Not a good "job"!

The unemployment report released by US Bureau of Labor Statistics(BLS) is so depressing and worrisome. The unemployment rate was unchanged at 10% in December from a month earlier. Non-farm employment dropped by 85,000 in December. I have been hearing many economists and government officials saying that the recession is over and the US economy would grow in the coming quarters. It is true that the recession in the US is technically over and the economy would grow in the coming quarters. But my question is how sustainable is that growth? When we look at the BLS report, we have some very clear indications. First of all, 10% unemployment rate is very very high (total number of persons unemployed currently = 15.3 million and this is without taking into account the persons who are unemployed but have given up searching for work). There was a decrease in unemployment rate from 10.2% to 10% in November from October and it remains unchanged in December. But when you look at the individual sectors, I find this marginal decline in unemployment rate with zero-significance. Infact the 10% unemployment rate worries me to the same extent as I was worried during the peak of the recession.

I looked at the past 5 months trend (from August to December) and I can see that the core sectors that include construction, manufacturing, wholesale trade, goods-producing sector (durable and non-durable), leisure and hospitality have all shown steady decline in terms of employment (there are some minor up ticks in these sectors here and there but on the basis of a straight August-December comparison we have had a steady decline in employment and an increase in unemployment). In December alone, construction has shed further 53,000 jobs; manufacturing-27,000 jobs and wholesale trade-18,000 jobs. The increase in employment was seen in temporary help services and health care. But here, as the name suggests it is only temporary and the increase in the number of physicians reported in health-care only adds to the scare. If it is true that more number of people are needed in health-care (read supply) then can we assume here that the demand is high (which means more sick people) and can we further assume that a measurable percentage of the increase in sickness in individuals is due to recession? If my assumption is true then this doesn't look good for the sick individuals and the for the country.

So to put it bluntly, all the stimulus programs introduced by the US government have simply not had the effects that were expected. Yes it decreased the unemployment rate but did NOT create efficient and sustainable jobs. The US government rightly spent $700 billion in rescuing the troubled banks but at the same time committed the biggest mistake of not nationalizing the banks. The government has poured billions of dollars of taxpayers' money and is now begging (should i say literally) the banks to lend to businesses in need. Not just businesses but the country as a whole needs that to. But in the meantime, the banks have gone to the old system of speculative-trading in the secondary markets. And with the global economic system currently being so volatile, so fragile and so awash in liquidity, it only makes it easier for these banks to speculate and earn profits. And this speculation only leads up to higher commodity prices thereby causing a further slack in consumer-demand. At the same time, these banks, saved by taxpayers money, are caught in a fever of suspicion to lend. If only the government had nationalized these bailed-out banks after their rescue, we would have had an efficient lending to businesses that would have then added jobs and created demand. The government stimulus then working in parallel would have helped to boost further demand. Some might argue and actually did argue that nationalization of banks would mean socialism, but pouring hundreds of billions of dollars of taxpayer money into private banks that played with the taxpayer money, on the principle of, as Dr.Paul Krugman would say, heads bankers win, tails taxpayers lose, without nationalizing the banks is the ugly side of capitalism. Some good capitalists would call this "bad capitalism". (Please note: I am NOT a socialist but I would like to be a good capitalist). And I am not talking about permanent nationalization of these banks but I would have preferred a short-term nationalization of these banks till we reached a point of sustainable recovery.

But let's look ahead and see what could/should be done. Currently we face a difficult situation of a shortage in supply of credit and an all-time low aggregate demand. And the current situation looks like demand must be created before supply for which jobs need to be created by the government. Programs like the "short-term work" program introduced by Germany need to be considered. Special loan programs to small and medium enterprises (SME), direct incentives to American export industries etc are some of the other things that need be considered. I might prefer the federal government to borrow from private banks and then set-up something like a federal-loan institution which would lend money directly at subsidized interest rates to businesses and consumers. This might increase the willingness of the banks to lend and at the same time we can have a check on the money supply in the system without printing anymore money or atleast printing less money. I have not looked/studied all the pros and cons of the above suggested programs but the stimulus program that will be inevitably extended should be something on this line and thinking. Some economists keep saying that if the "jobs" part is not taken care of then the economy might face another recession (double-dip). I don't know if I would agree that a double-dip recession is likely but if the jobs part is not taken care of then there might be an inevitable and prolonged slump in the economy.
So far, it's not been a good job by the US government but let's hope they the get the job done, WITH PERFECTION!

India's food crisis (Part-2)

This post is a continuation of my first article, "India's food crisis", since the situation in terms of food price inflation has evolved further and needs a newer look on the case. The food price inflation has reached 19.83% in the 12 months to the December 19, 2009. We have to remember that the oil prices were down below normal levels this time last year. So the food price inflation of 19.83% looks very high and considering that this is only a WPI measured inflation, the prices of the food products in the retail market will be much higher. In a country where almost half the population live on marginal incomes this situation is totally unacceptable. But nothing could/should be done on the monetary policy side to control this food price inflation. I agree that it is a genuine concern that this increase in food prices might slip into broader inflation. But we have to keep in mind that this food price inflation is due to a shortage in supply and is sector-specific. The only way to reduce price rise is by increasing supply and the way to increase supply is through imports and offloading some food stocks from the storage. I was assuming that a decent proportion of price rise of food products was contributed by speculation. So I was wondering if imports would increase the price of food products in the retail market above what could be achieved by controlling speculation. But the situation looks like the food price inflation is shooting above acceptable levels of real food price inflation minus speculation. I know that the Government of India was in direct talks with other governments to import essential food items but I am not aware of the results of the actions by the government. In any case, it is time to import food items and offload some amount of food stocks in storage. I have been hearing about the success of winter crops harvest. So a small amount of imports of essential food items along with offloading a measured amount of food stocks from the storage should reduce the food price inflation for few months before we come across the next monsoon season. And if the next monsoon season is a success then the government can offload a further measured amount of food stocks from the storage without importing any further to keep a tight lid on the food prices till we reach the next harvest season. Currently if the import costs are very high then the government might be forced to sell the food products at more-than-expected subsidized rates which may increase the government's deficit. But that's fine, the government must go ahead and import food for the sake of preventing this sector specific inflation from falling into the broader inflation. So yes I think it is time for the government to take some of the above mentioned measures (if they have not started already).

Again, no amount of monetary tightening should be done now to control food price inflation or in the fear to control broader inflation. Again, this is sector specific and is due to shortage in supply and is not because of excess demand or excess liquidity in the system. So all the great personalities talking about exiting monetary stimulus, I kindly urge them to think again.

By the way, considering the benefit of the people of India, I am confused as to why some top government officials OTHER than RBI Governor, Deputy Governors, Prime Minister, Finance Minister and Finance Secretary are even talking about monetary policies. Some are not just talking but are hinting and strongly predicting about monetary policies. Those officials will do a great favor by not talking about monetary policies. I hope they are aware that their on-the-run interviews in the media is unnecessarily hurting the financial markets and I also hope that the Indian media will in the future better know about whom to ask what questions.

Update 1:
Update Date : January 13, 2010
Good News - as per the news on January 13, 2010 the Agriculture Minister of India after a cabinet-level meeting today announced the release of 3 million tons of wheat and rice from storage into open markets. But he said that the Govt. has decided not to import rice.
Well, I am atleast glad that the release of wheat and rice is done. This should ease the price to a considerable level. The enormously high cost of sugar in recent weeks was an area of concern during the meeting and some political problems in one of India's state (which has not processed raw sugar that's imported and is sitting idle in its ports due to local political problems)was quoted as a reason and some measures have been taken to address this issue. I am not going into this political issue now but one thing that I can say is the - it is festival time in many parts of South India. And one of the highlights of this festival is consuming more sugarcane and making sweets at home. So this would have shooted up the prices of sugar. Once the festival ends this week, the demand should go down and I am expecting the sugar prices to come down a little. And the other measures taken by the government should reduce the price of sugar further more. So it looks like we are in a good situation. The food price inflation in December was near 20% and I am expecting it to come down a little in the coming weeks. I will keep this case posted.

Update 2:
Update Date : February 11, 2010
Food-inflation was 17.94% during the week that ended January 30, up from 17.56% in the previous week.

Complaints on Chinese mercantilism? Again? Oh No!

Dr.Paul Krugman, a Nobel prize winning economist and a NYTimes columnist in his recent article (http://www.nytimes.com/2010/01/01/opinion/01krugman.html), talks about how China's policy of not allowing its currency to appreciate is hurting the world markets and the US in particular. He also argues that in any kind of trade confrontation with China there is little to lose for the US. He has some valid arguments that with the interest rates already at an all time low in the US, any kind of slow down in buying American treasury bonds by the Chinese is not going to affect US interest rates in the short term(since the interest rates are already very low and will not be increased at the current economic scenario. Chinese used to do this to keep their currency artificially low against US dollars which benefits Chinese exports). Also, Dr.Krugman argues that the protectionist policies will follow if China doesn't allow its currency to appreciate. Dr. Krugman also says that his back-of-the-envelope calculations show that China's current currency policies will reduce US employment by around 1.4 million jobs in the next couple of years.
I agree with Dr.Krugman that the policy of keeping the Chinese yuan (renminbi) artificially low is affecting many other export markets and I can see that particularly many other developing economies' export markets are severely affected. Say if Chinese yuan appreciated in value, this would facilitate exports from other countries where the currency is naturally low. And when exports from these other markets go up, their currency gains in value (if its floating) and that market will become a market for US exports. Also, with the Chinese yuan's value going up, Chinese consumers will have a better purchasing power and China will be another big US export market. When the exports occur from one market and if that market's purchasing power is kept artificially weak then we are stuck in a one-way road.
But I should also say that I have some disagreements. As I have mentioned in my previous post (China's economy and the Yuan), Chinese economy grows mainly on exports. So, any drastic increase in the value of the Chinese yuan (renminbi) will seriously affect the cycle of money flow in China (refer to my previous post) and will cause huge amount of job loss in China. So we cannot even dream of China appreciating its currency drastically as some in the western counties urge it to.
Also, I disagree with Dr.Krugman's 'don't care' attitude even if China doesn't buy American bonds. America doesn't expect China to buy its bonds just to keep its interest rates low but to fund its budget-deficit every year. If China doesn't buy American treasury bonds then the interest rates in the treasury bonds will surely go up and this will only add up to the budget deficit every year. And if this continues, US government will reach a saturation point and will be forced to cut down on the services that it provides to its people.
And Dr.Krugman's point that he would send a "thank you" note to Chinese if they start selling the dollars is very scary. Did Dr.Krugman forget that the US dollar is the international reserve currency and that major commodities are bought and sold in US dollars in the international markets? The export-oriented manufacturing plants in China will not go anywhere overnight. There will still be a large number of goods that need to be bought from China and this will result in an enormous increase in the input costs for American companies that have setup manufacturing plants in China. This will shoot up the prices (read inflation) of the products bought in US and as a result of this the consumer-demand might become weaker which is already at an all time low. And with the world's economies decoupling itself from the western world more and more day by day, the Chinese manufacturing plants will still be needing enormous amount of oil and other commodities. So, if they sell US dollars then this will result in the value of the US dollar going very low and this in-turn will result in inflation in many parts of the world. With the global economy remaining very fragile, this might even cause stagflation in many countries. The loss that will be incurred through the world economy facing such catastrophic economic scenarios will NOT be offset by a weaker dollar that will help American exports.
Another point to consider is, the US interest rates are near zero and the economy is awash with liquidity. We are already fearing inflation if monetary easing is not cut back at the right time. If dollar falls in value in the international currency markets because of China selling its huge reserves then this might result in inflation in the US economy.
Above all there is already a talk in the global stage about replacing US dollar with some other currency (like Euro) as the international reserve currency in the longer-term( Note: Japan and other East-Asian economies are already talking about a common currency). I agree that US dollar cannot be replaced by any other currency as the international currency now and no country is ready to face the economic disadvantages that this action of replacing US dollar will bring. Particularly this will be very damaging to the US economy. But if the weakness of the US dollar in the international currency markets goes beyond a certain amount then this will result in favor of those who argue to replace the US dollar with some other currency as the international reserve currency (again I am talking in the longer-term). Let's say, for example, if OPEC countries think of selling oil in Euros or other currency then this will be very damaging to US.
So yes China should immediately start to change its economic structure. They have started it well with their response to global economic slowdown. And at some point in time, China has to allow its currency to appreciate in value but we need to wait for some more time till China changes its economic structure. China has already introduced a massive stimulus package and this is driving consumer spending. So we need to give China time to appreciate the value of its currency and this is to the advantage of both China and US. But in the meantime, we must think of how we can assist American exports by introducing some incentives. From China's part, as I mentioned in my previous post (China's economy and the Yuan), investment in vital areas such as rural health and education are needed to move the country from being an export oriented economy to an economy driven by domestic factors.

Climate Chaos

Representatives of around 200 countries and heads of around 100 states are in Copenhagen today and until December 18 to seal an agreement that would bring the world together in fighting the climate change. We have been hearing about the catastrophic effects of climate change that our and future generations might have to face if we don't take steps now to address this global problem. But the solution to this global problem is now caught up in a fight between developed and developing countries. It is no doubt that the industrialized countries, through their industrialization are primarily responsible for the greenhouse gases in the atmosphere. But the problem of such magnitude deserves global action and this is not the time to blame each other. But instead this is the time to accept responsibilities and the responsibility rests mainly on the shoulders of the developed countries. Let me give you a small statistics about a developing country India. India's population = 1.1 billion ; in this number of people living below the poverty line (less than $2 a day) ~ 200-300 million; number of people living just above the poverty line (less than $10 and more than $2 a day) ~ 200 million. Almost, the same ratio applies to many other developing and under-developed countries. With so much people living in such conditions the only way to improve the standard of living of such people is through industrialization. If any one economist or a global leader can give me a solution of how to eliminate poverty and improve the standard of living of these poor people to basic levels without industrialization, then I am ready to consider that. But everyone knows that there is no such solution to eliminate poverty. At the same time, this is not the time to argue about who is supposed to act and let us have NO doubt that everyone is supposed to act. But I suggest that the level of action should differ between developed and developing countries. Some might argue that the population outburst is a mistake of these countries (read China, India) and that they have to bear that problem. But in countries like China and India, population growth did not happen overnight or even in a decade. The population levels reached saturation even before we clearly understood the effects of climate change. But I am not supporting the population growth here. It's time for countries like India, especially India, to start taking immediate measures for population control not just for climate change effects but also to avoid resource scarcity at any point in time in the future. There is nothing farther from the truth that developing countries do not care about climate change. Most of these developing countries depend heavily on agriculture and will be the worst affected if actions are not taken to reduce their carbon emissions.

But my suggestions are as follows:

1. Classify countries by their economic status as "Developed", "Advanced but Developing", "Developing" and "Under-developed" countries.

2. An international panel must be set, which would review each country's economic status and officially declare such status of countries in a more practical level rather than theoretical. In this case, its important to take population into account since every human being is equal in this planet.

3. Set a flexible range of emission reduction targets for each of the above classified countries. Lets give them a range (for little flexibility) and special credits for doing more. Every country should be bound by international rules to achieve these targets within a given time-frame (say every 10 years). And after every, say 5 years, the international panel should review the status and classification of countries and should upgrade or downgrade their status accordingly.

4. Transfer of technology and finance to poor and developing countries from developed and Advanced but developing countries is a must. If this is not done, developing and poor countries cannot do anything to reduce their carbon emissions.

5. Easier market access for green technology and collaboration of scientists on a global level is a must.

6. More funding, incentives and competition for green-research is a must.

When global environmental scientists keep saying that we need urgent action to mitigate the adverse effects of climate change, it does not mean that the developed countries and developing countries should quarrel with each other on who will take the responsibility and how much BUT it means, according to me, that we should work on the above suggested steps (suggestions are purely mine) immediately.

By the way, I am just wondering how many of the so called global leaders who have gathered in Copenhagen to discuss this climate deal are wearing leather shoes. Will it not be funny if the guys wearing leather shoes discuss global climate deal? :)

Brazil looks "hot"!

Brazil's economy, Latin America's largest, has been performing well with some strong economic indications and is proving to be an attractive market for investors. But the problem is it looks too attractive. Brazil, one of the strongest emerging markets, has enjoyed some economic successes in recent years. It had a GDP growth of around 5.1% in 2008 and has a strong export sector. When the global financial crisis struck last year, many were wondering what would happen to the emerging markets but most of the emerging markets, particularly China, India and Brazil have emerged strongly from the global recession. Thanks to China, which through its enormous stimulus measures and through its strong trade links with many developing countries, deserves partial credit in helping these developing countries to come out of the economic slump. Brazil's largest trading partner is China. According to my analysis, this strong trade flow between China and Brazil has helped Brazil's export sector. Brazil's GDP (measured at constant prices) grew at 1.91% in the latest reporting quarter of 2009. In this, the household expenditure increased by 2.09%, government expenditure decreased by 0.06%, gross fixed capital formation increased by 0.03%, exports increased by 14.3% and imports increased by 1.54%. Also, unemployment has decreased from 7.7% to 7.5% while the inflation, measured by consumer price index, has increased only by a moderate 0.28%. (Note: All this economic data was collected from IMF's special data dissemination standard to which Brazil is a member). With the economy showing so strong indicators of a robust growth driven not only by exports but also by consumer spending has made many in the world to think Brazil as an attractive investment destination. But this has led to so much speculation and is causing the Brazilian 'Real' to increase in value in the currency markets. So far this year, Brazilian real has gained about 36% relative to the US dollar. With the economic numbers remaining so strong, Brazil had attracted $1.45 billion FDI in Oct 09 (a jump from $945 million reported in the previous month). Even though this would have resulted in an increase in the real's value, its still a good news for Brazil which can use this direct investment to fuel its growth to a more stronger sustainable level. But the thing that worries me is the increase in the value of the total portfolio investments - it has increased from $6.55 billion to $17.6 billion (with the value of foreign investments in Brazilian stocks and bonds increasing from $6.8 billion to $17.1 billion) as of the latest reporting month (Oct 09). When about half of this foreign investment might be real money, i suspect the other half to be speculative money. Brazil has been aware of too much foreign money flowing into it and has taken some measures. It imposed a 2% tax on all capital inflows. But this did not stop the capital inflow. The investors found a loophole and were converting the American Depository Receipts (ADR) into domestic shares and this way it was tax free. The reason why they were doing this - they expect Brazilian real to gain in value and wanted to hold the shares in Brazilian currency rather than in a foreign currency. There's already been so much speculation and appreciation of the real and this is starting to hurt Brazilian exports. In order to curb the currency appreciation, the 2% capital inflow tax was worked out but as I said the investors were using the loophole. So now, Brazil has imposed a 1.5% tax when foreign investors convert ADRs into receipts which can be used to buy domestic shares in Brazil.
But looking at the numbers reported in the last fiscal month (Oct 09) and considering the fact that the interest rates in US and Euro zone are going to remain low for considerable amount of time, I feel that this 1.5% tax will not curb excessive capital inflows into the country on a longer term. This may have a very short term effect but I think hot money will keep coming in for a considerable amount of time. We have to keep looking especially at the portfolio investments that's coming in. If the stock markets rise above normal levels then we have the problem of asset bubbles forming in Brazil. And when US economy stabilizes further in the future, any hike in the interest rates in the US, will cause capital flight from Brazil. This will be very damaging to Brazil since there might be wide swings on the currency at that time. A stock market crash can happen during such moments but we don't want that to happen and this is a little exaggerated situation. So, Brazil should increase portfolio investment tax, if too much hot money keeps coming in and make sure that speculative money is kept out of Brazil. Since very few countries are attracting speculative money, there is generally a large amount of speculative money flowing into any country that's speculated to show strong economic signs. So far, the numbers and indicators are fine but we just have to be very watchful. I hope Brazil's authorities are.

Dubai's Debt

The global market is rattled by the debt crisis of Dubai. So what happened and what are the consequences? Dubai, a city-state, is one of the emirates of the United Arab Emirates. Dubai does not have oil like that of the other emirates and hence followed on a principle of making Dubai a middle-eastern Las Vegas. The Dubai government followed the idea of making Dubai a financial hub and a high-class tourism center in the oil-rich region. One of the steps followed by the Dubai government to achieve this was to set up an investment firm, "Dubai World", which raised capital through foreign investors who saw the potential of Dubai and its grand ideas in the oil rich region. This idea actually worked out pretty well and the evidence of this is the skyscrapers and the business activities that go into these buildings. Dubai, as it planned, became a famous tourist destination for wealthy westerners and others. And as Dubai World appeared to become successful, it played a key role in many development projects in both developed and developing economies.
But when the credit crisis struck last year, I was expecting Dubai to be one of the first state to get severely hurt. Dubai has always planned its grand ideas through foreign money and I was expecting the foreign money to dry up in a rapid pace than what appears to have actually happened. As of this date, Dubai has an external debt of 103% of GDP. Dubai has around $80 billion in loan and Dubai World which is a government subsidiary has $59 billion in liabilities that it owes to its lenders. And Dubai World has asked the lenders to agree to a standstill agreement which would allow Dubai World, which is in the process of re-structuring itself, to delay its loan payments to its creditors. This has shocked the world market and we are waiting for a more appropriate response from the markets this week which were in a holiday week. I am very confident that Abu Dhabi, which is an oil rich emirate, would bail out Dubai and would keep Dubai running. But the handling of this debt crisis by the Dubai government has made me think if the foreign investors would still think Dubai to be a safer investment place. And this comes at a very bad time for the global economy. There is already a severe credit-crunch in the world and this debt situation only worsens the credit and money flow in the economies.
We still don't have a very clear idea about the exposure of Asian and Western banks to Dubai. I am especially worried about the Asian banks exposure because with credit flow remaining worse in the western economies, its the Asian customers and businesses who are expected to pull the world out of global recession. Especially through exports to the Asian countries, I expect a pick up in credit flow to western businesses by western financial companies since I feel that the western governments have not done everything that they should have done to increase demand and credit flow.
As of now, we have the data of exposure of the following banks to Dubai: RBS - arranged $2.3 billion in loans for the Dubai World. HSBC - has the largest exposure in UAE with around $17 billion of loans in just 2008. Abu Dhabi Commercial bank, PJSC, which is a lender and a book runner, has around $1.9 billion exposure. British banks have a combined $49.5 billions of loan outstanding in UAE. Bank of Baroda, an Indian bank with state support has around $1 billion of exposure in the region.
If more Asian banks reveal their exposure in the coming days, then this would cause a run in Asian investments by foreign investors. This would severely hurt developing economies although the pain might look less severe at the beginning. Asian banks and financial institutions trying to raise capital for a variety of Asian acquisitions of foreign firms, which is very essential for a strong demand and credit flow, will be hurt and this might cause a slump in the already weak global economy and prevent various successful implementations of much needed programs, like the UN food aid program which is already in a worse situation due to the global economic crisis.
I sincerely hope that Abu Dhabi comes with enough money in its pocket to bring a confidence in the minds of global investors on Dubai and this rescue of Dubai should definitely be done in a grand manner, by which i mean that investors get the confidence back on Dubai. This should also be done at a very short time-frame without dragging the rescue process, if one is needed.
Dubai has built sufficient infrastructure for it to continue as same old Dubai if it somehow becomes successful in getting confidence into the global investors' minds and keeps foreign money flowing into it.

China's Economy and the Yuan

There has been so much talk about China's rising economy and its "yuan" policies. International pressures are building up on China to allow its currency, yuan, to appreciate. But to understand why China is fighting back and not allowing its currency to appreciate, we must look into the fundamentals of the Chinese economy. China is a low-wage country with abundant supply of cheap labor. Due to the opening up of China's economy and availability of cheap labor, there is a huge capital inflow into China. One of the main reasons for this buoyant flow of capital investment in China is because the yuan is pegged to US dollar. It was literally pegged to US dollar until a few years back (1US$ = 7.6yuan). After heavy pressures from international community, particularly the US, China allowed its currency to float although tightly managed against a basket of currencies. And "tightly managed" here means that China interferes heavily in the currency market to keep its currency's exchange rate with US dollar almost constant which stays around 1$ = 6.8 yuan.

It is important to note that during the enormous growth of the Chinese economy in the past decade, the Chinese domestic consumption has decreased from 45% to 35% of the GDP. During the last decade or so, the Chinese economy grew on two major factors - exports and government spending. The Chinese state heavily invests in fixed assets and capital infrastructure thereby providing a conducive atmosphere for export-oriented industries which in-turn combined with its currency pegging policy and cheap labor attract huge amounts of FDI, mostly in the form of capital investment.

The export-oriented manufacturing plants that blossom up due to this heavy capital investment and incentives by the Chinese state act as a major source of job creation. Due to the lack of proper social safety net in China, a major portion of the income earned through these jobs by the Chinese individuals get saved in the state-run banks. It is also important to note that many industries including the ones that require heavy investment and man-power are run by the government. The banks then lend, under the orders of the government, to these state-run industries and export-oriented industries which in-turn create more jobs which in-turn increases the savings rate of the country.

But the point here is - with so many state run enterprises, a major portion of the banks' loans go out to these state run industries thereby crowding out private industries and entrepreneurs. Due to this crowding out of private sector I strongly believe that innovation in and from China will be less than what is needed and what is possible. So, without innovation and competition, no quality jobs will be created. Without quality jobs it will be very difficult to sustain the Chinese economy on the long run. With consumer spending remaining so low, this only adds up to troubles of achieving a sustainable and inclusive growth.

For any innovation/research, a strong yuan will be needed. A strong yuan can help in acquiring high end technology from the international markets to the Chinese business industries and would help keep input costs cheap which will facilitate greater innovation to come out of China. But any increase of Chinese yuan relative to the US dollar or any other major currencies will severely affect the cycle of money flow in the Chinese economy. This is because domestic consumption in China contributes very little to its GDP and exports are the only major driver of growth for which the yuan has to be kept weak. But if yuan remains weak, then there is a question on sustainable high quality growth in the Chinese economy.

So the foremost point for China is to increase domestic consumption through proper social safety net programs and investment in vital areas such as rural health and education . And when the domestic consumption becomes a considerable number in the GDP calculation, China has to allow its currency to appreciate. A stronger yuan will have better purchasing power which will in-turn kick start the cycle of more domestic consumption, better innovation, entrepreneurship, quality jobs and sustainable economy. This can be better achieved if more competition is allowed within Chinese people for which the government has to liberalize its economy further which would mean that the Chinese state loosen its iron-grip on the business activity of the country and transform from a model of state-led capitalism to a more people oriented free market economy. Will this happen? We wish.