Paul Krugman may think I’m an idiot, but I don’t think I’m an idiot:

This is from Michael Pettis‘ blog; he has his finger on the pulse of what is happening in China.

On a different note I found another very interesting article in today’s South China Morning Post:

Shenzhen foreign-exchange dealer Fang Zhen has been worried for months by a surge in people exchanging yuan for Hong Kong dollars based on fears that the mainland currency would plummet in value amid the financial crisis. The fears were so strong that they drove up demand for and the price of the Hong Kong dollar on the black market.

People soon realised they could make quick money by buying Hong Kong dollars at official banks and selling them on the black market. Mr Fang said he had reported his concerns to his superiors at the China Construction Bank and industry supervisors at the People’s Bank of China. Since October, many people in Shenzhen had discovered they could make a profit from currency trading between official banks and the black market. The margin between the buying price for Hong Kong dollars listed by state banks and the selling price set by black market dealers was growing. By the Lunar New Year, the gap was up to half a percentage point, Mr Fang said.

The widening spread between the official and underground prices was spurred by expectations that the central government would heed calls from influential think-tanks since late last year for depreciation of the yuan against the US dollar, to help beleaguered exporters.

Two weeks ago I wrote about the latest (rumored) reserve figures for January and surmised that there were at least $20-30 billion in hot money outflows that month. The SCMP article is consistent with my assumptions.

And finally, on a completely different note, my student Gao Ming is writing a paper that involves a mention of the Mexican crisis in 1982. He asked me some questions about President Lopez Portillo’s failed attempts to defend the peso, and that question led to some searching. In so doing I dug up an old quote that I had forgotten. During the oil boom of the latte 1970s, when every expert knew that oil prices would soar forever and would result in a major realignment of geopolitical forces, the president, presiding over Mexico’s then-massive oil wealth, ecstatically announced that his job was to administer the era of Mexican abundance (“¡Vamos a administrar la abundancia!” he proclaimed).

He went on to say: “En el mundo de la economía los paises se dividen en dos: los que tienen petróleo y los que no lo tienen. ¡Y nosotros lo tenemos!” which translates as: “In the world of economics there are two types of country: those that have oil and those that don’t. And we have it!”

What does this have to do with China or the world financial crisis? Perhaps not much, but it is good to remind ourselves about how utterly wrong we can be about predicting major changes or historic turning points. By the way Gao Ming’s favorite part of the story was my telling him that for years after his failed defense of the peso (“We will defend the peso like a dog!” he shouted), whenever ordinary Mexicans saw him in public they started barking like dogs. Mexicans have never lost their very healthy skepticism, it seems.

I am not going to hash over the Yuan – Dollar situation again, but I am going to point out that whenever the Yaun is traded, it gets beaten to a pulp and the Chinese government has to defend it. If the Chinese want a new reserve currency they are going to have to play the game with the big boys and take their lumps. The market – not the IMF or the G20 or G@$%&* or the Vatican determines which currency is the reserve currency and the market determines whether a nation’s currency policy is effective.

Market, market, market.

The entire article is interesting on its take on Chinese employment.