How about this scenario for avoiding economic doom? The Chinese have a savingsrate of +40%. What if you would allow the Yuan to skyrocket to parity with the USD. Sure, it would kill their exports badly but the apreciation in the Yuan would counteract in this to soften the blow. Now you have 1 billion Chinese who can spend MORE than the average US citizen who was a negative saving rate. Tourism around the world would truly explode as all those Chinese come and visit the Eifel tower or the Empire State building bailing out the West as well in this economic downturn we are experiencing. Some hyperbole to it sure and balance must be found in this to some extend but the scenario is likely to play itself out in the future anyway so they might as well accelerate it to the benefit of all. Yuan is the key not USD.
Are you on drugs? China is an export dependent economy. Guess who buys craploads of their stuff? As shown by this global meltdown, it is still the US health that has an overwhelming influence on the world. Not because it is the reserve currency, but because the US trades massively with everyone. Brazil and Canada won't be buying from China if the US isn't purchasing their goods. Russia will implode unless crude goes back up significantly. Sorry, but China buys US debt to prop the dollar for trade. They also have so many dollars that its the easiest method in which to invest them. There are few markets liquid enough to absorb such large investments without serious consequences. BTW, China has over a trillion in US reserves. They don't "need" dollars for trade. Besides, they could always trade in euros if that was an issue. Euros are accepted everywhere the dollar is.
How does a Yuan appreciation help the Chinese population if none of them have jobs? Their economy is overwhelmingly based on cheap exports. The Chinese government has been doing everything they can to avoid Yuan appreciation because they are having a hard time employing the populace as it is now. They are truly paranoid about a workers' revolution there, and want to keep everyone happy.
They are trying, but in the end they will be left "holding the bag" with trillions of dollars of worthless US treasury bonds. That loss of value will render their central bank insolvent. If you'd ever been a credit manager in hard times you'd know that it goes from where you lend more and more, to where you just try to keep the balance from increasing, to where you see that exposure MUST be reduced, even if slowly over time, to prevent the insolvent large customer from dragging your business under with them. Some countries are already avoiding or reducing US dollar exposure. If history is any guide, the last ones holding US dollars and Treasury bonds will suffer the most, because they will find themselves "holding the bag". The US Dollar and Treasury bonds only have value to the extent the Congress and President are willing and able to tax the people to repay those debts. They are not able to raise taxes to repay those debts. They could raise taxes for 100 years and still not be able to repay the debts. You'd be wise to remember that.
The chinese will diversify their export market, that's all. They will sell more to southern countries instead of northern countries - especially as the currencies of southern resource-rich countries gain value and as their markets grow. As for maintaining stability: there are many ways to achieve stabilty: jobs, but also improving living conditions. How to improve living conditions? By having a currency that buys more goods. How to create jobs? By developing a service sector at home, etc. Many people are forgetting the core issue of the current crisis: the realization that the standard currencies (the bases of the current economic order), as well as the asset-based on those currencies (USD & EURO) are unstable and risky... When looking for a solution to balance this out, inevitably, other currencies of developing economies will rise to the forefront - there is a economic transition in the making. Then again, what else can you expect: western currencies are overvalued (hence making their economies non-competitive), labor force is aging (hence shrinking), all that coupled with enormous debts and deficits and negative savings rates, half-paralyzed governments incapable of taking decisive action, citizens used to living in a welfare state, ... We better brace ourselves for a period of rapid decrease in standard of living - especially those with precarious jobs, over-spenders, or those with no homes/savings.
I agree with some aspects of this post such as the decrease in standard of living in debtor nations such as the US. But back to your original post, it will be many years before China will be able to shift to a consumption society for various reasons. Roubini thinks it will take decades (I can post a link to several articles discussing this if you wish). Bottom line is their rapid growth has been due to cheap imports created by slave labor wages, and an under valued currency. In addition, their extremely low GDP/person allows them rapid growth on a % scale at this point in their development. This will become much more difficult as they grow. Wages will rise, the Yuan will appreciate, and the cheap exports will be more expensive. China will inevitably become more consumption based, assuming they don't implode first. There is a very real possibility of this even if the the general US populace thinks China will take over the world. The Chinese government has just announced a half trillion (yes trillion) dollar infrastructure program because they are so paranoid about employing their people. Anything below 8% growth and they are screwed. There is no doubt about this, its a make work program, although it will greatly benefit the country for years to come. That is not why they are doing it however. Luckily for them, they currently have the cash. In a few decades China may not be so dependent on the US, and may well be the world economic giant, but don't hold your breath. In the near term, they absolutely need US trade. Other countries can in no way spend enough as a substitute, and if the US is not purchasing in a major way from China, they won't be doing this with other countries as well. Countries that need this trade to buy from China (Japan, S Korea, Brazil, Canada, etc). I would say that for at least the next 10 years, IMO, when the US sneezes..... Including China.
I agree that China is walking on a thin line and that along the path of reform/modernization many things can go wrong. But I think that the country is moving in the right direction and that the risk of implosion is no greater than India imploding to use a comparable. In fact, China doesn't need the US. What China needs are natural resources: grain, oil, wood, copper, etc. If it can find trading partners that can supply it with these resources, it will be fine. They supply the raw materials, it supplies the value-added product at half the price developed countries do. The fact is that it would be pointless to sell to the US if the only thing they get in return is a currency that buys nothing. Now this relates to your point: the fact is that the USD nowadays can buy anything, so it is a valuable currency. Because of this, it is worth selling labor and goods in exchange for it. But don't get me wrong, if the US keep on overextending their credit limit, this situation won't go un-noticed. Already the world is spooked by the crisis in USD and EURO as well as the huge amount of debts they are accumulating to finance wars and social programs they can't afford. We all know that all the poors of the world would like to benefit from a welfare system like that of France, but can't for one simple reason: their country can't afford it. Well France can't afford it, so why are they allowed to maintain it? There is a dented logic in this, and there is a movement of the equilibrium that is pointing towards a correction of this. This is about economic theory and the nature of competitiveness in a more democratic/fair world (no longer under colonial, post-colonial, or entrenched military factions). Can't fight against these laws in the long-run. p.s. the US can sneeze once, it will pass. But if the US sneezes a bit too often or is exhibiting a deteriorating condition, I don't see many friends being at its bedside ... this is the sad nature of global politics, and it's true for all nations and all winners of the past.
Many years down the road you may be correct. But China is VERY dependent on their export engine in the near term. They absolutely need the US for this, and they know it. As stated in my previous post, there is no way the rest of the world can substitute for a significant drop in US trade. In fact, the rest of the world's consumption economies, for the most part, are contracting even quicker than the US. Much of this is because of the US, directly or indirectly. By indirect, for example, crude oil prices are dropping which hampers Canada, and absolutely kills Russia. The drop in crude is demand led, not supply related. This is largely, but not entirely due to US markets. Direct effects are a drop in US consumption in general, and all the toxic derivatives purchased by other countries. Many of them got in even deeper than the US, but the derivatives were mostly created in the US. Everyone got too greedy. Somehow it blinded all of them to risk. Anyway, I am on a tangent here. Take away the US, and China would implode very quickly.
thriftybob If the dollar were to collapse partially or entirely, where would you have your wealth just before that event? and can someone explain how money velocity in relation to credit markets is likely to effect inflation.
OK, several points here. To answer the thread you tried to answer from thriftybob, US bonds and the dollar have value based on what the rest of the world thinks much more so than the taxing ability of the US gov nowadays. The econ 101 books are a bit outdated now. Ironically enough as it may seem, US Treasuries are seen as one of the safest investments on the planet, especially if you have billions to park. Yes, the reserve currency status is an issue here, but we could do an entirely new thread on that one. Velocity of money is the usual cause of inflation in most cases. This is basic macro econ. Too many dollars chasing too few goods in a basic sense. Spikes in crude can affect inflation as well, but usually this is a monetary situation also. Now that the world is paranoid about long term supplies; however, this is changing. BUT, in general, in layman's terms, too many dollars in circulation (velocity) = inflation. We do not have that problem now. We have the opposite problem. Not quite sure what you mean by in relation to credit markets. Can you be more specific? The current credit situation is very deflationary. Basically, very difficult to get any, and thus spend.