Other Criticisms of the ‘Gloomy Narrative’

Some support for our recent assertion that the U.S. press absolutely bungled the recent meeting between President Obama and President Hu of China (TOH to Brad DeLong):

• The Atlantic’s James Fallows, “Manufactured failure: press coverage of Obama in Asia”
• Fallows’ “Manufactured failure #2: the press, Obama, Asia” in which he cited the following three stories
• Howard French interview in the Columbia Journalism Review
• Tish Durkin in The Week, “Obama in China: What the media missed”
• Interview of Ambassador to China Jon Huntsman in the AP, “US envoy criticizes coverage of Obama visit” (Obama bashers should note that Huntsman is a Republican)

Additionally, a friend who’s an expert on China agreed with us that the behavior of students at the Shanghai townhall meeting was a rather worthless piece of evidence. They also pointed out that no matter what the financial relationship between China and another country, the Chinese government was not going to listen to any outside advice regarding its internal affairs (censorship, human rights, etc).  

All in all, the press really blew this one, perhaps out of a desire to perpetuate the prevailing myth of the U.S.-China power shift. Yes, there will be ongoing shifts in the two countries’ relative power. But a sudden shift is not going to happen overnight, and it’s especially not going to happen because China has accumulated vast USD reserves and U.S. Treasury holdings. In fact, on that latter point, one could argue that China has stepped on to the same tightrope that the Fed and U.S. Treasury – and U.S. Congress and Administration – have.

The press can sometimes get things wrong without meaningful consequences. But in this particular case, they’re feeding public debt (and other) anxieties of many voters, which could lead to short and/or intermediate term policy errors, and thus raise the likelihood of the dreaded “double dip” recession. 

URLs:

http://symmetrycapital.net/index.php/blog/2009/11/the-curiously-gloomy-narrative-continues-obamas-lack-of-leverage-over-china/

http://delong.typepad.com/sdj/2009/11/links-for-2009-11-22.html

http://jamesfallows.theatlantic.com/archives/2009/11/about_press_coverage_of_obama.php

http://jamesfallows.theatlantic.com/archives/2009/11/manufactured_failure_2_the_pre.php

http://www.cjr.org/campaign_desk/not_for_all_the_news_in_china.php

http://www.theweek.com/bullpen/column/103219/Obama_in_China_what_the_media_missed

 http://www.google.com/hostednews/ap/article/ALeqM5hopMZkJxkn_lh9AvGu2oQySbyl7wD9C35FNO0

http://prasad.aem.cornell.edu/doc/policy/ChinaReservesNote.July09.pdf

Tasker: China following in Japan’s footsteps?

China analyst Peter Tasker in the Financial Times:

[In the late 1980s, while] the western world was stuck in the post-crash doldrums, the Japanese economy had got back on track with apparent ease. Japanese corporations were using their high market capitalisations to finance acquisitions of foreign trophy assets. Japanese banks boasted the world’s strongest credit ratings.But what you saw was decidedly not what you got. The crisis, far from leaving Japan unscathed, exacerbated its structural problems and laid the groundwork for a far greater disaster. And it was the weak western economies, not Japan, that produced healthy investment returns over the next decade.

[Japan's] current account surplus and strong fiscal position provided the macro policy leeway to make any slowdown strictly temporary. The Bank of Japan duly put the pedal to the metal and the recently deregulated banks went on a patriotic lending spree. High-end consumption boomed but the real action was in the asset markets and capital investment, which soared as a proportion of gross domestic product.

Sound familiar? It should, because the same dynamic is evident today in China and some other emerging economies.

Tasker then invokes turn-of-the-20th-century economist Wicksell, a favorite of ours:

If the natural interest rate is, as the Swedish economist Knut Wicksell posited, around the level of nominal GDP growth, then China’s interest rates should have been close to 10 per cent for most of this decade. Alan Greenspan, former chief of the US Federal Reserve, has been criticised for holding interest rates too low and setting off a housing and credit bubble in the US. But if US monetary policy was wrong for the US, it was even more wrong for the high-growth countries that “imported” it. The result could only be a massive misallocation of capital.

Tip of the hat to the truly prolific Ed Harrison at the Credit Writedowns blog. On a related note, one of his colleagues, Marshall Auerback, is the first analyst we’ve come across who’s aware of the continuing significance of China’s yuan devaluations in the early/mid 1990s:

…between 1992-94, China devalued the RMB by close to 60% (she was already running a current account surplus when she did it the second time), which created huge competitive pressures for the other [Asian] countries and pushed them rapidly into deficit.  This time, China is devaluing along with the US dollar and reflating a credit bubble — not to encourage domestic demand, but to create a renewed export juggernaut, at a time of weak external demand.  This could really be problematic for the rest of the world.

I wonder how long before the protectionist pressures emerge?

All fair points, though Chinese authorities seem to be aware of the multiple risks they’re facing (whether they can manage them effectively is another question). But there’s another factor that might be just as important, and that’s demographics. The age composition of China’s population is trending in a direction that is not conducive to sustained 10%+ GDP growth.  Other BRIC  members should see more favorable demographic trends, with Russia the true standout. Russian markets also happen to sport the highest risk premia compared to Brazil, India, and China.  

URLs:

http://www.ft.com/cms/s/0/39f61cb6-c818-11de-8ba8-00144feab49a.html

http://www.creditwritedowns.com/2009/11/china-is-now-on-the-same-bubble-path-as-japan-post-1987-crash.html

http://www.creditwritedowns.com/2009/11/china-reflation-play-spells-trouble-for-rest-of-the-world.html

http://www.miraeasset.com/ourmarket/outlookView.do?board_id=1125&group_id=1&pageNo=1

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