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DAVID KRUSE

By Staff | Nov 27, 2009

U.S./Chinese relations are likely the most important relationship that exists to sustain the global economy. The U.S. has been consuming too much and China is too dependent on exports.

This has become described as “unbalanced” and the focus is on how to rebalance the trade relationship for sustained economic growth. China cannot depend on the U.S. consumer to support its economy any more than the U.S. can depend on China to finance its federal deficits, which is a great source of controversy.

The Chinese save 20 percent to 30 percent of their incomes. The Chinese save as they get no social security and have to pay cash for health care. This creates a pool of capital that their banks can lend.

U.S. “savings” put into the social security fund are borrowed by the Federal government so one could ask whether it is there, considering the deficits being run.

Chinese consumers spent $1.7 trillion in 2007 compared to $12 trillion for U.S. consumers. It’s difficult for Chinese consumers to spend enough to make up for curtailed U.S. consumer spending, but they have been trying.

The Plexus Cotton Market Report noted, “Retail sales in the U.S. peaked at around $380 billion a month in November 2007 and they are now about $35 billion less at $345 billion a month.

“However, on the other side of the Pacific, in China, retail sales grew by about $40 billion a month during the same period, from $110 (billion) to $150 billion a month. In other words, China’s consumers have more than offset the reduction of their U.S. counterparts.”

China’s stimulus worked to sustain economic growth this year in part because the ground work was already done for good infrastructure projects so that additional funding was able to accelerate those projects; unlike the U.S. where nothing tangibly worthwhile was immediately ready to spend money on. The result here was Washington spent it anyway.

China has problems, but appears to be more in control of its financial destiny than the U.S. is right now. It sets its currency value. The two sides have traded barbed advice that Beijing free its currency and Washington stop spending like fools.

Neither side appears to listen to the other. China has $2.1 trillion in cash reserves. China finances its own deficits and some of ours, too.

The impact of China’s fiscal policy is as far reaching as is its ag policy. China’s domestic price support for soybeans means more today to U.S. soybean farmers’ bottom line than anything in a farm program from Washington.

It’s been great for U.S. soybean farmers as Chinese demand has supported soybean prices, but there is great risk, too. Chinese demand dwarfs all other customers for U.S. soybeans exceeding the next dozen export buyers combined. This lopsided soybean trade to China is unbalanced. We have too many eggs in China’s basket if they trip and drop it.

While there are trade disputes over pipe, chickens and tires, these are small issues relative to the practice by Beijing of pegging the Yuan to our dollar. China did allow the Yuan to appreciate significantly before the global credit crisis occurred, but since has pegged their currency today for what they call reasons of stability.

President Obama will argue that the crisis is over and the Yuan needs to be allowed to rise again. China argues that it needs to sustain exports so will act slowly to release its currency.

It’s not just the U.S. complaining about the under-valued Yuan. South Korea, Japan, Brazil and others who compete with China for exports are put at great disadvantage from having their currencies appreciate against both the dollar and Yuan. China continues to suck up a huge amount of the world’s liquidity because investors see the Yuan as undervalued and therefore, investment in China is seen as an opportunity for gain when the Yuan climbs as it eventually will.

The Chinese can be coaxed, but not pushed, into anything. How China unwinds its economic stimulus next year will be very important to U.S. agriculture. As for last weeks meeting between lenders in Beijing, do you really think that China will release its Yuan or that Washington will reduce the spending as a result? Neither do I.

Beijing limited President Obama’s contact with Chinese people because of concern that they may warm up to him and that he might bring up censored topics Beijing doesn’t allow to be publicly discussed.

There is economic freedom, but not much other kinds in China. While the Summit was a time to discuss some of these issues face to face, the motivation to focus on anything else other than the economy is one sided from the Obama administration.

The Chinese are focused on their economy and ours and while I don’t agree with their currency manipulation, I agree with just about everything else they

worry about relative to the U.S. economy.

The U.S. cannot sustain out-of-control deficits. Washington doesn’t get that yet. There is not one iota of real austerity planning going on in Washington.

It’s all focused there on expanding entitlement spending, stimulus spending and the need to raise taxes as their only plan as to how to control the deficit. I think everyone knows that that is not going to work and the Chinese have the audacity to ask what the U.S. is going to do about changing the course it is on. It’s a valid question.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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