Author: Yiping Huang, Peking University and ANU

Paul Krugman is one of the international economists I most respect. He is a towering figure in the study of international trade. But his understanding of some international economic policy issues is, to put it generously, naïve. In fact, were the Obama administration to follow his policy advice, the world economy could encounter more serious difficulties, if not another recession, in the years ahead.

In the year 2010, Krugman suddenly found a new and passionate interest in China’s exchange rate policy. Read the rest of this entry »

Author: Yiping Huang, Peking University and ANU

The global financial crisis could mark the beginning of the end for the US dollar’s dominance over the global economy.

But the US dollar will not leave the global stage in the foreseeable future. It will remain one of the world’s most important currencies for many years to come. But the difficulties in maintaining the US dollar’s role as a global reserve currency are large, and are best characterised by the ‘Triffin Dilemma’. Read the rest of this entry »

Author: Yiping Huang, Peking University and ANU

As the year 2009 fades into the distance in the rear view mirror, the Chinese economy has entered into unknown territory in 2010. Investors are universally far more upbeat than one year ago. Policymakers talk busily about adjusting economic structure as the new top policy priority, seeing no risk in achieving above 8 per cent growth.

For some, China’s ability to achieve strong growth amid global recession was the biggest surprise of 2009. To me, it was not. The Chinese government’s abilities in mobilising resources have strengthened, not weakened, significantly during the past decade. If the government really believed that 8 per cent growth was critical, then that would happen. Read the rest of this entry »

Author: Yiping Huang, ANU and Peking University

China’s current account surplus has been the subject of fierce debate in recent times, with politicians in the United States and Western Europe often criticising China’s rigid exchange rate regime. Their real focus, however, was probably not the exchange rate policy per se, but China’s growing trade and current account surpluses. It has been argued that, by artificially depressing the value of the renminbi (RMB), China took jobs away from its trading partners.

Recently, some American policymakers have again blamed China for helping cause the subprime crisis in the U.S; an accusation that was rejected strongly by Chinese policymakers. Read the rest of this entry »

Author: Yiping Huang, Peking University and ANU

When Mao Zedong arrived in Beijing sixty years ago with his comrades from Yan-an, a remote town in Northwestern Shaan-xi province, he probably did not intend to ban free markets across the country. The socialist transformation began when Mao set his eyes on overtaking the United States. This was to be achieved, according to him, through the development of heavy industries, especially the steel industry.

The central planning system was established to maximize urban industrialization, but the development of urban industries required funding. Read the rest of this entry »

Author: Yiping Huang, ANU and Peking University

China’s consumer and producer price indexes, major gauges of inflation, fell in July, pointing to greater deflationary pressure. Indeed, overcapacity will make price hikes, or inflation, almost impossible in the foreseeable future.

But soaring asset prices fuelled by excess liquidity and infrastructure projects recently launched under the government’s economic stimulus package will eventually jeopardize macroeconomic stability – unless policies are adjusted now.

Widespread concerns about inflation have recently been premised on three conditions: a falling CPI, which seemed likely to bottom out by the end of this year; record bank lending in the first half, which pushed up inflationary expectations; and soaring world commodity prices, which may trigger domestic inflation – a scenario that seemed to be supported by recent increases in rice and meat prices.

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Author: Yiping Huang, Peking University and Australian National University

China’s real GDP growth moderated to 6.1 per cent in the first quarter this year from 6.8 per cent in the fourth quarter last year. But this was much better than market expectations.

Seasonally-adjusted quarter-on-quarter comparison suggests that the Chinese economy has already been experiencing a V-shaped recovery. In terms of headline economic growth, the worst is probably over.

Even March’s economic data, compared with those of the January-February period, showed clear evidence of improvement. The Purchasing Managers’ Index (PMI) for the manufacturing sector returned to 52.4 in March, a level above 50 implying expansion of economic activities. Growth of industrial value-added picked up from 3.8 per cent in January-February to 8.3 per cent in March. The decline in power generation eased from -3.2 per cent to -0.7 per cent.

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Author: Yiping Huang, Crawford School, ANU and Peking University

People’s Bank of China Governor Zhou Xiaochuan’s article on the international currency system last week signaled an important departure in Chinese policy thinking. Since the outbreak of the U.S. financial crisis, Chinese leaders had maintained that promoting a stable domestic economy was China’s best contribution stabilizing the world economy.

Just before the G20 Washington Summit, the State Council hastily announced a stimulus package of CNY4 trillion, about 16 per cent of GDP in 2007, to boost domestic demand. But China was much more reserved on international policy issues. This strategy was consistent with the strategy enunciated by Deng Xiaoping: focus on developing the economy but keep a low profile in international affairs. Read the rest of this entry »

Author: Yiping Huang, ANU

U.S. Treasury Secretary Tim Geithner’s accusation that China was manipulating its currency during his confirmation hearing once again placed China’s exchange rate policy under the spotlight.

Although the White House quickly clarified that it would wait for Treasury’s assessment on the issue in April, the timing of this accusation from a top incoming U.S. economic policymaker could not have been worse.

Not only is China now the only major stabilizing force in the global economy, but the U.S. desperately needs China to support its own efforts in arresting the downward spiral of the financial crisis.

Yet financial market investors do not seem to buy the argument that China will be forced to appreciate its currency. In fact, the non-deliverable forward (NDF) market prices in a 1.3 per cent depreciation of the Chinese yuan against the U.S. dollar (USD) within 12 months.

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Special Author: Yiping Huang, Citigroup and ANU

China enters 2009 in a vastly different situation from what it was in a year ago. At the beginning of 2008, the biggest macroeconomic challenges were overheating and inflation. Now, they are a slump in growth and deflation.

This sea change within a matter of 12 months had no single cause. The People’s Bank of China (PBOC) continued to tighten monetary policy aggressively during the first half of 2008, including significant rate hikes and rapid currency appreciation, in order to control inflation. But global recession was probably a far more important contributor to the reversal of China’s macroeconomic trend. Since mid-2008, industrial production has decelerated sharply, power generation has collapsed, and even the growth of exports turned negative in recent months. The Purchasing Managers’ Index (PMI) already pointed towards a deep manufacturing recession in China.

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Author: Yiping Huang

Perhaps it’s not accidental that China’s equity price index has tumbled more than 60% since October 2007. It was certainly true that, by late 2007, when the average price-to-earnings ratio reached above 70 times, the Chinese equity markets had already become overvalued. But the market dived further every time when major negative news hit the U.S. markets, including failures of Bear Sterns, Freddie Mac and Fannie Mae, Lehman Brothers, AIG etc. We can forget about the so-called “decoupling” thesis, at least for now. This was perhaps why the People’s Bank of China (PBOC) announced an emergency cut of lending rate by 27 basis points and reduction of reserve requirement by 1 percentage point on September 15, a public holiday in China, when news about Lehman bankruptcy and Merrill acquisition began to spread in the international market.

Chinese financial institutions, especially large banks and insurance companies, already lost hundreds of billions of dollars during the current crisis. More importantly, the State Administration of Foreign Exchange (SAFE) invested at least 60% of its $1.8 trillion foreign reserves in the U.S. dollar assets and, therefore, already incurs far greater losses, at least on the book. The good news is that China still maintains relatively strict capital account controls and the state still owns majority stakes of large financial institutions. Therefore, there is little risk of financial collapse. Read the rest of this entry »