by Leo Horn Phathanothai | Mar 18, 2009 | East Asia and Pacific, Economics and development, Global system
The latest World Bank quarterly update on China’s economy made headlines today, as it revised downward by one full percentage point (to 6.5%) its estimated economic growth rate for China in 2009. This downward adjustment in China’s estimated GDP growth has prompted much concerned commentary, which is understandable given how entwined China’s and the world’s economic prospects have become. I’ll briefly consider here the significance of 6.5%, and the prospects, risks and trade-offs that are wrapped up within that figure.
China would of course still be performing remarkably well in relative terms, with the new projected growth rate hovering at around 8 percentage points above the projected industrialized world average for 2009. The World Bank quarterly update reassures us that “China’s fundamentals are strong”: though dampened, economic prospects remain strong, given that: (i) the financial system has remained largely insulated from the effects of global financial turmoil, and; (ii) vestiges of central planning and a very strong fiscal position mean the government has an unparalleled ability to marshal resources to stimulate growth in the short term.
The numbers are encouraging in this regard. The government moved fast announcing a RMB 4 trillion (GBP 400 billion) fiscal stimulus package last November. In the first two months of 2009 urban fixed investment – which is the most important driver for economic growth in China accounting for 42% of GDP – surged to RMB 1 trillion (GBP 100 billion), a 26.1% increase from a year earlier. China’s industrial production grew 11% in February (on a year earlier), and new bank landing in February was four times the same month last year (at RMB 1.07 trillion). These are clear signs that the fiscal stimulus is kicking in, and in a big way.
Yet several commentators are forecasting doom on the basis that 6.5% is dangerously short of the 8% target growth rate, which is widely taken to be the minimum rate of growth needed to prevent spiraling unemployment and ensuing social unrest. Quite apart from a lack of evidence of such a social threshold at 8%, such dire outcomes are not inevitable. The silver lining in the current economic cloud is that China faces an unprecedented opportunity in this crisis to rebalance its economy, and by extension contribute to the rebalancing of the world economy. To make 6.5% socially sustainable the Chinese government will have to steer its economy away from the capital-intensive, export-led growth path of the past few years, towards labour-intensive growth powered by domestic demand.
Instead however, the government response seems to be reinforcing the structural imbalances that are at the source of China’s economic vulnerabilities – and to a certain extent of global economic imbalances – today.
The fiscal stimulus and financial easing measures are sizeable and speedily administered, but far too much of the money is pouring in to sectors already plagued by overcapacity. Around half of the stimulus package will be spent on infrastructure investment, compared to just 1% on social spending and 9% on the environment. This kind of short term boost is unlikely to do much to increase consumer spending in the medium term. A similar story can be told of the massive injections of credit. As Michael Pettis explains in a recent article in appearing in Newsweek: “because of the structure of the Chinese financial system, all this new lending is channeled into the manufacturing and infrastructure sectors”.
In normal times China’s huge overcapacity – domestic production outstrips consumption by about 10% of GDP – is simply exported to the world. It is worrying therefore that even as industrial production and bank lending soared, external trade slumped: exports tumbled 25.7% in February (from a year earlier), and imports fell 24.1%. With slumping global demand, where will all this excess capacity go?
The World Bank update rightly recommends that:
Looking ahead, less focus on targeting short term GDP growth would allow for more emphasis on the rebalancing and reform agenda […] There are useful synergies between China’s short and medium term policy objectives. The subdued prospects for the global economy – and thus for exports – increase the importance of boosting domestic demand and domestic consumption, which is also key for rebalancing.
by Jules Evans | Mar 18, 2009 | Climate and resource scarcity, Economics and development
I think we’re going through a commercial revolution in reverse.
In the 12th – 14th century, finance gradually worked its way free of ecclesiastical limits, and burst out into an orgy of innovation which has lasted until the present day, when the age of leverage appears to be coming to an end.
However, all is not completely bleak for the City. The two types of finance that seem set to grow are (1) Islamic finance, and (2) renewables / carbon finance. These young markets have very rosy outlooks, and they’re on the whole centred in London.
It struck me today that these two markets are actually very similar. They’re both ‘green’, OK, that’s not a big similarity. But they both also involve finance that is sanctioned by moral boards.
So, for example, an Islamic bank like the European Islamic Investment Bank sanctions its activities by having a Shariah board that gives the ethical thumbs up to any deal it does.
An environmental finance fund like the European Carbon Fund also has its board of (mainly bearded) experts who also give the ethical thumbs up to any deals it does.
Finance is slowly working its way back into the ecclesiastical strictures – either of Islam or of the new religion of Gaia – out of which it burst all those centuries ago. It’s going back into the womb.
by Charlie Edwards | Mar 18, 2009 | Conflict and security, Cooperation and coherence
Jon Henley @ The Guardian draws our attention to the Keep Calm And Carry On poster that seems to have gone viral and is being spotted in homes, pubs and government offices. Apparently the poster was created in the spring of 1939, by an anonymous civil servant who was entrusted with finding the slogan for a propaganda poster.
According to Henley:
This was the third in a series. The first, designed to stiffen public resolve ahead of likely gas attacks and bombing raids, was printed in a run of more than a million and read: Your Courage, Your Cheerfulness, Your Resolution Will Bring Us Victory. The second, identically styled, stated: Freedom Is In Peril.
Apparently the poster was held back for a single event: a German invasion – although I find it hard to imagine how (on hearing the news that German paratroopers were being dropped across Norfolk and the West Midlands for example) the Home Guard and others could have been mobilised quick enough to stick the poster up on billboards, and across towns and villages as the troops landed. Today the poster can be found in numerous places:
From homes to pubs to government offices. The Lord Chamberlain’s Office at Buckingham Palace, the prime minister’s strategy unit at No 10, the Serious Fraud Office, the US embassy in Belgium, the vice chancellor of Cambridge University, the Emergency Planning Office at Nottingham council and the officers’ mess in Basra have all ordered posters. Even David Beckham has the T-shirt.
According to Alain Samson, a social psychologist at the London School of Economics:
“people are brought together by looking for common values or purposes, symbolised by the crown and the message of resilience. The words are also particularly positive, reassuring, in a period of uncertainty, anxiety, even perhaps of cynicism.”
Dr Lesley Prince at Birmingham University, is blunt: “It is a quiet, calm, authoritative, no-bullshit voice of reason,” he says. “It’s not about British stiff upper lip, really. The point is that people have been sold a lie since the 1970s. They were promised the earth and now they’re worried about everything – their jobs, their homes, their bank, their money, their pension. This is saying, look, somebody out there knows what’s going on, and it’ll be all right”.
by Jules Evans | Mar 18, 2009 | Economics and development, Europe and Central Asia
The Kremlin has been shaken by the credit crunch, which hit the Russian stock exchange worse than any other exchange in 2008, pushing it down around 65%. The fall in the oil price threatens to push the economy into recession this year, and Russian oligarchs have seen their fortunes halve.
However, the country is still in a relatively strong position compared to its neighbours, and there are signs it is looking to capitalise on this to expand its economic influence in the region.
For the last few weeks, the country’s largest bank, state-owned Sberbank, has been in talks to buy the troubled Bank Turam Alem in Kazakhstan, which had to be nationalised by the Kazakh government earlier this year. It’s the biggest bank in Kazakhstan, and would give the Russian state enormous economic leverage within the country, at a time when Kazakhstan is wondering whether to join the ruble or to set up a new central Asian regional currency.
In Kyrgyzstan, which has also been badly shaken by the economic crisis, Russia agreed a $2bn loan package and $150m ‘grant’ in February. A few weeks later, the government agreed to close down the US air base at Manas.
In Belarus, talks with the IMF have stalled, while Aleksander Lukashenko is seeking a further $2.7bn loan from the Kremlin on his visit to Moscow this week, to prop up the central bank’s reserves. There are also talks to sell one of the country’s biggest banks, BPS Bank, to Sberbank.
In Ukraine, PM Yulia Timoshenko is trying to get a $5bn 15-year loan from the Kremlin to cover the country’s budget deficit, much to the ire of the country’s president, Viktor Yushchenko, who compared the potential deal to the Molotov-Ribbentrop pact.
This was after Timoshenko’s government failed to meet the IMF’s targets for government spending cuts in February, leading to the suspension of the second tranche of the IMF’s $16bn loan package to the country.
No doubt the Kremlin will be telling both Ukraine and Belarus that if they want the emergency cash, they need to give Gazprom more control over the pipelines that take the EU’s gas through these countries.
In Hungary this month, where the economy is also in dissarry and the government desperately needs cash, Gazprom signed two important deals with MOL, whereby the Hungarian government agreed to finance the South Stream pipeline from Russia (which will be a competitor to the EU-approved Nabucco pipeline). Details of the deal are shady, but it may have been that the government got some short-term loan in return for supporting the project.
by Jules Evans | Mar 17, 2009 | Climate and resource scarcity
There’s a climate change protest in Coventry this Thursday lunchtime, led by NASA scientist James Hansen, and organised by Christian Aid. It is partly protesting against the proposed new coal-fired power station at Kingsnorth. Hansen’s participation is a notable example of the new stridency and political activism among climate change scientists:
Prof Kevin Anderson, the research director at the Tyndall Centre for Climate Change Research in Manchester, said: “Scientists have lost patience with carefully constructed messages being lost in the political noise. We are now prepared to stand up and say enough is enough.”
