China’s Rear View Mirror

That’s where you can see the United States and the Western World. Yes, China was slammed by a horrific earthquake on April 14^th, killing hundreds and decimating thousands of buildings. Yes, there are entire towns of newly-constructed buildings – homes and businesses – that are virtually empty, pushing many to project that there is a real estate bubble in China waiting to burst. Of course we know that in the vast majority of China’s overseas markets, consumer demand is nowhere near what it was two years ago, before the big fall. We know that the United States has pressed China to allow its currency to rise relative to the dollar to decrease U.S. consumer demand for Chinese imports and stimulate the creation of economy-stabilizing jobs in the U.S. – a demand that has been repeatedly rebuffed by the PRC; if China is doing s o well, our monetary-policy folks ask, why isn’t their currency rising against the dollar unless the PRC is artificially suppressing the Yuan?

China is profoundly more successful than its Western counterparts in the economic spectrum. Their “stimulus” package – about $600 billion – was not financed with debt; they had cash on hand, well above the estimated $2 trillion in U.S. government debt instruments that they currently hold. And they are experiencing growth at level that we have not seen in decades. The April 15^th New York Times: “China’s gross domestic product jumped 11.9 percent in the first quarter of this year from a year earlier, the government said Thursday, pointing to an accelerating recovery from the global economic crisis… That growth rate, the highest in thr ee years, not only surpassed most economists’ forecasts but it also handily beat the 10.7 percent expansion recorded for the final quarter of 2009… China’s National Bureau of Statistics also reported that the consumer price index rose 2.4 percent in March from a year earlier and that the producer price index was up 5.2 percent. Those figures were generally in line with analysts’ expectations… The government said consumer prices were ‘basically stable.’ In an apparent indication of its confidence that inflation was in check, the government raised retail gasoline prices by as much as 5 percent [April 14^th], the first increase in those prices in more than five months.”

Sure, unemployment in China is still unacceptably high, the real estate boom is in fact pushing prices into the “danger zone,” inflation still looms and the instability of overseas markets isn’t going away any time soon. That the above stimulus may have pushed the growth statistics higher is clearly one “articificial factor,” but it also points out the fundamental difference between the Chinese economy and that of the West: economic power still lies heavily with the central planning authorities in Beijing. While they can take steps to regulate financial markets just like the Western world – recently requiring that homes over 1,000 square feet take a downpayment of at least 30% and second homes 50% – the government also has trillions of dollars of capital to pile into any sector of the marketplace, replacing market forces and consumer demand at the drop of a hat. If there is a bursting bubble, China can either let the adjustment flow or, unlike the cash-strapped Western world, use its own wealth to stabilize or moderate the fall.

And right now, China is in a very heavy “investment” mood: “The statistics bureau also reported that overall investment increased at an annualized rate of 25.6 percent in the first quarter, while urban fixed-asset investment expanded 26.4 percent… Industrial production rose 18.1 percent in March from a year earlier, in line with the 20.7 percent gain for the January-February period.” The Times.

That PRC economic recovery is on track and that the government itself recognizes that there is needed emphasis on increasing domestic consumption patterns instead of relying on overseas increases in demand suggests that there may, in the not too distant future, be some relaxation of China’s insistence for an almost lockstep linkage between the value of its and the US’ currencies. When you are the biggest, baddest and most solidly built financial player on the block, you actually get to call the shots… and your debtors often are relegated to nodding in agreement or silently but helplessly fuming at the bad news.

I’m Peter Dekom, and power shifts are never easily, especially for the party losing its edge.