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Aug 24
2009

The Occidental tourists

Posted by RedConn in offshoreJohn Goffdue diligenceChina

RedConn

Scores of articles have been written of late about the PRC's desire to end the U.S. greenback's role as the de facto global reserve currency. Mostly, these stories have zeroed in on Beijing's fears of a weakening dollar.

True enough, a deteriorating dollar will make China's goods more expensive for Joe the Plumber (or Josephine the Plumber, for all you Jane Withers fans out there). To keep that from happening, the central bank of China has become the true Bank of America, buying up around $1 trillion in U.S. debt, particularly short-term Treasury notes.

Thanks to that massive buying campaign, China now has about one trillion reasons to back a strong U.S. dollar. A falloff in the value of the dollar would mean those assets would be worth less and less.

There's just one catch. While China is clearly a manufacturing powerhouse, the other driving force behind its bustling economy is the boom in speculative markets, particularly local stock exchanges and real estate.

In China, like many countries in Asia, property is a true punter's market. If you don't believe that, just try renting an apartment in Hong Kong or Shanghai. The prices are astronomical.

Even small-time operators on the mainland envision getting rich off real estate investments. In fact, the property bubble in China is not a whole lot different than the one that has derailed the Japanese economy for the past two decades or so.

Some analysts don't see it that way. They like to point out that there's a lot less usable land in Nippon than in the middle kingdom. That limits supply in Japan, driving up prices.

Admittedly, there are at least 100 cities in China with a population of a million or more people. But despite China's size, the lion's share of the hot property developments in the country are being built on the coast, in commercial hubs like Shanghai's Pudong region or the special economic zone of Shenzhen. Get off the coast and you enter a third-world country.

Thus, desirable space is more limited than you might think, at least for now. And if the U.S. dollar begins to appreciate dramatically, that strengthening is going to drive a lot of foreign investors out of China's property sector. In essence, it could suck the liquidity from the real estate market, and to a lesser extent, the local stock markets.

If that happens, China's asset boom won't just go ‘pop.' It will go ‘ka-boom.'

The fact is, Beijing is stuck with a load of lousy options. Export bust? Reserve currency bust? Stock market bust? Real estate bust? Take your pick.

Most likely, leaders in China have grown tired of these sorts of no-win situations-predicaments that are so often tied to the dominance of the U.S. greenback.

At this point, it appears China just wants out of the game-no matter what the cost. As the noted Keynesian economist G. Jetson posited: "Jane, get me off this crazy thing!"   

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