Sunday, October 12, 2008

China Saying Goodbye to US Market

I am not sure if this announcement will receive the attention it deserves, but it is probably the most significant piece of news of this entire turbulent month. China today announced that it will “seek to expand its massive internal market to counter the global economic slowdown that has reduced international demand for Chinese goods.”As reported by Associated Press writer Gillian Wong, China has decided to shift the focus of its economic planning away from exports and toward domestic consumption. This is the beginning of the end for the U.S. dollar and what is left of the U.S. economy.

Fans of Peter Schiff (and I am certainly one of them) are familiar with the central tenet of his thesis: that it is a misconception to believe that China is dependent on U.S. consumption to fuel their export economy. For years, Schiff has been arguing, with few in the mainstream media agreeing, that China would be better off without the U.S. According to Schiff, they would simply consume their own products instead of sending them to America in exchange for increasingly worthless U.S. dollars. In fact, China has suffered its own inflation as a result of pegging its currency to the U.S. dollar. If they unpegged their currency, it would naturally float to its true value on the open market, making it much stronger and the U.S. dollar much weaker. This seems to be what they have finally decided to do.

The official release from the Xinhua News Agency goes on to say, "We should step up efforts to boost domestic demand, particularly domestic consumption, and keep the economy, the financial sector and the capital market stable.”

It is important to remember the definition of demand. Demand is not only the desire for goods or services, but also the purchasing power necessary to acquire them. There is certainly never a shortage of desire for goods and services anywhere. The Chinese people haven’t failed to buy their own products because they didn’t want them. They have failed to buy them because they did not have the purchasing power they needed to buy them. Now, the Chinese government is saying that they are going to try to give them that purchasing power.

However, the Chinese government is also saying that they wish to maintain stability in their financial and capital markets. This means that they must avoid what has been the U.S. method of boosting consumption, namely pumping cheap money and credit into the economy, compliments of the Federal Reserve. However, without new money, what will give the Chinese people more purchasing power?

The answer, obviously, is an increase in the purchasing power of the money that they already have. This will be the inevitable result of unpegging the strong Chinese Renminbi Yuan from the weak U.S. dollar. The Yuan will quickly float to its natural high value, allowing the Chinese people to purchase themselves those products that they used to export to the U.S. This will also mean that U.S. consumers will have to either do without those products, or pay the much higher prices of their counterparts that are made in the U.S. The higher prices of U.S. made products may go even higher due to the decreased overall supply, depending upon how that decreased supply balances against decreased U.S. demand (purchasing power).

However it plays out, it will mean a huge shift in standard of living, with the Chinese enjoying a higher standard, while the U.S. suffers probably the biggest decrease in standard of living in its history.

Make no mistake. The Chinese will have to suffer through an adjustment period as their export economy reallocates resources to sell their products domestically. Their equity markets have reflected this, both over the past year and during the recent crash. However, once the markets bottom and the Chinese complete the adjustment period to a domestic consumption model, Chinese equities will skyrocket as their economy realizes unprecedented growth, this time on much more solid footing as they sell their products to their own citizens in exchange for a currency with REAL purchasing power. As Jim Rogers has said since he moved to Singapore last year, “Moving to Asia in 2007 will be like moving to New York in 1907 or to London in 1807.”

A paragraph near the end of the article aptly reflects the opposite directions that China and the United States are heading in.

“State media reports ahead of the meeting said the committee would review an amendment to give 750 million rural dwellers more freedom to lease or transfer their land, but the final statement did not mention the issue.”

One country is moving toward less regulation and freer markets, and has the most prosperous century in its history ahead of it. The other is moving toward more regulation and increasing government control. For the former, the explosion in prosperity will eventually result in a political revolution that will transform it into the free society it deserves to be. For the latter, only a reawakening of liberty can save it from the fate of all great republics that devolved into empire.


1 comment:

Anonymous said...

Are you kidding?

This article totally disregards the overwhelming centralization of the Chinese economy, the corresponding lack of adaptability within Chinese markets, the need of the Chinese for American imports, the amount of debt that China has within the U.S economy. And a lot of other things, too.

Look at the bond rate in the U.S. Look at charts showing levels of foreign investment. Look at GDP, for friggin sake. You think those numbers mean the end is upon us for the U.S. economy? Please.

Most importantly, look at globalization. Last time I looked this recession wasn't American. It's global. It's effecting China as well as the US. Are the Chinese experiencing a vastly increased quality of life? Of course they are. America isn't able to dramatically improve the lives of hundreds of millions of subsistence farmers who don't own the land they farm because the government owns it. America doesn't have that kind of thing that much. But China does. The U.S. and China aren't exactly starting on the same level, are they?

And as far as the argument about regulation, are you kidding? China has to deregulate because there wouldn't be any economy besides a failed Soviet-style one if they didn't. They have basic markets but only within cities.

And America has to regulate because we haven't been doing so very well and we have a corporate attitude that is so entitled that executives of failed companies try to buy themselves luxury jets with taxpayer money during a recession.

It's not professional to overstate arguments. You sound so positive of Chinese supremacy and American disaster in the next decade. And although that's possible, you give no mention at all of the myriad factors that make such a shift highly unlikely.

It's like being positive the world will end.

I kindly doubt it.