Who is China Flexing it Muscles For?

Saturday, August 6, 2011 13:26
Posted in category The Big Picture

When I asked last week about what the exposure of a debt downgrade would be, I was initially thinking in commercial terms. Turns out, china has decided to use the downgrade as an opportunity to stand in front of the mirror and flex some muscles.

It started (officially) with Dagong’s downgrade of us debt a full 3 days ahead of the Moodys downgrade yesterday, and has continued with the statements that the the world needs a new currency and the US needs to act more responsible and kick its debt addition

To cure its addiction to debts, the United States has to re-establish the common sense principle that one should live within its means

Setting aside for a moment that China’s own role as an enabler, its own currency issues, and its own banking problems, does China believe that it’s rating agencies the clout to pull off the preemptive downgrade and that there are ears outside of the Mainland listening to its calls for a new currency?and who is their audience?

8-10 years back, these actions would (should) have been brushed off been brushed off by the international community as a joke, but with the Asian economies taking what may be an unfair ass kicking in this current cycle, I am beginning to wonder how China will look to further their own economic and political agenda going forward.

Update: In the Reuters article China Tells the US the “Good Old Days are Over”, I enjoyed the quotes from Chinese officials:

“China, the largest creditor of the world’s sole superpower, has every right now to demand the United States address its structural debt problems and ensure the safety of China’s dollar assets”

and

“International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country”

To me, these comments are off as China is NOT the largest creditor, and even as the largest FOREIGN creditor, their 8% of the total debt doesn’t really give them a commanding position.  More importantly, they are an investor whose currency/ export model (which turned their economy in #2) forced them to look for foreign assets, primarily dollar based, so that the ride could continue.

And what happened whenever they were told to reduce their trade surpluses, revalue the currency, or that a policy focused on domestic consumption would be better for China?  Well, we all know how that went

Which leads me to a second question – with around 8% of the total pie, what “rights” does China “have” beyond releasing statements on fiscal responsibility and trying to take a higher “moral” ground on responsibility

For me, China is coming off as a a whiny investor who shoulda, coulda, woulda, but didn’t take steps to address the core issues which resulted in their current situation.  The recent debockle in the US (which deserves scathing criticism) should have come to no shock to anyone.  ANYONE.

In fact, in my mind, Xinhua should either be (1)  criticizing China’s own decisions to keep the RMB inflated and exporters subsidized, which have resulted in the current level of exposure  or (2) should be downplaying the current situation, and accepting any losses as a cost of doing business… because, in the grand scheme of things, any losses that China will incur from this are a parking ticket when you consider the gains that have resulted from China’s exports.

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3 Responses to “Who is China Flexing it Muscles For?”

  1. Bill Rich says:

    August 6th, 2011 at 1:49 pm

    China always reserves the right to look foolish. It is an  inalienable part of Chinese culture an tradition.

  2. Ron Collins says:

    August 7th, 2011 at 5:29 am

    You hit the nail on the head when you said China chose to invest in US debt. Also, if the world changed to a new “world” currency, why would it be the RMB as it is restricted. I think their comment, like 99% of their comments, are directed solely to the Chinese people in the mainland. China knows the RMB would never become the world currency, but the majority of Chinese do not know this fact. A statement like that just allows to Chinese people to have hope (just like entering the WTO, having the Beijing Olympics, etc.)

  3. Chris Devonshire-Ellis says:

    August 9th, 2011 at 4:32 am

    Agreed, but to answer the question posed, China is flexing it’s muscles for it’s own domestic propaganda purposes, and the style of the rhetoric makes that clear.