China Regains A Position Already Held 500 Years Earlier

Sunday, February 26, 2006

The New York Times has this most entertaining historical research on China's trade balances. Grim result: A few hundred years earlier the British got millions of Chinese opium-addicted in order to reduce their huge trade deficit. China had then - as now - no interest in imports from the occidental hemisphere.
The other newsclips come from Zimbabwe where the government prints currency in order to buy foreign exchange to repay IMF debts and dictator Robert Mugabe now wants to "print money, so people will not starve."
From Keith Bradsher's piece in the NYT:
China has such a huge stash of other countries' money that it could, in theory, hand out bonuses equaling half a year's wages to all 770 million of its famously low-paid workers.
The country will soon release statistics showing it has passed Japan as the biggest holder of foreign currency the world has ever seen. Its reserves already exceed $800 billion and are on track to reach $1 trillion by the end of the year, up from just under $4 billion in 1989.
But China, it turns out, has held a similar position before.
The current pile, much of it invested in Treasuries and mortgages on American homes, is a result of China's selling more goods than it buys, and of foreign money pouring in for the building of factories, apartment towers, office buildings and shopping malls. China is not alone; oil exporters are also piling up cash and trying to figure out what to do with it, leading to disputes like the one over a Dubai company's effort to run cargo terminals at American ports.
History offers parallels to the yawning United States trade deficit and the resulting accumulation of dollars in China. China sells to American companies almost six times as much as it buys, but this is not the first time China has been an export powerhouse. Ancient Rome, for example, found that it had little except glass that China wanted to buy. Pliny complained about the eastward flow of Roman gold along the Silk Road in exchange for Chinese silk.
Long-distance trade collapsed during the early years of the Dark Ages. But through the next several periods of rapid growth in international commerce — from A.D. 600 to 750, from 1000 to 1300 and from 1500 to 1800 — China again tended to run very large trade surpluses. By 1700, Europe was paying with silver for as much as four-fifths of Europe's imports from China because China was interested in little that Europe manufactured.
A longstanding mystery for economic historians lies in how so much silver and gold flowed to China for centuries for the purchase of Chinese goods, yet caused little inflation in China. Many of China's manufactured goods remained much cheaper than other countries' manufactured goods until the early 1800's, despite the rapidly growing supply of silver sloshing around the Chinese economy.
One theory is that Chinese output was expanding as fast as the precious metals supply; another is that the Chinese were saving the silver and gold instead of spending it.
The same phenomenon has appeared today, as dollars inundating China have resulted in practically no increase in prices for most goods and services (although real estate prices have jumped in most cities).
China has an even easier time preventing domestic prices from rising these days because modern banking techniques allow China's central bank to buy up the dollars and take them out of everyday circulation. The central bank has accumulated the country's immense foreign currency reserves in the process.
The British Empire figured out in the 19th century how to maintain a large long-term trade surplus with China. So far, however, nobody has suggested that the United States try to fix its trade woes using the British approach: getting millions of Chinese addicted to imported opium.
But of course it will be different this time.
And on to Zimbabwe. Take note that this story appeared in The Financial Gazette, a government controlled newspaper. Inflation has risen to more than 600% in the impoverished country with a dictator who seems to have lost touch with reality, quotes in the story prove. And remember, this is no satire but harsh reality stemming from hyper inflation.
From The Financial Gazette in Harare:
President Robert Mugabe once again came out to bat for those that believe that these are not ordinary times, and that such times demand extraordinary measures. Nobody is going to throw the big Economics book at the crisis, President Mugabe said. A pile of freshly minted cash would do just fine, he suggested.
"Those who say printing money will cause inflation are suggesting that you must fold your hands and say 'ahh, let the situation continue and let the people starve'. The Good Lord up there has given you a brain and a brain must function, not in a stereotyped manner, but in a flexible manner. So I will print money today so people can survive," the President said in a ZTV interview to celebrate his 82nd birthday.
Debate will now emerge on how much government intends to use this "flexibility" with the printing press.
Last week, Reserve Bank of Zimbabwe (RBZ) governor Gideon Gono disclosed that the printing press had churned out $21 trillion to buy the US$210 million Zimbabwe paid to clear its IMF arrears.
This suggests that RBZ was buying the greenback at an average $100 000 exchange rate since it started raising the money last year, well before the rate hit its current rate just below the $100 000.
It is possible that the RBZ paid much more than the $21 trillion, given that exporters could have used their considerably stronger bargaining power to squeeze out a premium.
While it helped calm that pointless row about how Zimbabwe raised the funds, the $21 trillion disclosure shed light on where inflation and the parallel market exchange rate have been drawing their momentum.
To the bookish, printing excess money is a big no-no. But President Mugabe, backing his argument, said the bookish - and he named Finance Minister Herbert Murerwa as one of them - always forgot the "all things being equal part of economics". The bookish demand that money supply growth should match real demand only worked, he said, when all factors were constant - not when an economy was under siege from an army of detractors.
To give a little more data: Broad money supply growth has been on a sharp upward trend, from 178% in January to 411% in November last year. Inflation this week surged to 613% for January from the December rate of 586%.


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