Congratulations Mr. Obama, But Its Tough Out There

I always seem to be traveling when exciting things are happening. I just got back this morning from four days in Paris, where I had to go for our annual Board of Directors meeting (and took the opportunity in addition to meet a number of investors and government officials), and so I was in a Paris hotel for the US elections.

I am delighted with the results, of course. Obama is a brilliant thinker and a charismatic figure, and has shown himself to be willing to listen to people who know more than he does, however without fobbing onto them the ultimate responsibility for making the decision. More importantly, he graduated from Columbia University, and so he definitely owns my loyalty. But like many others I seriously worry about whether he can even come close to realizing some of the fantastic expectations placed on him by Americans and by people around the world.

It was interesting to see the results in France. Of course in discussing this I am stepping away from any discussion of Chinese financial markets, but this seems to be enough of an historical event that it merits some digression. Most French seem to support Obama, but perhaps he has unfortunately become almost a messianic figure to some. I watched a television report from one of the poorer northern towns heavily populated by immigrants and their children, and the rapture and excitement of his election exceeded even the happiness in Hyde Park. Men and women were screaming with happiness, the halls exploded with dancing and cheering, and hundreds of those present chanted “We have our president, we have our president!” But he is not their president, and they may be seriously overestimating what Obama can do for them.

In the program the journalists interviewed two young Frenchmen – one black and one Muslim. They were very smart, very serious, and the point they were making worried me a lot. They explained that for years France was way behind the US in racism and its treatment of ethnic minorities. With the election of Obama, they said, the US had taken a huge step forward, leaving France even further behind, and they expected that France, too, had to take a major step forward. Obama was their inspiration to expect more from France (I suspect this kind of thinking is happening everywhere in Europe).

Of course they are right, but in the US the discourse on race and ethnicity is an old and fiery one, and far more advanced than any in Europe – when I grew up in Spain and France we were able to say and do things without thinking that, I later learned when I moved to the US for university, should have been completely unacceptable. Saying or doing many of those things still isn’t unacceptable in most of Europe.

I am enough of a realist to know that racism isn’t resolved by friendly dialogue and feel-good announcements by official bodies, but rather by confrontation, disputation and hard work. (That is why, by the way, I am afraid that the racism and discrimination in a country like China will persist for a painfully long time – it is practically forbidden even to acknowledge racism here, let alone fight over it.) But here is the problem. The world is in the midst of a financial crisis – one that will almost certainly see a significant reduction in global growth. Historically, disadvantaged minorities do worse during periods of low or negative economic growth than does the population as a whole. During these periods anti-immigrant feelings almost always rise.

I am afraid that for those two young men in France – and for many of those others who screamed and sang with delight and thankfulness Tuesday night – the next few years are not only going to see their welfare decline in nominal terms, but also even in relative terms. But expectations are for the opposite, and it seems to me that they have gotten so far ahead of reality that the next few years are going to be politically very difficult in the many parts of the world.

In the long run this is a good thing. Let minorities and the systematically excluded demand more everywhere, no matter how good or bad economic conditions are. It is only by demanding that they will get anything. In the short term, however, it won’t be easy.

But enough pontificating – Obama’s election has been so exciting that it has made philosophers of us all. There was a lot happening in terms of China’s economy and financial system, too, although not a whole lot of good things. I will disucss more of the really interesting stuff I have been looking at over the next week, but for now I will bring up just a few general points.

The first thing I want to bring up seems at first to be a good thing. The IMF says that China will be an oasis of stability in the global turmoil, and it sort of reaffirms its 9.3% prediction for 2009 GDP growth, but there may be less here than meets the eye. This, of course, is the same IMF that predicted in November 1997 that in spite of the surrounding turmoil South Korea was immune from the troubles afflicting its neighbors and in 1998 it’s economy was going to grow by 5-6% (fortunately they managed to pull the report just before it was due to be released, after the won collapsed). For those who are interested, South Korea’s 1998 growth rate was actually -6%.

Cheap shot, maybe, but the IMF – perhaps because it is a political institution – has a very weak track record in predicting trouble. Their economists also, I am afraid, have had an even worse track record in understanding the relationship between the economy and the structure of the national balance sheet – even though they did write an interesting report in 2003 or 2004 on the subject (which I suspect none of them subsequently read). Here is what the South China Morning Post said on Tuesday:

David Burton, the head of the IMF’s Asia-Pacific department, said that despite China’s own economic slowdown, the country had many ways to shore up its economic growth. Mr Burton said China’s export-driven economy had been dragged down by dwindling demand from the United States and Europe, and it could even miss the IMF’s forecast of 9.3 per cent growth next year. But the country was still sitting on almost US$2 trillion in foreign exchange reserves and had a relatively strong financial system.

“The global economy is slowing sharply and [the mainland] and Hong Kong are going to be significantly affected,” Mr Burton told the South China Morning Post before meeting Chief Executive Donald Tsang Yam-kuen yesterday. “With its robust reserves, I have no major worries about China, which will be a source of stability for the globe for the next year or two.” He said both the mainland and Hong Kong would be well positioned to get through the crisis.

I have no doubt that 2009 growth expectations are going to be sharply revised downward several times. They are probably going to lag the investment banks, who themselves are going to lag the independent analysts, but ultimately I expect all of us will soon reach the point where no one is predicting anything above 7%.

Meanwhile Bloomberg yesterday had the following article:

The yuan completed its best week in more than two months on speculation policy makers are allowing some gains to prevent money leaving as overseas investors pull out of emerging markets amid the economic turmoil. Bonds rose.

I hadn’t heard these rumors but of course after the third quarter PBoC numbers came out it was pretty clear that not only was China no longer seeing massive hot money inflows, but in September it was seeing outflows. I am curious to see the fourth quarter numbers. It would be worrying if hot money outflows really were becoming a problem.

Finally I saw another interesting Bloomberg article on Friday:

China’s Finance Minister Xie Xuren was called back from an international economic conference in Peru before the meeting began, following orders from Beijing to help resolve problems at home, an organizer of the event said.

Xie left Trujillo, Peru, where Asia-Pacific Economic Cooperation finance officials are meeting this week, shortly after arriving at 11:00 a.m. on Nov. 5, Gladys Otero de Swinnen, protocol director for the conference, said in an interview. “They told him he has to resolve an economic problem and that he’s the only one who could do so,” de Swinnen said.

…Deputy Finance Minister Li Yong stayed in Trujillo. Li declined to comment on measures to boost China’s growth. Xie arrived in Beijing to take care of some “urgent business,” two finance ministry officials, who declined to be named, said today. They didn’t elaborate.

I have no idea of what this is about, and I have not been able to find any further references, but in the cloaked, gossipy world of Chinese politics I am very curious to know why he was suddenly called away. I suppose we may hear more in the next few days. Perhaps one of my readers may have better information than I do.

In 30 minutes we have the weekly meeting of the Guanghua Students Monetary Committee. Last week’s meeting was pretty good and I am very interested to see what the students conclude today about monetary and credit conditions in China. I will of course report anything that comes out of there.

About Michael Pettis 166 Articles

Affiliation: Peking University

Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business.

Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups.

Visit: China Financial Markets

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