I am leaving to New York and DC for a week, so this may be my last post for several days since my schedule will be pretty hectic. Of course most of my trip will involve meetings with bankers, investors and some government officials, but the timing of my visit was based on the three-week tour of a group of my favorite Beijing musicians. For those who live in the northeast and are interested, check out the tour schedule and by all means come and see the shows. The work of these artists is, in my opinion, among the most interesting in the music world and will give a very different idea of what Beijing’s hippest youth are thinking about than most people assume. I will be attending most of the performances until November 11, when I return to Beijing.

But on to grayer topics. When the US economic data for the third quarter of 2009 came out last Thursday judging by the market reaction it seemed much more mixed to me than it apparently did to others, especially as far as it relates to China. It is true that after four quarters of negative growth, with GDP contracting 3.8% in the year to July, we finally got positive GDP growth of an annualized 3.5%. This was above expectations, and given China’s reliance on US overconsumption, the increase certainly seemed to be good news.

The US trade deficit unexpectedly narrowed in August, according to the Commerce Department in a report released Friday. Exports were up slightly and imports down, mostly because of a reduction in oil imports, I think, but the trade deficit was still a hefty 3.6% of GDP.

As Beijing slowly unlocks from its 60^th anniversary celebrations – the streets are still relatively empty but more and more people are going out, although my local Starbucks still hasn’t reopened, forcing me to go elsewhere for my hardcore caffeine fix – a lot is still going on in the rest of the world. Both the US and the IMF have come out with releases that help us to pick through the problems that China and the world are facing.

While the G20 leaders make reassuring noises about international trade, I think the risk of rising trade tensions have not abated at all. As I see it, everything depends on whether or not domestic Chinese polices had any role in creating the global imbalances, and if they did, then we are still in the early stages of a difficult process of assigning the costs of the global adjustment through trade.

Regular readers of my blog will have noted all sorts of unfortunate goings on here in recent days. It has become impossible to get into the comments section, or indeed into any other section of my blog except the front page, and so to my great dismay the excellent discussions that have been so useful for me have been temporarily halted. I am not sure why this is the case, and now that school has started again I hope to get one of my terribly smart Peking University students to find out and fix it.

The Shanghai and Shenzhen stock markets are still hogging the spotlight. Although down 18.0% from its recent peak exactly one month ago, the past three days have been good for Chinese stock market investors. After rising 0.60% on Tuesday and 1.17% on Wednesday, the SSE composite was up a very smart 4.79% today.

So what happened? Better-than-expected earnings from Chinese corporations? A surge in US household income and a decline in US unemployment boosting the prospects for China’s tradable goods sector? A huge new loan number for the month of August?

According to a recent article on Reuters, on Saturday Lou Jiwei, the chairman of the CIC, China’s sovereign wealth fund, said at a conference on Saturday in response to a question about his expected performance: “It will not be too bad this year. Both China and America are addressing bubbles by creating more bubbles and we’re just taking advantage of that. So we can’t lose.”

In my last entry I noted that after the recent “green shoots” period, during time which it seemed hard to find anyone who was skeptical of our seeming ability to turn the corner on the crisis without actually having addressed any of the underlying imbalances, it was good to see that more and more analysts, and especially policymakers, had begun to worry again. President Hoover went down in a blaze with his “light at the end of the tunnel”, and of course one of my favorite stories of that time is his response in June 1930 to a delegation requesting a public works program to help speed the recovery: “Gentleman, you have come sixty days too late. The depression is over.”

Three weeks ago China Daily published a pretty funny article about a recent survey on credibility that had taken place in China. According to the article,

At a time when shamelessness is pervasive, we are often at loss as to who can be trusted. The five most trustworthy groups, according to a survey by the Research Center of the Xiaokang Magazine, are farmers, religious workers, sex workers, soldiers and students.

I usually don’t post a new entry so soon after the last post, but there was an interesting article in Monday’s Wall Street Journal by Andrew Batson.

China is center stage when it comes to fears that buyers will one day spurn U.S. Treasurys. The bond market has been the source of much political theater between the U.S. and China in recent months, with Chinese officials passing up few chances to lecture the U.S. on its profligacy.

My ten-day trip – partly holiday on Phuket and Phi Phi islands (even more beautiful than I had expected) and mostly meetings in Bangkok, Hong Kong and Singapore – finally ended yesterday. Besides three presentations to large investment groups, I met about twenty to thirty institutional investors in small meetings, and those meetings were very instructive. There is a real mix out there it seems to me of tentative optimism about Chinese prospects on the part of the majority of investors and deep pessimism on the part of a minority, which included both Chinese nationals and foreigners.

Perhaps this is because of my own prejudices as a former bond-markets trader, but the pessimistic minority seemed much more experienced and literate to me. They were also generally a lot more senior. That might not mean much but it does suggest to me that there is a risk of bad news in the future causing a stampede of pessimism. Of course the majority is not necessarily wrong (in spite of the claims of contrariarans, who paradoxically enough include nearly everyone, it seems), but the volatility impact of information that confounds their expectations is much greater than that of information that reinforces their expectations.

In my last entry I tried to set out the necessary shifts over the next few years as the world, and especially China and the US, works out its imbalances. These shifts will take place, I am pretty sure, but they can do so under a “good” scenario and a “bad” scenario.

So what does all this have to do with the SED? It means that the best hope for the two countries, I think, is a well coordinated set of policies acknowledging that the US savings rate must rise, and with it the Chinese must decline, but also recognizing that if this happens too quickly, or is accompanied by a collapse in trade, it will be bad for the US and terrible for China. These coordinated policies must also acknowledge – and this becomes much more difficult – that the current Chinese stimulus may be making the adjustment more difficult, and much of it will have to reversed at the same time as the “appropriate” measures aimed at spurring consumption may cause a short-term rise in unemployment.

By coincidence I had two OpEd pieces that came out last week, one in the WSJ and the other in the Financial Times. The latter came about because about a month ago Martin Wolf asked me to write a piece based on my June 20 entry. The former came about on the previous Friday when I was thinking about last week’s SED meeting and why I wasn’t expecting much to come from it. Although they are very different pieces, both of them build on this idea that the inversion of the consumption/GDP growth relationship in the US has important implications for China’s future GDP growth.

For the WSJ piece I start by pointing out that when the Japanese and German currencies soared in value against the dollar after the Plaza Accords were signed in September 1985, many analysts thought that at long last their trade surpluses with the US would decline. They were partly right in the sense that the German trade surplus with the US did indeed decline. But in spite of the fact that the value of the yen doubled, Japan’s trade surplus nonetheless surged.

First off, a lot of investors and government officials have recently been trudging to Beijing in spite of the heat and mugginess and seem to be eager to discuss the outlook for China. Perhaps because the press, and more importantly a lot of Chinese academics and think tank types, are beginning to worry much more in public about the medium term outlook, the conversations seem to be a lot more worried than they have in the past. On my upcoming trip I hope to get some more idea of what big investors are thinking, and if I am allowed to repeat their views, I will.

Next, I see that recent US GDP numbers are getting a mixed reception. Second quarter GDP contracted by an annualized 1.0%. That isn’t a good thing, of course, but it is much better than the 6.4% contraction in the first quarter, and also better than the 1.5% contraction that the market was expecting. According to an article in today’s Financial Times:

The RMB broke through 7 Saturday. This is pretty much a non-event, in my opinion, but it was treated as a symbolic milestone and some accounts claimed it had psychological importance. Since the rapid increase in the RMB is a pretty well-established trend by now, I think the only thing that will make me sit up and notice is if it suddenly gaps upward overnight.

I am working on a fairly long entry that I will post this weekend about why a trade rebalancing and a consumption/savings rebalancing will take place in both China and the US whether or not we want it.

So much for the future. The current bad news is described in an alarming article in Wednesday’s Wall Street Journal which shows that trade tensions are continuing to rise.