偸桃换李

Corbett | September 6, 2008 11:19 PM

I thought I had a pretty good handle on economics until recently when I tried to really fully understand the complicated financial tango going on between China and the US.

At the beginning of the year James Fallow in his article "The $1.4 Trillion Question" points out, "The Chinese are subsidizing the American way of life. Are we playing them for suckers--or are they playing us?"

Then all hell broke out with Fannie and Freddie and we realized how intricate the dance was between the US and China.

Just a couple days ago there was this fascinating NYT article that talks about how China's Central Bank is running on near empty. What was most interesting, and something I wasn't aware of was the contradictory push-pull between the Central Bank and the Ministry of Finance.

Then there was this simplistic and brutal article by Dean Baker in response to the NYT article, called "Is China's Central Bank Run By Morons?" As a smart guy with lots of creds, Dean came off like a guy you would not invite to your dinner party. His post begs you to say, "But what about those greedy Wall Street bastards that created this defective financial product in the first place?"

Then there was the article by Andrew Leonard that pulled a lot of this together called "A Chinese conspiracy theory" which sort of confirmed how I felt but left me thinking I was missing something important and obvious.

The Leonard referenced link to Henry Paulson's, "A Strategic Economic Engagement
Strengthening U.S.-Chinese Ties" made for interesting reading and showed that US/China economic policy wasn't without dialogue, but it didn't make me feel I understood anything, and in many ways made me more confused.

Then Michael Pettis on Seeking Alpha seemed to make the most sense of this muck in his article, "Is the PBoC Running Out of Capital?" He wrote, "If you exchange something below its fundamental value for something above its fundamental value, it is only an accounting trick that allows you to pretend you haven't booked a loss. Revaluing the RMB does not create the loss. It simply forces recognition of that loss. And as long as China continues to accumulate US dollar assets purchased with undervalued RMB, the PBoC will continue to run losses, whether or not they are fully recognized. Perhaps you need to be a trader, and not a government official, to get the point."

So now it all started to make more sense, bringing to mind the Chinese saying 偸桃换李 (tou tao huan li) meaning steal a peach and exchange a plum. But now the question is - who stole the peach? And maybe more importantly - who's counting the plums?

Category: Mr. Asia

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