The China Vortex

In the past few days, Henry Paulson has come up with his US$700B proposal to save the major lending institutions which made bad decisions re CDOs, with all the bad loans being covered by the US taxpayer. This is happening at a time when the US middle class is under unprecedented pressure already.

Over the next year, all the bad decisions made by China’s economic planners over the past 30 years will show through. These include:

• The decision to become overly dependent on the US as an export market, and buying US treasuries to effectively buy this single captive market and continue to sell it goods far beyond its capacity to pay for China’s exports.
• Somewhere along the line, a decision was made to jumpstart China’s economy and put it on the fast-track of economic development. To a large extent, this has happened. But China’s economy is like a body builder whose upper body strength is massive, but has toothpick legs. More incidents like the melamine milk incidents will become common, simply because the government is not equipped to handle incidents of this kind.
• China, unfortunately, has a reputation for cheap, low-quality products, in spite of the successful Beijing Olympics. For the most part, Chinese companies do not have the talent to work up the value chain creating better products. (There are some, but they are too few to make a significant difference.) This takes time to build.
• Exports will slow, and the Chinese domestic market will not pick up the slack fast enough to prevent major unemployment problems, especially among university graduates.
• The wealth gap between the rich and poor will widen dangerously, and real estate prices, which are already falling, will fall even more.

China became addicted to US orders and the US dollar the same way Americans became addicted to Chinese junk products. (This is a generalization; many goods are not junk. But the general image is of, well, junk.) For both sides, it was a dream which was too good to be true.

Now it’s over, and the Beijing Olympics are turning into the final hurrah for that period.

If you would like a well-presented systematic presentation, my friend Corbett Wall has written an interesting piece.

The fat days are over, and we are in for a tough 20-30 years ahead.

The Chinese government’s watchdog for equities, the CSRC (China Securities Regulatory Commission) has issued an edict to local fund managers that they are not to issue any pessimistic reports about equities during the Olympics in Beijing.

My question is “Why bother?”

The Shanghai market has been down 50% in the first half of the year, and what started out as a subprime mortgage problem in the US has now morphed into a banking problem with more US banks at risk.

In the meantime, Pony Ma, CEO of Tencent has joined in the chorus with Alibaba’s Jack Ma to talk about hard times ahead. The Chinese government has signaled that the rise of the yuan against the dollar will slow down, with a very public discussion in the People’s Daily. The signs of economic deceleration are everywhere.

When there is so much public discussion about upcoming economic challenges in the Chinese and western media, what good could possibly come from telling local fund managers not to say anything bad which might upset the Chinese equities markets? While many western observers of China see this as a sign of an authoritarian regime, for many Chinese, it looks more like desperation. Instead of allaying fears, it makes those who are still in the market fear the worst, and think that the government is trying to suppress even worse news, which in turn will fuel the rumor mill and make the market even more volatile.

In short, this looks more like a desperation move than a well-thought policy move. Instead of helping the market, it’s likely to make things worse.

This is what happens when politics interfere in the markets.

This is pretty self-explanatory.

Investors who bought notes due February 2018 on March 17, just after the Fed helped arrange the bailout of Bear Stearns Cos., have lost 6.2 percent, according to Bloomberg data.

The 10-year note, at 4.25 percent, yields no more than the inflation rate, leaving investors with real returns near zero. Consumer prices have exceeded 10-year yields by an average of 36 basis points since December, Bloomberg data show. In 1980, inflation reached a 33-year high of 14.8 percent and yields averaged 11.4 percent.

`Out of the Bottle’

Yields on 10-year notes had dropped to an almost five-year low of 3.28 percent on March 17, after the Fed cut the discount rate at an emergency weekend meeting and backed JPMorgan Chase & Co.’s deal to buy Bear Stearns Cos. Rates on three-month bills plunged to 0.39 percent, the lowest since the 1950s, the same day as investors sought the safety of the shortest maturity government debt.

Consumer prices advanced 4.2 percent in May from a year earlier, the Labor Department said June 13. The rate was above the median forecast of 3.9 percent in a Bloomberg survey of economists, and the highest since January.
Economists at New York-based Morgan Stanley say inflation will reach 5 percent to 5.5 percent this summer, the highest since 1991.

“The global inflation genie is out of the bottle,’’ Morgan Stanley analysts led by Joachim Fels, co-head of global economics, said in a June 11 report. Even if the pace moderates in coming months, “we are likely to see higher average inflation rates,’’ they said. Inflation averaged 3.1 percent during the past two decades.
`Unsustainable Levels’

Inflation is also eliminating the rewards of owning U.S. stocks. Standard & Poor’s 500 Index shares yield 0.2 percentage point more in profits than the interest on 10-year notes, the smallest advantage since 2004, data compiled by Bloomberg show. The last time corporate earnings returned less than bonds, the index posted its biggest monthly decline in five years.

“What did you say? You wanted us to buy more US assets?”

Oh, and I forgot to mention, this is in straight dollar terms only. You need to also figure in how much the US dollar is going to depreciate against other currencies in the coming ten years.

“Ouch!”

I wonder how the Chinese government is going to explain this to Chinese citizens, since it is their official responsibility to protect Chinese investments and assets? And that the situation, particularly re inflation, is going to get much worse before it gets better?

And it really doesn’t matter who becomes US president either, at least with regard to this set of issues.

Not even a US president can do anything about this.

“Interfering in another country’s internal affairs” is a routine mantra often used by Chinese government spokespersons, and is used most often when pointed at the US and US critics, especially with regard to human rights policies.

On the surface, this makes a lot of sense, especially with regards to generally ignorant US politicians, movie stars and others, who would have a hard time finding places like Tibet and Darfur on a map, but are moved by some of the images they see on television. For them, China and Chinese policies are a very convenient whipping boy, even though they have very little context and understanding of the real underlying issues.

This naturally puts the Chinese government on the defensive and more recently, some Chinese have become angry at the overseas criticism.

So who’s right and who’s wrong? Those who argue against interfering in another country’s internal affairs, or those who say it’s OK to do so?

The fact is that if a country is big and has a strong economy, whatever it does has an effect on other country’s economies, and on the global economy. Even though only American citizens’ can vote in their elections, the gross stupidity and ineptitude of American economic and trade policies in recent years do not end at America’s borders.

They go far beyond it.

And the Chinese government has started complaining about it. After all, they hold huge amounts of US dollar-denominated treasuries which are losing their value daily as the US dollar loses value, and their sovereign wealth funds are blocked from making investments in Europe and the US, mainly on political and not economic grounds.

So aren’t Chinese government officials interfering in US internal affairs? Yes, but the two countries’ economies are so tightly intertwined, the US policies are having an effect on the Chinese economy. When they are so tightly bound together by trade and economics, there is no borderline. It’s as silly as the right arm complaining about the left arm.

The fact is that the US and China are like two handicapped people: one is blind and the other is deaf. They need each other in order to survive.

The sooner politicians, officials and miserably deficient media on both sides recognize that, the better. If they don’t, ordinary people will continue to get caught in the middle and distracted by bad policies and ignorant offline and online media pundits getting them to chase red herrings while the real problems get worse.

Gold prices are going up.

Jim Rogers has long been a bull on China, to the point where his daughter’s first language is Mandarin, and is betting on a rise in commodity prices because of demand from China. He highlights this point in his new book A Bull in China: Investing Profitably in the World’s Greatest Market.

The recurring theme is not so much demand from China, but that people in Asia are turning to gold as an investment, safer than property. In my previous article, I mentioned that gold is often an investment of last resort which is safe when all the other investments have gone down the tubes. Obviously Vietnamese and other Asian investors have the same belief and affinity for the metal as Chinese do, and as I’m sure Jim Rogers does.

The astute investor will notice that it isn’t so much that they believe in gold, as it is that they are rushing to get out of US dollars.

When Jim Rogers talks about the commodity demand from China, the flip side of the story (which he is not talking about so much) is that he is using US dollars to buy those commodities.

When you have too much of a currency in circulation, you get inflation and the currency loses value until a new floor is found and supply and demand reach equilibrium. Right now, Asian investors do not feel that they know where this new floor will be; that explains the rush to gold and gold futures.

That is what’s going on now.

This morning I was watching a TV program on China’s CCTV-4 which talked about the history of gold, historically and in China. The program, all in Mandarin, had a fascinating format. It started off with history and the Bretton Woods agreement of 1945 and when the US controlled about 80% of the world’s gold reserves. At the time, the US Federal Reserve had a standing policy of letting non-US citizens redeem their gold at a price of US$35 per troy ounce, while not allowing Americans to own gold. Then, as the value of the dollar fell, Nixon basically opted out of Bretton Woods and the US government would no longer redeem gold. This started the period of different currencies floating against each other in floating exchange rates.

Before and during Bretton Woods, because of the tie to gold, the US dollar was often referred to as “meijin” 美金 instead of the now popular term “meiyuan” 美元 or US dollar. The implication is that in earlier times, the US dollar was as good as gold.

Not now.

In 1979 with 17% inflation in the US and the Soviet invasion of Afghanistan, gold shot up to US$850 an ounce. Then when things settled down, so did gold prices.

Now, because of all the trouble with the US dollar and the subprime mortgage crisis, gold is back between US$700-800 per troy ounce.

Then the program took a curious turn and started interviewing Chinese who were investing their savings in gold. The best way to describe it was as if it had suddenly become the Home Shopping Channel program for gold. China opened up the gold market to trading for Chinese retail investors in Oct. 2002. Then it proceeded to interview housewives and ordinary Chinese urban consumers about their investments in different gold markets, all in China, and how much money they had made. Then there were interviews with gold analysts for gold exchange websites, all of whom were gold bulls.

And this program went on and on for an hour. The interesting thing is that this program was broadcast on CCTV-4, which is the news channel. And of course, nothing gets on this channel without official approval. The underlying message of the program was that gold is a good investment for Chinese investors in turbulent times. Not euros, not yen, and certainly not the dollar.

Gold. So go forth and buy gold, and rest assured that you will not lose your investment money. I could not escape the impression that the Chinese government was trying to talk its citizens out of putting their savings in dollars, and wanted them to save their money in gold.

Fascinating!

Ever since the subprime mortgage crisis began, the US dollar has become the currency nobody wants. Private equity and venture capital firms from the US have been actively investing in Chinese companies, just because they want to get out of US dollars. This pace is picking up as even the top-tier VCs from the US are relocating to China. Sometimes I think that if you breathe and can count to 10 in English you can get seed funding for your China startup. (Follow-up rounds are not as easy; they depend on company fundamentals, at least for now.)

It seems like the Chinese are getting tired of buying economic activity in the form of exports to the US, and getting paid in depreciating dollars. Add to that some other recent tensions, and you get the picture that things are going to start getting more rocky on the economic, military and political fronts.

There was a time when the US financial markets were looked up to and trusted by the Chinese and the rest of the world as a model. That trust has been shattered. At the end of the day, that is what capital markets depend on to work: trust. Already we are seeing a trend away from going public in the US and to other capital markets.

All of this adds up to my view that globalization is one of those ideas which makes good sense when viewed from 30,000 feet, but simply will not work in the real world of economic, political and military power.

The US dollar’s fall, in a way, is a direct result of globalization. When the US had the world’s leading economy and was the home of the world’s most voracious consumers (consumers who continued to consume even after they had no savings), the rest of the world had almost no choice except to use the dollar as the main currency for international transactions. With the rise of Japan, then the European Union, and now China and the African nations, that has all changed. Economic strength and activity are now highly diversified; there is no single center of power.

China is investing heavily in the development of Africa. The world-famous China-Europe International Business School (CEIBS) based in Pudong, Shanghai will soon announce plans for an African campus. Other parts of the world, including India and oil-rich countries of the world continue to grow. And they have less need for dollars which continue to depreciate in value. Add on to this the general unpopularity of US foreign policy in the rest of the world. They are looking for more stable investments which more or less keep their value.

All this adds up to a picture of a world which has less demand for dollars. If the US did not rely on depreciating the dollar as a policy to lessen the debt burden, the falloff would not have been as precipitous as it has become. Sometime soon, American consumers will have to learn about living within their means, and saving money. I’m of the opinion that the sooner they learn, the better. In order for it be worthwhile for Americans to save, the dollar must be stable.

If there is one thing impressive about China, it’s all the investment in infrastructure. Sure, a lot of it is tacky and even poorly constructed, and sometimes there are bridge collapses, but it is getting better in quality. Most importantly, the government is building for the future.

It’s time the US started investing more in its own future, instead of just consuming for today.

But now, the world is looking for other choices besides the US and the US dollar. And globalization is giving the rest of the world more choices to pick from.

Over the past few years, one subject has dominated Chinese thinking on the government and enterprise levels: how to take Chinese brands global. During the runup to the Beijing Olympics in 2008, and then the Shanghai Expo in 2010, this subject will become even more popular, as China’s economic power grows and the US’s economic dominance gradually recedes.

So far, the thinking is that Chinese companies, with some degree of Chinese government assistance, should buy leading US brands and manage them. This was the thinking, for example, behind Lenovo’s purchase of IBM’s money-losing PC division and the Thinkpad brand in 2004. It was also the thinking behind the aborted CNOOC purchase of Unocal, an offer which had to be withdrawn because of heavy US congressional pressure over security.

Outright purchases of foreign companies, in the form of hostile takeovers and mergers rarely go well, even when the cultures of the two companies are close. When they are as far apart as Chinese and western companies, the odds are overwhelmingly stacked against success.

Now there is renewed interest in buying western companies for yet another reason: the Chinese government is sitting on US$1.3 trillion in foreign exchange reserves, and with the dollar falling against the euro and other major currencies, there is strong pressure to invest this money in something else besides US dollars, which will continue to depreciate. In order to slow down this depreciation, the Chinese government has announced that it will establish a Chinese sovereign wealth fund to invest about US$200-300B in higher-yield investments. Within the past year, sovereign wealth funds have proliferated as foreign governments seek to diversify their foreign-exchange reserves out of US dollars, especially as the US subprime mortgage lending crisis has spread overseas.

For the Chinese government, which likes to do great projects which it can then use in PR to the Chinese people, there is a fundamental bottleneck: there are not enough Chinese who have international experience managing global companies. And those who do have the skills usually decide to spend their time and effort in the private sector where their skills are more needed. In one article some time ago, Business Week claimed that China needed about 75,000 international executives while there are only 5,000 available.

There is another problem with creating global brands: in most sectors, it takes an awful long time to create them. If you look at Toyota in the automobile sector, it has taken the company mostly since the period from 1945 to become established as a leading quality maker. When it comes to manufacturing, global brands are not made, they are earned on the basis of quality products.

The place where brands have sprouted relatively quickly are in the computing and hi-tech sectors. Apple has been around since the 70s and has undergone a dramatic rebirth under the tutelage of its founder, Steve Jobs, who returned in 1997 after Apple’s acquisition of NeXT. Since his return, he has launched the iMac, iPod and now iPhone lines, all of which have won critical acclaim from users worldwide. Steve Jobs has shown that he is that rare type of executive, someone who learns from his mistakes and is passionate about creating excellent products. Now, even for dedicated Windows computer users, Apple’s products are something worth thinking seriously about. When it comes to evoking pure passion among users, there is no company like Apple. The way Apple has launched the iPhone globally has shown that it fully understands how to use the power of the Internet and the media to create global attraction for its new products at very little cost. On October 26, the company will launch its latest version of the OS X operating system, Leopard.

The company’s success has been rewarded on Wall Street; the company now has a market cap of more than 148.2B and its shares are trading at $172.

Another company which has succeeded in creating a global brand in a relatively short time is Google, which was founded on September 27, 1998. Google started as a technology company, and has morphed into a company which understands, and is now revolutionizing the media business. Coming from a very strong technology core base, they like to constantly talk about their technology, even though that is relatively unimportant backend stuff to most people. Very early on, Google figured out that as computing, and now mobile computing grew, more and more data would be accessed from online. The question was: “What was the economic/business models which would support it?” The answer is first search, and then other formats of online advertising. Google strived to make advertising more relevant and less disruptive, and strived to do this all with its Adwords solution.

It has also been a success on Wall Street. Even though expectations were high, it blew past the estimates with its recent earnings announcement , growing the company at twice the growth rate of the growing online ad market.

While Google has continued to have a hard time succeeding in China because of strong competition from Baidu, it is performing exceptionally well in other markets. Compared to their smaller local competitors, US companies continue to have a hard time succeeding in China. Nevertheless, Google continues to make inroads in China.

When talking about large investment amounts, it is easy to forget that the most important part of the equation in brand-building is always people, not marketing dollars or yuan. Buying into Apple and Google would get an inside view into how these leading companies are run.

So what is the best, the smartest way to buy into these companies?

My guess is that the smartest way is to buy Apple and Google shares on the open market and gradually build up enough to get a board seat, where the sovereign wealth fund’s proxies could quietly learn how these companies perform, and find out who are the people who really make contributions to the company. Steve Jobs likes to create the persona that he is Apple and Apple is Steve Jobs, but the truth is not that simple.

Be a smart passive investor, not a dumb active investor. Learn to walk before you run. While it may seem a longer, slower process in the beginning, this is actually the faster, smarter and more economical way to go. Can you think of another way where you earn money while you learn instead spending big chunks?

So to sum up, the benefits of buying into Apple and Google are:

• Great place to park those extra depreciating dollars and get some appreciation
• Great way to learn how digital online products and brands are made
• Great way to find out who the smart movers and shakers are
• Great way to learn how to become a smart passive investor

If the sovereign wealth fund is doing what they were set up to do, they are already buying Apple and Google shares.

Now that would be real smart…

An article in today’s Telegraph suggests that foreign central banks have sold US48B in US treasuries, with US32B in the past two weeks alone, according to figures released by the New York Federal Reserve. China currently holds US1,340B in reserves into other higher-yielding investments. Foremost among these newer investment vehicles is a sovereign-wealth fund.

China has bought US treasuries in order to secure its largest single export market. Effectively, China is lending money to its largest single buyer, since the American people have maxed out their credit. China is buying US treasuries so that Americans continue to have the capability to buy Chinese imports. Since the US dollar has been steadily falling in international markets, especially against the euro, this option is becoming less attractive.

In addition, China bought a large amount of US agency and corporate debt, some of which was backed by, you guessed it, subprime mortgages. For a detailed guesstimate (because it is not public information), take a look at this article by Brad Setser.

There is a good chance that there are some very senior people in Beijing taking a deep gulp as they look at their portfolio of dollar-denominated securities.

If so, that would explain the recent sell-off of US treasuries. And if they start selling, people in Washington are going to start worrying about how to handle US debt. Ultimately, Americans will have to recognize that they have lived beyond their means, and the US standard of living will have to make a downward adjustment, as is beginning to happen now.

So who wants to be president of the US in 2008?

Yesterday I participated in Barcamp Beijing 2007, which was held at the France Telecom Research and Development Building in Haidian district in Beijing. There were more than 100 participants with some 24 sessions held in three different languages.

It is hard to describe the firehose of information from Barcamp, but I will try to offer some of the highlights.

Michael Sikorsky, CEO of Cambrian House, first spoke about how to raise financing for startups. Based in Calgary Canada, Cambrian House offers a business platform for service providers, and Michael has successfully transitioned from being a tech person to a business person. I was immediately impressed by his praise of Paul Graham, founder of the Y Combinator seed-funding group. Paul Graham is the smartest tech guy who has transitioned to business, and Michael showed how Y Combinator has introduced a new VC business model of seeding startups by mentoring them through the startup process.

I have spoken frequently with Frank Yu about the need to bring something similiar to the Y Combinator seed capital model to Beijing. Chinese startups badly need mentoring, especially in their early phases because most of the founders do not know how to build teams. This is something Paul Graham’s Y Combinator organization has been able to address very well, teaching business smarts to founders from tech backgrounds.

The other main takeaway from Michael’s talk was that it was important for new companies to be “investor-centric” as opposed to “founder-centric”. If a company is set up to be friendly to investors up-front, then it is much easier for it to scale.

Andrew Lih, who is now living in Beijing, spoke about the Wikipedia movement. Andrew is a researcher in new media, and is now working on a book on Wikipedia due for publication sometime next year.

In the afternoon sessions, Karl Mattson, president of Medium Cool based in San Francisco, talked about what kinds of people were needed to build a good company. He put special emphasis on need for background diversity. When most Americans hear the word “diversity”, then tend to think in terms of racial, religious and sexual diversity. What Karl was talking about was the need to get people from different parts of the world, social and educational backgrounds so that they can exchange views by looking at a business proposition from different angles. Failure to do so meant that companies would often have “blind spots” and result in “group-think”, where the same group of people have a narrower and narrower vision.

I have noticed this tendency even in very large and successful US companies such as Microsoft and Google, where the definition of a smart person fits very closely with the founders’ definition of smart. This has resulted in a form of inbreeding, where the companies’ blind spots get bigger and bigger, creating opportunities for new challengers and startups.

Following his talk, Robert Scales, founder and CEO of Raincity Studios, talked about his company’s experience working with Drupal, the open-source community web framework. Robert talked about how Drupal has matured into an excellent solution for all kinds of businesses, with new modules being added on a regular basis. Previously, companies had been wary of using open-source as a solution because of security cares, but now he found that they had gone past those issues and had come to embrace it as a development platform. The best part for his 12-person team based in Vancouver was that because the software is regularly updated, his company only has to concentrate on basic functionality, design and configuration issues for his clients. And if his company cannot perform the work, design and feature requests can just as easily be addressed by another team which is familiar with Drupal. Now, his company is so busy that he has come to China to look for designers and coders to augment his Vancouver team; he mentioned that he is so busy that he has had to turn away business.

In reply to a question from me, Robert mentioned that the average billing amount and timeframe for a project is 3-6 months and 50-100k (Canadian dollars) per project.

My session was on the topic of “Building Management Teams” for startups. I focused on some of the problems which I found most Chinese startups to have:

• Founders fall in love with their own ideas too much, take criticism personally. This makes companies too slow to ditch old bad ideas.
• Chinese companies tend to be “founder-centric” instead of “investor-centric”, which means it is very difficult for a company to grow past US5B market cap in size (with the exceptions being Chinese state-owned enterprises or SOEs).
• Healthy startups have a technology founder, product founder and a bizdev founder, forming a tripod. Most startups in China do not have this setup; instead relying on one person to drive growth and vision. This model does not scale well, and feeds the founder’s ego too much. This puts a cap on future growth.
• There are too few original ideas; companies tend to copy each other.
• China has a high-competition, low-trust society. This also puts a cap on Chinese companies’ growth. If someone can successfully address the issue of how to build trust in the online/offline world, they will have something very interesting.

Many photos were taken, including many by Kris Krug, president of Bryght, one of the event sponsors. You can find the list of sponsors from my previous pre-event posting. If you would like to see photos from the event, you can find them on Flickr.

Many participants will be going to Shanghai where Barcamp Shanghai 2007 will be held at the offices of Tudou on Sept 8.

Barcamp Beijing 2007 was a very interesting and exciting event for those interested in technology. It provided an excellent opportunity to meet some of the participants and drivers in open-source and Web 2.0, and gave those from outside China a chance to learn about the Chinese market, and a chance for Chinese to mix with outsiders.

All in all, an excellent experience.

This is the opinion of Paul Craig Roberts, who previous served as Assistant Secretary of Treasury during the Reagan administration, and is often quoted as the “father of Reaganomics”. (You can read the Wikipedia entry about him here.)

Recently there has been discussion about China’s threat to use the “nuclear option”, or and basically destroying the value of the US dollar as a global reserve currency by dumping more dollars on the markets than they can absorb in a short time, forcing the dollar into a free-fall.

The prevailing wisdom among US economists is that China would not make such a move, as the damage to China’s own economy would be too great. Roberts rebuts this claim saying that

American economists make a mistake in their reasoning when they assume that China needs large reserves of foreign exchange. China does not need foreign exchange reserves for the usual reasons of supporting its currency’s value and paying its trade bills. China does not allow its currency to be traded in currency markets. Indeed, there is not enough yuan available to trade. Speculators, betting on the eventual rise of the yuan’s value, are trying to capture future gains by trading ‘virtual yuan.’ The other reason is that China does not have foreign trade deficits, and does not need reserves in other currencies with which to pay its bills. Indeed, if China had creditors, the creditors would be pleased to be paid in yuan as the currency is thought to be undervalued.

In addition, he refutes the claim that China would lose US markets with such a move.

The notion that China cannot exercise its power without losing its US markets is wrong. American consumers are as dependent on imports of manufactured goods from China as they are on imported oil. In addition, the profits of US brand name companies are dependent on the sale to Americans of the products that they make in China. The US cannot, in retaliation, block the import of goods and services from China without delivering a knock-out punch to US companies and US consumers. China has many markets and can afford to lose the US market easier than the US can afford to lose the American brand names on Wal-Mart’s shelves that are made in China. Indeed, the US is even dependent on China for advanced technology products. If truth be known, so much US production has been moved to China that many items on which consumers depend are no longer produced in America.

Roberts then builds a case for China’s dumping dollars as a reaction against US pressure for revaluing the yuan, refuting claims that this is an impossible scenario.

Consider that if China were to increase the value of the yuan by 30 percent, the value of China’s dollar holdings would decline by 30 percent. It would have the same effect on China’s pocketbook as dumping dollars and Treasuries in the markets.

Consider also, that as revaluation causes the yuan to move up in relation to the dollar (the reserve currency), it also causes the yuan to move up against every other traded currency. Thus, the Chinese cannot revalue as Paulson has ordered without making Chinese goods more expensive not merely to Americans but everywhere.

Compare this result with China dumping dollars. With the yuan pegged to the dollar, China can dump dollars without altering the exchange rate between the yuan and the dollar. As the dollar falls, the yuan falls with it. Goods and services produced in China do not become more expensive to Americans, and they become cheaper elsewhere. By dumping dollars, China expands its entry into other markets and accumulates more foreign currencies from trade surpluses.

Basically, Roberts makes a strong case for the argument that the US no longer has leverage over China and global financial markets the way it used to. You can read his whole article here.

Have we reached a tipping point in American power and global influence?