So will they or won’t they? One worry making the rounds is that on the economic front the government will overreact to the weather crisis in the same way it did during and after the SARS crisis, when it expanded monetary and credit growth much too quickly to make up for a supposed slack in employment growth.Given the level of unhappiness caused by the storms – not altogether the fault of the government although they have been criticized for being unprepared and for sugarcoating accounts of the crisis (no big surprise on the latter charge) – the government may be biased towards over-stimulating rather than under-stimulating employment growth in the near term. When in doubt, step on the gas.
Not everyone agrees.At a conference in Beijing today former Central Bank Deputy Governor Wu Xiaoling said that China would continue tightening economic conditions in order to moderate economic growth and rein in inflation.She also suggested that the government would allow more flexibility in the currency regime, especially since “the U.S. rate cuts have limited the room for the central bank to use interest rate as a leverage tool to adjust domestic demand.”I guess there are some rather tantalizing ways to interpret that comment, but I guess I shouldn’t read too much into it.
On the other hand, according to today’s Financial Times, “China has ordered financial institutions to provide emergency loans to businesses and individuals hit by the snow storms and power cuts that have paralyzed swathes of central and southern China.” They then go on to say that the directive, issued by the PBoC late Thursday night, “could bring a speedier than expected end to the credit squeeze instituted in recent months to fight inflation and cool a number of sectors of the economy, especially the property market.”Already, as I have mentioned several times before on this blog, there seems to be evidence that the weather crisis has tilted the balance of policy activity away from the monetary alarmists, who only seemed to gain the upper hand just a few months ago, back to the growth camp. As a card-carrying monetary alarmist I find that worrisome. How long the growth camp remains in control depends partly, I guess, on the duration of the weather crisis and the evolving evaluation of its economic, social and political impact.
Meanwhile weather conditions are not getting a lot better. Tthe China Daily today gives us the slightly awkward but soothing headline “Power could resume shortly in worst-hit area by snow”, but the story itself is not particularly optimistic. Conditions are grim.Other accounts of what China still has in store are even more alarming.Yesterday apparently Premier Wen speaking at a State council meeting warned the country that things were going to get worse, and today’s South China Morning Post has the headline “Another 10 days of misery forecast for a city living in fear,” which quotes Yu Jianhua, an operator for China Telecom’s information service in the city of Chenzhou, the subject of the headline, as saying "We know external help has been largely cut off. We know we must rely on ourselves and help each other. We cannot depend on the government.”
Most commentators see the weather crisis as an unambiguous political negative for the government, with the effect perhaps of increasing discontent and reducing credibility, unless the government succeeds in convincing people living in the affected areas that it has been sympathetic and effective in assisting them. The may well succeed in doing so since the leadership, perhaps a little belatedly, has nonetheless been firing all pistons to bring relief. Still, there is another, perhaps more positive, interpretation of the impact of the crisis making the rounds, at least among elite university students. Two different students (one from Tsinghua and one from Peking University) assured me yesterday that the weather crisis has provided a great excuse for the government to adjust CPI numbers that should have been adjusted earlier (I am trying to be polite here). I don’t know where they heard this and I have absolutely no idea if these statements have any basis or are completely groundless – and I am not trying to imply anything by repeating them – but I present them as, at the very least, evidence that there is a lot of cynicism out there.
In 16 and 17 days we will get PPI and CPI numbers for January.I think the consensus is moving towards 7% very quickly.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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January, 2008
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