Brad and Nouriel's China trip report

Nouriel Roubini of the Stern School of Business and Brad Setser from University College, Oxford have just posted a 23-page China trip report (PDF) on their RGE (Roubini Global Economics) website. I doubt many informed readers will entirely agree with their opinions, but its a fascinating view from the coalface:

We spent almost two weeks in China in mid-March. Nothing quite substitutes for on-the-ground impressions, but at the same time, nothing provides an impetus to read widely like a trip. Our perceptions were shaped by our priors, by the reading we did in anticipation of the trip, and by the set of people who we spoke to. Unlike luminaries like Stephen Roach, we did not talk to the top echelon of China’s leadership. Rather, we conversed with policy makers a couple of steps below the leadership, academics close to policy circles and financial market practitioners.

We learned a lot, but we did not find the Rosetta stone of renminbi revaluation either. We did hear many echo the themes that Guo Shuqing, the outgoing head of China's State Administration of Foreign Exchange, laid out in a March speech. Large trade surpluses, rapid export growth, large FDI inflows and large reserve increases are not always signs of economic health. China’s economic expansion is increasingly unbalanced, with too much investment in already prosperous coastal regions and too little in the interior. The next stage of China’s economic miracle will need to focus on developing domestic consumption, not just exports and investment.

This report tries to synthesize our impressions. Among other things, it touches on:
• The impact of the renminbi peg on monetary policy
• The management of China’s reserve portfolio
• The internal tensions associated with a policy that over-emphasizes foreign direct investment and exports
• The possibility of a revaluation, and the debate over the appropriate size of the initial revaluation
• The health of the banking system
• Internal distortions created by controlled prices for credit, fuel and the Communist party’s de facto monopoly on land use
• The possibility that China’s policy toward FDI might change, with less emphasis placed on attracting FDI and more emphasis on using surplus Chinese savings to expand the overseas presence of Chinese firms.

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