Michael Kevane

Source: Fletcher, Public Libraries in America, 2nd ed. (1894), 154.

For several years China has run current account surpluses that have been widely seen as the most serious source of global imbalances on the surplus side. Its exchange rate intervention limited appreciation of the currency and led to a buildup of external reserves to more than $3 trillion. Nonetheless, the surplus has fallen from 10 percent of GDP in 2007 to 2.8 percent in 2011, even though in September the International Monetary Fund projected the 2011 surplus at 5.2 percent of GDP and forecast a rebound to 7.2 percent of GDP by 2016. This policy brief examines whether the moderate 2011 surplus was a transitory aberration or a sign of a new trend. A statistical model explains the bulk of the reduction in the surplus as the consequence of the real exchange rate appreciation of about 20 percent that occurred from 2005–06 to 2009–10. Slow global growth, a rising oil deficit, and erosion in the capital income balance were additional causes. Projections based on this model and another used by the author indicate that if the exchange rate remains unchanged, the surplus is likely to be in a range of 2–4 percent of GDP in 2012–14 but rebound to 4 to 5 percent of GDP by 2017. If instead the government continues real appreciation at the 3 percent annual rate pursued since June 2010, by 2017 the current account would be approximately in balance.

via POLICY BRIEF 12-7: Projecting China’s Current Account Surplus.

The other key fuel for kleptocracy is a copious supply of domestic savings to loot. The reason Chinese savings levels are so high is the one-child policy.In most developing countries the way that people save is they have multiple children hopefully to generate a gaggle of grandchildren all of whom are trained to respect their elders. Given most people did not live to old age if you did you became a treasured and well cared for family member.This does not work in China. Longevity in China is increasing rapidly and the one-child policy results in a grandchild potentially having four grandparents to look after. The “four grandparent policy” means the elderly cannot expect to be looked after in old age. Four grandparents, one grand-kid makes abandoning the old-folk looks easy and near certain.Nor can the elderly rely on a welfare state to look after them. There is no welfare state.So the Chinese save. Unless they save they will starve in old age. This has driven savings levels sometimes north of fifty percent of GDP. Asian savings rates have been high through all the key industrializations Japan, Korea, Singapore etc. However Chinese savings rates are over double other Asian savings rates – this is the highest savings rate in history and the main cause is the one-child policy.

via Bronte Capital: The Macroeconomics of Chinese kleptocracy.

HT: Brian Go

The CBRC has ordered major State-owned lenders to assess their loan quality as economic growth slows and more loans turn sour, the Shanghai-based China Business News reported on Monday.The regulator ordered the top five lenders – Industrial and Commercial Bank of China Ltd, China Construction Bank Corp, Bank of China Ltd, Agricultural Bank of China Ltd and Bank of Communications Co Ltd – to examine the classification of all their loans as of the end of last year, the newspaper reported, citing an anonymous source.It reported that the results of this examination had been submitted to the CBRC at the end of last month.The order was actually issued by the CBRC at the beginning of this year, another source from the banking regulator told China Daily. This source said that the commission will comb through and summarize materials submitted by the lenders, but the results are unlikely to be released.Yan Qingmin, assistant chairman of the CBRC, said earlier that the regulator is tightening the reins on the classification of loans among commercial banks. The regulator expects that, by taking this action, credit risks generated as a result of large-scale lending during the financial crisis to shore up the economy could be contained.The five lenders’ outstanding loans exceeded 28 trillion yuan $4.4 trillion at the end of last year, while their NPLs totaled 316 billion yuan.

via Banks’ NPL figures ‘don’t add up’|Industries|chinadaily.com.cn.

The Chinese economy is in the midst of a gradual slowdown. A weaker global economic environment and tighter domestic policies combined to slow gross domestic product GDP growth from 10.4 percent in 2010 to 9.2 percent in 2011. Slow growth in the Euro area and sluggish recovery in the US limited the contribution of net exports, as exports decelerated more rapidly than imports. Tighter domestic policy conditions dampened investment particularly in infrastructure and real estate. In contrast, consumption growth remained robust as consumer confidence was sustained and household income continued to grow rapidly. The current account surplus is projected to increase slightly to 3 percent of GDP in 2012 and 3.3 percent in 2013. Terms of trade improvements offset an initially lower trade balance driven by export weakness and import robustness. With trade volumes recovering in 2013 and the terms of trade improving further, the surplus will also expand in 2013. Despite continued net capital inflows, foreign exchange reserves will accumulate more slowly. The longer-term outlook will depend on how China manages key structural challenges. As the traditional engines of growth weaken, GDP growth should gradually slow. The growth benefits of urbanization and industrialization are expected to hit diminishing returns. China will also see major demographic change over time, with old-age dependency rising and the labor force shrinking soon. Total factor productivity growth would likely soften as efficiency gains from first-generation reforms lessen and technology gaps with high-income economies narrow.

a link to the full report is here: China quarterly update, April 2012 English | The World Bank.

Official IMF assessment of the major risks to China’s economy, from press conference yesterday:

Over the past several years, China has made significant progress in reducing external imbalances. The current account surplus, for example, has declined sharply from 10 percent of GDP in 2007 to less than 3 percent of GDP last year and the real trade-weighted value of the renminbi has appreciated. With these developments, the undervaluation of the currency has been reduced. We now assess the renminbi to be moderately undervalued against a broad basket of currencies.

The external rebalancing, however, has come in large part with an increasing reliance on investment. This brings with it a set of risks around the worthiness of those investments and the sustainability of this approach. As the government acknowledges, reforms are needed to achieve quality growth that relies less on investment, more on consumption, and is environmentally friendly. In our view, these should include measures to raise household income, liberalize the financial system, strengthen the social security system while also lowering social contribution rates, appreciate the exchange rate, and increase the cost of various inputs to production. These priorities also feature in the 12th Five-Year Plan, but timely implementation will be key.

The reform process should go faster to avoid a further build-up of risks, produce a smooth and controlled adjustment to consumer-based growth, and contribute to the rebalancing of the global economy. Without these reforms, domestic imbalances could at some point unwind in a disorderly fashion and trigger an abrupt decline in investment. Our analysis, as part of the spillover report, indicates this would have a significant negative impact on China, commodity prices, and the global economy. More broadly, the spillover report itself highlights the economic tensions in all five systemic economies, and the importance of working collaboratively to resolve them.

Louis-Gustave Binger est le grand-père maternel de l’écrivain Roland Barthes, qui décrit ainsi son aïeul : «Dans sa vieillesse, il s’ennuyait. Toujours assis à sa table avant l’heure (bien que cette heure fût sans cesse avancée), il vivait de plus en plus en avance, tant il s’ennuyait. Il ne tenait aucun discours.»

From Wikipedia of course!

Time and again, China has defied the skeptics who claimed its unique mixed model—an ever-more market-driven economy dominated by an authoritarian Communist Party and behemoth state-owned enterprises—could not possibly endure. Today, those voices are louder than ever. Michael Pettis, a professor at Peking University’s Guanghua School of Management and one of the most persistent and well-regarded skeptics, predicted in March that China’s economic growth rate “will average not much more than 3% annually over the rest of the decade.” Barry Eichengreen, an economist at the University of California, Berkeley, warned last year that China is nearing a wall hit by many high-speed economies when growth slows or stops altogether—the so-called “middle-income trap.”No question, China has many problems. Years of one-sided investment-driven growth have created obvious excesses and overcapacity. A weaker global economy since the 2008 financial crisis and rapidly rising labor cost at home have slowed China’s vaunted export machine. Meanwhile, a massive housing bubble is slowly deflating, and the latest economic data is discouraging. Real growth in GDP slowed to an annualized rate of less than 7 percent in the first quarter of 2012, and April saw a sharp slowdown in industrial output, electricity production…

via Bear in a China Shop: The Growth of the Chinese Economy | Brookings Institution.

HT: Marginal Revolution

“Chinese Premier Blasts Banks”

Are China’s banks too big to be broken up?:

Chinese Premier Blasts Banks, by Dinny McMahon, Lingling Wei, and Andrew Galbraith, WSJ: Chinese Premier Wen Jiabao told a national audience on Tuesday that China’s state-controlled banks are a “monopoly” that must be broken up…

In an evening broadcast on state-run China National Radio, Mr. Wen told an audience of business leaders that China’s tightly controlled banking system needs to change. “Let me be frank. Our banks earn profit too easily. Why? Because a small number of large banks have a monopoly,” said Mr. Wen… “To break the monopoly, we must allow private capital to flow into the finance sector.” …

Mr. Wen’s push is part of a broader set of issues over China’s growth, and came on the same day that Beijing unveiled programs intended to support the development of the country’s capital markets and to spread international use of the yuan. Among them, China’s security regulator said it would more than triple the amount that foreigners would be allowed to invest in China’s heavily restricted financial markets to $80 billion. …

Mr. Wen’s remarks, in the export-oriented province of Fujian, are further indication that long-delayed economic reform is now at least a topic for public debate. …

The major question is whether increasing rhetoric and new initiatives toward economic revisions will lead to broader reform. Prior efforts have faltered amid Beijing’s drive to keep a tight rein on the economy and opposition from interest groups. …

via Economist’s View: “Chinese Premier Blasts Banks”.

Fed Watch: Cash Exiting China

Tim Duy:

Something that I have thinking about for a few weeks – and was reminded of reading Ryan Avent this morning – is the series of pieces at FT alphaville regarding the outflow of cash from China. See here and here and here. The thinking had been that the renminbi was a one-way bet as China moved forward with capital account liberalization as investors rushed to be part of the Chinese story. The growing exodus of cash, however, is calling that story into question. Moreover, I am interested in how much of the outflow is attributable to a generalized rush to safety as a result of the European crisis versus how much is attributable to capital flight due to a a deteriorating economic environment inside China itself. I am reminded of this story from the Wall Street Journal earlier this year: With a fortune of at least $1.6 million, Mr. Shi is part of the wealthy elite that benefited most from the Communist Party’s brand of capitalism. He is riding the crest of arguably the biggest economic expansion in history. And yet, while the party touts the economic success of the “Chinese model,” many of its poster children are heading for the exits. They are in search of things money can’t buy in China: Cleaner air, safer food, better education for their children. Some also express concern about government corruption and the safety of their assets. Domestic money in China will be the first to head for the exit – insiders will always know more than outsiders about the underlying economic conditions. So the exodus of cash could indicate that the Chinese story is coming to a close – and that will have significant consequences for the global economy. It is another signal that emerging markets will not be supporting global demand anytime soon. I think the team at alphaville is right – this story is slipping under the radar while we all have our eyes focused on the farce in Europe. But it could be the real game changer in the global economy.

via Economist’s View: Fed Watch: Cash Exiting China.

The discussion in China on capital account liberalisation, a major precondition for internationalising the renminbi, has intensified after the PBC released a new blueprint for accelerating the opening up of China’s financial sector. A senior central bank official gave an interview to the China Securities Journal on 24 February, outlining a three-step plan for liberalising the capital account over the next ten years. The first three years would see a loosening of direct investment controls and a liberalisation of capital flows out of China. The next three to five years would see deregulation of commercial credit controls and an increase in foreign renminbi-denominated lending by Chinese banks. And within five to ten years, China would ‘gradually open up trading of real estate, stocks and bonds to foreign investors’. By the end of this process, China would have achieved a great (and yet unspecified) degree of convertibility of the renminbi.

This announcement can be seen as an affirmation of the PBC’s irreversible goal of internationalising the renminbi, despite increasing domestic debate. It can also be seen as an attempt to change the perceived Chinese approach of ‘muddling through’ these issues. And finally, it suggests the strategic time for China to open up its capital account is now, and that the risks of opening up are controllable. Making the plan public was certainly also a test to gauge public sentiment on this matter — with the responses including both applause and anger.

via Is China ready to open its capital account? | East Asia Forum.

After years of stagnation on the economic policy reform front, there was a rush of Chinese economic-reform proposals in early 2012. The pro-state government led by Hu Jintao and Wen Jiabao is on its way out, to be replaced by unknown quantities like Xi Jinping. The reform camp, led typically by the People’s Bank of China (PBOC), correctly sees the transition as an opportunity.

The person doing the most talking is Wen himself, who has been calling for an end to state monopolisation of key sectors such as banking. But Wen lacks credibility. After his predecessor Zhu Rongji tried to shrink the state sector, the state giants that Wen now criticises re-emerged and prospered under his own leadership.

Elsewhere, the PBOC has been inching forward with external financial changes, including widening the yuan’s formal trading band against the dollar and broadening the uses of the yuan in two-way investment. The central bank is selling the nationalist line that a global power must have a global currency while minimising the fact that a truly global currency requires money to move freely in and out of the country — that is, China must have an open capital account. This would be a dramatic shift as it would diminish the government’s control of interest rates.

Perhaps most importantly, Wen’s likely successor as premier, Li Keqiang, linked himself to a report — co-authored by the World Bank and the Development Research Center, an arm of China’s cabinet — that calls for resurrecting reforms that have fallen by the wayside. The report’s objectives would be far too ambitious if the current government were staying in power, but it may not be so if the incoming government is less statist.

via Chinese economic reform: how the US should prepare | East Asia Forum.

Consider this example:[1] state A passes a bill offering tax deduction to employers providing health insurance. Let us also consider that in the year after the bill passed (year 2) the percentage of firms offering health insurance increased by 30% compared to the year before the bill was passed (year 1). To estimate the impact of the bill on the percentage of firms offering health insurance, we could simply do a before and after analysis and conclude that the bill increased insurance offerings by 30%. The problem is that there could be a trend over time for more employers to offer insurance. It is impossible to identify if the tax deductibility or the time trend caused this increase in firm offering.

One way to identify the impact of the bill is to run a DID regression. If there is a state B that did not change the way it treated employer provided health insurance, we could use this as a control group to compare the changes between A and B between the two years.

via Difference in differences – Wikipedia, the free encyclopedia.

Data from the People’s Bank of China showed that in the first five months of 2012, the value of the yuan fell more frequently than any year since 2005 when the country launched exchange rate reform. Of 96 trading days in the first five months, the yuan’s central parity rate declined against the U.S. dollar 56 times, the central bank said.During the same period in 2011, the yuan only recorded only four declines, and there were none in 2010.Since late 2011 the market has shown signs it expected the yuan to depreciate. A decline in the yuan’s non-deliverable forwards in Hong Kong started in the second half of 2011, and the value has been lower than the official rate.Wu Qing, financial analyst at the State Council’s Development Research Center, said that in long term, the yuan still had the potential to rise, but in the next two to four quarters, it would see a gradual decline and more fluctuations.Wu said that since the last quarter 2011, the yuan exchange rate had been close to equilibrium and fluctuated both ways. Moreover, slower economic growth in China lowered market expectations for the yuan.In 2011, the country’s current account surplus continued to drop to 2.8 percent of GDP, indicating that the trade surplus had fallen to a reasonable level. Many experts and officials said that it also meant the yuan had reached equilibrium.

via Yuan Continues Its 2012 Decline – Caixin Online.

Last week, a Chinese central bank official said the yuan’s exchange rate with the dollar “isn’t clearly undervalued.” Economists in the latest Wall Street Journal forecasting survey beg to differ.

Twenty-eight of 41 economists who responded to the question said that yuan was undervalued, and 23 of them said it was undervalued by more than 5%. Nine economists said the level was about balanced, and just four said the yuan was overvalued.

Stephen Stanley of Pierpont Securities was among those who said the Chinese currency was at about the right level. “The trade balance is getting less lopsided,” he said.

Meanwhile, Ram Bhagavatula of Combinatorics Capital thinks that while the yuan is undervalued, it’s not a large number. “Other countries in the region are proving more attractive,” he said.

But most of the respondents disagreed. Allen Sinai of Decision Economics estimates the currency is undervalued by up to 30%. And Julia Coronado of BNP Paribas say that if the exchange rate is balanced, China’s currency policy makes no sense. “If it weren’t [undervalued by more than 5%] then what would be the harm in letting it float?,” she said.

via Economists: Chinese Currency Significantly Undervalued – Real Time Economics – WSJ.

Wish I could have been there… looks fun!

BEIJING — The stock market played a strange trick on the Chinese Communist Party on Monday.Whether a cosmic joke or coincidence – or as some wags suggested, an act of God – the Shanghai stock market index fell 64.89 points on Monday, which happened to be June 4, the 23rd anniversary of the 1989 crackdown on pro-democracy demonstrators at Tiananmen Square.This darkest moment in recent Chinese history is customarily referred to as 6/4, the unembellished number conveying the same stark tragedy as 9/11 for Americans.In the numerology of censorship, nothing is more sensitive. There is a ritualized cat-and-mouse game every year on this date between the censors and those who want to commemorate the death of hundreds, perhaps thousands. On the 20th anniversary in 1989, an advertisement managed to slip into a newspaper showing two groups of people – six on one side and four on the other – gazing philosophically toward the sky.Nowadays, the game is largely played out on the Internet. The number 6/4 is banned by censors – as is 5/35, an attempt to get around the bans by referring to the date as the 35th of May. Other words that were scrubbed on Monday were “candle,” “commemorate,” “massacre,” “tank” and “never forget.”

via BEIJING: Shanghai stock market closes with a spooky echo of Tiananmen Square | McClatchy Tribune News Service | The Bellingham Herald.