The China Miracle: Forex Reserves Hit Record $2.87 Trillion

By: Jesse

In the 'Japan Miracle' of the 1980-1990's it is said that Japan essentially 'monetized its real estate.' There was also a mythology of the superiority of Japanese management, with an emphasis on quality management ironically pioneered by the American W. Edwards Deming.

It gained some traction because it was of course a very real and highly useful innovation. It succeeded in particular because so many Western manufacturing concerns were still under the influence of the management philosophy nurtured during the second World War of production in sheer quantity, and repair and correction of defects later in the field. Consumer had risen in living standards and preferences and such arrogant treatment by the auto companies in particular was no longer considered acceptable.

But at the end of the day, Japan Inc. was a bubble fueled by a mispricing of risk and assets. I can remember arguing with my business school professors at the time about this, with all their familiar theoretical arguments about efficient markets and the inevitability of the Japanese.

So, with regard to China, it is not an enlightened management prowess, and few make that argument which would just seem silly to anyone who has been there. And it is not the superior quality of their products.

It certainly is fueled by Western investment, particularly driving by companies like Walmart who insisted on suppliers moving production to China starting in the 1990's. A favorable and sizable devaluation in the yuan and a relaxation of US trade rules by Clinton helped to spark the 'miracle' which we are seeing today.

It seems to me that China is monetizing cheap labor, and playing an arbitrage against the middle class sensibilities and public policies of the West. China is exporting deflation and lower living standards for workers in massive quantities, and acquiring sizable foreign reserves in the process. Multinational corporations find this attractive because in the short run it breaks the power which labor and the middle class had gained in the reforms after the 1930's. And it comes complete with vendor financing by China et al., and the promise of fresh economies for exploitation to come. As Bill Gates noted, China represented his kind of capitalism, if only they could start enforcing intellectual property laws. Oligarchy requires pliant labor and obedient and law-abiding consumers.

Unfortunately China and other developing nations must now start growing their domestic markets, and a consuming middle class of their own, or face an economic collapse that will make the Japanese deflation look like a cyclical recession. This is not easy for a oligarchical non-democratic government to manage gracefully. It is harder to control a healthy and wealthy and better educated rising middle class.

Miracles like China and Japan are made possible by a currency system that is broken, subject to manipulation and mercantilist trade policies that protect domestic markets while promoting exports. It is promoted by economic quackery that is funded by Wall Street that is masquerading as a scientific approach to maximizing the common good.

This remnant of the efficient markets hypothesis is creating even more dangerously destabilizing imbalances than those which provoked the collapse of Russia and the Asian currency crisis, and will be at the root of the global currency crisis to come, most likely later this year.

Never one to waste a crisis which they created, the oligarchs will put another emergency offer on the table, as they did with the American TARP bailout. Adopt our solution, one world currency, or suffer the consequences. The econo-parrots will quickly fall into line behind this latest twist in financial engineering, and there will be an hysterical antagonism towards all other competing solutions, anything that runs counter to a larger monetary authority.

With one monetary policy comes the necessity of one fiscal policy, as has been most recently shown in the European union. And with one fiscal and monetary policy, sovereign government becomes increasingly irrelevant. Ponzi schemes by their nature must continue to grow and consume all, or collapse and be exposed for the fraud which they are.

AFP

China's forex reserves hit record $2.87 trillion
BEIJING (AFP) – China said Tuesday its foreign exchange reserves hit a record high at the end of 2010 as new loans topped an official target, highlighting Beijing's difficult task of stemming a flood of liquidity. The country's stockpile of foreign currencies, already the world's largest, expanded 18.7 percent from a year earlier to $2.847 trillion at the end of December, the central bank said in a statement.

New loans issued by state-owned banks in 2010 reached 7.95 trillion yuan ($1.2 trillion), exceeding the government's full-year target of 7.5 trillion yuan but less than the previous year's explosion of lending.

M2, the broadest measure of money washing around the world's second-largest economy, reached 72.58 trillion yuan at the end of last year, up 19.7 percent from a year earlier.

Analysts blame China's huge trade surplus -- $183.1 billion in 2010 -- and its massive stimulus measures since late 2008 to combat the financial crisis for the flood of credit that has been fuelling inflation and property prices.

Foreign exchange earned by Chinese exporters is changed for yuan with the central bank so it can control the value of the local unit -- a policy long criticised by China's trade partners for grossly undervaluing the currency.

The foreign exchange is added to China's growing coffers, while the yuan fuels the amount of money flowing into the economy.

Ever fearful of inflation's potential to spark social unrest, top leaders have been pulling on a variety of levers to rein in consumer prices and calm growing anxiety about soaring food costs and property values.

In December, the central bank hiked interest rates for the second time in less than three months. It has also ordered lenders to keep more money in reserve, effectively limiting the amount of funds they can lend.

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