China: Your Questions Answered
Friday, December 22, 2006 | Teeka TiwariRating:
Seasons Greetings! Over the last two weeks, I have been attempting to share a different perspective on our dear (tongue firmly placed in cheek) trading partner, China. Today I wanted to directly answer some your questions.A concurrent theme in many of the questions and comments I have received revolve around a universal fear of a loss of American power and prominence. That somehow China’s ascension from “third world” to “first world” status could only come about at our expense.
Is this a valid fear?
Yes and no. Yes, just like in the 1980’s when we were losing manufacturing jobs to the Japanese, lots of people got hurt. In fact, the 80’s were the death of the “employment for life” concept. Until then, the Average American had one job, at one company for his or her entire working life. The layoffs of the 1980’s were a huge jolt for millions of American workers. We collectively learned that we could not depend on our employers anymore for lifetime employment.
That paradigm shift unleashed huge entrepreneurial waves in this country that we are still benefiting from today.
But what we really learned from that period was that another country (Japan) could rise in economic might without its diminishing American Power. In the 80’s the Japanese were buying tons of US assets, and the press was fanning the flames of xenophobic fear. Americans were terrified that Japan would own America; that somehow we would be usurped from our own country!
Now they are spinning the same tales about China.
Don’t buy that hogwash! Let ‘em buy our stuff; what are they gonna do, rip it up out of the ground and take it with them? The more of our stuff that foreigners own, the more dependent they become on not offending us! We want all their money, every last drop of it.
Why?
Remember the golden rule: he who has the gold makes the rules! The more money they sink into our economy, the more powerful and influential we become. If they try to dump their holdings, they will slit their own throats. Who’s gonna buy them and where will they put their money?
Gold?
Gold just sits in a vault earning no interest and is bloody illiquid.
Euros?
Sure, they will put some money in Euros and have already started to, but the Euro market is tiny in comparison to the US dollar markets.
No other economy in the world is big enough to absorb all of those investment dollars; they have no other place to go. That is why it is critically important that we continue to foster that economic dependence they have on our financial markets.
It’s our trump card.
Q. Most Americans and politicians know very little about finance or how the USA actually give its citizens the means to spend by continually passing our debt to other nations. If they only knew what would happen to the bond market with the stock market following it to a huge downward spiral if we use tariffs! We have never taught USA citizens about the transfer of debt from the USA to the "federal" reserve, with interest forever climbing. Your article should be taught in every college. I really enjoyed it.
Bob C., Belmont, CA
A. You are absolutely spot on, Bob. We export our debt to the rest of the world, and they finance our economy. The incredible irony of this is that by buying all that federal paper of ours, we are using CHINA’s money to finance our own defense budget! How beautiful is that! We are taking a potential enemy state’s money and using that money to buy guns and bombs that we could one day use against them. Come on, how can anybody say that we are getting a bad deal here?
Q. If you think making bankers rich is good for America, you’re full of (scatological reference deleted.) We need manufacturing jobs, not services. We need to make our own things. Intellectual property at no cost to them is not world economy or free trade, it is suicide for America.
A. I couldn’t disagree with you more. I mean, how are all those poor bankers supposed to pay their country club dues! But seriously, we can’t compete on the manufacturing front anymore; our fixed costs are just way too high. That’s the ugly truth. The politicians will blow smoke all day long about the need to “take back American jobs”. That’s just empty rhetoric. Those jobs are gone and are never coming back.
Intellectual property and services is the future for the American economy whether we like it or not. It’s where we bring the most value and where we absolutely crush the competition. Our economy has been transitioning away from manufacturing since the 1970’s when we started making things cheaply in Japan. Then, when that got too expensive, we went to Taiwan, then South Korea, and now we are in India and China.
The CEO’s of the great US manufacturers will always seek to acquire the lowest labor costs they can. To do any less would be a breach of their fiduciary responsibility to their shareholders.
In the last 30 years, we can see that we did not get eaten by Japan, we did not get eaten by Taiwan or South Korea. What we did see was that these countries successfully navigated themselves from “Third World” to “First World” status, and the collective global economy benefited.
I believe the same will be true of China.
Q. What about the day they call the paper due, and the US can’t pay the debt?? Teek, they do not need a military, as not a shot will need to be fired. Check. DW
A. Let ‘em call the debt! You don’t think we’ve reneged on our debt before? That’s China’s biggest fear! What happens to their economy if we get into hostilities with China? Well, the first thing we will do is repatriate ALL American-domiciled Chinese assets. Their land, hotels, investments and bank accounts all get frozen. Oh yeah, and do you really think we will still be paying interest on their bond holdings? HELL, NO! If China tries to play tough with us, we will SQUASH them. We have all the power in this relationship, not them.
America can survive without China, but can China survive without America? No way, Jose! They will be forced back into the agrarian hell that has plagued them for millennia. Trust me when I tell you we are sitting in the cat bird seat in this relationship.
Q. I'm currently in Beijing at the moment. There is a Maybach sports car dealership in the hotel...
A. Go capitalism! After that comment, can anybody really doubt China’s transformation? China is becoming a communist country in name alone because their actions are clearly telling us that they are embracing capitalism.
Q. Teeka - what about Taiwan and Hong Kong?
A. As far as I know, life in Hong Kong hasn’t changed all that much since the British left. The papers aren’t as free, and that’s unfortunate, but the financial freedoms enjoyed while under British rule have remained intact, and Hong Kong remains a far eastern financial powerhouse.
Taiwan is a little trickier. What’s interesting about Taiwan is that it is a true democratic, capitalist country, but the United States does not officially recognize it as an independent state. Why is that? Why do we (America) refuse to accept Taiwan as its own sovereign nation? We’ve had many opportunities to do so, and I think we should. I can understand China’s view that Taiwan is part of greater China, but I do not agree with it.
What the Taiwanese have created in their economy over the last 30 years is incredible, and I believe it is a peek into the future of what China may one day become.
In closing, I’d like to let you know that it’s been an honor to have the opportunity to share my views with you over the last year. It is my sincere hope that these weekly articles have helped make you a better investor and given you some food for thought.
I am really excited about 2007 and look forward to helping you navigate next year's financial waters. For those of you who celebrate it, have a very Merry Christmas and a wonderful New Year.
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“Let the Game Come to You.”
Teeka Tiwari
Chief Investment Officer
Point & Profit
