July/August 2015: Zhou’s challenge

The twin themes of the July-August Bulletin are the immense challenges facing China’s economic policy-makers and the delicate circumstances in Europe after agreement on a third bail-out deal for Greece. These developments are interlinked. One of the reasons for the disarray in economic and monetary union was a large inflow of capital into Europe by Asian investors, led by China, in the early 2000s as excess savings sought out what appeared to be relatively low-risk returns in what were then the booming economies of southern Europe. The European periphery used Asia’s excess savings not wisely but too well, fuelling excess consumption and speculative activity in real estate markets rather than investment to improve economic sustainability – developments that have subsequently led to much pain.

We now see a partial reversal. Many Asian countries are preparing to channel savings towards domestic destinations such as infrastructure development, a theme underlined by the much-publicised Asian Infrastructure Investment Bank. At the same time, China is opening up channels for domestic residents to move savings abroad – undoubtedly one of the reasons for the convulsions in Chinese stock markets that have proved so preoccupying for People’s Bank of China Governor Zhou Xiaochuan, the subject of our cover story by Jonathan Fenby. In related articles, John Adams dwells on the Thucydides, Triffin and Lewis dilemmas facing China, while Gary Smith describes the review process for the renminbi possibly to join the IMF’s special drawing right. William Baunton explains the background to Shanghai stock market fluctuations. Jin Zhongxia presents his scholarly account of China’s role in the Bretton Woods conference in July 1944. This prefigures some of the efforts China is now making on the international monetary stage, including creation of the Asian Infrastructure Investment Bank – an area where Pooma Kimis outlines how Chinese and other Asian investors can make the best use of international opportunities. During the last month, OMFIF has given full attention to Greece, leading a party of investors to Athens on 23 June, which included several hours of meetings with Yannis Stournaras, governor of the Bank of Greece, and his colleagues. On 16 July we organised three telephone conferences on Greece in the aftermath of the parliamentary vote in n the early hours of that day approving a draconian set of revenue-raising measures to meet the creditors’ latest conditions for a new Greek bail-out. We bring a range of articles on Greece, the euro area and the international monetary scene – including the cautiously optimistic (Iain Begg, Plutarchos Sakellaris, Ruud Lubbers and Paul van Seters) as well as the critical (Desmond Lachman, David Marsh and Steve Hanke).

On wider issues, Darrell Delamaide writes from Washington that the long period of waiting for the Fed to raise interest rates seems to be coming to an end, while William Baunton looks at winners and losers from low oil prices. David Smith examines the potential for an alliance between Brazil and Mexico and our advisory board gives its opinion on the growth potential of the Asean bloc of southeast Asian nations. In the review section, William Keegan expounds on a new summary of Keynes’ works, edited by Robert Skidelsky. George Hoguet describes a monograph on investment behaviour from Marcus Schulmerich, Yves-Michael Leporcher and Ching-Hwa Eu that devotes particular attention to dissecting a subject in which Keynes would have been (like today’s Chinese leadership) highly interested: stock market anomalies.

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