Opinion

The Great Debate

What are China’s next steps?

By Michael Spence

China has weathered the present financial crisis better than most countries, for a number of reasons. It reacted very quickly to the collapse of external demand with a domestic stimulus package of 9 percent of GDP in both 2008 and 2009. The stimulus package in China was heavily weighted toward investment, especially in infrastructure, which is something they know how to do. To some extent, the Chinese relied on past experience in the ’97–’98 currency crisis in Asia, a storm they weathered without depreciating the currency but instead with what was then a large domestic stimulus pro-gram. China also eased credit quickly, and used their massive reserves to stabilize the currency.

The result is a rapid transition to high growth, with projections for 2010 in the 9 percent and above range. On the other hand, as with other countries, the stimulus and other dimensions of the emergency response are not a permanent solution. There is a growing concern among knowledgeable Chinese policy makers and academics with regard to two things. One is a return to the old ways, meaning the strategies and policies of the past thirty years that focused on investment and labor-intensive exports, policies that worked well but have outlived their usefulness. The influence of those in government and in the labor-intensive sectors that are set to decline is still substantial. Their hand has been at least temporarily strengthened by the crisis.

The other is a deep concern about overconfidence in the economy’s resilience in the face of some daunting short- and medium-term challenges. Managing to bounce back in the worst global crisis in eighty years — and by far the largest in the history of the PRC — is impressive. But, then, the hallmarks of Chinese growth have been rapid learning, a long time horizon, a willingness to support and encourage constant change, and a pragmatic problem-solving approach to a long process. These will likely reassert themselves and displace any short-term tendency toward triumphalism. Nevertheless, the risk is there.

China is entering upon a complex set of transitions that will build the base for its path to advanced-country status in the next twenty-five years. After three decades of sustained high growth and a remarkably successful, rapid, and effective policy response to the crisis, confidence is justifiably high.

China faces several parallel and related rebalancing challenges that are crucial for its internal growth and development, as well as for its relations with the rest of the global economy. Among them are:

U.S., China and eating soup with a fork

-The opinions expressed are the author’s own-

Are economists the world over using an outdated tool to measure economic progress?

The question, long debated, is worth pondering again at a time when two economic giants, the United States and China, are sparring over trade, currency exchange rates and their roles in the global economy.

In the run-up to U.S. mid-term elections on November 2, politicians from both parties, for different reasons, blamed trade with China for American job losses. China responded with irritation and hit back by accusing the U.S. of “out of control” printing of dollars tantamount to an attack on China with imported inflation.

Euro zone faces QE2 pain test

QE2 — a second round of quantitative easing — means that soon the U.S., Japan and Britain will all be busily exporting their deflation, raising the question: Just how much pain can the euro zone take?

If by November we have three of the largest economies printing money and buying up their own debt, the outcome — in fact the intention — will be to drive their currencies lower against their trading partners, opening new international markets for their goods and, by raising the price of imported goods, fighting deflation before its debilitating psychology can take hold.

That is the plan, at any rate, and, unless something else happens, it will force the euro up against all major currencies, including, as it is tied to the dollar, the Chinese yuan. The euro has risen about 9.5 percent against the dollar in the past month, a trend that ultimately will murder European exporters and its stock market.

from MacroScope:

Will China make the world green?

Workers remove mine slag at an aluminium plant in Zibo, Shandong province December 6, 2008. REUTERS/Stringer

Joschka Fischer was never one to mince words when he was Germany's foreign minister in the late '90s and early noughts. So it is not overly surprising that he has painted a picture in a new post of a world with only two powers -- the United States and China -- and an ineffective and divided Europe on the sidelines.

More controversial, however, is his view that China will not only grow into the world's most important market over the coming years, but will determine what the world produces and consumes -- and that that will be green.

Fischer, who was leader of  Germany's Green Party, reckons that due to its sheer size and needed GDP growth, China will have to pursue a green economy. Without that, he writes in his Project Syndicate post, China will quickly reach limits to growth with disastrous ecological and, as a result, political consequences.

China runs circles round adversaries

If the global currency war was a baseball game, they would have to invoke the “slaughter rule” and send China home the winner.

Motivations and consequences aside, China is so adroit in melding diplomacy, jawboning and action to keep the value of its currency low that you have to feel something approaching compassion for its plodding adversaries from the U.S., Europe and Japan.

China’s latest well played move is its pledge to use some of its massive foreign currency reserves to support poor Greece, which the markets widely believe will default some fine day, European Union support or not.

Speculators and China win big on yen move

What does $4 trillion a day in business, never sleeps and sees Japan’s Ministry of Finance as just one more patsy?

The foreign exchange market, of course, which is licking its collective lips as Japan embarks on another round of unilateral intervention to sell the yen in an effort to drive down its value and protect its export-oriented economy.

There are going to be two big winners in this, and neither begins with a “J.”

Flight to “safety” eases China diversification

China appears to be taking steps to diversify its holdings away from the U.S. dollar and may just have chosen a pretty good time to do it.

Longer term a meaningful diversification by China, which holds about a third of its $2.45 trillion currency reserves in U.S. Treasuries, is probably both inevitable and highly risky.

Inevitable, because China probably realises that, given the U.S.’s difficult fiscal and economic challenges it is not sensible to have its own fortunes tied so closely to its major client.

China needs to become a civil society in order to be a true global leader

The following is a guest post by Pei Bin, director of China Partnership Development for BSR, a global business network and consultancy focused on sustainability. The opinions expressed are her own.

At the recent Aspen Institute Socrates Summer Seminar, I attended the session “Soft-Power: U.S. Leadership in a Hardball World,” moderated by Joseph Nye, a professor of International Relations at the Harvard Kennedy School.

The session sparked my own reflections on the existence, or lack thereof, of soft power in China. While everyone at the Aspen Institute expressed strong and positive interest in China, the majority of the United States still views China as a threat.

from Jeremy Gaunt:

The rule of three

It is beginning to look like financial markets cannot handle more than three risks. First we have, as MacroScope reported earlier,  Barclays Wealth worrying about U.S. consumers, euro zone debt and Asian overheating.

Now comes Jim O'Neill and his economic team at Goldman Sachs, with three slightly different notions about risks in the second half, this time in the form of questions. To whit:

1) How deep will the U.S. economic slowdown be and what will  the policy response be? (That's two questions, actually, but let's not nitpick).

Cuba and twisted logic, double standards

It is time for the United States to stop trading with China and ban Americans from travelling there. Why? Look at the U.S. Department of State’s most recent annual report on human rights around the world.

“The (Chinese) government’s human rights record remained poor and worsened in some areas,” the report notes. “Tens of thousands of political prisoners remained incarcerated (in 2009).”

U.S. relations with Egypt should also be frozen, because “the government’s respect for human rights remained poor, and serious abuses continued in many areas…Security forces used unwarranted lethal force and tortured and abused prisoners and detainees, in most cases with impunity.”

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