Wednesday, May 04, 2011

Awesome Review of China's Problems

Very clear and concise in explaining a lot of the problems facing China.


The need to allow Chinese capital outflows unfettered by foreign exchange controls is growing more intense with each passing month. During the first quarter, China's foreign exchange reserves grew by another $197 billion, pushing total reserve holdings over $3 trillion. Because China was unable to sterilize the positive impact of money inflows (that is, neutralize their impact) on the growth of its money supply, inflation has accelerated while economic growth has remained at a level high enough to be generating more inflation. China's reported inflation on consumer goods rose to a 5.4 percent year-over-year rate in March, an acceleration from 4.9 percent in February. This is the highest inflation rate since July 2008 and is substantially above the level of 3-4 percent that China says it desires.

Think about that. They have $3 Trillion in reserves and are socking away $197 billion a quarter. They stopped buying so many US Treasuries to sterilize this, so their currency should appreciate.

The article also has an excellent explanation for the crazy real estate prices in China (and Japan, and Taiwan for that matter.) They happen when the government does not allow people to invest anywhere except domestically.

On a more fundamental level, China is tracking what one might call the Asian "work, save, and invest" model that proved so unsuccessful for Japan after its economic boom period in the 1970s and 1980s. During those decades, its financial sector failed to develop, and Japanese citizens were discouraged from investing abroad. Inside Japan, investment-allocation decisions were made largely by government agencies that recycled household savings deposited in Japan's Postal Saving System and its sheltered banks. As a result, Japan's financial sector developed far more slowly than its production sector. Saving was very high, as in China today, so there was a huge supply of funds for the government to allocate inside Japan. The government agencies favored investment in Japanese manufacturing facilities, especially those in the export sector.

As Japanese citizens grew wealthier, by the 1980s they looked for ways to store and enhance the wealth they were accumulating as a result of their hard work. They invested in the Japanese stock market and even more vigorously in Japanese real estate. In the late 1980s, the Japanese real estate bubble grew so large that the emperor's palace in central Tokyo was said to be worth more than the state of California. Of course, the bubble burst a year later, and Japan entered a lost decade that included wealth losses equal to nearly three years of national income followed by persistent deflation and generally stagnant growth.

Not only that, but the average person cannot afford a home in China. This is a problem in Japan, in Taiwan, and now in China. These countries all pursued very similar policies.

1 comment:

BigEll said...

I am pretty sure that the Chinese can buy real estate in Taiwan. Is Taiwan the only 'foreign,' market the Chinese can invest in?