Often enough I find that when people want to “prove” to me that China will continue growing well this year they simply quote government statements saying that China will grow by at least 8% in 2009. There is a touching faith, especially sometimes in China, in the strong connection between expert projections and the final reality, but as someone who actually keeps copies of “the year ahead” January editions of The Economist by my bedside to ward of insomnia (I am currently re-reading the January 2006 edition, which is a lot of fun), I think expert projections are little better than garbage. It is not just that experts get it wrong an awful lot (and they do), but rather that most economic projections ignore the highly pro-cyclical or counter-cyclical (usually pro) processes imbedded in balance sheets, and these usually force wide variations from expectations.
For two years I have been arguing that a US slowdown would cause a very rapid slowdown in China, but I hated projecting GDP growth because I think China’s financial system has hidden but highly pro-cyclical structures that make it likely to overshoot dramatically one way or the other (as it certainly did in the good years). All I was very confident about saying was that reality would be much worse than whatever the current expert projections were. In spite of my pessimism, nonetheless, had someone told me in late 2007 that 2008 fourth quarter GDP growth might approach zero, I would have rejected this projection as implausible.
Well, now we know that it may very well have been true. Year on year growth was 6.8%, and we aren’t given the numbers that allow us to back out the quarter on quarter growth, but most of the estimates I have seen range from negative 1% to positive 3%.
So what will happen in 2009? Of course I don’t know. The “everything but the kitchen sink” strategy that I wrote about a few weeks ago, in which an increasingly worried government throws more and more fuel into the recovery program, suggests to me that there are two possible outcomes. On the one hand the government might fail to do much – or better yet they may decide to use the crisis to force a transition that benefits China in the medium term – in which case GDP growth will slow significantly, and fall well below the roughly 7% consensus that now seems to dominate.
On the other hand the government may throw so much fuel into the fire that they actually are able to get the 7% growth that many expect, but this is an extremely risky strategy. If the world recovers by the end of this year and the global economy races off again, it will look to have been a brilliant strategy, and Chinese policymakers will be feted around the world for saving China from the crisis. But if the world recovery takes a few more years to materialize, which I think it will, China will be worse off next year than this year. Government debt levels – especially contingent debt such as non-performing loans in the banking system and hidden provincial and municipal debt – will be much higher and provide much less room for expansion, and credibility levels will be much lower.
In my opinion, for what it is worth, it probably makes sense for the Chinese government just to assume the next several months are going to be disastrous, and rather than try to hold things off, which will only make it worse in the longer run because it will distort the adjustment process, they should try to accelerate the contraction of those industries that are destined to contract anyway with the collapse in global demand, and work on providing aid for workers who are going to pay the cost. I admit I may not be the brightest guy in the world in making political judgments, but it seems to me that a disastrous six months – which can and anyway will be blamed fully on the US and other foreigners – followed by two or three years of good news trickling in would be much better for political credibility than two or three years in which expectations are constantly disappointed.
So what has suddenly inspired me to start making pronouncements on political strategy? Partly the fact that I spent the past three days in Washington DC, and so breathed deeply of the rarified political air, but mostly because of recent hints that the Chinese government may “revise” its growth target of 8% for 2009. According to an article in yesterday’s Bloomberg:
China may review its 8 percent economic-growth target for this year as the global financial crisis deepens, Deputy Commerce Minister Zhong Shan said. The legislature will discuss the goal at its annual meeting next month, Zhong said in Hong Kong today, adding that the government remains “confident that it can achieve that goal.”
I confess I am a little confused as to why they would want to review the goal if they are so confident that they will achieve it, but the article goes on:
The government’s 8 percent target is aimed at generating jobs and avoiding instability in the world’s most populous nation, China Banking Regulatory Commission Chairman Liu Mingkang said in Beijing on Dec. 13. “If China’s GDP growth slips to 6 percent or 7 percent any time, it will affect the employment rate and also social stability,” Liu said then. Last month, he said meeting the 8 percent target would be “exceptionally arduous.”
It will be exceptionally arduous – no question. On a separate but related note on Wednesday the Financial Times published a piece I wrote with the title “This is not the time to attack China,” in which I argue that policymakers in the US and Europe, and even more so in China, do not understand how difficult the crisis will be for China and how little China can do in the short term to help the global adjustment.
But this does not mean that Chinese policymakers are knowingly engaging in predatory trading behaviour. On the contrary, although they seem unable – some might say unwilling – to understand China’s role in the global imbalance (much like the US failed to understand its role in 1930), they would nonetheless like nothing more than to see China increase consumption sharply. To that end they have unveiled a fiscal stimulus package and forced banks to expand lending at a pace so rapid – January’s new loans equalled one-third of all new loans in 2008 – it will almost certainly lead to a sharp rise in non-performing loans.
But in fact their efforts have only increased total consumption, not net consumption. China’s outdated development model, a banking system that seriously misallocates capital and its weak consumer base make it very difficult for China’s fiscal stimulus to cause a rapid net increase in consumption.
Rather than penalize China for assumed predatory trade practices, I argue in the piece that it would be much better to recognize Chinese constraints and to work out a long-term agreement in which China is guaranteed room to adjust, in exchange for commitments to adjust.
The world, with US president Barack Obama in the lead, has a tremendous opportunity to help China through a difficult transition and, in so doing, create a new sustainable global balance of payments and a favourable institutional framework that will govern trade and capital relations for decades to come. If not, the advantages trade deficit countries receive from pushing the full burden of adjustment on to trade surplus countries will be overwhelmed by a global environment of deep mistrust and hostility.
Will it happen? Perhaps, but I am not terribly optimistic. On the hopeful side my article got a huge amount of play in China and was widely reproduced (although I wonder if always with the permission of the Financial Times), so clearly a lot of people are beginning to recognize China’s place in the crisis. Two of the Beijing musicians I am close to even told me yesterday that they had seen the article several times, even though like musicians around the world they rarely spend much time on the financial pages of any newspaper.
Since one of my arguments in the piece is that policymakers here have been unable – in fact unwilling may be a more apt word – to recognize China’s role in the crisis or the cost of Chinese adjustment, I am a little surprised that my piece has gotten so much play here, but maybe they just love to read articles that suggest that China is being unfairly attacked. Still, maybe there really is a growing recognition that as a fundamental part of the global imbalance, China is going to have to adjust its economic model just as dramatically as the US. Both countries relied heavily on the same source of growth – infinite leverage on the part of consuming US households – and this was clearly unsustainable. But so far I am not sure that this message is likely to be believed in China.
Not only am I pessimistic, then, about Chinese policymakers’ willingness to confront reality, but my trip to Washington also left me very worried about US policymakers. I was lucky enough to meet a wide variety of very smart and influential people in the US-China Economic and Security Review Commission, the US Chamber of Commerce, the Treasury, Commerce and State departments, the Senate Foreign Relations Committee, Congress, and a very interesting breakfast with people at the Carnegie think tank. The impression I got was that there are a lot of smart people very worried about how quickly policymakers are going to react.
I have already suggested that I think it is pointless to hope that Europe – or indeed other Asian countries – refrain from protectionist behavior or provide needed leadership, and my great hope has been that the new US administration surges forward and begins to design not just a short term solution that addresses the current collapse (I know, I know, much easier said than done, but the crisis part will end soon enough nonetheless), but also a longer term plan about what the new institutional framework will look like. But I don’t think this is happening.
Many people I spoke to last week were really bewildered by China’s role, and although many of them were extremely sophisticated in their understanding, they gave me the impression that policymakers are going through an almost existential crisis and have lost all confidence. The world needs US leadership more than ever, and the US is in a very strong position to provide it for at least three reasons. For all the problems of the economic contraction, the US will probably suffer less than other countries, it will emerge more quickly than the rest of the world, and it commands by far the largest amount of the most valuable resource in the world: net demand.
Inevitably someone will misread this and think I am crazy – the US has a great problem and, they will say, I am insane to suggest things are going so well. But note that I am not suggesting that the US is in great shape. I am suggesting that world is in worse shape, and the US has the flexibility and resources to reshape the global balance.
This seems to be something that not many people in Washington believe. The lack of confidence is so deep that several times I heard people refer knowingly to the Chinese fiscal stimulus (yes, that vague, risky, and hard-to-understand stimulus package) as the “gold standard” of economic stimulus packages. Gold standard? Really? The only way this can be true is if every other stimulus package in the world is total garbage. Perhaps it is.
One of my good friends in Washington, who is considering accepting a very senior position in the executive branch (surprisingly enough he might not accept it because of the bitterness of the confirmation process), asked me to point out a single bright spot for the US right now. I told him geopolitics – the chance to engineer a new global framework that will allow the US to regain the centrality that was lost in the past eight years while including Europe, China, Japan and the rest of the world as firmly committed members. He smiled dubiously and asked me to write it up.
However, even if I am right, unless the mood changes dramatically I am not sure that US policy makers are in any position to seize the reins and steer us firmly into a new global institutional framework. Instead I suspect that things will continue drifting downward for the next year or so, until it is that much harder for anyone to work out a reasonable plan that doesn’t involve a great deal of hostility and mistrust. Maybe it is just because I am a little jetlagged, but I am not very optimistic.
This entry is all terribly abstract and doesn’t say much that is real about Chinese financial markets, the misleading title of this blog, does it? Sorry, dear readers, but I promise that my future pieces will be more concrete and not nearly so pontificatory, if that is a word.
On a less bombastic if more narcissistic note, however, I am delighted to mention a very nice article in this week’s BusinessWeek that discusses my musical activities in China. Sorry to toot my own horn like this, but that accompanying photo makes me look a whole lot better than I really do, and so I would like everyone to see it.
Gosh. Bombast and vanity. Who would have though three days in Washington could have had such a profound effect on me?
Michael-
I really enjoy your stuff – you provide a perspective available nowhere else, although I wish I had a degree in economics to understand all of the implications of what you observe.
And now I learn you own a punk rock club in Beijing! I was a student in Beijing from 1996-1997. At the time, CD Cafe was one of the only reliable music venues – I have fond memories of smoky late night jazz shows. A highlight of my time there was seeing the all-girl punk band Cobra perform at a tiny club near the Kempinski Hotel. It must be fascinating to have seen the music scene emerge. Maybe you can start another blog to cover the best new indie acts.
Cheers,
Christian
“The US government frozen in the headlights”
“… they gave me the impression that (US) policymakers are going through an almost existential crisis and have lost all confidence …”
- a better description I have not read -
Michael,
I would assume you consider China’s buying of commodities a sign they aren’t taking the hard medicine path you’re advocating? From Bloomberg:
“China is buying commodities from aluminum to soybeans and sugar to bolster prices and incomes…”
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=agutJnP7QXSA
Is there any sense to this? It seems rather absurd.
I enjoyed the piece in BusinessWeek. When you mentioned muscian friends in your blog entry, I was visioning a cellist and pianist.
I to share your fear that there are going to be policy mistakes that exacerbate the problems. I would like to ask you though, as far as Washington goes, is there a group think dynamic going on? It seems like economist like yourself, Brad Setser, Peter Morici and Paul Krugman, while maybe not exactly on the same page are at least pointed in the same direction.
[...] Pettis has a really good post up on his blog, China Financial Markets. He has some very interesting things to say about the country’s real growth rate and then gets [...]
Thanks for the interesting reflections. Re your point ” I told him geopolitics – the chance to engineer a new global framework that will allow the US to regain the centrality that was lost in the past eight years while including Europe, China, Japan and the rest of the world as firmly committed members.” – why is it so important for the US to regain the centrality that was lost? Why is not better for the leading nations to change an over-reliance on the US to solve all problems and work to develop a true partnership hased on shared objectives? It seems if the US “believes” it must lead the world, vs “first among equals”, when the “world” has changed dramatically, we will fail to really address the global challenges on poverty, climate change, economic development, terrorism etc.
Prof Michael,
Your article in FT is well received by Chinese readers and officials,according to my knowledge.
To go a bit further from your discussion,I can find some buffer here in China’s balance sheet mechanism which may not need much external help.
A simple model is this:As China is an net importer of natural resources and raw materials,an net exporter of manufactured goods,and moreover,these two are interconnected becoz of so-called processed-manufacturing mode,so when our exports collapse with shrinking external demand,so does our import of resources and raw materials.In your words,this is a typical kind of counter-cyclical situtation embedded in China’s economy.So,maybe we shouldn’t worry too much about our natioanl balance sheet?
Another question,in your response to last blog entry,you mentioned a silly book,Currency Wars,can you write sth on why you think it is silly?thanks…you know,many in china have a poor understanding on international affairs.
Pettis: Government debt levels – especially contingent debt such as non-performing loans in the banking system and hidden provincial and municipal debt – will be much higher and provide much less room for expansion, and credibility levels will be much lower.
I don’t think so. If the world goes into economic contraction then it becomes more important than ever for China to undertake policies that encourage domestic growth.
Also, one pattern that is common in these sorts of crises is that it is important to spend money early rather than wait. If you wait then you get caught in a deflationary trap in which the money that you spend will have far less impact than if you took aggressive action early. Right now, domestic demand in China has not collapsed, and it is far, far less difficult and expensive to keep domestic demand running than to restart things after things have started to collapse.
I just don’t see how not spending now is going to keep NPL’s and ballooning from happening. If you don’t spend now and domestic demand collapses, then you are going to end up with huge NPL’s and debts, anyway. China has not yet entered the deflationary spiral that the US has, and now is the time for massive spending to keep that from happening.
Also a lot depends on what the stimulus packages are being spent on. If the government is trying to keep export factories open, this is a very bad thing. If they are giving payments directly to workers so that they can keep spending while they are looking for another job, and spending money in other sectors to create those jobs, this is a very good thing. My overall impression of Chinese stimulus is that it is aimed at the latter than the former, and this being the case, the more spending the better.
This is I think the big difference between Latin America and China. You need massive amounts of spending not to preserve the old system, but to replace it with a new one. You don’t keep paying an export factory that is losing money, you shut down the export factory and keep paying workers so that they can go out and find new jobs.
Pettis: One of my good friends in Washington, who is considering accepting a very senior position in the executive branch (surprisingly enough he might not accept it because of the bitterness of the confirmation process), asked me to point out a single bright spot for the US right now.
The US had an election. The US people threw the old guys out and brought in new people. The new people are busy at work trying to fix the problem. If they do, great. If they don’t, then we have another election, throw the old people out and get new people in. Keep going until something works. The fact that the US can have political change without people rioting in the streets, is a huge bright spot.
Pettis: The world needs US leadership more than ever, and the US is in a very strong position to provide it for at least three reasons. For all the problems of the economic contraction, the US will probably suffer less than other countries, it will emerge more quickly than the rest of the world, and it commands by far the largest amount of the most valuable resource in the world: net demand.
And I think this is all wrong. The strength of the US is that it has a constitutional system, a relatively low debt, and just too big to fail. Right now, however the financial system is in a total mess, and the US needs to focus its efforts at fixing it’s domestic problems.
More importantly, I get the very strong sense that the US people do not *want* the US to led the world. After Afghanistan and Iraq, most people in the US are just *tired* of having the world on its shoulder, and so any politician that talks about the US exercising “world leadership” is just going to get rotten fruit tossed at him by people that want to keep their jobs.
Being the leader of the world is fun for a while, but once the bills in blood and gold come in, people very quickly get sick of it.
Personally, I think the US can fix the world by fixing the US. Have the US government do whatever it needs to do to fix the US economy. Have China do whatever it needs to do to fix the Chinese economy. Have discussions so that everyone coordinates with everyone else, and in that situation there is no real need for anyone to be a leader, which is a job that no one really wants right now.
Glen M: I would like to ask you though, as far as Washington goes, is there a group think dynamic going on? It seems like economist like yourself, Brad Setser, Peter Morici and Paul Krugman, while maybe not exactly on the same page are at least pointed in the same direction.
At least in Wall Street, I don’t think that there is much of a group think going on.
In normal times, people tend to try to emphasize differences because that was the way to get ahead. Right now, people are more apt to try to reach some consensus because policy paralysis would be deadly.
It may be that we are doing completely the wrong things, but if we are, this isn’t going to be resolved by argument. Do something. See what happens. If it seems to be working, keep doing it. If it isn’t working, then do something else.
As far as political psychology……
a) One important thing is to have the political leaders be busy and be very active at solving the problem. Right now people *want* to know that the people in power are trying to fix the problem, and so there is a demand to do *something*. It may well be that “do nothing” may be the right policy approach, but “do nothing” is political suicide.
b) I think it would be a very *bad* idea for the Chinese leadership to bash the United States. People on the street are likely to be upset at the United States anyway, but the government should try to reduce anti-US sentiment rather than encourage it. One problem is that the US and China simply need to cooperate with each other. The other problem is that anti-Americanism is a genie that you can very easily lose control over. I worry about the consequences a decade from now, if the prevailing view in China is “the US destroyed our economy.”
Pettis: I know, I know, much easier said than done, but the crisis part will end soon enough nonetheless.
Honestly I don’t think it will. It’s possible, even likely that the Federal government will end up with responsiblities that it would not have dreamed of six months ago.
Once things settle down, the US government is going to have its hands full restructuring the entire US economy and financial system, and it’s not going to have the resources to think about restructuring the world system. Just thinking about what to do with prime residential mortgages is going to require hundreds of people working full time.
PB: It seems if the US “believes” it must lead the world, vs “first among equals”, when the “world” has changed dramatically, we will fail to really address the global challenges on poverty, climate change, economic development, terrorism etc.
I don’t think that most people in the US believes this, and one of the things that has changed over the last year is that I get the sense that for the first time since December 8, 1941, most people in the US don’t *want* the US to lead the world.
Right now a *first among equals* role in which other countries like China and the Middle East solve their problems with the US solves it, is very popular among people in the US.
What has changed is that since December 8, 1941, the United States has been under the belief that the main danger to US prosperity and well-being has been from the outside. First it was the Axis-powers, then the Russians, then Al-Qaeda. That changed last year, when it become obvious that badly written mortgages could damage the US in ways that no foreign power can, and that has massively changed US priorities and views of its role in the world.
michael — i read your proposal for the US to strike a deal that guarantees China access to US markets while China commits to adjustment with interest. my main question is how China could make its commitment to adjust credible? China afterall committed in theory toward a more balanced growth model in 04 (read stephen roach’s pieces from the time, which lauded China for getting it … and warned against discounting the commitment of China’s leaders to change) and well China’s economy only got more unbalanced from 05 to 08. obviously, the scale of the slowdown and the dollar’s stregnth (and resulting RMB stength) are creating pressures to adjust that weren’t there when the $ was weakening (and tending to pull the rmb down and help China’s exports) … but China’s track record here isn’t great.
p.s. I am not surprised that your article was positively received in China, as it argues that the world needs to give China a lot of space to adjust/ not put too much pressure on it to do so … which strikes me as very congruent with the views of China’s leaders.
Thank you for an interesting and thoughtful article. My one criticism would be that you seem to underestimate just how badly shot US credibility is with many of us outside North America. Putting aside whether or not we any longer wish to be led by one single external power centre as opposed to living in a more balanced mulit-polar system, the US elite has shown itself – and in my view continues to show itself – as unfit to lead its own country let alone the rest of the world.
Michael,
I wonder how the US consumers are going to respond to the massive stimulus package the US policymakers are unveiling at the moment. I had a friend who pointed out that the US market is inherently dynamic and entrepreneurial-friendly. Thus, chances are the US economy would still be the messiah for the global recession taking place now.
While Chinese policymakers have been heading in the right direction with its market-based reforms, the Chinese market is still a long long way off from possessing the dynamism associated with free-market economies. Historically speaking, the Chinese market has been plagued by the structural deficiencies from its state-based economy for decades. At any rate, the structural reforms being implemented to overcome these deficiencies would take an awful lots more time. On top of that, the Szechuan region has yet recovered from the major earthquake last year. An optimistic guess would still be several years of substantial efforts and money. I’m speculating that a big chunk of the Chinese stimulus would go to the recovery efforts. In all, it seems improbable that China would be leading the global economy out of the current recession.
Would you actually think that China, alongside US would be the key drivers behind any economic recovery?
UNITED States of America will cease to exist within five years. Political, stuctural and especially economical problems are all growing bigger and bigger all the time and there is little even Obama administration can do to prevent it.
Debt burden on all levels is so huge that without printing money and/or defaulting it cannot be paid back. Plutocracy rule is making everyday life worse and worse for the majority of people. USA will collapse soon into more or less to multiple smaller states of america and it will be a GOOD thing for Americans. That is, for those who survive the collapse…
The U.S. would be a world leader, and RMB would never be a world reserve currency, for the forseeable future, if the world were made up of North America and Europe only.
“US market is inherently dynamic and entrepreneurial-friendly. Thus, chances are the US economy would still be the messiah for the global recession taking place now.”
Afte witnessing what the “innovation and entrepreneurship” have done to the finanacial system in particular and the economy in general, I for one do not have such illusion anymore.
Michael, interesting post. I am slightly more optimistic that the Obama administration is up to the challenge, the rest of official Washington much less so. I was gratified to read this morning in the NYT that Obama is planning to go ahead with health care reform and energy reform, which not only do I think are essential long term but shows they retain some of their nerve. The good news is that if the Obama administration does provide leadership the rest of Washington is too cowed and frightened to resist.
One question is what do you think China could credibly do in the short term to assure its trading partners that they are adjusting? My first thought, which is not so much in the finance realm, is extending tuition benefits to parents of school children and expansion of other social safety nets. This would both remove some of the saving pressure from households and redistribute spending to the household sector.
Also, I’ll be sure to save the World 2009 Economist, laughs may be tough to come by in 2010.
[...] The US government frozen in the headlights [...]
I think that the new Administration needs to support the declining American middle class if they want to be able to do anything else (e.g. win a 2nd term). That is top priority. As Setser notes, China has not followed through on promises to rebalance in the past. I think America will have a jobs crisis, and protectionist pressures will win out.
Globalization has diminished the security and earnings of developed world workers. This model of globalization is flawed and needs to be dismantled first in order to be fixed.
tim73: “UNITED States of America will cease to exist within five years.”
So no sense filing taxes? Well, that’s a relief…
Bob_in_The_People’s_Republic_of_Massachusetts
Interesting that you mention the increase in Bank lending in January, Michael. We also have Citi and HSBC being pressured into giving more loans, but unable to participate in the ones towards state projects. Filling the void are pawn shops ….
“An auto dealer pawned his downtown apartment against a 4 million yuan ($585,000) credit line to secure funds for his business. A real estate developer gave his unsold properties as collateral to get an emergency loan while waiting to secure bank funds. And a construction company owner hocked his villa to get a loan to pay workers’ salaries.”
http://www.cnbc.com/id/29272218/
Another point about the US policy makers current awe of China. There is no doubt the percentage of growth, and absolute growth in China over the last twenty years has been impressive.
But, one should understand it as capital accumulation not innovation. For example a farmer in China circa 1988 had only to gain access to existing, and readily available technologies in order to see dramatic increases on productivity. In the US, however, most farmers are much further along on the technology curve, in order for them to increase productivity new methods need to be invented and adopted, yielding much smaller returns. This analogy holds for much of both economies, China is much further back on the capital accumulation yield curve.
This is not to say there isn’t a great deal of work and entrepreneurship behind China’s growth. However, that technology yield makes up for a great many weaknesses in the rest of economic system, such as corruption and poor financial systems, at least while the world economy was growing.
Don’t worry, you have a very very long way to go on the bombast and vanity front. Also, I do believe that you brought back the hope virus from DC. Hope you are right.
Great article. I really miss the now defunct ‘World News Review’ – I’m guessing they couldn’t compete with in a George Bush era – and your articles bring a real on-site feel for China. Thanks jegan
Michael,
Regarding “that vague, risky, and hard-to-understand stimulus package”, as much of the cash would be raised by the likes of municipalities through issuing bonds, is the government indeed fuelling even more “non-performing loans in the banking system and hidden provincial and municipal debt” ?
Keep rockin’
I think at this moment of panics, what we really need is some COMMON SENSE, on some important issues,
1. What is wrong? BUBBLE POPed because of too much easy money credits infused into the system by the central banks, (Chinese provided feul by , a, providing too much low cost production, 2. provide too much fiancing towards the US in term of treasury buying)
2. what to do? If you made a mistake, you have to pay for it. IT SEEMS EVERYONE EVERY COUNTRY WHAT TO SEEK A EASY WAY OUT, A PAIN-FREE WAY OUT, no such thing!
3. why bailout sucks, the key of capitalism is every people and business makes their own decisions AND TAKE THE CONSEQUENCES BY THEMSELVES. Too much easy money caused us into trouble, now the bailout want to solve the problem by throwing out even more ( borrowed Money?) This is plainly stupid.
4. LESS IS MORE, This old Chinese saying applies exactly towards current recovery efforts. No bailout is probably better than bailouts, US government is worrying about those businesses that are” too big to fail”, that’s like give those irreponsible business a big incentive to make Giant mistake so that they will be safe. Another stupid proposition, very soon the governement will find those businesses are” TOO Big to SAVE!”
4. What is the right thing to do? Buckle down! and suffer some pain. The prescriptions that US led IMF made for Thailand& Korea , as harsh as they are, are necessary steps for US and China and every country in trouble to consider.
5. Any need to rescue? YES, but keep the subsidies direct and minimal. for China, it’s not applausible to set an arbitary 8% growth rate at this oversupplied world. Be ready to embrace some unemployment problem during the change from export oriented economy towards consumption/ service oriented economy, so give those money directly to those unemployed and remove the red tapes for self-employments and small businesses.
also Cut all taxes and fees to agricutures will help to keep life easier for rural people to stay within their home, instead of wandering jobless in the cities.
Allow the price of properties and all other elements to come down (Devaluation of currency is not recommendable unless the market force made so) The price drops will help to boost the demands. (even not , it will help the life of those low income easier)
The 8% GDP target for 2009 is a gross over estimatation and I believe policymakers in Beijing now realise it. They are finding it very difficult to have it adjusted now without affecting confidence which in turn will affect domestic comsumptions. Sometimes I am wondering why they have it targeted at a magical 8. I think the Chinese believe the number 8 is an auspicious number.If this is so I am finding it very difficult to understand why they mix economy with Feng Shui. If they believe in the latter they should have targeted it at 6.8% which is as auspicious as the number 8.
[...] The US government frozen in the headlights (Pettis) [...]
The biggest bubble is China.
I just found the heavy (above 14 metric tonns) truck sales for China/US and EU.
By that,China growt is completly unsustainable.
Even they could be happy if the GDP dropp will be only 10%-20%.
http://bomlat.blogspot.com/2009/02/china-invesmtentexport-in-january.html
[...] The US government frozen in the headlights (Pettis) [...]
Bob, I think China is turning to commodities purchases as an alternative to other investments, such as low yielding USG bonds, and it also has the added benefit of showing up as a reduction in the trade surplus if it is direct purchases of commodities for strategic reserves. Except for its immediate impact on prices I don’t think it matters much to the adjustment in the global balance of payments in the longer term.
Glenn, I think there is a wide variety of opinion but I am not always sure that policymakers in the US, or indeed in China, Germany or other large countries, have a clear understanding of their role in the global balance and the feedback effects that can actually undermine domestic policy. To the extent that the guys you mention are all aware of the global links, I think it wouldn’t be surprising if many of us are making the same points. They are not exactly, in my opinion, very hard-to-understand issues.
PB, for all the (too fashionable) hand-wringing, the US is easily the world’s largest economy, it is the only one with sufficient credibility (even though that has been eroded recently) and it commands the world’s most valuable resource – net demand. That makes it the only country likely to be able to lead the world towards a “grand bargain” which will create the setting for an orderly resolution of the crisis. I know I may be very contrarian here, but I actually see no hard evidence of a relative decline in US power and, more importantly, I see no other country that is even close to taking a leadership position. I think that unless the US pushes for a new institutional framework, no one will.
MoneyIllusionist, the fact that China is a net commodity importer is definitely a counter-cyclical mechanism and helps stabilize the Chinese economy. Commidty exporters, on the other hand, are getting a double shock, as they always do in times of demand contraction.
As for Currency Wars, I read it partially at an airport bookstand, and I immediately realized that most of the book consists of a very standard set of arguments that have been made by cranks conspiracy theorists since at least the late 19th century (including by one of my favorite poets, Ezra Pound, whose greatness at poetry was perhaps not matched by great economic thinking). Any theory that begins with the assumption that a secret coterie of Jews led by the Rothschild family has control of the world’s governments and financial systems is just a rehash of this old argument and not something that I can take very seriously. Conspiracy theorists will disagree, of course, but the real world is far too complicated to be explained by such a neat set of circumstances. To give you and idea of how this thinking works, the same people argued in the 1970s that these Jews “engineered” the split between China and the USSR in the 1960s solely to fool the democracies into relaxing their guard, but that in fact China and the USSR were in secret agreement. Most people in China would be surprised to hear this. I think this kind of book is taken seriously in China mainly because Chinese readers have little familiarity with this tradition, and perhaps because the educational system encourages too little critical thinking and too much respect for “texts.” Even more than Americans, Chinese seem to be enthralled by conspiracy theories.
Twofish, I don’t disagree at all with you that “If the world goes into economic contraction then it becomes more important than ever for China to undertake policies that encourage domestic growth,” but I have no idea why this proves that an explosion in bank lending now will not result in more contingent liabilities in the future. At any rate yours is a fairly novel argument. Even those who support the stimulus and are most optimistic about the impact of the stimulus seem to acknowledge a growth in NPLs.
As for your last paragraph, I think you are completely wrong and one of my goals is to convince policymakers of how dangerous this kind of thinking is. If the US, China, and Europe try to fix their domestic economies without any concern about the impact of their policies on the rest of the world, the result will be horrible. By the way, this is one of the things that happened in the 1930s. It is hard to argue that policymakers then did the right thing.
Brad, the devil is in the details. There are a wide variety of policies that China can follow, but the proof must be in the trajectory of the trade accounts. I would focus on raising interest rates, raising minimum wages, liberalizing the financial system to divert more lending into services and consumption, greater spending on health and welfare, and a number of demand enhancing measures,. Most of these are things China is anyway desperate to do in the medium term, but it is too afraid to do in the short term because of the collapse in exports.
By the way it worries me that even a staunch internationalist like you is showing signs of weariness with China. This was also reflected in my meetings in Washington and with US and European policymakers I have met recently. Even China’s best friends are starting to get annoyed with China’s refusal to acknowledge its role in the imbalance, and this suggests a hardening of attitudes everywhere. I am deeply pessimistic about an orderly resolution of the global balance of payments crisis.
Kangwei, my guess is that, based on previous crises, the US will have a shorter, deeper contraction than most other large economies, with the most rapid liquidation, but will be the first out. The US economy tends to be amazingly flexible and can restructure itself very quickly. I remember the horrible gloom of the late 1970s, when it seemed that the US could absolutely nothing right, and how quickly it turned, and I suspect that within five years the mood will be very, very different. This is just a prediction, however, and like most predictions it has absolutely no hard value.
Seaturs, don’t overestimate the “meaning” of the impact of recent innovations on the financial system. First, this is not nearly the first time something like this has happened to the US. Financial innovation followed by financial collapse has been a pretty common event throughout US history, even before the Republic was established. Second, I believe the real culprit is excess monetary growth, not financial innovation. Even highly regulated, rigid systems with no innovation (think Japan in the 1980s) responds to massive liquidity growth by creating unsustainable bubbles.
OGT, see my response to Brad for a very brief set of proposals. Of course you are right that reforms in financing education could help, but I suspect that this falls in the very large category of good reforms that will only help in the medium term. And yes, three years from now when you read the 2009 edition of The World Ahead you will certainly find it amusing.
Grubby, I think the answer is a resounding “Yes.”
Michael: I have no idea why this proves that an explosion in bank lending now will not result in more contingent liabilities in the future. At any rate yours is a fairly novel argument. Even those who support the stimulus and are most optimistic about the impact of the stimulus seem to acknowledge a growth in NPLs.
Looking long term, it is possible that a huge stimulus now will keep the demand and production within the Chinese domestic economy high even in the face of a fall in world demand. A healthy expanding economy will have fewer NPL’s than a sick shrinking economy.
Or maybe not…. My point is that it far from obvious that spending less now will reduce future NPL’s. A lot depends on how credit is allocated now.
Michael: If the US, China, and Europe try to fix their domestic economies without any concern about the impact of their policies on the rest of the world, the result will be horrible. By the way, this is one of the things that happened in the 1930s. It is hard to argue that policymakers then did the right thing.
I’m all for coordination and if there is something that country A is doing that is hurting country B, then this needs to be discussed.
However right now there are very few areas in which new policies taking in one country are adversely impact another. The two biggest potential problems are trade and capital protectionism. Trade protectionism can be handled through WTO. Capital protectionism is not going to be an issue if everyone has bad banks.
Seaturs: Even highly regulated, rigid systems with no innovation (think Japan in the 1980s) responds to massive liquidity growth by creating unsustainable bubbles.
One thing that is interesting in finance is when you hear the same story told by different people. I’ve heard it argued (and plausibly argued) that what got Japan in trouble was that a rigid, highly regulated system, but rather the fact that the Japanese government massively deregulated the system in the early 1980′s.
As far as economics and politics, I tend to be a realist. If people start screaming for trade barriers and protectionism, I don’t go out and say “trade barriers are evil.” My reaction is “fine, if everyone wants trade barriers, let’s have trade barriers, but I’d like to you do X, Y, and Z so that we minimize damage to the overall system”
In the current situation, I don’t see very much likelihood of increased trade protectionism, and the most important thing here is to preserve the WTO framework. I do see a lot of capital protectionism coming up.
Something that no one has mentioned yet is that if you see massive nationalizations of the banks, then the banks will be under pressure to loan domestically.
One final thing. It’s a bad idea to hope rather than plan. No one knows how long this downturn is going to be, and I hope (and rather suspect that it is happening) that someone in Beijing is doing “what if” stress testing to think about what happens if you have a long term contracting global economy.
Michael: That makes it the only country likely to be able to lead the world towards a “grand bargain” which will create the setting for an orderly resolution of the crisis.
I’m not a fan of “big bang” solutions. To resolve this crisis takes a thousand little solutions rather than one big solution. There are four big players, the US, EU, China, and the Middle East. The US can be the first among equals, but it’s not in a position to dictate or even lead.
Michael: I know I may be very contrarian here, but I actually see no hard evidence of a relative decline in US power.
US power has certainly declined in *relative* terms. China, the EU, and the Middle East certainly have far more say in the structure of the world now than they did in 2000. After the collapse of the Soviet Union, the US had this brief and unusual period in which it was the only major power in the world. That period has drawn to a close.
What’s more is that in the last two years, there has been a sharp collapse in American self-confidence because of the debacle in Iraq and now the financial crisis. This is a very different nation than it was in 2003 or even 2006. Part of the reason I think it is unwise to suggest that the US take a strong global leadership role to remake the world economic system is that the American people just don’t want this, and will react very badly if Obama starts using this rhetoric. Talking about reshaping the globe just sounds too much like Iraq.
The US certainly has the most wealth and institutional capacity by far of the the major global players. It also has the biggest problems, and these two cancel themselves out. The best way that the US can help the world is to fix its own banking system, since US banks are still at the core of the world financial system, and if the US banks aren’t fixed, then there is only a limited amount of things that other countries can do.
I do think that the US has a fine future. These troubles will pass. Part of the reason that I think the US has a very bright future is that among all of the nations of the world, the US has one of the most diverse and globalized populations, and in a multipolar, global world, being about to speak 200 languages is useful.
Micheal: I see no other country that is even close to taking a leadership position. I think that unless the US pushes for a new institutional framework, no one will.
As a practical matter, I don’t think we are in a position to push for a new institutional framework because no one really knows what that will look like.
I think for the next year, we are just going to be muddling through. Fixing the obvious problems, trying to deal with the less obvious ones. After all the dust settles, we can see what things look like and then formalize some of the systems.
Prof Michael,
Thanks for your credible critics on conspiracy theory.More puzzling to me is that too many ppl on your blog worry too much on NPLs.I feel obliged to put forward a few points here.
To begin with,China has accumulated a massive amount of reserves during last several years.By taking hard-earned export dollars in and then recyclying it back to US,these reserves has led to liquidity expansion not only in China but also in US.
As both China and US are overwhelmed by ever-expanding liquidity,and too much liquidity leads to higher inflation and higher long-term interest rates which stifles long-term investment projects. To tackle this,I cannot put up any suggestion better(or less worse)than simply piling up more NPLs,which is just like setting fire to piles of paper money.
So we can see that unless the fundamental imbalance is not corrected,NPLs must go up.All good banking practice,which is summarized by Joseph Stiglitz as only lending money to those who don’t need money,can easily be overwhelmed by outside shocks.
So my point is,NPLs are not sth to worry about,but sth to live by under nowadays circumstances.I hope this point is not much too ironical….
Michael,
WRT China turning towards commodity purchases as an alternative, I think that this may backfire. With demand being in such short supply local producers are sure to argue that state owned enterprises should not be in the procurement business for their respective countries. Especially ones where the products (resources) are frequently sold below market prices. Countries in which these assets are based can, with a swipe of a pen, change ownership requirements.
well, wrong as he was about a lot of things not poetic, maybe old Ez was economist enough to get to the heart of the current mess. with usura hath no man a house of good stone… got to let him be wrong without losing rightness. i’m bringing my copy of the cantos to the end of the world.
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