The Wall Street Journal is out with a story about the property bubble starting to burst in Shanghai, China. See Shanghai Homeowners Smash Showroom in Protest Over Falling Prices.

This is part of a bigger problem. As a country it does not provide a social safety net (as in, if you show up to a hospital sick and can’t pay they wheel you out to die). This leads to two benefits for the country although not for the people. It makes labor costs cheaper (remember total labor costs are wages plus benefits). It also forces Chinese workers to save rather than consume. (Now, before hammering that saving is good it is inefficient saving. A social insurance program is more efficient pooling of risk and costs leading to both savings and extra money for consumption. I have yet to find someone complain because they paid for life insurance in the past year but did not get to collect on it.)

Back to the problem here – As a result Chinese workers need some place to invest their savings.  China does not have open financial markets so people look at where they can put their money. One place, about the only place, is in real property. This has lead to overpricing property and building more buildings than are needed. See the reports about whole cities that are empty. See  The ghost towns of China: Amazing satellite images show cities meant to be home to millions lying deserted

Because it is a bigger, structural problem when the problem reaches the breaking point the implications are huge. Because the world is interconnected, when it blows it will hit the rest of us.

Fund manager Jim Chanos who looks for overpriced situations and invests against them had this recent interview on Bloomberg:  Chanos Says China Property Is Slowing, Still Shorting Banks.

Blogger Mish Shedlock works through the numbers – price per square foot, unfinished, is about $268. In the US its about $85. Actually, if it were an open market Chinese would be better off buying the distressed houses in the US than what they’re overpaying in China because they have no other place to put their money. This will end poorly. His conclusion:

The property bust is underway in China and will spread from city to city just as it did in the US. No city will be immune and commodity prices will be smashed in the downturn.

Reuters is out with quotes from Chinese ministers, think US Cabinet-level politicians, strongly denouncing yesterday’s US Senate move to begin hearings on China’s trade manipulation through China’s currency peg. Thus I am reminded of the Shakespeare play line above. Where as the ministers say this will be bad for the US what they’re really saying it will be horrible for China. China’s main export to the world is unemployment.

Historical economic teaching, proven to be out of touch to all except economics professors, said countries could not maintain indefinite mis-aligned currencies. But that was in an era of gold-standard currencies where a country could literally run out of money. But not so today for the US or China. China can continue to impoverish their people through a low currency and no state-supported safety nets while the country builds up foreign reserves. But since those foreign reserves are pegged to the US dollar and the US can print dollars any time it wants, the US can always pay any ‘debt’ another country presents to the US. The question becomes, what do these countries do with the dollars they receive?

Unfortunately most of the main-stream media do not understand there are two types of debt. The federal budget is one type of debt based upon US government revenue and US government expenses. The other is trade debt which comes about from US buying more from other countries than other countries buy from the US. If China does not want our debt, all they have to do is stop selling to us more than they buy from us (or others in the world – the trade does not have to be even between two countries but if a country runs a surplus in trade then another country somewhere has to run a deficit.) If China continues to sell to us more than they buy, then they WILL end up with dollars. They can keep their money as dollars and get no interest or they can buy something with their dollars which is most often US Treasury debt instruments.

So, maybe what the Senate is doing is a good thing as it is getting China’s attention. The louder China screams, the likely it is better for the US at this time.

General’s son crashes into wall of outrage (Reuters) The cute, buried comment, is the kid was driving using fake license plates implying high level status let alone that he was not old enough to have a driving permit.

Reuters is out today with a report where Chinese officials are criticizing the US against potential trade protection measures proposed by Senate majority leader Harry Reid. This would be funny if it wasn’t so serious. China has numerous, active local protections against trade INTO China. They want to keep the playing field un-leveled in their favor as long as possible and thus their bluster. I hope our leaders, which may be very faint hope, understand and act upon appropriate measures.

From Reuters:

China’s Foreign Ministry urged U.S. lawmakers on Wednesday not to resort to “excuses” for trade protectionism after U.S. Senate Democratic Leader Harry Reid pushed for legislation aimed at forcing China to loosen controls on its currency.

“I want to stress that protecting the stable and healthy development of Sino-U.S. economic and trade relations is in keeping with the interests of both sides,” Ministry spokeswoman Jiang Yu told a regular news briefing.

“We urge members of the U.S. Congress to see clearly the importance of economic and trade cooperation between China and the United States, and it’s mutually beneficially, win-win character, and do not search for excuses to engage in trade protectionism against China,” she added.

Lets count just some of the ways that China protects their markets while protesting others who might try to protect theirs.

1. Pegged currency at a low peg
2. Lack of protection of intellectual property
3. Forced sharing of intellectual property
4. Forced domestic content, domestic production
5.  Unopen markets
6. Poor or poorly enforced environmental laws
7. Poor labor laws (if any)
8.  No social safety nets (retirement and health care)
9. Others….I’m sure there are but that’s a quick brain dump

Congress’s harping on the yuan/dollar exchange rate is not really the biggest, IMHO, of the systemic problems. The undervalued Chinese currency does allow them to import employment/export unemployment until the other countries wise up. This is where the economic classes being taught to the current generation and generations prior is pure bunk. In economic theory China should not be able to have run the trade surpluses they’ve run for as long as they have but all of that theory was based upon a gold standard behind sovereign currencies. When there is no fixed asset anchoring a currency, countries can spend as much as they want as long as people are willing to accept their fiat currency (and with the issuing country collecting taxes in their currency this can be a LONG time). Still, I take the  yuan-dollar conversion rate as still small potatoes from a systemic point of view (but its easier to understand and thus why Congresscriters make noise about it.)

Others on the list make for more permanent transfer of capabilities, or completely un-level the playing field, than just the currency issue.

Again, here’s hoping our Congress acts but don’t hold your breath.  And remember, China isn’t financing our deficit. They buy our Treasuries because of their trade surpluses othewise they’d just be holding dollars getting no interest.

What’s it mean when the richest in a country has as their number one desire is to leave their home country? I wonder how this AP article is getting played, if even seen, in China?

Chinese millionaire Su builds skyscrapers in Beijing and is one of the people powering China’s economy on its path to becoming the world’s biggest.

He sits at the top of a country – economy booming, influence spreading, military swelling – widely expected to dominate the 21st century.

Yet the property developer shares something surprising with many newly rich in China: he’s looking forward to the day he can leave.

Su’s reasons: He wants to protect his assets, he has to watch what he says in China and wants a second child, something against the law for many Chinese.

The millionaire spoke to The Associated Press on condition that only his surname was used because of fears of government reprisals that could damage his business.

China’s richest are increasingly investing abroad to get a foreign passport, to make international business and travel easier but also to give them a way out of China.

The Globe and Mail of Canada are reporting that with the new government of Libya taking Tripoli they have found documents presenting proposed arm sales from state-owned companies of China to the now deposed dictator of Libya, Moammar Gadhafi. As the Globe reports:

China offered huge stockpiles of weapons to Colonel Moammar Gadhafi during the final months of his regime, according to papers that describe secret talks about shipments via Algeria and South Africa.

Documents obtained by The Globe and Mail show that state-controlled Chinese arms manufacturers were prepared to sell weapons and ammunition worth at least $200-million to the embattled Col. Gadhafi in late July, a violation of United Nations sanctions.

The documents suggest that Beijing and other governments may have played a double game in the Libyan war, claiming neutrality but covertly helping the dictator.

Here’s hoping the new government recognizes who is their friend and who is not.

US’s new ambassador to China is causing some soul searching within China (twixt between pride and ‘it couldn’t happen in China’) See Bloomberg

This one is long but serious – basically China’s ‘banks’ aren’t banks as we think of them but are vehicles for government policy and certainly are not investment grade but more likely as sham enterprises that could collapse.

America can’t afford complacency on China (Reuters – by Ian Bremmer – this guy provides strategic advice to big money clients on investing in China. He’s been early on about ‘state-sponsored capitalism’ as a new type of economic warfare. )
Rise of China state-owned firms rattles U.S. companies (Reuters also) Some of the money quotes:

“A new dynamic in the world economy threatens the competitiveness of American companies and workers in world markets and undermines our country’s core belief in market-based economy,” the U.S. Chamber of Commerce and the Coalition of Services Industries said in a joint report.

“No adequate and effective international disciplines now exist to deal with this problem,” the groups added, complaining that China and other countries lavish regulatory favors and generous subsidies on their state-owned firms.

…it is very much a U.S. concern if the playing field is not level between them and their American competitors,” U.S. Under Secretary of State Robert Hormats said in a recent speech. (Editor – Duh…, and the US refuses to call China a currency manipulator).

Unknowledgeable easy prey for sellers of Chinese U.S. fakes (Coinworld) 

They are not aware that the United States is awash in counterfeit classic U.S. coins made in China, which have been pouring into the United States via online auction sites and Chinese sellers using the Internet.

This extends on our observations China fakes could destroy coin collecting market 

BBC is out with an update on fake stores (for those not tracking this issue, China has gone from faking products to faking whole retail operations). Although China shut down two stores, a recent blog report and follow-up by local authorities found 22 stores.

…according to Chinese trade officials, 22 have been found unlawfully using Apple’s brand and logo.

The investigation into unauthorised Apple stores in Kunming was brought about when an American living in the city published a blog post describing a visit to one such shop.

Describing it as a “beautiful rip-off”, BirdAbroad revealed how far the owners had gone to copy the decor and ambience of a real Apple store.

Staff also wore the same colour T-shirts as real Apple staffers, and sported lanyards of the same design.

The article concludes that local officials are going to step up their monitoring of the situation. But that’s what they said last time and now we have 5 times as many stores in one month. And we wonder why we have unemployment here.