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Sunday Buzz: Cash, Credit or Renminbi? (by Denny K Miu)


About a month ago, the hot-apple-news-of-the-day was that Apple changed their policy and decided to accept Renminbi, the Chinese currency, at their Appstore for online purchases made by the Chinese. This seems very insignificant but in some corners, this was considered a major event.

To understand why that is, we have to start by understanding why China is an important "World" economy. Actually China is a lot smaller than the United States as an economy. In 2010, the Chinese GDP was about $5.9T, while ours was about $14.5T. Keep in mind that in 2009, our GDP was already $14.1T and China was only $5T (behind Japan) so they are growing faster than anyone else (overtaking Japan in 2010).

But since China has four times our population, their GDP per capita is tiny compared to ours. In addition, their wealth gap is much larger than ours, so China has a lot more poor people who are a lot poorer than ours. Comparing to Americans, Chinese can't afford to buy a whole lot of finished goods. So as a consumer nation, China is far less significant than us Americans (especially to the developed World).

But what really makes the Chinese economy important is the fact that China is also the factory of the World. So to keep their machines operating and their people working, they consume a disproportionate amount of the World's natural resources. The plastic inside the baby toys that we buy from Walmart has to come from somewhere, right?

Therefore, most of the resources that they consume are not even for internal consumption. As a result, China is a disproportionately bigger trading partner for the undeveloped World (for their natural resources, not finished goods).


In the last few years, as I travel around the World with my son (Africa, South America, etc.), one thing that was glaringly obvious is that China now has tremendous influence and control over the rest of the World. In addition to being the consumer for their natural resources, they are also the supplier for finished goods needed for modernization.

As we travel, we see Chinese made bicycles, thermal bottles, four-door sedans, AK47's and even machetes. But we also see Chinese engineers and managers. The reason is that no country would accept Renminbi. It is not an international currency. They want American dollars in exchange for their exotic minerals. But China do not have much dollars (their share of the bill of materials for an iPhone is less than 5%). So they barter whenever they could. They help them build roads and airports in exchange for what they could dig out of the ground.

There is almost no American presence in these third World countries. Since America doesn't make anything anymore or ship anything anymore, and the only natural resource that we consume in volume is oil, Chinese now own the important commercial sea lanes. For example, they operate the bicoastal ports in Panama and they have successfully negotiated a new canal cutting through Lake Nicaragua. And that's just in our backyard.

In summary, China is a tremendously important economy to the rest of the World and their biggest problem is that they can't pay their bills with their own money. They need our money. But we don't want to sell them dollars because we have no need for Renminbi neither. On the other hand, if they want to buy our bonds which are tradable, we can talk.

This is the only reason why Chinese continues to buy our debts (as did the Japanese). They don't do it for the dividends or for the security, they do it because they need our money for international commerce. In other words, the Chinese subsidize our fiscal irresponsibility out of survival and we help them prosper by being irresponsible.


But what if the rest of the World decide that they don't mind taking Renminbi after all, as Apple just did a month ago?


I am sure we are not the first generation of Americans having a vigorous debate on national decline versus fairness. We are merely the first having it on Internet.

The one recurring component of this discussion has to do with our national debt and our credit rating. The argument is that if we don't reduce our debt or if we default on our debt, then no one would buy our debt anymore or the interest on our debt would go through the roof, further pulling us into a deep hole that we are already in.

To support their positions, people point to the rating agencies which are clearly making noises. Then to support their counter positions, others would point to the low interest rate of our treasury notes arguing that market forces are still on our side and there is no shortage of people buying them.

Then there are further discussions that perhaps the problem is not with our economy but with our politics. Or that the problem has to do with disproportionate taxation or disproportionate representation.

So what gives?


I believe we should declare Steve Jobs a national hero posthumously.

I believe Steve has pointed the way out of our national malaise, whether it is economical, political or cultural.

All we have to to convince other corporations, besides Apple, that they too should accept Renminbi as a tradable currency. Then and only then will the Chinese stop buying our debt. Then and only then will the threats of our national decline be made real. Then and only then will we be united with an iron resolve.


"I fear all we have done is to awaken a sleeping giant."


Have a wonderful Sunday, everyone

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