Archive for January 18th, 2010

Monday, January 18, 2010

“Using” the Credit Squeeze?

The following are translated excerpts from a Chinese website focusing on small and medium-sized enterprise.

China State Chairman Hu Jintao has emphasized that China will adhere to the policies of independent innovation, of breakthroughs in central technologies, of supporting development as the leading policies of the future […]. Hu Jintao was on an inspection tour of Shanghai from Thursday through Sunday. [Xinhua quotes him as saying that] China should make use of the monetary squeeze resulting from the international financial crisis (中国必需充分利用国际金融危机形成的倒逼机制), accurately identify the direction for the development of new international industries, firmly continue structural adjustments, further strengthen the capability of independent innovation, promote energy-efficient emission reduction and environmental protection, deepen reform and opening, and secure progress in the transformation of economic development.


JR is no political economist, but curious. It’s fun to try to make sense of science. So…

… a monetary or a credit squeeze can stand for a number of different situations. [1] Scarce money as a result of central banks increasing interest rates (that’s when governments or central banks want money to become more scarce), or [2] when money is scarce simply because demand exceeds supply (which leads to rising interest rates and cools the economy anyway), or [3] when governments borrow  tons of money (for a stimulus package, for example), which will push interest rates, too, sooner or later. (Quantative easing would be a controversial alternative for the situation [3], so as to avoid rising interest rates.)

At first glance, JR, innocent as he is, would tend to believe that Hu Jintao‘s remarks in Shanghai referred to sustainable, less export-driven economic development. As the chairman was talking to research institutes and corporations’ research and development people there, this would sound likely, too. After all, Beijing’s governmental stimulus packages had leaked in food inflation, and into an asset bubble [in equities, real estate and commodities], The Telegraph wrote on January 7.

But the Telegraph’s picture is that China’s coming credit squeeze at home (if it comes), and a desire by its leaders for further exports are two sides of the same intended policy: China appears to be opting for a credit squeeze rather than allowing the yuan to rise against the dollar, euro, and yen – an alternative way to cool the economy. This would be more of the old business pattern: low incomes, high saving rates and little money to push domestic demand in China.

If so, China might be able to heed part one of wide-spread economic advice – cooling the economy at home -, but only at the price of turning a deaf ear to part 2 of it, which is about moving away from the export-led trade pattern.

Zhong Shan, [China]’s vice-minister of trade, declared [on December 27] that China will continue to increase its share of world exports, writes the Economist of January 7, which had led to more trade frictions with North America and Europe already. Here, too, we find some backgrounder for Hu Jintao’s “independent innovation” talk.

China’s future export growth is likely to come not from existing industries but from higher-value products, such as computer chips and cars. Japan’s exports also moved swiftly up the value chain, but whereas this was not enough to support durable gains in its market share, China has the advantage of capital controls that will prevent its exchange rate rising as abruptly as Japan’s did in the 1980s. When China does eventually allow the yuan to rise, it will do so gradually.

If the rest of the world will or should play along with Beijing’s mercantilist strategy is, of course, a different question. Paul Krugman and some European media don’t think we should. Then what about China’s neighborhood? It doesn’t look that promising either. ASEAN, China’s latest free-trade-agreement partner, records a trade deficit of US$21.6 billion with China, five times as big as in 2000, while its trade surplus with America is – naturally – shrinking, according to a Bloomberg article republished by the Tapei Times.

And if trade disputes flare up between ASEAN and China, the much-hailed free-trade agreement (in effect since January 1 this year) doesn’t arrange for rigorous mechanism for settling them, criticizes the Economist, also in its January 7 edition.


Welcome, Trade War, January 9, 2010
Chinese New Year, Paul Krugman, New York Times, December 31, 2009
What’s wrong with Overcapacity, December 13, 2009

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