My Blog

November 9, 2008

After dropping as low as 1679 on Tuesday the Chinese stock markets managed nonetheless managed to put in a decent week, with the SSE Composite closing the week at 1748, up 1.1% for the week, helped by Tuesday’s Obama-inspired global rally.  A lot of people have asked me what I think the bottom of the market is likely to be, and though I have a very low level of confidence in my ability to predict these things, I think that even with a sharp expected drop in corporate profitability we are already at reasonable valuations.  

I would guess that we are probably within 20% of the bottom, which would suggest, if I am right, that the SSE Composite is unlikely to go much below 1500.  This would take the index close to its 2006 lows although, for what it’s worth, we did test 1000 in 2005.  In relative terms it should be remembered that China has seen official annual GDP growth rates of over 10% during this period.

We will probably see the markets surge Monday because of recently released news (which I will discuss further below) about the State Council’s approval tonight of a RMB 4 trillion package of fiscal expenditures through the end of 2010.  This is great news, but I don’t think the surge will last very long because there are many questions about the fiscal package and I don’t think there is a lot of fundamental good news out there.  The biggest problem I think is the size of the global adjustment within which China must participate.  This leads to two points I want to make in this entry.

1.       The size of the US adjustment in Chinese terms.

The first is just to an attempt to get our arms around the magnitude of the global adjustment within which China must participate.  Last week I met with a Japanese economist working for a major US fund manager who showed me a very interesting presentation he had prepared.  He asked that his name not be mentioned, so over the next few weeks I will be plagiarizing his material without crediting him.

One of his graphs shows the US household savings rate from the 1950s to the present.  From his graph it seems that until the early 1990s the US household savings rate tended to hover somewhere between 6% and 10% of GD, except for a brief period in the mid-1970s when it exceeded that level.  Since then, as is well known, the US savings rate has declined, to around 2-3% of GDP. 

As I see it the most recent globalization cycle began in the late 1980s and early 1990s.  My model posits globalization cycles as being caused by rapid liquidity expansion, for which there have historically been many different reasons (including gold discoveries, the invention and expansion of joint stock banks, the recycling of trade deficits or surpluses, even in one case war reparations payments, etc.).  The latest liquidity cycle was probably caused by the recycling of the large and growing US trade deficit, which can be seen as a machine that has converted US consumption into Asian savings – at first primarily Japanese and later primarily Chinese.  The decline in US savings beginning in the early 1990s is simply the flip side of the accumulation of Asian savings, and the numbers fit my model well.

Whatever the reason for the decline in US savings, I think most of us agree that it was related to the long rally in stock and real estate markets in the US, which were seen to obviate the need for households to save out of income (I would argue that the liquidity creation fueled the accompanying stock and real estate market rallies – long bull markets have always been a feature of globalization cycles).  The banking system played a key role in the process by intermediating the capital inflows into the US (the obverse of the trade deficit) and converting them into consumption via an expansion in mortgage, credit card and consumer loans.

This process has probably stopped.  Banks are no longer willing to make consumer loans, and with stock and real estate markets down so dramatically, the US household savings rate will almost certainly rise. 

By how much?  With households seeing their home and equity savings decline so dramatically I think one can easily argue that we will probably go above or at least to the higher end of the “normal” range of 6-10% of GDP, but even if we assume that households will only go back to the middle of the range, that still implies an annual adjustment of at least 5% of US GDP (around.$700 billion)

If global demand isn’t to collapse, someone else has to increase consumption by that amount.  But who?  The US government will probably increase its net spending, although it has already significantly increased its gross debt by recapitalizing the banks, and it will almost certainly see tax revenues fall.  Corporations are more likely to be cutting spending than increasing it, so the combination of the two is not likely to be significant.

Can the rest of the world step up and replace US consumption?  I am not an expert on global economies, but I think it is pretty safe to say that European, Japanese, and Latin American households and businesses are unlikely to be in a hurry to increase spending.  In fact they are all likely to reduce consumption, although perhaps not as dramatically as the US.  Given high debt levels in all those areas, there are also some constraints on fiscal expansion. 

That leaves the net exporters, of which China is the most important.  It is the largest saving nation, and the “other” nation along with the US at the center of the global balance-of-payments imbalance, and so much of that adjustment is likely to be forced onto China.  As the country that has benefited most from US over-consumption, in other words, it is likely to be the one that will most have to adjust to a drastic cut in consumption.

What are the comparable numbers for China?  US GDP ($13.5 trillion) is about 3.4 times the size of China’s ($4.0 trillion).  In that case a 5% adjustment in the US is equal to roughly a 17% adjustment in China.  That means, all other things being equal, Chinese consumption must go up by 17% of GDP just to compensate globally for the decline in the US, and bear in mind that consumption in China is only around 30-35% of GDP.  What is worse, there is reason to believe that Chinese private consumption is likely to slow down in response to rising uncertainties and a slowing economy.  Domestic consumption tends to be positively correlated with exports – a very pro-cyclical type of relationship typical for developing countries with large export components.

There are great hopes pinned on fiscal expansion in China, but I have already expressed my doubt about the government’s ability to expand as rapidly as many of us hope (and Stephen Green and Nouriel Roubini have anyway argued that there is less here than meets the eye).  Even if they are able to expand dramatically without crowding out domestic investment, the sheer magnitude of the numbers make it almost impossible that China can successfully bear the burden of the global adjustment.

Of course it is not China’s job to replace US demand.  Chinese policy-makers are only interested, in principle, in protecting growth in the Chinese economy.  So why worry about whether China can or cannot replace US demand?  Because with the rest of the world unable to step up, and in many cases even reinforcing the decline, if China cannot do so the whole world must see declining growth and a rise in savings, and since China was the main counterbalance to excess US consumption, it will probably bear much of the brunt. 

An excessively high savings country, in other words, cannot benefit from a massive rise in global savings, and just as the astonishing flexibility of the US financial system meant that until recently US consumption had to adjust to absorb excess Asian savings (warning: I am a believer in the Bernanke savings glut hypothesis), the seizing up of its financial system means it no longer can absorb those savings, and so something must break.  Instead of the US adjusting to excess savings, excess savers must adjust to declining US consumption.  The world must balance.

I know this quick analysis is going to be accused of excess oversimplification, and I accept the accusation, but the point of this exercise is not to work out the process in full complexity, and certainly not to make policy prescriptions, but rather simply to get an idea of the adjustment that must be made, and if it isn’t China, as one of the two main players in the global imbalance, that will make the adjustment, then we need to figure out who else will.  The biggest potential mistake in my argument, I think, might be my assumption about how much US savings will need to adjust.  Perhaps the adjustment will be much lower.

2.       What difficulties might China face in trying to reduce the cost of the adjustment?

The second point is to discuss some of the policy options that I think China will consider.  The first and most obvious is fiscal expansion, something which I and other China experts have discussed and about which there is very real and very honest disagreement, with very plausible arguments on both sides.  I have already discussed many times why I am skeptical about the ability of fiscal expansion to make up the slack.

As I write this Xinhua reports that the State council has approved fiscal spending over the next two years equal to nearly 15% of current annual GDP.  The very short article says in its entirety:

China has decided to adopt active fiscal policy and moderately easy monetary policies to boost fast but steady economic growth by expanding domestic demand, according to an executive meeting of the State Council on Sunday.   It is estimated that investment into infrastructure, social welfare and other key sectors will amount to four trillion yuan by the end of 2010.

A Bloomberg article gives a little more color:

The spending announced today, of which 100 billion yuan is earmarked for this quarter, will cover low-rent housing, infrastructure in the rural areas, as well as roads, railways and airports, the State Council said. The government will also allow tax deductions for purchases of fixed assets such as machinery to stimulate investment, a move that will reduce companies' costs by an estimated 120 billion yuan

This seems like a very large spending plan (nearly $600 billion, or about 14-15% of one year's GDP spread out over two years), and I think it may be enough to keep Chinese growth close to current levels, but only under the following conditions:

¨          It represents net new spending above current levels of expenditure.  I think government expenditures represented around 14% of GDP last year, so if that suggests government spending will increase by around 50%.

¨          These are actual expenditures – for example tax deductions aimed at stimulating investments must actually stimulate investment by as much as the numbers project.  Without looking carefully at the numbers (and possessing an understanding of budget issues much greater than mine), it is hard to say how much of this is real spending and how much wishful “projections”.

¨          The increased spending is not paid for out of an increase in taxes but rather by borrowing.  I think this is likely.

¨          There is no large reduction in private consumption, the government borrowing and investment does not crowd out private investment to any material extent, and there is no significant reduction in municipal government spending financed by real estate sales.  Here I am much more skeptical, especially about the last two points.

¨          Disbursements begin rapidly and are not wasted.

¨          At least half of the global adjustment tales place outside China.

The success of this plan depends crucially on continued government credibility in the face of rapidly rising deficits (I predicted earlier this year that guessing the real size of the government liabilities would be a popular sport next year) as well as on the health and stability of the banking system. 

If the banking system can withstand a downturn without any significant rise in NPLs and without forced credit contraction, this may be the shot in the arm China and the world needs, but there are very big question marks.  Still, I think it is an indication of how worried the government is and how determined they are to address the issue that this plan was approved.  (As a complete aside, I also think it is an implicit acceptance of Bernanke’s savings glut hypothesis.)

The discussion of the health and stability of the banking system leads easily into the second much-discussed option – really sort of a variation on the first.  The government can force credit expansion by requiring the banks to lend more.  Although there has been a process over the last decade of freeing the banks and allowing them more discretion in lending as a way of improving China’s dismal capital allocation process, there is no reason why policy-makers cannot reverse course and force banks to lend more.

Certainly they are trying.  Last week, after weeks of rumors that loan caps were being relaxed, the PBoC announced that they were junking the credit restrictions they had previously imposed on banks (interestingly enough they have always denied that they had imposed constraints).  But instead of gleefully exploiting their newfound liberty banks have refused to party, and loan growth has been very low.

This is hardly surprising.  In such dire economic circumstances with global credit markets and liquidity seizing up, with domestic bankruptcies rising, with inventories and receivables also rising, it takes both brave banks and brave borrowers to accommodate credit expansion.  Most good companies seem reluctant to borrow and anyway banks are reluctant to lend. 

So what if policy-makers simply announce minimum loan growth targets for every bank?  That should certainly cause an expansion in banks’ balance sheets.

I think, however, that there are two problems with such a policy (although administrative measures of this sort hold a dangerous allure to policy makers).  First, I don’t think it will be effective in net credit creation for the country.  This argument is simply the flip side of my previous arguments as to why I did not believe the loan caps that were in place until this summer actually restricted credit creation.

In those days I argued that if monetary conditions are consistent with rapid credit creation, we will see credit creation.  Any attempts to restrict credit creation will simply meet with some or all of the following responses:

1.        Banks will innovate around the restrictions.

2.        Credit creation will occur outside the restricted areas.

3.        Banks will lie.

In China’s case we have definitely seen innovation (securitizations and transactions that took loans off the balance sheets of banks) and outside growth (rapid increases in dollar loans and policy bank loans and, most importantly, growth in the informal banking sector).  If there is a sharp contraction we will know if there have also been many cases of lying.

The same thing can happen in reverse.  If banks don’t want to lend but are forced to, we will see off-balance sheet transactions placed back on balance sheet and a much more rapid decline in loans from informal banks.  That means that real credit expansion can still be negative even with minimum loan growth target enforced onto the banking system.

The second problem is likely to be the quality of the loans.  It is always possible to find borrowers, even in a sharp economic contraction and an overinvestment crisis.  The problem is that many of these borrowers are not the ones that any prudent bank should be dealing with, and to the extent that the forced loan expansion is successful, it will probably do little more than ease the credit crisis in the immediate near term and make it much worse in the medium term.

A variation of this might have happened in Japan in the 1980s.  As Japanese GDP growth slowed from its very high levels in the 1970s (from an average of roughly 10% to an average of roughly 6%), Japanese banks flush with liquidity were eager to extend loans.  Loan growth actually accelerated steadily from around 7% in 1980 to around 14% in 1987, even as GDP growth declined from around 8% in 1980 to around 5% in 1987.  Credit creation vastly exceeded real credit needs during this whole period, with the balance going largely into real estte lending and, later, stock market speculation.

We may have already seen this process in China in the last four years and of course I don’t want to suggest that the processes in China and Japan are identical, but I do want to point out that forcing credit expansion beyond the real needs of the economy can create tremendous future problems, and China may have already gone through this very process with a monetary policy that accommodated too-rapid credit growth (much of which may have occurred, of course, outside the banking system).

Comments (33) for "Can China adjust to the US a...

Thanks for the analysis... the 4 trillion RMB announcement is confusing... is it in addition to budgeted spending or just the total spending? Anyway, I'll probably sell into the rally after 4-5 days. =) By falanke - 11/9/2008 1:06 AM

One of your most salient points is borne out in this quote, "I do want to point out that forcing credit expansion beyond the real needs of the economy can create tremendous future problems..." Is this not what happened in U.S. beginning in the mid 1990s when the government encouraged (forced?) mortgage lending by banks to marginal and credit unworthy clientele by way of the so called Community Reinvestment Act and support of massive leveraged balance sheet expansion at the GSEs? By Unknown - 11/9/2008 1:20 AM

I would think that China can spend its way out of this crisis, for the simple reason that China is a developing country, and its growth potential is far greater than Japan in the 1990s or the U.S. now. The critical issues at this juncture are of course health care and social security, which the government must establish as soon as possible. After that, consumer spending will take off. By seatrus - 11/9/2008 1:33 AM

If the chinese ( economy stimulus)method could work the Soviet union is the richest country on the world. By bomlat - 11/9/2008 3:05 AM

Reading some of your analysis in this blog, I feel you're really on the pessimistic side and seem to be always looking for evidence to support your negative opinion. I would suggest that when analyzing the policy recommendations and implications, you may also need to consider the factors that may not support your opinion or conclusion. Also, one common fallacy among some of the analysts and economists is that they read too much into the numbers. When the export started to fall earlier this year, the Chinese government sent many senior officials and cabinet members to Guangdong and Zhejiang to understand the situation on the ground, instead of sitting in Beijing combing the various numbers and reading reports ... Ok, so the Chinese government called back the Minister of Finance from Brazil as you broke in the other entry, but it's not because the sky is falling in China. Obviously the government needs to work a the stimulus package and it's hard to believe they can do that without the MOF. When you have a pessimistic/negative opinion to begin with, you start to look for any evidence to support your view. By greg - 11/9/2008 3:44 AM

Michael, What effect do you think this stimulus program will have on the exchange rate policy? If exports are declining I wonder if they will encourage more imports to help stimulate domestic consumption, or try to close up shop. By David Oliver - 11/9/2008 8:37 AM

Professor, One point I have to make on your assumption: China does not dream to save the world. We just try to help ourselves. Thus, China really does not have to come up the GDP loss from US consumers. By fatbrick - 11/9/2008 9:22 AM

The 4T RMB package for 2 years is 7-8% of GDP per anum. If China's growth falls to 5-6% as the worst case scenario now suggests, that plus that 7-8% spending minus 2-3% that might overlap with already announced spending or overcrowding effect, etc gives you 10% growth rate. Am I missing something? By RBG - 11/9/2008 10:39 AM

Michael, Above calculation is my first impression to the numbers that you provided. However, you definitely sound more cautious and skeptical about if the 4T RMB package will bring 10% growth rate. Would you mind telling me what I am missing in my simple calculation? Thanks. By RBG - 11/9/2008 10:43 AM

Your points on US consumption and savings may prove correct - but a significant portion of US consumption is subject to price elasticity. This is already proving the case in an increase in residential real-estate transactions at the near-foreclosure and distressed levels. The same may prove to be the case across a spectrum of consumer goods, capital goods and securities. So, while I believe US consumption trumps US savings below a price/savings equilibrium point, I think the opposite holds true for Chinese consumption, particularly at the consumer level. I could be wrong, but I think the Chinese consumer is constrained from consumption by issues having nothing to do with price. Feel free to call me out on this if you think I'm mistaken. By Sinosam - 11/9/2008 11:50 AM

The big difference between China and Japan is that Japan is a developed country and China is an underdeveloped one, and it's much easier to find places in China than will benefit from infrastructure spending then it is in Japan. As far as boosting global demand goes, the only solution I can see is a massive Keynesian stimulus on the part of the US government. I really don't see that there is any realistic solution to this mess than to have the US government be far more active in the economy than it has traditionally been. The first test is going to be what the US does with the auto makers. Also the fact that people will act in ways that mitigate government action doesn't mean that this action is useless. Sure if you set loan caps or loan limits, the people will try to get around them and will to same extend succeed, but that doesn't necessarily mean that what you did was useless or had no effect. There is this notion that "well because people will work around the regulations, there isn't any point in even trying to regulate" that kills effective policy making. By Twofish - 11/9/2008 1:35 PM

Seatrus, there is a long and not very glorious history of developing countries attempting to spend their way out of slowing growth. Sometimes it works, but usually it creates serious debt credibility problems, especially if, as is likely in China, a significant portion is wasted or misallocated. This is definitely a step in the right direction, but as Bomlat implies, if you could spend your way to wealth there would be a lot of very rich countries. Greg, it is true that I have been more worried than most about prospects in China, especially in 2006 and 2007 when it seemed I was the only pessimist, but in retrospect I think I was more on target than the optimists. Of course it is also true that one’s outlook may affect the information one sees, and I am sure I am guilty of this, but with the legions of bank economists and consultants eager to say good things, not to mention the Chinese press, I think anyone looking for a rosier view than mine doesn’t lack for alternatives. I do try to warn people to take my gloomy assessments with a grain of salt. David, to the extent the fiscal expansion is effective it MUST cause a reduction of the trade surplus, but unless that unleashes massive hot money outflows it would be a net positive since it would help the PBoC regain control of monetary policy. By Michael Pettis - 11/9/2008 3:05 PM

Fatbrick, my point is not that China wants to save the world. It doesn’t, but I think that since China and the US are at the heart of the global imbalance, any global adjustment must primarily affect China and the US, and any US adjustment must be met by a corresponding adjustment elsewhere, most likely primarily by China, especially since a contraction in global demand must hurt net exporters disproportionately. If the world does not recover China must suffer, and any Chinese attempt to save itself must help the world. RBG, if your numbers are right your conclusion is probably correct, but of course the assumptions already include the conclusion. It really depends on how much of the spending is new and real, and on what its secondary effects are likely to be. Sinosam, I think Chinese consumption is certainly affected by non-price issues, including medical and insurance coverage and pension expectations, and these are very hard to change in the short term. We really have to wait and see how consumers respond. Twofish, to argue that credit controls are likely to be undermined in a system as complex as China’s is not to argue that all administrative controls are useless. This is a pretty big jump and a very false dichotomy. My point, and I think it is a simple one, is that credit constraints have been largely ineffective in constraining credit growth in China, and for similar reasons forced credit expansion is likely to be equally ineffective. By Michael Pettis - 11/9/2008 3:10 PM

This is a REALLY great article on the global picture. I am especially on your side concerning the fundamental symmetry of the situation China vs US in terms of consumption and investment. And certainly do not believe you are a pessimist... The situation calls for prudence. Here in Europe on a much more limited frame, a lot of us remember the case that Roubini made in the past concerning the need for Germany to consume and reversely Spain to save and restrain on spending. This limited Euro-centric, currency-neutral stuff is in the making. It is already be extremely rough... I hope for the better concerning the China/US adjustments. But the size of the countries, currency mismatches and cultural issues will certainly not make the transition an easy stuff. The timing seems quite a bite late from here in Europe where most of us here have been aware of a Chinese export conundrum since the end of 2007. Quite a few people expected this step to be taken earlier by the beginning of the current year. Hats off to Chinese authorities anyway! As long as a devaluation of the yuan - such as the one currently being discussed - does not mitigate the value of the plan on a worldwide basis, this is definitely a step in the right direction. By François - 11/9/2008 4:10 PM

600bn spending is simply ridiculous. add another $140bn to bail out the ag bank and we're talking serious money even before the big 4 probs are addressed. in the absence of hot money inflows and mushrooming trade balance it will all have to be printed. eventually there will be a run on the banks and the yuan. By chegewara - 11/9/2008 8:54 PM

China will get the biggest yang for its yuan by cutting import tariffs. It's also politically optimal, since lower prices will benefit the greatest number of people. By Matt - 11/9/2008 10:46 PM

The government's stimulus announcement appears to exaggerate the size of its plan by including projects already under way, including reconstruction from the devastating May earthquake in China's southwest, said Sherman Chan, an economist for Moody's Economy.com. "The exaggeration highlights the government's desperation to revive sentiment, which is perhaps the key factor to sustaining growth amid global turmoil," Chan said in a report. By tyaresun - 11/10/2008 1:48 AM

Michael, I think you set an unrealistic goal, i.e., for China to completely replace the lost demand globally from US and to maintain the current growth rate (around 10%). You're not pessimistic to expect China to meet that goal. However, the (implicit) goal for the Chinese government is to maintain a growth rate above 8% in the next two years. There is a realistic chance that it is attainable, especially considering the stimulus package that the government has just announced. The 4 tr RMB package can not be all new spending. It's more of a combination of delaying spending, accelerated spending, new spending and existing budgeted spending. For example, the investment in the railway construction in 2006, 2007 were all under the budgeted amounts, due to the time it takes to prepare the new projects and later the investment constraints to cool the overheating economy. However, the investment in the sector accelerated in Q4. The total investment in railway construction so far in Q4 is 150 bn RMB, equal to the total in the first three quarters of this year. With the quarter less than half way, the investment amount will definitely increase. To understand the latest stimulus package, let's compare it with what China did last time it tried to stimulate the economy after the Asian financial crisis in '97-'98. From '99 to '03, China issued long-term debts in the amount of 910 bn RMB. The investments mainly went to the infrastructure spending, particularly expressways. China's economy in 2000 was around 1 tr USD, today it is around 4 tr USD. Assuming the extra spending and investment of similar ratio to GDP per year, the new spending amounts to about 1.5 tr RMB, or 40% of the announced 4 tr RMB package. China could afford to spend more and indeed may have to, since it is in a better fiscal position, but then the world economy is in worse shape. Economically, the last five years have probably been the best 5-year China has had in last 30 years, in terms of high growth and low inflation. But the economy has become increasingly unbalanced and unsustainable. The current economic slowdown is due as much to the world financial crisis as to the business cycle internally, with the bursting of stock market and real estate bubbles well before the world-wide recession. To grow at its potential growth rate, China needs to institute long-term structural reforms to change its development and growth model. The current economic slowdown and world-wide recession may actually provide the opportunity, if the right policy responses and structural reforms are taken. The 4 tr RMB stimulus package should be as much to sustain the growth as to the down payments for reforms and structural changes. It is therefore important to examine the details of the package and how it is implemented. To put it in the proper context, it's helpful to look back at what China did in the last 10 years. For the first 5 years, from 1998 - 2002, what China did was not just to implement a nearly 1 tr RMB stimulus package, but also undertook some difficult and painful structural reforms. About 20 million employees from the state-owned enterprises were laid off during the period; a bailout package in excess of 100 bn USD was spent on the big three banks (ICBC, CCB and BOC). Today, all three banks are among the most profitable in the world and all major banks in the country are publicly-listed. The large state-owned enterprises are very profitable and hold plenty of cash. The first five years' restructuring, plus a very favorable world economic climate,paved the way for the phenomenal growth in the second five year. Whether China can return to a healthy, double-digit growth depends, to a large extent, on the necessary reforms and restructuring implemented in the next 3-5 years. In the end, more domestic consumptions, driven largely by the urbanization, rural growth and more growth from the hinterland will be direction and answer. By greg - 11/10/2008 2:22 AM

Professor, I want to ask a technical question. How is the financing of the Chinese stimulus actually going to occur? Are they going to print more yuan or are they going to sell some of their dollar t-bill horde to finance yuan creation? How sustainable is the US Treasury's current mad yard sale in the face of a possible slowdown in Chinese t-bill demand? Thanks By Yevgeny - 11/10/2008 4:31 AM

Yevgeny, The financing of the stimulus package will not come from the selling of the foreign currency reserves. The spending is in RMB and it will come from the fiscal deficit and issuing long-term debts by the central government, bank lending from large state banks which have plenty of deposits, and large state enterprises which have a lot of retained earnings; local government will also spend, plus some matched private investments. To give you an example, the Beijing-Shanghai Bullet Train that broke ground in April, is expected to cost 200 bn RMB. Out of the 200 bn RMB, the bank will lend 100 bn RMB, local governments (where the rail tracks will be laid) and businesses (e.g., insurance companies, national social security funds) will invest about 60 bn RMB, with rest from the central government (Ministry of Railway). There are plenty of capital in China; the key is to identify the good investment projects and generate reasonable returns for the investment. The government's spending may not be very profitable in the short-term, but should lay the foundation to long-term healthy growth and address some of the structural deficiencies. By greg - 11/10/2008 5:16 AM

Greg, Thanks for the response. So they will be printing more yuan to finance their spending. My next question is how much appetite for local debt issuance do the Chinese have given that they have been sterilizing most of their trade surplus for the past few years? By Yevgeny - 11/10/2008 8:35 AM

Yevgeny , When PBOC sterilized the trade surplus, it issued short term notes to big banks and effectively took cash off the markets. Now, PBOC can just stop roll over its notes and put credits back into the system. By fatbrick - 11/10/2008 10:45 AM

Thanks Greg, I agree with much of what you say, but I would have two caveats. First, while the fiscal plan may benefit China in the medium term, there are two very different sets of problems, and the most pressing one is the short term problem of rapidly declining global and domestic demand. I am much less sanguine than you are about the improvement in the financial system and remain very worried that an economic contraction could lead to nasty surprises from both the formal and informal banking systems. Second, previous fiscal expansions occurred in a very different global environment and I am not sure comparisons are very useful. When the global economy was growing quickly and current account deficit countries showed an almost unlimited capacity to absorb additional capacity from current account surplus countries, Chinese fiscal expansion had an immediate domestic impact. But with the US and European demand contracting, the global environment will reduce significantly the domestic impact of fiscal expansion. Yevgenev, Greg is right that fiscal expansion will not come from the selling of reserves (at least not directly, although to the extent that the expansion spills out into additional imports, it will). My guess is that they will simply borrow much of it from commercial banks, and accommodate the banks by lowering reserve requirements, or by selling bonds indirectly to the PBoC. Both actions result in monetary expansion. They may also sell bonds directly to the public and, as Greg implies, liquidate government deposits in the banking system and retained earnings in state-owned companies. Fatbrick, in fact the PBoC has already reduced its sale of bills and notes. By Michael Pettis - 11/10/2008 1:27 PM

The real pity is, that if the “C” party had never come to power, then China would have progressed much more quickly under a much more democratic system, to gain much more wealth, much earlier, than it now has, and this would have meant, very probably, that China's population, today, would not be at such an unsustainable level, as it now is. And that people in China would have been much happier, during the recent 60 years. And much happier, today. Of course the “C” party ought to stand for the Cancerous party. Because the “C” party is sucking the every loving strength out of the country, just to the last dregs almost, even while most people are just waiting for it to be overthrown and die, gasping for its last ill-begotten succubus breath. By WhoLovesTheCrummies? - 11/10/2008 2:32 PM

Hope this will come true. I am looking for some good <a href="http://www.chinafinancenews.org/> China Finance News </a>. By china finance - 12/6/2008 8:52 PM

Hope this will come true. And also there are some good China Finance News at http://www.chinafinancenews.org/. By china finance - 12/6/2008 8:54 PM

You are a wenie By wenie is spelled wrong - 5/9/2009 4:00 AM

Northwestern offers nearly 50 majors and has a lakeside campus in the northern suburbs of Minnesota's Twin Cities—only 15 minutes from downtown Minneapolis and St. Paul. By nwc.edu - 5/25/2009 4:14 PM

A Rainbow Play system is more than just a swing set; it’s a place where imaginations soar! It provides the physical activity your children need, the safety you demand, and most importantly, FUN!!! By Rainbow Creation - 5/25/2009 7:08 PM

Explosion-proof portable explosion proof lighting: Chambers Power Products Explosion-proof portable explosion proof lighting: portable explosion proof flood. By Cpowerproducts - 6/29/2009 10:18 PM

Heavyquip is the leading aftermarket provider of Heavy Equipment Parts : Rubber Tracks, Paver PArts and more. By HEAVYQUIP - 6/30/2009 3:19 PM

Learn How Retractable Awnings & Exterior Solar Screens Save Energy, Provide UV Protection & Are A Perfect Fit For Your Outdoor Lifestyle. By Markiluxawnings - 6/30/2009 6:23 PM

Strategic Management Consulting facilitates the process to help communities, businesses. Some goals we’ve established to help our client’s achieve like Business evaluation, Operations Effectiveness and Cash Flow Optimization. By Transcendstratconsult - 7/1/2009 7:30 PM