

Never short a country with $2 trillion in reserves? - cwan
http://mpettis.com/2010/02/never-short-a-country-with-2-trillion-in-reserves/

======
mediaman
Office vacancy rates in Pudong are over 50%. Many of the signs of excess
capacity are readily apparent in China: it is only the massive currency
injections, in keeping the currency pegged to the dollar, that have allowed
such expansion unjustified by demand.

One way or another, China has borrowed from the future and will have to pay
for this excess expansion. It could be a crash, or it could be years of
stagnation as the nation attempts to use up the excess capacity it has built.

This is a good piece written by someone who understands the underlying
economics.

Chanos has been criticized as just recently beginning to study the Chinese
economy, but sometimes being fresh to a subject helps distance an analyst from
recent past--which can be a good thing.

~~~
maxklein
China is taking all the massive cash it is making now because there is no
other really big and cheap factory, and sticking it into infrastructure.
Buildings, roads, subways, minority villages - all of that is being built up.

Even if you have a crash, a built road is still there and a built office still
exists. Pudong is empty because the offices are expensive and it's not really
in town - if a crash happens that forces the government to reconsider whom
they want to target pudong at, then there will be enough people moving in
there when the prices are right.

China is not developed, it's developing. It's not borrowing from the future -
the U.S is borrowing from the future and giving it to china. China is taking
the money and building infrastructure.

Property is not expensive in china. There is no excessive inflation or
speculation. China has the typical bubble of any rapidly growing economy, but
the huge internal market, massive infrastructure development, and large
population of highly educated people, and the introduction of chinese
businessmen to secondary markets in Africa and South America mean that the
fundamentals of the chinese economy are fine. If there is any bubble, it will
blow over and growth will continue.

~~~
ohashi
Infrastructure for infrastructure's sake? If it crashes and forces the
government to re-think things, you think this happens instantly? That crash is
figuring things out and filling up the excess capacity.

~~~
jacquesm
Better to spend it on roads than on cheap Chinese merchandise.

~~~
houseabsolute
I happen to like cheap chinese merchandise. I'd rather pay $1500 for a Macbook
Pro manufactured there than $2000 for one manufactured here.

~~~
jacquesm
Long term that's a losing strategy. It means you are willing to export all
your production facilities to another country, creating a massive trade-
imbalance in the process.

Think about how strange it is that not just your macbook, but almost
everything you can buy has been manufactured on the other side of the planet,
can be transported, imported and _still_ be sold cheaper than you could
produce it locally.

It's a bit like selling your birthright.

Also, don't forget that those workers abroad are usually working in
circumstances that local authorities would not tolerate.

A nice bit of backstory about moving production to China.

A few years ago, rubbermaid was forced to raise its prices because of the
developments on the raw materials market.

Wall-mart refused to accept the rise, dropped the rubbermaid product line,
rubbermaid filed for bankruptcy, and then the whole production was moved to
China and wall-mart signed a distribution deal with the new owners of the
moulds.

~~~
houseabsolute
No, all it means I'd prefer Chinese people to do what they're good at, and
Americans do what they're good at. If we can't manufacture cost-effectively in
this country, then it's fine for it to happen somewhere else. I don't view
manufacturing plants as a birthright.

~~~
jacquesm
Manufacturing cost effectively and manufacturing cost effectively while
maintaining workplace safety, paying a living wage and respecting the
environment are two different things, and it is the latter that you are
comparing with the former.

So the only reason why you can buy that stuff manufactured in China cheaper is
because of a combination of lack of respect for human beings, sloppy
environmental controls and unsafe work place practices.

If those were brought up to the same standards that are held in the developed
countries the prices would be roughly the same after import duties and
transportation costs are figured in.

~~~
houseabsolute
> Manufacturing cost effectively and manufacturing cost effectively while
> maintaining workplace safety, paying a living wage and respecting the
> environment are two different things, and it is the latter that you are
> comparing with the former.

It would be interesting to see some objective measurements about how much of
the cost difference is explained by which differences in practice. For
example, I think the "living wage" paid to manufacturing employees in the U.S.
frequently exceeds the real living wage by a substantial margin, which they
exact from their employers via a monopoly on labor (unions).

~~~
jacquesm
Let me give you just one example, not even looking at the cost of waste
processing and such, because they don't apply to this story.

A friend of mine is an interesting character, something of a
mechanical/electrical genius, he can literally fix any machinery.

One of his jobs involved flying to China to help with the repair of a machine
that mass produced latex condoms.

While he was there the proud owner of the condom factory announced he had just
finished the creation of a factory for car jacks that were sold in large
numbers to the big three car manufacturers for inclusion with their vehicles.

He got a tour of the 'new' factory.

He described a scene straight out of the worst of the beginnings of the
industrial age. Workers, mostly women and children stood at endless tables in
very bad light operating hand operated machine tools and tool-and-die stamping
machines.

Plenty of them were missing fingers or worse, and the pace was literally
feverish, the noise deafening.

It was the most unsafe machine shop he has ever seen and he's been in quite a
few of them. Now, arguably this is low tech stuff, not comparable with your
macbook, and I'd hope that Apple held their suppliers to a higher standard.

But responsible waste management and safety cost a lot of money when you
factor them in to the end price of a product, no matter whether it's a nike
shoe, a macbook or a car jack.

~~~
houseabsolute
Fair enough, but Apple apparently has very stringent inspection practices with
the factories it maintains overseas in order to ensure things like this aren't
going on. Yet they still choose to do business here rather than there. I admit
it's possible they are simply lying about these practices, but I think it's
more likely that a substantial portion of the savings have nothing to do with
human rights or basic environmental issues.

~~~
three14
Even supposing Apple has perfect inspections, the workers only need money to
buy goods on their local market - and their local goods and services going to
be much cheaper because they're manufactured under those same poor working
conditions. So Apple still gains from Chinese working conditions.

------
jhancock
This is the most level-headed view I've read on this subject. A worthwhile
read.

------
discolemonade
I remember reading the Friedman piece several weeks ago and thinking to
myself, "This guy drank the China kool-aid too." It's part of the whole
American declinism notion that pops up every ten years or so and I've never
believed it. We were there with Japan in the 80s, The Soviet Union, the EU,
and now China (and India too). It's easy to believe China is going to be the
next superpower if you look at its growth relative to the U.S over the last
decade. But the thing that's always made me skeptical about any country
replacing the U.S as the world's lone superpower any time soon isn't our
resources. It's our sense of mission and purpose in the world. It's something
that nobody else has. Only we have it because it's in our cultural fabric.
It's not something you create on purpose. It grows organically out of a
hapenstance of historical events. It informs everything else about us. You see
it when you travel to other countries and come back. Americaness is optimism
and hope. It's a source of our soft power, which is extremely attractive to
the rest of the world. It's why everyone wants to be American but nobody
secretly wishes they were Chinese or Nigerian or Brazilian. China or Russia or
the EU or India don't have that sense of mission and purpose in their psyche.
No amount of military hardware or GDP growth can compensate for
that.Superpowerdom is unsustainable without it. So China could be a paper
tiger.

~~~
enjo
Except for China. They actually have a very similar concept of destiny and
mission.

I think the issues with China are going to be much more practical. They remind
me a lot of the Soviet Union. A closed society that is very effective at
giving the appearance of prosperity, while under the covers things are very
different. They'll be able to keep it up for a decade or two, but over time
the whole thing crumbles as the base was never truly well built.

Our biggest advantage lies in the risk taking aspects of our culture. We're a
people that celebrates the type of risk that leads to true innovation. The
cool thing: It's not just the U.S. anymore. Europe has caught on as well.

I do think the United States is going to weaken (relatively) in the coming
decade. We'll still be a world power, but I think we'll be sharing that with a
re-awakened Europe.

~~~
jimbokun
"It's not just the U.S. anymore. Europe has caught on as well."

Europe has taken on U.S. style risk taking? I have honestly not heard or read
this elsewhere. Can you elaborate?

------
bilbo0s
So Chanos may turn out to be wrong, but not for the reasons Friedman thinks he
is. This is probably a reasonable view.

Professor Pettis is also correct in asserting that the role of central bank
reserves is one of the most misunderstood concepts in economics. In fact,
nowadays, almost any economic concept as it relates to governments or
sovereign states are routinely misunderstood. Probably because that is
precisely the part of the economy that the average person feels they
understand so well.

For instance, many people worry, rightly by the way, about our USD1.4 Trillion
deficit. They feel qualified to comment on its implications authoritatively
since we can SORT OF understand the concept. Yet you see no publicly expressed
concern at all over the USD500 Trillion house of cards that is the derivatives
market. Very few people understand derivatives markets well enough to know the
implications of this situation. I think this causes us not to think about it
and to hope that someone else will deal with it before the bottom falls out.

Now understand that these guys are not average at all. I have attended Pettis'
talks and he is definitely not average. But I think the same sort of
intellectual dynamic goes on even in their circle.

------
nazgulnarsil
_This is because it is about central bank reserves, a topic that to my dismay
probably generates more confused and mistaken thinking than any other topic in
economics._

not understanding the basics of sovereign accounting is understandable. could
you make heads or tails of a companies finance if they did all their
accounting in their own stock?

------
johngalt
A good counterpoint to the title quote would also be "Never expect a good
thing to last forever".

At some point growing investments gain a momentum all their own. I.E. everyone
invests in China because of their double digit growth; and China has double
digit growth because everyone invests in them.

The problem with a compounding growth curve is that it gets so steep that it
shoots past the place where it should have found equilibrium.

------
siculars
Wow, Michael Pettis melts one particular face in specific and lays out a
historical precedent analogous to China's current horde of foreign reserves.
Without cribbing his article too much, my main takeaway is the underlying
economic imbalances at play in China that have resulted in their accumulation
of foreign reserves, particularly 2 trillion US dollars.

------
known
I hope China will invest more on its Infrastructure & Irrigation projects.

------
va_coder
If one factor - large reserves - leads to economic problems than this guy is
dead on. But it doesn't.

Economic success or failure is due to many factors.

He should have chose to argue with Jim Rogers, who has much more credibility,
than Friedman.

~~~
mediaman
His argument is that large reserves do not protect from economic problems.
This is in response to Friedman's assertion that the Chanos analysis is wrong
because despite excess capacity, China can use its currency reserves to stave
off recession, which isn't true.

In the article he states explicitly that large reserves do not necessarily
cause economic problems.

------
lucifer
A country that can draw from a larger pool of "geniuses" can afford channeling
that resource into a larger set of activities. Dividing China into 4 will
result in a set of nations with a reduced set of talent to distribute in key
national industrial and scientific efforts.

~~~
hga
Yes, but how will that help the broad economy?

For example, it could help you to increase your level of military technology,
but it doesn't provide markets for all those factories who's export markets
are drying up.

Haven't we learned that central planning doesn't work (for long) for this sort
of thing? See Japan, Inc.

~~~
lucifer
You've misunderstood [my] post. The article is arguing that China's massive
population (and consequently the size of a cream of the crop brainiacs slice)
is irrelevant, which made little sense. [edit]

