ArticleThere's a high potential for a second wave of the financial crisis (3)
China confidence
China’s State Council announced a trial program allowing foreign trade settlement in R-M-B in five cities. Shanghai, Guangzhou, Shenzhen, Dongguan and Zhuhai. This is seen as a critical first step towards the internationalization of the Chinese currency.
A: The RMB is going to be part of the pilot program to make it the foreign currency of trade. What are your thoughts about that?
J: We are all for it. We are all for it, I think, it’s a logical step in that China trying to establish itself as a major financial center. And obviously as a financial institution, we will stand to benefit from it, so we are happy that there is more progress being made in that in recent times.
A: Do you think the dollar will ever lose its lead in foreign trade?
J: It’s almost certain to say“yes, it will”, but just difficult to say“when”and that might happen in my life time. I mean if you go back in history, dollar was not always the major benchmark currency. So, I think, with the change in economic dominance around the world, and that might be a result of commodity push and that might be a result of China’s, you know, the factory of the world kind of establishment. Whatever happens, on some stage, it’s likely to be either a mix of a few currencies, but I think to see the US dollar from here to remain forever, I think, is quite difficult. But, for now, I don’t think, it takes a long time for currency to be replaced a benchmark currency. So, I don’t see anything’s changing in the next decade or so, but you can see the direction.
A: Talk a little bit about the benefits of making the RMB closer to the benchmark currency.
J: But I think it will take more than that for RMB to establish itself as a benchmark global currency, because you clearly have to sort of loose all controls on it, and that ,you know, it’s probably something which is not very easy to do, you want to test that at every step. It also needs to be in the capital markets of China need to be at the world class level which take time to develop how the strong the intention. So, clearly, it is time around it, as one currency, one repeat as an obvious alternative in time to come. It’ll being RMB, that might be one or two or more if the Middle East currencies got together to a common currency or a bigger Asian conglomerate got together to a common currency. You know, like China, Japan, Korea, kind of combination, but the RMB is very likely to be the middle of something as the next alternative.
A: Why has it taken this long to get it to this point even?
J: I think, till very recently, there was no question about America’s dominance of the global economy stage. I think it’s only when that gets questioned, and the amount of printing they have to do for currency to get through this crisis, is probably another blow, for their dominance. But, you know, they have a new leadership, they have new horizons to conquer. So, who knows, in the 80th people say Japan is going to shoot through the roof and will takeover the world and that didn’t happen. And now, people are predicting that US will fall through and they might not happen as well so we will see.
Chinese Premier Wen Jiabao said in his work report to the National People’s Congress that China will achieve 8% growth this year. He believes that goal is realistic despite the deepening financial crisis, and stressed that China is playing an important role in stabilizing the world economy.
A: The IMF has said that out of all the countries involved, China is the only one not part of what they called in great recession. What makes China so insular to that?
J: I think there’s such a powerful domestic mystery that China has. Also I think it has all lot of its destiny in its own hands. It has the potential given the strong foreign exchange reserves, given the form of government where it can implement and execute much more effective leadership than other forms of government and can do it in a size which is also quite important. On the other hand, by the same token, it’s also very much vulnerable to the success of the US because, not only it is dependent on the US and Europe for its export market, but it’s also dependent for its investment which is quite sizable. And I think the immediate solution for China is of course creating the right levels of employment, which I think at the CPPCC meeting, it was reinforced. But I think the more medium term solution is to unlock consumer spending in China, because eventually we have to find another spending base. It’s not going to be the US and Europe in a hurry. So I hope China, it has all the ingredients within itself to be able to come up with its own solution in the time to come.
A: On that note, a report out today saying that lawns have quadrupled in the latest report and the percentage of cash flow getting back into the market is like 20%. It’s a huge number right now.
J: It’s very encouraging. And it’s a big signal to the rest of the world as well that there is confidence here. It’s back by reelection. It’s real impetus going into the real economy. This is not about feeding affluence institutions or feeding big balance sheet etc. this is about real common man on the street getting the benefit of that. So I think China is leading the way.
A: There’s also some concern out there however that the amount of savings in China is increasing. What can that signal worrisome down the road?
J: Culturally, China, as many other countries in Asia are one where the elderly provide for the young offspring. So clearly there’s going to be huge amount of bias towards saving, especially when they see another crisis hitting them. But I would think in the medium term, China has the potential to create enough security through health care, through pension reforms, through social security measures, which will allow people to live more for the day than for the future.
A: Is there some concern however, with all this money in the credit lawns going out to people that it’s going to be hard for the government to stabilize the market?
J: It’s a trade off situation because if you don’t pump money into the system, you are not going to bring confidence back, you are not going to bring spending back, and you are not going to be able to revive the economy. On the other hand, absolutely, the more money out there in circulation, you have less control over how it gets allocated and how it gets spent. But I guess, in today’s world, to get out of the crisis, it’s better to have more in the system than this.
And it appears the measures are working. On April 13, Premier Wen Jiabao announced the economy showed better than expected changes in the first quarter. That news came just days after the central bank said it would be boosting financing for small and medium sized businesses. Leaders, once again, emphasizes the need to boost confidence in order to boost spending.