Grand Central: A PBOC Reporter Points to Threats for World #2 Economy

November 25, 2014 Posted by admin

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    If you didn’t get a chance to read it this weekend, I recommend you take a moment today to read my colleague Bob Davis’s Saturday essay on the possible end of China’s economic miracle. Bob just returned to Washington after a four-year stint in Beijing covering China’s economy and its central bank, the People’s Bank of China.

    Bob returns with a sobering perspective on the prospects for China’s economy. Sometimes, an anecdote is more valuable than a gigabyte of economic data (especially Chinese economic data.)

    From Bob, there is this:

    From my hotel window in the northeastern Chinese city of Yingkou I could see empty apartment buildings stretching for miles, with just a handful of cars driving by. It made me think of the aftermath of a neutron-bomb detonation—the structures left standing but no people in sight.

    And then there is this:

    The situation has become so bad in Handan, a steel center about 300 miles south of Beijing, that a middle-aged investor, fearing that a local developer wouldn’t be able to make his promised interest payments, threatened to commit suicide in dramatic fashion last summer. After hearing similar stories of desperation, city officials reminded residents that it is illegal to jump off the tops of buildings.

    I did my own stint in Asia in the late 1990s. The economic miracle in question then was the Asian tiger economies of South Korea, Taiwan and Southeast Asia. Foreign investors had a hard time believing in early 1997 that these economic success stories could land hard after a long run of robust growth and what looked like sound economic fundamentals. If the past quarter century is proof of anything, it is that no economy — no matter how large, how sophisticated, how developed or how respected for its economic policy management — is impervious to the laws of gravity after a debt or real estate boom.

    Bob notes that over the past 50 years, only four countries have experienced as rapid a buildup of debt as China during the past five years. All four—Brazil, Ireland, Spain and Sweden—faced banking crises within three years of their supercharged credit growth.

    There are two common arguments against this glum perspective, which I hear often from central bankers and others.

    The first is that China is armed with nearly $4 trillion of foreign exchange reserves, a vast trove of resources with which it can cushion a downturn. Yet those reserves are already being put to work. They’re sitting in foreign denominated assets, largely U.S. dollar assets like Treasury and mortgage bonds, preventing the Chinese currency from appreciating and undermining the all-important export sector. It’s not obvious how Chinese authorities would transform foreign currency assets into domestic bank capital in the event of a bank crisis without somehow undermining exports. Nations with current account surpluses and large reserves are not immune from economic malady. Exhibit A: Japan.

    The other argument is that Chinese officials are savvy, capable and well aware of the economic challenges they face. To that I would note that U.S. officials felt awfully savvy during the U.S. economic boom in the 1990s. That didn’t end well.

    Hundreds of millions of Chinese have emerged from poverty during its long-running economic boom. That really is a miracle to celebrate. Yet China seems to loom today as a serious threat to the global economic outlook.

    -By Jon Hilsenrath


    Associated Press

    What Big Economies Got Right, or Wrong, After Crisis. The starkly divergent policy paths taken by the world’s advanced economies in recent years point to lessons for world leaders trying to chart courses in difficult post-crisis environments. The U.S. and U.K. appear to have gotten something right, while the eurozone and Japan have fumbled.

    Central Banks Move Again to Boost Global Economy. Two major central banks moved Friday to pump up flagging global growth, sending stock markets soaring but raising new questions about the limitations of a seven-year effort to use monetary policy to address economic problems.

    China’s Central Bank Succumbs to Political and Market Pressure. The surprise interest rate cuts Friday by the People’s Bank of China came after a series of piecemeal easing measures that failed to encourage banks to lend and companies to borrow. Before Friday, the central bank had resisted calls from within the government and in the financial markets and corporate sector to cut interest rates. Bank officials had feared broadly easing credit would worsen China’s debt problems and put the economy at greater risk, according to People’s Bank officials.

    Bloomberg News

    China Central Bank Cut in Rates May Be Short on Impact. China’s move to slash lending rates to help slowing growth may lack punch, as Chinese banks likely will remain reluctant to lower loan rates for fears of hurting their profits.

    More on China’s surprise rate cut:

    – China Rate Cut Surprises, Doesn’t Overwhelm – Heard on the Street

    – China’s Interest-Rate Cut: A Primer 

    Economists React: China Central Bank makes surprise rate cut.

    – China’s interest rate cut: Markets are euphoric now, but will it work?

    Bloomberg News

    Dudley Denies ‘Serious Problems’ in Fed’s Regulation. The head of the Federal Reserve Bank of New York defended the regulator’s oversight of large financial firms Friday in the face of tough questions from Senate Democrats, who accused the Fed of kowtowing to the biggest banks. New York Fed President William Dudley denied his institution has serious cultural problems but said it could always improve on how it oversees big Wall Street banks.

    More on the New York Fed’s Role as a Regulator:

    Five Things to Know About Big Banks, the Federal Reserve, and Policing Wall Street. A Senate hearing this week raised the question of whether the Fed has fully addressed its alleged shortcomings as a regulator of big banks.  Here are five things to know.

    N.Y. Fed Staff Still Too Cozy With Banks, Senate Panel Is Told. The Federal Reserve Bank of New York hasn’t adequately addressed its shortcomings as a regulator of big banks, said David Beim, a Columbia University professor who had reviewed the institution’s practices in 2009.

    Fed’s Dudley: I’m More of a Fire Warden, Not a Cop on the Beat. Sen. Elizabeth Warren (D., Mass.) asked New York Fed President William Dudley to describe his organization’s supervisory responsibilities. Would he liken it to a cop walking the beat? she asked. That’s not quite how Mr. Dudley sees it. He offered a different comparison: a fire warden that focuses on making sure a building doesn’t catch on fire and burn down.

    Fed’s Dudley: It’s Up to Congress To Decide How to Fill My Job. “It’s the province of the Congress to decide how the Federal Reserve Act is written and how the president of the Federal Reserve Bank in New York and other Federal Reserve presidents are selected,” Mr. Dudley told senators during a heated hearing Friday.

    Fed’s Bullard Says Markets Misread Him In October Bond-Buying Dustup. In a Wall Street Journal interview, St. Louis Fed President James Bullard attributed some of the confusion to the fact that many market participants didn’t listen closely enough to what he said. He noted that what he said about the Fed’s bond-buying program hadn’t altered his long-running view that short-term interest rates should be lifted off their current near zero levels next spring.

    Fed Official Says Regulators Looking at Banks’ Commodities Activities. Regulators are expanding their examination of bank activities in commodities markets and could unveil new restrictions early next year to sharply restrict their trading and ownership of physical oil, metals and other raw materials, Fed governor Daniel Tarullo told Congress on Friday. He said the regulator was considering measures that could reduce the amount of allowable assets or revenue banks derive from physical commodity markets, increase capital costs for such activities and prohibit involvement in markets that pose risks to financial stability.

    Bloomberg News

    ECB’s Nowotny Says No Rush for New Measures. European Central Bank should assess the measures it has already taken to increase inflation before it considers new actions, a member of the ECB’s governing council said Monday. “Monetary policy always has long lags that means one should have a calm hand,” Ewald Nowotny said.

    BOE to Probe Whether Staff Helped Rig Money Auctions – The Bank of England has opened a formal investigation into whether its officials knew of – and even facilitated – the possible manipulation of auctions designed to inject money into the credit markets to alleviate the financial crisis. The probe, which started in the summer, has been revealed just a week after the UK central bank published a report that criticised its own response to the foreign exchange rigging scandal.

    Bloomberg News

    Sri Lanka Central Bank Warns on Yen Weakness. The fall of the yen against the dollar has raised the specter of competitive depreciations that could upset Asia’s monetary order, the governor of Sri Lanka’s central bank said in an interview.

    Swiss to Vote on Central Bank’s Gold. Swiss voters will decide Nov. 30 on an initiative that would force the country’s central bank to more than double its gold holdings, a prospect that has rattled markets and drawn opposition from the government, lawmakers and business groups.

    SNB Chief Warns Against Gold Vote. The head of the Swiss National Bank reiterated concerns that a popular vote requiring the central bank to keep a fifth of its assets in gold would hinder its ability to conduct monetary policy. SNB Chairman Thomas Jordan said Sunday the initiative, known as “Save Our Swiss Gold,” would limit the central bank’s “room for maneuver.” That would make it harder for the bank to intervene during crises and fulfill its mandate of price stability.

    Malaysia Fuel Subsidy Removal Won’t be Inflationary – Central Bank Gov. Malaysia’s move to end fuel subsidies beginning December would not be inflationary because of low global oil prices, its central bank chief said Monday. Bank Negara Malaysia Gov. Zeti Akhtar Aziz told reporters that the government’s move to scrap subsidies for a widely-used gasoline variant and diesel was a “very positive development” as it would also help the government to shrink its costly subsidy program. “It would not have inflationary consequences because [oil] prices are softening,” she said –Dow Jones Newswires.


    Joblessness Fell in Most States in October. How Does Yours Compare? The lowest unemployment rates in the U.S. remained concentrated in the Midwest last month, though broad improvement across the country signals a steadily improving economy. Thirty-four states and the District of Columbia saw falling unemployment rates in October compared with September, the Labor Department said Friday. The rate rose in five states and held steady in 11.



    -ECB’s Nowotny delivers opening remarks in Vienna at 0745 GMT

    -BOE’s McCafferty remarks published at 1000 GMT

    -ECB’s Coeure speaks in London at 1000 GMT

    -ECB’s Weidmann speaks in Madrid at 1300 GMT

    -Bank of Israel releases a policy statement at 1600 local time


    -Bank of Japan releases minutes of its Oct. 31 meeting

    -BOJ’s Kuroda speaks in Nagoya

    -BOJ’s Nakaso, ECB’s Noyer speak at a luncheon in Tokyo at 0400 GMT

    -BOE’s Carney, Cunliffe, Forbes, McCafferty appear at a Treasury Select Committee hearing at 1000 GMT

    -ECB’s Nowotny speaks in Vienna at 1215 GMT

    -National Bank of Hungary releases a policy statement at 1400 GMT

    -Central Bank of Nigeria releases a policy statement


    -BOJ’s Shirai speaks in Hiroshima

    -ECB’s Constâncio speaks in London at 0810 GMT


    -ECB’s Draghi speaks in Helsinki at 1130 GMT

    -ECB’s Weidmann speaks in Frankfurt at 1215 GMT

    -Central Bank of Egypt releases a policy statement


    -ECB’s Weidmann speaks in Berlin at 1100 GMT


    -ECB’s Lautenschläger speaks in Berlin at 1030 GMT


    The end of China’s economic miracle? Journal reporter Bob Davis reflects on four years of living and reporting from China, where he says debt and corruption are hobbling the Asian giant. “During my time in Beijing as a Journal reporter covering China’s economy, starting in 2011, China became the world’s No. 1 trader, surpassing the U.S., and the world’s No. 2 economy, topping Japan. Economists say it is just a matter of time until China’s GDP becomes the world’s largest. So why, on leaving China at the end of a nearly four-year assignment, am I pessimistic about the country’s economic future?”

    The Week That Shook the Fed, Gretchen Morgenstern writes in the New York Times. Clearly, last week was not a good one for the Fed. But it was a good week for anyone interested in understanding how this secretive institution works… Increasing scrutiny of the Fed, and the New York Fed in particular, is absolutely justified, given the immense powers they enjoy.

    ECB moves a step closer to BOJ, says Richard Barley in the Journal’s Heard on the Street columns. He writes, “Drawing inspiration from Japan isn’t readily admitted to in economic circles. But under pressure, that looks like what the European Central Bank is doing.

    Bring on the currency wars, says Alen Mattich in the Journal. “Central bankers struggling against weak growth and falling inflation have come up with a cunning plan: shift the problems onto someone else. Finding it hard to stimulate domestic demand through cheap credit in a world of rock bottom interest rates, the next best solution central bankers have settled on is to generate growth by boosting net exports. And the way to do that is to devalue their currencies.


    The director of “Twilight” is out with a film about the Fed called “Fed Head.” Per the website, “When Federal Reserve Chairman Rob Rafaelson awakes with amnesia only moments before a big press conference, his children, maid and intern must explain the Fed to him using the only thing handy: the children’s toys.”

    More Americans think the IRS is doing a good job (41%) than think the Fed is (38%)

    Nancy Teeters, First Woman on Federal Reserve Board, Dies at 84—Bloomberg.

    Students at the David Eccles School of Business in Utah will hold a mock Federal Open Market Committee meeting Monday, complete with policy vote and news conference. The school is named for the father of former Fed Chairman Marriner Stoddard Eccles.

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