The Economist Intelligence Unit looks at the prospects for a trade war between the US and China in a new risk analysis.
Highlights:
It should be noted that there is no agreement among economists that China’s manipulation of its exchange rate is fully to blame for unemployment in the US … But even were China to allow its currency to rise, there is a strong likelihood that China would remain a competitive producer of a large range of goods–and richer, higher-wage economies such as the US are unlikely to suddenly become competitive following a minor revaluation of the renminbi.
As long as China is seen to be a free rider in the global economy and refuses to engage in meaningful co-operation on economic issues, pressure will continue to build for a US response. It is unlikely that a small move in the renminbi exchange rate would have much of an impact on the Chinese economy, and the refusal of the Chinese government to allow even a token, say 2%, revaluation of the renminbi so far reflects a determination not to be seen to be yielding to overseas pressure on its economic policy. … The perception is that a more assertive China is refusing to be helpful to the US where it could be.
The destructive potential of a US-China trade war is the key reason for believing that both countries will avoid ratcheting up tensions too far. However, China’s penchant for believing that every attempt to engage China in international co-operation is part of a plot to constrain its emergence as a great power represents something of a wild card.
At the moment, the most likely scenario is that trade sanctions will broaden out to a few more products, but that self-interest and mutual interdependence will play a role in keeping the situation within rational bounds. However, as long as China’s export growth and foreign-exchange accumulation remain high, unemployment in the US remains high, and the final fully sustainable recovery from the recent global downturn remains elusive, pressure will be build on the US administration to take action to bring China into line.
For details see: World risk: Alert – China’s assertiveness could lead to a trade war (Premium)
Technorati Tags: china, PulseCheck, renminbi, trade, US, US-China
Guest Post by Oxford Analytica
China has witnessed tremendous growth in science and technology (S&T) inputs in terms of university students, research and development (R&D) investments and S&T workforce, but this has not resulted in greater innovation.
University students. On the input side, investment by the state in higher education led to an approximate ten-fold increase from 2 million in 1991 to 19 million by 2007. Gross enrollment rates of 18-22 year-olds rose within around 15 years from 3.5% early in the 1990s to 22%. The 15-year (2006-2020) Medium-to-Long-term Plan for the Development of S&T (MLP) aims to increase gross enrollment rates to 25% by 2020. Half of China’s university students major in science and engineering subjects.
R&D expenditures and personnel. As a percentage of China’s fast growing GDP, research and development (R&D) expenditures have gone from under 0.7% of GDP in 1991 to 1.5% by 2007. At purchasing power parity, China’s gross R&D expenditures have reached 100 billion dollars and rank third behind the United States and Japan. The number of scientists and engineers involved in S&T activities has doubled and the number of R&D personnel has tripled over the last two decades.
Quality concerns. Each of the inputs comes with serious quality concerns:
- In university education, only slightly over 10% of faculty members have PhDs and only 40% have any post-graduate degree.
- R&D expenditures are inefficiently used as shown by the meager output of internationally valuable patents.
- In respect of R&D personnel, McKinsey Global Institute has found that only 10% of China’s young white-collar workers are fit for employment at multinational corporations (MNCs). Of total R&D personnel, less than 4% have PhDs and only 10% have master’s degrees.
Patents. China uses its large R&D expenditures inefficiently. With the third highest R&D expenditures in the world, it generates relatively few internationally valuable patents, such as United States Patent Office (USPTO) utility patents. China’s USPTO patents have increased twenty-fold over the last 15 years from a very low base, but China still only ranked 12th in USPTO patents received in 2008. Domestic firms do not seem to be leading this innovation activity. Instead, foreign firms are in the driver’s seat. From 2003 to 2007, MNCs generated 1,125 USPTO utility patents where the lead inventor on the patent was located in China. In contrast, Chinese firms and institutes only created 244 such lead inventor patents.
Although China’s rapid growth in technology inputs over the past decade is remarkable, there are serious institutional problems impairing efficient and effective use of these inputs.
- Ineffective public funding. Ministry of Science and Technology (MoST) and other public sources of R&D funds have traditionally done a poor job of distributing these resources to those who might best realize innovation returns. Peer review panels can incline to favoritism, collusion or even incompetence. MoST’s brief move towards blind review panels to address issues of collusion and favoritism has been reversed.
- Public procurement. The procurement process favors firms with strong government connections and thereby hinders efficient allocation of public resources to support domestic innovation.
- Financial system. The financial system is still heavily biased towards state-owned firms. State-run venture capital firms have done little to rectify this as they generally do not invest in entrepreneurial start-ups.
Outlook. All three institutional problems will only be solved over the medium-term, at best. More likely they will continue to act as a drag on China’s development of innovative capabilities for the next decade.
Technorati Tags: china, innovation, R&D, research & development
It may be coincidence but both the World Bank and the International Monetary Fund and the today called on China to play its part in increasing global financial stability and rebalancing the world economy.
In its Quarterly Report on China the World Bank projects 9.5% GDP growth for this year and worries about a housing fueled bubble.
The World Bank’s policy recommendations for China:
The monetary policy stance needs to be tighter than last year and the case for exchange rate flexibility and more monetary independence from the US is strengthening.
- Ensuring financial stability includes mitigating the risk of a property price bubble and ensuring the sustainability of local government finances.
- Sustained, sustainable growth requires structural reforms.
- The fiscal plans for 2010 rightly imply a broadly neutral fiscal stance.
- Given the remaining uncertainty with respect to global growth, additional fiscal flexibility in implementation would be good.
- Inflation expectations and pressure can be contained by tightening the monetary stance and allowing the exchange rate to strengthen.
- Further on inflation, it would be useful to increase the tolerance for modest inflation to allow useful relative price adjustment.
- In addition to containing inflation expectations, monetary policy has a key role to play in containing risks of asset price bubbles.
- The case for a larger role of interest rates in monetary policy is strong.
- If policymakers remain concerned about interest rate sensitive capital flows, more exchange rate flexibility would help.
- Ensuring financial stability calls for mitigating the risk of a property bubble and avoiding strains on local government finances.
Meanwhile, in a speech to the European Parliament, IMF Managing Director Dominique Strauss-Kahn said for China’s currency must appreciate to help balance trade imbalances.:
“In economies that have been running persistent current account deficits—such as the U.S., but also several European countries—domestic saving must increase. And to support demand, exports will need to contribute more to growth.”
In economies with persistent current account surpluses—such as China, Germany, and many oil-producing countries—domestic demand must go up. Broadly speaking, this means boosting growth in consumption; in some cases, exchange rate appreciation will also play an important role.
And Market News reported that the clash over the value of the yuan heated up again this week with a move by the U.S. Congress that would force the U.S. Treasury to increase the pressure on China to reform its exchange rate policy, even while some economists dispute the charge that Beijing has manipulated its currency.
Technorati Tags: china, exchange rates, fiscal-policy, housing bubble, monetary-policy, renminbi
Led by China, foreign governments/central banks sold record amount of US financial assets in January (FT Alphaville)
US Bank Failures Threaten Small-Business Lending (WSJ)
Global harmony on financial regulation a distant prospect despite Lehman outrage( FT’s Gillian Tett) Sad but true
Junk Bond Avalanche Looms for Credit Markets (NY Times)
Traders Tapping Social Media to Gauge Market Sentiment using Alacra Pulse (WSJ)
Technorati Tags: bank lending, china, financial-regulation, junk bond, small business, Twitter
Oxford Analytica critiques the OECD’s second China survey, which comes five years after the publication of its first and largely does not reflect on China’s handling of the global recession.
The OECD acknowledges major achievements. At the same time, it recognises weaknesses, many that have long been known but which come in the evolving context of China’s development into a major global economic power. These include imbalances, for example, between savings and investment; China also has capacity issues; environmental problems have come with rapid industrialisation.
…the immediate problem is how to maintain real growth in the economy while damping down the problem of asset price inflation and risk of bubbles in the property and stock markets.
- If China is to get its long-run finances in order, and balance better the way in which it funds long-term investment and growth, it needs a well functioning stock market.
- Housing policy may have scope to influence the evolution of a functioning market through planning laws, land release and the mortgage finance system.
Both these issues are extremely difficult to manage, even with the type of direct monetary controls still available in China, where the credit ‘tap’ can be adjusted relatively precisely to generate economic growth. In the short-term, in the absence of other rapid solutions, this mechanism will have to be used — and currently is being turned down to withdraw excess liquidity from the economy.
The global recovery might create enough external growth for Beijing safely to cool its asset prices. If not, instability in China will risk derailing not only its own plans, but also those of many other emerging economies that look to it as both a market for exports and an example of how to achieve sustainable high growth.
For details, see: CHINA: OECD downplays short-term drivers (Premium)
Technorati Tags: china, housing, OECD, stock market
One chart from the OECD’s Economic Survey of China 2010 tells you most of what you need to know about the country’s economic ascendancy:
Highlights:
With the help of massive government stimulus action, China is now leading the world economy out of recession. Already the world’s second largest economy, China could well overtake the United States to become the leading producer of manufactured goods in the next five to seven years.
Iit will be important to ensure that government saving, now falling in the wake of the crisis, does not revert to its previous, excessively high levels.
Public spending should be stepped up to support much needed social reforms in areas such as education, welfare assistance, pensions and health.
China can afford the extra spending as its public finances remain strong. Gross government debt amounted to only 21% of GDP in 2008. The stimulus measures, which nevertheless dwarfed those of other countries, are expected to increase this debt ratio by only 3% of GDP in 2010. By contrast, gross public debt in OECD countries is projected to almost reach their total GDP this year and even exceed it in 2011.
Free Policy Brief PDF
Technorati Tags: china, economic-forecast
Guest Post by Oxford Analytica
China’s substantial stimulus succeeded in restoring robust GDP expansion during 2009. However, the 10.7% growth year-on-year in the fourth quarter suggests the economy may be overheating and becoming susceptible to inflation and asset price bubbles.
The world has just been through the worst economic crisis since the Second World War.
Global environment. In these circumstances, it was expected that Asia would be particularly hard hit, reflecting the slump in import demand in its main markets, the United States and EU. Indeed, Asian exports plummeted in late 2008 and shipments remained weak through most of 2009, especially to developed nations. This was also true for China, where exports were down by 20-25% in early 2009 and only picked up in the last months of the year:
- Year-on-year growth of 17.7% reported for December only took Chinese exports back to around the level seen just before the collapse in trade.
- The overall loss in export revenues in 2009 was of approximately 16%, to 1.2 trillion dollars, although the drop in net exports was only a third of this, as imports also fell by around 11%, to 1.0 trillion dollars.
China’s resilience. After a drop in GDP growth to 6-7% year-on-year in the last quarter of 2008 and first of 2009, the government’s massive fiscal and monetary stimulus provoked a surge to 7.9% in the second quarter of last year. That figure climbed to 9.1% in the third quarter and reached double digits in the last quarter, although the estimated rate of 10.7% was flattering in comparison with the weakness that had already set in at the end of 2008.
Risks. On average, GDP growth for the year was 8.7% in 2009, less than a percentage point weaker than the 9.6% expansion in 2008, but well down from the peak of 13% seen in 2007. Yet, the result surpassed the 8% target set by authorities at the beginning of the year, and was extraordinarily strong considering the fall in exports, which could have seriously derailed investment, consumer confidence and spending:
- China’s fiscal package was set at 4 trillion renminbi (585 billion dollars).
- Bank credit was up by about 30% in 2009, in a massive engineered surge.
Success came at a fairly steep cost, and with risks attached. Much of the liquidity pushed into the economy leaked into speculation in the stock and property markets, which risks stoking asset price bubbles.
Bubble threat. No analyst doubts China can deliver growth, but there is less certainty about its capacity to deliver stability in financial and property markets, and how it will cope with the risk of bubbles bursting if things go wrong:
- Consumer price inflation was up 1.9% and purchasing prices for manufactured goods increased 1.7% year-on-year in December 2009.
- The consumer price index fell 0.7% in the whole of 2009, but turned positive in November.
In fact, the authorities have already started to take steps against excess liquidity. So far they have:
- increased the reserve requirement ratio, so major commercial banks must now keep 16%, rather than 15.5%, of deposits at the People’s Bank of China (PBoC), the country’s central bank;
- asked major banks to limit lending; and
- raised the yield on the government’s three-month and one-year bills, making it more attractive for financial institutions to hold these securities.
While China could go it alone through the recession, during the recovery years it will become increasingly vulnerable unless other economies help it sustain momentum.
A firm pick-up in exports would relieve the strain on policy and facilitate action to damp down the bubble threat and keep inflation tamed without the risk of damaging GDP growth. In any event, economic policy-making has become more complex for Beijing.
Technorati Tags: bubble, china, economic-policy
Kraft’s Rosenfeld seen raising Cadbury bid, but not much beyond 800p
US foreclosures in Dec up 14% from Nov and up 15% from Dec 08; total for 2009 up 21% from 2008 (RealtyTrac)
Hershey may yet enter the ring for Cadbury
Mayflower Hotel looks to restructure $200 million debt
Manhattan has 38% more office space for rent than a year ago on Wall Street job cuts
Retail sales became more concentrated among the world’s 10 largest retailers in 2008 (Deloitte Global Powers Rankings)
China’s share of global consumption to increase from 5.2% in 2009 to 23.1% in 2020, overtaking the US (Credit Suisse)
Technorati Tags: (HSY), (KFT), Cadbury, CBRY, china, commercial-real-estate, foreclosures, Hershey, hotels, Kraft, retailers
As China bull Tom Friedman and short-seller Jim Chanos debate the future of China’s economic miracle, Oxford Economics takes an analytical look at China’s economy in a new report, available for complimentary download from the Alacra Store.
Selected Highlights:
China’s economic growth continued to gather pace in Q4; the annual rise in industrial production was 19.2% in November, up from an average of 12.4% in Q3, supported by a renaissance in exports which have now almost recovered the ground lost during the global recession. But the biggest stimulus is still coming from domestic demand, with investment up just under 30% on a year earlier so far in Q4 while retail sales growth has averaged 16%.
We expect GDP to expand by nearly 11% in Q4, up from 8.9% in Q3, and growth to average 8.7% in 2009.
With the strengthening of the economy, there has been a pick-up in inflationary pressure, with CPI inflation at 0.6% in November, its first positive reading since January. Although, this in part reflects a rise in food prices, there are concerns that the massive expansion of credit in China will fuel inflation. However, the more immediate risk is that the credit boom will lead to an
asset price bubble, especially in property prices. House prices rose 1.2% in November to stand 5.7% up on a year earlier as the volume of property sales surged – mortgage loans were up 11.5% in Q3 alone.
The government is now trying to use policy to generate more balanced domestic growth and to limit the impact of the credit boom. Policies include limiting the area of land sold for residential development and expanding property tax to limit speculation, as well as measures to limit the activities of banks with low capital adequacy ratios.
With import prices expected to rise faster than export prices in 2010 on the back of a rebound in commodity prices, the current account surplus is likely to edge down further and average 5.8% of GDP in 2010, after 6% in 2009 and just under 10% in 2008. The narrowing of the current account has not stopped the pressure from the EU and US to revalue the CNY. The People’s Bank of China has indicated that there might be some relaxation of exchange rate policy and so a gradual appreciation of the CNY exchange rate is possible in 2010.
The monthly report China Economic Forecast is available for free download by Research Recap users for 30 days by special arrangement with Oxford Economics, an Alacra content partner. (After 30 days the report will revert to its regular Alacra Store price of $250.00)
For additional free research reports from the Alacra Store click here.
Technorati Tags: china, economic-forecast, free research, renminbi
The UK, Spain and France must articulate more credible fiscal consolidation programs over the coming year in order to ensure they maintain their sovereign ratings, Fitch ratings says in its Sovereign Review and Outlook (Premium)
Fitch says that the impact of extraordinary levels of sovereign intervention and support for the financial sector, as well as fiscal stimulus packages and the severity of the recession, has weakened high-grade (rated ‘AA-’ and above) sovereign credit profiles during 2009.
For large ‘AAA’ rated sovereigns with greater financing flexibility, the capacity to absorb and finance the expansion of their balance sheets this year has been impressive,Fitch says. “Nonetheless, the capacity to finance large budget deficits over a prolonged period without financing stress is not in it self sufficient to preserve ‘AAA’ status, as the experience of Japan in the 1990s demonstrated.”
“While current ratings incorporate a further substantial rise in public indebtedness, all major ‘AAA’ sovereign governments need to articulate more credible and stronger fiscal consolidation plans during the course of 2010 to underpin confidence in the sustainability of public finances over the medium-term and the commitment to low and stable inflation.
In Fitch’s opinion, the UK, Spain and France in particular must articulate more credible fiscal consolidation programs over the coming year given the pace of fiscal deterioration and the budgetary challenges they face in stabilizing public debt. Failure to do so will greatly intensify pressure on their sovereign ratings.
Fitch adds that though emerging economies, especially in Asia, have led the global economic recovery, this primarily reflects the rebound in global trade and the inventory cycle that will only be sustained if final consumption demand in the MAEs, most notably the US, recovers. “The success of emerging market economies is a function of strengthened macroeconomic policy frameworks and globalisation – global economic recovery cannot be sustained without the emerging economies, but nor can it be powered by them alone.”
Fitch’s latest global economic forecasts, also published today in its quarterly Global Economic Outlook, predict that for the MAEs , the recovery will prove self-sustaining even as policy authorities begin to withdraw extraordinary monetary and fiscal stimulus, but that it will be very weak by historical standards. The global economy is expected to show more dynamism next year as growth in the so-called ‘BRIC’ emerging economies (Brazil, Russia, India and China) is forecast by Fitch to accelerate from 4% this year to more than 7% in 2010.
However, Fitch cautions that China’s (’A+’) transition to greater reliance on market mechanisms and a private consumption-led economy – both necessary to reducing global macroeconomic imbalances and sustaining steady and strong growth over the medium-term – is not without risk.
For details see Sovereign Review and Outlook (Premium) and Global Economic Outlook (Premium)
Technorati Tags: china, emerging-markets, France, sovereign-debt, Spain, UK sovereign debt
