Insider

The China Syndrome: A Hard Landing Coming Soon?

Friday, January 20, 2012, 8:53 AM
Enroll NowFor enrolled members only. Enroll or Sign in to read the full article.

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.

 

Enroll Now
Or Sign In with your enrolled account.
Endorsed Financial Adviser Endorsed Financial Adviser

Looking for a financial adviser who sees the world through a similar lens as we do? Free consultation available.

Learn More »
Read Our New Book "Prosper!"Read Our New Book

Prosper! is a "how to" guide for living well no matter what the future brings.

Learn More »

 

Related content

18 Comments on The China Syndrome: A Hard Landing Coming Soon?

Enroll now or Sign In to read all member comments.