Sunday, 12 October 2008

China watches as the financial crisis continues - why?

An article in the Seattle Times considers China's peripheral role in the current financial crisis.

My immediate observation is that this headline is somewhat misleading. China i will be massively impacted by the current crisis. First, consumption in the EU and US will decline rapidly. Chinese exports will plummet. This will lead to the loss of thousands if not hundreds of thousands of jobs. This will necessarily lead to a domestic difficulties for China. The domestic market is simply not developed sufficiently to absorb this fall in demand.

China has every incentive to help stabilise the global financial situation as soon as possible. However, the article correctly points out that China will need every penny to save itself for the reasons outlined above. Saving our skins will not be a top priority and nor should it be.

China has already been burnt buying overseas assets at inflated costs. It may turn out that buying US treasury bonds was a very wise decision despite the historic low returns.

Why China sits on sidelines of financial unrest [Seattle Times]

BEIJING — China sits on a huge pile of money, and its policymakers crave global assets. So why doesn't China spend a little and save the world from global financial meltdown?

Economists give a number of reasons why China prefers to sit on the sidelines of the global turmoil, focusing instead on protecting its economy and maintaining growth powered by consumers at home.

"In this type of global crisis, the best China can do is take care of itself," said Qing Wang, chief economist on China for Morgan Stanley. "Its role in the global economy is still quite small."

An export powerhouse, China has amassed foreign reserves of $1.81 trillion, an unprecedented stockpile, and is awash in the savings of its thrifty citizens. That war chest has drawn cries from other corners of the globe for China to help bail out the global financial system — a cry that's been resisted in China.

Reserves locked up

Economists said it is easy to overlook that China's foreign reserves are already largely locked up — including some $1 trillion in U.S. government bonds.

"The money is already spent. ... It's not sitting there in cash," Wang said.

Earlier this week, Premier Wen Jiabao suggested that the "biggest contribution" China could do to help the global crisis is to maintain "steady and fast growth."

China's economy expanded at a blistering 11.9 percent in 2007, but the pace is slowing markedly. The International Monetary Fund forecasts China's economy will grow 9.7 percent in 2008. Several Wall Street firms forecast 2009 growth at around 8 percent — a significant slide.

The crisis has certainly buffeted China. Its stock exchange in Shanghai has followed the stomach-churning slides of major exchanges elsewhere, although to a milder degree than in Tokyo, which plunged 9.6 percent Friday, or Hong Kong, which sunk 7 percent.

Major stock index

Shanghai's major stock index fell 4.6 percent and has lost two-thirds of its value in a year.

Still, some independent economists suggest that as China weans off its dependence on exports it should use its savings and begin scouring the globe for distressed foreign banks or big companies to buy at fire-sale prices. Or at least buy some more U.S. Treasury bonds in a sign of confidence in the global system.

Others preach caution.

"The financial markets are very sophisticated, and the Chinese players have less experience than elsewhere," said Chen Zhao, an economist at Shanghai's Fudan University. "Chinese players are cautious."

China, after all, has learned painfully that it can lose. Last year, its sovereign wealth fund bought a $5 billion chunk of Morgan Stanley, only to see its investment drop in half, a story repeated with its investment in the Blackstone Group.

"We can't evaluate American assets until the subprime lending crisis is over. We must wait for a time," said Wang Songqi, chief editor of The Banker magazine.

"It's not the bottom of the market yet," Chen added.

Any attempt by China to purchase a large bank or other sensitive asset could raise howls on Capitol Hill, just as happened in 2005 when a China state offshore oil company bid on Unocal, then the ninth-largest oil company in the world, said Andy Rothman, a Shanghai-based economist for CLSA Asia-Pacific.

The Chinese bid was withdrawn, and Unocal was purchased by Chevron.

"How would Congress respond if a Chinese Communist Party-owned bank were to make a bid for a major U.S. bank? You just have to go back a few years to see the reaction to CNOOC's bid for Unocal."

Rothman said China is on the right path of trying to stimulate domestic consumption with few social-safety nets where most families save to pay for education, health care and retirement. Chinese families save an average of 16 percent of their disposable income, he wrote in a research note this week.

In this year's most important political meeting, Communist Party honchos are in a four-day plenary through the weekend to discuss rural reforms that could sustain economic growth, a pillar of the party's legitimacy now that it has largely ditched socialist ideology.

The reforms are expected to "make it easier for farmers to lease or transfer the management rights of their land," the China Daily newspaper said Friday.

Under a collective-ownership system, China's 750 million rural dwellers manage land for 30-year periods through contracts with village or township bodies, but don't own it outright.


1 comment:

francis said...

Economists say that a financial asset (stock, for example) exhibits a bubble when its price exceeds the value of the future income (such as interest or dividends) that would be received by owning it to maturity. If most market participants buy the asset primarily in hopes of selling it later at a higher price, instead of buying it for the income it will generate, this could be evidence that a bubble is present. If there is a bubble, there is also a risk of a crash in asset prices: market participants will go on buying only as long as they expect others to buy, and when many decide to sell the price will fall. However, it is difficult to tell in practice whether an asset's price actually equals its fundamental value, so it is hard to detect bubbles reliably. Some economists insist that bubbles never or almost never occur.
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