China is Running out of Dollars

In short:

  • They use dollars to pay contractors inside and outside of China as apart of Belt & Road.
  • They use dollars to pay Bond Holders.
  • They use dollars to pay foreign suppliers.
  • A crisis a year ago forced them to distribute $1 Trillion in foreign reserves, denominated in dollars.

Without dollars, B&R projects will shut down, more Chinese companies will default, supply lines for products they need will dry up, and the Chinese Government itself will at least partially default on its own debt.

But there is “good” news for China in that Coronavirus has crippled other export economies, meaning China is gaining strength as an exporter, and the Yuan, their currency, is gaining strength at the moment. This could leave them with more leverage to use Yuan to pay down debts, or fund projects with it to begin with.

Meanwhile, we’re trying to catch China in a technicality on Republic of China (RoC) and Qing China Bonds from the 1930s and 1940s.

You (China) say there is only one china and no “other” RoC, but claim you don’t have to pay those bonds because they were distributed by the RoC. You also paid part of those bonds to the British in 1987. You also make territorial claims like the RoC and Qing did.

Seems to many this should be all or nothing. And President Trump has gotten involved backing this effort.

If paid out in total, these bonds are worth $1.3 Trillion. Their remaining foreign reserves would be cut in half by it.

Just something to be aware of with them.

Yes, Trump was right to go after China. Everyone who decried the tariffs, and “trade war” were wrong. This had the potential to undercut China and prevent them from dominating the globe for the next fifty years.

China is in a time crunch, and if we can delay them by even ten years - it’s over. They may end up largely ruling Africa, but they won’t control Asia. India is rising fast, and with just a little more time, China can’t force the smaller countries to become economic vassals. And without that control, they never become the single biggest economic force on the planet.

Tariffs didn’t do this. Tariffs couldn’t do this, as they don’t decide their supply of dollars.

(Equally, China’s exports are higher than ever right now.)

Furthermore, this problem started years ago in 2015. This is a problem China caused to itself in several ways.

When you look for the cause, you get statements like this:

“The root of the problem is simple: Beijing would like to be a major financial player overseas, but few borrowers have any interest in the yuan. Most international trade is accounted for in dollars, the yuan is difficult to convert and foreign owners of Chinese assets have at best an uncertain relationship with the country’s legal system.”

Why has the Yuan struggled to become a global currency? Because how the CCP manages the Yuan puts investors on edge. The biggest reason recently for Yuan not getting more adoption, is China’s mishandling of Hong Kong. Hong Kong was serving as a safe haven foreign investors like to have to park their money, disconnected from CCP interference. The CCP has since ruined that confidence.

When it comes to why companies are defaulting on dollar-denominated debt, that’s the Coronavirus at work, destroying demand for several months.. China’s economy has been in a bubble for years, and both private and Public corporations are highly overleveraged. Much of it secretly.

As the video mentions, Trump could lean on this by sanctioning them the same way we sanctioned Russian, which would cut them off from the world financial system and its supply of dollars nigh-completely, but we haven’t done that yet.

Tariffs didn’t re-shore manufacturing. Because it can’t.

Manufactures overwhelming just set up shop in Southeast Asia.

It was also still a blunder not to negotiate a Trans-Pacific trade deal.

So long as there isn’t one, China gets to use BnR to fill the vacuum. Countries like the Philippines will choose working with them over their own territory.

The guy in front of the camera is trying to be funny, but he’s not very good at it, but the story is really interesting.

My off the cuff response is to say that at least part of this is the delay of the 2008 financial crisis where China encouraged it’s private sector to borrow as the CCP did the same and delayed the inevitable.

The problem is, it’s always best to borrow in you’re own money and if/ when China goes down in flames, remember it was foreign debt that caused it’s demise, not sovereign debt.

I think it’s even simpler than that.

The simple fact that they are a MASSIVE net exporter means foreign dollars flow into their economy (real goods flow out). For the US, we are a massive net importer which means our dollars flow out into the world (and real good flow in). As a result countries all over the world hold trillions of US dollars ($6 trillion by some estimates). This is what makes it possible for 42% (according to this vid) of all global trade to be conducted in US dollars.

The simple fact is, nations of the world hold very little in Yuan reserves. Its simply impractical to trade in Yuan.

This is why a trade war if it were successful, would decrease the number of dollars circulating globally as there is more domestic production resulting in decreased imports and (presumably) increased exports.

Which is why, when the US government creates and spends trillions of US dollars if those dollars end up in the hands of the average consumer, who then turn around and purchases foreign goods (which they benefit from in innumerable ways), it assures the world stays addicted to the US dollar and US consumers benefit from lower prices than they’ed pay if the same goods were made domestically.

Wrong. Most countries trade in US dollars because they are relatively stable as currency. The Yuan fluctuates often, mostly based on what the Communist Central Committee wants done. Nobody wants to “hold” the Yuan for that reason. The CPCC are currency manipulators and it HURTS their economy.

This explains why you support tariffs, because you don’t understand international trade.

I think you meant “importer” here.

Didn’t have to be; China has a middle class that’s about 400 million strong. They have massive import potential.

But they control outflows of their currency because that’s one way people can transfer assets out of the country, and they wanted to crack down on that.

Equally, while there are numerous places you can save dollars in off-shore bank accounts outside of U.S. Government interference, there’s no where where you can do this for the Yuan.

The one place you could was Hong Kong, and that was promoting Yuan’s use in more and more markets… but now they’ve interfered with it. Confidence is gone.

That’s stimulus logic, and we know from experience it doesn’t work.

The Government is just shifting dollars around, and it create false signals. It confuses the economy, it doesn’t help it.

Stimulus essentially create numerous micro-recessions. Hence why the “multiplier” in each case was less than the “2” they needed to justify it, and typically less than 1.

Thank you, fixed

I agree, and long term I suspect that’s their plan, but if they deploy their spending power globally with the goal of becoming a net importer, they are going to have to find jobs for hundreds of millions of people who can’t, by definition keep their jobs in the export sector. Sure they can swap from manufacturing to some sort of service sector, but that’s going to take a decade or more.

I think that depends on what the government spends its money on. Is it creating real useful infrastructure to ensure that even with higher costs, there are benefits to creating here in the US?

That said, there are a lot of unproductive ventures the government can engage in that do as you say. So again, I don’t think there’s a rule here one way or another, the devil is in the details.

Doesn’t matter, as the government doesn’t know. It’s going to guess wrong most of the time.

And there are political incentives involved where it intentionally puts money in things that look good but are economically dubious. Or perhaps don’t look good but boost a metric somewhere the people managing the money care about.

Funding stadiums, funding infrastructure that’s a net loss, asking repair workers of monuments to use slightly smaller tiles…

But yeah, there’s no case of an out-and-out stimulus working. They just create misallocation.
And the signals they create promote misallocation of other money/assets/labor beyond the stimulus funds themselves.

It’s a temporary high with a long hangover.

I can agree to disagree with you on this point and here’s why, because even if (certain) projects are a net loss from the public sectors point-of-view, they can be offset by gains in the private sector.

For example, a bridge could connect two places that increase commerce and decrease costs (and time spent) for the businesses that use them.

Of course, the devil is always in the details.

If they can’t even pay their own operating costs, and the Government goes into debt financing that, they’re a net loss to everyone.

And again, stimulus spending entangles other resources that could have been spent enhancing something productive. The false signals and the misallocation is damage to the economy.

Except we build bridges to no where, we built $billions in bridges and roads in Detroit that fewer and fewer cars used.

And we seriously overbuilt Dams.

White elephant infrastructure is real, and persists. Grants are a known text book case of rent-seeking, as they encourage States & cities to waste resources chasing after them.

And again, I’m not speaking in abstract terms, but to the actual track record. Stimulus funding fails, and it fails for predictable political and game theoretical reasons. Even before you get to the out-and-out knowledge problem.

You can’t point to a stimulus bill that succeeded in getting that 2x multiplier. Your ideal situation, wasn’t the outcome.

Yeah, you know we disagree on this. I offered to introduce you to Warren Mosler who is essentially the originator of what has come to be known as Modern Monetary Theory since you didn’t take me up on that, maybe you’d consider joining a group I co-host a FB page called “Introduction to Modern Monetary Theory” . I think a discussion there might help unwrap what I think are the weaknesses in you’re argument. I think you’d find some interesting debate there and I’d be happy to invite some well-spoken and knowledgable people (including Warren).

Come on AS, you know I already conceded this argument, Yes, if you build a bridge to nowhere or a train to nowhere or you build 1000’s of tanks even the military says it doesn’t want, that is an issue. But there are projects that are too big, too risky, or just aren’t profitable enough that the government sector can take on. Look at the space program. The government put a man on the moon back in the 1960’s and even today that would be a herculean effort for the private sector some 50 years later. Yet one could argue the strategic military and economic advantages were sizable and worth the money spent (though I admit, this isn’t the best example of government money spent.

But you act like the private sector doesn’t misallocate its own resources.

That said, I’m not advocating that all projects be taken on by the government, I prefer a mix myself.

Christina Romer admitted the 2009 stimulus failed to achieve the 2X multiplier. There are no examples of any other stimulus achieving this. Thus, all he can give me is hypotheticals.

Results are what matter. They’re the sanity check.

You haven’t though.

Politics does this, because it’s built to do it, and there’s no stepping away from it. Rent seeking brings this behavior out every time. You’re not getting to a place where only disinterested actors actually choose how the money is spent based on a cost curve or ROI.

Just like how the Post Office in theory could run fine, but in reality can’t, because it’s managed by Congress who has political incentives that run it into the ground.

You can’t get away from this mess. The mess is in infrastructure, it’s in the military, it’s in rockets, it’s in every enterprise the Government engages in.

And this is because Government operates by allocating resources based upon prestige, connections or tradition. Economics is an afterthought. That’s the reality.

Admit that, maybe then we agree.

I’d rather not. I work in space. I know first hand how awful this is.

How much the old paradigm has stagnated development for decades.

Artemis and the SLS are built like jobs program, white-collar welfare. Not something interested in getting to and staying in space.

It exists because of connections and traditions, like Senator Hatch wanting the Solid Rocket Motor builders for the Space Shuttle in Utah to continue building them for the next NASA vehicle. And another Senator in Alabama wanting Marshall Space Center to integrate that vehicle.

Not merit, not cost, not scale, tradition.

We have an entire industry fed a steady diet of cost-plus contracting, and which fetishizes “heritage” (old technology) in their designs. They’re used to it, and they want to keep it. And it sucks to the viewpoint of anyone who wants this industry to, y’know, do ****. Or update in a continual way like how you see computers and cars do.

SpaceX. “Can you turn a rocket into a commodity?” Lockheed said “no” to Robert Zubrin in the 90’s, Elon Musk said “hold my beer” .

Same thing to “Can you make a rocker reusable?” “Can you make it purposively land?” “Can you make a full-flow stage combustion cycle and not have that cost $10 Billion?”

The entirety of what Musk has done can fit within the cost of 3 Shuttle flights. All of his rockets, all of his launches, all of his sites, all of his tech development. NASA’s own estimators have repeatedly failed to account how much what SpaceX was proposing to do would cost. They were off by a factor of 10.

Cost-plus contracting and distributed suppliers has made things artificially expensive in space for decades, and Elon Musk is calling BS on all of it.

The military also causes this kind of dysfunction. In the 1970s their getting hung up on having automated CnC machines, and their monopsony resulted in us catering to that demand then losing commercial CnC to Germany and Japan.

The military stresses performance whereas everyone else stresses cost.

It’s like if you had to build every car to F1 Formula standards. Or every plane like the SR-71.

Heck, the Soviets had plenty of technology themselves; ever wonder why so little of it proliferated back into consumer goods? It’s the same problem. Monopsony.

The private sector quits doing it because it hates losing money, the government continues because it’s incentivized by Politics, and empowered with tax dollars.

Detroit keeps building roads it doesn’t need because the public Sector Unions demand it. And in a private economy under collapse, Public Sector representation has even more power than usual.

Multiply that x1000 for all the localities we’ve seen go broke over the past decade.

So you won’t take me up on my offer?

Oh the FB link? Sure, send it as a PM.

No. He MEANT exporter. Otherwise, his premise doesn’t work at all.

That debacle was sold to the public as “shovel-ready jobs.” What it turned out to be was bail-out money for mismanaged city and state governments who used the “stimulus money” to pay into under-funded retirement accounts and to pay current and hire MORE “government employees.” That was a net LOSS for the rest of the country. When they laughed about there being NO “shovel-ready jobs”, if we were a sane society, everyone involved in that scheme SHOULD have been kicked out of government and locked up somewhere they could USE shovels and sledge-hammers to make gravel out of big rocks.

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He meant net importer, as to America. He even changed his post to reflect that.

How would the foreign sector acquire trillions of US dollars as reserves (around $6 trillion to date) if not through the sale of goods to the US consumer?