The First World debt crisis only serves to hasten the shift of power to the East

The problem is not just public debt. It is total debt. The governments of the developed world have over-borrowed but so have consumers and companies ...

The first thing is surely that the two-speed world will continue through this recovery.

The West ... will be increasingly preoccupied by its debts.

Much of the fruits of growth will have to go, first in stopping public debt rising further, then starting to pay it off. That will restrict private consumption as well as public spending ...

The second thing is that it looks more and more as there will be a second leg to the downswing ...

The third thing that is going to happen is that we in Europe ... will think differently about public spending ...

We have in effect been lied to ... about what the state can provide at any particular level of taxation.

And as a result of that lie, we have transferred a huge burden on to our next generation of working people.

They have to provide not only for the pensions and healthcare of the retiring workers but also pay interest on the debts that have passed on ...

The hardest thing to see is the financial consequences.

Will governments try to reduce the real burden of debt by encouraging inflation? There will certainly be a great temptation to do so ... the course of inflation is the great imponderable; what is certain is that the shift of power from West to East will continue.

Independent  11 June 2010

China Signals a Gradual Rise in Value of Its Currency

The statement, by China’s central bank, was the clearest sign yet that the country would allow its currency to appreciate gradually against the dollar ...

... it remains to be seen whether the move will significantly rebalance the global trade picture.

The People’s Bank of China was cautious in its statement about how far its currency, the renminbi, might fluctuate, warning explicitly that “the basis for large-scale appreciation of the RMB exchange rate does not exist.”

Chinese officials said the renminbi would move in relation to an unspecified basket of currencies, not just the dollar ...

For China, a stronger renminbi will increase the buying power of its consumers and could make gasoline and other imported commodities seem less expensive.

Faced with spreading labor unrest, particularly in the auto industry, the government has started to make an energetic effort to improve the standard of living of industrial workers ...

NYT  19 June 2010    IMF

China's currency move changes the G20 agenda

China official newspaper calls for workers' pay rises

One of China's most influential newspapers, the official People's Daily, has called for workers' incomes to be raised.

The paper says wages need to rise to protect stability and transform society ...

Earlier this week, Premier Wen Jiabao called on officials to take greater care of migrant workers.

This commentary goes further. It says they should be paid more.

"The time has come to narrow the gulf between rich and poor which is stifling consumer demand here," the paper declares.

The All China Federation of Trade Unions says nearly a quarter of Chinese employees have not had a pay rise in five years.

But some of the workers who have gone on strike for higher wages in recent weeks have accused this organisation of colluding with local officials and factory managers to try to force staff back to work before their demands have been met ...

BBC NEWS  17 June 2010

Is the era of cheap Chinese labour almost over?

Debt-ridden Greece gets vote of confidence from China

• Chinese sign multibillion euro contracts with Greece
• News come hours after Greek debt downgrade ...

The deals, which will see Greek olive oil being exported to China, were a welcome relief for a government smarting over Moody's move hours earlier to downgrade the nation's credit rating to junk.

As investors moved in the other direction, the world's pre-eminent emerging economy embraced Greece.

Signing the agreements, China's vice premier Zhang Dejiang not only lauded Athens' efforts to resolve its worst debt crisis in years but gave the eurozone's weakest link a public vote of confidence, declaring it would soon come out of the woods.

"I am convinced that Greece can overcome its current economic difficulties," said the politician who arrived in Athens with 30 of the economic power's leading businessmen. "The Chinese government will encourage Chinese businesses to come to Greece to seek investment opportunities."

Greek officials said the fourteen deals amounted to the biggest single investment by China in Europe.

China views Greece as a "perfect gateway" to the continent and Balkan peninsular where Chinese exports have proliferated in recent years ...

Guardian  15 June 2010    The Euro

Chinese workers strike at Honda Lock parts supplier

Honda Lock strike and labour unrest suggest era of cheap manufacturing in China coming to end ...

About 500 workers demonstrated outside the gates of the Sino-Japanese joint venture and said they wanted to elect their own representatives rather than accept the so-called "enterprise union" imposed on all factories in China by owners and the communist party ...

The rally is the latest of at least five strikes at foreign firms in the past two weeks. Honda has been the focus of most unrest.

Two suppliers – of exhausts and transmissions – have just resumed production after earlier stoppages.

Honda said employees of Foshan Fengfu Autoparts agreed to a pay raise of 366 yuan, an increase of about 23% on the previous monthly salary.

Japan's Brother Industries also announced the end of a week-long strike that halted assembly lines at its sewing machine factory in Xi'an, the provincial capital of Shaanxi.

While Japanese companies appear to be the most affected, they are not alone.

This week, workers at a Taiwanese rubber products factory in Shanghai rallied for higher wages.

Late last month, the South Korean carmaker Hyundai promised a 25% pay rise to curtail a strike by 1,000 employees at a supplier in Beijing ...

Guardian  11 July 2010

Honda factory workers in China strike

China export surge stirs US anger

A surge in Chinese exports and rising anger in the US Congress will put renewed pressure on China to allow its currency to rise against the US dollar ...

FT  11 June 2010

Suicides at Apple Factory in China Rock the Sweatshop Supply System

Many first equated Foxconn with suicides last summer when Sun Danyong, a 25-year-old worker who allegedly lost a prototype of the fourth-generation iPhone, jumped to his death.

Now, the suicides have built into a crisis for Apple and Foxconn, one that activists could push to crack the abusive relationship between between corporations and their suppliers that drives wages and working conditions ever downward across the globe.

A shocking 12 Foxconn workers have now ended their lives this year, mostly by jumping from the massive multi-story dormitories they live in during the precious few off hours they have. The crisis is so deep the company has installed safety nets between dorm buildings.

All those who have committed suicide have been between the ages of 18 and 24 and are part of a young generation of migrant workers attracted to jobs in the cities who then face terrible conditions.

While these workers’ struggles could have been forgotten, their important role in the global supply chain of high-priced, high-demand devices like the iPhone and the iPad is keeping their stories in the media ...

LaborNotes  02 June 2010    Global Labour Market

China's oil demand increase 'astonishing'

China's demand for oil jumped by an "astonishing" 28% in January compared with the same month a year earlier, the International Energy Agency (IEA) says.

The body added that demand for oil in 2010 would be underpinned by rising demand from emerging markets, with half of all growth coming from Asia.

But the IEA predicted demand in developed countries would fall by 0.3%.

The IEA has increased its global oil demand forecast for 2010 by 1.8% to 86.6 million barrels a day ...

BBC NEWS  12 Mar 2010    Peak Oil

Oil price up amid jobs joy in US

Key oil figures were distorted by US pressure

Is China's Politburo spoiling for a showdown with America?

As so often, the blogs are better than the article

The long-simmering clash between the world's two great powers is coming to a head, with dangerous implications for the international system ...

Telegraph  14 Mar 2010    

China opposes US and EU demands for yuan revaluation

Chinese facing debt time bomb

China sells $34.2bn of US treasury bonds

China sold $34bn (£21.5bn) worth of US government bonds in December, raising fears that Beijing is using its financial muscle to signal that it has lost confidence in American economic policy.

US treasury figures for the period ending in December 2009 show that, following the sale, China is no longer the largest overseas holder of US treasury bonds. Beijing ended the year sitting on $755.4bn worth of US government debt, compared to Japan's $768.8bn.

Since the sub-prime crisis that began on Main Street USA grew to engulf the global economy, China's leaders have repeatedly expressed concerns about US policy. December's $34bn sell-off made only a tiny dent in Beijing's total holdings of US assets, which amount to well over $1tn when stakes in American companies, as well as treasury bills, are taken into account.

But the news intensified concerns about China's appetite for bankrolling ever-widening American deficits. Premier Wen Jiabao told reporters last year: "We have made a huge amount of loans to the United States. Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried." ...

Guardian  17 Feb 2010

US's strike threat catches China off guard

The United States plans to unveil later this decade a new conventional "Prompt Global Strike" (C-PGS) system. It will enable the US to instantly carry out a massive conventional attack anywhere in the world in an hour or less.

Research and development work by the US Department of Defense (DoD) on C-PGS began almost two decades ago, and this shifted into high gear in 2003.

Instead of delivering a nuclear warhead, a new US-based missile and/or some other unmanned delivery vehicle may carry a conventional warhead that is able to destroy a distant target in less than an hour.

"The US cannot take its current dominance for granted and needs to invest in the programs, platforms, and personnel that will ensure that dominance's persistence," wrote US Secretary of Defense Robert Gates in a commentary accompanying the 2010 QDR entitled, "A Balanced Strategy: Reprogramming the Pentagon For a New Age".

"In the case of China, Beijing's investments in cyberwarfare, anti-satellite warfare, anti-aircraft and anti-ship weaponry, submarines, and ballistic missiles could threaten the United States' primary means to project its power and help its allies in the Pacific: bases, air and sea assets, and the networks that support them.

This will put a premium on the United States' ability to strike from over the horizon and employ missile defenses and will require shifts from short-range to longer-range systems, such as the next-generation bomber." ...

Asia Times  04 Feb 2010

Dalai Lama to meet Barack Obama

Deficits May Alter U.S. Politics and Global Power

... the ... number ... that really commands attention: By President Obama’s own optimistic projections, American deficits will not return to what are widely considered sustainable levels over the next 10 years. In fact, in 2019 and 2020 — years after Mr. Obama has left the political scene, even if he serves two terms — they start rising again sharply, to more than 5 percent of gross domestic product ...

... as Mr. Obama’s chief economic adviser, Lawrence H. Summers, used to ask before he entered government a year ago, “How long can the world’s biggest borrower remain the world’s biggest power?” ...

For Mr. Obama and his successors, the effect of those projections is clear: Unless miraculous growth, or miraculous political compromises, creates some unforeseen change over the next decade, there is virtually no room for new domestic initiatives for Mr. Obama or his successors.

Beyond that lies the possibility that the United States could begin to suffer the same disease that has afflicted Japan over the past decade. As debt grew more rapidly than income, that country’s influence around the world eroded.

Or, as Mr. Obama’s chief economic adviser, Lawrence H. Summers, used to ask before he entered government a year ago, “How long can the world’s biggest borrower remain the world’s biggest power?”

The Chinese leadership, which is lending much of the money to finance the American government’s spending, and which asked pointed questions about Mr. Obama’s budget when members visited Washington last summer, says it thinks the long-term answer to Mr. Summers’s question is self-evident.

The Europeans will also tell you that this is a big worry about the next decade ...

NYT  01 Feb 2010

US defends $6.4bn Taiwan arms deal as China threatens sanctions

China has threatened to impose sanctions on America in retaliation for their $6.4 billion arms deal with Taiwan.

Beijing said Washington faced "serious repercussions" if it does not withdraw from the deal to provide the quasi-independent island with missiles, helicopters and military equipment.

The Chinese said they would impose measures including suspending military exchanges with the US, reviewing their co-operation on major issues and imposing sanctions on companies involved in the proposed sale ...

Times  30 Jan 2010

China tests missile technology after Taiwan-US deal

China's power surge makes world take notice

Outside academia and the financial markets who, two years ago, would have cared much about the year-on-year pace of monthly M2 money supply growth in China?

In 2010, it cannot be ignored. It has joined a swelling list of Chinese numbers that have begun to shape global politics.

For the record, aggregate new lending in China last year was RMB9.6 trillion (£860 billion) – almost twice what it was in 2008.

The banks of China have doubled the amount of money in the system in 12 months. That has never happened before in a major economy that was not at war.

The volume of the cash itself is also unprecedented. That amount of money will cause disruption and the effects will be global.

No one – including the Chinese government – knows exactly how and where the disruption will emerge, however, which only adds to the need for worldwide scrutiny of numbers we never used to care about ...

Times 15 Jan 2010

Chinese car sales overtake America

China has overtaken the US as the world's largest auto market.

More than 13.5 million vehicles were sold in the country in 2009, figures showed yesterday. By comparison, 10.4 million cars and light trucks were sold in the US, the worst for the American automotive industry in 27 years.

China is even ahead of the US after subtracting 650,000 heavy industrial vehicles included in its count. The Chinese government originally aimed for 10 million sales for 2009, but its economic stimulus programme boosted the total.

China's market grew by 45 per cent year-on-year. "This is even better than anyone expected," said Rao Da, secretary general of the China Passenger Car Association.

Independent  09 Jan 2010   

These days, screwing with the environment could cost you: The failed summit in Copenhagen has spawned the idea for a carbon surcharge in global trade. Just how serious are the threats from Western politicians against China & Co.? International lawyers and environmental economists are skeptical.

John Kerry was on a roll. At the Copenhagen climate summit, the former US presidential candidate delivered a fiery speech that was mostly directed at China.

If the US has to accept binding targets for reducing their greenhouse gas emissions, then Beijing must do the same, Kerry told his audience. Workers in the US should not "lose their jobs to India and China because those countries are not participating in a way that is measurable, reportable and verifiable," he said ...

Experts, however, warn strongly against eco-punitive tariffs ...

Measured by the carbon dioxide emissions incurred in the production of goods, China is undisputedly the world's largest emitter of CO2. Punitive duties would hardly change that. "An adjustment of tariffs would likely never be high enough to substantially alter the demand in the West for goods from China," says Edenhofer (Potsdam Institute for Climate Impact Research). "China will remain the workbench of the world."

Punitive tariffs would therefore have almost no environmental impact, but would come with enormous risks. On one hand, the decrease in imports from China would likely weaken the US economy. "In addition, the Chinese could respond with counter-measures, of course," says Edenhofer ... China could -- in theory -- squander US Treasury securities and make the country's economy vulnerable ...

The industrialized world must now ask itself the fundamental question of what products they want to continue to produce abroad -- where the price of labor may be low, but the price the environment pays is often too high.

Der Spiegel  24 Dec 2009

Selfishness Abounds: Copenhagen Reveals a Vicious Circle of Mistrust

Consequences of Copenhagen: Forget the Club of Rome, This is the Club Of Losers

The World from Berlin: 'Copenhagen Was an All-Out Failure'

Merkel Speaks Out over Summit: 'We Experienced a Self-Confident China'

The US is having to get used to ... China's growing reach.

Whether addressing climate change, achieving a "balanced" global economy and "realistic" exchange rates, or pursuing fair trade based on World Trade Organisation rules, Washington is increasingly beholden to Beijing's point of view.

China is, after all, its largest creditor.

And when it comes to geo-strategic issues such as Iran, Burma, Somali piracy or North Korean nukes, it is increasingly dependent on China's goodwill or, at least, its co-operation.

Obama set the tone this year, stressing the desirability of pursuing a pragmatic global partnership.

Speaking in February, secretary of state Hillary Clinton spelled out what that meant. Concerns about China's lamentable human rights record, for example, could not be allowed to "interfere with [joint efforts to tackle] the global economic crisis, the global climate change crisis and the security crisis".

But confirmation today that Obama has put off meeting the Dalai Lama until after his visit to China next month has reawakened fears that Washington is going too far in accommodating Beijing's interests, that its new policy of "strategic reassurance" comes at the cost of abandoning both friends and principles, and that in the end, the US will be the loser.

Guardian  06 October 2009

Why Obama faces a brush off from China

Clinton: Chinese human rights can't interfere with other crises

Barack Obama accused of bowing to Beijing with Dalai Lama 'snub'

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars ...

Independent  06 October 2009

Dollar tumbles on report of its demise

China will overtake America, the only question is when

... even though democracy may not suit China right now, the country desperately needs the building of institutions that would both immeasurably improve the lives of its citizens and most likely deliver a sound platform for fundamental political reform and, eventually, democracy.

First things first: Why does the building of institutions that might lead to democracy matter in China? Because in one important respect, authoritarian China is failing: While the Chinese state is rich and the Chinese Communist Party (CCP) powerful, civil society is weak and the vast majority of people remain poor ...

How then do we establish the best possible conditions that will eventually lead to greater political reforms that benefit the Chinese people?

We need a strong civil society where there is rule of law. Courts need to be independent and officials need to be accountable.

Private property needs to be protected, individual enterprise needs to be given a chance to succeed, basic human rights must be enforced, and the government needs to be restrained ...

Meanwhile, a billion people remain "outsiders" in the corporate-state system and are largely missing out on the fruits of gross domestic product growth.

In fact, 400 million people have seen their net incomes decline during the past decade. Absolute poverty has doubled since 2000 ...

John Lee is a foreign policy fellow at the Center for Independent Studies in Sydney, Australia, and a visiting fellow at the Hudson Institute in Washington, D.C. He is the author of Will China Fail? (CIS, 2009).

Der Spiegel  06 October 2009

“So often China and the U.S. are mixed together as being in the same situation, and that is totally wrong,” said Xu Xiaonian, an economist in Beijing with the China Europe International Business School.

That does not mean the two nations are not connected, of course. China’s rebound in growth may slow if the American economy does not pick up. China needs the United States to buy its goods, and the United States needs China to continue to buy its debt ...

... key to China’s recovery, economists say, are two other government efforts that are paying big dividends: looser lending and export supports.

The state-controlled banking system here — which breezed through the global financial crisis with minimal losses as American financial institutions reeled — unleashed $1.2 trillion in extra lending to Chinese consumers and businesses in the first seven months of this year.

That money is financing everything from a boom in car sales, up 82 percent in August from a year earlier, to frenzied factory construction.

Beijing also has given huge tax breaks and other assistance to exporters. They include placing broad restrictions on imports and intervening heavily in currency markets to hold down the value of the renminbi, to keep Chinese exports competitive even in a weakened global economy ...

... American trade data shows that imports from China only eroded 14.2 percent in the first seven months of this year while imports from the rest of the world plunged 32.6 percent.

China’s trade surplus, already the world’s largest, was $108 billion for the seven-month period ...

NYT  17 Sept 2009

China alarmed by US money printing

China criticises dollar

Renminbi on the way to being the world's most important currency

East promises much at the expense of Western woes

PetroChina becomes world's biggest firm

Chinese legislators will debate a new resolution on climate change next week, the state media reported today as a high-powered research institute called for the country to reduce carbon emissions by 2030.

The moves indicate possible flexibility in the negotiating stance of the world's biggest emitter of greenhouse gases ahead of climate change talks in Copenhagen at the end of this year, but, even if adopted, are far from sufficient to avoid dangerous levels of global warming.

A new climate change resolution and amendment to the renewable energy law are on the agenda of the next bimonthly session of the standing committee of the National People's Congress, according to the Xinhua news agency.

It revealed few details, but hopes for a set of more ambitious targets were raised by state media reports that a high-powered thinktank has called for emissions to fall by 2030.

China has refused to set a cap on emissions because it wants to expand its economy to catch up with richer nations that historically pumped more carbon into the atmosphere during the process of development ...

Nete75
18 Aug 09, 10:02pm

China has the largest installed solar hot water capacity (which is usually either gas or electric heated otherwise, hence considerable CO2 savings).

It also has some of the largest green energy projects in the world.

Meanwhile some sod on the Isle of Wight, which actually has a windmill production plant is against the installation of 6 (and I mean six measly miserable insignificant) windmills for renewable energy.

The UK is not in any way a shining star on the green firmament. China does considerably more on the green front, however it is a huge nation and necessarily as living standards rise and they aspire to even some of the comforts Europeans and Americans take for granted CO2 emissions are going to rise.

The offset to chinese emissions has to come from those who have the highest CO2 output per capita (europeans and North americans).

Compulsory solar water heating systems for all UK housing old and new seems like an excellent place to start. Tripling petrol taxes, should do something to get people on their bikes and out of the cars, and while we are at it: Make a minimum number of windmills compulsory in any region of the UK having a reasonable level of wind.

Screw local opinion, after all this is an emergency.

The study forecasts China to account for about a quarter of global greenhouse gas emissions by 2030, by which time its economy will be bigger than that of the United States.

Amid mounting international approbrium, China has signalled that it may be willing to adopt carbon intensity targets relative to economic growth and to make a huge investment in "new energy", including nuclear, solar and more efficient coal plants.

China's top climate envoy, Yu Qingtai, said last month that Beijing would like to see a peak in carbon emissions as soon as possible, but suggested no timetable for when this might happen.

Guardian  18 August 2009

China’s Incinerators Loom as a Global Hazard

Environment fears halt China dams

China launches green power revolution

... renewed hostilities may be aimed at sabotaging a referendum set for January 2011 over independence for the south.

The region's future has wider importance, for large oil reserves lie beneath its lush plains.

Those reserves are coveted by the north as a resource to sell to China, whose appetite for Sudan's oil has given Khartoum a financial and diplomatic windfall ...

If the referendum goes ahead in January 2011, as laid down in the peace agreement, few doubt the south will choose to break away and a new country will emerge in the heart of Africa.

But the south has about 75 per cent of Sudan's 6.3 billion barrels of proven oil reserves, giving the north a vital interest in preventing it from seceding.

One way would be to stir violence across the south, to the point where the situation is too unstable for the referendum to be held ...

Telegraph  15 August 2009

Sudan

As Washington tries to rebuild its strained relationships in Latin America, China is stepping in vigorously, offering countries across the region large amounts of money while they struggle with sharply slowing economies, a plunge in commodity prices and restricted access to credit.

In recent weeks, China has been negotiating deals to double a development fund in Venezuela to $12 billion, lend Ecuador at least $1 billion to build a hydroelectric plant, provide Argentina with access to more than $10 billion in Chinese currency and lend Brazil’s national oil company $10 billion. The deals largely focus on China locking in natural resources like oil for years to come.

China’s trade with Latin America has grown quickly this decade, making it the region’s second largest trading partner after the United States. But the size and scope of these loans point to a deeper engagement with Latin America at a time when the Obama administration is starting to address the erosion of Washington’s influence in the hemisphere.

“This is how the balance of power shifts quietly during times of crisis,” said David Rothkopf, a former Commerce Department official in the Clinton administration. “The loans are an example of the checkbook power in the world moving to new places, with the Chinese becoming more active.” ...

NYT 15 April 2009

There is general agreement that the IMF is the body best placed to help the growing number of debt-ridden emerging economies hit by the global recession; that if it is to offer this help, it will need more money; and that China, with its huge reserves, is best placed to provide those extra funds. But China is unwilling to finance an organisation over which it has little or no influence, while the EU and the US appear unwilling to cede control ...

If a deal is going to be hammered out at the G20, the Europeans and Americans are going to have to make China an offer. Perhaps the most surprising development in China's position is its apparent conversion to the benefits of international multilateralism.

Zhou Xiaochuan, president of the People's Bnak of China, proposed in his recent speech that the IMF might become the trusted custodian of national reserves.

This is a real shift. Ultimately, the Western powers need to face up to political reality and offer China a reform of IMF governance that properly reflects the distribution of power in the new global economy ...

openDemocracy 31 March 2009

China fears bond crisis as it slams quantitative easing

China's trade surplus widens to $18.6 billion in March

China presses G20 reform plans

China's central bank has called for a new global reserve currency run by the International Monetary Fund to replace the US dollar.

Central bank governor Zhou Xiaochuan did not explicitly mention the dollar, but said the crisis showed the dangers of relying on one currency.

With the world's largest currency reserves of $2tn, China is the biggest holder of dollar assets.

Its leaders have often complained about the dollar's volatility.

China has long been uneasy about relying on the dollar for trade and to store its reserves and recently expressed concerns that Washington's efforts to rescue the US economy could erode the value of the currency ...

Mr Zhou said the primacy of the US currency in the financial system had led to increasingly frequent crises since the collapse in the early 1970s of the system of fixed exchange rates ...

BBC NEWS 24 March 2009

China has the power to reduce the dollar’s dominance

This crisis affords a glimpse of global power in transition

China urges switch from dollar as reserve currency

China presses G20 reform plans

China today laid the blame for the global financial crisis firmly at America's door but said it was crucial that it works with the new administration of President Barack Obama to prevent the crisis getting worse.

Speaking on the first day of the World Economic Forum, Chinese premier Wen Jiabao also insisted that the Chinese economy could grow by 8% in 2009 thanks to prompt action by his government to combat the worst effects of the credit crunch.

"This crisis has landed the world in its worst situation since the great depression of the last century," Wen told a crowded conference hall.

He made clear where responsibility lay: "Inappropriate macroeconomic policies of some economies and their unsustainable model of development characterised by prolonged low savings and high consumption."

He also cited "an excessive expansion of financial institutions in blind pursuit of profit, lack of self discipline among financial institutions and ratings agencies" ...

Guardian 28 January 2009

China's warning to the US

China’s Leader Says He Is ‘Worried’ Over U.S. Treasuries

Blaming Deregulation

Think about the way we’ve been living the past 30 years. Thirty years ago, the leverage of the investment banks was like 4-to-1, 5-to-1. Today, it’s 30-to-1. This is not just a change of numbers. This is a change of fundamental thinking.

People, especially Americans, started believing that they can live on other people’s money. And more and more so. First other people’s money in your own country. And then the savings rate comes down, and you start living on other people’s money from outside. At first it was the Japanese. Now the Chinese and the Middle Easterners.

We—the Chinese, the Middle Easterners, the Japanese—we can see this too. Okay, we’d love to support you guys—if it’s sustainable. But if it’s not, why should we be doing this? After we are gone, you cannot just go to the moon to get more money. So, forget it. Let’s change the way of living.

[By which he meant: less debt, lower rewards for financial wizardry, more attention to the “real economy,” etc.]

The Atlantic December 2008

The looming global recession will trigger a dramatic shift in the economic balance of power to the emerging world that could see the west lose the dominance it has enjoyed since the dawning of the industrial age, according to one of Britain's leading consultancy firms.

Calculations by PricewaterhouseCoopers suggest that the lopsided nature of the downturn means the developed world may have only five years left before it is overtaken by developing countries led by China and India.

John Hawksworth, chief economist at PWC, said emerging market economies were likely to be hit much less hard by the global recession than the west, and were on course to account for more than 50% of world GDP by 2013 once the lower cost of living in poorer countries was taken into account. ...

Larry Elliott 31 October 2008

The real roots of the crisis lie in a flawed response to China. Starting in the 1990s, the flood of cheap products from China kept global inflation low, allowing central banks to operate relatively loose monetary policies. But the flip side of China's export surplus was that China had a capital surplus, too. Chinese savings sloshed into asset markets 'round the world, driving up the price of everything from Florida condos to Latin American stocks.

That gave central bankers a choice: Should they carry on targeting regular consumer inflation, which Chinese exports had pushed down, or should they restrain asset inflation, which Chinese savings had pushed upward? Alan Greenspan's Fed chose to stand aside as asset prices rose; it preferred to deal with bubbles after they popped by cutting interest rates rather than by preventing those bubbles from inflating. After the dot-com bubble, this clean-up-later policy worked fine. With the real estate bubble, it has proved disastrous.

So the first cause of the crisis lies with the Fed, not with deregulation. If too much money was lent and borrowed, it was because Chinese savings made capital cheap and the Fed was not aggressive enough in hiking interest rates to counteract that. Moreover, the Fed's track record of cutting interest rates to clear up previous bubbles had created a seductive one-way bet. Financial engineers built huge mountains of debt partly because they expected to profit in good times -- and then be rescued by the Fed when they got into trouble.

Of course, the financiers did create those piles of debt, and they certainly deserve some blame for today's crisis. But was the financiers' miscalculation caused by deregulation? Not really.

The key financiers in this game were not the mortgage lenders, the ratings agencies or the investment banks that created those now infamous mortgage securities. In different ways, these players were all peddling financial snake oil, but as Columbia University's Charles Calomiris observes, there will always be snake-oil salesmen. Rather, the key financiers were the ones who bought the toxic mortgage products. If they hadn't been willing to buy snake oil, nobody would have been peddling it.

Who were the purchasers? They were by no means unregulated. U.S. investment banks, regulated by the Securities and Exchange Commission, bought piles of toxic waste. U.S. commercial banks, regulated by several agencies, including the Fed, also devoured large quantities. European banks, which faced a different and supposedly more up-to-date supervisory scheme, turn out to have been just as rash. By contrast, lightly regulated hedge funds resisted buying toxic waste for the most part -- though they are now vulnerable to the broader credit crunch because they operate with borrowed money.

If that doesn't convince you that deregulation is the wrong scapegoat, consider this: The appetite for toxic mortgages was fueled by Fannie Mae and Freddie Mac, the super-regulated housing finance companies. Calomiris calculates that Fannie and Freddie bought more than a third of the $3 trillion in junk mortgages created during the bubble and that they did so because heavy government oversight obliged them to push money toward marginal home purchasers. There's a vigorous argument about whether Calomiris's number is too high. But everyone concedes that Fannie and Freddie poured fuel on the fire to the tune of hundreds of billions of dollars.

So blaming deregulation for the financial mess is misguided. But it is dangerous, too, because one of the big challenges for the next president will be to defend markets against the inevitable backlash that follows this crisis. Even before finance went haywire, the Doha trade negotiations had collapsed; wage stagnation for middle-class Americans had raised legitimate questions about whom the market system served; and the food-price spike had driven many emerging economies to give up on global agricultural markets as a source of food security. Coming on top of all these challenges, the financial turmoil is bound to intensify skepticism about markets. Framing the mess as the product of deregulation will make the backlash nastier.

The next president will have to make some subtle choices. In certain areas, markets need to be reformed -- by pushing murky "over-the-counter" trades between banks onto transparent exchanges, for example. In other areas, government needs to fix itself -- by not subsidizing reckless mortgage lending. But a president who has a mandate only to reregulate will be a boxer with a missing glove. By going along with the market skepticism of his party, Obama may end up winning an election while compromising his presidency.

Washington Post 06 October 2008

Our gaze might be on the markets melting down, but the upheaval we are experiencing is more than a financial crisis, however large. Here is a historic geopolitical shift, in which the balance of power in the world is being altered irrevocably. The era of American global leadership, reaching back to the Second World War, is over. ...

Despite incessantly urging other countries to adopt its way of doing business, America has always had one economic policy for itself and another for the rest of the world.

Throughout the years in which the US was punishing countries that departed from fiscal prudence, it was borrowing on a colossal scale to finance tax cuts and fund its over-stretched military commitments.

Now, with federal finances critically dependent on continuing large inflows of foreign capital, it will be the countries that spurned the American model of capitalism that will shape America's economic future. ...

The Observer 28 September 2008

An intelligence forecast being prepared for the next president on future global risks envisions a steady decline in U.S. dominance in the coming decades, as the world is reshaped by globalization, battered by climate change, and destabilized by regional upheavals over shortages of food, water and energy.

The report, previewed in a speech by Thomas Fingar, the U.S. intelligence community's top analyst, also concludes that the one key area of continued U.S. superiority -- military power -- will "be the least significant" asset in the increasingly competitive world of the future, because "nobody is going to attack us with massive conventional force." ...

In the years ahead, Washington will no longer be in a position to dictate what new global structures will look like. Nor will any other country, Fingar said. "There is no nobody in a position . . . to take the lead and institute the changes that almost certainly must be made in the international system," he said.

The predicted shift toward a less U.S.-centric world will come at a time when the planet is facing a growing environmental crisis, caused largely by climate change, Fingar said. By 2025, droughts, food shortages and scarcity of fresh water will plague large swaths of the globe, from northern China to the Horn of Africa. ...

Washington Post 10 September 2008