Brad DeLong on China and the Alignment problem

This is an interesting article - I do not necessarily agree with the grave concerns about scenario 2 - the Chinese maintaining the close ties between the Yuan and the Dollar and keeping inflation under control - the fear expressed here is that there could be a crash in the dollar in three or four years time. That is a long way off.

Alignment problem shifts to China [Taipeitimes]

Now that the dollar has dropped 43 percent from its high against the euro, the process of global financial rebalancing is seriously under way. The US' trade and current account deficits have begun to shrink relative to US and world GDP. Asian current account surpluses are about to start to shrink as well, especially if growth slows markedly in the US in the aftermath of the end of its housing boom.

At the moment, Europe is feeling most of the pain, as the euro's value has risen furthest and fastest against the dollar. But Latin America and Asia will start to feel distress as well, as the US sheds its decade-long role as the global economy's importer of last resort.

As long as imbalances of world trade and capital flows unwind slowly and smoothly, the magnitude of any global economic distress should be relatively small.

Of course, it will not seem small to exporters and their workers who lose their US markets, or to Americans who lose access to cheap capital provided by foreigners.

Yes, the US might enter a small recession -- the odds are roughly 50-50 of that happening. Yes, a US recession might spill over to the rest of the world and cause a worldwide recession. And yes, global economic growth over the next five years is unlikely to be as rapid as growth in the last five years.

A formal recession, however, is not an overwhelming probability and is likely to be small.

The prospect of a truly hard landing -- one where global investors wake up one morning, suddenly realize the US current accounts cannot be sustained, dump dollars and crash the global economy -- is becoming less likely with each passing day.

Under two scenarios -- both concerning China -- the unwinding of global imbalances could cause regional if not global depression.

In the first scenario, China keeps up its attempt to maintain full employment in Shanghai, Guangzhou, and elsewhere not by stimulating domestic demand but by trying to boost exports further by keeping the yuan stable against the dollar and falling in value against the euro.

The effort to maintain the dollar-yuan exchange rate at a level approved by China's State Council has already led to an enormous increase in the Chinese economy's financial liquidity.

The consequences of this are now manifested in property and stock market inflation, but not yet in rampant and uncontrolled consumer price inflation -- at least for now.

But if China does not accelerate the yuan's revaluation, the world might see a large burst of consumer inflation in China in the next two or three years.

If so, the consequences will be a choice between stagflation on the one hand and the destructive run-away inflation of post-World War II Latin America on the other.

The fall-out from this scenario, however, would be largely confined to Asia.

The second scenario is more dangerous for the entire world. In this scenario, once again China continues to attempt to maintain full employment by keeping the yuan undervalued. But this time, the Chinese government manages to restrain domestic inflation, so the US' trade deficit with Asia stops falling and starts rising again.

Five or six years hence, the world economy faces the danger of a sudden crash in the value of the dollar and the euro against Asian currencies.

Four years ago, I would have said that the principal source of international economic disorder was made in the US.

That has passed as a result of the dollar's decline and the ebbing political strength of right-wing populist factions in the US that seek ever-greater redistribution to the rich fueled by ever-increasing tax cuts and ever-rising long-term deficits.

Today, the principal source of international economic disorder is made in China, owing to factions inside its government that hope to avoid a more rapid appreciation of the yuan's value.

I cannot judge the strength of these factions, or whether they know that the falling US account deficit and dollar may reduce the urgency of adjustment in the rest of the world, but not in China.

Former US president Richard Nixon's treasury secretary, John Connally, once told a group of European leaders that while the dollar was the US currency, its misalignment was Europe's problem. Today, the misalignment of the dollar -- and the euro -- against the yuan and other Asian currencies is increasingly becoming Asia's problem.

J. Bradford DeLong, professor of economics at the University of California at Berkeley, was assistant US Treasury secretary during the administration of former US president Bill Clinton.

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Long-Term Effects of the 1959-1961 China Famine

This new NBER working paper demonstrates how economists are not restricted to studying exchange rates and inflation.

I am always in two minds when I see a paper like this. It is an interesting topic with important conclusions. It is also a unique experiment that tells us more about biological processes than merely economics.

Given the sex imbalance in China between males and females the conclusions seem at odds with situation on the ground but that is another blog post entirely.

A paper worth reading. Contact a friendly blogger via email if you are unable to access this paper from the NBER.

"Long-Term Effects of the 1959-1961 China Famine: Mainland China and Hong Kong"
NBER Working Paper No. W13384


Contact: DOUGLAS ALMOND
Columbia University - Department of Economics,
National Bureau of Economic Research (NBER)
Email: da2152@columbia.edu
Auth-Page: http://ssrn.com/author=172748

Co-Author: LENA EDLUND
Columbia University - Department of Economics
Email: le93@columbia.edu
Auth-Page: http://ssrn.com/author=298099

Co-Author: HONGBIN LI
Chinese University of Hong Kong - Department of
Economics
Email: lhongbin@cuhk.edu.hk
Auth-Page: http://ssrn.com/author=251685

Co-Author: JUNSEN ZHANG
Chinese University of Hong Kong - Department of
Economics, Institute for the Study of Labor (IZA)
Email: jszhang@cuhk.edu.hk
Auth-Page: http://ssrn.com/author=172991

Full Text: http://ssrn.com/abstract=1013514

ABSTRACT: This paper estimates the effects of maternal malnutrition exploiting the 1959-1961 Chinese famine as a natural experiment. In the 1% sample of the 2000 Chinese Census, we find that fetal exposure to acute maternal malnutrition had compromised a range of socioeconomic outcomes, including: literacy, labor market status, wealth and marriage market outcomes. Women married spouses with less education and later, as did men, if at all. In addition, maternal malnutrition reduced the sex ratio (males to females) in two generations - those prenatally exposed and their children - presumably through heightened male mortality. This tendency toward female offspring is interpretable in light of the Trivers-Willard (1973) hypothesis, according to which parents in poor condition should skew the offspring sex ratio toward daughters. Hong Kong natality micro data from 1984-2004 further confirm this pattern of female offspring among mainland-born residents exposed to malnutrition in utero.
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China stockmarket reversal November 2007

Could this be the beginning of the fall in China shares to a more realistic level?

Daily falls of over 2% can be considered serious. There could be further trouble ahead. My doom laden economists prediction is that the major fall out will occur close to the Olympics when the world's attention is on China. Then we we see fireworks of all types.

Chinese share prices go further down

Chinese share prices Monday continued the downward trend on last Friday with the benchmark Shanghai Composite Index closing the daily trading at 5,634.45 points, down 2.48 percent.

The Shenzhen Component Index on the smaller bourse in Shenzhen ended at 18,116.88 points, down 2.41 percent.

However, the combined daily transaction volume on the two exchanges increased sharply to 197.2 billion yuan (26.4 billion U.S. dollars) from the 158.4 billion yuan on the previous trading day.

These falls come on the back of Greenspans comments on the 30th October:

The stock market bubble of Chinese characteristics [China Elections and Governance]

On October 30, Alan Greenspan issued another warning on the risk of a Chinese stock mar­ket bubble. A few months ago, when China's stock index rose by more than 90% over a year, Greenspan expressed concern that the market could experience a "dra­ma­tic shrinkage." At present, the Shanghai and Shenzhen 300 Index has risen 170% this year, allowing China to surpass the US in the number of its companies within the world's ten largest by market value for first time. October 24, investment master Warren Buffett also issued a warning that China shares were rising too fast.

The judgments of "Greenspan" and "Share God" Buffet may not always go unchallenged, but few financial experts would deny that China's stock market prices and risks are on the high side. Interestingly, China's crazy stock market resembles its hypertrophic economy in repeatedly having the last laugh on pessimists' predictions, leaving at least some experts wary of forecasting what the price level of China's stock market will be, or how a major adjustment might take place. It appears that as with "socialism," stock market bubbles in China have some indefinable "Chinese characteristics."

The Chinese characteristics of the bubble are derived from those of the stock market itself. The first of these is that state-owned enterprises occupy a dominant position, whether in the proportion of the assets of listed companies, or equity ratio, state-owned property is absol­u­tely dominant. More importantly, the structure of property rights in the economy on which China's stock market is dependent, is still more unique, in that control of the major­ity of non-financial assets, above all in land, is in the hands of the government, while the im­mov­able property that ordinary people can freely transfer is only a small fraction of the total. The major part of personal assets are deposits and other financial assets that can be depreciated by the government at any time. As I have pointed out before, this abnormal structure of property rights is the inevitable result of the "separation of powers without separation of property" in China's reforms.

Opening up secondary share markets in such a context necessarily results in a large amount of money chasing a small number of stocks, totally detaching stock prices from corporate book profits. This problem in fact existed prior to the share market reforms, but people were so naive as to think that after the share reform this issue had been over­come and share­holders could expect to operate rationally in accordance with classic textbooks, rather than the "irrational exuberance" of price-earnings ratio of up to 80—even several hundred —times. It now seems to have been impossible for the share reforms to resolve the problem of Chinese residents of lots of money but few investment opportunities. measured by their price-earnings ratios, Chinese shares must therefore break through the normal level of states which have private ownership; this is the first of the Chinese characteristics of the stock market bubble.

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Rising Fuel Prices in China

A round-up of fuel price related articles. This is an important issue - China is investing heavily in Africa to secure oil stocks in the future. This is a problem that may persist for some time.

This statistic shows how quickly things can turn around with this trade switch indicating how much China has grown since 1993.

China is the second-largest crude oil consumer after the US and although it was a net exporter as recently as 1993 it now relies on imports for nearly 50 per cent of its crude supply.

This quote shows clearly the problems that can occur when strict government controls are in place. Something that Taiwan and many other East Asian countries are also experiencing.

The current shortages, particularly of diesel, result from a combination of high global oil prices and strict government controls, causing huge losses for Chinese refiners that must pay more for oil but cannot raise prices at the pump.

With the Olympic games around the corner there is sure to be a lot more column and blogger inches devoted to this subject.

Beijing raises pump prices as shortages bite [FT]

Faced with worsening fuel shortages across the country Beijing raised petrol, diesel and jet fuel prices at the pump by almost 10 per cent on Wednesday, in an effort to boost domestic supplies and exorcise the spectre of social unrest.

The policy reversal came as shortages spread to the capital, which is usually immune from the country’s periodic supply crunches.

But the government is unwilling to allow prices to rise too much because of a morbid fear of spiralling inflation, which has a history of toppling governments in China and is currently running at a 10-year high, above 6 per cent.

../

Analysts say the increasingly independent state oil giants are playing a high-stakes bluffing game with the government in which they chase profits by exporting refined products instead of supplying the domestic market.

This has created shortages that force the government to choose between doing nothing and risking incidents like the one in Henan, or raising prices at the risk of triggering a backlash among ordinary citizens that could escalate like the recent protests in Burma, which started as a reaction against a fuel price increase.

“The government will be under enormous pressure to keep fuel prices low at least until after the Olympics next year,” says Gordon Kwan, head of China energy research at CLSA in Hong Kong. “They can’t have sad faces, let alone street riots or fuel shortages, in Beijing with Bush and Putin here to watch the games.”

China hikes fuel prices as long lines form at gas pumps and shortages disrupt trucking [China Post]

BEIJING, China -- China raised gasoline and diesel prices Thursday by about 10 percent to curb demand amid shortages that have caused long lines at filling staions and disrupted trucking in key export areas.

and finally, a China bloggers view of events from 30th and 31st October a good 2 or 3 days before the FT got hold of this story.

Fuel shortage spreads [China Financial Markets]

Hidden inflation? [China Financial Markets]

Certain regions in China are experiencing shortages in diesel fuel. I heard first from my students and then in the press that in parts of coastal China gas stations are rationing the amount of diesel they sell. This often happens when price controls clash with underlying inflation – instead of showing up in higher prices, inflation shows up as shortages.

I believe that the last time gasoline prices were set by the authorities, oil was trading around $60 a barrel. Unless oil prices drop substantially in the near term I would expect that there might be pressure on the government to let gasoline prices rise, thereby showing up in the non-food component of CPI inflation. Perhaps more worrying, to see inflation spread from food to transportation may lead to a rise in inflationary expectations. All eyes will be on October inflation numbers, which I believe should be released in less than two weeks.

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Fuel

The rise of "Anti-Chinaism" in the US

Apart from the terrible use of the term "Anti-Chinaism" which is just plain ugly and the lack of any meaningful economics this is still an interesting article.

The US does have a habit of going overboard on the perceived economic threat posed by pretty much everything: immigration; off shoring; our sourcing; Japan in the late 80s and early 1990s; and now China in the 2000s.

This article raises some interesting points although this appears a little harsh:

"In essence, the China blame game is a reflection of the United States’ collective self-hatred."

an interesting little Euro centric argument:

To understand why, one just has to examine the relationship between Europe and the United States. A key ingredient of anti-Americanism there — a phenomenon that is almost two centuries old — is rooted in the Europeans’ gnawing and highly unpleasant realization that this upstart nation, due to its own built-in dynamics, was inevitably absorbing a vital share of the global power status once solely accorded to the Europeans themselves.

Good stuff. I have included the entire article as the arguments and true anti-US rhetoric of the article can then be clearly seen.

The United States and the Rise of Anti-Chinaism [The Globalist]

Given China's rising defense budget and the ever-expanding U.S. trade deficit, expressing disgust with China is fast becoming a national sport in the United States. Stephan Richter explores the real reasons behind the increasingly broad-based movement of "anti-Chinaism" — and the very real pitfalls it entails for addressing the nation's larger reform agenda.

Most observers view the recent bout of rising anti-China sentiment in the United States as a direct reflection of worsening U.S. trade statistics. Since the numbers are not turning around, a culprit needs to be found. And this time, it’s not Japan — but China.

Others engage, seemingly more nobly, in an analysis of China’s democracy deficit — and see the country as being on the same path as early-20th century Germany when it pursued militarism instead of true democracy.

The China blame game

So much for the conventional wisdom. What really explains much of the China bashing is that U.S. policymakers and opinion leaders are just plain frustrated — about their own internal inability to get anything done. This is true between the Congress and the Bush Administration, between Democrats and Republicans — and even within their own respective party confines. In essence, the China blame game is a reflection of the United States’ collective self-hatred.

Given this dysfunctional state of affairs, few have the courage to express what really ails the United States of America: the demise of the quintessentially American virtue of pragmatism — and the corresponding inability to simply get things done.

The collective inability to develop a coherent national strategy on key issues of our time — from education to health care to immigration — is indeed stunning.

Victims and perpetrators

The reason why politicians rarely express this sentiment is because they are both the chief perpetrators and victims of this process. Perpetrators — because it is they, in their legislative chambers, who seek to block each other’s every move. And victims — because it is enormously frustrating to work in a profession systematically focused on perpetuating stalemate.

Nothing can be more frustrating to U.S. policymakers than to find themselves resorting to playing games of moral relativism toward China. It wasn’t meant to be that way. But that is where they find themselves at this point.

"Global bad"

In essence, the Bush Administration’s ill-fated unilateralism has created a “global bad” in Iraq that exceeds the “global bad” China is committing in Sudan and elsewhere. Thus, once again, China is off the hook politically as well as morally.

While China engages in some questionable activities, such as supporting rogue regimes in Africa, any U.S. criticism of such moves is implicitly discounted around much of the world due to the loss of the moral power and authority of the United States in world affairs.

What adds insult to injury is that China gains not by investing more in its military, but just by standing idly by and letting the United States diminish its own.

Hypocritical U.S.

Consequently, the entire world wonders, what gives the United States the right to play “holier than thou” and criticize China — before apologizing for the human rights mess it has created in Iraq?

And, even more poignantly, what gives Americans the right to criticize China’s activities in Africa — considering how miserably Americans failed to stop their own leadership from engaging in an ill-advised and unnecessary war in the Middle East?

Psychological effects

Faced with this turn of events, it is no wonder that there is real potential for self-hatred — and a corresponding need to deflect this self-loathing onto another nation, namely China.

If only that would help. In reality, engaging in that blame game is incredibly short-sighted because it seemingly absolves the United States to get its act together, which would be one monumental task.

Instead, U.S. politicians continue to play their mind games. Why does nobody among them talk about what’s really going on? Because doing so would be considered highly unpatriotic — and effective political suicide.

Manning up

One would have to call that ironic — if it weren’t so tragic. After all, the only patriotic thing to do is to rally the country to improve on itself — not to blame others so as to argue that all is well and good in the United States of America.

The process of facing up to this challenge is tough and painful indeed. After all, it would involve acknowledging, on the part of Republicans, that nobody has done more to propel China’s rise than George W. Bush, given the morass created by his ill-advised foreign and domestic policy moves.

Democrats fail too

The fallout from these poor decisions detracts a lot of key decision makers from focusing on the real battle — adjusting critical U.S. policies to position the country for the long term.

Democrats would feel the pain as well. They would have to acknowledge that “getting tough on trade” is not the answer to the nation’s core woes.

The truth of the matter is that Democrats have failed, for a long, long time, to put into place a number of policies that workers in other advanced countries have long called a basic right — such as continuing health care in case of being laid off.

China isn't only problem

The Chinese, to be sure, are far from being above reproach. However, they are not the be-all and end-all of America’s problems — not even those of U.S. manufacturing workers.

And both parties, as well as opinion leaders across U.S. society, will have to come clean with another painful admission: The power dynamics vis-à-vis China are such that the United States will inevitably see its own power slip on a relative basis.

Three choices

Faced with that inescapable reality, the U.S. establishment and the country at large have three choices: They can keep on ignoring this fundamental reality — or they can acknowledge it and seek to act smartly in order to ensure the United States’ continued preeminence.

At a minimum, while Americans are still making up their minds between these two basic choices, they can opt for a third interim solution — doing nothing unilaterally that serves only to accelerate China’s rise.

And that, first and foremost, would entail acting in a more far-sighted, consensual manner in the foreign policy arena. That China has come to be seen as a rather rational and balanced player on the world stage is in part due to the country’s return to long-standing principles of balance-of-power politics — and a rising level of constructive engagement on a variety of issues (such as North Korea).

"Anti-Chinaism"

Ultimately, however, even if the moves advocated here are implemented, the world would still need to reckon with a significant dose of U.S. “anti-Chinaism.”

To understand why, one just has to examine the relationship between Europe and the United States. A key ingredient of anti-Americanism there — a phenomenon that is almost two centuries old — is rooted in the Europeans’ gnawing and highly unpleasant realization that this upstart nation, due to its own built-in dynamics, was inevitably absorbing a vital share of the global power status once solely accorded to the Europeans themselves.

U.S. charades

Few have the courage to express what really ails the United States of America: the demise of the quintessentially American virtue of pragmatism — and the corresponding inability to simply get things done.

That same realization of a relative decline in power is hitting the United States these days. Tragically, the Bush Administration — and even many Democratic leaders — has seen fit to respond to this new reality by emphasizing the unique power status of the United States.

That is humanly comprehensible — because it absolves them of shedding the comfortable, albeit fake, cloak of patriotism.

True patriotism would mean dealing with reality — and preparing the nation for a prosperous future — by focusing on one’s own shortcomings and developing plans to overcome them.

Pragmatism

Such a move is long overdue. The United States’ continued failure to act on this most crucial front stands in stark contrast to China, whose leaders are totally focused on the process of constant self-improvement. They are living the "Toyota principle" — of relentlessly engaging in a continuous, daily improvement process.

It is high time that the United States, the modern world’s first society to do just that, reawakens to its own best traditions. After all, before it was called the “Toyota principle,” the process of seeking constant self-improvement was called pragmatism.

"American pragmatism"

Nothing can be more frustrating to U.S. policymakers than to find themselves resorting to playing games of moral relativism toward China. It wasn’t meant to be that way.

Under the label of “American pragmatism” — in politics, industry and elsewhere — it became the great envy of the world.

However, in the last few years, America’s competitiveness, power and prestige have been eroded because it has abandoned its defining virtue.

The United States cannot afford to continue giving short shrift to pragmatism. In the end, that is what the China challenge should really remind every American of.

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FDI in China and Credit Constraints

Intersting new take on FDI in China related to the alleviation of credit constraints.

Foreign Direct Investment in China: Reward or Remedy?

* Olena Havrylchyk 11CEPII, Paris and and
* Sandra Poncet 22Université Paris 1 and CEPII

*
1CEPII, Paris and 2Université Paris 1 and CEPII

Abstract

This paper tests the significance of FDI as a way to alleviate credit constraints. Incoming foreign investment provides additional sources of capital. Specifically in the Chinese case, enterprises may look for foreign investors, being constrained in their activity due to distortions in the state-dominated system. First, the Chinese financial system allocates resources to the least efficient firms – state-owned enterprises – while denying the same resources to Chinese private enterprises, forcing them to look for a foreign investor. Second, the inefficient system of state investment planning leads to mismanagement of public enterprises, increasing ‘insolvency-induced FDI’. We propose to analyse determinants of FDI in Chinese provinces to test the above hypotheses. We control for traditional determinants of FDI such as market access, labour costs, productivity, infrastructure, reform advances and banking sector size in order to assess the impact of inter-provincial heterogeneity in terms of the access that private enterprises have to credit and the distortive management in state-owned firms.