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Blaming the Chinese for the credit crunch

This article over at the Foreign Policy website, by Helen Mees, dusts off an argument that I have mentioned here on Samizdata before, (in relation to a comment by the US investor and commentator Peter Schiff) namely, that China, by using its vast foreign exchange reserves to buy Western government debt, thereby pushed down long-term interest rates and encouraged the kind of reckless lending that ended up going ker-boom! in 2007-2008. And if only the Chinese had not flogged us all those artificially cheap computer parts and children’s toys (made cheap by that naughty fixed exchange rate regime for the yuan), they would not have made so much money to then lend to us Westerners to blow on housing we cannot really afford. (Here is another old post of mine on the same subject of debt/savings imbalances between the West and China.)

The problem with this line of reasoning is that if, say, a country has earned genuine income by selling something valuable and useful (like toys, cars, electronic components or whatnot), and invested the proceeds abroad in things that can generate new wealth in the future, what is the problem? The problem is not that China invested huge savings and other surpluses into the West – after all, in the 19th Century, the UK invested large capital surpluses in places such as the US, Canada and Argentina (now there’s an irony, Ed). And there was nothing “imbalanced” about that. If real savings – not central bank funny money created out of thin air – gets lent to people to invest, that’s hardly bad. The problem is if the money is lent to people buying homes as part of a broader speculative bubble in real estate, say. And there is no doubt that domestic policy in the West, most definitely in the US, encouraged unwise lending and borrowing for property, consumer goods and so on, rather than investment in new technologies and industries.

The comment thread on the FP item are interesting, where it is contested that subprime borrowing made up only a tiny fraction of the US mortgage market. It did not, since one of the issues with the sub-prime market and the huge losses sustained by banks was how sub-prime debt was mixed up with better quality stuff and then sold to investors as if it is was all investment-grade, when it was wasn’t. For example, here is a comment from a person called “RRAFAY”:

“Actually, 5% of Subprime is enough to cause a crash. Especially, when no mention is made of how these mortgages were leveraged. Secondly, Alt-A is not mentioned either. When both are taken together, they represent roughly 15% of the US mortgage market. Secondly, the idea that Chinese surplus capital led to an excess supply of money is so weak, that it is mind boggling that someone would even suggest this. China only holds 7% of total US debt. Each country mentioned had a housing crisis, Ireland, Spain, and the US.”

In my view, it is certainly true that in a world of free capital movements, if a country A can export a vast amount of its capital into country B, and people in the latter country are not constrained by proper market disciplines and there is already a full-blown encouragement of high borrowing and lax lending, then the added money will pour fuel on the fire. But in the main, I think it is a pretty silly line of argument to say that it is the fault of the Chinese for having earned so much money and then reinvested it. There’s something just not quite right about that argument on so many levels.

5 comments to Blaming the Chinese for the credit crunch

  • I’m not quite sure what they were meant to do with the dollars that they were earning exporting to the US.

    The only alternatives were to buy overeas (i.e. outside the United States) assets denominated in US Dollars – yes they’ve done a lot of that.

    The only other thing they could have done was to reinvest the dollars earned in the US, but I seem to remember when the Japanese did exactly this during the 1980’s they were crucified for it.

    Maybe they should have just bought Taiwan back from the Kuomintang.

  • Maybe they should have just bought Taiwan back from the Kuomintang.

    That said, there is enough Taiwanese money and management and expertise in mainland China at this point that they might have to do it with the Taiwanese people’s own money. That might be a neat trick.

  • RRS


    The pundits of today are so involved in what they perceive as “unravelling the complexities” of “Globalized Economies,” that comprehension of the most fundamental elements from human experiences are overlooked, ignored, or worse, denied.

    We read or hear little of the distinction of surpluses from savings, which latter are deferred consumption.

    There seems to be almost no recognition of the role of surpluses, their creation, the differences in the manners of their creation, their deployment, the effects of the differences in their deployment – all in and on various social orders, with the effect of “moving” the core of dominant civilizations.

    Concentrating soley on the financial aspects of the commerce of trade, goods and services, loses perspective of what transpires in the Chinese social order. Basically, they have been reorganizing that order to convert unused and under-used “human capital,” principally “raw” labor supply into claims for future goods and services (credit), which the pundits tend to class as “investments.” In fact China has been selling its services (labor) on credit -accounts receivable, whilst amalgamating that labor (and refining it) through intense urbanization, drastically altering the nature of its social organization into a quasi-Western format.

    There is evidence to support the school of thought that the development, rise and decline of civilzations and the movements of their “Cores” correlate to the accumulation, location and specific deployments of surpluses.

    It is not beyond imagination that the “core” of Western Civilization, as modified, now located in the U S, will continue its westward course to become located in Eastern China as that area further absorbs its perimeters of Hong Kong, Taiwan, Korea and Japan.

    Perhaps far fetched? Consider the surpluses of the U S today, what are they, where are they held, how are they deployed or redeployed as our own social order has produced managerial capitalism.

  • Rob H

    I agree that China can’t be blamed for investing per se.

    However, those state policies to encourage irresponsible lending would not have been possible/effective if the Govt debt had been properly valued. China set out to prevent the true value from showing. It deliberately ignored/hid the true risk to prevent a market correction (in the form of interest rates) from cooling a debt bubble. Had the “growth” been due to increased income from greater/more efficient production or based on savings and real capital rather than expenditure borrowed from the future then the low interests rates would have been justifiably low. China deliberately tried to postpone the correction for political reasons leaving a much bigger correction to come in the future (for both parties).

    For those who believe the financial destruction of the west was planned it is also another exhibit worth their consideration.

    The ultimate question for me is whether those controlling the economic policy really believed that borrowing from the future would lead to longterm prosperity or whether they understood al too well where it would lead.

  • Paul Marks

    This BS theory was first trotted out by Alan Greenspan.

    Who was the real force responsible for the expansion of the American money supply (“saving the world”, by yet more credit money expansion, every time the bubble looked like it was going to burst year after year – and THUS MAKING THE BUBBLE WORSE AND WORSE).

    The Federal Reserve system.

    And who was the head of the Federal Reserve?

    Alan Greenspan.

    If people can not see through this sort of self justifying “argument” then they are retarded.

    Oh no, that is a six months suspension and “compulsory diversity awareness training”.