In a Q & A with Michael Spence, Nobel Laureate in Economics 2001, on the U.S. economic crisis on Squawk Box at CNBC, Spence makes some notable comments on China’s management of its economy and its responsible actions on the global economic stage.
These statements are “notable” only in that they represent a rare, positive (and fairly objective, in my view) comment on China’s responsible management of its economy, from an authoritative figure, made on U.S. mainstream news.
In light of the coming U.S. election and our tendency to scapegoat foreigners for domestic ills, it is helpful to hear a voice which does not seek to assign either blame, cast China’s role in a negative light or speak of China with a sense of paranoia.
At the very least, it might help some people realize that not everyone who opines that the Chinese government is doing a responsible job in managing their economy is a mere unthinking follower of Chinese government propaganda.
My favorite soundbite: “China’s faced challenges for the last 30 years, when they started reforms, people bet against them every year, and every year we’ve been wrong, [laughter] so this is not a good time to start betting against them.”
See the link below.
The exchange on China starts at about 5:50 mins and runs to 7:30. My rough transcript follows:
Excerpt from Nobel Thoughts on the Economy. Assessment of today’s global economy, with Michael Spence, 2001 Nobel Laureate in Economics and Jack Welch, former GE chairman/CEO. SquawkBox, CNBC, October 23, 2008.
Q. Is China going to save us?
Michael Spence (MS):Yes.
Q. They are?…[Jack Welch interruption]…Talk about China. In what way are they gonna help? Cause some people are talking about real dire circumstances there that’s not going to rescue us.
MS: Yeah, there’s a lot of talk of that, let me just put it into perspective.
China’s faced challenges for the last 30 years, when they started reforms, people bet against them every year, and every year we’ve been wrong, [laughter] so this is not a good time to start betting against them.
They have enormous fiscal and other resources. Their debt to GDP ratio is tiny. They have a huge batch of government revenue, and they\’re done this before. In 1997-98, we, the United States government, and and the IMF, asked them not to devalue into that disaster, in Asia, and they didn’t. Highly responsible action.
And Zhu Rongji poured billions into the economy, uh, to stimulate domestic growth. And and it’s…it’s perfect for them anyway. Their savings rate is you know, ten percent above the investment rate. At 55 percent, they might as well consume a bit more right now. So, I think they will hold it at eight, eight-and-a-half percent.
Q. Are they, and others, gonna to continue to finance our debt? All our new debt?
MS: Well…in the long run, no. We’re going to restore…get rid of the imbalances. Uh, there’ll be some recycling of capital, it has nothing to do with trade deficits, right? We pour capital in there, other people do too, and they cant absorb it all, so the Central Bank sends it back out, so I wouldn’t be surprised to see reserves continue to grow for some time. But they they won’t shoot themselves in the foot. For sure.
Yes, China should fund US finance as without US’s help (and its influences on the West) in last 30 years, China will not be today. US’s FDI (investment) and opening the market is the most important pillar to China’s success. The other pillars are building infrastructures in coastal/special areas and governance. India lacks all 3 and that’s why they are behind. The other argument is you do not want to kill the goose that lays golden eggs.
No. It is like opium, the more money they take the more they spend on stuffs they do not need; an addict seldom recovers. China’s past investments including almost 1/3 of the treasury bill yield bad returns. Some big investments last year lose over 50%. China does not have the financial skills to evaluate foreign investment. In most yardsticks, they’ve over-paid at the time of the investment.
Tasks China should do. US companies are still rich in technology and management (not all). Bail out or buy the companies that will help China to move from low-cost consumer products to high tech products. Negotiate with US to buy certain technologies that currently are restricted to China. Evaluate buy/build options as plenty of bargains in US. To illustrate, many locations of some failed banks around the world are great buys and they’ll never be available when economy returns. Negotiate good prices to buy farm products for next several years.
With the shrinking market from US and the west for the next two years at least, they still have to improve the infrastructure to reduce social unrest even the return is less than before. Buy and stock pile minerals and oil. Invest in pollution controls… 8% growth is the goal.
Also time to tweak the system.
1. QA on toys. Saving pennies on paints using lead caused the entire toy industry to collapse – the major part of the blame is world recession. Is it worth it? The government needs to control before it happens. More inspectors and laws to punish violators.
2. Same for food and many other sectors.
3. Water/air pollutions. The price we pay for jobs is too high.
4. Local corruption.
With high monetary reserve, it is time to clean up in addition to create jobs.
Charles Liu says
What do you expect Spence to say, in light of what’s happening economically? Greenspan just got grilled at a congresional hearing yesterday, where he was forced to perform political self-criticism by admitting he’s 40 year view on the free market system may be wrong.
Tony, these losses now can be put on something a little more respectable, like “economic downturn”, “investment loss”, rather than unequal treaties and war reparations 😉 China, you’ve come a long way.
TonyP4: I couldn’t have put it better. I completely agree with everything you say and all your recommendations. These days, China has an opportunity to really uplift her economy and improve the infrastructure and the society as a whole.
Charles, Americans don’t perform “political self-criticism”. It’s not even a part of our thought process. 🙂
Greenspan is only consulting these days and I give him a lot of credit for admitting he was wrong. He didn’t have to appear before Congress, he chose to.
China’s economic decisions have been praised in every article I’ve read. Even holding the value of the renminbi steady is considered a smart decision on the part of American economists. I think Spence was just being honest. When you’re a Nobel Laureate, you typically don’t care about impressing others and just shoot straight. I also noticed everyone on the panel agreed with him. So far, I haven’t heard anyone blame foreigners for this economic situation. The greatest blame has fallen on the Bush administration for lax regulation and on Congress for pushing loans which were later turned into securities that only had value if the price of housing continued to rise. Wall Street investment bankers have also taken a lot of well deserved heat.
We personally know about 5 or 6 Chinese Americans here in San Diego whose investment banker sons have been laid off in the last few weeks, not just from the companies that failed but also from Merrill Lynch, Goldman Sachs and smaller concerns. Interestingly, these kids all in their late 20s/early 30s were pulling in around a half million apiece last year. I guess the roller coaster ride is over.
It could be a very valuable lesson for those half-millionaires in life. It is good for them in the long run. I wonder whether they drive their expensive cars to the unemployment office, sorry for asking.
Steve Rose says
On QA on toys and other exports:
Let’s hope Wal-mart, Mattel, and the likes reduce exploiting the low-income chinese workers. Give the factory some breathing room so that the Taiwanese factory owners do not need to use extreme approaches to cut cost. Walmart, for example, is notorious in china to offer the lowest price for products.
I guess the slow down in US consumption this holiday season will see bankruptcy of many Taiwanese owned sweat shops in China, or drive them to other countries. So that chinese companies can refocus on domestic consumers first. Generally it is a good thing.
TonyP4: It seems some of them bought reasonably priced houses and paid them off, so they’re in good shape. Others created a high end lifestyle expecting to be making that money or more for the rest of their lives and are taking a bath financially. So I suppose you can get a great deal on a luxury car these days!
Charles Liu says
Steve is right, My aunt in LA just got 10K off sticker price on a new E-Class. Used cars are plenty and cheap too. Collectible car market is a mess right now.
So all you Asian saver type, go bid on a near-vintage Ferrari cheap (make sure it’s a Pinnifarina.) After Obama is elected those cars will only go up in value.
Come to think of it, that’s a business opportunity right there – auction sports cars cheap and send them to China to feed the growing car culture there.
@Charles Liu – Too right, self-criticism is exactly what Greenspan’s speech was. It was incredible, as a life-long conservative I was shocked by it.