China grasps its global role
Reuters in Washington
Updated on Oct 10, 2008
The world's humbled economic powerhouses are reaching out to developing countries to help solve the credit crisis - and China's involvement in Wednesday's co-ordinated interest-rate cut suggests it is willing to join the fight.
Policymakers in the United States and Europe seemed to be lurching from crisis to crisis, leaving investors wondering whether governments had an inkling of how to end the credit crunch. That is partly why rate cuts from seven world central banks failed to halt the global stock sell-off.
However, China's participation with US and European central banks in a co-ordinated cut for the first time shows that world leaders recognise everyone stands to lose unless something is done soon, and that they are prepared to co-operate in ways that would have been unthinkable just a few weeks ago.
"This is part of the process of China becoming a stakeholder [in the global economy], and a constructive one," World Bank president Robert Zoellick said.
Hu Xiaolian , deputy governor of the People's Bank of China, yesterday called for even greater co-ordination, noting that "increased spillover of financial risks" would challenge all countries. "We hope to strengthen communication and co-operation with other central banks to create synergy so as to boost the long-lasting and sustainable development of the global economy."
In the early stages of the financial-market turmoil, which first spiked in mid-2007, it was largely viewed as an American problem that required an American solution. But calls for co-ordination have grown louder after more European countries had to step in to prop up ailing banks or guarantee deposits and the global economic outlook dimmed.
"Markets are really waiting to see whether something coherent emerges within Europe, between Europe and the US, and possibly for the rest of the world," said Olivier Blanchard, chief economist with the International Monetary Fund.
It may take some time to sink in, particularly among investors who are far more focused on the immediate problem of getting credit markets functioning normally, but coherent action seems to be taking shape.
Alex Patelis, head of international economics at Merrill Lynch, pointed out that not only did China join Wednesday's rate-cutting party, but another recently rich emerging economy - Russia - was in talks to aid Iceland with a multibillion-euro loan.
"Political and economic historians take note," he wrote in a note to clients. "The world's savings now reside with emerging markets. How these countries decide to channel their reserves will be critical."
In a sign that Washington now recognises it needs help from all corners, Treasury Secretary Henry Paulson called for a special meeting of the Group of 20, which includes China and Russia, after finance officials from the Group of Seven leading industrial nations gather today.
While political conflicts mean Russia is not a likely candidate to help the US economy, China is another story. "It's clear that they [China] have the means to make a difference. And it may be that they will," the IMF's Mr Blanchard said.
Beijing has a clear incentive to help. The US and Europe are two of its best export customers, and China can ill afford to see them fall into such a deep recession that they stop buying.
China is also the world's second-largest foreign holder of US Treasury notes, with US$518.7 billion as of July.
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Mainland in denial over yuan devaluation
Simon Pritchard
South China Morning Post
Updated on Jan 17, 1998
In Guangzhou yesterday, the buzz from the street was that a devaluation of the yuan was imminent. In Beijing, United States Deputy Treasury Secretary Lawrence Summers is thought to have delivered a simple message - devalue and trigger a meltdown in Southeast Asia.
It's been a week of denials. Hong Kong Chief Executive Tung Chee-hwa denied the mainland was going to devalue, Vice-Premier Zhu Rongji was even firmer, and yesterday, People's Bank of China governor Dai Xianglong joined the chorus.
With its economy insulated from the ravages of currency turmoil, Beijing seems to hold all the cards.
The mainland's contribution to Asia's economic woes is a matter of great debate. Did its 1994 devaluation trigger the export crunch that finished the Tigers? More significantly, what are Beijing's vital interests in the region? US foreign policy planners had a violent wake-up call last month. The speed with which a small local currency crisis threatened to change the entire regional balance of power was dramatic. Should economic collapse in Indonesia end with the Suharto regime toppling, a new order will have begun.
If Beijing devalued and tipped the region into a final fatal spiral of currency turmoil, ending in economic collapse and toppled regimes, the mainland would emerge as the sole regional power facing the US across the Pacific.
What of Beijing's perspective? In crude realpolitik, the question might be: does it take out Southeast Asia as an economic and strategic rival by devaluing its yuan? The trouble with such sweeping analysis is the mainland remains domestically focused. With urban discontent rising and plans for the closure of thousands of state-owned enterprises (SOE), Mr Zhu faces hard policy choices.
Moves towards a proper commercial banking system are making bank managers accountable for their lending decisions. Yet the uncertainty of SOE reform is causing a sharp contraction in lending.
Money supply growth is anaemic and outright deflation looms. Should Mr Dai try to reflate through dramatic interest-rate cuts, the fear is he will be pushing on a piece of string.
Without the financial transmission of a functioning bond market to mobilise savings or a commercially driven banking sector, could the mainland experience a similar fate to Japan over the past two years? Maybe, but perhaps the early 1990s US experience, when rates fell to 3 per cent, is more instructive.
A very real threat does exist that banks simply stop lending due to the uncertainty of SOE reform and mass bankruptcies. As such, simply cutting interest rates would not have the demand stimulative the text book promises.
In the worst case, Beijing would experience the kind of shock therapy that Russia went through in 1992. Of course, nothing so scares party bosses as that possibility.
The threat is that having decentralised credit control and set in train a massive industrial restructuring process, an uncontrollable deflationary cycle takes hold.
If so, the only alternative might be a dramatic policy about-face. SOE reform would have to be stopped and credit pumped indiscriminately into the banking system. Hardly ideal, and alternatives do exist. Fiscal expansion via large government infrastructure projects are widely touted.
All of this can be achieved without having to worry about the impact on the currency. Most evidence suggests regional devaluations have yet to hurt the mainland's export competitiveness. Although facing acute problems, Beijing is at least the master of its own economic destiny.
You can be sure when entreaties not to devalue are made, Mr Zhu and colleagues will be extracting maximum advantage. The US is not the only one weighing up the changing balance power in Asia. What better time for Beijing to win favourable concessions for early access to the World Trade Organisation? Just maybe, Mr Tung, Mr Zhu and Mr Dai protest their innocence truthfully.
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