♠ Posted by Emmanuel in China,Credit Crisis
at 2/06/2009 01:14:00 AM
I almost missed this fascinating Financial Times interview with Chinese Premier Wen Jiabao, recently on the receiving end of a shoe-throwing tantrum. You can also read the full transcript and see the video from the first link. The post's title concerns the blame game now being waged by major world economies. Just who started this mess? From my POV, American dissaving and investment in unproductive endeavors are largely responsible. From others' POV, an excess of LDC savings "forced" the US to use surplus global investment in suboptimal ways. More reasonable commentators would say that there's plenty of blame to go around. After all, it takes two to tango.Anyway, to today's feature. Prior to the shoe throwing fracas at Cambridge University--AKA Shoes 'R' Us--Premier Wen arranged to have an interview with the Financial Times. For some reason this highly informative interview has largely been overlooked. I urge you to read it carefully if you are at all interested in world affairs. Here, I will give you some interesting excerpts. Let us begin the beguine with Wen's thoughts on using China's legendary two trillion in reserves for replenishing the IMF:
Hopes in London and elsewhere that China would hand over a large chunk of its near $2,000bn (€1,560bn, £1,380bn) foreign reserves to help recapitalise the International Monetary Fund are likely to be disappointed.I am inclined to believe that it is infeasible for China to simultaneously fund the IMF and prop up the dollar. If China ever put more money into the IMF, the unit of account would have to be changed into special drawing rights (SDRs)--an artificial reserve currency. Also, China is not as free to do what it pleases with its reserves unlike, say, Saudi Arabia and its manna from heaven. It is also striking to me how China still skirts participation in key international institutions. However diminished American power is, one thing is clear: it can still exert influence via these institutions. Next, Wen pooh-poohs multilateral environmental regimes:
Mr Wen also plays down the idea of signing up to a new environmental treaty at the talks in Copenhagen later this year that would place limits on the country’s carbon emissions.China is the world's largest carbon emitter. This is in no small part due to its exceedingly energy inefficient economic activity. With Obama climbing aboard the green bandwagon in a way his predecessor didn't, look for China to be branded the world's #1 environmental rogue state--which it is. We then turn to the thorny matter of spurring consumption in China. Wen and other officials keep giving it lip service though consumption as a percentage of Chinese GDP keeps falling:
But also key is a long list of measures aimed at providing the softer context to a comprehensive stimulus effort – including initiatives to boost consumer spending and welfare.Fair enough. We'll wait and see, though I remain apprehensive as a command-and-control system built on leveraging the commanding heights of export industry isn't as suited to spurring product innovation. There's yet more fun stuff as Wen takes aim at The Great Paulsonio's assertion that LDC savings precipitated the crisis:
The sales tax on vehicles with small engines has been halved. Meanwhile, 74m low-income people have received lump-sum spending subsidies. Former employees of state-owned enterprises received pension supplements, there have been subsistence allowances for vulnerable groups, and Beijing has significantly increased the salaries of 12m primary and middle school teachers in the state system.
The trick in spurring consumer spending is not to engage in sloganising, Mr Wen says, but actually to put money into people’s pockets. “We do believe that consumer spending is vital in boosting economic development.”
Several commentators in the west have called upon China to overhaul its economic model by rebalancing away from its current heavy reliance on investment, savings and exports and embrace a more consumer-oriented system instead. Most observers agree that such a shift would require Beijing to relieve pressure on consumers by beefing up social welfare, healthcare and education provisions.
Mr Wen reiterates his pledge to put in place a “fairly comprehensive social safety net”. He adds that Beijing has already announced an Rmb850bn medical care spending plan and would spend Rmb600bn on unspecified technological upgrading.
Shortly before he left office, Hank Paulson, former US Treasury secretary, said in an interview with the Financial Times that the huge volume of savings in countries such as China had been one of the root causes of the crisis because it reduced risk premiums around the world.Those looking to avert a US-China trade war may take (cold?) comfort in Wen's (public) insistence that China isn't going to wield its reserves as a weapon. But if the US makes more aggressive moves...
Mr Wen is having none of it. “I think the main reason for this global financial crisis is the imbalances of some of the economies themselves. For a long time they have had double [fiscal and current account] deficits and kept up high consumption based on massive borrowing.” Banks used excessive leverage to reap huge profits. “And when such a bubble bursts, the whole world has been exposed to a big disaster,” he says.
“It is completely confusing right and wrong when some countries that have been overspending then blame those that lend them money for their spending,” he argues. Mr Wen points to a famous proverb in China about Zhu Ba Jie, a fictitious character in the 16th-century Chinese fable, Journey to the West , who always blames others who try to help him. “When I shared this view at Davos with the world business leaders, they all agreed with me on that,” he says.
He gives equally short shrift to the argument put forward by Timothy Geithner, the new US Treasury Secretary, that China is “manipulating” its currency. “Completely unfounded,” he says: the renminbi had appreciated 21 per cent since China adopted a managed float of its currency in 2005.I will save you from my favorite line that cheap foreign capital fuels American spending nonsense. For that I direct you to my other post for the day. One thing that surprised me with Wen, though, is that he reads classic political economy--something many of his "Western" counterparts don't. It's food for thought that makes me wonder why Obama and Co. are so lacking in the foundations of political economy:
Mr Wen refuses to make an explicit commitment not to devalue the Chinese currency during the crisis – as the government did after the Asian financial crisis in 1997, a pledge that helped engineer the eventual recovery and won China a lot of prestige. But he does rule out any big shifts in the value of the Chinese currency.
“I want to make it very clear that maintaining the stability of the renminbi at a balanced and reasonable level is not only in the interests of China but also the interests of the world,” he says. “Many people have not yet come to see this point that if we have drastic fluctuation in the exchange rate of the renminbi, it would be a big disaster.”
Mr Wen says that Hu Jintao, China’s president, and Mr Obama spoke late last week on the telephone, but would not confirm reports in the US that Mr Obama had told his Chinese counterpart that the new administration would not take a confrontational approach over the currency issue. He expresses a hope for “increased co-operation” with the US, but says that there are a lot of different “voices” in the US debate.
Mr Wen says China, which is the largest foreign holder of US Treasury bonds, would continue to be an active participant in the market. “We believe that it is important to stabilise the current Treasury bond market. To do so will be in the interest of shoring up market confidence, overcoming the global financial crisis and facilitating the early recovery of international markets,” he says.
But he also issues a veiled warning that China might rethink its long-term investment strategy for its reserves once the immediate crisis is over, when some economists believe the huge borrowing the US is undertaking could lead to a slump in the value of the dollar. “We will take into account China’s own needs to maintain the safety and good value of our foreign exchange reserves,” he says.
An eclectic reader, Mr Wen says that when he travels he always carries a copy of The Theory of Moral Sentiments by Adam Smith, the Scottish economist, which lays out the moral underpinnings for governing societies – and market economies. “Adam Smith wrote that in a society if all the wealth is concentrated and owned by only a small number of people, it will not be stable,” he says. It is an observation that holds just as well for the crisis-ridden US as it does for China, with its skewed model of development and rising inequality.Thought provoking, indeed.
