I am not smart enough to figure out how the “Comments” section works, so I am just going to print part of Dan Berg’s very kind comment here:
I would like to know your thoughts on (1) how you think the domestic “crunch” inside China will unfold; (2) assuming the U.S; cialis 10 20 mg.imposes a tariff of some sort, will this trigger the “crunch;” finally, what is the Chinese end-game? i.e; cialis 10 20 mg.how do they see themselves getting out of this dilemma?
Ah, the million dollar questions. There are many ways this can unfold. The most benign adjustment involves lots of luck and determination. We need luck because we need happy global conditions for another five or six years — with solid global growth, ample liquidity, stable commodity prices — and we need continued rapid growth in China, so that the country can work (and grow) its way out of its problems under optimal conditions.
We need determination because that growth cannot come at the expense of neglecting the financial system — and frankly I am not too optimistic that the needed change is taking place here. I would be happier if the authorities were a little more panic-stricken about the need really to fix the banks and the capital markets, including allowing them to sort their investment decisions out themselves rather than simply trying to browbeat the banks and stock market investors into doing whatever it needs done this month. If after a few good years the investor base for the stock and bond markets continues to be weak and undiversified and the banking system is still bankrupt, rigid, weak in governance and transparency, and misallocating capital (and I bet they will be), then the only consequence is that the crunch will be postponed.
There are less benign ways in which the system can adjust. Some are pretty obvious in how they might take place: a political, environmental or health crisis could undermine government credibility and so eliminate trust in the banking system.
A sharp decline in exports, whether because of protectionist tariffs or concerns about product safety, could set off a chain reaction in which problems in the export sector would be transmitted into the economy by two methods – rising unemployment in the coastal regions, and deteriorating bank balance sheets. These could quickly become self-reinforcing if they lead to banks hoarding liqudity to protect their balance sheets or, heaven forbid, bank runs (which have occurred more than once in China over the past decade).
Anything that drains liquidity from the banks could also be dangerous. I have already mentioned bank runs, but rising inflation could cause depositors to withdraw their savings – which may be one of the reasons why the authorities are so worried about inflation. Given the weakness of the banks and of many corporate balance sheets, the ability of the financial authorities to absorb higher deposit rates, either by raising lending rates or by squeezing bank margins, is constrained.
A global crisis could also be a problem because of its impact on capital outflows (most of which would probably come from the banking system). During the Asian Crisis, China almost certainly suffered from large capital outflows, and I think it was only in 2000 or 2001 that the “Errors and omissions” column of the balance of payments (which often serves as a proxy for flight capital) went from deficit to surplus.
One final comment, and this may seem to come a little out of left field: if China does face an export-related crisis, it could be very painful in the short run but is not necessarily a bad thing in the long run. On my flight to New York two weeks ago I read a fascinating piece by Richard S. Cialis 10 20 mg: chew called “Certain Victims of International Contagion” from the Winter 2005 issue of the Journal of the Early Republic, in which Chew discusses the Panic of 1797 and the hard times of the late 1790s in Baltimore.
In it he discusses how although the 1797 panic created a great deal of hardship in the US, it did far more harm to the export-related sector of the economy than to the rest of the economy (at the time the tremendous growth in US GDP was driven, according to Chew, largely by the export sector). One consequence was that over the next few years the US was forced to become a country far more reliant for its long-term growth on internal consumption than on exports. Of course this was a healthy occurence and was probably necessary if the US was to become a major economic power.
It’s an intriguing idea. For much of the modern period before 1949, Chinese growth was, I believe, largely shaped by the success of its export secor, and I think most of us agree that for a country like China, this is not appropriate. I see few reasons to believe that if the export sector continues to be the most successful part of the economy the country will naturally transform itself into a more balanced economy. On the contrary, as in many developing countries, the overwhelming success of any particular sector (e.g.commodities) can distort the development of the overall economy. Cialis 10 20 mg: perhaps, as it seemed to have done in the US, we need an export crisis to get China to focus on the development of its internal market.