Decoupling Debate and China

For 2 years now, I have been an advocate of raising the value of RMB. Most Chinese people look at me weird and think I am out of my mind. I think what they fear most is the repercussion of a stronger yuan on Chinese export. In their view, everything, I mean EVERYTHING, in the Chinese economy is built for exporting to the United States.

Don’t get me wrong, global trade has benefited China more than anything else. But the export mentality means that even after 30 years of breakneck investment in education and infrastructure, Chinese people hasn’t created enough wealth for themselves to start consuming. The article below talks about how export dependent China (and other emerging economy) really is.

http://www.economist.com/finance/displaystory.cfm?story_id=10808782

“Sceptics argue that much of this investment, especially in China, is in the export sector and so will collapse as sales to America weaken. But less than 15% of China’s investment is linked to exports.”

“Over 95% of China’s growth of 11.2% in the year to the fourth quarter came from domestic demand. China’s growth is widely expected to slow this year but to a still boisterous 9-10%.”

In addition to the new wealth in China which created a lot of demand, there’s the investment needed to capitalize on China’s future potential. Corporate balance sheet in China is ridiculously healthy, thanks to years of exploding profits and growth. I just don’t think people will stop investing in China when a recession in America hits.

The case is even clearer when you think about the 1.3 trillion dollar of foreign reserve China holds. Let me put this into an analogy.

When you are a poor shoe shining boy, your only alternative are to shine shoes. So you are dependent on selling your service. When you are a rich shoe shining boy, you have more alternatives. (1) You can invest in yourself and get an education, or even buy a shoe shop, increasing your future income potential. (2) You can do (1) and in the mean time get an ipod nano for yourself. Or (3) You can get an iphone.

Of course, if you are stupid enough to choose option (3) (a lot of people did actually, think Africa), then too bad, you are doom to be a shoe shining boy forever. But even (3) is better than the option (4), which is to lend money to the ipod salesman so he can continue to pay you to shine his shoes. If the Chinese government, by holding the yuan and buying US bonds at ridiculously low interest rate (AND depreciating principal base –falling dollar!), is not taking money from the shoe shine boy and giving it to the ipod seller, I don’t know what is.

Addition: By holding down the yuan, what the Chinese government is effectively doing is taking say 30% of PRC’s people’s wealth and buying US dollar denominated bonds. The worst part is, the US dollar fell 40% in the past 4 years.

** USA really have some wisdom here. Not only can it pay back its loanes with pennies on the dollar now. It has been able to use those money to invest in FDI that earns positive returns. I sounds a lot like those Hedge Fund using leverage. Okay, maybe they bought an iphone on the way too, but who doesn’t want to buy an iphone when it’s on a 40% discount.