As G-20 finance ministers and central bankers meet in Seoul to call a verbal truce at least in the currency wars, Bloomberg has a piece noting that China has taken note of what happened to Japan after the 1985 Plaza Accord led to the rapid appreciation of the yen against the dollar.
A short history lesson for younger readers: Following the accord between what was then the G-5 to depreciate the dollar against the yen and the mark, the dollar fell by 51% against the yen between 1985 to 1987. Japan’s exports shrank, unemployment rose, cracking the system of lifetime employment at the large conglomerates, and the economy slowed dramatically — the endaka fukyo, high-yen recession. The cutting of interest rates to get the economy going again led to the asset bubbles which, after they inevitably went pop, left the country mired in debt, which in turn has left the Japanese economy becalmed in the still waters of recession and deflation ever since.
Now Japan made policy mistakes and had a political and social system designed to absorb external shocks rather than effect change when change was needed, so the analogy only goes so far, but Beijing doesn’t want to go anywhere near there in the first place. Hence its determination to let its own currency appreciate only gradually.
There are two other lessons from Japan’s experience in the 1980s that won’t have escaped the notice of China’s leaders. First, it was Japan’s huge current account surpluses that had given it the global buying power in the 1980’s that made the country “No 1” and raised a scare among developed nations, particularly the U.S., that Japan was taking over the world and would eclipse the U.S as the world’s leading economy. When the current account surpluses disappeared, Japan’s emerging clout on the world stage evaporated with it. Second, what happened to Japan’s economy after the Plaza Accord led eventually to the long-ruling Liberal Democratic Party lose its monopoly grip on power.
Foxconn, the Taiwanese-owned electronics contractor whose Shenzhen plants were hit by a wave of suicides earlier this year, is to expand its presence in Chengdu with a new assembly plant there, the latest of a number of new inland factories. Foxconn is owned by Hon Hai Group and numbers some of the best known global technology brands among its customers such as Apple, HP, Sony and Nokia.
Since the suicides put the company into the international spotlight it has opened new assembly plants in Henan, Hebei, Shanxi and Hubei provinces as well as raising wages and improving living conditions for workers at its giant Shenzhen operations. The Chengdu plant is expected to produce advanced panels for LCD TVs and tablet PCs. Foxconn has already has started producing Apple’s iPads there and the new plant will let it expand production of these. Hon Hai has reportedly allocated $275 million for investment in six new Chinese plants, most of them inland.
A leading dairy company, Mengniu, stands accused of organizing a black online PR campaign to smear the product-safety reputation of a rival, Yili. There are, shall we say, several versions of what happened, who was responsible, what documents may or may not be fraudulent, who is under investigation, who has or has not been arrested and even who has been smeared. Mengniu not only denies the charge, but says the accusation is, in turn, defamatory of it. We don’t have any special knowledge with which to disentangle the tale, but it stands as a salutary warning. EastSouthWestNorth has rounded up the coverage. We are not sure you’ll be sure either exactly what happened after reading it, but it is well worth the read none the less.
As this Bystander expected, prospects for the G-20 calling a truce in the currency wars seem remote. Reuters news agency is reporting that China, India and Germany are rejecting out of hand a U.S. proposal to set numerical targets for trade surpluses and deficits at the G-20 finance ministers meeting in Seoul this weekend.
The American proposal would put far too much flesh for the taste of the surplus nations on the bone of a mom-and-apple-pie agreement among the G20 a year ago that big surplus countries like China would aim to shift growth away from being export led while the big deficit economies like the U.S. would seek to boost domestic savings. We expect the communiqué to be issued after this weekend’s meeting will be long on good intentions but short on any agreed measures — let alone commitments — to make good on them, not the ideal preparation for the G-20 leaders’ summit next month.
This post was first published on Market Bystander.
The latest GDP and consumer price inflation figures confirm the economy is slowing more slowly than expected, which led to the surprise rise in interest rates earlier this week. The economy grew at 9.6% in the third quarter compared to the same period a year earlier. That is the slowest year-on-year quarterly growth of the year as the government continues to mop up after its stimulus package, but still faster than expected. Consumer prices rose by 3.6% in September compared to the same month a year earlier, the fastest increase in two years and well above the government’s 3% target rate. More expensive food, in the wake of the year’s abnormally bad weather, and housing were the reason.
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At an IMF conference on Monday, central bank governor Zhou Xiaochuan (right) said China faces increasing risks from excessive liquidity, inflation, asset bubbles and non-performing loans in the wake of the global financial crisis. While those may all be true, the latest economic data and the firmness of domestic demand and investment suggest the economy has weathered the crisis and is now getting back to normal. While more interest-rate rises and increases in banks’ reserve-ratio requirements are likely, they will be mainly intended to deflate the persistent property bubble.
The Chinese central bank’s move to raise interest rates was unexpected. Policymakers are getting more nervy about the inflation risk and inflows of hot money.
The rate rises, the first since before the global financial crisis hit in 2008, lift the one-year lending rate a quarter of a percentage point to 5.56% and the deposit rate by a similar amount to 2.5%. We would not be surprised if they turn out to be the first of a series of modest rises over the coming year to 18 months as the central bank starts to mop up the excess liquidity that fueled the re-acceleration of growth following last year’s slowdown. Last week, the central bank increased reserve ratios for selected banks.
The next set of monthly figures are likely to show consumer prices rising at their fastest pace in a couple of years at 3.6% for September and that the third-quarter GDP figure may be stronger than the 9.5% growth expected, but the rate increases are better considered as part of the attempt to dampen a prospective asset bubble, particularly in real estate where we have seen a number of recent measures to curb demand and reduce the obdurately high levels of loans still flowing into property markets. Negative real interest rates would only exacerbate the flow of money out of bank savings and into hard assets, so the central bank has to get ahead of the inflation figures with its deposit rates.
But what is given to policymakers with one hand is taken away with another. Higher rates will encourage more capital inflows from abroad, inflows the People’s Bank of China is already concerned will be swollen by the U.S. Federal Reserve’s expected second round of quantitative easing. And that will put more pressure on the yuan for an upward revaluation, adding further layers of both economic and political complexity to the management of the economy.
It does, however, provide Beijing with a convenient excuse for letting the currency move up ahead of next weekend’s G-20 finance ministers’ meeting without appearing to be bowing to international pressure to do so. We can only wish, too, that it will also help the world get away from the sterile debate over currency wars.
Recovery teams have now brought out the bodies of all 37 coal miners smothered by coal dust after by an underground explosion in the Pingyu No.4 coal mine in Yuzhou in Henan on Saturday, Xinhua reports. Two hundred and thirty nine miners survived the disaster. Strenuous official efforts are being made to rid the industry of its reputation as the world’s most dangerous, but this is still China’s worst mining accident since only June.