Redstate

Oh, the irony

By blackhedd Posted in Economy — Comments (4) / Email this page » / Leave a comment »

A month ago, many people in global business and finance were optimistic that the worst was behind us. A truly putrid corporate-earnings season and continued severe distress in credit markets put an end to that, and gloom is now the order of the day.

But China, as usual, finds itself in a different situation from everyone else. And in a bizarre irony, a global economic slowdown could be just what they need to solve their biggest problem: they have too much money.

Read on...

I've been raising the flag on inflation in China here at RedState since early this year. They appear to be running at around 11% annual growth, with nearly 5% inflation. It's a scorching-hot performance, reminiscent of the unstoppable US economy during the railroad boom of the late Nineteenth Century.

But China's trade surplus with most of the rest of the world is pouring more money into the country than they can put to good use. (Their 2007 surplus with the US through September was bigger than for all twelve months of 2006.)

The Chinese government tightly controls the country's financial system. When China's exporters bring dollars or euros into the country, they're required to give them to the People's Bank of China, which exchanges them for yuan at a rate that significantly undervalues the yuan against the dollar. That generates too many yuan, which leads to inflation.

The primary policy tools that China has been using to deal with the problem have been a series of increases in the benchmark interest rate and in bank-reserve requirements (to 7.29% and 13%, respectively). These are very weak reeds, and they're not working.

But the weak global economy may come to China's rescue. With each passing day this October, expectations have risen for a massive spillover of the global financial crisis into real-world economies, as businesses find it hard to obtain credit. 2008 now is widely expected to be a considerably weaker year than originally forecast. (And as I wrote here, some completely serious people are expecting 2009 to be weak, because of an adverse outcome in our Presidential election.)

If we get a serious slowdown in the US and Europe, then China can expect to export less, which will slow down the floods of cash entering the country.

And that ought to be the magic elixir that will give them a chance to cool off their red-hot stock and commodity markets, to say nothing of food-price inflation. (The latter is of extreme concern to the regime because historically it has a nasty habit of inciting the Chinese people to revolution.)

(Lest we forget: even though the Chinese nation will soon be the most important one in the world, the Chinese regime is still evil. I'll never forgive them for wiping out Tibet's beautiful religion and culture. And they will always be ready to deal with social problems like inflation by murdering thousands of innocents.)

The Chinese have been building manufacturing capacity at an absolutely astonishing rate. The downside of a global slowdown for China appears here. If their capacity-utilization should fall, the result would be a lot of underperforming loans. If that happened here or in Europe, it would be a huge problem, but China tightly insulates its financial system from market discipline.

Why doesn't China deal with their inflation by simply letting the yuan appreciate to a more realistic level? Because they're afraid of competition from lower-cost producers elsewhere in East Asia.

If there is a global slowdown, then all of the region's exporters will feel the pinch. This creates a perfect opportunity for China to cool their jets without losing any market share.

Have you ever noticed that when you're on the upswing (as a sports team, or a business, or a political party, or a country), all the breaks seem to go your way?

A final note: today is a Monday in late October, following a Friday which saw a large stock-market decline, after a summer of widespread market disorders. Memories of 1907, 1929, 1987, 1998... I'd better stop now. But still: batten down the hatches, everyone, today just might be a wild day.