On China...

A top ranked football team hires a manager to much acclaim at considerable cost.  But despite all the fanfare, no matter what he does, things just don’t go right on the pitch, and the team are languishing near the relegation zone, despite being the most successful team in the league, with the most titles won and so forth.  As the losses continue to be racked up, the supporters start demanding their highly paid manager be sacked.  Some on the board start making noises in reference to the mass clamour of supporters for the manager head, but don’t actually call for him to be sacked.  Many on the board acknowledge the situation privately, but are held back by the fact that, should he be sacked, they’d have to pay said manager a massive pay off, and that is something they felt they could ill afford to do. 

That sort of, to an extent quantifies China’s current problem, vis-a-vis the mammoth mountain of US Debt it currently “owns”.  Many people have said to me that China simply will not be selling the US Bonds it holds, as to do so would be suicide.  They also say that they need to keep buying up the debt, so that a lot of it can be recycled back, with US consumers buying Chinese goods, and thus helping to prop up further the Chinese Manufacturing Sector, amongst others.

 The US economy and it’s stockmarket etc, are in freefall, with no signs of it stopping anytime soon.  But in tying with the fall in it’s economy, US imports of Chinese goods is falling all the time too, as consumer demand is simply nowhere near the levels it used to be.  This means that the value of it’s bonds are also heading south too.  Thus the “investment” China made in buying these bonds, is devaluing all the time.  There must be senior mandarins (pardon the pun) in State economic circles who are watching the US situation unfold, like a hawk, and are in a deep sweat over it all as I type.  If the US cannot stablise the situation – and that looks every more unlikely as the days pass; China will have no choice but to take decisive action.   

Do some economists really expect us to believe that China will just sit on it’s hands, and do nothing, as the value of the US bonds it holds, hurtles evermore towards zero? The Senior economic strategists in Beijing must surely have already drawn up the line that “cannot be crossed”,  a level at which, should the value of the US Bonds, fall below it, they will sell.

It is surely inevitable, that as the days passes, the cursor on the Chinese Mouse, is moving ever closing to the sell button.  In my opinion, given how things stand re the US, and how they are projected to go in the future, it’s a matter of when, not if, they left click on that “sell” button.  One can’t even begin to imagine the mass turmoil in the markets that would occur should that happen.  Even the mere mention of a ratings agency, or senior government figure of a major country, that the scenario of China selling it’s US Bonds was now in play, would alone send the markets into freefall.  China will not keep buying up the debt of foreign states indefinitely.  It has not got an infinite treasury supply to allow it to do that.  

Yes, the Pro-Capitalist financial magazines will fill their pages with razzmatasmic articles banging on about the further Growth rates in China, and how it’s still on the up, while most of the rest of the world falls further.  But look at the enormous lengths the Chinese state has had to go to make this all possible.  It has overseen an unprecedented stimulus plan, but there are only so many areas of the economy you can try prop up, and even at that there is only a certain level upon which it can rise, even if being artificially propped up. 

A further big worry for China is the rapid slowdown in consumer sentiment and purchasing in the US and Europe.  Factories still manufacture goods like there’s no tomorrow;  But more and more of these items are ending up in containers and the like, gathering dust with nowhere to go.  I always laugh when I read articles from people proclaiming that the Chinese consumer is going to save us all, and that they’ll simply be the ones to buy all those excess electronic and other goods that are currently massively overbloating the market.  Take a farmer in Rural China, who farms in a similar way to the way they did here in the middle ages, and is lucky if he earns €600 in a year.  Can you really picture him, suddenly stopping the two oxen he’s been hauling around his field, and fumbling in his satchel to take out his new Ipad to read what the “Peoples Daily” has to say, via their App?  

China is like a train hurtling at vast speed, who’s brakes are wearing thin, and if something drastic is not done in the short term, there will be no brakes at all, and no way of stopping the juggernaut when serious danger comes it’s way. 

China faces many critical junctures over the next while, and you can be sure the world will be watching VERY closely, as what actions/decisions it takes when they arrive at them. To me, in a way, it’s like a meteorite hurtling in the direction of Earth, upon which astronomers believe part of it will surely hit the earth, but just how many parts of it, and if these parts will be minimal or massive nobody knows...