In the game of chicken, two cars barrel down a road headed toward each other. The game ends when one or the other veers off, or they crash. Well, right now, Obama and the Chinese government are playing a game of chicken, and which one wins will determine the future of the American economy and this presidency.

On February 5, the Chinese government initiated the game when it announced plans to slap tariffs of 43.1%-105.4% on American chicken parts. This move follows its rejection of Obama's initiative to seek greater Chinese purchases of U.S. exports at Obama's face-to-face meeting with Chinese President Hu on November 17. The United States needs rapidly increased exports to China's rapidly growing market in order to come roaring out of this recession.

I have another paper available for download outlining my China short thesis available for subscribers here: China Macro Discussion 2-4-10 2010-02-04 13:10:26 922.25 Kb.

In addition to the issue-specific ETFs (Chinese ETFs with Exposure to Real Estate, Banks, Insurance and Export Industrials) that I have already proferred, I will be offering my viewpoints on specific companies across various geographic regions as well.

The People's Bank fo China continues to amass huge levels of foreign currency reserves with little attention paid. Those reserves totaled $2.4 trillion as of December 2009, which is larger than the GDP of Italy, the world's 7th largest economy. China's reserves are growing at about $400 billion per year, roughly adding Norway's economy to their reserve surplus every year.



These reserves are generated from structural imbalances in the world economy, with China running huge trade surpluses which are exacerbated by China's currency peg. To keep the currency within a narrow range, China is forced to buy foreign currency that comes into the country. The Yuan it spends to buy foreign cash is added to the funds sloshing around China's banking system. In addition, the foreign currency that the Bank of China holds is then reinvested, mostly in low yielding investments like US Treasury Bonds. In fact, China is the largest holder of US Treasuries. The Yuan flowing around the banking system is causing some to wonder about inflation and asset bubbles. Some market participants are taking notice of bank loan growth and Urban real estate markets. Chinese officials have taken steps recently to slow loan growth and to potentially slow inflationary pressures. We've seen the market respond with the Hang Seng Index falling over 11% over the last month.

Source: Bloomberg
China's huge arsenal of reserves is increasingly troublesome. William Pesek of Bloomberg has called it a "massive and growing pyramid scheme." China is essentially trapped in its current arrangement; as it buys more US Treasuries, it becomes harder to sell them without causing huge capital losses.