China's View From Across the Pacific

All we can do this morning is pause to take a breath. In the last 48 hours, the Chinese have checked the following items off their national to-do list…

China's To Do List

We discussed the last item yesterday. We’ll get to the other two shortly. But first, we pause to consider what it is the Chinese see when they look across the Pacific at the “sole superpower.”

“I saw Jared Loughner’s mugshot on The New York Times, The Washington Post, Time and Newsweek, etc.” writes a faithful reader, a teacher in Beijing whom Addison hears from every few weeks.

“I smell some reminiscence of political assassinations – some really famous ones after which the course of history was changed. This guy could be a hero to many. He looks proud and victorious on Time. Many nationalist nut jobs would kill for that front cover.

“From his motivation, we can smell his mind deep drenched in the alcohol of Tea Party propaganda. The popularization of political assassination is the pretext of many authoritarian regimes. Before National Socialists became Nazis, we thought it was just a populist movement.

“The government can regulate the economy and Wall Street, but can’t regulate people’s anger. The Tea Party and the Tucson assassination [are] only the beginning of something big enough to start an ultra-nationalism movement on the path to a possible world war. What could we do to stop history from repeating itself?”

You don’t have to agree with all of this, or any of it. We just present it as a glimpse into what folks might be thinking over there, even as they accomplish new headline-grabbing feats.

China’s forex reserves grew a record $199 billion during the fourth quarter, far more than Western “experts” had figured. That brings the total to $2.85 trillion.

According to an analysis by Standard Chartered, less than half the increase was due to trade and government-approved foreign investments into China. Most of it was hot money – investors piling into real estate and other Chinese vehicles, searching for return in a world of zero interest rates.

Of course, this is a double-edged sword, fueling the fires of inflation in China. But the Chinese have a plan for that, too.

At the start of 2011, China quietly eased capital controls on its exporters. Up till now, exporters who generated their revenue in dollars had to take those dollars to the Chinese treasury and exchange them for yuan…which usually could be spent only within China.

This is one way the Federal Reserve has been able to “export inflation” to the developing world. But no more. Now those companies have a choice about what to do with the dollars they earn – even keep them overseas to invest in ventures outside China.

Defense Secretary Robert Gates just got some interesting news during his visit to Beijing: Chinese leaders confirmed they carried out a test flight of the J-20 – a “stealth” fighter jet that can evade radar.

Chinese J-20 Stealth Fighter
First a “carrier-killer” missile, now this…

It was wheels down the whole time. “Nothing fancy” says a brief email from our resource expert and Renaissance man Byron King, whose CV includes 128 carrier landings as a Navy pilot. “Idea is just to get the bird off the ground and make sure it flies.” Mission accomplished.

It’s just a prototype, likely years away from deployment. But whenever the J-20 is ready, it’s a safe bet it won’t cost $350 million per plane, it won’t require 30 hours of maintenance for every hour of flight time and its stealth coating won’t fall victim to rain or blowing sand.

All those things are true of the American F-22 stealth fighter.

Of course, the Chinese don’t have to worry about building the J-20 in 44 states and God knows how many congressional districts just to keep everyone happy. No wonder we’re bumping up against a national debt ceiling of $14.3 trillion.

Dave Gonigam
for The Daily Reckoning