The Gold Standard  

Come to think of it, the entire edition of 16th July of WSJ could be labelled a China special. Check out the following: 

‘China growth brings risks’ (here); Sinopec’s ex-chief convicted of graft (here), U.S. urges China to improve business climate (here), Quarterly foreign exchange reserves surge (here), Follow China on copper (here) and Chinese upstart Geely expands to take on Detroit (here). Some of them may require subscription. If so, I apologise for the inconvenience caused.

Some charts in these news articles are telling. Notwithstanding the acknowledgement at the intellectual level, China’s ability to shed the old growth model that, among other things, leads to a surge in foreign exchange reserves, is questionable at best and non-existent at worst.

Richard McGregor, it appears, is back to writing about and from China for the FT. He writes his usual cryptic piece on the boom in State lending. Consider this sentence:

The economic rebound has been driven by a simple but effective mechanism still controlled by the ruling Communist party: a surge in lending by state banks. In the first half of this year Chinese banks, all but a handful of which are owned by the government, lent Rmb7,370bn ($1,079bn, €765bn, £656bn), nearly double the total loans extended in the whole of 2008. [More here]

For a ‘political economy’ take on the China lending surge, this earlier piece by him is a MUST READ:

The way the Chinese political system is constructed, however, the state banks, which account for about two-thirds of lending, had no choice but to comply. The heads of large state banks are appointed directly by the Communist party’s personnel department and rank as vice-governors in the broader government system.

Four of the five chiefs of the big banks sit on the central committee, the Soviet-inspired body with about 370 members which acts like an enlarged board of directors for the party. In short, if the Politburo issues an order, it doesn’t really matter what the Chinese banks’ foreign shareholders think. The bank chiefs are required by party discipline – the highest law of the land – to obey.

Not only that, and herein lies part of the beauty of the Chinese system, the heads of the banks compete to obey their political masters, in this case, by lending out as much money as they can as quickly as possible.

Like provincial governors, the bankers are as much politicians as businessmen. As such, fulfilling the Politburo’s orders is a task on which their future promotions will be judged. [More here]

It is hard to reproduce the chart (No. 5 – ‘Exploding New Loan Extension’ on page 3) that Standard Chartered Bank’s Stephen Green had made on China’s bank loans. But, if you can, take a look at it. The report is labelled ‘China – June data’ dated June 16, 2009. Surprisingly, barring Fitch – the credit rating agency, not many sell-side economists and analysts are voicing concerns on this. 

It is good to see ‘Economist’ finally acknowledging the need for Yuan revaluation/appreciation:

But China’s real problem is that it is running a persistent current-account surplus; in order to keep the yuan closely tied to the dollar it has to keep buying more dollar assets. If China really wants to reduce its exposure to the greenback it must allow the yuan to rise. It would incur a loss on its existing reserves but stem future losses. But so long as China maintains its current exchange-rate policy, it is, ironically, helping keep the dollar dominant. [More here]

Separately, not too many in the research community are voicing concerns at China’s handling of the Rio Tinto executives in China or its handling of the protests in Xinjiang province.

As for the private sector research community, history is set to be repeated here as it did with the technology boom: don’t see, don’t hear and don’t comment on negatives until it is reality. Then, one could always point to a stray sentence here and there to claim that we told you so.

This Op-Ed piece on Wall Street Journal (Asia Edition – July 16, 2009) is an exception:

More disturbing, China has upped its ore purchases in recent weeks even as mainland growth seems to be slowing, suggesting an effort to lay in a stockpile for a longer showdown against Rio-BHP.

If the Rio arrests mark the beginning of a Chinese war to remake the global ore market more to China’s liking, Beijing might want to think again. Its clumsy attempt to make computer makers instruments of Internet censorship was not exactly confidence-inspiring. Ensuring nobody wants to do a business deal with China for fear of being charged with a death penalty crime hardly improves the case. Then there’s the epic civil disorder in Xinjiang.

The final casualty may be China’s overblown reputation for macroeconomic competence, on which so many hopes for global recovery depend. [More here]

Prof. Arthur Waldron’s letter to FT in response to this piece by Gideon Rachman is rather interesting. Read these lines:

What I found was a rejection of the quest for “Communism with a human face” as the fundamental error that had misled not only Mikhail Gorbachev but even Nikita Khruschev coupled with an insistence on uncompromising party rule and avoidance of any political reform or liberalisation.

To be sure, Deng Xiaoping championed economic change, but because he saw it as a way of avoiding political change. My findings are consistent, I think, with the brutally hard line that Beijing has used against both the Tibetans and the Uighurs. [More here]

Prof. Waldron has been writing letters to FT at regular intervals. For example, read this letter in response to the initial stance that Tim Geithner took in his confirmation hearings on the undervaluation of the yuan and this one on selling short Japan and going long China in a geopolitical sense. You may also wish to check out his dissenting note on the on the Council of Foreign Relations China Task Force report in April 2007. I have not read the full report. These remarks, in particular, caught my attention:

Furthermore, the Chinese government has learned that, by and large, influential Americans are relatively easily won over, while the American government (with some important exceptions) has generally shown a willingness to accept whatever China does and find a rationale for doing so. 

Finally, I conclude this print-media survey on China with the following observations I found in an ‘Economist’ article on the riots in Urumqi (Is China fraying?, July 11, 2009):

Repression had already been stepped up in Xinjiang long before the rioting. The escalation dates back to the launch of America’s anti-terror campaign in 2001. China then began linking long-simmering separatist tensions in Xinjiang with the same forces of extremism that America faced. It said one Uighur group, the East Turkestan Islamic Movement, was part of al-Qaeda. America backed this assertion, but Western human-rights groups said there was little evidence of al-Qaeda’s involvement in Xinjiang. China was playing up the connection, they said, in order to justify harsher measures against Uighur nationalists.

Since 2001 the authorities have banned private visits to Mecca and insisted that those making pilgrimages there must go on organised tours. The authorities have tightened controls on mosques in Xinjiang and rules that ban children from receiving religious education. They have warned students and civil servants not to observe Ramadan. A group of Uighur women staged a protest in Khotan last year against local government efforts to ban head coverings. (The niqab is often seen in Xinjiang, especially on older women.)…

… The government, however, was unusually quick to restrict internet and mobile telephone communications. It has been spooked by the role of the internet during recent unrest in Iran. The Iranian opposition has sparked considerable online discussion in China, as well as disapproving coverage in the official media. Within hours of the Urumqi riot, internet access was cut across Xinjiang (the first time such a wide outage has been reported anywhere in China, even during the unrest in Tibet). International telephone calls were blocked. Within 48 hours text-messaging services were also suspended. A few broadband lines were kept open in an Urumqi hotel for the media. [More here]

Leftists and Sinophiles in Indian politics and media would do well to take note of and remember what they and minorities in India enjoy and what their counterparts in China don’t.