Check out this gal's BLOG...explaining the Chinese Money Ethic

Check out personal finance BLOGGER WISEBREAD: Living Large On A Small Budget for more insight into how the Chinese people save.

Compare that with how you treat your money....how you save.

Compare that with how others your know save......

I consider Another Investment "Detour" (as a sort of defensive speculation)

Last month I read this article (as well as this article) that drove me to thinking. The article was written in March 2007, and it describes a changing situation over in China.

As I type this China is sitting on an incredibly large cash reserve that has been built up from their massive imbalance. They have been holding about 70% of this cash reserve in US Dollars, which probably means they own US government bonds and investment instruments.

The article describes China having $1.07 trillion in these reserves, that is growing at a rate of $20 billion a month! (That means they currently hold about $750 Billion in US dollars)

The article goes on to say that it is not clear what the new agency in control of this money has for an exact mission, but it is most likely to build internal infrastructure within the country, for both social and industrial gain. What that exactly means, no one is sure.

But one thing that seemed clear, the Chinese will now be diverting at least a portion of this money....apparently beginning with $200 billion. The article speculated that the new agency would probably continue to apply pressure to the remaining reserves held in currencies, with the result being that there might be a pressure to get higher yields....they talk about in the range of 6%.

If I'm not mistaken, current US Bond investment yields are in the 4-5% range, so this would result in a pressure to increase that....but what does that mean? Could it mean inflation? Would the government start the presses to supply that yield? Would the US dollar continue to slide in value on the world stage?

The Chinese have apparently uncoupled the Yuan value from the dollar, so the two currencies are perhaps only tied together by this large holding of US Dollars in China. Will they move even further apart? Will the dollar lose the "shine" it has as the world's stable currency....to the point where other countries to divest in their holdings too? Many people are holding dollars because they are "as good as gold"......will the Euro take over that mantle?

WHAT TO DO:
All of this information is great, but what is a person to do with it? That was my question.

Being the person who likes diversification, my first thought was to find some other currency and invest in it.....maybe buy some of it. In fact, perhaps buy a bit of 2 or three currencies. But which two or three?

Given the article above, the obvious (and in my opinion wrong) target was the Chinese Yuan...or perhaps the Indian Rupee. But I think those are wrong because if the theory that the US will be hurt by falling dollar value, then countries that are currently relying on the US market will also be affected when the downturn happens. Yes, it is true that China and India will be holding the best hand in that card game of chicken....having all the production capacity to produce for the "next" economy that steps up to take the #1 position once the US drops to #2 or #3.....but that is after they take a small bath when the US slides from grace.

I needed to look to a country and currency that was not as connected to the USA, China or India.

I'm still looking, but I'm thinking of the Swiss Franc, and to some extent the Euro. (if the middle east were not such a powder keg, I would consider there too because they hold a natural resource that will always be in demand until it is pumped dry, so they hold a natural strength in both times of good and bad.....but the currency and investment in it or any country is only as strong as the government holding it up.)

MY IDEA: (undecided)
I thought I would perhaps take my investment and buy government and commercial bonds that are sold in the currency I am interested in. That is, these investments can NOT be priced or sold in Dollars since it is the dollar that I am hedging against. They can't be bought on the US Stock or Bond market....probably in another market, and in another currency. But how and what?

I still have not thought it all through....but my money I am considering is currently in a 15 month CD getting somewhere in the mid 5's for interest....so I have about 13 months to figure this out.

MY FINANCIAL ADVISOR'S SUGGESTION:
I went to see him yesterday for our regular quarterly review and things were going along just fine. (maybe some day I will release a description of my investments, but I'm not quite ready for that right now)

I posed this question to him, and he instantly sprang forward with information on two funds...one a bond fund and the other a mixed equity/bond fund....with the latter being a very high tech activly managed fund by some sort of MIT Business-Science PHd type....driven by three modern economic models of the world economy.

Well, all of that sounded nice, and I have not yet digested the suggestion, but it somehow did not fit the model of what I thought needed to be done....it doesn't seem to address the basic defense I was trying to implement, though it might since the fund was trading in foreign currency.....but being a fund, and one sold in the USA to US investors, a portion of it's "price" will be derived from the supply and demand of the investors......and if it is the slow slide of the US I am defending against, I don't think I want US investors as part of the "mix" that drives the value of this investment in particular.

SLOW VS FAST SLIDE:
I guess the heart of this whole discussion comes from my concern that the US is a huge debtor nation, and that we will eventually pay for it with lower dollar values. This I believe, but the question is how will it come about.

First there is a question of how....by inflation or deflation? I was initially in the camp of deflation, but I can see that the world hates deflation so much that it will do whatever it can to stay away from that cliff.

So it appears that if you were a betting man, that Inflation would be the bet. (My friend Pradeep has always been in this camp...and I guess his arguments have won me over....but they are too long to write here now)

Now, the next question.....how fast.

Pradeep believes it will be swift. He essentially believes there is a mania around US Dollars that the world will quickly lose once it begins to slide. He believes the slide will be swift....on the order of weeks. He believes this because once the slide starts, people will see their currency reserves value falling and will understand that the last one out is the worst loser. (just look at the fall of the stock market and tell me that wasn't the truth. I have a story about Sun Stock I could write about....)

I tend to think that it will be a slow slide because no one wants to see their currency investments disappear, so the move out of dollars will be slow and careful. It will be like the story of the frog in the pan of slowly heated water. The frog has such a poor set of senses for feeling heat that such slow rising water temperature is not even detected and after a while it doesn't even know it is dying in a pot of boiling water.

MORE INVESTIGATION:
As I noted...I have about 3 months to decide since my money is now in a CD. More on this in the future....my analysis is not complete.

Please post your thoughts and ideas....tell me where I am all wet and give me your opinions. (I want to learn)

Chinese and Indian Cars are on their way soon....

Chinese cars in the USA and Europe soon? These guys in this Economist Podcast suggest these cars are still crap, but is this another shortsighted view....

Oh, but haven't we seen those sort of short-sighted comments in the past with our old bias against "Made in Japan" not too many years ago?

Who funds our debt when the world isn't so dependent on us in the future?

I admit to being an Electrical Engineer and in no way an economist....so my ideas of how the world works may not exactly line up with reality.

I have noticed that I sometimes do not have a good perspective on how "fast" certain things tend to take....basically because the economic systems are so much bigger than I tend to imagine. (there is a huge inertia....sort of a big flywheel effect)

So when I read this article about how this US recession would not really affect the growth and health of the European and Asian economies....it caused me to go back to one of my personal predictions that the giant and growing economies of China and India are sort of "loaning" the USA the money we need to buy their goods. I felt that they NEED us because we are the big consumers, and in order for them to become the big producers, they need consumers.

Given the imbalance of trade, they quickly accumulate wealth from us...and by buying our debt with their savings, they keep us buying more and more. (and also going more and more into debt)

Apparently the US delegation to China this month seems to have come to some agreement on both counties working to lower the imbalance, but this sounds like "saving face" talk to me.

I don't think it is a fluke that China keeps their money valued low and tied to the dollar...this way it makes their goods cheaper to us and we ultimately can NOT resist them! (and in fact are going further into debt with every purchase)

But the above article sort of indicates that our slowdown is not slowing them as much as might be normal....so it seems that they are beginning to become almost "Self-sufficient"....and by that I mean that perhaps their middle class has about built up enough wealth to support the growth of their own production.....so may be they need us less and less as things go on.

Could this be why the Chinese signaled to the world that they were going to start thinking about diversifying a higher percentage of their $1 trillion cash reserve in other currencies besides the dollar?

Now I'm not predicting a crash of total melt-down of the dollar and therefore our economy....that would make their $1 trillion dollar reserve evaporate....that's not what the Chinese want either....but perhaps this might be the start of a slow "backing away" from the dollar by the world who now looks at the dollar as being better than gold.

I worry that our country needs to fix things NOW....while we still have the ability to do something. Our debt to the world is already of record size....but our country and currency still has very good standing in the world, and we need to get our house in order before we lose that too.

Baby boom in China; Year of the Golden Pig (any investment opportunities?)

The year 2007 is one of the special "Year of the Pig" that comes around every 60 years. Having a child is this special year is apparently very lucky, and this seems to NOT have gone unnoticed. (In China anyways)

I have read several reports that indicate that China expects a bump in the birth rate of 20% this coming year, and at least part of it is the hope of the Golden Pig year. (general prosperity is of course another reason)

So the obvious question that pops into my mind is "How can I invest to take advantage of that?"

Well, I don't know that I have enough of a cultural knowledge of China to truely know the answer, and it is always dangerous to reflect the values and characteristics of the USA on any other place in the world. I also would not like to guess how this would play out in say 5 to 10 years when these "Golden Pig" kids are growing....that's kind of a long term investment to me.

I'd be interested in your thoughts. I'm thinking that besides the normal baby related clothing or toy stuff that the thing to consider is perhaps entertainment or education. I'm not sure how the Chinese version of Disney will go over, but with this sort of baby boom and an ever increasing wealth there, I would think that spending more of their new family members might NOT be just an American trait, but perhaps a normal human reaction.

Maybe 20% increase isn't enough to cause any noticeable difference, but I suspect it is. What do you think? (this guy thinks "golden pigs" are the way to go)

China isn't just a Manufacturer....they are trying to LEAD the world's Technology Direction too

EVD players.....for the price if DVD...right now....today! (that's $87 in case you were wondering)

We in the west like to think of China as our "manufacturing arm"....but the Chinese are not happy simply making our goods.

Sure, they know that there is plenty of value in that, but they see the great value in being the leaders and creators of those things.

But wait, isn't that what our leaders of industry and government have declared that we have carved out for ourselves....we would develop ideas and they would make them.

Sorry Charlie, China has a different notion of the world. They have always had their eyes on the whole process....and they didn't create this plan today. They have been sending people to school and positioning them in major industries all around the world for quite a while, carefully getting the knowledge and experience they need to bring it all back home.

But after experiencing the taste of life in a free and expanding US or European country, why would they bring their skills and knowledge back "home"?

....come on people, China is the fastest growing place on earth right now...it is the wild west of the east! It is gold rush time in China, and who wasn't lured out west in the USA by the gold rush.

There are articles that talk about China having an 8% growth rate, but I keep reading news briefs about growth in the 9% and above range! (double digit growth has been reported over and over) That is exciting growth compared to the 2.6% we have here in the USA!

They have a statistic called Purchasing power parity, and they say China is very close to the USA already when you look at things from that perspective!

Here is an article I saw on the net that talk about China creating a new ultra-high density DVD standard that is supposed to blow away Bluray and HD-DVD. They say they want to make it a standard in China....well, this isn't the first standard they have tried to create in China. (going against the current world standards) They have apparently begin creating their own Cell ular system standards, their own WiFi networking standards, and their own encryption protocols.

None of it has stuck yet because they are still the 3rd largest market in the world....but you mark my words, when they get to #1, or even #2 with the kind of growth that are having....the world standards will be theirs. (we will have no option but to accept cell phones with Chinese keypads)

You heard it here first......(Ok, probably not first....but you heard it!)