Who's Hotter? - China Economy vs. US Congress

Jul 26th 2007 HONG KONG, From The Economist print edition

Fears that China's economy is overheating are exaggerated
http://economist.com/finance/displaystory.cfm?story_id=9552969&CFID=13626166&CFTOKEN=47135672

New figures showing that China's GDP growth quickened to 11.9% in the year to the second quarter, its fastest since the mid-1990s, while inflation jumped to 4.4% in June from 3.4% in May, have fuelled concerns that its economy is now seriously overheating. However, a closer inspection of the numbers suggests there is no need to panic—yet.

China is always one of the first countries to report its GDP after the end of each quarter. But speed kills accuracy. Each province later publishes its own growth numbers, which have consistently averaged higher than the national figure in recent years. Moreover, if you add up the main components of GDP—investment, consumption and net exports—you also get a higher growth rate.

Thanks to such inconsistencies, many China-watchers track alternative proxies of growth. Jonathan Anderson at UBS uses one based on production (industry, electricity, construction, transport and agriculture) and another based on real expenditure (household spending, fixed-asset investment and net exports). Curiously, neither gauge shows an acceleration since 2003-04. The growth in electricity production rose broadly in line with GDP during the first half of this decade, but the economy's apparent surge since 2004 has not been matched by faster growth in electricity (see chart).

So what are Chinese number-crunchers up to? Mr Anderson suggests that the reported faster growth may partly reflect a move to correct previous inaccuracies. In the past, official GDP figures have been much lower than his own estimates, but now the gap has disappeared. In other words, the acceleration in growth may be largely illusory.

Other classic symptoms of overheating are also absent: bank lending and imports have slowed in recent years, and reports of surging wages due to labour shortages are misleading. Average wages in manufacturing have indeed risen by 15% over the past year. But HSBC reckons that labour productivity in manufacturing rose even faster, by 20%, so unit labour costs are still falling. Even inflation is not as bad as it seems. The recent jump was mainly due to the prices of pork and eggs. Excluding food, consumer prices have risen by only 1% over the past year. That is not to say that rising food prices (one-third of the consumer-price index) do not matter, but they are due to supply-side shocks, such as a pig disease, rather than excess demand.

This may help explain why the People's Bank of China has not slammed on the brakes. On July 21st the central bank raised lending and deposit rates by only 0.27 percentage points, to 6.84% and 3.33% respectively. The government also cut taxes on interest income from 20% to 5%. This will reward savers, giving them the equivalent of an additional 0.5 percentage points of interest, and thus encourage them to keep their money in the bank rather than speculating on shares.

Rates are still too low for such a fast-growing economy, but few expect the bank to lift rates aggressively to quash inflation. Higher rates would do little to dampen food prices. A better solution would be to let the yuan rise more quickly, which would curb the prices of imported foods. Hong Liang at Goldman Sachs reckons that a 10% rise in the yuan's trade-weighted value would knock 1.5 percentage points off inflation over two years.

The yuan's appreciation has already quickened this year, rising by an annual rate of 9% since April, compared with only 3.4% in 2006. Goldman Sachs predicts a further 9% rise over the next 12 months. This would not only help to squeeze inflation, it would also help to ease trade tensions with America, which complains that China's currency is too keenly priced. This week the Senate Finance Committee was due to begin drafting legislation that would allow firms to seek antidumping duties to offset the alleged “subsidy” from the undervalued yuan. The bill enjoys wide support and is likely to be passed before the end of the year. The real overheating, it seems, may be in Congress.

Deal or no Deal - Banks ABC

Yesterday I watched the Singapore TV version of "Deal or no Deal" for the first time. Since I played a simple online game before, the whole process didn't seem to be very exciting, probably also because I was just a spectator:-)

The more exciting "Deal or no Deal" being talked about these days is obviously the take-over bidding of Dutch bank ABN-AMRO. Now there's an interesting twist with two Asian powers backing up the London based Barclays bank, one of which is China Development Bank.

Following is the full-report: http://www.economist.com/displaystory.cfm?story_id=9549590&fsrc=nwl. Along this chain of interests, Bank B is trying to catch A but not enough capitcal, C & some others are behind B, in the hope of gaining some share of interest once B bought A. Sounds like the Chinese parable "螳螂捕蝉、黄雀在后" (tang2 lang2 bu3 chan2, huang2 que2 zai4 hou4) The mantis stalks the cicada, the oriole is behind. Luckily, there's a more appropriate business term called "Win-Win". We shall find out the result soon, after the "commercial breaks"!

Surprise!

from Economist: http://www.economist.com/displaystory.cfm?story_id=7911221

The balance of economic power in the world is changing. Good
IF ECONOMISTS have a tendency to trust their figures too much, politicians often pay numbers too little attention; and they do so at their peril. Napoleon dismissed Britain as a nation of shopkeepers, but its emerging might as a trading power helped fight him off. In the cold war Western strategists probably spent too much time worrying about the Soviet Union's military clout, and not enough analysing its commercial frailties. Economics does not determine history, but it does provide the backbeat. And something dramatic has been happening to the numbers recently.

As our survey this week points out, the emerging world now accounts for over half of global economic output, measured in purchasing-power parity (which allows for lower prices in poorer countries). Many economists prefer to measure GDP using current exchange rates (which put the emerging world's proportion closer to 30%). But even on this basis the newcomers accounted for well over half of the growth in global output last year. And a barrage of statistics shows economic power shifting away from the “developed” economies (basically North America, western Europe, Japan and Australasia) towards emerging ones, especially in Asia. Developing countries chew up over half of the world's energy and hold most of its foreign-exchange reserves. Their share of exports has jumped from 20% in 1970 to 43% today. And, although Africa still lags behind, the growth is fairly broadly spread: they may be the most talked about, yet Brazil, Russia, India and China account for only two-fifths of emerging-world output.

No social or economic change this big takes place without friction. The most obvious sign is the uproar about jobs being “outsourced” to India and China. The howls will get louder as globalisation affects ever-richer voters. But there are wider ramifications too. In Asia China's rise has helped push Japan and India closer to the United States, and South Korea further away from it. The once-poor world is scouring the earth for mineral rights, trying to buy Californian oil firms, accounting for ever more carbon emissions and making its weight felt in international negotiations on everything from trade to proliferation to the secretary-generalship of the United Nations.

An idea whose time has come, again
There are weaknesses in some of the growth stories. China's population is ageing and India's schools are rotten. Perhaps the emerging world won't continue to motor along at nearly three times the rich world's pace. Maybe it will take a little longer than 2040 to fulfil Goldman Sachs's prediction that the world's ten biggest economies, using market exchange rates, will include Brazil, Russia, Mexico, India and China. But these are arguments about when, not whether, change will happen. And things could speed up: even the rosiest predictions underestimated Asia's ability to recover from its 1997 financial crisis.

This shift is not as extraordinary as it first seems. A historical perspective shows it to be the restoration of the old order. After all, China and India were the world's biggest economies until the mid-19th century, when technology and a spirit of freedom enabled the West to leap ahead. Nor should it be regarded as frightening. The West, as well as hundreds of millions of people in developing countries, has benefited from emerging-world growth. Globalisation is not a zero-sum game: Mexicans, Koreans and Poles are not growing at the expense of Americans, Japanese and Germans. Developing countries already buy half the combined exports of America, Japan and the euro area. As they get richer they will buy more. The world is on course for its fastest-ever decade of growth in GDP per head, which has been powering ahead at an annual rate of 3.2% since 2000—far faster than during the great period of globalisation that ended with the first world war.

Somme where, over the rainbow
If that comparison raises spectres, so it should. A century ago Edwardian globalists were predicting ever more peace and prosperity—only to see those dreams blown apart on the fields of Flanders. The momentum behind globalisation is considerable; but pushing trade barriers lower depends on political will. It is doubtful that any American president would follow the example of the Chinese emperor Qianlong, who announced in 1793 that the then economic superpower had no interest in “foreign manufactures”, setting his country on the road to two centuries of impoverishment. But there are a few worrying omens in the air, notably the collapse of the Doha round of trade talks.

Protectionism and xenophobia should be fought wherever they spring up. But it is also worth acknowledging that these bumptious new economic powers have made the world more complicated for Western policymakers. For instance, although they have helped keep inflation and interest rates down, they have also encouraged asset prices to bubble up. They have allowed America to finance its massive current-account deficit with apparent impunity. Righting these imbalances will be tricky, even if the strength of emerging economies makes the world less dependent on America.

But the two main challenges for the West are long-term political ones. One has to do with accepting that there will be some Western victims of globalisation. Adding 1.5 billion people to the global labour force has boosted the return to capital and richly rewarded rich Westerners; but in Germany, Japan and the United States, real wages for the median worker have barely budged. None of this is an excuse for protectionism—unless you want to make everybody poorer. But there may be fiercer debates, even in America, about using the tax and benefits system to redistribute more of the winnings.

The other challenge has to do with geopolitics. As the balance of economic power in the world changes, mustn't the balance of political power change too?
In time, perhaps. But economic power is not the same as political power. Most developing countries are still military pipsqueaks: China does not yet own a single aircraft-carrier, and its defence budget is less than the annual increase in America's. Nor in political terms is there such a thing as an “emerging block”: no alliance of interests brings all these very different countries together in the way that history and culture have united America and Europe. In Asia, for example, the rise of China is balanced by the rise of India, which America is striving to turn into a strategic partner. But there is also plainly a need to fiddle with some of the global political architecture. The IMF will tinker with the power structure of the fund at its annual meeting next week. Others should follow. The UN Security Council—whose permanent members include Britain and France but exclude Japan, India and Brazil—has long looked outdated and will soon look absurd. Similarly, it does not make much sense for the G7, supposedly the world's main economic club, to discuss currencies when China, which holds the largest official reserves, is not a member.

Making such adjustments will no doubt be awkward. But these are the problems of success. A world in which most people enjoy prosperity and opportunity is surely better than one in which 80% are mired in economic stagnation. Celebrate the riches that globalisation has brought—and be prepared to defend the economic liberalisation that underpins it.

Fear of Flying - Welcome Onboard by Veritas Airways

http://www.economist.com/displaystory.cfm?story_id=7884654

Welcome aboard
Sep 7th 2006From The Economist print edition
In-flight announcements are not entirely truthful. What might an honest one sound like?

“GOOD morning, ladies and gentlemen. We are delighted to welcome you aboard Veritas Airways, the airline that tells it like it is. Please ensure that your seat belt is fastened, your seat back is upright and your tray-table is stowed. At Veritas Airways, your safety is our first priority. Actually, that is not quite true: if it were, our seats would be rear-facing, like those in military aircraft, since they are safer in the event of an emergency landing. But then hardly anybody would buy our tickets and we would go bust.

The flight attendants are now pointing out the emergency exits. This is the part of the announcement that you might want to pay attention to. So stop your sudoku for a minute and listen: knowing in advance where the exits are makes a dramatic difference to your chances of survival if we have to evacuate the aircraft. Also, please keep your seat belt fastened when seated, even if the seat-belt light is not illuminated. This is to protect you from the risk of clear-air turbulence, a rare but extremely nasty form of disturbance that can cause severe injury. Imagine the heavy food trolleys jumping into the air and bashing into the overhead lockers, and you will have some idea of how nasty it can be. We don't want to scare you. Still, keep that seat belt fastened all the same.

Your life-jacket can be found under your seat, but please do not remove it now. In fact, do not bother to look for it at all. In the event of a landing on water, an unprecedented miracle will have occurred, because in the history of aviation the number of wide-bodied aircraft that have made successful landings on water is zero. This aircraft is equipped with inflatable slides that detach to form life rafts, not that it makes any difference. Please remove high-heeled shoes before using the slides. We might as well add that space helmets and anti-gravity belts should also be removed, since even to mention the use of the slides as rafts is to enter the realm of science fiction.

Please switch off all mobile phones, since they can interfere with the aircraft's navigation systems. At least, that's what you've always been told. The real reason to switch them off is because they interfere with mobile networks on the ground, but somehow that doesn't sound quite so good. On most flights a few mobile phones are left on by mistake, so if they were really dangerous we would not allow them on board at all, if you think about it. We will have to come clean about this next year, when we introduce in-flight calling across the Veritas fleet. At that point the prospect of taking a cut of the sky-high calling charges will miraculously cause our safety concerns about mobile phones to evaporate.

On channel 11 of our in-flight entertainment system you will find a video consisting of abstract imagery and a new-age soundtrack, with a voice-over explaining some exercises you can do to reduce the risk of deep-vein thrombosis. We are aware that this video is tedious, but it is not meant to be fun. It is meant to limit our liability in the event of lawsuits.

Once we have reached cruising altitude you will be offered a light meal and a choice of beverages—a word that sounds so much better than just saying ‘drinks’, don't you think? The purpose of these refreshments is partly to keep you in your seats where you cannot do yourselves or anyone else any harm. Please consume alcohol in moderate quantities so that you become mildly sedated but not rowdy. That said, we can always turn the cabin air-quality down a notch or two to help ensure that you are sufficiently drowsy.

After take-off, the most dangerous part of the flight, the captain will say a few words that will either be so quiet that you will not be able to hear them, or so loud that they could wake the dead. So please sit back, relax and enjoy the flight. We appreciate that you have a choice of airlines and we thank you for choosing Veritas, a member of an incomprehensible alliance of obscure foreign outfits, most of which you have never heard of. Cabin crew, please make sure we have remembered to close the doors. Sorry, I mean: ‘Doors to automatic and cross-check’. Thank you for flying Veritas.”