The catalyst for a trade war will be determined by the state of the US economy, not by the hopes of politicians. If someone can convince me how China will grow domestic consumption fast enough on an average urban wage of $15/day creating jobs both in the US and China while correcting trade imbalances, then and only then a trade war can be avoided.

We met at the talk you did for the Foreign correspondents club. I’m working for Irish TV in Beijing and woud like to do an interview in the next few days if you are in town. If you could drop me a line that would be great. Thanks.

I may have used some strong words, and I appologize if that upsetted you. But would you please read my post again. I’ve never said anything that suggested that only the US was responsible. I’ve never even for a moment thought that was the case. So I can’t be the one fixing blames on anyone.

I was only responding to the parts of your article that I strongly disagreed with, especially the accusations that the Chinese were not helping and were being irresponsible. I don’t think it is a good idea to talk about trade wars and then unnecessarily portraying one side as an aggressor. This clearly has the effect of fanning the flame. Don’t you think?

As for your predictions of a trade war, I wasn’t actually commenting on that in the previous post. That may be why my comments didn’t make sense to you. But if I am to place a bet, I would be happy to bet that it won’t happen. Both Obama and Mr Hu are very calm and pragmatic people. I can’t imagine either man would go for a solution that is clearly a lose-lose situation for both sides.

Twofish, domestic assets are not a known problem except to the extent that the authorities know that there are domestic assets and that their may be NPLs there. Certainly it is less of a known problem than foreign assets, in which the problem can easily be quantified by making very conservative consumptions. Most people you speak to in the PBoC and other bodies have only recently started to recognize that NPLs are getting worse, and I suspect that the extent of the problem is going to surprise everyone. Also the flurry of activity concerning the informal banks, including a lot of talk about suddenly recognizing and regulating them (much too optimistic talk), suggests that they were caught flat-footed.

Dave G., debt forgiveness follows default, and is never an easy process but usually drags on for years, and even decades when it is systematic. “Writing off the mess” involves a significant transfer of wealth from one group to another – from equity investors in indebted companies to lenders. I am not sure why the lenders would see this as a good solution, and I don’t think it would be an easy political process for Chinese authorities to explain to the very poor Chinese population that they should forgive western debt. At any rate since most of what they own is US Treasuries, and they are certainly going to get repaid, why should they?

Mark, I suspect that it is actually you who is looking to fix blame. Unfortunately much of the discussion about the global imbalance of payments has been mired in an idiotic game of trying to fix blame, and this doesn’t help. A global imbalance requires two players, and your insistence that only the US can is responsible, not China, doesn’t make any sense.

The E&Y prediction about Chinese consumption of luxury goods has more to do with predictions of income inequality than of macro-consumption, and anyway predictions are not evidence of anything. I find most predictions of Chinese growth to be absurd, and it is noticeable that in the last year everyone has been rapidly shifting their predictions down. If China really is dealing with its overcapacity problem by encouraging consumption it is hard to see why in the past five years production has grown much faster than consumption – with the balance showing up as a rising trade surplus – that definitely means that it is ‘encouraging” production a lot faster than consumption.

I am surprised you use the RMB 4 trillion expenditure as proof of consumption. First, it hasn’t been implemented, and second, no one really believes the number. I am not sure I understand the rest of your post. If you are saying that a slowdown in China can be politically and socially costly, of course I agree, but I don’t see why that suggests that it cannot happen. If there is a trade war I suspect China will be forced to adjust fully to its overcapacity problem, just as the US did in the 1930s. The fact that the process will be ugly doesn’t mean that the prediction is wrong.

Some of your arguments are hardly convincing. I feel that part of your article seem to be focussed more on blaming the other side than trying to find a practical solution.

I’d like to comment especially on your remarks about the Chinese not doing their part to help solve the oversupply problem, and your accusation that they are irresponsibly exasperating the problem by raising export rebates and considering depreciating the currency.

First, regarding your comment about the Chinese not doing their part to boost consumption: Unlike what you are saying, their government has for a long time tried to increase domestic demand by convincing their citizens to spend. And if you have lived in China, you would know that they have been quite successful, especially in the big cities. In fact, at the current rate, a report by Ernst & Young has predicted that by 2015, China will surpass the US and Japan to become the world’s largest consumer of luxury goods, accounting for 29% of the world’s total. This is quite spectacular considering that Chinese culture encourages people to save.

If you are still not convinced, shouldn’t the 4,000,000,000,000 RMB make you think twice before saying the US is the only one considering massive fiscal expansion while the Chinese are sitting around not doing their share.

Next, regarding your accusation that they are considering depreciating the currency, you should know that at the current status quo, Chinese are not yet capable of replacing the combined US and Europe in absorbing the oversupply. Clearly if one is genuine about overcoming the oversupply problem, one has to also think about slowing the rate of contraction of demand from the US and Europe. The depreciation is meant to make things cheaper for the consumer and therefore hopefully reduce the speed of contraction of world demand. Although this is clearly not a long term solution, it would certainly lessen the impact of the recession on everyone, and at the same time reduce the chance of a full-blown world depression (which would definitely have been the case if the Chinese economy was to crash at this crtical moment).

Lastly, regarding the export rebates, neither the 4 trillion yuan nor the currency depreciation can alleviate the immediate problem that the government in China faces. And that is the mass collapse of factories, resulting in violent massive social unrest. In the West, the loss of a job results in hardship. But in developing countries, the same losses can potentially result in huge loss of lives. In the case of China, this can in turn lead to unthinkable scenarios, not just for themselves, but for humanity in general. The rebates are just another desperate temporary measure to prevent such scenarios. I believe these actions by the Chinese authorities are not only responsible, but also necessary (at least under the current circumstances)

I wonder if there is an alternative that you haven’t considered: Western debt forgiveness. If Asia’s excess savings, sunk into American assets, is a problem, as-is America’s debt to Asia, why not just write off the mess by forgiving some or all of the outstanding debt that is causing so many problems?

No, this does not fix the fundamental problem of excess savings to excess debt ratios, but it does relieve a great deal of the short-term pressure built up in the system and provides time to work out our global imbalances in a more gradual, predictable way than trade wars(!)

This would allow Americans, free from their debt, to continue to borrow and consume. It allows Asia to continue to save and produce. I could go on, but you get the idea.

I understand the political ramifications of this solution are huge, but when weighed against the alternative – a bankrupt customer (America) and an out-of-work producer, and the resulting domestic turmoil likely to result in China, this seems like a keen if counter intuitive solution.

From a Chinese perspective, leaders may save their necks if they can convince their citizens that their savings were something of an illusion and impossible to recoup. I’m sure Americans would be willing to accept debt forgiveness, that side of the equation wouldn’t be a problem!

I’m just afraid the proposed solution, increased Chinese domestic production, exacerbated by trade wars (!) will result in vastly increased Chinese military spending (aka a form of domestic production) and take us down a road towards military conflict. I.e. if WW2 pulled the US out of the great depression, what is to prevent Chinese leaders from concluding that WW3 would do the same for their country?