China Premier Wen Jiabao says world risks double dip recession

Wen Jiabao, the Chinese Premier, closed the National People’s Congress session
today with grim warnings that the global economy risked plunging into
double-dip recession and that China itself faced a “complicated” year.

Mr Wen’s note of alarm for the global economy was based on the still high
state of unemployment in many of the markets that buy Chinese exports.
Sovereign debt problems and exchange rate instability, he said, created the
risk that the world economy could tumble back into a second recessionary
downturn.

His speech included an aggressive defence of Beijing’s currency policy – the
emergency decision made at the height of the financial crisis to re-peg the
yuan and stop the steady appreciation against the dollar which began in
2005.

That position has been heavily criticised in Washington and blamed by some for
suppressing recovery in other major economies. In a blunt rebuttal of those
charges, Mr Wen said that “finger-pointing” pressure from other nations was
to be opposed, could equate to protectionism and that China was
fundamentally a “supporter of free trade”.

“I don’t think the yuan is undervalued,” said Mr Wen, who then took aim at
Washington.

America, he said, should take concrete steps to reassure investors about the
security of dollar assets. China is a massive holder of US treasuries, with
a hoard of at least $894 billion (£588 billion) at the end of December.

The comments on the yuan will stoke an increasingly heated debate within
financial markets over when Beijing will loosen the currency’s peg to the US
dollar.

Mark Williams, chief China economist at Capital Economics, is among a number
of observers who predict that moment will come in the middle of this year.
Economists at Bank of America-Merrill Lynch suggested that today’s speech
was a sign that China would resist revaluation for the next few months.

Mr Wen’s bearish remarks on the global economy come amid a rising sense of
unease in some quarters over the state of China itself. It is the key driver
of global commodity prices, poised to overtake Japan as the world’s second
largest later this year but rife, some suggest, with potential sources of
domestic trouble.

Although Chinese economic growth has returned to pre-crisis levels, questions
have been raised over the sustainability of the recovery when government
stimulus measures are withdrawn.

Notes of alarm have also been sounded over incipient property and other asset
bubbles that have developed in some cities.

Mr Wen said that the combination of inflation, a still wide gulf between rich
and poor and persistent official corruption were potential sources of
instability in China. They even represented possible threats to the
Communist Party’s hold on power, he added.

One major area of concern among global economists is the record 9.59 trillion
yuan of new loans extended by China’s banking sector in 2009 – a level of
credit creation that takes China into untrodden areas of economics and which
some believe sets the fuse on a financial time bomb.

Analysts at Citigroup warned that local government debt in China had been
allowed to spiral out of control in recent months and that the country’s
unprecedented splurge of stimulatory bank lending in 2009 might produce a
$350 billion mountain of bad loans. One forecast suggests the possibility of
a “massive bailout” of Chinese banks in coming years.

That sort of prediction may be premature, said Andy Rothman, chief China
economist at the investment group CLSA. “There is a serious local government
debt problem in China. But as in the case of other long-term structural
problems such as unfunded pension liabilities, the environment and
corruption, local debt is highly unlikely to generate a near-term crisis for
China’s banking system or fiscal health,” he said.

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