LNR Commentary about an article in the Economist Magazine

The Economist has based its entire analysis on convenient and contrived suppositions. This distorted picture is being presented as facts. The following facts are well known all over the world.- commentary from someone writing about an article in the Economist.




1 China is sitting on the largest cash reserves- economist

LNR Review commentary:


The only reason countries like China, and others, have “cash reserves” is because those reserves are in a currency other than their own. The reason certain countries keep, dollars, pounds, yen, Euro is because they are the main currencies in which settlements between currencies are made- they are a “global” mediums of exchange- currencies of other nations, like China, are not used for settlements in international trade, thus, countries with currencies which have “little” confidence in them- MUST have some reserves in one of the reserve currencies. Therefore there is no need that countries like America keep “reserves” because America’s currency IS the major reserve currency of the world. There are two other main reasons why China keeps large reserves- it must maintain liquidity to its importers and exporters because the RMB is not used for trade; second- China requires large reserves because there are gigantic financial losses on paper due to bad bank debts- China’s “toxic debt” which were extended during the real estate boom and to bankrupt state companies – these loans have no hope of recovery and merely remain on the books- understated or non-performing but hidden due to the wide lack of transparency in the Chinese banking system. However, the Chinese government is aware of the gigantic size of non-performing loans with banks and therefore has built up reserves to protect against a widespread banking collapse. Bottom line, the huge reserves of China does not reflect strength, but structural weakness.

2 Chinese banks do not have toxic debt like USA

See above: Toxic debt is an understatement- China specifically keeps enormous reserves to cover trillions of RMB in bad debt- these loans were made under pressure to state owned companies which according to international accounting standards- are bankrupt, and bad real estate loans which are non-performing or made against real estate assets with wildly inflated value appraisals.



3 America is trillions in debt


Yes: so what. America’s wealth- including derivatives is easily over 100 Trillion- therefore, although debt is high in relation to past ratio’s, America compared to many countries has lower debt to wealth. If one compares “deficits” to GNP/GDP it’s true that the current spending will put the ratio of debt to GNP much higher than in recent years, although not even near what it was during WWII era, thus, we are not in the range of “bankrupting’ America as some pundits have declared. America’s wealth is NOT measured by your GNP- that is “America’s “ income- not it’s wealth- and this is where the mistakes in comparisons are being made in the media.

4. America owes trillions to China


Hardly true: America owes in financial instruments- near ONE trillion but not “trillion S “ with an S. Remember, many countries including China buy American treasury bonds because of confidence and strength in America- and many American investors buy bonds- however, most American investment is attracted to higher yielding investments which are too sophisticated for foreigners- thus, most American capital flows to other investment vehicles and not treasury bonds. Even now, the Government has had NO lack of buyers for American debt. The bottom line- the fact that other countries, including China DOES NOT indicate any lack of funding based in America- since the yields for T-Bills are comparatively low for Americans- they invest in other things- but the safety + yield of T-bills for foreigners are attractive and they would rather invest in America than anywhere else- this indicates strength and confidence in the American government and economy- NOT weakness. In other words, if China and other countries were NOT to invest in T-bills- there is more than ample capital in America to buy up those T-bills- we don’t NEED foreign capital to buy our T-bills, if there were a lack of buyers- the yields in T-bills would rise commensurate to need of capital and American’s would flood the T-bill market with cash. How does one compare the wealth of America at over 100 Trillion dollars to China and Japan with an estimated 30 Trillion combined ? America is over 300% richer in total wealth than the second and third largest economies in the world combined. Does one think for a moment that America’ needs a few hundred billion dollars from foreigners to buy up the T-bills issued by the Government ? It’s a fallacy about foreigners and T-bills that has been around for many years.

5 China can produce goods much cheaper than Japan, Europe or USA, it has the competitive edge.



Yes: so what. That is the way of free markets- this does not indicate future success or wealth- the fact that you produce manufactured goods indicate a lack of a sophisticated post-industrial economy. The real money, with hi-technology, percision goods and intellectual services- are dominated by the USA, Japan and Europe. These jobs and economies deliver higher wages and better standards of living. It is not a “comparative” advantage (Michael Porter) for intelligent and educated citizens in the West to produce shoes or bricks. The “competitive” edge for China remains with low-tier goods. The “competitive” edge in technology, music entertainment, robotics, software, engineering, high quality goods, law, etc, etc. Clearly remains with the USA, Japan and Europe.

6 China has made huge strides in high technology in an extremely short time

Yes, of course, the technology is stolen, back-engineered or purchased or acquired through foreign investment in China. It was not “originated” in China however.




7 With its cash reserves, China can keep its economy going by developing the rest of the country; it has the money, the skill and the man power.

The cash reserves are just that- reserves- they are not part of the budget for infrastructure spending or development- they are a buffer for a banking system sitting on a heap of bad loans. The development funds are coming from the regular budget of China- NOT so-called reserves which are mainly in fixed investments and therefore could not be used in any case.
Man power- yes there is ample manpower to dig ditches, there is NOT ample man power for sophisticated managerial duties or high technology- that is why there are over 250,000 foreigners working in such jobs.
Unlike USA it does not need to borrow or fiddle by printing monopoly money.
That’s right, there is plenty of money in Chinese savings accounts to allow the banks to lend money for development- why- ? because there is no national health care system, there are no wide-reaching pensions, there is no modern social security system, there is no deposit insurance, and most people don’t own their own homes- so there is nowhere safe to invest their money. There are also 900 million Chinese NOT sharing in the wealth of China. It’s amazing how one speaks about China in the media everywhere, America and China, it forgets that there are TWO China’s – one third of the people live in middle class China – that we refer to in popular media- however, TWO THIRDS live in country side poverty- many levels below the Chinese middle class of the first and second tier cities. This is glaring fact almost always ignored. China doesn’t have NEAR the funds, reserves or resources to pull up TWO THIRDS of her improvrished population- therefore- where are your measurements of success ? If you wish to measure only ONE THIRD- then- yes- great success- but this is only possible by IGNORING- TWO thirds of your population- where is the success there ? So, the fact is that more and more of the available investment funds and “wealth” of China is going to have to be diverted to the other two thirds and less to continue pushing up the one third who have now achieved a middle class status- this will begin to stagnate upward mobility.

In America, most people have the majority of their investment and savings in their homes, not savings accounts. American’s also pay out for health insurance and private pension funds- this allows for and keeps a much higher standard of living for Americans. When you do not have those investment vehicles available, like in China, the majority of people stick the money in savings- however, these high saving rates reflect a lack of fundamental structural financial underpinnings of a modern society rather than “disposable” income.

9 China has demonstrated its ability in expanding their economy at a rate never achieved in history. What took the west 200 years to achieve, China has done in it mere 20 years.

Several factual errors, the rate of Chinese economic growth is nothing new for countries who have started at a very low baseline. China’s growth creating a middle class out of one third of the population is not any faster than growth that took place in Japan, South Korea, Singapore- about 30 years (China 1978-2008) so there is no historical breakthrough by China. In addition, in creating its high rate of growth, it mainly relied on America- enormous purchasing of cheap goods from China gave it the investment money it needed to develop further. America grew and developed basically on its own, not by being an export driven economy or direct foreign investments- America’s was a home grown natural growth that emerged from all the right factors, from culture, freedom, liberty, private property- to modern business ideas and capital accumulation. It was America that both Japan and China leaned on for their own growth, acting as a pulling force for both countries.
China has the edge in every sense. When all these facts are added together, the readers can come to their own conclusion. Even the most pessimistic will agree that unless the entire Chinese nation gets addicted to cocaine, China cannot fail in expanding their economy.

There is no edge “IN EVERY SENSE”, China is a classic example of an export driven economy supplanted by extremely low wages. You are basically exchanging low wage labor for the creation of giving middle class status to one third of your population. As all developing countries typically experience hyper-growth during their first phases of development, this inevitably slows down once economic development brings up wages- making you a much less competitive exporter (i.e. Japan- exporting boom in the 1960’s, 1970s- 1980’s slowing down- now a dead economy, South Korea- an export boom in the late 1980’s and 1990’s- now growth much lower- as a result of a developed economy). Once hot cash settles down, wages rise, and foreign direct investment slows down due to higher wages- strong economies DO NOT continue at growth rates of 8-10% (as evidenced by Japan and South Korea). China is not following a different path- it’s just a question of time when a developed Chinese economy radically slows down.