This article from the FT contains a number of Chinese points of view from Beijing think tanks worth getting to grips with as the picture around imbalances doesn’t appear to be getting any clearer.

In the background, another big idea has been gathering support, with much more potential to have an impact soon. A growing number in Beijing are calling for some of the reserves to be channelled to the Bric nations – Brazil, Russia, India and China – and other developing countries. This is not just about snapping up oilfields and copper mines on the cheap, as China has been doing all decade. The stated goal is much bigger: to use the reserves to help stimulate a new cycle of development and trade between China and with the developing world.

It  is clear that China is in it for the long haul in the developing world and that at the moment, it is not really sure how to, nor under pressure to, use its surpluses. Would it make  sense to pump it into, say, Brazilian infrastructure upgrading? Well, yes. Helping to boost consumer demand through civil infrastructure projects, while at the same time improving industrial infrastructure  – and easing of access to commodities – will let China share over the long term in Brazil’s growing prosperity.

The article, though admitting limitations of this type of idea, goes on to explain its current attraction:

Yet the idea is potentially powerful because it goes with the grain of big shifts in the global economic map that are already taking place. China is at the centre of powerful economic new links between developing countries. In the past Brazil’s economy would have been felled by a US crisis but Brazil could in fact grow this year. Fifteen years of sound economic policies have helped but it is no coincidence that China has this year become Brazil’s biggest trading partner. South Africa tells a similar story.

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Howard Davies, former Chairman of the Financial Services  Authority, current Director of the London School of Economics spoke at the LSE last night about where China was up to with its financial reform (download slides here). Davies, a member of the advisory boards of the China Banking Regulatory Commission (since 2003) and the China Securities Regulatory Commission, is ideally placed to talk about reform and the impact of the stimulus.

Davies main tenet: The crisis has meant that China will reform its financial system in its own way and at its own speed. Additionally, the crisis has not derailed the party’s development policies so don’t expect much dramatic change in the model for now.

Key insights:

• The global recession has seen financial reform slow
• China aims for min of approx 6.5% growth rate to maintain its development policies and keep absorbing rural workers -gov target of 8% for this year is reachable
• Whilst the surplus will have decreased, lowering ‘global imbalances’, the effect is modest
• Exports did not drop sharply, rather growth has levelled off
• Stimulus was a quick, not measured response to crisis of global consumer confidence to avoid a compete meltdown of an economy so geared towards exports
• Money went of shovel ready infrastructure projects- good for environmental upgrading – to State Owned Enterprises (SOEs) via central government allocation
• Could/should have spent the stimulus on creating better social safety nets- but gravity of the situation compelled them to rush the money out.
• The Chinese consumer is growing in confidence – based on Mckinsey consumer survey 2009 (below). Mckinsey China consumer survey 2009 parts 1 and 2
• Non-performing loans will rise linked to indiscriminate, and size of, fiscal boost – but no need to fear asset bubbles highlighted by The Economist

For me, what stands out is the reluctance to try and build social safety nets and these are seen as incompatible with boosting (internal) demand.  However, providing more social goods will dampen peoples appetite for hoarding cash for medical expenses etcetc. This paper from the UNDP Poverty Centre 2007 provides more detail on the impact of the Bolsa Familia.

This article from the Carnegie Endowment for International Peace has plenty of data and asks some good questions about sustainability of China’s model:

While maintaining growth is essential for social stability, there is little doubt that China is also serious about industrial restructuring and macroeconomic rebalancing. It seems probable that China will be able to grow at 7–8.5 percent in the next few years and that the share of consumption in GDP will increase.

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