The China Syndrome: A Hard Landing Coming Soon?

Friday, January 20, 2012, 8:53 AM
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As captivating as the drama is in Europe, and it is quite worthy of all our attention, there are more and more signs from China that its own economic troubles are mounting.

The chief concern for those in the West regards the flow, or rather recycling, of China’s reserve monies gained through their trade surplus. Those funds constitute a crucial factor that has allowed the western OECD countries to continue borrowing well beyond their means. The mechanism was simple enough: Chinese manufacturers would export their goods and receive various currencies in return. Dollars, euros, and yen would be then be exchanged for local yuan, and the People’s Bank of China would have to do something with all those foreign currencies. 

Over the past decade, what the People’s Bank of China chose to do was to use those currencies to buy foreign debt, an act which prevented the yuan from rising in value in relation to all the currencies in question. Thus the cycle could repeat and repeat again, as a low yuan encouraged higher exports and therefore higher domestic employment. Everyone was happy.

Western consumers got cheap goods. China got to keep busy. The only downside was that the West could not really afford all those goods and bought most of them on credit, resulting in debts which China now holds.


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