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How China is Dealing with the US Bubble Economy

http://money.cnn.com/2011/07/20/news/international/china_us_debt/

China tells US to get debt under control.  If US could take a hint, its politicians should imagine a scenario, where Chinese financial inspectors come to US banks and US government to inspect/audit the accuracy of the books, much like US inspectors inspect Chinese made products for lead in Chinese factories.

Crazy?  Why not?  China is now a $1.5 Trillion investor in the US economy and currency, and is facing potential losses on bad management and indeed some confidence rigging in the US economy.

Granted, China may not yet call on US’s bluff by “dumping” 100% of US treasury, causing a bad chain reaction across the world, that would be impractical and dangerous.  For the very least, it may turn world opinion against China.  So China must play the prudent hand regardless of political reasons.

For the moment, the US Bubble Economy (still bubbling), remains somewhat “too big to fail” in public.

However, I suspect, China has already played a silent tactical hand to hedge its eventual long term bets.

The interesting part, China learned this hand from Western nations, especially US.

What’s the hand, you ask?  Simply put, mask a bubble with another bubble, and to quote Charles Dicken’s “Great Expectations”, “Always get hold of portable property”.

The China doomsayers have noted that China’s inflation is going up, and China’s banks seem to be spending way too much money on all sort of construction projects that China doesn’t seem to need.  All of that is building up to a bubble inside of China, independent of China’s $1.5 Trillion US treasury holding.

Seems illogical that a country would create another bubble, when it might also inherit the bubble of another country.  Shouldn’t China save up to shore up?  Instead China is spending money like mad.

But there is method in madness.  Look at the US banks, they knew the sub-prime loans they had were risky, so they repackaged them into derivatives and sold them off, trading risky instruments for safe money, (and even betting on the derivatives to FAIL).  That’s making money from the downturn.

Unethical it seems, there is the basic lessons of how to pass a risky instrument out of one’s pocket.  That being, trade it for something more valuable.

So what does China do?  Spend money, buying things, building homes, factories, roads, trains, resources, ie. “portable property”.

Why?  Sure, those houses may be a glut in China now, but when the savings become worthless, those houses will be valuable.  And when the US dollar value takes a dive, it’s the factories that are worth the money.

It is like preparing for end of the world.  Money, even gold and diamond will become worthless, then it’s the water, food, and weapons that are the most valuable.

So, why keep worthless money around, instead buy up property.  And China is getting ready to spend its own currency RMB in other countries, to buy up things in massive quantities, by increasing RMB exchange amount in the world.

Hey, I’m not saying, and China does not want, a total US economic melt down, but in case it does happen, China wants to be prepared, with LOADS of property and jobs on hand.

Then, that $1.5 Trillion US treasury may turn into paper waste, but Chinese factories and companies will still have business, making things, paying salaries, and there will be loads of cheap houses for Chinese workers.

It’s better than to lose all the savings AND have nothing else.

When you have worthless money, SPEND them before you are stuck with them!

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  1. pug_ster
    July 20th, 2011 at 13:10 | #1

    Personally, I think China is dumb because they are hoarding US treasuries. They should’ve sell it over the next 2 years and buy Euro debt or some other countries debt instead.

  2. raventhorn2000
    July 20th, 2011 at 13:56 | #2

    I disagree.

    It’s not hoarding, it’s spending it. Essentially, China is leveraging its US treasury holding for all of its spending, thus passing the bubble down.

    If the bubble bursts, China will still be left with property.

    The future economy may indeed be overflowing with all kinds of worthless currencies in the world, which makes all the real and personal properties more valuable.

    In this game, the dumb ones are the ones holding ONLY currency, and little else.

  3. zack
    July 21st, 2011 at 00:03 | #3

    interesting analysis, raventhorn
    it definitely comes down to real estate and primary goods alright, food, water, power etc.
    worst comes to worst, there may be some in the halls of power in the US who would much rather have a war with China than to be anything but numero uno

  4. July 21st, 2011 at 05:19 | #4

    Hence, China shouldn’t “dump” US treasuries and currency, but rather “leverage” them to buy property.

    That keeps US on the hook, and reduces the possibility of war in the long run.

    Ie. rather have them OWE China, than to try to go into “repossession”.

  5. Charles Liu
    July 21st, 2011 at 13:16 | #5

    @pug_ster

    Pug, despite people on both side posturing about China’s buying/selling of US treasury, there’s actually legitmate international trade mechanism requiring China to hold US currency.

  6. July 23rd, 2011 at 13:22 | #6

    http://www.washingtonpost.com/world/asia-pacific/china-with-much-to-lose-largely-silent-on-debt-talks/2011/07/23/gIQAVgsIVI_story.html

    China is very quiet on the US Debt ceiling/default issue.

    However, I disagree with the author largely, and only partly with Dean Cheng of the Heritage Foundation.

    “Cheng said there may be nationalist elements in China — “a tiny, tiny minority” — who might not mind seeing the U.S. economy take the hit from a default, because that would feed into the popular narrative among some here that the United States’ days as a global superpower are numbered.”

    Cheng is only hinting at the bigger picture in China.

    Ie. China is now more self-confident, (not so much Nationalist), but confident of its own future, no matter what others do.

    Thus, China has no emotional need to make a big fuss over US Debt ceiling.

    (Or perhaps, as I hinted, China is already prepared for the US debt default and downturn.)

    🙂

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