本文发表在 rolia.net 枫下论坛CHINA. Current Economy. (side note)
March 30 (Bloomberg) -- Three months into 2005, China has little to show for efforts in 2004 to avoid a hard landing by its economy.
That's not the party line in Beijing. On March 14, Premier Wen Jiabao said investment and lending curbs had ``worked to solve prominent problems threatening steady and rapid economic development.'' While Wen hedged -- saying China ``mustn't slacken'' inflation-cooling policies -- it's a far cry from a year ago, when he warned of ``overheating.''
While China hasn't said it explicitly, one wonders if the government is close to declaring victory in the battle again inflation and irrational exuberance among foreign investors rushing there. Doing so would be a mistake.
Signs of rapid growth abound. Exports jumped 37 percent in the first two months of the year, while industrial production increased 17 percent and retail sales gained 14 percent. In the first two months of 2005, investment in China's factories, roads and other fixed assets in urban areas rose 24.5 percent.
A slowdown? Perhaps. Victory against overheating? Hardly.
China's money supply is still growing apace. In February, M2, which includes cash and all deposits, expanded 13.9 percent from a year earlier after growing 14.1 percent in January. While down from the 19 percent pace seen at times last year, China needs much slower money growth to avoid overheating.
`Further Improvement'
Not surprisingly, consumer prices in February rose 3.9 percent from a year earlier after rising just 1.9 percent in January. The central bank last week said inflation pressures have yet to ease and monetary policy needs ``further improvement.'' And monetary authorities are right.
Yet it's hard to see prices easing amid such rapid money growth. Because China doesn't ``sterilize'' all the foreign exchange reserves it accumulates, its money base increases, undermining efforts to curb credit growth. Sterilization is when steps are taken to neutralize the effects of rising reserves on money growth.
China's monetary inertia is so powerful that last year's central bank rate increase actually boosted the economy. A nation with a pegged exchange rate is hard-pressed to run an independent monetary policy. Raising longer-term borrowing costs -- as China did in September -- at a time when dollar interest rates were falling was an invitation to companies to finance investment in plant and equipment in dollars, not yuan.
`Wisest Course'
Foreign-currency borrowing, once converted back to yuan, boosts both the holdings of foreign exchange at China's central bank and the domestic money supply. ``That suggests the wisest course of action would be to cut interest rates so domestic firms will be less inclined to borrow overseas,'' says Carl Weinberg, chief global economist at High Frequency Economics.
A contrarian view, indeed, yet one that gets at the through- the-looking-glass nature of China's economy. Read all the Milton Friedman, John Maynard Keynes, Adam Smith or even Karl Marx you want -- it won't get you much closer to fathoming the zigs and zags of the world's next economic superpower.
One thing seems clear: China isn't as keen on slowing its economy as it lets on. It's not that officials in Beijing don't want steadier, more sustainable growth; it's just not an option. Stability is what's most important to Beijing.
The Internet has made it difficult for the Communist Party to keep 1.3 billion people in the dark about its shortcomings. It knows the best way to avoid discontent and social instability is a strong economy that creates jobs and raises living standards.
GDP Sells
A swelling gross domestic product also enables China to get its way internationally. The Bush administration might support Taiwan's democracy more aggressively if it didn't fear reprisals on the China trade front. An unhappy U.S. business community equals an unhappy president.
GDP is a vital form of advertising, too. China is the economic equivalent of sex -- it sells. If you want headlines and investors calling for prospectuses, stick the word ``China'' in the name of your company or product. It's not unlike the rush five years ago to attach ``.com'' to the end of anything. Slower GDP would reduce China's sexiness.
All this explains why China hasn't altered its currency peg to the U.S. dollar. Western politicians frame the debate as a matter of fairness -- that China is selfish for not letting the yuan rise. Yet China's rickety financial system may not be ready for such a change.
Rolling the Dice
Along with untold numbers of bad loans in China's banks, corruption is a clear and present danger. Fraud cases are unfolding against three of China's four-biggest state lenders. Among them are two -- Bank of China and China Construction Bank -- that received a $45 billion government bailout in late 2003 to boost capital before initial public offerings.
So, for better or worse, China seems keen on rolling the dice and letting the economy zoom ahead. Putting stability in the short run above long-term inflation risks could backfire and cause considerable instability. Yet the rest of the world has little choice but to hope for the best.
Just as the U.S. effectively says its our dollar, your problem, China is saying it's our economy, your problem. Of course, if the dollar crashed under the weight of record U.S. current-account and budget deficits, or China experienced a hard landing, the entire global economy would pay the price.更多精彩文章及讨论，请光临枫下论坛 rolia.net
March 30 (Bloomberg) -- Three months into 2005, China has little to show for efforts in 2004 to avoid a hard landing by its economy.
That's not the party line in Beijing. On March 14, Premier Wen Jiabao said investment and lending curbs had ``worked to solve prominent problems threatening steady and rapid economic development.'' While Wen hedged -- saying China ``mustn't slacken'' inflation-cooling policies -- it's a far cry from a year ago, when he warned of ``overheating.''
While China hasn't said it explicitly, one wonders if the government is close to declaring victory in the battle again inflation and irrational exuberance among foreign investors rushing there. Doing so would be a mistake.
Signs of rapid growth abound. Exports jumped 37 percent in the first two months of the year, while industrial production increased 17 percent and retail sales gained 14 percent. In the first two months of 2005, investment in China's factories, roads and other fixed assets in urban areas rose 24.5 percent.
A slowdown? Perhaps. Victory against overheating? Hardly.
China's money supply is still growing apace. In February, M2, which includes cash and all deposits, expanded 13.9 percent from a year earlier after growing 14.1 percent in January. While down from the 19 percent pace seen at times last year, China needs much slower money growth to avoid overheating.
`Further Improvement'
Not surprisingly, consumer prices in February rose 3.9 percent from a year earlier after rising just 1.9 percent in January. The central bank last week said inflation pressures have yet to ease and monetary policy needs ``further improvement.'' And monetary authorities are right.
Yet it's hard to see prices easing amid such rapid money growth. Because China doesn't ``sterilize'' all the foreign exchange reserves it accumulates, its money base increases, undermining efforts to curb credit growth. Sterilization is when steps are taken to neutralize the effects of rising reserves on money growth.
China's monetary inertia is so powerful that last year's central bank rate increase actually boosted the economy. A nation with a pegged exchange rate is hard-pressed to run an independent monetary policy. Raising longer-term borrowing costs -- as China did in September -- at a time when dollar interest rates were falling was an invitation to companies to finance investment in plant and equipment in dollars, not yuan.
`Wisest Course'
Foreign-currency borrowing, once converted back to yuan, boosts both the holdings of foreign exchange at China's central bank and the domestic money supply. ``That suggests the wisest course of action would be to cut interest rates so domestic firms will be less inclined to borrow overseas,'' says Carl Weinberg, chief global economist at High Frequency Economics.
A contrarian view, indeed, yet one that gets at the through- the-looking-glass nature of China's economy. Read all the Milton Friedman, John Maynard Keynes, Adam Smith or even Karl Marx you want -- it won't get you much closer to fathoming the zigs and zags of the world's next economic superpower.
One thing seems clear: China isn't as keen on slowing its economy as it lets on. It's not that officials in Beijing don't want steadier, more sustainable growth; it's just not an option. Stability is what's most important to Beijing.
The Internet has made it difficult for the Communist Party to keep 1.3 billion people in the dark about its shortcomings. It knows the best way to avoid discontent and social instability is a strong economy that creates jobs and raises living standards.
GDP Sells
A swelling gross domestic product also enables China to get its way internationally. The Bush administration might support Taiwan's democracy more aggressively if it didn't fear reprisals on the China trade front. An unhappy U.S. business community equals an unhappy president.
GDP is a vital form of advertising, too. China is the economic equivalent of sex -- it sells. If you want headlines and investors calling for prospectuses, stick the word ``China'' in the name of your company or product. It's not unlike the rush five years ago to attach ``.com'' to the end of anything. Slower GDP would reduce China's sexiness.
All this explains why China hasn't altered its currency peg to the U.S. dollar. Western politicians frame the debate as a matter of fairness -- that China is selfish for not letting the yuan rise. Yet China's rickety financial system may not be ready for such a change.
Rolling the Dice
Along with untold numbers of bad loans in China's banks, corruption is a clear and present danger. Fraud cases are unfolding against three of China's four-biggest state lenders. Among them are two -- Bank of China and China Construction Bank -- that received a $45 billion government bailout in late 2003 to boost capital before initial public offerings.
So, for better or worse, China seems keen on rolling the dice and letting the economy zoom ahead. Putting stability in the short run above long-term inflation risks could backfire and cause considerable instability. Yet the rest of the world has little choice but to hope for the best.
Just as the U.S. effectively says its our dollar, your problem, China is saying it's our economy, your problem. Of course, if the dollar crashed under the weight of record U.S. current-account and budget deficits, or China experienced a hard landing, the entire global economy would pay the price.更多精彩文章及讨论，请光临枫下论坛 rolia.net