For a long time I have read a bunch of opinions about how China will lead (is leading) the recovery, how they will decouple and become dominant in the world market and how their investments in infrastructure are going to help lead the way. This is starting to smell like horse manure to me.

First- when has a Communist, or communofacist, or socialasist, or commusocialfacsit- or what ever China's economy is right now (there is still a shortage of capitalism there) country led real world growth? China's Gov is still heavily involved in its economy and pushing it in the direction it desires. We know this doesn't traditionally end well.

second- 100,000,000 unemployed migrant workers. The urge to buy their support/prevent disquiet is a hard urge to resist. Welfare benefits on this scale would be remarkable.

third - they have very high monetary growth right now- with M2 increasing 28.5% in the past year (a record) .

Fourth- the weakness in the dollar will continue to hurt both trade with the US and the value of their reserves.

Fifth- a huge stimulus plan (as a % of the economy its 3x bigger than the US stimulus- not counting all the stuff the FED has done though)

sixth- a high savings rate. Should inflation take off the average chinaman (and yes- the chinaman is the issue here) will want to dump those savings quickly in exchange for goods.

I'm just starting to look at it, but I think this could be a big surprise to a lot of people.

LOL, though seriously you've posed an interesting question here.

The Chinese economic boom was an indirect product of the printing press at the Federal Reserve. When that blows (and it's already billowing smoke), the better part of the Chinese economy goes with it, imo.

http://en.wikipedia.org/wiki/Sociali...haracteristics
http://en.wikipedia.org/wiki/Chinese_economic_reform

Does this change any of your thoughts?

Why will weakness in the dollar hurt their US export industry?

My understanding was, and still is, that China has manipulated its currency to expand its export sector- which is largely private. This is a form of fascism- government allowing private ownership but with a direct hand in how and what is produced. All told China had an ~8 trillion $ economy in 2008 with $1.5 trillion coming from exports- with a per capita GDP of ~$6,000 per year we have exports contributing a little over $1,000 per year of income to the average Chinese person. I don't know what the cost of living/purchasing power numbers are but I would be willing to bet that 1k represents essentially all- if not more than all- of China's discretionary household spending. A collapse in the dollar and the corresponding collapse in world trade could wipe out discretionary spending and cause major turmoil in China.

Might explain why they've been slowly accumulating gold then.

What about if China invests bundles (which I believe they are doing due to the weakness of the dollar?) in Gold? Surely they benefit hugely here?

Benefits at whose expense? Currency is a zero sum game for the most part.

It depends on how much is a "bundle" and how they pay for it.

They are neo-merchantilist state who has manipulated their currency to grow their export base.

If you debase your currency more than others, your currency is worth less than other currencies. Other countries buy your stuff because its cheaper, their currency buys more in terms of your currency.

If the US dollar becomes weaker, then other countries currencies' appreciate vis-a-vie the dollar. This means goods from other countries are more expensive for Americans, so Americans will import less.

Americans importing less means China exporting less to the US.

I agree Tolbiny, good OP.

This is a big beef I have with Schiff. No Austrian should be running around claiming a fascist/communist economist system is gonna blow it up economically and decouple. The yuan doesn't float and is only starting to be traded in limited international contexts.

China will grow in economic importance over time, no question. But they will have lots of growing pains, and the G will really muck it up.

No question, China will grow greatly in wealth by exchanging dollars/dollar assets for gold. Really what they are mostly doing is purchasing their domestically mined gold, and they are the world's largest producer of gold. This store of wealth (gold reserves) will strengthen the yuan (which is undervalued because of the merchantilist polices and as they let the yuan float, it will appreciate). There are also strategic consequences here, as this also exacerbates dollar weakness and hastens the reweighing of the unbalanced international monetary system.

But a big issue is still how they manage this wealth - that is where the fasco-communist-socialist government comes into play.

I think you mean "rabidly."

See these:

WSJ Oct 9. 2009 - U.S. Stands By as Dollar Falls

FT Oct 8, 20009 - Asia steps in to support dollar

I just didn't see any reference in OP to the dollar peg. One of the main criticisms of China among the American political class is that a weak dollar doesn't hurt China's trade with the US. Given the above articles, it rather appears to afford them an opportunity to poach business off of the non-dollar pegged Asian currencies.

Of course, a collapse in the dollar is different from weakness.

JR, what about the argument that increased purchasing power for China and other countries' currencies will replace the demand lost through the decline of the dollar (i.e. stuff can be sold locally instead of shipped to WalMart)?

This strongly implies that the goods currently being produced in China for export are ones that are in demand, or would be in demand, with the additional purchasing power- or at the very least close enough that retooling and retraining won't take overly long. This is very unlikely- China is still developing. Per Capita GDP is ~$6,000 a year- the things that people at that level buy with extra purchasing power tend to be more and better food, education and healthcare- it takes a lot more growth before they are buying the electronics and entertainment that they ship out now. Remember at the heart of ABCT is the concept that misallocated resources must be liquidated and put to other uses- and that they must be allowed to- and this liquidation drives the recession.

Now its obvious that Chinese citizens have needs and wants and fill them with goods and services and that increases in purchasing power will lead to more internal demand- but it is not obvious how much pain it will take to make this transition and, perhaps more importantly, how much pain the government is willing to accept and how much it will try to prevent.

A decline in the US$ means fewer overall imports into the US. China may be poaching from others but they could end up with a larger % piece of a smaller pie.

tolbiny,

the relevant question is for China is whether the overall slack in US demand for Chinese goods with the weak US dollar is offset by the pickup in local demand for Chinese goods as inflation rises.

It is an incredibly complex situation in China, which can be best reduced to understanding that the CCP know only building factories and exporting since they believe further unemployment threatens social stability, and the technocrat and economists in the Treasury want the RMB to become a complete floating currency because they want to build a genuine middle class in China which produces and consumes goods in equal measure.

Chinaman is not the preferred nomenclature imo

Tyler Cohen links a Wall Street Journal piece today

If I believed in Austro-Chinese business cycle theory

I don't subscribe to the WSJ so I can read the whole piece- but I think China could be a dark horse for sparking the next wave of crises. My list right now would be

1. Japan
1a. Great Britain
3. Euro
4. US
5. China

little late here, but wsj has a "bug" where you can read full articles if you come through google (this one is only a handful more lines though)

just search for the title and wsj for an article (i did "china's growth story wsj) and it should work

Someone mentioned it but I think it is being slightly ignored: The yuan pegged to the USD. This general policy of the chinese is specifically designed to maintain steady demand from the US and not to have large halts in exports as a result of currency fluctuations.

A second comment is the economic integration of the ASEAN countries (and india/bangladesh as well) in the last decade or so. Essentially as Japan and the asian tigers have modernized and started to create american style middle class, these other ASEAN countries are starting to take over the export role for china that was once exclusively american. For instance, what bangalore is to the united states, the chinese city of Dalian is becoming to the Japanese. South Korea has significantly increased the amount of staple goods it imports from china. Etc.... The idea is somewhat a "a rising tide raises all ships" principle and that, led by the asian tigers but being backed by considerably modernization even in china's SEZs and india they are starting to create their own export markets. This isn't to belittle american dependencies because it is obviously still huge and is the US dollar fails asia will be in a painful recession for a long time, but it is slowly raising average quality of life in ASEAN countries, creating semblances of middle class and the export markets that come with them and most importantly a much higher level of interconnectedness.

Who buys the fresh printed US $, so far i know china and arabs. I am not surprised if soon this both own the US.

Opec countries only make up about 5%. Japan is by far and above 2nd on the list and really after japan it is just a long list of countries with a few percent here and there.

http://en.wikipedia.org/wiki/United_...eign_ownership