China Schools US on Capitalism

posted by Nima

December 4, 2008 · Posted in Global Economics 

Moneymorning.com writes China Blasts U.S. Economic Policy, Expresses Doubt in Financial System:

China blasted U.S. economic policy yesterday (Thursday) at the Strategic Economic Dialogue, a two-day summit engineered to address long-term issues between the two countries. Chinese authorities have grown more fervent, and more explicit, with their criticism of the U.S. financial system over the past year, evidence of a shift in the balance of power between the nations.

“Over-consumption and a high reliance on credit is the cause of the U.S. financial crisis,” said Zhou Xiaochuan, governor of the Chinese central bank. “As the largest and most important economy in the world, the U.S. should take the initiative to adjust its policies, raise its savings ratio appropriately and reduce its trade and fiscal deficits.”

China schools the United States government about savings, trade balance, and fiscal responsibility, the essentials of sound capitalistic policy. They are stating exactly what needs to happen in order for the US to get out of its demise. Not once have we heard Bush, Paulson, or Bernanke suggest reducing fiscal deficits, saving more, borrowing less as a solution to this crisis. They are, in fact, encouraging the exact opposite! It takes the Chinese government to tell Paulson in his face. This truly marks a historical shift in global economic relations.

This kind of lecture was a deviation from past meetings, which were dominated by U.S. calls for China to better manage its fiscal policies. However, the global financial turmoil that has emanated from the collapsing U.S. housing market has left the United States without a pulpit on which to stand.

One result of the crisis is that the U.S. no longer holds the high ground to lecture China on financial or macroeconomic policies,” Eswar Prasad, a senior fellow at the Brookings Institution, told the Financial Times. “This may actually help turn their relationship into a more equal partnership with less posturing on both sides.”

Indeed, U.S. Treasury Secretary Henry Paulson, who in the past used summits like these to press Beijing to open its financial system and appreciate its currency, was noticeably more humble in representing the United States yesterday.

“International cooperation and coordination have been robust and we appreciate the responsible role China has played in the crisis,” he said.

Paulson needs China’s money badly. That’s what’s behind this humble tone.

Meanwhile, Wang Qishan, vice premier and leader of the Chinese delegation called on the United States to “take the necessary measures to stabilize the economy and financial markets as well as guarantee the safety of China’s assets and investments in the U.S.”

Wang’s remarks followed those of Lou Jiwei, chairman of China’s $200 billion sovereign wealth fund, China Investment Corp. (CIC), who said Wednesday that his firm lacks the confidence to invest in the United States, particularly U.S. financial institutions.

“Right now we don’t have the courage to invest in financial institutions because we don’t know what problems we will put ourselves into,” Lou said at a conference in Hong Kong. “My confidence should come from government policies. But if they are changing every week, how can you expect that to make me confident?”

CIC has lost about $6 billion of the $8 billion it invested in Morgan Stanley (MS) and The Blackstone Group LP (BX) last year. More importantly, however, China last month overtook Japan as the largest holder of U.S. government debt. And according to the Financial Times, officials have privately admitted that they are concerned about the value of the holdings.

Hopefully this teaches international investors a lesson: Don’t invest in US Banks. Leave it to Warren Buffet to burn his money on failing banks. The Chinese government will without a doubt have to get a lot more cautious about their holdings in US securities. The US central bank is in the process of creating a major Treasury bubble. This bubble will collapse. It may take 1-2 years, but it will happen eventually.

Concerned with China’s overexposure to the United States, central bank governor Zhou said policymakers should no only address the country’s slowing economy, but “restructure the development model” and prepare “for a worst-case scenario,” the FT reported.

However, Chinese officials also say that any large-scale unwinding of U.S. holdings would be counterproductive, as the value of U.S. bonds and the dollar would subsequently plummet.

If US fiscal policy doesn’t change significantly, once the next inflation picks up steam from the current money supply growth, the Chinese government will not have a choice but to dump its holdings of worthless US Treasuries.

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