Sunday, September 13, 2009

The Fed Puts China Under Pressure

The Federal Reserve's quantitative easing policies, and medium-term endorsement of interest rates near zero, are contributing to an asset bubble in China. Ambrose-Pritchard of the UK Telegraph quotes Cheng-Lie, former vice-chairman of the Politboro Standing Committee:

Mr Cheng said the Fed's loose monetary policy was stoking an unstable asset boom in China. "If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise.

"Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down."

But the Fed has made it quite clear that it will keep real interest rates at low levels for a very long time.

Ambrose-Pritchard also writes:
Of course, China cold end this problem by letting the yuan rise to its proper value, but China too is trapped. Wafer-thin profit margins on exports mean that vast chunks of Chinese industry would go bust if the yuan rose enough to close the trade surplus.

China's options are few, and their responses are magnified by what could almost be called Western hysteria. Consider China's recent announcement that it has doubled its gold reserves. Yet the United States has eight times the gold reserves of China. The Eurozone as a whole has ten times the reserves. Italy - the lightweight of the G7 - has two and half times the reserves of China. If one considers Gold to be the historic world currency, than the West is actually in a very powerful position. I would suggest that this is also why the United States feels it is able to be so reckless with its fiat currency.

Andy Xie writes of China's housing bubbles :
Absolute oversupply, i.e., there aren’t enough people for all the buildings, could happen quite soon. When it happens, the consequences are quite severe. Property prices could drop like Japan has experienced in the past two decades, which would destroy the banking system.

A destroyed Chinese banking system, brought under the control of the West, has been the dream of Wall Street for many years. This 'dream' has been a guide to U.S. policy on trade and international relations, and probably was a big factor in allowing China into the WTO. The bonanza would be as historic and lucrative for the West as it would be debilitating for China's central government.

Perhaps this is why Zhu Min, Bank of China's Vice President, was recently quoted as saying "the real economic crisis is just starting".


1 "China, Bernanke, And the Price of Gold" - UK Telegraph
2 "China Alarmed by U.S. Money Printing" - UK Telegraph
3 "The Real Economic Crisis is Just Starting" - Zero Hedge
4 "Zero Lower Bound Blogging" - Krugman
5 "China has Become a Giant Ponzi Scheme" - Andy Xie

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