The first one talks about a new plan to give the US Federal Reserve 'extensive powers over all large US financial groups' and create an 'independent body to police risks across the financial sector'.
The second announces that China's 'foreign exchange reserves reached $2,132bn after rising by $177.9bn in April to June, including a record monthly build-up of $80.6bn in May'.
And so, Chinese currency manipulation is going on at full speed to ensure Chinese exports remain artificially cheap, and the Fed now has even more power to make sure US interest rates remain artificially low. Will that get us out of the current crisis? No. It will only allow China and the US to pretend things are getting better, until the next crash.
They just can't help it. If China floats the Yuan, more Chinese people will lose their jobs in the short term. If the US lets interest rates rise, more Americans will default on their payments and lose their pants. And since both economies are regulated by politicians and not by a free market, short term is the only thing that counts.
And since both economies are regulated by politicians and not by a free market, short term is the only thing that counts.
I think you may as well have said "since both economies contain people, short term is the only thing that counts".
Thanks, Captcha. It's not the same thing. Politicians, by definition, are driven by short term goals and trends in public opinion.
If it was up to the market, for example, China's manufacturing industry would have been slashed, lots of people would have lost their jobs, and then they would gradually find work in other fields, based on real market needs. The intervention of politicians, however, means that more investment is going to these industries, and that instead of becoming smaller, they are actually getting bigger. This means that, in the short term, more people can maintain their current jobs and the government can remain popular. But in the long term, it means that more public resources are being invested in industries that are not based on real market demand, and that more people are being trained in professions that are not necessary (some of them even skip high-school and go directly to work in a factory!). So, in the long term, severe damage is being caused.
People are never the problem. If they are given the freedom to act, their choices bring about an order that is beneficial to most, at a low public cost, and without the need to use violence. Have you read I, Pencil?
I'm been reading a lot on China and believe they are creating another bubble. I have a few questions. How long will the PCC be able continue this pump priming. If they continue at their current pace, here are the calculations:
If credits continue to grow at the rate of 30 odd percent vs GDP growth of even 10%, we will see a credit to GDP ratio of 190% by year end of 2010. In the US at the peak of the credit bubble this was 210%. in H1 09 there were 7tn RMB loans extended, vs economic expansion of slightly above 1tn. It took roughly about 7 yuan of credit to generate 1 yuan of GDP. At the peak of the credit bubble in US this was 4.5
A recent Bloomberg article suggests that China is locked in to loose liquidity for the net several years. Here is the excerpt:
"The Shanghai stock market is already up 75% this year, while the national average price of residential properties jumped more than 20% in the first half, Mingchun Sun, Nomura’s chief China economist, noted in a report.
Liquidity conditions were at their loosest in two decades and Shanghai’s price/earnings ratio was well below its historic peak.
“In other words, we believe a bubble is inevitable and will only grow bigger, possibly exceeding that of 2007,” Sun said.
All bubbles burst, messily, so why don’t policymakers act now?
One reason, Sun said, is that many investment projects launched by the state will take three to five years to complete, requiring additional bank financing in 2010 and 2011.
“Therefore, a sudden and aggressive tightening would not only face substantial resistance from local governments, but may also delay the completion of some of the projects and bring immediate and unnecessary non-performing loan problems to banks,” he wrote.
So monetary conditions are likely to stay loose until 2012 or even later, he said...."
http://www.forbes.com/feeds/reuters/2009/07/17/2009-07-17T102607Z_01_SP55950_RTRIDST_0_CHINA-ECONOMY-POLICY-ANALYSIS-REPEAT.html
One to two years of bubble growth is all China will be able to get out of its pump priming. Michael Pettis compares it to Japan's 1987 economy crash where they enjoyed another 2 years of bubble growth before the their house of cards came down. Derek Scissors gives China only one year:
http://www.heritage.org/Research/AsiaandthePacific/wm2546.cfm
He describes China's current surge in bank loans as an "utterly unsustainable pace for lending and indicates severe damage to banks. With the old ratio, banks were at best holding their own in terms of bad debt. With the new ratio, tens of billions--and perhaps hundreds of billions--of dollars of loans will not be repaid. Official denials will flow like water, but the simple numbers are inescapable: China's economic recovery is being constructed on the back of a savaged banking system."
Do you agree with the above information?
I believe China's dictatorial state-corporatist model will ultimately be proven a failure.
I see a lot of problems with it socially, politically, and economically.
I appreciate your honest feedback.
Meant to say CCP above. It's late.
Hard to submit comment. Many failures.
Hi Mike. Thanks for the interesting and elaborate comment. There are different views on the details, but in general - yes, managing a large scale economy is not a viable long-term strategy. The need to focus on short-term results and avoid any (necessary) pain exacerbates this even mote. Bottom line: Not going to work. But might take a good while until that becomes clear to everyone and the CCP still has a chance to mend their ways, although it's difficult to see how they can manage that without causing some serious unrest.
I have been writing about these issues since last year, when all the cheerleaders were going on about how much cash China has and that the CCP will buy their way out of this crisis. These days, more and more people realize how fragile China is, although most still don't. In addition, China's role in creating this crisis is also become apparent to more pundits.
In the mean time, China is still the best place to make money, since the government and foreign investors are pouring in everything they've got.
By the way - China 2009 is very different from Japan 1990. During Japan's "lost decade", employment remained relatively high, average incomes remained relatively high, and Japan's social security, health, and education networks continued to perform. If China enters a lost decade, the consequences - to them and to the rest of the world - will be far more dramatic. China cannot afford to stagnate for ten years.
Another question for you. Will China be able to change its economy toward internal consumption and away from the export driven economy that it has been? From what I read, they are actually intensifying their export economy and not making any significant changes toward internal consumption.
China was told today that:
"the U.S. recovery will be "a slower recovery than what the Chinese are used to" and that therefore China's economic growth "isn't going to come from exports to the U.S.," said David Loevinger, Treasury's coordinator for the bilateral talks.
...But China needs to understand that the days of easy credit and a housing boom driving U.S. consumption were over, said Loevinger.
"It's not so simple as putting in place a big fiscal stimulus, a big monetary stimulus, to tide each economy over for a year or two, and then we can get back to the old days, where China was exporting into a consumption boom in the U.S.," he told a group of Asian-American business leaders in Washington.
China will "need to depend much more on home-grown growth ... particularly consumption-led growth," added Loevinger.
The United States also intended to discuss in the July 27-28 talks investment in China's service sector to help create jobs to soak up surplus rural labor, he said.
Washington would also repeat its recommendation that China adopt a more flexible exchange rate policy that would lead to a stronger Chinese currency, said Loevinger."
So you have a needed change in China's economic model and a change in their currency control. Is this feesible in the next 2 years with the CCP?
Thanks, Mike. IMHO, the necessary transition to a consumption-based economy will take at least half a generation even at best-case scenario. In the mean time, they will have to rely on government investment. They can do that for a while, but ultimately rely on demand in the US picking up again.
Since US is not likely to consume as much as it did in 2007 any time soon, and the Chinese are now investing in additional industrial capacity, it might be a long and rough ride.
Michael Pettis has an interesting - and gloomy - article about China's ability to buy its way out of a prolonged crisis.
China's growth is already based 70-90% in domestic consumption. Not exports.
Simply putting the value of net exports and then dividing it by nominal GDP is pure idiocy by American pundits.
Captcha: as far as I know, you are not correct. By a large margin. Even without government spending, a big chunk of GDP still depends on exports and FDI. Indicators used by American pundits are indeed not too effective at gauging China's development, but saying that 90% of China's growth is based on domestic consumption is simply not true.
In fact, consumer spending as part of the GDP has been decreased during the past year, in line with a dramatic increase in government spending + inflow of hot money from abroad who rushed into China's "unscathed" economy.