Following dollars through the Chinese economy

Politics International Politics
1

danwei.org/china_books/postc … square.php

[quote]Let’s say you buy an Oral-B electric toothbrush for $30 at a CVS in the United States. I choose this example because I’ve seen a factory in China that probably made the toothbrush. Most of that $30 stays in America, with CVS, the distributors, and Oral-B itself. Eventually $3 or so — an average percentage for small consumer goods — makes its way back to southern China.

When the factory originally placed its bid for Oral-B’s business, it stated the price in dollars: X million toothbrushes for Y dollars each. But the Chinese manufacturer can’t use the dollars directly. It needs RMB — to pay the workers their 1,200-RMB monthly salary, to buy supplies from other factories in China, to pay its taxes. So it takes the dollars to the local commercial bank — let’s say the Shenzhen Development Bank. After showing receipts or waybills to prove that it earned the dollars in genuine trade, not as speculative inflow, the factory trades them for RMB.

This is where the first controls kick in. In other major countries, the counterparts to the Shenzhen Development Bank can decide for themselves what to do with the dollars they take in. Trade them for euros or yen on the foreign-exchange market? Invest them directly in America? Issue dollar loans? Whatever they think will bring the highest return. But under China’s “surrender requirements,” Chinese banks can’t do those things. They must treat the dollars, in effect, as contraband, and turn most or all of them (instructions vary from time to time) over to China’s equivalent of the Federal Reserve Bank, the People’s Bank of China, for RMB at whatever is the official rate of exchange.

With thousands of transactions per day, the dollars pile up like crazy at the PBOC. More precisely, by more than a billion dollars per day. They pile up even faster than the trade surplus with America would indicate, because customers in many other countries settle their accounts in dollars, too.

The PBOC must do something with that money, and current Chinese doctrine allows it only one option: to give the dollars to another arm of the central government, the State Administration for Foreign Exchange. It is then SAFE’s job to figure out where to park the dollars for the best return: so much in U.S. stocks, so much shifted to euros, and the great majority left in the boring safety of U.S. Treasury notes.

And thus our dollar comes back home. Spent at CVS, passed to Oral-B, paid to the factory in southern China, traded for RMB at the Shenzhen bank, “surrendered” to the PBOC, passed to SAFE for investment, and then bid at auction for Treasury notes, it is ready to be reinjected into the U.S. money supply and spent again — ideally on Chinese-made goods.[/quote]

2

Sometimes I want to bang my head into my keyboard as some armchair economist goes from points A to B to C then to J to Q and mysteriously gets back to A without nary a clue nor care how he got there.

Margins of profit as a percentage-fuck it
Cost of capital-What’s that?
Where’d the other $27 get spent on out of the $30?-Not sure and can’t be bothered, because I got my narrative and I’m going to write the story to fit it.
How does buying all those US treasuries effect borrowing in the US?-I seem to vaguely remember a housing meltdown that had $500 BILLION of Chinese money involved in it.

Like I said, they got their narrative and they ain’t going to let no stupid facts or questions get in there way.

3

[quote=“Okami”]Sometimes I want to bang my head into my keyboard as some armchair economist goes from points A to B to C then to J to Q and mysteriously gets back to A without nary a clue nor care how he got there.

Margins of profit as a percentage-fuck it
Cost of capital-What’s that?
Where’d the other $27 get spent on out of the $30?-Not sure and can’t be bothered, because I got my narrative and I’m going to write the story to fit it.
How does buying all those US treasuries effect borrowing in the US?-I seem to vaguely remember a housing meltdown that had $500 BILLION of Chinese money involved in it.

Like I said, they got their narrative and they ain’t going to let no stupid facts or questions get in there way.[/quote]
You could write an article on the toothbrush business that answers all the fascinating questions you have raised in excruciating detail but it would be much less readable and would totally obscure the big picture, which is that only 10% of the US retail price goes back to China and almost all of that is invested in US T bills by SAFE to stop the RMB appreciating against the dollar.

4

Must…Not…Bang…Head…on…Keyboard :bluemad:

The main problem with this view is globalization. If China didn’t make it cheap, than India, Vietnam, Korea, Singapore, Taiwan, Thailand, Malaysia, Indonesia, and/or the Philippines would. China has a cheap currency to compete against them for work for their large pool of unskilled and semi-skilled workers. You think China has is bad now, then watch what would happen if their currency were at an exchange rate that reflected fair market value(actually fluctuations near and wide of FMV since nothing is really statically priced on the market)

What percentage of that is profit and how much of that is spent on imported goods, wages, shipping, taxes, regulations, etc. Last I checked a toothbrush like they are talking about would have 30-100 parts, not all of which would be wholly made in China from China-sourced materials.

It was invested in more than T-bills, just nobody has the cajones to talk about it. They actually don’t need to invest it in anything, they just do anyway, especially with T-bills currently sporting a low low rate of return currently.

See this is the beautiful thing about globalization. We not only get really cheap goods, but low interest rates to buy said objects thanks to subsidies by foreign govts. The only downfall being the inflationary effects on other parts of the economy as China basically prints US dollars, just giving them the much cooler Chinese name, Renminbi. Have you paid attention to what has happened to China’s real estate and stock markets within the last 5 years?

God bless the Chinese, for the American consumer has never had it so good. Cheap goods and interest rates for borrowing thanks to China’s willingness to sacrifice it’s people’s standard of living to increase ours by keeping an artificially low currency with all of its unintended perks. I mean they are so nice they won’t even let Chinese people buy most of the things that those same Chinese people make.

I personally love how they completely gloss over the fact that China through it’s assembly factories in Special export zones has kept Japan, Korea and Taiwan economies humming through their purchases of components from those countries.

Like I said, the author had a narrative and wasn’t going to let the facts get in the way of the point of his story. I’m just thankful it wasn’t as long as the poorly written as “Shanghai Baby”

5

[quote=“Okami”]Must…Not…Bang…Head…on…Keyboard :bluemad:

The main problem with this view is globalization. If China didn’t make it cheap, than India, Vietnam, Korea, Singapore, Taiwan, Thailand, Malaysia, Indonesia, and/or the Philippines would.[/quote]
No one can make it cheaper than China right now. That’s why Taiwan, Korea, and other places are putting their factories there: because wages are even lower. That’s why China has a large trade surplus: because it’s more inexpensive to assemble everything there. China needs the extra work and jobs. We need to give them the reason to work.

6

I would use assemble instead of make and that’s only because of an artificially low currency. This is the stuff trade wars are started over.

Currently, you still leave out other low wage states such as India, Indonesia and Vietnam. You also have to remember that shipping is a big factor, hence why sometimes somethings are cheaper to make in the US due to easier shipping and regulations and less govt interference.

This is such a keyboard/head moment. China assembles things from parts imported from other countries. The large trade surplus is actually only with the US. That sucking sound you hear from China is from getting all the components to make things from more advanced Asian countries. Just to make it easy:

As far as what China wants and needs and what we should give them, that’s China’s business and none of ours. China will succeed or fail on its on despite whatever we do. We can’t even trust the numbers coming out of China. It’s like Enron or Madoff only bigger with more people.

7

Posting graphs like that to debunk conventional wisdom is a lot more informative than banging your head against the keyboard when conventional wisdom rears its ugly head.

8

That’s because most people don’t read but they love those pretty pictures.

9

People like well reasoned arguments rather than Inane Flames too.

Come to think of it, maybe you’re better off banging your head against the keyboard.

10

So would the author of that piece that you posted without comment. I can’t believe that someone who writes for a magazine could put out such a shoddily written article like that. Did you write that? If so, I can understand why you are so defensive.

Next time do the research and see where the research takes you instead of deciding what you want to write and grabbing facts out of thin air and post it noting it into a poorly written piece on China’s use of currency.

11

So would the author of that piece that you posted without comment. I can’t believe that someone who writes for a magazine could put out such a shoddily written article like that. Did you write that? If so, I can understand why you are so defensive.

Next time do the research and see where the research takes you instead of deciding what you want to write and grabbing facts out of thin air and post it noting it into a poorly written piece on China’s use of currency.[/quote]
I’m not sure what you’re point is and having trouble following your posts. The author of the piece is just saying that China’s got it rotten because their people don’t get much benefit on all those dollars spent on the purchases of their merchandise. (Well, of course not when wages are much lower than in the US). And I’m guessing you don’t really disagree with that. You seem to be disagreeing over little quirks here and there along the road that doesn’t seem to have much to do with the main point.

At any rate, from the US point of view, what we “wastefully” consume must come back somehow in the American market because it’s necessarily denominated in dollars. It’s like gravity: just like what goes up must come down, so also what goes out must come in. Those dollars don’t just dissappear just because their spent on Chinese goods. They aren’t wasted or consumed, really.

12

No, I didn’t write it. I thought it was interesting for the 10% figure and the way that Chinese regulations suck dollars into SAFE. Actually it reminded me of the old Communist technique of confiscating rice from collective farms. The author also claims that this is very different from the way other countries handle foreign currency.

Do you disagree with the figure, or that China’s foreign currency system is effectively collectivised?

Incidentally there’s a longer version of it here.

theatlantic.com/doc/200801/f … se-dollars

Maybe you should try balancing a pencil on your keyboard before you start to read, pointed end up.

You still haven’t explained why you dislike the article so violently. I wasn’t actually be facetious about graphs’n’facts. The reason I posted the article here was so people could criticize/comment on it. Maybe it’s true maybe it’s bullshit. Mind you if you think it is bullshit it’s traditional to try to explain why.

To recap, here are your criticisms

[quote=“Okami”]Margins of profit as a percentage-fuck it
Well it’s hard to get that information about a Chinese business. Hell it’s hard to get that information from the accounts that a Western business publishes.
Cost of capital-What’s that?
Where’d the other $27 get spent on out of the $30?-Not sure and can’t be bothered, because I got my narrative and I’m going to write the story to fit it.
How does buying all those US treasuries effect borrowing in the US?-I seem to vaguely remember a housing meltdown that had $500 BILLION of Chinese money involved in it.[/quote]
Margins of profit. I think it would be very hard to get that information from any business, and even harder in China.
Cost of capital. That would be interest rates.
Where did the other $27 go. He seems to think the Chinese factory get $3 and the rest is spent in the US. The article is about the $3
He does mention the effects of buying T bills. It strengthens the dollar for one. I’m not too sure what effect the Chinese owning of T bills had on the housing crash.

You haven’t explain why these details contradict the narrative.

13

I finally have enough time to write a response, please pardon my tardiness.

The reason I hated the article so much is it followed one of the main China story archetypes without explaining why they do what they do from a behavioral economic standpoint, where it looks crazy from the outside but makes perfect sense from the inside. I also hated the pie-in-the-sky thinking that China if they could do it again would do things to improve people’s standard of living, I think this was mainly so he could enter the country and not get harassed.

He makes it seem like China gets to keep all of that 10% without realizing that some of it has to be spent on imports to make the products that China is exporting as China is more an assembler than a manufacturer though that is changing. Even a casual reader of Asian business affairs would know that China has been a boom to Japan, Taiwan and South Korea by importing their advanced manufactured goods to assemble other products that the Chinese then export.

I don’t follow this as that was an unmitigated disaster. China only started turning around after they opened up farming and allowed farmer’s markets. I remember reading about this when I was younger and how revolutionary it was for them at the time.

I would disagree with this as a lot of countries undervalue their currencies and use currency controls to avoid runs. China does it better due to it being a massive fascist police state. Different, no; better, yes because you can get shot in the head or sent off to be an organ donor.

The author also fails to follow the massive amount of Chinese money in the sub-prime market. This is the elephant in the room and if you can find any reporter brave or stupid enough to talk about it, I’d love to read it. He leads a casual reader to believe it was all in US treasuries.

Are you being facetious again? I’m not sure, so I will explain it. Basically with a raging market in T-bills before and now, the interest rates got driven down, the problem being there wasn’t enough t-bills and the rates weren’t all that great. So a lot of money went into Fannie and Freddie Mac products thinking that since it was a US govt backed entity(not sure of the exact wording at the time, but you can call it this now) They could never go bad and were in effect T-bills with different names. This is how they found the money for all of those mortgages. It was like Japan in the 80’s, you loaned cash to whoever wanted it because you had so much cash to loan.

Some highlights form the article:

[quote]Without China’s billion dollars a day, the United States could not keep its economy stable or spare the dollar from collapse. [/quote]Without US’s billion dollars a day loan rate, the China could not keep the Renminbi stable or spare the country from collapse.

[quote]Suppose the CIC makes another bad bet—not another Blackstone but another WorldCom, with billions of dollars of Chinese people’s assets irretrievably wiped out.[/quote]It’s already happened with sup-prime lending and you can hear crickets chirp before you get an answer.

[quote]Years ago, the Chinese might have averted today’s pressures by choosing a slower and more balanced approach to growth. If they had it to do over again, I suspect they would in fact choose just the same path[/quote] This is just hilarious. You can’t even make this stuff up. China had no choice but to go the path it did. Deng Xiaoping knew that. The country was heading towards bankruptcy unless things really changed. They are facing a demographic old/young ratio, not enough jobs and a sex balance ratio that in any non fascist police state would cause instant turmoil and violence of the armed insurrection kind. Not once does the author bring up the disaster that will happen as fewer young people support a larger population of elderly non-working adults due to the one child program. What if all those US dollar assets were meant to act like retirement program for the Chinese state in the 2nd half of the 21st century? I don’t know because no one asks the right questions. FFS, reading China articles is like a Groundhog Day version newspaper reporting. The varieties are China will rule the world, China will collapse, and the Chinese are just misunderstood. China also chose this path because it worked for every other successful Asian economy.

[quote]The dollar’s value has been high for many years—unnaturally high, in large part because of the implicit bargain with the Chinese.[/quote]I would change this from Chinese to SE Asia.

Conclusion:
China has enough problems that you really don’t have to worry about them. Anyone who says they know China, is probably lying. Chinese lie all the time about their growth, exports, cash, factories, etc. At one time people thought that the USSR was going to grow at 3% average forever and that we’d better learn to accommodate them, not realizing that in the final decade of their rule over 50% of their electricity generated was being stolen. At another time, people thought Japan was going to overtake the US and be the #1 economic power in the world. What they didn’t realize was the inflationary effects that a govt sponsored undervalued currency would have on their economy leading to binge spending and lending. While I’m quite bearish on the US at the moment, I wouldn’t bet against them as long as they don’t lose their laissez-faire attitude to business to the socialist mindset that has caused so much world misery.

14

Almost as entertaining as the “Chimerica” argument.

I think what people fail to realise is that governments will eventually learn from their mistakes. Eventually the American half is going to need to learn how to regulate the markets better. It was the laissez-faire attitude to the booming markets that caused the crash. If the conclusion is that US market crashed, leading to a global recession, because the PRC “gave” the US too much money; I don’t think people are being realistic at all.

If one ask the question of why the US was so willing to accept all that cash from PRC and abroad, it really has to do with the specialized funding that currently pays for the 2 wars US is involved it. The bulk of hte wars are not actually paid for in annual fiscal budget but comes from special budget that comes directly from t-bill sales.