Brad Setser

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As trade slows, China doesn’t rethink its growth strategy …

by Brad Setser
January 2, 2009

My title is a play on the New York Times’ online headline: “As Trade Slows, China Rethinks its Growth Strategy.” The print version of the Times carries a headline that more accurately reflects the content of Keith Bradsher’s story : “Juggernaut in Exports is Withering in China.”

Chinese exports were doing reasonably well in October but dipped in November and — if Korea’s December trade data offers any guide — will fall even more in December. Industrial production is heading down too. Bradsher’s story documents the depth of the slowdown but doesn’t offer much evidence that China is “rethinking” its growth strategy. Bradsher reports:

“In the last two weeks, Chinese officials have announced a series of measures to help exporters. State banks are being directed to lend more to them, particularly to small and medium-size exporters. Government research funds are being set up. The head of the government of Hong Kong, Donald Tsang, plans to seek legislative approval by late January for the government to guarantee banks’ issuance of $12.9 billion worth of letters of credit for exports. Particularly noteworthy have been the Chinese government’s steps to help labor-intensive sectors like garment production, one of the industries China has been trying to move away from in an effort to climb the ladder of economic development with more skilled work that pays higher wages. But now China has become reluctant to yield the bottom rungs of the ladder to countries with even lower wages, like Vietnam, Indonesia and Bangladesh.

China has been restoring export tax rebates for its textile sector, for instance, which it had been phasing out. Municipal governments have also stopped raising the minimum wage, which doubled over the last two years in some cities, peaking at $146 a month in Shenzhen. “China will resort to tariff and trade policies to facilitate export of labor-intensive and core technology-supported industries,” Li Yizhong, the minister of industry and information technology, said at a conference on Dec. 19. “

The global slump seems to have prompted China to cling to its existing export-led growth strategy. China seems to be rethinking is its previous willingness to move out of low-end labor-intensive exports as higher-end export sectors expand. With jobs scarce, that no longer seems like a great idea. China also seems to be rethinking its exchange rate policy. Here too it seems to going back to the past. Over the past several months the RMB has been effectively repegged to the dollar — going up when the dollar went up (October) and going down when the dollar went down (December). Neither policy shift constitute a real change; both reinforce the old model of trying to spur growth by subsidizing exports.

But the global environment is changing in ways that will make it harder for China to avoid a sharp downturn in its exports no matter what China does. And that isn’t just because China’s efforts to subsidize its exports and limit the RMB’s appreciation against the dollar may attract the ire of the US. Bradsher reports that Indonesia is keen to find ways to limit its imports from China that do not formally violate its WTO commitments.

In Indonesia, the third most populous country in Asia after China and India, the government is already acting to limit imports of garments, electronics, shoes, toys and food — five large categories in which Indonesian producers are struggling to compete with China. Starting in the new year, importers of these products will have to be registered with the government, use only five designated ports for their shipments, arrange for a detailed inspection of goods before they are loaded on a ship or plane bound for Indonesia and then have every single container exhaustively inspected on arrival by Indonesia’s notoriously slow customs bureaucracy. The plan, intended to comply with W.T.O. rules, was adopted after heavy lobbying by Indonesian manufacturers and labor unions.

h/t Rybinski

The jobs argument cuts both ways. Indonesia wants jobs for its rural migrants too.

China’s export sector hasn’t experienced a sharp cyclical downturn in a long time. In 2001 global trade did contract. But that contraction didn’t hit China all that hard. It came at a time when the electronics industry was migrating to China, allowing China to increase its share of a shrinking global market. Year-over-year export growth slowed from 25% at the peak of the .com boom in 2000 to 5% — but it didn’t turn negative. In dollar terms, the y/y increase in a rolling 12m sum of China’s exports went from $50b to $15-20b. But y/y exports never fell in dollar terms.*

But China now is a much much bigger share of global trade. China’s 2008 exports — in dollar terms — will be more than five times large than its 2000 exports. That means that China is now far more exposed to the global economic cycle than it was. And this cycle looks brutal.

Korea is reporting its biggest drop in industrial production in twenty-one years. That is the kind of data point that gets my attention. I was a bit surprised to hear that the current fall is sharper than the fall that accompanied Korea’s own crisis in 97/98.

The natural instinct of China’s policy makers is to do what they can to support employment in China’s export sector. But there are limits to how much China can do to offset the global fall in demand. And the more the world’s biggest surplus country does to support its exports, the more frustrated the world’s deficit countries are likely to become …

Pettis is right. If the deficit countries are the ones most willing to use macroeconomic policy to support demand and the surplus counties are among the most reluctant to run expansionary macroeconomic policies (Germany) or among the most inclined to subsidize their exports (China), the likely result is a widening deficit (meaning non-oil deficit) in the deficit countries — i.e. bigger imbalances among the oil-importing economies– even as activity in all economies slows. That adds to the risk of future trade conflict. Signs of future trouble aren’t hard to find even now.

*1998 and early 1999 was a bit worse. Y/y export growth turned negative. But exports weren’t quite as large a share of China’s economy then — and perhaps as importantly, China wasn’t going off a long boom where exports only went up. Volatility was far more expected then.

32 Comments

  • Posted by Indian Investor

    I find your analysis very interesting from an Indian market perspective. Thanks a lot for your insightful post.
    The Nifty has rallied from its October low of around 2500 to around 3050 levels at this writing.
    Over the last 4 trading days volumes have been low (presumably affected by the holiday season) and the rally has proceeded in the range upwards from around 2810 to 3050 in these 4 days.
    The November trade data for the Indian economy is out. It shows a contraction of around 9% plus in merchandise exports in Nov 2009 and an increase of around 3%plus in non oil-imports. India’s fiscal deficit and current account deficit are both widening and forex reserves are falling.
    Today the Govt. of India is expected to make an announcement regarding further stimulus programs after market hours.
    Speculation in the marketplace is around the following factors:
    1) The Govt. stimulus program is expected to be bullish.
    2) Earnings for the Sep-Dec Quarter will start to be announced around 10 days from now.This is expected to have a negative effect on market sentiment.
    3) Global cues are being closely watched. FII buying has begun in Dec 2008 after a selling trend throughout 2008. However, if you total up FII turnover from the previous trough onwards you get a negative total (i.e. more sales than purchases)
    Given your analysis that “the global environment is changing in ways that will make it harder for China to avoid a sharp downturn in its exports no matter what China does” I believe it applies to India’s merchandise exports as well.
    Merchandise exports are around 15% of India’s GDP and exports total up to around 32% of GDP overall.
    Your post reinforces my bearish outlook on the Nifty for the January series.
    At the same time you have to remember the recent rally on the Nifty has been led largely by HNIs and retail investors rather than institutional buying.
    The current bear market rally can either be artificially extended beyond the earnings season, or there could be a natural collpase to re – test the October lows of 2500.

  • Posted by Ying

    “United States and China Announce $20 Billion in Finance Facilities that Will Create up to $38 Billion in Annual Trade Finance to Assist Global Trade”

    Specifically, the United States, through the U.S. Export-Import Bank, announced its intention to provide $4 billion in new short-term trade finance facilities and $8 billion in new medium- and long-term trade finance facilities for export of U.S. goods and services to emerging markets. China, through the Export-Import Bank of China, is providing $8 billion in short-, medium-, and long-term trade finance facilities for export of Chinese goods and services to emerging markets. Short term trade financing, typically 90 to 180 days in maturity, effectively supports three or more times the value of financing in trade volume during a year. Both countries will also coordinate with the International Finance Corporation and the Regional Development Banks to complement existing emerging market liquidity efforts.

    http://www.treas.gov/press/releases/hp1318.htm

  • Posted by Ying

    Latest social study report in China shows that unemployment in urban area reached 9.5%. This figure is five percent higher than 4% from Statistics China. The 9.5% figure doesn’t include migrant workers from rural areas. The sudden slowdown of demand from US and Europe caught China in a total surprise.

    Relieving the export sector a little is only a very small part of whole policies to address sudden unemployment issue. I am optimistic that restructuring economy and exchange rate system is on the way.

  • Posted by All Roads

    Brad.

    Short term, where these policies will probably amount to little more than announcements in the news paper is that China cannot control the demand side of the equation.

    Perhaps had these moves been made 6 months ago, a bit of a relief to the global economy would have helped delay the inevitable, but until consumers in US have money in the bank and feel comfortable spending the money – I think given 3% more VAT rebate to a toy manufacturer will have marginal impact at best.

    Sae can be said for the recent real estate changes. Sure, access to credit is there, and the taxes are cheaper, but with a rental market in the trash can right now no one is going to purchase an investment property..

    Where I think the more interesting news is coming from, related to the rural and domestic economy, are the announcements about the development of a social security system and funding into healthcare. A long term proposition for sure, but is a much more mature approach to developing the balance later on that is needed.

    R
    http://www.allroadsleadtochina.com

  • Posted by Albion

    The Asian economies sensitivity to exports has not diminished from the previous decade, it is doubtful that macroeconomics and domestic stimuli are going to provide for the necessary cushion when households precautionary savings are rightfully kept at a high level.
    Remembering 2001, Guandjou train station packed with idle workers, many dwellings built as ghost cities that no one could afford to purchase. Banks assets plagued with non-performing loans, financial assets at level 3, Pudung offices left empty.
    Wishing to be wrong but for now this scenario seems to be more prevalent with capacity, prices deleveraging (not deflation) and banks recapitalisation. This is not a dramatic scenario but a healthy rebalancing of assets allocation coupled most probably allocation of resources in needed infrastructures.

  • Posted by geert

    Even considering the growth of exports over the last years, it remains rather small relative to gdp. To reduce exports to value added exports requires some acrobatics, but my guess is that it isn’t much more than 10 %.
    On the other hand infrastructure and residential construction is more than 40 % of GDP and here too China hits the same road and will spend an extra (I think) 4 billion yuan.
    The fall in exports is accompanied by a fall in imports and can point at several influences (the trade balance widened). Of course lower prices of oil and commodities come to mind, but also lower import prices of semi-manufactured goods (to be finished in China). Both lead to lower import and export prices.
    I keep my eye on the trade surplus because as long as it rises it contributes positively to GDP.

  • Posted by kaan

    Brad,
    I sense a consensus is developing among US-UK elites to blame China for unravelling of the AngloSaxon Ponzi scheme.
    Where is savings glut in Russia now? It disappeared as soon as Ponzi scheme unravelled.Chinese trade surplus may prove to be more resillient but will be reduced as soon as US policy makers allow adjustment of US bubble economy to a sustainable level.
    How can Keynesian policies reflate an economy with debt/GDP ratio at 350 %?

  • Posted by Kafka

    From what I can tell the only thing that is semi real in this fake world is funds flow, funds flow tells the story. I would expect China to continue with substantial surpluses as long as oil (transport costs) stays low. No one can compete with a well organized country that has one billion people happy to get one meal a day and no environmental constraints. The Chinese government could care less about its one billion slave workers and caters to the 300 million or so “middle” class. China will broaden its relationships with emerging markets using the U.S. model of debt subrogation to suck out all the resources from the so called underdeveloped countries in Africa and Latin America. Pay no attention to what the Chinese government rhetoric, it is meaningless especially with the artificial subsidies it provides through currency manipulation. The Maoists are intent upon destroying the dollar and will likely succeed given all the New Keynesian economic policies being adopted by the West. Schumpter new what he was talking about. Y of course does equal MV but in a ponzi scheme based economy that has likely reached its debt limits, it is a meaningless formula. No one beats a liquidity trap with more debt.

  • Posted by DJC

    A blessing in disguise from the Wall Street financial fiasco is that the rest of the world will increasingly ignore the “voodoo neoliberal market fundamentalism propaganda” from the Washington Consensus elites. The global financial meltdown resulted when the massive Ponzi scheme on the part of the Federal Reserve finally collapsed. The fact remains that the Fed cannot repeatedly use “cheap” money to fund serial economic bubbles without cumulative economic consequences.

    To eliminate poverty, the Chinese government needs to maximize employment both for domestic consumption and the export marketplace. In case anyone has forgotten, the Chinese government is a declared socialist state with the “mandate from Heaven” to provide jobs and opportunity for the people. The role of the Chinese government is to provide steady, sustainable “real” economic growth. Political instability resulting from unemployment of lower skilled Chinese workers should be of paramount importance to the Chinese leadership. A socialist nation should not permit poverty anywhere within its borders.

  • Posted by DJC

    Government statistics show that Chinese exports slipped 2.2 percent in November when calculated in dollars, after seven years of rapid growth. But figures in dollars do not come to close to capturing the real depth of the downturn.

    Convert the export figures into China’s own currency, a much better measure of the effect on China’s economy, and exports plunged 9.6 percent last month. Factor in inflation over the last year and the plunge was 11.4 percent.

    Indications are that the December data will be even worse.

    Consumer electronics manufacturers have been hit the hardest, according to customs data. “No one has any money any more, so demand for our mini hi-fi systems has declined a lot,” said Lion Yuan, the sales manager at the Shenzhen Yidashi Electronics Company, where exports have dropped 30 percent in the last year.

    In the last two weeks, Chinese officials have announced a series of measures to help exporters. State banks are being directed to lend more to them, particularly to small and medium-size exporters. Government research funds are being set up. The head of the government of Hong Kong, Donald Tsang, plans to seek legislative approval by late January for the government to guarantee banks’ issuance of $12.9 billion worth of letters of credit for exports.

    Particularly noteworthy have been the Chinese government’s steps to help labor-intensive sectors like garment production, one of the industries China has been trying to move away from in an effort to climb the ladder of economic development with more skilled work that pays higher wages. But now China has become reluctant to yield the bottom rungs of the ladder to countries with even lower wages, like Vietnam, Indonesia and Bangladesh.

    China has been restoring export tax rebates for its textile sector, for instance, which it had been phasing out. Municipal governments have also stopped raising the minimum wage, which doubled over the last two years in some cities, peaking at $146 a month in Shenzhen.

    “China will resort to tariff and trade policies to facilitate export of labor-intensive and core technology-supported industries,” Li Yizhong, the minister of industry and information technology, said at a conference on Dec. 19.

    http://www.nytimes.com/2009/01/01/business/01exports.html?ref=asia

  • Posted by bsetser

    DJC — The material that you pasted in comes straight from the Bradsher article at the center of my post. Not sure what is gained.

    All Roads. Maybe. China is certainly taking some steps that are geared toward supporting domestic demand. But they still strike me as timid. The rise in the government’s fiscal deficit — per the World Bank — will be far smaller than the rise in the US government’s fiscal deficit. And, well, more measures to support the export-sector are, so-to-speak, shovel ready. Whether they work in the current context is a harder question.

    geert — given that China’s trade surplus is @ 10% of its GDP value added in China’s export sector has to be a bit higher. Using a couple of different measures, I come up with a total of around 20% — (think exports to GDP of around 40%, and 50% domestic value-added — with the 50% number coming from a study that was posted at Vox eU). That is consistent with say a 10% of GDP trade surplus and imports for domestic use (mostly commodities) of 10% of GDP.

    Is 20% high? Well it is higher than the share of the US and Japan, but lower than that of Germany ….

    More importantly, value added in the export sector has increased dramatically — in my view — over the past several years as exports have grown strongly (outpacing imports) and net exports have been a major contributor to GDP growth. So I wouldn’t minimize the impact of exports.

    At the same time there is no doubt that China’s current difficulties reflect a synchronized slump in domestic activity (less construction) AND an export slowdown.

  • Posted by Antiochian

    Maybe I dwell too much in my prosperous corner of New Jersey but do I imagine it or are the shelves, in even the stores which aren’t on the troubled list, less crowded than they used to be? The real problem for the Chinese exporters may be still to hit. The bankruptcies of stores have occurred largely in the second half of 2008. Export orders from China usually have long lead times. I suspect that retailers will be chopping orders (and have been doing so) for the New Year inventories.. A cautious attitude to stock levels driven not just by wary consumers but also by retailers husbanding their cash rather than spending on stock (they will need to sell below cost) could spell large reductions in future export orders from September of last year out.

  • Posted by DJC

    It’s laughable when the US complains about some Chinese export programs when billions of dollars in taxpayer bailout funds are squandered on General Motors, Ford, and Chrysler. General Motors CEO Rick Wagoner who has single-mindedly driven the corporation into the ground even gets to keep his job with a $15 million taxpayer bonus. The US Treasury’s Paulson is further guaranteeing $6 billion of subprime auto loans by GMAC with the taxpayers responsible for the inevitable losses.

    The US textile industry is another protectionist racket that shouldn’t exist with or without China. Tariffs and quotas shelter the US textile industry. As a high-wage nation, the US Textile industry is globally uncompetitive. Period.

    The trade agreements with China which place limits on clothing for example are due to expire during the early part of 2009. CITA (the Committee for the Implementation of Textile Agreements ) recently confirmed that Electronic Visa Information System requirements for mainland Chinese textiles and apparel currently subject to quota will be terminated effective with respect to all merchandise exported on or after 1 January 2009.

    While the current Bush administration probably does not have enough time left, the Obama administration is expected to seriously consider the possibility of a trade war by restricting Chinese textile imports. This will merely shift over one-half million Chinese textile jobs to Indonesia, Vietnam, Mexico, and India. Not a single US textile job will be created or even preserved.

  • Posted by jonathan

    Question: to what extent is Chinese domestic demand separate from their exporting? And to what extent is that demand the “better kind,” meaning higher weight in dollar (or yuan) terms? I highlight the higher value kind because that has multiplier effects.

    My questions are getting at the extent to which maintaining exports is their way of supporting domestic demand?

  • Posted by bsetser

    investment in building new export capacity counts as domestic demand — so there is a link.

    but rebalancing means relying less on both export and the expectation of future exports (ergo domestic investment in the export sector) for growth.

    the question of whether domestic demand broadly speaking is correlated with exports is a key one. exports and investment (including investment in structures — i.e. construction) have been highly correlated on the way up and now seem correlated on the way down. that is a problem. if China’s consumers facing an export and investment led slowdown pull back, then there will be real trouble.

  • Posted by DJC

    Current Situation in China.

    I spoke to a friend just back from Beijing. While the labor-intensive industries in Guangdong province are getting clobbered, the high-tech Chinese companies are still doing alright. Foreign multinationals are still investing in China which still has the fastest economic growth out of major economies in the world. Microsoft is firing 15% of its US workforce, but it is still hiring in China. Overall Chinese growth has slowed, but the economy is still growing. However, the crime rate across the Pearl River Delta has risen due to rising low-skilled unemployment. Relatives in Xinjiang province say that the northern region is still booming from massive state investment for oil and natural gas production. Remember that China is so large and economically diverse that economic problems in one part of the country don’t always reflect the entire nation.

  • Posted by Christian

    I can’t help but remember Steve Balmer explaining Microsoft’s strategy when they were overtaking IBM with MS DOS “Ride the bear, you gotta ride the bear”. I believe that is exactly what the China are doing to the US. They intend on riding the American bear with their trade surplus strategy until it collapses. What the Chinese say isn’t important, it is what they do that is.

  • Posted by DJC

    Actually an export slump has a limited impact on GDP growth in China. A report out today shows export growth only accounts for 6% of GDP growth in the past year. The biggest contributors to GDP growth in the past was domestic spending (45%), and fixed assets investment (40%).

    The financial collapse on Wall Street illustrates to the rest of the world that it is the US economy that really needs reform. The Chinese didn’t create the US subprime housing defaults that imploded the banking system. Why is it that the United States always lectures the Chinese to do this or that?

    Most of the Western economic advice given to the Chinese is self-serving and detrimental to China’s economy. In any case, how much China exports to the rest of the world is none of the damn business of Washington bureaucrats.

  • Posted by bsetser

    DJC — but presumably it is the business of China’s bureaucrats?

    Remember, China’s policies don’t just affect China, they also affect the world — and if China is too aggressive in asserting that it must act in its own interests, the rest of the world may conclude that it isn’t in its interest to buy so much from china … Chinese exports are partially a function of China’s own dynamism, partially a function of the various inducements China provides to exports, partially a function of Chinese intervention in the fx market and partially a function of the rest of the world’s willingness to maintain open markets for Chinese goods/ take steps to stimulate their economies so their is demand for Chinese products.

    You may call my advice to China self-serving, but i would respond by saying that if China had shifted to domestic led growth a bit earlier, it would be in a very better position now.

    incidentally, the numbers above are off. export growth likely contributed more than 1% to China’s GDP growth in the first 3qs of 2008 (q4 is different, but that is the point). probably more like 1.5%. That works out to around 10-15% of overall growth. and it was more like 25-30% in 05/06/07. That may seem small (that is what the economists argues) but it is acutally quite unusual for a large economy to get 2.5 to 3 percentage points of growth from net exports.

  • Posted by Ying

    Remember that the Chinese central government tried very hard to curb overheating in fixed investment till the sudden breakout of US financial crisis. The People’s Bank of China had adopted tight monetary policy till 2008. It increased the RMB reserve requirement ratio five times and increased the withdrawal of currency from circulation. It raised interest rate several times to the highest level in 2007. The government also introduced tougher labor law and environmental law which almost increased labor cost by at least 20%. It also increased exchange rate flexibility significantly. Winning the export market while sacrificing the local environment and suppressing wages are not interest of top Chinese policy makers. As the private sector transferred more and more social cost to the government, government became a center of conflicts. If the communist party wants to continue to stay in power, it has to address these social problems and grievances created by the global trade.

    For me, the Chinese government didn’t do very well in cracking down local corruption in the past. It is widespread corruption between FDI investors and local government. Investors and managers of more than fifty FDI factories in Qingdao this year fled China and left unpaid workers and huge amount of loans from Chinese banks behind. It takes time to clean up this mess now.

    The financial crisis is a great opportunity for China to shift its economy. It may look a bit chaotic during the transition, but there is no turning back for Chinese leaders.

  • Posted by gillies

    so china hasn’t rethought its growth strategy. but which countries have – and of these, which would be the best example for china to follow ?

    i feel that opening up trade between china and the west over the last thirty odd years, and particularly over the last ten, has naturally raised production of labour intensive manufacturing, overall, while depressing wage levels overall (even while raising them in china).

    its the unsold model t syndrome – where the ford production line employees cannot afford to buy the car.

    – more goods but weaker consumer demand (but with the evil day of reckoning put off for a time by borrowing).

    so now the chinese exports are going to contract or grow more slowly. the surplus earned by chinese exports and saved / invested back in western economies is going to contract also.

    in turn the surpluses earned by oil and commodity exporters are going to contract, and balanced, or unbalanced, the flow of money in the global economy is going to slow.

    the imbalance in the global economy is an imbalance between wages and profits. this imbalance reaches political limits, as much as economic ones.

    apologies if these remarks are too simple for those with expertise –

    but the idea that china is going to become ‘the next superpower’ by somehow cheating at trade – is too simple for me.

    i would not proceed by economic harangue at all – but by promoting education. china and america should be promoting student exchange, so there are more people in each country able to appreciate the subtleties of where the other is coming from.

    i still believe that mildly anti china rhetoric is for western consumption – not for chinese enlightenment.

  • Posted by gillies

    the u s stock markets are down 1/3 from their peak.

    the irish stock market is down 2/3 from its peak.

    soon the germans will be able to buy up our banks and supermarket chains for half nothing. we dithered between ‘boston’ (code for all out american capitalism) and ‘berlin’ (code for european socialism). now we are stranded somewhere we did not expect (let’s call it reykjavick ?) not much we can do, now.

    i wonder if that nice guy on the golf links in hawaii has any bright ideas ?

  • Posted by don

    “At the same time there is no doubt that China’s current difficulties reflect a synchronized slump in domestic activity (less construction) AND an export slowdown.”
    I would add that there is a joint effect – the export slowdown will affect investment in domestic chinese construction.
    I second geert’s comment, with the addition that the trade balance can be determined most effectively with currency interventions.

  • Posted by Lyle B.

    Henry C. K. Liu has written an article in Asia Times in which he proposes a radical new strategy for China, similar to Lincoln’s Greenback system. If the Chinese government accepts this proposal, it will be a historic development. Of course they will not accept it until the situation gets a lot worse.

    Here is an excerpt from his article:

    The structural problem of the Chinese economy can be described in one sentence: China produces from plants financed by foreign investment that operate with low domestic wages for foreign markets that pay with dollars that cannot be used in the domestic economy.

    The solution to this structural problem can also be summed up in one sentence: China must finance plants with sovereign credit to produce for the domestic market where consumer purchasing power will come from high wages, with sovereign credit repaid from increased tax revenue from a vibrant domestic economy.

    To kick-start a new economic strategy of shifting the Chinese economy from export dependency to domestic construction, the Chinese government needs to establish a Commission to Restructure the Chinese Economy (CRCE) as a special agency in the State Council under the direct control of the office of the premier, with emergency powers to deal with the unemployment fallout from the sudden collapse of the export sector that will soon threaten social stability.

    The proposed CRCE should have full authority to formulate and implement a national economic recovery program with appropriate and adequate credit-creation power to finance an urgently needed recovery to provide full employment at high wages. Equally importantly, the CRCE must have full government authority to commit unconditionally to the timely repayment and retirement of this temporary debt created by sovereign credit.

    The CRCE would be responsible for launching immediately a massive work-creation program to achieve in-place national full employment with minimal relocation of population. This program can be financed outside of the government’s fiscal budget by a pre-financing regime through the use of work-creation certificates, a form of special-purpose money specially designed to facilitate job-creation in the socialist market economy.

    Under the pre-financing regime, the State Council will authorize the CRCE, with full support of the Finance Ministry, to issue work-creation certificates that mature every three months and are renewable up to five years. These certificates would be distributed by the CRCE to local public works agencies and participating financial institutions that lend to private enterprises engaged in the job-creation in the program to shift export enterprises toward the domestic market.

    http://www.atimes.com/atimes/China_Business/JL24Cb01.html

  • Posted by Twofish

    To talk about “strategy” and “China” involves much more coordination that actually exists. The Chinese strategy is to try fifty different things, and figure out the one or two that work, and then go with those.

    There is a very good reason why China is timid about some things. Some things are more easily reversible than others. If China does export tariffs and those turn out to be a bad thing in a year, they can be easily reversed. By contrast, if China starts major infrastructure projects and a year from now things look they are over heating, then you will have pitched battles with local officials trying to shut them down.

    You saw this in 2001-2002 when a lot of the policies that got us out of that recession were impossible to stop once you got out.

    The danger of whipsawing is a very big one. A year ago the danger was inflation and overheating. If it turns out that the US recession isn’t that deep, then policies that assume that they are will turn into huge problems.

  • Posted by Twofish

    Also it is interesting the difference is between emphasis in the Chinese media and the US media. The export rebates got a lot of play in the US, but Chinese media hardly mentioned it. The big things that are being mentioned in the Chinese media is doing are interest rate cuts and incentives and discounts for people to buy houses.

  • Posted by Twofish

    Quoting Henry Liu: To kick-start a new economic strategy of shifting the Chinese economy from export dependency to domestic construction, the Chinese government needs to establish a Commission to Restructure the Chinese Economy (CRCE) as a special agency in the State Council under the direct control of the office of the premier, with emergency powers to deal with the unemployment fallout from the sudden collapse of the export sector that will soon threaten social stability.

    Adding just one more agency to the alphabet soup of Chinese agencies. It’s all really unnecessary and counterproductive. Anything that Liu proposes be done with his proposed new agency can be done through the National Development Reform Commission, PBC and Ministry of Finance, and starting a new agency would require the approval of the National People’s Congress in which situation you get into all sorts of bureaucratic turf wars which is going to eat up a lot of time and energy.

    Also, I’m a believer in the idea that “power corrupts” and “absolute power corrupts absolutely.” The fact that you have Chinese political and economic power distributed among a lot of different groups that really don’t like each other is the reason why everything works as well as it does.

  • Posted by Ying

    There is a tremendous lack of curiosity to understand China from US media except pure economic interest. Economists are fixated on the few macroeconomic policies and statistic data from China to guess what the Chinese are doing. These data are never able to depict the whole picture of what’s going on in China and macroeconomic policies are not effective in a vastly geographically and economically differentiated regions. Unless economists can broaden their minds and learn something about its history, geography, philosophy, politics, culture and language, it is hard to them to come up any meaningful analysis and discussions about issues facing China. Neither will they be able to come up with any useful suggestions for Chinese policy makers.

  • Posted by Twofish

    DJC: The trade agreements with China which place limits on clothing for example are due to expire during the early part of 2009.

    Cool, that’s why NY and NC are making noises again.

    DJC: While the current Bush administration probably does not have enough time left, the Obama administration is expected to seriously consider the possibility of a trade war by restricting Chinese textile imports. This will merely shift over one-half million Chinese textile jobs to Indonesia, Vietnam, Mexico, and India. Not a single US textile job will be created or even preserved.

    This isn’t quite true. Textiles are odd since they are one of the areas in which China does really have a competitive advantage over both the first and the third world. The other interesting thing about textiles is that they are one area in which the US gets support from other countries.

    If the US increases tariffs on textiles, then Indonesia, Vietnam, Mexico, and India get annoyed, but if the US gets China to restrict textile exports then Indonesia, Vietnam, Mexico, and India side with the United States since it helps those markets. Most of the trade negotiations over textiles have involved getting China to voluntarily restrict textile exports, which Beijing has been willing to do because its been able to get other things in the negotiations.

    Part of the reason may be that although production moves to the United States, the people doing the producing end up being Chinese anyway.

  • Posted by Twofish

    bsetser: If China is too aggressive in asserting that it must act in its own interests, the rest of the world may conclude that it isn’t in its interest to buy so much from china …

    If it wasn’t in the US interest to buy so much from China, it would have stopped doing years and years ago. China acts in China’s interests. The US acts in the US interests. Trying to pretend otherwise just makes things more complicated than it needs to be. If a nation’s leadership isn’t aggressive at asserting national interest, then really they need to be replaced.

    People need to put up or shut up. Either start putting in protectionist measures or stop talking about them, because talk without action just undermines one’s own credibility. If there really is a national consensus that the US would be better off with new tariffs, then for goodness sakes, stop whining and put them in. If people in the US don’t like the current system of rules for international trade, then for goodness sakes, propose new ones.

    Right now everyone is bending the global rules regarding trade as far as they go, but no one has suggested either breaking them or changing them. China made a set of commitments a few years ago when it joined WTO, and so far it has mostly kept them.

    If the US has a problem with Chinese actions, then it needs to get on the phone to Beijing and start screaming and if necessary making threats, because otherwise Beijing has no real clue about what it needs to do. If the US really wants China to stop export rebates then it needs to at formally least *complain* about those export rebates.

    If there is no formal complaint about it (and there hasn’t been), and if it doesn’t violate any pre-existing agreements (which it doesn’t), and Beijing finds it in its national interest to do something, then China will just go ahead and do it. Why shouldn’t it?

    The basic problem here is that there *isn’t* a national consensus for getting “tough on trade”, that lots of American companies are benefiting from the export rebates. But that’s a problem that needs to be resolved in Washington and not in Beijing.

  • Posted by Twofish

    Ying: Unless economists can broaden their minds and learn something about its history, geography, philosophy, politics, culture and language, it is hard to them to come up any meaningful analysis and discussions about issues facing China. Neither will they be able to come up with any useful suggestions for Chinese policy makers.

    Part of the problem is that people in the United States have this enormous impulse to try to come up with suggestions rather than come up with issues.

    For example, the logical thing for a Congressman from North Carolina to do is not to lecture Chinese officials about what they should do but rather talk about North Carolina. If Chinese actions are having an adverse impact on North Carolina, then mention that and then try to figure out what can be done about it.

  • Posted by ma

    On the point that China seems to be rethinking is its previous willingness to move out of low-end labor-intensive exports as higher-end export sectors expand. You might have misread or misled by some reports. As far as I understand, it has never been China’s position to move away from low-end labor-intensive exports. What it tries to do is to move these industries inward, i.e. its relatively backward regions, where the labor cost is much lower than the coastal areas, but at the same time, do not have high quality infrastructure. The coastal areas will then be redesigned to move up the value chain and serve as development and research centers, etc. This will enable the country to have a more sustainable and integrate industrial chain and layout.

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