Surrounded by Negative News in US

Two days after I arrive at the bay area, I still didn’t see anything wrong. I arrived in Saturday, and has a bunch of meetings in San Francisco. Everything seems great. Now, it is Monday.

However, some chat with my friends today is all about negative news.

Lehman Bros’ Bankruptcy

I may be too late on news, but I just heard about the bankruptcy of Lehman Brothers. I just heard it 10 minutes over coffee from my old friend in eBay.

What? What is happening. Then I realized the Dow Jones dropped by 504 points, the worst since 9/11. It is a bad day today.

How interesting that my first meeting tomorrow will be at Lehman Bros’ office. It is a awkward situation. How about the meeting tomorrow?

But there are much bigger question to ask beside my little meeting: What’s next for the US economy?

Feeling the Recession

I haven’t experienced recession in my life time. The China economy just keep growing in the last 30 years since I was born. There are some problems, but not as big as US recession this time.

My friend told me that Americans just cut their spending, and don’t pay for many things. They don’t buy new things, they don’t have expensive dinner (or even don’t dinner outside), and they don’t plan for vacations. (By “Don’t”, it really means less). Jobs are cut, and the cloud just appears to be everywhere.

To add a note to this, yesterday, I had appointment with a friend at Starbucks, 1 Market Plaza. We went into the building just to find out the coffee shop has been closed. It just echos of the news that Starbucks is closing outlet because people don’t buy expensive coffee as often as before.

It seems people in American is tied more closely to economy and finance world than we are. I still cannot understand what is going on now. Would like to hear what do you think about it.

And, the question is, what about China?

14 Comments

  1. get us some first-hand news, if you can..

  2. i m getting scared if this will happen in china. though china nowdays have enough problem yet.

  3. The average Americans spend a lot and save very little (or none at all). Matter of fact, credit card debt is a huge problem in America, not because they have lots of “expenses”, but because they spend more than they make/have. Maybe the mentality is that they can always make more so they spend first? Perhaps the recession is finally hitting them and they realize that they might not make enough….

    In China, the older generation folks have always learned to save. However, I see similar patterns (like the Americans) among young people, spending all their money and not saving much. Part of the reasons could be the only child syndrome (2 parents/4 grandparents providing for one child). So young people today have lots of spending cash and don’t worry as much about saving for the future. If China ever faces an economic downturn, the same problems will arise here.

  4. yeah…what about China? Hmm….well let’s see. How about more than a 100 children with kidney stones from contaminated milk powder in yet ANOTHER contaminated food scandal? This doesn’t catch your attention, WJS? Let’s face it, there’s shady companies all over the world, but contaminating food for children seems to be something the Chinese particularly excel at. Assuming they’re able to eat anything from underneath the rubble of buildings that government safety inspectors didn’t bother checking, in an earthquake prone zone.

    Think of this while you write the “Chinese economy just keeps expanding.”

    So does the pile of bodies….

  5. I don’t know express my feelings on my motherland.But at least we have a lilltle confidence with our nativie product.Wish all things would be better.

  6. Most of my friends and family that live in America are especially conservative with their spending today because one never knows if a layoff is around the corner. The pressure has slowly been building up, gas prices rose, housing market crashed, now the Lehman and AIG are in trouble. It’s a domino effect but I think things will continue to worsen. Poster Susan has a valid point – credit cards are a big problem among Americans. There’s a name for the syndrome: “credit card millionaires” because they live the life (cars, houses, vacations, daily starbucks fix, etc.) of the wealthy but can barely make the minimum payments to the credit card companies. It’s not just the housing market that overextended; credit card companies give credit to anyone. Now that the market is continuing to crumble, layoffs are going to be more and more commonplace and people will start to file for bankruptcy in record numbers as their credit card debt, home foreclosure and layoffs start to cave in.

  7. Brian, what exactly is your point? What does the baby formula scandal have to do with the recent economic problems in the US? Yes, the Chinese economy has expanded considerably in the past few decades…and? You seem to be getting defensive about something that doesn’t warrant a defensive position. All Jian Shuo is trying to get at is that the recession here is bound to affect China’s economy. So unless all of the Chinese economy is based upon baby formula, I don’t see why you’re bringing it up.

  8. Jianshuo, I’m glad that the Chinese media and officials are finally realizing this– China, for its own economic survival, must get out of the dollar *now*!!! You cannot depend on the US economy– our government, our economy, our culture are all broken. The USA is beginning a path of rapid and horrific decline.

    I live here in the USA, and it’s just extraordinary how many millions of bright, educated young people in the USA are emigrating, leaving the USA for other countries. There is no future here. Most Chinese people I know respect intelligence and achievement, whereas US culture respects mediocrity and stupidity. Just look at our Presidential election, to see how broken our culture, economy and government are. Propaganda and lies rule our political “discussion,” actual accomplishment is criticized and penalized (while stupidity and arrogance are rewarded by the media), our entire government is bought by rich corporations…

    In summary, the USA is broken, for good. Our culture, government, economy in terminal decline. Our schools are among the worst in the world. Our infrastructure is collapsing. Our national debt is now over $11 trillion with the recent bailouts, and it’s going to double that within 5-7 years! As our debt grows, the value of the dollar plummets, through inflation and interest rate cuts.

    If there’s one major flaw that I’ve seen in the Chinese people– it’s that too many Chinese people are naive. I still talk to many Chinese who think the USA is the world’s best country. We were 20-30 years ago. We’re not anymore. We still do some things well (some aspects of technical innovation and entrepreneurship), but overall we are falling apart, and even in technology the USA is falling behind.

    I understand that China’s economy still does depend on exports, but you cannot depend on the USA anymore. Invest your savings into China’s own infrastructure, education, entrepreneurship, creativity, cultural production and science. And above all, do not buy dollar-denominated assets– don’t save up dollars or Treasury Bills.

    I also realize that China must be careful not to allow the renminbi to rise too quickly. This is true– but you have to transition as quickly as possible to an economy that is strong domestically, focusing on domestic infrastructure and production, and exporting higher-quality goods in high-tech (so that cost is less of a factor), including films, TV shows and music in Mandarin Chinese.

    To allow the RMB to rise slowly, making a gradual transition from a cheap export-dependent economy, buy up Euros and Euro-dominated assets– as well as Swiss francs, yen, ringgit, won, rubles, Norwegian krone and other currencies– but not the dollar! Diversify the languages you study– make English just an elective, and focus more on languages like German, Hindi, Spanish, Portuguese, Arabic and other languages. The USA is collapsing– don’t hitch your own economy to ours anymore!

  9. Jianshuo, To be honest with you, you seem to be out of touch with China’s real reality. China today actually has bigger problems than the US. But the difference is, US government won’t try to cover the problems up, all will be in the news and everybody knows about it immediately. But the Chinese government will cover it as much as possible. With the economic problems around the world, China will not be spared. Very soon, China will experience more big troubles other than the stock crash in Shanghai stock exchange. Housing trouble will soon come, which can wreak big havoc on Chinese economy and ordinary people’s life.

    Rimbaud, your suggestion is good. However, under the current world geopolitical environment, US dollar’s dominance as the world currency is still not replacable despite USD’s weakened position. Buying up Euros and Euro-dominated assets will actually cause Chinese government to lose more money. That’s why Chinese government understands it and may be wise to buy up more US Treasury bills which they have already done in July.

    Yes, Chinese GDP is largely dependent upon export to abroad. Unfortunately, that export is still mostly to North America. This situation cannot be changed overnight. That’s why big trouble is brewing in China as the import from USA and Canada is shrinking fast. It’s not that Chinese government elites don’t understand the ideas you are proposing, it’s really that they don’t have much of a choice. Why? Chinese industrial base has been too much entrenched at the lowest level of global food chain – OEM manufacturing, at the same time, China doesn’t really possess enough advanced skills to go up the ladder of the food chain. Therefore, China could experience about 10 years of recession, probably more severe than the one US is about to experience or experiencing. We may soon see.

    In the mean time, American big companies will take the opportunity to further expand their equity ownerships of Chinese companies. In the future, the marriage between US interests and Chinese interests are going to be tremendously increased as more and more American conglomerates are infusing funds to buy more and more Chinese companies. Even Jianshuo is working for the Americans, that’s a fact. Coca Cola is trying to buy HuiYuan, that’s another example…

    Rather than your vision of a separate Chinese and American economy, I am seeing a fully integrated economies between China and US. After 10-20 years, it may be hard to tell if any Chinese companies are really owned by Chinese or by Americans. The line will be blurring. From the way it goes, the end will be an economically “colonization” of Chinese economy by the American. If that trend is not stopping, soon, the central government may lose the control of this economy.

  10. I may want to serve a warning: China’s housing market may soon undergo huge pressure. First, home builders are now at the brink of cash flow stoppage, similar to what AIG has been experiencing. Will Chinese government bail out these home builders? nobody knows. If Chinese housing market is completely like that is in the outside world, a free-trading market in which buyers and sellers decide the market price of land and the structures on it, China’s housing market would have already experienced similar drop like that in the US started from 2006. But, Chinese housing market is not a free market for one important key: nobody owns the land except the government. Therefore, housing price has been artificially held steady, at least in places like Shanghai. Therefore, China’s housing market is not a normal market. We don’t know the future, but the warning sirens have been turned on.

    If China’s housing market collapse, the damage it would cause would be much much much bigger than the collapse of the stock market. We are at a critical juncture in history.

  11. Jqian, the claim of American economic “colonization” of China’s economy is ridiculous– I’m sorry, I live here in the USA, do high-level analysis of exactly the companies you talk about, and I see the rot from the inside. The USA couldn’t even colonize the economy of Panama if we wanted to, we’re declining more every week! (Who cares that Jianshuowang is working for a US company? That means absolutely nothing– I have American friends now who work for Chinese companies like Haier or Lenovo, and in any case Jianshuowang’s employment is merely an indication that China’s economy is open to FDI these days. USA has a century now of big multinationals, China is just ramping up but starting these companies very fast.)

    You claim that the US economy is transparent in its problems (in comparison to China’s). That assumption is wrong– the reason that Bear Stearns, Fannie Mae and Freddie Mac, Lehman, Merrill Lynch, AIG, probably soon other big banks (JP Morgan among others) and insurance companies, even possibly GM or Ford, are all collapsing right now is the total lack of transparency. They are able to conceal their worst problems using “false accounting” as Enron did. We concealed the problem with our housing market, and so we got a massive “bubble.” So our economy is not nearly as strong as is often claimed and as you assume. Our companies are far overcapitalized as it is and simply lack the actual ability to even colonize other companies within the USA, let alone abroad. Our auto companies have lost so much market share, that Toyota now dominates the world market. This is why Chinese SWF’s are getting valuable assets here rather than the other way around. The only thing preventing Chinese companies from getting even more US assets, is rather xenophobic US law against Chinese companies acquiring a broad range of US companies, not underlying economic factors.

    Don’t assume that our “free press” does anything to help illuminate the problems. Our major news organizations are basically controlled by a handful of companies that have a vested interest in not reporting the actual news, but distracting Americans with frivolous stupidity– the so-called “bread and circuses.” So the “news” we have is fluff and propaganda, rather than genuine analysis pointing out our economic problems and giving solutions to solve them.

    I never said China’s economy was trouble-free, but China’s ***fundamentals*** are much better than those of the USA. That’s in large part because of debt– China is a nation of savers who patiently earn their money through real goods, while the USA is a nation of debtors, the chief example being the US government itself. Our government is “only” $10-11 trillion in debt due to existing accumulation, but true debt is actually more like $70-75 trillion, which our former comptroller general and others have calculated as a *minimum*. We spend trillions of dollars on foolish wars like Iraq and a bloated military that we can’t actually use– wasteful spending that will continue to damage our finances.

    US fundamentals in terms of human capital and infrastructure are even worse. Our education is almost dead last in the Western world and getting worse every year. And our infrastructure is, LITERALLY, falling apart. Our bridges are collapsing, tunnels are flooding in. Our trains are getting into wrecks– we recently had a major train disaster in California because the state was too lazy to invest in safety measures!!!

    I’ve worked in two dozen countries across the world, and I agree with the conclusion that investors like J. Rogers and Buffett have come to– the USA is in severe and permanent decline now, because our country’s economic fundamentals are in disastrous shape, and our culture is no longer conducive to innovation and accomplishment. If you live here, you can see this decline with your very eyes and know exactly what they are talking about– US culture supports mediocrity and stupidity these days, and it pervades everything, from our schools to our politics to our media. The USA lacks any sense of history or perspective. China, whatever its flaws, has a culture that supports accomplishment, intelligence, and savings and patient growth, and a much stronger sense of history and the importance of long-term planning. Young Americans know this, which is why young and talented Americans are emigrating (chiefly to countries like Germany, or to South America) at by far the highest levels in the USA’s history. The United States is not the land of opportunity anymore, and we above all know this!

    The dollar is crumbling as a world currency as it is. Just look at the inflation levels hitting the USA– this inflation makes the dollar far less valuable, and so China loses hundreds of billions of dollars (trillions of RMB) on these dollar investments. For that matter, so do we Americans!!! Our dollar is increasingly worthless, making life painful for us Americans with our useless dollars– and so China, by investing in dollar-denominated securities and Treasury Bills so much, is rapidly accumulating a depreciating asset!

    I do agree with you that China has been far too dependent on low-cost, low-quality OEM’s and the North American market, but this is EXACTLY WHY China needs to change that practice very soon. The problems that you note regarding China’s economy, are PRECISELY BECAUSE China has invested far too much in the North American market and the declining dollar– which is exporting inflation to China. The Chinese real estate market is in trouble, largely because the USA is exporting its own dollar inflation to China. In other words– China’s dependence on the US economy is causing China’s real estate troubles in the first place, so the solution is to REDUCE DEPENDENCE on the US economy, not increase it!

    Compare for example Brazil, which does not depend so much on the dollar, and in fact largely has “decoupled” from the USA, with a stable economy.

    It was a mistake for China to become so heavily invested in North America to the exclusion of other world markets, and you don’t correct a mistake by compounding the mistake further!!! Your comments here seem to be indicative of exactly the major “character flaws” that I see in so many Chinese people– despite your excellent qualities (especially hard work and a focus on education, innovation and accomplishment), it’s this Chinese lack of self-confidence and naivete that causes your country tremendous damage. I’m just being honest here– this is constructive criticism that you need to hear.

    You naively assume that the USA has the most “robust economy and political system,” and what I’m telling you is, it’s all “smoke and mirrors.” The USA only PRETENDS TO HAVE the world’s best system– our fundamentals are awful and we merely “postpone the day of reckoning” by taking on more national debt that we cannot possibly repay. The US economy is basically run by con artists, and so long as China continues to be so dependent on the US economy, the Chinese people will be “conned” by the USA and we will continue to take trillions of RMB out of your economy because of your false belief in the strength of ours.

    Rather than relying so much on OEM’s and the US market in particular, China needs to DIVERSIFY– that’s the keyword here.

    In many years of studying the most successful investors and companies, the one factor they ALL HAD IN COMMON is that they DIVERSIFIED– many countries, many companies, many languages, many currencies. THEY NEVER, EVER DEPENDED TOO MUCH ON A SINGLE MARKET! The long-term fundamentals of the US market are utterly horrendous, so it would be disastrous for China to invest too much in the declining American market.

    The next few years are going to be tough for the world economy in general, nobody doubts that. But the solution for China’s economy is not to continue this foolish and naive dependence on the US economy, with our terrible fundamentals and decline– the solution for China is the opposite, to diversify its economy to focus not only on domestic infrastructure and investment, but on trade with other major economic blocs such as Brazil, India, the EU, Russia and the Middle East. Don’t become too dependent on the dollar, which is rapidly depreciating and increasingly worthless– diversify into other currencies. I agree with you that China must do this gradually (to gradually transition out of exports to other sources of economic growth)– moving too quickly and allowing too rapid a rise in the yen was, of course, Japan’s major mistake in the 1980’s: http://blogs.ft.com/wolfforum/2007/02/history-holds-lhtml/

    However, China does need to DIVERSIFY the nations to which it exports, as I wrote above, while transitioning to the more domestically-fueled economy. The USA is going to have a very painful period for a long time, and it’s only going to get worse because our Baby Boomers are retiring– China cannot depend on the USA like this! So even as China gradually reduces dependence on exports, the solutions are as I wrote in the previous thread: http://home.wangjianshuo.com/archives/20080905_china-us_economy_discussion.htm

    Chiefly, as China focuses increasingly on domestic education and infrastructure, China will then be better able to produce “higher value-added products” and start “Chinese versions of Google” and Chinese Silicon Valleys. China needs more domestic venture capital firms to encourage innovation and international brands, as well as a Chinese movie/TV/music industry that exports high-quality, appealing cultural content (films, TV and music) in the Mandarin Chinese language (with dubbing and subtitling as needed).

    As far as diversifying China’s exports (which will “provide China a cushion” as it transitions from experts to a stronger domestic economy), again, focus on other growing markets such as Brazil, Latin America, India, the Middle East, EU and Russia. Learn their languages (chiefly Hindi, Portuguese, Spanish, German– a very high-tech and high-quality language– Arabic and Russian) and diversify China’s currency reserves.

    Thus, China’s “currency basket” should include fewer dollars and more yen (a “safe haven currency” under appreciation pressure that would largely preserve the value of China’s current dollar reserves), as well as Swiss francs (another “safe haven currency” of a stable nation), Korean won, Brazilian reals, Indian rupees, Russian rubles, Malaysian ringgit, and of course Euros. The Euro is already rapidly displacing the dollar as the world’s “reserve currency”– most oil-exporting nations now accept the Euro as much as the dollar!

    Finally, Chinese savings should, wherever possible, focus on accumulating real goods when the price of commodities drops– reserves of e.g. copper, tin, magnesium, zinc, aluminum, coal, oil, natural gas, precious metals, ships, factories. These are concrete goods that retain their value, rather than dollars and US Treasury Bills which are increasingly worthless as inflation in the USA becomes worse. (Again, to the extent that China invests in “securities” at all, they should be diversified– not just dollar-denominated, but also in the other currencies listed above, to an increasing degree.)

    The plan for China to move away from “dollar hegemony” has been described best by Henry CK Liu:

    http://henryckliu.com/page165.html

    http://henryckliu.com/page166.html

    Please read Henry CK Liu’s articles, he tells you exactly what China needs to do, to stop depending so much on depreciating dollar assets and make China’s economy stronger.

    And above all, as we say in the USA, “keep your chin up.” The next few years are going to be tough, and yes, China is going to have some tough economic challenges. But don’t respond by losing your confidence– instead, stay tough and continue to increase your independence from the dollar, diversify yourselves internationally while improving your economy domestically. Long term, China must become more independent from the USA, and more closely linked with the broader world economy, not just with the USA itself. Even if you face some “bumps in the road” (difficulties) as we say, just stay strong and continue on the path of diversification with the world economy, with a greater focus on infrastructure and quality at home.

  12. Jqian, the claim of American economic “colonization” of China’s economy is ridiculous– I’m sorry, I live here in the USA, do high-level analysis of exactly the companies you talk about, and I see the rot from the inside. The USA couldn’t even colonize the economy of Panama if we wanted to, we’re declining more every week! (Who cares that Jianshuowang is working for a US company? That means absolutely nothing– I have American friends now who work for Chinese companies like Haier or Lenovo, and in any case Jianshuowang’s employment is merely an indication that China’s economy is open to FDI these days. USA has a century now of big multinationals, China is just ramping up but starting these companies very fast.)

    You claim that the US economy is transparent in its problems (in comparison to China’s). That assumption is wrong– the reason that Bear Stearns, Fannie Mae and Freddie Mac, Lehman, Merrill Lynch, AIG, probably soon other big banks (JP Morgan among others) and insurance companies, even possibly GM or Ford, are all collapsing right now is the total lack of transparency. They are able to conceal their worst problems using “false accounting” as Enron did. We concealed the problem with our housing market, and so we got a massive “bubble.” So our economy is not nearly as strong as is often claimed and as you assume. Our companies are far overcapitalized as it is and simply lack the actual ability to even colonize other companies within the USA, let alone abroad. Our auto companies have lost so much market share, that Toyota now dominates the world market. This is why Chinese SWF’s are getting valuable assets here rather than the other way around. The only thing preventing Chinese companies from getting even more US assets, is rather xenophobic US law against Chinese companies acquiring a broad range of US companies, not underlying economic factors.

    Don’t assume that our “free press” does anything to help illuminate the problems. Our major news organizations are basically controlled by a handful of companies that have a vested interest in not reporting the actual news, but distracting Americans with frivolous stupidity– the so-called “bread and circuses.” So the “news” we have is fluff and propaganda, rather than genuine analysis pointing out our economic problems and giving solutions to solve them.

    I never said China’s economy was trouble-free, but China’s ***fundamentals*** are much better than those of the USA. That’s in large part because of debt– China is a nation of savers who patiently earn their money through real goods, while the USA is a nation of debtors, the chief example being the US government itself. Our government is “only” $10-11 trillion in debt due to existing accumulation, but true debt is actually more like $70-75 trillion, which our former comptroller general and others have calculated as a *minimum*. We spend trillions of dollars on foolish wars like Iraq and a bloated military that we can’t actually use– wasteful spending that will continue to damage our finances.

    US fundamentals in terms of human capital and infrastructure are even worse. Our education is almost dead last in the Western world and getting worse every year. And our infrastructure is, LITERALLY, falling apart. Our bridges are collapsing, tunnels are flooding in. Our trains are getting into wrecks– we recently had a major train disaster in California because the state was too lazy to invest in safety measures!!!

    I’ve worked in two dozen countries across the world, and I agree with the conclusion that investors like J. Rogers and Buffett have come to– the USA is in severe and permanent decline now, because our country’s economic fundamentals are in disastrous shape, and our culture is no longer conducive to innovation and accomplishment. If you live here, you can see this decline with your very eyes and know exactly what they are talking about– US culture supports mediocrity and stupidity these days, and it pervades everything, from our schools to our politics to our media. The USA lacks any sense of history or perspective. China, whatever its flaws, has a culture that supports accomplishment, intelligence, and savings and patient growth, and a much stronger sense of history and the importance of long-term planning. Young Americans know this, which is why young and talented Americans are emigrating (chiefly to countries like Germany, or to South America) at by far the highest levels in the USA’s history. The United States is not the land of opportunity anymore, and we above all know this!

    The dollar is crumbling as a world currency as it is. Just look at the inflation levels hitting the USA– this inflation makes the dollar far less valuable, and so China loses hundreds of billions of dollars (trillions of RMB) on these dollar investments. For that matter, so do we Americans!!! Our dollar is increasingly worthless, making life painful for us Americans with our useless dollars– and so China, by investing in dollar-denominated securities and Treasury Bills so much, is rapidly accumulating a depreciating asset!

    I do agree with you that China has been far too dependent on low-cost, low-quality OEM’s and the North American market, but this is ***exactly why*** China needs to change that practice very soon. The problems that you note regarding China’s economy, are ***precisely because*** China has invested far too much in the North American market and the declining dollar– which is exporting inflation to China. The Chinese real estate market is in trouble, largely because the USA is exporting its own dollar inflation to China. In other words– China’s dependence on the US economy is causing China’s real estate troubles in the first place, so the solution is to REDUCE DEPENDENCE on the US economy, not increase it!

    Compare for example Brazil, which does not depend so much on the dollar, and in fact largely has “decoupled” from the USA, with a stable economy.

    It was a mistake for China to become so heavily invested in North America to the exclusion of other world markets, and you don’t correct a mistake by compounding the mistake further!!! Your comments here seem to be indicative of exactly the major “character flaws” that I see in so many Chinese people– despite your excellent qualities (especially hard work and a focus on education, innovation and accomplishment), it’s this Chinese lack of self-confidence and naivete that causes your country tremendous damage. I’m just being honest here– this is constructive criticism that you need to hear.

    You naively assume that the USA has the most “robust economy and political system,” and what I’m telling you is, it’s all “smoke and mirrors.” The USA only PRETENDS TO HAVE the world’s best system– our fundamentals are awful and we merely “postpone the day of reckoning” by taking on more national debt that we cannot possibly repay. The US economy is basically run by con artists, and so long as China continues to be so dependent on the US economy, the Chinese people will be “conned” by the USA and we will continue to take trillions of RMB out of your economy because of your false belief in the strength of ours.

    Rather than relying so much on OEM’s and the US market in particular, China needs to DIVERSIFY– that’s the keyword here.

    In many years of studying the most successful investors and companies, the one factor they ***all had in common*** is that they DIVERSIFIED– many countries, many companies, many languages, many currencies. They never, ever depended too much on a single market! The long-term fundamentals of the US market are utterly horrendous, so it would be disastrous for China to invest too much in the declining American market.

  13. The next few years are going to be tough for the world economy in general, nobody doubts that. But the solution for China’s economy is not to continue this foolish and naive dependence on the US economy, with our terrible fundamentals and decline– the solution for China is the opposite, to diversify its economy to focus not only on domestic infrastructure and investment, but on trade with other major economic blocs such as Brazil, India, the EU, Russia and the Middle East. Don’t become too dependent on the dollar, which is rapidly depreciating and increasingly worthless– diversify into other currencies. I agree with you that China must do this gradually (to gradually transition out of exports to other sources of economic growth)– moving too quickly and allowing too rapid a rise in the yen was, of course, Japan’s major mistake in the 1980’s: http://blogs.ft.com/wolfforum/2007/02/history-holds-lhtml/

    However, China does need to DIVERSIFY the nations to which it exports, as I wrote above, while transitioning to the more domestically-fueled economy. The USA is going to have a very painful period for a long time, and it’s only going to get worse because our Baby Boomers are retiring– China cannot depend on the USA like this! So even as China gradually reduces dependence on exports, the solutions are as I wrote in the previous thread: http://home.wangjianshuo.com/archives/20080905_china-us_economy_discussion.htm

    Chiefly, as China focuses increasingly on domestic education and infrastructure, China will then be better able to produce “higher value-added products” and start “Chinese versions of Google” and Chinese Silicon Valleys. China needs more domestic venture capital firms to encourage innovation and international brands, as well as a Chinese movie/TV/music industry that exports high-quality, appealing cultural content (films, TV and music) in the Mandarin Chinese language (with dubbing and subtitling as needed).

    As far as diversifying China’s exports (which will “provide China a cushion” as it transitions from experts to a stronger domestic economy), again, focus on other growing markets such as Brazil, Latin America, India, the Middle East, EU and Russia. Learn their languages (chiefly Hindi, Portuguese, Spanish, German– a very high-tech and high-quality language– Arabic and Russian) and diversify China’s currency reserves.

    Thus, China’s “currency basket” should include fewer dollars and more yen (a “safe haven currency” under appreciation pressure that would largely preserve the value of China’s current dollar reserves), as well as Swiss francs (another “safe haven currency” of a stable nation), Korean won, Brazilian reals, Indian rupees, Russian rubles, Malaysian ringgit, and of course Euros. The Euro is already rapidly displacing the dollar as the world’s “reserve currency”– most oil-exporting nations now accept the Euro as much as the dollar!

    Finally, Chinese savings should, wherever possible, focus on accumulating real goods when the price of commodities drops– reserves of e.g. copper, tin, magnesium, zinc, aluminum, coal, oil, natural gas, precious metals, ships, factories. These are concrete goods that retain their value, rather than dollars and US Treasury Bills which are increasingly worthless as inflation in the USA becomes worse. (Again, to the extent that China invests in “securities” at all, they should be diversified– not just dollar-denominated, but also in the other currencies listed above, to an increasing degree.)

    The plan for China to move away from “dollar hegemony” has been described best by Henry CK Liu:

    http://henryckliu.com/page165.html

    http://henryckliu.com/page166.html

    Please read Henry CK Liu’s articles, he tells you exactly what China needs to do, to stop depending so much on depreciating dollar assets and make China’s economy stronger.

    And above all, as we say in the USA, “keep your chin up.” The next few years are going to be tough, and yes, China is going to have some tough economic challenges. But don’t respond by losing your confidence– instead, stay tough and continue to increase your independence from the dollar, diversify yourselves internationally while improving your economy domestically. Long term, China must become more independent from the USA, and more closely linked with the broader world economy, not just with the USA itself. Even if you face some “bumps in the road” (difficulties) as we say, just stay strong and continue on the path of diversification with the world economy, with a greater focus on infrastructure and quality at home.

  14. The next few years are going to be tough for the world economy in general, nobody doubts that. But the solution for China’s economy is not to continue this foolish and naive dependence on the US economy, with our terrible fundamentals and decline– the solution for China is the opposite, to diversify its economy to focus not only on domestic infrastructure and investment, but on trade with other major economic blocs such as Brazil, India, the EU, Russia and the Middle East. Don’t become too dependent on the dollar, which is rapidly depreciating and increasingly worthless– diversify into other currencies. I agree with you that China must do this gradually (to gradually transition out of exports to other sources of economic growth)– moving too quickly and allowing too rapid a rise in the yen was, of course, Japan’s major mistake in the 1980’s (linked in the earlier China US-economy thread).

    However, China does need to DIVERSIFY the nations to which it exports, as I wrote above, while transitioning to the more domestically-fueled economy. The USA is going to have a very painful period for a long time, and it’s only going to get worse because our Baby Boomers are retiring and will push the USA even more dangerously into debt– China cannot depend on the USA like this! So even as China gradually reduces dependence on exports, the solutions are as I wrote in the previous China-US economy thread.

    Chiefly, as China focuses increasingly on domestic education and infrastructure, China will then be better able to produce “higher value-added products” and start “Chinese versions of Google” and Chinese Silicon Valleys. China needs more domestic venture capital firms to encourage innovation and international brands, as well as a Chinese movie/TV/music industry that exports high-quality, appealing cultural content (films, TV and music) in the Mandarin Chinese language (with dubbing and subtitling as needed). Also, better basic as well as applied scientific research, again published 在普通话 to help attract the best and brightest foreigners to Chinese universities and research centers (as well as attracting Chinese abroad back home).

    As far as diversifying China’s exports (which will “provide China a cushion” as it transitions from exports and to a stronger domestic economy), again, focus on other growing markets such as Brazil, Latin America, India, the Middle East, EU and Russia. Learn their languages (chiefly Hindi, Portuguese, Spanish, German– a very high-tech and high-quality language– Arabic and Russian) and diversify China’s currency reserves.

    Thus, China’s “currency basket” should include fewer dollars and more yen (a “safe haven currency” under appreciation pressure that would largely preserve the value of China’s current dollar reserves), as well as Swiss francs (another “safe haven currency” of a stable nation), Korean won, Brazilian reals, Indian rupees, Russian rubles, Malaysian ringgit, and of course Euros. The Euro is already rapidly displacing the dollar as the world’s “reserve currency”– most oil-exporting nations now accept the Euro as much as the dollar!

    Finally, Chinese savings should, wherever possible, focus on accumulating real goods when the price of commodities drops– reserves of e.g. copper, tin, magnesium, zinc, aluminum, coal, oil, natural gas, precious metals, ships, factories. These are concrete goods that retain their value, rather than dollars and US Treasury Bills which are increasingly worthless as inflation in the USA becomes worse. (Again, to the extent that China invests in “securities” at all, they should be diversified– not just dollar-denominated, but also in the other currencies listed above, to an increasing degree.)

    The plan for China to move away from “dollar hegemony” has been described best by Henry CK Liu in his page 165 and 166 articles.

    Please read Henry CK Liu’s articles, he tells you exactly what China needs to do, to stop depending so much on depreciating dollar assets and make China’s economy stronger.

    And above all, as we say in the USA, “keep your chin up.” The next few years are going to be tough, and yes, China is going to have some tough economic challenges. But don’t respond by losing your confidence– instead, stay tough and continue to increase your independence from the dollar, diversify yourselves internationally while improving your economy domestically. I’m not at all saying that China should “disinvest entirely” from the US economy– there are still some opportunities here, and China does not need to go to that extreme. The problem right now, is that China is stuck on the other extreme, with far too much dependence on the US economy, which is in permanent decline. Long term, China must become more independent from the United States, and much more closely linked with the broader world economy, not just with the USA itself. Even if you face some “bumps in the road” (difficulties) as we say, just stay strong and continue on the path of diversification with the world economy, with a greater focus on infrastructure and quality at home.

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