Sunday, March 7, 2010

One Eye on China: It's Economic Foundation is Being Built

The US Government finds itself entangled in the global financial crisis that it started and has, as financiers of it's spending, two of the largest Eastern governments, Japan and China. Perhaps the single largest owner of US Treasury bonds in the world is the Bank of Japan. The Chinese government investment in U.S. Treasury bonds officially shrank to $755.4 billion in December, down $34.2 billion from the previous month, and that technically allowed Japan to jump China as the owner of the world's largest holding of Treasury securities.In addition, China has foreign exchange reserves of $2.4 trillion US dollars which has accumulated after years of trade deficits. It also has almost $9 trillion of US dollars held on deposit in China's banks. I guess that makes it clear why we must be aware of China and it's $US strategy.

China has evolved into a powerful economic engine with economic growth, as measured by annual GDP, of more than 8%. China is now concerned that the growth and development is occurring too quickly and that it is too concentrated in real estate development and investing in their stock markets. As a result the government is taking action to to cool the economy. So far this year it has twice increased the required reserve rate banks in China must maintain in it's attempt to slow lending. This will have ripple effects because the growth of China's economy has supported economic activity in other emerging markets where economic growth is contributing to recovery from recession. On the other hand, if internal supply of liquidity is not managed, a property bubble and stock bubble both are the feared results.

I described some other features of the strength of the economy in China Watch, One Eye On China. I have also discovered an interesting expert speaker, Jing Ulrich, Chairman of China Equities and Commodities for JP Morgan Chase. She offers a great deal of insight for us to point out the cultural distinctions in the China economy that are not obvious to most of us Westerner's. Here is a link to a Bloomberg Radio interview with Jing Ulrich and includes Will Landers, a BlackRock expert on Brazil. Ulrich Says China Real Estate Market Won't `Collapse'

China's Premier Wen Jiabao said China is a very concerned holder of our debt. China's concern is about our fiscal and monetary policy. Premier Wen told Fareed Zacharia on January 14, 2009, in a 25 minute CNN television interview, that the US economy needs to be stabilized as quickly as possible. He also said that China has cooperated with the US reflecting China's interest of keeping the crisis from spreading.

From the perspective of a Western observer, understanding governments within Western culture is relatively straight forward. Language is seldom an obstacle, knowledge of Western history is widespread, physical borders are open and political borders are known after decades of trading with each other. On the other hand, Eastern cultures pose much more of a challenge. Language is an obstacle. History of the Eastern cultures is not widely studied and Western beliefs about them may be useful, confusing, and misleading. Physical borders are sacred, sometimes closed and often guarded. Political borders are seldom disclosed to outsider's, leading to speculation about them. There is a lot to know and appreciate about China. And because it is on a trajectory of increased economic power at the same time as the US is on a declining trajectory, it appears that the time is now to dig into the understanding of the fascinating history and varied cultures of China. For inquiring minds looking for a high level description of the geopolitics of China here is a link to an article posted on Stratfor Global Intelligence, the title is "The Geopolitics of China: A Great Power Enclosed". Keep an eye on China. Scanner