Monday 25 May 2009

"Dollar Trap" snaps shut

One of the most intriguing political games being played out at the moment is the ongoing "death grip" between China and US over China's massive (and growing) holdings of US paper.

Both countries stand to suffer massive losses if either country deviates off the current, unsustainable path. How China and the US can get out of this is not clear to me but the only answer I can see if for there be a slow unwinding of positions over 5 to 10 years. Speculators will not make this easy.

I happen to believe the dollar will come under increasing pressure and opens up some interesting futures trading opportunities although there are other good FEX deals out there at the moment (on which more another day).

Stick the following title into google to read the whole story.

China Stuck in "dollar" trap [FT]

"China's official foreign exchange manager is still buying record amounts of US government bonds, in spite of Beijing's increasingly vocal fear of a dollar collapse".

The article goes on to say that China has little choice but to keep buying US paper. It is in a dollar trap. The massive volumes involved means that Chinese buying of any other currency would distort the market. Likewise, selling dollars would cause a collapse in the dollar.

I suspect Chinese outbound FDI will increase with less emphasis on US paper but this will be a long process. Look what happened to Japan when it went down this route in the early 90s.

China is overextending itself and its expertise.


Monday 18 May 2009

UK's ONS gets retail figures wrong

OK, hands up. I have criticised the reliability of Chinese data regularly on this blog to the extent that I do not believe a lot of the published Chinese macro data.

Interestingly, I did wonder about the robust UK retail numbers that were coming out of the ONS in the UK. Surely UK statistics can be trusted. Surely.

Only now do we get the truth. How hard can it be - honestly. OVERSTATED by 56% - that is simply dreadful.

It is becoming clear that this financial crisis is great for getting the world back on a more realistic track - the party is over - we now need to clear up the mess left behind.

Heads should roll at the ONS. China's statistical office can still learn a lot from this sort of misguided confidence that the head of the ONS showed in their own ability to collect a simple series of data.

There is political capital from posting wrong numbers whether it is to convince a domestic or overseas audience.

ONS gets sums wrong on retail sales [FT]

One of Britain’s most closely watched economic indicators has heavily overstated the quantity of high street sales over the past two years, the Office for National Statistics admitted on Friday.

Britain’s supplier of official statistics conceded that since the financial crisis began in August 2007, it has overstated the volume of retail sales growth by 56 per cent.

Many economists have been worried for some time that the published retail sales figures were too strong and have always received a furious response from the ONS.

Karen Dunnell, the national statistician, wrote to newspapers last October, insisting that “ONS retail statistics are the best available and are not inaccurate”.

She stuck to the same theme in another article, saying economists who had expressed surprise at the strength of ONS retail figures were upset because “City analysts also have a vested interest in not being proved wrong”.

Yet while the ONS head was defending the accuracy of the retail figures, industry experts knew the outdated nature of price measurement in the retail sales index was much more than a triviality.

The ONS previously said that between August 2007 and March 2009 retail sales volume grew 3.6 per cent. The changes announced on Friday mean it will now say the real rise in sales volumes was only 2.3 per cent.

Such a large difference in the one indicator that has persistently given a more positive account of Britain’s economy will cause red faces at the ONS, especially as it had insisted on the superiority of its retail data to unofficial estimates.

So confident has the ONS been that it warns users of the CBI or the British Retail Consortium sales data every month that these figures might not be “fit for purpose”.

The BRC on Friday welcomed the changes, saying they meant the official data would now be more in line with its figures.

The ONS’s old methodology failed to take sufficient account of goods that had risen strongly in price and so under-estimated the true rate of inflation in calculating the headline retail sales volume figures.

The ONS said on Friday it was changing the way it compiled its retail sales data to make sure it “more accurately captures recent trends in retail sales, including where consumers switch purchases to goods that have fallen in price’’.



Friday 15 May 2009

"Manchurian Paradox" - Can China see the wood for the trees?

Thanks to a comment on this blog directing me to an article by Stephen Roach who is the chairman of Morgan Stanley Asia.

It raises some interesting points. This is a long article. Highlights only below.

I agree entirely - I do not think that China sees the danger it is getting itself into. They are simply too optimistic. Having not experienced how ugly capitalism can get they are walking into a whole pile of trouble.

It is reassuring to read that I am not the only one who is calling that the emperor has no clothes.

Manchurian Paradox [The National Interest Online]

THE CHINESE word for crisis, weiji, includes elements of both danger and opportunity. This symbolic meaning has taken on especially great significance in recent years. The emergence of modern China as a global economic power can, in fact, be dated to the nation’s willingness to seize critical moments of adversity. That was very much the case during the Asian financial crisis of 1997–98, which marked a critical turning point in the ascendance of China as a major economic power. And it could also be the case today.

But there is an important catch: unlike earlier crises, it is not altogether clear that China senses the gravity of the current danger. That leaves it caught in something much closer to denial—making it difficult to seize the opportunity that peril can provide.


There is nothing wrong with China’s gathering sense of self-confidence and its concomitant contribution to the global debate. In fact, it is to be encouraged. China has earned its place at the table. For a nation steeped in five thousand years of inward-looking experience, China is looking outward as never before. The world can only benefit from this sea change. But that underscores the biggest danger of all—the risk that China takes its newfound external dependence too far and ignores the lasting and serious pitfalls of a postcrisis world. If it fails to rebalance its unbalanced economy, China’s power play could be surprisingly fleeting.


Wednesday 13 May 2009

"Sickness of Savers in China"

Excellent piece on the FT on the role of health care provision in China and the link with savings.

This problem has been clear for the last ten years. Chinese consumers will not save the global economy when the social security and health care provision is so poor. The Chinese need to save such a large percentage for education, old age and health care.

Improving health care will help but it is only one part of the jigsaw. I disagree that the savings problem is primarily health related. Education I would argue is far more important. A well employed son or daughter can then pay the health bills of the parents in later life.

Sickness of the savers [FT]

China’s economy has turned the corner. Government banks have been lending at a rapid rate, factory output is rising again and the local stock market is blazing ahead. But just how quickly the world’s most populous country emerges from the global economic crisis will depend, in part, on places such as the cancer ward of Jingdong hospital in Sanhe, not far from Beijing, and how they treat patients like Cao Jun.


If the US economy stored up problems for itself through consuming too much, China has distorted its economy by saving too much and spending too little. In recent years, the savings rate has risen as high as 50 per cent of gross domestic product, including the retained earnings of state-owned companies, and even families with incomes of less than $200 a year still save 18 per cent of their income, according to the World Bank.

One of the main underlying causes is the weakness of the social safety net. Many Chinese put a large chunk of their wages into bank accounts because they are worried about pensions, education expenses and – most of all – the prospect of a big hospital bill if a family member falls seriously ill.


Exports just keep on sliding

I am becoming more and more convinced that politicians all over the world are making non stop comments on "green shoots", "bottoming out" and similar phrases just for the sake of "talking up" the global economy - this is perhaps no surprise at all. I just don't buy it when you look what is happening on the ground.

The Chinese growth story is another one of the great falsehoods of our time. I do not believe the figures. If you take oil consumption as a REAL proxy for output it is continuing to fall despite the massive stimulus package.

The FT reports on the continued decline in exports. This is NOT a surprise to anyone with any sense.

When will anyone report what is really going on. Now I might be on the "extremely" dismal end of dismal scientist line but I can still not see any green shoots from where I sit.

Look at the FT first two lines. What I want to know is WHO said the worst was over and WHY?

This article at least puts things in perspective. I agree - China is massively ill prepared for a continued decline in demand for its exports. The world economy will not bounce back that quickly (or as quickly as some analysts believe).

Rant finished. Apologies.

Slide in Chinese exports will hit growth strategy [Financial Times]

Chinese exports fell steeply in April for a sixth month in succession, suggesting that the worst might not be over for the world's third largest economy.

The total value of Chinese exports fell 22.6 per cent to $91.9bn (£60.2bn) last month compared with the same month a year earlier - a faster rate of decline than the 17.1 per cent year-on-year drop in March.

Imports fell 23 per cent from a year earlier to $78.8bn in what some analysts said was a sign that domestic investors remained unwilling to invest in new capacity. Exports rose 6.9 per cent between March and April. However, the month-on-month figures are not seasonally adjusted and are regarded by analysts as misleading.

JPMorgan said it estimated that month-on-month exports fell 2.8 per cent on a seasonally adjusted basis after gaining 6.1 per cent month on month in March.

The monthly trade figures are being watched closely after some economists criticised Beijing's stimulus efforts for relying too heavily on an assumption that there would be a quick rebound in global demand for cheap Chinese exports.

"The top leaders have made the calculation that this crisis is nothing like the 1930s and the global economy is going to rebound quickly, at which point China will take a greater role in the world," one senior retired government official told the Financial Times.

That view is questioned by some economists. Stephen Roach, Asia chairman of Morgan Stanley, argued in an article that the Chinese government had miscalculated and was "clinging to antiquated policy and economic growth strategies that presuppose a classic snapback in global demand.

"That leaves China illprepared for what could well be the defining feature of the post-crisis world - an enduring US-led shortfall of external demand."

In its effort to boost growth, Beijing is investing huge sums in new infrastructure projects, while also providing ample support for its export industries in the form of favourable policies, cheap loans and tax rebates.

This strategy is "strikingly reminiscent" of the Chinese response to two earlier external demand shocks - the Asian financial crisis of 1997 and the bursting of the dotcom bubble in 2000 - according to Mr Roach.

In both those instances the Chinese export-led economy emerged from the downturn in an excellent position to take advantage of the rebound in global trade.

On a more positive note, the government said yesterday that fixed-asset investment in Chinese urban areas rose faster than expected in the first four months, jumping 30.5 per cent from a year earlier.


Tuesday 5 May 2009

China, the collapsing dollar and independence

China is well aware that independence from the dollar is an important step that it needs to make in the next five to ten years. The problem is that there is little alternative at the moment.

There is something I don't like about this article but cannot quite put my finger on it at the moment. I think it relates to the treatment of ethnic Chinese savers in the text.

The broad issue has been covered in this blog before but it raises some important points worthy of great discussion.

I suspect the US would be happy to inflate away some of its dollar debts with China and petrodollar holders losing. Seems a good way out of the crisis for the US.

Will the dollar really collapse? The problem is that China is in too deep. In a way, China is too dependent on the dollar now so the current situation is "too big to change" for both the US and China.

If China loses faith, the dollar will collapse [FT]

Emerging economies such as China and Russia are calling for alternatives to the dollar as a reserve currency. The trigger is the US Federal Reserve's policy of expanding the money supply to prop up the banking system and its over-indebted households. Because the magnitude of the bad assets within the banking system and the excess leverage of its households are potentially huge, the Fed may be forced into printing dollars massively, which would eventually trigger high inflation or even hyperinflation and cause great damage to countries that hold dollar assets in their foreign exchange reserves.

The chatter over alternatives to the dollar mainly reflects the unhappiness with US monetary policy among the emerging economies that have nearly $10,000bn (€7,552bn, £6,721bn) in foreign exchange reserves, mostly in dollar assets. Any other country with America's problems would need the Paris Club of creditor nations to negotiate with its lenders on its monetary and fiscal policies to protect their interests. But the US situation is unique: it borrows in its own currency, and the dollar is the world's dominant reserve currency. The US can disregard its creditors' concerns for now without worrying about a dollar collapse.

The faith of the Chinese in America's power and responsibility, and the petrodollar holdings of the gulf countries that depend on US military protection, are the twin props for the dollar's global status. Ethnic Chinese, including those in the mainland, Hong Kong, Taiwan and overseas, may account for half of the foreign holdings of dollar assets. You have to check the asset allocations of wealthy ethnic Chinese to understand the dollar's unique status.

The Chinese love of the dollar began in the 1940s when it held its value while the Chinese currency depreciated massively. The renminbi remains a closed currency and is not yet a credible vehicle for wealth storage.

The US could repair its balance sheet through asset sales and fiscal transfers rather than printing money. The $2,000bn fiscal deficit, for example, could have gone to over-indebted households for paying down debts instead of dubious spending to prop up the economy. When property and stock prices decline sufficiently, foreign demand, especially from ethnic Chinese, will come in volume. America's vast and unexplored natural resource holdings could be auctioned off.

The global environment is extremely negative for savers. The prices of property and shares are not yet good value and may decline further. Interest rates are near zero. The Fed is printing money, which will inflate away the value of dollar holdings. Other currencies are not safe havens either. As the Fed expands the money supply, it puts pressure on other currencies to appreciate. This will force other central banks to expand their own money supplies to depress their currencies. Hence major currencies may take turns devaluing. The end result is inflation and negative real interest rates everywhere. Central banks are punishing savers to redeem the sins of debtors and speculators. Unfortunately, ethnic Chinese are the biggest savers. Diluting Chinese savings to bail out failing US banks and bankrupt households will eventually destroy the dollar's status. Ethnic Chinese demand for it is waning already. China's bulging foreign exchange reserves reflect the lack of private demand for the US currency.

US policy is pushing China towards developing an alternative financial system. For the past two decades its entry into the global economy rested on providing cheap labour to multinationals and pegging the renminbi to the dollar. The dollar peg allowed it to leverage the US financial system for its international needs, while domestic finance re-mained state-controlled to redistribute prosperity from the coast to the interior. This dual approach has worked well. China could have its cake and eat it. Of course, the global credit bubble was what allowed the approach to be effective; its inefficiency was masked by bubble-generated global demand.

China is aware it must become independent from the dollar at some point. Its recent decision to turn Shanghai into a financial centre by 2020 reflects its anxiety over relying on the dollar system. The US will not pay attention to something so distant. However, if global stagflation takes hold, as I expect it to, it will force China to accelerate reforms to float its currency and create a single, independent and market-based financial system. When that happens, the dollar will collapse.


Monday 4 May 2009

China survives recession without a scratch?

A couple of rather remarkable stories suggesting China has suffered relatively little in the current recession and that it survived without a scratch?

How do they define scratch - millions losing their job and high levels of poverty?

China: What world recession? [Salon]

Back when the Asian financial crisis ravaged the world, China surprised nearly everyone by bulldozing through the downturn while suffering hardly a scratch. Could it be possible that the Middle Kingdom is about to repeat that amazing feat, in the face of a much, much worse economic crisis?

Goldman Sachs appears to think so. Last week, Goldman upgraded its estimate of Chinese GDP growth in 2009 from 6 percent to 8.3 percent. Even more astoundingly, the investment bank forecast that GDP growth in 2010 would be back to a robust 10.9 percent.

This article is way off the mark, not least because the recession is far from over. We may even by some way off the bottom. At least William Buiter has been correctly included for balance.

Next we have:

China cashes in on crisis [Asia Times]

The global financial crisis is proving a boon for a resurgent China, which is poised to exert ever greater influence in Southeast Asia.

While drawing neighboring countries back into China's economic orbit has been part of Beijing's strategy for restoring what it sees as the country's rightful place on the global stage, recent months of recession have furnished Beijing with new opportunities to further its leadership ambitions in the region.

This article is closer to the action. China has large surpluses and it has used them fairly well in the recent stimulus package. I am not sure I mean "well". China has spent a lot of money. Other Asian countries have not. There is every possibility that China will be more powerful in the region at the end of all this.

Where the end is, nobody knows.


Sunday 3 May 2009

Financial news operations banned in China

I hope this does not mean China finance related blogs will be banned as well - opps I forget - China Economics Blog has been banned shortly after its inception although I lose track whether "blogger" blogs are banned or not these days.

China bans foreign financial news operations [FT]

China raised the spectre of renewed international trade friction over market access for foreign financial information providers as the government said such businesses must not engage in news gathering in China.

The surprise ban on this business area is seen by industry executives as backtracking on an agreement China reached with the US, the EU and Canada in November last year on allowing companies like Bloomberg, Dow Jones and Thomson Reuters to distribute information to financial and corporate clients.

The November deal adopted a loose definition of financial information, including news rather than limiting such information to data such as stock market indices and exchange rates.

It was reached after the US, the EU and Canada lodged a complaint against China at the World Trade Organisation earlier last year over Beijing’s move to make Xinhua, its official news agency and a competitor for the foreign providers in the financial information business, its de facto regulator.

In regulations published on the cabinet’s website on Thursday, the government said foreign financial information providers would be allowed to set up businesses in China and would be regulated by the State Council Information Office. But the rules also said: “foreign financial information providers set up in China ... must not undertake news gathering activities".

The industry had seen the memorandum of understanding signed late last year as a victory of advocates of opening over protectionism.

But on Thursday, people close to the situation said they had the impression that forces intending to protect Xinhua had intervened in the last minute. “There will have to be communication and clarification,” one source said.

Industry executives praised the rules in general as a breakthrough giving foreign players a clear legally-defined role for the first time.

“Thomson Reuters has developed an excellent relationship with SCIO over many years and looks forward to working with them on the successful implementation of the new measures to ensure that financial markets in China are as well informed as their counterparts outside China,” said Henry Manisty, global head of government and regulatory affairs at Thomson Reuters.

Dow Jones and Bloomberg were not immediately available for comment.

China has required foreign news agencies to distribute to media clients only through Xinhua for more than 50 years. This will not change, and the foreign players do not challenge this arrangement for their news agency business which helps the Chinese government ensure news does not reach the public uncensored.

The companies’ financial information services business had been relatively unrestricted until 2006, when China took the controversial step of ordering distribution through an agent wholly-owned by Xinhua.


Saturday 2 May 2009

China to annex California?

Here is a newly drawn map of the US following its inevitable breakup as predicted by a Russian professor. After so many "Soviet empire" breakup stories this map makes a refreshing change.

From the always great "Strange Maps"

The break-up predicted by Panarin would be the result of mass immigration, economic decline and moral degradation, all of which would trigger a second American civil war, and the collapse of the dollar. This would then lead to the break-up of the United States, by mid-2010, into half a dozen regional sub-entities. These would be dominated or absorbed outright by foreign powers.

* Alaska would revert to Russia, and Hawaii would become Chinese or Japanese.
* The West Coast (the three Pacific states, joined with Idaho, Nevada, Utah and Arizona in a Californian Republic), would fall to China or at least be under Chinese influence.
* A Texas Republic, which would also include New Mexico, Oklahoma and all the other traditionally southern states (except the Carolinas, the Virginias, Kentucky and Tennessee), would similarly be either directly or indirectly under the sway of Mexico.
* The aforementioned southern exceptions would join the northeastern states in forming a bloc that might join the European Union.
* The rest - all midwestern and western states - would be at Canada’s mercy.

Imagine Chinese overlordship of Utah - another Tibet waiting to happen -, the Maple Leaf flag flying at the Gateway Arch and the European Union and Mexico meeting just south of there, on the Mississippi. As far-fetched as that may sound, Mr Panarin is no fringe looney. He heads the Russian Foreign Ministry’s academy for future diplomats (and Russia will need quite a few more of those, if his prediction comes true). Mr Panarin also is one of the talking heads on (Russian state) tv whenever US-Russian relations are at issue.


Friday 1 May 2009

"Globalization" in China

The Globalist have an interesting article looking at the relationship between the Chinese state and "globalisation". It is interesting that the very phrase "globalisation" has such negative political connotations in China.

I am not convinced by a lot of this article but it does raise some interesting points.

“Democracy Is A Good Thing,” [Globalist]

While China has undoubtedly reaped many benefits from the process of globalization, many of its people are still skeptical of the true nature of this market-integrating phenomenon.

In the early half of the 1990s the word "globalization" itself was so politically sensitive that Chinese scholars avoided mentioning it in articles and books.

On a practical level, globalization was long-regarded as synonymous with capitalist development, a fact that explains the previous ideological sensitivities it carried.

China and the dollar trap

I have written on numerous occasions how China's massive holdings of US paper is distortionary.

Paul Krugman explains the "dollar trap" well in a recent article that was picked up by the FT yesterday HERE.

The key point that Krugman makes is about China's expectations. They have been and remain far too high. How the Chinese government manages expectations is crucial.

I happen to agree wholeheartedly with Krugman on this issue - the crisis probably does have years to run and some tough decisions will need to be made.

Apologies for the lack of posts recently - my large new academic administrative job is proving rather time consuming. Hopefully normal service can resume again soon.

China’s Dollar Trap [NY Times]

Back in the early stages of the financial crisis, wags joked that our trade with China had turned out to be fair and balanced after all: They sold us poison toys and tainted seafood; we sold them fraudulent securities.

But these days, both sides of that deal are breaking down. On one side, the world’s appetite for Chinese goods has fallen off sharply. China’s exports have plunged in recent months and are now down 26 percent from a year ago. On the other side, the Chinese are evidently getting anxious about those securities.

But China still seems to have unrealistic expectations. And that’s a problem for all of us.

The big news last week was a speech by Zhou Xiaochuan, the governor of China’s central bank, calling for a new “super-sovereign reserve currency.”

The paranoid wing of the Republican Party promptly warned of a dastardly plot to make America give up the dollar. But Mr. Zhou’s speech was actually an admission of weakness. In effect, he was saying that China had driven itself into a dollar trap, and that it can neither get itself out nor change the policies that put it in that trap in the first place.

Some background: In the early years of this decade, China began running large trade surpluses and also began attracting substantial inflows of foreign capital. If China had had a floating exchange rate — like, say, Canada — this would have led to a rise in the value of its currency, which, in turn, would have slowed the growth of China’s exports.

But China chose instead to keep the value of the yuan in terms of the dollar more or less fixed. To do this, it had to buy up dollars as they came flooding in. As the years went by, those trade surpluses just kept growing — and so did China’s hoard of foreign assets.

Now the joke about fraudulent securities was actually unfair. Aside from a late, ill-considered plunge into equities (at the very top of the market), the Chinese mainly accumulated very safe assets, with U.S. Treasury bills — T-bills, for short — making up a large part of the total. But while T-bills are as safe from default as anything on the planet, they yield a very low rate of return.

Was there a deep strategy behind this vast accumulation of low-yielding assets? Probably not. China acquired its $2 trillion stash — turning the People’s Republic into the T-bills Republic — the same way Britain acquired its empire: in a fit of absence of mind.

And just the other day, it seems, China’s leaders woke up and realized that they had a problem.

The low yield doesn’t seem to bother them much, even now. But they are, apparently, worried about the fact that around 70 percent of those assets are dollar-denominated, so any future fall in the dollar would mean a big capital loss for China. Hence Mr. Zhou’s proposal to move to a new reserve currency along the lines of the S.D.R.’s, or special drawing rights, in which the International Monetary Fund keeps its accounts.

But there’s both less and more here than meets the eye. S.D.R.’s aren’t real money. They’re accounting units whose value is set by a basket of dollars, euros, Japanese yen and British pounds. And there’s nothing to keep China from diversifying its reserves away from the dollar, indeed from holding a reserve basket matching the composition of the S.D.R.’s — nothing, that is, except for the fact that China now owns so many dollars that it can’t sell them off without driving the dollar down and triggering the very capital loss its leaders fear.

So what Mr. Zhou’s proposal actually amounts to is a plea that someone rescue China from the consequences of its own investment mistakes. That’s not going to happen.

And the call for some magical solution to the problem of China’s excess of dollars suggests something else: that China’s leaders haven’t come to grips with the fact that the rules of the game have changed in a fundamental way.

Two years ago, we lived in a world in which China could save much more than it invested and dispose of the excess savings in America. That world is gone.

Yet the day after his new-reserve-currency speech, Mr. Zhou gave another speech in which he seemed to assert that China’s extremely high savings rate is immutable, a result of Confucianism, which values “anti-extravagance.” Meanwhile, “it is not the right time” for the United States to save more. In other words, let’s go on as we were.

That’s also not going to happen.

The bottom line is that China hasn’t yet faced up to the wrenching changes that will be needed to deal with this global crisis. The same could, of course, be said of the Japanese, the Europeans — and us.

And that failure to face up to new realities is the main reason that, despite some glimmers of good news — the G-20 summit accomplished more than I thought it would — this crisis probably still has years to run.