Structured,to,Survive THEInternationalMonetaryFundsrecentmeetinginTokyofocusedonthecontinuingdeteriorationoftheglobaleconomy.Inthesecondquarterof2012,G7economiesregisteredmere0.1percentgrowthonaverage,whileEUoutputcontracted. Confrontedwiththesedismalstatistics,Westerncentralbankshaverespondedwithacommonpolicyofmassivemoneycreation.TheU.S.FederalReservelaunchedQE3aUS$40billion(RMB250billion)open-endedpurchaseofmortgage-backedsecurities,tobeconductedmonthly.TheEuropeanCentralBankannouncedanunlimitedprogramofOutrightMonetaryTransactions(OMT)thecreationofmoneytopurchaseEuropeangovernmentbonds.TheJapaneseCentralBankintervenedinanattempttolowertheyensexchangerate. Suchmassivemonetaryinjectionsaffecttheglobaleconomyandindividualmarketsalike.MohammedEl-Erian,chiefexecutiveofPIMCO,theworldslargestbondinvestor,hascitedoneriskcreatedbysuchaprocess.“EssentiallytheFedisinsertingasizeablepolicywedgebetweenmarketvaluesandunderlyingfundamentals.Intheprocess,manyassetpricesarehoveringnearwhatwouldnormallyberegardedasbubbleterritory,withsomealreadythere,”El-Eriansaid. WhetherornotyouagreewithEl-Eriansanalysis,onethingiscertain:Westerncentralbanksareengaginginquantitativeeasingonascaleunprecedentedinrecentmemory. Centralbanksareresortingtodrasticmonetarypolicytoboosttheireconomiesbecausetheyhavefewoptionsleftinthepolicytoolbox.ThisbringsustooneadvantageofChinaseconomicstructure:thecountryhasmoretools.AstheWallStreetJournalcorrectlyputit:“Mosteconomiescanpulltwoleverstobolstergrowthfiscalandmonetary.Chinahasathirdoption.acceleratetheflowofinvestmentprojects.” Globallyspeaking,themajorlingeringfeatureofthefinancialcrisisislowinvestment.IndevelopedeconomiesallothermajorcomponentsofGDParenowabovepre-crisislevels.FixedinvestmentneverthelessremainsUS$491billionbelowitspeakininflationadjustedterms.Itistheinabilitytoreversethisfallininvestmentthatparalyzesdevelopedeconomies. Incontrast,Chinas2008stimulusprogram,andthemorelimitedeconomicboostlaunchedinthemiddleofthisyear,tackledthesituationdirectlyviastatedecisionsonincreasinginvestment.AsmanyWesterneconomiesrejectsignificantstateinvestmentonideologicalgrounds,theyareforcedtorelypurelyonbudgetaryconsumptionmeasuresandmonetaryexpansion.Whenthefinancialcrisiseruptedin2008almostallWesterneconomiesrespondedbysimultaneouslyintroducingultra-lowinterestratesandexpandingbudgetdeficits,thelatterfinancedviaborrowing.Butthescaleoftheeconomicdownturnmadeitclearthatsuchlargeborrowingwouldhavetocontinueforalongperiodoftime.Runningbudgetdeficitsthatinsomecasesapproachedorexceededdouble-digitpercentagesofGDPwouldthereforehugelyincreasestatedebt.TheIMFslatestWorldEconomicOutlookrightlystressedthatstatedebtintheU.S.,JapanandmanyEuropeancountriesisnowaround,orabove,100percentofGDP. AttheIMFgathering,asharpdebatetookplacebetweenthose,ledbyGermany,whowantrapidbudgetdeficitcuts,andthose,supportedbyIMFManagingDirectorChristineLagarde,whoregardslowerdeficitreductionasalessriskystrategy.ButnomainstreamWesterngovernmentproposedrespondingtothenewglobaldownturnwithmajornewfiscalexpansion.Therefore,ithascometopassthatfiscalpolicyhasbeencastaside;monetarypolicyistheonlypoliticallyacceptableavailabletoolwithwhichtofashionaresponse.Andusingthisonetooltoexcesshasconsequences. MonetaryexpansionhassofarfailedtohalttheslowdowninWesterneconomiesandisactuallycreatingstructuralfinancialproblems.Withprolongedperiodsofextremelylowinterestrates,andwithmoneycreationcontinuingonsuchalargescale,financialdecisionsaredistorted.Anddistortionsleadtobubbles,whichmoreoftenthannotcollapsewheninterestratesareeventuallybroughtbacktohistoricallyaveragelevels. HowdoesthisaffectChina?Oneimmediateriskisinflation.EvenbeforeQE3wasofficiallyannounced,mediaspeculationprecedingitprecipitatedasharpincreaseinglobalcommodityprices.TheDowJonesUBSindexofspotcommoditypricesroseby18percentbetweenJuneandOctober,withevenmorerapidincreasesinkeyfoodpricesfollowingtheadditionalimpactofdroughtintheU.S.TheresultingfoodpricerisesstimulatedsocialunrestintheMiddleEast,SouthAfricaandIndia.AsChinasCPIfollowsworldcommodityprices,Chinaseconomicpolicymustguardagainstinflationaryrisks. HoweverupwardpressureonglobalcommoditypricescreatedbyQE3iscounteredbydownwardpres-sureduetotheworldeconomicslowdown.Globalcommoditypricesremainninepercentbelowthelevelreachedinearly2011,whentheypropelledChinasCPIto6.5percentinJulyofthatyear.Chinaislimitedinthetypeofexpansionarypoliciesitcanpursueduetothefactthatitmustexercisecaution.Sofar,however,theinternationalsituationdoesnotindicatethatinflationinChinaislikelytobecomeanintractableproblem.ThelargequantitativeeasingprogramsbeingconductedbytheU.S.,ECBandJapanposeotherthreats.Partsofthemonetaryexpansionwillinevitablyspillintoothereconomies,includingpotentiallyChinas,aprocessthatthreatenstocreateassetbubbles.Forthisreasonleadinginternationalmonetaryexperts,suchasBarryEichengreen,haveadvisedcountriestostrengthenadministrativecurrencycontrols. Give