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Can China Save the World's Economy

Discussion in 'BBS Hangout: Debate & Discussion' started by glynch, Sep 26, 2011.

  1. glynch

    glynch Contributing Member

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    An interesting article. It urges China to take the previous role the US used to assume to be the lender of last resort and the stabilizing force in the world economy. Hopefully China devoid of consrvative ecomomic blinders can step forward. for the sake of our 401(k)'s, let's hope so. The bubble and bust economy of all wealth to the upper 1% and sincere belief in trickle down doesn't seem to be cutting it.
    **********
    Red Saviour?
    Can China Save the World Economy?
    by DEAN BAKER
    That is a question that people should be asking as the other potential candidates withdraw from the race. At the moment, the economies of the United States, Europe, and Japan are all suffering from weak growth or worse. The debt crisis of eurozone countries threatens another financial crisis that could lead to another plunge in output, not just in Europe but throughout the world.

    Meanwhile the actors who could in principle take steps to reverse this dismal course of events are largely paralyzed. The eurozone countries are struggling with efforts to form the necessary fiscal union to support their currency. This requires creating a new legal structure while also confronting intense political opposition in Germany and other better-off countries who will be asked to support the debt of Greece and other struggling economies.

    Meanwhile the European Central Bank (ECB) is finding it difficult to break with its cult of 2.0 percent inflation targeting even after the economic disaster caused by this single-minded policy focus. It actually raised its overnight rate by 0.5 percentage points in the spring, slowing growth and increasing the cost of borrowing for debt-burdened governments.

    The United States does not face the same imminent crisis, but it is likely to see slow growth and rising unemployment as both fiscal and monetary policy are largely checkmated by politics. Furthermore, a eurozone financial freeze-up will almost certainly lead to a double-dip recession in the U.S. as well.

    And Japan has just seen another prime minister sent packing after failing to deal effectively with the aftermath of the earthquake and tsunami. The country now has its fourth prime minister in four years.

    With the key actors in the wealthy countries either unwilling or unable to take the necessary steps to support the world economy, it is reasonable to ask whether China can fill the gap. Certainly China has the ability to act as a backstop for the world economy, if it chooses to play this role.

    On a purchasing power parity basis China’s economy is already more than 75 percent as large as the U.S. economy. It is projected to exceed the size of the U.S. economy by 2016. China also has a vast amount of reserves, holding almost $1.2 trillion in U.S. dollar assets, and close to $2 trillion in total reserves.

    It would need only a small fraction of this wealth to have an enormous impact on the sovereign debt crisis in Europe. In the case of Greece, it would need to set some floor on the value of Greek debt as an orderly restructuring is arranged. Greece has roughly $450 billion in debt outstanding. Much of this debt has already been partially written down by its holders. Certainly $100 billion in debt purchases would be more than sufficient to arrange an orderly write-down and restructuring of Greece’s debt to a sustainable level.

    The other troubled countries actually suffer primarily from a crisis of confidence more than a serious debt problem. For example, Spain has a debt-to-GDP ratio that is just over 60 percent, well with within anyone’s conception of manageable. Italy has a more troubling debt-to-GDP ratio of 120 percent, but has a near-balanced budget. In both cases if interest rates could be kept at reasonable levels, the debt burden could be easily met.

    Interest rates on both countries’ bonds have soared in recent months as the ECB has demanded harsh austerity measures at a time when the downturn has sent budget deficits soaring. The austerity measures threaten a downward spiral where weak growth leads to rising deficits, which in turn require further austerity measures. With the ECB determined to tell investors that sovereign debt can default, they have created a perfect recipe for a self-imposed disaster.

    China can reverse this picture by providing guarantees to support the bonds of these governments. By setting a floor on the price of their bonds (or a cap on interest rates), it can ensure that they can borrow at interest rates that make their debt sustainable. In addition, by easing up on the austerity measures demanded by the ECB (actually the IMF and European Union are also actors in this story), China’s intervention can help these countries to return to normal levels of growth, reducing the burden of the debt in the future. It is likely that such guarantees would never cost China anything, since the debt-burdened European governments would have little problem meeting their debt service obligations once they return to healthy growth path.

    This sort of intervention by China would not require altruism. Europe is a substantial market for China’s exports, as is the United States. If the eurozone collapses, the resulting financial crisis and economic fallout will send China’s exports plummeting, just as happened in the fall of 2008.

    China already intervenes to support its exports — that is why it holds almost $1.1 trillion in U.S. government debt — so this idea of intervening to sustain export markets is not new to the Chinese government. The only thing that would be new would be the form of the intervention.

    If China took this path it would provide enormous benefits to the world economy. The wealthy countries would have to acknowledge China’s role as the leading economic force in the world. They would also have to acknowledge the boneheaded economic leadership that put them in a situation where they could not rescue their own economies.

    http://www.counterpunch.org/2011/09/23/can-china-save-the-world-economy/
     
  2. Dubious

    Dubious Contributing Member

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    At some point, like the German worker, the Chinese worker is going to ask "why am I working 60 hours a week for slave wages to support Western bankers?"





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  3. pirc1

    pirc1 Contributing Member

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    Yes, The average standard of living is much higher in Greece than in China. I do not think China is ready for this role yet.
     
  4. glynch

    glynch Contributing Member

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  5. pippendagimp

    pippendagimp Member

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    lol china has its own huge banking liquidity problems right now
     
  6. Northside Storm

    Northside Storm Contributing Member

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    People are just going to have to wake up and see that the world is built on bad debt.

    China has been acting irrationally for some time as part of its' US Treasury strategy, but don't expect it to step in to save Europe. China can't be the white knight forever.
     
  7. meh

    meh Contributing Member

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    Not sure what the government will do. On one hand, they are very Scrooge-like when it comes to hoarding money. OTOH, they are big on making Chinese "important" in the world. Not sure which viewpoint wins out here.

    From the people I talk to who work middle management in Chinese banks, there's plenty of money. It's the government that's witholding that money to limit the amount released to the public. Liquidity problems will never occur in China until people stop saving. Which is until, at the very least, the Chinese equivalent of our baby boomers all die off.

    A lot of western economists severely underestimate Chinese populous' willingness to save. Especially because we are the exact opposite when it comes to spending habits. And our governments mirror the people in this regards.
     
  8. pippendagimp

    pippendagimp Member

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    true, plenty of money in the form of illiquid foreign reserves. but word is that a couple of their big 4 banks have been cookin the books and currently sit on vast portfolios of bad loans, ICBC up to 20% perhaps. the govt says they withhold cash to cool off the economy, while at the same time the shanghai composite's still down 60% off its high >>> something does not compute...
     
  9. Nook

    Nook Member

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    China cannot even feed or support large parts of their population, they certainly cannot save the world economy.
     
  10. Blake

    Blake Contributing Member

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    With a gigantic real estate bubble teetering on popping and inflationary problems of their own, I don't think the chinese are going to be saving anybody.
     
  11. Don FakeFan

    Don FakeFan Member

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    Europe should reject any help from China. Not long ago, China is their enemy.
     
  12. Cohete Rojo

    Cohete Rojo Contributing Member

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    China can't put more oil in the ground. The world is gonna have to do something, but that word...that word that escapes me...sacrifice. Yeah, no body is going to do that. SPeaking of oil, anyone notice that eia.gov and GoldmanSachs have been counting LNG and condensates in their US oil reserves? What that all about?
     
  13. meh

    meh Contributing Member

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    This has been true for a long time. But it actually doesn't matter. Chinese yuan has been inflating at record paces. And inflation has always severely outpaced interest rates. So banks can continuously pay back people's savings with devalued currency.

    But regular people in China still save because (A)there's not enough social welfare that allows them the luxury of spending their paychecks, (B)One Child Policy has parents devoting their entire lives and money to their kids through savings and (C)there aren't really any investments other than savings. C is one of the reasons why the Chinese real estate market is so inflated, because people can't put their money in other places.

    It's a horrible system leeching from the populous. But that's China. And it works.
     
  14. YallMean

    YallMean Member

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  15. rocketsjudoka

    rocketsjudoka Contributing Member
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    Its an interesting article and the PRC is already taking some steps in that direction. As other posters have noted there are still many problems in the PRC already and it looks like they are targeting a lot of their cash reserves towards internal development rather than prop up the global economy.
     
  16. da_juice

    da_juice Member

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    The Chinese worker, however, needs American consumers to buy the cheap goods from his factory. The Communist party realizes this and will ignore these questions.

    Germany, on the other hand, is more self sufficient. Look for a rise in German Nationalism in German politics, almost certainly it will grow.

    You know who doesn't have to worry? The Swiss. They've been neutral and self sufficient for 500 years, and they've been just fine. The rest of the world still hasn't caught on.
     
  17. rocketsjudoka

    rocketsjudoka Contributing Member
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    Except that the PRC is looking to develop their own internal market also and as the Chinese get more affluent they are more willing to buy the goods that might've been sold to the US.

    For what its worth though I was told by Chinese that they would still like to see the US remain as the number one economy as they realize how dependent they still are on regarding exports. How long that will last and whether they will look to take major steps to prop up the US and economies I am not at all that certain. There may come a point when they feel they are strong enough to go it alone.

    Didn't UBS just have some huge scandal regarding foreign traders? The Swiss are also vulnerable to global upheavals.
     
  18. geeimsobored

    geeimsobored Contributing Member

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    The one thing aggressive lending would do is give China huge leverage in international organizations. The IMF and World Bank are products of American loans to post-war Europe (along with the dollar becoming the global reserve currency via Bretton Woods) We literally used our creditor status to rewrite the global rules of the world at the time.

    China honestly has a pretty great opportunity to do the same with Europe collapsing like it is. The European Bailout Fund can't grow indefinitely and German public opinion is solidly shifting against adding more into the fund. France is already being threatened with losing its AAA bond status so the other so called "stable" economy is starting to get hurt by its debt as well. Germany can't keep a bunch of poorly structured economies afloat on its own.

    Obviously its not like post-war Europe when the entire developed world was at the mercy of US loans and aid but its still enough to where you China can do things like take informal control of the IMF away from Europe by insisting on an IMF run loan to Europe that would be funded by Chinese money (thereby making the Chinese the largest donor to the IMF).
     
  19. Invisible Fan

    Invisible Fan Contributing Member

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    Their monetary policy favors exports at the expense of the Chinese consumer. I think the PRC is pushing development first and thinking the internal market as an afterthought that comes naturally with a fully established industrial base, which they think aren't there yet to support the entire population.

    It's a plan Japan and other Asian Tigers employed. Focus on exports. Locals can buy the poorer quality leftovers. Once saturated industrially, wages rise as skills and outside demand improves. Local customers become more demanding and open to western conveniences (car, AC, individual living space, meat for lunch and dinner).

    You could claim China is staving off the last step by artificially keeping its currency undervalued, but there still hundreds of millions hovering around the poverty line. The west might want outside sources to pick up the slack, but the Chinese have better insight on when their population is ready, and it doesn't help that the slack was created by poor short term economic policies combined with ongoing or oncoming stress on the welfare systems for rapidly aging populations among US, Japan, and Europe.

    China will face that dilemma too except they have no guarantees for an elderly safety net. I'm not too optimistic those little emperors will support their parents as they eek out factory wages in the midst of their journey to make it big.

    Maybe other Chinese members here will chime in on how China will come to grips with its aging population and supporting them financially.


    Their currency isn't strong enough to be among the big boys. I think increasing currency dominance would be one of the biggest reasons to lend to Europe. The Euro hasn't been resilient either because member nations require exports for their economies to thrive. They could probably put better use of that money bribing dictatorships for more fields or raw resources.

    Wasn't Japan a sugar daddy for a while?

    I do think when the Chinese make a move, they'll make sure it's permanent or at least enough to overstep the obvious trap or two by rival economies. Not that everything will fall exactly as they intended.
     
    #19 Invisible Fan, Sep 28, 2011
    Last edited: Sep 28, 2011
  20. YallMean

    YallMean Member

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    Not there yet. China has a long way to go to be able to exert global influence like the U.S. No comparison between the post-war Europe and today's Europe. Then Europe was in the shadow of the cold war and looking to the U.S. for help on everything. U.S. as the victor of the war could exert a lot of influence on Europe at the time.
    There is a deep distrust of China in Europe today. China was actually blocked out of Europe's sovereign debt investment several years ago. As a result, China doesn't have much skin in Europe's game today either. But this shows you the level of European's distrust towards China. Unlike the Americans, Europeans don't like cheap Chinese products all that much either.
    To be honest, it will be really scary to have China as the world economic leader. :grin:
     

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