Tuesday, December 7, 2010

The Royal Bank of Scotland Warns Agains China Sovereign Default in 2011

It warns that the Communist Party will have to puncture the credit bubble before inflation reaches levels that threaten social stability. This in turn may open a can of worms.

"Many see China’s monetary tightening as a pre-emptive tap on the brakes, a warning shot across the proverbial economic bows. We see it as a potentially more malevolent reactive day of reckoning," said Tim Ash, the bank’s emerging markets chief.

Officially, inflation was 4.4pc in October, and may reach 5pc in November, but it is to hard find anybody in China who believes it is that low. Vegetables have risen 20pc in a month.
RBS recommends credit default swaps on China’s five-year debt. This is not a forecast that China will default. It is insurance against the "fat tail risk" of a hard landing, with ramifications across Asia.
The Politburo said on Friday that China would move from "relatively loose" money to a "prudent" policy next year, a recognition that credit rationing, price controls, and other forms of Medieval restraint are not enough. The question is whether Beijing has already left it too late.


  1. Well, hopefully you know that the Chinese currency inflating will effectively mean that the US Dollar is deflating. We are talking about the two major economies in the world here. Bernanke says he is worried about Deflation more than Inflation for the American dollar. He has a right to worry.

  2. Capitalist China and its economic growth and economic system is tied to Western capitalism , “the free market” and its fiat money paper , world $ hegemony in finance and trade of the once mighty dollar.
    The US economic crisis will spread to China both economies are only propped my money printing stimulus . In China . Interest rates on savings at the banks are lower than the inflation rate .
    Production and consumption of wealth form a whole and now drive each other globally.
    China was an exporter of cheap labor created wealth.
    Pre crisis 40 of its GDP was earned from exports.
    Commodity wealth/new value is created in industrial production but the profits can only be realized when the commodity is sold.
    China evolved from a Stalinist form of economy under Mao to a “profit in command” economy under the Deng reforms into a state capitalist country, at first the basis in agriculture, the socialist collectives in agriculture were broken up into family leasing arrangements . The major industry was left in state hands while a competing private sector in industry was expanded .Foreign capital was then invested in this private sector right alongside the state owned sector that was then allowed to shrivel from lack of investments.
    So things evolved differently than in the Soviets where under Breshnev all the industry remained in state hands ,converted into a state capitalism ,with capitalist profits driving development. This state capitalism failed and collapsed owing to loss of real profitability just like American capitalism today.
    There is a myth that China is a still a socialist or ‘Stalinist” command economy because it still has the large remnants of a large state owned sector, but this state owned sector of its industry is not profitable any longer. That is not its purpose in Chinese capitalism .
    Its main purpose is to provide infrastructure support and cheap raw materials to the profitable private capitalist sector , particularly the often foreign owned manufacturing exports sector.
    So, this State sector is known by all to be unprofitable, but still it provides many low paid jobs. The low paid workforce in this sector are discouraged from seeking wage rises out of fear that the known unprofitable company will easily be sent bankrupt.

    World trade is not on the gold standard ,the US paper $ was seen as a good and world standard store of value. The Chinese were stupid enough to fall for that and put their national savings into US $ Treasury and often fraudulent property bonds.
    But de-industrialized America in the end had no real great commodity wealth to exchange value for value for Chinese commodities.
    All it had was $ paper and foreign, especially Chinese, Japanese and Arab, credit fueled a Ponzi debt economy .
    So America consumption was running on foreign credit and on the wealth it could exploit from control of third world natural resources and the profits on capital ,or really paper $ investments , including ‘aid” that mostly disappeared into the pockets of captured local elites and economic puppets ,through kickbacks ,commissions and outright theft.
    Some of that US foreign “aid” had to be used to finance a US empire protection racket of selling armaments for the defense of the local elites from their own people and neighboring country elites. For example the fake country Kuwait.
    American military force backed up these robber elites like the Saudi and Kuwaiti royal families . In return these corrupted countries priced their oil in dollars thereby creating a worldwide demand of all countries for dollars.
    To an extent gold backing for the dollar was replaced by oil backing.
    The Ponzi finance sector was responsible for roughly 40 % of US profits and therefore roughly 40 % of the shares on its stock markets.
    Share values are fictional values based on expectations and a title claim to a share of future profits, the P/E price ratio valuation .

  3. there are 3 flations here:
    ordinary americans see stagflation. no job, asset value like home is going down and food price is going up.
    the rich and wall stret see inflation because of all the QE. that is why they are buying up commodities. no wonder sugar, cotton, grain, wheat, precious metals, base metals, etc. are all going up.
    the people in power from Washington see deflation. they see high unemployment so they print money and keep interest low to help boost employment. the side effect of QE and low interest rate is creating inflation in the U.S. and leak to the rest of the world. there is inflation from India to China to Brazil, etc.
    so by printing money out of thin air we are exporting inflation to the rest of the world and the world is exporting unemployment to the U.S.
    what does around comes around.

  4. LOL - China to default... on what exactly? The tiny amount of bonds they have issued?

  5. 7.06
    it is wrong just to look at national /public debt.
    All bonds are a title claim to future incomes by invested old money invested as capital or usury .
    Their are different forms of government bonds .
    National government bonds for purchasing the natioal debt.
    provincial /state and municipal bonds .
    Then their are bank bonds ,perhaps issued with government guarantees /insurance against bank defaults.
    then their are bonds issued by companies and financial money lenders perhaps lending to speculators on property .
    These different kinds of bonds values can crash in China in a property bubble crash just as they did in the USA .

    The US has problems not only with selling its its national treasury bonds but with its past guarantees to fannie and freddie bonds and bank guarantees to banksters in an insolvant ponzi economy.
    The past savings of China were mostly invested in the US and these savings values can be easily inflated away by US money printing.


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