Spend, China, spend!

Desperate measures? In a rather unusual editorial today the NY Times urges China to spend more money to pick up the slack of reduced spending by the US and Europe, and thus help keep the global economy lubricated.

China has grown 13-fold over the last 30 years, thanks to hypercharged exports and white hot investment. But its economy is lopsided. Consumer spending amounts to little over a third of economic production, probably the lowest share in any country in the world. And its overwhelming dependence on exports has made it overwhelmingly vulnerable to changes in world demand.

The government in Beijing, which is running a huge budget surplus, also has money to spare.

The government has announced some measures to fuel domestic spending —including a tax cut on home purchases to revive an ailing housing market and a vague plan to invest in public works. But it must do more to unlock the savings of its citizens and encourage them to spend.

To do that it needs to rebuild the system of social insurance that fell apart when state-owned industries collapsed and were replaced by the private sector. Government investment in things like health care, education and pensions would help develop China’s middle class and its domestic market.

A boost to consumer spending would undoubtedly help China weather the economic storm. But by raising Chinese imports and reducing its dependence on exports, it would also help the rest of the world.

Are you listening, China? This isn’t just anybody telling you what you should do, it’s the New York Times!

Actually, there’s nothing in the editorial I disagree with. And if nothing else, it’s certainly confirmation of just how huge a role China now plays in the world economy – almost as if the pedestal has shifted from being the US to China. Is that what the editors meant to imply? I’m not sure, but the title of the editorial is “As China Goes, So Goes …” There’s definitely a new order rising.

Meanwhile, it’ll be interesting to see how receptive China is to this well-meaning if unsolicited advice from The Gray Lady.

The Discussion: 60 Comments

I would listen to the New York Times if it told me to spend. In fact I do listen to it when it tells me to spend.

October 27, 2008 @ 5:12 pm | Comment

The short and dirty version of this article is as follows:

China should let its massive export sector out to dry because America is going to be uncomfortable during this recession and therefore so should China.

Of course Beijing should move China towards greater domestic consumption (which it is) and a necessary component of that is investment in education, healthcare, etc. To me, that seems beyond debate. However, If there’s just one lesson that we can take from the Chinese experience, it’s that gradualism works and attempting massive structural economic changes overnight does not. Everyone is going to hurt in the short-term, China just has the means to lessen the impact of the slowdown on it’s citizens while shifting their GDP portfolio to one rooted in domestic consumption. In the US, we just bail out investment banks and housing lenders responsible for this whole mess.

October 27, 2008 @ 7:01 pm | Comment

Nice synopsis. China certainly holds the trump cards this time.

October 27, 2008 @ 7:09 pm | Comment

Yes, but in the absence of a reliable social safety net and rising economic anxiety, Chinese people are going to save their money rather than spend it. China is the world’s manufacturer. The Chinese domestic market isn’t large enough to absorb the loss of capacity due to shrinking export markets, much less become the engine of growth for foreign countries’ export. The more rational approach for China is to become protectionist.

October 27, 2008 @ 8:18 pm | Comment

I know if I were Chinese I would be saving my money and investing right now. Very carefully,

October 27, 2008 @ 8:21 pm | Comment

I agree that greater spending on education and healthcare is desperately needed. However, it is going to take an awful lot of government spending to replace the welfare system that was dismantled during the opening up and reform period. Also, would that necessarily unlock the savings of the middle classes and encourage them to spend? It’s going to take a pretty major cultural shift to do that, especially in a society where living on debt is practically unheard of.

Dunno if China’s willing to sacrifice the savings account in order to save the world.

October 27, 2008 @ 8:23 pm | Comment

“Dunno if China’s willing to sacrifice the savings account in order to save the world.”

They won’t do it for saving the world, they will do it to save themselves from political chaos and social unrest. Soon people will switch from “China is very clever and will emerge victorious” to “why didn’t we see this coming?”.

The “economic war” language and symbolic is starting to penetrate the medias (A site you recommended Richard, you probably already saw this headline) ;):


“We are in the midst of an intensifying economic war and most of us don’t know it.”


October 27, 2008 @ 8:41 pm | Comment

During 97 Asian financial storms, US gov and IMF asked China not to devalue its currency to save the region. China listened, sucked up and took upon the responsbility.

Ironically 10 yrs laters, US thinks Chinese currency should devalue because of American interests, China did just that, 20% in 2 yrs, yet multiple US presidential candidates still called China CHEATOR in primary.

In light of the recent events, which country is the cheator of this world?

October 27, 2008 @ 8:49 pm | Comment

Coldbooded, did they really call China a cheater in the primary? If it’s any consolation, China seems to be having the last laugh, having been smart enough to save more than it sends, thus giving them an upper hand as global markets spiral out of control. At least China has a bannister to hold onto as many other countries fall down the stairs.

October 27, 2008 @ 8:57 pm | Comment

I was going to post this in the open thread but it looks like you got to it first.

This is going to be a very interesting transition.

Dish, I think the key is not necessarily encouraging the existing middle class to spend more (In Hangzhou it seems that they already spend like there is no tomorrow).

What China ultimately needs to do is figure out how to get more wealth into the hands of all those rural residents, so THEY can begin spending more. By the sheer size of that population, even a small increase in wealth would make a huge difference. I think that they are on that track, but as always it will be a slow process (all applauding of gradualism aside), and we will see a lot of export-oriented manufacturers closing because they simply can’t afford to wait around until that increase occurs.

October 27, 2008 @ 8:57 pm | Comment

In light of the recent events, which country is the cheator of this world?

I vote Zimbabwe, because somehow the country hasn’t collapsed even with inflation in the mega-millions of per cent.


As for the article, I’ve come across other publications around the world advising their countries to “spend, spend, spend!” I have no idea if it is good for developed nations without the reserves to do such a thing, but China is in a better position that many. If it works then it would be a good excuse to try to bring in more social security.

dish, I don’t think that China has to go back to the 1970s, but do you think that it could become as “great” a power as the US without some sort of developed world ss. system? Or are you saying now is not the right time?

October 27, 2008 @ 9:01 pm | Comment

Redistribution of the wealth! That’s what you’re talking about, Andy What a dastardly socialist notion!

Except, all that Medicare and Medicaid and Social Security and the graduated income tax and the charity tax deduction – all that any of those things are is redistribution of the wealth. Hell, our bailout package was the biggest redistribution of wealth in the history of the world, ever – only this time the wealth went from the bottom to the top!

So funny to see the nutters wringing their hands and rending their garments and speaking in tongues over Obama’s use of the phrase (offhandedly, in an interview) as if that makes him a Nazi Communist Terrorist Muslim, or whatever they are calling him today.

October 27, 2008 @ 9:03 pm | Comment

And I think it would be great for China to spend more, and it really would be a huge help to propping up world markets, and for the good of everyone. Knowing the Chinese people, however, I know (or at least feel) they will find this a most inopportune time to spend like a drunken sailor and instead, as dish suggests, will save with even more determination until they feel the storm has been weathered.

October 27, 2008 @ 9:07 pm | Comment


How dramatic. Unfortunately, quoting an opinion piece in the People’s daily doesn’t mean squat. Until it’s coming off the lips of someone who matters, it’s just a newspaper trying to sell copies and get hits on their website by taking a hard-line stance. The Chinese media has been using the rhetoric of economic warfare for..well.. ever.

I don’t know if China will “emerge victorious” (whatever that means) from this economic down-turn, but should they take the Times’ advice they will almost certainly end up in the scenario you described/yearn for.

How does gradualism lead to “political chaos”?

October 27, 2008 @ 9:10 pm | Comment

Amerigo, did you really find the NYT’s advice that catastrophic? I think it was all pretty sound – the only qualifier I’d add is that it can’t all be done at once, they need to open up their market to more imports and encourage domestic spending incrementally, though not necessarily glacially.

October 27, 2008 @ 9:14 pm | Comment


Not sure what your policy is on posting links, but here’s something just posted on the China Herald Blog which relates to this discussion.


Zing Zang Zoom.

October 27, 2008 @ 9:17 pm | Comment

Brilliant. China is already doing what the NYT asked – that sure didn’t take long. Thanks for the link, Amerigo.

October 27, 2008 @ 9:19 pm | Comment

Hahahaha…well hopefully China will go the other way, but I’m sure those CCP fatcats and their SOE cronies will continue to find a way to get their “cut” no matter what social safety net is put in place.

It is funny. The gas tank has run dry and all they have they have left to run on are the scared, angry fumes of the right-wing “base” (now that its stripped down its quite scary to see who this “base” actually consists of)

Did you know that Barack actually traveled to Hawaii to destroy documents confirming that he is in fact a Muslim and not an American citizen? And, that “The Audacity of Hope” was actually ghost written by Bill Ayers?

Speaking of US politics, I caught this article today which left me conflicted. On the one hand, it seems that we’re seeing the beginning of the end of the McCain campaign. On the other, a future with Sarah Palin….say it ain’t so!


Anyway, I’m crossing my fingers while knocking on wood until November 4th…

October 27, 2008 @ 9:23 pm | Comment


I think that those caveats you provided, as small as they seem, would make a huge difference in the hit China takes from a global slowdown. The Times wants results globally NOW and as such they give China a positive and negative policy. Positive- invest domestically in healthcare, education, etc. Negative- Don’t protect export industries. Not protecting export industries in the short-run would really hurt China right now. It probably wouldn’t fulfill Bao’s scenario (I got a little carried away with my wording), but it would definitely hurt more than the alternative. I agree that the export-model is on the way out and in that respect the Times’ advice is great, but you can’t just let it drift out to sea like that.

October 27, 2008 @ 9:29 pm | Comment


Not an economics guy, so how do you think China could protect exports in the short-term with markets abroad falling apart?

October 27, 2008 @ 9:33 pm | Comment

Andy, one way is to encourage more domestic consumption to keep the factories going. And in the short-term to not encourage more imports; leave that for the next phase. Or at least that’s what I’m kind of getting from Amerigo. That doesn’t sound too radical.

October 27, 2008 @ 9:40 pm | Comment

Amerigo Vespucci

I am sorry, but I don’t see the link between my reference and the People’s Daily (except for the small quote inside of it)…

2006 article…


“There is a more insidious connection between the saving postures of China and the U.S.: Chinese savers are, in effect, subsidizing the spending binge of American consumers.”

“That’s dangerous for the U.S., but it’s also an increasingly risky proposition for China because it bloats that country’s money supply. This excess liquidity then spills over into the Chinese financial system, leading to asset bubbles, such as those in its coastal property markets.”

“It is in neither country’s best interest to stay the present course. Instead, there must be a role reversal: China’s savers must be turned into consumers, and the excesses of U.S. consumption must be converted into saving. This won’t be an easy task for either nation, but it sure beats the increasingly treacherous alternatives.”

“In the U.S., it will take nothing short of a major campaign to boost national saving. That will require a reduction of public-sector dissaving (i.e., outsized federal budget deficits) and the enactment of some form of consumption tax.”

I can think of a more effective way than a “major” campaign. A recession. Magic!!! People will behave like squirrels instantly, you don’t even have to make them understand anything else than the fact that if they don’t do so, they’ll end up on the street living in cardboard boxes.

October 27, 2008 @ 9:44 pm | Comment

What they’ve done so far (increasing rebates on export taxes and slowing RMB appreciation) seems pretty sound to me. Still, export and investment driven growth is inevitably on the way out and both China and the world will be a better place for it.

October 27, 2008 @ 9:45 pm | Comment

Richard, I understand the domestic spending thing (see my previous comment), but I don’t see this happening quickly enough to offset the inevitable drop-off in exports. I guess I was looking for another “magical solution”.

What is your opinion on infrastructure development? As I get from Amerigo’s article, it seems like this is always the answer cooked up by the engineers at Zhongnanhai. In my opinion, as mentioned above, investment in social services like health care and education would be a better use for the money as it would take some of the financial burden off of ordinary folks, allowing them to find other uses for their money, and perhaps even dulling the potential for social unrest. But they never seem to push these type of agendas. Yes infrastructure development creates a number of temporary jobs, but in the long run when the job is over it seems to me you still haven’t necessarily provided a cushion for people to feel that they have more disposable income to spend on domestically produced goods, which is where China ultimately wants to be. Just a thought.

October 27, 2008 @ 9:56 pm | Comment

Andy, what you’re suggesting is very similar to what the NYT suggests. A combination of both – infrastructure and social services – would be splendid. The infrastructure jobs are finite, sure, but they’ve worked before to help keep troubled economies afloat. Many, many times. I think the idea is that by the time the projects are done, the economy will be limping back to life.

October 27, 2008 @ 9:59 pm | Comment

Yeah, I agree with the NYT, but it just seems that the technocrats at Zhongnanhai would rather invest in infrastructure than social services…anyway we’ll see, but I guarantee you’ll see more subway lines than health care subsidies in the coming years.

Also, I had a nice reply to your socialist comments above, but it must have gotten eaten up by wordpress…yeah socialism!

October 27, 2008 @ 10:02 pm | Comment

@AndyR: I totally agree that the central and western (ie predominantly rural) areas need investment and development. Just a little bit more wealth in those areas will result in more spending because people who now have nothing will want to buy something – even if it’s just a new pair of shoes or a motorbike.

However, I’d like you to take a look at the way the people you see in Hangzhou are spending. If you honestly compare yourself with your Chinese peers do you really think they own as much stuff as you do? And have you noticed how they pay for things? It’s with money from their pay-checks. They don’t have overdrafts. They don’t have credit card bills. If they need a loan for a large purchase it’ll come from close family members, not from the banks. Also add in the fact that the folks from the rest of China consider those on the east coast (Shanghai and environs, including Hangzhou and Ningbo) to be financially reckless and given to ostentatious displays of wealth when they should be saving more, and I think you’re only seeing part of the picture.

@Raj: In the 1970s there was a cradle-to-grave welfare system, but in return everybody had to accept the job they were allocated without argument. Of course it is impossible to recreate that situation now. However, there has to be something better than the current system. My parents-in-law and grand-parents-in-law worked on the farm all their lives and did everything the party leaders told them to do. None of them have any kind of medical insurance and the party hasn’t organised any scheme to help them get it. Last month we (that is, my husband and I) had to pay 10k rmb for grandfather’s medical treatment. That was for a minor condition. Any minute we could be hit with a much larger bill for a serious illness or accident. A lot of the Chinese middle classes are in the same position; they’re supporting a whole load of relatives back in the village and they’ve got to be ready to pay out when it’s needed. The lack of welfare coverage encourages saving not spending.

And don’t even get me started on the fees people have to pay for basic education here…

October 27, 2008 @ 10:26 pm | Comment

I’m with Dish, as usual. That’s been a long-favorite topic here, abruptly leaving the people to their own devices with no safety net at all. We’ve all read the stories of people being turned away from the emergency room and dying on the street outside the hospital because they couldn’t pay in advance. There really does need to be a happy medium, and maybe as part of the back-room deals cut among the superpowers China will agree to make this a part of its stimulus package.

Andy, your comment on socialism did get posted, but was delayed. If you go now to memeorandum.com, you’ll see Michelle Malkin and the usual National Review loons foaming at the mouth over a tape from a 2006 interview in which Obama uttered those socialist words, “redistribute the wealth.” Look at all the wealth Bush has spread to his cronies and contractors, and look at they virtual hysteria over Obama’s passing remarks, which were unfortunate but hardly anything radical – government exist to spread wealth; to collect taxes and use the money for the public benefit. Call it what you will.

October 27, 2008 @ 10:36 pm | Comment


Maybe I’m a wierd case, but they do spend more then me, and they have more stuff than I do. They have nicer apartments, they shop at nicer stores so on and so forth. I’m currently renting my apartment from a middle class couple two years younger than me, so in some cases the middle class is doing pretty nicely. (I don’t own a home yet.) In general, I would say that you are right in comparison with normal American spending behavior they are way off the mark, but I’m not a CEO living in a hotel for months and expensing it. I pay in cash, I stay away from credit. Anyway, I just put Hangzhou out there as an example that the middle class IS spending. I know it’s not all of China and I know they don’t do it on credit like in the US. Point is they are spending.

Why do you automatically assume every American is filthy rich? Unlike Chinese many of us don’t have the luxury of borrowing from family, we have to make it on our own and are usually in debt right out of college because of exorbitant education fees. Not to be surly, but maybe you aren’t looking at the entire picture either.

October 27, 2008 @ 10:41 pm | Comment


“Finally, I wouldn’t want to draw too many conclusions from a single incident, but I will say that the panic (and violence) starting to bubble up through the Chinese scrap markets seems to indicate a much deeper manufacturing recession than what the rather sanguine, China-can-weather-this-storm narrative, has previously provided.”

And now back to our snobbish, self-illuminated and insightful comments.

October 27, 2008 @ 11:01 pm | Comment



I usually enjoy the NYT, but I can’t take this one seriously. My summary:

Dear Chinese people,

Please stop saving money. You need to move more down the road to fiscal irresponsibility to bail out the rest of us. Our systems are seriously broken, but instead of sorting that out we need a new mass group of consumers to suck up excess capacity and prop up the ridiculous asset prices we have all grown fat on. While the financial crisis is hitting home, we still refuse to recognize that more fundamental economic analysis also got way out of wack. Can you please buy more of our stuff? Can you please drive global growth the way we did- by driving people away from sound personal financial management?
You see, the problem isn’t that the world has serious supply overcapacity- the problem is that there isn’t enough funny money around to let people buy it. If only people had access to high levels of ficticious financial wealth again, everything would be alright. And dear China, you have a great role to play in bringing this about. Nothing says inflated asset values like the perpetual dream of 1 billion consumers spending like there is no tomorrow.


PS: Oh, and fix your human rights or something

October 27, 2008 @ 11:05 pm | Comment

Well said, PB! I think China opening up its markets and spending on badly needed services are noble enough goals. But there was something downright odd about the NYT lecturing China to spend more money (thus the irreverent title of this post).

October 27, 2008 @ 11:09 pm | Comment

Many people are talking about the Stock Market. But hardly anyone is talking about Derivatives……


LOL could it really be that bad? lets all go back to stone ages! At least I m good at fishing……

October 28, 2008 @ 12:14 am | Comment

The financial-types are all buzzing about derivatives, but most ordinary people simply can’t understand the concept of their loan for a home in Virginia being sliced and diced and repackaged, with one piece for sale in Dubai, another in Poland, another in…. (That’s just one type of derivative, of course…)

October 28, 2008 @ 12:20 am | Comment

@PB: Beautiful. I love it.

@Richard: It might be a good idea if you made your sarcasm stronger. It doesn’t come across firmly enough online. (I’m thinking of other times I haven’t noticed you were being sarcastic until you pointed it out to me. Not just this one.)

@AndyR: Sorry, you didn’t know I was British, did you? Well I am. When I lived in Ningbo, and now that I’m in Shanghai, I’ve visited many average middle-middle or lower-middle class families in their apartments. And I can mentally compare them to equivalent families back in South London. For a start middle class Chinese families are living in small apartments rather than a semi or detached house. Yes, they have probably decorated it nicely, but it’ll be much emptier than a middle class British house. All those piles of stuff we seems to accumulate just aren’t there. (Of course, they could just lack the pack-rat gene.)

Ok, tell you a story. This happened in central China – Jiangxi Province – and I think it was the Christmas of 2000 or 2001. I was heading over to my (foreign) friend’s flat to prepare Christmas dinner. I was carryig my toaster oven, a basket containing various ingredients and utensils and another bag containing Christmas presents. The taxi driver asked me – completely serious – if I was moving house.

October 28, 2008 @ 12:30 am | Comment

It seems like people here seem to think that all the countries in the world can start saving at the same time. Globally at any instant, savings has to equal consumption. The only reason China is able to save more than it consumes is because the rest of the world (mainly US) is consuming more than it saves.

In a free market, the Chinese currency would rise if Chinese consumption is smaller than saving. This makes foreign products cheaper in China, and China’s current account surplus would decline. This is how the market corrects imbalances. But for the last 10 years or so, China has been manipulating the Dollar-Yuan rate by building up foreign currency surpluses.

US has an equal right and capability to manipulate the Dollar-Yuan rate as China has. It could start buying up Yuan or put a tarriff on Chinese products to force China to revalue the Yuan. Hopefully the next administration would put a lot more pressure on China to revalue the Yuan up so that American consumers can start saving.

October 28, 2008 @ 2:37 am | Comment


When I was living in China, those I met who tossed around pink Maos like they were going out of style were most often:

a)instant filthy rich entrepreneurs discovering nightlife
b)government officials
c)working for a bank in some managerial capacity
d)spending other people’s money
e)all of the above

I agree with you above more run-of-the mill families (and definitely urban, not just rural). Very frugal and careful with money management.

October 28, 2008 @ 2:43 am | Comment

My point above is that if China stopped trading with the world, then Chinese savings has to equal Chinese spending. (This is a mathematical necessity) Therefore although savings is good for an individual, to increase economic output for the whole system, you need to increase spending as well as savings at the same time.

Currently it is the responsibility of China to increase spending and the US to increase savings to correct the imbalances. It is not Chinese charity to do that. They are just helping correcting the imbalances they created in the first place.

About the people arguing for Chinese protectionism. It will hurt China at lot more than anybody else because China currently has a huge current account surplus. If China stopped trading with the world (if China restricts imports, you can expect the world to do the same), a lot of factories would move from China to the rest of the world to bring the current account surplus to 0.

October 28, 2008 @ 2:48 am | Comment

Bretton Woods II

Again, instead of following the trend here on this blog and reformulating what I read and make me personally look clever and very educated, I choose to simply post the links for others to read and understand (as Richard said, nobody will read it anyway, but if I was a reader:I would. This is my own personal approach of course and I don’t think I am a victim of the A.D.D syndrome that sadly stigmatize our era).


October 28, 2008 @ 3:12 am | Comment

Richard, et al

I’m delighted to read this post and the ensuing discussion. I think it’s one of the most enlightened and well written ones on this blog. If China does indeed look inward to providing the education and health care that its citizens desperately need it may yet rise to the level of greatness and power everyone likes to predict.

I don’t think that will happen under the fist of the CCP, but in order to actually have reforms in health care, education and agricultural land use, local and provincial officials will have little to loosen their money grubbing fists. With manufacturing and other businesses it’s very easy for those officials to extort bribes at every point in the process (they prey on the greed of the business people). In the case of health care and education (especially education!) the budgets are more finite and therefore not as potentially lucrative.

October 28, 2008 @ 7:53 am | Comment

Dish, not sure what you mean about sarcasm – what were you referring to?

MT, China already does practice protectionism, which any exporter outside of China will acknowledge. The editorial is a call to loosen or eliminate that protectionism.

October 28, 2008 @ 8:48 am | Comment

The New York Times only got it half right.

Accelerating consumption in China can only go so far. A ten percent or so increase is not going to make a dramatic impact on world economy.

More importantly the US government, particularly the Congress, needs to look at their discriminatory practices when it comes to Chinese investment in US economy. I am talking about CNOOC’s bid to take over US oil firm UNOCAL. There will be no serious Chinese capital injection without a guarantee that incidents like CNOOC will never happen again.

The US will soon run out of cash, and the whole country will need a bailout. At that point Chinese money will be critical. But if you want Chinese capital, you need to support China’s national interest. It is about time to make a few gestures. Here is a token one the US can do to show some good will: ban the Dalai Lama from traveling to US.

October 28, 2008 @ 9:24 am | Comment

Serve the People,

First of all, the US is very open for private Chinese investment. Most of the restrictions are on Chinese govt investment in the US. Meanwhile China severely restricts all foreign investment, whether private or govt, in Chinese banks, telecom etc. So for fairness sake China should open up its investment climate before asking the US to do anything.

Easing Chinese govt investment in the US, without a reciprocal easing of investment in China will only make the imbalances worse. It gives the Chinese govt opportunities for investment other than low yielding treasury bonds. This makes encourages it to keep accumulating currency reserves to keep in Yuan down.

If people thought the US will “run out of cash”, then the yields on long dated US treasuries will not be so low (something around 3% to 4%). If anything yields have been going down the last couple of months. This allows the US to finance its debts at a very low cost.

In fact by nationalizing Fannie Mae and Freddie Mac, the US govt gave a bailout to the Chinese govt. If Fannie and Freddie were allowed to fail, the foreign currency reserves China holds would take a hit, because it includes Fannie and Freddie debt.

October 28, 2008 @ 10:02 am | Comment


I agree. China does already practice protectionism. But making new rules to keep out foreign products will only make protectionism against Chinese products in the US worse.

October 28, 2008 @ 10:03 am | Comment


The US economy, not the Chinese economy, needs cash, so the pressure is on the US to attract foreign capital. China can keep its protectionist policies for a long time, since it has plenty of cash. I am talking about the economic realities, not high principles.

Almost all foreign reserves in China are held by state owned banks. Sorry, you will have to deal with the Chinese government, whether you like it or not.

You are right that people are still buying the US treasury bonds. This is the last card the US has. If this shoe drops, all bets are off, and the US will become Iceland.

After the real estate, investment banks, stock market, I expect the government bonds to be the next target. This is how recessions work. Everything will be hit. You will have no place to hide. Whenever there is anything which is still worth something, speculators will come in and short it. You will have to go down, way down, before you can go up again.

If you have Yankee bonds, sell it. If you have cash, spend it on yourself. Join a gym, take a vacation, or go back to school.

October 28, 2008 @ 10:31 am | Comment

Serve the People,

The US economy, not the Chinese economy, needs cash, so the pressure is on the US to attract foreign capital. China can keep its protectionist policies for a long time, since it has plenty of cash. I am talking about the economic realities, not high principles.

I don’t think you understand. The US will never be short of dollars, because it can print it. If foreign investors lose interest in US assets, the US dollar will decline. If Chinese govt stops buying dollars the yuan will rise against the dollar. That is exactly what I want and the US govt wants, because will will correct imbalances by making US goods cheaper in China and Chinese goods more expensive in the US. What what we need is the Chinese govt to stop pumping their capital into US assets. (Of course nobody wants China to dump their US assets all at once. It will decimate both the US economy and the Chinese economy)

Almost all foreign reserves in China are held by state owned banks. Sorry, you will have to deal with the Chinese government, whether you like it or not.

Wrong. The foreign reserves are held by the Bank of China (which is the central bank).

You are right that people are still buying the US treasury bonds. This is the last card the US has. If this shoe drops, all bets are off, and the US will become Iceland.

Unlike the US, Iceland’s govt bonds used to yield a lot before the crash. The US has an unsustainable current account deficit. The natural way for this to correct is for the dollar to decline in value vs the yuan. For that to happen we need China to stop manipulating the dollar-yuan rate, and allow the market to work. It needs to do this for the sake of the world economy.

Btw, the current recession in the US is reducing American consumption. This has already corrected the trade deficit somewhat. I am more positive about the value of the dollar now than I have been in years.

October 28, 2008 @ 11:10 am | Comment


The central bank of China is the People’s Bank, not Bank of China (BOC). BOC is a commercial bank, and it is not even the biggest commercial bank, which is the Industrial and Commercial Bank of China (ICBC).

The 1.8 trillion or so foreign reserves China has are owned by the government, corporations and private citizens. Most of them were deposited in the commercial banks, and a few state owned investment companies like CITIC group. They invest the foreign currency deposits in US government bonds and, to a lesser extend, US equity markets.

About the US government prining money to cover its budget deficit. That is plain robbery. You create inflation to take wealth away from the people to enrich the government. If that happens, you will see another American revolution. I bet you that people will stop using the greenback, form militias, and print their own money.

October 28, 2008 @ 11:57 am | Comment

MT: Bank of China (中国银行) is a commercial bank. The central bank is “People’s Bank of China” (中國人民銀行). Both are state-owned banks.

October 28, 2008 @ 12:01 pm | Comment

STP and Peter, thanks for the correction. I didn’t know there was a commercial bank called BoC. I should have said “People’s Bank of China”.

But most of the reserves are managed by the State Administration of Foreign Exchange for the PBOC. Foreign exchange reserves in most countries are owned by the central bank (which is not a “real bank”), not state owned commercial banks. The PBOC (and the govt) has final say on what is done with the money.


Basically my point was that the US should be open to private Chinese investment not govt (including govt owned company) investment, because govt owned companies are not always driven by profit. This creates national security implications.

About the US government prining money to cover its budget deficit. That is plain robbery. You create inflation to take wealth away from the people to enrich the government.

I was responding to you saying there would be a shortage of cash. If there is a shortage of cash, it creates deflation, and the govt fights it by printing money.

What the US Fed is doing now is not printing money. What they are essentially doing using their zillion different programs are selling treasuries (for which there is huge demand now) and using that cash to buy risky assets like mortgage paper and commercial paper (for which there is no demand). By doing so the Fed is changing the traditional character of its balance sheet, and in the process exposing it to credit risk (risk that borrowers will default). This does not change the total amount of cash or base money significantly.

October 28, 2008 @ 12:40 pm | Comment

The 1.8 trillion or so foreign reserves China has are owned by the government, corporations and private citizens

I don’t see any Chinese corporations or private citizens going out and spending their foreign currency reserves 🙂

October 28, 2008 @ 12:49 pm | Comment

Chinese citizens and the majority of Chinese corporations do not directly invest their foreign money in the US. They invest in Chinese banks and Chinese investment companies, almost all of which are state owned, through savings accounts, mutual funds, etc. These banks in term invest their clients’ money in US bonds.

Even if you only wish to accept private Chinese citizens’ money, you still have to suck up to the Chinese government.

October 28, 2008 @ 1:09 pm | Comment

Even if you only wish to accept private Chinese citizens’ money, you still have to suck up to the Chinese government.

It is up to the Chinese govt to provide private sector investment solutions to its citizens, if it wants them to invest in the US. The US would rather have lower foreign demand for US assets so that the dollar would decline and thus boost exports and correct imbalances. The is true especially now that inflation is not a problem because of the weak economy (During normal times, a weaker currency usually results in inflation).

October 28, 2008 @ 1:41 pm | Comment


Did you say the US would rather have lower foreign demand for US assets? Are we in a financial crisis? Isn’t the US government begging Mitsubishi to buy Morgan Stanley?

About inflation. It is still there. The world has no shortage of cash. The US government does.

As George W. said so eloquently, this sucker is going down.

October 28, 2008 @ 9:50 pm | Comment

Did you say the US would rather have lower foreign demand for US assets? Are we in a financial crisis? Isn’t the US government begging Mitsubishi to buy Morgan Stanley?

The US wants private investors (whether foreign or domestic) to invest in banks because the Bush administration is opposed to injecting govt capital into the banks and nationalizing them. If it wants the US congress/treasury can easily capitalize all the banks itself (it is doing that now).

I general I am against putting govt capital into banks (mainly because we don’t want politicians to interfere with who gets a loan etc.) By the same logic it is much worse to have a foreign govt interfering with US banks. So I think it would be bad for the US govt to let the Chinese govt invest in major US banks even if the Chinese govt is interested.

About inflation. It is still there. The world has no shortage of cash. The US government does.

In fact during the current crisis the world is short of US dollars (probably temporarily) and only the Fed can supply them. That is why the US dollar is going up. That is also why the Fed is starting swap agreements with other G7 central banks (ECB, Bank of England etc.) for hundreds of billions of dollars so that those banks have a ready supply of dollars to lend to their companies.

The Chinese and Russian central banks are also responding to the shortage of dollars in foreign markets by providing access to their foreign reserves to their companies so that those companies can survive and continue trade. There were some rumors this month of ships loaded with merchandise getting stranded because they can’t arrange trade financing. This is happening because the dollar is the currency of trade and is the currency in which most international transactions are settled.

There is a shortage of dollars in the US also because the banks have no equity capital to make loans. They have easily borrow lots of dollars from the Fed, but you need equity capital to make loans (most banks are required to maintain a certain loan to equity ratio). The US Treasury/Fed is fighting this by injecting equity capital into the banks to recapitalize them, as well as making loans directly to companies (buying commercial paper).

Bottom line: The US has an unlimited supply of dollars. The only risk is that foreign investors suddenly lose interest in US assets and result in a dollar collapse. To prevent such a scenario, we need to engineer a gradual decline of the dollar so that the trade imbalances can be corrected.

October 28, 2008 @ 10:38 pm | Comment


If you do care about China’s healthcare system reform, go to the above website, read the whole draft, and make constructive suggestions.

Healthcare reform has been one of the most important topic discussed today, it concerns not only with the health of Chinese people, but will also affect the whole economic situation, especially consumer spending.

So, this is your chance to make a difference.

October 29, 2008 @ 8:23 pm | Comment


If you do care about China’s healthcare system reform, go to the above website, read the whole draft, and make constructive suggestions.

Healthcare reform has been one of the most important topic discussed today, it concerns not only with the health of Chinese people, but will also affect the whole economic situation, especially consumer spending.

So, this is your chance to make a difference.

October 29, 2008 @ 8:26 pm | Comment

Its interesting how much attention this gets when the NYT advises it. Have we all forgotten the fact that, at least since the Central Economic Work Conference of December 2003, the government of Hu Jintao and Wen Jiabao have been saying almost exactly the same thing. The CPC effectively declared at the CEWC that the PRC’s existing economic growth model of relying on exports and investment was unsustainable. It said that the PRC should switch to economic growth fundamentally based on domestic consumption, and that to stimulate that they should do more for ordinary people in terms of a safety net.

YET very little has actually changed in China since 2003 and certainly not in the economic growth model, despite Hu/Wen’s desires. I wonder why that might be? Can you say vested interests? The US certainly has no lock on vested interests and pork-barrel local politics. For all the talk by Hu/Wen about healthcare and rural affairs the sad fact is the people who got extremely rich from the old growth model and their ‘connections’ are doing their damndest to thwart any shift to a new model that would necessarily ‘redistribute’ the benefits of economic growth away from them.

Now those vested interests in a few coastal provinces are squealing for an end to revaluation of the yuan and a return to the good old days of massive export tax rebates and other disguised subsidies for exporters. How will that help shift China’s growth model?

October 30, 2008 @ 8:02 pm | Comment

Even if Beijing loosens its purse strings, there is much to spend on within China that does not involve importing products. Creating a real social safety net and K-12 tuition relief would cost alot of money, take several years and require at most paying some foreign experts (mostly from the US Social Security Administration and its European counterparts).

So just because Beijing goes on a spending spree doesn’t mean that foreign MNCs would prosper.

November 1, 2008 @ 1:27 pm | Comment

China might not be listening to the NY Times, but somehow, when Obama speaks about it, there seems to be some echoes…

Obama says China must stop manipulating currency

“China must change its policies, including its foreign exchange policies, so that it relies less on exports and more on domestic demand for its growth,” Obama said in a letter to the National Council of Textile Organizations.

“That is why I have said I will use all diplomatic means at my disposal to induce China to make these changes,” Obama said in response to a questionnaire from the group.

Could we witness a strong return of protectionist ? And maybe he won’t even have to do anything about it, since it’s already what China is doing (I wonder why)…

November 1, 2008 @ 7:34 pm | Comment

[…] no denying that). He also specifically takes issues with the NYT editorial board for its somewhat rosy belief that China can spend its way – and the world’s – out of a recession. There’s been a lot […]

November 6, 2008 @ 11:08 pm | Pingback

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