This China sceptic is a bull for the US

China will face serious problems in medium and long term, says Deutsche Bank ex-chief economist

(SINGAPORE) While just about everyone hails the rise of China as the new economic powerhouse, economist Norbert Walter maintains that America, for all its woes, will remain the global superpower in the decades ahead.

China may well be the 'locomotive' for now and even the next five years, 'but I don't buy into a longer-term future of China', says the former chief economist of Deutsche Bank Group. As far as the longer term is concerned, 'I'm a bull for the United States and for the US dollar', he declares, adding though that he's not too upbeat about the greenback's prospects over the next three years.

Since retiring at the end of 2009 from the German bank, where he had been chief economist since 1990, Professor Walter has continued to air his views on the global economy, consensual or controversial - only he's now doing it in the name of Walter & Daughters Consult, which got underway in Germany early this year after Christine and Jeanette, both economists themselves, left their jobs to join their father as his support crew.

In town on a barely 30-hour visit this week, Prof Walter spoke to BT after addressing a breakfast meeting of the Singaporean- German Chamber of Industry and Commerce on the euro and other key economic issues of the day.

He doesn't share the worries of those who point to risks in China's banking or property sectors, and has 'no doubt' that the Chinese economy will still clock about 10 per cent growth next year, he says, but remains unconvinced about its long-term might.

'So I'm not sceptical for the short term; I'm more sceptical than almost everybody on the medium and the long term on China,' he says. In his view, theirs is a demographic problem.

The social consequences of producing 'too many boys and too few girls' are 'unbelievable', says Prof Walter, who was last in China in April, in Shanghai. 'If you have a policy that moves a five-child family into a one-child, one-boy family within two generations, you end up with fat boys, not competitive and not willing to take up challenges.'

In any case, he reckons that China's economic growth 'will voluntarily be moved from 10 per cent to over-7 in the next few years to something like 5 per cent after 2020 in order to preserve the local environment'. China will become increasingly dependent on imports for agricultural and energy supplies, he says.

Meanwhile, the US will, despite its intractable fiscal problems, 'remain the No 1 power, even in the middle of the 21st century', he declares.

'They are the youngest among the Old World. And the Americans have a better constitution to deal with change; the Americans will prove that they are better at dealing with change than anybody else.'

As for talk about the eventual demise of the euro, Prof Walter says: 'The euro will stay, with pain.' But Europe's leaders, and particularly the European Commission, must eventually work towards some 'new form of political arrangements' for the EU, he says.

'I think that's the direction to go but it will be a very bumpy road, and it will not be a fast track,' he adds. Indeed, Europe's growth will 'not be impressive' in the near term, with a few countries mired in 'imbalances, like the US'.

But his own country Germany - which he describes as 'the little locomotive of Europe' - is seeing good growth and 'will be perfectly capable of pulling the small guys around us', he says, citing Austria, Belgium, the Netherlands and Switzerland.

Prof Walter also points to who he reckons could be 'potentially the stars of the next decade'.

In relative terms, he says, 'I'd suggest that those countries that are very strong in supplying energy and agricultural products will be promising countries as well'.

So 'Latin America will be something to watch, if they improve their governance and their infrastructure', he says, citing Brazil particularly, with a new leader in charge, as 'a very interesting case' that could exceed expectations.

Source: The Business Times Singapore

Blaming Game - Lack of Freedom Causes Global Imbalances

Tear down this Chinese wall.

In his famous 1987 speech in Berlin, U.S. President Ronald Reagan delivered the exhortation to Soviet leader Mikhail Gorbachev: “Tear down this wall.” Contrary to everybody’s expectation, the wall started to come down only two years later.

It is about time to give the same directive to communist China. The Chinese wall is metaphorical, but equally hideous: It limits freedom of expression, assembly and movement. It prevents the Chinese from pursuing their happiness and choices freely. If there weren’t enough moral and humanitarian reasons to make that exhortation, here is an economic one: The lack of freedom in China is the main cause of imbalances in the world.

It is well-known that the Chinese trade surplus, or the excess of its exports over its imports, is the counterpart of too much saving, which leads to unfair advantages and possibly deflationary pressure on a global scale.

The causes of this imbalance, and the potential remedies, are disputed. The prevailing view is that it is due to China’s undervalued currency. By keeping the yuan artificially low, the argument goes, the Chinese are dumping underpriced products on Western markets, wiping out the competition unfairly. It is incumbent upon the Chinese government, the reasoning continues, to stop manipulating its currency and let it strengthen.

Cost Advantage

This theory doesn’t explain two facts. First, the Chinese cost advantage in the products they export exceeds the 20 percent to 30 percent difference that a stronger yuan could achieve. In this situation, a currency revaluation may mean Americans will pay more for Chinese imports, without reducing the amount imported by very much. The dollar’s real effective exchange rate is now almost as low as it has ever been since the end of the Bretton Woods currency-exchange system.

Why then does China export so much more than it imports? The answer comes from simple accounting. For every country, the current account is equal to the difference between the income produced and the sum of domestic investment and consumption. When a country consumes and invests less than it produces, it is bound to have a current-account surplus.

In the case of China, a country that grows 9 percent a year and invests 43 percent of its gross domestic product, it is hard to argue that it invests too little. But it is very easy to argue that it saves too much: 54 percent of GDP versus an average of 33 percent among developing countries and 17 percent among Organization for Economic Cooperation and Development economies. So China’s surplus is due to its excessive saving, not to its undervalued currency.

Citizen Preferences

How can we deem Chinese savings excessive? In a free country, the aggregate consumption-saving decision is the result of individual choices, which reflect the preferences of its citizens. It would be very paternalistic of us to argue that savings are excessive.

The point, though, is that China isn’t a free country and the economic decisions of Chinese aren’t driven by market forces. They are influenced by political decisions made by a small self-appointed elite. This group has decided that the accumulation of claims on the rest of the world is more important than the standard of living of the current generation.

The excess savings don’t reflect the will of the Chinese people. Most of it doesn’t come from household savings, but from the corporate sector, especially government-owned enterprises.

American Steaks

At the same time, Chinese wages are kept low by preventing labor from organizing and limiting the flow of information. Not only does this provide an unfair advantage to Chinese producers, but it prevents Chinese workers from having the resources to buy American steaks and iPods.

A redistribution of income would benefit the Chinese people and the world alike. Income inequality in this workers’ paradise is among the highest in the developing world. In addition, some more generous social-security system -- now almost non-existent -- for Chinese families would lower their precautionary savings.

The U.S. government should stop bashing China for its currency policy, while the Federal Reserve engages in massive quantitative easing. It’s hypocritical and leaves the Chinese with an easy way to respond. Instead the U.S. should regain the high ground and lecture them on what’s best in America: freedom.

Accusing communist China of keeping workers’ salaries artificially low and not being pro-workers would embarrass the nation’s government. Learning from Reagan, we can stand on our beliefs. If we do, the Chinese wall will come down sooner than we expect.

(Alberto Alesina is a professor of economics at Harvard University. Luigi Zingales is a finance professor at the University of Chicago Booth School of Business. The opinions expressed are their own.)

Huge gold buying from China.

"As at 31 October 2010, the US has approximately 8,134 metric ton of gold reserve while China has only 1,054 metric ton of gold reserve."

Gold's record rally has been attributed to everything from worries about inflation, the dollar and the emergence of exchange-traded funds. One big factor many may have missed: huge buying from China.

Data cited Thursday by China's state-run Xinhua news agency showed that China imported 209.7 metric tons of gold in the first 10 months of the year, a fivefold increase compared with the same period last year.

That surpassed purchases made by ETFs and surprised analysts, who until now had no clear insight into the size of China's buying.

Gold demand in general has soared globally this year, as a result of the sovereign-debt crisis in Europe and the Federal Reserve's new round of bond buying. Gold prices were pushed up to an all-time high of $1,409.80 a troy ounce on Nov. 9. Thursday, gold settled $1.20 higher, or 0.1%, to $1,388.50, up 27% for the year.

"Everybody in the gold market knew there was a surge in investment demand, but they didn't know it was China," said Jeff Christian, managing director at CPM Group.

China's import growth is a reminder of the country's huge but nascent purchasing power.

It comes as the government loosens its restrictions on gold purchases by financial institutions and individual investors. In August, the country began allowing more banks to import and export gold, opening up the gold market to the institutions and their clients.

Then this week, the Chinese securities regulator approved the country's first gold fund designed to invest in overseas-listed gold ETFs, a move analysts interpreted as another bullish sign for gold.

"The big picture is that China is continuing to relax the rules governing the domestic gold market," said Martin Murenbeeld, chief economist of DundeeWealth Inc., which oversees $69.9 billion in assets. "What we are seeing is the latent demand that has been there all the time and now can be exercised in the market because now the market is freed."

The World Gold Council estimates that China's gold demand could double in 10 years as more investors there embrace precious metals.

Until several years ago, China's gold market was strictly controlled by the central bank, which bought all the gold mined domestically. It then sold the metal to jewelry makers. The country, which is now the largest gold producer, remained largely self-sufficient in gold, with imports at a meager 31 metric tons in 2009, according to GFMS Ltd.

This year, fears of inflation have driven many Chinese investors to include gold in their portfolios as a store of value. At the Shanghai Gold Exchange, trading volume increased 43%, to 5,014.5 tons, in the first 10 months of 2010, exchange Chairman Shen Xiangrong said, according to Xinhua.

At a speech at the China Gold and Precious Metals Summit in Shanghai Thursday, Mr. Shen detailed the size of China's imports this year, Xinhua said. Those purchases were big enough to absorb all the gold that the International Monetary Fund had shed during that time period, which stood at 148.6 tons. It also dwarfed the SPDR Gold Shares, the world's largest gold-backed ETF, which added 159.48 tons of gold into its holdings in the same period.

China also is home to a booming gold-mining industry that keeps it as the world's largest gold producer. Wednesday, China's Ministry of Industry and Information Technology said the nation's gold production reached 277.017 metric tons in the January-to-October period, up 8.8% from the same period last year.

China's 2010 gold production is expected at about 350 metric tons, according to Standard Bank head of commodity strategy Walter de Wet.

"We note that there is likely to be illegal gold exports and imports from and to China," Mr. de Wet said in a note to clients. "This would distort the actual gold numbers for China. However, the trend is undeniable, gold demand in China is rising rapidly."

In other commodities markets:

CRUDE OIL: Prices settled at a two-year high Thursday, with oil for January delivery rising $1.25, or 1.4%, to $88 a barrel on the New York Mercantile Exchange, as economic data in the U.S. and actions in the euro zone to support debt markets lifted hopes for oil demand. Improving economic conditions in the U.S., the world's largest oil consumer, are vital to continuing the drawdown in global supplies that piled up during the recession. Tightening supplies could help clear the way for oil prices to hit $100 a barrel next year.

Source

Are you ready for the next bubble in Asia?

Asian central bankers see a ghost from the past in the U.S. Federal Reserve’s plan to pump $600 billion into the banking system. To them it's like the rolling mid-1990s again, except that they know how this party is going to end.

Here's the scenario: This tsunami of cheap dollars would flood Asia's stock, property, commodities and other asset markets, pushing up prices, then forming bubbles that would eventually burst and result in another ruinous recession like the 1997 Asian financial crisis.

Even scarier now than 13 years ago is that options to manage this cash onslaught have come down to a hard dilemma for central bankers in Asia: If they raise interest rates to absorb excess capital, which would almost definitely be higher than the rates in the U.S. and Europe, it would only attract more of that cheap money. If they leave the markets alone, the risk of a severe shock multiplies. Hot money comes in fast, and flees just as easily.

Compounding the situation is that these economies have only just come off their own stimulus in 2008-2009. So the Fed's move is like a double stimulus for them, piling on top of the money still sloshing around.

“The launch of QE2 [this second round of quantitative easing] will definitely add pressure to the asset markets in the emerging market economies such as Hong Kong’s. As far as Hong Kong is concerned, we will take measures that are specific to the housing market,” said Norman Chan, chief executive of the Hong Kong Monetary Authority, the city’s de facto central bank.

Property prices in Hong Kong have risen to their highest since 1997, the peak of the last bubble. The Hang Seng index this week reached a two-year high in anticipation of the Fed's loose money. With a highly liquid market and no capital controls (unlike mainland China), Hong Kong is a natural proxy for investors seeking a China exposure. In the first 10 months of the year, HK$345.9 billion ($44.6 billion) was raised in Hong Kong from initial public offerings. That shows just how much money has been circulating. Hong Kong hardly needs more.

Property speculation is a major concern too in China, Malaysia and Singapore — all three already curbing mortgages. In South Korea, stocks reached their highest level in nearly three years this week. Bailed out by the International Monetary Fund in 1997 — South Korea came out with a combative tone against effect of the stimulus, signaling it will “actively” seek measures to control the flow of capital, which could include taxing foreign investments in government bonds. Thailand — another poster country of the 1997 crisis — already did that last month.

Surely, Asian authorities want to see the U.S. economy pick up – after all they sell a lot of their exports to America? However, the Fed’s intervention, although anticipated, still conjures U.S. unilateralism, an attempt by America to save itself regardless of how it would affect others.

“The main issue here is that the United States conducts monetary policy that has consequences not only on the United States. The U.S. dollar, for better or for worse, is the only serious international reserve currency,” said Uwe Parpart, chief Asia economist and strategist of Cantor Fitzgerald in Hong Kong.

The Fed’s stimulus was a de facto weakening of the dollar. Conversely, it means the Fed has just engineered for the value of Asian currencies to go up.

So how is that different from the Bank of Japan intervening in the foreign exchange market to weaken the yen? Or from China managing its exchange rate?

Whatever happened to global coordination of policies to prevent a currency war? Did the Fed just precipitate that? Only a few weeks ago, Treasury Secretary Tim Geithner said there was “no risk” of a currency war.

This only gives Beijing ammunition to counter the expected clamor at the G20 next week for the yuan’s appreciation and it allows central banks in Asia to justify future foreign exchange interventions.

Already, the currencies of big exporting economies such as Japan, South Korea and Thailand have risen to multi-year highs. This makes their products more expensive abroad and they are unsurprisingly, not happy with that (although a strong currency also makes imported components cheaper.) More foreign capital flows further raise the values of their currencies as foreign investors buy local currencies.

The Japanese yen hovers around a 15-year high against the dollar despite a massive purchase of dollars by the Japanese central bank in September to weaken the yen.

There are indications that Asian central banks may take concerted actions to control the flow of capital into their economies. Capital controls work well when done together, but a robust common policy may be hard to come by because some Asian economy stand differently today, than say, in 2008, when all agreed on stimulus measures.

Japan, for instance, has mirrored the sluggish economic recovery of the United States and may even implement its own quantitative easing (expected Friday).

China, too, attracts foreign capital, perhaps more than others, because of its expected 10-percent growth rate this year. But because the yuan is heavily managed by the central bank and because of existing capital controls and foreign investment restrictions, it has some built-in safeguard against capital inflows.

All told, Asian monetary authorities are probably reaching for their antacids now. Yes, they want the U.S. economy to grow to stabilize the global economy. But they don’t want the imported inflation and the instability risks. They didn’t survive two severe financial crises in less than 15 years to be sitting ducks for another one.

The question now is, how far would Asian leaders assert themselves at the G20 talks in Seoul next week (Nov. 11-12) against the United States and the weak dollar?