http://www.nytimes.com/2009/02/21/business/worldbusiness/21yuan.html

The challenge is that penetrating other markets with those resources (in many languages, with many retail outlets, different local consumption patterns, etc.) takes a little time. Penetrating the US market and buying commodities with dollars was ever so easy by comparison.

http://henryckliu.com/

for example, under the section titled “Shifting China’s export towards the domestic market”.

I for one, expect to see a smiling joint communique expressing China’s support for the dollar.

Various sources are reporting that the new GM, with financing from the US Treasury, will be marketing small cars produced by US, unionized factory where parts imported from China will be assembled.

And so some of the proceeds those T-Bills the Chinese are buying will apparently be recycled back to support Chinese export and heavy industry.

“From the Chinese point of view, it is best to support the dollar as a safe haven currency until they have finished opting out of it – which may take a while, then let it drop sharply in order to establish the yuan as the world’s new currency of choice.”

Ze has it right here. Likewise for SNS.

US currency power is in decline, and what remains of that power is largely driven by the simple fear among dollar-owners of letting their holdings devalue rapidly. They are thus supporting the currency while slowly shifting out of it. In a sense, the US itself is “too-big-to-fail” (for now).

The US has two options (other than vascillation and incompetence) – negotiate a currency transition or preempt the fall of the US currency by printing money (leaving dollar owners holding the bag).

The preemption option essentially involves printing a vast amount of money and using it to restructure US debt. Though tempting, this would incur tremendous domestic consequences and the US does not seem to have the ability to act decisively in such a manner. (not with the tremendous influence of financial interests who would lose out) China seems well aware of this difficulty, and has signalled such – its grumblings about not supporting US debt were clearly intended for global financial media consumption.

The negotiation option is difficult to read, since any successful negotiation would never hit the presses. We can be certain those negotiations have taken place, but we cannot know what may have been the outcome.

Yet it is important not to overstate China’s strength in this matter. China is in the unfortunate position that much of its production feeds US consumption, and it uses US dollars to buy commodities from other countries. It needs to redirect exports to commodity producing regions (and, essentially, cut the US dollar out of the loop). But the commodity producing regions cannot afford current Chinese exports, nor are those exports customized for those markets. This transition will not happen quickly.

Assuming the transition is managed, the question is whether the US can get its current account in order BEFORE China has completed its economic restructuring. This, essentially, means fixing our sick economy on many dimensions (aka, living within our means). In order to do this, it would be helpful to print dollars AND to devalue the dollar to reduce imports, but China doesn’t want us to do this because this harms its reserves (and/or forces it to loan the US more to sustain the value of its reserves) and creates internal dislocations. That is why China is grumbling – it wants to control the timing of the transition.

The US seems to have no choice but to inflate its way out of the debt mountain, and the Chinese just want to make sure that they continue to get a positive real interest rate on the dollar while this happens. I will not be surprised to see the 10- and 30-year rates jumping sharply in the near future, as the US desperately tries to maintain the attractiveness of its bonds.

If, as written above, China is stockpiling on commodities, it is acting wisely because it should indeed prepare for a global inflationary wave, that may affect developing economies more seriously than developed countries, to the point of causing social unrest.

From the Chinese point of view, it is best to support the dollar as a safe haven currency until they have finished opting out of it – which may take a while, then let it drop sharply in order to establish the yuan as the world’s new currency of choice.

Americans perhaps find it easier to think that the Chinese pursue a policy of economic cooperation with the US. If this view is blindly followed, the consequences may be dire.

It isn’t a pipe dream. The US political elite seem to be clueless on the economic consequences of deficits as far as the eye can see and a looming entitlement crisis.

Foreigners will stop lending us money at these absurdly cheap rates and they are increasingly seeing the huge risk of holding US dollars as a reserve currency.

We can only hope that they divest themselves slowly, but a run on the dollar and US bonds is not out of the question.

Even if the CEOs of the Investment Banks, the Rating Agencies and Mortgage Originators will never accept real responsibility, one would think the independent economists would recognize where the real responsibility lies instead to trying to blame a country with $2,900 per capita income and emerging market and financial systems vs the country with 20 times the per capita income and apparently the most innovative and sophisticated market and financial systems in the world. To portray the US as a “helpless” victim taken advantage of by the malevolent Chinese is ridiculous but unfortunately not surprising