Jim Walker (an Austrian economist with the bank CLSA is reportedly forecasting another Asian crisis (Note: the Sydney Morning Herald requires registration to read the article, registration is free). (See also this in-depth study by Walker and others, although it is about 1 year old). The New York Times pipes in with Investment Bubble Builds China.
Walker notes rapid wage inflation and high-end consumption, which he traces to the Chinese central bank. In order to maintain its currency peg with the US$, it must intervene in the currency market, purchasing dollars and selling Yuan to keep the Chinese currency from rising against the dollar. It cannot borrow enough savings from within China to support this intervention, so the difference is made up by inflating:
- All these, Walker says, point to China coming to the late stage of its frenetic economic cycle, one characterised by massive oversupply of a currency so long pegged to the US dollar its holders treat it as the same.
- Across town at investment bank Morgan Stanley, its China-watching economist Andy Xie also sees an economic machine going at high speed towards a crash, similar to the meltdown that hit Asian economies in 1997.
“China is an export and investment-driven model and the connection between exports and investment is basically that the state banking system takes the money earned by exports and puts it into investment regardless of returns,” Xie says. “That model is likely to last until the crisis.”
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In the latest issue of the Quarterly Journal of Austrian Economics I have an article titled “Skyscrapers and Business Cycles” which shows why the building of the world’s tallest building has coincided with big downturns in the economy. China is now building the world’s tallest building.
http://mises.org/store/product1.aspx?Product_ID=130
From the SMH article:
The fuel for the overheated economy is coming from the central bank’s conversion of rapidly accumulating foreign reserves – which hit $US610 billion ($783 billion) at the end of last year and are on track to grow another $US250 billion this year – into yuan and then trying to “sterilise” the monetary effect by forcing Chinese banks to buy low-yield bonds.
Could someone flesh out this process a little more for me, please?
CHL (coolishhandluke@yahoo.com):
The Chinese government wants to maintain their currency exchange rate with the dollar at a below-market level. Left on its own, the market price would tend to rise to the market value. In order to fix the price, the Chinese central bank must be continuously ready to buy dollars for yuan at the fixed rate.
Where do they get the yuan that they use to buy the dollars? Two possibilities: borrow from existing holders of yuan (which could be banks with savings deposits or individuals) or print them, as central banks are able to do.
If they were to print their currency in sufficient quantity, that would lower the value of their currency, and to some extent make the price control even further away from the market price.
“Sterilisation” refers to borrowing that offsets or replaces money printing. To the extent that they are abl to force Chinese banks to loan them the money that they use to purchase dollars, they are not required to print that amount.
Chinese savings are to a large extent wasted-but that aren’t a really big problem given that the national savings rate is nearly 50% of GDP-meaning that there are more than enough funds going to productive investments. And as this high savings rate is largely the result of factors likely to remain (Chinese cultural attachment to thrift and the lack of a welfare state).
China’s situation is also different from the position of countries like Thailand, Indonesia and South Korea in 1997 in that they had hugh current account deficits while China has a large surplus. Largely as a result of this, China faces pressure to increase rather than lower the value of its currency. Therefore China does not risk the same kind of debt crises that Thailand etc. faced when the value of their currency which inflated the domestic currency value of dollar denominated debt which in turn bankrupted large parts of the economy.
China´s risks are therefore of a somewhat different kind than in Thailand etc. in 1997. For Thailand the problem was that the foreign capital inflow would stop, but for China the great risk is that its very high export growth could be halted and perhaps even turned into a decline because of a recession in America and/or harsh protectionist measures (like the 27.5% across the board tariff proposed by Senator Schumer) and/or a sharp revaluation of the yuan (For the effect to be dramatic however we would have to see a larger revaluation than the 10% increase many people think they will do).
Another threat would be if capital controls were loosened and the Chinese savers pulled their money from the banks and sent them offshore. This could be very damaging to the fragile fractional reserve banking system. But given the fact that the Chinese government is aware of this problem I doubt that they will loosen capital controls
before the banking system has been made more solvent.
But given the fact that the Chinese government is aware of this problem I doubt that they will loosen capital controls before the banking system has been made more solvent.
But how will they make the banking system more solvent? By delaying the reckoning for all that bad debt, are they not simply guaranteeing a much larger crash when it occurs? Or are they counting on simply wiping out their citizens’ savings – and then waving the flag and/or a gun in their faces?
They could always simply give the banks taxpayer’s money, which is what was done in Sweden in 1992 when the banking system seemed ready to collapse following the bursting of a massive speculative bubble. The Swedish government gave the banks nearly 200 billion kronor ($25 billion] or more than 10% of GDP at the time. Although the price was very high, this helped prevent the collapse of the banking system.
And from what I understand, the Chinese government has indeed started to hand out money to some of the more fragile government banks to make them more solvent.
the war between china and japan, and against european union (the no from france in the referendum might be viewed has a declaration of war to china) and the usa:
Chavez is the leader right now so it might be him who will have an influence (with its ennemy) to china use of its growth. free press is used as a tool for usa in china, and chavez is building an alternative way to make internationalism in a populist face. If chavez can deal with opposition in a peacefull and or constructuve way then china will follow them, but if they become as fascist as chinese police then china will hear from its people that they must follow usa…which is a bad exemple right now for sustainable growth.
India too as a role in giving the exemple, their democracy is fragile but constructive so if they can deal with china by sharing their goods (even if this could mean usa and europe are left apart..), their technology without too much spying and protectionism then it could lead to a real productivity in jakarta,cairo and istanbul.
I have fun making these comments, sorry for my ignorance…but i try.
Robert – Thanks
Stefan – How much of this 50% savings rate is due to monetary expansion?
Notice how they are shifting into US assets? (unocal, maytag)
It appears a bust of big-time proportions is on the horizon for China.
What are a people who like to save to do when they realize their savings have been frittered away by their illustrious (greedy and corrupt) banking/industrial/state establishment?
Maybe they are too polite to revolt. I guess we’ll just wait and see.
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