Friday, 17 February 2012

Historical: My thoughts on the Chinese Premier's Financial Times article of 23rd June, 2011 [uncensored]

The Chinese Premier, Wen Jiabao's article can be accessed here. My thoughts (November 14th 2011) below:

- I believe that he should have made a distinction between the parts of the world where inflationary tendencies are HIGH and where he sees them LOW (due to reduced consumer spending and confidence). That distinction is very important as it guides monetary policy in any clime. As is obvious from the current state of affairs, inflationary tendencies are dangerously LOW in the US and the Eurozone (still under watch though) ---> the US Federal Reserve maintained the interest rate @ 0.25%, while the ECB lowered theirs by 50 basis points to 1.25%. All they are trying to accomplish is to help SMEs access to credit facilities and boost consumer spending. But apparently, as we can see, that is not enough. But the story is different in emerging markets like China. Inflationary tendencies are HIGH there; the after-effects of the stimulus package that the Chinese government initiated (similar in principle to the Quantitative Easing [QE] initiated by the US Fed). 

- He said that his government was going to rein in government spending and in effect reduce deficits to somewhere below 3% of GDP and external debt to 60% of GDP. Simultaneously he intends to adopt a loose fiscal policy, to support a policy of economic development through domestic demand. This double move is CONTRADICTORY. Cutting government expenditure is a sure way to reduce fiscal deficits, but increasing infrastructure spending cancels out the gains. The overall effect might be ZERO change in fiscal policy. My view is that China can handle deficits to some degree for now. Inflation has been hovering around the 6% level since this year, and a contrasting mixture of loose fiscal policy and tight monetary policy will serve to keep inflation in check. China's main worry as it grows economically will continue to be INFLATION. Its also a factor that African economies have not been able to handle that's partly the reason it's difficult to reconcile GDP growth in Africa to SOCIAL improvements (the Ugandan and Kenyan currencies have been brutalized this year, causing interest rate hikes to 23% and 16.5% respectively, to shore up their values. Of course this hasn't helped much). The 4th part of my series on Afro-Chinese matters covers this to some degree, though I focused more on the demographic trends rather than inflation. 

- All in all, China has been historically effective in managing inflation. According to Wen's article again, the Chinese strategy to keep inflationary tendencies LOW is to increase IMPORTS. This is good as the SUPPY of non-China goods and services (to the Chinese) will INCREASE, driving costs and prices LOWER. But as data from suggests to me, balancing export volume with import volume will present itself as a major challenge too. [Another story to watch is the new Free Trade Zone (similar to NAFTA) deal being proposed by the US President for the Asia-Pacific region --> 8 countries have indicated interest but China is yet to make a move on that]. 

Let's go back to the topic of the Chinese Premier's article, it says: "How China Plans to Reinforce the Global Recovery". After reading this article, I believe Wen Jiabao made the following errors:

 - he did not understand the IMPLICATION of the TOPIC of his article; because if he did, he would know that it doesn't make sense that your main thrust for reinforcing global recovery would be 'IMPORT VOLUME INCREASE' when developed countries who have the greatest capacity to export to China are still mired in the after-effects of the credit crunch and business confidence is still relatively LOW.

- the article which as stated by the Financial Times is a rare move by CONSERVATIVE China, was written as a DEFENSIVE TACTIC in response to the developed world's call on China to re-evaluate her growth model --> China has been maintaining her fixed exchange rate regime and only allowing it to appreciate slowly (in essence favouring her exports on the international market). China's present currency level is seriously UNDERVALUED. It should be worth more than it presently is. Intellectual Property theft has also been another issue against China altogether. The last paragraph of his article reinforces my argument. Besides the tone of the article to me is that of a CHINESE-ECONOMIC SCORECARD. Like when Nigerian governors celebrate their 100 days in office. It falls short of addressing very critical issues (again, the date of the article is June 23, 2011). 

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