China To Dump One Trillion In U.s. Reserves!!!!

Nice to hear someone talking sense in this thread.

 

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The largest trading partner of the EU is the...


EU!

 

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Hm

Its interesting in theory. China couldnt do something like this however. By "dumping" its reserves into Euro, it would expand the euro-zones purchasing power, however, its exports would increase dramaticly over night, and because Europe is, like China, is reliant on someone in the US buying their goods, it would spell havoc for Europe, who could never find another market for its goods. One would say "Japan or China!" however, assuming China keeps its current currency polices of pegging the Yaun to something (this is why the US congress wants to call it a currency manipulatior- the yaun is undervauled and it lets Chinese companies sell goods cheaply everywhere) it would, naturally, chose the Euro, meaning, just as it means now, it would have an unfair advantage when it sells to Europe, and europeans would be even more out of luck then they are now. Japan- has anyone even looked at the currency market? one USD, even at its "weak" state buys 115 Japenese Yen.
Further more, if we all agree that the US is Chinas biggest trading partner, and indeed is reliant on the US to pump cash into its ecnomy, China would have just destroyed something that they rely on, and I cannot see another nation on earth and stepping up and saying "yeah, we can fill the shoes of the US..no problem." Your forgetting that the world is already supplied with goods- assuming that US demand suddenly stops, world demand wouldnt surge, it would stay the same- or even drop some, as everyone then would be ultra consious of what they are doing, and would probably focus more on buying domesticly, thus hampening China's goals even more.
In terms of "hyper-inflation," one is correct in assuming that goods that are imported would overnight be a lot more expensive, however, the US has the capability of brining back the now almost dormant industrial component-meaning goods produced wholly in the US would remain the same. In terms of oil we have oil in Alaska as well as off the gulf coast, and recently the US government has permitted Shell oil co. the right to experiment with the huge deposit of Oil Shale, witch is estimated could produce up to 2 trillion barrels of oil, thus eliminating the need for OPEC or our reliance on need for foreign oil.
On the miltiary aspect; its been tried before. Pearl Harbor was an attempt at getting the US out of the picture while Japan spread its influence across the Pacific region. The fact of the matter is, doing this would not take the US military out of commision, infact its been proven that the US military swells in numbers when times are getting rough (the most secure job is a job in the military/ government.) China would be in a world of hurt if it were try to do this, and then launch an attack for Tiwian and south korea.
In actual fact, the US sent the deligation to China to presuade them to unpeg its currency and let it freely float on the market- something China does not want to do, even under the WTO guidlines, because its economy is 'too fragile' and would collapse without its trade surplus (witch would look dramaticly diffrent, if the yaun were allowed to rise). Because China said no- the US congress is looking to call them "currency manipulatiors" something that would give them the right to impose sanctions on China, and stem the trade flow.
China will diversify, of course, but as for dumping all of its USD- no of course not.

 

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I used the PPP because I wanted to compare real wealth levels AND because China devalues it's currency (or so they say). It didn't occur to me that ER GDP would be better suited when comparing trades.

 

It's okay to do the calculation in PPP terms as well, as long as you're careful to ensure that all of the terms entering the calculation are expressed in PPP. Expressed in PPP, China's total exports would be more like $3 Trillion. Either way, though, the percentage of GDP from exports to America works out to 7.19%, which is certainly hefty.

 

Well, it's 19 December. Has it started? Should I move to that cave I have set up in Central Park before it becames another Hooverville?

 

Err... intra-EU trade certainly exceeds extra-EU trade, but that's kind of beside the point. Extra-EU imports total $1.4 Trillion annually, and the biggest import partner is... (wait for it) ... the United States, from whom the EU imports some some $220 Billion every year. Number two is China, at about $160 Billion per year. Not as huge as the $250 Billion America imports from China every year, but still pretty significant.

This brings up another point: if China were to dump dollars and buy Euros, it would not only drive up the exchange rate between yuan and dollars, but also between Euros and dollars. As RobN pointed out, US imports would be much cheaper for them to purchase, and European goods much more expensive for Americans to purchase. Thus, EU imports would shift dramatically from China to America, reversing the American trade deficit with respect to Europe, which is currently around $125 Billion per year (nearly as much as the $200 Billion per year US/China trade deficit). Thus, China would be losing both America and the EU as export markets, reducing the Chinese GDP by 15% overnight. The end result would be: decimation of Europe's manufacturing economy, a huge boost in US manufacturing (along with the reversal of the trade deficit), and the reversal of decades of Chinese development (since their goods wouldn't be cheap any more, and they don't make enough high-quality goods to compete in the high-price markets). It would also be a massive shock to the systems of every country involved, leading to unpredictable fiscal/monetary/political problems for everyone.

At the end of the day, China has the most to lose and least to gain from such a move, with the EU not far behind. The player who would lose the least and gain the most from such a move would actually be America. As bad as the inflation and subsequent recession might be, the US would still be ending up on a sound footing, with strong exports and revived manufacturing. China and Europe, on the other hand, stand to be pushed into the abyss, with no markets for their products. China in particular would have to worry about the ability of its political institutions to withstand such a shock. Europe might hope to achieve a similar transition away from manufacturing as America did in the 1980's and 90's, although the relative prominence of labor/socialist movements there, combined with the rapid pace of change dictated by a dumping of dollars, make this a risky proposition both politically and economically.

This is why nobody, on any continent, thinks it's a good idea for anyone to dump dollar reserves. A slow, gradual adjustment, on the other hand, which eventually results in reduced trade deficits for all parties involved, is in everyone's interest, and so this is the likely course. The only danger of a "dollar dump" stems not from intentional dumping (which screws everyone, especially the dumpers), but from an accidental "dollar run" in which the diversification occurs too quickly and triggers runaway speculative selling of dollars. It bears emphasizing, however, that the policy-makers on all sides are coordinating to ensure an orderly adjustment. So provided they don't screw up their jobs, there shouldn't be much to worry about.

 

your wrong on this account. China holds its currency to .03% a day increase or decrease against the dollar- once it reaches that amount, it is pullen from the market. if dollars were to be dumped for euros, it would peg its currency to the Euro, and I am assuming that the practice of pegging its currency would still apply- simply because it will make its exports seem cheaper. However, US manufactured goods (and there is alot of manufacturing in the US) would be cheaper to the europeans due to the ultra low value of the USD compared to the euro...but as for the yaun shooting up in value, it wont happen unless china changes polciy.

 

on the EU..

Im sorry- what? if your following that logic, then the largest trading partner of the US is the US..as im sure intra-state trade is gigantic given all the trade that happens across state lines, but thats simply not the case as everyone counts the US as being a singel entity. the EU however, seems to have the best of both worlds- it is considered a singel entity when it is to its advantage to be so(currency, EU-directives, politics), but can be broken apart when it is convient-UN security council..to witch Britian and France- also EU members- hold permenant seats on, witch would be like having NY and CA being part of the concil aswell, it just wouldnt work. Sorry to go off topic, but i think its high time someone address the situation- what is the EU? its not a central government because, obviously, spain and other countries are independant- to a degree, but in a way it is because EU directives are something inwitch no member state has a choise in..i think its ridiclous they get the benefit of being, in a way, both forms of government.

 

Lets look behind the number..15% GDP reduction overnight would be the tip of the iceburg. If chinese factories, as we theorize, have no where to sell what the domestic market doesnt buy, then they would be forced to cut back on the goods they produce, meaning more people would be out of a job, meaning its internal market would become even weaker- thus laying off more people..and it would be a continuous cycle untill China grinds itself to a halt.

High paying jobs once shipped to China and India would return to the US thanks to the ultra low dollar value, restoring faith in our education system, witch allows more development to happen. Likewise governments and buisnesses would no longer ship blue collar jobs to China as the cheapest, educated, labor force would be located in America, making it the place to send jobs- especailly for the now hyper rich nations of Europe. America would reinvent itself in a realitively quick fashion. China would colpase and not be able to recuperate because of the ill-will it had just amassed in the world, and europe would be in the position the US is in right now- huge debt (as they would have bought many cheap american made products..) and a weak industrial core (no one would want to produce in europe when they could export to the US)..they might have a strong service economy, but we're seeing now strictly service structure doesnt work well.

 

As anyone who reads my economic post knows, I have seen the fall of the dollar coming for some years (and said so here). I put much of my assets into ADRs (stocks of foreign companies but held by US banks which issue these American Depositor Reciepts) In about three years they have on average trippled, the best is the Sao Paulo water company, SBS, which is up 700% The worst was New Zeland Tel, NTZ, which I got out of, three months ago, with very slight profit in dollars. The underlying stock is down nearly 50% in NZ as the government has changed the rules of the game. (NZT was a dominate as old ATT, but now must open all it "last mile" to competitors.) I have not actually figured the average gain in local currencies but suppect it is up about 100% - more than the DOW is up as now many are doing what I did a few years ago and this extra demand for foreign stocks is making them appreciate more than the earnings in the country would justify.

A few months ago I started a thread with title "Dow & NYSE NOT at all time high - dollar going down." That is still true. In dollar terms the NYSE Dow Jones ave will soon exceed 1500, but the value in Euros or gold etc. will not equal that of today.

 

the EU is not a country.

 

I agree with Quardphonics and several here that say China will not dump its holding of dollars, NOW and said so in post 21:

From post 21:
"China will not soon dump it trillion dollars, only not hold some, which it replaces with Euros. It still need the US to buy on credit (deficit spend) the major share of its production. It domestic economy is not yet rich enough to buy most of it productive capacity. Traditionally the Chinese do not use credit. This is why China is opening it banking system to western bankers/ investors. ...The Chinese communist did not do this because they love western bankers! -They need to quickly develop an economy that use credit to expand the domestic buying. ...
Only about 3% of Chinese even know what a charge card is. - In a few years the wealthier ones (twice the US population) will be getting credit cards in the mail! Then, China will sell most of what it produces domestically to the rapidly growing middle class. ...China will not need the US to buy its goods, which is fortunate for China as then the US dollar will have collapsed and US will not be able to buy even the oil it needs to run the 1950s US economy. ..."

With credit (and twice the US population then having purchasing power of average Joe American), China will no longer need to sell anything to US. Then it can dump the dollar. No faster way to “rule the world” because:

China knows how (should after 50 years of doing so) to run a "closed economy" - So even with rest of world in deep depression, Chinese factories will be humming (to meet demand discussed in next paragraph). Only thing US will supply China is foodstuffs in a couple of decades*.

China is making deals, all over the world for long term supply of energy and raw materials - much of Chinese productivity will be required to keep up China's end of those deal. For example, China signed a 25 year deal for enriched iron ore with Brazil and will pay part of it in new port facilities and railroads - Chinese locomotives, as well as electronic products etc. Africa will be completely new Chinese made infrastructure.

Even if US could buy, China will have its hands full keeping up with domestic demand from greater than total US population of new "middle class" and its external, long-term contracts already signed.

As usual, Quadphonics is looking backwards and I am looking forward.
----------------------------------
*Chinese farmers will then be complaining as US business do today about chinese cheap labor. I.e. Using it expanses of fertile land and is keeping dollar low to facilate food exports to China, US running a trade surplus artificially with China etc.

 

The problem with that is that with the weakening dollar, even chinese goods will seem more expensive to the US consumer. Even at the limited trading band the chinese allow the yaun to fluctuate, it has appricated something like 7% in the past year since the chinese allowed it to trade on the open market- if the trend continues then cheap chinese goods will no longer be advaliable; thus leading to a resurgance in US manufacturing, or at least US consumers looking elsewhere for cheap goods. The thing that has kept Chinas economy going is the US pumping money into it because of the cheap labor- if it suddenly becomes not so cheap then whats from stopping them from pulling out and going elsewhere? nothing. This doesnt need to be sparked by a decline in dollars- with the US congress being handed to the democrats, its likely to create protectionist policies, and policies that will bring jobs back to the US- in the form of tax breaks for companies for every US citizen they hire, and that would stop china from going bonanza aswell..either way, its impossible to predict what will happen for certain.

 

What does that refer to? I agree that China will sell much less to US for the two reasons I stated (1) needs it production domestically and (2) to honor all the long-term contracts it is making for energy and comodities.

Because China can (and has) run a "closed economy" it can set the value of the Yaun as it likes even better after dollar collapse as the trades with rest of the world are more like "barter deals" than "cash and carry". World currently runs on two things: oil & credit (mainly to the US in form of accepting "green backs" for goods and services.) - both both will be in decreasing availablity in the not distant future.

 

I was refering to the recent decline in the dollar, it has an affect with US trade NOW, not at some unspecified point in the future. Your assuming China and the US trade deficit will continue to grow. However, the appricating Yaun and the declining US dollar- the situation that is going on now- will mean that US consumers are actually seeing a gradual rise in prices on items that are imported. If this becomes too far out of line with what the US consumer is willing to pay, then all of a sudden the US consumer will look elsewhere (maybe more domesticly if US companies were to market it as "patrotic act" to buy american) and stop buying Chinas' goods- meaning China wont always have the reliable US consumer ready to buy goods, simply because it will be cheaper elsewhere. The decline is going on now- the decline isnt likely to stop for sometime as the euro keeps appricating because the EU central bank keeps hiking intrest rates. Im betting on the change to happen sooner, rather then later..betting on americans actually being smart enough to realize whats happening, and, contrary to popular opinion, i think we are.

 

My thinking was that they wouldn't be able to sustain a tight policy on exchange rate during the process of dumping a trillion bucks, but perhaps thats not the case. Maybe a better first-order picture is that the Euro and yuan would hold steady, while the dollar plummets with respect to both.

However, China's currency peg is not actually to the dollar, but to a basket of currencies dominated by the dollar, Euro, yen and won. Given that Europe, Japan and South Korea all have significant dollar reserves, it seems to me that the effects of a "dollar dump" (and so the appropriate monetary policy for China to pursue) depend a lot on what those countries do with their reserves (which, together, far outstrip China's). And that's without considering other significant dollar holders not in China's basket, such as Russia, Taiwan, etc.

Some might join in the frenzy of dumping dollars for Euros, but others might prefer to pick up dollars while they're cheap and invest them in factories in America to take advantage of the incipient manufacturing boom. Actually, the second path is probably smarter: much of the value of your existing dollar holdings will have already been wiped out by the huge Chinese dump, so your only shot at getting your money back is to invest the dollars in something high-growth, such as US industry in a low-dollar world.

 

Where did I say that? I did say the opposite. Namely that after the dollar colapses and China needs it full production for domestic consumption and to met the requirements of the long -term contracts it is now signing in Africa and South America, that the Chinese will not be selling much to US (I noted that that will be good for Chinese not to be dependant on US buying as US will not be able to - not even able to buy the oil required for a 1950 level economy!)

I predicted that the trade imbalance will be in the US favor in about a decade as the US exports cheaper food stuffs to China than China can produce. that Chinese farmers will be complaining that the US is keep the dollar artificially low making it hard for them - the mirror of US busniess now complaining about the low Yaun and "cheap labor" etc.

Please read my post 73 to see that I do not assume what you said I did.

 

I agree with this also.

I can't agree here. There is no reason why owner of factory (typically stock holders) will sell at the old price. You can see this happening already. The dollar price of shares is going up rapidly now as the actual value of the transaction is constant or perhaps dropping. -This I stated in my thread "Dow & NYSE is NOT at all time high - Dollar is dropping."

I recently predicted the Dow average will go above 1500 soon for same reason, but when it passes 1500, the value of the Dow, if converted into Euros or gold, will not be as great as it is today. I.e. Don't buy stocks for this reason - you will lose purchasing power and the IRS will also take a bite, falsely claiming you have a profit.

When German mark when bust, the cost of buying a German factory did not stay at the old price. - The cost of US factories will not either. - You are still looking at what was, (old prices in this case), not what will be. This rapid increase in factory costs in terms of a falling local currency has has been well demonstated by history.

 

Then what is it? it has all the traits of a country- 25 members, a similar currency, a flag, considering a unified army, strict membership rules, common work force, is reconized by international players in diplomacy. Furthermore they have EU directives- that can range from just about anything from travel restrictions onwards- that each state must follow..It slowly is becoming a strong decentralized country, it seems like to me..what did they call it? the united states of europe?