Five Things You Need to Know: China: Two for One, U.S. Urges Faster China "Economic Reforms", Mind the Gap, Whole Lotta Collapsin' Goin' On, "I Am Rather Screwed."
What you need to know (and what it means)!
Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. China: Two for One
Two important developments out of China overnight.
One: China's central bank still sees a possibility of an upturn in inflation, central bank chief Zhou Xiaochuan said.
Two: China's high savings rate will be difficult to reverse, the central bank governor, Zhou Xiaochuan, said.
- First, China's Central Bank warned at a financial seminar that "inflation is a matter of concern for the central bank."
- Central bank chief Zhou Xiaochuan, however, said China will not adopt inflation targeting and instead will focus on economic growth and generating employment.
- The People's Bank of China (PBoC) announced plans to absorb $20 billion from the banking system by selling 1-year bills to Chinese commercial banks, which is a policy move aimed at "tightening."
- Meanwhile, Zhou also noted that the PBoC's objectives include maintaining low inflation, but warned of deflationary pressures and overcapacity in some industries as a result of China's high savings rate.
- Zhou said that it is difficult to set a standard for an appropriate level of savings, due to "cultural differences."
- A chief reason why China's economy remains unbalanced from a global perspective is due to low levels of domestic consumption.
- China has raised minimum wages and increased welfare spending this year to prompt households to consume more and make the economy less dependent on exports.
2. U.S. Urges Faster China "Economic Reforms"
If, by "economic reforms," one means, "consumer spending."
- Treasury Secretary Henry Paulson (with Federal Reserve Chairman Ben Bernanke in tow) is visiting China this week to press for Chinese consumers to save less and spend more.
- "The Chinese currently save about 50% of their GDP, which is much higher than necessary -- un-healthily high," Al Hubbard, assistant to the president for economic policy, was quoted as saying in Barron's.
- the article also noted that in a preliminary discussion last week in Washington with China's deputy finance minister, Hubbard said he stressed the need for the Chinese to move toward a lower savings rate.
- The current Chinese economy is driven by exports.
- According to Barron's China exports $200 billion more than it buys from the U.S.
- Moreover, China's central bank chief Zhou Xiaochuan noted, above, there are steep cultural barriers to shifting the Chinese economy from export-led to domestic consumption-based.
- From the U.S. perspective, with a personal savings rate that has been negative for more than a year-and-a-half, spending more makes perfect sense.
- From a Chinese perspective, however, the question is: Spend what?
- Research published this week showed that the Chinese, one fifth of the world's population, accounted for less than one-in-100 of the world's richest 10% of adults, the Financial Times reported.
3. Mind the Gap
Closely related to Number One and Two, above, Li Bengong, executive deputy director of the China National Committee on Aging noted that consumption by China's 143 million senior citizens will reach $180 billion by 2010.
- Wow, $180 billion by 2010, that's pretty good, right? Wait, it gets even better, China's seniors are projected to spend $550 billion by 2020.
- Currently about 11 percent of China's population is over the age of 60, according to China Gate.
- "In terms of consumption, the aging population will have a huge influence on China's future social and economic development," Li Bengong, executive deputy director of the China National Committee on Aging said.
- Before we get too excited about this projected level of Chinese consumption, however, let's put it in some context.
- 143 million Chinese seniors are projected to spend $180 billion by 2010. How does that compare to the U.S.?
- U.S. census data reports there are roughly 47 million people in the U.S. aged 60+, roughly a third of China's over 60 population.
- They are estimated to spend more than $1 trillion a year on goods and services, more than five times what China's seniors spend.
- That's a sizeable gap.
4. Whole Lotta Collapsin' Goin' On
According to new data from the Bank for International Settlements (BIS), oil producing countries have reduced their exposure to the dollar to the lowest level in two years, the Financial Times reported.
- Russia and members of OPEC cut their dollar holdings from 67% of forex reserves in the first quarter to 65% in the second.
- Eighteen months ago, the exposure to the dollar of oil producing countries was above 70%.
- They increased their holdings of euros from 20% to 22%, the BIS said.
- The last time oil-exporting countries cut their exposure to the dollar was in late 2003, the article said.
- The revelation in the latest BIS quarterly review could put new pressure on the ailing US currency, the FT suggested.
- But is that really true? After all, the data simply reports a shift that has already happened.
- Concerns over long-running trade imbalances, fiat currency and why the dollar will collapse are not new.
- These same concerns have been around for a long, long time.
- How long?
- Why, this long:
Gold and the Dollar Crisis, Robert Triffin, 1961
The Economics of Crisis: War, Politics, and the Dollar, Eliot Janeway, 1968
Understanding the dollar crisis, Percy Greaves, 1973
The Day the Dollar Dies, Willard Cantelon, 1973
The Conspiracy Against the Dollar: The Spirit of the New Imperialism, Peter Beter, 1973
The Federal Reserve and Our Manipulated Dollar: With Comments on the Causes of Wars, Depressions, Inflation, and Poverty, Martin Larson, 1975
Nothing can replace the U.S. dollar ... and it almost has! : How you can multiply your money during runaway inflation and depression, Martin Rom, 1975
Fate of the Dollar, Martin Mayer, Feb. 3, 1981
Getting Rich Outside the Dollar, C. Weber, L. Reiss, Aug.1, 1993
Currencies and Crises, Paul Krugman, Feb. 1995
The Dollar Crisis, Ross Perot, 1996
The Dilemmas of the Dollar: The Economics and Politics of United States International Monetary Policy, Fred Bergsten, 1996
Tug of War: Why You Should Care About the Global Currency Crisis, Paul Erdman, Oct. 15, 1997
Day of Reckoning: The Consequences of American Economic Policy, Benjamin Friedman, Sep. 12, 1998
The Sixteen-Trillion-Dollar Mistake: How the U.S. Bungled Its National Priorities from the New Deal to the Present, Bruce Jansson, Feb. 2001
The Dollar Crisis: Causes, Consequences, Cures, Richard Duncan, July 25, 2003
The Coming Collapse of the Dollar, James Turk, John Rubino, Dec. 28,. 2004
Petrodollar Warfare: Oil, Iraq and the Future of the Dollar, William Clark, May 15, 2005
The Demise of the Dollar... and Why It's Great For Your Investments, Addison Wiggin, Aug. 8, 2005
- Man, that's a whole lot of crises and collapsing going on!
5. "I Am Rather Screwed."
From the Los Angeles Times this morning:
"Every day, Will Hertzberg owns a little less of his three-bedroom house in Corona.
Like hundreds of thousands of other homeowners around the state, Hertzberg has a mortgage that lets him choose how much he pays each month.
Like many of them, he always chooses to pay as little as possible.
For the moment, this allows the 56-year-old Hertzberg to continue living in his tract home despite being only marginally employed. But his debt is swelling, and his mortgage company controls his fate.
"I am rather screwed," he said."
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