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China: trapped between a weak and a soft place

Econofog

Like Economist, but heavier


China: trapped between a weak and a soft place

World’s biggest manufacturer forced to hoard dollars and euros

Financing its customers’ lifestyles at the expense of it’s own

Article originally published in GTG December 2010

Brussels take-away

Beijing, Mon Nov 22nd:
Stark choice: weak or soft? dollar or euro?

China is facing a dilemma. The export-driven powerhouse has amassed huge reserves of US Dollars, earned in exchange for the provision of cheap welfare products to the world’s leading dependency cultures in America and Europe

But ironically, due to market forces and deliberate sabotage (now known as Quantitative Easing) these reserves decrease in value as fast as the Chinese pile them up. As a consequence, the Chinese are effectively getting ‘richer’ at their own expense

But what alternatives are there to the dollar?

The Yen? If they wanted more of those they could simply send a few million men over the East China sea with rucksacks and shotguns and bring back what they wanted. The don’t, so they obviously don’t see Yen as a compelling investment

Sterling? surprisingly it still has some worth, but there’s not enough of it and Britain no longer has the manufacturing resources to enable it to print more money, so buying pounds is just a pointless nostalgic indulgence – a bit like buying tins of Scottish shortbread or having tea at the Ritz

Yuan? You’ve got to be joking. China’s own currency’s only value is as a tool to keep their economy artificially competitive by enabling their manufacturers to pay their workforce in pretend money that can only be spent at home – effectively a glorified version of the ‘scrip’ paid by some 19th century US and UK companies that could only be spent in the company-owned store

So that leaves the Euro as the only credible reserve currency. The trouble is, it’s not credible!

They could buy stuff, assets in their client nations. Like film studios, or Manhattan skyscrapers perhaps? But that will just force up asset prices and further devalue their cash mountains. It was tried by the previously dominant Asian exporter, Japan, but they ended up having to flog most of their trophies back to the original owners at knock down prices

World’s richest slaves

So the nation continues to toil away, churning out cheap products for the still relatively rich lay-a-bouts in the rest of the world and all they get in exchange is an increasingly less credible IOU that they might be able to spend one day some time in the future (like never!)

After a sustained 25-year period of growth, nurtured by their Glorious Leaders, they have a few thousand very rich individuals (who of course are not related to the aforementioned leaders), a couple of hundred million doing OK (i.e. nearly as well off as 19th century English mill workers), and 800 million dirt-poor. And now as a manufacturing base they’re starting to look a bit expensive. Fickle thing that Globalization

It’s a triumph of Western Economic Imperialism. An immense con-trick. And they fell for it!

World’s next super power? World’s next whopper Civil War more likely…

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