Craig Dougherty has been a banker for 20 years, and was the President of the Union Bank Private Capital Group. He was the former CFO of Replay TV (now part of Direct TV), and was co-founder of Content & Company.


The Chinese took a page out the Japanese playbook, and re-invested the FX reserves earned from their burgeoning current account surplus into US Treasuries. This is how they kept the yuan from appreciating, which induced more and more companies to invest in Chinese manufacturing (i.e. low cost labor) – which perpetuated the surplus. Of course, the normal corrective action of an appreciating currency bringing down a surplus never happened, which was the intent of the Chinese!

The Chinese took away Western manufacturing, they got jobs for their peasants, and huge trade surplus … but now own huge amounts of Treasuries as the price.

Going forward, they now dominate manufacturing, so they don’t have to artificially suppress the yuan nearly as much as before. And they are free to invest their hard currency reserves not in UST, but in hard assets/materials/oil, etc. And precious metals.

We got screwed as a nation. The US Chamber of Commerce, wielding extraordinary power on behalf of their constituents (US corporations) … well, they’re happy as big US multinationals just moved manufacturing offshore, to low wage countries. They benefit via lower labor costs.

The US worker got fucked.

The bond market going forward? The Fed has become the default buyer, as the Chinese are buying less. As the Japanese buy less, and other BRIC nations follow the Chinese lead and buy hard assets, there will be less demand for a huge supply of Treasuries. With the Fed ending QEII, $600 billion in demand goes away. They WILL re-invest the interest from the securities on their $3 trillion balance sheet, but you still have a $600 billion buyer leaving the market.

This is why Bill Gross has said adios.

IF our clueless, bought-off politicians did something meaningful on the budget (defense, ag and energy subsidies, Medicare, buying generics, re-importation of drugs from Canada …. I could go on), the equity markets would rally, and the wealth effect Bernanke has created successfully via QE I and II would continue WITHOUT QE III.

If not, I submit higher rates when the national debt rises inexorably will kill us. 25% of revenues for debt service is not far off.

Once you’re national debt starts to creep over 90% of GDP, it’s a slippery slope that’s hard to get off.

Category: Current Affairs, Fixed Income/Interest Rates, Markets, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

7 Responses to “How China Ran the Japanese Playbook”

  1. Greg0658 says:

    another “vigilant & watchful” (book of names) derivative – thanks Craig – thats about how I see the grass … not sure it was > to spread growth world round > or to screw the unions and knock em down > because we know brains built America not brawn … u pic to your world view I guess

  2. sangfroid says:

    For someone with 20 years of banking and head-honcho experiences this analysis is simplistic….

    Don’t blame the Chinese…this could not have happened without the tacit and conniving consent of the ruling class of the United States (which Craig Dougherty, whether he realizes or not, is a part of).

    The US could have unplugged the inflow of Chinese money anytime by not issuing US Treasuries for them to buy or restrict their purchases.

    The ruling class of US wants to break labor and lower costs, and that’s the route they took.

  3. teraflop says:

    I used to read (way back) several books on Japan. One of their famous tactics is something called “Japanese Inspection” by which imported goods on Japanese shores were held for inspection. Delays in perishable products, such as rice, would render them unusable.

    This entertaining and simple book, In the Jaws of the Dragon: America’s Fate in the Coming Era of Chinese Hegemony, by Eamonn Fingleton, draws from the Japanese experience applied to recent learnings in China. Anyone accusing Eamonn of hyperbole should spend more time either in China or reflecting on how technologies and techniques that took decades to learn are being handed over on platters without old-style Western concepts such as licensing or non-compete contracts.

    Having worked as an engineer, I heard time after time the refrain of don’t-invent-it-here. Do this on a national scale egged on by lobbyists and representatives for decades …

  4. Data Room says:

    I think china can do anything. I give a little example, show anything no matter what is its, they will produce the same things without any problem. Even USA owes million of Dollars to China today.

  5. mattinfl says:

    US workers got fucked by losing their jobs, but Chinese workers also go fucked by because they were paid for their labor in undervalued currency. For many years it was difficult for them to buy imported goods and despite the jobs, educated people were still eager to leave.

    The people who benefited were were Americans with jobs and money in the bank (who could suddenly buy lots of cheap Chinese stuff), and, perhaps, the Chinese government and collective economy.

  6. vader says:

    Perhaps or perhaps not. Makes a good read esp that the US upper crust cursed their inferiors. Of course there is the possibility that American style capitalism is being put in its grave by state style capitalism. Or maybe we and the Chinese workers workers are equally screwed as China keeps on building empty cities and collecting either worthless currency or equally worthless after the bubble burst hard assets leaving them with lots of excess production capacity.

  7. stratcounsel says:

    There is no doubt that the Chinese have played their hand well for the last couple of decades, but there are certainly nuances as pointed out by the several comments above. I would also add that the manufacturing that moved to China represents the more cyclical part of the U.S. and other economies. As you would expect, during the recession, Chinese manufacturing was slammed. The Chinese economy continued to grow during the recession, and no doubt some of that growth was organic, but a significant part of Chinese growth was due to the massive fiscal stimulus poured in by the Chinese government and probably a little help from soft economic bookkeeping. Now they are having trouble controlling inflation. Such is the dilemma posed by the more cyclical nature of their economy. (The fact that their economy is centrally planned doesn’t help either.) As for their massive accumulation of US$ denominated Treasuries, it remains to be seen how well that works out for them.