Pimco's El Erian: Revive Growth

Government officials should examine why their response to the global financial crisis hasn’t revived growth when the International Monetary Fund and World Bank hold annual meetings in Washington next month, according to Pacific Investment Management Co.’s Mohamed A. El-Erian.

“The unifying theme should be the simple question: why is policy stubbornly ineffective,” El-Erian, the chief executive and co-chief investment officer at the world’s biggest manager of bond funds, said in a radio interview today on “Bloomberg Surveillance” with Tom Keene. “It doesn’t make sense for different countries to be doing things without coordinating. You don’t have enough coordination.”

Policy makers have been more successful when they have worked together in the midst of the global crisis, and risk allowing stagnation to persist should they fail to cooperate, El-Erian said. Newport Beach, California-based Pimco, which oversees more than $1.1 trillion of assets, says the world has entered a period of slower growth, more government intervention and less influence by the U.S. in what it calls the new normal.

“Policy ineffectiveness matters a great deal,” El-Erian wrote in an op-ed article published today by Bloomberg News. “The longer it persists, the greater the challenge of restoring industrial economies to the path of sustained high growth and job creation.”

Fragmented efforts are at risk from the outset as they are undertaken without regard for or examination of the efforts of their neighbors and trading partners, El-Erian said.

Several countries are at the same time trying to restrain government spending, push exports and lower the value of their currencies, El-Erian said in the radio interview. “Everybody’s self-interest is to do something that’s not in the common interest.”

“In the U.S. alone, just look at the high unemployment rate that persists in the face of unprecedented fiscal stimulus and the extended use of unconventional monetary policy,” El- Erian wrote. “In Europe, dramatic policy actions have failed to calm concerns about solvency risk in peripheral countries such as Greece, Ireland, Portugal and Spain.”

The biggest obstacle to achieving policy goals may be the amount of debt still on government and household balance sheets, El-Erian said in the interview. “Once you have overhangs, policy becomes less effective.”

Without coordination, policy makers have lacked imagination in their approach to the problems posed by the indifference shown to their initiatives by the lack of economic improvement, El-Erian said.

“We tend to do more of the same,” El-Erian said. “It’s called active inertia.”

When they have coordinated, policy makers have been effective, El-Erian said, citing the period from October 2008 to April 2009 as a “golden age” of cooperation that helped avert a meltdown of the global economy.

Efforts at addressing problems stemming from the global economic crisis without coordination may run a greater risk of failure, El-Erian said.

The Japanese yen tumbled from a 15-year high versus the U.S. dollar after Japan intervened to sell its currency and buy the greenback today for the first time since 2004 to curb gains that threaten an export-led recovery.

Japan’s currency slid the most in 22 months after Finance Minister Yoshihiko Noda said the nation unilaterally sold yen. The move comes a day after Japanese Prime Minister Naoto Kan won re-election as the head of the ruling party, beating a candidate who had insisted intervention was necessary.

“It is highly unlikely” to succeed, El-Erian said. “They’re getting the impact of the surprise. Now people are asking what’s next, particularly is it coordinated or is it one- off.”

(source: Bloomberg, September, 15, 2010)

Chinese Central Bank Governor Zhou Xiaochuan Pledges Fast, Forceful Policies for China Growth

By Li Yanping and Luo Jun, published on Bloomberg.com, March 6, 2009

Chinese central bank Governor Zhou Xiaochuan pledged fast and forceful policies to restore confidence and prevent the global financial crisis from deepening the nation’s economic slump.

“If we act slowly and less decisively, we’re likely to see what happened in other countries: a slide in confidence,” Zhou said at briefing in Beijing. The central bank has “ample room” to fine-tune monetary policy after a record surge in lending in January, he said.

The central banker said he saw “signs of stabilization and recovery” in the world’s third-biggest economy, echoing Premier Wen Jiabao’s confidence that the nation’s 8 percent growth target for 2009 remains within reach. Collapsing exports because of the global recession have dragged growth to the weakest pace in seven years and cost the jobs of 20 million migrant workers.

“This isn’t the time to be cautious with the measures you roll out, it’s time to overdo it,” said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong. “The outlook for the global economy has deteriorated dramatically.”

The Shanghai Composite Index closed 1.3 percent lower on concern that the global recession is deepening. The yuan was little changed against the dollar as of 4:48 p.m. in Shanghai.

Premier Wen restated the 8 percent target in an annual speech to China’s parliament yesterday, the equivalent of a U.S. State of the Union address.

Slump in Confidence

Fast and forceful policies are preferable to “prevent confidence slumping during the financial crisis,” Zhou said.

China’s confidence contrasts with U.S. Treasury Secretary Timothy Geithner’s warning yesterday that his nation’s recession is deepening as it starts a $787 billion stimulus program of public works.

China’s official manufacturing index rose for a third month in February, from a record low in November. Initial public offerings of shares may resume, the nation’s securities regulator said today. Wen has cited growth in power output and consumption, loans and retail sales as positive signs.

Chinese banks doled out a record 1.62 trillion yuan ($237 billion) of loans in January and more than 800 billion yuan last month, Liu Mingkang, chairman of the China Banking Regulatory Commission, said in Beijing yesterday. The regulator plans to conduct spot checks of bank loan books to “ensure quality of growth,” Liu said.

Lending Quotas

Loans and money supply may have grown too quickly, Zhou said, after China cut interest rates, scrapped quotas limiting lending and pressed banks to support a 4 trillion yuan stimulus package. The jump in lending exceeded the central bank’s expectations, he said.

The government will study the results of its existing stimulus package before deciding whether to take any new measures, Zhang Ping, head of the National Development and Reform Commission, said in Beijing today.

The People’s Bank of China cut interest rates five times in the final four months of last year, including the biggest single reduction since the 1997-98 Asian financial crisis, leaving the benchmark one-year lending rate at 5.31 percent. There have been no cuts in 2009.

China needs “stable and relatively fast growth” to create jobs, boost incomes and ensure social stability, Premier Wen said yesterday.

Not everyone is convinced that China will meet its 8 percent goal.

Lower Growth Forecasts

The 6.8 percent gain in the fourth quarter was down from 9 percent for all of 2008 and 13 percent for 2007. The International Monetary Fund forecasts the economy will grow 6.7 percent in 2009, the least in almost two decades.

Economist Kowalczyk sees a 6 percent expansion this year and warns that surging unemployment may undermine social stability if the government fails to do more to boost growth.

China’s exports may have fallen 20 percent in February from a year earlier, the 21st Century Business Herald newspaper reported today, citing an unidentified trade official. Imports may have also fallen 20 percent last month, it said.

The nation’s trade surplus for February may be $7 billion, the newspaper reported. That would be less than a fifth of the size of January’s surplus.

“China’s economic conditions may appear less dismal than its Asian peers, but the government’s growth target of eight percent seems too optimistic,” said Sherman Chan, a Sydney- based economist at Moody’s Economy.Com.