China only officially raised interest rates one time last year but in December 2010, for sixth time last year, they raised the Reserve Ratio Requirement (RRR) to a record 19 percent. It is 10 percent in the United States. For some background, the RRR is that amount of money that a bank must hold in ratio to it's liabilities (i.e. deposits). China uses the RRR as an inflation-fighting tool and if China was a Mortal Kombat avatar it would be the easiest move to make: Rawr, Raise that ratio again. The problem is it doesn't appear to be working; as of November inflation was at 5 percent.
This must come as a surprise to some people as the unlimited China growth dragon flies high in the minds of most Americans who regard it as some type of super economy that holds America hostage with T-Bonds. To clarify, China holds about $2 trillion of them. We use this money to finance operations (the deficit); they use it to peg the value of the Yuan (RMB) to the dollar. If China were to dump Treasuries en masses it would hurt us but it would crush them. Unlike China, the Untied States isn't a fairy tale and our country holds a lot of welth in its assets alone. The problem is we have a lot of debt which is never good as it puts to be in the position of having to at the very least entertian Cjineses demands and at most to give in to them. But that sounds so adversarial, and the Unitied States and China are undergoing some current friction in regards to trade but war is hardly imminent.
But this story is popular in Asia and if you watch movies from the 1980s you'd think that by now Japan would be our feudal overlords when in fact they have been mired in deflation and a no-growth slump for decades.
The problem is that rising inflation in China in commodities, like food and gas, kill their consumer sector which is barely a fetus right now. It also kills jobs. China has a jobs policy ever since Tienanmen Square in order to quell protests and riots--one person, one job. But, if the current pace keeps up, China will burst big time, just like the Tulip bubble back in the 1600s. Tulips once went from being worth thousands of dollars in today's money to being worth, well, the price of a tulip.
From Peter Tasker, in a Financial Times article:
"The China story that has been sold so skilfully all over the world is simply another version of the “new era” thinking that has characterized every investment mania from the South Sea bubble to the dot-com frenzy
"If China were to follow Japan, the next stage would be labor strife and inflation. The best way to avoid that outcome would be a radical tightening of the current super-easy monetary policy. But that would risk a serious slowdown and probably necessitate a large revaluation of the Renminbi – both anathema to Beijing. Meanwhile, China’s reliance on a cheap currency is helping to fuel a trade war, in the words of the Brazilian finance minister."
I fear the biggest threat right now in finance comes from China and the mania that goes along with it. Whole cities sit empty. Don't beleive me look up Ordos City on YouTube; it's quite creepy. The South China Mall is the titanic of commercial properties built to be the best and right now it is a sunken shell of dreams too big to have been dreamt.
The point is is that if you believe the China story, you will be in for a big surprise this year or sometime soon as inflation finally takes off to the moon. And just today the China decided for the first time to offer the Yuan to U.S. traders in FOREX markets, which is something that before now would have been unthinkable as it takes away power from the party leaders in China. But things are happening fast so before you go buying a bunch of Yuans, you might want to consider building a fireplace in order to keep you warm because you could lose all your money and need those Yuans to keep warm.
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