this realization and centralized things in sovereign wealth funds or major state companies the asset prices world over are in extremely bubble territory and the really big strategic assets they won't be allowed to purchase. The mid-small sized companies would have been far more efficient with this over the course of past 10 years than the big state firms.

Sooner or later the transition out of China by multinationals will create a severely adverse position for the Chinese. High value added services they will produce will be blocked due to patent theft and low value add will be negated by the cost. They will have niche industries but it won't solve the problem.

My guess is the optimal revaluation would be gradual enough to make the food increases very negligible but the export lobby won't have it so social unrest is already rising at a high pace.

My 3 cents of opinion.

[Skywatcher]

Today is gold expiration day it had to be pushed below the expiration(by those that sold calls)... very obvious kinda. But yes extremely manipulated, the problem is settlement with gold manipulated or not the put up or shut up is the gradual eating away at available bullion supply.

The yuan has to either appreciate or inflation will explode either way the U.S. is winning because the cost of doing business for the Chinese goes up. (This is not my idea Jim Rickards book "Currency Wars" from the G20 chapter)
Because the U.S. is printing money and the world holds dollars monetary inflation is pushing raw materials and other goods up, if China keeps the peg they eat inflation which destabilizes their society far more than here since they are more sensitive to food and other prices fluctuating. If they revalue by removing the peg (6.22 or so to the dollar) they will increase costs of their products and their goods prices on world market making exports less competitive.

Yuan has been appreciating but very slowly and is still pegged to the dollar.

The reality is by forcing interest rates so low internally, asset prices in China for real estate or anything else that can be financed are at extreme velocities. Think about this in the following way imagine you are the first person whom can finance something in relation to your competitors in a market, lets say iron ore. You would be willing to bid for it as much if not more then them due to your purchasing power being marginally higher due to finance ability. Since prices are formed on the margin the initial price increases will be of higher magnitude early on rather then later when everyone can finance their product in a market. The other aspect is margin change for those products which creates higher velocities of change as leverage expands. Say first you could only finance 10% of iron ore then 20, 30, 40, 50 and so on. Bidding up to the limit because past outcomes partly directed by increased ability to finance and leverage buying showed that it was the right decision. At the end point of that bid up when nobody has any purchasing power anymore you get a collapse and everyone is screwed (unless banks roll over debt by government fiat) which they have. The problem China has is rationalizing all of this inefficiency without letting losses come out (which is not gonna happen). Someone somewhere has to eat the loss for stupidity to come out of the system, and if they can't eat it, it passes to someone who can, ergo if bank financed someone whom is insolvent the bank eats it because you cant squeeze money from a rock.

What China should have done was to gradually allow the transition of enterprises to control their own surplus forex so they could venture out and buy assets on world markets (they would be more efficient at it). Here you have the control issue at hand. The way to unwind it was to follow in the footsteps of Japan which let their companies keep the foreign exchange. By the time they came to this realization and centralized things in sovereign wealth funds or major state companies the asset prices world over are in extremely bubble territory and the really big strategic assets they won't be allowed to purchase. The mid-small sized companies would have been far more efficient with this over the course of past 10 years than the big state firms.

Sooner or later the transition out of China by multinationals will create a severely adverse position for the Chinese. High value added services they will produce will be blocked due to patent theft and low value add will be negated by the cost. They will have niche industries but it won't solve the problem.

My guess is the optimal revaluation would be gradual enough to make the food increases very negligible but the export lobby won't have it so social unrest is already rising at a high pace.

My 3 cents of opinion.

On the other hand, state owned enterprises in China act more like those corporations in developed countries that have effectively completed regulatory capture.

I doubt that multinationals are going to transit out of China, there market and efficiency advantages will remain there for while, and frankly, there's no serious move to block Chinese high value products/services (the actual R&D input of IP theft is exaggerated, it's the business intelligence advantage from IP theft that's the real issue, because of the inherent difficulty in reverse engineering modern high value products, even if one has the blueprints).

[snapper]

Umm, you are aware that the U.S. gov't has acknowledged that the yuan has been appreciating?

Of course it has - against the $; they are devaluing the $.

[Doktor]

Of course it has - against the $; they are devaluing the $.

Really?

[snapper]

You're missing the point Dok... US $ relative to Chinese yuan is what we are discussing here; "Yuan strengthens to highest level against US dollar in 19 years" Yuan strengthens to highest level against US dollar in 19 years | South China Morning Post

The UK has engaged in 'QE' as has Japan via 'Abenomics' whereas the euro hands out 'loans' in the form of bailouts that can never be repayed. The US has QEternity and 'magics' $85bn of 'new money' per month nominally until unemployment falls to a certain percentage (or so says Bernanke). It is hardly surprising then that the $ has fallen relative to the yuan.

[cyppok]

On the other hand, state owned enterprises in China act more like those corporations in developed countries that have effectively completed regulatory capture.

I doubt that multinationals are going to transit out of China, there market and efficiency advantages will remain there for while, and frankly, there's no serious move to block Chinese high value products/services (the actual R&D input of IP theft is exaggerated, it's the business intelligence advantage from IP theft that's the real issue, because of the inherent difficulty in reverse engineering modern high value products, even if one has the blueprints).

Full factories capital equipment and ip stolen and then same products produced to compete in the rest of the world with your own. Aha, the money will keep coming in for capital investment....

A growing sense of economic nationalism in China has led to a slew of policies that discriminate against multinational corporations while benefiting state-owned domestic businesses. In the past year alone, China has filed over a dozen trade-related cases against multinationals and the nations they operate out of, implemented a strict “buy Chinese” policy and limiting the export of some materials to force companies to move operations to China.

Chinese Restrictions Hurting Multinational Companies | Economy In Crisis

once they moved there new pressures to share ip and let other chinese companies produce the same thing is applied, then they are pushed out and legally constrained and ipso facto a new competitor arrives on world market with their technology, lower costs and no need for R&D cause its all stolen.

[USSWisconsin]

I am writing a short paper on the economic relationship between China and the U.S.

My Purpose statements is:
"In this paper I want to examine important aspects of the economic relationship between the USA and China, focusing on possible problem areas".

It sounds like a big topic for a short paper. I suggest you identify one or two related aspect(s) and focus on a smaller subject, treating it in detail. The subject as stated could be a book, and its a dynamic subject as well - it is changing. I suspect a "short" paper would be more like a journel article or short chapter. The currency exhange issues might be appropriate. Can you narrow the subject at this point or are you commited to the thesis statement above?

[Tennetc]

I don't know about the big picture and have never studied economics, but I do know a few things:

1) from 2009 to 2012 knitwear orders from the US has dropped a lot (I guess 70%)
2) from 2009 to 2012 domestic demand for knitwear has risen a lot (I guess 50%)
3) this year, orders from the US has risen a little, but it is still early, so not sure about the whole year
4) the fact that the RMB to USD is now around 6 something to 1 does make chinese knitwear more expensive then before.

[Skywatcher]

Of course it has - against the $; they are devaluing the $.

And Beijing is completely fine with it (makes it easier to import more U.S. exports, among other things).

China won't be affected by the yen devaluing (if nothing else, it will make Japanese capital goods easier to purchase, which f***s over South Korea and Taiwan is all sorts of ways), since they and Japan occupy completely different positions on the value added chain.

I doubt that Abe can keep inflation at 2%. H.P. Lovecraft put it thus: "Do not raise what you cannot put down".

[Skywatcher]

Full factories capital equipment and ip stolen and then same products produced to compete in the rest of the world with your own. Aha, the money will keep coming in for capital investment....


Chinese Restrictions Hurting Multinational Companies | Economy In Crisis

once they moved there new pressures to share ip and let other chinese companies produce the same thing is applied, then they are pushed out and legally constrained and ipso facto a new competitor arrives on world market with their technology, lower costs and no need for R&D cause its all stolen.

I see that your incomprehension about technology policy and other international matters has returned. Alas, and to think that your previous post had hope.

What specific examples of "full factories capital equipment and ip stolen"* and "then they are pushed out and legally constrained and ipso facto a new competitor arrives on world market with their technology, lower costs and no need for R&D cause its all stolen" are there have happened? Given your track record on this forum, you'd better provide some actual proof.

That article is from nearly three years ago. Haven't seen the Chinese economy or foreign FDI collapse since then.

*Protip: Try capitalizing IP.

[Doktor]

You're missing the point Dok... US $ relative to Chinese yuan is what we are discussing here; "Yuan strengthens to highest level against US dollar in 19 years" Yuan strengthens to highest level against US dollar in 19 years | South China Morning Post

The UK has engaged in 'QE' as has Japan via 'Abenomics' whereas the euro hands out 'loans' in the form of bailouts that can never be repayed. The US has QEternity and 'magics' $85bn of 'new money' per month nominally until unemployment falls to a certain percentage (or so says Bernanke). It is hardly surprising then that the $ has fallen relative to the yuan.

Snapper, you said "...they are devaluing the $.", I just showed you that it is not the dollar which devalues.

[snapper]

And Beijing is completely fine with it (makes it easier to import more U.S. exports, among other things).

China won't be affected by the yen devaluing (if nothing else, it will make Japanese capital goods easier to purchase, which f***s over South Korea and Taiwan is all sorts of ways), since they and Japan occupy completely different positions on the value added chain.

I doubt that Abe can keep inflation at 2%. H.P. Lovecraft put it thus: "Do not raise what you cannot put down".

As long as they are fine with it great! But the reverse of what you mention (cheaper US goods) is that Chinese exports become more expensive as Tennetc notes. How far can the $ drop before knitwear (and other) orders from the US dry up? How many Chinese business's are dependent on exports? As I noted in my first post here they to have create domestic demand to keep current levels of 'growth' and ultimately employment going.

Snapper, you said "...they are devaluing the $.", I just showed you that it is not the dollar which devalues.

Dok I was replying to Skywatcher who said "the U.S. gov't has acknowledged that the yuan has been appreciating". My comment was NOT related to the euro or other currencies. Allow me to make my comment clearer... ahem: "They are devaluing the US $ relative to the Chinese yuan". Of course some might see this as a 'currency war'.... :whome: