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It is hard to think of an A+ grade as a bad thing, but Fitch 's downgrading of the China's debt rating, and the local currency rating, to an A+ (from AA-) is not exactly welcome news. It points to one factor that could slow growth in China's economy: debt concerns. It appears that the global economy's next superpower is not immune from some of the finance issues that have hit in the West--namely credit buildup and shadow banking . Fitch Ratings ' Andrew Colquhoun spoke with the Wall Street Journal 's Deborah Kan about the downgrade, and his firm's concerns over bad loans in China:

China is trying to prevent a dangerous housing bubble by placing some state controls over home sales and mortgages. Andrew Sheng and Xiao Geng --president and director of research at the Fung Global Institute , respectively--argue that quotas and requiring 70% down payments are likely to be less effective, and that policy leaders instead should focus on the real problem: "the low cost of capital." From Project Syndicate : Excessively low interest rates have generated a mismatch between housing prices and the available supply, because they serve as hidden subsidies for those who can borrow – for example, the rich and SOEs – and thus stimulate demand for luxury property. In order to curb this trend, policymakers have reverted to the quota as a macroeconomic tool, but this time for housing credit. Like quotas on manufactured products, these new quotas are generating a dual-price allocation system, in which SOEs can borrow at significantly lower interest rates than small and medium-size enterprises (SMEs), which must rely on the informal market at interest rates as high as 2% monthly. But eliminating quotas in order to allow prices to reach market-clearing levels is not an option this time, owing to the complexity and competitiveness of the real-estate and bank-credit markets. Three major factors are impeding policymakers from raising interest rates to market-clearing levels. First, the domestic interest groups that benefit from low borrowing costs have become a barrier to their liberalization. There is a “common-sense consensus” among borrowers – in China, as well as in highly indebted advanced economies – that raising interest rates would undermine GDP growth, employment, and asset prices. Second, many argue that raising interest rates would trigger a flood of speculative capital from low-yielding advanced economies. With the PBOC unable to sterilize the inflows, upward pressure on the renminbi’s exchange rate would threaten competitiveness. Finally, an inadequate understanding of structural inflation (the growth in prices for non-tradable assets) has generated the false belief that China can maintain similar levels of inflation and exchange-rate stability as the OECD economies. As a result, over the last decade, the Chinese authorities’ implicit target for annual inflation and currency appreciation has been only about 3%. Read Quitting the Quota here .

Wall Street Journal economics editor David Wessel tells us we should stop looking at China as the big bad example of a country that is hurting other economies with exports vastly outpacing imports. China's trade surplus has been coming down. But Germany's has not. So Wessel argues that Germany should follow China's example, which would in turn help out its Euro partners and the global economy:

In an interview with Knowledge@Wharton , New York Times Company Chairman Arthur O. Sulzberger, Jr. discusses business leadership, the future of his newspaper company, and the transition of business models in response to the shift to digital media. While Sulzberger is very careful to avoid making any predictions about where his company and his industry are headed, it is interesting to note the global goals. His company recently launched its first Chinese language site, and it sounds like this is just the beginning of a bigger outreach strategy in Asia:

The Monkey Cage , one of our favorite political science blogs, has shared an interesting article from Soo Yeon Kim of the National University of Singapore (from Political Economist ). Kim argues that the latest global recession was different from previous ones in that "that dreaded specter of protectionism did not materialize." And she says the primary factor seems to be organizations like the IMF and WTO working hard to discourage change in policy that would scale back global trade: There is widespread agreement regarding the critical role of international institutions as “firewalls” against protectionism during this recession. Economic and non-economic international institutions have served as conveyors of information and mechanisms of commitment and socialization. Their informational function enhances the transparency and accountability of states’ trade policies, and they mitigate uncertainty when it is running high. Specialized international institutions devoted to trade, such as the WTO and preferential trade agreements (PTAs), also lock in commitments to liberal trade through legal obligations that make defections costly, thus creating accountability in the actions of its members. Equally important, international institutions are also arenas of socialization that help propagate important norms such as the commitment to the liberal trading system and cooperative economic behavior. In this connection, the degree to which a particular country was embedded in the global network of economic and non-economic international institutions has been found to be strongly correlated with fewer instances of protectionist trade measures. Information provided to date by international institutions, with the exception of the GTA project, largely agree that states have not resorted to large-scale protectionism during this recession, in spite of the fact that the “great trade collapse” at the beginning of the current crisis was steeper and more sudden than that of its Great Depression predecessor. The WTO Secretariat, in addition to its regular individual reports on members’ trade policies under the Trade Policy Review Mechanism (TPRM), has issued more than a dozen reports on member states’ trade policies during the crisis. At the request of the G-20 countries, which pledged not to adopt protectionist trade measures at the onset of the crisis in 2008, the WTO, the OECD, and UNCTAD have produced joint reports on the trade and investment measures of the world’s largest trading states. They, too, find that G-20 countries had largely adhered to their commitment not to raise trade and investment barriers. In the World Bank’s Temporary Trade Barriers (TTB) project, an important and unique data collection that includes information on pre-crisis and crisis trade policy behavior, Bown finds that temporary trade barriers such as safeguards, countervailing and antidumping duties saw only a slight increase of usage by developed countries, in the neighborhood of 4%. In contrast, emerging market economies were the heavy users of TTBs, whose usage rose by almost 40% between 2008 and 2009. As scholarly insights accumulate on the current recession and its impact on protectionism (or lack thereof), two questions emerge for further research. First, to what extent have governments employed policy substitutes that have the same effect as trade protectionism? International institutions may appear to have been successful in preventing protectionism, but governments may well have looked elsewhere to defend national economies. This question can be seen in the broader context of the “open economy trilemma,” in which governments may achieve only two of three macroeconomic policy objectives: stable exchange rates, stable prices, and open trade. Irwin argues that governments that abandoned the gold standard during the Great Depression were less protectionist, and their economies also suffered less from the recession. Existing scholarship also indicates that governments are likely to employ policy substitutes, opting for monetary autonomy when facing trade policy constraints, for example, due to membership in a preferential trade agreement. Moreover, at the time of writing, the International Monetary Fund (IMF) has announced that it has dropped its objections to capital controls, albeit cautiously and only under certain conditions, thus potentially providing another policy alternative for governments to achieve economic stability during this crisis. Future research may further extend the application to policy substitutes that are deployed during economic downturns. Read the full article here .

As President Obama launches into his second term, getting the economy moving remains among his top priorities. It is not the challenge he faced four years ago, when we were just months removed from the near global economic meltdown of September 2008. Rather, it may look very similar to last year: slow growth around the globe. But, according to Nouriel Roubini , there will be some "important differences , " that might lead us to prefer slow growth to the alternative. In a piece for Project Syndicate , Roubini raises concern that, "given synchronized fiscal retrenchment in most advanced economies, another year of mediocre growth could give way to outright contraction in some countries." With growth anemic in most advanced economies, the rally in risky assets that began in the second half of 2012 has not been driven by improved fundamentals, but rather by fresh rounds of unconventional monetary policy. Most major advanced economies’ central banks – the European Central Bank, the US Federal Reserve, the Bank of England, and the Swiss National Bank – have engaged in some form of quantitative easing, and they are now likely to be joined by the Bank of Japan, which is being pushed toward more unconventional policies by Prime Minister Shinzo Abe’s new government. Moreover, several risks lie ahead. First, America’s mini-deal on taxes has not steered it fully away from the fiscal cliff. Sooner or later, another ugly fight will take place on the debt ceiling, the delayed sequester of spending, and a congressional “continuing spending resolution” (an agreement to allow the government to continue functioning in the absence of an appropriations law). Markets may become spooked by another fiscal cliffhanger. And even the current mini-deal implies a significant amount of drag – about 1.4% of GDP – on an economy that has grown at barely a 2% rate over the last few quarters. Second, while the ECB’s actions have reduced tail risks in the eurozone – a Greek exit and/or loss of market access for Italy and Spain – the monetary union’s fundamental problems have not been resolved. Together with political uncertainty, they will re-emerge with full force in the second half of the year. After all, stagnation and outright recession – exacerbated by front-loaded fiscal austerity, a strong euro, and an ongoing credit crunch – remain Europe’s norm. As a result, large – and potentially unsustainable – stocks of private and public debt remain. Moreover, given aging populations and low productivity growth, potential output is likely to be eroded in the absence of more aggressive structural reforms to boost competitiveness, leaving the private sector no reason to finance chronic current-account deficits. Read The Economic Fundamentals of 2013 here .

At Vox , Amit Khandelwal , Peter K. Schott , and Shang-Jin Wei argue that the benefits of opening up trade are often greater than expected because the elimination of some institutions may remove "corrupt customs agents, bureaucratic red tape and the withholding of goods in bonded warehouses." In their post, they look at the example of textiles coming from China following the abolishment of quotas in 2005: Figure 1 displays the growth of constrained versus unconstrained Chinese apparel and textile exports from 2000 to 2005. As illustrated in the figure, the removal of quotas in 2005 led to a substantially larger increase in the growth of previously bound products versus products that were exported quota free. Examining the sources of this relative growth can reveal a great deal about whether or not the Chinese government allocated quotas efficiently. In theory, an efficient quota-licensing regime, like an auction, establishes a per-unit fee that equates the supply and demand for quota. This fee induces self-selection based on productivity, as only the most productive firms earn profits in the export market net of the licensing fee. Consequently, removal of efficiently allocated quotas has three observable effects. First, it causes the exports of the most productive incumbents to jump relative to those of less productive incumbents. Second, it allows less productive firms to profitably enter the export market. Finally, entrants and incumbents have opposing effects on export prices. Removal of the licence fee pushes incumbents’ prices down, while entry by relatively less productive exporters pushes prices up. The key prediction is that export growth and price declines are dominated by incumbents. In fact, we find that the post-quota export growth and price declines of quota-bound versus quota-free goods are dominated by entrants rather than incumbents. Furthermore, we show that the entrants behind this trend are primarily privately owned domestic and foreign firms, and that their growth comes at the expense of state-owned enterprises, who are on average nearly a third less productive than their private-sector counterparts. Additional evidence of misallocation comes from the fact that nearly two-thirds of the price decline observed in the year quotas are removed is due to entrants rather than incumbents. These trends provide strong evidence against the hypothesis that quota licences were allocated on the basis of firm efficiency. Based on a coarse measure of productivity differences across ownership types, the observed reallocations of market share in quota-bound exports imply that industry productivity increased 21% when quotas were removed. This productivity increase is a combination of the distortion caused by the quotas and the distortion caused misallocated quota licences. To estimate the relative contribution of removing misallocation versus the actual quota, we compare numerical solutions of the efficient export-licensing model noted above to a counterfactual calibrated to match the importance of entry that we see in the data. We find that 71% of the overall gain in productivity from removing quotas is due to the elimination of quota misallocation versus 29% for the removal of the quota itself. Our estimates suggest that simply replacing the government's actual licensing institution with an auction would raise industry productivity by 15 percentage points. This implies a sizeable drag on aggregate productivity due to misallocation. Read Trade liberalisation and embedded institutional reform: Evidence from Chinese exporters here .