History Repeats Itself: Communists Still Can't Cope With Economic Problems

Of all the stories over the past 4 days, the one that has me the most interested is what we have seen coming from China. In case you missed the event while celebrating Thanksgiving, this story starts in the South China Sea.

Last Monday two U.S. minesweepers, USS Patriot (MCM 7) and USS Guardian (MCM 5), returning from exercises in Vietnam were seeking to refuel and get shelter from bad weather in the South China Sea. They asked for permission to enter Hong Kong... China said no. Then...

Thousands of sailors aboard the USS Kitty Hawk and its carrier battle group had to mark the Thanksgiving holiday at sea after they were denied entry to Hong Kong for a port call that had been planned months in advance, U.S. Navy officials said Friday.

Hundreds of sailors' families had flown to the city to spend the holiday with their loved ones, while dozens of Americans living in Hong Kong had prepared turkey dinners for those without visiting relatives.

In an unusual last-minute decision, China turned the ships away as they neared the port. It later reversed its decision, but by that time the aircraft carrier, along with four warships and a nuclear submarine, were already leaving the area for their home ports in Japan.

This was to be the last port of call for the USS Kitty Hawk (CV 63) before she is replaced by the USS George Washington (CVN 73) next year. Considering the size of the Kitty Hawk Carrier Strike Group, we are talking somewhere around 8,000 US sailors. I did a bit of research, and in 2005 it is suggested the economic impact of Hong Kong from a similar port of call is around $32,000,000. Over 35 US Navy vessels have pulled into Hong Kong so far this year without problems.

There is speculation as to reason. The media is guessing when they say this is over the Dalai Lama or perhaps the Iranian nuclear issue, the fact is China hasn't said anything and we don't know. It is also probable that when US military commanders go to China in January they are unlikely to get a good reason, meaning we will probably never know.

I have a theory though, one not being discussed. Have you noticed the price of oil? Have you noticed the drop of value in the dollar? You do realize they are related right? The US is currently intentionally devaluing the dollar, and will do so further in the near future if the Fed decides to reduce yet another percentage point of the interest rate. What is noteworthy is the US economy, while slowing down in some sectors, is not showing any signs of panic, nor is there any signs of inflation.

China's currency is pegged to the dollar, and the US is forcing reform whether China wants it or not. In case you are wondering, nobody, and I mean absolutely nobody, thinks the EU could do anything to pressure China without the US helping, and there is speculation that this issue is likely a big part of the give and take happening with EU and US on the Iran issue.

China is progressing with foreign- exchange reform and the mechanism plays an important role in ``adjusting'' the nation's trade balance, central bank Deputy Governor Su Ning said.

The rate of the yuan also plays an important role in sustaining the nation's economic growth, Su said today at a financial conference in Beijing.

...

The yuan's appreciation ``should accelerate,'' European Central Bank President Jean-Claude Trichet, who arrives in Beijing on Nov. 27 for two days of talks, said Nov. 22. He will be accompanied by Luxembourg Prime Minister Jean-Claude Juncker and European Union Commissioner Joaquin Almunia and will meet central bank officials.

While the yuan has risen about 5 percent against the dollar his year, it has weakened by almost 7 percent versus the euro, increasing the cost of European goods.

One of the side effects of the devalued dollar is US exports are at an all time high. The price of Chinese exports are on the rise, and China has raised their interest rate 5 times this year in an attempt to curb inflation, but because of the currency issues the interest rate hikes may not be enough to ultimately prevent inflation.

Reduced returns on the greenback would drive some of the international capital into China to seek better returns; and the increased liquidity would put more pressure on inflation, he said.

Also, as the dollar depreciates against currencies of economies producing resources such as oil, grain and raw materials, it will mark up the nominal prices of commodities.

In turn, the prices China pays for those commodities would rise, thus stoking so-called "imported inflation", said Guo.

"Interest rate hikes would not do much to ease this, because they cannot offset the effect of international factors," he said.

China has raised the interest rate five times this year.

"It will make China's exports more expensive and imports cheaper, thus narrowing the gap between exports and imports," said Shi.

China registered a trade surplus of $212.4 billion in the first 10 months, up 59 percent year on year. But growth in October dropped 0.5 percentage points from a month earlier, while import growth increased by 9.4 percentage points.

Look. China has an economic bubble because it has been playing dirty with its fixed currency. The Bush administration in fact has been playing this bubble to the advantage of the US economy, not a bad move when you consider the incredible increases of federal revenues despite tax cuts, in many ways the bubble has been exploited to pay for much of the 9/11 recovery efforts (although it is a fair argument to say those gains have been blown by economic costs of war).

With the US now putting extraordinary strain on the yuan due to dollar drop, increasing the costs of commodities worldwide in the process, and somehow *cough* avoiding inflation in the US, China is not only seeing increased competition worldwide from other emerging markets, but is seeing widespread demand for appreciation in their own currency from both inside and outside China, and is also facing inflation from all angles despite massive interest rate hikes.

In response, China is doing what it can to demonstrate their displeasure, and by that they have few options, so they take it out on the US Navy. In the end, all it does it piss in the economics of Hong Kong, which I think highlights the nature of Chinese leadership and their absence in understanding how to deal effectively with external economic pressure.

In the past I have given a lot of credit to China. Until I see otherwise, I'm not going to make that mistake anymore. Chinese communist leaders appear absolutely lost on how to handle diplomatic problems on economic issues, all they have are communist rule solutions for capitalist type problems, and they give all the indications of foolishness in trying to use those types of solutions. For example, how did they handle the Dalai Lama? They violated World Trade Organization agreements and blocked US search engines. It is a completely fair statement to say that almost all Democrat (exception Clinton) and almost all Republican (exception Romney) presidential candidates would have taken action against China. Bush let off China easy.

So how does China respond to the economic pressures of the US? They deny access to Hong Kong. Fine, the US Navy can take shore leave elsewhere, Singapore and Thailand would LOVE to have the US come into port. Do they think this punishes us? All it does is piss us off. Morale in the 7th Fleet took a hit, but I'm pretty sure the Admirals can get the sailors focused again. which in turn will not be to China's advantage.

Finally, how did China respond to the lead paint toy problem? They executed a bunch of Chinese dudes then bragged about it to the US media. Only the cowardice of the US cable media prevented that from becoming a public relations disaster for the Chinese, but it hasn't stopped human rights groups who have been trying to tell anyone who will listen, and plan to remind everyone come time for the Olympics. I wonder how long before China threatens NBC over Olympic commercials, between the Unions and PACs in the middle of a huge election year, China is set to get smeared on TV like butter on toast.

The Chinese are acting like rookies. They have no idea how to handle economic pressure except with their usual communist behaviors, which ironically usually works exactly counter to the economic driven reforms they are trying to promote. If the US had a clue we would crush them for their communist stupidity, but alas, the Bush administration is just like the Clinton administration, and operates under the theory that China can do no wrong.