Bo Peng

China's First Step Towards Bilateral Currency Swaps

Stephen, good point on the potential competitive devaluation. But if it happens, for example triggered by Japan/Switzerland/ECB doing QE, I think USD would only strengthen before world economy stabilizes, for the same reason why USD has strengthened after the Fed's QE announcement. If Yuan still holds on to the dollar peg under this scenario, then it'd create some very intriguing dynamics.

USD will remain strong for the duration of the depression, even though JPY collapsing is a distinct possibility. I don't know for how much longer Japan can bear the pain. Their decision yesterday to do practically nothing was very surprising to me.

China's First Step Towards Bilateral Currency Swaps

Over the time horizon of 10-20 years, I think the end of USD as the sole reserve currency is almost a certainty. Rather than putting up a futile fight or staying in denial, US could instead try to prepare for and take advantage of it. For example, a devalued USD can have many positive effects on US economy -- jobs, export. But it's something we're not used to, thus appears scary. It takes a change in mentality to adapt to it.

China's Economy Isn't in the Same Boat as the 'Developed' World

mr freddo, the Chinese gov hasn't been "communist" for decades, and very few true-to-the-color communists among the general population or the elite. And it's not because they played the capitalist game so well. They happened to be conservative and prudent in a right area (financial reform) at a right time (and it doesn't mean they're right in all areas).

As I said in the post, it's not all about luck however. There're a few fundamental differences, primarily due to recent history and current stage of socioeconomic development.

China's Economy Isn't in the Same Boat as the 'Developed' World

Last two day's markets have been interesting. Yesterday worldwide equity markets rallied on rumor of additional stimulus from Chinese gov. Today everything tumbled on second-thoughts on that.

To me, both are over-reactions. China will not be able to single-handedly turn world economy around, not with the massive debt in US, massive leverage (still!) in European banks, and near collapse of most all of eastern Europe in both currency and debt. And I very much doubt the 8% 09 growth "prediction" from Beijing would bear fruit. But, I stand by my view in this post: China has a good chance of staying economically sound and socially stable in 09, thus providing some support to world economy.

But if world economy stays in constant crisis mode beyond 09, then the game may need reset again.

China's Economy Isn't in the Same Boat as the 'Developed' World

User 360916, do you have a point or are you arguing for argument's sake?

Again, this is not the place to argue about trade policy and global imbalance and social structure and political philosophy. If you'd like to talk about it, let's move to my blog and we can drill down to it. Here I'm talking about investment opportunities. Are you trying to say big US banks have yet to pull their big stakes out of China, or are you saying they're done?

My point is beyond this, however. What the US big banks have or have not done with their China stakes is irrelevant on this regard. What I'm saying is China is in a fundamentally more sound footing at this juncture. Let's stick to this here. Anything else, move over to my blog and we can talk about it.

China's Economy Isn't in the Same Boat as the 'Developed' World

Ricard, you raised a good point. Unfortunately, I have no anecdotal evidence to say either way on it, not to mention data, which I doubt anybody has. I guess we'll have to wait and see.

Billy Gee, I tried to stay away from anything that might be used to stoke protectionist sentiment but I have to make an exception for you because your comment on Chinese government bureaucrats involved in "import stifling" goes beyond ignorance. One important factor in chronic trade imbalance between US and China is the fact that US government prohibits export of many hi-tech products to China. This is xenophobia thinly veiled behind phony ideology arguments that have been outdated since 30 years ago. National security can be a valid concern. But it needs balance and scrutiny. The list of prohibited export to China was arbitrarily drawn up by politicians two decades ago with no public debate. It has denied many American businesses tremendous opportunities and caused a lot of distrust and suspicion towards US among certain segments of Chinese society. This is stupidity beyond comprehension as far as I'm concerned.

China's Economy Isn't in the Same Boat as the 'Developed' World

Ricard, your point about the strength in rural social structure in sustaining the unemployment surf in a valid one. But the number is still tiny in percentage. I'm not seeing any sign of stress, though admittedly I'm talking from the 500,000 ft level.

User 360916, do you have any evidence showing the extend of unwind of China stakes from the banks you mentioned? I know Buffet and BoA already pulled out big chunks, but nothing concrete about other significant moves. Judging by the dramatic drop in Chinese stock market since late 07, they would not have done their homework if they had been sitting on it all this time.

China's Economy Isn't in the Same Boat as the 'Developed' World

Socialism cannot compete! :
>>Then a) you admit China isn't a "developed" country? And b) why would I invest in an undeveloped country right now?

Whoever told you China is even close to a developed country was pulling your legs. ;> Parts of the few modern urban centers look are fantastic, even authentic in many ways. And the improvement in overall living standard as well as the general sense of satisfaction/content over the past 20-30 years -- and yes, even the political scene -- is nothing short of astonishing. But no, it'd take more than a generation to transform a country of 1.3B people from an almost complete lack of industrial foundation into a "developed" country, no matter how you define "developed".

As paultaut answered above, this (plus my basic stability view) makes China a potential outperformer in investment. Even today, 1.5 years into the subprime crisis and full half year into the global crisis, only the R in BRIC looks somewhat shaky. BIC is still burning strong.

China's Economy Isn't in the Same Boat as the 'Developed' World

I'd appreciate if everybody could please try not to turn this into a discussion about political philosophy. I'm not saying it's not a fascinating, worthy topic; it's just that this is not the proper platform.

And, please, no nationalist or xenophobic rants.

Thank you.

Why I'm Worried About China

I'm not worried about China. I mean, things are not pretty there for sure, but not even close to "crisis".

1. Their banks do have some shaky assets which will get worse as the economy slows, but look like angels compared to those in the developed world. There's no chain reaction mechanism tying the real economy to the banks. It's to a large degree an isolated problem, and a much smaller problem. Nothing the government/GDP can't handle.

2. There's a housing bubble there in the process of busting. But it's nothing like the ones here and in Europe. There's no subprime or Alt-A. Some here have compared the housing price to income ratio in US vs China. Those people obviously know little how the newly emerging home-owner class in China live, their day-to-day cost structure, and where their real income come from.

3. The oversized package doesn't mean, as you feared, that everything stopped cold. It's not. It's the Chinese government's way of showing their resolve and capacity in avoiding China becoming a victim of contagion. The message is this: if the world stops consuming, then we'll create some consumption to get through the worst time. Many governments would like to send similar messages, unfortunately not many have the same back-up, therefore carry similar credibility.

Why China's Exporters Are Complaining Loudly

Mr. Pettis, I did a correlation study on USD/XYZ exchange rates and the quarterly trade balances with corresponding countries going back 7 years. I was quite surprised to find that the correlation is -0.04, meaning 0. What I realized afterwards are that

1. US economy is highly intertwined with the rest of the world. Except for a small number of products that we either import & consume or originate & export, we import the lower end of value chain and export the higher end.

2. Trade balance is the aggregate result of a huge number of factors, of which exchange rate is but one.

The popular soundbite of exchange rate driving trade balance is great for political consumption, but it's intellectually dishonest to make that automatic link without detailed analysis of the two economies (and in the global context, not just bilateral).

Chinese economy is not unlike US's on the above two points, except that import-valueadd-export portion is probably even bigger. Remember 97? Virtually all export competitors of China's had their currencies massively depreciated in a matter of months or even days. Somehow Chinese trade didn't suffer any significant or lasting impact. And the reason is very simple -- as pointed out above.

Of course there're some exporters and interest groups in China complaining. But if my analysis/guesstimate above is correct, the Chinese economy overall wouldn't be significantly impacted by CHY appreciation (within certain limit of course). By the same token, Americans who've been crying for CHY appreciation in hope of improving bilateral trade balance would be sourly disappointed and severely discredited -- as the facts over the past 1/5 yrs have already shown.

To me, it's plainly political posturing by interest groups on both sides.

China Outlook: Policy Adjustment Risks May Be Growing

With the stock market way down and showing no sure promise of sustainable rebound and the housing bubble bursting (though not nearly as severe as in US/UK), the carry cost for hot money in China is high. This is decidedly different from last year when hot money could easily finance itself from asset bubbles there, even without relying on RMB appreciation. So the incentive for hot money to hang on and for one-off revaluation are decreasing.

Looks to me the call for one-off revaluation is more of the existing hot money to make a bundle and get out. It would have been a good idea from the Chinese economy and monetary policy point of view to do one-off revaluation last year. But since they missed the chance, now it's a BAD idea. While previous hot money bets have mostly paid off well, the class of 08 will have to bail out or become longer term while being contend with relatively small returns in the interim.