Tag Archives: China

Financial Repression Dogs China (Cato Institute)

by James A. Dorn  James A. Dorn is a China specialist at the Cato Institute and coeditor of China’s Future: Constructive Partner or Emerging Threat?  Added to cato.org on October 10, 2006  This article appeared in the Australian Financial Review on October 3, 2006.

Since the start of the reform movement in late 1978, China’s leaders have declared that their top priority should be to achieve robust economic growth and improve the standard of living. They chose this path of ”peaceful development” to minimise the likelihood of civil and economic unrest that dominated the Mao regime. China’s accession to the World Trade Organisation in December 2001 was evidence of the commitment to liberalise trade and the financial sector.

Progress has been made since 2001, but much remains to be done. It is clear that opening capital markets without reforming state-owned banks and without maintaining monetary stability could lead to substantial capital flight and exacerbate the problem of non-performing loans. Moreover, there must be an effective legal system to protect newly acquired private property rights.

If Beijing chooses to keep the yuan, also known as the renminbi (RMB), undervalued and maintains capital controls, China will continue to experience stop-go monetary policy as the domestic money supply responds to the balance of payments and the People’s Bank of China tries to sterilise capital inflows–that is, withdraw excess base money.

The State Council announced earlier this year that it wanted to achieve an external balance in 2006, but China’s overall trade surplus will match or exceed last year’s historic high of $US102 billion. Likewise, the PBC constantly says its goal is to pursue a ”sound monetary policy” and ”keep the RMB exchange rate basically stable at an adaptive and equilibrium level”. Yet, money and credit continue to grow at rates inconsistent with long-run price stability, and the exchange rate is still pegged at a disequilibrium level.

In a May 23, 2006 press release, the PBC recommended ”better coordination among the various macro-policies, transformation of government functions, and institutional innovation”. It also promised that the ”foreign exchange system reform will be deepened”, and committed itself to ”preserve the continuity and stability of monetary policy, and promote appropriate growth of money and credit, in order to provide a stable monetary and financial environment for economic restructuring”.

Those objectives are laudable, but the rhetoric has failed to match the reality. In its monetary policy report for 2003, the PBC said it would maintain the yuan exchange rate ”at an adaptive and equilibrium level”. Yet, the yuan/dollar rate remained fixed at 8.28 from 1994 until July 21, 2005, when it was revalued by 2.1 per cent, and has only appreciated slightly since then to about 7.98 yuan.

As a result, China’s foreign exchange reserves have more than doubled since 2003. Clearly, financial repression is the hallmark of China’s state-directed financial regime. If China is to carry out its plans for financial liberalisation and have a flexible exchange rate regime, the PBC must have greater independence.


Gold, Toll Bros. (12-08-07)

For the record (an email I sent out before feedblitz and this blog):


The IMF is planning on selling a lot of its gold stock and it’s planning on restructuring to recoup some of its revenue shortfalls as of late. That means, all other things being equal, the price of gold should – given the quantity IMF will likely put on the market – fall. The dollar’s value – a proxy for the gold price (the relationship between the two being inversely proportional) – could be stabilizing as Europe and hopefully Asia follows us into a recessionary trend. That is to say, these other economies are [hopefully] not planning a pull-back in free trade and will [hopefully] accept lower returns in exchange for stability and continued growth (albeit diminishing).

        I impute that Hume’s price-specie-flow mechanism will, in the absence of economic populism, restore external balance (our balance of trade deficit with heretofore financially repressive, neomercantilist countries) and in the process, drive US GNP growth. This phenomenon [would] cause, among other things, domestic manufacturing production to explode, thereby pulling the American economy out of economic stagnation.

        The so-called velocity theory of money is effective in the context of economic nationalism such that it predicts that increasing monetary supplies will water down the real value of the existing monetary base, acting like a hidden tax for consumers and investors alike. This spectre of inflation incites market volatility and leads to decreasing marginal returns on capital for corporations, which can spur layoffs and a vicious cycle of decreasing: incomes, investment, growth and consumption in our economy.

       In 1997, we saw the effects of Asian economic nationalism with the currency crisis and the drastic effects it had on the economies of those countries. I think many of us are hoping the Asians learned from their mistake and will not do the same thing again. If these people don’t let their currency revalue at least somewhat and if they don’t allow the value of their external surplus to decrease, we will be facing another currency crisis, but this time it will affect all the underlying bonds – in the world. If bond prices rupture, the cost of borrowing will skyrocket and the financial flows will seize.

The issue that Asians are facing as monetary inflation increases in Anglo-Saxon countries, among others, is a phenomenon economists refer to as diminishing marginal returns. The point at which Asians experience real negative returns [on credit sales, e.g.], there will be an incentive for them to lock in their gains and cut off the supply of investment dollars, which would entail a run on American currency with all of its implications.

Hopefully the Asians can get over their politics of invidious comparison and cooperate even when free trade is not relatively more favourable for them. Unfortunately, given historical trends I doubt this will be the case and we may be on the proverbial knife’s edge but one can always hope.

Either way, I think Toll Brothers might be a good long-term stock due to it’s being replete with cash and its forty year performance which has been relatively good. In 2005 this company roiled the Fortune’s 500 list. There will probably be trouble in homebuilding and in Real Estate more generally in the foreseeable future, but given demographic trends and faith in the US economy over the long haul, land, hence property, is going to become scarcer and more expensive in the future. In thirty years, the population of California doubled. If there is not productivity here in the free market capital of the world – namely, the US – where will it come from? I can easily make a case against Europe or Asia, but that’s fodder for another discussion.

Some economists say that the housing market is at or near a crisis point. Certain indicators predict lousy growth for Real Estate in the future and although that might be a good assessment, I’d say in ten years it won’t make a difference what’s happening now.

Hu Jia (WSJ Lawblog)

If terms like “Kafkaesque” or “Orwellian” haven’t already come to mind when reading about the saga of Hu Jia — the Chinese blogger who was sentenced to three-and-a-half years in prison for subversion of state power — check out the latest news from China.
On Monday, Hu faced an appeals deadline for his case. But when his lawyer, Li Fangping, showed up at the detention center where Hu was being held to ask if he wanted to appeal his conviction, Li was told by prison guards that Hu was not available because he was undergoing a medical examination. Here’s the NYT story.
According to the story, Li said he waited for several hours as prison guards prevented a meeting. He said he eventually drafted a motion for an appeal, but a guard refused to forward it to Hu for his signature. Instead, the guard instructed Li to mail the motion to the court, which he did a day later. I definitely can say that my work as a lawyer has been seriously restricted, said Li.
Hu’s wife, Zeng Jinyan, said she had tried to call the judge in charge of the case, but no one answered the telephone. I dont think we can do anything about the situation right now, unless the judicial system in China makes changes, she said.
Yesterday, reports the NYT, Hus case was raised by reporters at the Chinese Foreign Ministrys regular news briefing. Jiang Yu, a ministry spokeswoman, said, the case has been dealt with according to the law of process and the law of China.

Torching Beijing (IBD)

Ladies and Gentlemen,

Hillary’s idea that Bush should abstain from the opening ceremonies in Beijing is a good one, in my humble opinion.



Torching Beijing

By INVESTOR’S BUSINESS DAILY | Posted Tuesday, April 08, 2008 4:20 PM PT

The Olympics: San Francisco’s bridge protesters never served much purpose in the past, but their disruptions of the Olympic torch relay are different. As China refuses to lighten up on Tibet, it deserves these furies.

Read More: East Asia & Pacific


It started on Sunday in London. Angry protestors managed to get close to the Olympic torch and douse it with water to protest China’s crackdown on Tibet.

Moving on to Paris Monday, street mobs intercepted the torch-passing to send the same message. In the City of Light, the torch ended up getting snuffed out and loaded ignominiously onto a bus.

More Tibet protests are expected in days ahead, enough that the International Olympic Committee is considering scrapping the symbolic opening act of the Olympics altogether. But not before San Francisco’s bridge danglers in all their bannered glory disrupted the relay in the biggest protest show of all.

Most of us can do without street-theater of this kind. But this chain-reaction protest is rather different.

The spontaneous global interruption of the Olympic relay, by hordes of uncontrolled people, shows signs of infuriating and shaming Beijing even as it tried to argue against anyone boycotting its Opening Ceremonies.

It shows a pent-up frustration that’s got to come out. It also shows that such protests are having an effect on a country that’s usually oblivious to such demonstrations.

Even as China covets global recognition as an Olympic sponsor, the communist regime’s rule is characterized by bullying and oppression, solely to force people to quiet down. It refuses to tolerate dissent, and it declines to extend safeguards of citizen rights.

This is why it can easily slide into the kind of brutality seen in Tibet. But it’s out on the world stage now, where the same actions only invite visible protest specters that Beijing abhors. But it cannot stop.

Facing the biggest humiliation probably any Olympic sponsor has ever suffered, these protests will define China’s Olympics for the history books. But they wouldn’t be happening if China hadn’t tried to silence Tibet first, thinking such behavior couldn’t set off reactions as far as Paris and San Francisco.

Maybe that’s what Beijing has to learn as it steps out on the world stage in global events like the Olympics. Either it respects the rights of its citizens or, in its quest for global recognition, all it gets are hippies dangling from assorted global bridges.