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Author Topic: Short Term Problems in China  (Read 833 times)
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tamo42
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« on: 2011 May 16, 01:19:53 pm »

There was a pretty startling headline out of China today, namely that two bond auctions were only about half subscribed. This is strangely both good news and bad news. Let's look a little deeper.

Like most governments around the world, the Chinese government finances its operations through the sale of bonds. Why the Chinese government does it this way is a bit of a mystery to me. I'm sure there is some historical-political reason for it, but given the way the communists came to power by opposing the old nationalist inflationary regime, I would think they would know better. Whether they should or shouldn't, this is the way they do it. So they tried to auction off a few billion dollars worth of bonds with a payment rate of about 3%, but only managed sell around half of them.

Why this is bad news: participants in the Chinese market are telling the government that 3% is too low given the inflationary pressures in the country now along with the falling prices in coastal real estate. The expectation is that they are looking at much higher rates of inflation in the coming year. Apparently, SocGen in France thinks this will mean a falling demand for commodities like copper and concrete while maintaining demand on agricultural commodities. They could very well be right about that.

Why this is good news: the fact that not all the bonds were sold means that the People's Bank of China (PBoC) isn't monetizing this debt issuance, unlike what the Fed does in the US. This is good for the Chinese in that it at least won't add to the inflationary problems they are experiencing (and will continue to experience).

All of this points to continued problems inside China as they keep the peg with US dollar (a main source of their inflation), try to unload their dollar denominated assets without crashing the dollar market, raise banking reserve requirements, deal with a deflating coastal real estate bubble, and contend with rising food prices in a place where half a family's budget goes towards food.

Keep in mind, these are short term gyrations that do nothing to the long term trend. And that trend is that all governments around the world are indebted and are trying to default their way out through printing more money, albeit at different rates.
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« Reply #1 on: 2011 May 16, 01:42:24 pm »

This is the global economic collapse in progress. The only people who will come out of this OK are the ones that stay as far away from government criminality as possible. When governments control everything, that may mean you just have to hide for a while, especially when the scapegoating, mass imprisonments, torture, murders, executions, wars, etc are occurring right now just to keep the criminals in power as long as possible.
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