Uln

Can China Lead the World Out of Crisis?

Yes fiscal policy with a social profile, that is what we want China to do, and lately everyone seems to believe it's going to happen. Look at the latest World Bank report, for example, where it is taken as a fact that China's stimulus package in 2009 will be spent sensibly to "rebalance its economy"

I find it hard to believe, for a few reasons.

1- Will the development hawks in the CCP allow Hu to implement this kind of policies? Especially considering that some of them, like Health care system, are costly and someone needs to finance them. How much power do Hu and Wen really have to oppose the interests of business?

2- Chinese like to save money, that is just the way they are, it is a trait of character. No amount of health care or Land reform is going to make them spend more in 2009. How would it make sense that the same people who were saving during an economic boom decide to spend now more now that there is fear of crisis? It will take one new generation to change consumer behaviour.

3- All the advice you give makes sense in the long term, but it will not help China weather a difficult 2009. How well will the system resist the social and political tensions that will arise? And how well will Hu Jintao resist them in the Party?

It is all very good to dream, but I am afraid the largest part of China's money in 09 will go to help the companies, not the peasants. And as for currency, exporters pressure will be strong to keep RMB down, we can only hope that Hu won't let them get away with this one at least.

China will have enough trouble helping itself next year, so I wouldn't count on it saving the world.

Is China Experiencing Dollar Outflows?

Hmm. France cannot ban Chinese imports directly, but countries have many many ways to set barriers on imports that are less obvious and that France can still use. For example, stricter health and safety standards, etc. Moreover, although EU is typically slow to react because of its structure, it does have a very strong voice in WTO and it has showed in the past that it can take serious measures against unfair trading partners.

I tend to agree with Michale Pettis's idea. It is pure business logic, when you are a suppllier you want to be careful with the guys who are buying your products.

Can China Take Up Consumption Slack From the U.S.?

OK, I get it now.
I have taken some time to get back to the basics last night. Even undusted my old Samuelson. Too long time not dealing with economics and some concepts were starting to swim in my head. Thanks for your help!

Anyway, from you posts I understand that we don't have a very clear picture of where The MoF stands today in terms of liabilities. So any prediction of when or how much all this will affect the state budget is little more than a guess. Right?


On Nov 11 07:12 AM M. Pettis wrote:

> Chinayouren, that's part of the answer. China cannot use foreign
> currency reserves for domestic investment without pushing the RMB
> through the roof and effectively killing off the export industry.
> But there is also the fact that reserves aren't unencumbered wealth.
> They are simply assets against which there are liabiltiies, in the
> same way that Citibank has a trillion dollars of assets but is not
> worth a trillion dollars (it also has nearly that much debt).

>
>
> In other words the PBoC had to borrow RMB to buy the reserves, and
> some people think the rise in the value of RMB liabilities may have
> already wiped out the PBoC's capital cushion. Giving the government
> reserves as a 'gift' is no different than having the MoF borrow the
> money domestically, with the difference being that it would result
> in a rise in PBoC domestic liabilities rather than MoF domestic liabilities.

Can China Take Up Consumption Slack From the U.S.?

Dear professor Pettis,

I have seen Nouriel Roubini mentions you (but doesn't link you) in his latest article about crisis, and in particular about the fiscal policy. www.japanfocus.org/pro...

Finance is a bit my weak link in economics so I would like to ask you, how is China's fiscal policy limited by the government liabilities? Doesn't China have a large amount of reserves (as opposed to the US) and therefore it should be easier for China to apply aggresive fiscal policy without fear of deficit?

I suspect the main problem has to do with most of China's reserves being denominated in dollars, and by selling them to spend in RMB they would be pushing the RMB up and harming their own export economy. Is this the reason?

I would really appreciate it if you could give us some explanation on this point. Thanks!