China has tightened money supply (monetary policy) in order to control inflation. Now they will modify it with a “directional loose” money supply.
What they mean is that certain industries will be allowed easier access to financing. Those industries include agriculture, certain small and medium sized businesses, and construction of low income housing.
Chinese officials hope this new policy will still hold down inflation, without putting a drag on industries.
“The U.S. has made other economies, including China, partly pay the bill for its recovery.”– Zhang Xiaoqiang, National Development and Reform Commission
“…the global economy is strapped stiff in the chariot of the U.S. dollar. The United States adopted quantitative easing policies and successfully levitated the inflation level on a global scale. The country needed the world’s help to solve its debt pressure. Its domestic economic growth can hardly free it from its debts.”-Ye Tan, National Business Daily
“More than 70% of our products are exported to the U.S. while the rest all go to Europe. Therefore, the depreciation of the U.S. dollar as a result of an economic recession will have a great effect on us. The only solution we can think of now is to produce high-end products. Buyers of these goods usually care less about prices.”-Zhou Mingwang, Yiwu Mingwang Jewelry Company
“The economic situation in the United States and Europe is not going to recover within two or three years, so we will probably reduce the proportion of exports to 50%.”-Zhang Guanjin, Shaoxing Jinyong Textile Company
“It’s like gambling, it’s hard to secure substantial, long-term profits. The only thing we can do is to transfer our factories to the inland regions to reduce costs.”-Chen Xi, Wenzhou Dongyi Shoes Company
“The economic development mode, which is highly dependent on high energy consumption, heavy pollution and resource exhaustion has reached its end in China.”-Dong Dengxin, Wuhan University of Science and Technology.
“We cannot count on the U.S. promise to ensure the security of our assets [reference to the U.S. debt China holds]. We should rely more on domestic demand and become stronger by ourselves. Don’t worry about any hard landing in China.”-Zhang Xiaojing, Chinese Academy of Social Sciences
“A series of actions adopted by the EU this year suggests that tougher trade policies adopted towards China may increase the possibility of trade protectionism.”-Bai Ming, Chinese Academy of International Trade and Economic Cooperation
Last November, the European Union put together a five year plan to boost European production. The plan targets China by imposing and raising tariffs. The goal is to force Europeans to start buying more expensive European made products by slowing, or stopping the importation of Chinese products.
Earlier this year the EU already jacked up tariffs on Chinese ceramics by 70%! Now, as part of the five year plan, tariffs will be raised on other inexpensive products coming from China. Several EU member countries have also boycotted products made in China.
The five year EU plan is known as ‘protectionism’. If you know your history, protectionism became the main economic policy of many countries, including the United States, prior to the First World War, and prior to the Second World War.
Also, protectionism is the result of bad economic times, like major recessions, or depressions. The times we’re living in now look more and more like history repeating itself. What’s next is another World War. Right now it looks like Europe Union has drawn the line with China, who’s next?
“In the past couple of weeks, the world has moved from a troubled multi-speed recovery to a new and more dangerous phase.”-Robert Zoellick, World Bank president
In an interview with Australian media, the president of the World Bank says things are not getting better, and anyone who complains about the drastic cuts in their taxpayer funded social programs is a terrorist!
“We are in the early moments of a new and different storm, it’s not the same as [the] 2008 [financial crisis].”
Zoellick says the debt situation in Europe is much worse than what’s being reported. He also says governments took too long to take action. Because of the slow response, of Europe and the United States, to deal with economic and financial problems, the world’s financial power is rapidly moving in China’s favor.
Zoellick also said that public protests over drastic government cuts in social programs are a threat, and he agrees with government crack downs on protestors: “I believe what British Prime Minister David Cameron is doing in the U.K. is really necessary.”
So you see the new terrorists in the new global economic war, is you!
“In my opinion, at this moment, the best strategy is no buy, no sell. At this moment, it’s very difficult to shift (investment), to change fundamentally, because we hold such a big amount.”-Cheng Siwei, former senior Chinese lawmaker
Cheng Siwei, is advising the Chinese government to take a “no buy, no sell” attitude towards U.S. Treasury bonds. Cheng is telling the government that it needs to hold off on investing it’s $3.2 trillion in foreign exchange reserves.
Many European countries have been knocking down China’s door, begging China to bail them out by buying their bonds, instead of more U.S. bonds.
Cheng says the situation for China has become more of a political one, than an economic one. In other words, with so many countries, including the United States, hoping to be saved by China’s cash, the Chinese are starting to realize just how much power they have.
“The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone.”-Chinese government/media commentary
The European Central Bank will hold an emergency meeting on Sunday, August 7. The issue; the credit rating downgrade for the United States.
Finance ministers and central bankers from the Group of 7 major industrialized nations will meet by telephone on Sunday. The broader Group of 20 were due to hold a conference call Saturday evening.
China and Japan are calling for coordinated action to avoid a new worldwide financial crisis. One issue that’s being looked at is whether the world can continue to use the U.S. dollar as a reserve currency: “International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country.”-Chinese government/media commentary
Another issue to be discussed is the amount of secure debt versus risky debt: “It will weigh on secure assets. The bigger reaction will be on risky assets, including equities and on agencies and states backed directly by the federal government. U.S. Treasuries will remain a benchmark. This is a ship which takes a long time to turn around.”-Ciaran O’Hagan, Societe Generale in Paris.
Germany, the economic powerhouse of Europe, says it’s about time the U.S. got what it deserves: “I’m not surprised about the U.S. rating downgrade, rather I am astonished that, for weeks, international rating agencies have focused their attention on the European debt situation but not the American one. For a while, there have been clear worries about America’s economic woes but also the fact the U.S. is heavily indebted.”-Norbert Barthle, a budget expert for German Chancellor Angela Merkel’s conservative party
German drug and chemical giant, Bayer, says high utility cost in Germany could force it to move all its German operations to a new location outside of Europe.
The most likely new home for Bayer, China.
Bayer blames the German government, and in a round about way the German people, for their decision to end the use of nuclear power plants in Germany.
Bayer claims the electricity cost would skyrocket, making it almost impossible for them to do business in Germany : “It is important that we remain competitive in comparison with other countries. Otherwise, a global business such as Bayer would have to consider relocating its production to countries with lower energy costs.”-Marijn Dekkers, CEO
Dekkers hinted that China could be Bayer’s new home, because they’ve already invested big time into their China operations. They’re also looking at Brazil and India.
It’s not like Bayer is losing money in this bad economy. They reported a net profit of $1.1 billion for the second quarter of this year!
Most people know that China is the largest foreign holder of U.S. debt. Japan is the second biggest, and the United Kingdom (Britain) is the third.
According to the most recent information, China holds a little more than $1 trillion in U.S. government debt (bonds), Japan holds $912 billion and the U.K. holds $346 billion. Those bonds are held not only by foreign governments, but by private banks and corporations.
Standard & Poor’s downgrade means that U.S. government bonds are now ranked 2nd place. Germany, United Kingdom and France still hold their triple A 1st place ranks. Interestingly the Federal Reserve Bank (not a government agency) says the drop in ranking will not change how they handle U.S. bonds.
The problem is that foreign banks will surely change how they handle U.S. bonds.
The majority of U.S. government debt is still held within the United States, by banks, corporations, individuals and taxpayers via the U.S. Treasury.
In a move that’s officially meant to tighten money supply, to counter rising inflation, China has banned all domestic businesses from taking loans from foreign banks.
The specific type of loan is called RMB (RenMinBi, a type of international currency). The People’s Bank of China, told all other banks that it would stop accepting applications for direct offshore borrowing.
An unnamed source said one of the reasons China is banning RMB loans, is because they have no control over the interest rates of those loans.
China has already tightened lending by Chinese banks, again, to try and control inflation by restricting the amount of money in the consumer market. The RMB loans are controlled by foreign banks, and have increased their lending in China since the beginning of the year.
An official with the People’s Bank of China said they are going to come up with a system in which they can influence the lending of foreign money in China.
“If the unemployment rate continues to rise, it will further damage investor confidence and force them to move away from U.S. Treasury securities, leaving the U.S. government no choice but to print money and depreciate its currency.”-Lu Zhengwei, Industrial Bank Co Ltd
Chinese officials say the U.S. Debt Limit Deal is not enough, mainly because it will not stop job loses, and it doesn’t cut enough government spending.
Zhu Baoliang, chief economist at the State Information Center, says U.S. government debt is too large to be resolved through normal measures such as tax increases and deficit reductions. Also, it is highly unlikely the U.S. government will significantly reduce entitlements like Social Security and Medicare, or significantly draw down troops overseas. All that means is at the very least the U.S. dollar will continue to lose value.
The Chinese are blaming their runaway inflation on the falling U.S. dollar. In June inflation hit 6.4% in China. The increase in costs is causing a drop in factory orders, which hits China where it hurts.
Chen Kexin, chief analyst at the Distribution Productivity Promotion Center of China Commerce, says no matter what happens now, inflation will pick up speed. He predicts oil prices will go back up to more than $100.00 per barrel, and copper could hit $10,000 per ton.
According to the U.S. Department of the Treasury, China is the largest foreign holder of U.S. government debt (the overall largest holder of U.S. debt is…the U.S. taxpayer via the U.S. Treasury). Many analysts in the United States think China has no choice but to keep buying U.S. debt, creating a false sense of security among U.S. leaders. But one analysts admits China is cutting back: “Beijing is probably not buying Treasuries as intensely as it did last year.”-Derek Scissors, The Heritage Foundation
Chinese analysts are pushing for their government to diversify their U.S. debt holdings, because the debt limit deal won’t help: “The debt crisis may have a negative impact on the fiscal spending of the U.S. government, which may drag down the U.S. economy for the rest of the year.”-Hou Zhenhai, Investment bank China International Capital Corp
It’s not just U.S. government bonds China has, but something called foreign exchange reserves. These bonds can come from corporations, like Fannie Mae and Freddie Mac. The problem for China is most of its foreign exchange reserves are in U.S. dollars. Chinese analysts are warning of the “all your eggs in one basket” scenario; they think China will be dragged down when the United States finally sinks.
In fact, one analysts thinks the situation is so bad that China should stop investing into all foreign operations: “Because of the lack of mature overseas investment projects, the scale of China’s overseas investment is not big enough to absorb massive foreign exchange reserves in the short term. Therefore, to invest overseas is not realistic.”-Zhang Yi, Institute of Foreign Economy, the National Development and Reform Commission