ECONOMICS:

China has an Economic Strategy; Do We?

by Fred Cederholm

China and Japan hold roughly 25% of our privately held National Debt and don’t want to further increase their dollar denominated assets. What does that portend?
I’ve been thinking about "the China costs," "trade deficits," "surplus recycling," "global strategies," and "vulnerabilities." Red China is red hot right now and has been increasingly so in this new millenium. The low prices of "Made in China" goods have obscured the true long-term costs to the global bargain hunters and their own economies.

You see, China, with a population of over one BILLION, has an unlimited worker force which can undercut the labor costs of virtually the entire planet. It is estimated that China’s hourly labor costs runs one-twentieth of those of the United States and one-twenty-fifth of those of Western Europe. When you consider both the wage costs and the employee benefit costs, China has a huge advantage against the industrial West – or should I say the FORMER industrial West. How many manufacturing jobs (with full benefits) have been lost in the past five years?

The United States is the hands-down largest market for Chinese goods. The growth of our trade imbalance figures speaks for itself. The Current (Trade) Deficit with China was $83.8 BILLION in 2000, $83.1 BILLION in 2001, $103.1 BILLION in 2002, $124.1 BILLION in 2003, and $161.9 BILLION in 2004. In 2005, it’s been averaging about $15 BILLION a month and we haven’t gotten into the Christmas spending season yet! A $200 BILLION gap in 2005?

Uncle $ugar is fueling the world economies with money we don’t have! China was more than willing to keep the goods flowing by financing these credit-covered purchases of their goods. They were not alone in this regard. The Japanese had racked up similar huge surpluses in the 1970’s and 1980’s; and when their native interest rate on deposits hit "zero" in the 90’s, the cumulative surpluses of bucks were repatriated to the US. Red China is presently sitting on $250 BILLION in US Treasury Securities alone and the Japanese have almost three times that amount. These two nations hold roughly 25% of our privately held National Debt – that is, the part of the National Debt not held as the chits owed to the Social Security Fund – but that’s another story!

It would appear that the Chinese have painted themselves into a corner. They need the US consumers to keep shopping, but they don’t want to further increase their dollar denominated assets; in fact, they have indicated they intend to gradually divest their mega-buck holdings. The Chinese are shrewd, they march quietly, and they are very patient. In the past twelve months, they have negotiated agreements/ deals/ purchases on virtually every continent. These business transactions have involved mineral rights, timber rights, oil and gas contracts, as well as outright purchases of corporations, their intellectual property, and/or their selective assets. Would you care to wager whether these deals were financed/ underwritten with renminbi/yuans or dollars?

Until recently the Chinese currency was tied to the rise and fall of the dollar relative to the world’s other currencies. When the dollar dropped, the Chinese goods gained an additional currency competitive advantage against their global competition. In the month since their currency began "floating" against a basket of currencies (they made the basket and picked the currencies), their currency rose about 2%. While not yet a significant change, it could be.

Is the long-term strategy for the Renminbi/yuan to replace the US Dollar as the world’s reserve currency? More foreign investment capital IS flowing into China than anywhere else on the planet. China has held discussions with Iran regarding their proposed Petroleum Bourse; an international oil and gas exchange in Tehran scheduled to open in 2006. Is THAT development one more attack/assault on the US Dollar monopoly as the official currency of OPEC? Is the world really ready to transfer the crown of currency hegemony to the Central Bankers of China? Remember, it only took two no votes on the EU constitution to scuttle the attack by the EURO!

While China’s future is based upon its production and trade growth, such growth faces some significant vulnerability. China has the most to lose in a global recession. They are already plagued with energy deficiencies involving oil, natural gas, and electricity. A widespread outbreak of influenza (bird, swine, H5N1...) would have their goods quarantined at the docks. Remember SARS?

I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.


Copyright 2005 Questions, Inc. All rights reserved. Fred Cederholm is a CPA/CFE and a forensic accountant. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at asklet@rochelle.net. To "Audit" this column, and to learn more about the subjects discussed, check out:


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This story was published on August 12, 2005.