This year to everyone’s surprise the PBoC failed to announce 2011’s lending quota. Instead it announced a series of new polices aimed at monitoring the banks. According to an article in Thursday’s People’s Daily:
The People’s Bank of China (PBOC), the country’s central bank, will check credit and capital levels of commercial banks each month to determine the reserve requirements for individual lenders, viewed as a measure to strengthen control over banks’ monthly credit.
The China Securities Journal reported on Wednesday that banks may have to set aside more reserves if their capital-adequacy ratios cannot meet the government-set standards, citing an anonymous source close to the People’s Bank of China.
“The key point of the differentiated reserve requirements lies in how important the individual financial institution is to the overall economy. Apart from systematic importance, its capital adequacy rate, operational stability and other factors will also be taken into account,” the source said.
There is a lot of debate about what all this means. In part, of course, it is aimed at the CBRC, with whom the PBoC has been rumored to be conducting a so-far losing turf battle over control of the banking system. By putting into place a complex monitoring system, then, the PBoC may be trying to reclaim priority in setting commercial bank policy and to keep the banks from gaming the system.
But would I have taken seriously a quota on new lending? Not really. It seems to me that if Beijing wants GDP growth in 2011 to come in at the expected 9%, the amount of new investment in China – which is determined in large part by the banking system – is really not something they can decide today. It is going to be whatever it needs to be given developments in household consumption growth and the trade surplus.
This is why I argued a few weeks ago that at whatever level the new loan quota was set, I was not going to think of it as constraining new lending in any way. Either the loan quota would be adjusted (upwards, almost inevitably) or more new lending would occur outside the banks’ balance sheets, as it did in 2009 and 2010.
Investment this year I suspect is going to be extremely high, as high as in 2009 and 2010, because it is only with very high levels of investment that we are likely to manage GDP growth rates high enough to keep Beijing happy.
So my guess is that 2011 will be yet another year in this increasingly strained investment-driven party. Chinese GDP growth will continue to be the envy of the world, while those of us who worry about the sustainability and quality of the growth will worry more than ever. The banks will probably rush to expand lending in the first quarter, out of fear that they may be restricted later in the year. And of course we will all be watching the trade account very closely.
On the topic of trade I am going to put on my broken-record hat and say what I have been saying for two years. Forget about momentary thaws, feel-good speeches, and pious posturing. The global trade environment is not about to get better. All of the distortions and strains remain, and the crisis in Europe is putting more pressure than ever on a resolution.
Why am I such a pessimist? Well let me limit my response by citing articles in just one newspaper last week.
On Tuesday, the Financial Times reported that the central bank of Chile, a country not known for its currency intervention, was going to force down the value of the peso to protect is external account:
Chile is set to become the latest country to join the “global currency wars” on Tuesday after the central bank said it would spend up to $12bn this year to curb the peso’s strength and so help exporters from one of Latin America’s most open and best managed economies.
…Felipe Larraín, Chile’s finance minister, said: “We are supporting domestic producers, our exporters, in the farm as well as industrial sectors who depend on exchange rates. We think it is a well targeted step that is going to have an effect on the exchange rate.”
On Thursday it was Brazil’s turn, again, to intervene. The FT article reports:
Brazil’s currency, the real, weakened for the third consecutive day against the dollar on Thursday after the central bank announced curbs on short selling. The measures, aimed at halting the real’s further appreciation, give teeth to threats from the new government of President Dilma Rousseff that Brazil will act to protect the competitiveness of its domestic industrial base from exchange rate fluctuations.
Meanwhile on the same day the Financial Times reports that the IMF is getting very worried:
The International Monetary Fund has called for global guidelines on managing international capital flows, a sign of rising tensions as governments impose blocks on cross-border movements of speculative money.
…“In the aftermath of the global crisis, and especially now with resurgent capital flows requiring a considered policy response, it is not tenable for the fund to remain on the sidelines of a debate so central to global economic stability,” the report concluded.
On Saturday the Financial Times wrote about the dilemma that other countries, especially developing countries, are forced into because of Chinese currency policies:
China is not making life easy for anyone. In just a week the renminbi has given back 17 per cent of its rise since June, when Beijing loosened controls. It is now just 2.9 per cent stronger than in the summer and going in the wrong direction.
A weakening Chinese currency is one of the few things that could unite Republicans and Democrats in Washington. It is also sure to worry those faced with the increasingly difficult task of managing other emerging economies, for whom China is the main competitor.
The global story, in other words, is pretty consistent. Every country is attempting to gain a larger share of weak global demand, or at least to protect its share against predatory tactics elsewhere. Countries that can intervene in their currencies will do so – many of them nonetheless insisting that while their own currency intervention is not harmful to the rest of the world, currency intervention by other countries is harmful to them.
Countries that cannot easily intervene in the currency – mainly the US and Europe – are faced with a very difficult prospect. Either they must give up the hope to rebuild growth and employment based less on consumption, and more on production and manufacturing, or they must do “something else”. What else can they do?
Europe is doing something, albeit very unwillingly. On Friday the Financial Times warned yet again about Portugal:
Portuguese equities and bonds tumbled on Friday, forcing the European Central Bank to intervene to steady the markets as investor fears rose about the ability of Lisbon to fund its public debt. Portugal’s cost of borrowing, or bond yields, jumped to euro-era highs while some of the country’s banking stocks slumped to 17-year lows amid hardening views in the markets that Lisbon will have to follow Greece and Ireland into using bail-out loans.
The rest of Europe doesn’t look a whole lot better. That same day the Financial Times reported:
Eurozone unemployment remained at record levels in November, dashing hopes that Europe’s nascent economic recovery would filter down quickly to its labour market. The jobless rate in the 16 countries then using the euro was stable at 10.1 per cent, the highest level since the creation of the single currency in 1999, according to Eurostat, the European Union’s statistical arm. It also unexpectedly downgraded estimates of the bloc’s economic output for the third quarter of 2010, from 0.4 per cent to 0.3 per cent.
So peripheral Europe is resolving its external imbalances more or less by a collapse in net demand. With high and rising unemployment, and an increasingly difficult refinancing environment, we can pretty much expect European deficits to disappear, even while European surpluses (mainly German) surge on the back of the weak euro and fiscal tightening.
So that leaves the US. Either it can accept rising trade deficits as it absorbs the employment problems of the rest of the world, or it can move to intervene in trade. I don’t know what it will do, but I am pretty confident that the domestic debate will intensify. One way or the other the crisis in international trade is far from over. In fact the day after I finished this entry the Financial Times, again, had a new headline: “Trade war looming, warns Brazil.”
This is an abbreviated version of the newsletter that went out Monday. Academics, journalists, and government and NGO officials who want to subscribe to the newsletter should write to me at chinfinpettis@yahoo.com, stating your affiliation, please. Investors who are clients of Shenyin Wanguo Securities (HK) will already receive the newsletter. Investors who are not clients but who want to buy a subscription should write to me at that address.
Dear Dr. Pettis,
Thanks a lot. Even after “reducing” the content, your blog continues to be a must.
I still miss Dr. Setser (from who I knew about you) but it is great to have such a source of information and opinion as your blog.
Have a happy new year,
Ignacio
Professor Pettis,
I don’t understand why you said the US cannot easily intervene in the currency? Or do you really only mean intervene in the direct sense like China trading in the currency market?
I actually think the US has the strongest hand in this currency war. There are a couple of reasons for my view.
First, I think the Fed’s QE program is a very powerful tool (admittedly an indirect tool) for affecting the dollar exchange rate. Given the differential in economic performance of the US (slow recovery) and the developing countries like China (starting to overheat), it would be very difficult for China to keep printing to match the dollar without risking inflation getting out of hand. QE2 is brilliant.
Second, we are in a world of excess supply. Whereas, the US is still the world’s biggest consummer. “The customer is always right” applies here. The US doesn’t actually have to directly manipulate the dollar. It only needs to make some creditable threat with its trade policies. There are plenty of other countries who would love to sell to the US. In a trade war, while everyone loses, China will be the biggest loser. This is particularly true given China’s political structure.
Third, inflation in China has the same affect on trade imbalance as RMB appreciating against the dollar. In other words, trade imbalance will adjust regardless of the direction of RMB.
China is in a weak position in this fight. It is ultimately all for the best. This situation will help China move forward with reform. China also knows this. It knows it’s excessive reliance on export for economic growth is not long term sustainable. It just wants to slow down the rate of change to smooth out the shocks to it’s economy. This is ultimately a tug of war over the “rate of change” to the global imbalance. However, it is not a war over “what the changes will be”.
Of course this is blocked in China, but for those of you with access, this is a somewhat droll take on a perspective that is gaining ground here in the U.S.: http://www.youtube.com/watch?v=XnAT7FZpmg0&feature=player_embedded
It seems that Chinese surpluses are putting the greatest pressure on European employment for now. But without Chinese end demand for cars and homes would the situation be any better? Demand for big ticket items is falling in most parts of the world it is only with cheap lending that the consumption levels all over the world are being sustained
Thank you for continuing to post here.
Australia seems completely unconcerned about trade wars or the rising Australian dollar. Indeed the strong AUD is seen by local commentators as helpful in controlling inflation and reducing the need to raise interest rates.
The commonly held view in Australia is that China will grow at 10% forever, and China’s insatiable need for Australian iron ore and coal will grow even faster. No-one in Australia is concerned about unsustainable levels of investment in China.
Meanwhile, Australia’s non-resources exporters wither and die. Are we mad to place so much faith in continuing demand for our resources from China?
It appears that the PRC is and will continue to be unresponsive to the concerns of essentially the rest of the world in terms of trade policy. This is understandable from the perspective of the PRC’s leadership, as their primary objective is to remain in power and continuation of current policy seems the best way to achieve that objective.
What can the rest of the world do to offset the result of the above? The indoctrination of policymakers and the public regarding the virtues of “free trade” over roughly the past 30 years in Western countries means that setting up tariffs and trade restrictions against Chinese products would be an admission that “free trade” has been a failure. The logical conclusion from this would be that policymakers and politicians who created and advocated for “free trade” need to be replaced. Therefore such a policy reversal is unlikely to come from current leaders. In addition the status quo has been highly profitable for elites both in the West and in China, which means that these groups will be strongly opposed to policy reversal, decreasing the chance that this will happen.
Replacement of US political leaders with individuals who will respond to China’s mercantilist trade policy probably won’t happen without a much greater drop in the standard of living for American workers.
I have no idea how this ranking was done, but congratulations nontheless to the ranking as “the 16th Most Influential Blogs in Financial Media”.
http://www.minyanville.com/dailyfeed/the-20-most-influential-blogs/
The actions of all the major players (US, China, EU) are “unsustainable.” However, they continue to continue (to continue, etc). Certainly, US deficits, EU protection of banks, China malinvestment will have to end “some day” but which day?
I wonder if we are not testing the world economic and political system to destruction. When it fails will it do so in a manner which we can recover from?
One feels as if we are passengers on a runaway train as it approaches a hairpin curve. All we can do is watch helplessly. This is a new situation for those of us raised to believe that we controlled our fate. Perhaps we should be returning to the mindset of our ancestors in that whatever happens is “God’s will” and we must just accept it as we are powerless to affect the outcome.
Regardless, thanks for your insights, Dr Pettis. Interesting as always.
I wish Brad Setser was still blogging. It would be very interesting to see how much USD assets China has purchased since the announcement of QE2 or how much Euros since the recent turmoil. After all the consternation regarding the value of the USD from China it would be only logical to assume that they should be divesting.
The TIC data is interesting. Look at China, Japan and the UK (assumed proxy for China). Japan looks to be back in the game – Oct 2010 purchases 26 billion.
http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/snetus.txt
http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt
Sillythings,
You have to look at things not just from the economic but also from a political point of view. Politically there is a growing pressure on the Fed, and while its hard to imagine the Republican Congress buying into the Tea baggy rhetoric of abolishing the Fed the fact that Ron Paul is in the chairman of the monetary policy subcommittee is not welcome news.
At the same time, the Republican party is simply unprepared to articulate a pro-tariff policy. Nor are those democrats that have a say on economic policy. Look at how painfully Geithner’s face contorts every time he has to discuss China and the RMB and the way he always dances away from the accusation that China is a currency manipulator.
From a policy point of view, both political parties in America completely and thoroughly bought into the free trade cool aide and they will only deviate from it on very specific products in very specific times for short term political goals [like Bush's steel tariffs] or whenever one industry lobby group achieves momentary victory [which will then be rolled back by some other industry lobby group.]
To the Gentlemen that stated about this countries this, that countries that, another countries combination,….well you left everyone else out of that puzzle of similitude.
The understanding that this is an organic whole, is what undermines the more common thesis’ that one finds on the more common purveyors of knowledge, where the beliefs, constructs, patterns of delusion may differ as to specifics, they do not differ as to impact, which is a narrow, uneducated, limited, often parochial, working towards the parochial, upon tenants, where the emotions that existent will from fear of the present to the future, anger at others, excitement at this or that, while all are equally deceived by the experience of repetition of the belief constructs, regardless as to the opposing nature of these things.
Regardless, in your very limited discussion of the big three, you miss the relations between the rest, the three, and between each other. This is why clarion calls of this or that are so misplaced, as the highlight to the ignorance, perceived new movements that belie longer term movements, the value and purpose of such, and further the range of emotions exhibited by the different constructs, can undermine the natural primacy, in the human as the political, or decision-making, animal, in exerting his interests, where natural disturbances, can be mis-con(strued)(structed) as the (outcome(s)) of (other people/countries actions) highlighting a potential undercurrent of (xenophobia) which can run parallel and unnoticed within a persons weltanschuang. The age old tenant, to watch what you eat, holds importantly in this respect.
Lorax,
You are right that Australia is in a risky position, and that position is not really helped by the lack of a proper government (the current one can only do caretaking work and hope that it will gain some kind of incumbency p[remium for the next election). But even with greater government capacity, what can they do? Discourage exports to China? Change the brief of the central bank (currency instead of interest rate policy; and then, how? )? There is of course one very good way to deal with that situation, but that is off limits for both parties, and that is to raise the GST to at least 15%. Further (slightly less controversial) raise the petrol excise tax, reduce corporate tax (but with a strong mining super profits tax) and gradually reduce income tax in the lower brackets, while also phasing out silly subsidies to families etc). No need for subsidies to silly industries like car manufacturing, mass textiles, furniture etc. All of that you can find in conventional advice, raging from the Az treasury to IMF and OECD. But try to do this (a) when the people are blissfully ignorant of the threat and (b) in an adversarial political system completely devoid of meaningful political philosophies and captured by unions, rent seeking businesses and developers.
But maybe also this governance vacuum has a benefit too: as long as politicians compete only on (economically) irrelevant issues like boat people, indigenous people’s rights, status and recognition and parallel issues in the gender field, nothing will change for the worse and the Canberra bureaucracy is quite capable of governing well without political interference.
MIchael,
It is hard to disagree with your assessment and the implications are indeed that the near future will be extremely contentious, either leading to some kind of international compromise (but the price of anything meaningful is probably out of reach for the political elites of China, Europe and the US, so any result of compromising would not be credible) or conflict. Therefore wise national leaders should prepare for conflict and, especially an optimal position in the post-conflict world that will arrive some day. For Germany and Japan that would mean not getting involved and not spending resources on assisting players who are unlikely to return the favour later and, especially, improve their own competitiveness and that of their economic client states. Also, in both these countries (less so in their client states) there is traditionally public support for competitiveness (“sacrifice”) over consumption (“indulgence”).
Maybe people interested in speculating about China’s immediate economic future (even the leadership hardly do more than that given the highly stochastic environment a developing China ends up in and for which the political system is unsuited they may be unsure of the challenges, to what extent these challenges are feedback from their own actions, and their own capacity to control party, state institutions and people towards objectives that they may not be able to select, given their groups’ collective prejudices) should read a little about an earlier period of economic conflict and its effect on governance in a country with a mixture of modern and anachronistic elements in its governance. We are at the end of what a poorly educated genius (Deng) was able to set in motion from a position of utter failure of all alternatives and nothing to lose. The next generation of Chinese leaders have a lot to lose and are not geniuses. And the country has far more antagonists than ever before. My parallel would be Japan during Hirohito’s regency while his father was still alive (roughly the 1920s) when the imperial function was quite weak, probably the most anarchic period in Japan’s modern history until the end of Koizumi’s prime ministership. Why: an upstart economy that had begun to go beyond being a welcome provider of cheap goods and threatening to upset the political economy of the “atlantic” establishment, with severe political flaws: an irrational ideology in which the main icon (the emperor) himself did not believe spiritually dominating government in a flawed model of power sharing between limited democracy, the imperial power and an highly independent military. I do not have to point out the elements of comparison here, but read for simplicity’s sake State Council for civilian government, the CCP for the emperor-function and the JIN and JIA for the PLA and the Military Commission. The logic of collective action predicts that under external stress and facing internal obsolescence, this trio gets reduced to a duo, dominated by the military and big business. probably not what the US wants either…
Michael,
An entirely different comment: good to see you highlight that these measures are the PoBC’s, a bulwark of westernized technocratic thought. It is questionable what it could achieve and for what audience it is playing here. Maybe it is part of the puzzle that the Chinese state banks find in Basel III and maybe the PoBC wants to project the image that those banks are actually being run with an eye to capital adequacy conforming to international standards (which are increasing while the banks are probably already not in compliance with the older standard and if lending goes up further that will mean even more of a capital deficit, not to mention the mess when the development music stops). If the PoBC is simply trying to do PR with a bit of a scare to dthe domestic audiences, I guess nobody would blame them and their careers might be safe under the new brooms?
Michael, I have enjoyed reading your site for the last couple of years. Your insight has always been valuable to my own education in the matter of economics. Wish you well and will continue to read what you post here. I would like to read your entire posting, but I hate to say that I don’t keep up with email too well and it would merely get lost in the spam. Thanks again.
Prof Pettis
Nice to see an update in the new year. No doubt easy credit will again create the same bubble scenario but with more pessimism on the back of the euro scene washing over the world, not really sure if demand is really going to come back in any sensible way. As for a “collapse” in european demand figures, probably, but the question is demand for what type /class of consumption. Discretionary and luxury spending may be affected but more basic consumption is probably not going to be as affected. Of course buying local would be an ideal thing, question is would it make financial sense to the local consumer whatever the populist background noise may be.
Stagflation looks likely to make some comeback in the headlines at least, especially with the natural disasters increasing the squeeze on an already tight supply situation on the commodities scene and the less than healthy economies out west. Of course that will make the two trenches of economic policy dig in harder.
Much as it sounds anachronistic, with the combination of economic factors, wealth gap and simmering anger and politicking, won’t be surprised if camps on either side of the political spectrum cash in on the situation, we do live in interesting times, more’s the pity!
Happy New Year Professor!
BTW, will you reply to comments as before in this comment section?
Perhaps a lone voice that’s about to be drowned out in the debate? http://www.nytimes.com/2011/01/18/opinion/18wu.html?ref=opinion
@Glen
be careful what you wish for, Setser’s return may mean greater disillusion with the system than ever(not that that isn’t likely) since he’s likely to return to blogging only if the official position is history. On a different note, think most attention is focussed on the eurozone saga that looks destined for reruns ad nauseum.
Houhui, I am traveling all this week so it is tough for me to respond to comments, but I do plan to do so when I return to Beijing.
I thought I should pass this on to you Michael, and the readers of this blog. At the time of the bursting of the US housing bubble, there was much discussion on how could banks be so careless. A look at the recent comments and actions of one of Canada’s largest banks may by enlightening.
Ed Clarke, CEO of TD Canada Trust, has been pleading with the the Federal Government on change the maximum amortization period of Canadian Mortgages from 35 to 25 years.
In December, the TD’s Ed Clark was prominent among bankers calling for such tightening. He seemed to be pleading, “Stop us before we lend again,” but his message was really that when government insures mortgages, bankers can’t afford not to extend them. Government policy creates a classic “prisoners’ dilemma,” where bankers are led to make decisions that are individually rational but systemically suboptimal, even downright dangerous.
Read more: http://www.financialpost.com/news/Soft+landing+housing+from+certain/4123310/story.html#ixzz1BQ5M1snD
What is interesting is that at the same time TD encourages customers to register 125% of their home’s value on title, which is being marketed as a way to make it faster and cheaper for them to borrow more money from TD in the future, if their home goes up in value.
And Judy, Dean Baker has a look at Wu’s arguments…
http://www.cepr.net/index.php/blogs/beat-the-press/prices-dont-matter-the-bizarre-case-against-lowering-the-dollaryuan-exchange-rate
Another excellent, insightful, and educational post. Thank you for sharing this with us readers.
Good to hear Prof.!!
I see today that the CBRC has thrown a spanner in the 2011 lending works:
http://www.china-snap.com/?p=68#more-68
with an announcement on off balance sheet lending…do you think this can be true?
Most excellent post.
I am again put in mind of an old thought – your stated opinions, and your current position, seem to bely the impression I get from the U.S. press about the degree to whcih open debate is censured in China.