chinaview.cn 2009-01-16 http://news.xinhuanet.com/english/2009-01/16/content_10666664.htm
Expert: China not to blame for crisis
The global credit bubble
started with U.S. policies rather than the savings of China and
oil exporters, a leading World Bank economist said.
"The global credit bubble started with U.S. policies," David Dollar, World Bank's country director for China, said in an exclusive interview with China Daily Thursday.
The Financial Times on Jan. 2 cited U.S. Treasury Secretary Hank Paulson as saying, "In the years leading up to the crisis, super-abundant savings from fast-growing emerging nations such as China and oil exporters ... put downward pressure on yields and risk spread everywhere."
Paulson said this laid the seeds of a global credit bubble, the newspaper reported.
US Federal Reserve Chairman Ben Bernanke, according to the Financial Times, largely endorsed Paulson's argument.
"After 2001, the U.S. stimulated its economy by reducing taxes and increasing government spending," Dollar said. "This was appropriate for a short time, but the U.S. stuck with the stimulus for too long."
After the burst of the Internet bubble in 2000, the Federal Reserve slashed interest rates 13 times to a record low of 1 percent, trying to give a boost to the economy. The low borrowing cost then led to an investment binge in the real estate sector, which later turned out to be another bubble.
The blame on China's surplus as the cause of the bubble is absurd, Albert Keidel, a senior fellow with Carnegie Endowment for International Peace, a Washington think-tank, said in an earlier interview with China Daily. "China's exchange reserve only started to grow after its entry into the WTO in 2001, but before that the bubble in the U.S. was already brewing," he said.
Keidel reckons excessive deregulation of the financial market, which then allowed banks to lower oversight on mortgage applications, is the main reason for the subprime crisis.
In testimony last year before the U.S. House Oversight Committee, former Federal Reserve Chairman Alan Greenspan acknowledged he had made a "mistake" in believing that banks operating in their own self-interest would be sufficient to protect their shareholders and the equity in their institutions. Greenspan said that he had found "a flaw in the model that I perceived is the critical functioning structure that defines how the world works".
"When the U.S. stimulus continued for too long, normally interest rates would have risen and that would have slowed the U.S. bubbles," Dollar said. "But the large trade surpluses in China, Japan, Germany, and the oil exporters provided lots of low-interest lending to the U.S., enabling the bubbles to keep growing."
January 16, 2009 Bloomberg http://bloomberg.com/apps/news?pid=20601089&sid=an1lSsWKeDs0&refer=china
China Central Bank Attacks Paulson’s ‘Gangster Logic’
A Chinese central bank official attacked reported comments by U.S. Treasury Secretary Henry Paulson that China’s high savings rate helped trigger the global credit crisis.
“This view is extremely ridiculous and irresponsible and it’s ‘gangster logic,’” Zhang Jianhua, the bank’s research head, said. His comments were in an interview with the state-run Xinhua News Agency, posted on a government Web site today. 張健華 中国人民銀行研究局長
Commentaries by China’s state media this month had already accused Paulson and Federal Reserve Chairman Ben S. Bernanke of playing a “blame game” over the cause of the crisis.
Friction between the two nations includes a U.S. complaint to the World Trade Organization last month that China uses prohibited subsidies to boost exports. The U.S. also regards China’s currency, the yuan, as undervalued and a factor in global trade imbalances.
Massive savings accumulations in countries such as China helped to trigger the crisis by squeezing interest rates and pushing investors toward riskier assets, the Financial Times reported Jan. 2, quoting Paulson.
Zhang countered that U.S. policies that aggravated imbalances in that nation’s economy, which was excessively dependent on consumer spending, were a key cause. He also cited failures in corporate governance and risk management at investment banks.
‘Finding an Excuse’
“The ‘China-responsible theory’ is an attempt by major western economies to find an excuse for their own policy and regulatory failures,” Zhang said in the transcript. “I’m afraid these countries are also finding an excuse to issue trade protection measures or impose pressure on China in the future.”
Zhang also criticized the International Monetary Fund for paying too much attention to financial risks in emerging and developing economies and not enough to those of developed countries, “which have a larger impact, especially economies issuing major reserve currencies.”
The organization also didn’t respond quickly enough to the crisis, he said.
China’s trade surplus is partly caused by developed nations’ restrictions on technology exports, Zhang said. Last year’s surplus was a record $295.5 billion.
January 2 2009 Financial Times http://www.ft.com/cms/s/0/c56df5aa-d86f-11dd-bcc0-000077b07658.html
Paulson says excess led to crisis
Global economic imbalances helped foster the credit crisis by pushing down interest rates and driving investors to riskier assets, Hank Paulson, US Treasury secretary, has told the Financial Times.
In a valedictory interview, Mr Paulson cast the crisis as partly the result of a collective failure to come to terms with the way that the rise of emerging markets was reshaping the global financial system. These imbalances - arising from differences in the inclinations of different nations to save and invest - are reflected in large current account deficits and surpluses around the world.
The Treasury secretary said that, in the years leading up to the crisis, super-abundant savings from fast-growing emerging nations such as China and oil exporters - at a time of low inflation and booming trade and capital flows - put downward pressure on yields and risk spreads everywhere.
This, he said, laid the seeds of a global credit bubble that extended far beyond the US subprime mortgage market and burst with devastating consequences.
"Excesses . . . built up for a long time, [with] investors looking for yield, mis-pricing risk," he said. "It could take different forms. For some of the European banks it was eastern Europe. Spain and the UK were much more like the US with housing being the biggest bubble.
"With Japan it may be banks continuing to invest in equities."
This argument - advanced by a number of economists and largely endorsed by Ben Bernanke, the Federal Reserve chairman - suggests that the roots of the crisis do not simply lie in failures within the financial system. It implies that avoiding crises will require global macroeconomic co-operation as well as better financial regulation and risk-management.
Sceptics say this argument excuses financial mismanagement and regulatory failures, above all in the US, which resulted in what should have been a beneficial flood of international capital on cheap terms being misdirected into bad investments in housing and other mispriced assets.
"A lot more needs to be learned about global imbalances," Mr Paulson said.
The International Monetary Fund warned about imbalances for many years, and the Group of Seven industrialised nations regularly expressed concern but there was little follow-up by national policymakers.
"Read the communiqués," Mr Paulson said. "I am not one who says just reform the IMF and let them deal with imbalances. You have to have sovereign nations . . . understand the system."
He said the Group of 20, which includes emerging nations, was the right international grouping to lead the global response to the crisis.
2008/12/25 New York Times http://www.nytimes.com/2008/12/26/world/asia/26addiction.html
Chinese Savings Helped Inflate American Bubble
“Usually it’s the rich country lending to the poor. This time, it’s the poor country lending to the rich.” Niall Ferguson
In March 2005, a low-key Princeton economist who had become a Federal Reserve governor coined a novel theory to explain the growing tendency of Americans to borrow from foreigners, particularly the Chinese, to finance their heavy spending.
The problem, he said, was not that Americans spend too much, but that foreigners save too much. The Chinese have piled up so much excess savings that they lend money to the United States at low rates, underwriting American consumption.
This colossal credit cycle could not last forever, he said. But in a global economy, the transfer of Chinese money to America was a market phenomenon that would take years, even a decade, to work itself out. For now, he said, "we probably have little choice except to be patient."
Today, the dependence of the United States on Chinese money looks less benign. And the economist who proposed the theory, Ben S. Bernanke, is dealing with the consequences, having been promoted to chairman of the Fed in 2006, as these cross-border money flows were reaching stratospheric levels.
In the past decade, China has invested upward of $1 trillion, mostly earnings from manufacturing exports, into American government bonds and government-backed mortgage debt. That has lowered interest rates and helped fuel a historic consumption binge and housing bubble in the United States.
China, some economists say, lulled American consumers, and their leaders, into complacency about their spendthrift ways.
"This was a blinking red light," said Kenneth S. Rogoff, a professor of economics at Harvard and a former chief economist at the International Monetary Fund. "We should have reacted to it."
In hindsight, many economists say, the United States should have recognized that borrowing from abroad for consumption and deficit spending at home was not a formula for economic success. Even as that weakness is becoming more widely recognized, however, the United States is likely to be more addicted than ever to foreign creditors to finance record government spending to revive the broken economy.
To be sure, there were few ready remedies. Some critics argue that the United States could have pushed Beijing harder to abandon its policy of keeping the value of its currency weak - a policy that made its exports less expensive and helped turn it into the world's leading manufacturing power. If China had allowed its currency to float according to market demand in the past decade, its export growth probably would have moderated. And it would not have acquired the same vast hoard of dollars to invest abroad.
Others say the Federal Reserve and the Treasury Department should have seen the Chinese lending for what it was: a giant stimulus to the American economy, not unlike interest rate cuts by the Fed. These critics say the Fed under Alan Greenspan contributed to the creation of the housing bubble by leaving interest rates too low for too long, even as Chinese investment further stoked an easy-money economy. The Fed should have cut interest rates less in the middle of this decade, they say, and started raising them sooner, to help reduce speculation in real estate.
Today, with the wreckage around him, Mr. Bernanke said he regretted that more was not done to regulate financial institutions and mortgage providers, which might have prevented the flood of investment, including that from China, from being so badly used. But the Fed's role in regulation is limited to banks. And stricter regulation by itself would not have been enough, he insisted.
"Achieving a better balance of international capital flows early on could have significantly reduced the risks to the financial system," Mr. Bernanke said in an interview in his office overlooking the Washington Mall.
"However," he continued, "this could only have been done through international cooperation, not by the United States alone. The problem was recognized, but sufficient international cooperation was not forthcoming."
The inaction was because of a range of factors, political and economic. By the yardsticks that appeared to matter most ? prosperity and growth ? the relationship between China and the United States also seemed to be paying off for both countries. Neither had a strong incentive to break an addiction: China to strong export growth and financial stability; the United States to cheap imports and low-cost foreign loans.
In Washington, China was treated as a threat by some people, but mostly because it lured away manufacturing jobs. Others argued that China's heavy lending to this country was risky because Chinese leaders could decide to withdraw money at a moment's notice, creating a panicky run on the dollar.
Mr. Bernanke viewed such international investment flows through a different lens. He argued that Chinese invested savings abroad because consumers in China did not have enough confidence to spend. Changing that situation would take years, and did not amount to a pressing problem for the Americans.
"The global savings glut story did us a collective disservice," said Edwin M. Truman, a former Fed and Treasury official. "It created the idea that the world was doing it to us and we couldn't do anything about it."
But Mr. Bernanke's theory fit the prevailing hands-off, pro-market ideology of recent years. Mr. Greenspan and the Bush administration treated the record American trade deficit and heavy foreign borrowing as an abstract threat, not an urgent problem.
Mr. Bernanke, after he took charge of the Fed, warned that the imbalances between the countries were growing more serious. By then, however, it was too late to do much about them. And the White House still regarded imbalances as an arcane subject best left to economists.
By itself, money from China is not a bad thing. As American officials like to note, it speaks to the attractiveness of the United States as a destination for foreign investment. In the 19th century, the United States built its railroads with capital borrowed from the British.
In the past decade, China arguably enabled an American boom. Low-cost Chinese goods helped keep a lid on inflation, while the flood of Chinese investment helped the government finance mortgages and a public debt of close to $11 trillion.
But Americans did not use the lower-cost money afforded by Chinese investment to build a 21st-century equivalent of the railroads. Instead, the government engaged in a costly war in Iraq, and consumers used loose credit to buy sport utility vehicles and larger homes. Banks and investors, eagerly seeking higher interest rates in this easy-money environment, created risky new securities like collateralized debt obligations.
"Nobody wanted to get off this drug," said Senator Lindsey Graham, the South Carolina Republican who pushed legislation to punish China by imposing stiff tariffs. "Their drug was an endless line of customers for made-in-China products. Our drug was the Chinese products and cash."
Mr. Graham said he understood the addiction: he was speaking by phone from a Wal-Mart store in Anderson, S.C., where he was Christmas shopping in aisles lined with items from China.
A New Economic Dance
The United States has been here before. In the 1980s, it ran heavy trade deficits with Japan, which recycled some of its trading profits into American government bonds.
At that time, the deficits were viewed as a grave threat to America's economic might. Action took the form of a 1985 agreement known as the Plaza Accord. The world's major economies intervened in currency markets to drive down the value of the dollar and drive up the Japanese yen.
The arrangement did slow the growth of the trade deficit for a time. But economists blamed the sharp revaluation of the Japanese yen for halting Japan's rapid growth. The lesson of the Plaza Accord was not lost on China, which at that time was just emerging as an export power.
China tied itself even more tightly to the United States than did Japan. In 1995, it devalued its currency and set a firm exchange rate of roughly 8.3 to the dollar, a level that remained fixed for a decade.
During the Asian financial crisis of 1997-98, China clung firmly to its currency policy, earning praise from the Clinton administration for helping check the spiral of devaluation sweeping Asia. Its low wages attracted hundreds of billions of dollars in foreign investment.
By the early part of this decade, the United States was importing huge amounts of Chinese-made goods ? toys, shoes, flat-screen televisions and auto parts ? while selling much less to China in return.
"For consumers, this was a net benefit because of the availability of cheaper goods," said Laurence H. Meyer, a former Fed governor. "There's no question that China put downward pressure on inflation rates."
But in classical economics, that trade gap could not have persisted for long without bankrupting the American economy. Except that China recycled its trade profits right back into the United States.
It did so to protect its own interests. China kept its banks under tight state control and its currency on a short leash to ensure financial stability. It required companies and individuals to save in the state-run banking system most foreign currency ? primarily dollars ? that they earned from foreign trade and investment.
As foreign trade surged, this hoard of dollars became enormous. In 2000, the reserves were less than $200 billion; today they are about $2 trillion.
Chinese leaders chose to park the bulk of that in safe securities backed by the American government, including Treasury bonds and the debt of Fannie Mae and Freddie Mac, which had implicit government backing.
This not only allowed the United States to continue to finance its trade deficit, but, by creating greater demand for United States securities, it also helped push interest rates below where they would otherwise have been. For years, China's government was eager to buy American debt at yields many in the private sector felt were too low.
This financial and trade embrace between the United States and China grew so tight that Niall Ferguson, a financial historian, has dubbed the two countries Chimerica.
'Tiptoeing' Around a Partner
Being attached at the hip was not entirely comfortable for either side, though for widely differing reasons.
In the United States, more people worried about cheap Chinese goods than cheap Chinese loans. By 2003, China's trade surplus with the United States was ballooning, and lawmakers in Congress were restive. Senator Graham and Senator Charles E. Schumer, Democrat of New York, introduced a bill threatening to impose a 27 percent duty on Chinese goods.
"We had a moment where we caught everyone's attention: the White House and China," Mr. Graham recalled.
At the People's Bank of China, the central bank, a consensus was also emerging in late 2004: China should break its tight link to the dollar, which would make its exports more expensive. Yu Yongding, a leading economic adviser, pressed the case. The American trade and budget deficits were not sustainable, he warned. China was wrong to keep its currency artificially depressed and depend too much on selling cheap goods.
Proponents of revaluation in China argued that the country's currency policies denied the fruits of prosperity to Chinese consumers. Beijing was investing their savings in low-yielding American government securities. And with a weak currency, they said, Chinese could not afford many imported goods.
The central bank's English-speaking governor, Zhou Xiaochuan, was among those who favored a sizable revaluation.
But when Beijing acted to amend its currency policy in 2005, under heavy pressure from Congress and the White House, it moved cautiously. The renminbi was allowed to climb only 2 percent. The Communist Party opted for only incremental adjustments to its economic model after a decade of fast growth. Little changed: China's exports kept soaring and investment poured into steel mills and garment factories.
But American officials eased the pressure. They decided to put more emphasis on urging Chinese consumers to spend more of their savings, which they hoped would eventually bring the two economies into better balance. On a tour of China, John W. Snow, the Treasury secretary at the time, even urged the Chinese to start using credit cards.
China kicked off its own campaign to encourage domestic consumption, which it hoped would provide a new source. But Chinese save with the same zeal that, until recently, Americans spent. Shorn of the social safety net of the old Communist state, they squirrel away money to pay for hospital visits, housing or retirement. This accounts for the savings glut identified by Mr. Bernanke.
Privately, Chinese officials confided to visiting Americans that the effort was not achieving much.
"It is sometimes hard to change successful models," said Robert B. Zoellick, who negotiated with the Chinese as a deputy secretary of state. "It is prototypically American to say, 'This worked well, but now you've got to change it.' "
In Washington, some critics say too little was done. A former Treasury official, Timothy D. Adams, tried to get the I.M.F. to act as a watchdog for currency manipulation by China, which would have subjected Beijing to more global pressure.
Yet when Mr. Snow was succeeded as Treasury secretary by Henry M. Paulson Jr. in 2006, the I.M.F. was sidelined, according to several officials, and Mr. Paulson took command of China policy.
He was not shy about his credentials. As an investment banker with Goldman Sachs, Mr. Paulson made 70 trips to China. In his office hangs a watercolor depicting the hometown of Zhu Rongji, a forceful former prime minister.
"I pushed very hard on currency because I believed it was important for China to get to a market-determined currency," Mr. Paulson said in an interview. But he conceded he did not get what he wanted.
In late 2006, Mr. Paulson invited Mr. Bernanke to accompany him to Beijing. Mr. Bernanke used the occasion to deliver a blunt speech to the Chinese Academy of Social Sciences, in which he advised the Chinese to reorient their economy and revalue their currency.
At the last minute, however, Mr. Bernanke deleted a reference to the exchange rate being an "effective subsidy" for Chinese exports, out of fear that it could be used as a pretext for a trade lawsuit against China.
Critics detected a pattern. They noted that in its twice-yearly reports to Congress about trading partners, the Treasury Department had never branded China a currency manipulator.
"We're tiptoeing around, desperately trying not to irritate or offend the Chinese," said Thea M. Lee, public policy director of the A.F.L.-C.I.O. "But to get concrete results, you have to be confrontational."
An Embrace That Won't Let Go
For China, too, this crisis has been a time of reckoning. Americans are buying fewer Chinese DVD players and microwave ovens. Trade is collapsing, and thousands of workers are losing their jobs. Chinese leaders are terrified of social unrest.
Having allowed the renminbi to rise a little after 2005, the Chinese government is now under intense pressure domestically to reverse course and depreciate it. China's fortunes remain tethered to those of the United States. And the reverse is equally true.
In a glassed-in room in a nondescript office building in Washington, the Treasury conducts nearly daily auctions of billions of dollars' worth of government bonds. An old Army helmet sits on a shelf: as a lark, Treasury officials have been known to strap it on while they monitor incoming bids.
For the past five years, China has been one of the most prolific bidders. It holds $652 billion in Treasury debt, up from $459 billion a year ago. Add in its Fannie Mae bonds and other holdings, and analysts figure China owns $1 of every $10 of America's public debt.
The Treasury is conducting more auctions than ever to finance its $700 billion bailout of the banks. Still more will be needed to pay for the incoming Obama administration's stimulus package. The United States, economists say, will depend on the Chinese to keep buying that debt, perpetuating the American habit.
Even so, Mr. Paulson said he viewed the debate over global imbalances as hopelessly academic. He expressed doubt that Mr. Bernanke or anyone else could have solved the problem as it was germinating.
"One lesson that I have clearly learned," said Mr. Paulson, sitting beneath his Chinese watercolor. "You don't get dramatic change, or reform, or action unless there is a crisis."
December 31, 2008
The headline on a front-page article on Friday, on the role in the housing bubble and consumption binge in the United States played by investment from China, could have been misunderstood. The article described how the United States has been tolerating a huge trade deficit with China while Chinese authorities have invested huge sums in American government securities from savings partly created by the inflow of American dollars. "Dollar Shift: Chinese Pockets Filled as Americans' Emptied" meant to describe the complications of that situation; it did not mean to imply that China has profited from the weakness of the American economy.