Daily Archives: January 14, 2009

Globalization in reverse? The China Price Hits Bottom

Brad Setser, partner to the better known Nouriel Roubini, notes that the hot money flow into China, to take advantage of an appreciating renminbi, is now moving into a sharp reversal.

This suggests a slow down in China. And it squares with my own pet hypothesis – that the current global financial meltdown is due to the fact that a bottom was reached in the “China Price” as Chinese workers started over the past few years to push back.
More on this later but here is a useful snippet from Setser:
Hot money is now flowing out of China. Here is one way of thinking of it: 

The trade surplus should have produced a $115 billion increase in China’s foreign assets. FDI inflows and interest income should combine to produce another $30-40 billion. The fall in the reserve requirement should have added another $50-55 billion (if not more) to China’s reserves. Sum it up and China’s reserves would have increased by about $200 billion in the absence of hot money flows. Instead they went up by about $50 billion. That implies that money is now flowing out of China as fast as it flowed in during the first part of 2008.

If this trend continues it will not only undermine the claims for the permanency of financial globalization, but will radically alter labor politics in the US where protectionism is on the rise and, of course, could have a politically cataclysmic effect on Chinese politics.

Brad Setser: Follow the Money