Beating a Dead Tibetan 2: the Remetaphorizing!

Sorry to sweat-shop-belabor this--I'm sure we're all sick of discussing just where China falls on the Economic Boogy-man Index (76 as of yesterday)--but just to go back to point I was talking about earlier...
I mentioned an article/blog I read a few days ago which claimed that the current demand for treasury bills from China will likely begin to wane as their exports drop off. As demand falls for Chinese goods (and therefore Chinese RMB), so the argument goes, there is less upward pressure on the Chinese currency and therefore less need for the Chinese government to intervene directly into American financial markets to keep the peg...well, pegged. In his own words:

China no longer needs to be as active to keep the yuan (which now appears to be back to a hard peg) where China wants it to be. A presumably smaller current account surplus and a capital exodus would seem to be prime suspects. (Link)

Tonight, the BBC is running a headline: "China's Exports in Record Decline".
Bad news for China certainly, but not necessarily a vindication of the argument above. Scroll down on the BBC article and you will eventually find that

December imports fell even more sharply, declining 21.3%, the China Daily reported.

That was a bigger decline than November's 17.9% drop.

With exports in December worth $111.2 billion, and imports worth $72.2 billion, that made December's trade surplus $39 billion.
That is the country's second highest trade surplus ever, just short of November's record $40.1 billion. (Link)

Quothe Captain Obvious: China's economic growth has largely been driven by exports. Imports, otherwise considered exogenous (i.e. not at all related) to exports, are a function of overall demand within the economy. But for China, where overall demand is disproportionally accounted for by foreign demand through exports, a drop off in exports will necessarily lead perhaps not an equal, but proportionate decline in imports. This isn't just an issue of exports => aggregate demand => imports (if you'd like additional sophisticated diagrams, I'm available for any class or business presentations). Most of Chinese exports are "re-exports": raw materials are imported and assembled cheaply for export or sophisticated technological equipment is imported and, again, assembled cheaply for export. Therefore, imports aren't just a function of exports in an indirect sense (see elaborate illustration above), but literally make up the exports. As an aside, contrast this with the United States. If everyone were to hypothetically stop buying American stuff (see: past 10-35 years), that wouldn't stop all us good ol' boys and gals from buying everyone else's stuff because our economy is more "dynamic": the Camerro that is American economic progress also runs on domestic consumption, investment, government spending and, more recently, the tears of unicorns imprissoned in the sea by Alan Greenspan.
Back to China, as the article points out, in December the fall in imports was even larger than that of exports. I don't know if that is accounted for by an actual decline in quantity imported vs. exported or by a change in currency values between one of China trading partners. Whatever the case and whether that will continue to be the trend (or whether there will be a trend at all) is secondary to the point that, because China's very economic soul predisposes it such that a drop off in exports will entail some degree of declining imports, at least in the short-term, the global recession will not fundamentally alleviate the upward pressure on that country's currency.
I should point out however that currency values are not solely (and in many cases primarily) determined by current account fluctuations (exports and imports), but by capital markets.
And everyone knows how predictable capital markets are.

Beating a Dead Tibetan

Just a few more thoughts on the relationship between the United States and China. So far the discussion of this sorta-kinda-reciprocal co-dependence between the two countries has been defined as, one side of the Pacific, a need for easy credit and cheap plastic shit and easy credit to buy that cheap plastic shit. And war and stuff. And then on the other hand, we have an economy completely reliant on exports. Why can't China just pull the plug on the comatose vegetable that is the American Dream? So far we've talked about China's need to keep its currency and wages low, both of which help to make their lead and melamine so deliciously cheap. That's the macroeconomic perspective, and its correct.
What we haven't really talked too much about (or if we have, I wasn't paying enough attention) is that China's interests in American T-bills and private equity is not just about keeping the dollar strong against the RMB; these are legitimate investments. Given the massive inflation that up until recently China was worrying about, the massive amount of money poured into the American financial system wasn't just a way to keep China's trade-relationship as static as possible (though it certainly was), it was also about keeping the money in a secure and safe place. Now that that secure and safe place has turned out to be neither, this doesn't mean that the Chinese government is going to sell off all of its American assets. If China decides to start selling off its American assets (and in doing so, take a dump all over the American dollar), we therefore just see a sharp(er) deterioration of China's trade position, we will see a massive deterioration of its financial position. An estimated 70% of Chinese reserves are held in dollar-denominated assets. In a sentence then: in my limited capacity to evaluate things, I would imagine that the flow of cash from China will not turn on a time, but instead slow down. On the other hand, as one blogger writes, China may not need to be so concerned about an imminent appreciation of its currency: right now, people aren't buying as much of their exports (i.e. its current account surplus is beginning to flatten if not fall) and people aren't investing as much in China, financially or directly. Which is to say, in the absence of the standard upward pressure on the Chinese currency, the Chinese government may not need to interene in currency markets by gobbling up T-Bills and other American assets. Which is to say, that counter to everything I've said to far, the value of Freedom is about to dive off a cliff.
On the other hand, and I'm just speculating here, the middle of a world-wide recession might be just the time for China NOT to loosen up on its currency manipulation. Any appreciation resulting from a more laissez-faire approach is only going to compound the short-term pain. And that brings me back to my initial thought: there will be no sudden apocolyptic cluster-fuck where American interest rates sour, the dollar tanks and the North American continent disappears into the ocean. This may all very well occur--but in slow motion.
Such is the fate of American prosperity: not out with a bang, but a whimper.
Oh, and a lot of unemployment.