Umair Haque / Bubblegeneration
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Monday, November 22, 2004

The First World is the New Third World

"...In a mark of China's growing economic confidence, the country's central bank has offered blunt advice to Washington about its ballooning trade deficit and unemployment.

...�If there is a small deficit, we are not concerned. But certainly we don't want to run into the US situation of having a trade deficit of 6 per cent of GDP,� he said.

�That is not sustainable,� he added. �The appreciation of the RMB will not solve the problems of unemployment in the US because the cost of labour in China is only 3 per cent that of US labour they should give up textiles, shoe-making and even agriculture probably.

�They should concentrate on sectors like aerospace and then sell those things to us and we would spend billions on this. We could easily balance the trade.�"

Highly unusual, to say the least. Ignore the political motive of the prescriptive advice (ie, we won't float the rmb yet) and focus on the fact that he marks 6% of GDP as a danger sign for the deficit. That's a clear signal that China's only willing to grant the US so much latitude - roughly 6% is where the US will begin to lose creditworthiness (relatively speaking), and China will shift it's peg to a basket most likely heavily weighted with euros as the slide of the dollar accelerates on the back of this info.

That is really big news - because I think most people expected the US's credit to be good for more than 6% of GDP. This places a nice big constraint on current levels of consumption growth/savings decline.

-- umair // 10:50 PM // 0 comments


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