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China is close to the end of faith in the dollar

Posted by arnon_k On July - 31 - 2011 ADD COMMENTS

The Chinese have long admired the economic dynamism of the US. But they have lost confidence in the US government and its dysfunctional economic stewardship. That message came through loud and clear in my recent travels to Beijing, Shanghai, Chongqing, and Hong Kong.

Coming so shortly on the heels of the sub-prime crisis, the debate over the debt ceiling and the budget deficit is the last straw. Senior Chinese officials are appalled at how the US allows politics to trump financial stability. One high-ranking policymaker noted in mid-July, “This is truly shocking. We understand politics, but your government’s continued recklessness is astonishing.”

China is no innocent bystander in the US race to the abyss. In the aftermath of the Asian financial crisis of the late 1990s, China amassed some US$3.2 trillion in foreign-exchange reserves in order to insulate its system from external shocks. Fully two-thirds of that total _ around $2 trillion (59.5 trillion baht) _ is invested in dollar-based assets, largely US treasuries and agency securities (ie, Fannie Mae and Freddie Mac). As a result, China surpassed Japan in late 2008 as the largest foreign holder of US financial assets.

Not only did China feel secure in placing such a large bet on the once relatively riskless components of the world’s reserve currency, but its exchange-rate policy left it little choice. In order to maintain a tight relationship between the renminbi and the dollar, China had to recycle a disproportionate share of its foreign-exchange reserves into dollar-based assets.

Those days are over. China recognises that it no longer makes sense to stay with its current growth strategy _ one that relies heavily on a combination of exports and a massive buffer of dollar-denominated foreign-exchange reserves. Three key developments led the Chinese leadership to this conclusion:

First, the crisis and recession of 2008-2009 were a wake-up call.

While Chinese export industries remain highly competitive, there are understandable doubts about the post-crisis state of foreign demand for Chinese products. From the US to Europe to Japan _ crisis-battered developed economies that collectively account for more than 40% of Chinese exports _ end-market demand is likely to grow at a slower pace in the years ahead than it did during China’s export boom of the past 30 years. Long the most powerful driver of Chinese growth, there is now considerable downside to an export-led impetus. Second, the costs of the insurance premium _ the outsize, largely dollar-denominated reservoir of China’s foreign-exchange reserves _ have been magnified by political risk. With US government debt repayment now in play, the very concept of dollar-based riskless assets is in doubt.

In recent years, Chinese Premier Wen Jiabao and President Hu Jintao have repeatedly expressed concerns about US fiscal policy and the safe-haven status of treasuries. Like most Americans, China’s leaders believe that the US will ultimately dodge the bullet of an outright default. But that’s not the point. There is now great scepticism as to the substance of any “fix”_ especially one that relies on smoke and mirrors to postpone meaningful fiscal adjustment.

All of this spells lasting damage to the credibility of Washington’s commitment to the “full faith and credit” of the US government. And that raises serious questions about the wisdom of China’s massive investments in dollar-denominated assets.

Finally, China’s leadership is mindful of the risks implied by its own macroeconomic imbalances _ and of the role that its export-led growth and dollar-based foreign-exchange accumulation plays in perpetuating those imbalances.

The Chinese understand the political pressure that a growth-starved developed world is putting on its tight management of the renminbi’s exchange rate relative to the dollar _ pressure that is strikingly reminiscent of a similar campaign directed at Japan in the mid-1980s.

However, unlike Japan, China will not accede to calls for a sharp one-off revaluation of the renminbi. At the same time, it recognises the need to address these geopolitical tensions. But China will do so by providing stimulus to internal demand, thereby weaning itself from relying on dollar-based assets.

With these considerations in mind, China has adopted a transparent response. Its new 12th Five-Year Plan says it all _ a pro-consumption shift in China’s economic structure that addresses head-on China’s unsustainable imbalances.

By focusing on job creation in services, massive urbanisation, and the broadening of its social safety net, there will be a big boost to labour income and consumer purchasing power. As a result, the consumption share of the Chinese economy could increase by at least 5% of GDP by 2015.

A consumer-led rebalancing addresses many of the tensions noted above. It moves economic growth away from a dangerous over-reliance on external demand, while shifting support to untapped internal demand. In addition, it takes the heat off an undervalued currency as a prop to export growth, giving China considerable leeway to step up the pace of currency reforms.

But, by raising the consumption share of its GDP, China will also absorb much of its surplus saving. That could bring its current account into balance _ or even into slight deficit _ by 2015. That will sharply reduce the pace of foreign-exchange accumulation and cut into China’s open-ended demand for dollar-denominated assets.

So China, the largest foreign buyer of US government paper, will soon say “enough”. Yet another vacuous budget deal, in conjunction with weaker-than-expected growth for the US economy for years to come, spells a protracted period of government deficits.

That raises the biggest question of all: Lacking in Chinese demand for treasuries, how will a savings-strapped US economy fund itself without suffering a sharp decline in the dollar and/or a major increase in real long-term interest rates?

The cavalier response heard from Washington insiders is that the Chinese wouldn’t dare spark such an endgame. After all, where else would they place their asset bets? Why would they risk losses in their massive portfolio of dollar-based assets? China’s answers to those questions are clear _ it is no longer willing to risk financial and economic stability on the basis of Washington’s hollow promises and tarnished economic stewardship. The Chinese are finally saying no. Read their lips.

His Majesty endorses parliament assembly

Posted by arnon_k On July - 31 - 2011 ADD COMMENTS

His Majesty the King yesterday endorsed a royal decree authorising the opening of an assembly of parliament on Monday to be followed the next day by the election of the House Speaker.

The Election Commission has endorsed 496 MPs this week, which exceeds the required minimum number of 475 of the total 500 needed for the House to convene.

Pitoon Pumhiran, secretary-general of the House of Representatives, said the opening ceremony will be presided over by His Royal Highness Crown Prince Maha Vajiralongkorn on Monday. On Tuesday, a House meeting will be held to elect the House speaker.

Mr Pitoon said former House Speaker Chai Chidchob, as the most senior MP, will temporarily act as the speaker during the first House meeting to select a new House Speaker.

The election of the House Speaker needs to be royally endorsed, a process which could take up to a week.

Justin Bieber is under the thumb

Posted by arnon_k On July - 31 - 2011 ADD COMMENTS

JUSTIN Bieber is well under the thumb these days.

The singer has been wearing T-shirts with missus Selena Gomez’s face on them.

But at least he looked embarrassed as he left her Florida gig.

Selena had on a top with a No1 splashed over it.

Better than a No2, I suppose.

Tech Check: iPhone rumors, Nintendo 3DS, goats

Posted by arnon_k On July - 31 - 2011 1 COMMENT

(CNN) — This week, on the Tech Check podcast, Doug Gross, Brandon Griggs and Stephanie Goldberg break down and discuss the latest iPhone 5 rumor (as well as the Apple rumor phenomenon itself).

The newest buzz came when a U.K. tech site posted what they said was a design for Apple’s iPhone 5. Which, of course, doesn’t exist yet. But, you know. Rumors are rumors.

(In fairness, a recent survey suggested that folks are plenty excited about the as-yet unannounced phone and would consider buying it despite the fact it doesn’t exist).

We also break down what Nintendo’s announcement that they’ll be slashing the price of their handheld 3DS game system might mean.

Sales have been disappointing for the video game giant. Will the new price bolster sales, as has happened for e-readers, or be a sign of a fast slide to oblivion?

Our Reader Comments of the Week are about Apple. And goats. And Darth Vader. Seriously. You just have to listen.

And we hand out the Tech Fail of the Weekfor a tweet in the wake of Amy Winehouse’s death that puts a new face on crass commercialism.

To listen, click on the audio box to the left. To subscribe, you can add Tech Check to your RSS feed here or subscribe on iTunes.

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