China’s Economic Exposure and Forward Policies

Tuesday, April 7, 2009 10:09
Posted in category The Big Picture
Comments Off on China’s Economic Exposure and Forward Policies

Early on, questions related to China’s stability and exposure were being asked as the global financial issues began to unfold. It was largely an unknown at the time, but as we have all see, the decoupling theory that some were putting forward just a few months before that have been proven wrong.

One of my favorite analysts during this time is well known Victor Shih from Northwestern. he has published a number of articles on various aspects of China’s exposure, and over this past weekend a very interesting debate surrounding his recent piece in the WSJ took place offline.

It involved a number of players, several of which agreed to allow me to post excerpts of their comments.

To start things off, I would suggest that you go read Victor’s piece at the journal (Legless Stimulus in China), it is an article I refrerenced in my previous post March PMI Data for China Out that addresses some very important issues related to China’s economy, the measures being taken to stimulate it, and the prognosis thus far.

The most important piece at that time for me being:

There is considerable evidence, however, that even if the stimulus manages to produce some positive headline numbers, it is likely to fall short on its ultimate aim of creating employment and jump-starting private consumption.

In response to the article, and the email announcing its posting, I replied to the group (roughly 30-40 economists/ analysts/ bankers/ others) the following:

many believe that the best way is to stimulate our way back to where we were, while dismissing any thought/ notion of getting used to where we find ourselves now and how to develop programs that build sustainable. My fear is that we are still looking to just re inflate the bubble through a series of high risk moves and that in the medium/ long term have much more severe consequences.

Anyone see actions to the contrary? If we look at the recent G20 communique and pledge to act in the interest of greater good, what is wheat and what is chaff? What are consequences of failure should we spend the remaining collective equity of the G20 on this plan and it doesn’t work?

It was a series of questions that set off several others to respond, as Quoc responded:

I think big ben is picking the lesser evil (total collapse of banking system versus potential bubble) think the biggest bubble now is the US dollar.  We’re printing $$ like crazy and at some point (once people lose confidence), there might be dollar panic on the street and everybody might try to exit @ the same time.  HK$ will probably be depegged, commodities will run up like crazy (thanks to being priced in US dollar), OBAMA will sell California (My comment: I believe Alaska would go first and would be more suitable) to China to cancel US$700 billion debt because Americans can no longer pay debt interest, and Russia/OPEC refuse to deliver oil to the US unless it is settled in GOLD —- I know it sounds outlandish but what could be more outlandish if 20 years ago people tell you that China one day would have US$2 trillion?!  The US Dollar is the New Black Swan.

Victor responded to that:

 While we are running a deficit, it is all transparent, and the market has priced in most of the risks related to the dollar.  The reason why investors still fled to the dollar is because the unknowns are much greater in other regions of the world.

To be sure, Chinese diversification away from the dollar will put some downward pressure on the dollar, but it won’t be that severe.  I think the big bubbles are world trade and China. In essence, Chinese foreign exchange policies have generated a huge global imbalance that needs to be righted.  I doubt that the US can export that much stuff, so this means contraction of trade, and serious problems for the Chinese economy that government actions cannot address, as per my editorial.

It is a conversation that has grown into another thread about which is safer, China or the US, but for the purposes of this post what I find most interesting is that there is a general sense of agreement that through many of the policy decisions we are creating much larger issues and our governments (both China and the US) are content at this time to inject money and risk into the system believing the best solution at this point is to drive credit and consumer spending.

thus… my questions still stand (and I encourage anyone to participate on this):
1) Anyone see actions to the contrary?
2) If we look at the recent G20 communique and pledge to act in the interest of greater good, what is wheat and what is chaff?
3) What are consequences of failure should we spend the remaining collective equity of the G20 on this plan and it doesn’t work?

Additionally, another question that has been posed to me by a friend is “what would happen to the world’s economy if consumer spending as we know it ceased? If the consumer had bought everything they “needed” already and decided to take a break from the malls?
1) How would government policies differ under this as a primary constraint?
2) What would this mean in terms of existing stimulus packages?

Finally, with the amount of US debt currently outstanding, and with entitlements soon to surpass government revenues, the payback and value of these instruments are likely to change radically over the medium term, and we are already seeing signs that “China” is growing tired of buying them.
1) Can the US continue to attract Chinese money much longer?
2) is the T-bill the latest entity seen as too big to fail?
3) Is China better off investing internally now to strength/ insulate it from a potentially deeper recession/ depression should the stimulus not work?

Both comments and pings are currently closed.