This is what I read this morning from my reliable columnist Ambrose Evans-Pritchard from the UK Daily Telegraph:
Caixin magazine reports that China’s entire solar industry is “on the verge of bankruptcy” as it struggles with debts built up during its world conquest over the past four years.
Morgan Stanley said Chinese exporters face a “margin call”. Profits have been squeezed 5pc a year since 2004 as wages rise faster than productivity, and the renminbi strengthens against the euro and the dollar.
China Securities Journal confirmed this week that Beijing is steering the currency lower to cushion the shock. “The renminbi has entered a period of depreciation,” it said, adding that this could cause short-term capital outflows – running at $110bn in the second quarter – but the overall effect will be “beneficial, by enhancing exports.”
The policy risks a serious confrontation with Washington. “If they do the same old thing and slam down a few more roads to the Gobi desert they will end up with stagflation. They need Thatcherism to get out of this,” said Mr Dumas.
There’s a lot on which to comment in these four paragraphs. Let’s start with the first one: the entire Chinese solar industry is on the verge of bankruptcy. Apparently, in order to bankrupt Solyndra, China’s solar industry borrowed money in order to cut prices. Now the debts are coming due. First: recall the Romney ad chastising Barry O for loaning all that money to Solyndra? Now it can be told how the Chinese flooded the market with low cost solar panels NOT produced by Solyndra. As a purchaser, who did you buy from – cheap from China or expensive from “buy American”. I suppose the answer is obvious. Well, it’s too late for Solyndra, but the chickens have come home to roost for China. So don’t blame Barry O – blame the Chicoms, as Al Payne my friend used to call them.
On to the rest of the quote. The Chinese currency is getting stronger versus the dollar and the Euro. Chinese exporters are seeing their profits dwindle, because they’re paying their people more and shipments are declining because the price – relative to other currencies – is going up. That’s a double whammy. First – is Chinese money going up because of anything China is doing? Nope. The dollar and the Euro are declining because their economies are in serious decline, with high unemployment and government deficits. These are two things China does NOT have, and doesn’t want. So what does China do? The government is “steering the currency lower to cushion the shock.” “The policy risks a serious confrontation with Washington.” And finally, the recommendation that China needs “Thatcherism”.
The Chinese government has always resorted to steering the currency lower to buy themselves time to prevent massive uprisings from its huge population. Since they are a ‘planned’ economy – love the euphemism for communism – they can do that. The U.S. and the E.U. are subject to the buffeting winds of the world’s investors, and have to manage as best they can to influence the strength of their respective currencies. The Fed – that entity Ron Paul wants to dismiss – thru its monetary policy can have some influence on it. Congress and the President through fiscal policy can have less influence, and it takes a lot longer to manage through the budget. The E.U. is really up the creek in this regard, with individual countries managing their fiscal policies and no strong central bank.
So why does this policy risk a serious confrontation with Washington?
Then the Chinese will institute tariffs on American goods, and they are a seriously large purchaser of American equipment, software and technology. Yep, that’ll fix it! Be careful what you ask for, America: don’t say I didn’t warn you!
Finally, the last part – a few more roads into the Gobi desert and the potential for “stagflation”. What’s stagflation? Whew – that would take another six paragraphs and do we really want to go there? Let’s just say “Japan” and you’ll get the idea. Governments can’t necessarily spend their way out of trouble if other factors in their demographic and political realities neutralize the effect.
And the answer is “Thatcherism”? That deserves an OMG! Or at least an “Are you Kidding”? Thatcherism is the exact opposite of communism. Is that likely to happen? Not in my lifetime – probably not in yours, dear reader – if any of you are out there.
China has enough dough to muddle thru, and I’m not talking about fortune cookie batter. The U.S. will re-elect Barry O and we will team up with Russia, China, Japan and the friendly sheiks of the middle east to assist Europe in getting back on its feet. Believe it or not, I’m very encouraged about the future! Thanks for staying with me on this very long post.