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A note: the paradox of US-China economic dialog. [Copy link] 中文

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Post time 2010-4-8 20:00:40 |Display all floors
There is really nothing to discuss about the US-China economic relationship. The hard reality is that the Chinese consumer sector has to grow faster than the Chinese economy as a whole; the US economy can no longer absorb export surpluses from its own economic activity and the willingness to run deficits to finance imports, especially from China, is falling more rapidly than the price of homes in Palmdale.

This isn't a policy prescription. It's not a suggestion. It's simply the truth of what is going on. In the long run 1.3 billion people cannot rely on the expenditures of 300 million. Because these forces are not subject to policy, there is nothing for the US and China to discuss which is not also merely tweaking the margins.

However, under current conditions there is a problem. China is looking at an upcoming transfer of power as the current leadership makes its exit and a new generation moves in. This is always a difficult time for China's government, internal disputes become more dangerous for various careers. There is also the issue that China missed its chance to transition to a consumer economy while the former boom would have smoothed the transition. Finally, when China cleaned up NPLs in 1999, it did so by reducing Chinese household incomes and slowing wage growth to recapitalize banks. This presents a problem underscored by the massive numbers of protests that periodically grip China: many Chinese people are obliquely aware that they have not been the biggest winner in all of this.

This final problem has been reasserting itself during the current crisis. China's official stimulus has been large, but the unofficial stimulus has been much larger. There are severe doubts about China's self-reported debt levels of less than 25%, especially given the amount of speculation going on and the number of funding guarantees (which, while debt-like, do not count officially). A level closer to 60% would probably be more accurate. Underperformance is a potentially huge problem because enormous amounts of this have been funded through real estate collateral in a bubbly market and, worse still, many loans constructed buildings of questionable quality. Some may not exist by the time their bonds mature.

Once you add in the massive amounts of resource speculation, the financial picture in China is not merely debt-heavy, it is highly inverted. Should a global recovery fail in the near term, be slow or simply weak, this debt could explode. Will this create a round of bank collapses? No. But it will undermine the solvency of banks from the PBoC down and require the Chinese government to perform an operation like that in 1999.  With consumption levels already low, wage growth depressed and NPLs in the pipeline, there are severe risks to social, and thus political stability in China if the export machine fails early.

This presents risks for China and the United States. China's leadership is unlikely to fail, but it could be motivated to pursue increasingly damaging international policies to deflect attention towards "outside actors". Leadership could also be captured by hardliners, a possibility that doesn't serve the interests of the US, the Chinese leadership nor the majority of the CPC.

There is, at base, nothing to discuss about Sino-American trade but there is a need to tweak the margins. If the US moves unilaterally on trade, changing the balance of trade, China faces severe risks and the long-term interests of the US will be negatively impacted by some of the possible scenarios. While none of these may come to pass, it is not worthwhile to take the risk. Hence the paradox of continued economic dialog: both China and the US must seek a way to maintain the status quo until either the real economy improves enough that China's position on the dollar can be unwound in an orderly way or until a successful leadership transition places China outside major political risks.

Economic dialog cannot "solve" the problem, it is like a failing dam; but the talks can delay its failure long enough to allow both sides to evacuate.
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Post time 2010-4-9 08:39:28 |Display all floors

Here is a dialogue that is not a dialogue :D

You might have read that Chinese workers got hefty pay increases, some as high as 20%, to come back to work the factories in the coastal economic zones. Also, it is government policy to increase the income in the rural area. Obviously this will lead to increased discretionary spending power. I think we can expect a pickup in consumer spending in all areas, albeit slowly.

However, Chinese tend to hoard and to save, it is culturally ingrained and saving to buy a home is a great Chinese dream. Then saving to buy a second rental property and so forth. As you have pointed out, there is a bit of a real estate bubble.

The stimulus program seems to be working well, so I don't think there will be a lot of social unrests and protests, but it is a topical issue and the Chinese need to manage expectations. Chinese tend to be a bit less articulate and more volatile in this respect. The general population need to be educated that the path to financial security is through a slow and methodical process of wealth accumulation and not speculation or gambling.

With respect to the actual stimulus measures, I can see China is concentrating on infrastructure improvements and enhancements eg. high speed trains, a tried and proven method, China can only come out of this global recession stronger than before.

As for deflecting attention, there are those in the USofA who spread the believe that China is a "currency manipulator" and if China were forced to float the RMB, USA manufacturing sector would be more competitive. Some believe that it would solve the twin-deficit problem. Generally these same people would than carry on about tyrannical dictatorship. Much of this is emotive, rabble-rousing and self-serving talks with the objective to deflect from the country's past poor policies and inadequate political will to confront fiscal problems.

One more thing, I don't think China is speculating in the resource sector, China is investing in resource, which China will be using when the global economy picks up steam. Similar to USofA's strategic reserve in oil, but for China, it is a civilian thing.

I do agree that we need to maintain the current status quo until the global economy improves, I have yet to see a workable win-win solution to unwind PBoC's collar positions. The latter carries significant political downside risks.

Which brings us back to the dialogue. There is a lot to talk about just so there is no sudden, knee jerk reaction. China would not be served by a loose monetary policy and and a build up of inflationary pressure in USofA.

Unfortunately, I have no reliable figures to do some number crunching and data mining.

[ Last edited by cestmoi at 2010-4-9 10:06 PM ]
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Post time 2010-4-9 09:24:16 |Display all floors

Should Mr Wu Jinglian play a more prominent role again?

Mr Wu Jinglian has been one of the great architects of modern Chinese economy.

I see him as a liberal reformist. It would be refreshing if Mr Wu can continue with his debate on the role of the Chinese government in a hybrid socialist-capitalist society. Quo vadis?

Mr Wu has been critical of capitalist cronyism.
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Post time 2010-4-9 10:45:21 |Display all floors
Originally posted by cestmoi at 2010-4-9 08:39

You might have read that Chinese workers got hefty pay increases, some as high as 20%, to come back to work the factories in the coastal economic zones. Also, it is g ...

I worked in BJ for 3 years, With regard to my observation to my friends ,most of them suffered salary cutting this year no matter what kind of Corp. you are working for , for a classmate who worked in ChinaPetro, Affirmirtively he got 2K yuan less than before . Just aroud me, the only persons who get money in this turn of inflation are those wo speculate intthe real estate. so know ,there are so many potential risks and inequitys in china society......

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Post time 2010-4-9 11:23:14 |Display all floors


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Post time 2010-4-9 21:38:54 |Display all floors

Managing expectations

Originally posted by iamthelast at 2010-4-9 10:45

I worked in BJ for 3 years, With regard to my observation to my friends ,most of them suffered salary cutting this year no matter what kind of Corp. you are working for , for a classmate who wo ...

From my observations, the younger Chinese generation has high expectations. You need to balance expectations against economic realities. The whole world is in a global recession, EU is teetering on the brink and China is a part of the global economy, it will definitely be affected by it.

Forget about the get-rich-quickie schemes and speculating on the stock market, wealth accumulation is a long term process requiring some discipline. What you lose now, it is likely you will regain later when the economy picks up.

I know this won't help you feeling bad after suffering a pay cut, but a lot of people are without jobs, in the USofA about 20% are without jobs or are underemployed as a result of the Bush-Greenspan mismanagement. You are lucky to have a job, spare a thought for the others an try to balance your expectations against the reality.
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Post time 2010-4-11 01:06:10 |Display all floors

Pay increases of 20% for workers to return to the Pearl Delta region only impact a small number of industries, like construction, which are labor intensive and generally no better paying than work in rural China. Wage growth in China is very depressed, there really is no question about it. That should be apparent even here, where we have periodically seen waves of people asking where their livable salary is.

"Hoarding and saving" aren't culturally ingrained but a byproduct of specific government policies. This is very obvious when you examine recent auction prices for Imperial antiques, the homes of China's upper class and China's rapid rise to the top of conspicuous consumption,  even as wages decline in real terms year after year. For people fortunate enough not to be caught in the trap of PBoC financial policy--which squeezed out Chinese savings to recapitalize banks and provide growth to SOEs--"hoarding and saving" simply doesn't exist, they're greater spendthrifts than anyone else. Finally, the majority of "savings" in China is actually corporate money that is not distributed to shareholders. This is not a "cultural" phenomenon; it is common to all countries with weak fiduciary obligations and few enforced rules on dispersal of profits.

China's stimulus program has largely been wasted. While the official, well-publicized program went to "infrastructure", the overwhelming majority of stimulus went ahead as PBoC policy directives to banks. This has taken the form low interest loans to SOEs, party-linked commercial interests and local officials. This money has been deeply misallocated on resource and real estate speculation. Moreover, even the official funds are deeply misspent: the much adored high-speed train system is simply a bad investment that mostly makes a marginal improvement to areas awash in infrastructure; the green power initiatives actually fail to deliver power (installed capacity and delivered wattage are not in line); and much of the "infrastructure" has taken the form of speculation by local officials. Worse still, much of it has been built using methods so shoddy it would make a Sichuan school look safe.

I think you deeply misunderstand speculation. Essentially, what has happened is that Chinese businessmen have purchased large quantities of commodities like iron ore or copper and held them in warehouses or even on left them on one of the many unused vessels that now litter East Asia's continental shelf. They are betting that the price of resources after the recession will be high enough to make back both the purchase price and the carry cost of the resources themselves. These aren't stockpiling manufacturers or the Chinese government, the overwhelming majority seems to be in vast stocks of material held by private individuals to be sold on the Chinese market. This bet is highly inverted and at absurd leverage ratios, I'm sure you can appreciate the implications. (It's also more complex than I stated, but I have a meeting today and don't want to start rambling here and not have any ramble left for my other audience.)

Lastly, I think you are being a bit unsympathetic to Last. He's experiencing a distinct consequence of PBoC policy which favors financial and industrial interests over workers. It is no different than the bank bailout in the US and its impact on American incomes (please note the similar and sudden trend to saving there then recall my contention about government policy) but on a society which is much poorer. To make it all worse, it's only about half the size but paid for by people with a fifth of the income of Americans. It's a terrible shame and waste.
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