I can only submit a very short entry this time to discuss the raft of numbers that came out this morning. Regular readers will suspect that once again I am going to suggest that the numbers gave grist for everyone’s mill – optimists will see their hopes confirmed and pessimists will see their worries confirmed.
Yes, but this time around I think the pessimists clearly have the edge. On one hand optimists who are confident that the massive fiscal and credit stimulus was the appropriate response to the global crisis will note that growth in the fourth quarter was more than robust. According to an article in today’s Bloomberg:
China’s growth accelerated to the fastest pace since 2007 in the fourth quarter, capping Premier Wen Jiabao’s success in shielding the nation from the global recession and adding pressure to rein in a surge in credit. Gross domestic product rose 10.7 percent from a year before, more than the median forecast of 10.5 percent in a Bloomberg News survey, a statistics bureau report showed in Beijing today.
Days before the data were released rumors had been circulating that GDP growth would be high. The People’s Daily today had, for example, a very different interpretation of what expectations were than did Bloomberg:
China easily beat its 2009 growth target after a blistering fourth quarter performance that set the stage for further monetary tightening measures to come out in the upcoming days.
…Gross domestic product surged 10.7 percent between October and December, compared with a year earlier, a tad below market forecasts of 10.9 percent, but up sharply from a revised 9.1 percent in the third quarter.
On the other hand pessimists, of course, were very unhappy with the quality of growth. Here is what Bloomberg went on to say:
Sales quickened in December on a year-earlier basis, climbing 17.5 percent, while industrial production increased at a slower pace of 18.5 percent, today’s report showed. Urban fixed-asset investment jumped 30.5 percent in 2009, the statistics bureau said.
The surge in industrial production and fixed-asset investment highlights the fact that this growth is still wholly investment-driven, and no one has a clue as to what will happen when the government pulls back, perhaps because of concerns about rising debt. Worse, the inflation number came in higher than expected. Yesterday morning, while I was in Hong Kong, I was told by a very credible source that December CPI was going to come in at 1.9%, relative to expectations of 1.4% to 1.5%. People’s Daily again:
The statistics bureau, which released the GDP figures, also reported that consumer prices rose 1.9 percent in the year to December, a marked acceleration from November’s reading of 0.6 percent. Alarmed by a new burst of credit at the start of January, the central bank last week increased the proportion of deposits that banks must hold in reserve, rather than lending out, and followed through this week by recommending some of them to sharply curtail lending for the rest of the month.
The central bank has also been raising yields on its 3-month, 6-month, and 1-year-long bills over the past few weeks and on Thursday nudged up the yield on three-month bills for the second time this year.
Given the worrying stories about RMB 1 trillion credit growth in the first three weeks of January, and rumors (subsequently denied) that the CBRC told banks to stop lending for the rest of January, the jump in inflation will give the PBoC the ammunition it needs to press its case on monetary tightening. It has had a tough time making its case in the past, but inflation is something that worries everyone.
I guess I have been a little more aggressive than others in suggesting that we would see a move on the currency and interest rate tightening in the first quarter. Most analysts still believe that these will be second quarter events, but are increasingly warning that they could happen in the first quarter. Let’s see what happens in January, although as usual January and February numbers are always distorted by the Spring Festival celebration, which date varies from year to year according to the lunar calendar (it will be February 14 this year).
As an aside, and as an indication as to how tough the fight over trade is going to get, one of my students sent me the following note yesterday. It is about a recent Stephen Roach article in which he criticized analysts in the US who argue that the undervalued RMB has had an adverse impact on US employment (sorry but I lost the article):
Xinhua News Agency announced another notice in its internal network saying its “leading organization” instructed it to publish an important article and required all media to adopt the article in full. The article quotes Stephen Roach, head of Morgan Stanley Asia, as saying the US’s blaming China for the imbalance problem is hypocritical. The implication derived from this notice is that China won’t appreciate RMB in the near future.
Hardliners on each side are preparing for a fight. The key is to insist that the other side is wholly to blame.
I am going to assume that it is this Stephen Roach interview to which you are referring….
http://www.cfr.org/publication/20486/avoiding_a_uschina_trade_showdown.html
Quite honestly Stephen is full of self serving hyperbole. He cannot make the claim that the value of the RMB is of little consequence without explaining why China is willing to pay such a high price for doing it. Stephen’s prescription is to increase China’s internal economy. What better way to stimulate internal demand than to increase the purchasing power of ones currency.
To bad Brad is no longer at the CFR. His information would clearly expose the outright distortions that Stephen is making.
Michael, if you see Stephen ask him to explain the logic of China’s continued (and accelerated) purchases of US dollar assets. He might might want to explain why Japan is back purchasing again. The worse the long term value you looks, the more they pruchase. Hmmm…
It would be better and clearer simply for Professor Pettis to admit that he was wrong. Let us recall his original analysis analysis: ‘the US would be the first major economy out of the crisis and China one of the last’. Given that last year China’s economy grew by 8.7 percent, while the US economy will have shrunk by around 3 percent, it is clear it is China which is emerging from the crisis far more rapidly than the US.
To say on China’s GDP figures, as does the current post, that ‘this time around I think the pessimists clearly have the edge’ is simply denying facts. China has just registered 8.7% GDP growth. This is the fastest for any major country in the world. If this warrants ‘pessimism’ then suicidal despair is called for regarding these other countries.
The test of any analysis is its ability to predict the unfolding facts. The analysis that China would recover from the crisis after the US is one that has been shown to be wrong. Those who have been shown to be essentially correct in believing that China’s stimulus package would be successful and it would undergo rapid growth are not confined to the present commenter but also include:
- Jim O’Neill, chief economist of Goldman Sachs
- Professor Danny Quah of the London School of Economics
- Mark Weisbrot of the Centre for Economic and Policy Research, – Yan Wang of BCA Research.
Those who have been demonstrated to be wrong also include not simply Michael Pettis but also:
- Stephen Roach, who wrote: ‘The [Chinese] government’s steadfast insistence on hitting its official eight percent GDP growth target for 2009 is simply no longer credible…. it is almost mathematically impossible for China to grow by eight percent growth for the year as a whole. This needs to be recognised and communicated both within and outside of China’
- Ben Simpfendorfer of the Royal Bank of Scotland who predicted China’s GDP growth in 2009 would be only 5 percent, and others.
A list of predictions and outturns can be found here
There has been a wide ranging international discussion on China’s economic performance. Those who believed it would be successful have been shown to be right. Those who rejected that have been shown to be wrong. That is what the facts show.
If a theory and the real world do no coincide there are only two things that can be done. A sensible person abandons the theory. The only other course is to deny the real world. The attempt to present China’s GDP growth, the fastest in the world, as a justification of ‘pessimism’ is unfortunately to follow the latter course.
Hypothetically speaking, if the PBOC were to achieve its stated target for monetary growth of 17% (yes, reality always seems to exceed this number, but play along), this would amount to a tightening more severe than during he late Zhu Rongji era. It seems impossible to me that bank lending can grow by less than around 25%, just to keep all of those things dependent on rapid money and credit growth afloat. The 1 trillion in loan growth in January says that they are 1) rolling over short-term credit from 2009, 2) trying to get in as much bill financing before the authorities raise rates, which they now have, 3) commercial bankers want to take the rest of Q1 off now that they have met their quotas, and 4) the velocity of money is going to drop, so don’t count on inflation battering the supply side for too long. It amazes me that the PBOC and other agencies can inflict such volatility on the monetary system.
Michael
Thank you for taking the time to post your latest analysis.
As you indicated the battle lines are being drawn for a nasty trade fight. The Chinese government is digging in and Obama is trying to dig out of the loss to the “Kennedy senate seat” in Massachusetts by becoming more populist. And just when you think it can’t get any worse a report published Wednesday in the Financial Times stated:
.
“Accusations in two (Chinese) newspapers that Washington was using Google as a foreign policy tool were echoed by Chinese government officials on Wednesday”.
Of course the Chinese government would never use an SOE as a foreign policy tool…
Increasing trade tension has been apparent for awhile and I don’t mean just in the relatively minor disputes that have arisen thus far. This is not the traditional post WWII recession; it is a worldwide de-leveraging event. If you want a straight forward examination of this and how it might play out, look at the recent McKinsey report (found here: http://www.mckinsey.com/mgi/reports/freepass_pdfs/debt_and_deleveraging/debt_and_deleveraging_full_report.pdf )
There is no simple, expedient (from a politician’s perspective) method for extracting various countries from debt induced sub-par growth in the short term although China does seem to have found a temporary bridge to the next problem. Therefore, the blame game will take center stage. It would be in every country’s individual best interest to attempt, in part, to export its’ way back to growth. However, all countries cannot simultaneously accomplish that and the developed world can no longer afford, politically or economically, to allow China this privilege in return for hoping growing wealth would make China a more cooperative partner in the world. Very possibly China misplayed its’ hand during the Obama visit and in Copenhagen by not discerning cooperation was necessary in this new environment.
It is difficult to discern how trade conflict will not accelerate unless countries find true statesmen to lead them, ones who know the history of trade conflict. The coming decade looks unappealing both economically and geopolitically otherwise.
Michael,
I’m curious what you thought of Thomas Freidman’s editorial/blog posting a couple days ago: http://www.nytimes.com/2010/01/13/opinion/13friedman.html.
I’ve heard this argument before ($2 Trillion in Reserves = economic trump card), and I’m curious if you have a response to Friedman similar to the cogent poist you made a while back refuting the probability of developing economies picking up Chinese exports where US demand lags.
You’ve highlighted a number of problems in China’s economy over the course of your blog; do you think the reserves gives China a strategic advantage in the 5-10 years?
The global imbalances involve too much spending and borrowing by Americans.
The Chinese politicos remember the Plaza Accord revaluation of the yen forced on the Japanese that resulted in a burst bubble economy in recession for the last two decades.
Beijing isn’t likely to revalue the yuan anytime soon. Unlike Japan still occupied by US military bases, China retains its geo-political independence and will say “No” to foreign powers when pressured.
Glenn, I know Stephen Roach and think he is a smart guy, even though we disagree on a number of things. I do think it is in everyone’s best interest to tone down the fierce posturing, however, or there is no way this ends well. To the extent that Roach can convince Americans to back off from demanding too quick an adjustment of the currency, this is as helpful as convincing the Chinese that accusations of manipulating trade are pretty well-grounded.
Ross, I am not sure how many times I will have to repeat this to you, but China has no more obviously emerged from the 2007-2008 crisis than Japan in 1988 had obviously emerged from the 1987 crisis – although then, as now, there were plenty of cheerleaders in Japan and abroad that made that clearly-very-idiotic claim. Your knowledge of history is, to be kind, not terribly sophisticated, nor is your understanding of what has driven recent Chinese growth. By the way, it is China’s good fortune that few policymakers in Beijing believe the kinds of things people like you are saying. In my private conversations, and from public statements by Premier Wen and quite a few other policymakers and advisors, it is pretty clear that few in Beijing believe the crisis is over.
CNM, your comment indicates to me one of the dilemmas facing the PBoC. I agree that a “mere” 17% growth in money would be extremely painful, but given the incredibly high growth in 2009 I would also argue that 17% growth is still excessive and will lead to adjustment problems over the medium term. It is hard to figure out what to do in this case.
Nada, as I have often pointed out, because of its symbolic importance trade disputes with the US hog the headlines, but they are much less serious than trade disputes elsewhere. For example today I received the following article from IndianExpress (http://www.indianexpress.com/news):
For the first time ever, India has issued a demarche to China on an economic issue. The stern diplomatic protest follows the dissatisfaction over the lack of specific commitments offered by the Chinese government to facilitate export of Indian goods and services to the latter, which are increasingly coming under various restrictions.
The unusual move was taken by India at the conclusion of the meeting of the Joint Economic Group of the two countries in Beijing on Tuesday. The Indian commerce ministry handed the demarche to its counterpart in China listing specific items on which India expects China to take urgent action soon.
Chris, there is probably more misunderstanding about reserves than about any other subject in economics, and Friedman has never once, to my knowledge, got it right. Do massive reserves protect you from crisis? No. They only protect you from external debt crises and currency runs, neither of which even the most pessimistic analysts believe is a serious risk for China. They are not wealth because they are funded with domestic debt. Friedman’s dictum – “First, a simple rule of investing that has always served me well: Never short a country with $2 trillion in foreign currency reserves – is frankly idiotic. The two biggest piles of reserves ever accumulated in previous periods were the US gold and sterling reserves in the late 1920s (probably the biggest hoard, as a share of GDP, ever accumulated) and the Japanese dollar reserves in the late 1980s. Needless to say, what great shorts both turned out to be. The subsequent decade for both countries was disastrous and I would argue that in fact this was not a coincidence. I could go on but nearly everything Friedman says in his article is wrong or misapplied.
Dean, I couldn’t agree more. The current path looks distressingly like previous periods of collapses in global demand followed almost inevitably by trade collapse.
Dave Chiang, the lesson of the Plaza Accord was not that Japan should not have revalued, but rather that it should not have revalued so quickly – and that it should have started the process much earlier. It was forced to do so quickly probably because after so many years of refusing to do it at more appropriate times, the political pressure was unavoidable. Whereas it may have made sense to blame the rapid revaluation for one or two years of crisis, it is simply silly to say that two decades of brutal economic adjustment and soaring debt were caused by the Plaza Accord. There must have been much deeper problem than unfair US pressure. Encouraging China to make the same mistake may be emotionally satisfying but is terrible advice.
Mike:
As usual insightful, amazing that DC, of Brad’s old page, formerly of China Daily, is still running around singing the same old song. It seems as if he believes it is a good idea to encourage Int Investors to pour more hot money into China. Anyway, with the sheer amounts of loans that have been given out over the last few years, what is the eventual result, do you believe? Are companies still borrowing and investing/speculating in the Equity markets like in the heady days of 2007? What are the typical lengths of terms on the loans being given? Are most simply recycling older loans, or is this in new lending?
Anyway, thanks, you have been a voice of reason.
What do you think of Green as the new driver of Global Growth, considering medium term population growth dynamics, in China and elsewhere?
Again, thanks.
Michael Pettis, revaluation of the yuan and/or economic sanctions imposed on Chinese exports won’t bring employment back to the United States. The Obama protectionist and WTO illegal 35% tariffs on tire imports from China merely shifted those imports to Mexico, Indonesia, and other low cost producers. Most of the tire factories in China exporting to the US market were owned by US multinational corporations. That is why Goodyear Tire opposes US trade protectionism. Furthermore, a revaluation of the yuan would disrupt Chinese trade relations across the world. The US isn’t even China’s largest trading partner anymore so why should the Chinese bend over backwards to be dictated on its sovereign monetary policy. If the Chinese government doesn’t look out for the best interests of China’s economy, than who else in the world will?
I saw an opinion piece that seemed to echo some of your view points. I hadn’t heard of Gordon Chang before, has he published anything worth reading?
http://news.yahoo.com/s/csm/20100121/cm_csm/275118;_ylt=AhlYhEm4R1lezhMwfMvoUSSs0NUE;_ylu=X3oDMTFlbDc4NDUyBHBvcwMyMTcEc2VjA2FjY29yZGlvbl9vcGluaW9uBHNsawNjaGluYXRoZXdvcmw-
CS, I think that China should impose tougher capital controls to “hot speculative” money from the West, but that would be anathema to the Neo-liberalism ideology of US poltical elites. Over the past 2 decades beginning with the Clinton-Rubin Administration, the Washington Consensus was formost concerned with financial liberalization of the Chinese economy for Wall Street special interests. Personally I an adament against any outside foreign state interference in Chinese sovereignty. The US has never provided a dime of foreign aid to the Chinese people. Therefore wrongly or rightly, the Chinese should decide their own economic destiny without being dictated to by any self serving Western pundits.
Michael,
I will have to disagree with you regarding the utility of Stephan’s remarks. I am not suggesting that he is not a smart guy. Merely that his opinion is a little to self serving for comfort. Besides failing the reality test. As Brad Setser responded to my one year ago….
glen M. Good question. if china thought US monetary policy was too loose and the US wasn’t doing enough to support the $, the obvious question is why did it continue then to import us monetary policy through its dollar peg.
—and
i think the Chinese threat to sell treasuries is being a bit over stated.
game it out:
a) China has to buy something else – if it buys euros, it would push the euro up/ $ down. that doesn’t obviously help china much .. unless it wants a weaker RMB/ euro and thus continues to peg to the $ even as it pushes the $ down through its sales.
b) the fed would buy long-term treasuries to keep yields from rising … and that likely would put additional downward pressure on the dollar.
c) to the extent that everything got disorderly, the fall in us output would mean less demand for china’s exports. and since the whole point of a weak rmb is to help exports, that kind of undercuts the original logic for keeping the rmb down ..
i could be totally wrong, but i was much more worried about this threat when china’s growth was strong than i am now. it would go against china’s efforts to support its exports as much as allowing further rmb appreciation v the usd. and right now chinese policy seems to be geared to supporting chinese output thru all means necessary.
the counter to this is that china already is worried about its treasury exposure and doesn’t want more. but then it has to either :
a) engineer large hot money outflows so the pboc doesn’t need to add to its reserves
or
b) bring the current account surplus down w/o changing the rmb v the USD.
c) but other us assets, like say agencies
the best way out: a big enough stimulus to bring china’s current account surplus down. real appreciation plus a falling surplus woudl give the treasury something to work with
————————–
BTW, it is not hard to assume that Brad is now where he is because of the predictable situation that China and the US are in.
Professor Pettis: Thank you for an excellent post.
As regards Q4 2009 data, China surely has lots of problems, but I would prefer having to rein in an economy growing at 10,7+% than one sputtering at around 2% with a budget defict of 12% and piles of NPLs!
Glen’s comments on Stephen Roach are a wee bit uncharitable. Roach’s position should be analysed by the empirical evidence over the importance of the “absorption” versus “price effects” of currency changes. Both are important, but one can find as many studies showing price elasticity pessimism as optimism. Hence, we probably don’t know much — especially when dealing with hugely distorted “dual economies” — where prices are administered.
Ideally, the US should be reducing domestic absorption (relative to potential output growth) reinforced by price switching measures — while China (Japan, Germany and the OPEC) should be doing the opposite.
If the short-run income effects outweigh the price effects — what is the big problem with China’s game plan for a big fiscal-monetary boost, followed by a gradual, but steady “real appreciation” of the RMB — once growth is on a sustainable path?
I fear the real obstacles are political — global adjustment requires painful adjustment by the DEFICIT countries, i.e. slower domestic absorption and extended, higher unemployment — to drive down real wages — in the face of an angry and vocal electorate. This probalby explains why the “blame game” and protectionism is usually a politically easier option than cleaning up home grown problems. best regards James
MP,
Basic economic theory tells us that if a country produces more goods its real effective exchange rate should increase (it can buy fewer foreign goods per one of its goods, ceteris paribus). Increased Chinese industrial investment suggests that either sales (from foreign or domestic consumption) will increase or inventories will.
A) what is the potential scope for an increase in inventories in China and could this be a logical reaction to the current depressed commodity/financing prices and indicate decreased investment and production in the future?
B) If a large portion of Chinese goods reach markets there will be a depreciation in the real effective exchange rate. Since the Yuan is pegged to the dollar this can either come in the form of 1. Chinese inflation 2. Foreign decreased inflation/deflationary pressures 3. An adjustment of the Yuan in relation to other foreign currencies, especially the Euro, which would then cause the dollar to depreciate relative to other foreign currencies unless China maintains its exchange rate with more than just the US.
Is this analysis correct?
-BZ.
Neither the optimists nor the pessimists, particularly the outsiders, should jump for joy or cry for foul when examining the latest set of China’s economic performance data released few days ago. The Chief economist and spokesman for the national statistics bureau Yao Jingyuan at a Chinese news conference on 19th January 2010, regurgitated the Party’s great achievements in 2009, then went on to elaborate the numbers echoing familiar slogans from 1958’s “great leap forward”. If any Chinese conversant contrarian pundits presented at the new conference, they would not have hesitated a moment betting on China to crash the next day.
But, hold your horses yet, James Chanos and his clique. This is China, the Newtonian Laws of Physics do not seem to work in its sovereign space, i.e. law of inertia, action and reaction, and law of gravity do not seem to have any effect on housing prices, stock market, foreign reserves, GDP, CPI, PPI,…etc. One must remember this is an economy manipulated by authoritarian government, it has a huge critical mass of 1.3 billion wiling workers. Its trade policy is described as Mercantilist, but hardly by design or intent, but by nature. Chinese officials are as dumbfounded what to do next since day one the “paramount” leader Deng Xiaoping wanted to feel his way when crossing the river, regardless numerous talented Chinese and Western educated economists, academics, and entrepreneurs offering magical solutions. In any case, the government would suddenly adopt and implement swiftly a policy that would trigger pundits to bet the contrary, but never such bets materialized. The only historical track record and logics of government’s behavior can be explained as: the party’s forever rule precedes the nation, the nation precedes its people’s interest and well-beings.
It’s interesting to look at the World Economic Forum Global Risk Report for 2010
http://www.weforum.org/en/initiatives/globalrisk/Reports/index.htm
It has consistently listed one of the biggest global risks since 2006 if “China’s growth is less than 6%”, the same risk appeared for 2010. Through the years, all other predicted global risks have materialized except for this one. What does it mean? The slightest crash in China would mean devastating effect for the rest of the world. Therefore, the smartest contrarian is to short the collapse of commodity supply chain outside of China. It seems the entire world has been bundled up with a suicide bomber.
The world should help out China defy Newtonian Laws of Physics, on behalf of their best interest not to let China fail.
Michael, Here I relayed a comment from a Beida scholar, who couldn’t access your blog in BJ, but through email copying your text. Instead of crunching numbers, he seems to be rather philosophical about it.
“This GDP mythology is getting to a point of absurdity, if not insanity.
It is like cow merchants haggling over the value of a cow merely by weighing the manure.
Is it the result of forced feeding? At what kind of feedstuff cost? How is the body itself taking it? Is it gaining or losing weight? Any sign of indigestion or parasites?
Is it actually healthier or otherwise? Is the over-dosage of hormone good for the animal in the longer term?
Single-minded objective is easy to achieve, but mostly at the expenses of other long lasting side-effects.
With due respects to learned economists, professors, Nobel laureates, I am only an old fashion Beida scholar, rest my case.”
Ross, your understanding of economics fits roughly with your far left socialist roots. I remember you distinctly arguing that savings rates wouldnt rise in the US (they have and are) or the UK (they are too.) Mentioning O’Neil whenever you comment on someone’s blog / FT article is flattering for him, but your relationship with him is a mystery – why do you need to constantly bring in people to support you? Unlike your tedious habit of linking to your own blog, I don’t understand what you get out of it. Your arguments should stand for themselves.
To humour you, what do you see as a future for China’s growth over the next 36 months? Will the stimulus / loose monetary conditions carry on for ever? Why are they still in place if, as you say, China has already successfully navigated the crisis? How long do you think such monetary expansion can be maintained? Do you think the investment share of GDP and consumption subsidies / government consumption can be maintained for years?
Please try and reply without pointing out how someone else is (in your opinion) wrong. I realise i should ask these questions on your blog, but that would be rewarding your blatant attempts to get readers.
MIchael,
It is a pity that well intended comments that try to criticize the simplistic rhetoric about currency manipulation (and of course the currency is being manipulated) are being used for propaganda purposes.
Perhaps the position of “the west” re China’s FX policy should be:
We (that is the rest of the world) know that FX by itself would not solve the trade imbalances, because of the internal structure of China and several other Asian countries that believe firmly in mercantilist strategies to increase their populations’ share in world affluence.
But it happens to be one of the few instruments available to the central government to slow down China’s displacing other countries (especially other developing countries) in world trade, and buy time for the government to manage the urbanization problem properly. Other, more effective instruments to stimulate private sector demand (both firms and households) for imports are simply not available to the Centre, or cannot be enforced by it. Continued Chinese membership of WTO should be made conditional upon structural changes that would move important parts of China’s political economy closer to OECD paradigms. China is not a small irrelevant country that can free ride the world trade system.
However, given the fact that FX policy is undisputedly a Central responsibility (however unpopular it may make the individuals pandering to western dictates), the Centre should, as a token of good will, adopt FX policies that would be mutually acceptable between China and its main trading partners.
Found the answer to my own question.
http://blogs.ft.com/money-supply/2009/12/09/bis-on-stress-test-failure-and-rising-chinese-lending/
What do you think are the implications, and rationale, behind the move toward longer term loans?
What impact will this change have upon the nature of business in China? It would seem the changing nature.
And, further, opportunities for growth?
Thoughts.
The fact that China has a government that does not have to listen to hypocrites in the West on democracy, human rights or currency levels means that it can manage its way out of its current predicament far more effectively than its critics. The size of its foreign currency reserves is not the only reason not to short China. Its politicians have far more power and intelligence than their western counterparts. They have demonstrated this by their incredible achievements over the past twenty years. The West needs to learn how to cope with what they will achieve over the next twenty years.
Ross, well done for linking to your own blog AGAIN! I am sure no one has noticed yet
China’s QonQ growth is slowing, 2Q 2009 of 14% was the highest, 4Q 2009 QonQ was down to 8.5%. This is a clear trend already over 3 quarters, as the stimulus and monetary credit flood are withdrawn.
I agree with Prof. Pettis that declaring China’s crisis over within such a short timespan may be a little premature. I am not sure if you are still in China or not (if so congratulations for finally getting a VPN or proxy), but if you are you will notice that neither the government here nor the media consider the crisis to be over for China. Equally the stock markets are obviously not impressed – i think mainland markets are amongst the worst performing 10 in the world this year.
Those who have bothered to look at the makeup of growth are stuck by the dominant role of investment, which will have to slow as the government fiscal stimulus ended in July last year and as lending is slowed this year. Can private investment replace this in the coming months? Admittedly consumption (in China including govt purchasing and measured on a wholesale basis) was stronger, but only a bizarrely optimistic person would assume that this can continue at such high rates- particularly if the property market is deflated (as govt. officials here are already talking about).
Falling QonQ growth combined with rising inflation is worrying to most people…
Equally, your object of obsession Jim O’Neil has just predicted the the Yuan will begin to move, and he is not alone there, which with the weak recovery in China’s main export markets (you yourself point this out) will stop the export sector from picking up the slack.
I think the entire game is a fraud. For one, Roach is right. The Chinese merely based their currency on the dollar. Thus, they have been the printing press for the world the past year. But, the problem with trade imbalances has more to do with the excessive amount of consumer credit and home finance that has been available in the US. The same as the massive amounts of soon to be or already non-performing real estate and capacity in China is due to the same thing. If China was flooded with consumer credit and government transfer payments, it would only be a few years before they were hiring maids, eating all their meals out, building retail stores as if people didn’t have a life outside of retail stores and some other country would be handing the overflow. It is all about to implode.
It took China customs various tries to come out with the right data for Dec underlying the extremely strong 4th Quarter imports. Even Chinese Chicken producers were importing and stocking copper in the 4th quarter by using government loans. It is not an affordability issue to build inventory – China clearly can afford it when considering the amount of capital that wants to move into China ahead of a possible revaluation. The main question is what to do with all this inventory? Will this overhang of inventory provide the sword that wounds the giant manufacturing house? China’s strength lies in value addition due to low costs. China is depriving the rest of the world of cheap raw materials at this moment on purpose. China is making a large wager that customers will come back to buy Chinese made products because they own the cheaper raw materials. The main issue that the Chinese government has missed is that for this to happen, you need customers who have money in their pockets in EU and US and the rest of the world. Currently such customers are without jobs and therefore unlikely to buy more of the same. Sounds like a disaster in the making…
Mr Pettis
Gather the 2 sides of the great divide are already slugging it out on your site?
The credit growth squeeze seems to be that fog that hasn’t lifted over the markets but at least property speculators in shanghai seem to have gone into hibernation – at least the local ones. perhaps the sun has decided to stop shining for a while?
Frankly am getting more worried though the chinese economy is chugging along, perhaps it’s all that weather but does anyone else worry about the existence(?) of tracks ahead?
Obama’s recent pronouncements on financial sector reforms seem to point towards governmental susceptibility to populist sentiments these days which means potentially fractitious times are to be expected ahead- protectionism may just become the new name for a WWE arena.
Houhui,
You say ‘I remember you distinctly arguing that savings rates wouldn’t rise in the US (they have and are).’ Your memory is right I did say that and the facts confirm it – as can be calculated from the US Bureau of Economic Analysis Statistics.
Total savings in the US fell in the third quarter of 2009 to 10.4% of GDP – the lowest level since quarterly statistics began in 1947. Depending on when you date the start of the financial crisis from they have declined from 12.7% of GDP in the third quarter of 2008 or 14.8% in the first quarter of 2007.
Those who claim savings have risen in the US are making the error of confusing US household savings (which have risen) with US total savings – which have fallen. From a macro-economic point of view, in particular the balance of payments and therefore global imbalances, it is total savings which determine the situation. Maybe 4th quarter US GDP data to be published on 29 January will show that US savings have risen but up to the third quarter 2009 they had have been falling.
As regards prospects for China’s economy in 2010 I am working on an article on this which I will post on my blog – it would be an abuse of Michael Pettis to post repeated long macro-economic articles as comments on his. Do I wish people to read the details of such an analysis – evidently.
However briefly to deal with Houhei’s question the key issue will be how China deals with capacity constraints – which are the dominant issue in China in this regard and not excess capacity as Michael Pettis and the European Chamber of Commerce in China argued. Such capacity constraints are evidently inflationary – which is an underlying macro-economic reasons it is the most serious immediate threat.
Contrary to claims spread by those who do not have seem to have studied the figures China uses its investment very efficiently by international standards. Therefore no major gains in increasing capacity can come from more efficient use of investment.
To overcome capacity constraints in the medium term requires China maintaining its high level of investment. However in the short term, given that China’s economy is beginning to come up against capacity constraints, a further short term boost to investment would be unwise. However, proposals to reduce investment in an economy which is suffering from capacity constraints are extremely unwise. China’s economic policy makers got it about right in 2009 and moderate monetary tightening, to prevent growth accelerating further, is required. As they have been skilful in the past my best estimate is they will succeed in this – and this is of course is roughly their official policy already.
What is clearly not called for in this situation is further major measures to stimulate consumer demand, China’s economy is roughly at capacity, and possibly going beyond it. Consumer demand, by definition, does not add to capacity but it does increase demand pressure – a combination which is evidently inflationary. Therefore to deal with the inflationary risk further boosts to consumer demand are not called for in the short term.
This evidently simplified a lot and much more detail could be added.
As an aside this whole situation shows a further reason why the analogy to Japan in the 1990s is wrong. Japan suffered from deflation – indeed its situation in that decade is one of the classic illustrations of Irving Fisher’s theory of debt deflation and depression. China today is facing the risk of inflation. There are many other reasons that could be given but this one by itself is sufficient to show the whole analogy to Japan is wrong.
Michael Pettis and I have a very simple and clear disagreement which is being tested by facts. I think the foundations of China’s macro-economy are strong and its policy has been essentially correct. Today a major immediate problem is capacity constraints not overcapacity. He has argued China’s economic policy has been wrong, and today it is suffering from over-investment which has created a situation where overcapacity, not lack of capacity, is the dominant issue in this regard. Given these points I therefore think, China’s economy will overcome the crisis before the US, and he thinks the opposite. Looking at the facts, not abuse, is the best way to deal with this rather simple disagreement.
I think these facts show so far that the analysis I support has been proved right and Michael Pettis’s has been shown to be wrong. As always with such matters continuing to look at these facts as they unfold, alongside the theoretical issues, is the best way to deal with them.
Ross, you say: “Looking at the facts, not abuse, is the best way to deal with this rather simple disagreement.”
That’s a funny thing to say after trying to muscle your way into the debate by abusing your betters. But aside from that, you assert that “what is clearly not called for in this situation is further major measures to stimulate consumer demand.” How can you say that Chinese policymakers got it right when that is exactly what they have been eager to do?
Also, inflation has not been a problem in the tradable goods or industrial sector and so is in no way indicative of capapicty constraints. It has been a problem in the food sector.
JJ,
On China’s policy makers getting it right the issues are quantitative. China’s trade surplus, at 7.7% of GDP in 2008, was definitely too high – made more serious by the fact that as China’s GDP grows a given percentage of GDP translates into a larger absolute number. As the balance of payments surplus, which in China is dominated by trade, is equal to the difference between domestic savings and investment there are two ways go get it down.
1. To increase the percentage of investment in GDP – which almost certainly occurred in 2009.
2. To decrease savings, that is to increase the share of domestic consumption – which also probably occurred in 2009.
Because both happened China’s balance of payments/trade surplus shrunk.
But they have different effects on inflation.
1. Investment, by increasing capacity/supply, helps contain inflation over the medium term – which is one reason it is beneficial. But in the short term an increase in investment increases demand which is inflationary. As at present China is up against capacity constraints at this point in the business cycle a further boost to investment is unwise in my judgement.
2. Increasing consumption, by definition, does not add to capacity and is, therefore, all other things being equal, inflationary. Last year when China was faced with deflation and the need to increase domestic demand very strong measures to increase consumption were beneficial in dealing with both issues. This year, when the economy is up against capacity constraints, further measures to increase consumption would be clearly inflationary.
The fact that China’s policy makers got it basically right last year of course is not a blank cheque stating they always do so.
capacity constraint in China? Crushing capacity in the food sector shows processing capacity well in excess of demand – China crushes 50-60 Mil MT of Soybeans but has 87 Mil MT of crushing capacity. Steel industry, am told is same. Lets see some real data but definitely the issue is not lack of capacity that has caused food inflation. The main culprit has been high liquidity allowing all the punters to speculate on the Dalian Commodity Exchange where almost the entire vegoil traded world wide in a month trades in one day!!!
The real problem with the American economy isn’t really US government debt held by the Chinese. One needs to understand that the US Dollar is a “fiat currency” that can be printed in unlimited quantities by the Federal Reserve. The Fed has been printing at rate of $200 billion per month to finance stupid Middle East wars and Government Sachs / AIG bank bailouts. Ultimately the US Dollar will be worth its intrinsic value of toilet paper.
The real problem is that the US economy has de-industrialized except for defense production. There is very little “real wealth” producing industrial capacity left. You cannot run an entire country on playing accounting and financial ponzi games. The Washington Consensus Elites have been attempting to divert the public’s attention to scapegoating China when the real problem is the corruption of Wall Street special interests. Economist Henry CK Liu summarizes the economic policy of the US political elites:
“Much of the talk now among US establishment economists has been focused on technical debate on the government stimulus packages being too small to kick-start the seriously impaired economies around the world, when the problem has been that good public money has been targeted for bailing out undeserving private institutions to enable them to again play the same immoral game of reckless speculation through “carry trade”, risking the people’s money for unproductive, obscene private profit, while leaving a dispirited population unemployed and underemployed, with families with young children facing homelessness. If even only a fraction of the people’s money is spent directly on the people themselves, the world will emerge with a new economic order of moral justice instead of deprivation.”
http://www.henryckliu.com/page118.html
Hi Michael,
Your statement about China reserves “they are not wealth because they are funded with domestic debt” is not correct.
Reserves are an asset. Your argument applies to flows or, in other words, how the increase in reserves is balanced since it generates, at least, partially, monetary expansion. China, as you well know, has done this balancing very well over recent years and not only increasing domestic debt.
Can´t you imagine various powerful ways how 2,4 trillion dollars can be used by and in China´s advantage?
Your historical examples may or not apply to this unique case. It all depends on how China uses its reserves. And they have been quite smart.
Regards,
Christopher.
Professor Pettis: I would appreciate your view on the ECONOMIST’s 14/1/10 article on China. This raises a number of points that down play the pessimists’ predictions of an imminent “crash”landing.
Point 1. HOUSING PRICES are way ahead of themselves. They say the case may be less black and white. Take the ratio of house prices to household incomes — this is currently much higher relative to 1999 in the USA and Japan than in China. Indeed the current ratio for China is lower than 1999. The caveat is that the Chinese ratio is for the TOP 20-30% of urban households, as they are the main buyers.
Is this a relevant indicator of “buyer potential” in a “dual economy”? They also argue that fears of overheating may be over stated because 20% of purchasers pay cash!; and minimum deposits are 20% for first time buyers and 40% for investors.
Point 2. CAPITAL WASTE is huge. Analysts using ICORs conclude that China has huge (rising) capital destruction and rising excess manufacturing capacity; hence lousy growth prospects.
But the dilemma is that virtually all studies show that China’s TFP (and profitability) is surprisingly good (Bosworth and Collins, OECD studies are typical)! How come? The Economist cites estimates that infrastructure was 15% of GFI in 2007 — rising to a whopping 45+% currently as a big factor in this paradox. Interestingly, the share of manufacturing in GFI dropped from 45 to 25% from 2007-09. This may imply that fears of mfg. excess capacity are overstated; e.g. in the bell weather steel sector — capacity is 0,5 tonnes per capita. This compares with a USA figure of 0,6 tonnes in 1920 and 1,1 tonnes in Japan in 1973.
More generally, I wonder if pessimistic views on China’s medium-term growth potential are based on unrealistic 1st world economy yard sticks? Taking Japan in the 1960s and/or Korea and Taiwan in the 1970s as comparators — leads to quite different conclusions. regards James
All:
Very simple, and to the point of the WTO, the sheer amount of interest that China has garnered, for its long-term potential, and due to its geo-political importance, to a stable world, which is vastly supported globally, regardless of positioning which mostly panders to domestic constituencies in other nations, is that the scale of the endeavor is so large, it is moving to fast, and its ability to draw off growth, and create and an unstable growth path for the global economy is apparent; mostly due to weaknesses of institutions within the country to check the influence of dominant stakeholder groups, which might not be exactly working for what is in the interest of the nation or people, or the world for that matter, but in the interest of their pocketbooks. So…
Where is talk of opportunity cost in this equation?
How much of the vast amount of investment, has been invested under conditions which were too costly, because of the simple pace, and the competition for resources, driving up costs, values, GDP and creating an overhang.
Further, point in fact, policies are siphoning off growth that could, and would have gone elsewhere, because, investors, for all the tools that they might use, are animals that move in packs, searching for the next watering hole. Soon, will they find sweeter water, what happens then, what of the vast over-development of capacity.
The gentleman who mentioned Chicken farms hoarding copper, as no doubt they have been led to believe a good and smart investment, not much different then the companies who borrowed from banks to speculate in the stock market back in 2007 when it was pushed past 6000. Where food shortages and costs have spiked, and expected food consumption is to rise with living standards, were the smarter not to have invested their savings, or borrowings from banks, in the production of more chickens rather than hoarding a metal of little importance to their business model. As to the person who thinks people will return to China for the cheap prices of copper goods, post recession, what of the impact on the financial system and savings picture of the Chinese people. Something is amiss…
Most likely it has to do with the pace and composition of growth, which is destabilizing for both China and the world, and largely is due to the pace, and terms, by which they entered the WTO.
The size and number of participants in that body has exploded, where the institutions to deal with such an increase in participants has not evolved nearly as quickly. Plain and simple.
@John Ross
Your following statement:
“What is clearly not called for in this situation is further major measures to stimulate consumer demand, China’s economy is roughly at capacity, and possibly going beyond it. ”
I assume you suggest that China’s output gap is zero. As we all know, the output gap in large, diversified and mature economies (such as the US, EU etc) with a public sector that hardly participates in market production, is a useful concept (though prone to measurement errors). The more open an economy is, the less useful is the concept for macroeconomic policy, because trade leaks will interact with policy. I have my doubts about (a) the relevancy for China in view of its internal rigidities (provinces, non-fungibility of hukou and non-hukou workers) (b) its very large state sector with the potential for non-market conforming managerial behavior (c) the general quality of statistics in a country with China’s characteristics (d) last but not least the sheer impossibility of deriving useful measurements in a country where capital expenditure is such a large share of both GDP and the installed stock.
Someone may be collecting numbers and processing them but that does not mean that what comes out and is sanctioned by the higher echelons of the bureaucracy for public consumption is the same sort of information that observers (investment analysts, etc) in the typical OECD country get and may draw conclusions from. Furthermore, the type of monetary policy conducted in China -as far as I know- is far more direct than one that might benefit of an output gap approach, if useful,information were available.
The only thing we know is that Chinese productive capacity is growing very fast overall and that there may be sectors (such as bespoke exports for US retailers) that suffer overcapacity, whilst eg rail builders may be very busy. I think Michael’s views are more plausible, especially now the economy is being driven back towards a highly centralized structure that may well negate the gains of China’s unique “transition” model. Anyone familiar with transition issues knows that nomenklatura capitalism is the wrong way to grow productivity. And somewhere, China will need locally owned firms that are managed for economic autonomy (i.e. profitability, continuity and independence of subsidies, gvt controls and excessive market power). I doubt there is one SOE learning how to do that.
Ross, I wonder if you and David Chiang are talking about the same country everyone else seems to be. The current issue of Caixin has an alarming article on the frantic attempts by the PBoC to cut back on lending in January, saying:
“China’s reliance on credit for economic development has already reached unprecedented levels, and the risks should not be underestimated. The ratio of the M2 money supply to gross domestic product, a major indicator of the national economy’s reliance on monetary policy and credit issuance, continues to move upward, and has reached the rarely seen level of 160 percent. ‘This means China’s use of credit to drive the economy has reached a maximum, and continuing the policy could be counterproductive. The excessive accumulation of credit risk will inevitably result in non-performing loans in the future,’ a senior official at a state-owned commercial bank said.”
http://english.caing.com/2010-01-25/100110847.html
You and Chiang like to assume a kind of orientalist government spokesmanship, even without their requesting it, but it seems you are both totally out of tune with what Beijing is actually saying and doing. They do not seem to be nearly as confident as you are that capital and investment levels are just fine. On the contrary, they seem terribly worried about overly high investment levels but even more frightened of pulling back. It is probably a very good thing they’re worried, by the way, since dumb confidence would almost certainly lead to a terrible collapse.
Bloomberg today:
Jan. 25 (Bloomberg) — China’s property-market data may be masking the degree that speculation is driving prices in some of the larger cities, a World Bank economist said.
Official data “may actually under-represent what’s going on,” Ardo Hansson, the development bank’s chief economist for China, said in an interview after a press briefing in Beijing today. “It’s people buying because they think next week or next month it will be even higher.”
JHas anyone read “China’s Economy: Something Is Not Right in Beijing,” by Derek Scissors. You can find it at
http://www.heritage.org/Research/AsiaandthePacific/wm2775.cfm
China’s State Statistical Bureau (SSB) claims that everything from GDP to consumption to employment is humming along. If its economic statistics are accurate, Chinese policy is then incomprehensible–even by the PRC’s own standards of less than a decade ago. Because there are so many flaws in the numbers, it is certainly plausible that they have been falsified while Beijing’s policy choices have been largely correct.
The other possibility, though, is that the economy really has been doing fairly well. In this case, however, hyper-stimulative policy is a travesty. The State Council has demanded frantic bank lending that has generated far too much liquidity, a stunning increase in commercial property sales, and an even more unbalanced economy. The American version of this policy ended badly and the Chinese version will as well, whatever official data say.
…So when the PRC says that 2009 real GDP grew 8.7 percent, real retail sales grew 16.9 percent, and consumer inflation was -0.7 percent, some of the results may be fraudulent. Indeed, it seems that even China’s government might believe so.[6]
The PRC announced a growth rate of 9 percent for 2008, revised to 9.6 percent. Growth in the fourth quarter of 2008 dipped only slightly below 7 percent and stayed above 6 percent in the first quarter of 2009 before again spiking higher.
Beijing reacted with absolute panic. In addition to the touted 4 trillion yuan fiscal package, bank lending rose an astonishing 32 percent last year. State banks pushed out $1.4 trillion in new loans, the equivalent of nearly 30 percent of GDP. In recent weeks, government officials pledged to continue roughly the same fiscal and monetary policy.[7]
This is a very odd reaction. The central government chose an emergency response to an emergency that never materialized in official data. Further, it has committed to largely continuing that emergency response, even though official growth has averaged almost 10 percent over the previous six months.
It may be that hyper-stimulus has become the normal state of affairs. The willingness in the early part of this decade to genuinely target 8 percent GDP growth and accept 7 percent when necessary looks to have been replaced by a growth target closer to 10 percent, where 7 percent is considered a disaster.
Or this interesting article on Yu Yongding’s views by John Garnaut, which you can find at
http://www.smh.com.au/business/chinas-runaway-growth-train-on-a-dangerous-course-20100124-msll.html
The article says, in part:
Yu, the recently retired director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, did not explicitly say I was barking mad. But his email continued: “When a country has an investment rate over 50 per cent [of] GDP and rising, you say this country is not suffering from overcapacity! … are you serious? ”To judge whether there is overcapacity you cannot just do a head account. With a 1.3 billion population and human greed, China’s needs are unlimited, you can say that China will never suffer from overcapacity!”
The email noted that, on my logic, no developing country could ever suffer from overcapacity until it became rich and that the world should never have suffered a Great Depression in 1929.
Since that salutary critique, Yu has elaborated further on his views.
He believes China is trapped in a cycle where constantly rising growth in investment is constantly increasing China’s supply, but consumption has conspicuously failed to grow fast enough to absorb it. And so China is forced to increase investment in order to provide enough demand to absorb the previous round of increased supply, thus creating ever-widening cycles of oversupply.
In this manner, the investment share of gross domestic product has increased from a quarter of GDP in 2001 to at least half.
“There is sort of a chase – demand chasing supply and then more demand is needed to chase more supply,” he says. “This is of course an unsustainable process.”
From 2005 China’s overcapacity problem had been “concealed” by ever-increasing net exports – but that strategy was interrupted by the financial crisis. Then came last year’s globally unprecedented stimulus-investment binge, which might not have been so worrying if it were delivering things that people needed.
But the Government’s hand in resource allocation has grown heavier since the crisis without reforms to make officials more responsible for what they spend.
“As a result of the institutional arrangements in China, local governments have an insatiable appetite for grandiose investment projects and sub-optimal allocation of resources,” as Yu previously said, in his Richard Snape lecture for the Productivity Commission in November.
So there are now airports without towns, highways and high-speed railways running parallel, and towns where peasants are building houses for no reason other than to tear them down again because they know that will earn them more compensation when the local government inevitably appropriates their land.
CS, I suspect that “green” concerns will only emerge when the leadership needs a whip with which to beat back overheating. Unfortunately I do not think policymakers in most countries will pay green growth anything more than lip service when unemployment is a real worry.
David Chiang, thanks for your various assertions. I am not sure however how they are relevant to the rebalancing issue. Fortunately the debate in China is a little more sophisticate than that.
James, I think the quality of the growth is very important. If China’s growth is driven by sustainable consumption growth, the current numbers are great, but if they are driven by further overinvestment and overcapacity, as Yu Yonding points out in the excellent article referenced by JohnZ, then it may be simply anticipating future growth while creating net negative economic value. This is why the comparison with Japan in 1988-89 is useful. By the way it is not obvious that China’s fiscal deficit, if correctly counted to include what are effectively policy loans by commercial banks that will convert into NPLs, is much below 12%.
Brandon, I think inventories are already rising quickly and will continue (you need to count standard inventory measures, plus stockpiling in state reserves, plus private and unrecorded stockpiling, plus “indirect” stockpiling disguised as end use, for example speculative apartment purchases). But the real worry is overcapacity, not inventory. I found this fascinating quote in
S. Jay Levy David Levy’s 1993 “Surviving the Contained Depression of the 1990s”:
“Recessions are retrenchments necessitated by overproduction; depressions are caused by overinvestment. The primary imbalances in a recession are in inventories; in a depression they are structures and productive capacity. Inventory imbalances can be corrected quickly; excess structures and capacity take years to absorb.”
Gull-up, I am old enough to remember when the Newtonian Laws were not supposed to apply to Japan. But they always apply – they may get distorted at times, but excessively abundant and cheap capital always leads to misallocated investment.
“ChinaHand”, the assertions made by “David Chiang” effectively serve the same purpose and are equally useful to the debate.
Houhui, interestingly enough Jim O’Neil is now predicting that China will engineer a “surprise” one-off revaluation of the RMB. Hey! I said it first!
Mannfm, I am thinking about doing a piece on what I suspect will be the next and probably last “trick” to keep growth high for a little longer, and that is an order to banks to force up consumer lending. This should artificially boost consumption numbers for a while at the expense of future rising NPLs.
Judy, I agree. Mahatma Gandhi famously complained that speed is irrelevant if you are going in the wrong direction.
Ross, I suspect that at this point it is not a question of your seeing the wrong things so much as your admirably robust refusal to recognize the obvious. You (along perhaps with Fareed Zakaria) are probably the only person in the world who thinks the crisis is over and the results tabulated. Even those whose views you have decided to represent, Beijing policymakers, are not so foolish as to believe that, as TR points out.
Christopher, I disagree. If I borrow $1 million and use the proceeds to buy the equivalent amount of euros, I am not any richer. All that has happened is that I am now running a currency mismatch which may increase or decrease my wealth. This is in effect what the PBoC has done to accumulate reserves, except that in the case of the PBoC, where the only serious risk is an RMB appreciation, the PBoC runs a one-way mismatch. Reserves are not wealth.
James, the Economist article has been vigorously criticized elsewhere and it would be hard for me to address it briefly, but as I have often written, I disagree with the claim that these comparisons are “based on unrealistic 1st world economy yardsticks.” Very briefly, aside from the fact that this is simply another very common version of the “this time is different” argument, the same yardsticks can be found in less developed countries. In both developed and poor countries there are reams of examples of excessive liquidity and too-low interest rates leading to massive capital misallocation and furious growth followed by difficult adjustments.
JohnZ, the Garnaut article is indeed interesting. I have always thought Yu Yonding one of the smartest people on the Chinese economy. Thanks.
After reading John Garnaut’s essay, I took a quick look around for more on Yu Yongding. His most recent blog post is available in English here:
http://www.blogchina.com/20090903798837.html
His Sohu blog (in Chinese) is here:
http://yuyongding.blog.sohu.com/
If anyone knows where I can find more by Yu Yongding (Chinese or English), please let me know. Thanks in advance.
Yu Yongding gave an excellent talk this past November in Australia entitled “China’s Policy Responses to the Global Financial Crisis.” It’s available for download (English, 20 pp) at:
http://www.pc.gov.au/__data/assets/pdf_file/0003/92595/2009-yongding.pdf
Michael, for a change maybe you can write about china consumer/household credit evolution
There are so many mixed numbers still coming out of China. The markets keeps falling though and now the rest of the world is following. I don’t think the other markets will stop until China does.