Can China Save The World? Towards A New Economic Model

Publié le par AL de Bx

D. K. Matai, Chairman mi2g, Phlanthropia, and ATCA, is an engineer turned entrepreneur
and philanthropist with a keen interest in the well being of global society. DK founded mi2g
in 1995, the global risk specialists, in London, UK, while developing simulations for his PhD
at Imperial College. DK helped found ATCA – The Asymmetric Threats Contingency
Alliance – in 2001, a philanthropic expert initiative to address complex global challenges
through Socratic dialogue and joint executive action to build a wisdom based global economy.
ATCA addresses opportunities and threats arising from climate chaos, radical poverty,
organised crime, extremism, informatics, nanotechnology, robotics, genetics, artificial
intelligence and financial systems. This is a recent essay from ACTA which raises some
fundamental questions about the next phase of global economic development. As the West
contemplates a new phase in the global financial crisis, China — the second biggest economy
on Earth — appears to some executive decision makers to be well placed to sail through the
doldrums of the global financial markets or even use her wealth to come to the rescue of the
rich world. Is this wishful thinking or is it grounded in facts? Despite its rising pre-eminence
on the world stage, China is unlikely to save the world if the West slides back into recession.
Why?

 

http://www.1info2.com/DATA/iivylqYzaD.jpg


1. China sits on a $3 trillion mountain of foreign exchange reserves
Local Government Finances and Property Bubble
The World Bank has warned that China’s “strained local government finances” are a big risk
to its growth and stability. Granted that China holds the world’s largest foreign exchange
reserves, but the figure of $3 trillion does not seem large when compared to China’s local
government debt. In 2009, while the world slowly recovered from the recession, the Chinese
economy grew the fastest at 8.7 percent. The growth was pushed through via a record 4
trillion yuan stimulus of which the central budget financed a big tranche. Since late 2008,
local governments went on a project-planning spree. Those governments set up 8,000 local
investment companies and provided land as collateral to borrow loans amounting to 11.4
trillion yuan or 1.7 trillion dollars by 2009. In 2009, Chinese banks lent a record 9.5 trillion
yuan, sparking concerns of a massive property bubble. It is estimated that more than a quarter
of the loans are already bad debt and the proportion of bad loans is steadily rising. Can China
be the Engine for the Next Phase of Globalization? Credit: Bigstock The Chinese banking
system will have to bear the brunt of this toxic fallout as the economy slows in tandem with
the global economy, necessitating a massive bailout from China’s national budget and foreign
exchange reserves.
Large Imbalance
In the last decade, China’s gaping trade surpluses and her uninterrupted buying of dollars to
suppress the Yuan’s value have led the reserves to balloon 17-fold! The stockpile has grown
so big because China refuses to let the yuan rise faster for fear of hurting her exports, much to
the frustration of her trading partners. China’s $3 trillion reserves are now nearly triple
Japan’s holdings, the world’s second-biggest official currency reserves. At first glance, the
colossal stockpile appears to be a symbol of China’s fast-growing wealth. But on deeper
inspection, the vast cash holdings are an unflattering testimony too much that is wrong with
the world’s second-largest economy.
Why?
They reveal:
i. How undervalued the yuan is;
ii. Why it is so difficult to control inflation in China; and
iii. How much more their government could be investing domestically to engender sustainable
growth.
Too much of a good thing can be bad?
China’s reserves are clearly too much, excessive to her needs, and more importantly,
extremely damaging to her economy. For every dollar that goes into her reserves, China
prints about 6.5 yuan, adding even more cash to her economy. This is worrying since China is
already at pains to drain excess money, with inflation running near its fastest in three years.
This is knocking the national economy out-of-balance and leaving the country’s money
managers with a near impossible assignment.
Bank Reserve Ratios
To neutralize all the money that has been created, China has conducted what are known as
“sterilization operations.” Her primary tool has been to increase banks’ reserve requirements,
forcing them to lock up cash that they would otherwise lend. Required reserves are already at
a record 20 percent of deposits for China’s biggest banks, denting their profitability. The
room for further increases is now extremely limited.

 

http://www.journaldunet.com/economie/magazine/dossier/l-economie-chinoise-en-2008-et-2009/image/chine-acteur-incontournable-348046.jpg


2. China registered growth of 9.5 per cent in the first half of this year
In an interconnected global economy, decoupling is a beguiling myth! As fears mount that
the developed world is shifting from slow growth to no growth, emerging markets seem to
many executive decision makers better placed to weather the storm than they were able to
during the great financial crisis of 2008-09. While the economic fundamentals look better in
many emerging economies than they did in 2008, policy makers generally have much less
leeway. Is the Yuan part of the solution or part of the problem? Credit: Bigstock
China is an overbuilt and overinvested economy. Tourists to China gaze at the towering
skylines and massive bridges, highways and airports from the boomtowns to neat new cities.
China has been building and borrowing in excess. Several of those skyscrapers and industrial
zones remain partially empty.


3. China exported 24 percent more than in the same period of 2010
China relies too much on exports to the Western world. As a result, it would not be left
unscathed if the rich world fell into recession, and reduced demand for her exports would
have a knock-on effect on commodity prices and producers. For example, if either the
European or US consumption were to shrink just 10%, the decline would rival what an entire
nation of Chinese consumers might spend in a year. At present, China cannot generate nearly
enough demand internally to keep her own people employed at existing levels, should most
major nations slow their consumption by just 10%. How many Europeans or Americans have
cut back their spending by 10% in the last three months or will do so in the coming three
months? Ergo, China cannot generate additional demand in a short space of time to replace a
decline in Western demand in the US alone. Counting on China to jump-start the global
economy is wishful thinking, unless its massive population magically metamorphoses into a
nation of spenders as opposed to savers. China’s consumption levels remain too small
relative to those of the US, Europe, and to a lesser extent Japan. China is still in need of
steering its economy from capital spending towards private consumption.

 

http://www.decitre.fr/gi/91/9782729831691FS.gif


4. China has become the lender of last resort to the US Government
There is the perennial problem of finding a safe place to invest $3 trillion. Any chief
investment officer in the world would find it difficult to look after such a huge pile of cash.
Its monstrous size precludes China from most markets except US Treasuries, leaving Beijing
vulnerable to the dollar’s fortunes. As the US treasuries rise in value, the point is not how
successful the Chinese have been in their investments. The real failure is the lack of an
exchange rate regime that is fully dictated by market forces. To let the yuan float would help
control inflation but the reason why the Chinese are loathe to do that is because this would
further depress their exports to Europe and the US, those being their first and second largest
export markets. If China is supposed to help the world by buying up assets in trouble spots in
Europe and elsewhere, how can she do that without selling her US treasuries? If the
American debt is sold by the Chinese, who is there to buy that debt? Further, what will
happen to the price of US debt as large volumes of that debt are brought to the market for
selling by the Chinese? Selling US Treasuries to fund internal projects in China would raise
interest rates further for the US, slowing US consumption and driving down the value of the
US dollar further, exacerbating China’s three intertwined challenges:
i. Rampant inflation with attendant social chaos;
ii. Over-reliance on exports; and
iii. Peg to the US dollar.
China’s accumulation of foreign exchange reserves also represents an opportunity cost. Given
China’s high savings rate over the past decade, it was bound to have a high rate of
investment. Had China let its currency rise, that investment could have taken place at home
with the creation and building of much needed extra social services such as new schools and
hospitals. Instead, much of that investment ended up being parked in assets like US
Treasuries. China is the biggest foreign holder of US Treasuries, with $1.15 trillion at the
start of 2011.

 

http://www.chine-informations.com/usb/images/upload/2009010621323225741.jpg


How can China help the West?
For rapid growth in emerging markets to help the developed world, imports from China and
oil-producing countries would have to rise sharply, reducing their external surpluses. But in
fact, the emerging world’s current account surplus is likely to increase in 2011 and remain
high. In other words, far from helping the developed world out of its rut, emerging economies
are becoming an increasing drag on demand in the rest of the world!
What is a balanced level of reserves?
By most estimates, China only needs about $780 billion of reserves or about a quarter of its
present $3 trillion cash pile. That would be sufficient to pay for three months of imports and
to cover all of China’s short-term foreign debt. This is based on the standard metrics of how
much most countries ought to hold in reserves as a form of insurance in case of a financial
crisis.
Key Observations
1. While the world’s executive decision makers eye the $3 trillion cash mountain of China as
a silver bullet solution, the truth is that global economic challenges and massive debt levels
are on an entirely different scale, if not at least an order of magnitude greater. What China
possesses is truly dwarfed by the global debt and deleveraging task ahead.
In summary, the cash reserve is:
a. Not enough to save the world;
b. Partially already spoken for to shore up local finances and black holes; and
c. In question going forwards, because of the steadily rising value of the Chinese yuan and
falling exports as major Western nations’ growth slows.
2. China is experiencing a transition from an economy that depends too much on exports and
on investment in infrastructure and property to one where consumers play a much greater
role. That is a structural change and it is a decades long process. China is unlikely to deliver
results on this side of Christmas to save the West from a financial meltdown or great
recession in 2011-12.
China is neither Santa Claus and nor the tooth fairy!
3. A nation that maintains such a massive trade surplus cannot be the engine that drives global
recovery; otherwise all the nations of the world would simply export themselves out of
trouble. Put simply, the Chinese are not the horse, they are a buggy-of-supply and they go
wherever the horse-of-demand may take them.
4. China’s forceful rhetoric about how the yuan is not undervalued and how it needs to rise
slowly belies a growing belief at home that the currency is simply not strong enough.
Increasingly, the Chinese realize that a stronger yuan can help them fight imported inflation
and give them more bang for their buck when they invest abroad. If the appreciation of the
yuan continues to take place to reflect reality, the massive cash reserve of China will look like
an historical anomaly.
5. Neither record fiscal nor monetary stimulus created sustainable accelerating growth in the
US or China, why should anyone think that doing more of the same would work this time?
The real question that the West needs to ask itself is how and why does it expect China to
save the world? Why should they put their own future at risk to do so when history has
shown that major nations of the world will not take the necessary steps to deal with their own
massive demographic and social spending challenges?

 

http://storage.canalblog.com/27/02/497307/47223202.gif


A Transformed China in Future Decades
China has shown remarkable pragmatism in the exploration of alternatives between socialist
central planning and decentralized capitalism. That pragmatism may result in a different
model of economic growth in future decades that would enable China to play a larger, more
constructive role in helping to stabilize the inevitable swings in global economic activity.
After it had become clear that the impulse of the Cultural Revolution was not delivering
benefits of growth to the entire population, Deng Xiaoping, chairman Mao’s successor was
claimed to have said, “I don’t care what color the cat is as long as it catches mice!” What he
meant was the objective of his administration was to provide the optimum outcomes for
Chinese people, and open market capitalism seemed to him to be the best way of moving
forwards. Having so decided, he worked with a number of macro-economists to ensure the
economy of China moved to a totally different model than that outlined by chairman Mao
during the Cultural Revolution. ATCA 5000 understands from some of its distinguished
members in Beijing, that the highest levels of the Chinese administration now believe that
economically, environmentally and socially the current model of growth and success,
measured purely in terms of GDP, is totally unsustainable. They are investigating what
alternative well-being based economic models might look like. So, over time, China could
provide a new model for global sustainability. In other words, it is now being recognized in
China that Deng’s open market capitalist cat is now getting old and does not see so well, and
its sense of smell is not so good, and it is not so effective in catching mice any more.
The Chinese administration is now looking for a new cat, or trying to create a new one!
Given the old model, it is recognized inside China that its economy is not currently in a
position to save the world from a global financial meltdown. On the other hand, some Chinese
officials see this moment in history as an opportunity to shift the system pragmatically, as
China has proven it can do in the past. A new, more sustainable model may be generated that
can better serve China as well as the rest of the world going forwards….


Jean-Claude Tourneur
Rédacteur en chef d'Enjeux
jeanclaude.tourneur@afnor.org
Tél: 01 41 62 82 53
Fax: 01 49 17 90 69
www.enjeux.org

Publié dans International

Commenter cet article