Sunday, June 26, 2011

Volume 3 Issue 26: Two-Cent Economics

The Chinese Bubble?

For about a year now, many people are hyping up the supposed property bubble in China. Many people have been waiting on the sidelines for China's property market to fall, and then condemn the Chinese economy for "over-investing".

Personally, I think the people above have been over-exposed to the Western media. They read from Bloomberg, the Wall Street Journal, Reuters and what not. How many of those reporters actually know what they are talking about China? To really understand what is going on in China, we should consult the experts on China. Also, to avoid the Asian bias, we should not immediately take the word of a Chinese economist.

So what do we do? How about this? Let us look at the following views by two prominent Western experts on China. First up is Mr Howard Davies, who is the former Chairman of Britain’s Financial Services Authority and a former Deputy Governor of the Bank of England, and is currently Director of the London School of Economics. His latest book is Banking on the Future: The Fall and Rise of Central Banking. See his article entitled, "Chinese Finance Comes of Age".

I particularly like this quote from the article:
It would be flattering to think that this turnaround in China’s financial system been attributable to the wise counsels of foreign advisers. But, while external influences have been helpful in some ways – the stimulus of Basel 1 and 2 strengthened the hands of those in Beijing determined to clean up the banking system – the Chinese now, not unreasonably, treat advice from the City of London and Wall Street with some skepticism.

For example, recent criticism of Asian regulators by US Treasury Secretary Timothy Geithner is viewed across the region with scorn, not to mention incredulity. A little more humility is in order, given US regulators’ performance in the run-up to the crisis. People who live in glass houses should not throw even rhetorical stones.

The next article is from someone even more famous. Stephen S. Roach, is a member of the faculty of Yale University, and is also Non-Executive Chairman of Morgan Stanley Asia and author of The Next Asia (Wiley 2009). He gives us "Ten Reasons Why China is Different".

In short, here is what Stephen Roach has to say:
Yale historian Jonathan Spence has long cautioned that the West tends to view China through the same lens as it sees itself. Today’s cottage industry of China doubters is a case in point. Yes, by our standards, China’s imbalances are unstable and unsustainable.  Chinese Premier Wen Jiabao has, in fact, gone public with a similar critique.

But that’s why China is so different. It actually takes these concerns seriously. Unlike the West, where the very concept of strategy has become an oxymoron, China has embraced a transitional framework aimed at resolving its sustainability constraints. Moreover, unlike the West, which is trapped in a dysfunctional political quagmire, China has both the commitment and the wherewithal to deliver on that strategy. This is not a time to bet against China.
While it is good to be skeptical in your approach to reading, we should always apply our skepticism at all times, and not selectively. I think both the articles above reflect a deeper insight on what is truly happening in China's transformation.

While everyone in the West is ready waiting to pounce on China by blaming it for the next global recession due to its asset bubble, it would only confirm what the West has been fearing all this while. China has arrived at the global stage. The West needs China more than ever to pull themselves out of their sluggish economic recovery.

With China (and the rest of the emerging economies) tighten its screws on its economy, the West will feel the pinch, as their export growth will slow down, while domestic demand remains lukewarm at best. I like how Howard Davies puts it:

People who live in glass houses should not throw even rhetorical stones.