Comments on: New trade and reserve numbers from China http://mpettis.com/2009/04/new-trade-and-reserve-numbers-from-china/ China's financial and monetary links to the world Tue, 09 Mar 2010 05:54:10 -0600 http://wordpress.org/?v=2.8.6 hourly 1 By: OGT http://mpettis.com/2009/04/new-trade-and-reserve-numbers-from-china/comment-page-2/#comment-1456 OGT Sun, 19 Apr 2009 18:28:08 +0000 http://mpettis.com/?p=426#comment-1456 Ha, Michael, your MDMA suggestion reminds me of the Jonathan Hodges's solution to the economic crisis, an emergency Christmas and free cocaine at every cash register. But, alas, foreclosures aren't by and large a product of lack of confidence, nor is bank insolvency (bank illiquidity, maybe) but from too much debt and not enough cash flow. Ha, Michael, your MDMA suggestion reminds me of the Jonathan Hodges’s solution to the economic crisis, an emergency Christmas and free cocaine at every cash register. But, alas, foreclosures aren’t by and large a product of lack of confidence, nor is bank insolvency (bank illiquidity, maybe) but from too much debt and not enough cash flow.

]]> By: Dr.Frank Loo http://mpettis.com/2009/04/new-trade-and-reserve-numbers-from-china/comment-page-2/#comment-1455 Dr.Frank Loo Sun, 19 Apr 2009 16:15:47 +0000 http://mpettis.com/?p=426#comment-1455 Michael: " yes, what will happen when the PBoC becomes so worried about the impact of explosive growth in loans that they put on the brakes (as they are already rumored to be considering)? hael: " I have heard the same news in Hong Kong as well. Looking at the performance of the stock markets in China for the past two sessions in a row I believe PBoC will soon put the brakes on those explosive loans banks have been giving out over the past months. Giving out loans is easy and getting repayments is another matter. RMB 4 trillions is by no mean a small amount of money and if they (lenders) are not prudent they will land themselves with mountains of bad loans (NPL) as well as non-performing assets (NPA) which will at the end of the day cause a credit bubble which will be as bad as the sub-prime crisis in the US. PBoC should put on the brakes as soon as possible before it is too late. Michael: ” yes, what will happen when the PBoC becomes so worried about the impact of explosive growth in loans that they put on the brakes (as they are already rumored to be considering)?
hael: ”

I have heard the same news in Hong Kong as well. Looking at the performance of the stock markets in China for the past two sessions in a row I believe PBoC will soon put the brakes on those explosive loans banks have been giving out over the past months. Giving out loans is easy and getting repayments is another matter. RMB 4 trillions is by no mean a small amount of money and if they (lenders) are not prudent they will land themselves with mountains of bad loans (NPL) as well as non-performing assets (NPA) which will at the end of the day cause a credit bubble which will be as bad as the sub-prime crisis in the US.

PBoC should put on the brakes as soon as possible before it is too late.

]]> By: bill j http://mpettis.com/2009/04/new-trade-and-reserve-numbers-from-china/comment-page-2/#comment-1454 bill j Sun, 19 Apr 2009 12:01:54 +0000 http://mpettis.com/?p=426#comment-1454 Have to agree with 2fish, on deleveraging and printing money. US debt is priced in dollars. There are a finite quantity of dollars. Therefore if the Fed increases the quantity of dollars - say by around $1 trillion or so - then they decrease the real value of its debt by that amount. The assets added to the Feds balance sheet at no expense to itself, can be exchanged for debt at some suitable future propitious moment. So who is paying for the US reflationary package? The owners of its debt. Basically China and Japan. Have to agree with 2fish, on deleveraging and printing money. US debt is priced in dollars. There are a finite quantity of dollars. Therefore if the Fed increases the quantity of dollars – say by around $1 trillion or so – then they decrease the real value of its debt by that amount. The assets added to the Feds balance sheet at no expense to itself, can be exchanged for debt at some suitable future propitious moment.
So who is paying for the US reflationary package? The owners of its debt. Basically China and Japan.

]]> By: Michael Pettis http://mpettis.com/2009/04/new-trade-and-reserve-numbers-from-china/comment-page-1/#comment-1453 Michael Pettis Sun, 19 Apr 2009 10:12:48 +0000 http://mpettis.com/?p=426#comment-1453 Twofish, don’t confuse the issues. Dynamiting excess capacity may be a good way to eliminate excess capacity, but it is not a good way to increase the wealth of an economy, and the purpose of economic management is more likely to be the latter than the former. I am not sure what the rest of your objections to ChinaInterest’s point mean. If you are simply countering his claim that the transition will be difficult by saying that economies always go through transitions, then I am sure you are right, but also irrelevant. By that argument we should also contradict statements that crises, famines, war, economic contractions, etc. are difficult, perhaps because in the long run we are all dead anyway. By the way as easy as it is to criticize someone for proposing “that problems can be magically solved quickly,” I am not sure that this was what he, or anyone lese, has seriously proposed. As for your next point, “You can deleverage by printing money which is basically what is happening in the United States. You in debt? Well, there is several trillion dollars of freshly printed currency to cover that debt, you are now deleveraged,” makes no sense at all. I am sure if you go through the cashflows you will see why. As for your next two points, there is a too much circularity in your logic. There is also circularity in your claim that boosting confidence is all we need to end economic contractions and I would strongly disagree that this comes from Minsky. He spoke about real balance sheet structures whose instability had real impacts on the economy. Perhaps we can posit a neo-Minsky school that recommends that in times of economic contraction we should force everyone in the US to overcome their anxiety by ingesting MDMA every day for a week. This would certainly build confidence. Excess leverage and overcapacity would then turn out to be mirages. Finally an economy that does not have a functioning financial system with credit creation cannot have financial crises. That is sort of obvious but scant comfort. Both China pre-1978 and North Korea today more than make up for the lack of financial crises with crises (and famines) on the real economy side. The only reason we should abhor financial crises is because they often become economic crises, otherwise we wouldn’t worry much about them. Nemo, it is always helpful to do the math. I think you may be right. Dr. Loo, the GEAB piece seems a little frantic to me. I looked at some of their other stuff and found them to be a little “cranky.” Twofish, don’t confuse the issues. Dynamiting excess capacity may be a good way to eliminate excess capacity, but it is not a good way to increase the wealth of an economy, and the purpose of economic management is more likely to be the latter than the former. I am not sure what the rest of your objections to ChinaInterest’s point mean. If you are simply countering his claim that the transition will be difficult by saying that economies always go through transitions, then I am sure you are right, but also irrelevant. By that argument we should also contradict statements that crises, famines, war, economic contractions, etc. are difficult, perhaps because in the long run we are all dead anyway. By the way as easy as it is to criticize someone for proposing “that problems can be magically solved quickly,” I am not sure that this was what he, or anyone lese, has seriously proposed.

As for your next point, “You can deleverage by printing money which is basically what is happening in the United States. You in debt? Well, there is several trillion dollars of freshly printed currency to cover that debt, you are now deleveraged,” makes no sense at all. I am sure if you go through the cashflows you will see why. As for your next two points, there is a too much circularity in your logic.

There is also circularity in your claim that boosting confidence is all we need to end economic contractions and I would strongly disagree that this comes from Minsky. He spoke about real balance sheet structures whose instability had real impacts on the economy. Perhaps we can posit a neo-Minsky school that recommends that in times of economic contraction we should force everyone in the US to overcome their anxiety by ingesting MDMA every day for a week. This would certainly build confidence. Excess leverage and overcapacity would then turn out to be mirages.

Finally an economy that does not have a functioning financial system with credit creation cannot have financial crises. That is sort of obvious but scant comfort. Both China pre-1978 and North Korea today more than make up for the lack of financial crises with crises (and famines) on the real economy side. The only reason we should abhor financial crises is because they often become economic crises, otherwise we wouldn’t worry much about them.

Nemo, it is always helpful to do the math. I think you may be right.

Dr. Loo, the GEAB piece seems a little frantic to me. I looked at some of their other stuff and found them to be a little “cranky.”

]]> By: Michael Pettis http://mpettis.com/2009/04/new-trade-and-reserve-numbers-from-china/comment-page-1/#comment-1452 Michael Pettis Sun, 19 Apr 2009 10:12:24 +0000 http://mpettis.com/?p=426#comment-1452 Fatbrick, I guess I am a little less enthusiastic about conspiracy theories than some people are, but in fact there are quite a few people in the US who “seriously believe that U.S. will benefit from the idea of SDR as the international reserve currency” – Joseph Stiglitz and me, just to name two. I think there are many good arguments in favor of the US dollar becoming less active as reserve currency, and to the benefit of the US, but my guess is that the Obama administration is not eagerly pursuing this partly because they want stability in the currency markets right now – no need for more dislocations in the midst of a crisis – and mainly because they recognize that the whole idea is a little silly and not worth pursuing. I doubt, and they probably do too, that a group of IMF bureaucrats or whomever can decide what the world’s reserve currency will be. This idea displays far too much trust in the ability of governments to determine these things. If the world really wanted the dollar to play a smaller role, the dollar today would be playing a much smaller role. Basically the only way for the dollar to stop being the global reserve currency is if there is a serious alternative (there isn’t) and simultaneously the US so mismanages the dollar that they force the world to choose the alternative. The US may very well do the latter, but I doubt Obama would do it as a conscious policy decision. OGT, it can never hurt to read Minsky. At the very least it will disabuse you of 90% of the fashionable nonsense that people who should know better have been saying about the crisis. Dwayne, viva Mexico! Fatbrick, I guess I am a little less enthusiastic about conspiracy theories than some people are, but in fact there are quite a few people in the US who “seriously believe that U.S. will benefit from the idea of SDR as the international reserve currency” – Joseph Stiglitz and me, just to name two. I think there are many good arguments in favor of the US dollar becoming less active as reserve currency, and to the benefit of the US, but my guess is that the Obama administration is not eagerly pursuing this partly because they want stability in the currency markets right now – no need for more dislocations in the midst of a crisis – and mainly because they recognize that the whole idea is a little silly and not worth pursuing. I doubt, and they probably do too, that a group of IMF bureaucrats or whomever can decide what the world’s reserve currency will be. This idea displays far too much trust in the ability of governments to determine these things. If the world really wanted the dollar to play a smaller role, the dollar today would be playing a much smaller role. Basically the only way for the dollar to stop being the global reserve currency is if there is a serious alternative (there isn’t) and simultaneously the US so mismanages the dollar that they force the world to choose the alternative. The US may very well do the latter, but I doubt Obama would do it as a conscious policy decision.

OGT, it can never hurt to read Minsky. At the very least it will disabuse you of 90% of the fashionable nonsense that people who should know better have been saying about the crisis.

Dwayne, viva Mexico!

]]> By: Michael Pettis http://mpettis.com/2009/04/new-trade-and-reserve-numbers-from-china/comment-page-1/#comment-1451 Michael Pettis Sun, 19 Apr 2009 10:12:02 +0000 http://mpettis.com/?p=426#comment-1451 DaveG, I think what seemed like a useful and successful strategy (the “Asian development model”) was put will off-kilter by US monetary policy, especially with respect to the funding of the Iraq War. I think ultimately the strategy would have had to end, but in the five years before 2007 it went completely out of control and Chinese policymakers weren’t sufficiently aware of the risks and problems to try to escape from the system they built. They were learning from the 1997 crisis when they should have learned from Japan 1987-90. Vivchy, interesting points, and of course we will simply have to wait and see how things develop, but I find it hard to believe that even with lots of Fed easing US consumption growth will not significantly underperform GDP growth. LiuMang, yes, what will happen when the PBoC becomes so worried about the impact of explosive growth in loans that they put on the brakes (as they are already rumored to be considering)? DaveG, I think what seemed like a useful and successful strategy (the “Asian development model”) was put will off-kilter by US monetary policy, especially with respect to the funding of the Iraq War. I think ultimately the strategy would have had to end, but in the five years before 2007 it went completely out of control and Chinese policymakers weren’t sufficiently aware of the risks and problems to try to escape from the system they built. They were learning from the 1997 crisis when they should have learned from Japan 1987-90.

Vivchy, interesting points, and of course we will simply have to wait and see how things develop, but I find it hard to believe that even with lots of Fed easing US consumption growth will not significantly underperform GDP growth.

LiuMang, yes, what will happen when the PBoC becomes so worried about the impact of explosive growth in loans that they put on the brakes (as they are already rumored to be considering)?

]]> By: Michael Pettis http://mpettis.com/2009/04/new-trade-and-reserve-numbers-from-china/comment-page-1/#comment-1450 Michael Pettis Sun, 19 Apr 2009 10:11:19 +0000 http://mpettis.com/?p=426#comment-1450 Litz, I am not suggesting that floating rate regimes are best, but if Asian central banks did not intervene, in nearly every case the currency would have risen, and probably by a lot on the case of China. This would have diverted resources from the productive sector because of the resulting contraction in the rate of credit expansion, reduced the competitive advantage of the tradable goods sector, and almost certainly caused a much slower rise in trade surpluses. After all following the Plaza Accords Japan’s trade surplus contracted sharply. Mark, actually quite a lot of people, especially here in China, although they don’t actively publicize their views, are very skeptical about the long-term impact of the stimulus package. At this point it is frankly much easier for me to find Chinese economists (non-government spokesmen, I mean) than to find foreign economists who doubt the usefulness of the stimulus package. Porter, thanks for the invitation. Feel free to send me information on your site and on the board f advisors but given my current work load I am unlikely to take on additional commitments. Litz, I am not suggesting that floating rate regimes are best, but if Asian central banks did not intervene, in nearly every case the currency would have risen, and probably by a lot on the case of China. This would have diverted resources from the productive sector because of the resulting contraction in the rate of credit expansion, reduced the competitive advantage of the tradable goods sector, and almost certainly caused a much slower rise in trade surpluses. After all following the Plaza Accords Japan’s trade surplus contracted sharply.

Mark, actually quite a lot of people, especially here in China, although they don’t actively publicize their views, are very skeptical about the long-term impact of the stimulus package. At this point it is frankly much easier for me to find Chinese economists (non-government spokesmen, I mean) than to find foreign economists who doubt the usefulness of the stimulus package.

Porter, thanks for the invitation. Feel free to send me information on your site and on the board f advisors but given my current work load I am unlikely to take on additional commitments.

]]> By: seatrus http://mpettis.com/2009/04/new-trade-and-reserve-numbers-from-china/comment-page-1/#comment-1448 seatrus Sat, 18 Apr 2009 18:48:32 +0000 http://mpettis.com/?p=426#comment-1448 kobe24, what the CNPC official said indicated his lack of PR skill. I suspect any executive in a large western private company, such as ExxonMobil, Microsoft, or even GM (when it was in its prime) would think the same way. But they will never say it in the public, because they are shrewder. China Interest, I think Andy Xie’s idea sounds like Russian “shock therapy”, where millions died prematurely, and the country transformed into a kingdom of oligarchs. I think the priority for China now is to lay down the social safety net. The investment and building up of social security institutions itself will boost the economy tremendously. Only after the institutions are in place, can we consider farther reforms in China. kobe24, what the CNPC official said indicated his lack of PR skill. I suspect any executive in a large western private company, such as ExxonMobil, Microsoft, or even GM (when it was in its prime) would think the same way. But they will never say it in the public, because they are shrewder.

China Interest, I think Andy Xie’s idea sounds like Russian “shock therapy”, where millions died prematurely, and the country transformed into a kingdom of oligarchs. I think the priority for China now is to lay down the social safety net. The investment and building up of social security institutions itself will boost the economy tremendously. Only after the institutions are in place, can we consider farther reforms in China.

]]> By: Dr.Frank Loo http://mpettis.com/2009/04/new-trade-and-reserve-numbers-from-china/comment-page-1/#comment-1447 Dr.Frank Loo Sat, 18 Apr 2009 18:17:24 +0000 http://mpettis.com/?p=426#comment-1447 HSBC had enjoyed a lot of publicity in Hong Kong over its right issue recently and its share price at the same time had some fun riding the roller coaster. However, it has appeared to have kind of calmed down recently and it is moving up again closing at HK$55.15 Friday April 17. It is one of the most popular shares among small private investors in Hong Kong. Don't get excited just yet over the recent rebounce. Read this and you will be duly alarmed. http://www.guardian.co.uk:80/money/2009/apr/12/hsbc-credit-cards-us-business HSBC had enjoyed a lot of publicity in Hong Kong over its right issue recently and its share price at the same time had some fun riding the roller coaster. However, it has appeared to have kind of calmed down recently and it is moving up again closing at HK$55.15 Friday April 17. It is one of the most popular shares among small private investors in Hong Kong. Don’t get excited just yet over the recent rebounce. Read this and you will be duly alarmed.

http://www.guardian.co.uk:80/money/2009/apr/12/hsbc-credit-cards-us-business

]]> By: Dr.Frank Loo http://mpettis.com/2009/04/new-trade-and-reserve-numbers-from-china/comment-page-1/#comment-1446 Dr.Frank Loo Sat, 18 Apr 2009 18:01:59 +0000 http://mpettis.com/?p=426#comment-1446 Total economic breakdown is underway: http://www.leap2020.eu/GEAB-N-34-is-available%21-Summer-2009-The-international-monetary-system-s-breakdown-is-underway_a3129.html Total economic breakdown is underway:

http://www.leap2020.eu/GEAB-N-34-is-available%21-Summer-2009-The-international-monetary-system-s-breakdown-is-underway_a3129.html

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