I sometimes wonder if there is any editorial work being done in the world media - the article below is from one of the IHT's top columnist from the old days when IHT was a joint WP/NYT operation.
1. He claims China threatens to diversify out of dollars. OK. Diversify to what? Yen? Yen T bonds pay no interest. So what he says elsewhere he means Euros or Euros and Euro souragates [Swiss francs, Norwegian krone, British pounds...]. Yes China could. So could OPEC. So could everyone. And if they do they will run the exchange rate on the European currencies up enough to shut off Europe's Atlantic trade totally and price Europe out of most other markets versus dollar and yen denominated goods. So Europe will allow China to sell in dollars and then use those dollars to wreck Europe's economy? Just another joy of financial globalization or liberalization if one prefers.
2. China may well be in a bubble. However the only major nation China runs a trade surplus with is the US. So effectively in this case everyone else's exports to China [the only source of growth in this decade for most folks and the main source besides exports to the US for the rest] tie directly back to the US. The Bush deficits and Greenspan's 1% interest rates on USG bonds are what is keeping the world economy from imploding. This is a bigger bubble than dot comm and has less real value behind the hype. Presume that Chinese internal investment is overstates. Make it 20%. Does anyone seriously believe China can parlay 20% more trade to the US compounded? If so for how many years. House of cards folks. And if it busts there isn't another set of arrows in the quiver. Yes Greenspan can take the funds rate from 1% to 0% but I doubt cutting Fed Funds will move actual interest rates to corps and people as everyone will price in the certainty that the rates must eventually rise. Can Bush double the defecit again to 10% of GDP and if so this is sustainable for how long? We are about to live in interesting times. If China gets a 21st century Asian flu everybody except the US goes splat for a period of years until we can find a new formula to reconstruct the world economy.
Is China's Economy Overheating?
By David Ignatius
Tuesday, April 20, 2004; Page A19
BEIJING -- Inside a bubble economy, people begin to think that good times will last forever. That was true in Japan in the 1980s and in America in the late '90s. And it's true now in China -- the "miracle economy," where the sun has been shining so brightly that many people don't see the clouds that are beginning to drift in.
Drive down one of the capital's broad boulevards and you'll find billboards advertising "Season's Park," the latest fancy apartment complex that bills itself as "Home of the Tycoons." The entrance is decorated with images of the Statue of Liberty and the Arc de Triomphe, and there's a telephone "hot line" so newly wealthy Chinese can rush to buy a piece of the dream.
The race to join the tycoons is suggested by some statistics: Investment in the Chinese steel industry grew 96.6 percent last year; in aluminum, 92.9 percent; in cement, 121.9 percent. Those numbers are "a bit astronomical," the head of China's top economic ministry warned last month.
The new Chinese leadership seems to understand the danger of overheating, and in the past few months it has taken some gentle steps to slow the economy from last year's 9.1 percent growth rate. But like Alan Greenspan's 1996 warning about "irrational exuberance" on Wall Street, these calls for restraint haven't had much effect. During the first quarter, economic growth actually increased to 9.7 percent.
After talking to some senior Chinese officials the past few days, I'm convinced they understand that stronger measures may be needed. But they're also worried these efforts might backfire -- creating a sudden sharp downturn. Their desire for a "soft landing" is certainly understandable, but it may prevent any landing at all -- until there's an eventual crash.
"Some people think that China's economy is already overheated; others think it's in the process of becoming overheated," explained Zhao Qizheng, the minister who runs the State Council Information Office. He told me that China needs "sustainable" growth, and he's right.
The sharpest analysis I heard was from Li Ruogu, the deputy governor of China's central bank. He even used the "B" word: "If credit is growing as fast as it has been, we will be concerned about a bubble," he said, adding that the central bank had raised reserve requirements for Chinese banks this month partly "to send out the message that we are concerned about overheating of the economy."
Li warned that the central bank could also raise interest rates soon, a move many analysts think is overdue. Li said inflation during the first quarter was running at an annualized rate of over 12 percent. "If that trend continues, we will be in the position to raise interest rates," he warned.
China's leaders are struggling with the question of whether to move toward full convertibility of its currency, the renminbi. U.S. officials have been urging that step, believing it would lead to an appreciation of 20 percent or more that would slow China's exports and rate of growth. Li's boss, central bank governor Zhou Xiaochuan, said over the weekend that "building a more market-driven trading system for the renminbi is now a task of top priority." But Li, speaking a few days earlier, said he worried that full convertibility could be destabilizing by allowing surges of speculative capital in and out of China.
Like many Chinese, Li has been studying what happened to the Japanese bubble economy, and he worries that an appreciating Chinese currency could make the bubble here worse. The sharp rise in the Japanese yen during the 1980s pushed real estate and stock prices to unrealistic levels, he notes.
Li also cautioned that the United States shouldn't assume that China will keep buying U.S. Treasury securities indefinitely. If the United States doesn't protect the value of the dollar so that it is a stable "anchor," China will eventually move to hold its reserves in a basket of currencies, he said.
China's debate about overheating has received relatively little attention in the West, but the issue could be the most important challenge for the global economy. The Chinese locomotive has been pulling Japan and other Asian nations into recovery. If China slowed suddenly, the global economy would feel the crunch.
China's leaders seem to understand that the world is counting on them to get economic policy right. "Neighboring countries are dependent on us," Li said. "If we have a hard landing, they will be affected."
"To get rich is glorious," said the late Deng Xiaoping in what has become a motto for the Chinese economic transformation over the past two decades. Yes, but beware of becoming too rich too fast. Even in the new China, the law of gravity has not been repealed.
davidignatius@washpost.com
© 2004 The Washington Post Company
posted by scott 7:00 AM