The Economist magazine this week says Asia is where the crisis is hitting hardest. Maybe so. It doesn’t feel that way to people in the U.S. who have had it so good for so long. I would bet that Asia and China will emerge first from this financial collapse. The tremendous dollar reserves will be very useful in keeping bellies full in China – and in providing domestic demand to substitute for foreign demand. Brad will get his wish.

Thank you for your reply.10% to 20% exchange rate adjustment probably won’t do too much difference to the existing global trade system.

For stimulus package, I am not sure if the government is in the seat to spend large sum of money. My view is that the role of the government is to set the rules, not to play the games. There are principals that guide them to set these rules.(For example,equality,efficiency and financial security,labor protection etc.) By simply giving away money (to business sector)is probably not a solution for the long term health of the economy. Every country’s situation is different and it needs to consider carefully the balance of pros and cons for each project. Also the money may not be there. Going into deficit is not a responsible behavior to taxpayers and the future generations.

For the last two answers, I guess that US has to move quickly to reform its financial system and pull itself out of crisis. People has to eat and sleep everyday. Asia countries including China won’t have the luxury to wait too long for US economy to turn around due to the political pressures at home. Ultimately, they will have to save themselves by lessening their ties with US.

In general, I would like to see policies that won’t further integrate the two countries together in the future. After all, it is much easier for politicians and business sectors to be accountable to their own people if there is no cross-boarder complexity. The current globalization makes nobody account for anything.

I like your comments about China: the current leadership prioritizes production, has the capacity to do so and understands the sources of that capacity.

As to the Landes quotes (from the Loss of Leadership chapter of Wealth and Poverty of Nations apparently) I doubt they are very relevant here. Attributing rentier characteristics to a China that is busy catching up technologically and institutionally is rather eccentric by itself, no need to illustrate the point by the Anglo-Dutch case history. Apart from the possibility that Landes’ grand narrative may have a few inaccuracies and omissions

Anyone studying this subject should be aware first that Western Holland from 1570 through say 1710 was a location (not really a country or even nation) with unique features (highly developed wind power, freehold farmers, militarily impregnable, freedom of religion, absence of what the Greeks would have called tyranny) that attracted refugee wealth and technology (huguenots, sephardis, etc) from the troubled larger countries surrounding it. Second, once these countries had developed secure absolutist systems and early nation state structures, and , third, the military core (the Orange court) had moved to London, much of that wealth moved with them (a more secure location) and the the natives were left with an empty “luxury hotel”, as yet insufficient incentives to adopt modern science to replace wind energy and a shrinking market for their established businesses because of rising mercantilism abroad. In addition, the absolutist and largely state religious neighbours loathed the Calvinist republic’s institutions and acting as a useful political rentier (financing wars) was a reasonable survival strategy, in combination with the Anglo-Dutch strategic alliance.

Where is the relevance for the US-China relationship? The lesson applies to Singapore..

Your response to Ying deserves to be calligraphed, and hung next to Mao’s picture on Tienanmen..As an inspiration of course, not a recipe.

http://www.cfr.org/content/publications/attachments/FDl_CSR34.pdf

“The Dubai Ports World transaction roiled Congress in spring 2006, with some
members of Congress expressing outrage that a state-owned entity based in the Middle
East could own and control port facilities in the United States. CFIUS had previously
approved the transaction, and more than a dozen congressional hearings were called
during which administration officials were excoriated for their supposed lack of judgment in sanctioning the deal.”

So here I need to correct my fact above. It was a Dubai investment in the US port facility that was blocked by Congress, and not a CIC investment. The principle of my argument is that there is a lot of reason for foreign governments to view the US FDI policy as being restrictive. But that shouldn’t stop them from welcoming foreign investment into their own economies, which would help a lot with economic progress there.

Brad’s comment:
all purchases of existing chinese firms (greenfield investment is different) are forbidden w/o explicit chinese gov. approval. the us regime is the opposite: everything can be bought subject to CFIUS review (with a few small exceptions). Boeing in theory could be bought. of course in practice it cannot be … b/c of CFIUS

I can understand this better if you can elaborate a bit more. Is the distinction that in case of a foreign investment in China, the investor has to first approach the relevant government authority for approval, and then proceed with the investment plan if approved?
In case of the Us the plan is first negotiated and then put forward to a review by CFIUS, which seems to me more a procedural sequencing difference than an FDI policy difference.

“Brad,

How much should rmb be appreciated against dollar?

How much treasury do you expect Chinese government continue to buy in 2009 to support US economy?

How big fiscal stimulus package do you expect Chinese government to have to support its economy?

What are other polices do you expect Chinese government to implement to be a responsible global player?”

My answer to 1) is that it depends on what the dollar is doing against other currencies and what the relevant time frame is. right now the dollar’s rise v other currencies has produced a strong real appreciation in the rmb. if that continues, i would expect china to maintain its dollar peg. if the dollar starts to fall and that brings China’s RER down, i would expect China to allow the rmb to appreciate against the dollar to maintain the real appreciation. Right now i suspect that china is undervalued by between 10 ad 20% in real terms, and i would like to see that corrected over time. China’s RER is only a bit above its 00 levels right now, and china’s economy is WAY more productive. The extent to which that involves an appreciation v the $ depends on what happens to the dollar.

on 2) my answer to “how many treasuries should china buy to support the us economy” is zero. China’s government doesn’t buy treasuries to support the us economy. That isn’t its job. China’s government’s job is to support china’s economy. It buys treasuries to keep china’s currency from rising as part of its policy of supporting china’s economy through supporting its export sector. If hot money outflows subside, i would expect that the continution of this policy would require ongoing intervention in the market and i would expect china to buy some treasuries as a result, tho less than in 08. but it wouldn’t be doing so to help the US economy.

3) how big a stimulus. Measured in the same way (i.e. relative to a baseline that includes automatic stabilizers), i would like to see a stimulus that is larger, relative to China’s GDP, than the stimulus in the US (the us stimulus is now estimated at around 3% of 09 GDP, with more in 10). Think of a Chinese fiscal deficit larger than 5% of GDP …

4) Limiting export subsidies and not dramatically changing the currency composition of its reserves when any major currency is under pressure. That plus offsetting the RMB’s real appreciation due to $ appreciation with a very large stimulus would suffice. I would also like to see China implement a social security and health care system that reduces income insecurity in china, but that is ultimately china’s choice …

and on 4) resuming agency purchases would help the US and global economy, but i wouldn’t ask for it — as I don’t think the US/ others should ever ask China to buy anything as that creates an implicit expectation that any such securities will be protected from losses.

moreover, if you read my work carefully you would know that I do not advocate that China lift restrictions on foreign investments/ capital flows. i accept that its capital controls are necessary so long as the rmb is structurally undervalued. i have long argued that instead of focusing on trying to get china to lift its restrictions on us investment, the us should focus on getting it to allow its currency to rise …