China’s Nuclear Financial Option & The Subprime Mess

Posted on Fr 10 August 2007 in misc • 3 min read

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    Things got very interesting this week. At the beginning of the week the markets seem to shrug off the subprime mess on reports of better earnings and no interest rate hike from the Fed. Sentiment turned Bullish again and Wall Street was looking forward to resuming the market trends higher.

    Then the news came out that the US subprime mess has spread beyond housing and into the global marketplace. In a surprise move, the ECB injects over $100 billion dollars into their system to create liquidity because a few mutual funds got in trouble.

    Injecting additional liquidity into the system is not necessarily the best answer and I happen to agree with Christian on this one.  However, my opinion  is that the ECB has been the better bank to bet on than the US Federal Reserve. The ECB refused to play along with Greenspan's liquidity game and started raising rates before everyone else did because they were taking care of themselves first.

    People are now screaming for Bernanke to cut rates to avoid a recession and to stabilize the Real Estate market and subprime mess. No matter how much I want to avoid a catastrophe Real Estate bust in the US (I own a rental property) I hope Bernanke will stay the course. We need to burn all these bubbles out of our global economy before we get dragged into a global depression rather than a recession. It's time to take our medicine!

    Complicating this week was a shot across the bow from China’s finance chief, Xia Bin.

    Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.

    Xia Bin, finance chief at the Development Research Centre (which has cabinet rank), kicked off what now appears to be government policy with a comment last week that Beijing's foreign reserves should be used as a "bargaining chip" in talks with the US [via UK Telegraph].

    Where the heck is this coming from? I think its coming from two areas, our pressure on pushing for a free floating yaun and the importing of bad, and sometimes deadly, product quality. China can’t innovate shit and they know that. They rely on cheap labor, copying technology, and stealing intellectual property to make money. The new elite class in China likes their cushy positions and the obscene amount of money they are making by buying up our debt and financing our buying habits.

    Everything is ok as long as the US and the world keeps buying their stuff. Any bad PR about deadly toothpaste or US protectionist legislation would hurt business and possible cool off their red hot economy. This could lead to a lot of internal chaos (紛亂) in China, which is their biggest fear.

    I happen to agree with Babak’s analysis that if China suddenly sells our debt, they’ll end up shooting themselves in the face. His domino scenario is very plausible and the big question I ask is this, why would China hurt their biggest importer of goods, especially before the 2008 Olympics?

    The answer is they won’t, this is just a smoke screen for something else which remains hidden right now. Besides, I’m curious to know just how much subprime paper China holds in their $1.33 trillion dollar reserve.  Maybe its more than they like too right now.

    My message to you Chairman Bernanke is to stay the course! My message to you Mr. Bin is stop being stupid!