Brad Setser

Brad Setser: Follow the Money

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

loading...

How fast will China’s economy slow? And will China also slow the pace of RMB appreciation?

by Brad Setser
July 22, 2008

Chinese policy makers are concerned that China’s economy is slowing.

The stock market is obviously well off its highs, taming some animal spirits.

Housing prices in Shengzen are no longer rising.

Complaints from the export sector are growing – even though China’s exports are still up substantially relative to last year. Some forward looking indicators suggest that the global slowdown is catching up to China’s export sector – and a slowdown in exports could spillover into a slowdown in investment.

At the same time, China is worried about ongoing hot money inflows, and the ongoing difficulty sterilizing extraordinary fast reserve growth. A host of controls have been tightened. Controls on exporters. And now controls of FDI inflows. Yu Yongding of the Chinese Academic of Social Sciences characterizes China’s new capital account policy as “easy out, difficult in”. He is right. Note as well Dr. Yu’s comments on the “unattractiveness” of QDII)

And to make matters worse, there are fears that the recent rise in inflation has changed domestic expectations about future inflation. Dr. Yu writes that “inflation expectations have been firmly established among the public.”

Key members of the state council recently went south to hear the complaints of exporters first-hand. And Chinese policy makers are now meeting, reportedly to set the course of China’s economy policy over the course of the remainder of the year. Michael Pettis relays a report in the South China Morning Post:

The nation’s [China's] top decision-making body, the Politburo, will meet this week to consider major economic policy for the mainland for the rest of the year amid growing concerns over slowing growth, rising inflation and, in particular, a dramatic decline in exports as the global economy slows. All the most senior leaders completed fact-finding missions to economic strongholds and key export bases early this week, according to reliable sources.

The policy choice is fairly binary: Should policy be directed at controlling inflation, or supporting growth?

Chinese policy makers are clearly worried that the global slowdown will spillover into China. Dr. Yu reports that the Chinese Academy of Social Sciences has been asked to look into the question, and that some of his colleagues believe that a 1% slowdown in the US translates into a 1% slowdown in China.

My colleagues at Institute of World Economics and Politics are calculating the possible impact of a slow down of the US economy on China’s growth. So far we have not reached a firm conclusion yet. Taking direct and indirect impacts into consideration, according our calculations, for a one percent slowdown in the US economy, which will have negative impact on China’s other trade patters, may cause a slowdown in China’s growth rate by one percent.

That seems high to me.

Over the last four quarters, the US imported just under $325b of goods from China (and exported just under $70b). That is roughly 9% of China’s GDP over the last four quarters. Assume that the Chinese value added is 50% (see the CBO for more), so the Chinese value-added in China’s exports to the US is around 4.5%. The difference between 20% y/y growth and 0% y/y growth in US imports from China (Chinese exports to the US) is a bit under 1% of GDP. But the slowdown from 20% y/y growth to current levels also reflects a slowdown in US non-oil demand growth of more than 1%.

This rough calculation leaves out the impact of a US slowdown on the rest of the world, and on China’s exports to the rest or the world. More importantly, it also leaves out the ways a US slowdown stimulates China. China manages its currency against the dollar. If the US slowdown pulls the dollar down, it also pulls the RMB down. And that stimulates China’s exports. There is a reason why Chinese exports to Europe have been growing so strongly over the past year.

And so long as China manages its currency against the dollar, it faces pressure to “import” US monetary policy. It can cut policy rates as the US cuts policy rates. Or it can keep rates high and attract large capital inflows – some of which aren’t sterilized and could result in rapid money growth, higher inflation and lower real interest rates.

So far the “stimulus” from a weaker dollar and low real rates has offset most of the slowdown in Chinese exports to the US. China’s exports to the US are basically flat in real terms over the past year – so China has in some sense already felt the impact of slower US growth. But Chinese policy makers are clearly worried that is still more to come – and that the problems in the US economy will neither be temporary nor well-contained.

Morris Goldstein and Nick Lardy argue that this shouldn’t matter. China’s exchange rate is as undervalued as it has ever been. The RMB’s appreciation against the dollar has been largely offset by the dollar’s depreciation against other currencies. Real appreciation has mostly come from the rise in inflation. Throw in stronger productivity growth in China than elsewhere, and the gap between China’s current exchange rate and the likely market exchange rate is as large as it has ever been.

Goldstein and Lardy note that China has failed to “rebalance” the basis of its growth away from exports and investment:”China has remained heavily dependent on investment and growing trade surpluses to sustain its double-digit growth rate.” A global slowdown presents a ideal opportunity for a bit of rebalancing. Exports are (perhaps) slowing on their own accord. Investment could slow too. China could try to push exports back up by slowing (or stopping) RMB appreciation. Or it could look to other policies to support growth –

Fiscal policy is an obvious choice. China has significant domestic needs. Better schools, for one. Better access to health care for another. Its government has large deposits at the central bank. Those deposits are part of China’s efforts to sterilize rapid reserve growth. With a different exchange rate regime, those deposits could be run down, supporting economic growth. Government spending hasn’t increased as fast as revenues. That too could change. China has plenty of ways of stimulating the broad economy rather than stimulating the export sector by holding the RMB down if growth is a bigger concern than inflation.

China’s choice doesn’t just matter for China. If China tries to support its growth amid the global slowdown by supporting its export sector, it is working against global adjustment. If China tries to support its growth by supporting domestic demand, it can help to facilitate global adjustment.

50 Comments

  • Posted by Rien Huizer

    Thought I would raise your eyebrows at Dr Yu’s One Percent principle..

    Your last paragraph is correct, Lardy’s estimate that combination of appreciation, inflation and productivity growth lads to movement without motion looks plausible too.

    I think that this situation will result in intense factional strife between various stakeholders as well as people with real ideological preferences (perhaps less rare in this country than always assumed). Then there are the foreign investors who do not like any appreciation and hate floating exchange rates. And given that many of those investors are very familiar with incentive structures of PRC officials outside the centre, and the centre does not have enough control (although it ts getting better), it is very hard to get rid of the export complex.
    This may well be a contest between three groups: populists, technocrats and foreign proxies. Somewhere along the line (and the earthquake may accelerate this) the six or seven “Koreas” nearing completion will have to allow the rest of the country some of the things the peasants hoped to get during the revolution and for which they are still waiting. We know very well how the other Asian developers dealt with the countryside whilts prioritizing industrialization. But China is not quite doing that. You’ve got to keep your farmers reasonably happy and on he farm until the factories need them. And you have to maintain the communal socialization mechanisms.

    My impression is that he current leadership is a lot more representative of the country than the previous one, so perhaps this time the “greater Taiwan” approach will lose against “grater China”… But it looks like we are going to see some very interesting politics, and part of that will probably not be completely secret. Can’t wait. But do not hold your breath for quick results. US elections first.

    Trouble is, how do you spend 2 trilllion USD on schoolbooks, country roads and hospitals? who will accept the greenback?

  • Posted by Michael Pettis

    Brad, a friend of mine (and, I believe, of yours) who is very knowledgeable about the politics of financial decision-making in China told me today that we should expect a significant reshuffling in bank leadership after the Olympics. From what I understand, he seems to believe that the new bank leaders are more likely to be symphathetic to the concerns of the provincial leadershp — i.e. the guys who worry more about growth and less about inflation. If he is right (and he has a good track record), we may see even more of a tilt to growth, perhaps through disguised fiscal expansion through the banking system — not a good thing, in my opinion.

  • Posted by Rien Huizer

    Would that be POBC, CIC or the commercial banks themselves. It makes sense but if the provinces get more say over the local affairs of the banks, that would be a giant step back in financial dvelopment. I guess you mean that we will see more people with the type of background of Hu and Lou, with government experience in the provinces (and then specifically the non-coastal ones), rather than Princeton, IMF and WB.
    The return of the bank owned by the Whole People?

  • Posted by Twofish

    bsetser: The policy choice is fairly binary: Should policy be directed at controlling inflation, or supporting growth?

    The policy choice really isn’t binary since you really want to do both, and you try to come up with a set of policies that give you rational trade-offs between two conflicting goals.

    Huizer: I guess you mean that we will see more people with the type of background of Hu and Lou, with government experience in the provinces (and then specifically the non-coastal ones), rather than Princeton, IMF and WB.

    I wouldn’t be surprised if this happened. The current state of the US financial system has greatly eroded the standing of people who were advocating that China make its financial system more like the US financial system, and so its understandable (and probably not a bad thing) if people advocating these sorts of policies lose some power.

  • Posted by Twofish

    bsetser: China’s choice doesn’t just matter for China. If China tries to support its growth amid the global slowdown by supporting its export sector, it is working against global adjustment. If China tries to support its growth by supporting domestic demand, it can help to facilitate global adjustment.

    But if there is a slowdown in the United States, could it be a bad thing if China decides not to support global demand growth? I’m thinking if China just suddenly decides not to buy any more US treasuries or agencies.

    One other thing, the “populist faction” tends to be from the interior rather than the coastal provinces so while they tend to be pro-growth, they tend not to be pro-export-growth, so if you have the “populist faction” in charge rather than the “technocratic faction” you are more much likely to get a jump in the Renminbi and a shift away from promoting export industries toward promoting SOE’s which don’t promote exports.

    This points to the danger in trying to think of different policy groups as “good” and “bad.”

  • Posted by Twofish

    One final thing. The shift in bank leadership is probably part of an overall generational shift away from the Hu-Wen generation to the next generation of Chinese leaders. Hu-Wen are preparing for their retirement. Their designated replacements are in the Politburo and we are seeing the shifts start to trickle down into the banks and the economic bureaucracy.

  • Posted by bsetser

    Michael — interesting. It seems like there has been a strong push-back against the tightening of last fall.

    Rien — I have to confess I never under the center lacks the tools to control the provinces argument, at least when it comes to the exchange rate and monetary policy. The external value of the RMB is set at the center. if the center wants to force the provinces to adjust, it can let the RMB rise. Sterilization — whether from a rise in bank reserves or a buildup of fiscal deposits (i.e. tight fiscal) — is also set at the center. The barrier here doesn’t seem to be a lack of instruments in Beijing, but rather an unwillingness to use them.

  • Posted by bsetser

    2fish — the US can adjust to a gradual fall (at this stage i would take a pause in the increase) in China’s purchases of Treasuries and Agencies. it cannot easily handle a sudden stop (in new purchases). Given that Beijing isn’t going to let the RMB rise to the point where China’s current account surplus disappears or there so many more people who think the RMB is overvalued than undervalued that something like $400b of private capital (on net) wants to leave China, i think this risk is minimal.

    Remember as well that China’s strong export growth sucks demand away from other producers — 30% y/y growth off $1200b is $360b (that won’t happen this year, but you get the picture), 30% off $1.5 trillion is $450b and so on. At some point, China’s export growth is going to have to slow — you know the problems of compounding off a bit base well.

    Finally, more Chinese demand = more Chinese demand for US exports, and more demand for US exports from other countries that are selling more to China … adjustment isn’t all pain and no gain.

  • Posted by Rien Huizer

    Brad, yr #7

    I was not referring to monetary policy. No doubt there is only one CNY (remember the discussions about money in the 19th century USA) What I meant is the pre-Zhu world where the provinces had everything “national” under provincial control, except the PLA (one of the many wise moves of the very flawed genius Mao Z D) . That should not return. The reorganisation of the POBC and the commercial banks to no longer mimic the overall administrative structure of the PRC was one of the great reforms of the 1990s. But I doubt that provincial authorities “printing their own money” i,e, making credit available not based on economic feasibility but on need (whoever’s?) will return.

    More attention for the interior is of course one of those Chinese political perennials (you cannot blame the neo mandarins for being snobs of a sort) that will never make it into real money. But it is -given the right position of the business cycle – a powerful weapon against the Princetonians in those constests where defining and providing Minsheng is important. A bit like the Democratic Party in the US?

  • Posted by AC

    Brad – You wrote in previous posts that the growth of the Chinese reserves could be one trillion dollars this year. Does that mean that China needs to buy this huge amount of dollars in order to prevent a faster rise of the yuan? If this is not the case, then in principle the Central Bank could refuse to buy all the dollars offered to it for purchasing. That would be a good way to fight against hot money inflow. What could the dollar holders do with their dollars, if the Central Bank does not buy them?

  • Posted by Gregor Neumann

    @all: Have look at this article in Caijing. It describes the position of different schools of thinking in China and searches for real world examples for some claims (quotes below)
    http://www.caijing.com.cn/20080723/76088.shtml

    * “Such is the distorted fruit of price controls. Consumers, enterprises and foreign investors are taking advantage of low input prices. As a result, some companies survive with abnormally low spending levels, while others are reluctant to upgrade technology and product structures. As a result, China is home to excess investment, overcapacity and rapid GDP growth.
    Controlled input prices and near-zero environmental costs have encouraged excessive investment, resulting in high resource consumption and environmental damage, said Xu Xiaonian, a professor with China Europe International Business School. The 10 percent GDP growth level is too high, he said.
    “Raising resource and environment prices, and lifting salary standards, is a substitute to yuan appreciation,” said one analyst. Furthermore, he said, lifting price controls can be seen as a cost normalization process.”

    * “Meanwhile, a problem with excess investment has been exposed. According to the central bank, loans to Zhejiang companies grew 22 percent annually between 2003 and ’07 — far above the 16 percent national average. Apparently, they went too far.
    Cai explained that companies in the province flush with cash have tended to increase investments and expand production, instead of enhancing management, upgrading product structures or improving risk and cost controls.
    “They have invested too much in too many fields,” said an executive at a major shoemaker. “Once credit conditions are tightened, they have trouble raising funds.”

    * “Excess liquidity has been blamed for inflation, while the trade surplus is said to be a major liquidity driver. To maintain a stable yuan exchange rage, the central bank — the People’s Bank of China — buys with U.S. dollars, putting another 7 yuan into circulation for every dollar. To soak up trade surplus liquidity, the central bank raised the required reserve ratio for commercial banks six times this year to 17.5 percent, and continued issuing central bank bills. Now, there is less room for reserve hikes, and bill issues are less effective.
    The central bank usually looks at curbing loan and M2 growth to control money supply. Some think the broader M3, which includes domestic loans plus foreign exchange assets, should be monitored as well. But as long as forex assets are seen as an “uncontrollable” external variable, the focus will remain on domestic loan growth.
    There has been speculation in recent months that the central bank may soon raise interest rates for the first time this year. Some experts suggest raising rates while relaxing quantitative controls to test and filter out the most competitive companies.
    However, risks have kept the central bank from making such a move. Higher rates attract more “hot money,” raising finance costs and adding interest burdens for real estate buyers. Therefore, the central bank is unlikely to raise interest rates this year“

  • Posted by PG

    Brad, Europe is slowing significantly as well. Euro/$ may adjust lower. So, the Chinese Government might have to choose a policy for a global slowdown. I don’t think they can change export/investment orientation into domestic consumption on a dime. Besides, results of such change of policy may be highly uncertain at best.

  • Posted by Dave Chiang

    The Guangdong faction within the Chinese government has considerable financial ties with large export manufacturers across the Pearl River Delta. Recall that China’s economic opening to the world by former paramount leader Deng Xiaoping was spearheaded by the Hong Kong business community. The labor intensive textile manufacturers with razor-thin profit margins have been extemely impacted by the yuan currency revaluation. Over 50% will soon close shop in Guangdong province. Those Hong Kong enterprises are mostly medium to small companies that generally have a low technology production facilities.

    Including Brad Setser at the CFR, the Washington Consensus Elites have never expressed one iota of concern over the massive job displacement of millions of Chinese workers from the revaluation of the yuan versus the US dollar. Guess what, labor intensive Chinese textile workers with high school educations can’t be retrained to become investment bankers or hedge fund managers. Bottom line. Without jobs, these people will go hungry and eventually will riot in the streets. Instead of pandering to self-centered US political pressure, the Chinese government needs a real backbone to just say “No” to Western Neo-liberal pundits who place the average Chinese worker at the absolute bottom of the list of concerns.

    Furthermore, labor intensive textile jobs will NEVER return back to the US Economy even if the Chinese yuan were revalued an additional 10, 15, or 100 percent. US multinationals are already shifting production from China to even lower labor cost nations especially Vietnam and India. Under Washington Consensus Neo-liberalism economic dogma which Former Treasury Secretary Robert Rubin brutally applied to the Indonesian people during the late 1990′s, Chinese workers are equally expendable as American workers.

  • Posted by Sinomania!

    2fish – on the generational shift, both Xi Jinping and Li Keqiang are busy visiting manufacturing areas and Li continues to assure rapid growth will continue.

    I think the policy choice will remain with growth. Beijing seems more than willing to tolerate a lot to ensure growth stays on track – urbanization still has a long way to go.

  • Posted by Twofish

    Huizer: What I meant is the pre-Zhu world where the provinces had everything “national” under provincial control, except the PLA (one of the many wise moves of the very flawed genius Mao Z D).

    This structure may have helped China move toward a market economy more easily than Russia. In the case of China, most industries were organized along provincial lines with each province able to be self-sufficient, whereas in Russia, most industries were organized along functional lines in which you had different parts of the enterprise in different union republics.

    What this meant is that when central planning was relaxed, the different provincial industries were able to compete with each other with the central government acting as referee, and this had the added effect of making the provincial authorities interested in strengthening the power of the central government, since having a strong central government acting as referee meant that a provincial industry could expand into other provinces.

    By contrast when central planning was relaxed in Russia, things just fell apart.

    One reason China adopted this industrial structure was military. Mao wanted to be able to lose a third of the provinces to a Russian invasion or a nuclear war and still be able to fight back (which is basically what happened when he fought the Japanese).

  • Posted by Dave Chiang

    http://www.bloomberg.com/apps/news?pid=20601101&sid=a2wJ3vgrBR9E&refer=japan

    Chinese people are increasingly optimistic about their own country, with 86 percent expressing satisfaction with its overall direction, a jump of 38 percentage points since 2002. Sixty-five percent said they believe the government is doing a good job on the issues that matter the most to them.

    Seventy-seven percent of Chinese said people in other countries have a favorable opinion of their nation. Nine of 21 countries in which Pew conducts polls showed views of China have become more negative, according to Pew research released in June.

    The findings are based on in-person interviews with 3,212 Chinese adults between March 28 and April 19. The poll had an error margin of plus or minus 2 points.

  • Posted by Twofish

    DC: The Guangdong faction within the Chinese government has considerable financial ties with large export manufacturers across the Pearl River Delta.

    There really isn’t much of a “Guangdong faction.” There was something of a “Shanghai faction.” In any case, the main division within the Communist Party between the “populists” and the “technocrats” doesn’t fall very neatly allow provincial lines.

    In any case, politicians associated with coastal regions tend to be more favorable to policies associated with the “Washington Consensus” than those from the interior. Someone from Guangdong tends to be more in favor of limited government and more role for the market than someone from Hunan.

    Also politics shifts. In the mid-1980′s, it was possible to think in terms of Guangdong versus Shanghai, but that was decades ago, and what people are arguing about has changed.

    DC: Guess what, labor intensive Chinese textile workers with high school educations can’t be retrained to become investment bankers or hedge fund managers. Bottom line. Without jobs, these people will go hungry and eventually will riot in the streets.

    Most of the people who are ending up in Guangdong are farmers from the interior which could be better off with a revalued RMB which will allow them to easily buy imported fuel and fertilizer needed to farm. There is no way that export industries can absorb the 500 million people in the interior, and for that to happen you need to improve standards of living in the interior provinces rather than having everyone move to the coast.

    DC: Furthermore, labor intensive textile jobs will NEVER return back to the US Economy even if the Chinese yuan were revalued an additional 10, 15, or 100 percent.

    This isn’t necessarily the case. You could see a shift in some textile production back to the United States if the price of energy shifts. If the cost of transport increases, this pushes production near the consumer. Also for high value, limited run textiles, speed matters more than cost.

  • Posted by Twofish

    Sinomania: on the generational shift, both Xi Jinping and Li Keqiang are busy visiting manufacturing areas and Li continues to assure rapid growth will continue.

    If you look at the positions in the Communist Party, with almost mathematical precision, you have one person that is a “technocrat” and one person that is a “populist.” Li Keqiang is the populist, and Xi Jinping is the technocrat.

  • Posted by Dave Chiang

    Twofish,

    Although not as pronounced as before due to rapid national transport and communications integration, there still is a regional element to internal Chinese government politics. Under former Jiang Zemin, there was alot of resentment against the Shanghai faction across Guangzhou. The Guangdong economy has a relatively weak technology industrial base in comparison to the Shanghai or Beijing region. While Hong Kong businessmen operating “light industries” in Guangdong would have previously preferred limited Chinese Central government economic role in the Economy, right now they are screaming “bloody murder” across the Pearl River Delta for government intervention to lessen the yuan currency revaluation. The fast appreciation has drawn strong opposition from exporters and some government departments including the Ministry of Trade and Commerce.

  • Posted by bsetser

    PG — there are fairly easy ways of stimulating domestic demand. Lower taxes (see “W”). More government spending. Reducing the bank reserve requirement and allowing more bank lending. The entire economy cannot be reoriented on a dime, but it is quite possible to offset a 1% of GDP drag from net exports with a domestic fiscal stimulus. The problem here isn’t a lack of capacity; it has been an unwillingness to change from an exchange rate stimulus (i.e. an undervalued exchange rate that propels exports) to a fiscal stimulus.

    AC — if the PBoC stopped buying dollars, the RMB would rise until private demand demand for dollars materialized. No one really knows where that might be.

    DC — I have a great deal of sympathy for workers displaced by global shifts. I have a hard time feeling sympathy for workers in China’s export sector tho when exports are increasing by 20% y/y and net exports contributed between 1 and 2% of China’s GDP growth in q1. the export sector is still expanding.

    More importantly, there is now a great deal of evidence that China’s export and investment intensive growth hasn’t created many jobs in aggregate — that is why labor income is falling as a share of GDP. a desire to reverse that pattern of growth — and create a pattern that creates more jobs (tho not necessarily more export jobs) — is a big reason why I advocate a bit of fiscal stimulus.

    I haven’t seen you express any concern about the jobs lost b/c China’s government isn’t spending all the revenue it takes in, and fiscal deposits are building up at the central bank. why?

  • Posted by don

    Nice post. The last paragraph, it seesm to me is indisputable. However, China’s currency policies have, like subsidies everywhere, gathered a constituency. I’d like to see more on how influential it is. DC’s point and the note on multinationals are iluminating. Could be important in what I think are upcoming tensions over China’s currency policies. Sarkozy already has indicated that Europe may be less patient than the U.S. with these policies.

  • Posted by Dave Chiang

    Brad writes, “I haven’t seen you express any concern about the jobs lost b/c China’s government isn’t spending all the revenue it takes in, and fiscal deposits are building up at the central bank. why?”

    Simply stated, if the Chinese government were to massively increase social spending in rural regions of China by giving local officials a blank check, the funds would be misallocated and embezzled. Contrary to Western perception, corruption is far more serious in rural China than urban cities that have significantly greater checks and balances. Alot has been already done to try to alleviate rural poverty including the elimination in state taxes, and Central government funding of rural education. But the institutions take alot of time and effort to be properly put in place to ensure the funds aren’t embezzled.

    In regards to the Hong Kong economy, light industrial exports are the “bread and butter” for the Hong Kong business community. The Chinese government has a moral and legal obligation to also ensure the political stability of the Hong Kong territory. Unlike mainland China, the Chinese government can’t just tell Hong Kong residents to “shut-up”. If the Hong Kong economy tanks as a result of yuan currency revaluation, the Chinese leadership will definitely be hearing about it on the streets.

  • Posted by Twofish

    DC: Simply stated, if the Chinese government were to massively increase social spending in rural regions of China by giving local officials a blank check, the funds would be misallocated and embezzled.

    So don’t give local officials a blank check. You have money, hire auditors, reduce the number of officials to remove deadwood, and boost the salaries of people left to remove corruption. Things change. I don’t think that China was prepared to do massive countryside spending three years ago, but a lot has happened since then.

    Among other things is that China now has a credit system that is largely outside the hands of the local governments.

    The interesting thing here is that while you think you are bashing the “Washington elites”, you are actually bashing both the “go West” program of Jiang Zemin and the “new socialist countryside” of Hu-Wen.

    DC: In regards to the Hong Kong economy, light industrial exports are the “bread and butter” for the Hong Kong business community.

    This is increasingly not the case.

    Hong Kong is moving heavily away from light industrial exports into financial services and management, and wants to be the financial capital of Asia. HK is likely to generally support revaluation for the same reason that all of the other “evil capitalist cronies” do.

  • Posted by PG

    Brad, fiscal or monetary measures may be easy to implement but the results might be different from planned. Such measures would have been implemented a long time ago if the results were quantifyable. These measures might cause spikes in inflation, loss of control over sections of economy, net losses of jobs, etc… As a result, net benefits might be negative.

  • Posted by Twofish

    PG: Brad, fiscal or monetary measures may be easy to implement but the results might be different from planned.

    The results will be certainly be different from what is planned. If we could predict how markets would behave, we could get by with central planning, and the reason that central planning doesn’t work is precisely because social systems are unpredictable.

    Much of the reason for not moving too quickly is so that you can deal with unexpected events, however not moving too quickly is not the same as not moving at all.

    About three years ago, I was opposed to fast revaluation, because we didn’t know what was going to happen. Three years have passed, and we know a lot more about the Chinese and American economies than we did three years ago, and I think it is wise at this point to accelerate appreciation to limit reserve growth.

    Also, fiscal and monetary measures are not easy to implement. It has taken China decades to get the institutions to the point were it has the fiscal and monetary tools in place to reduce the severity of boom-bust cycles. Institutionally, China is in a better and stronger position to absorb a revaluation than it was two years ago, and light-years away from where it was twenty or even ten years ago.

  • Posted by Dave Chiang

    Twofish,

    I personally contribute and donate to NGO’s that are actively involved in rural China. It’s so easy to say, why not implement this program or that, but without proper oversight, funds can be misallocated and embezzled. The Zigen Fund that I am involved with finances privately rural education in China and has sponsorship from the Ministry of Education. Even with the Central government financing primary schools in rural China, there are still a considerable number of mountain communities that don’t receive any Chinese government education funding. The reason why this exists is because many of these small mountain communities don’t even have dirt roads to the villages. The Zigen Fund hires auditors that have to march on foot for hours to reach these mountain villages to ensure the funding is properly allocated.

    There are still tens of millions of Chinese that still live in absolute poverty. The US government has never contributed a single dollar in foreign aid towards poverty alleviation or rural education for the Chinese people. Therefore any advise from Washington Consensus pundits on how the Chinese should manage their internal affairs should be relegated to the trash disposal.

    Any Questions?

  • Posted by Dave Chiang

    http://www.globalresearch.ca/index.php?context=va&aid=9648

    The West is less interested in human rights in Africa than in justifying and setting the stage for a new Cold War. The BBC reported on 13th July it “has found the first evidence that China is currently helping Sudan’s government militarily in Darfur”.

    Yet, China’s real crime is its dominating investments in Africa which now exceeds British, USA, European Union, World Bank and IMF aid budgets, combined.

    A recent World Bank confirmed that China is financing infrastructure projects in more than 35 African countries with Angola, the Democratic Republic of Congo (DRC), Mosambique, Nigeria, the Sudan, Zambia and Zimbabwe among the biggest recipients. In the DRC, China has agreed to build thousands of kilometers of roads, several hospitals and three universities. Unlike the West, China gives Africa quality projects on time and much more cheaply.

    In their most direct statements yet recorded, African leaders made their views about the West clear during the Chinese Africa summit, held in Beijing in November 2006. Speaking to Lindsey Hilsum of British Channel Four television, former president Festus Mogae of Botswana said “”I find that the Chinese treat us as equals. The West treats us as former subjects (read slaves). Which is a reality. I prefer the attitude of the Chinese to that of the West.”

  • Posted by Charles

    Brad, I was very glad to see the last two paragraphs, which I feel have been missing from–or at least underemphasized in– your previous writings.

    My sense is that the Chinese oligarchy is more committed to maintaining social peace than that in the US. In a highly oversimplified schematic, the export sector represents profits for the oligarchs, while the domestic sector represents sharing the wealth. (The Twofish v. DaveChiang exchange presents the dichotomy as a regional issue or as a Party split, but the net upshot would be the same).

    So, while the personal aspirations of the oligarchy would be to maximize growth through exports, they are cautious and pragmatic enough to see that this would cause strains in the society. At the moment, they are in my view leaning toward gratifying themselves, but are reaching the conclusion that it’s time to take out a bit of insurance.

  • Posted by Twofish

    DC: . Even with the Central government financing primary schools in rural China, there are still a considerable number of mountain communities that don’t receive any Chinese government education funding.

    That situation has changed over the last few years. The plan is that by 2012, basic health and education will be the responsibility of the central government and this system has already been rolled starting with the poorest counties.

    DC: The US government has never contributed a single dollar in foreign aid towards poverty alleviation or rural education for the Chinese people. Therefore any advise from Washington Consensus pundits on how the Chinese should manage their internal affairs should be relegated to the trash disposal.

    Actually the World Bank has provided some funding for pilot projects in both health and education in China, and the US government sponsors Peace Corps activities in rural China. The World Bank has been especially useful since what the WB has is experience in rural development throughout the world so you get Chinese and Moldavians talking about common issues.

    The US government does have extensive experience (both good and bad) with education funding in poor areas, and I see no reason to not have conversations with Americans to see if both sides can learn something from each other. Ethiopia and Haiti haven’t contributed any money to China either, but I’m sure that a conversation is going to be useful for both sides.

    DC: Speaking to Lindsey Hilsum of British Channel Four television, former president Festus Mogae of Botswana said “”I find that the Chinese treat us as equals.”

    And there have been riots in Zambia over Chinese copper concessions. No nation is immune to arrogance, and as China’s power increases, it will have a huge temptation to dictate conditions.

  • Posted by Twofish

    Charles: My sense is that the Chinese oligarchy is more committed to maintaining social peace than that in the US.

    I don’t think this is the case. It’s that the US being richer and more powerful has fewer threats both internal and external. There isn’t any serious chance of a revolution that would overthrow the American ruling classes in the next generation.

    It’s rather funny since every American politician that talks about “change” and being an “outsider” is actually an insider that wants to more or less preserve the status quo.

    Personally, I don’t think that the American system of government is less oligarchical than the Chinese system of government. If you count the members of the power elite in the United States, I think it ends up being roughly the same number as the members of the power elite in China (about 2000-3000). Also I don’t think that Chinese politicians are generally less responsive to public opinion than American politicians.

    The system of government in the US is far more free and far less brutal, but the lack of brutality is in large part because people who want to overthrow the system can be ignored or bought off.

    Charles: the export sector represents profits for the oligarchs, while the domestic sector represents sharing the wealth

    Be careful about oversimplifications of what is going on. One problem is that even when you can narrow down the differences to group A versus group B, what A and B believe may not be what you expect.

  • Posted by Twofish

    DC: Unlike the West, China gives Africa quality projects on time and much more cheaply.

    And I predict it won’t be long (aay ten years) before you will have Chinese asking “we have been so good to the Africans, why do they hate us?” Actually, lots of Han Chinese have been asking that about Tibet.

    If you go back to the 1950′s, Arabs hated the French and British and loved Americans. If there is a global shift in power, my guess is that by 2050, Africans and Arabs will grow to dislike China, and love whoever the next rising power is (maybe Brazil).

    The one thing that I think that China has is a sense of history, and if you look over 5000 years of history, you see lots of good things and lots of bad things, and you see empires rise and fall and rise again and fall again etc.

    The one thing I get out of Chinese history is the notion that Chinese aren’t “better” than non-Chinese. Right now Africa is inviting China in because it is new uncorrupted power. Power corrupts, and over time global power will corrupt China the way it corrupts everyone.

    And if you think that your own people is somehow more incorruptible and less capable of evil, that makes it much easier to be corrupted and act evilly.

  • Posted by Rien Huizer

    2Fish # 9

    Not any american would share this view, although what you say would resonate with neutral observers having lived in both countries for a while. But the institutional and historic contexts of both oligarchies are of course very different. Reltive size is not everything. But, the US is not as “democratic” as people think, and China is not a dictatorship, and certainly not of he proletariat.

    I find it difficult to understand how the various people on this blog orginanize their Chinese factional structures. Would be very interested in learning more (names, telephone numbers, foreign affiliations, bank accounts), etc

    DC, you finally hit one of my chersihed topics this time: the industries that China (or rather, some locations in China) can no longer afford. We call that progress. When the sweatshops leave town and the biotech firms move in (helped along by the good offices of wise leaders, like Qianlong’s namesake (what a contrast) in Singapore), we should cheer because there is no future in low wage work. Let the low wage workers in Guangdong go back to their villages…

  • Posted by aim

    Will inflation cause China to change it’s monetary policies?

    http://www.dbresearch.com/PROD/DBR_INTERNET_DE-PROD/PROD0000000000227837.pdf

  • Posted by Hector

    On Africa, I strongly agree with Twofish. The so-called “equal treatment” that China grants to Africans is definitely another rhetoric effect of the Chinese communist clique. No need to discuss a long time with them to find that there remains a deeply rooted xenophobic feeling toward Africans. The fact that Chinese officials are currently trying to overcome this natural propensity just shows that their strategy in Africa is even more self-interested that Westerner’s strategy was. Don’t we all know that most Chinese projects in Africa have underlying raw material supply?

    Also, there are plenty of anecdotal evidences that China’s presence in Africa is not as welcome as it used to be a few years ago. China certainly delivers cheap infrastructures very quickly. But their quality is at least questionable. Besides, Chinese projects are generally implemented using a massive Chinese expatriate workforce. In many countries facing unemployment (Algeria for instance), this creates serious tensions. Let’s wait a couple of years and we will see, indeed, a major shift in China-Africa relations.

  • Posted by Rien Huizer

    We have all been tought that a slowdown in job creation is dangerous for the ruling whatever. Probably that is a much to crude way to state the problem of a leadership that is indeed responsive to the public and the public expectation (in the relatively pampered cities where people have gradually lost the iron rice bowl benefits) remains that the government deserves to be in power only if benevolent. The oficials who believe that that the people have that expectation (and may become obstinate) are (1) the populist technocrats at the highest levels, whose careers have taken them to stints in provincial administration (not only Tianjin etc) (2) the much lower ranking officials who do not get transferred outside their own province and (3) officials involved in education , health care and domestic security.

    The reformers have only one chance, continued “capitalist” success. Are the reformers our friends, or the populists? Western policy mainly articulated by politicians who seel cheap domestic points, plays into the hands of the populists. And I guess the Taiwanese and the Diaspora will do business with both groups, may even politically and business-wise, prefer the populists?

    There is no way realistic way to prevent China taking a much bigger share of the world pie. And defining that pie as GDP is a severe oversimplification; there is a risk that valuable structures (clusters etc) of human capital, technology and synergy effect, sources of socially attractive future GDPs get destroyed. It is not about textiles, furniture and shipbuilding anymore . All the west can do to protect its volume of pie is making sure that China’s increase comes out of the global increase and that its demand for things whose production is useful to the more advanced countries is stimulated and proper institutionalization (inellectual property rights etc) is encouraged by offering effective incentives (to always include sticks as well). China is the only country in Asia that has the opportunity to both develop and avoid the zero sum, mercantilistic trap that the developmental state style has created in the rest of Asia. And China is much too big to be another Korea. And its people are much to good to remain the world’s sweatshop for ever.

  • Posted by Twofish

    I wouldn’t use the term “reformer” to characterize the “technocrats” since that implies the “populists” are somehow “anti-reform” which they aren’t. Also, I wouldn’t make the mistake of assuming that differences of opinion are deeper than they actually are, and for assuming correlations of opinions that don’t necessarily exist. How someone feels about industrial enterprises tells you very little about how they feel about political dissent.

    The external environment shifts, and people change their minds about things. I also wouldn’t think in terms of “friends” and “enemies.” You can have a “friend” in one issue that turns out to be an “enemy” in another, and the fact that things are constantly shifting is I think a good thing since it prevents policy disagreements from breaking out into open and permanent warfare.

    Huizer: The reformers have only one chance, continued “capitalist” success.

    What if “capitalism” (however you define it) doesn’t work? The good thing about having people with different opinions on how things should work is that someone is going to be right, and so as you get new information, the system can adapt.

    Right now we are in a situation in which markets have failed in a big way, so the people in both China and the United States that were always somewhat suspicious of markets now have more influence in promoting their notions of how things should work, and that is as it should be.

    Huizer: And I guess the Taiwanese and the Diaspora will do business with both groups, may even politically and business-wise, prefer the populists?

    If you are doing business, generally it’s a bad idea to take sides unless something affects your profits, and when something does affect your profits, you take the side of the group that makes you the most money, and that changes from month to month and issue to issue. So you maintain good relations with everyone, since you never know when you’ll need a favor, and you really don’t know who is going to be “in” and “out” next year.

    Ideologically, I tend to be more of a “technocrat” than a “populist” because I went to an elite American school and so I see the world in the same way that other people who went to elite American schools do. I’ve never been a peasant farmer and I wouldn’t have any idea how to begin planting rice.

    This is precisely also why I tend to try to listen to the arguments of the populists and take them seriously. It’s very easy to be in a situation were you surround yourself with people that think and act like you do, come up with a policy which everyone thinks is great, and then march yourself and the country into hell.

  • Posted by Twofish

    Hector: Let’s wait a couple of years and we will see, indeed, a major shift in China-Africa relations.

    Actually the reason that I’m pointing out problems in China-Africa relations is to prevent problems and trying to keep tensions from turning into crises. China needs raw materials from Africa, and not having Africans hate China makes it easier to get those materials. The problem with bringing in expatriate employees and making the locals angry is something that the Chinese government has to look at since this is a one of the big triggers for the mess in Tibet.

    One problem that you have in these situation is the colonial attitude. (We are such wonderful people for building schools and hospitals, since the locals are obviously too stupid and ignorant to build them on their own.)

    Also, I think that the fact that China is acting out of self-interest is I think a good thing, since a lot of nasty stuff gets excused with the idea that “we meant well.” If you do something out of charity then the relationship is unequal, whereas if you do something out of self-interest the relationship tends to be more equal. The fact that China needs raw materials is something that Africans should exploit for their own self-interest.

  • Posted by Gregor Neumann

    Interesting. China is putting policies in place to prevent the overextension of SEOs:

    “The State-owned Assets Supervision and Administration Commission of the State Council (SASAC) has warned central SOEs (state-owned enterprises directly under the central government) against over-expansion. SASAC announced that it would strictly restrain their M&A and reorganization, and forbid central SOEs from illegally investing funds borrowed from banks in financial, securities, real estate, or insurance projects.”
    http://www.chinastakes.com/story.aspx?id=541

  • Posted by Rien Huizer

    Twofish, we tend to disagree mainly on semantics and I just do not have a better word for the “reformers”.

    All these guys have bureaucratic skills and at least a basic ability to assess diverse reformist (in the normal meaning of the word) ideas without necessarily being able to develop them. I would guess that your “bureacrats” would be as cosmopolitan as my reformers, somewhat intellectually elitist, a lot less likely to get powerful and rich than the populists.

    My point is, if I had a realtionship with a foreign country where we both could do enormous damage or enjoy enormous benefits, I would like to concentrate on what it takes to get the populists on board (publicly) and not just have few professors applauding an idea that hardly resonates with laobaixing. And the fixation on exchange rates is one of those simple things that can do a lot of domestic political damageto you when people are looking
    for a scapegoat.

  • Posted by Dave Chiang

    Twofish,

    So much for joint and equal cooperation between China and the US. The foreign policy agenda of the Washington Consensus remains the same, to ultimately decapitate the Chinese government. Remember that guy Paul Wolfowitz, well he’s back advising “little” Bush on China policy.

    Wolfowitz says US will OK Taiwan arms deal
    Wednesday, July 23, 2008
    http://www.heraldonline.com/wire/world/story/699030.html

    (07-23) 02:39 PDT TAIPEI, Taiwan (AP) –

    President Bush is committed to an $11 billion arms package for Taiwan, former Deputy Secretary of Defense Paul Wolfowitz said Wednesday, amid reports that the U.S. is freezing such sales to the island to avoid angering China.

    Wolfowitz, a former World Bank chief, is now the chairman of the U.S.-Taiwan Business Council, a nonprofit organization working to develop trade and business between the United States and Taiwan. He made his comments a week after the top U.S. military commander in the Pacific confirmed the freeze on U.S. arms sales in Taiwan.

    Beijing claims Taiwan as part of its territory and has threatened war if the island moves to make its 1949 break from China permanent.

    Wolfowitz told reporters in Taipei that Bush is committed to the arms package the administration approved in April 2001, two months after Wolfowitz became the Pentagon’s No. 2. Among the items in the package are Patriot III anti-missile missiles and Apache helicopters.

  • Posted by Twofish

    At this point my pet goldfish probably has more influence and inside knowledge on US foreign policy than Paul Wolfowitz does.

  • Posted by Twofish

    The fact that the “usual suspects” are complaining about the apparent freeze in Taiwan arms sales in newspaper articles after the fact shows how much out of the loop and powerless they are. My guess is that the freeze was a gift for the help that Beijing provided to get North Korea to open up its nuclear program.

    This points out one new reality in global affairs, which is that the US and Europe are no longer in a position to force China to do anything. The age in which trade sanctions and diplomatic pressure were even thinkable has passed, and the only thing that the US can do if it wants China to do something is to “ask nicely” and if China doesn’t want to do something it can just ignore the US.

  • Posted by Dave Chiang

    Twofish,

    I think Paul Wolfowitz knows alot more about the inside scoop on China policy than your goldfish. Paul Wolfowitz and his deep insider Neo-con contact in the Bush Whitehouse, VP Dick Cheney, have never had much love for the Chinese. Recall that Paul Wolfowitz and Dick Cheney were the original signers of the “Project for a New American Century” manifesto that explicitly stated that China’s emergence as a world power was to be prevented at all costs. It’s hardly a state secret, the PNAC manifesto by Wolfowitz and Cheney was openly published on various Neo-conservative websites. Neo-con influence in the Bush Whitehouse may have somewhat abated, but its hardly been eliminated with VP Dick Cheney still commanding “little” Bush’s attention. The Iraq war was partially about the removal of Chinese state investments in Iraqi energy reserves.

  • Posted by Rien Huizer

    DC,

    You may have wanted me to admit that I secretly yearn for the day that the first aircraft carrier of the Coxinga Class patrols the Straits of Formosa (Russian Hull, Israeli AA missiles, Chinese characteristics and planes on order) or the opposite . And of course I will gladly donate all of my nuclear arms for the Cause. But I did not mean cooperation, I meant mutually beneficial interaction. Not quite what certain people may have in mind, but pretty good to have. There is a lot more that binds the US, China (plus its renegade province, speaking about Coxinga) have in common than the US and Europe these days. The problem in the US is exactly those people who need a nationalist (-xenophobic) fetish, and orientalism is still alive and kicking. I was a neocon when these guys were still marxists.. (Quoted from the memoirs of Zhu Rongzhi)

  • Posted by Twofish

    DC: I think Paul Wolfowitz knows a lot more about the inside scoop on China policy than your goldfish.

    I don’t. My goldfish may have more inside information on China policy than Wolfowitz does.

  • Posted by Dave Chiang

    Twofish,

    A Goldfish doesn’t have a memory that last longer than 20 seconds. The Neo-cons have much longer memories. Wolfowitz invasion plans for Iraq were first proposed during the first Bush Sr. Administration, and then implemented during the current “little” Bush administration. It’s a not so secret, secret that US Intelligence agencies consider the Chinese to be the top strategic threat of the 21st century. Even as the US fights Muslim extremists across the Middle East, the really big bucks are being spent on the Pacific island of Guam is being turned a superbase with B-1 and B-2 Nuclear strike bombers and attack submarines. Two-thirds of the US Navy fleet is being redeployed to the Pacific theater. The $300 million dollar Stealth Fighter has never been deployed in Iraq, but is being deployed to Japan, Guam, Hawaii and Alaska. Hint: It isn’t little North Korea that the US military under Neo-con leadership is stacking massive firepower against.

  • Posted by Sinomania!

    Could it be that Wolfowitz is just shepherding on Lockheed’s behalf? By way of associations going back years he is connected to Lockheed-Martin and Lockheed will most likely get most of that $11 billion wish list.

  • Posted by Twofish

    The neo-conservatives had a political agenda against China, but they have completely and utterly failed at it, because they had no understanding of global finance. With China’s money such a critical part of the US economy, the United States is simply not able to create an aggressive military buildup against China, unless Beijing does something very, very stupid.

    At this point overreaction to the remnants of neo-conservatives is far more dangerous to China than the neo-conservatives are.

    Sinomania: Could it be that Wolfowitz is just shepherding on Lockheed’s behalf?

    Absolutely, that’s his job. His current position is head of the US-Taiwan Business Council, and part of that is to promote the interests of US companies that do business with Taiwan including defense contractors.

    However, it’s amusing to see US conservatives trying to get Taiwan to buy weapons that Taiwan is somewhat lukewarm about. What they are really concerned about is that if the arms shipments don’t get approved now, they may never get approved at all, with the new administration coming in.

  • Posted by Hector

    2fish: Also, I think that the fact that China is acting out of self-interest is I think a good thing, since a lot of nasty stuff gets excused with the idea that “we meant well.” If you do something out of charity then the relationship is unequal.

    Though one must admit that Western ODA policies have had and still have serious weaknesses, I really do think that the debate has overcome for a long time a mere opposition between charity and self-interest. There is room in between but this implies a huge involvement from local governments, which is often missing. All these stuff have fed a long ongoing debate. China is arriving on this field as if they knew better than anyone, but
    I do not believe there is a “Chinese way” of assistance. I only believe there is a combination of circumstances: ODA from the West is shrinking; China is getting richer and badly needs natural resources.

  • Posted by don

    Twofish:
    “The problem with bringing in expatriate employees and making the locals angry is something that the Chinese government has to look at since this is a one of the big triggers for the mess in Tibet.”
    Are these problems really similar? Did Chinese pay for the land they inhabit in Tibet, or is it more like the British in Ireland?

Pingbacks