Satyajit Das’ Latest Letters: The China Syndrom & Chinese Recovery Stepping on A Bounding Mine
Satyajit is a very bright derivatives guy who knows how to boil topics down to their core…
Article 1: The China Syndrome ( Click Here For The Article )
Excerpts
In 1971, Ralph Lapp, a nuclear physicist, used the term “China syndrome” to describe a hypothetical nuclear reactor meltdown where the molten core breaches containment barriers and melts through the crust of the Earth reaching China. The economic equivalent of the China Syndrome describes a process where China’s strong growth, abundant savings and foreign exchange reserves assists a rapid restoration of global growth. The nuclear metaphor ignores the geographical fact that the opposite side of the globe from the USA is actually the Indian Ocean and that the entire idea is physically impossible. The economic metaphor conveniently discards some significant doubts about the ability of China
Export success created large foreign reserves that now total over $2 trillion. These reserves became the centre of a gigantic lending scheme where China would finance and thereby boost global trade flows.
Dollars received from exports and foreign investment have to be exchanged into Renminbi.
In order to maintain the competitiveness of its exporters, China invests the foreign currency overseas to mitigate upward pressure on the Renmimbi.
As reserves grew paralleling its growing trade surplus, China invested heavily in dollars helping to finance America’s large trade and budget deficits. It is estimated that China has invested around 60-70% of its $2 trillion reserves in dollar denominated investments, primarily U.S. Treasury bonds and other high quality securities.
Article 2: The Chinese Recovery Stepping on A Bounding Mine (Click Here For The Article)
Excerpts
In 2007, unsustainable levels of debt in many economies triggered a near collapse of the global banking system that, in turn, triggered a major slowdown in growth.
The unprecedented external demand shock, with sharp decreases in consumption and investment from synchronous deep recessions in the developed world, affected the Chinese economy. The sudden and precipitous fall in exports led to a significant slow down in China’s stellar growth rates in 2008 triggering sharp declines in stock and property markets.
Job losses in export-intensive Guangdong province were in excess of 20 million migrant workers. Workers and students entering the workforce were unable to find work. Fearful of social instability, the Beijing government moved quickly to restore rapid growth.
China’s position is like that of an unfortunate who has stepped on a type of anti-personnel mine, known as a ‘bounding mine’. The mine does not explode when you step on it. Instead, it trips when you step off it as a small charge propels the body of the mine into the air where the explosive charge bursts and sprays fragmentation at a height of around 3 to 4 feet (1 to 1.3 metres). China, in building and investing its massive foreign exchange reserves in dollars and U.S. Treasury Bonds, has stepped onto the mine and it cannot step off without serious damage!
