03/01/2011 – Financial Times
China’s biggest bear, Andy Xie, has made his prediction for 2011 and it is pretty grim: the race for economic recovery will be a zero-sum game between China and the US. Xie, a former Morgan Stanley economist and one of the most outspoken critics of China’s growing property bubble, wrote last week in the Chinese publication China Century Weekly (published here in English) that he expects one of the two countries’ economies to crash. Xie says the combination of US dollars flooding the system with liquidity and China holding its currency down will be potent.
The most likely candidates to trigger the next global crisis are the US’s sovereign debt or China’s inflation. When one goes down first, the other can prolong its economic cycle. China may have won the last race. To win the next one, China must tackle its inflation problem, which is ultimately a political and structural issue, in 2011. If China does, the US will again be the cause for the next global crisis. China would suffer from declining exports but benefit from lower oil price.
Keeping inflation down is of key concern to Beijing’s mandarins. Over the weekend state media quoted Premier Wen Jiabao pledging to keep consumer inflation, a potential source of social unrest, down in 2011.
“The central government has taken a slew of steps to stabilize prices,” Wen said, promising to put the issue higher on the official agenda, something the government has been saying since November when inflation soared to a two-year high.
Following zero-sum logic Xie expostulates that China’s inflation will be great news for the US:
Inflation is good for the U.S., because foreigners own nearly 100 percent of its GDP in financial assets. With its massive U.S. debt holdings, China will suffer especially hard. Indeed, if China’s foreign exchange reserves evaporate in value, it becomes very vulnerable, unless its structural problems are solved.
Today’s lower-than-expected Chinese purchasing managers’ data for December will likely assuage concern in Beijing, and it will also calm investors worried that Beijing will clamp down on red-hot growth. Yet it is precisely this growth, Xie says, that risks a hard landing for China. He writes,
If China has a hard landing, the US’s trade deficit can drop dramatically, maybe by 50%, due to lower import prices. It would boost the dollar’s value and bring down the US’s treasury yield. The US can have lower financing cost and lower expenditure. The combination allows the US to enjoy a period of good growth . . .
Neither scenario would bode well for a 2011 global financial recovery. Even if one takes Xie’s warnings with a grain of salt, his predictions reveal precarious and complex possibilities that could trip-wire global recovery and that economic power brokers in both the US and China would do well to keep in mind.