The collapse of Lehman Brother and Bear Stearns has altered the landscape of the global economy. Since then series of dramas have been staged in US encompasses the nationalization of the two mortgage giants, the bailout of the notorious Wall Street financial institutions, the recent rescue measures for the Detroit big 3 auto makers and the arrest of the former Nasdaq chairman Bernard Madoff, etc. I wonder if anyone out there actually enquiring how possibly a country like US, with double deficits, is capable of throwing out so much money to revamp its deeply battered economy. Of course they can, at least they can get the Fed to print more money and the Treasury to raise further debts from countries like China to subsidize the whole scheme.
Much attention has been focused on whether China, with its huge amount of foreign exchanges reserves, could come to rescue. Some said yes, with other no. Those who favor the idea would inevitably say it is necessary so that the world can be saved from slipping into recession. Those who are against it will probably question the benefits of such Samaritan act.
Many would argue that China’s gigantic domestic demand can cushion the slowing down of the western consumptions and look forward the “Product made in China” by the world factory to be absorbed / phased out domestically. But what we noticed in the past few months is the shutting down of many factories by stealth in the southern part of China. Had China filled the consumption vacuum created by US, I believe that the shutting down and bankruptcy cases would be reduced. In addition, there are many lay-offs in China, with substantial number of fresh graduates from university with grim hope of getting job. I have an online friend in Shanghai who has just resigned on October and found a job in November but until now he still has not started his job yet. Why? The new company has simply responded to him that the job offer letter is not yet ready; the same excuse was given for about two months. Indirectly it means he has not got the job. So he has to go around and hunt for another job.
It is a daunting task to push the Chinese spending off their RENMIBI while the unemployment rate keeps rising. People just want to hold a firm grip of whatever fortune they have now, this is more so after the 60% drop in China stock markets which has subsequently impacted on many Chinese’s saving. Chinese is simply a very different kind of people raised under a totally different systems and culture; hence it would be silly to ask Chinese to spend the way how American used to spend.
So if one keens to see China as a White Knight with “huge” (or elusive in fact) domestic demand and expect more investment activities, forget it!!!
How about throwing billions and billions on public infrastructures projects? Have to man!!! Otherwise it will be just difficult to achieve the 8% GDP growth.
But Chinese government has encountered a lot of pressures internationally including not depreciating its RENMIBI to help Chinese manufacturers sell their cheap China products competitively.
Other issue includes whether to keep buying more Treasury bill from the States since China is one of the largest holders of US Treasury bills. Capital flee is common in countries severely hit by financial crisis. That is the case in the 1998 Asian financial crisis. Korea is one of the victims of the current crisis where investors crawled back its capital and parked under much safer assets such as US Treasury bills, bonds, etc. I just wonder if this is the safe heaven because US is the epicenter of the whole financial meltdown. But where else can these investors go? I think US is the only place. No wonder the US currency keeps going up and on the other hand I believe it reduces the energy price. That is something positive. Otherwise we certainly will have another monster to combat.
If China reduces its current holdings or refuses to buy new Treasury bills issued by the States, the credit rating of such bills will drop and China will probably feel its aftereffect by having huge losses. And I also wonder if the reduction of such holding would result in the plummet of US currency. I believe no one will like to see the drop in US currency because that will imply a potential increase in energy price which many countries trying very much to get around.
Many people have predicted that the worst is over and hope that China can come to rescue. But recently China has slowly released some dismal data about its own economy. I think the full dire effect of Chinese economy will only emerge next year. Hence, the worst probably has yet to come.
China, a developing super power with its own problems to solve, now has staggering duties to discharge, to save the world. Sound like a “Hero”, but can they really SAVE the world?
p/s: visit http://oneyearplan.net/Andrew
