China’s lack of growth drivers is a bigger risk than inflation: Michael Pettis

(This interview with Michael Pettis, professor at Peking University’s Guanghua School of Management, a specialist in Chinese financial markets, was published in DNA edition dated January 10, 2011.)

China’s headline inflation numbers have had global financial markets bracing for tightening measures in what they consider ‘the engine of global economic growth’. But Michael Pettis, professor at Peking University’s Guanghua School of Management, a specialist in Chinese financial markets and a senior associate at the Carnegie Endowment for International Peace, reasons that, in fact, the bigger risk in China in 2011 is that it lacks adequate growth drivers – beyond investment-led growth. And that investment-driven growth is feeding surpluses into a world that is, in fact, experiencing anaemic demand, while also feeding malinvestment in China. To that extent, China isn’t the “locomotive of global economic growth,” and a ‘new normal’ in GDP growth rates, which is well below trendline, would be good for China and for the world, Pettis argues in an interview to DNA Money’s Venkatesan Vembu. Excerpts:

Let’s talk of China in 2011: is inflation or the lack of growth drivers the bigger risk in China?

I would say it’s the lack of growth drivers – or rather that the main growth driver is still going to be growth in investment. I know that there’s a great deal of worry about inflation and if inflation continues rising, it creates real serious problems. But I also believe that in a financially repressed system like China, where interest rates are kept very low, there’s a very weird inflation dynamic. Inflation becomes sort of self-dissipating: as inflation rises and interest rates fail to follow, the real rate declines and the deposit rate is pretty much negative. That has two effects: on the consumption side, it further reduces household income share of GDP because, with such high savings, the return on your savings should be an important part of your total income. But with the return actually negative, it puts significant downward pressure on your total income. I would argue that low household consumption in China is a function of low household income as a share of GDP. Anything that reduces that household income share puts downward pressure on consumption.

Imagine a world with easy visas on arrival…

(This column was published in DNA edition dated January 5, 2011.)

Venkatesan Vembu

The ex-Beatle and irremediable peacenik John Lennon, who was murdered 30 years ago last month, wanted us to imagine a world without countries (or religions or possessions). There’s evidently a big market around the world for syrupy sentimentalism of that sort, which accounts for why Imagine became something of a “global anthem”. Heck, there’s even an ice-cream flavour, complete with chocolate peace symbols, called Imagine Whirled Peace.

When Barkha joins Sun TV, it’s time to eat your noodles

(This column, intended purely in jest as a turn-of-the-year satire, was published in DNA edition dated January 3, 2011.)

Venkatesan Vembu

A year ago, I gave expression to my wish-list of 10 whacky things I’d like to see happen in 2010. It turned out to be quite a madcap year, and a fair bit of my irreverent wishes were granted. Since the God of Whacky Things is in a benevolent mood, I’m offering my wish-list for 2011, in the hope that however low we may be dragged by corruption scandals, we’ll find something quirky to elevate us to a higher state of being…

1. Radia calling Radia
The latest tranche of leaked Niira Radia tapes shows that the corporate lobbyist calls herself and talks to herself. “After my tapped phone conversations were leaked, nobody takes my calls anymore,” Radia tells Radia. “I’m so glad I have you to talk to.” To which Radia responds: “Don’t say anything incriminating. They may be tapping this call too.” CBI officials want to interrogate the ‘other’ Radia as well.

‘Zombie ideas that caused the near-meltdown of financial markets are still driving policy’

(This interview, with John Quiggin, professor of economics at the University of Queensland in St Lucia and author of Zombie Economics: How Dead Ideas Still Walk Among Us, was published in DNA edition dated January 3, 2011.)

The arresting cover of John Quiggin’s recent book on economics looks more like a scene from Michael Jackson’s Thriller: beneath a night sky, zombies crawl out of cracked graves; blood trails trickle down, and a haunted house shimmers in the moonlight. That’s only because the message from Quiggin, professor of economics at the University of Queensland in St Lucia, is very spooky. “The zombie ideas that brought the global financial system to the brink of meltdown… still walk among us,” he says. These ideas – that “the financial markets are efficient” or that “trickle-down economics works” or that “privatisation is good” – that had been killed and laid to rest, most recently following the near-meltdown in global financial markets in 2008, are now “reviving and clawing their way” back to life – and continue to influence policy. In an interview to DNA Money’s Venkatesan Vembu, Quiggin explains why if these zombie ideas aren’t killed once and for all, they will do even more damage next time. Excerpts:

What are these “zombie ideas” and how is that even though they’ve been “killed”, they haunt the policy discourse?

In the book I look at five different ideas that together form a package that’s often called by names such as ‘neoliberalism’ and the Washington Consensus. I’ve used the phrase ‘market liberalism’ to describe these ideas. There are a bunch of different reasons why they keep coming back. One is that people have academic careers around them and are committed to the ideas; a second is that they benefit the interests of powerful groups, who want the ideas to be sustained.

The limits of Keynesian economics have also been exposed by the financial crisis of 2007-08. Is Keynesian economics also a zombie idea?

In my view, it isn’t. Particularly from an Australian perspective, we adopted Keynesian policies and came out a lot better than countries that were either unwilling or unable to adopt Keynesian stimulus, and so have run into the greatest difficulty, particularly some of the countries where the scale of the banking crisis has been such that they’ve had to move rapidly towards austerity.

‘It’s a myth that Made-in-China goods are of poor quality’

(This interview about the campaign, by an unlikely candidate, to pitch the made-in-China label as measuring up to international quality standards, was published in DNA edition dated January 1, 2011. It offers an interesting counter-narrative to reports about the poor quality of mass-manufactured made-in-China goods, which was reflected in this interview with Paul Midler, author of Poorly Made in China.)

Lionel Derimais: photograph by Jade Charles

China’s reputation as the world’s factory floor has been dented in recent years by horror stories about the poor quality of made-in-China goods. Children’s toys were found to be coated with lead-laced paint, and medicines and pet foods with toxins caused fatalities overseas.  But beyond those aberrations, which perpetuate something of a myth, it is possible today to find many “nicely made-in-China” products, argues Lionel Derimais, a French national who until recently lived in Beijing. Derimais is quite an unlikely authority on Chinese-made merchandise: an itinerant professional photographer – he travelled in the Sunderbans with French writer Dominique Lapierre in 1999 – he came to Beijing in 2005 to document a country in the throes of an Olympics fever. Earlier this year, disquieted by the erroneous image being conveyed about the quality of Chinese merchandise, he started a blog (www.nicelymadeinchina.com) to showcase manufacturers and service providers in China who measure up to international standards. In just eight months, his blog has become a gateway for people looking to source quality goods from China. In an interview to Venkatesan Vembu, Derimais explains his motivation in promoting the made-in-China label. Excerpts:

How did you, a professional photographer, come to write about China merchandise?

Whenever I read reports about the poor quality of made-in-China products, I’ve felt that they don’t reflect the reality of people who live in China, for whom things are improving every day. One evening in November 2009, after one of those ‘bad China’ days, my girlfriend showed me a beautiful bag and said, “See, there are some nicely made-in-China products.” That gave me an idea: I immediately checked if the domain name (nicelymadeinchina.com) was available, and bought it, with no particular idea in mind. In mid 2010, I began to write about people I knew of who made quality stuff to an international standard; my friends and associates referred other products and services. That’s how it all started.

Wen a neighbour comes calling…

(This article, a curtain-raiser to Chinese Premier Wen Jiabao’s upcoming visit to India, was published in DNA edition dated December 12, 2010.)

Venkatesan Vembu

A chill wind is blowing across Beijing, but it isn’t just a momentary meteorological effect that drives down night-time temperatures well below zero. The frostiness in the air in recent times has cast a cold, clammy influence farther afield – on China’s relations with practically all its neighbours. It is reflected in the icy edge to the tone in which Chinese leaders have been hectoring leaders far and near, and in the blustery headlines in the official Chinese media.

On Friday, however, the weather changed momentarily on at least one unlikely front: the official English-language China Daily sought to dispel some of the winter chill with an all-too-rare sunny account of Sino-Indian relations, barely days ahead of Premier Wen Jiabao’s visit to India. A new supplement, ‘Asia Weekly’, bearing a splashy photograph of Wen and Prime Minister Manmohan Singh, framed Sino-Indian relations in the context of the rise of the “two Asian Titans” as growth engines of the global economy at a time when much of the developed economies are down and out.

Stephen Roach takes the ‘baseball bat’ to Paul Krugman

(This article was published in DNA edition dated December 10, 2010.)

Venkatesan Vembu

The intellectual war of words between economists Stephen Roach and Paul Krugman is the stuff of legends. They disagree – vehemently – on the fundamentals underlying the reasons for the US economic affliction: the Nobel Prize winning Krugman argues that China is ‘stealing jobs with an undervalued currency, and uses his platform as a columnist in the New York Times to campaign for tariffs on Chinese imports. Roach, on the other hand, points out that the US has a trade deficit not just with China but with 89 other countries, and traces US’ economic ailments to a poor record of saving.

Earlier this year, when the argument got a little too heated, Roach said, “we need to take the baseball bat” to Krugman’s argument.