Comments on Market Skeptics: The Strength of China's Banking System

"Nonsense. We'll see how strong China's banks are ...

2009-01-12T03:36:00.000-08:00

"Nonsense. We'll see how strong China's banks are when."

I never Chinese banks were not in trouble, I said they were "among the strongest in the world". Due to China's capital controls, they were isolated from the rest of the world. That means they have no exposure to the US-lead financial insanity which swept up most banks: subprime loans, off-balance sheet vehicles, exposure to the 50 trillion credit-default-swaps market, etc. That alone makes them attractive by comparison.

"their exports are cut in half, as they will be shortly"

So you believe Wal-Mart sales are going to crash by 50%? Wal-Mart was the only retailer whose sales ROSE this past holiday season.

(To be fair, once the dollar crashes, I expect China imports to fall close to 50%)

"China's economy is a leveraged play on western consumers."

You aren't thinking this through. Let me ask you this, where do you expect worldwide demand to hold up the best?

Commodities--Oil, gas, steel, etc
Capital goods--Airplains, Catapillars, Machinery for new factories, Machinery for new mining/oil exploration projects, etc

Durable goods--SUVs, CARs, appliances, business equipment, electronic equipment, home furnishings, etc

Luxury goods--brand name products, designer clothing, artwork, etc...

Cheap consumer goods--Everything you buy at Wal-Mart

Guess what China makes? Cheap consumer goods.

I am sure China's exports will fall, but they will fall less then the export of any other country. The US consumers will stopped shopping anywhere else by the time they begin to cutback on their

(By the way, if you can think of anything that is going to hold up better than cheap consumer goods, I would love to hear it.)

If the China's economy is a "total sham", then what does that make the US economy?

Do you REALLY BELIEVE that demand for our boings, caterpillars, and SUVs is going to hold up better than demand for cheap consumer goods?

Nonsense. We'll see how strong China's banks are w...

2009-01-12T00:46:00.000-08:00

Nonsense. We'll see how strong China's banks are when their exports are cut in half, as they will be shortly.

Jesus... the "China's taking over the world" hysteria reminds me of the coverage of the Soviet Union during the Red Scare. All of the

China's economy is a leveraged play on western consumers, and a total sham. China's banks might be in decent condition for now, but the real economy is not. The US economy is a sham as well. In fact, the entire world economy has deep structural problems. But people focus only on the problems here; stop being so geocentric, people.

"In order for China to avoid hyperinflation and st...

2009-01-12T00:03:00.000-08:00

"In order for China to avoid hyperinflation and stimulate their economy at the same time, China has to drop it's dollar peg"

Exactly.

"Is this why China will stop buying US Treasuries and why China will not fund the US bailouts?"

Yes, but here is how I see it happening. China tries to both keep its dollar peg and stimulate its domestic economy at the same time. As a result, China's money supply is going to expand at an extremely rapid pace while its economy slowly shrinks because of falling exports. Either this months or next months, inflation in China is going to stop falling and start rising quickly.

At some point after inflation goes above 20%, Chinese officials are going to start panicking. They are not only going to drop the peg, but also start selling their US holdings in order to get inflation back under control.

"China's exports will crash regaurdless?"

Yes. Think about it: you can't go on selling on credit forever to someone who is obviously broke.

"In order for China to save it's economy it must focus on domestic consumption?"

Pretty much.

The most important reason why China may not invest...

2009-01-11T23:21:00.000-08:00

The most important reason why China may not invest in the USA is self interest. China will spend money on it's own economy first by way of stimulus projects. It is a no-brainer that you would develop your own country first as a priority.

"The main policy risk comes from the possibility t...

2009-01-11T23:07:00.000-08:00

"The main policy risk comes from the possibility that the government will meddle in how the banks lend money in order to help stimulate the economy. This could take the form of marginal borrowers exploiting a relaxation in lending policies."

I'm trying to understand why China will stop buying US Treasuries and I think what I just quoted is the reason.

The risk of the Chinese government meddling in how China lends money and putting relaxation in lending policies is greater because China's economy has slowed from a decrease in exports and will continue to slow down unless China works on stimulating domestic consumption because the rest of the world will continue to buy less of China's exports as they(the rest of the world) focus more on paying off their debt. In order for China to avoid hyperinflation and stimulate their economy at the same time, China has to drop it's dollar peg and refuse to buy the amount of Treasury debt needed for US' bailouts because with the high price of US Treasury debt along with the amount of US Treasury debt needed for all the continuing US bailouts and US stimulus packages, China will end up printing massive amounts of Yuan to buy all those US Treasuries. With the massive amounts of Yuan being printed there is a great chance that as they are trying to stimulate their economy through a relaxation in bank lending that hyperinflation will occur.

Is this why China will stop buying US Treasuries and why China will not fund the US bailouts?

The main point is these US bailouts will not help China's exports will it? China will still have the same problem with exports decreasing except if they choose to also fund US' bailouts they(China) will also have the risk of hyperinflation. China will need to stimulate it's economy because of the crash in it's exports and with the enormous amounts of Yuans being printed, with a start of relaxation of bank lending there is a huge risk of hyperinflation.

Is this right?

So there is no benefit for China to continue to buy US Treasuries? China's exports will crash regaurdless? In order for China to save it's economy it must focus on domestic consumption?