There’s another conflict in the making – this time between hot money and lukewarm money, in China and other developing countries. Meanwhile, Russia is celebrating its most promising outlook in, well, in a very long time.
According to Bloomberg, currency speculators are about to swamp China with their speculative cash pile.
Remember when George Soros did it to us, back in 1992, when he forced sterling’s ejection from the ERM? George is something of a moralist these days, full of philanthropic thoughts, leftish ideas about how markets do not self-correct if left to themselves, and the massive problem of what to do with $1bn a year income.
Mind you, in 1992, Soros reckoned the pound was too high. He felt its fall was inevitable, so he bet against it. And, of course, won.
It is different with China. The view is the yuan is too low.
Bloomberg quoted Louis Kuijs, acting chief economist for the World Bank China as saying, “China is too large an economy not to have an independent monetary policy.”
As you know, China’s policy of only allowing the yuan to rise slowly against the dollar is one of the most contentious issues in economic debate today.
But the World Bank now thinks inflation in China this year will be 7 per cent, and if Mr Kuijs is right, then it could get a whole lot worse.
Yet, while the currency men may resort to pumping money in, the fund managers and the speculators in the equity arena are pulling their money out.
According to this morning’s Telegraph, fund managers are pulling their money out of China and India at “a record pace.”
It quoted David Bowers, who has just put together a Merrill Lynch survey of fund managers’ activities, as saying that fund managers no longer believe that developing countries have a grip on inflation.
But it is a different story for countries rich in commodities. As a result, the Merrill Lynch report found massive interest among investors in Russia.
Mind you, Russia has its fair share of inflation problems too, and is far too reliant on commodity exports.
In 1998 the Russian crisis was made a whole lot worse by the rock bottom price of oil – it was just $10 a barrel back then. At one stage the entire Russian stock market had a market capitalisation which was roughly the same size as Sainsury’s.
As long as oil stays high, Russia will be laughing, and its oligarchs laughing some more. Western companies, such as BP, which dare try and make money off the back of the boom, will be accused of arrogance by Russian businessmen, as happened earlier this week.
Actually, the West really messed up with Russia. Former winner of the Nobel Memorial Prize for Economics, not to mention former chief economist at the World Bank, Joseph Stiglitz, told in his book, Globalization and its Discontents, how the IMF helped make the Russian crisis of 1998 so much worse than it needed to be.
IMF action may have helped save some Western banks, and restricted the crisis largely to Russia, avoiding a recession in the West as a result, but in the longer-term this has led to a Russian mistrust of the West, free markets and democracy.
It was, by the way, a similar story in 1997 in the East Asia crisis.
In both the Asian and Russian crises, the IMF prescription was for higher interest rates, and lower government spending. The precise opposite of the policy advocated by Alan Greenspan for the US, when it faced a similar crisis, and the complete opposite of Ben Bernanke’s policies today.
In China, this led to concerted efforts to ensure she was never reliant on the IMF. So, we had the scenario of growth funded largely by internal saving. China is possibly the first-ever example of an economy growing rapidly while savings levels are high, and the balance of payments is in massive surplus.
If you really cut through the economic crisis today, and get to the core, you will find one of the key issues is the high level of saving in China. This is partly down to the actions taken by the IMF in the late 1990s.
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