The Real Economy: Overheating is a myth: industrial output remains strong, so the idea of “too much money chasing too few goods” does not apply. Indeed, China’s policy mix remains extremely growth – friendly: fiscal expenditures are rising by a real 24 percent a year. Hence, real demand remains strong (we call this “excess demand”), which is what Beijing wants: growth, growth, growth….10 million new jobs must be created each year just to keep social unrest at bay…
The Monetary Economy: Thus, (October) non-food inflation is falling by an annual 10percent; only food inflation is rising - by an annual 15percent. NO Central Bank can control crop prices or, indeed, the weather!
So why the recent measures?
EVENT: effective 25th December, reserve requirements raised the most in four years, by one percentage point, to 14.5percent of deposits that must be set aside as reserves. EFFECT: This freezes 400bn yuan in excess money. LOGIC: the government wants to control reckless lending. So by giving the banks less money to play with, they will have to be a little more careful to whom they lend…that is the official line, at least. My guess is that with lending rising by an annual 15 percent they are worried about bubble trouble…particularly in the property sector – and particularly after the Olympics end…
EVENT: Qualified Foreign Institutional Investors (QFII) now may invest US$30 billion in overseas funds – up from US$10 billion. EFFECT: this means that US$20 billion more get to flow out of China. But, with forex reserves of US$1.5 trillion, that US$20 bn extra equates to an eye-popping 1.4 percent of total forex reserves. LOGIC: the Central Bank wants to drain reserves in order to contain growth in liquidity. So, these dollars, having flooded in via the trade account, now can leave officially via the capital accounts. This heralds further opening of China’s capital accounts
It could reach about 7percent, but that is a food – driven phenomenon
Paulson Visit: expect more parochial platitudes festooning his arrogance of ignorance. Pay attention to Susan Schwab, however It seems as if she really knows everything better than anyone else. Besides which, Paulson’s former bank is extremely powerful, controlling the US Treasury, Citi and Merrills via ex Goldmans executives. So he will be his usual, gushy parochial self. I hope that Wu Yi bats him one: what does Hank Paulsen understand of China’s issues? He is just playing to his domestic audience – and presumably looking for gainful employment once Bush leaves the Black House….
On a more general tone: I am afraid that China will be America’s whipping boy for the nefarious US “policy” in the Muddle East. In other words: the unpopular and tragic mess that Bush is creating in the Muddle East is costing him votes – so he will garner votes by beating up on China. Hank Paulsen is just one of his henchmen. Put differently, Bush is running a “market neutral” policy, as a hedge fund expert explained to me today: what the right hand taketh, the left hand giveth…
Due to personal dealings with Susan Schwab years ago, I am more inclined to listen to what she has to say as the USTR. She has a far better grasp of the real issues – and will hopefully inject some feminine common sense into Capitol Hill’s scurry for votes before the elections….
Sinopec deal with Iran
I have no corporate insights. But we all know that “the great game” is re-emerging in that new players are scrambling for access to resources. My guess is that Iran will use China as a joker in its pack when dealing with America. Thus, with China becoming America’s Muddle East whipping boy, and with China becoming Iran’s “joker” in her game of poker with America, we are in for interesting times on the geo-political stage….how will America handle this?