Thursday, July 28, 2005

Great Wall Street

The new issue of The Economist is out. The cover reads "How China Runs the World Economy" and has an American-looking street sign that reads "Great Wall ST." The cover story is available to subscribers only, but I will offer a few highlights for those not fortunate enough to be a subscriber to the best news magazine in the world. This edition's special report is also on China. It is entitled "From T-shirts to T-bonds" and is available to non-subscribers. Without further ado, here are some highlights:

China's Growing Influence in the World Economy
Beijing's new influence was clear from the shockwaves in global currency, bond and commodity markets last week after it announced that the yuan will no longer be pegged to the dollar. Until a couple of years ago nobody cared much that the Chinese yuan was pegged to the dollar. Recently, though, this link has become one of the hottest issues in international politics, widely blamed in America for its huge trade deficit. [...] The popular focus on the yuan, America's trade deficit and jobs as China's main impact on the rest of the world misses the point. China's growing influence stretches much deeper than its exports of cheap goods: it is revolutionising the relative prices of labour, capital, goods and assets in a way that has never happened so quickly before. [Cover]
America's Trade Deficit
America's trade deficit is due mainly to excessive spending and inadequate saving, not to unfair Chinese competition. If China has contributed to America's deficit it is not through its undervalued exchange rate, but by holding down bond yields and so fuelling excessive household borrowing and spending. From this point of view, global monetary policy is now made in Beijing, not Washington.[Cover]
Oil Prices
China has accounted for one-third of the increase in global oil demand since 2000 and so must bear some of the blame for higher oil prices. Likewise, if China's economy stumbles, then so will oil prices. However, with China's oil consumption per person still only one-fifteenth of that in America, it is inevitable that China's energy demands will grow over the years in step with its income. [Special]
China's Effect on Trade Unions and Wages
The entry of China's vast army of cheap workers into the international system of production and trade has reduced the bargaining power of workers in developed economies. Although the absolute number of jobs outsourced from developed countries to China remains small, the threat that firms could produce offshore helps to keep a lid on wages.[Special]
Real Estate Bubble
By helping to hold down interest rates in rich economies, China may have indirectly created a global liquidity bubble. Total global liquidity last year rose at its fastest pace in three decades after adjusting for inflation. This excess liquidity has not pushed up conventional inflation (thanks to cheap Chinese clothes and computers), but instead it has inflated a series of asset-price bubbles around the world. Thus, pushing this argument to its limit, it could be said that the global housing boom is indirectly “made in China”. Not only has China played a role in holding down short-term interest rates, but the People's Bank of China has also supported America's mortgage market by buying vast amounts of mortgage-backed securities.[Special]