“urely it would be possible to spend a chunk of their vast reserve horde on imported goods to promote public health and education?”

Why does China have to waste those reserves on articles of consumption? Why shouldn’t it buy up US assets? They could buy Boeing and Apple and Microsoft. Wouldn’t it be better, long term, for China to put its money on high tech companies?

Seems like most people lost sight of the issue of why Asian currencies re under comparative strain now. Your explanations are fine, but there is one thing that makes me wonder, and that is the comprison with the 1997 crisis. Then you had a Korean domestic crisis (strikes enormous wage inflation, great loss of market share, extremely high leverage indicating very weak bnking system, etc requiring corrective action for which the immediate post Chun democarcy was ill-equipped. You also had very dysfunctional Chavalit government in Thailand, where everyone had ben speculating in real estate by borrowing USD from barely regulated “finance companies, again an extremely vulnerable financial system unable to survive the collapse of a boom, and a domestic political constellation unable to intervene.
Both countries got rid of their “conservative” nationalistic and (for a westerner) ugly governments, got the fall guys from the IMF in, cut loose of the deadwood, ripped off every foreign bank in sight, and then slowly reverted to an upgraded version of their respective oligarchic systems, with populist/nationalis rhetoric (in Thailand even with a coup!), freshly competitive, with a sobered middle class and workers that had learned their lesson and were also reminded on a daily basis how competitive “China” was becoming. It could be that we are in the early stages of a similar (but different mechanism, do not know what yet). In Korea we have a former Hyundai manager as president (”strong executive” type constitution) with several conflicts on the shelf, and in Thailand, despite some cute posturing by the judiciary, the government seems to be in the hands of the business lite, rather than the military/aristocracy group. With the King getting on, that may be quite a difficult situation too. My intuition is that in several Asian countries (Thailand and Korea in particular), the (very small, highly incestuous) establishment prefers a scenario of avoidable (by having good policies instead) misery, followed by transfering power to more “liberal”, “urban”, “western” types temporarily, letting the external market do a lot of small wealth destruction while the few (who may have taken FX positions ahead of the trouble) re still OK and buy assets on the cheap once the crisis unfolds. One could call this “hedge fund government” . I am just curious with what these rogues will come up with this time. It would be interesting to watch countries like Indonesia and Malaysia though. They hve really very little reason for a crisis and for some reason, I would not be surprised if we could have a little contagion again.

That could be another reason for the PRC to be very conservative in its appreciation policy.

Finally, there is also Vietnam. With agriculture recovering and the long term benefits of energy independence (if they get it right, the oil and gas are there) they have only a short window for respectable currency weakness.

DC: now you see how easy it is to make your own conspiracy scenarios. Just one theme: tightly knit, selfish politicians combined with workers and peasants without bargaining power able front run not only a boom but also a bust. And doing us a favor by offering ever cheaper gear. You do not have to rly on copying others.

Excellent as usual Sam. Your statement always makes me wonder why people are so confident that China is going to be the next super power. I dont understand how a country that isnt free can ever produce enough ideas to ever power domestic demand. which leads me to the conclusion that they are building massive over capacity in manufacturing. Capitalism has been and always will be about the consumer. A communist country will never be a consumer country becuase spending implies wealth and wealth means the power to change. something the ccp has zero interest in doing. I feel really bad for china. The higher ups are essentially sending all the peoples savings to the US in order to let us live in 5000sf houses and drive bentlys. Knowing full well they can never redeem all the bonds they have.

The us is still far wealthier than China (or india) and has many advantages in many high tech sectors (as is necessary to maitain the discrepancy between us and european wages and chinese/ indian wages) — but it is equally clear that china intends to do more thinking/ less sweating over time.

even if China currently is having trouble giving up some of the “high sweat” sectors that are less and less competitive as coastal china develops (see my next post).

I strongly disagree. US multi-nationals are outsourcing more and more engineering work (read value-added) because of the currency manipulation by China and India. Engineers are being replaced in the US. IBM has moved about half it’s work force to India because India holds down it’s currency against the dollar.

As far as the US outsourcing for greedy profits, we do not outsource the value-added work. Apple innovates, designs, and makes the tough decisions on the Ipod in Cupertino. Some factory in Xiamen assembles it perhaps. Who adds the value here? At my desk right now, I’m using a Sun Workstation, an Intel semiconductor, Microsoft Windows & Excel spreadsheet, Bloomberg terminal, and a CDMA phone terminal. Of course, they might be assembled and shipped from China, showing a trade deficit, but where is the value added really? Who keeps the economic profits? Of course, my chair design and innovative structure is probably done in China, brilliant. This is what Andy Kessler (who has run real money and understands tech better than all of us) calls the “we think, they sweat” dynamic. Chinese won’t think until they move up the value chain by rebalancing the economy away from a bloated manufacturing and export sector. Moreover when Bill Gates talks about intellectual property rights enforcement with Hu, he’s mindful of MSFT’s bottom line but also the encouragement of innovation in China. Without rebalancing and IPR enforcement, we’ll continue to get pirated Windows, rip-off Chanel bags, fake DVD’s, and a DC incessantly copying and pasting URL’s, facts, and thoughts that aren’t his own.

obviously things have changed recently.

DC — I agree with one of your points, namely that exports to the US are less important to China than they used to be. Exports to the US have clearly fallen v China’s GDP over the past year. Conversely, exports to Europe are far more important relative to China’s GDP than in the past. What we don’t know is whether or not a rise in chinese value added has offset the fall in exports to GDP …

on the other hand, China exports more relative to its GDP to the US than say Europe does, so in some sense china remains absolutely quite exposed to the US. It wasn’t so long ago that total US exports were around 10% of US gdp (they are a bit higher now), so even 7-8% of GDP in exports to a single country isn’t small for a big place like China.

i also would guess is that China’s deficit with the rest of asia is falling rapidly as more and more components are made in china. that certainly was the trend in 06 and 07.

I also would note that you have made your points on the washington consensus policies in the past here; it really isn’t necessary to continue to repeat them.

DC – Either you owe a commenter on another econ blog an apology or the two of you are one in the same, which would be rather sad. Please don’t steal another commenter on another board’s comment or idea and pass it off as your own. What I find comical is that you deleted out a section of one of the quotes with “hollowing out of America” phrase, which was on the other board’s comment (see your #12 comment), reinforcing Sam’s quote from comment 10. Please stay on target with posts as your “threadjacking” is rather annoying.

Here are some facts about China

2007
US imports from China: 321.5 billion.
US exports to China: 65.2
Balance: -256.3
Total world exports from China: 1,218.0
Total world imports to China: 955.8
China GDP: 3597 billion dollars/24,661.9 RMB

The trade with US is roughly 7-8 percent from the GDP and 25 percent of exports. Big chunk but when the economy there are growing in a year more than the TOTAL YEARLY EXPORTS TO USA (350-400 billion dollars), China is not very dependent of USA anymore.

Source:
http://www.uschina.org/statistics/economy.html