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The Forum > Article Comments > There are no limits to Chinese mercantilism > Comments

There are no limits to Chinese mercantilism : Comments

By Peter Coates, published 1/2/2010

There are no limits on China's mercantilist policies because they are appropriate, effective and flexible.

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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
Posted by plantagenet, Monday, 1 February 2010 1:04:29 PM
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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.
Posted by stevenlmeyer, Monday, 1 February 2010 5:20:48 PM
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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
Posted by plantagenet, Monday, 1 February 2010 8:43:56 PM
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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!).
Posted by Ozandy, Tuesday, 2 February 2010 8:26:02 AM
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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.
Posted by stevenlmeyer, Friday, 5 February 2010 1:13:13 PM
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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.
Posted by Michael T, Saturday, 13 February 2010 5:43:51 PM
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Hi Michael T

Your pivotcapital paper (which doesn't open up to non subscribers) appears to be more an advertising plug than a sound argument on OLO.

US-centric pundits were wrong about Chinese growth a year ago and likely wrong now.

The Chinese economy is flexible and has much unsatisfied domestic demand - which has not even needed to be called on.

However much Wall Street seers have hoped for failure in the Chinese economy it is the US economy that has let the world down through the mortgage debt bubble - resulting in the global financial crisis.

The good thing for us Australians is we can choose - no longer "All the way with LBJ" (slavishly following the US) now.

Pete
Posted by plantagenet, Saturday, 13 February 2010 9:19:18 PM
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Plantagenet, I'm interested to know how you concluded the Pivot Capital paper was worthless without reading it.

In fact it is 10 pages of closely argued economic analysis based on the best evidence available. They too make the point that over 90% of China's growth last year was based on capital investment. They point out that the credit to GDP ratio is approaching 200%, and demonstrate that many of China's industries are reaching maximum capacity, and that even their housing and infrastructure levels are much more developed than most commentators realise.

They show that even on the most optimistic growth scenarios, domestic consumption cannot power growth to the levels seen in recent years.

They conclude that China is heading for overproduction and overcapacity and there is a high probability of a slowdown sometime in 2010.

They might be wrong, but it would be foolish to ignore this waning.
Posted by Michael T, Saturday, 13 February 2010 10:06:19 PM
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Michael T

I'm not saying that the Pivot Capital paper that you appear to be advertising is worthless.

The paper http://www.pivotcapital.com/research.html written by Pivot Capital Management way back in August 2009 appears to be unopenable by non-customers of said Pivot.

I would recommend OLO readers pursue their sources for free and not fall for fund paying manager's advice from Wall Street?

Perhaps show us evidence from the free internet.
Posted by plantagenet, Sunday, 14 February 2010 8:37:13 AM
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Well spotted Michael T. For an important insight into China's property market check out the OLO article of 23 February entitled 'China's looming property bubble' by Arthur Thomas http://www.onlineopinion.com.au/view.asp?article=10083.

The assertion by P Coates that "China’s rise to being the world’s wealthiest country in the next ten years is inevitable." is somewhat naive, as is his suggestion that "As agricultural workers gradually move off the land to higher paying industrial and service sector jobs a country is on firmer ground to move from mercantilist policies to a free market “developed” economy...And ... China already has a growing free trade sector especially in machinery and high technology equipment such as computers and aircraft."

Most if not all of this latter economic 'growth' and 'progress' is restricted to Special Economic Zones on China's Eastern and South-eastern seaboards. The mis-guided assertion by P Coates regarding the 'gradual' dislocation of agricultural works into such zones into' higher paying industrial an service sector jobs is also naive. Yes, millions of displaced peasants have been forced off their collectives by corrupt Party officials to become "cheap labour' for these economic 'miracles'.

However so appallingly low are their wages and working/living conditions, that large numbers of these internal peasant migrants cannot afford to buy their dream apartments, and turn, instead, to speculation to increase their funds base, aided by developers and corrupt bank officials to circumvent government anti-speculation legislation.

At the same time vast swathes of office space lay empty and idle in major cities of Bejing and Shanghi.

All this has resulted in rising unrest among the real 'wealth creators' in the SEZ's, their empoverished kinfolk back in rural China and the young educated masses of China's major cities. The brutal 'crackdown' in Tianamin Square by China's so-called ' communist' leadership clearly demonstrated for the rest of China and the world how they plan to deal with any threat to their plans for 'unending prosperity'

As Arthur Thomas perceptively concludes, "The consequences of creating and trading in illusions are likely to surface later this year".
Posted by Sowat, Thursday, 25 February 2010 4:18:58 PM
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Thank you Mr So What for representing Mr Arthur Thomas' doubts.

Time will tell - preferably about any short term trends this week.

That is the highest truth of highly paid stockbroker advice.

US Wall Street Inc. still makes money - even when investors sell out broke and the rest of the world is forced to suffer - as in 2008.

China is doing the work not just advising about it.

P
Posted by plantagenet, Thursday, 25 February 2010 7:37:03 PM
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