When you read in the newspaper that a “strong statement” is being issued about China, it is directed at you, not China. To China, it means less than nothing.
It would be easier to talk about the Philippine economy, the stock market, or even government economic policy. But China is the elephant in the sala that never goes away, can never be ignored, and it’s part of every discussion whether we like it or not.
Leaders of the G-7—Canada, France, Germany, Italy, Japan, the United Kingdom and the US—met in Japan this past week. Of course, while China was not a primary issue, since all of these nations’ economies have already or might in the future crash and burn, the regional territory issues are still a concern.
The substance of the statement was that everyone should follow the “rules” and not go to war. Apparently, China agreed by immediately announcing through the China Daily newspaper that it intends to turn the Spratly Islands into a tourist resort. “We will develop some islands and reefs to accommodate a select number of tourists, who have a patriotic spirit, and want to have a taste of ocean life.”
According to the Chinese government, there is nothing to fear. The reclamation projects are only an extension of the new Shanghai Disney Resort. Sending China a “strong statement” is like asking the elephant not to break your favorite chair since you know you can’t get it to leave.
China spent trillions to increase its steel manufacturing and since its economy has cooled, has been “dumping”—selling at or below production cost—to the US. The US has raised customs duties on Chinese steel to over 500 percent to stop imports. But what will China do? They will sell to other countries—like the Philippines—at an even lower price to squeeze out the US, Japan, India and South Korea. Alternatively, China will stockpile the steel and about the time the Philippines starts building steel mills, will dump its steel on the market to kill our production.
When crude oil was $100—and going to $250 according to the experts—China loaned multibillions to oil-producing countries like Venezuela, payable in oil, not cash. Now those loans are being paid at twice —or more—the original amount of oil because of the current $50 price. Venezuela owes $7 billion to Beijing this year and needs nearly 800,000 barrels per day (bpd) to meet payments, up from 230,000 bpd when oil traded at $100. Africa’s largest oil producer Angola, borrowed $25 billion and is now sending almost its entire oil output to China for debt repayments. China is flooded with stockpiled crude oil, getting millions of barrels for “free.”
The good old days of 1988 are easy for me to recall. That was the beginning of the golden age of the Philippines. The Philippines’s per- capita GDP was nearing $1,000. At that time, China was at $500. As of 2015, we are up 60 percent to $1,600; China has gained 700 percent to $4,000.
China is “The Boss” because no nation or group of nations can effectively stand up to China without risking military action or hurting their own economies. “Strong statements” are only political propaganda.
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E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.
2 comments
stupid and amateurish analysis,,,debt of china is about or more than 200 percent of their gdp,, it is about to burst in their face and u are saying china is the boss u know what?im reading ur opinions sometimes but for me they are to shallow and amateurish go and fack urself
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We strongly condemn the illegal reclamation and construction activities, and aggressive actions, and do
not recognize the excessive 9-dash claim. China has to stop these reckless,
irresponsible and illegal acts that are raising tensions that could create
scenarios that could lead to conflict or war. Right, we have to resolve this
issue peacefully and diplomatically, adhering to the rule of law and refrain
from conflict, but when all else fails, we should never shirk from it—and we
shall be prepared. The Balikatan 2015 exercise with the US is highly welcome.
We have the Mutual Defense Treaty (MDT) with the US that obligates us to defend ourselves and our ally the US in any form of conflict, and we will continue to do that. This is a highly complex, unpredictable and in some instance
ruthless global environment, as we have just experienced and will probably
continue to experience going forward—and working with our allies is one of the
most effective way of navigating and surviving in this increasingly chaotic
world.
We have to remind China that just because it is, a) the largest
US outsourced manufacturing and assembly facility in the world, b) the
recipient of the largest US Financial Feeding Program for the past 30 years
(through the massive China trade surplus with the US which amounted to $343
billion in 2014 alone (https://www.census.gov/foreign-trade/balance/c5700.html) and has reached $3.65 trillion nominal in 2014 or
approximately $10.95 trillion in current value) and c) with the introduction of
the China led Asia Infrastructure and Investment Bank (AIIB), the US’s/US
dollar proxy or front (some say as the US dollar broker and distributor, Note:
the reported $100 billion or possibly more China contribution at the AIIB largely comes from the
trade surplus/current account surplus/foreign reserves) does not mean that it can recklessly and
irresponsibly violate the rule of law and trample on the poor, the small and the weak
such as the Philippines, Vietnam, Brunei and others. Apparently, China, the
virtual US light industrial base or US annex has gone rogue.
Many advance the opinion that the US debt to China is the key reason that the US has exercised what appears to be extreme restraint in dealing with China on the reclamation and construction activities or many view it as a major US weakness and limitation. It is a skewed proposition and unfortunately a product of very bad math and very poor understanding of geoeconomics in the knowledge and information age. The huge US interests in China which serves as the largest US outsourced manufacturing and assembly facility in the world is highly likely the critical factor for the restraint. In his book “Dealing with China”, Henry Paulson Jr. (the 74th United States Secretary of the Treasury and former Chairman and Chief Executive Officer of Goldman Sachs and now chairman of the Paulson Institute) wrote to the effect that the thinking that US debt is highly
disadvantageous is based on poor math and a poor understanding of basic economics.
The US debt will be explained in a simplified form below from an
amateur’s perspective.
US Debt
The Philippines has been buying (and owns) US Treasuries, otherwise known as US debt, accumulating $39.4 billion (https://www.treasury.gov/ticdata/Publish/mfh.txt) as of April 2015, which is equivalent to 13.6% of PHL GDP ($289.7 billion as of
Dec 2014 based on official exchange rate-OER, https://www.cia.gov/library/publications/the-world-factbook/geos/rp.html).
China is the largest foreign holder of US Treasuries that amounted to $1.2634
trillion, equal to 12.2% of GDP ($10.36 trillion as of Dec 2014 based on
official exchange rate-OER).
Japan comes a very close second largest holder of US debt, reaching $1.2157,
equivalent to 25.5% of GDP ($4.77
trillion as of Dec 2014 based on official exchange rate-OER).
In terms of the ratio of US debt holding relative to GDP, Japan towers over China
by more than 100%.
Let us scratch the surface a little bit and present a simplified explanation. The US debt are actually US Treasury bills, bonds and notes that China purchased thru intermediaries, brokerage houses and others that are called US debt. The Treasuries are auctioned and buyers like China, the Philippines and others bid (offering the highest price) to be able to acquire the Treasuries—using US dollars from the nation’s foreign reserves.
Let us bear in mind that the US debt is not like the normal debt in which a nation
seeks a loan from say, the World Bank and amortize it over a certain period
with the corresponding interests. In a sense there is a similarity in which, for
example a US 10-year bond yields about 2.5% interest (which fluctuates depending on global geoeconomic and geopolitical conditions).
Nations buy US Treasuries/debt, considered the safest haven as long term investment and protection against financial instability and crises. Nations purchase US dollars as a strategy to
manipulate its currency (control its appreciation or manage a depreciation in
order to render its exports cheaper and more competitive), as currency for
international payments and others.
China’s US dollar reserves comes from the US as payments for the Chinese exports which in 2014 reached $466.7 billion (https://www.census.gov/foreign-trade/balance/c5700.html)—while the US exported to China goods worth $123.7 billion—a bilateral trade totaling $590.4 billion. In short, while the US bought from China goods worth $466.7 billion, China bought goods worth $123.7 billion from the US—gaining a trade surplus and a current account surplus (CAS) of $343
billion in trading with the US in 2014 alone. The CAS represents the massive US Financial Feeding Program (FFP) to China for the past 30 years, which is the key component and driver to its rapid economic growth that uplifted more than 500 million Chinese from poverty and created millionaires and billionaires—generating a
multiplier effect as China in turn imports from its neighbors (paying them with
the monies from its foreign reserve) like Malaysia, the Philippines, Singapore,
Cambodia, Vietnam, Chile, Peru, the Middle East counties for its oil, Africa,
Europe and so on—boosting the economies of these nations and further lifting tens if not hundreds of millions from poverty.
In effect, the CAS-US FFP cascades down from China to other countries
in the world.
(Lifting poverty provides disposable income to the people, which increases the propensity to spend, thus increasing business growth, generating employment, which in turn increases spending—creating a cycle of economic growth and acceleration—ideally).
Now, a slice of the CAS accumulated by China or the payment made by the US (and the west) to China is being used by China to bid and purchase US Treasuries/debt. Environmentalist and those with conservation
inclinations refer to this process as “recycling and reuse” and some may call
this as the financial blow-back (money coming back) or as the cash out-cash
back or the financial out-back. Others may say that this depicts the true “financial return”—money that returns to its original owner, in this case the original printer of the US dollar.
Some wise guys and jokers may say that the US dollars paid by the US to China to buy its goods is being used by China to buy US Treasuries/debt, which in turn is being paid back to China for the next year’s round of goods, which in turn is used to purchase additional US Treasuries/debt, which in turn …… —and back again and again. For example, China has purchased and is holding US debt of $1.2634 trillion as of April 2015. By next year, the US will likely
import from China goods worth $490 billion or probably more.
It will probably not print money to pay China, but use the money China
paid to purchase US debt or utilize other US instruments. To put it bluntly, in this highly complex and ruthless world, the wise guys and jokers are highly likely right. China is very smart in economics and business— but one nation is far more smarter than it is. Our great leverage is that we have a Mutual Defense Treaty (MDT) with smartest of them all—and we should smartly take the opportunity to avail and exploit that relationship. Both the PHL and US have our interests to
protect and advance, but we should not fear to negotiate and compromise with
our long term ally and treaty partner.
Let us pull in US investments in our soil and thence they will have a
stake in our economy and by extension our national security—and provide jobs for our people, giving them the monies to spend that will generate more businesses—creating a growing cycle of economic growth thus bolstering our quest for economic development—lifting millions from poverty—and improving the lives and well-being of so many. We have to attract the appropriate investments in order to move this country forward. If we have to amend the economic provisions of our constitution—then let us do it.
Paradoxically, China is a very good competitor in seeking those investments. Again, paradoxically, as China declines and faces extreme challenges ahead, only the US can save it—and China’s leaders know it. Access to the US consumer market valued at $12.5 trillion (70% of US GDP of $17.4 trillion as of Dec 2014), which is
larger than China’s GDP of about $10.4 trillion, access to US technology and
financial markets are the critical factors to China’s survival and growth years
and decades ahead. And the contest to have continued and increased access to and of the US market and in direct association the control and militarization of the West PHL Sea is one of the critical elements for China’s reclamation works and construction activities in that area. And that is where tension boils and the potential for conflict or war
increases every passing day.
A credible US military presence in Asia and the continued US economic recovery
are the two most critical factors that could suppress avenues to miscalculate
and misread, prevent conflict and war, and promote peace and stability — and
prosperity for all.
China, by irresponsibly and recklessly reclaiming the coral reefs, destroying the
environment and promoting hunger and poverty by wiping out marine life and
fishery breeding ground that is the source of livelihood of thousands of
fishermen and food of hundreds of thousands of people of Asia is undertaking a
“self-containment” policy, wittingly or unwittingly, or may have been
forced-moved or being forced-moved to do so.
It has increased its defense budget to approximately $150 billion. Some analysts estimate that about half of the budget is allotted to bolster internal security as China declines or slows down. A declining economy risks social
unrest and instability that could undermine the Communist Party. In short, China’s or the Communist Party’s potentially very powerful adversary is its own people.
The role of China as the largest US outsourced manufacturing and assembly facility in the world and the presence of US and the west’s investments in its soil,
China calculates, is a deterrence that is far more powerful than its military, the PLA. On this regard, the dependency of China to the US, highly likely will not decline—rather the leadership aims to strengthen this dependency—which necessitates the control of the West Philippine Sea in order to disrupt the US strategic imperative TO REBALANCE ASIA (Note: likely not rebalance to Asia or pivot to Asia as many thinks—just a simple rearrangement of the word to) by shifting part of its manufacturing and assembly facilities and other interests from China to ASEAN and other countries. Ever since the China Reform and Opening, which started in the 1980’s until today China has been and is dependent on the huge US market, which at $12.5 trillion (70% of GDP, $17.4 trillion) is larger than China’s GDP of $10.3 trillion, technology and financial market. Apparently, China will do whatever is necessary to retain the US’s interests and presence in its soil. Deeper analysis indicates that in this scenario, China is being “subsumed” by the US with the active participation, wittingly and/or unwittingly, of China’s leadership—as it implement acts to preserve its power.