Robert Blumen
Ludwig Von Mises Institute



James Fallows, writing in the Atlantic, has produced a fascinating piece on China's fund. I have covered the emerging sovereign wealth funds several times already (1 2 3 4 5 6 7), however, Fallows' piece is one of the more economically literate I have seen on the subject.


Most writers presume that the so-called "export-lead growth strategy" has something to do with economic growth because of its name. But naming something incorrectly does not prove cause and effect. I drank a dozen beers before getting in my car and called it the "beer-lead safe driving strategy", that would not make it so. In terms of its actual effects it should be called the "export subsidization savings-wasting strategy". Fallows does a great job of explaining how the currency peg generates more investment in export sectors at the expense of a lower standard of living for Chinese consumers:

Any economist will say that Americans have been living better than they should--which is by definition the case when a nation's total consumption is greater than its total production, as America's now is. Economists will also point out that, despite the glitter of China's big cities and the rise of its billionaire class, China's people have been living far worse than they could. That's what it means when a nation consumes only half of what it produces, as China does.



and

Some Chinese people are rich, but China as a whole is unbelievably short on many of the things that qualify countries as fully developed. Shanghai has about the same climate as Washington, D.C.--and its public schools have no heating. (Go to a classroom when it's cold, and you'll see 40 children, all in their winter jackets, their breath forming clouds in the air.) Beijing is more like Boston. On winter nights, thousands of people mass along the curbsides of major thoroughfares, enduring long waits and fighting their way onto hopelessly overcrowded public buses that then spend hours stuck on jammed roads. And these are the showcase cities! In rural Gansu province, I have seen schools where 18 junior-high-school girls share a single dormitory room, sleeping shoulder to shoulder, sardine-style.

The accumulation of reserves is a form of "forced savings", as Fallows explains:

China's savings rate is a staggering 50 percent, which is probably unprecedented in any country in peacetime. This doesn't mean that the average family is saving half of its earnings--though the personal savings rate in China is also very high. Much of China's national income is "saved" almost invisibly and kept in the form of foreign assets.

__________________
"It is the Right of the People to alter or abolish the Government"
Declaration of Independence
"Never trouble another for what you can do for yourself."
Thomas Jefferson
"If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand."
Milton Friedman

The forced savings is implemented through the fixed currency exchange rate. When exporters receive dollars by selling products to Americans, they take the dollars to their local bank, which must "surrender" them to the Chinese central bank for a quantity of Chinese currency based on the fixed exchange rate. Because the fixed rate is lower than the market rate would be, the Chinese central bank over time accumulates dollars. These dollars have accumulated to the tune of over $1 trillion. After suffering negative real returns year after year as treasury yields were lower than the rate of depreciation of the dollar, some of the central planners have decided to "invest" a portion of their reserves in stocks. The first part of the article tells the story of how the state investment fund has lost $1 billion on the Blackstone IPO.

The article shows that the capital allocation process is not economically driven at all; on the contrary, it has become entirely has become totally politicized. A career communist party bureaucrat who "has never bought a share of stock, never bought a car, never bought a house." was put in charge of investing the fund. Every purchase they make is decoded semiotically as some kind of signal to the rest of the world about Chinese geopolitical intentions:

Foreign observers also suggest that, even after exposure to the Lou Dobbs clips, the Chinese financial leadership may not yet fully grasp how suspicious other countries are likely to be of China's financial intentions, for reasons both fair and unfair. The unfair reason is all-purpose nervousness about any new rising power. "They need to understand, and they don't, that everything they do will be seen as political," a financier with extensive experience in both China and America told me. "Whatever they buy, whatever they say, whatever they do will be seen as China Inc."

Fallows, however, does not question that China's economic activity is real growth (and also believes that economic growth causes inflation). In fact, economic growth has nothing to do with inflation (which is a monetary phenomenon -- real growth causes falling prices):

Neither government likes to draw attention to this arrangement, because it has been so convenient on both sides. For China, it has helped the regime guide development in the way it would like--and keep the domestic economy's growth rate from crossing the thin line that separates "unbelievably fast" from "uncontrollably inflationary."

Not only Fallows, but almost the entire economic media believes that China is growing by 8-12% per year because their measured GDP is growing at that rate. GDP as Reisman explains, overweights consumption spending relative to production spending.

Real economic growth consists of the expansion of an integrated capital structure that is consistent with consumer preferences. A credit-driven boom also causes aggregates to increase. The cannot be distinguished from a credit-driven burst of activity entirely through the measurement of aggregates.

Lots of spending can be generated and aggregates boosted by pumping credit into an economy. This activity can go on for a while until it becomes clear that certain sectors of the capital structure are not economically rational. But until that point, the aggregate spending statistics look fine. What I suspect is happening in China is some combination of real growth and a credit-driven frenzy of mal-investment.

Their real economic growth in terms of creating an integrated capital structure consistent with consumer preferences is probably much lower than the reported GDP number would indicate. A lot of their "export-driven investment" is economically irrational because the currency peg encourages the development of an export industry for which there is not true (i.e. funded) demand, and because the forced savings resulting from the currency peg is "invested" by central planners who will largely waste it.

__________________
"It is the Right of the People to alter or abolish the Government"
Declaration of Independence
"Never trouble another for what you can do for yourself."
Thomas Jefferson
"If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand."
Milton Friedman

yeah Americans are pieces of shit and China blah blah blah who fucking cares

Well, two points are missed.

The exports from China are for things that are not resource intensive.

Think of it, lots of toys, made of plastics and cheap metal, with much coming from US scrap and trash. The plastic does require oil and gas to make, it is remarkably efficient in terms of pounds of natural resource to pounds of finished goods to quantity of goods, and the amount of coal burned to form it is relatively low compared to steel or concrete.

The sales of these goods have generated lots of cash coming into the country, and much has been paid to the people of China, who for various reasons, partly attitude, and partly for lack of opportunity, is saved at rates approaching 50%.

Employment opportunity is very high, so the number of people leaving the farm rivals the industrialization of the US or of England and Europe. Instead of the bosses getting wealthy, it is the state and the workers who are getting wealthy.

For the government, they face a difficult choice. If they allow the workers who are building up huge savings the opportunity to buy cars or housing, they will need to increase the production of coal to produce energy and to produce steel and concrete beyond the current high rate that has outstripped the ability to implement environmental controls.

Just as in the US, rapid growth and so many people seeking to get rich means the rule of law is ignored by the people because they see others polluting and so they don't see how their joining in can make it much worse, and if they are good citizens, they will fall behind the others and not do anything to limit pollution. Remember China is the same size as the US, but instead of rapidly industralizing with 100 million people, China is doing it with ten times that number. Those who oppose environmental laws and regulation often say that the environment will be protected when the people are rich enough to protect it themselves. That says that you would find it acceptable for China to have massive pollution problems, but the government needs to limit the level of pollution to something approaching the levels of England, Europe, and the US when they industrialized.

The problem is how to accomplish that, and the solution is to instill and coerce the people into saving, just as the US has done during wars, and in particular during WWII.

The Chinese government has mandated that cars today met standards that are higher than the new CAFE standards that won't go into effect for about a decade in the US.

But no one has a solution for how to limit the pollution, and in particular CO2 emissions from making concrete. To build build homes that you might think very small in China at rates you would consider slow would require a massive increase in the rate of concrete production. China doesn't have the vast forests of the US, nor a neighbor that can deliver lumber as the US has had and has. In fact, one of the places China has gotten its wood has been the US national forests, tho those exports are pretty much closed off, so China gets a lot from Canada, and other parts of the Americas.

Now I suppose you will argue that the people should be allowed to spend their money, but that would generate massive rates of inflation, not because of inflated money supplies, but from shortages of materials. This would create massive inequity in China with hundreds of billions of people unable to get the things they need while a limited few buy the limited resources and live in relative luxuary. That would likely lead to unrest and then violence.

That would make invading Russia which has far more land, more resources, and a fraction of the population; perhaps Russia wouldn't nuke China but would look for some accomodation. Or maybe China would seek to invade the US, taking Alaska, for example. China needs to maintain some level of order and limiting the rate of growth in consumption is the path they have taken. You might think it was wrong, but that would mean you would have thought the rationing during WWII to have been wrong and that the rich should have been allowed to live richly during the war and flaunt it because they were smart enough to not be cannon fodder for the war.

If we looked at industy in China, the goods that China shipped to the US a decade ago are being consume in China with little production going to the US. The more expensive goods being shipped to the US today will be mostly consumed internally in China in a decade. The US is a much richer pool of consumers, so China's industries are selling to the rich consumers first at high margins for China, and then selling internally at lower margins after the investments in new production capability is paid off.

Btw, one of the astounding figures I've heard on what China is building in the way of highways....

WHAT STARTED THE WAR IN IRAQ

Makow - The 'Quiet War' Against Humanity The Lulling Before the Culling

WHATS GONNA STOP IT ???

Live Search: FEMINISM ANTI-WAR and the NWO AGENDA

Live Search: GLORIA STEINEM FEMINISM THE CIA and OPERATION MOCKINGBIRD

Live Search: THE GAY MAFIA the CIA and OPERATION MOCKINGBIRD

I DON'T THINK SO :-(

BUT THIS WILL ;-)

CLASS ACTION LAWSUIT AGAINST CIA/MEDIA VIOLATION OF FIRST AMENDMENT-RIGHT TO A FREE PRESS Petition

GOD SPEED FUCK YA MULP

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You didn't read the article, apparently.

__________________
"It is the Right of the People to alter or abolish the Government"
Declaration of Independence
"Never trouble another for what you can do for yourself."
Thomas Jefferson
"If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand."
Milton Friedman

No, I would argue that China's central planning can not sustain itself for much longer. Especially when the Government's coerced currency exchanges are reliant on the value of the Euro and the American Dollar. Which is bound to collapse in on itself when the reality of the Yuan's false value begins to take hold in China's domestic economy.

__________________
"It is the Right of the People to alter or abolish the Government"
Declaration of Independence
"Never trouble another for what you can do for yourself."
Thomas Jefferson
"If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand."
Milton Friedman

yeah I don't read internet articles but all that matters is the chinese are a shitload better prepared then we are and their citizens are not afraid to fight. Unless it has to do with the Chinese taking our oil who gives a fuck? We would be better off if we were more like them.

If I were a gambling man I'd bet you on that one.