Weak US Dollar Policy Will Boost China Investment and
Capital Inflow
Just when it looked like China's economy would take a
body blow from the SARS crisis, the US Treasury Secretary
has come to China's rescue by supporting a weak US dollar.
Some estimates put the SARS effect on China's GDP growth
this year at as much as 2 percent, lowering it to 6%.
But John Snow and Alan Greenspan have teamed up to generate
a quick fix to the Chinese economy by supporting a weak
US dollar policy.
According to their thinking, a cheaper US dollar will
stimulate exports, as US products will become cheaper.
Increased demand for US products will lead to hiring of
more US workers, which will stimulate more US consumer
spending. Happier US consumers and a smoother economy
will be less likely to vote out the Bush administration
in 2004. At least, that is the conventional wisdom.
But the reality may be very different. A weak US dollar
is like a crack high; it may make you feel like the king
of the world for a short while, but the comedown can be
a potential killer. Foreign investors will not put their
capital in the US because their rate of return will be
way down. Importers of foreign goods in the US will at
first absorb smaller profit margins in order to remain
competitive, but will then be forced to raise prices.
In order to bring in more foreign capital to finance US
debt, interest rates will have to go up, causing inflation.
Remember, the US economy relies on foreign capital and
investors to finance its debt. And it is unlikely that
foreign companies will choose to put their manufacturing
in the US because of weak consumer demand and higher costs.
Handled poorly, the US economy will end up with the worst
of all possible worlds: little or no job creation, weak
consumer demand and inflation.
When it comes to job creation in the US, the best that
can be said for the Bush administration's economic policies
are that the link between tax cuts, economic stimulus
and job creation are very tenuous. When it comes to new
business, most US companies are trying to offer a security
angle in the hope that they can get federal contracts
from the Department of Homeland Security, since they seem
to be the only organization with any purchasing budget.
So where will the capital go?
Capital always goes where it generates the best rate
of return, and it continues to be China, even after the
SARS crisis. China is now the factory to the world in
many sectors, and this pace will accelerate with the depreciation
of the dollar. Because the Chinese yuan is pegged to the
US dollar at 8.2 to 1, Chinese products will become even
cheaper and Chinese makers will enter more manufacturing
sectors and markets. As China's export markets reach full
capacity, Chinese companies will turn their attention
to developing and stimulating demand in the Chinese domestic
market. When the manufacturing sector reaches capacity,
growth will be focused on China's service sector.
US, Japanese and European makers will continue to enter
the China market and set up factories, but more and more,
the emphasis will be on serving the China market instead
of their own stagnant markets because that's where the
growth will be. Competition in the Chinese consumer market,
already hot, will become red hot.
US baby boomers will begin retiring in 2010. Faced with
a foreign debt overhang, low job creation, a stretched
health insurance and social security system, US consumers
will cut their spending even more, which will in turn
lead to a fall in the US standard of living. Interest
on foreign debt will take a growing piece of the US budget.
Hardest hit will be US workers entering the US workforce
after 2010; they will have to support all the retiring
baby boomers and the combined deficit/demographic timebomb,
where a smaller, shrinking tax-paying population supports
a growing deficit and growing retired population.
So will there be a cap on Chinese domestic market growth
upside? Foreign companies' participation in the China
market will largely be limited by their ability to find
key management personnel who are experienced at working
in headquarters and as team builders and leaders in China.
Put simply, these people must be able to "manage
up" to the boardroom level, and "manage down"
by building China teams which produce results. Without
these key personnel, world corporations run the risk of
their China operations spinning out of control. Most companies
will be forced to ask themselves the question: "Which
is more important: someone who has worked successfully
in New York (or Stuttgart or Tokyo), or someone who has
a successful track record in China?" People who have
successful track records both internationally and in China
will be in especially high demand; most companies will
have to choose people with one or the other qualification.
The trouble with Snow's and Greenspan's economic policy
is that it fails to take into account that capital no
longer recognizes international boundaries; capital markets
are truly globalized. While Karl Rove, President Bush's
political policy guru, only worries about the opinions
of US voters as he plans for the 2004 election, capital
flows reflect the votes and opinions of worldwide investors.
Failure to take this into account will have dire consequences
for the US economy. It is high time that they understand
what a globalized economy means, and take it into account
instead of making short-term fixes which they think will
stimulate the US economy in the short-term at the price
of increasing the medium- and long-term burden on the
US population.
If the European, American and Japanese markets continue
to stagnate and their populations age at the current rate,
and this scenario plays out, the Chinese consumer will
replace the US consumer as the locomotive of world economic
growth in 5-10 years.
Now you know why Warren Buffet's Berkshire Hathaway invested
in PetroChina, and why he travels to China with Bill Gates
every year....
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