Brad Setser

Brad Setser: Follow the Money

Print Print Email Email Share Share Cite Cite
Style: MLA APA Chicago Close

loading...

Adding to echo chamber started by the New Economist, with a bit on China thrown in

by Brad Setser
July 21, 2006

I second the New Economist’s description of Tim Duy as the John Berry of the blogoshere.   I thought Tim retired from Fed Watching when he moved to Oregon, but the internet gave him a second life … 

I personally am more of a reserves watcher.   Rather than recite my usual litany of complaints about some central bank policies , I’ll just follow the New Economist’s lead for a second time and link to the Roubini/ Atlig econoblog on China's peg. I tend to side more with Roubini than Altig (surprise, surprise) – though I still am not quite sure why Nouriel thinks China will do a step revaluation now (read Survived Sars) …  there are other ways to get a bit of a revaluation if China so decides. 

I do share Altig’s sense that not much has changed since last summer.  At least so long as he is referring to the policy debate.  China certainly has changed.   The evidence that China is over-heating seems a quite a bit stronger.  I wonder if China’s decision to scale back its sterilization last summer had something to do with the current bout of activity.  China has indicated that it scaled back sterilization in part because it wanted to drive down domestic interest rates to deter speculation.  But perhaps China was also worried that the small revaluation would slow the economy. 

If China did want a bit of offsetting monetary stimulus, they may have gotten a bit more than they bargained.  The line of the week comes from Stephen Roach – Morgan Stanley’s resident former bear.  

Roach’s new found optimism (at least as much as is left) stemmed from confidence that central banks were taking imbalances seriously.  But he doesn’t seem to have much confidence in the PBoC’s ability to reign China’s economy.   Roach:

Most believe the People’s Bank of China will lead the charge in acting to slow the Chinese economy.  I don’t.  

The PBoC’s influence is limited, whether by political constraints that keep it from using the policy tools it has (interest rates, exchange rates), limits on the effectiveness of those tools in China’s unique context or a bit of both.

Right now, Roach seems to have more confidence in the central planners than the central bankers. 

Its [China’s] central planners are likely to be more important than its central bankers in regaining control over a runaway economy. 

That is a good line.  Roach is also right: it is pretty clear that China’s economy isn’t a classic market economy.  Not yet.  And somewhere there is a deep irony in the notion that the chief economist of an icon of American Capitalism seems to be calling for a bit more (effective) central planning …  

32 Comments

  • Posted by China Law Blog

    I think Roach is right on all counts. I too do not think Beijing really wants to slow down the economy. I don’t think they can politically afford to right now. There are still way too many people in China who are essentially unemployed. I also think that raising interest rates in China will have little effect, since so much of the growth is coming from the private sector (which gets very little of its money from Chinese banks) and the foreign sector, which gets virtually none.

    http://www.chinalawblog.com

  • Posted by Gcs

    brad ever notice the tick tock on china

    tick its over heating
    headed for an overcapacity slump
    or wild inflation

    tock its wasting itself away
    on negative return investments

    all will come home to roost
    when the chime of doom and contraction sounds

    tick …tock…. tick…. tock

    but
    the chime never goes off

    we aren’t “yet”
    dealing with a normal climax here
    credit crisis

    because private creditors
    do not control the flow of credit

    i’ll say no more then this

    if the trans nats get their way

    wall street and its comprador partners
    will gain control of this credit flow

    then we can talk of the chimes of midnight

  • Posted by psh

    OTly, Soros at FDL on his book, Sunday 5 PM NY time. His political philosophy’s the focus but I bet the thread would benefit from people who can surface his macro assumptions. The GOP intelligentsia will show up so you’ll be like Clarice Starling running the spaff gauntlet to get to Hannibal Lecter, but having seen him speak before he became the Antichrist, can say he’s even awesomer interacting.

  • Posted by wimpie

    “if the trans nats get their way

    wall street and its comprador partners
    will gain control of this credit flow

    then we can talk of the chimes of midnight”

    Gcs, shhhh!!! Prince charming(Hank “the hammer” Paulson) is telling PBC, chinderella will be fine once she’s fitted with her brand new anglo structured finance shoes.

  • Posted by Guest

    Heidi Wernett’s response was interesting:

    “I have been living in China for the past 11 years, prices tend to remain stable for 5 years at a time, with sudden 20% increases occurring all at once for consumption goods. This has translated to an average of 4% annually. However form 2005-2006, prices continue to rise for gas (50%), rice (50%), housing (25%), wages (20%). Specifically, building materials (25-30%). I audit my company’s expenses regularly: For example: Retail 1995-2001: a 50 lb bag of cement was USD$0.60. Today a a 50 lb bag of cement is USD$2.25. In 1996, Minimum wages for entry level farm workers were USD$40/month + 20% in extra benefits. In 2006, minimum wages are USD$75/month + 25% in extra benefits. Appreciation of the Chinese Yuan simply means for foreign investors like myself, who manufactures products in China to sell domestically, that I need to transfer more USD to support the same costs for business investment in China… Increasing cost of goods is out of control here in China but I haven’t read about it anywhere.”

    http://discussions.wsj.com/n/mb/message.asp?webtag=wsjvoices&nav=messages&msg=3951

  • Posted by Guest

    re: Roach’s statement: “…The efficacy of Chinese monetary policy is frustrated by two structural shortcomings — undeveloped capital markets, which limit the impact of interest rate fluctuations on corporate borrowing, and a highly fragmented banking system, which diffuses the transmission of centralized policy directives…” question being if the Chinese authorities see this as a structural shortcoming.

    Thinking about Richard McGregor’s recent observation: “…The corporate sector, both state-owned and private, now far outstrips households as the largest source of savings and is fuelling the investment expansion. China’s household savings rate has fallen below that of India…”, FT, July 18, 2006

    Aren’t the social unrest problems attributed to ‘unemployment’ grounded more in what seems to be growing inequities in human rights, living and working conditions, and the distribution of wealth? Is there any reason to believe that more ‘growth’ will generate more incomes that keep pace with increasing cash costs of maintaining, let alone improving the broader populace’s standard of living?

    The comment from chinalawblog reminds me of this:

    “Legal interpretation should not be guided by justice; it should be guided by efficiency (Cooter, 1989). Consequently, lawyers – as opposed to legislators-politicians – should not be concerned with dividing the pie as much as with making it bigger. Their role is not that of helping to cut the slices in a more just way. Issues of distribution should stay outside of the scholarly analysis of lawyers. They are the domain of politics.” – ‘Comparative Law and Economics’, Ugo A. Mattei, Luisa Antoniolli and Andrea Rossato, Universita Degli Studi di Trento http://encyclo.findlaw.com/0560book.pdf

    Might be helpful to know a bit more about how lawyers define efficiency.

  • Posted by Guest

    chinderella?

    “…On June 16, Asharq al-Awsat newspaper reported… that Iran had agreed to underwrite the purchase of military hardware for Syria from Russia, China… As such, the structure of a dual-superpower world is being revived, complete with all the rivalry between the Eastern and Western blocs in the Middle East that was characteristic of the Cold War era…” http://www.smh.com.au/news/opinion/israel-falls-into-a-dangerous-trap/2006/07/21/1153166583059.html

    And, still thinking about Norway:

    “President Vladimir Putin is set to keep US oil companies out of a lucrative gas field… The Russian leader is expected to favour Norwegian companies and reject bids by America’s Chevron and ConocoPhillips after failing to secure backing from the United States for his country’s attempt to join the World Trade Organisation… Putin singled out the Norwegian bidders for praise when asked by reporters about energy deposits in the Barents Sea. ‘You have probably heard that we are holding talks with several countries on the development of different fields, but companies from Norway are among the first on this list,’ he said…” http://observer.guardian.co.uk/business/story/0,,1826629,00.html

  • Posted by Gcs

    whimpie…right on !!!!!

    guest? “question being if the Chinese authorities see this as a structural shortcoming”

    indeed indeed

    my horse of a different color warnings aside

    jiggering away at
    policy interest rates hardly governs
    trans nat corporate “real” investments
    ie plant /machines etc etc
    thats a school yard dream
    of the pointdexters
    aka
    the monks of uncle milty

    ps i love the fragmentation bit

    compare the us banking system
    circa 1975
    to britains
    were we disfunctional then ???

    ———————————–

    to me

    this heidi W
    is the perfect trans nat

    villain

    wants a high dollar
    to make chinese imputs cheaper

    in fact
    for anyone interested in american jobs
    the wage inflation chitter
    is very encouraging but i tend to discount it
    in the long run

    housing costs are another matter entirely
    as has been observed here often

    urban lot rents are getting spec-ed up to the sky

  • Posted by MTC

    Dr. Setser -

    Having read the Roubini-Altig exchange, I could not help but wondering whether or not–warning, potential extreme stupidity ahead–the tools and outlook of macroeconomics are inappropriate for analyzing the behavior of China. Would it make more sense to think of China leaders as the–again, potential extreme stupidity ahead–the board of directors of an immense corporation, China, Inc.?

    Take the build-up of an Everest of currency reserves–senseless for an economy, but maybe just the cost of doing business for a corporation. Whatever potential valuation losses present therein are balanced by increased government revenues from an economy growing at 11% and the interest income from the reserves portfolio.

    The Political Bureau of the Central Committee of the CCP is composed almost entirely of industry engineers. Would they not tend to view the state as a big corporation?

    Looking at China with a micro- outlook rather than macro- outlook may indeed throw some light on some of the more unorthodox moves, such as the refinancing of major banks through rerouted currency reserves.

  • Posted by MrBill

    Does it not strike anyone else that there is no masterplan? Did anyone assume there was?

    China is trying to get bigger, so they can compete with the USA for power and influence as well as secure scarce natural resources to support future growth.

    That Russia should prefer to work with Norwegian companies rather than US companies does also not surprise me. The USA would also rather sell F16′s to India and Pakistan rather than Russia and China as well.

    Norwegians and Russians have already cooperated extensively in the Baring Sea. But ConocoPhillips also has +/-20% in Lukoil, so balanced development of strategic assets is not unusual for any country, and Russia has usually played for influence in Central Asia and the ME. So again, no surprise there for me.

    As a matter of fact global current account imbalances with the main players lined-up on either side (and the non-alligned as the new Third World) is starting to look like the New Cold War to me. Mutually assured self-destruction via trade flows and the threat of dollar devaluation.

    RE Wall Street versus The City. I think we all know who the innovator has been, and we’re all worried about US regulatory creep because they are stiflers (Sarbox/ Patriot Act/etc.)not innovators, and if they can level the playing field to their advantage for political or economic self-gain in the process (SWIFT), so be it! ; – )

  • Posted by Guest

    re: ‘Wall St.’ vs. ‘City’

    for this post, question may be how Beijing is positioning itself, perhaps along with other emerging centers?

    “THERE is an intriguing turf war going on between the Financial Services Authority and the Commodity Futures Trading Commission, the US regulator, over what used to be called the International Petroleum Exchange… But market gossips have noted the unexpected departure yesterday of a key member of the CFTC. Sharon Brown-Hruska is described to me as “very much the liberal, very much for open competition”. Her departure may indicate that things are swinging the way of the hawks.” http://business.timesonline.co.uk/article/0,,8210-2279164,00.html

  • Posted by Guest

    “China is to trim export rebates for a range of products as part of measures aimed at rebalancing and restraining economic growth and its swelling trade and current account surpluses… the rebates would be cut by about 2 per cent in industries that are “energy-consuming and resource intensive” … In other measures, China announced on Friday a 0.5 percentage point increase in the reserve requirement for banks from August 15 to 8.5 per cent. Jun Ma, a Deutsche Bank economist, said this indicated the central Bank had “become significantly more hawkish, due to stronger consensus for policy tightening at the highest level than in any other period over the past four years”. To ease pressure on the renminbi from capital inflows, the government also approved three state banks on Friday to invest $4.8bn in offshore securities.” http://www.ft.com/cms/s/7ed67314-1a68-11db-848c-0000779e2340.html

  • Posted by Guest

    And looking at Pesek’s ‘China’s Schizophrenic Boom Would Baffle Keynes’, which also quotes Brad:

    “…Sure, China could boost the yuan 10 percent or 20 percent to restrain inflation and get U.S. politicians off its back. Yet that could slam an economy all too dependent on exports and one that has made little progress getting domestic consumers to spend more…” http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_pesek&sid=aOhdnwWVgEOc

    question also being the challenges of addressing an apparent lag in consumers’ capacities to spend more? As for his comment that China may need a role model, might suggest that China and all of its peers may be in need of one (whether or not they may want one is another question) as the current global situation has to be unprecedented (also think his ‘Soviet Union’ example may not be as isolated as he seems to infer). But as economies integrate, interesting to watch the similarities and differences develop, along with tools and tactics for maximizing leverage as participants compete in an endgame which may not be all that clear.

  • Posted by MrBill

    “”re: ‘Wall St.’ vs. ‘City’

    for this post, question may be how Beijing is positioning itself, perhaps along with other emerging centers?”"

    I think many of us viewed the handover of HK back to China and the two systems, one country as a transition period until Shanghai as a financial hub was up and running, and then when HK was no longer needed as the gateway to China for FDI its usefulness and influence would diminish. I think that is pretty much what has happened, although I am not sure? Any thoughts?

  • Posted by Guest

    Any comments on, or updates to this?

    “…Hong Kong Chief Executive Tung Chee-hwa is careful to avoid claiming the FDI is real. In a speech on June 1, he suggested that China was the ultimate destination of much of this money and interpreted this as proof of Hong Kong’s “unique position” as one of China’s leading financial centres. But government sources have suggested privately that a big chunk of it is due to mainland entities shifting assets to Hong Kong subsidiaries ahead of initial public offerings or to boost flagging share prices of existing listed companies. These movements were presumably approved on the mainland, but it would require an unprecedented transfer of assets to explain the volume of last year’s inflows. What is known is that in 1999, money from tax havens and the mainland made up almost 70% of Hong Kong’s FDI inflows according to official statistics. For last year, there are also suggestions that apart from mainland money, the boom in Taiwanese investment in the mainland could also explain some of the influx because the island’s businesses are forced to conceal their transactions to avoid Taipei’s restrictions on cross-strait economic ties. Other senior local economists suggest tax avoidance on the mainland is probably behind a sizeable proportion of these flows. However, most economists never acknowledge this when they analyze capital flight from China or any other market for that matter. The most common method of calculating these outflows is to compare China’s trade surplus plus net capital inflow against the rate of increase of the country’s foreign-exchange reserves. These gaps are often described as errors and omissions in the notoriously unreliable official statistics…”

    http://www.feer.com/breaking_news/010613.html

  • Posted by MrBill

    So Hong Kong is a better brand of washing machine for laundry than either Haier or Maytag? ; – )

  • Posted by MrBill

    RE Stockmarket listings
    “AMONG the heads of foreign companies listed on American exchanges, there is a broad consensus: America’s legal environment is increasingly toxic and has only been worsened by the onerous provisions of the Sarbanes-Oxley act. At the same time, American exchanges’ advantages in transaction costs have narrowed substantially. Were it not for equally despised laws preventing companies from delisting their shares, many foreigners would be gone in a moment…. ”
    Source: http://www.economist.com/finance/displaystory.cfm?story_id=E1_STJRSPS

  • Posted by Guest

    “The deficit has stubbornly remained for so long that economists are beginning to construct stories about how it may be sustainable after all. A new paper is circulating from the National Bureau of Economic Research, suggesting that the global urge to accumulate US assets is a natural and sustainable consequence of fast-growing developing economies with weak capital markets.” http://www.ft.com/cms/s/fb0bfeb8-191e-11db-b02f-0000779e2340.html

  • Posted by Guest

    The New Multinationals – These emerging giants are smart and hungry, and they want your customers. Be afraid. Be very afraid.

  • Posted by Guest

    Thinking of models, Brown-Hruska’s new employer looks interesting:

    http://www.econres.com/documents/about.html

  • Posted by Guest

    In response to another guest’s post, interesting article, which goes on to say:

    “…Where they choose to fight, of course, the established multinationals still hold big advantages over the upstarts. Citibank, General Electric, Honda, HSBC, Motorola, Nokia, and Philips are masters at using low-cost manufacturing, engineering, and managerial talent from Bangalore to São Paulo. Few developing-nation companies have such management agility… “We are not afraid of competition,” Everitt says. “It gets the juices going and helps us find ways to be better.”… Last year, Whirlpool Corp agreed to pay a surprisingly high $2.8 billion to buy Maytag Corp. It wanted to keep Maytag out of the hands of China’s Haier, which is ramping up in the U.S. and had made a rival bid. Cisco, meanwhile, is keeping up the pressure in China, Huawei’s home market. Cisco continues to win large orders from Chinese corporations, has plowed $650 million into Chinese tech startups, and has forged a tieup with local Huawei rival ZTE Corp. Then there’s always the strategy of joining the new challengers…” http://www.businessweek.com/magazine/content/06_31/b3995001.htm

    but would appreciate some clarification as to how this relates to brad’s post.

  • Posted by Guest

    Lex: US current account – US overseas ventures do not appear unusually profitable, by either US, or local market standards.

    America’s openness to foreign investment – To recap: the US economy is suffering from the largest current-account deficit in its history at a time when net national savings have dropped below 1 per cent of gross domestic product. At a moment such as this, the US should be fighting hard to attract more foreign capital on both its current and capital accounts. Mr Shelby’s bill would take the US in the opposite direction.

  • Posted by Guest

    Might also be a bit of a problem with contemporary definitions of ‘foreign’ capital and investment?

  • Posted by roast

    Brad says…
    “The PBoC’s influence is limited, whether by political constraints that keep it from using the policy tools it has (interest rates, exchange rates), limits on the effectiveness of those tools in China’s unique context or a bit of both.”
    How do interest rates control the lending of capital at the local bank level? It’s my understanding big loans for major developments at the local level would be controlled by the big-wheels in the CP or the fellow-travelers who are “connected”. I figure that credit-worthiness is an issue for Joe Doakes who is looking for small loan, but I am unaware any big changes in the way loans are handed out since the most recent credit debacle.
    The PBoC recently raised its reserve requirement…this could be signal that the price of money is not functioning as a rationing agent, and that the same-old, same-old rules apply. Less sterilization would also support the view of a carrot-and-a-stick. If the big regional banks bit the bag for a second time, this could be too much for even the Daddy Warbucks CP to swallow, and they might have to cash in a few of those US Treasuries.

  • Posted by bsetser

    roast — call me old fashioned, but when i have to pay more for something, I usually demand less of it; if the price of borrowing rose, some local developers would find leverage less attractive … but you raise a valid point. interest rates are so far below nominal GDP growth that small changes would have little impact; most folks would take out a loan if they had the connections to get it.

    MTC — in the past i have argued that China, Inc often acts a bit like a city with lots of city owned land that is works in cahoots with a bunch of developers (particularly since they can help the developers get land at under-market prices) … but they also have lots of industrial assets. I think the picture you paint has an element of trust, but it also leaves out out the center/ local dynamics. And i suspect it also imputes a bit too much rationality to the chinese policy processes. Some things happen because a policy that had one impact in different circumstances has a very different impact in other circumstances — and then it becomes embedded in a lot of decisions and hard to change. the RMB peg strikes me as an example. but there are others — America’s low gas taxes for one.

    guest — yes, there is a lot of round tripping via hong kong, with local money coming out to come back in as foreign FDI. that is encouraged by the favorable tax treatment for FDI v. domestic investment (unless this has been changed). such roundtripping tho doesn’t have a net impact on the capital account — money comes out to come back in. Taiwanese (and US/ other) FDI being routed via HK also rings true.

    as for the errors and omissions — one additional point: so long as reserve growth numbers are not adjusted for valuation effects, some of the errors and ommissions will come from such valuation changes. Wei and Prasad argued that this could be an important source of errors and omissoins in 03/04 (valuation changes worked the other way in 05, they should reduce “errors”). But there is clearly quite a bit of unrecorded capital movement. Plus, China doesn’t report much detail on its capital account — compare Russia’s data to the PBoC and you will see what i mean.

  • Posted by DOR

    The Hong Kong FDI quote by Tung Chee-hwa is at least two years old. That was the last time he was CE on June 1st . . . The current guy is Donald Tsang.

    More on some of the other tidbits here later; off to see the FS on the GST this morning.
    .

  • Posted by DOR

    Guest,

    “Aren’t the social unrest problems attributed to ‘unemployment’ grounded more in what seems to be growing inequities in human rights, living and working conditions, and the distribution of wealth?”

    No. Social unrest in China almost exclusively arises from corruption. Typically, land confiscation / under compensation, or non-payment of wages.

    “Is there any reason to believe that more ‘growth’ will generate more incomes that keep pace with increasing cash costs of maintaining, let alone improving the broader populace’s standard of living?”

    Yes. That is what the last 25 years have been all about: soaring standards of living, both relative and absolute.

    MTC,

    China is far too fragmented to be thought of as a corporation, even a conglomerate. There is no centrally produced employee handbook.

    Why? We (OECD) told them not to do it that way, so they don’t.

    MrBill,

    You are correct that there is no master plan. We (OECD) told them to scrap central planning and national price fixing, and they did.

    “I think many of us viewed the handover of HK back to China and the two systems, one country as a transition period until Shanghai as a financial hub was up and running, and then when HK was no longer needed as the gateway to China for FDI its usefulness and influence would diminish. I think that is pretty much what has happened, although I am not sure? Any thoughts?”

    Short answer: Hong Kong has over 200 mainland companies listed on the stock market. Shanghai has zero foreign companies on its “market”.

    Longer response: We don’t do the same things. Shanghai is all about excitement – consumer markets, cheap production – while Hong Kong is the boring bits like rule of law, convertible currency, clean government, enforceable contracts, IPR, world class financial services, headquarters operations, low taxes, few (and sensible) regulations and lots of good support facilities for families (schools, clubs, languages).

    Oh, and Hong Kong is the largest non-local investor in all parts of China, net of round-tripping and Taiwan money.

    Given 30-50 years, they might catch on, but not yet.

    * * *

    Policy in China is sticky. Individuals get personally attached to a policy, and fight like hell to keep it as a monument to their power. Few policies get very far without personal and powerful champions. When the people change, so does policy.

    .

  • Posted by MrBill

    “while Hong Kong is the boring bits like rule of law, convertible currency, clean government, enforceable contracts, IPR, world class financial services, headquarters operations, low taxes, few (and sensible) regulations and lots of good support facilities for families (schools, clubs, languages).”

    yep, all those boring bits…. no where as exciting or as entertaining as The Bolivar Revolution! for example… IPR?

  • Posted by DOR

    MrBill,

    IPR = Intellectual property rights, if that’s what you were asking.

    Hong Kong people go across the border to buy fakes, and Mainlanders come here to buy the real thing (from Gucci bags to baby formula and pharmaceuticals).
    .

  • Posted by MrBill

    RE IPR. Thanks.

  • Posted by Guest
  • Posted by Guest