Financial Meltdown: China Blames West, West Blames China

I just finished reading a Financial Times article about the likely coordinated global policy solutions to emerge from the upcoming G-20 meeting in Pittsburgh. It does not sound like there is a huge amount of consensus. Indeed, it sounds like there is a lot of finger pointing regarding what the true causes of the financial crisis were.

China expressed scepticism on Thursday about a US and European push to launch an effort to tackle global economic imbalances at next week’s G20 summit in Pittsburgh.

Zhou Wenzhong, China’s ambassador in Washington, said: “People should not focus on only one thing, that is balancing the economy.” The International Monetary Fund should concentrate on doing a better job of monitoring the build-up of financial risks.

Translation: You lot in the West created a house of cards in the financial sector to fund a drunken binge of excess consumption. Your guy Stephen Roach even says so. Clearly, this is where we need to focus future reforms.

Edward here. Don’t take my word for it that this is what the Chinese are saying. Later in the same article, we get the following from Ambassador Zhou:

Imbalances were “certainly not the root cause of the problem”, Mr Zhou said. “The root cause of the crisis is the lack of supervision and abuse of the openness of the market, very risky levels of leverage and too much speculation.”

Unfortunately for Zhou, this is not the interpretation of events being drawn in the West. Western officials are more interested in correcting ‘global imbalances.’

“Global imbalances have to add up to zero, so if the US is going to be less the consumer and importer of last resort then other countries are going to need to be in different positions as well,” a senior administration official told the Financial Times recently.

Britain, France and other European nations are backing a push on global imbalances at the G20 summit. Gordon Brown, the UK prime minister, said this week: “When I attend the G20, I will be putting the case for a global compact for growth and stability for now and for the future.”

Brown and the other Western leaders are not denying responsibility for the global meltdown as directly as Zhou seems to. Nevertheless, you must realise that this is a coordinated effort to re-focus the policy debate on China, its pegged currency, trade surplus and huge accumulation of foreign currency reserves. I call this the Blame Asia meme. I would be curious to hear what the Brazilians, Indians and Russians are saying about all of this.

The question is whether this tiff over who caused the crisis in the first place will impede consensus about coordinated global policy going forward. No one country or set of policy makers covered themselves in glory in the lead up to this panic. Yet, because the same set of individuals is still at the table, we now see greater interest in putting a positive spin on past events than on moving forward in a constructive way.

Correct me if I am wrong. It sure looks like we shouldn’t expect anything substantive to result from the G-20 meeting in Pittsburgh.

Source

China scorns focus on imbalances – FT

Comments

[Carlos Lam:]

Our Western leaders' arguments are completely laughable. The problems were caused by China's saving and producing??? That's like an arsonist blaming the match manufacturer for burning down a building.

Sep 18 06:03 AM

[chap08:]

They are talking about different things. Trade imbalances (which the West are talking about) are not the same as massive financial leverage, badly managed banks and white collar criminality (which the Chinese are talking about). Certainly the Chinese are right to say that you can have sustained trade imbalances without making the mess that we have done.

Sep 18 06:52 AM

[Jiang Nan:]

Understandable given the language barrier.

There is an old Chinese saying, Chicken trying to quirk with the Duck.

You are absolutely right,apart from some nice photo, nothing much else is to be expected.

Sep 18 08:07 AM

[CautiousInv...:]

The reader above, Chap, got it right.

This is the same old and disingenuous argument that had China consumed more and saved less we would not have had imbalances and a glut of savings to absorb all of the US debt. This completely overlooks our maintaining interest rates at artificially low levels, government encouraging federal agencies to compromise lending standards to expand lending to those with lousy credit, bad credit scoring of securitized products, colossal regulatory failure, pervasive casino thinking within the financial services industry and a failure on Bernanke's part to (1) recognize the housing bubble and then (2) to suggest the nuclear fall out would be contained to subprime.

At the upcoming meeting, club med Europeans are fixated on addressing compensation of bankers; given their socialist slant on things we should not be too surprised. Meanwhile, we are bent upon form over substance and rather than take needed reform to curb the activities of sysemically important banks we will simply reorganize and expand regulatory oversight.

Along the way we may tinker with capital ratios and try to focus light on derivatives trading but we will not propose needed actions to make banks smaller, less risky, less interdependent and more transparent. Why? Because we are craven and the distinctions between the banking cartels and the Fed and Treasury are all blurred.

Sep 18 08:38 AM

[Jiang Nan:]

Understandable given the language barrier.

There is an old Chinese saying, Chicken trying to quirk with the Duck.

You are absolutely right,apart from some nice photo, nothing much else is to be expected.

Sep 18 09:10 AM

[Graham and ...:]

This debate shows too rather different cultures and approaches. Americans are focused on fixing the immediate problem, while Chinese take a more "holistic" approach that includes a strong dose of prevention.

Sep 18 10:01 AM

[Michael Clark:]

I really wish our leaders (all of them) would say: 'America screwed up. We let the banks and insurance companies run wild. We made bad judgments about housing and about lending and we need to try to fix the problem right now by confronting the bad debts in our banks and in our government and in our consumer society...'

Blaming the Chinese is another instance of not taking responsibility. We're always spinning. We've become such cowards at looking at reality head on.

As long as we continue looking for someone else to blame we are going to get no where. The suspension of the mark-to-market rule was the second step down the road to hell. The first step was allowing that freak Hank Paulson anywhere near Washington.

Sep 18 10:12 AM

[James Lewis:]

America is the junkie, China is the dealer.
Up until now, both the junkie and the dealer need to be blamed.
However if the dealer starts to make it difficult for the junkie to get clean and change its ways. Then the karmic fault will be extended more to the dealer.

Sep 18 12:24 PM

[Carlos Lam:]

On Sep 18 12:24 PM James Lewis wrote:

> America is the junkie, China is the dealer.
> Up until now, both the junkie and the dealer need to be blamed.<br/>However
> if the dealer starts to make it difficult for the junkie to get clean
> and change its ways. Then the karmic fault will be extended more
> to the dealer.

To an extent, you're right: If the Chinese keep buying our debt, then they shouldn't complain when the government inflates it away. It doesn't seem like China has enough foresight to see this. For all their talk about worrying about the dollar, they keep buying our debt. An American saying is, "If you talk the talk, you should walk the walk." It means: if you say something, you gotta follow it up with action.

Sep 18 12:44 PM

[rosey99:]

I think people may in fact be surprised by the tone and substance of the summit. Perhaps the tire tariffs coming so close to the summit is just a coincidence, eh?

Why is it that the yuan does not float? Why is USD/CNY stuck where it was back in June, 2008? Doesn't anyone find this a little strange? I expect this question to once again make its way into the media, and there will be many excuses made by the Chinese government (now is not the time for deflation) and US/EU firms manufacturing in China for export to the US and EU.

Chinese currency policy is not sustainable. It's not the only way that the Chinese government promotes economic growth and protects "young industries," but it is a big one. And it affects Europe and Japan in major negative ways too.

seekingalpha.com/artic...

Eventually the remnimbi must float. It's as simple as that. The major problem is that much like the US, China is unwilling to admit to their role in fostering a crisis made much worse by the nature of global trade imbalances. While the US cannot seem to stop relying on debt to fuel growth, the Chinese cannot seem to stop relying on increasing exports to fuel growth. Given that times are precarious to say the least, what we are getting is more and more of the very policies that helped to get us here in the first place. Everyone want to go to heaven, but no one wants to die. And it can't go on forever, probably not even for much longer, we all need to accept a little pain here. Or in the case of China, a "boatload" (no pun intended) of deflation. They have been exporting deflation for many years. Unless the Chinese government will allow the yuan to appreciate at a rate acceptable to the US/Japan/EU I think we can expect more in the way of tariffs and other protectionist measures. To a certain degree, the Chinese are doing this to themselves. In a nutshell, they have the same problem we in the US have: "I can't do that today, it's too painful, maybe next year when things are better." It's more than a little ironic.

Thanks for the piece, and the comments are interesting too. Another SA post on this:
seekingalpha.com/artic...

And some great stuff at mpettis.com:

mpettis.com/category/c.../

Sep 18 03:59 PM

[Strangewalk:]

I partly disagree. The Chinese government pursued an aggressive policy of mercantilism through import restrictions and state-supported dumping in addition to actively promoting the world's largest counterfeiting, illegal copying and pirating industries that pre-empted internal demand for imported products as well as creating new markets for its illicit goods. Also, Chinese exporters paid the world's highest tax rates that built the government's massive, destabilizing foreign reserves and prevented the development of a consumer driven middle class to purchase imports. The foreign reserves in turn led to arfificially low interest rates in much of the world that allowed the bubble to form.


On Sep 18 06:03 AM Carlos Lam wrote:

> Our Western leaders' arguments are completely laughable. The problems
> were caused by China's saving and producing??? That's like an arsonist
> blaming the match manufacturer for burning down a building.

Sep 19 04:03 AM

[LCACM:]

In this debate each side is correctly depicting their own side of the two sided Coin. Each side has contributed to this mammoth problem. Huge trade imbalances due to the Chinese policies caused the US economy to tank due to US job losses. The correct way to revive the US economy would have been for the US Government to take quick measures to balance trade, instead, the US Fed tried reviving the economy using cheap credit coupled with lax regulations, thereby fuelling the internet bubble and than the housing bubble. Corrective increases in US interest rates were prevented by Chinese purchases of US Treasuries, artificially keeping US interest rates low. The Chinese government has done this deliberately to prevent Chinese workers from consuming any sizable part of the goods they were producing. This problem can now be solved by both sides acting in a coordinated and responsible fashion.

Sep 20 08:54 AM