You are quite right.

I realised that yesterday afternoon, and hoped nobody would notice!

‘ Ironically, the best hope of an industrial revival in Europe would be to free up China’s savings to promote domestic consumption and create a larger export market. ‘

I agree. And the best way of convincing Chinese workers to stop saving such a high proportion of their income is for the Chinese state to build social safety nets.

‘ Russia? Argentina? ‘

Their debt crisis was related to foreign currency and their pegs to the USD. Nearly all debt crisis in the developing world are related to foreign currency borrowings. Moreover, all currency pegs eventually lead to a crisis. Nearly all ( in the region of 99.9%) of UK Treasury borrowings are in GBP. The only gilt-edged promise, hence the name gilts is to pay the coupon and principal in pounds sterling. Since the government are monopoly suppliers of pounds sterling there is zero risk of default. I am not disagreeing with you on the mechanics of rising sovereign yields. I worked within the beast for long enough to know what happens when markets turn against companies and states. However, for sovereign issuers it is all a phony war to restrain governments from spending money. There will be huge sums of money being made playing the yield curve and CDS in the Greek crisis. Unfortunately the ordinary Greek citizen will be totally oblivious to the money being made from their ‘ crisis ‘ as they lose their jobs and public services are cut. When the same forces are finished with Greece they will move onto Portugal, Spain and finally Italy.

There are also things like the labour contract law introduced in 2008 which formally at least gives Chinese workers more rights in the workplace than US workers (enforcement is another matter).Peasants have also been given improved land use rights amounting to leashold status, which has tended to boost rural wages, or at least buffer them against the effects of recession. There’s also been a lot more investment in central and western China in recent years, where infrastructure is needed.

I mean, on a micro level, there are actually some good things you can point to from the Hu administration – and things, moreover which look fairly good from a leftist standpoint. But these are the sort of things that people like Ross and LIvingstone ignore in favour of huge macro-level development schemes basically designed to keep the wheels turning until Americans are ready to spend again.

In answer to Richard J @17: I’m aware of the issue and of Michael Pettis’s blog: I don’t think that China’s continued reliance on exports will lead to protectionism, basically because there’s nothing to protect and no political will to repatriate the industries that migrated to China and elsewhere. As we’ve seen, the political classes have no more desire in the West than in China to change the rules of the game. Ironically, the best hope of an industrial revival in Europe would be to free up China’s savings to promote domestic consumption and create a larger export market.

[Chinese workers] are paid pitifully low wages and have no hope of securing anything better.

Given the growth in China’s per capita GDP, I’d say they have very realistic hope of getting higher wages in the future.

“Another way China grows is by doing what I observed last summer: going to places like 1000-year old Yancheng, razing it to the ground, and raising a city the size of Chicago in its place.”

A de facto default through inflation is not something the CRA consider when rating.

That’s just too simplistic. What the rating agencies use to determine their ratings is the affordability of the debt. The markets (not the agencies) factor in inflation risk as a part of the premium they will pay for the debt. If inflation is high (or there is seen to be a risk that it will become so), they will either demand higher interest rates (thereby making debt more expensive and less affordable) or will demand inflation-linked bonds (thereby making borrowing no less expensive if inflation does rise).

Which ultimately means that inflation, or the risk of inflation, makes borrowing more expensive, which tracks directly into the rating agencies’ calculations on the rating. And if you think this is all strictly irrelevant and theoretical, look at what happened to Greece’s borrowing costs when they were downgraded.

http://ftalphaville.ft.com/blog/2009/12/22/117886/greek-bond-blow-out/

Portugal is likely to be next.

with a sovereign issuer who issues debt in their own currency there is zero risk of default. Spain and Greece do not have control over their monetary policy.

Russia? Argentina?

“THE security service MI5 has accused China of bugging and burgling UK business executives and setting up ‘honeytraps’ in a bid to blackmail them into betraying sensitive commercial secrets. . . ”
http://www.timesonline.co.uk/tol/news/uk/crime/article7009749.ece

Too much attention is given to sovereign credit default spreads. There is no implied default risk in the price as they are over-the-counter illiquid instruments. For example, what is the point of CDS on US Treasuries? It’s like buying insurance against the end of the world. You will not be around to collect. And if the US ever defaulted on their debt there would be no functioning monetary system left. I know very well the mechanics of rising yields in response to a downgrade but my point was with a sovereign issuer who issues debt in their own currency there is zero risk of default. Spain and Greece do not have control over their monetary policy.

I know that the market would react irrationally. However, gilt yields in an efficient rational market would only rise to increasing inflationary expectations and in expectations of interest rate rises. The UK banking system has an infinite capacity to absorb gilts as the central bank has an unlimited capacity to provide liquidity. That is the difference between issuing debt in your own currency as opposed to foreign currency. The only reason we have to worry about CRA is because we choose to play a game with the primary dealers.

The triple-A rating does not have a significant meaning for an advanced mature economy like the UK. Relying on the opinion of a credit reference agency for an obscure company or country in the developing world issuing external debt in foreign currency might be appropriate. However, a fund manager is not doing their job if they need to rely on a CRA to tell them the macro and fiscal position in Britain. If the UK was downgraded gilt yields would spike and sterling would depreciate because market noise slavishly follows such things. However, yields and the currency effective exchange rate would in time return to fundamentals. Why? Because ratings attempt to estimate probability of default and there is precisely zero chance of default by a sovereign issuer.

Wrongo… On a few levels really, The first is that ratings agencies are like the press – they don’t shape opinion as much as they follow it. Rating downgrades are preceded by large increases in credit spreads: the market recognises that a country’s debt is riskier, and the ratings agencies just formalise this. Look at what happened to Spain, and Greece, over the last year.

The second point is that while few sovereign issuers default (Russia, Argentina etc), lots of them resort to inflating their debts away. From a lender’s perspective this is basically just as bad. In one scenario the borrower just tells you that he’s not paying you. In the other he’ll pay you – with worthless money. So: it’s not just default you need to worry about; it’s inflation.

If the ratings agencies do downgrade UK gilts (and S&P have already downgraded the UK banking sector) then it will also have a follow-on effect of making borrowing more expensive (as well as reflecting the fact that borrowing has become more expensive). That leads to higher interest rates, and makes our public borrowing less affordable – meaning that we have to borrow more, which makes our debts less attractive and so on. It’s not a good situation to be in. At present the agencies are factoring into their calculations the probability that the next Govt will institute fairly dramatic fiscal tightening moves. If that looks less likely, then a cut in the ratings may well follow.

This post was mentioned on Twitter by libcon: China is a very bad model for the left http://bit.ly/bSNQ9I...

So firstly, Ken LIvingstone and John Ross are proposing an alternative model that socializes most risk to the poorest sections of Chinese society in order to create the state-led investment model that they like so much. And secondly, this isn’t an alternative model at all, since it’s still designed largely to facilitate exports and inward investment: as such it’s entirley complementary to the finance-led economy of the US and other western countries. ‘

That model could only survive as long as the current account deficit countries could absorb the huge Chinese surplus caused by the state directing investment to the favoured export sector. At the heart of the problem is the undervalued RMB. China continuing their model of development are attempting to export their overcapacity problems to others and this will inevitably lead to a reaction. The level of personal debt and rising unemployment in the deficit countries means their consumers can no longer absorb the Chinese surplus. Unless China changes, protectionism and trade conflicts are inevitable. Moreover, it is not just the Western nations involved, as China are also in effect trying to export their overcapacity to their Asian neighbours.

It is always the problem when discussing China that so much of the analysis is cheerleading. Any criticism leads others to point out how many have been lifted fro poverty. However, the model is no longer sustainable and they need a different model to spread prosperity to the hundreds of millions who still live in abject poverty. Professor Michael Pettis of Peking University has an excellent blog discussing the distortions and contradictions being built into the Chinese system.

http://mpettis.com/2010/01/

Screw the left and the right.

Freedom from tyranny for all.

Excellent point, Jamie.

John Ross is in the comments thread at my place, trying to argue his corner. Frankly, I’ve wasted enough time on him today.

If anyone feels like taking over the reigns of refutation, be my guest.

The Chinese economic model itself is unusual, founded on a controlling state that permits capitalist enterprise by its rules. In many ways it has imitated Asian Tiger economies, such as Singapore and South Korea, which themselves are less liberal than “traditional” Hong Kong. But China is so big and so disparate that it is not comparable with anything that precedes its development.

The Chinese government has crushed (not literally) peasant farmers and factory workers in order to construct railways, dams and Olympic stadia. When the peasant farmers and factory workers become more wealthy, it will become more difficult for government to take away the land.

And when the wealthy peasants become in conflict towards government, it will be about land ownership or (brain dead) ethnicity. Not human rights.