A money shaped building in Shengyang, China. Photo by Brian Yap
I think the literal answer is so you could carry it on a string. Which gets us to the modern problem. The Chinese aren’t consuming enough to pick up the slack for broke-ass western economies. Hence the NYTimes is saying ‘China, the biggest developing economy, is still more a caboose than a growth engine’ and dark prophet Nouriel Roubini is saying ‘China is part of the problem’.
I read Roubini’s comments in Foreign Policy which I found really interesting. I just couldn’t make head or tail of what seemed to be important paragraphs. I emailed Jack Point and he explained it in human speak. His latest post quoting Frédéric Bastiat is also worth a read.
Basically, the Chinese government is making their currency artificially weak against the dollar. That means it’s cheap for the west to buy stuff here, but Chinese people can’t afford to buy stuff from the west. It is, in effect, a tax on the Chinese consumer, unless I’m reading that wrong. The Chinese government makes money on exports which they funnel back into infrastructure.
This was OK until the west got all its credit cards cut. Now demand from the west is dropping. The world needs China to consume to pick up the slack, and a lot of the developing world is shadowing China. Hence the developing world isn’t picking up the consumption slack, because its citizens money is worth less. Artificially so. The money has a hole in it, bubbled by government intervention.
The countries that have large deficits are going to have weak domestic demand because of the leveraging of the public sectors, so they need to grow to get net export growth, which implies a weakening of the dollar in other currencies of countries (Foreign Policy)
So, I think that finally makes sense, for me at least. The Chinese need to revalue the Renminbi (denominated in yuan) in order to give its consumers more purchasing power – at the expense of its producers. Theoretically those consumers could make up for some of the export losses, but who knows. The danger is that people might lose export business, and jobs, which makes for political instability, which is feared above all. Even at the expense of long-term stability.
What I find interesting is Roubini’s prediction on how this will all play out.
By 2013, China is going to have a hard landing — because no country is going to be so productive that you invest every year half of your GDP into new capital stock. You’re not going to have at the end of the day a massive NPL [non-performing loan] problem, a massive public debt problem (the Chinese public debt is now 80 percent of GDP), and a massive amount of overcapacity that’s going to lead this investment boom into investment bust.
Basically, I think he’s saying that China has a production bubble. That I’m still trying to understand.