Is China graduated from "Original Sin"

Some more quick thoughts about the sizable Chinese stimulus package:

Is China graduated from the class of emerging markets, which are often characterized by inability to borrow in the local currency - the original sin, and countercyclical fiscal policy? Many people in the west are in shock of the size of stimulus that was announced. Although the true figure is hard to verify - I have no idea how they arrive at that figure - China is acting more like a matured economy on that front.

Upon further investigation of the detail though, China is unique in many aspects. Perhaps it should not be in the EM class at the first place.

• Most of the announced stimulus is directive to state-owned companies to invest and expand. The U.S. has been urging its banks to lend more also, but I bet China would have more success in cajoling its companies.
  
• China enjoys high saving rate. Although many argue the approach has been mercantilism, the high reserve comes in handy in a time of crisis like the current one.
• The mere size of a diversified economy. Countries like Chile and Brazil, and possibly Russia who relies a lot on oil revenue, are more likely to be subject to a turn-of-trade shock from their commodity exports. Although China's external component of GDP is about 70%, which is alarmingly high, China also enjoys the advantage of sheer size and a more diversified economy.
  

This reminds me of a New Yorker critics piece:

If the invention of derivatives was the financial world’s modernist dawn, the current crisis is unsettlingly like the birth of postmodernism. For anyone who studied literature in college in the past few decades, there is a weird familiarity about the current crisis: value, in the realm of finance capital, evokes the elusive nature of meaning in deconstructionism. According to Jacques Derrida, the doyen of the school, meaning can never be precisely located; instead, it is always “deferred,” moved elsewhere, located in other meanings, which refer and defer to other meanings—a snake permanently and necessarily eating its own tail. This process is fluid and constant, but at moments the perpetual process of deferral stalls and collapses in on itself. Derrida called this moment an “aporia,” from a Greek term meaning “impasse.” There is something both amusing and appalling about seeing his theories acted out in the world markets to such cataclysmic effect. Anyone invited to attend a meeting of the G-8 financial ministers would be well advised not to draw their attention to this.

He could be talking about market characterization terminology. Developing, underdeveloped, emerging, BRIC, what else?

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Topsey Turvey Economics

funniest news piece about the economy on Sina Finance. Translated into English, it reads:

President of SoHo China, Pan Shiqi, in pleading for government help in the real estate market, warns that suffering of developers would lead to higher housing prices, not lower. Houses, he says, like coal, pork, and baby milk formula, will have higher prices when supply shrinks.

I have to solute him for not mention just one non-durable product, but three as comparison; I'd also solute him for understanding concept of higher price with negative supply sift. However, before doing that, he needs also assume the market for housing, a durable good, is in equilibrium - then why the hell he cries for government again? China has been worrying about an American style meltdown originated from real-estate market, and this quote can be viewed as an empty threat from the troubled developers.

Don't ask Chinese real estate tycoon about economics.

It reminds me of a research paper by Chicago economist. The gist of that thesis is that inequality isn't as bad as previously believed when measured in real consumptions because the rich buys differently. While the poor has enjoyed steady or declining prices as a benefit of Chinese exports, the rich has not been as lucky - the price of luxury cohort of the same goods don't decrease as much.

The consumers of China's contaminated diary products, because they can not afford the more expensive foreign brands, would surely disagree.

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Behind the Juicy Story

Who would have thought juice would make headline story. An potentially important news that slipped through last few days was that Coke is bidding the takeover of HuiYuan, a dominant Chinese juice make for $2.4B, potentially making it the biggest takeover bid of Chinese firms to date.

The outcome of this take over bid will have much to say about the direction of Chinese global economic policy. Internet opinions, especially those have promoted for domestic name brands, have seen plenty of displeasure of yet another multinational takeover. Do not discount the importance of beverages either; America has been through an similar episode of foreign bid, by a Belgium beer maker, of maker of Budweiser. That deal ended in veil. Chinese fruit juice groups were considering joint opposition to the deal, arguing the proposed takeover, which if successful would give Coke a dominant share of the market, would put them at a competitive disadvantage and threaten their survival. Market awaits to see if the deal can get pass regulator overhang.

But, what is the deeper revelation of this juicy story? The coming takeover touches a nerve of the public, not only the business communities, because foreign capital has permeated many Chinese businesses, many of which, the public believe, have been sold under value. A criticizer would point to high dividend payouts, higher than the IPO take-home of Chinese state banks. Complicating matter is that China is a transition economy from a socialist system, and a lot of the assets sold was accumulated while other parts of the economy was making sacrifice. So, possibly of "sell-out" is always on people's mind.

Yet, such takeover scenarios are inevitable. In particular, current economic structure precisely dictated that, even when Americans are mounting historical deficit against the Chinese. The comparative advantage of the American economy is no longer in manufacturing. In stead, it's more and more in corporate financing, even when its financial markets are in turmoil at home. On the Chinese side, the financiers, mainly banks, have their own bigger moral hazard problem; and for firms, the prospect of property right protection would be higher with foreign capital involvement. It thus creates incentives to sell assets to U.S. capitals seemingly undervalue. Therefore you get the current financial structure. Capital flows from China to the U.S. for low-risk, un-intermediated investments, mainly government bonds, keeping the interest low. Capitals then flow back to China for intermediated investments, snatching up assets. So, for China, the biggest concern is the American inflation; and for American investments, the biggest concern is Chinese growth.

It is a convenient and attractive setup for both sides right now. The real test comes when Chinese economic growth gets stalled, thus amplifying the asset risk. There is a lot of riding, of both sides, on the Chinese economy.

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Let's talk some Economics

Let's talk some economics, since there seems no escaping for that.

I find Economist online, my favorite news magazine is now totally open and free. There's no longer subscriber-only content. But my Nike shoes nevertheless stays about the same price. While we marvel the free contents online, let's not forget they are not actually costless. It's advertising from the likes of Nike and the price I pay for it keep the web world, including this blog service from google, free.

My brother, who was recently visiting the U.S. told me everything here is so cheap. Well, maybe not his eat-out bills. And he was so mad at the Bank of China for balancing out his dollar credit prematurely. That is of cause due to the continuing slide of dollar against most major currencies including RMB. For Americans, the concern is mostly focused on $135 a barrel crude and $4 a gallon gasoline. These things are more related than you probably think, and U.S. and China are trying to sort it out. (You can also be sure that China will be firm on the Darfur issue. Subsidy and not paying for the market price keep the gas price in China at $2.5 a gallon.)

Aside from the often mentioned demand shock from emerging markets like China, at least part of the reason of the expensive oil is the depreciating dollar. It reflects the diminishing purchasing power of the currency. The exchange rate, as they like to say, is fundamentally a "money phenomenon". The fed has issued billions of new dollars just to cover the sub-ordinate market crisis. Over the last eight years, the American economic theme was about spending - tax cuts, financing the war, etc. Here, China is also complicit. In that economic arrangement, China's huge trade surplus against the U.S. partly made the spending and the housing market bubble possible. That may be the reason why the U.S. has never serious take any economic action against China - sanction or tax slap - despite the repeated threat. Under normal circumstances, a country is willing to run continuous surplus this lend money to the other country because it expects the future growth of the foreign country will be higher than its own. However, the expectation never comes to fruition, it turns out to be the housing bubble. Or, should be say it is pushed out to the more distant future? Under the current U.S.-China exchange rate system, the fed is the real central bank, both in the U.S. and China. China running continuous surplus is no different than farmers in Wyoming provide New Yorkers with beef and lend them the sales money for them to play in the stock market.

So, will China or should China continue to appreciate its currency? It's a complicated question to answer. Chinese dollar reserver is at the record high, but exports has already signs of slowing down. And China has huge appetite for growth due to its structural problems. Americans multinationals are not doing too bad amid China growth either. For an extreme example, Chinese banks are said to be among the worst managed banks in the world, so why can Banks of America reap billions of profits from its minority stakes in Chinese banks, big enough to cover its sub-prime loss? The answer can only be growth. If China allows RMB to further appreciate much, the growth will further slow down, and the American debt Chinese own will certainly worth less. (Chinese system is equivalent to letting the government manage all foreign exchanges for you.) The only decent choices for China would then be, like the Japanese used to do, to use the new purchasing power to purchase American assets and American technology, both of which American government is wary of. On the other hand, if China stick mostly to the current peg, it runs the risk of importing inflation, especially form hot money. The advantage of an authoritarian government is that China has the apparatus to control capital flow and limit credits, to a degree. The reverse ratio has been increase several times recently.

So, there's a lot to tango with. My brother will continue to ponder how much he'll lose when he has to convert dollar back to Yuan. And I tell him not to worry too much. At least, it's a better problem to deal with than the $4 gas price. Oh, and don't expect China will hike the gas price dramatically either.

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