Funny how Chinese hackers are suspected of being the main hackers into US and Australian computers. Often there's no proof.

Even China's treatment of Islamic terrorists (from Western China) is seen as a human rights outrage while in most countries (say Britain and Australia) harsh treatment of Muslims with bombs is publicly supported.

Could it be that American bitterness about China's economic success (see http://krugman.blogs.nytimes.com/2009/12/31/macroeconomic-effects-of-chinese-mercantilism/ ) make China Public Enemy No.1 on any issue?

Pete

Coates misses the point. No serious economist doubts the benefits of mercantilism PROVIDED RIVALS DO NOT RETALIATE.

If rivals retaliate everybody loses.

So far China has had an easy ride. It has been permitted to keep its currency undervalued – in effect a subsidy to its exporters. However if its customers, mainly the US and EU, retaliate against China's blatant currency manipulation by, for example, imposing countervailing tariffs, the wheels could come off China's mercantilism very quickly.

Mercantilism is a game all can play and it usually results in everybody losing.

The danger for Australia is clear. If China's customers retaliate then China's demands for our raw materials will decline. Even a small decline in volume could lead to a major fall in prices. That's the nature of commodity markets.

Let's hope the Chinese are smart enough to understand that they need to tread wearily. Unlike the economically illiterate Mr. Coates they probably do.

Mr Lmeyer

I'll have you know I'm literate in all matters and a thorough, gentle, person.

You appear to be ignorant of the fact that China owns a vast number of US Treasury Bonds - doing much to prevent a free fall of the US Dollar (if China decided to sell). This would ultimately prevent the US retaliating against China's sound, fair and timely economic policies.

To be specific - in November 2009 China held US$789.6 Billion in Treasury Bonds (Securities). See Table here http://www.ustreas.gov/tic/mfh.txt . China is the No.1 US Bond holder followed by Japan (see Table) with the combined countries of OPEC (including Saudi Arabia, Mr Lmeye) owning less than a quarter of China's holdings.

This gives China market/currency power - yet the US quietly appreciates the way China is propping up the US economy.

The economic world is interdependent Mr Lmeyer. China needs US money and American (and Australian) consumers crave inexpensive Chinese manufactured goods. Everbody continues to win this way, not lose, despite the rather avaricious failings of Wall Street and ineptitude of the US Federal Reserve.

The US is in no position to wage a trade war on China as China could pull the plug on the US economy. They need each other Mr Lmeyer.

Don't you agree?

Kind Regards

Peter Coates

Good article.
My main fear is that the US will start provoking China into a huge military build-up by taunting them in Taiwan and playing their usual games with propaganda.
I find it quite silly that the US is blaming China for it's currency policies: the US has no one to blame but itself. the Middle East war gambit has not paid off. Private enterprise warfare is *extremely* costly, as is supporting a population of parasite multi-millionaires who exported America's major manufacturing industries and who make money from skimming the economy instead of creating wealth.
The currency imbalance is a symptom of the industrial transfer and wealth destruction, as well as the artificial $US value due to the reserve status (and you need them to buy oil!).

Plantagenet

China is not "propping up the US economy". Buying US dollar denominated financial assets is the way it keep the remnimbi under-valued. That's why it currently owns nearly a $1 trillion dollars of US debt.

The Chinese leadership are acting in what they perceive to be their own best interests, not because they wish to prop up the US economy.

In essence the Chinese business model is to keep lending ever greater amounts to their customers, the Americans, so that the latter can keep buying. The Americans, foolishly, just keep borrowing. They are able to do this in almost unlimited amounts because, for now, they own the global currency.

However, ultimately this strategy impoverishes both countries. If the US borrows too much the USD will cease to be the global currency and China will have lost one of its best customers.

It would be better for the Chinese to allow the remnimbi to appreciate which would increase the global purchasing power of its labour force. That would benefit everyone.

If they don’t the US and other countries WILL impose some form of sanction on China – probably in the form of a countervailing tariff. They will need to do this in order to protect their own labour markets. The alternative will be domestic unrest and impoverishment.

At that point Chinese mercantilism will cease working.

It ONLY works until other countries get wise.

It's also doubtful that China's short-term prospects are so good. This has been contested by a first-class paper from two gurus at Pivot Capital. See: http://www.pivotcapital.com/research.html

Also the Harry Dent people have pointed out that 92% of China's GDP in 2009 came from investment, not from consumption or exports. In other words they are heading for massive overproducton. They are building up their factories and investing in buildings on the assumption that the US consumer will start buying again - and it ain't happening.