Twofish's Blog

June 20, 2006

Notes on Stephen Roach’s blog

Filed under: china, finance — twofish @ 3:25 pm

http://www.morganstanley.com/GEFdata/digests/20060619-mon.html#anchor0

(One pet peeve on Roach's comments. The 'big four banks' aren't policy banks.)
The problem that I see in his blog is that it's hard for me to figure out what he is suggesting Chinese authorities do, right now. I agree that in the time scale of one to three years, it is necessary for the Chinese government to slow down the pace of investment and reorient the economy from foreign exports to domestic consumption, but that isn't going to cool down the economy in the next month or two. The problem with complaining about the Chinese governments lack of use of the "new controls" of macroeconomic controls is that they probably won't work without some "administrative control" underlying them.

The only thing that will work to cool the economy as quickly as is needed is what I call the "third lever" of administrative controls on bank lending and industrial reform. This did work in 2004, and the problem is that the Chinese government took their foot off the brake a little too early.

One thing that should be noted is that the nature of the "third lever" is changing. With each cycle, the Chinese government has been relying less on direct administrative orders to industry, and more on indirect methods such as administrative orders regarding the volume of bank credit. Whatever works.

I did make a comment on Brad Setser's blog

http://www.rgemonitor.com/blog/setser/132676

The bottom line in all of this is that the reforms that started in 1998 are basically working. There are now profitable SOE's sitting on top of reasonably healthy banks.

Also, the fact that news of corruption scandals are popping up right and left is probably a good thing. If you look at the dates of most of those scandals, they tend to be in the past. What I think has happened is that the government has cleaned up some of the worst of the scandals, and now that no one in power right now is in danger of losing their jobs over corruption, they have a free hand to bash the people that are out of power.
Also, it's not clear to me that from a social justice point of view the money from SOE's should go to SOE workers. SOE workers are a rather privileged bunch, and I can think of people who probably deserve the money more than workers in SOE's (namely the rural poor and workers in private non-state plants). My own sense is that the profits from SOE's should be invested back into improving China's health and education infrastructure. (Then again I'm an academic so there is some self-interest here.)

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Leave a Comment »

  1. Thanks for linking to those other two articles, and thanks for putting forth your opinion in this entry. I could see some valid points from all three of you guys. This is definitely a complicated issue, and it will be interesting to see what the Chinese government actually does about it.

    Comment by zhonghuarising — June 20, 2006 @ 8:56 pm


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