World
Economy & Nation Exclusive
Stagflation with Chinese Characteristics

The recipe for stagflation requires permitting excessive growth of the money supply with excessive regulation of markets. Both of which exist in China. This is the second part of the article on the slowing Chinese GDP

China’s GDP (gross domestic product) numbers last week confirmed suspicions that China’s economy is slowing. But not to worry, the central bankers of the world will ride to the rescue. Every investor has been conditioned better than one of Pavlov’s dogs to expect that any indication of a slowing economy will bring in another acronym for printing money. Investors will react with a risk rally that will temporarily mask the real problems. The rallies last until the next set of figures again confirming a basic paradox. For wads of additional stimulus to actually promote growth it has to actually go somewhere productive. It hasn’t. In the US the money has simply gotten stuck on corporate balance sheets and encouraged additional profligate government spending. In Europe it has had a similar effect. Banks used the money to buy government bonds, delaying the need for painful adjustments.

The monetary manipulation in developed countries has many harmful side effects, especially to underfunded pension funds to say nothing of pensioners, but at least they have been achieved in market economies. In China flooding the market with more cheap money has an even larger perverse effect, because of the nature of the system.

An example of the problems with the Chinese political economy is how they choose their leaders. The Chinese Communist party uses as system known as paoguan. It means to “run around for titles”. In essence at promotion time members of the party make tribute-paying visits to higher-level officials. In China this process is in high gear. The change of leadership means that offices in 31 provinces and province-level municipalities, 361 cities, 2,811 counties and 34,171 townships will be reshuffled among 80 million members of the party.  Many of these offices have vast discretionary power and their decisions can be very lucrative.

A selection process based on paoguan also creates a perverse allocation. Government officials are not chosen by either merit or their appeal to public interest, but by their abilities to manipulate a corrupt system. Patronage and pay off become more important than the actual ability to do the job.

The same problems exist with the Chinese stimulus. With state-owned banks, loans are directed by the state and the state is run by a system of patronage. This guarantees that any stimulus package that the Chinese produce will to go to the wrong place. The unprecedented amounts of stimulus money in the form of massive bank loans went to inefficient state-owned business and local governments. Neither have any intention of paying the money back.

Of course the good news is that state-owned banks have a monopoly. They can generate large profits even with mounting loan losses by paying lower interest rates to captive depositors. This means slower growth, but the financial system remain solvent. Until now.

The Chinese are well aware that the distortions have slowed growth. To change that, they are attempting to gradually reform parts of the system. One such reform is an experiment in the ever entrepreneurial city of Wenzhou.

Since small and medium sized businesses, the more efficient parts of the economy, were excluded from the state banking, a shadow banking system grew to cater to the need. The Wenzhou experiment extends legitimacy to the system. But there is a catch to reform. If the Chinese legitimize private banks, then the state-owned banks no longer have a monopoly and must compete for depositors. Depositors like their western counterparts will shop for yield. This will deprive the state-owned banks of much needed cheap financing to help prop up their balance sheets.

In addition to the Wenzhou reform, the Chinese government has also widened the trading ban for the yuan and raised the cap on foreign investment in the country’s securities market. Although these reforms seem encouraging, both loosen the grip of China’s government on its economy which could potentially lead to sudden drastic moves.

Still despite minor reform, the state retains a tight rein on the economy. It is also reflating. State-owned banks lent up to 2 trillion yuan in the first two months of 2012. This is almost twice what was lent in the last quarter or 2011 and two thirds of the entire lending for 2008. Not only does the patronage system distort this lending, the continuing government restrictions on real estate developers have made the problem worse. It has to be remembered that the recipe for stagflation requires permitting excessive growth of the money supply with excessive regulation of markets. Both of which exist in China.

The vaunted Chinese policy makers are faced with a paradox. Reforms aimed at strengthening the economy could weaken it. Unlike western economies, China’s economy is still growing quickly. To revitalize their economy the Chinese are resorting to more bank loans which will simply increase inflation and bad loans without rekindling growth.

You may also want to read: China’s slowing GDP

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at [email protected] or [email protected]).

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Public Interest Exclusive
Twitter buzz scares away Pratibha Patil's emissary sent to pacify protestors of Pune land grab

The Governor of Tripura, DY Patil, had planed to fly down to Pune to pacify activists opposing President Pratibha Patil's post-retirement home; tweets depleted his confidence and he sent his confidante instead, who in turn asked the soldiers to "tone down the agitation"

A couple of days back, President Patil’s men in the Defence Estate Office, Pune, were busy taking measurements of Col Suresh Patil’s outhouse, despite the fact that only Pune Cantonment Board is authorized to do so.

When they found no substance in this raid, the next best thing was to find out a strategy to pacify him and his two colleagues, Commander Ravindra Pathak and Anoop Awasthi, former naval officer, who has been spearheading a campaign against President Patil’s palatial retirement home in Pune measuring a whopping 2,42,000 sq ft when she is entitled to only 4,498 sq ft and that too of an existent government bungalow (she cannot indulge in new construction on government land).

A little bird tells us has it that last night Pratibha Patil asked Governor of Tripura, D Y Patil to fly down to Pune and meet Col Suresh Patil and somehow salvage the situation for her. Apparently, Col Patil got a call this morning as early as 6 am from  Governor D Y Patil who said he would be in Pune to meet him at 5.30 p m. He would send his driver and car to pick him up, once he lands in Pune. 

The news of the meeting spread like wildfire on the twitter and the media was constantly keeping a close watch on the event, throughout the day. However, 5 pm turned to 6 pm but there was no sign of D Y Patil.  Col Patil followed up with the driver every half an hour. He would reply that ``Dada has still not landed.’’ His private aircraft was awaited.

At around 7.30 p m `Dada’ D Y Patil landed but by then he must have been informed of the damage that Twitterati had done to his supposedly secret meeting.  Put off by this, D Y Patil instead sent his trusted  trustee of D Y Patil educational institutes, B D Kotkar Patil (there are just too many Patils involved in the mega controversy!).  He drove to Col Patil’s house at 8.15 p m.States Col Patil, ``we have known each other for many years and we chatted for a while. After about half an hour Kotkar said that he wants to talk to me separately.’’ Kotkar took him aside and asked him to ``tone down the agitation’’ and to have patience until April 24th when D Y Patil will surely meet him. Col Patil replied, ``there is no question of toning down the agitation, instead it would be intensified. Now, it is not just the fight of citizens of India but also Indians who are staying all over the world and have joined us in our campaign. Our demand is that the President must return the land to our soldiers and there is no compromise on that.’’ Kotkar reiterated that D Y Patil would meet them on April 24th.The three soldiers continue their mission to protest against President Patil’s palatial retirement home. On Monday, they are carrying out a signature campaign outside Collector of Pune’s office and will begin an online petition. They request everyone to join the movement.

 

 

 

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COMMENTS

Pradeep

5 years ago

Who has borne the cost of travelling to Pune? isn't it a misuse of Government machinery? Is the President not accountable to all national waste that this episode has created?

Nagesh Kini FCA

5 years ago

What are Dr.DY Patil's antedecents to fly down to Pune 'to suitably deal with the activists' was is a gesture of thanks giving to a fellow Marathi-bai saheb for signing his appointment order?
Why do the Pune and neighbourhood MPs got to say? Dumb onlookers?

param

5 years ago

i can only pray for the safety of these crusaders. it is so easy for patil(s) to arrange an 'encounter' to 'tone down the agitation', but i can see the true army spirit in them. god bless them...

Deepak

5 years ago

What more can you expect from Education King?. He was himself in news for land grabbing. Read

http://ibnlive.in.com/news/tripura-gover...

REPLY

malQ

In Reply to Deepak 5 years ago

Interesting, thanks - and here is more information on these "education kings" with details of tax issues therein . . .

http://www.financialexpress.com/news/nin...

Wonder what happened to those Income Tax cases.

Punit

5 years ago

Seems to me anyone can become president these days.they just have to do errands for sonia gandhi and i cant understand that whats the job our president do,ofcourse other than delaying the punishment awarded to dreaded terrorists like kasab and afjal.

REPLY

malq

In Reply to Punit 5 years ago

Not just become President or Governor, but also use national resources to squander away public money, fight personal cases at Income tax or elsewhere, grab land, murder people, anything.

This is the great culture that we expect in the "Oxford of the East"??

Shame on Governor of Tripura D.Y. Patil if he is using his official position to try and coerce or co-opt - and what about this Income Tax due, any information on that please? 50 crores is what, not a small amount?

brgds/VM

Vishram patil

5 years ago

It is alleged that DY Patil who is Tripura Governor for services rendered to Pratibha Patil of the illegal sort is in Pune to try to resolve Income Tax out standings exceeding 59 crores. h

He may try to use Government resources and other influence to try to evade this payment,

Matters are not as clear and simple as they seem.

Indian government draws flak for ASG's submission in Italian ship case

Kerala state government may or may not have a jurisdiction to detain Enrica Lexie, the real question is why then the Centre has not started investigations about the killing on its own

Thiruvananthapuram: The United Progressive Alliance (UPA) government at the Centre has come under sharp attack from various quarters in Kerala over additional solicitor general (ASG) Harin Raval's submission in the Supreme Court that Italian ship Enrica Lexie was not within Indian territorial waters when the marines aboard it had allegedly shot dead two Indian fishermen on 15th February, reports PTI.

Seizing on the development, the critics said ASG's submission amounted to reinforcing Italy's assertion that Indian courts had no jurisdiction to try the case since the alleged incident happened when the ship was in international waters.

The family of the deceased fisherman Valentine Jalastine, the Latin Catholic Church and fishery unions have expressed shock and anguish at the position taken by the Centre's legal officer when the case came up for consideration in the apex court yesterday.

The ruling Congress-led UDF in the state also found itself in a bind as ASG's submission contradicted the stand of the government headed by Oommen Chandy which firmly held that India has every legal competence to try the case under its law.

Reacting to the development, Mr Chandy who was in New Delhi yesterday, said he would bring the matter to the notice of the Central leaders as the state had always taken the position that the victims should receive justice.

The ruling front leaders, who were the target of attack from the opposition, however, drew some solace from the clarification issued by the Ministry of Shipping later in the evening that the views expressed by Harin Raval were his personal opinion.

Spearheading the no-holds-barred attack on the Centre, CPI(M) stalwart VS Achuthanandan said the submission made by ASG was nothing short of a betrayal of the country and people.

In their statements, leaders of various other opposition parties made veiled digs at the Congress president and UPA Chairperson Sonia Gandhi over the development and accused the state government of playing a double game.

Reacting to the development, family members of the slain fisherman Jalastine termed the ASG's submission in the apex court as "cruel".

Doramma and Derirk Valentine, the deceased fisherman's wife and son, respectively, said in Kollam that it was difficult for them to understand as how the Centre could taken such a U-turn in the case after expressing solidarity with the bereaved families.

Slamming the Centre's position, Archbishop Soosai Packyan of Latin Catholic community, to which both the murdered fishermen belonged, said he was at a loss to know as to why the Centre had taken such a position in the case.

Talking to reporters, the Archbishop said it was the duty of the central and state governments to ensure that the kin of victims received justice.

The two fishermen were killed when the marines Latore Massimiliano and Salvatore Gironi allegedly fired at their boat off Kollam coast. They were arrested on 19th February and charged with murder.

According to a notification of the Government of India, anything that happens beyond 12 nautical miles on the west coast comes under the jurisdiction of the Yellow Gate police station in Mumbai. The jurisdiction lies in Mumbai as it has an admiralty court.

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