I apologize for waiting two weeks since my last post, but my schedule has been crazier than usual what with the SED meeting and a number of conferences and visitors to Beijing. What’s more, next week I will go to New York and environs for a week, followed by a week in Italy. It always takes a huge amount of time to prepare for these things, although the Italian trip will be as much holiday as work. Among other things I will have a chance to have dinner with legendary American composer and Rome resident, Alvin Curran, who performed in my club when he visited Beijing three years ago. That will be a great pleasure.
But here in China things don’t ever seem to slow down. Last week the inflation numbers for May came in. At 3.1% year on year, inflation was slightly higher than expected. Here is what an article in Saturday’s People’s Daily had to say:
Inflation in China edged higher in May, exceeding the official target of 3 percent for the year, amid some initial signs that the world’s major developing economy’s investment has slowed.
The National Bureau of Statistics reported Friday that consumer prices in May rose jumped 3.1 percent from a year earlier, accelerating from April’s 2.8 percent rate. To make things worse, producer price index, a major gauge of inflation at the gate of manufacturers, soared a staggering 7.1 percent.
The rapid industrial product price rises are expected to be transmitted to consumer inflation in a couple of months, analysts say. Higher inflation in recent months has stoked concerns that Beijing might hike interest rates to cool economy overheating that surged to 11.9 percent in the first three months.
3.1% CPI inflation, if that number isn’t understated, isn’t really a lot to worry about although 7.1% PPI inflation is much more problematic. Much of the price increase was in food prices, so of course inflation is worse for lower-income households than for higher income. This means that real income growth is likely to be understated for the rich and overstated for the poor. Aside from the social implications, it also has consumptions effects – the poor typically consume a greater share of their income than the rich.
As I see it there are two concerns with these inflation numbers. The first, concern, much noted, including implicitly in the People’s Daily article, is not so much the level of inflation but the trend. We have seen rising inflation all year, and although part of this may reflect a low base last year, if it continues rising it will create real problems for monetary policy-making.
Declining cost of capital
The second, and related concern, is the impact of inflation on real interest rates – for me a much bigger problem. As I have said many times before, rebalancing in the Chinese context requires that household consumption rise as a share of GDP. This will only happen I think if household income (or wealth) rises as a share of national GDP. Except for a transfer of state assets to the household sector – in effect a kind of privatization – it seems to me that an increase in the household income share requires that wages rise more quickly than they have in the past, that the currency revalues, and perhaps most importantly, that real interest rates rise.
So has this happened? So far we seem to be seeing some upward pressure on wages, although my friend Logan Wright at Medley Advisors told me yesterday that he is not sure upward wage pressures are likely to remain in place for too long. I won’t go into his reasoning, but I would add anyway that upward wage pressures are likely to be pro-cyclical. In other words we cannot count on them to drive growth since they are as much likely to be a consequence of growth as an engine of growth.
The currency, too, has been rising in trade-weighted terms this year, although this is not as good for rebalancing as it might at first seem. The rise in the RMB against the euro does not mean that Chinese demand for European goods is rising so much as European demand for foreign goods is collapsing. In other words, the appreciation of the RMB against the euro is not contributing to global rebalancing so much as reacting to a sudden and sharp increase in the global imbalances. For all the rise in the RMB, the global imbalance ex-Europe is worse, not better, and its impact must be absorbed by someone – and it is not just China that doesn’t want any part of it.
Against the two positives of rising wages and appreciating currency, real interest rates are declining. Measured against CPI inflation, real deposit rates in the banking system are already clearly negative, and measured against PPI inflation almost all loans made by banks are at negative real lending rates.
Surge in exports
In other words the cost of capital for China’s already too-capital-intensive and overinvesting economy is declining, and so worsening the domestic imbalances, and all but assuring that China’s trade surplus excluding Europe will surge (and maybe even including Europe it will still rise). In fact one of the least surprising of the “surprises” of recent months was China’s May trade figures. Here is what an article on Thursday in the South China Morning Post says:
Mainland’s exports rose 48.5 per cent in May from a year earlier and imports were up 48.3 per cent, the General Administration of Customs said on Thursday, giving the country a trade surplus of US$19.53 billion, up from just US$1.7 billion in April. The median forecast of 32 economists polled by Reuters was for exports to rise 32 per cent and imports to climb 45 per cent, with a projected trade surplus of US$8.8 billion.
Sources said on Wednesday that export growth was up about 50 per cent from a year ago, giving a boost to global financial markets as investors expressed relief that the country’s fast growing economy did not appear to be juddering to a sharp halt.
Some surprise, although I should add that I have a worrying feeling that the subsequent applause by the global stock markets may have got it exactly backwards. Net exports had to surge after the temporary contraction earlier this year, and in fact if you exclude the impact of commodity stockpiling, which overstates outflows due to consumption imports and understates outflows due to investment, China’s trade surplus would have probably been much higher. It is being artificially reduced by commodity stockpiling, which of course must be reversed at some point in the future. I expect that Chinese net exports will continue very strong this year, perhaps even taking into account the effect of the European crisis, which should be excluded from the number. And of course I expect US net imports, and with it US unemployment, will surge to politically unacceptable levels throughout this year and next, thanks in large part the European crisis and the unwillingness of anyone else to absorb it.
Why do I keep insisting on excluding Europe in judging the process of Chinese rebalancing? Because, as I discuss in an earlier entry, what happens in China in relation to Europe is not part of global rebalancing so much as a reaction to the European-induced exacerbation in global trade imbalances. The impact of the European crisis will be to make all non-European trade balances much worse regardless of what happens domestically in China, Japan and the US. So policies – in Beijing or elsewhere – aimed at protecting the domestic trade account from the effect of the European crisis can only work to the extent that some other country can be forced into absorbing the full cost.
Where is the inflation?
Still, for all the outsized trade surpluses and limited currency appreciation, over the past several years inflation in China has been fairly moderate, even though credit and high-powered money have been expanding at a breakneck pace. Why haven’t we seen more inflation in China? China has seen very sharp productivity growth in the tradable goods sector, and according to the standard economic model, any country experiencing very rapid productivity growth in the tradable goods sector will see a rise in the real value of its exchange rate.
This can occur in two ways. One way is for the nominal exchange rate to rise. In a market in which the central bank does not intervene, the nominal currency would rise automatically as demand for renminbi exceeds demand for dollars. In an intervened market, in response to surging reserves the central bank would simply re-peg at increasingly higher rates (although central banks are often very late when it comes to revaluing their currencies).
If the nominal exchange rate doesn’t rise, the resulting net current account inflows should cause excess domestic monetary expansion, which means, ultimately, that domestic prices must rise. This is just another name for inflation. A country that runs large and persistent trade surpluses and a pegged exchange rate should gradually see an erosion of those trade surpluses as rising domestic prices increase the external price of that country’s exports.
For the past decade, the rapid growth in Chinese productivity has far exceeded that of its trade partners, and has also far exceeded the growth in domestic wages. The natural result should have been a gradual but strong appreciation of the renminbi. But the level of the renminbi is set by the People’s Bank of China, and its total appreciation in the past decade has been much less than the relative growth in productivity – and I am ignoring other factors that should have put even more upward pressure on the currency, like low interest rates, subsidized capital and real estate, and socialized credit risk. As a result China has seen a surge in its trade surplus. As a share of global GDP China’s recent trade surpluses (roughly 0.6-0.7% of global GDP) are easily the highest recorded in the last 100 years.
This is all the more striking when you consider that the two previous record holders, the US in the late 1920s (with a trade surplus equal roughly to 0.4% of global GDP) and Japan in the late 1980s (0.5% of global GDP), were relatively much larger economies. The US represented more than 30% of global GDP in the late 1920s, and Japan represented 15% of global GDP in the late 1980s. By contrast China represents only 8% of global GDP today.
The huge resulting current account inflows, reinforced by net capital account inflows as foreign money poured into China to take advantage of cheap assets and subsidized costs, forced an expansion in domestic money supply far beyond the needs of the Chinese economy. Normally, such rapid money growth should have pushed China into an inflationary spiral, which would have then forced a rebalancing of the Chinese economy away from excess reliance on a trade surplus. Remember that rebalancing in China primarily means that household consumption must rise as a share of GDP, and this can occur in both good ways (a surge in consumption) or bad ways (a sharp drop in GDP growth). Spiraling inflation would probably force GDP growth to drop relative to consumption.
Financial repression
But this inflation didn’t happen. There have periods of inflation in China in recent years, and even a brief inflationary scare in 2007 and 2008, but on average inflation has been far less than what was needed to revalue the currency sufficiently.
So what happened? Why has inflation been muted – as it has by the way in other countries that followed the so-called Asian growth model, including most importantly Japan in the past several decades?
Two months ago University of Chicago economist, Robert Aliber, came to speak at my central banking seminar at the Guanghua School of Peking University. In a fascinating discussion he explained that in fact there was another possible resolution of the imbalances caused by relatively rapid productivity growth in the tradable goods sector.
He pointed out that if the nominal exchange rate is not allowed to rise, policymakers can still contain inflation by what economists call financial repression, made possible by their control over the banking system in countries where banks completely dominate the financial system. In the Chinese context, financial repression exists because the vast bulk of Chinese savings is in the form of bank deposits, and the deposit rate is set at extremely low levels.
This has the effect of transferring large amounts of income away from net savers, which for the most part consists of Chinese households, and in favor of net users of capital. Net users, of course, consist primarily of large, capital intensive businesses, real estate developers, infrastructure investors and local and central governments, including the People’s Bank of China, the largest net borrower of renminbi in China. Net savers are forced into subsidizing net users, in other words.
The consequence is that monetary growth is channeled not into household demand but rather into the production of more goods, and the inflationary impact of monetary expansion is muted. Financial repression is an alternative to currency appreciation or inflation.
The cost of low interest rates
But according to Aliber’s model, financial repression has a cost. It leads to overinvestment, asset bubbles, and rising excess capacity. By keeping the cost of capital in China very low – perhaps as much as 5-8% below a rate that would impose a fair distribution of the benefits of economic growth between savers and users of capital – it results in a surge in investment which, allied with large-scale socialization of credit risk, can lead at first to a rapid increase in economically viable investment but ultimately, if left unchecked, results in capital continuing to pour into investment long after its returns are uneconomical.
I think it is pretty clear that during the last few years, and perhaps even longer, we have migrated into a state where the correctly valued costs of Chinese investment in infrastructure, real estate development, manufacturing capacity, and government spending, exceed the economic benefits. In fact on Sunday Beijing announced measures aimed at what may be among the worst offenders. According to an article in Market News:
China’s State Council, the cabinet, has ordered local governments to stop borrowing using financing vehicles that rely solely on government fiscal revenue for their income, and to shut down those financing vehicles as soon as possible. The State Council said its policy announcement at the weekend is aimed at “effectively guarding against fiscal and financial risks.” Cumulative debt levels of local government financing vehicles have expanded too rapidly and local governments have in many cases illegally guaranteed the debt of those vehicles, resulting in ever-rising debt risks.
The economic impact of the government’s move to rein in local government borrowing is unclear. Spurred on by the central government’s edict last year to expand lending to boost growth, banks lent lavishly to local governments to finance local development projects.
No official figures have been published on total Chinese government debt from the central, provincial and local governments. However, Victor Shih, assistant professor of political science at Northwestern University in the United States, has estimated total debt at about CNY3.9 trillion by 2011, or approximately 96% of GDP.
…The State Council also forbid local governments from using their fiscal revenues to guarantee any more debt through financing vehicles. The cabinet said banks are not allowed to provide loans to any local government vehicles that can’t generate stable cash flows to repay their debts. The State Council ordered local governments to report their progress on cleaning up their debt vehicles by December 31, 2010.
Non-economic lending
Xinhua’s article on Monday was a little more circumspect:
China’s State Council, the Cabinet, ordered local governments on Sunday to better manage investment agencies amid concern that their borrowings, estimated at hundreds of billions of yuan, could cause problems for Chinese banks. It also directed banks to control lending to these agencies by targeting loans at specific projects and monitoring how the credit is used.
Chinese banks have escaped the mortgage-related turmoil that hit Western financial institutions and triggered the global economic downturn, but analysts warn that a lending boom driven by government stimulus spending could leave lenders with a mountain of bad loans.
…The State Council statement said some banks and financial organs had poor risk awareness while investment agencies lacked adequate credit management. Local governments, it said, had also broken rules. They are not allowed to use state-owned assets or government revenue to offer guarantees, directly or indirectly, for the investment agencies.
These investment agencies or debt vehicles, which seem to account for a large portion of the recent fiscal and credit expansion, have become notorious for the quality of their investing, but since these debt vehicles were created precisely to generate the level, if not the type, of growth that Beijing required, it is not clear how easy it will be to enforce the new ban. It is going to be hard to generate rapid growth without leaving on the credit spigot. This kind of thing is one of the expected consequences of financial repression.
More importantly, China’s financial repression is also at the heart of the imbalance in the Chinese economy. By transferring large amounts of wealth from the household sector to net borrowers (perhaps as much as 5-10% of GDP annually, as I explain in an earlier entry), it creates the large growth differential between national GDP and household income that is at the root of China’s very high savings and very low consumption levels.
I should add that if much of this investment is non-economic, as I believe it is, this will exacerbate even further the differential. Why? Because the total economic cost of the investment (which must include the real debt forgiveness implied by excessively low interest rates), and which will be borne over the future as the cost are amortized in the form of debt repayment, exceeds the total economic value of the investment (which must include externalities), which will accrue upfront. This means that we get more investment-driven growth today and less consumption-driven growth tomorrow.
China is faced with a difficult policy choice. It can maintain an undervalued exchange rate, it can run the risk of inflation, or it can increase the domestic costs of financial repression. How Beijing balances these separate forces will determine the pace and form of its necessary rebalancing.
China can introduce extensive social safety nets to reduce the savings rate and increase private consumption. This is a much better and sensible way to rebalance and fiscally support domestic economy in crisis times. And it is also what Japan needs to do instead of endless and hopeless build-up of infrastructure
The friction between the Chinese government and the US senate is heading for a showdown with Geithner unable to get any concessions on the currency front other than some empty words.With the Euro in such a bad state,it is difficult if not impossible for China to appreciate the yuan.
These local investment vehicles have little accountability and make loans to local industries without doing much due diligence .
Another amazing entry. Thanks!
There are elements of the financial repression that remind me a little of Japan in the late ’80s. The ability to invest cash outside of Japan was limited.
Why do the Chinese put their money into savings when the interest rate of return is so low? Why don´t they just spend it?
Splendid text. IMHO, one of your best posts ever. Possibly because, as an Austrian-based economist, I agree on most of it:)
One point though, “financial repression” is a bit of an understatement. This is more like capture or robbery in my view.
Thanks a lot.
Michael, you mentioned most of the price increases were in food. I thought, like the U.S., China does not include, food and energy in the reported monthly CPI numbers. Given the local street market prices for veggies where I live, up 10-20% in the last 90 days, I suspect the reported China CPI + delta (food + energy) would be impressive.
I understand that if I borrow money at 5% and buy a house that appreciates in value at 6%, then I’m benefitting from negative real interest rates, but if I borrow money at 5% to invest in capital equipment and the price of food goes up 7%, can the same be said?
China can introduce extensive social safety nets to reduce the savings rate and increase private consumption. This is a much better and sensible way to rebalance and fiscally support domestic economy in crisis times. And it is also what Japan needs to do instead of endless and hopeless build-up of infrastructure
It is of course to late for Japan for this kind of policy. And it will be too late within two or three years for China. Time is running short.
Once mis-allocations start producing their first nasty effects – shortly IMHO – authorities will need much more courage to shift deeply ingrained habits. The chances that this happens in adequate time are now limited.
Michael,
According to Victory Shin China suffered inflation rates of over 10% in ’94 and ’95 and inflation rates of around 5% in 2003-04. Why has financial repression become more effective as more money actually enters the system?
I don’t think that the question is ‘where’s the inflation’. The question is when will efforts to conceal it fail.
Of interest is the recent wage hike demands and strikes in China. With reported large increases, labour costs might be getting ready to explode. This is predicated not only on the agreed settlements but with an inevitable increase in the value of the Yuan. US Congress is itching do something and after being called ‘baby kissing incompetents’ you can bet that they will. The rag trade is already looking out for new sweat shops.
Why this train has not come off the rails yet is a mystery to me. Perhaps we are wrong and such national accounts identities just don’t work for China. “This time it is different.”
If this type of analysis does work then when the train does derail there will be a massive world calamity that will make Greece look like the local car wash going bankrupt in comparison.
Michael, you have become the Alfred Hitchcock of financial punditry in terms of your ability to build dramatic tension. Only this movie project is the longest running horror film ever……we seem to be only half way thru the blue script. When the white script is published they might want you to edit down a bit for the sake of time. But hold on, “this aint no disco, this aint no fooling around…”
If China follows the global trend in place at present and in addition continues doing what it already is and has in the past it will socialize the losses through domestic financial repression. This is turning out to be the big story of the early 21st century. “How the financial elite engineered global repression through the control of money supply in developed nations.”
These days if you are looking for financial freedom head for a developing nation where there is low debt a young population and an immature financial system that has not yet figured out how to control and repress.
Edward: “Why do the Chinese put their money into savings when the interest rate of return is so low? Why don´t they just spend it?”
As a young Chinese I can tell you that most of my income would be spent on living basics and paying mortgage, with almost nothing left for saving or any kind of investment. And the same happens with many of the others. Like many reports have already pointed out, the “oversaving” problem of China is mainly caused by the enterprises and government institutions rather than household, whose income has growed more slowly in recent years compared to GDP growth. With the huge amount of wealth transfer from household to producers under the financial repression mechanism that Michael mentioned above, most working class of Chinese people has contributed the most they could for domestic consumption. PEOPLE WOULD SPEND MORE IF THEY COULD GET MORE.
The quote “owever, Victor Shih, assistant professor of political science at Northwestern University in the United States, has estimated total debt at about CNY3.9 trillion by 2011, or approximately 96% of GDP” appears wrong. 96% of GDP should be more like US$3.9tn than CNY 3.9tn. So either debt number is wrong or the % is wrong. By the way, in some recent conference calls Victor Shih admitted he was double counting data and extrapolating in his calculations. His study is not that credible – please dont quote that before verifying, as it undermines your own credibility in careful readers’ eyes.
Michael,
Thanks. Another great post. If China’s investment is not efficient, then that would suggest that the inefficient parts are consumption. All the benefit of such spending is realized in the current period. We used to talk about guns versus butter in the cold war. Now will we talk about pork versus pork barrel in China?
Sergei, the idea that China’s high savings rate reflects the lack of a social safety net is a myth that fails to reflect either the numbers (the recent increase in savings has not been caused by an increase in household savings) or comparative analysis (there is no evidence from other countries, including form other Asian countries, that better social safety nets leads to lower savings). China’s high savings rate in my opinion is largely a function of policies that constrain household income growth and subsidize production.
David Merkel, I agree. In fact financial repression has been a key part of the Asian development model pioneered by Japan.
Edward Lambert, Chinese, like Americans, spend more when they feel richer and less when they feel poorer. Low interest rates make them feel poorer. I try to explain why in http://mpettis.com/2010/04/chinese-savings-and-the-wealth-effect/
Daniel de Paris, thanks very much. In fairness, financial repression has been a very successful policy for driving rapid industrialization and, with it, employment and income growth. The problem is that it runs into at least two major constraints – over-reliance on trade surpluses that in some cases become too large for the world to absorb, and over-investment which, the longer it goes on, the worse it becomes.
Crispus, food represents roughly one-third of the CPI basket. Most countries included food in CPI, but may exclude it in their calculation of core inflation. In the case of China I don’t think it would make sense o exclude it.
Dennis, I am not as familiar with the pre-2000 data, but it seems to me that both interest rates and the wage/productivity differential became much more serious after the 1997 crisis, for reasons that may be obvious – the need to generate surpluses and build reserves.
Thanks George, but one quibble. National accounting identities hold for China and for everyone else. Nothing in the analysis of the Chinese economy suggests otherwise. But I am not sure China will do anything so dramatic as “derail.” It will do, I think, what Japan did after 1990, undergo a slow, grinding period of reduced growth. I also think it may not be as bad for the world as many might believe. If anyone had asked in 1987 what the world would look like if the unthinkable happened, and Japan stopped growing for a decade, he would have been told without doubt that the whole world economy would suffer enormously and come to a grinding halt. In fact the world shrugged off the Japanese slowdown without much difficulty. That doesn’t mean it will happen again, but remember that Japan was a much larger share of the world (15%) in 1990 than China is today (8%).
Wen, thanks for your comment. I think it is important to remind people that consumption growth in China (like everywhere else) is largely a function of income or consumer credit growth.
CM, Victor Shih was misquoted. He said 3.9 trillion dollars, not RMB. He was also conservative in his estimates. Most importantly, the very people who attacked his number have no come up with almost identical numbers and the regulators are now obsessing about the very thing he warned about. His study is extremely credible and has been vindicated even among his critics (who seem to have disappeared in recent weeks).
Michael
You say that when productivity rises in China relative to productivity in say the US, one would expect the yuan to rise relative to the dollar or the exchange is fixed (as it is) that wages and prices would rise in China relative to wages and prices in the US “in other words inflation”. But why is a currency rise “good” and inflation in this context “bad”? If productivity in California rises relative to productivity in NY, then given the fixed exchange rate between these two states (other things being equal), California’s inflation would be higher than NY’s. I cant see why that is better than “inflation” China in this context. The issue I can see is that a rise in the currency benefits savers more than households (i.e the corporates with cash surpluses on the capital account) whereas a rise in wages and prices benefits households more than savers (inflation destroys wealth). But on your reasons this ought to be a positive?
Glen
Mr Pettis
Perhaps one factor that hasn’t been considered is that whilst Japan languished in the 90s, there was the US express that ran on (and over some parties), What we have now is a recovering US and an EU that looks to be walking the tightrope with buffer winds that look unlikely to cease anytime soon. To say that China’s impact would be less consequential than Japan might be a tad simplistic? Of course, lots of people are pointing to India and all other hopefuls but how those play out and whether they play out any different from the BRICET story we were all fed …well, only time can tell.
Do have a great summer holiday though one does wonder if Europe is all that much of a retreat this summer, doesn’t take too much to see a summer of strikes and unhappiness on the continent, north or south.
Saw the headlines (though not the details ) about India intending to introduce a tax on stocks and funds, just wondering if that’ll mean more crazy $ piling into the SSE? yep, crazy summer ahead.
Excellent and interesting article. One question on the Aliber model, does he include any endogenous growth from the exchange/capital control policy?
I am thinking specifically of productivity gains via a sectoral shift out of agriculture and the ‘learning by doing’ externalities posed in the rather interesting paper linked below. It seems like the model did produce productive investment for some time, even if it distorted the capital allocation process. But, now the return of those positive effects has dimished and the distortion of capital allocation appears to be increasing.
There would also seem to be a political economy element to the diemna in that by the time the financial repression regime becomes a net growth liability interest groups will have grown around its continuence, making any shift out of it politically difficult even if the economic case is generally recognized.
http://www.voxeu.org/index.php?q=node/5022
Michael I did not understand your answer (see my post # 27 and your response in 17)
My point is that if the currency is pegged, inflation is inevitable given the differences in productivity between the US and China. We appear to agree on that. But you seem to think that is a bad outcome. I don’t see why. Its good – its just another way of securing a revaluation of the yuan. There should be more wage increases, all round. That will boost household income (in the same way as a revaluation of the yuan woulod) reduce the profitability and surpluses in the corporate sector, reduce the amount of exports and allow for an increase in income. households can experience an increase in real income not only by increasing real interest rates but also but increasing wages, no?
as usual a very interesting read. i’ve got a question though, one i’ve been trying to figure out (without any luck). why does india have ~10% inflation and china ~3%? i might also include another “bric” question: why does brazil have double digit interest rates? as far as i can tell, they’re about the highest around and they’re doing quite well gdp wise.
Michael, do you have any thoughts on the upcoming G-20? Frankly, it looks like things are about to get ugly if China does not move before then.
I think what Wen says hits the point spot on – the savings is generated by firms and not being recycled back into production that raises incomes/consumption. Another word for that kind of corporate savings is excess or super profits.
Marshall Auerback has a great post discussing how this non-reinvested firm savings provides opportunities for financial engineering, control frauds, etc. You may not agree with his prescription, but may find it relevant:
http://neweconomicperspectives.blogspot.com/2010/06/should-we-tax-excess-corporate-profits.html
Also, not to toot my own horn too loud, but here is a comment from the blog posting of May 26th:
http://mpettis.com/2010/03/be-careful-of-bilateral-trade-numbers/#comment-5492
“… With regard to the trade deficit inversion – I think the fact that it took SO LONG to get there relative to the crisis time frame is more telling than the absolute amount. It will be interesting to see the rebound effects as the US economy is finally showing some signs of a pickup. My bet is that it goes back to surplus faster than we might anticipate.”
Even a blind squirrel finds an acorn occasionally. The prediction may have been close, but the reasoning was flawed – I failed to see the Euro crisis developing and how financial engineering functions to provide short-term adjustments. I don’t have visibility into the differences of financial regulations of China vs. ROW (US/Europe/Japan).
Not to make any predictions, but I don’t believe this adjustment is sustainable – however, the length of time such a buffer can be maintained is often longer than we expect.
I heard in other news that the Chinese government (or some institution) is starting to promote much greater use of credit cards to the public? Is this just a fad or a sustained effort – any comments would be appreciated.
Mr. Pettis: I have read very carefully your recommendation to China to buy euros, expressed in your May 19 th comment. I have one question about that:
Don t you think that is only a very short term solution? I tell you why I think that: a stronger euro will make the recession in Europe permanent, and a permanent recession would hurt exports in China, Japan, US, as well as generates pressures to a future devaluation in the euro much bigger than the one it needs today, I believe…Dont you think it is a very dangerous solution to try to delay the necessary adjustment in the european currency?
Professor,I would like to ask yr view whether a one time one off evaluation is preferable or the recently introduced more flexible exchange rate regime for RMB?
With the current state of euro,and the prospect of continued hot money inflow into China,what would be the real possibility of a gradual rebalancing of global imbalances?
Thank you so much
Michael,
for goodness sake please go back to a non-white background for your site. It used to be a whole lot easier on the eyes.
I saw that David Rosenberg doesn’t think China’s decision to gradually remove the dollar peg is that big of a deal, and that the deflationary pressures around the world remain the much larger factor for the global economy:
http://www.goldalert.com/stories/Gold-Price-Plummets-Chinas-Move-No-Panacea
Is the Aliber paper available anywhere on-line? I haven’t been able to google it.
Michael,
This topic requires a lot of “reduction” explicit assumtions re foreign policy responses to Chinese policy. Chinese central gvt policy space is constrained most predictably by the political structure, which affords much more capacity for cost transfer to less powerful segments (maybe “classes”). Economic welfare (not be be confused with a satisfactory basic livelyhood) has never been a priority and despite this (or perhaps because) there has been considerable wealth creation among the ranks that count. The second level of possible constraints is international and China faces no realistic threat of coordinated foreign activity that would shrink the policy space as determined by domestic factors.
China’s government may well have become be the first of a very large economy that operates like Marx’s committee organized to serve the bourgeoisie (without a conservative or socialist opposing force) and the experience in other Asian countries with (less extreme) versions of that model seems encouraging for its practitioners.
But there may be -China’s spin officials are never idle and move with the times- rhetoric around the consequences of pegging and domestic sterilization that might look like a debate with some economics content. That may then result in rich academic debate in the West, no doubt to the amusement of the ledership.
web:
1. Middle Kingdom offers 5% five on savings (but is now 6/10 only
studying deposit insurance- it can informally support banks in other ways),
more than the z.i.r.p. in JP / West
2. as in parts of the EU the crown/ state owns land, builders merely rent it
3. Jim Rodgers, K Rogoff see a housing bubble, S. Roach says no bubble
4. Like JP, state planners are trying to keep up jobs/exports
5. They could be building air bases overseas but now are not,
merely pouring concrete into condos to sell to foreigners. . . .
Financial repression in China leads to inefficient use of capital . The reason is the suppression of inflation. This process is very similar what happened in the former Soviet Union, so rapid liberalization of the Chinese economy very clearly fit into the “Madison’s tables”.