China’s upper hand

Don’t mean to sound like a broken record – I know we’ve talked about this many times. But the situation is worsening in the US and making it even more obvious than before that we’re on the verge of a new world order as America becomes, in the words of a friend I had dinner with last night, “a banana republic with nuclear weapons.” Based on the rapidly deteriorating situation in America, this merits a healthy clip:

While the rest of the world is grappling with the global slowdown, China is figuring out ways to exploit it.

Over the past few months, China has capitalized on the financial turmoil that has paralyzed the world’s “developed” economies by stocking up on cheap commodities, weeding out competition to its largest state-run companies, and acquiring even more foreign assets.

Indeed, with China’s economic growth projected at an enviable 8% for this year, that country’s government has been able to spend less time promoting immediate growth and liquidity, and more time preparing for the economic renaissance that almost certainly seems to be the Asian giant’s destiny.

By exposing Western free-market capitalism, undermining the United States economic clout, and eviscerating commodities prices, China is using the financial crisis as the perfect opportunity to advance its domestic agenda.

That agenda begins with the recently unveiled $586 billion stimulus plan – a plan primarily focused on infrastructure.

China’s financial institutions have little or no exposure to the toxic subprime assets that spawned this current global crisis. Thus, instead of having to spend hundreds of billions of dollars to bail out its banks, China can choose to develop the stage on which it will display its future economic might.

And the first phase of that plan is key: Before its plans for a massive infrastructure overhaul can be realized, China must first load up on the raw materials crucial to its execution.

We all know the impossible problems China is facing, and that 8 percent growth (which some call a rosy prediction) is a big drop that will have painful impact. We all know it’s killing its environment and repressing those citizens who can’t fight back. And we all know that the US economy is entwined with China’s, meaning more pain is inevitable. But there are differences and there are reasons why China holds an advantage for the future. The engineers at the top of the party know what they want to do and don’t have to deal with messy thing like pluralism or individual rights, so whoever gets in their way can be quickly and (relatively) easily silenced. What they want to do now is seal deals for the future, giving China more global leverage and creating a new balance of power.

We’ve been hearing about the imminent collapse of China for ten years. I was on that bandwagon in 2003. But as all the bad news keeps accumulating and everyone finds links that guarantee China has to collapse, somehow it keeps going and in some ways even gets stronger. Like in cementing its relations with Africa and exploiting the depression to make bargain-basement acquisitions that will ensure badly needed natural resources in the future. I know, I know – China’s totally fucked. But they’re less fucked than the US and Europe. And that is what will leave them in a cozy spot after the carnage is over, perhaps years from now.

Meanwhile, I hope everyone’s watching where gold has gone since I first recommended it, when it was under $650 an ounce. Think about where’d you’d be today if your 401K money had been invested differently. The dollar simply has to fall, and as the dollar falls, gold…. Please take a look at this if you still doubt. This issue is relevant to China, which is already quietly looking for other places to invest its money.

The Discussion: 56 Comments

First of all, from the articles I read, China isn’t the only Asian economic power that is taking advantage of the situation. Japan is too, and I’ve even read some stuff on South Korea’s increased investment in Africa. This despite all three being in the soup. I don’t really consider any of this evidence that China is using the crisis to achieve its long-term goals. I would expect that, based on its needs, it would be making many of these purchases even if the prices weren’t so low.

I don’t believe that, based on the rapidly deteriorating situation, that China will come out of this intact or better than the States. I do think that the US, and Europe’s, financial sector is fraked. But I also believe that Asia’s will be too. China’s attempts to prop up its economy this year will heavily expose its fragile banking system to great risk, which will probably lead to a collapse of China’s banks in 2010. I would also expect Japanese and Korean banks to start falling sometime this year. The problem for China is that its economy is primarily fueled by exports, and trade has collapsed. In such a situation, no matter how fraked importing nations appear to be, export based nations always end up getting it worse.

As for debt, there is too much importance placed on that angle. America can run itself into a gazillion dollar debt, and it won’t matter a lick to its future prosperity. Just ask yourself this question “What would happen if America defaulted on its debt?” There will never be any external pressure on America over its debt, since the consequences of a US default are so dire.

If you were to ask me who might be coming out ahead in all this, it seems that Latin America and India are better placed than the rest. Both are less dependent on exports and Latin America’s banking sector seems better able to get through this crisis relatively unscathed.

Finally, Gold does appear a good bet: http://www.fnarena.com/index2.cfm?type=dsp_newsitem&n=203EE21F-1871-E587-E1761A32CE8C8E9C

By the way, India is the world’s largest gold consumer, accounting for about 70 percent of global bullion demand (picked that fact up from a Reuters story on gold).

February 3, 2009 @ 11:45 pm | Comment

Tom, let’s agree to disagree. What I feel will happen isn’t based on an emotion, but on pieces I’ve read by economists, which I’ve cited here before, as well as my personal knowledge of Americans and the Chinese. I’ve heard both arguments and this is where I am now. That may change tomorrow.

China will certainly not come out intact, only relative to the US. We have a lot more to lose. And yes, export-based nations get hurt the hardest, but those with the most cash on hand can afford to buy people off for the longest periods of time. We’ll see.

February 4, 2009 @ 1:52 am | Comment

Well I do not see how China will gain an advantage. I think the leadership missed too many oppurtunities. Instead of Highways they should have built hospitals, and schools. A lot of china’s impressive infrastructure doesnt really translate into economic improvement. The situation in the countryside is getting worse. Superhighways that have no traffic while peasants struggle to get electricity. But plenty of Range rovers and mercedes for the party bosses. All those nice highways are toll roads and the average Hunanese cant afford the toll.

Maybe the reason I dont think things are so bad in the U.S. is that I am old. I remember the 20% interest rates of the 1970’s when no one could buy a home and the 9% unemployment rate of the early 1980’s.

The dollar is doing quite well particuraly against the Euro and pound. I dearly love the simple rural folk of hunan, they didnt get all the goodies that the Chinese economic boom brought the East coast cities, so they havent so far to fall. They will just continue on. I do agree about the strength of india and Brazil looks like it is in a very good position. There is some evidence that a lot of money is leaving China, that mailland chinese are hiding their money abroad. This is possibly due to the fears of social unrest.

February 4, 2009 @ 7:38 am | Comment

To see whether China will come out of this crisis in better or worse shape than US, we should look at the policies that the two countries implementing now. I am very disappointed by the Buy American clause in the current US stimulus package. This will do great damage to the international trade and the world economy. The Europeans are already complaining.
http://news.bbc.co.uk/2/hi/business/7866900.stm
I do not think the Republicans have the ability to have this clause removed, and Obama has not shown the courage that he can stand up to the congressional democrats.

February 4, 2009 @ 7:49 am | Comment

Buy only “whatever” would be to repeat the mistakes of the great depression 1928.

I believe is a temporary automatic reaction of the governments, much worried by the growing crisis, unemployment and company bankruptcies.

In the end I think a more rational behavior will prevail. I put my bets on an eventual coordination of stimulus packages, and specially transnational infrastructure projects.

February 4, 2009 @ 9:46 am | Comment

Even though nanhe has lots of time on his hands, the only thing he could find is a crackdown on internet porn.

high-profile internet crackdown on so-called low-class content.

It probably touches a nerve with him.

February 5, 2009 @ 5:36 am | Comment

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