Exports in March dropped a less-than-expected 17.1% from the same time last year – below expectations of 20% and the 21.1% drop for the first two months of 2009. Most of the articles I read in the Chinese and foreign press including, not surprisingly, comments from the customs bureau, hailed this as a sign that the export slump is bottoming out. According to an article in Saturday’s South China Morning Post, for example:
Many economists said the export slump of the past five months was finally showing signs of abating, with the Administration of Customs describing the latest export figures as a “marked improvement”. However, they cautioned that imports would remain weak in the near future, overshadowed by prevailing low commodity prices and the de-stocking of mainland factories and overseas importers.
“It is the beginning of stabilisation,” Citibank economist Ken Peng said yesterday. “We should have seen stronger import numbers last month. We had more money in place, but we’re not importing more and that’s surprising.”
A Bloomberg article had the following:
The “collapse of global trade and China’s exports in the last few months was not in small part due to a freeze in trade credit and aggressive de-stocking abroad as a result of extreme uncertainty,” said Wang Tao, an economist at UBS AG in Beijing. “As expectations start to stabilize, we expect to see export orders rebound in the coming months.”
I guess that different people have radically different ways of forecasting export growth. To me, it is completely meaningless to look at recent trends in China’s export performance in order to forecast the future. The only thing that matters is what will happen to net demand from the trade deficit countries – most of which is represented by US net demand – and so the recent improvement in China’s export performance (not really an improvement, of course, but an improvement in the rate at which it is deteriorating) really tells us very little.
The real question is will US gross and net demand continue to contract? Almost every serious economist I have spoken to believes that it will, with disagreements only on the speed, intensity and duration of the contraction. Someone whose blog I have been reading a lot lately (I like him because, aside from his Minsky-Fischer orientation, he has the audacity to claim that if you don’t know economic history then you don’t know economics and, what’s worse, he even insists that history extends to beyond the past twenty years), University of Western Sydney professor Steve Keen, suggests that from what he calls a non-orthodox, Hyman-Minsky point of view we should think of aggregate demand as “the sum of GDP plus the change in debt.”
That sounds right to me. Certainly debt accumulation seems to have represented the difference between the growth in US consumption and the growth in US GDP over the past decade, as I discussed in Wednesday’s post. If he is right, we should expect US consumption (and that of many other deficit countries, for that matter) to grow less than GDP by the amount of the deleveraging taking place. That is a lot of deleveraging.
In that case the export performance of countries like China can only get worse because the ability of deficit countries to consume China’s export of excess production will be contracting quickly, and in that light it doesn’t matter how successful you think the Chinese stimulus package may have been. Export growth depends on someone else’s import growth, which depends on their consumption growth, and in a world of contracting GDP, if consumption growth is even underperforming GDP growth, it is a little hard to be optimistic about export growth forecasts. The domestic stimulus is irrelevant.
Talking about the stimulus package, there has also been a lot of talk about its success as being evidenced by the way a number of indicators have bottomed out or even turned. Unfortunately it seems to me that most of those indicators fall into one of two groups. In some cases there were special circumstances that caused a surge, but whether the surge is sustainable, and in some cases whether it won’t be reversed in the future, is questionable. For example car sales have finally started to rise: China’s passenger car sales rose 10% in March from a year earlier. But this was after tax cuts and government subsidies boosted demand, and there are lots of rumors about government agencies and state-owned enterprises being persuaded to anticipate vehicle purchases. If that is the case, the surge in purchases may soon peter out, and in fact may slow sharply to the extent that planned purchases for later this year were accelerated.
The second group of positive indicators I would describe not as evidence that the fiscal stimulus is working but rather as evidence that some people are behaving as if they believe the fiscal stimulus will work. For example rising steel and concrete inventories and increased purchases of equipment suggest to me not that end demand has been created but rather that many producers are anticipating that end demand will be created. Perhaps they are right, in which case we should see more positive indicators in the future, but if they are wrong then we are likely to see nothing more than a temporary buildup that will have to be reversed.
But to get back to exports, China’s trade surplus for March was $18.6 billion. That sums to $62.6 billion for the first quarter, compared to $41.7 billion for the first quarter of 2008 and $114.3 billion for the last quarter of 2008. Although lower than the astonishing heights of January and late last year, the trade surplus is still much higher than this time last year. That means China’s export of overcapacity is still increasing, especially if you think, as I do, that February’s very low trade surplus ($5 billion), and possibly part of March’s, was caused by commodity accumulation to replenish strategic reserves.
More capacity?
In that light articles like this one from Friday’s Financial Times are not encouraging:
The aluminium industry has been hit hard by the global economic crisis with sharp falls in sales across the automotive, construction and aerospace industries. …However, a recovery has emerged in recent weeks and prices are 18 per cent off their lows. The concern in the industry now is that the nascent recovery could be nipped in the bud because Chinese smelters are busy ramping up production at a time when demand is continuing to fall.
As China accounted for about 35 per cent of global aluminium production and consumption last year, its supply and demand developments are of huge significance for the world market. Industry leaders warn that the outlook for demand remains weak
…However, Wen Jiabao, China’s premier, has made it clear that Beijing will do whatever is needed to maintain economic growth at “about 8 per cent”. This has led to huge pressure on local governments to ensure growth targets are met. One result is that aluminium smelters have been offered tax cuts and subsidised bank loans to encourage production to restart.
Last year’s price crash forced China to close about 3.1m tonnes (22 per cent) of its total aluminium production capacity as many of the country’s smelters fell into the red. But analysts at Macquarie estimate that 500,000-600,000 tonnes of capacity has recently been restarted in Henan province. “Local government officials, especially in Henan, have been urging the aluminium industry [the key income tax payer of the province] to restart spare production capacity immediately,” says Bonnie Liu of Macquarie.
China’s government has also been providing significant levels of support to the domestic market. The State Reserves Bureau, which has already bought 590,000 tonnes, is expected to expand purchasing up to 1m tonnes. The State Grid Corporation has bought about 400,000 tonnes and provincial governments have indicated they will buy up to 900,000 tonnes.
Too many people who should know better assume that trade policies are limited to raising import tariffs or devaluing the currency, and since both of these were addressed in the recent G20 meeting, we can all more or less relax. This is wrong. Anything that alters the gap between total production and total consumption must have a trade impact, and if capacity is boosted in the face of falling demand, that is as likely to force up the trade surplus as import tariffs or currency devaluation.
I do not believe that will go on much longer. Over the next few months we should start seeing even more pressure on China’s exports as either trade friction or exhaustion (on the part of countries who have had to bear more than 100% of the brunt of the contraction in US demand) forces continued global demand contraction to switch to China.
How important will that be? Ever since The Economist came out with a consensus-busting piece last year that China is much less reliant on exports than many people think (whatever that means), well-informed people have been assuring each other that “China is much less reliant on exports than many people think.”
Maybe. But it is still very heavily reliant on exports. When your total production exceeds your total consumption by 7% of GDP (in the past 12 months China’s trade surplus was $320 billion, while its 2008 GDP was $4.3 trillion), you rely very heavily on foreign demand to absorb a big chunk of your output.
According to a recent Andrew Batson article in the Wall street Journal, a trio of researchers at the Hong Kong Monetary Authority revisits the whole question of China’s dependency on exports. I was not able to find the cited piece, so I can only limit myself to the comments in the article, but, and sorry for the long quote, here is what they find:
The paper builds on previous work by one of the authors, Li Cui, who in a 2007 working paper for the International Monetary Fund presented evidence that China was becoming more dependent on external demand over time. Indeed, net exports contributed about 20% of China’s economic growth from 2005 to 2007, compared to less than 10% in the previous five years. But the authors of the new paper try to go beyond that number to capture the total effect of the export manufacturing sector on the economy, including investment in new factories by exporters, and spending by people employed in those factories. That leads them to conclude that the spill-over effects from the export sector are in fact quite large.
The authors estimate that a decline of 10 percentage points in export growth would be associated with a decline of about 2.5 percentage points in GDP growth. “This is about at least twice as large as what could have been expected if only the direct impact of exports is considered,” they write. Part of the explanation, they say, is that exports are extremely important to a group of Chinese coastal provinces, which themselves account for the majority of the national economy. So changes in export demand can cause dramatic fluctuations in those regional economies, even while the inland provinces are less affected.
But of course, China’s exports have recently slowed by a lot more than 10 percentage points. In volume terms, export growth rates have swung from around positive 20% in 2007 to nearly negative 20% in the first part of this year. The biggest effect of a decline in exports, the authors find, is on corporate investment, as companies scale back expansion plans. And since the sharp drop in exports is just a few months old, the full magnitude of the subsequent drop in capital spending may not yet be evident.
Foreign currency reserves
Besides export numbers the other piece of important news for me was the release of first quarter reserve numbers. According to Xinhua’s account:
China‘s foreign exchange reserves rose 16 percent year-on-year to 1.9537 trillion U.S. dollars by the end of March, said the People’s Bank of China on Saturday. It represents an increase of 7.7 billion dollars for the first quarter, but the increase was 146.2 billion dollars lower than the same period of last year.
In March alone, the foreign exchange reserves rose by 41.7 billion U.S. dollars. The increase was 6.7 billion U.S. dollars higher than the corresponding period of last year.
This is the smallest quarterly increase we’ve seen in a long time. The first quarter of 2008, for example, saw reserves grow by an astonishing $153.9 billion, and 2008’s fourth quarter, the weakest quarter of the year by far, nonetheless saw reserves up by $40.4 billion.
|
2009 |
January |
February |
March |
Q1 |
|
Headline reserve growth |
-32.6 |
-1.4 |
41.7 |
7.7 |
|
Trade surplus |
39.1 |
4.9 |
18.6 |
62.6 |
|
Net FDI |
7.4 |
5.8 |
8.4 |
21.6 |
|
Currency gains or losses |
-31.0 |
-16.0 |
15.0 |
-32.0 |
|
Interest income |
6.8 |
6.8 |
6.8 |
20.4 |
|
Unexplained amount |
-54.9 |
-2.9 |
-7.1 |
-64.9 |
With Logan Wright’s help I put together the above table to try to understand what is going on with reserves. The key thing on which to focus is the “Unexplained amount,” which is a proxy for hot money inflows or outflows. Of course my estimates for currency gains or losses and for interest income are nothing more than estimates and may be, especially in the former case, substantially off.
Nonetheless the picture the table shows is pretty clear and pretty consistent with what we would expect. January, a time of deep gloom, saw a large unexplained outflow at least part of which may represent flight capital from nervous Chinese businessmen. Confidence seemed to rebound in February and March, with widespread (but to me doubtful) claims that the fiscal stimulus was “working” and with the stock market rocketing up. During that time unexplained outflows collapsed to nearly zero. The only conflicting evidence was reports in the Hong Kong press of a serious increase in the amount of currency transactions among border money changers, in which the number of Chinese buying US and Hong Kong dollars with RMB rose to suspiciously high levels.
The overall picture is consistent with two different and popular predictions. First, the stimulus package is working and that China will soon emerge from the worst of the crisis. Second, that the fiscal stimulus represents a risky bet on the duration of crisis abroad, and if sustainable and recovery in global demand does not occur in the next few quarters, it will set the stage for a deeper contraction late this year and next year.
Trade determines reserve currency status
Finally, for those who might be interested in today’s version of my biweekly South China Morning Post piece, here is the original, pre-edited version:
People’s Bank of China Governor Zhou Xiaochuan generated huge controversy when he argued two weeks ago in favor of an international reserve currency to cure distortions in the global balance of payments. Although his reasons for worrying about excessive reliance on the dollar were probably correct, his proposal for an alternative currency based on SDRs was more problematic.
The SDR is not a currency. It is an accounting unit based on an artificial currency “basket”. As of January 1, 2006, the SDR valuation basket had the following weights based on their roles in international trade and finance: U.S. dollar 44%, euro 34%, Japanese yen 11%, and pound sterling 11%.
If countries accumulated reserves in the form of SDRs, they would effectively accumulate a basket of the above currencies. But of course no one needs SDRs to accomplish the same thing directly. If the People’s Bank of China, for example, felt that the SDR represented a more balanced and appropriate portfolio composition for its reserve holdings, nothing could have prevented it from apportioning reserves according to the SDR basket.
And yet informed observers believe that the US dollar accounts for anywhere from 65% to 70% of the PBoC’s total direct reserve holdings – even more if we include foreign assets of state-owned enterprises and minimum reserves held by China’s commercial banks.
But if holding more than 44% of a country’s reserves in dollars distorts the global balance and creates excessive currency concentration, why do the People’s Bank of China and other central banks willingly do just that? Dark mutterings about US hegemonic power notwithstanding, there are no legal or physical restrictions on the ability of central banks to choose the assets they purchase. For the past decade they could easily have purchased fewer dollars assets and more euro, sterling and yen assets.
The answer has little to do with geopolitics. It is a necessary requirement in global trade that capital and trade flows balance. Countries running trade surpluses must recycle their surpluses to the countries running trade deficits. Normally this is done through private investment flows, but following the 1997 Asian crisis a number of central banks, especially in Asia, began accumulating such large amounts of international reserves that their purchases of foreign assets completely dwarfed private investment flows.
Assets which the central banks of trade surplus countries purchase will to a significant extent determine which countries run trade deficits. If central banks mostly buy US dollar assets, the US will run the corresponding trade deficit. Contrary to popular opinion, financing flows do not necessarily follow trade flows. It is often the other way around..
Let us assume that over the past decade Asian central banks had decided to acquire reserves in the amounts described by the composition of the SDR. This means, assuming trade surpluses were constant, that they would have purchased between one-half and two-thirds the amount of dollars they actually did. The balance would have gone into euro, yen and sterling.
One likely consequence is that with less demand the dollar would have been weaker relative to the other three currencies then it has been. This would have cause a relative expansion in the tradable goods sector of the US, and a relative contraction in the tradable goods sector of Europe and Japan. With the expansion in the US tradable goods sector, and its positive impact on employment, the Federal Reserve would have kept interest rates a little higher, and US consumption would have been a little lower relative to GDP. Of course the exact opposite would happen in Europe.
Lower consumption means lower imports, and vice versa, in which case the US trade deficit would have been lower and the European and Japanese trade deficits higher by roughly the difference in the amount of dollar reserves purchased. By choosing to buy euros instead of dollars, in other words, Asian central banks would have forced a large part of the US trade deficit to migrate to Europe.
But could Europe have sustained a large trade deficit for any long period of time? For both political and economic reasons too complex to discuss here, it is reasonable to assume that Europe would not have been able to bear the burden of a substantially larger trade deficit. Most Asian policymakers know this.
That is why the US dollar is the world’s reserve currency, and most especially the reserve currency of Asian countries using foreign demand to boost domestic growth. In the distorted trade environment of the post-1997 world, the US was the only economy large and flexible enough to absorb the trade deficits that Asian countries required for their growth. US hegemonic power or deliberations had very little to do with it. Asia had to accumulate dollars if it wanted foreign demand to power domestic growth, and SDRs would have prevented this from happening. That is probably a good thing for the world, but a bad thing for China and Asia.
“collapse of global trade and China’s exports in the last few months was not in small part due to a freeze in trade credit and aggressive de-stocking abroad as a result of extreme uncertainty,”
To which you respond:
“In that case the export performance of countries like China can only get worse because the ability of deficit countries to consume China’s export of excess production will be contracting quickly”
This is a complete non-sequitor. Deleveraging only means that demand will fall from that of previous levels of leverage. It is indisputably the case that demand has, in fact, fallen from pre-crash levels. It is also indisputably the case that exports have likewise fallen from pre-crash levels. The question raised by Wang Tao, and the question you do not address, is whether exports have AT THIS POINT IN TIME fallen farther than demand NOW AND IN THE NEAR FUTURE.
If that is in fact the case, then exports can, contrary to your assertion, rise from current levels.
Damn, that was a great.
When I read other reporting about China, especially the recent dose of barely controlled euphoria, all these obvious questions seem unanswered. Like, how does encouraging aluminum smelters to restart act as a stimulus?
When I read this blog, all the pieces seem to click into place.
The Economist has really dropped the ball on China. I get the feeling their China bureau consists of one guy in Hong Kong who reads the official press from Beijing and then heads to the expats’ favorite bar by 5pm. (My vision is heavily influenced by James Bond movies and Graham Greene novels, and the fact I’ve never been to the Far East at all. It also includes big ceiling fans and wicker furniture. Kind of an “Our Man in Hong Kong” thing.)
Thanks.
hi, Michel
Your article in south morning post is a fantastic entry. However, less clear is the causality of the global imbalance. Is currency regime the single most important factor behind the overconsumption and overproduction? If, counterfactual, we had a float regime everywhere in the world, would the the current account be balanced for each country? My guess is, there might still be a large imbalance between US and the asian export countries, because of the different quality of their domestic fianancial institutions. At the same interest rate level, the US financial system grant the consumer and firms easy access to the credit, and the less developed financial institutions in developing countries encourage firms using self-capital for reinvestment. With the same interest rate, the saving rate will stil different significantly.
Dear Michael:
I really enjoyed reading your piece on the new trade and reserve numbers. It’s a relief to find that someone besides me thinks there’s something fishy about how well the stimulus is “working.”
It’s funny how few people seem to have noticed that the current stimulus is almost exactly the same as the post-Asia crisis “expansionary” fiscal policy. And it seems unlikely that this infrastructure-intensive approach will work as well today as it did then. Rising inequality over the last ten years means that the marginal propensity to consume, and consequently the investment multiplier, will be lower today because, as Yang and Zhu showed in their Dec 07 Jingji Yanjiu article, MPC is much lower for consumers at the tails of the income distribution. Excess capacity is more serious now than ten years ago, which means non-state sponsored investment will be harder to stimulate. And net exports have risen from 4% of nominal GDP in 1998 to 9% in ’07, making the external sector a much bigger drag on growth at a time when the outlook for world trade is clearly much worse.
If you’re curious, there’s more on this comparison between today and 1999 in a piece I did for Asia Sentinel last December. It’s at http://www.asiasentinel.com/index.php?option=com_content&task=view&id=1630&Itemid=590.
And in case you need it, I found this link to the HKMA article cited in Batson’s WSJ piece (you mentioned having trouble locating it):
http://www.info.gov.hk/hkma/eng/research/cei/2009/CEI_200901.pdf.
Best regards,
Mark
Michael
Thanks for your excellent blog. I find your articles to to be very informative and insighful and generally free of polemics and political agendas.
You wrote: “That is why the US dollar is the world’s reserve currency, and most especially the reserve currency of Asian countries using foreign demand to boost domestic growth. In the distorted trade environment of the post-1997 world, the US was the only economy large and flexible enough to absorb the trade deficits that Asian countries required for their growth.”
The US has been too willing to allow it’s industrial base to be decimated by this one sided, so called free trade system. With US unemployment and Federal budget deficits increasing rapidly it cannot go on much longer. The persistent export surplus countries do not appear to be doing what needs to be done to bring this into balance. I belive that political pressure will continue to built as this recession drags on to the point that the US will start to take actions as you imply other countries would have done if this excess production had been directed at them.
A new dimension needs to be added to the free trade paradigm. Most of the free trade rules and actions seem to be aimed at the micro level, i.e. at specific products, industries, or policies. Rules are needed concerning countries that maintain long term persistent trade surpluses without good reason, which should be considered as strong evidence of unfair trade practices allowing other contries to take action if these persist.
Hi Michael
I enjoy reading your blog. You have an important role to play. It is through your blog, and a few others, that I or anyone else can hash out a better insight into the daily economic and financial ongoings in China.
Furthermore, I, like you, and some of the other readers posting here, are having a hard time putting together what we might read, or review elsewhere (from more official sources), and what we are actually observing in China. Lets just say that the puzzle doesn’t quite have all the pieces fitting.
I’m also teaching business (economics and finance) at an University in China and usually (most of the time) concur with your, and some of the readers, take on the economy. For instance, I too am concerned with the where all this is going. The outcome might not be too pretty unless other, more longer-term, actions are taken – and taken soon.
I read elsewhere, on another blog, an apt analogy of the Chinese economy. The writer, compared China to the bus in the movie ‘Speed’ – so long, as the bus doesn’t drop below 50 mph – the bomb doesn’t explode. But should the speed of the bus drop below 50 mph – look out! To extend this analogy – for some time the bus has had plenty of fuel and fairly unobstructed road (i.e, developing economy playing catch up with ample willing labour and markets) but now the road has become a lot less clear and the fuel that should have been conserved more – might not be enough to get past the obstructions today.
The government had a window of opportunity 10 years ago to take steps to improve the education system (don’t get me talking about this one, oh boy!), and do the necessary reforms to include more people in the market economy, protect innovation, and give people property rights, etc… but has largely squandered them. Now with its back in the corner, it is taking a short-sighted approach and putting the nation at peril, for a short gain. The last thing this economy needs is more capacity doing the same. For example, for anyone who thinks that the USA or other western economies are overbuilt, which they probably in many instances are, just visit Beijing (or for that matter any other first or second tier city in China) – and observe endless commercial real estate sitting empty (some of it for years now), and a glut of residential properties either unused (at current market prices), or rented at an extremely low investment return. Add the fact that 5 star hotels and high-end retail stores are from my observation largely without clients or customers (In fact, I heard from two different sources that the lease rates for the high-end stores in some of the malls are being heavily subsidized just so as too fill the spaces, with the retailers more or less just getting an alternative low cost billboard – they staff with low cost labour for an occasional sale). Plus note that for every non-performing asset, there needs to be on the same balance sheet either a non-performing liability or the equity is tied up when it could have been invested in a better alternative opportunity. Add these up in all the sectors in China and the aggregate number is staggering! Something has to give and it is downright scary if the bus happens to drop below 50mph!
@ G. Stegen,
My feeling is that People’s Bank of China Governor Zhou understands what as happened and believes that China’s export growth model is unsustainable, as it clearly is given it’s target markets no longer exist. That is why he has suggested a managed international currency such as the SDR. He is looking forward not backward.
Governor Zhou writes;
“And when a country’s currency is no longer used as the yardstick for global trade and as the benchmark for other currencies, the exchange rate policy of the country would be far more effective in adjusting economic imbalances. This will significantly reduce the risks of a future crisis and enhance crisis management capability.”
This may have no relevance but here in New Zealand our central bank was concerned about inflation and the high rate of growth in house prices. It tied to slow these down by increasing interest rates which just didn’t work. All it did was encourage currency speculators to buy our dollars and push our currency value up. The banks never had any trouble lending the money out although they are probably having second thoughts now.
The high interest rate – high currency problem caused our exporters major pain at the same time. So the hopeless situation arose where the most worth while investments were unproductive ones like housing loans and auto loans etc.
The central banks monetary polices were ineffective and in many ways exacerbated the problem. rising interest rates encouraged currency inflows and reckless lending.
If a controlled international reserve currency allowed exchange rate policy (read interest rates) to be more effective in adjusting economic imbalances this would be a terribly good thing in my opinion.
G. Stegen,
America has the legal means to quickly address it persistent trade deficit with China, while conforming to WTO obligations. In fact it is through Article XII, Restrictions to Safeguard the Balance of Payments, of the WTO that the US can address the issue…..
Michael: Things are getting a bit scary with the latest numbers. Let’s see the turnout at the Spring Canton Fair and this may give us an indication to some extent.
All these insane numbers in metals (my area of specialty) all suggest that its the SRB buying, and people expecting them to continue buying. That sounds awfully like an “information availability cascade” or a Ponzi scheme. Cao Jianhua’s comments on real estate were particularly sobering – an awful lot of copper, aluminum, zinc and iron gets put into that sector.
Makes me think of someone pouring diesel on a dying bbq. Looks cool but unlikely to be an indicator of the future.
Michael,
As you mentioned, there is/was nothing stopping China from apportioning reserves according to the SDR basket. So that begs the question, why promote something that you are free to do anyway. Unfortunately, I think that it comes down to implementation.
An official SDR reserve scheme might a allow for a means to purchase such before the effects of said purchases effect the underlying values of the currencies that make up the basket. I am afraid that this appears to be nothing more than attempt by China to export the cost of its policies to the rest of the world.
Will US gross and net demand continue to contract?
That is indeed the question. But the answer is far from as clear as you make out. US demand crashed in large part because the banks needed to hoard cash to rebuild their financial base. The slump in profits at the end of last year was predominantly, although not entirely, in the financial sector.
Losses continue to be sure, but as results from Bank of America and Goldman have confirmed even a lower rate of hoarding enusres that financial profits will revive. So where will the renewed demand come from? A recovery in financial profits for one.
A loosening of credit will ensure that consumer borrowing revives to a degree and the Obama stimulus will similarly boost consumer spending.
While US consumers will continue to benefit from falling import prices and cheap raw materials, notably gas.
All in all things are not nearly as one sided as you make out.
Michael: we are launching a new virtual stock trading site in China later this year and would like to explore the possibility of your joining a very prestigeous board of advisors we are currently assembling. The company is based in Los Angeles and Shanghai and is called Tournement Trading Technologies Ltd. No website yet, but coming in a week or two. Please let me know if we can open up an exploratory dialogue with you. All best, PORTER
Dr Pettis,
Congratulations on what I consider to be your best posting yet.
So if I’m understanding this correctly, the post-97 decisions made by China created what was essentially a pernicious circular flow, essentially funding and even encouraging the trade imbalance? This raises some important questions.
Did the Asian policymakers knowingly trigger this trade bubble that formed? If they were that smart didn’t they see that the endgame left them with their foreign reserves ‘trapped’ in USD?
If this is how China is going to act, where they use currency imbalances for trade advantage, knowingly fund this unhealthy imbalance – encouraging a dangerous bubble to form… If China wants to be considered a world leader, it needs to grow up and start acting responsibly.
Personally, I hope China is given more authority (and thud responsibility) for the IMF. Once they understand the big picture beyond their self interests they may begin acting like the world leader they aspire to be.
Some people seem oblivious to the fact that China’s “overcapacity” is relative, and the development of western China has barely begun. China needs roads, railways and aluminum for her West. In the future, much of the manufacturing industry will be replaced by service industry in the coastal area, and the factories will move to western China.
It is interesting to see this article in the context of what just happened today. It was announced this morning that U.S. retail sales fell unexpectedly in March. Retail analysts I just talked to refused to take this as negative. They are still optimistic about American’s ability and habit to spend.
I am personally not positive of what they are so sure about, but to play the devil’s advocate, I am asking this question: we all know that American consumer spending will be weak, due to unemployment, and due to deleveraging. But, why can’t the government flood the market and consumers with a lot of liquidity and reflate the economy again, as what the Fed is doing? why their efforts can’t succeed? It’s another issue this reflationary effort may cause another bubble and lead to another crisis in the years to come, but if the government does succeed, then temporarily consumers will spend again, the U.S. GDP recovers, and export-driven economies are gaining strength again.
As for China’s reliance on export, it is a hot-debated topic. On an absolute basis, i.e. net export accounts for about 30-40% of GDP, but on an apple-to-apple comparison, net export contributes to 10% of GDP growth. Is export important for China? yes. Will the weak export kill the whole China growth story? probably not. There is still demand for cheap goods, especially in recession when everone is trading down – same reason why WMT was one of the best performing stocks last year. China is still a poor and low efficient economy. There are many ways for China to benefit from catch-up effect as the result of productivity improvement. The real challenge for China albeit is the enlonged misallocation of capital. Economic crisis is not devil, it could be the self-cleansing mechanism of an economy – wipe out those incompetent people and low-efficient industries and put those efficient ones to work. But what the government is doing is elongating the painful process – in a Chinese saying, taking poison to quench the thirst…
I am actually ambivalent on what the government is doing, either in China or in the U.S. From the bottom of my heart, I don’t believe government stepping in will work in the long-run, but in the short-term, I hope the market could get boost from the stimulus plans, otherwise many of us will lose our jobs.
Glen M
Thanks for the input. Is there a way I can easily get a copy of the actual language?
While this may be legally possible, the US leaders (at least under Clinton and Bush) have been unwilling to do much of anything. If Obama is also reluctant, perhaps public opinion and/or congress will force his hand.
The current talk about a turnaround in the Mainland economy seems pretty ridiculous to me. Any economy that meets a decent whole-year target for loan growth in the first quarter of the year better some bang for all of that lending, otherwise the abyss awaits. The question is what happens when this quantitative easing with Chinese characteristics ends? China is leveraging up, while the rest of the world releverages. In the end global manufacturing over-capacity (not just China, OECD Asia too) will have to be dealt with. The idea proposed above that “China’s overcapacity is relative” is the favored shibboleth in Beijing these days, and the answer to the question this asinine statement raises – relative to what? – is of course vanishing global demand. On the point about western China, billions and billions has been poured into construction in western China in recent years, a territory noted for low population density, and inhospitable climate and an overall shortage of just about everything needed to support an industrial base. Good idea for the next phase of development Seatrus, better go back to Party school.
G. Stegen,
Here you go.
http://www.wto.org/english/docs_e/legal_e/26-gats_01_e.htm#articleXII
The “relative over capacity” is always referred to inland provinces, like highly populated regions like Henan and Sichuan, the provinces that the migrant workers come from.
As the reserve currency, I do not think that anyone seriously believe that U.S. will benefit from the idea of SDR as the international reserve currency, otherwise Obama will embrace this idea but not reject it right away.
I’ve been reading Steve Keen recently myself, he makes a persausive, if pugnacious and depressing case. He seems to me to inflate the differences between Minsky and more mainstream economists, but then I am only beginning Stabilizing an Unstable Economy, so perhaps Minsky is more radical than I perceive. Though Keen is right that the lack of historical knowledge of too many economists is truly shameful and embarrassing.
Correct me if I am wrong. I have the feeling that China over produces for one reason and this is to keep jobs. I am wondering if there are stats to pin point who is over producing i.e. SOE or private enterprises. If SOE are over producing then the answer is obvious. Keeping jobs, I agree absolutely, can activate domestic consumption but it is not a wise strategy to keep jobs and activate domestic consumption by over producing. It is equivalent to the US method of printing money. Here the American have done better as countries like China and Japan are still buying what they have been printing so far i.e. Treasuries but the American are not buying those stuff China over produces.
Interesting article in BusinessWeek on how Mexico – of all places – is grabbing some manufacturing jobs back from China and India:
http://www.businessweek.com/magazine/content/09_16/b4127034232864.htm
Liu Mang, most mineral and energy resources are located in the inner China. The future oil and gas pipelines from Middle East, Iran and Central Asia will also reach western China first. The salary of western areas is much lower. All China has to do now is to build up transportation and power infrastructures toward the West, and the West will become today’s coastal area, and many of today’s coast areas will become Hong Kong or Singapore style service centers. Do I need extra schooling to see these?
Seatrus: You have made a valid point that the west does have potential to be the next growth region to sustain China’s economic development, however, I would caution that it is unlikely that the west will anytime soon reach the potential of the coastal regions. For instance, many of the best young minds have already left the central regions and relocated in the coastal cities.
I know that few, if any, of my students would be willing to locate to the western regions. In fact, I think they would rather take almost any job in the coastal cities then locate for a much better job in the west.
The growth model that has worked well in China for the past 30 years is showing its age. It is in my opinion unsustainable. The transition to a new growth model will not come easily – the process should have been in progress 10 years ago. Now I think it is too late without significant pain, and the government, from what I have observed, has yet to actually do more than lipservice.
Mark: And it seems unlikely that this infrastructure-intensive approach will work as well today as it did then.
The difference is that most of the nations in East Asia are extremely developed in comparison to China, and so infrastructure intensive approaches are going to work a lot less well in a developed country than it will in a massively underdeveloped country. Infrastructure-driven development worked very, very well in East Asia in the 1960′s and 1970′s and that is the roughly the development level of China today.
Mark: Excess capacity is more serious now than ten years ago, which means non-state sponsored investment will be harder to stimulate.
So stimulate state sponsored investment. If the problem really is excess capacity then pay people to dynamite factories and replace them with empty fields.
China Interest: The transition to a new growth model will not come easily – the process should have been in progress 10 years ago.
Ten years ago, China was busy making the transition from the growth model of the 1990′s to the current one. Ten years from now, the new growth model is going to prove unsustainable, and there will be a need to transition to another one. Economies are in a state of constant transition, and one very bad economic idea is that there is this magic economic model that will guarantee prosperity for all time.
For example, I do think that the next Chinese growth model will be very heavily infrastructure driven. It might work for China-2010 not for China-2030 or even China-2020.
China Interest: Now I think it is too late without significant pain, and the government, from what I have observed, has yet to actually do more than lip service.
Economic transitions are always painful and one of the consequences of constant transition is that the economy will be in constant pain. Governments will only act when the pain of doing something exceeds the pain of not doing something. Also in a growing economy, delay is good. Economic transitions are costly and if you have a growing economy, you end up with more resources to cushion the transition.
China Interest: The government had a window of opportunity 10 years ago to take steps to improve the education system (don’t get me talking about this one, oh boy!)
And if you look at the size of the problem, it’s amazing that they have gotten as much done as they have. If you just look at the numbers of people that need to be educate, and look at the amounts that need to be expended, we are talking about a big and tough problem that can’t and won’t be solved instantly.
If you start looking at health and education, you very, very quickly get into issues of taxation and financing. Local governments are basically bankrupt.
China Interest: Do the necessary reforms to include more people in the market economy, protect innovation, and give people property rights, etc… but has largely squandered them.
No it hasn’t because a) these are huge, huge complex and messy problems and b) no one really knows what works and what doesn’t so you end up spending huge amounts of time doing experiments to see what really does work and what really doesn’t.
I tend to mistrust people that think that problems can be magically solved quickly, because it usually means that they don’t really understand the difficulties. One is that you have a limited amount of time and attention to solve problems.
For example, ten years ago, the government really wasn’t focused on creating an innovation economy or on health and education issues, because it was desperately trying to keep the banks from collapsing. If they banks had collapsed, then any sort of planning on health/education or creating an innovation economy would have been useless.
Pettis: If he is right, we should expect US consumption (and that of many other deficit countries, for that matter) to grow less than GDP by the amount of the deleveraging taking place.
Not necessarily. You can deleverage by printing money which is basically what is happening in the United States. You in debt? Well, there is several trillion dollars of freshly printed currency to cover that debt, you are now deleveraged.
In fact the reason for printing money is so that you can deleverage without causing demand to collapse. You get inflation if you try to do this when you are near capacity limits, but that isn’t a problem right now.
Pettis: But this was after tax cuts and government subsidies boosted demand, and there are lots of rumors about government agencies and state-owned enterprises being persuaded to anticipate vehicle purchases. If that is the case, the surge in purchases may soon peter out, and in fact may slow sharply to the extent that planned purchases for later this year were accelerated.
They again maybe not. The whole point of stimulus is to get money flowing. Once you have money flowing then the SOE will have the cash to buy an extra car at the end of the year, which gives cash to the car manufacturers. Plans can change.
Pettis: The second group of positive indicators I would describe not as evidence that the fiscal stimulus is working but rather as evidence that some people are behaving as if they believe the fiscal stimulus will work.
Again, if people think that it’s working, then it is working. One other purpose of fiscal stimulus is to change psychology so that people will spend more, so if people think that the stimulus is working and are willing to spend more, then the stimulus is working.
Pettis: Perhaps they are right, in which case we should see more positive indicators in the future, but if they are wrong then we are likely to see nothing more than a temporary buildup that will have to be reversed.
This reverses cause and effect. People’s attitudes affect the economy more than the economy affects people’s attitudes. If people think that the economy is going to improve (and there is idle capacity) then the economy will improve. When you have a situation of overcapacity and under-demand, then the limiting factor in economic growth is psychology, so change the psychology.
Also looking at Minsky’s theory of the business cycle, you tend to have positive feedback. People think the economy will improve -> the economy improves -> people think the economy will improve even more -> the economy improves, and before you know it, you are in a situation where people have totally unrealistic expectations of the future, and which point things blow up and the process unwinds very quickly. If all goes well, then we should have another crash around 2020, at which point we will all be back to the drawing board trying to destroy the economic model that we created in 2010.
One funny observation that someone has made is that before 1978, China didn’t suffer from any financial crises, but since 1978, China has gone from one financial crisis to the next one in rapid succession. Similarly since World War II, South Korea has also been having constant financial crises whereas North Korea has been free of financial crises.
Michael: I have heard about a book talking about “The Second Financial Crisis Wave” which is brewing in the horizon. This book is written by a Chinese who once worked for Freddie Mac or Fannie Mae. This book is one of the best sellers in China which has sold over 1 million copies. Have you heard of this book? If so what is its tittle and who is the author? Thanks.
What’s up with China’s big run on copper?
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5160120/A-Copper-Standard-for-the-worlds-currency-system.html
China Interest, I think China’s near-term strategy should be developing the West and expanding education and service industries. China cannot be transformed into a consumer society with a vast waste land in the West, and without a credible social security system. West China should be manufacturing for both Chinese coastal areas and the overseas markets. Nobody wants to go to the western provinces now, because there is nothing there yet. The key is infrastructure: “if you build it, they will come!”
On the other hand, China should spend much more on education and health care. Implement free education and universal health care. Build more schools and hospitals; tear down all unsafe schools and hospitals and build safer new ones. Prolong medical education to 8 years instead of 5-6 years. Make all teachers from pre-school to 12th grade civil servants; do the same to all health care personals. These will attract more students to the field of education and health care, and reduce the unemployment in college graduates significantly. Make all nannies and home care assistants civil servants too, so even low-skill persons can work.
Seatrus and China Interest: About your remarks of developing the western region to consume China’s overproduction, I totally agree that this is the best possible way to help China transfer to a more sustainable development model. This reminds me of the history when US headed west to develop central and western states from the east coast during 19th century. Though indeed the large-scale infrastructure building left something that was not fully used at that time, finally it has proved that the West Expansion had played an extremely critical role in US economic growth and laid a profound base for its future development. Of course there are factors definitely different between China and US, from natural condition to national incentive (Hukou for example), but it is still a “how to do” problem, not a “whether to do” one. Although I have to admit that China would probably retreat to export-oriented economy once US and Europe demand revives from this crisis, it will be to the long-term benefit for China to carefully think about how to develop a vast west without simply mining the minerals.
Here I want to share another interesting thing. A few days ago I attended a seminar with CNPC(China National Petroleum Cooperation, one of China’s biggest SOEs) to market our products, and we were told this: “We, as a big SOE, cannot do what the market tells us to do. If we really try to boost competitiveness like our foreign counterparts, would there be any living space for SMEs considering our monopoly advantage?” (they themselves did admit that)
Gosh, they really take their monopoly position for granted, and they seemed happy to catch this opportunity to teach us what is politically right and their mercy to SMEs.
And I suddenly had this feeling: actually we don’t need too much to revive China’s economy. Just open all the state-owned markets to social capital. Then the high savings could finally find a place to invest, and as productivity is boosted, people will have the willingess and ability to consume more. That almost solves all the core problem we have now in the economy. To be frank I have never worried about Chinese people’s willingness to spend and invest, there’s just no place to do that.
However this is a daydream in reality, so we have to refer to a government stimulus, which is both ineffective and unscrupulous.
Quick thoughts on reserve diversification
Copper Price: $2.20/lb
Global production: 13.6Mt
Pounds in a short ton: 2204
Global demand decline in 2009: 10-15%
If China soaked up 15% of supply in 2009 it could only spend ~$10bn on copper. Zinc is much less. I think China is stuck – if you try to buy all the mining companies you’ll get a protectionist backlash and if you buy physical you’d have to distort the markets so much it would hardly be worth it.
Bob_in_MA (comment #2), the Economist may sometimes drop the ball on China, but they have a bureau in Beijing, too. Reportedly, their correspondents also do some travels, once in a while. Even as far as to Tibet, last year in March.
Obama’s banks rescue effort will fail, according to Nobel Prize winning exconomist Stiglitz. He said either those people who designed the plan have vested interest in Wall Street or they are just incompetent.
http://bloomberg.com/apps/news?pid=20601087&sid=ahnPchOxZMh8&refer=home
The Chinses reserve numbers are interesting.There is a high correlation with the reporting period and the movement of the reserves.
Seatrus: I wholly agree that the education system needs to have more spending. I would also add that it isn’t just money but a restructure that is required. There needs to be more emphasis on quality than on quantity. For instance, at the university level, too many students are graduating without the entry level skills required. The universities are being asked to graduate every student regardless of their abilities/aptitudes. While this might seem like a good idea (leave no child behind) I would argue that it marginalizes the overall performance.
Getting back to the topic on global imbalances and the trade numbers, I would like to suggest that while I agree with Michael that the current scenario is unsustainable I do see some reasoning why it won’t and doesn’t need to equalize with either trade surplus countries (i.e., China) consuming more domestically or the trade deficit countries consuming less internally (i.e., USA).
In the 1980s, Japan was running a significant trade surplus with the USA, and Japanese companies invested a substantial amount of monies in the USA and elsewhere. Japanese brands became the emblems of global trade. However, now turn to 2009, and while China is running even larger account surpluses and amassing huge international reserves, there is little outflow of brick-and-mortar investment. The crux of the problem is how can China redirect the investment in T-bills, agencies, and other money market securities, into sustainable brandname investments. The problem is the big elephant in the room. Most companies in China that are large enough to make the transition from domestic to global, also just happen to be State-Owned Enterprises (SOEs). There are few corporations in China that are private initiatives that have the means to expand globally. This is, in my opinion, a really big problem for China and the world at this pivotal point in history. China needs to build global brandnames and yet the companies that have the means to do so, remain under the government, in some form or another. It isn’t just that other countries are reluctant or unwelcome to have SOEs invest their much needed money in their cash short companies but it is even more concerning that these SOEs investments may stifle the very creativity, and entrepreneurial innovation that made these companies successful.
China hasn’t had a lot of success with taking over companies abroad. Most of the acquisitions or joint mergers have had disappointing results. Thus, I would argue that China needs to take the steps to entirely privatize the SOEs, prior to them going global. Unfortunately, China seems to have in recent years reversed the trend of privatizing SOEs. Now is the time to privatize the SOEs, and that might be where Andy Xie’s idea of giving Chinese citizens shares in the SOEs is actually a worthy idea to consider. (http://english.caijing.com.cn/xieguozhong)
If the SOEs could be made more accountable to their shareholders, and structural reforms be made domestically to support the transition of these SOEs into competitive, entrepreneurial firms that can compete outside China (that means cutting the apron strings from government), then China could embark on an expansion of global brandnames that is no different in history then what Japan did in the 1980s. These firms might even be able to make greenfield investments abroad that would get far less resistance than acquisitions of well known brands in their respective countries.
Total Economic Breakdown is underway.
http://www.leap2020.eu/GEAB-N-34-is-available%21-Summer-2009-The-international-monetary-system-s-breakdown-is-underway_a3129.html
Total economic breakdown is underway:
http://www.leap2020.eu/GEAB-N-34-is-available%21-Summer-2009-The-international-monetary-system-s-breakdown-is-underway_a3129.html
HSBC had enjoyed a lot of publicity in Hong Kong over its right issue recently and its share price at the same time had some fun riding the roller coaster. However, it has appeared to have kind of calmed down recently and it is moving up again closing at HK$55.15 Friday April 17. It is one of the most popular shares among small private investors in Hong Kong. Don’t get excited just yet over the recent rebounce. Read this and you will be duly alarmed.
http://www.guardian.co.uk:80/money/2009/apr/12/hsbc-credit-cards-us-business
kobe24, what the CNPC official said indicated his lack of PR skill. I suspect any executive in a large western private company, such as ExxonMobil, Microsoft, or even GM (when it was in its prime) would think the same way. But they will never say it in the public, because they are shrewder.
China Interest, I think Andy Xie’s idea sounds like Russian “shock therapy”, where millions died prematurely, and the country transformed into a kingdom of oligarchs. I think the priority for China now is to lay down the social safety net. The investment and building up of social security institutions itself will boost the economy tremendously. Only after the institutions are in place, can we consider farther reforms in China.
Litz, I am not suggesting that floating rate regimes are best, but if Asian central banks did not intervene, in nearly every case the currency would have risen, and probably by a lot on the case of China. This would have diverted resources from the productive sector because of the resulting contraction in the rate of credit expansion, reduced the competitive advantage of the tradable goods sector, and almost certainly caused a much slower rise in trade surpluses. After all following the Plaza Accords Japan’s trade surplus contracted sharply.
Mark, actually quite a lot of people, especially here in China, although they don’t actively publicize their views, are very skeptical about the long-term impact of the stimulus package. At this point it is frankly much easier for me to find Chinese economists (non-government spokesmen, I mean) than to find foreign economists who doubt the usefulness of the stimulus package.
Porter, thanks for the invitation. Feel free to send me information on your site and on the board f advisors but given my current work load I am unlikely to take on additional commitments.
DaveG, I think what seemed like a useful and successful strategy (the “Asian development model”) was put will off-kilter by US monetary policy, especially with respect to the funding of the Iraq War. I think ultimately the strategy would have had to end, but in the five years before 2007 it went completely out of control and Chinese policymakers weren’t sufficiently aware of the risks and problems to try to escape from the system they built. They were learning from the 1997 crisis when they should have learned from Japan 1987-90.
Vivchy, interesting points, and of course we will simply have to wait and see how things develop, but I find it hard to believe that even with lots of Fed easing US consumption growth will not significantly underperform GDP growth.
LiuMang, yes, what will happen when the PBoC becomes so worried about the impact of explosive growth in loans that they put on the brakes (as they are already rumored to be considering)?
Fatbrick, I guess I am a little less enthusiastic about conspiracy theories than some people are, but in fact there are quite a few people in the US who “seriously believe that U.S. will benefit from the idea of SDR as the international reserve currency” – Joseph Stiglitz and me, just to name two. I think there are many good arguments in favor of the US dollar becoming less active as reserve currency, and to the benefit of the US, but my guess is that the Obama administration is not eagerly pursuing this partly because they want stability in the currency markets right now – no need for more dislocations in the midst of a crisis – and mainly because they recognize that the whole idea is a little silly and not worth pursuing. I doubt, and they probably do too, that a group of IMF bureaucrats or whomever can decide what the world’s reserve currency will be. This idea displays far too much trust in the ability of governments to determine these things. If the world really wanted the dollar to play a smaller role, the dollar today would be playing a much smaller role. Basically the only way for the dollar to stop being the global reserve currency is if there is a serious alternative (there isn’t) and simultaneously the US so mismanages the dollar that they force the world to choose the alternative. The US may very well do the latter, but I doubt Obama would do it as a conscious policy decision.
OGT, it can never hurt to read Minsky. At the very least it will disabuse you of 90% of the fashionable nonsense that people who should know better have been saying about the crisis.
Dwayne, viva Mexico!
Twofish, don’t confuse the issues. Dynamiting excess capacity may be a good way to eliminate excess capacity, but it is not a good way to increase the wealth of an economy, and the purpose of economic management is more likely to be the latter than the former. I am not sure what the rest of your objections to ChinaInterest’s point mean. If you are simply countering his claim that the transition will be difficult by saying that economies always go through transitions, then I am sure you are right, but also irrelevant. By that argument we should also contradict statements that crises, famines, war, economic contractions, etc. are difficult, perhaps because in the long run we are all dead anyway. By the way as easy as it is to criticize someone for proposing “that problems can be magically solved quickly,” I am not sure that this was what he, or anyone lese, has seriously proposed.
As for your next point, “You can deleverage by printing money which is basically what is happening in the United States. You in debt? Well, there is several trillion dollars of freshly printed currency to cover that debt, you are now deleveraged,” makes no sense at all. I am sure if you go through the cashflows you will see why. As for your next two points, there is a too much circularity in your logic.
There is also circularity in your claim that boosting confidence is all we need to end economic contractions and I would strongly disagree that this comes from Minsky. He spoke about real balance sheet structures whose instability had real impacts on the economy. Perhaps we can posit a neo-Minsky school that recommends that in times of economic contraction we should force everyone in the US to overcome their anxiety by ingesting MDMA every day for a week. This would certainly build confidence. Excess leverage and overcapacity would then turn out to be mirages.
Finally an economy that does not have a functioning financial system with credit creation cannot have financial crises. That is sort of obvious but scant comfort. Both China pre-1978 and North Korea today more than make up for the lack of financial crises with crises (and famines) on the real economy side. The only reason we should abhor financial crises is because they often become economic crises, otherwise we wouldn’t worry much about them.
Nemo, it is always helpful to do the math. I think you may be right.
Dr. Loo, the GEAB piece seems a little frantic to me. I looked at some of their other stuff and found them to be a little “cranky.”
Have to agree with 2fish, on deleveraging and printing money. US debt is priced in dollars. There are a finite quantity of dollars. Therefore if the Fed increases the quantity of dollars – say by around $1 trillion or so – then they decrease the real value of its debt by that amount. The assets added to the Feds balance sheet at no expense to itself, can be exchanged for debt at some suitable future propitious moment.
So who is paying for the US reflationary package? The owners of its debt. Basically China and Japan.
Michael: ” yes, what will happen when the PBoC becomes so worried about the impact of explosive growth in loans that they put on the brakes (as they are already rumored to be considering)?
hael: ”
I have heard the same news in Hong Kong as well. Looking at the performance of the stock markets in China for the past two sessions in a row I believe PBoC will soon put the brakes on those explosive loans banks have been giving out over the past months. Giving out loans is easy and getting repayments is another matter. RMB 4 trillions is by no mean a small amount of money and if they (lenders) are not prudent they will land themselves with mountains of bad loans (NPL) as well as non-performing assets (NPA) which will at the end of the day cause a credit bubble which will be as bad as the sub-prime crisis in the US.
PBoC should put on the brakes as soon as possible before it is too late.
Ha, Michael, your MDMA suggestion reminds me of the Jonathan Hodges’s solution to the economic crisis, an emergency Christmas and free cocaine at every cash register. But, alas, foreclosures aren’t by and large a product of lack of confidence, nor is bank insolvency (bank illiquidity, maybe) but from too much debt and not enough cash flow.