China only officially raised interest rates one time last year but in December of 2010 for sixth time they raised the Reserve Ratio Requirement to a record 19 percent. It is 10 percent in the United States. For some background, the ratio 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 is at 5 percent.
This must come as a surprise to most people as the unlimited China growth dragon flys high in the minds of most Americans; whi regard China as some type of super economy that holds America hostage not with fire but with T-Bonds. They about $2 trillion of them. We use this money to finance operations; they use it to peg the value of the Yuan (RMB) to the dollar. If China were to dump Treasuries it would hurt us but it would crush them. Unlike China, the Untied States isn't a fairy tale.
But this story is popular in Asia and if you watch movies from the 1980s you'd think that Japan by now would be our feudal overlords but in fact they have been mired in deflation and no-growth for decades now.
The problem is that rising inflation in China in commodities like food and gas kill their nascent consumer sector which is barley a fetus tight now. It also kills jobs. China has a jobs policy ever since Tienanmen Square in order to quell protests and riots But if the current pat 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 characterised every investment mania from the South Sea bubble to the dotcom frenzy
"If China were to follow Japan, the next stage would be labour 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 it's mania. Whole cities sit empty. The South China Mall is the titanic of commercial properties built to be the best and in the end nothing but a sunken shell of dreams too big to have been dreamt.
The point is, is that, if you belief China story, you will be in for a big surprise this year as inflation finally bursts what is just an illusion an Potemkin village used to impress the masses and make people believe wealth and power exists were this is really nothing. Funny, thing is now China is offering the Yuan to U.S. traders something before that would be unthinkable. 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 will lose all your money and need those Yuans to keep warm.
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