A blog on Chinese economy & society

Andy Xie believes that trade war can be averted

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Xie is my favorite China economist by far. He penned an article in the New Century magazine, discussing the probability of trade war and calling for more rapid interest rate hike. The piece is in Chinese so you’ll have to bear w/ my translation.

Chinese exports to the US are mostly owned, designed, and marketed by large American MNCs. Across-the-board tariff increases will cut their profits, leading to collapse in the equity market, which in turn will cause a second-dip in the real economy. The current US government doesn’t even have gust to prosecute those that blew the bubble and wrecked its economy, it will in no way dare to hurt its economy this way.

Xie is more optimistic than I am. People are not entirely rational and Washington is looking for blood this time. Does Obama strike you as a staunch free-trader? Not to this blogger anywayz. The only thing that might hold back the US from a full-scale trade war is a prospective rise in interest rate. Last week’s lousy treasuries auctions are more helpful in pulling us from the brink than any other rational argument.

To me a key event to watch is the April 12 summit in Washington over nuclear nonproliferation. What does this have anything to do with the economy? Well, nation states have other business to look after besides things economic. The US has been trying to talk Hu Jingtao into attending the meeting personally. Giving the Chinese emphasis on face, I doubt he’ll go if there’s any chance that China will be named a “currency manipulator” 3 days later.

The 2nd half of the article relates to interest rate and Xie is calling for a sooner hike rather than later. He sees a huge bubble in the Chinese property market and wants tighter monetary policy.  One of the arguments against interest rate hike is that this will attract more hot money inflow to an already overheating economy.

Already there are a large amount of hot money inflows into China. What they are chasing is not interest income, but a bubble. If China hikes interest rate, the hot money may actually leave worrying about the upcoming burst. This will lessen the RMB’s pressure to appreciate, rather than intensifying it.

This may be true, if the interest rate hike is drastic enough. However, given the mildness of  the world recovery and the Chinese authorities’ natural and historic tendencies to moderation, I doubt the hike will be sharp enough to scare off further hot money inflows. Creating a one-side bet against the RMB a la 2005 is not desirable from China’s perspective. I think China most likely will tighten through controls on new bank loans, unless inflation surpasses the 3% target. Then China may feel the need to utilize the interest rate sledgehammer, or maybe even currency appreciation.


Written by Cindy Luk

March 30, 2010 at 5:43 pm

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