In an interview with the BBC, Mr Geithner said that world leaders must concentrate on the “paramount” challenges of growth and confidence.

He added the world could not rely as much on the US as it has in the past.

Mr Geithner was speaking in Washington ahead of G8 and G20 meetings this weekend in Toronto.

The Group of Eight and Group of 20 rich and developing nations are assembling on Friday for three days of talks on emerging from the worst financial crisis since the Great Depression.

But the Reuters news agency reported that world leaders at the meeting would admit that sickly public finances could hurt long-term growth.

Many European governments, including the UK, have implemented severe austerity measures in recent weeks in order to cut debt levels.

UK Prime Minister David Cameron, who has arrived in Canada along with other leaders, said in an article for the Globe and Mail newspaper: “No-one can doubt the biggest promise we have to deliver: fixing the global economy.”

“I believe we must each start by setting out plans for getting our national finances under control,” he added.
Growth challenge

When asked if Europe faced the possibility of Japanese-style stagnation if it carries on with debt reduction policies, Mr Geithner said “Europe has the capacity to prevent that”.

But he went on: “Europe can make a choice to put in place the reforms and policies that will provide the possibility of stronger growth rates in the future.

“This meeting gives us the chance to sit together and look at whether we’ve got a broad strategy across the country that’s going to strengthen this recovery.”

“Our job is to make sure we’re all sitting there together to focus on this challenge of growth and confidence because growth and confidence are paramount.”

Some commentators in Europe argue that austerity measures should only be introduced once strong growth has been secured in the wake of the global downturn.

This was a more widely-held position until the Greek debt crisis focused policymakers’ minds on cutting debt levels.

The Greek crisis showed that governments with high levels of debt find it very difficult to borrow money from international investors, money that they need to service existing debts.
Common goals

In a letter to G20 leaders last week, US President Barack Obama warned against cutting national debts too quickly, arguing it would put economic recovery at risk.

But Mr Geithner said the US and Europe “have much more in common than we have differences”.

“We all agree that we have to restore responsibility to our fiscal positions. Everyone agrees that those deficits have to come down over time to a level that’s sustainable,” he said.

But he said that the US and Europe would take “different paths, at a different pace” in order to reach the common goal.

“It’s going to require different things as we have different strengths and weaknesses,” he said.

Mr Geithner said the US was not in a position to work out what were the best policies for European countries to pursue.

The treasury secretary said the US had laid out “very ambitious plans as well” to cut its deficit.

But he said the US was in a stronger position than many other economies to cut its debt levels.

“We’re in the very good position of being able to deliver relatively strong growth rates [compared] to what we’re seeing in other major economies,” he said.

IF A sense of panic has started to grip Europe over the potential for Greece to default on its debts, and the contagion to spread rapidly to the continent’s other struggling economies, it has not yet struck Herman Van Rompuy, the president of the European Council. He insisted on Wednesday April 28th that there was “no question” of Greece’s debts being restructured. He also said leaders of the euro-zone countries would meet next month to consider how to activate their proposed joint lending programme with the IMF to support Greece. Jean-Claude Trichet, president of the European Central Bank, delivered an almost identical message, saying that a Greek default was “out of the question”.

The calm demeanour of Mr Trichet and Mr Van Rompuy is not shared by the markets. On Wednesday Greece said that it would ban the short-selling of shares for two months to prevent speculators doing further damage to the country’s banks. The previous day, shares in Greek banks had plunged by nearly 10% and the Athens stockmarket as a whole fell by 6% on fears that the country would soon suffer another downgrade of its debts. Those fears proved entirely justified. After the markets closed Standard & Poor’s heaped indignity on Greece by cutting the rating of its sovereign bonds to “junk” status. It also cut Greece’s banks to “junk” because of their hefty exposure to government debt.

Although the move to ban short-selling steadied Greece’s stockmarket somewhat on Wednesday, the chances of the country defaulting on its debts were still perceived by the bond markets as high. Spreads on Greek government bonds (the risk premium compared with German bonds) reached a 13-year high as investors worried that the proposed rescue plan for Greece could stall. Talks between Greece, the European Union and the IMF got under way last week.

Greece was initially seeking up to €45 billion ($60 billion) in emergency loans from euro-zone governments and the IMF this year, the first chunk of which will be needed by May 19th, when the Greek government must refinance a €8.5 billion bond. But as the crisis has worsened it has become clear that Greece could need much more. On Wednesday it was reported that the EU and IMF were preparing a package worth up to €120 billion over three years—if so, the biggest sovereign rescue yet attempted. Nevertheless, even aid on this scale might only postpone an eventual default, if Greece’s economy fails to grow faster than its debt pile.

Investors do not seem convinced that euro-zone governments will be able to muster the political will to hammer out an agreement. Germany, as the largest euro member, is vital to any effort to save Greece, but it is wavering. German public opinion is firmly set against dipping into the public purse to help the profligate Greeks. Angela Merkel, Germany’s chancellor, is in a tight spot. If she agrees to extend aid quickly to Greece a voters’ backlash back home may send her party crashing to defeat in regional elections set for May 9th. But if she sits back and watches Greece slide towards default, the contagion is sure to spread rapidly to other, bigger EU countries with debt problems—Mrs Merkel could then end up being blamed for triggering a far worse conflagration across Europe, including a fresh banking crisis.

Fears that Greece’s fiscal crunch would spread to other euro-area countries have sent the region’s single currency reeling to a one-year low against the dollar. S&P’s decision on Tuesday also to downgrade the debt of Portugal by a couple of notches pushed European and world stockmarkets lower. Portugal, despite a smaller budget deficit and lower public debt than Greece, is widely touted as the next European country that may suffer a sovereign-debt crisis. Portugal’s slow-growing economy, drastic loss of competitiveness and high public and private indebtedness are all weaknesses that markets might put to greater test.

If Portugal comes under intense pressure, contagion might then spread to Ireland, Italy or Spain, the other euro-area countries with some mixture of big budget deficits, poor growth prospects and high debts. Only swift and decisive action by the leaders of Europe’s big economies is likely to head off the current crisis. Default by a smaller member such as Greece would be a body blow to the euro’s standing but it need not spell the end of the currency. However, that might not be the case if the problems spread further afield.

Those funds were agreed during an extraordinary teleconference of eurozone finance ministers on Sunday and would be supplemented by contributions from the International Monetary Fund that could yield an additional €15bn (£13.2bn, $20.2bn) according to European officials.

The rates charged to Athens would be around 5 per cent for a three-year fixed loan — above the IMF’s standard lending rate but below those currently demanded by jittery investors. Two-year Greek bonds were last week trading at 7.45 per cent.

At a press conference in Brussels on Sunday, European officials presented the three-year package as the detailed commitment that financial markets have been demanding after a series of vague communiqués failed to ease the crisis.

“This is the step of clarification the markets are waiting for,” said Jean-Claude Juncker, the Luxembourg prime minister and eurogroup president. “It shows there is money behind this.”

IMF managing director Dominique Strauss-Kahn said the eurozone agreement marked “an important step”, adding that the IMF was ready to contribute financing when necessary and would hold talks in Brussels Monday with the Commission and Greek authorities.

In Athens, George Papaconstantinou, Greek finance minister, made clear that the government had not yet asked for the money, and expressed confidence that the very existence of the package would allow his country to access debt markets at sustainable rates.

“We believe we can continue to borrow on the [international capital markets] without obstacles,” Mr Papaconstantinou said.

A key test of market sentiment will come on Monday, when Greece will attempt to raise €1.2bn through the sale of three and six-month paper.

Details of the rescue package were the result of months of sparring among eurozone members that revealed deep divisions about how to address the immediate crisis as well as broader disputes over economic governance.

One of the most contentious issues was interest rates, with Germany insisting that Greece pay “market rates” and France and other eurozone members pushing for easier terms.

Olli Rehn, Europe’s commissioner for economic and monetary affairs, insisted that the pricing agreed by the 16 eurozone members did not constitute a subsidy for Greece. Their contributions to any rescue would be proportional to their capital commitments to the European Central Bank, leaving Germany with the largest share.

Representatives from the Commission, the ECB and the Greek government will meet with the IMF on Monday to negotiate additional features of the package, including conditions that would be imposed on Athens and the exact size of the IMF contribution.

ONE of the few good things about the Great Recession of 2008-09 was a merciful absence of complaints from America’s Congress about China’s currency. The yuan’s gradual appreciation stopped in July 2008, and China has since kept its currency tightly pegged to the dollar. But even as America suffered its worst downturn in the post-war period, its legislators steered clear of ranting against China.

That restraint was driven partly by fear. At the depths of the crisis even the most myopic Congressmen worried about a descent into 1930s-style protectionism. And it was driven partly by the facts. As investors’ flight to safety strengthened the dollar in late 2008, the yuan rose along with it. With America’s imports slumping it was hard to blame Chinese workers for American joblessness. And thanks to its huge domestic stimulus China added to global demand last year, as its current-account surplus shrank sharply.

Now things have, unfortunately, gone into reverse. As policymakers in both countries shift from cushioning recession to managing recovery, the rigidity of the yuan is, once again, becoming a source of tension—one that a still-fragile global recovery can ill afford.

America sounds increasingly determined to push its exports, and its attitude to China has hardened. Mr Obama has set a goal of doubling exports in five years (see article) and has promised to “get much tougher” over what it regards as unfair competition from China. Speculation is rising in Washington, DC, that the Treasury will brand China a currency “manipulator” in its next exchange-rate report. With America’s unemployment at 9.7% and the mid-term elections approaching, the appeal of China-bashing is rising in Congress, too. Several senators recently revived a mothballed demand that the Commerce Department should investigate China’s currency regime as an unfair trade subsidy.

Beijing, in turn, shows little sign of budging on the yuan, even though the latest figures show surprisingly strong export growth and higher-than-expected inflation. Zhou Xiaochuan, the head of China’s central bank, caused a brief flurry in currency markets when he argued on March 6th that keeping the yuan stable against the dollar was “part of our package of policies for dealing with the global financial crisis” from which China would exit “sooner or later”. But he made it quite clear that China would be cautious and gave no hint that sudden exit was imminent. In recent days various other Chinese officials have put even more emphasis on the stability of the currency, bristled at outside pressure to hurry up and denounced American “politicisation” of the exchange-rate issue.

A speedy end to the dollar peg makes economic sense for China as well as for the world. A stronger, more flexible currency would make it easier for China to control inflation and asset bubbles. A dearer yuan would also help rebalance China’s economy towards domestic spending by boosting Chinese consumers’ purchasing power, discouraging excessive investment in manufacturing and squeezing corporate profits. That would put the global recovery on a steadier footing, especially if a stronger yuan were mirrored by appreciation of the currencies of other Asian emerging economies. And China would gain politically by helping to diffuse protectionist pressure from abroad.

But it would not be a magic bullet, either within China or outside. Rebalancing China’s economy will require big structural reforms, from tax to corporate governance, as well as a stronger currency. A stronger yuan would not suddenly bring back millions of jobs to America. Since America no longer makes most of the products it imports from China, a stronger yuan would initially act more like a tax on consumers.
Soft-soaping, not sabre-rattling

Will the administration’s new tough talk move things in the right direction? Those who argue in favour of sabre-rattling do so on two grounds: first, that it is likely to shift China’s position, and second, that a stronger stance against China’s currency from the White House will diffuse protectionist sentiment in Congress. Both are dubious. China’s reactions so far suggest that American complaints make an imminent currency shift less, not more, likely. And a row could spur rather than diffuse anti-China action in Congress.

Rather than raising a bilateral ruckus, America would be far better off convincing other big economies in the G20 to press together for a yuan appreciation as part of the world’s exit strategy from the crisis. Cool and calm multilateral leadership will achieve more, with fewer risks, than a Sino-American currency spat.

The euro rose 0.6% to $1.3698, but was slightly lower against the pound at 90.70 pence.

On Tuesday, the currency fell to its lowest level against the dollar for 10 months amid continuing concerns over Greece’s debt crisis.

Persistent worries over Greece’s 300bn euro ($419bn; £259bn) debt have weighed on the European single currency.

The pound rose against the dollar, trading at $1.512.

Protests

The Greek government approved an austerity package of tax rises and spending cuts worth 4.8bn euros, hoping to convince financial markets that it can pay off its debts and persuade European leaders it is doing enough.

Greece has pledged to reduce its deficit from 12.7% – more than four times eurozone rules – to 8.7% during 2010.

The measures include raising VAT to 21% from the current rate of 19%, and cutting civil servant bonus payments during holidays – which has annoyed union leaders.

But the austerity measures already proposed – such as freezing public sector pay, raising taxes and changing the pension system – have provoked huge street protests.

“The fiscal measures announced by Greece today should allow the government to ease the short-term pressure on its finances with a bond issue and may lead to firmer support from other countries,” said Ben May, European economist at Capital Economics.

Greece needs to sell bonds in the coming weeks. It has to raise 20bn euros in order to pay off maturing debt in April and May.

Greece’s Prime Minister George Papandreou is due to visit German Chancellor Angela Merkel in Berlin on Friday, in what could be a key meeting to decide what, if any, European assistance Greece receives.

He will visit France to meet President Nicolas Sarkozy soon afterwards.

European investigation

The European Commission announced that it intends to question banks and regulators over the role played by credit-default swaps in the Greek debt crisis, and how these financial instruments might be regulated in future.

Credit-default swaps are similar to insurance contracts, and allow banks and other institutions to buy financial protection against the risk that a borrower is unable to repay its debts.

However, the swaps have also been used by hedge funds to speculate against Greek debt, and make money if Greece’s standing in the markets deteriorates.

Despite the Commission’s concerns, the chairman of the Financial Services Authority, the UK’s financial watchdog, played down the importance of speculators.

Adair Turner said it is more important to keep the confidence of long-term buyers of Greek government bonds.

“It is important that even if we look at this issue we don’t overstate it,” added Mr Turner, who said that swaps speculators only comprised around 3% to 4% of outstanding Greek debt.

“A fundamental issue that can drive volatility on spreads on Greek bonds is a whole load of long investors not being willing to buy.”

“We need deep profound change,” he said in his keynote speech at the World Economic Forum in Davos.

His comments came as bankers and regulators clashed over proposals to break up banks that threaten the whole financial system.

Mr Sarkozy said he wished to restore a “moral dimension” to free trade.

“Were we not to change, we would be showing tremendous irresponsibility,” he told the bankers and politicians that gather annually in the Swiss alpine resort.

Bank reforms

France has supported forcing banks to hold more capital and curbing bonus payments in global negotiations over the past year on how to reform the system to prevent future crises.

US President Barack Obama has proposed curbing the size of banks, preventing key financial institutions from owning hedge funds and barring them from proprietary trading – investing to make a profit for themselves rather than on behalf of customers.

Bankers in Davos were less than pleased with the ideas.

Earlier on Wednesday, Barclays boss Bob Diamond said he had “seen no evidence … to suggest that shrinking banks and making banks smaller and narrower is the answer.”

Other bankers, like Jacob Frenkel of JPMorgan Chase, have said they were worried about “bad regulation”.

‘Moral dimension’

Mr Sarkozy told the delegation – to scattered applause – that governments and companies in the world economy could not pretend it was business as usual.

“We are not asking ourselves what we will replace capitalism with, but what kind of capitalism we want?” he said.

“We must re-engineer capitalism to restore its moral dimension, its conscience,” he said. “By placing free trade above all else, what we have is a weakening of democracy.

While saying that those who ran companies that made money deserved to be compensated well, Mr Sarkozy hit out at huge bank bonuses that have caused public outcry in the US and UK.

“There are remuneration packages that will no longer be tolerated because they bear no relation to merit,” he said.

Earlier in Davos, legendary investor George Soros backed Mr Obama’s proposed reforms to limit the size of banks and told journalists that Wall Street bankers who opposed the plans were “tone-deaf”.

MANY people start the new year by resolving to change their old ways. Not China. On December 27th Zhong Shan, the country’s vice-minister of trade, declared that China will continue to increase its share of world exports. Figures due out on January 11th are expected to show that China’s exports in December were higher than a year ago, after 13 months of year-on-year declines. China’s exports fell by around 17% in 2009 as a whole, but other countries’ slumped by even more. As a result China overtook Germany to become the world’s largest exporter and its share of world exports jumped to almost 10%, up from 3% in 1999 (see chart).

China takes an even bigger slice of America’s market. In the first ten months of 2009 America imported 15% less from China than in the same period of 2008, but its imports from the rest of the world fell by 33%, lifting China’s market share to a record 19%. So although America’s trade deficit with China narrowed, China now accounts for almost half of America’s total deficit, up from less than one-third in 2008.


Trade frictions with the rest of the world are hotting up. On December 30th America’s International Trade Commission approved new tariffs on imports of Chinese steel pipes, which it ruled were being unfairly subsidised. This is the largest case of its kind so far involving China. On December 22nd European Union governments voted to extend anti-dumping duties on shoes imported from China for another 15 months.

Foreigners insist that the main reason for China’s growing market share is that the government in Beijing has kept its currency weak. But there are several other reasons why China’s exports held up better than those of its competitors during the global recession. Lower incomes encouraged consumers to trade down to cheaper goods, and the elimination of global textile quotas in January 2009 allowed China to increase its slice of that market.

How high could China’s market share go? Over the ten years to 2008 China’s exports grew by an annual average of 23% in dollar terms, more than twice as fast as world trade. If it continued to expand at this pace, China might grab around one-quarter of world exports within ten years. That would beat America’s 18% share of world exports in the early 1950s, a figure that has since dropped to 8%. China’s exports are likely to grow more slowly over the next decade, as demand in rich economies remains subdued, but its market share will probably continue to creep up. Projections in the IMF’s World Economic Outlook imply that China’s exports will account for 12% of world trade by 2014.

Its 10% slice this year will equal that achieved by Japan at its peak in 1986, but Japan’s share has since fallen back to less than 5%. Its exporters were badly hurt by the sharp rise in the yen—by more than 100% against the dollar between 1985 and 1988—and many moved their factories abroad, some of them to China. The combined export-market share of the four Asian tigers (Hong Kong, Singapore, South Korea and Taiwan) also peaked at 10% before slipping back. Will China’s exports hit the same barrier as a result of weakening competitiveness, or rising protectionism?

An IMF working paper published in 2009 calculated that if China remained as dependent on exports as in recent years, then to sustain annual GDP growth of 8% its share of world exports would rise to about 17% by 2020. To consider whether that was feasible, the authors analysed the global absorption capacity of three export industries—steel, shipbuilding and machinery. They concluded that to achieve the required export growth, China would have to reduce prices, which would be increasingly hard to manage, whether through productivity gains or a squeeze in profits. In many export industries, particularly steel, margins are already wafer-thin.

However, China’s future export growth is likely to come not from existing industries but from higher-value products, such as computer chips and cars. Japan’s exports also moved swiftly up the value chain, but whereas this was not enough to support durable gains in its market share, China has the advantage of capital controls that will prevent its exchange rate rising as abruptly as Japan’s did in the 1980s. When China does eventually allow the yuan to rise, it will do so gradually.

Another big difference is the vastness of China’s economy. China consists, in effect, of several economies with different wage levels. As Japan moved into higher-value exports, rising productivity pushed up wages, making old industries, such as textiles, uncompetitive. In China, as factories in the richer coastal areas switch to more sophisticated goods, the production of textiles and shoes can move inland where costs remain cheaper. As a result China may be able to remain competitive in a wider range of industries for longer.

Foreign hostility to China’s export dominance is growing. Paul Krugman, the winner of the 2008 Nobel economics prize, wrote recently in the New York Times that by holding down its currency to support exports, China “drains much-needed demand away from a depressed world economy”. He argued that countries that are victims of Chinese mercantilism may be right to take protectionist action.

From Beijing, things look rather different. China’s merchandise exports have collapsed from 36% of GDP in 2007 to around 24% last year. China’s current-account surplus has fallen from 11% to an estimated 6% of GDP. In 2007 net exports accounted for almost three percentage points of China’s GDP growth; last year they were a drag on its growth to the tune of three percentage points. In other words, rather than being a drain on global demand, China helped pull the world economy along during the course of last year.

Foreigners look at only one side of the coin. China’s imports have been stronger than its exports, rebounding by 27% in the year to November, when its exports were still falling. America’s exports to China (its third-largest export market) rose by 13% in the year to October, at the same time as its exports to Canada and Mexico (the two countries above China) fell by 14%.

Some forecasters, such as the IMF, expect China’s trade surplus to start widening again this year unless the government makes bold policy changes, such as revaluing the yuan. However, Chris Wood, an analyst at CLSA, a brokerage, argues that China is doing more for global rebalancing than America. Rebalancing requires that China spends more and America saves more. Mr Wood argues that China is doing more to boost domestic consumption (for example, through incentives to stimulate purchases of cars and consumer durables, and increased health-care spending) than America is doing to boost its saving. America’s total saving rate fell in the third quarter of last year to only 10% of GDP, barely half its level a decade ago. Households saved more, but this was more than offset by increased government “dissaving”.

Strong growth in China’s spending and imports is unlikely to dampen protectionist pressures, however. China’s rising share of world exports will command much more attention. Foreign demands to revalue the yuan will intensify. A new year looks sure to entrench old resentments.

RUSAL, the world’s largest aluminium company, desperately needs money to support mountains of debt but, as its recently issued prospectus suggests, there are reasons why funds may be tricky to raise. The prospectus repeatedly warns would-be investors that they could lose everything; it also admits that the firm does not meet the profit test for listing on the Hong Kong stock exchange.

That apparently does not bother the exchange itself, which will host Rusal’s planned multibillion-dollar share offering, the first by a Russian company, later this month. The bourse is making a vigorous play for foreign listings from companies outside China, the source of its recent success but a stamping-ground that may soon be lost to resurgent local exchanges in Shenzhen and Shanghai.

If the Rusal offering is pounced upon by investors, there is hope that another six or seven big Russian companies will quickly follow. In short order Hong Kong could usurp London’s AIM market, which proved to be a popular destination for Russian listings in the past.

The Russians are not the only ones. Hong Kong received its first German listing in late December. The company, Schramm Holding, is controlled by South Korean investors who settled on Hong Kong because they thought the local investor base would find the company’s growing sales in China appealing. Esther Leung, a lawyer at DLA Piper who worked on the transaction, says she is in discussions about listings with companies from America, Japan and Kazakhstan, as well as South Korea and Russia. As many as ten non-Chinese companies may have already received quiet approval from the exchange’s listing committee, reckons PricewaterhouseCoopers, an accountancy firm. This is in addition to a handful of extremely large expected offerings, including the spin-out of AIG’s Asian life-insurance operations.

Hong Kong’s appeal is the result both of what it offers and of what it withholds. Although China’s capital account is technically closed, a flood of money, presumed to be sloshing over from the mainland’s massive bank-lending binge, has pushed up the prices of investible assets in the territory. The broader story of Chinese growth helps boost valuations. Li Ning, which sells sports kit in China, is valued at 30 times trailing earnings, half again as much as Nike, which also has a robust China business but trades in America.

At the same time disclosure requirements and general intrusiveness are lower in Hong Kong than in other destinations. Whether Rusal and many other Russian companies could even qualify for a listing in America, say, is a subject of debate.

Aware of this, and of Rusal’s controversial status, Hong Kong’s regulators have attached unprecedented conditions to the aluminium company’s offering, in effect barring all but the richest individuals from participating. However well intentioned, the move sends an odd message. In expanding its horizons, the exchange is willing to lower its standards.

The American economy in 2010 will be torn between two opposing forces. The first is that deep recessions usually lead to strong recoveries. The other is that financial crises usually produce weak recoveries. The interplay of these two forces will produce a cycle that resembles not a V, U or W, but a reverse-square-root symbol: an expansion that begins surprisingly briskly, then gives way to a long period of weak growth.

Recessions interrupt the economy’s natural inclination to grow. They create pent-up demand for homes and other goods, and prompt businesses to slash production, payrolls and investment to levels well below what normal sales require. Ordinarily, the deeper the downturn, the more powerful the reversal of those effects. Based on experience, the American economy, which shrank by some 4% over the course of the 2007-09 recession, ought to grow by as much as 8% in its first year of recovery. The unemployment rate, around 10% in late 2009, should drop to about 8%.

That won’t happen. But growth could still beat the consensus forecast of 2.5% in 2010. Business inventories are deeply depressed and even a modest swing to restocking will bring a rapid rebound in factory production. New-home construction is at its lowest proportion of GDP since 1960, and the inventory of unsold new homes the slimmest in 17 years. A sizeable upturn is in store. Capital spending is at its lowest relative to GDP in 40 years and is due to rise. The Obama administration’s $787 billion fiscal-stimulus package has been criticised for dribbling money into the economy too slowly, but for that reason it will support growth well into 2010.

None of these factors, however, can sustain strong growth past 2010 without a self-sustaining cycle of private spending and income growth. Several obstacles stand in the way of that transition. Through to mid-2009 households had lost $12 trillion, or 19% of their wealth, because of the collapse in house and stock prices. That saps their purchasing power and pushes them to save more, especially those nearing retirement. Though they’ll boost their saving only gradually, that still means consumer spending (about 70% of GDP) will grow more slowly than income, after two decades in which it usually grew more quickly. High unemployment will hold back wage gains (see chart); wage cuts are already commonplace. Leaving aside swings in energy prices, inflation, now about 1.5%, will slip to zero and may turn to deflation in late 2010. Deflation drives up real debt burdens, further sapping consumer spending.

High interest rates caused most previous recessions, and low rates ended them. Not this one. When it began, the Fed’s short-term rate at 5.25% was not particularly high. The Fed cut it in effect to zero and aggressively expanded its balance-sheet by making loans and buying long-term bonds. In spite of that, bank loans to business and consumers are falling, as are loans packaged into private, asset-backed securities. Only the government-backed mortgage agencies, Fannie Mae, Freddie Mac and Ginnie Mae, continue to expand credit.

This reflects not just a lack of willing borrowers, but the lasting damage to the financial infrastructure that matches savers with investors. The International Monetary Fund studied 88 banking crises in the past four decades and found they led to sustained losses of output. Swathes of America’s “shadow banking system” of finance companies, investment banks and hedge funds have been vaporised. The government won’t let any more big banks fail, but the survivors are neither inclined nor able to expand their lending much. Residential- and commercial-property values fell by $8 trillion, or almost 20%, through to mid-2009, impairing existing loans and eroding the collateral for new ones. Regulators are also proposing to raise capital requirements, which will further encourage bankers to turn down borrowers.

Other crisis-racked countries, such as Sweden in the early 1990s and South Korea in the late 1990s, rode devalued currencies and booming exports back to health. That won’t work for America: the rest of the world isn’t big or healthy enough, and a steeply falling dollar would inflict deflationary harm on others.

Fiscal and monetary policies were admirably aggressive in 2009, but a withdrawal of either would threaten growth beyond 2010. The scheduled expiration of Mr Obama’s stimulus will subtract up to 2% from GDP in 2011. But Mr Obama will not want to push for significantly more stimulus since voters are already worried about big government and the deficit, and Republicans will exploit that sentiment as they seek to pick up seats in the 2010 congressional elections. The Fed, under fire for its meddling in the markets and expanded balance-sheet, may be tempted to raise interest rates early in 2010 if growth is surprisingly good; it will resist.

The list of roadblocks is depressing, but America will not slip back into recession or a lost decade akin to Japan’s in the 1990s. It did not enter its crisis with as much overinvestment as others, Japan in particular; its population is still growing (Japan’s is shrinking). It took two years to tackle its banks’ problems; Japan took seven. Boom times will be back. Just not very soon.

While a final decision has yet to be made, these people said CIC would likely receive a similar amount to the initial $200bn it was given on its establishment in 2007.

Chinese media have also reported the government is considering a new capital injection of $200bn for the fund.

Any infusion would amount to an acknowledgement from Beijing that CIC has performed well during a time of global turmoil. It would also mark a turnround from a year ago when the fund was under attack for its early lossmaking investments in Morgan Stanley and US private equity firm Blackstone.

Bankers say that despite those hiccups the fund has managed its funds well through the crisis. It stayed mostly in cash last year before switching into highly liquid US dollar assets as the greenback bounced back in November 2008 and again in March this year.

As the global economy began to recover earlier this year, the fund was quick to make investments in commodities-related assets that benefit from a rebound in Chinese growth.

In recent months the fund has clinched a series of deals and has committed more than half of the funds it had available for offshore investments.

“Their performance has been very good by most measures and they have gotten through the Blackstone-Morgan Stanley debacle, which really hurt and constrained them in 2008,” said one person who works closely with the fund.

China’s foreign exchange reserves increased by $326bn to a total of $2,273bn in the first nine months of 2009. Beijing has repeatedly expressed its intention to gradually diversify away from low-yielding US government securities, which make up the bulk of the reserves.

Another factor influencing the decision to give CIC more money is the fact that China’s largest banks are expected to raise roughly $50bn in new capital over the next couple of years to meet tighter regulatory requirements.

Since CIC holds controlling stakes in most of China’s largest banks, the fund must provide much of this capital to avoid seeing its holdings diluted.