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Greece, PBOC Monetary Policy, Chinese Economic Model

Greek Tragedy
While poor and unfortunate Haiti dominated the news (see links below if you are interested in helping), the credit markets were dominated by Greece.    The EU Commission started the week with a report saying that Greek statistics were unreliable and the deficit may be larger than expected.  “The current set-up does not guarantee the independence, integrity and accountability of the national statistical authorities.  Poor cooperation and lack of clear responsibilities between several Greek institutions and services… diffuse personal responsibilities, ambiguous empowerment of officials, absence of written instruction and documentation, which leave the quality of fiscal statistics subject to political pressures and electoral cycles.”  Greece currently has a government debt to GDP of 113% and a 12.5% deficit.  (Hopefully the EU Commission will not write a report about the UK or the U.S.) 
The Greek government announced yesterday that they will hold off from increasing taxes on alcohol, tobacco and inherited property in order to allow a public debate on the measures. Meanwhile, Moody’s warns that Greece may face a “slow death” unless it puts in place measures to pay down debt. GreeceComment- The Greek government announced yesterday that they will hold off from the decision to implement additional increases in alcohol and tobacco taxes and inheritance property taxes in order to allow a public debate on the measures. These changes were announced last week and they are meant to bring extra revenues of EUR 1 bn. Comment: the move makes clear once again the difficulties the government is currently facing in passing the message to the public that aggressive fiscal consolidation is needed to stabilise the Greek economy. “(Citigroup Report on Greece, 1/15/10)
This story is still ongoing, but how it finishes will determine the future of the euro-zone.  Besides Greece, Portugal, Ireland, Italy, Spain, the UK, Japan and the U.S. also face the problem of too much debt.  McKinsey Global Institute just put out a report on “Debt and Deleveraging: The Global Credit Bubble and Its Economic Consequences”.  I’m still reading it, but the basic conclusions are that leverage levels are very high globally, empirically a long period of deleveraging nearly always follows a major financial crisis and historic deleveraging periods have been painful lasting six to seven years and reducing the ratio of debt to GDP by 25%.  I haven’t seriously delved into the 93 page report, but I notice that it does not talk about deleveraging through inflation, which is another alternative.
 
China Developments
 
The central bank is facing a number of worrying signals about inflationary pressures and the PBOC is tasked with containing it.  However, top leaders in the Politburo favor continued loose monetary policy to ensure high growth.  They are pushing for aggressive lending.  One economist at a leading university in China says, “I would not assume that there is a unified policy about what the exit strategy should be”. 
 
Markets weakened because of Chinese tightening, but the PBOC attempted similar actions last August when they put out a white paper with steps to rein in bank lending.  Following the adverse reaction in the market, Politburo officials reversed the PBOC’s policy and said lending would continue.  Can it happen again?
 
At any rate, I don’t think any real decision has been made to tighten.   So be careful how you trade here.
 
 
The Chinese Promote Their Model
 
In this week’s Economist there is an article entitled “Crying for Freedom: A disturbing decline in global liberty prompts some hard thinking about what is needed for democracy to prevail”.  I was surprised to learn that the United Russia party held closed door talks with the Chinese Communist party about applying the Chinese “experience in building a political system dominated by one political party”.  Syria’s Baath Party is copying China’s “socialist market economy”.  Extensive oil ties have cemented a strong relationship.  Iran has called in Chinese legal experts and economists.  Meanwhile, across emerging markets, China is actively cultivating trade ties in an attempt to gain access to commodities.  Regimes best known for their curbs on political and human freedoms look to China as a model of economic development.
 
It is understandable why these authoritarian regimes can take heart that another authoritarian regime seems on a path to eclipsing America on a GDP basis.  Just this week Shanghai overtook Tokyo in terms of trading value.   Chinese companies are snapping up commodity assets all over the world (now Chinese state-owned enterprises are eyeing Australian vineyards).  Tesco opened its first mass market mall in Qingdao, a seaside city of 1.5 million people, the first of 23 freehold malls to be built.  About 50,000 shoppers turned up on the first day as people elbowed their way through crowds.  Credit Suisse put out a proprietary survey on China this past week.  It noted the household income of the bottom 20% rose 50% and the top 10% rose 255%.  The poor and the middle class are much better off with average income of the 40-60% income group having doubled.  The Chinese savings ratio has fallen from 26% in 2004 to 12% in 2009.   China put out impressive statistics last week.  Exports recovered in December from November rising 17.7%.  Imports rose 55.9%. 
 
While China’s growth is impressive, the element that nations like Russia, Syria and Iran are missing is that China’s authoritarianism is wholly unlike theirs.  Russia is the privy of one man and his coterie of gangster oligarchs.  Syria has been ruled by one family for decades.  Iran is an assembly of an ayatollah and elite that are sucking away the nation’s wealth. 
 
Economic nightmares like Mao’s Great Leap Forward and the Soviet Union’s forced collectivism programs happened as a result of a concentration of power within a small group of people who faced no constraints.  Robust economic development is a result of competition and Darwinian forces of the survival of the fittest.  If incompetent rulers and elite commandeer a nation’s resources for their own purview, then the economy suffocates.   It is no coincidence that the growth of China’s private sector from less than 5% of the economy at the end of Mao’s death to 65% today has accompanied tremendous economic growth.    
 
The rise of the private sector and China’s economic growth came after it ceased to be dominated by one individual and morphed into a factional form of governing.   There is a Shanghai faction, a Beijing faction, a Guangzhou faction that is powerful, but dozens of little factions scattered throughout the Politburo.  The individuals that rise to the Standing Committee level have a tendency to have been successful at something.  China’s next generation of leaders includes Bo Xilai who was parachuted in as party chief of Chongqing, a province dominated by gangsters, after citizen petitions to the central government.  He broke the gangs; executed a Communist legislator, a deputy mayor, and a major businessman; and threw the mayor in jail.   The local economy started to boom.  Wang Gang is the party chief of Guangdong.  In 2005 through 2007, he picked up the Chongqing portfolio and made it a major player in attracting international investment.  He has publicly disagreed with Wen Jiabao’s central policies on supporting state owned enterprises saying, “those businesses that should go bankrupt should go bankrupt”.   Wen Jiabao is the prime minister of China.  One would think Wang Gang’s political career should be over; instead he may get a standing committee post in 2012.  Hank Paulson said about Wang Qishan, Vice Premier in charge of Economic Affairs, “He is a Chinese patriot, but he understands the U.S. and knows that our two countries benefits from the other’s economic success.  And he is bold – he takes on challenges, does things that have never been done before and succeeds.  Wang managed the largest bankruptcy restructuring in China’s history in 1998 and thereby prevented a banking crisis that could have crippled the country’s growth”.  Wang Qishan has a high probability of taking over as Prime Minister in 2012. 
 
Not everyone on the Standing Committee gets there by merit.  Jiang Zemin, the former President, tried to power broker his successor when he was forced to retire under the communist party rules (Presidents must retire after 10 years; a reform introduced by Deng Xiaoping to prevent a Mao from ever rising again).   Wikipedia cites, “when the transition finally took place in the 16th National Congress of the CPC in 2002, Jiang was reluctant to leave the center of power. It was widely believed that he staffed the Politburo with many members of the so-called "Shanghai Clique", including Wu Bangguo, Jia Qinglin, Zeng Qinghong, Huang Ju and Li Changchun, which could ensure Jiang's control behind the stage.”  These figures represent the face of China we don’t like.  Wu Bangguo is on the Standing Committee, and said in 2007 “Hong Kong will have as much power as Beijing wants it to and nothing more”.  He has also been North Korea’s key benefactor.  Li Changchun is the Propaganda Chief and Google’s chief nemesis.  Zeng Qinghong has thrown support behind Vice President Xi Jinping to take over for Hu Jintao in 2012, which other factions are now opposing.  Still despite these machinations, the “Shanghai Clique” will struggle to retain influence in the next transition period.  They are also key propagators for the state owned banks and state owned enterprises creating bubbles in China’s commercial and residential property markets over the past year. 
 
The key difference between the countries trying to copy China’s “system” is that China’s system is actually somewhat meritocratic; no one dominates the party, which requires victors to show competence to get support from other factions; and all leaders eventually have to retire, so there is constant turnover.  What Mr. Putin, the Assads, the Ayatollah and all the other kleptocratic authoritarian governments don’t understand is that in order for their countries to progress, they have to leave.  
 
So copy away Russia, Syria and Iran: it won’t work.
 
Last Week’s War
 
If you are still disheartened that China and Iran are edging closer together, cyber-war broke out this week between the two countries.  Iranian hackers tapped into Chinese web-sites and put up Iranian flags and propaganda.  The web-page of Baidu, China’s equivalent to Google, was covered with an Iranian flag and the words “Iranian Cyber Army”.  Chinese blogs rallied the cyber-troops and by mid-day Chinese flags were on Iranian websites. 
 
Haiti Aid Groups
 
For those wishing to donate to Haiti, here are a few non-secular links to help. 
 
Worldwide Aid Groups Accepting Donations for
EArthquake Victims
 
UNICEF – UNICEF's field staff is working around the clock to help save the tens of thousands of children who have been injured in the quake, separated from their families, and desperately need clean water, food and other help.  unicef.org
 
PlanUSA – Plan already has 143 staff on the ground in Haiti working to provide immediate relief in the wake of the disaster. The organization has a long-standing presence in the country, where their programs serve 42,000 children. PlanUSA.org
 
Oxfam America – Oxfam's 200 staffers stationed in Haiti, including a highly trained emergency response team of 15, are rushing to meet the most urgent needs, such as providing clean water and other public health necessities.  oxfamamerica.org
 
ActionAid – ActionAid has worked in Haiti since 1996; their crisis response efforts focus on providing shelter, clean water and medicine to survivors.  actionaid.org
 
ACCION International – ACCION is working with SOGESOL, its Haitian partner, to provide services and support to its 13,500 microfinance clients in the nation. acion.org
 
Doctors Without Borders    http://www.doctorswithoutborders.org