Samizdata

This article over at the Foreign Policy website, by Helen Mees, dusts off an argument that I have mentioned here on Samizdata before, (in relation to a comment by the US investor and commentator Peter Schiff) namely, that China, by using its vast foreign exchange reserves to buy Western government debt, thereby pushed down long-term interest rates and encouraged the kind of reckless lending that ended up going ker-boom! in 2007-2008. And if only the Chinese had not flogged us all those artificially cheap computer parts and children’s toys (made cheap by that naughty fixed exchange rate regime for the yuan), they would not have made so much money to then lend to us Westerners to blow on housing we cannot really afford. (Here is another old post of mine on the same subject of debt/savings imbalances between the West and China.)

The problem with this line of reasoning is that if, say, a country has earned genuine income by selling something valuable and useful (like toys, cars, electronic components or whatnot), and invested the proceeds abroad in things that can generate new wealth in the future, what is the problem? The problem is not that China invested huge savings and other surpluses into the West – after all, in the 19th Century, the UK invested large capital surpluses in places such as the US, Canada and Argentina (now there’s an irony, Ed). And there was nothing “imbalanced” about that. If real savings – not central bank funny money created out of thin air – gets lent to people to invest, that’s hardly bad. The problem is if the money is lent to people buying homes as part of a broader speculative bubble in real estate, say. And there is no doubt that domestic policy in the West, most definitely in the US, encouraged unwise lending and borrowing for property, consumer goods and so on, rather than investment in new technologies and industries.

The comment thread on the FP item are interesting, where it is contested that subprime borrowing made up only a tiny fraction of the US mortgage market. It did not, since one of the issues with the sub-prime market and the huge losses sustained by banks was how sub-prime debt was mixed up with better quality stuff and then sold to investors as if it is was all investment-grade, when it was wasn’t. For example, here is a comment from a person called “RRAFAY”:

“Actually, 5% of Subprime is enough to cause a crash. Especially, when no mention is made of how these mortgages were leveraged. Secondly, Alt-A is not mentioned either. When both are taken together, they represent roughly 15% of the US mortgage market. Secondly, the idea that Chinese surplus capital led to an excess supply of money is so weak, that it is mind boggling that someone would even suggest this. China only holds 7% of total US debt. Each country mentioned had a housing crisis, Ireland, Spain, and the US.”

In my view, it is certainly true that in a world of free capital movements, if a country A can export a vast amount of its capital into country B, and people in the latter country are not constrained by proper market disciplines and there is already a full-blown encouragement of high borrowing and lax lending, then the added money will pour fuel on the fire. But in the main, I think it is a pretty silly line of argument to say that it is the fault of the Chinese for having earned so much money and then reinvested it. There’s something just not quite right about that argument on so many levels.

A few minutes back I was glancing through Chinese trade statistics, in an attempt to put together the hopefully reasonably detailed post on what is going on in China that Brian has been nagging me to write.

With respect to Europe, the stat that pops out is that Germany runs a significant trade surplus with China, but that the eurozone as a whole and even more the EU as a whole runs a large deficit. Trade patterns with China are responsible for part of the immense stresses that now exist on the €uro. The German surplus puts upward pressure on the currency at the same time that the southern deficits put strong downwards pressure on it.

One thing that comes up is the “Hong Kong Problem” in the statistics. Many containers of Chinese exports from the factories of Shenzhen and Dongguan are carried over the border into Hong Kong, and are then shipped from the port of Hong Kong. Others are carried to the port of Shenzhen and then exported from China directly. Which port is chosen determines whether the export shows up in China’s trade surplus with America or whether it shows up in Hong Kong’s trade surplus with America. It is not difficult to simply consolidate the numbers, but this is not always done, and figures are sometimes misleading because of this. The two ports of Hong Kong and Shenzhen are only a few miles away from each other, and are at present third and fourth in the list of busiest container ports in the world, but would be the busiest by far if counted together. I had seen the port of Hong Kong many times prior to my last visit to the area in 2008, but I was curious about the port of Shenzhen, so I visited the Yantian district of Shenzhen.

After I wandered down the roads between warehouses and goods yards full of containers for a time, and took many photographs through gates, a man in a uniform gestured to me to stop and went of to consult with someone else in a more impressive uniform. At this point I thought it would be good to make myself scarce, so I departed rapidly down the road and out of the container port. (I sent a text message to a private equity fund manager friend of mine in South Africa, who urged me to keep taking photographs, as he was interested in seeing them, and because “Mike, your safety is something I am entirely willing to risk”).

But anyway, I made myself scarce. A half hour later I found myself walking along the shore past a rusting Russian aircraft carrier, which was apparently the centrepiece of a bankrupt, cold war themed theme park named “Minsk World”. After a while of this, I departed for a different area of Shenzhen, and somehow managed to end the day drinking a weissbier served to me by a young Chinese woman wearing a dirndl, while sitting on the deck of a boat that had once been Charles de Gaulle’s private yacht.

However, it was a good day. It is only on very special occasions that life gets this weird.

When buying two old Soviet aircraft carriers from the Ukrainians, the Chinese claimed that their reason for doing this was to convert them into tourist attractions. Reputedly, the actual situation was that they hoped to learn as much about aircraft carriers from them as possible, and then refit them as actual aircraft carriers. Upon discovering that they were in fact large and immense floating pieces of rust that had actually not been very good aircraft carriers in the first place, in a possible attempt to save face, the Chinese did attempt to convert them into tourist attractions after all. Thus the two Soviet military theme parks, one in Shenzhen based around the Minsk and the other in Tianjin based around the Kiev.

Both subsequently went bankrupt, a day out while looking at rusting remnants of the Soviet Union not apparently being a big attraction for the young Chinese. The Kiev carrier in Tianjin has apparently been subsequently converted into a hotel. The Minsk in Shenzhen continues to rust.). The Chinese in 1998 purchased the incomplete Admiral Kuznetsov class carrier the Varyag, which was at that point floating somewhere in the Ukrainian waters of the Black Sea. The carrier was officially bought by a Macau based tourist venture, with the pretext being that it would be converted into a casino. In this case, though, it remains in the hands of the Chinese military. After a (very) lengthy refit, it may one day enter into service in the Chinese navy.

All evidence is that the Chinese did in fact purchase Charles de Gaulle’s yacht with the intention of turning it into a floating Bavarian beer bar, however.