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China's economic luck unlikely to run out

Comments on Ilan Alon "Is China’s economic luck running out?" 30/09/2015

I would argue that the presence of corruption in China had rose rampantly by 2013 but has fallen since the current leadership took over in 2013. Obviously, President Xi’s anti-corruption campaign has captured some former corruption officials including some very high ranked ones.

The recent financial market turbulances reflect the inexperience and the lack of understanding of financial markets by the current leadership. It has been reported they encouraged people to buy into the market that propelled the Chinese financial markets to about 150% rise in a year. Of course, that kind of exuberance cannot last for ever and sooner or later the valuations would cause corrections: that was exactly what happened in the Chinese stock markets.

Is China’s economic luck running out? It is unlikely in the medium to longer run, even though in the short run, it seems every factor seems to work against China’s economic luck. The Chinese leadership cannot afford to let the economy to slow too much and for too long, as they work out successful strategies to have the Chinese economy back on track to the so called medium to high growth. The Chinese government was for some time reluctant to use fiscal stimulus, but has probably realised it has to use some sort of stimulus before its economic transformation into an innovative and service focused takes shape. It is understandable they were very cautious in using fiscal stimulus given the impact and consequences of the last huge stimulus following the GFC. But it will not be optimal to move from one extreme to another extreme.

Personally, I think the Chinese government should set a target of about 7.2% for the next two decades so it can double in ten years and double again by 2035. That would mirror what Japan did in its “income-doubling plan”.

It will not be easy, but it should be achievable if China can upgrade its economy to greater value-added in the international economic value chain. Of course, if it will help and make it easier should China be successful in taking advantages of the current digital technological and economic disruption and in becoming an innovative economy as its Premier has been calling for. But that will certainly take time. So in the short term, traditional policy tools have to be used. No economy can suddenly become from a traditional to an innovate economy over night. One has to be realistic.


Different ways for a currency to become international reserve

Comments on Yukon Huang "Rationalising China’s exchange rate policy", 28/09/2015

While the author, Yukon Huang argues it is easier to make the Chinese currency a regional reserve currency than a global one, China is probably more interested in making the RMB a global one. A global currency does not mean the stability against a particular major currency. The British pound, the Japanese yen and the euro all have had much greater fluctuations against the US dollar and against each other. So the idea that China must have a stable exchange rate with the US dollar is unnecessary in China's endeavour for the RMB to become a major international currency. If China's authority or its monetary authority has had that idea, that is naïve and unnecessary too.

However, it is probably good to have a stable currency in terms of against a basket of the major international currencies, as opposed to a particular one, even though the US dollar is by far the one used by most countries as the world currency reserve.

I am confounded by the argument that for a currency to become a major international reserve currency its host country must run a trade deficit to do it. There must be more than one way and different ways to make to happen, as lone as there is a need for other countries to hold that currency as a reserve. For example, the host countries can run trade deficits, or purely exchange its currency for another major or a number of other major currencies, so its currency can be available to other countries which need them. The host country can then invest those other currencies internationally, such as buy US bonds and other securities. The host country can, of course also buy gold from other countries.

It seems people see the US has run trade deficits and the US dollar is a major international reserve currency and therefore mistakenly think any host country of an international currency must run trade deficits.


China is friend to both Russia and Ukraine

Comments on Duan Xiaolin "Why the West is wrong about Beijing and Kiev", 22/09/2015

This post appears to be more balanced than those who are unduly concerned with the geopolitical development or its potential development following the Ukraine crisis. Notwithstanding that and irrespective the geopolitical implications of the Ukraine crisis, China has and will likely to continue to adopt a more neutral stance towards both Russia and Ukraine.

Undoubtedly Sino-Russia relations will be strategically more important to China due to the fact that Russia has far a greater international power status militarily, politically and economically than Ukraine and due to the fact China and Russia share a long border, while China and Ukraine does not have direct border relations. Russia is a strong military power and used to be a member of the G8 group. It has very strong military technologies and has abundant natural resources.

But that does not mean that China should forego its relations with Kiev. China can maintain a strong relation with both Russia and Ukraine. China can be friends to both countries. China’s ambiguous attitude in the wake of the Ukraine crisis reflects its balance act. This contrasts to the United States and its Western allies, imposing sanctions on Russia.

Despite the existence of some distrusts between Russia and China, a strong and good bilateral relation is important to both countries, particularly in the face of the containment of both countries by the US and some of its allies. In a mulit-polar world with the US unwilling to accept and share with another power or another rising power, that bilateral relation is likely to be cherished by both countries.


Xi's dual strategies: anti-corruption and Chinese dream

Comments on William H. Overholt "The politics of China’s anti-corruption campaign", 16/09/2015

This is a very interesting discussion about the politics of China’s anti-corruption campaign, though it may have misunderstood some of China’s politics.

China has undergone various social, economic and political reforms (or experiences) since the Communists came to power in late 1949.

While there was little corruption during the pre-cultural revolution period, the cultural revolution period under Mao, political campaigns and class struggles were dominant and the economic system was command and highly planned economy (as far as the industrial economy was concerned). People’s actual living standards may have improved but fairly slowly. Since the reforms and opening policies began, it has been the economy that became the major focus and outstanding results have been achieved. The economic system has also gradually moved to a market economy. People may say the fundamental political system has not changed much apart from the tenures of top leaders are limited to two terms now, corruptions became widespread and engulfed the whole country. People’s living standards at the same time have dramatically improved, even though income inequality has also widened and the environment has worsened.

Many people in China probably wish to have both a system as clean as that period of pre-reforms under Mao and the improvement of living standard since the reforms started. That provides the background for Xi’s anti-corruption campaign and his advocate of the Chinese dream.

Unfortunately, China’s economy has encountered significant headwinds. So while the anti-corruption has been popular among most ordinary Chinese, the slowing of the economic growth may prove to be an offsetting factor in people’s thinking.

Further, it is true that the anti-corruption campaign may have contributed partially, though a very minor part, to the slowing economy due to the reduction in consumption of public money by officials, bureaucrats and compony executives and there might be a period when people may not be sure what to do exactly in terms of implementing reforms, it should be clear enough when new reform measures and plans are required under Xi’s leadership. Due to the anti-corruption and the criteria for performance under the Chinese system, most bureaucrats should not have too many problems with implementing most reforms initiated by the leadership team, as long as the leadership team is united under Xi. However, the slowing economic growth, if not handled well enough, can become a significant check on the popularity of the anti-corruption campaign and may even diminish the support for the current leadership team, thanks to people’s desire to have the better parts of both the pre and the reform periods.


Both China and Japan must work hard for a better relationship

Comments on Akio Takahara "Are Japan–China relations sweetening or souring?" 11/09/2015

The relationship between China and Japan is one of the most important bilateral relations within Asia, given their geographic closeness and the fact they are the two largest economies in Asia and they also represent the largest industrialised and industrialising economies in Asia.

Unfortunately, it seems from time to time problems arise between the two major Asian neighbours, whether it is due to historical or current issues in one of or both countries.

It is inconceivable neither country can become an effective leader in Asia (let alone a world leader) if they cannot handle their bilateral relations well. Both countries need to be mature enough to develop constructive relationship between them.

Chinese yuan has appreciated quite a lot against major international currencies since 2008

Comments on Stephen Olson "Hypocrisy mars RMB devaluation debate", 11/09/2015

While I am not sure whether the Chinese yuan has appreciated by more than 30% against the US dollar since 2008 (I cannot produce that results using some data from the internet), it is a fact that it has appreciated. The issue is not just the appreciation against dollar, but also the appreciation of the US dollar against virtually all major currencies at the same time. The following table shows the appreciation of the US dollar since 11/09/2008.
US Dollar Appreciation of US dollar against major other currencies since 11/09/2008:

Table 1 Changes in US dollar against other major currencies, 11/09/2008 to 10/09/2015
US Dollar
Appreciation of US dollar against major other currencies since 11/09/2008
Euro 1.243727314
British Pound 1.139751852
Indian Rupee 1.456126442
Australian Dollar 1.139451374
Canadian Dollar 1.227951612
Singapore Dollar 0.983935053
Swiss Franc 0.858302022
Malaysian Ringgit 1.254505586
Japanese Yen 1.129265962
Chinese Yuan Renminbi 0.932251339

The US dollar appreciated 24%, 14%, 13% against the euro, the British pound and the Japanese yen respectively from then to yesterday. On the other hand, it depreciated about 7% against the Chinese yuan.