There are glimmers that the Great Leap Forward is about to happen, that China will let the yuan rise and spend like crazy to stoke a domestically driven boom to offset the slowdown in US demand for its exports. More than the Olympics, this would be China's coming out party and one that gives the world that difficult nudge forward along a path away from a global economy dominated by the US consumer. Increasing reports of an massive Chinese fiscal spending package are emerging, along with signs that the Asian economies - and the Gulf's - are not going to slow down appreciably as the US and Europe do. Another sign: Chinese companies continue to go to the market to sell bonds, indicating that the liquidity crunch hasn't shut them down and, equally important, that they need the money. The same thing appears to be happening here: firms and banks are still tapping international debt markets to fuel the regional boom, and while the credit crisis if forcing up the rates they have to pay, they are still finding and getting funds. What's driving this long-delayed shift is inflation. High inflation would undo the social gains being achieved by the emerging world's development. Signs that the US downturn would lead to a palpable slowing of inflation would take the pressure off Asian policymakers to drop the dollar, raise their own interest rates to fight inflation, and move on. In fact, it was fears that raising rates would hurt export-led growth that have prompted Asian policymakers to dither on fighting inflation, leaving governments to fight prices rises with price controls and subsidies (which only make matters worse). The result was an exodus of funds that actually forced monetary authorities to sell dollar reserves and buy their own currencies to support them against the rapid outflow. We are now seeing a similar phenomenon with foreign funds here in the Gulf, which is sending interbank rates, bond yields and real interest rates higher. But even the Fed now agrees that inflation is not quite licked. Commodity prices should eventually begin to recover some ground, and that will push money back into Asian markets on expectations of revaluations. Once these come, and commodity-price inflation is finally put to rest at its source - in Asia, then the worm will have turned. Perhaps the best news of all, though, is that there are glimmers that the US economy is bottoming. Housing price declines have slowed and there is movement in the housing market. Consumer confidence is showing some signs of life. And orders for durable goods, moreover, recorded their third monthly increase in July, an important measure of future business activity. The financial crisis itself appears to have more damage to inflict, with more troubles ahead at Fannie Mae and Freddie Mac and cracks starting to appear both at FDIC, which insures US bank savings, and at FHA, whose home lending is bearing the weight of almost the entire housing market now that banks and F&F have had to pull back. What's interesting is that, while the US appears on the verge of embarking on a typical post-crisis phase of over-regulation, it also seems to be shifting towards a more internationalist view on business oversight. The Fed is debating whether it needs more power to regulate the financial industry and hunt for asset-price bubbles in financial markets. At the same time, the SEC has begun to harmonize its regulations with those abroad, in Australia, for example. And it has also decided to require US companies to adopt international accounting standards by 2016. While the US Congress may still appear xenophobic towards foreign investments, these small and subtle regulatory shifts will make the US much more open to foreign investment and make foreign investment much easier for Americans and their companies.
Could the Great Leap Forward be imminent?
There are glimmers that the Great Leap Forward is about to happen, that China will let the yuan rise and spend like crazy to stoke a domestically driven boom to offset the slowdown in US demand for its exports.