Is Tim Adams a closet Democrat? And some other musings on Snow’s trip to China

Clearly not, given his role in the Bush/ Cheney 2004 campaign. 

But he also seems to think China should develop a social insurance system to help spur domestic consumption.   Read Friday's Wall Street Journal article by Neil King and James Areddy. 

"The US would like to see China cut the personal income tax rate and divert more money from massive fixed-asset investments in buildings and factories toward social programs like pensions and health care."

The call for tax cuts sound very Republican, the call for more social programs less so. 

"China ... has the highest savings rate—at around 50%-- of any major economy.   The reasons for that are many.  China has no real pension system, or government-funded health-care and housing costs are soaring.  "There is enormous precautionary savings" Mr. Adams said.

I tend to agree with Mr. Adams.  China ought to increase social spending, even if that means larger fiscal deficits.   As Cynic's Delight makes clear in an excellent post (which draws on work by the IMF), the recent surge in Chinese national savings reflects, in part, a surge in savings by the Chinese government.  Household saving rates are high, but unlike business and government savings, they have not been rising.  

Here, I think the US is pushing China to take steps that are also in China's own interest.   For reasons that I will lay out in more detail later this week, I doubt that China can rely as much on export growth to drive overall growth in the future as it has in the past.

I was a bit less impressed by the Treasury's call for massive financial sector liberalization -- above and beyond the liberalization that China has agreed to do as part of joining the WTO.   China's banking system certainly channels too much savings towards China's industrial and export sector, and letting US banks in might change that.  US banks are known for consumer (and hedge fund) financing, not for financing smokestack industries.   Still, I thought Mr. Adams statement that -- 

"The current banking system is not really a banking system, it is a mechanism by which the central state has pushed resources out to thousands of state-owned enterprises"

was a bit off.   

First, China's banks currently are a mechanism for channeling household savings to the China's central bank (the PBoC), not to state-owned enterprises!   Deposit growth has outpaced lending growth recently.  That is one reason why the PBoC has been able to sell large quantities of sterilization bills this year without pushing interest rates on those bills (By selling sterilization bills, the central bank prevents rapid reserve growth from leading to rapid money growth).  Second, China's banking system is changing.  The fastest growing banks are so-called joint stock commercial banks, which are often owned in part by local governments.  They often lend to joint stock companies, which themselves are partially owned by the local government.  If that sounds a bit murky, that is because it is.  As Jonathan Anderson of UBS has noted, the blurring of the lines between state firms and private firms is one reason why it estimate of share of economic activity generated by state firms differ so much. 

I still worry though.  The joint stock commercial banks may not make the mistakes the big four state commercial banks made in China in the 1990s, but it seems to me like that may be making some of the mistakes banks in other Asian economies made in the go-go years of the 1990s.

More generally, the Treasury's financial wish list seemed to push the narrow interests of US financial firms a bit too hard.  At least from the press reports, it does not seem like the US paid comparable attention to the reforms needed to maintain financial stability inside China during the liberalization process.    I would have liked to see a bit more emphasis on cleaning up the legacy of past bad loans.  China has made some progress here, but I think they still have a ways to go.  The government of China sometimes uses the poor health of Chinese banks as an excuse -- for example, as an excuse not to allow the renminbi to appreciate further.  But that does not mean there are not serious problems in China's financial sector, problems that will not be solved simply by letting US banks in. 

The US has an interest in Chinese financial reform, but it also jas an interest in China's financial stability.  If financial troubles from a botched liberalization led to a sudden fall in investment in China, China's current account surplus could surge.  Savings might rise, pushing the current account deficit up even more, if consumption fell along-side investment.  That would make China more dependent on exports.  

I also suspect the "Western banks will do for China's financial sector what Western hotels did for Chinese hotels" comparison made by Secretary Snow did not play that well in China.   The US would not respond well to a Chinese lecture on how to build up the US manufacturing sector. 

More generally, as Mark Thoma notes, Asia is less and less keen to be on receiving end of US lectures.  Listen to India's petroleum minister, Mani Shankar Aiyar: 

"I'm sick and tired at the lectures we are given by the west about the rules of the market, the sanctity of contracts and the need for correct procedures."

The Western banks who brought Refco's IPO to the market a few months ago also don't look so good right now.  Ironically, though, Aiyar was complaining about Goldman Sachs' role in helping a Chinese  state oil company win the bidding for PetroKaz, despite a higher initial bid from India's state oil company.  Tis a strange and tangled world we live in ....