China's Acting More Capitalistic than U.S.

The US could learn something about monetary discipline and pro-capitalistic tax policies from a couple of unlikely sources: China and Russia.

As we continue to walk our economic tightrope between recession and recovery, in many people's eyes one of the biggest factors keeping us upright continues to be China.

Is there a bubble in China?

Over the past few weeks, there have been a few developments in China that I'd like to comment on here. Floating Chinese currency passes the swim testFirst off was the market-moving news about three weeks ago that the Chinese had decided to abandon the currency peg that sets the exchange rate between the yuan and the dollar. Although the Chinese were careful not to say precisely what the new currency regime would entail or how much the yuan would be allowed to move in value compared with the dollar, that headline still created a fair amount of commotion.

It's not yet clear what the full implications of this change will be, because it's not clear exactly how much, and by what means, Chinese policy will change, especially in the short run.Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 300, 213, {"configCsid": "MSNmoney", "configName": "player-money-articles-16x9", "player.vcq": "videoByUuids.aspx?uuids=5e5621b8-ddcd-43be-9f53-aaeb5d348cb5,21547a44-230d-4def-bc79-0dced40999b5,3a6da7ed-359e-45cd-8817-52067bf53ff5,322cc6d8-c309-4182-b0ec-5888a891a22c,81af29e2-3151-4c57-8ad2-d9720f2c7642,39e41062-5193-4557-ae27-e2914f31d5f1,ba9277b4-87a9-4672-8421-a70bae949378,e87c7c1a-187c-44d2-bd45-dcb6555b7e1e,4f6ee827-dd18-45f1-8a3c-1010c1891276,91260fda-1038-42c9-808d-917eeae9cc01,229ab033-d79a-4988-baca-e49f9a786754,8381a14a-5b9d-4df4-87d8-23286e689fd5,b79829b7-91e7-4222-9019-ccc4e110fd4d", "player.fr": "iv2_en-us_money_article_16x9-Investing-ContrarianChronicles"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=5e5621b8-ddcd-43be-9f53-aaeb5d348cb5,21547a44-230d-4def-bc79-0dced40999b5,3a6da7ed-359e-45cd-8817-52067bf53ff5,322cc6d8-c309-4182-b0ec-5888a891a22c,81af29e2-3151-4c57-8ad2-d9720f2c7642,39e41062-5193-4557-ae27-e2914f31d5f1,ba9277b4-87a9-4672-8421-a70bae949378,e87c7c1a-187c-44d2-bd45-dcb6555b7e1e,4f6ee827-dd18-45f1-8a3c-1010c1891276,91260fda-1038-42c9-808d-917eeae9cc01,229ab033-d79a-4988-baca-e49f9a786754,8381a14a-5b9d-4df4-87d8-23286e689fd5,b79829b7-91e7-4222-9019-ccc4e110fd4d;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');

However, this shift does fit a pattern of the Chinese moving ever so slowly toward an economy led more by domestic demand, which would benefit from a stronger currency. That said, in the medium term, China still needs to export; thus nothing dramatic is likely. A stronger yuan, if only marginally, also will ease trade tensions around the globe, so from that perspective it's a positive development.

With regard to the impact on the U.S., it seems ultimately bearish for the dollar and for Treasury bonds, though not in an immediately meaningful way. I expect that in the coming months the Chinese will accumulate fewer dollars and, by extension, bonds -- a trend that will probably accelerate as time goes by.

Find a new broker and trade online now

Capitalism with a big 'C' More recently, China was the skunk at the earnings-inspired July 13 stock market party. Its market declined about 1.5% while nearly all other markets rallied. The cause was the Chinese government making clear that it intended to "strictly" enforce its recent policies designed to prevent speculative real-estate investments from getting further out of hand.

It's interesting to note how that country has been addressing the white-hot property markets that exist in its 10 or so largest cities. It clearly wants to prevent those markets from becoming even wilder and ultimately more dangerous down the road.

Thus I find it surprising that folks who maintain that China is experiencing a full-blown bubble don't acknowledge that Chinese authorities seem to be at least trying to do something about it. There probably is somewhat of a bubble in those big-city real-estate markets, but to extend that argument to the country overall is a stretch, especially when one looks at the balance sheet of the average Chinese consumer.

Contrast that approach with the policies of the U.S. Federal Reserve, which claimed that it is impossible to see a bubble until after it has burst and, more importantly, that terrible damage would be done if it lifted a finger to attempt to thwart bubblelike behavior. Of course, both of those points are nonsense. Bubbles can be identified and dealt with, as the Chinese are showing, without ruining the economy. Officials at the Fed should have focused on bubble prevention, thus avoiding the disastrous aftermath we are now enduring, rather than honing their post-bubble management skills. Behind the Irony Curtain So on the world stage it is now hard to escape the conclusion that China is the monetary leader in the fight against bubbles. (Of course, Canada should get a tip of the hat as well, for never allowing its banking system to get as drunk as the rest of the West's, but that's a different subject.) And as if that were not bad enough, we have Russia showing us the way on tax policy.

As readers may recall, I made note of this a few years ago when the Russians copied one of the planks of my "platform," that being a flat tax (theirs is 13%). They have now decided they are going to abolish capital-gains taxes starting Jan. 1, 2011. (Unfortunately, in Russia there is no serious rule of law, and for that reason I would never invest 10 cents there, as intelligent as their approach to taxation appears to be.)

Nevertheless, the irony is inescapable. As America's policies continue on their socialistic bent, two of history's biggest erstwhile enemies of capitalism are embracing a level of monetary discipline and a pro-capitalistic tax agenda that probably has Mao Zedong and Karl Marx spinning in their graves.

It would be funny if it weren't so sad -- and the consequences so unsettling -- for us. More from MSN Money

The market's best bet right now

Can China keep its economy afloat?

The housing bubble hangover, part 2

Why Mr. Market seems so moody

Which way(s) will world markets go?

Rate this Article Click on one of the stars below to rate this article from 1 (lowest) to 5 (highest). LowThank you for rating.UGR('ratCntrl')High var avgRating=0;avgRating=8.17094; if(avgRating!=0){avgRating=avgRating/2;avgRating=Math.round(avgRating*100)/100;var sDisplayText="Average rating: " + avgRating + " from ";var usersCount=351;sDisplayText = sDisplayText + usersCount;if (usersCount==1)sDisplayText=sDisplayText + " user";else sDisplayText=sDisplayText + " users";avgRatingElem=document.getElementById("averageRating");avgRatingElem.innerText=sDisplayText;} View all top-rated articlesE-mail us your comments on this article Discuss in a message board MSN Money InsightNew Investor CenterMarket DispatchesJubak's JournalTop Stocks blogCompany FocusContrarian ChroniclesSmart Spending blogFast AnswersDecision CentersStart InvestingMutual FundsFind Hot StocksSimple StrategiesPower ToolsInvesting for IncomeReal Estate InvestingRecent Contrarian Chronicles ArticlesThe market's best bet right now 07/09/2010The housing bubble hangover, part 2 07/02/2010Why Mr. Market seems so moody 06/25/2010More . . .Contrarian ChroniclesAbout Contrarian ChroniclesLearn the Contrarian Chronicles lingoSubscribe to Market Rap on Fleckenstein CapitalFund data provided by Morningstar, Inc. © 2009. All rights reserved.StockScouter data provided by Gradient Analytics, Inc.Quotes supplied by Interactive Data.MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.Msn.Video.createWidget('Gallery8Container', 'Gallery', 500, 230, {"configCsid": "MSNmoney", "configName": "gallery-money-article-site-wide"}, 'Gallery8');msft.msn._ic.cid='2ctrfi56ewujq35xarxxc7p0p20fu65b';msft.msn._ic.pst=false;msft.msn._ic.pgn=1; Join the discussion!Add a commentShow commentsSort by:Newest firstOldest first_uc2f12('iucGo');1 - 8 of 8PreviousNextKilgourTrout #1Saturday, July 17, 2010 9:43:26 AMThanks Bill for a rare assessment of China's proactive approach to bubblemania.  Often overlooked as well is China's real accountability system of dealing with financial fraud, another lesson we should learn from them.  Where our regulators are captured by their industries, their regulators actually deter financial fraud.  Our light penalties for financial fraud make it a simple cost-benefit analysis for  banksters and others, where fraudulent behavior is the usual choice.  ReplyReport AbuseLost Dollar #2Monday, July 19, 2010 6:52:44 AMThe Great Wall Of China helps prevent against Bubbles, outsiders, and threats real and perceived!ReplyReport Abusecel1 #3Monday, July 19, 2010 7:48:56 AM

Agreed KilgourTrout, their regulators actually are. And when you commit a crime over there, white collar, blue colar, no collar, you go away and are likely never seen or heard from again. That would only have to happen to one person here in the USA and the rest would quickly learn the lesson.

 

There is a reason there used to be tall oak trees surrounding court houses and horses tied nearby with long ropes hanging on their saddle pommels.  Hang 'em higher...........................

ReplyReport AbuseWorking Monday #4Monday, July 19, 2010 9:04:03 AM

Thanks Bill!

 

The Fed is a creation of US Congress and when confronting bubbles, the big-bubbles of Congressional leadership must be popped first, in order to protect the American people living in a Capitalist System.

 

ReplyReport AbuseSteveJJ #5Monday, July 19, 2010 9:16:50 AMChina has real consequences for law breakers, exercises discipline regarding debt and bubbles and has respect for balanced budgets and living frugally! They've learned from our mistakes because they're an emerging economy and have the advantage of studying our mistakes! Too many of us (US) seem to be ego maniacs with gambling/spending problems and poor morals! Can't say I'd blame the President for these problems-more blame falls on congress and hollyweird! We need frugal leaders with decent morals! Conservative!ReplyReport Abusejohnny522 #6Monday, July 19, 2010 9:51:11 AMEven the illegals get to play Bingo. No punishment in USA. Rewards for doing illegals things.ReplyReport Abusedisillusioned101 #7Monday, July 19, 2010 9:58:56 AM

The whole idea that you cannot see a bubble forming is pure nonsense. It is born partially by propaganda to protect unwarranted speculative gains and partially a case of selective vision also to protect unwarranted speculative gains. This hear no evil, see no evil, speak no evil mind set is great if you are on the winning side of the speculative bet; it sure beats working for a living. However, someone must pay the price with their hard earned capital in order for capital accumulators, primarily on Wall Street, to slice a piece of other peopleâ??s productivity for them selves. Thus a well funded system that perpetuates selective blindness.

 

Of course this selective blindness is economically inefficient. It creates an opportunity for more efficient systems to take advantage of the less efficient system and here we are. Could you please pass the Vaseline, it is going to be another ruff day of crony capitalism.

ReplyReport Abusequinniv #8Monday, July 19, 2010 10:08:45 AMIf our former fed head Alan Greenspan had lifted a finger to reduce  a little of the huge housing and easy money bubble the US would have an average mild recession rather than  this severe recession which caused a financial collapse and over 8.5 million unemployed americans. George W Bush's "Ownership Society" and the banks' reckless lending and bailouts put the US in a shameless mood that China want no part of.ReplyReport Abuse1 - 8 of 8PreviousNext_ucf13('0'); _iuc2Om1('MSNPortalInlineComments','Initial_Load_Comment_View','http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/chinese-lesson-better-red-than-Fed.aspx?','en-us');Are you sure you want to delete this comment?Report AbusePlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease notify us using the Report abuse form below. We will investigate your report and take appropriate action against offenders. We report all illegal activity to authorities.CategoriesSpam or advertisingChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatOtherAdditional comments(optional)100 character limit To add a comment, pleasesign in/*MSN PrivacyLegalAdvertiseRSSHelpFeedbackSite mapAbout our ads© 2010 Microsoft/*

However, this shift does fit a pattern of the Chinese moving ever so slowly toward an economy led more by domestic demand, which would benefit from a stronger currency. That said, in the medium term, China still needs to export; thus nothing dramatic is likely. A stronger yuan, if only marginally, also will ease trade tensions around the globe, so from that perspective it's a positive development.

With regard to the impact on the U.S., it seems ultimately bearish for the dollar and for Treasury bonds, though not in an immediately meaningful way. I expect that in the coming months the Chinese will accumulate fewer dollars and, by extension, bonds -- a trend that will probably accelerate as time goes by.

Capitalism with a big 'C' More recently, China was the skunk at the earnings-inspired July 13 stock market party. Its market declined about 1.5% while nearly all other markets rallied. The cause was the Chinese government making clear that it intended to "strictly" enforce its recent policies designed to prevent speculative real-estate investments from getting further out of hand.

It's interesting to note how that country has been addressing the white-hot property markets that exist in its 10 or so largest cities. It clearly wants to prevent those markets from becoming even wilder and ultimately more dangerous down the road.

Thus I find it surprising that folks who maintain that China is experiencing a full-blown bubble don't acknowledge that Chinese authorities seem to be at least trying to do something about it. There probably is somewhat of a bubble in those big-city real-estate markets, but to extend that argument to the country overall is a stretch, especially when one looks at the balance sheet of the average Chinese consumer.

Contrast that approach with the policies of the U.S. Federal Reserve, which claimed that it is impossible to see a bubble until after it has burst and, more importantly, that terrible damage would be done if it lifted a finger to attempt to thwart bubblelike behavior. Of course, both of those points are nonsense. Bubbles can be identified and dealt with, as the Chinese are showing, without ruining the economy. Officials at the Fed should have focused on bubble prevention, thus avoiding the disastrous aftermath we are now enduring, rather than honing their post-bubble management skills. Behind the Irony Curtain So on the world stage it is now hard to escape the conclusion that China is the monetary leader in the fight against bubbles. (Of course, Canada should get a tip of the hat as well, for never allowing its banking system to get as drunk as the rest of the West's, but that's a different subject.) And as if that were not bad enough, we have Russia showing us the way on tax policy.

As readers may recall, I made note of this a few years ago when the Russians copied one of the planks of my "platform," that being a flat tax (theirs is 13%). They have now decided they are going to abolish capital-gains taxes starting Jan. 1, 2011. (Unfortunately, in Russia there is no serious rule of law, and for that reason I would never invest 10 cents there, as intelligent as their approach to taxation appears to be.)

It would be funny if it weren't so sad -- and the consequences so unsettling -- for us. More from MSN Money

Agreed KilgourTrout, their regulators actually are. And when you commit a crime over there, white collar, blue colar, no collar, you go away and are likely never seen or heard from again. That would only have to happen to one person here in the USA and the rest would quickly learn the lesson.

 

There is a reason there used to be tall oak trees surrounding court houses and horses tied nearby with long ropes hanging on their saddle pommels.  Hang 'em higher...........................

Thanks Bill!

 

The Fed is a creation of US Congress and when confronting bubbles, the big-bubbles of Congressional leadership must be popped first, in order to protect the American people living in a Capitalist System.

 

The whole idea that you cannot see a bubble forming is pure nonsense. It is born partially by propaganda to protect unwarranted speculative gains and partially a case of selective vision also to protect unwarranted speculative gains. This hear no evil, see no evil, speak no evil mind set is great if you are on the winning side of the speculative bet; it sure beats working for a living. However, someone must pay the price with their hard earned capital in order for capital accumulators, primarily on Wall Street, to slice a piece of other peopleâ??s productivity for them selves. Thus a well funded system that perpetuates selective blindness.

 

Of course this selective blindness is economically inefficient. It creates an opportunity for more efficient systems to take advantage of the less efficient system and here we are. Could you please pass the Vaseline, it is going to be another ruff day of crony capitalism.

Read Full Article »