China getting worried about the strength of the US Dollar

China has renewed its call for the creation of a super-sovereign currency to reduce the US dollar's domination of the world's monetary system. It is believed they want the Special Drawing Right, the International Monetary Fund's unit of account, to eventually displace the dollar as the principal reserve currency.

In its annual financial stability report, China's central bank did not mention the dollar by name but said it was a serious defect that one currency should tower over all others.

'An international monetary system dominated by a single sovereign currency has intensified the concentration of risk and the spread of the crisis,' the People's Bank of China said.

In a veiled call for the US not to erode the value of the dollar through excessively loose monetary and fiscal policies, the PBOC urged closer supervision of those countries that issue the main reserve currencies.

China is no doubt getting worried about the $1.95 trillion in official currency reserves it has in US dollars. Any further big US budgetary and monetary stimuli may well generate inflation, in turn lowering the purchasing power of the US dollar and handing Beijing big losses on its large portfolio of dollar-denominated bonds.

China becomes world's third largest economy

Ashley Seager reports in Thursday's Guardian that China has overtaken Germany to become the world's third largest economy after revising its figures for output growth. The Chinese economy has grown tenfold in three decades and grew 13% rather than 12% in 2007, Beijing said, putting it behind only the United States and Japan in terms of gross domestic product.

The revision raised the Chinese gross domestic product to 25.7 trillion yuan, the national statistics bureau said, or $3.5tn at 2007 exchange rates. That would be ahead of Germany's 2007 GDP of €2.4tn, or $3.3tn. The fact that China has 1.3 billion people, though, means that GDP per head – a typical measure of individual wealth – remains well behind leading economies. Germany's 85 million people were far ahead of China in this category in 2007 at €28,200 euros per head ($38,800). China's per-person figure was 19,800 yuan ($2,800) in 2007, although many Chinese survive on a lot less than that. The Chinese government says 100 countries in the world enjoy a higher income per head than it does.

China expects to keep on growing in spite of the current economic turmoil. But economists have slashed 2009 growth forecasts to as low as 6%. That would be the highest for any major economy but is worrying for the country's leaders, who are concerned about public anger over recent job losses. Nevertheless, economists think it will take only three to four years for China, which recently overtook Britain, to surpass Japan ($4.4tn GDP) to become the world's number two economy. The United States is the world's biggest economy, at $13.8tn in 2007.

Shanghai drops low

A recent survey by the official Shanghai Securities News and Stock Star showed that over 60% of the 25,110 respondents had lost nearly 70% of the money they invested in the Chinese stock market in 2008. Only 6% of the respondents said they had made money in the past year, the China Daily reports. The survey also showed that more than half the respondents said they were "fully" invested in equities while 30% said they had kept on buying in the past several months in the false belief that the market had bottomed out. As financial opportunities in China are more limited than in the West, investments in shares are undertaken by a wider section of society than here.

Chinese slowdown may fuel social unrest

The accelerating economic slowdown in China will lead to huge unemployment and could fuel social unrest, China's top planner has said. Zhang Ping, head of the National Development and Reform commission, said the impact of the global crisis on China's economy was deepening. "Excessive bankruptcies and production cuts will lead to massive unemployment and stir social unrest," he said. A state think tank said annual economic growth would slow to 8% this quarter.The State Information Centre blamed the fall - from 9% in the third quarter - on slowing export and the property market crisis. The 8% growth forecast for the fourth quarter is still faster than any other leading economy but the Chinese authorities have already had to deal with protests from fired workers.

China pumps huge money into its economy.

China announced an absolutely huge economic stimulus plan on Sunday aimed at bolstering its weakening economy, a sweeping move that could also help fight the effects of the global slowdown. At a time when major infrastructure projects are being put off around the world, China said it would spend an estimated $586 billion over the next two years — roughly 7% of its GDP each year — to construct new railways, subways and airports and to rebuild communities devastated by an earthquake in the southwest in May.

Following the news, the price of oil climbed more than $4 a barrel today to $65.32. Although analysts had been expecting China to announce a stimulus package, they had not been expecting anything of this magnitude or aggression.

The slowdown in China

We’re now seeing evidence that China isn’t immune to the financial crisis after all. Its economy is clearly slowing down. Very few economists expect China to go into recession and while the forecast that the economy will expand by 5.8% in the fourth quarter this year might make western economies envious, it is down from about 11% in 2007. Just as its growth astounded much of the world, it now appears to be slowing more quickly than anyone expected.

The Chinese boom was built on three components, namely exports, investment and consumption. All three have slowed down. Construction projects are being suspended, consumer confidence is declining and many factories in southern China are closing, putting tens of thousands of migrant laborers out of work. Car sales in China have plummeted this year, air travel is in decline, property sales have dried up, and this weakness in the property market is hitting the makers of steel, cement and glass. It's also not helping that China’s stock markets have also collapsed, after a stunning rise in 2006 and 2007. Share prices in Hong Kong are down about 50%, and Shanghai 67% this year — wiping out nearly all the gains it had made in the previous two years.

All of this and the threat of rising joblessness and social instability will spur the Chinese Government to address the issue. It is preparing a large economic stimulus package (fiscal and monetary policy measures), which will push new infrastructure projects, offer aid to exporters and search for ways to prop up the nation’s severely depressed stock markets and property markets. There will be more massive and aggressive announcements from the Chinese government in the months ahead. However, China also has a lot of plus points to help out. Unlike elsewhere, Chinese banks did not issue subprime loans as a rule, and the country's €1.43 trillion in hard-currency reserves will be very useful to have in a downturn. The currency is stable and there are high liquidity levels, all of which give China the most flexibility in the world to fend off the impact of the global financial crisis.

"China may be heading for a severe economic slowdown",
London Times, 08/11/2008.

"Once sizzling, China’s economy shows rapid signs of fizzling",
New York Times, 07/11/2008.
"China's stalling boom has globe worried",
Irish Times, Saturday, 25/10/2008.

Chinese Toymakers Feeling the Crunch.

The 4c students may recall on Thursday, while we were looking at factors which can shift a supply curve, I mentioned how Chinese toy exporters were being put under so much strain that half of them have gone bust in 2008. The reasons behind the failures are weaker demand from the US, a stronger Chinese currency and tougher safety standards.

Here's the BBC news report on it.
If you'd prefer to read the report, it's here.