Some on China and some on other things

As part of its special report on ageing populations,  Economist has a section on China’s dramatic rise in dependency ratio. The chart says it all. Check it out here.

Perhaps, if you are on the subject of ageing, you should treat yourself to Lucy Kellaway’s always-a-pleasure to read piece on ageing and the comparisons that ageing people engage in.  Hard to combine fun with messages. Lucy Kellaway has few challengers in that respect.

Over at, the Chief Economist of OECD Helmut Reisen deftly deflects talk of the renminbi replacing the dollar by concentrating on the potential for Special Drawing Rights (SDR) to play that role. Two citations that he refers to are interesting. One is by Avinash Persaud and the other is by a former European Central Bank official. In my humble opinion, both peices fail to take into account non-economic factors that could come in the way of the world accepting the renminbi as a reserve currency.

The financial blogging world was abuzz with chatter about Matt Taibbi’s piece in ‘Rolling Stone: ‘The Great American Bubble Machine’ – “From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression – and they ‘re about to do it again”.  It is not possible to link to that article here but this comment by Felix Salmon is interesting in itself.

Financial Sector Reforms

My weekend reading in the typical Swiss summer day (that is, minimum temperature in single digits and maximum temperature in mid-teens) was the 100-page US Administration proposals for financial sector reforms.  It is clearly an improvement over status quo. Some key loopholes are plugged.  Many are not. More importantly, these are only proposals. Real legislative action is yet to begin. So, final shape and substance are very much open to question.

Last week saw two European Central Bankers hold forth on the issue of the financial sector. Both speeches were great reads. One was by Merwyn King of the Bank of England and the other was by Philip Hildebrand of the Swiss National Bank. In my view, somehow, it seems inconceivable that one would hear a similar speech from a Federal Reserve offficial or from the US Treasury these days.

I have covered (or, tried to) cover all three of them in my MINT column this week (appears on Tuesdays).

Eichengreen and Rogoff

In his piece in ‘Project Syndicate’, Prof. Eichengreen writes as follows:

What China lacked was not demand for consumption goods, but a supply of high-quality financial assets.[More here]

Prof. BE makes a mistake, in my view, of course. China’s lack of high-quality financial assets and lack of demand for consumption goods (low and falling household consumption share of GDP expenditure) are two sides of the same coin. It is arising out of the political economy arrangement, with the government or the party in control of the economy not just occupying the commanding heights. In other words, China cannot increase the supply of high-quality financial assets without increasing the household consumption share of GDP.

Prof.  Ken Rogoff writes, in contrast, a thoughtful piece:

…the domestic politics of the US-China trade and financial relationship is deeply rooted. [More here]

He alludes to an important political economy angle here and that is what I cover in my MINT article last week.

This article by Ms. Wen Liao is quite perplexing. I am not quite sure how to place it.

Obama’s financial sector reforms

It is a proposal. The Congress has to approve it. It will be mangled by the time it emerges at the other end. The Financial Services Forum – a lobbying group – has expressed satisfaction. That is not a good sign.

Without going into details – which we will later – what are the key principles?

Capital requirements to be raised on banks and other institutions that hold financial assets so that leverage does not accentuate downturns.

Massive conflicts of interest at various levels in the Industry should be targeted – rating agencies’ clients paying fees, the revolving door between the Wall Street and Washington, D. C (how about a five-year moratorium on regulators joining the firms that they regulated?)

Symmetry between rewards and penalties for risk-taking: compensation not only to be amortized but also adjusted for risk-taking

Also, symmetry between executives, shareholders, lenders and tax-payers in terms of sharing the costs of failures and the rewards for risk-taking.

If these are not addressed, then the reforms may not mean much.

Willem Buiter summarises the state of the world

The emerging markets are a very heterogenous bunch.  Their recent economic performance and prospects range from quite good (India, Turkey, Brazil since the end of the destocking implosion), to prima facie quite good (China) to pretty mediocre or bad (Central and Eastern Europe), to dismal (Russia).

Those emerging markets that (1) did not have their domestic financial sectors destroyed or excessively exposed to parent banks in the North Atlantic region; (2) are not excessively dependent on export demand and (3) are not too dependent on foreign funding are likely to do best and have a ‘V’-shaped recovery.  India ticks all the boxes.  …

China is the great unknown.   It is big enough to make a global impact.  It is, however, very export dependent.  It will have to swicth demand towards domestic final demand, including consumption of non-traded goods and services.  The potential is certainly there…

A key question is whether the Chinese authorities have the implementation capacity to steer this change in the composition of production and demand towards import-competing goods and non-traded goods and away from exportables.  Given enough time, they no doubt can, but it is not obvious that it will be possible to achieve this right now – over a horizon relevant to the cyclical state of the Chinese and global economy…

Finally, there is the usual worry about the quality and bias in the Chinese statistics.  In China, as in most authoritarian states, statistics are not primarily a source of information, but a policy tool and a propaganda instrument.  Corroberation is therefore important.  Chinese energy (electric power) consumption historically tracks industrial production and GDP quite well.  Not so since the downturn began.  Power consumption has been declining despite continuing GDP growth.  As there has been no big push on energy conservation in China, either through prices or through administrative methods, this coexistence of rising GDP and declining power use is strange.

Bottom line is, I continue to have doubts about the strength of the Chinese growth performance, but would welcome confirmation that eight percent growth or more this year is truly achievable. [The full thing here]

Reminder of issues that need attention

Bibek Debroy writes a wonderful blog post on the Government Savings Bank Act of 1873. I would not spoil the surprise for you. Go read the short and hard-hitting stuff here.

The Indian Express editorial on the Naxalite actions near Bokaro is a reminder of the challenges faced by India that stock market bulls do not recognize.

Minister Deora says that petrol and diesel prices would have to be raised with the recent doubling of crude oil price. Now is an opportunity for the government to let go off administered prices of petroleum products.

The ManPower Survey of Employers’ Hiring attitudes for 2009Q3 is out and is worth taking a look at the employment outlook in various countries. The contrast between hiring attitudes in India and in China must have some relevance for the underlying growth dynamics if this is a ‘representative’ survey. (ht: Jim Walker of Asianomics)