I finally got back to Beijing Friday, and have spent the past five days getting over jet lag and struggling to climb up the seemingly bottomless pit of unanswered emails. For those many people who have asked me about the East coast tour of the Beijing musicians, I have to say it was really good – and much better than we hoped and expected. The performances were packed, with sold-out performances at the Glasslands in Williamsburg, one of NY’s hippest clubs, and in DC’s Velvet Lounge. In NY several well-known local musicians and artists came backstage to meet the Beijing musicians, and in DC our musicians were given a tour of Dischord’s offices by Ian MacKaye, the legendary founder of Fugazi, who came for the show. For those who are interested, we are trying to collect the many reviews and comments on the Maybe Mars website, although there is still another week of performances. The next US tour will be for Austin’s “South by Southwest” festival in March, and we are in the process of looking for sponsors who will help us fund the tour by the six bands and performers who have already been invited to perform there (unfortunately you play SxSW for prestige, not money)..
Away from music, my meetings in NY and DC were fairly different from the meetings I had in February. This time around I got the impression that far more people in the US (although still a minority) understand how risky the Chinese recovery has been and how trade tensions are likely to result as a consequence of the stimulus. In fact I have the sinking feeling that over the next two or three years I am going to find myself spending an awful amount of time thinking or writing about trade disputes between China and the rest of the world.
Regular readers know that for me the key source of China’s high savings and trade surplus is the large excess of the growth rate in national income over household income, caused in large part, I believe, by policies that systematically transfer income from the household sector to investment, SOEs and large producers. Until these policies are reversed I do not think it is meaningful to talk about China’s rebalancing. Just before President Obama came to China President Hu gave a speech which my friend Dan Rosen in his November 13 Rhodium Group report described as a “stirring speech about a policy big bang to promote consumption-led growth.” Dan is skeptical, and I am adamant – a surge in consumption will not happen except perhaps briefly as a consequence of government subsidies and anticipated consumption.
In Washington I had the chance to meet someone I admire a great deal, Nick Lardy at the Peterson Institute, and although I shouldn’t put words in his mouth so as not to misrepresent him, I am glad to say that he seems to agree with the analysis of Chinese high savings as a consequence of policy-related constraints on household income growth, although he thinks currency undervaluation may have a greater impact on high savings than low interest rates, whereas I think it is the other way around. In fact more generally I think this argument has become increasingly influential, and more and more analysts seem to be taking it up, both inside and outside China.
In that light I read earlier this week a fascinating and perhaps important article by Hung Ho-Fung in the current issue of the New Left Review, in which he argues that China’s development model has left it dangerously vulnerable to changes in US demand, and that these polices include repression especially of rural income. According to Hung:
The PRC’s urban-biased development model, then, is the source of China’s prolonged ‘limitless’ supply of labour, and thus of the wage stagnation that has characterized its economic miracle. This pattern also accounts for China’s rising trade surplus, the source of its growing global financial power. However, the low wages and rural living standards that have resulted from this development strategy have constrained China’s domestic consumer market and deepened its dependence on the global North’s consumption demand, which increasingly relies on massive borrowing from China and other Asian exporters. As those other exporters have been integrated with China’s export engine through the regionalization of industrial production networks, the vulnerabilities of the Chinese economy have turned into weaknesses of the East Asian region as a whole.
Hung goes on to make a point that I wish many more would make. When people like me warn about continuing domestic imbalances within China and the difficulty that China will face in its transition, we are often attacked for “blaming” and criticizing China. Monday I was at a conference consisting of many prominent European and Chinese (and a few American) analysts who were discussing global imbalances. At the end of one panel a member of the audience, who turned out to be from the Ministry of Commerce, demanded the right to make a rebuttal and set off on a fairly strange harangue in which she lambasted, to everyone’s bemusement, any attempt to assign China responsibility for any aspect of the crisis as well as any suggestion that its fiscal stimulus was worsening the underlying imbalances. China has not, apparently, made even minor policy mistakes at all in the past decade and especially in the past year.
The nationalist argument
Although her view of the fiscal stimulus is not a majority view among the kinds of officials I am likely to meet, it seems it may be among the much more powerful domestic constituencies. In fact another Chinese government official at the meeting told me afterwards, and at least partly in response to the outburst, that as difficult as it is to make these criticisms of policy, it is extremely important that foreign analysts keep making them so that Chinese policymakers can be made more aware of the difficult transition China will face.
As an aside, this lopsided debate within China between the domestic constituencies (more stimulus) and the internationalists (more rebalancing) reminds me, as I have often said, of the debate over the passage of Smoot-Hawley, which most Americans with knowledge and experience in international economics and finance, including President Hoover, thought at the time a dreadful mistake. Hoover was unable to stop its passage however because domestic constituencies were so strongly in favor. Their reasoning? In previous episodes of US economic slowdown an increase in tariffs had always been expansionary for the economy, so given how bad conditions were in 1930 how could a sharp rise in tariffs not work?
Because underlying conditions were different. Before WW1 the US almost always ran large trade deficits, and so it could raise tariffs with near impunity and boost domestic production. By the end of the 1920s however the US was running what at the time were enormous trade surpluses (the third largest as a share of global GDP in the past 100 years[1]). Because of its changed position the risk of retaliation meant that the US could no longer thumb its nose at free trade. In a global demand contraction, surplus countries are always the most vulnerable, as the US discovered.
What does this have to do with China? It seems to me that many policymakers in China note that every time they have faced a slowdown in the past, they were able to emerge via a sharp increase in investment. Given how sharp the current slowdown has been, why not respond with an equally sharp boost in government financed investment?
Because, as in the US in 1930, conditions that permitted the earlier responses have dramatically changed. When the US was growing robustly and, more importantly, US consumer credit was surging, an increase in the gap between Chinese consumption and production resulting from a surge in investment, no matter how uneconomic, always helped Chinese growth because the excess could be sold to the US. Now the US is unable to play that role much longer. The strategy will no longer work.
But to return to Hung, the point is that Hung makes a very different argument as to why China needs to come to terms with something with which many are unwilling to consider, and an argument that should appeal even to the most nationalistic in China:
Unless there is a fundamental political realignment that shifts the balance of power from the coastal urban elite to forces that represent rural grassroots interests, China is likely to continue leading other Asian exporters in diligently serving—and being held hostage by—the US. The Anglo-Saxon establishment has recently become more respectful towards its Asian partners, inviting China to become a ‘stakeholder’ in a ‘ChiAmerican’ global order, or ‘G2’. What they mean is that China should not rock the boat, but should continue to help maintain American economic dominance (in return, perhaps, for more consideration of Beijing’s concerns over Tibet and Taiwan). This would enable Washington to buy precious time to secure its command over emergent sectors of the world economy through debt-financed government investment in green technology and other innovations, and hence remake its ailing supremacy into a green hegemony. This seems to be exactly what the Obama administration is betting on as its long-term response to the global crisis and declining American power.
If China were to re-orient its developmental model and achieve greater balance between domestic consumption and exports, it could not only free itself from dependence on the collapsing us consumer market and addiction to risky us debt, but also benefit manufacturers in other Asian economies that are equally eager to escape these dangers. More importantly, if other emerging economies were to pursue a similar re-orientation and South–South trade were to deepen, then they could become one another’s consumers, ushering in a new age of autonomous and equitable growth in the global South. Until that happens, however, a recentring of global capitalism from West to East and from North to South in the aftermath of the global crisis remains little more than wishful thinking.
I am not sure I agree with everything Professor Hung says about the various political strategies, but I think he is absolutely correct to see the savings and trade imbalances as arising directly out of domestic policies that constrain household income growth in favor of the state and corporate sector, and I am sure he is even more correct to argue that rather than being the source of its strength, China’s continued vulnerability to US overconsumption is a great source of weakness.
We all love free trade, don’t we?
How great? I guess we will find out over the next year or so. President Obama’s meetings in China were, as widely expected, more about developing a relationship between the two leaders than about addressing real issues, and both sides did what they could – subject of course to domestic political pressures – do smooth over trade disputes, but for all their attempts trade disputes will not be smoothed over.
President Obama had to listen to several lectures from the Chinese about the importance of keeping trading markets open and fair (President Hu said that the world “must continue to promote trade and investment liberalisation and facilitation and oppose protectionism in all its manifestations, particularly the unreasonable trade and investment restrictions imposed on developing countries”), which of course struck many observers as hypocritical and almost funny, but I think it is important for foreign observers to recognize that China simply cannot adjust quickly enough to a lesser dependence on trade. It will be a slow and difficult process, which is why I worry that with high and rising unemployment in the US and a high and rising trade deficit, trade cannot help but become a major political issue.
In that light there was an interesting piece on the Vox website by Richard Baldwin and Daria Taglioni with the rather alarming title “The illusion of improving global imbalances.” They argue that the sharp “improvement” in global trade imbalances is largely a statistical outcome created by a temporary sharp drop in what they call “postpone-able” consumption items, “such as consumer and investment electronics, transport equipment, and other types of machinery.” Their conclusion?
Projections of improving imbalances are almost surely wrong. The rapid collapse of trade between the third quarter of 2008 and the first quarter of 2009 improved most balances of trade. It could not have done otherwise; if both imports and exports drop rapidly, the gap between them drops equally rapidly. In the same mechanistic manner, the recovery of trade flows – a recovery that seems to have started this summer – will almost surely return the US, Germany, China and others to their old paths.
If they are right, and already the US trade deficit has risen sharply from its lows, the fight over trade will heat up even sooner than I expect and it will be a hotter dispute. To repeat my earlier assertion, high and rising unemployment in the US (and Europe) is not easily consistent in the real world of politics with high and rising trade deficits.
Little in the meetings between Obama and Hu was said about the currency, at least in public, but so much has been said about it in the press and among analysts that there was easily a balance. For the record, I think the much-commented November 11 statement by the PBoC, in which it omitted a phrase promising to keep the renminbi stable and instead said it would “improve the exchange rate pricing mechanism in a proactive, controlled and gradual manner, with reference to international capital flows and major currency moves,” does not indicate that the decision has been made to appreciate the RMB. That decision is not the PBoC’s to make. At any rate other policymakers have been saying very different things. Commerce Minister Chen Deming said less than two weeks earlier that“the renminbi exchange rate has to remain stable for exporters and Chinese manufacturers to make an easier judgment on future situations ”
Real debate
And on Tuesday the Ministry of Commerce was even more strident. On Monday that IMF Managing Director Dominique Strauss-Kahn said in a conference in Beijing that “a stronger currency is part of the package of necessary reforms. Allowing the renminbi and other Asian currencies to rise would help increase the purchasing power of households, raise the labour share of income, and provide the right incentives to reorient investment.” That same day the MoC struck back. According to an article in Bloomberg:
China’s Ministry of Commerce said international pressure for appreciation in the yuan was “not fair,” as U.S. President Barack Obama started a four-day visit calling for a more balanced relationship between the two nations.
Seeking a stronger Chinese currency as the dollar weakens “is not conducive to a global economic recovery and is not fair,” ministry spokesman Yao Jian said at a press briefing in Beijing today. “It’s necessary for us to provide a stable and predictable environment in terms of macro-economic and exchange rate policies.”
What all this does indicate, I think, is that there is a very active and maybe even fierce debate within China about the whole rebalancing process, and that at least some policymakers are worried about a trade backlash. In that case it may make sense to appreciate the RMB a little to appease US and European (not to mention Asian) anger while perhaps reversing the impact of the appreciation by managing other variables – reducing interest rates, increasing energy or other subsidies, etc. In my opinion we will probably see action on the RMB front in the next quarter or so, but the timing will really depend on two things: increasing international pressure, and a sense domestically that the fiscal stimulus is continuing to work and growth prospects over the short term are stable. It will also depend on what kind of anticipatory hot money inflows we see over the last quarter of 2009.
One of the centers, I think, of those calling for rebalancing is the National Bureau of Statistics, and Xinhua had an article last week on that topic, in which Yao Jingyuan, chief economist of the National Bureau of Statistics, seems both to be assuring policymakers that the stimulus-induced growth is stable and that it is time to focus more closely on rebalancing.
Yao Jingyuan, chief economist of the National Bureau of Statistics (NBS), told a forum in Beijing that China’s economy was over the worst, saying November 2008 to February 2009 was the toughest period for the economy. The country’s economy had gained momentum each quarter, which would ensure full-year growth of 8 percent, he said.
…The stimulus packages to prop up growth had set a stage for stronger growth in the future, he said. However problems remained and the real challenge for the economy was to adjust its economic structure, Yao said. ”We should not pursue economic expansion in terms of size and speed in the fourth quarter or the next year, but put more efforts on structural adjustments.”
It seems pretty clear to me that Yao is explicitly arguing the case for rebalancing. When I am abroad it often seems to me that foreign observers have a mistaken view of what is happening in China. There is too much acceptance at face value that China has managed to escape the crisis fairly well, and that there are no serious concerns within the country. On the contrary, however, it seems to me that the debate in China is very deep, very worried, and although I think that on balance policy is moving in the wrong direction because the preponderance of power is held by policymakers who simply do not understand China’s place within the global balance, it is focusing on most of the right things.
You might not, however, get a sense of the debate at first from today’s rather reassuring lead story in People’s Daily:
The United States and China, the world’s first and third largest economies, have pledged to rebalance each other’s economy and move in tandem on forward-looking monetary polices for a strong and durable global economic recovery, according to a China-U.S. joint statement released in Beijing on Tuesday.
The statement, issued after talks between Chinese President Hu Jintao and his U.S. counterpart Barack Obama, has climaxed the latter’s first China trip since he took office in January. “China will continue to implement the policies to adjust economic structure, raise household incomes, expand domestic demand to increase contribution of consumption to GDP growth and reform its social security system,” said the statement.
The United States, in return, will take measures to increase national saving as a share of GDP and promote sustainable non-inflationary growth. “To achieve this, the United States is committed to returning the federal budget deficit to a sustainable path and pursuing measures to encourage private saving,” it said.
It sounds good, but is this what the two countries are really doing?
Credit growth predicts financial crises
Before going on to the last topic, I want to make a brief mention of a very interesting article on Bloomberg that suggests the magnitude of recent Chinese commodity stockpiling:
Copper stockpiles held in duty-free warehouses in China, the top user, may be re-exported after surging to as much as 350,000 tons from almost none at the start of the year, according to Xi’an Maike Metal International Group. “We can hardly find buyers for refined copper,” said Luo Shengzhang, general manager of the copper department at Xi’an Maike. The company ranks among the country’s three biggest importers, according to the executive. “China’s got to export some copper from now and next year,” Luo said in an interview.
I have been warning many of my investor friends that if there is a slowdown in Chinese growth over the next three or four years, not only will commodity prices drop to reflect the normal reduction in demand, but they may drop sharply to reflect the reversal of what I think is very significant stockpiling that has occurred in the past year or two, and which has distorted China’s import numbers. China has been buying lots of stuff which it hasn’t yet used. Will inventory and stockpiling draw-downs replace contracting trade as the next big drag on Chinese growth (requiring, by the way, a continued fiscal stimulus to generate employment growth)? I suspect it will.
Finally, Moritz Schularick and Alan M. Taylor have a new NBER Working Paper, “Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870–2008.” The paper discusses the behavior of money, credit, and macroeconomic indicators over the long run based on historical data for 12 developed countries over the years 1870– 2008, and argues based on this data that rapid credit growth is a powerful predictor of financial crises, suggesting that such crises are “credit booms gone wrong”. In their words:
Our key finding is that all forms of the model show that a credit boom over the previous five years is indicative of a heightened risk of a financial crisis.
…The findings mesh well with our overall understanding of the dramatic changes in money and credit dynamics after the Great Depression. In the summary data for the pre-WW2 sample, we saw how broad money and credit moved hand in hand, so that a Friedman “money view” of the financial system, focusing on the liability side of banks’ balance sheets, was an adequate simplification. After WW2 this was no longer the case, and credit was delinked from broad money aggregates, which would beg the question as to which was the more important aggregate in driving macroeconomic outcomes. At least with respect to crises, the results of our analysis are clear: credit matters, not money.
What about the so-called “Lawson doctrine” – the counterargument that credit booms are risky depending on whether they are funding investment or increased consumption? Would this make a difference given that China’s credit expansion is aimed almost exclusively at investment rather than consumption? Leaving aside the possibility that the riskiness of China’s investment boom may be affected by the extremely high level (historically unprecedented) of investment that China had before the crisis, the authors are not terribly positive:
According to arguments heard from time to time, if credit is funding productive investments” then the chances that something can go wrong are reduced—as compared to credit booms that fuel consumption binges or feed speculative excess by households, firms, and/or banks.10 Our results caution against this rosy view. Over the long run, in our developed country sample, the lags of investment are not statistically significant, suggesting that crises are no less likely when they have been funding investment booms as opposed to other activity. If this is the case, then the suspicion arises that when banks originate lending, they may be equally incapable of assessing repayment capacity in all cases, with investment loans having no special virtues.
Most historical work on financial credit booms and crises (and I think have read a significant portion of the best stuff) suggests the same thing: the best predictor of either financial crisis, or of the long-drawn out contractions like that faced by the US after 1873, Mexico after 1982, or Japan after 1990, is a rapid expansion in domestic credit. China has had a ferociously rapid expansion in domestic credit. Does that mean that China is on the verge of a crisis? No. I don’t think China will have a crisis, but I do think that after the fiscal stimulus runs out of steam, probably after another two or three more years, we are going to enter a long and difficult period of much slower and more volatile growth as China is finally forced to make the adjustments it has so desperately tried to avoid.
[1] In the late 1920s, the US represented over 30% of global GDP and ran a trade surplus equal to around 0.4% of global GDP. In the mid-1980s Japan represented around 15% of global GDP and ran a trade surplus equal to around 0.5% of global GDP. Two years ago China represented about 7% of global GDP and ran a trade surplus of about 0.6% of global GDP. Given what the following decade brought to the US and Japan, it may be worth figuring out how these imbalances get resolved.
When ever I see you have written a new post I grab my coffee and sit down to what I expect will be another treat. Again you do not disappoint. Thanks for the great postings.
I first went to China in the early 1980′s (when each hotel had one black and white TV per floor), and have marveled at how fast China has developed, but I have always had the uneasy feeling that it has all been too fast, a marvelous structure built on a not to sturdy foundation. Your posts have really helped illuminate for me just where these “foundation issues” live.
Michael,
when you mention how domestic contituencies made the passage of Smoot-Hawley inevitable, it reminds me of Polanyi’s analysis of how swiftly underlying social forces can unleash an irresistible process of self-protection. Such forces may be powerful enough to significantly damage the global trade system and – in extremis -bring countries to autarky.
Indeed, few foresaw how quickly the world could change from the orthodox attempts to keep the gold standard operational and maintain free trade
in the 20s and early 30s to the chaos that followed.
China is pursuing beggar-thy-neghboor policies. I agree with you that removing the institutional constraints to domestic consumption may be a more relevant long term driver to lower savings than the exchange rate, but at this point a significant appreciation of the renmimbi seems to be a necessary step.
Back to Polanyi: if the global recovery falters and global imbalances do not decline appreciably over the next year or two, the West will feel obliged to protect its social contract. It will also be legitimate that other emerging countries adopt a tougher stance. I write from Brazil, where the burdens of currency overvaluation are quickly becoming intolerable. Such risks cannot be underestimated.
China is not Korea or Taiwan. It cannot continue to behave with the assumption it is at a small open economy.
Welcome back. That was a really long post, gulp, will try to read it in its entirety. Try being the key word.
Just some points that were thought provoking:
1)The last point on credit growth and the link with crises
when banks originate lending, they may be equally incapable of assessing repayment capacity in all cases, with investment loans having no special virtues.
Was wondering if this was an indication of greed and the fear of not cashing in on what is seen as easy business (and profit) that prompts banks to throw all caution to the winds and jump into what is otherwise probably dodgy business?
2)The restriction of rural income
have to admit must be missing some background info here- huh? why would the central government be doing this and how? particulary when you think about the very real social consequences of such policies. We are talking about a society where social unrest stirs uneasy memories of what is relatively recent history.
3)Stockpiling and commodity prices
That would be a really interesting arena to watch at the end of the year or early next year (ok, there’s probably a bit of a smirk there but if you’ve been watching the surreal commodity prices, you’ll understand). Watching people running out of the path of a mad bull is always more fun than when you’re likely to be one of those frantic victims. Of course there are eternal optimists like Jim Rogers but hey they have the billions at stake!
Indeed, thank you for the post.
I am reminded by the Professor’s comments of how perceptions differ depending on what side of the ocean you live in. For Americans, since the 1950s (at least), we have tended to view China as one large rational actor, all of whose constituent parts understand its overarching strategy and play accordingly. Now, if the Professor’s comment is indicative of anything, many on the mainland may now view America that way.
But we’re not that good. The Obama Administration will maintain some common policy and strategical elements from the Bush Administration, true, but even different components of the administration (State vs Defense, Clinton vs Obama, FCC vs Justice, SCOTUS vs Pelosi) will impact what we are capable of doing and these views are dynamic: they change with time, elections, and money, which is to say preferences.
The Chinese are better perhaps, but not by much. The party is able to enforce only so much doctrinal orthodoxy on the provincial governors from Shanghai to Xinjiang and there’s no need to play up the fairly pronounced differences between the old Zemin crowd and the Hu boys.
Do overarching strategies wash out some of the ripples of changes in time, elections, and money? Perhaps a little. But not by as much as the Professor says, no?
I have been wondering about China’s prolonged growth for a while and wrote an article about it. I would be interested in hearing your thoughts. Thanks.
China’s Minsky Moment.
Minsky’s “Financial Instability Hypothesis,” which he developed in the 1960s, stated that success breeds instability in financial markets. Thus, the longer a boom lasts, the less economic agents consider failure possible. Take China for example: many economic actors take growth for granted and thus stock-market bubbles, shady lending practices (as seen by a high ratio of Non-Performing Loans), and corruption have proliferated. The government control of the economy has provided an anchor, preventing these practices from destroying the economy. However, a government seeking to adopt more capitalist ideology and inject a large stimulus into the economy to continue growth, along with the United States purchasing of cheap Chinese goods have masked the flaws and allowed a generation to grow-up with the idea that China is always growing. Thus there will necessarily be a Minsky Moment that destroys the system since growth has been taken for granted. No country has grown at 10% for twenty years before and there’s a reason for that; human fallibility and generational dynamics (see Paul Samulson). In these last twenty-plus years of Chinese growth, a new generation has grown-up and much like as in Plato’s The Cave, young Chinese economic actors have only seen growth, so it is taken for granted therefore guiding expectations throughout the entire economy. But when imprudence has eclipsed prudence that which is taken for granted will come undone—a Minsky moment of Biblical proportions built upon a generation of growth.
I believe most officials in China, even including the female official you mentioned, understood that Chinese economic growth depends too much on US and EU demands. I believed that this reason itself is enough to make the point that China should adjust itself.
Talking about the cause of this crisis and pointing finger at Chinese policy are quite counterproductive. I personally also do not subscribe that view as well.
Therefore I am not sure why you always try to mix these two issues together: the problem in the future and the responsibility in the past. I am convinced that many people including me agree what you said about the need of rebalance in the future. But at the same time, a large part of us in China won’t accept your view on the root of past.
The debate on the past greatly undermine your credibility on the more important issue: how to rebalance the future.
You were right, you were the oldest kid in the room! Thanks so much for bringing the bands to Williamsburg, really enjoyed the music.
What are your thoughts on China’s expansion into Africa? Is it possible that the Chinese can get rid of the excess supply of raw materials they are building up by re-focusing their attention on a different continent?
In the Chinese government’s quest for new sources of raw materials, many deals have been signed with foreign governments that require the Chinese to build hard infrastructure in exchange – roads, dams, power stations, ports, etc.
Most of the news articles I read feature Chinese management, workers, suppliers, and other contractors handling the infrastructure development. There is also a hefty security (armed forces) contingent although they are keeping a low profile.
It is kind of like what Haliburton is doing in Iraq and Afghanistan except w/o the satellite bombing.
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Welcome back and thanks for a nice long meaty post!
Do you think there has been any closed door agreement with China about the when of RMB appreciation?
Judy,
RE: rural vs city centric economic growth, there is a great book that sets out the specific policy choice of focusing on city, coastal, export driven, large industrial growth vs permitting rural entrepreneurs to continue their relatively successful expansion during the 80s:
http://www.amazon.com/Capitalism-Chinese-Characteristics-Entrepreneurship-State/dp/0521898102/ref=sr_1_1?ie=UTF8&s=books&qid=1258606167&sr=8-1
Thanks Bill. Just to make things clear, I am optimistic for the longer term outlook for China and think once they get through the rebalancing they will continue to grow a decent rates for many years, but for me the concern is that they pushed too hard on investment and this necessarily means a long period of grinding through the resulting imbalances.
Paulo, thanks for your comments. I too am worried that if we postpone serious discussions and negotiations while the going is (relatively) easy, there is a risk that they become highly politicized in the US, Europe and China, in which case the necessary nuances will be lost and the compromises more difficult to pull off. During my last trip to Brazil (in May) I got the impression that a growing minority of business and political leaders are very worried about the consequences for Brazil.
Sorry, Judy, but there is so much to write about that even though I didn’t cover all I wanted to it ran on and on. For me the risky lending that banks engage in when there is excess underlying liquidity has been a pretty permanent feature of financial history, so my guess is that it has less to do with outbreaks of greed and fear and more to do with the way financial systems accommodate liquidity imbalances.
Ender, I am not sure there is doctrinal unity in either country, and I suspect that as bothersome as that may be in the short term it is a good thing in the long term. Every step of the way should be debated, even if that slows down action. I suspect that the differences on trade issues between the Commerce and Treasury departments in the US are as great as the differences between the Commerce Ministry and the PBoC in China.
Brandon, as a Minskyite I would agree that factors that “guarantee” banking stability, in the case of China rapid GDP growth and implicit guarantees, cause banks to alter their behavior in ways that systematically increase the riskiness of the system. History is full of such cases.
Fatbrick, it worries me that many Chinese, including policymakers, are so sensitive to foreign perceptions that any discussions of China’s role in the imbalances are considered pointing fingers at China. This doesn’t help China at all, and it is completely inconsistent to believe that China achieved the highest savings and investment rates ever recorded, the highest trade surplus as a share of GDP ever recorded, and the highest accumulation of reserves ever recorded, without these being at least partly a consequence of Chinese policies. More importantly I am not sure how it is possible to discuss the risks of Chinese stimulus policies for the future without discussing impact of past policies. Without an explanation of how Chinese policies in the past forced the savings rate to rise to historically unprecedented levels, it seems to me that any discussion of what China must do to raise its consumption rate is a waste of time.
As an side it seems to me that many Chinese want China to be treated by the world as a great power, but they want this to happen without the scrutiny, criticism and debate that great power status always brings. As an American, who accepts that the whole world will always have very strong opinions on whatever the US does, whether those opinions are fair or not, I can tell you that this is a wholly unrealistic expectation.
Gael, glad you liked the music. There will be more.
IDWT, I am not sure the African economy (or indeed the developing countries in aggregate) is big enough to absorb the kinds of deficits the US was absorbing, even granting that they would want to run the deficits. By my reading there is a lot of Chinese bad behavior in Africa, but this should be kept in context. China is just one of many countries, and far from the largest, that has behaved badly in Africa.
Denis, I know Yasheng Huang’s book and am a big fan.
I believe much of this is in error. China impounds foreign money and I find it highly doubtful that their balances are a result of pure trade surpluses. Just as the United States grew and ran trade deficits for so long, it is clear that China couldn’t pursue the growth it has without a massive infusion of foreign money. Also, it is clear that much of their advantage is in employing what amounts to slave labor, not that pay isn’t better than other areas of the Chinese economy. That is beside the point
The point on credit is something else. I don’t believe in any case is using credit for expansion safe. In fact the flow between consumer and inventory lines of credit are much more healthy than the speculative investment in capacity. I believe the Great Depression was caused by a combination of the 2, consumer and investment credit. In Chinas case, much of the expansion was done on US credit, but it has been kept going with Chinese manufactured money, which in a free market would actually collapse its financial system.
China jawbones down the dollar then devalues behind it. Some of this is dirty pool. The status quo cannot go on and there be a middle class remaining in the US.
It has been very convenient for everyone to have the US-China bilateral agenda take center stage. Most importantly because it has prevented real tensions between China and other producer nations in Asia that have suffered as the RMB as depreciated against most non-dollar currencies. The EU, too, has gotten a free ride on this latest go-around, but they will have their chance to try to address similar issues on a bilateral basis soon enough (this will fail, by the way, as individual nations are too interested in their own short-term commercial gains to act in line with anything approaching a united EU – they have already divided and conquered themselves). All of this aside, the Obama visit resulting in the same nothingness as the last visits of the Bush years, and there is little will on either side to take positions to fundamentally alter the status quo. This post could have been written in 2007. The long and short of it is that in the abscence of another crisis, the structural characteristics of the US-China economic relationship will not change substantially, or at least in the right direction. This is not to place blame on either side, but as long as the US is running huge external deficits and not investing in productive capacity it will buy stuff from China; and China will remain a mercantilist state until this doesn’t work anymore. It will work for a long time, and most to the disadvantage of other producer nations rather than those that are services and consumption oriented. I have very little confidence in the ability of policy makers to bring about meaningful structural change in either the US or China in the near term. Path dependencies are just too hard to break. Zhu Rongji was only able to bring about some degree of banking sector reform by manufacturing a crisis (the timing of it anyway), and I don’t think that any Chinese officials has the cajones or authority to pull of something similar in any policy sphere. In the US, the impetus for financial sector reform subsided as soon as recovery was on the horizon. In China, the Party line is essentially that nothing is wrong and we are back to sunshine, light and the lucky number of 8%. So, to reiterate, in the abscence of a crisis, there is just too much institutional resistance and momentum working against rebalancing to think it realistic.
thanks a lot Dear Prof for your posts
Your readers know already most of the argumentation developped in the following study:
http://www.pivotcapital.com/reports/Chinas_Investment_Boom_the_Great_Leap_into_the_Unknown.pdf
but it seems you are a little more optimistic…
Michael.
Great post.
Two points.
First, your point on domestic consumption I think are right on the mark, and few article I have seen recently have really taken the time to understand that much of China’s savings are locked within enterprises…. and second, like the US, much of the personal spending occuring is driven by rebates.
Not very sustainable.
Second, your comment about exporting the overstock of commodities was an interesting one. Personally, I saw these stockpiles as strategic reserves for when the economy kicked back into gear. Chinese firms would be able to achieve a huge cost advantage over others were the prices to hold steady.
But, your thoughts provoke a different question. If, as you suggest, China has to offload these stockpiles, who will be the buyers and what are the potential loses? Prices are already at roughly 2005 for some of the key metals (AL for example), so dumping this stock back could have a dramatic impact on price.. and those who invested.
r
http://www.allroadsleadtochina.com
As a non-economist, I fear a higher Yuan. I am concerned it will lead to inflation in the US and further reduce the standard of living for the poor and middle class here. On top of that, I do not see it leading to all that many new US jobs; instead, I see it leading to new jobs in places like Bangledesha and Vietnam. Am I wrong for thinking it not such a bad thing to have China essentially subsidizes the US through its low Yuan? What are your views on this?
Well, I beg to differ. China is over dependent on US and EU. The risk of this over-dependence could not be higher. Everybody has seen this during the second half of 2008. I do not think it is a waste of time to remind people that domestic consumption is the more reliable alternative for that foreign demand. It is not rock science. Leadership had already known this back in late 1990s.
We all agree that China should focus more on domestic income growth, lower saving rates, and more domestic consumption. How can we talk about the risks of Chinese stimulus policies for the future without discussing impact of past policies? Previously we did the right things, but in the future we got to change because quite simple, things changed. There is going to less foreign demand-western consumers have less money . And there are going to be trade disputes-they are going to protect their jobs by trade tariffs. In my view, everybody already knew that. I agreed with this view and would stick to this line if I were in a position to advise the policy makers. But the policy change takes time so you can suggest the policy maker to act now. I remembered that you have talked about this before. But then you always turned to the “fault of the crisis” arguement, which even I do not buy.
Now the statement “that many Chinese want China to be treated by the world as a great power, but they want this to happen without the scrutiny, criticism and debate that great power status always brings. ” is irrelevant to this issue. How American feel about the world opinion is not really comparable here. And if you put it this way, I am sure policy makers will be convinced!
Seriously, MOC understandably needs to do their jobs and protect their constituency: exporters. But then higher leaderships need to make changes based on the bigger picture. I suspect that the other official in your story is partly trying to do that. But blaming game on the past fault would only mess things up and distract people from important decisions (plus I have different opinions on the past policies).
Were China a conventional G7 country, we would be talking about the transition of power that is looming in 2012-13 and the degree to which big economic, trade and currency policy decisions would be taken in the light of political moods and rivalries. Indeed, we are already talking in exactly such terms about new stimulus policies designed to improve the situation for the US mid-term elections next year and for Obama’s re-election bid in 2012. Even given the difference between the US 2-party system and the Chinese situation,I suspect it will be very difficult for Beijing to reach a policy consensus over the next couple of years until they first reach a clear and accepted political consensus – which is where those internal constituencies come in.
With regard to the comment about China’s desire to be treated as a world power, Chinese officials are increasingly behaving on the international scene as they do at home – that is with the expectation that if they are relatively more powerful, then they can act as if their power is absolute. Look at the way China’s bureacratic hierarchy, with scores of pompous officials running around with flocks of followers paying them tribute. The expectation is that the world should treat China this way, too. This is entirely relevant to the RMB question and those about trade balances. Again – this has less to do with the US-China bilateral equation than it does with China vis-a-vis the rest of the world. China’s blind pursuit of manufacturing capacity through cheap land, capital, export rebates, and a cheap currency has devastated small producer nations, and trade frictions between developing countries (including China) and between China and other Asian producer nations, will be a bigger story in the end. In this respect China is not a good neighbor, and beggar-thy-neighbor policies will do little to help China improve its international image. Back to the bureacratic system analogy, China is expecting that once it can project enough power that outsiders won’t dare question the uglier side of its domestic policies (we already see this in outright European capitulation to get transport contracts), just as domestic officials know that anyone of lesser rank won’t dare question what is going on for fear of retribution. Look at the domestic outcomes, and we know the future of this trajectory on the international scene.
” If they are right, and already the US trade deficit has risen sharply from its lows, the fight over trade will heat up even sooner than I expect and it will be a hotter dispute. To repeat my earlier assertion, high and rising unemployment in the US (and Europe) is not easily consistent in the real world of politics with high and rising trade deficits. ”
At least, high and rising unemployment in the US and Europe can easily be consistent in the real world of free trade economy with high and rising trade deficits.
See the following :
- Antoine Berthou, Charlotte Emlinger
- High quality imports suffer more during recessions
- http://www.voxeu.org/index.php?q=node/4152
A squeezed consumer will fallback on lower quality goods, which, right now, favors Chinese producers and stresses even further domestic (OECD) producers, aggravating the crisis, etc. That pretty kills the usual argument of OECD countries going up the added value chain (education, education, education).
And, given the cognitive capture of western political actors by free trade orthodoxy and the business interests behind it, I don’t see free trade being truly challenged in the real world of politics until it gets much, much worse than it already is.
That would suggest a highly delayed backlash, but then a truly momentous one.
Michael, A fantastic article.
I quite agree with Wallace Butterfinger above. The simple focus on the US-China dynamic is misleading, especially in the post crisis economy. The US needs to delever, which means constrained consumption growth and lowering or reversal on the CA deficit. If China’s policies continue to unduly tilt towards exports, through all of the various means (currency, credit, etc.), then the brunt of the rebalancing will go somewhere else.
US producers probably compete most directly with Japan and Europe. While China’s producers compete most directly with other developing Asian countries, this points to the US possibly in surplus with Europe and Japan and the rest of Asia virtually crowded out of the US, Europe and markets.
Of course, no one will stand for this even though the policy options are third or fourth best solutions at best.
Also, it should be noted that if the US is unable to delever a second, and much larger, crisis is a real possibility.
Dennis
Thanks, will try to get a copy. But as preamble, does pursuing those policies in that manner really restrict rural income or is it an unintended side effect? Does the rate of urbanisation act as a measure /indicator (direct or otherwise) of the rate at which policies affect rural income or development?
Mr Pettis
I think there is a bit of misunderstanding – not referring to outbreaks of greed and fear (though much has been made of them recently) – I believe fear and greed exist in constant parallel streams but when credit is free and easy, the fear of losing out to the bank next door overcomes even the strictest of compliance and conservative limits ending in increased volume of loans (which may or may not be subjected to regular oversight) which inevitably leads to higher default rates – a question both of quantity and quality of the loans in question. Furthermore on the investment side, when credit is available cheap, it’s almost a dream come true, when else to take risk than when it’s a carry trade without too much risk on the downside – at least apparent risk . What do you think?
One area US policy makers should be addressing and are not, is the other big piece of the US CA deficit, oil. Policy makers need to seriously ween the US from its imported oil deficit, which is a piece of the CA that is too often accepted as an act of nautre.
If the US moved towards European levels of oil consumption the trade adjustment would be much more manageable for everyone but the Saudis.
When people blame others for their mistakes, they learn less and perform worse. This problem is magnified when blame becomes embedded in the shared culture of groups and organizations. Yet, little is known about whether—and, if so, how—the propensity to blame spreads from one person to another. Four experiments addressed this issue, demonstrating that blame is socially contagious: observing an individual make a blame attribution increased the likelihood that people would make subsequent blame attributions for their own, unrelated, failures (Experiments 1, 2, and 4). Results also indicated that this “blame contagion” is due to the transmission of goals. Blame exposure led to the inference and adoption of a self-image protection goal (Experiment 3), and blame contagion was eliminated when observers had the opportunity to alleviate this self-image protection goal via self-affirmation (Experiment 4). Implications for research on causal attributions, social contagion, and cultural transmission are discussed.
http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6WJB-4XGBG5S-1&_user=10&_coverDate=10%2F17%2F2009&_rdoc=1&_fmt=&_orig=search&_sort=d&_docanchor=&view=c&_searchStrId=1102853014&_rerunOrigin=google&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=dab73bc4b2c89d11be68f3e15138f5b6
Great article, Michael. I don’t get over to China Financial Markets often enough.
I’ve been appalled at how dense western policymakers have been. If you are trying to persuade me to do something that is in your best interest, but contrary to mine, how likely a sell is that? Western policy makers need to point out that a rise in the renminbi will raise Chinese living standards. In order to minimize the potential loss of trade income, the West should support a coordinated rise in Asian currencies.
Indeed, Japan has been allowing the yen to strengthen, costing it heavily in the export trade. But that rise allows its people to live better. Even if there is a small cost to employment (and if the currency rise is coordinated, it should be small), that is compensated for by people who remain employed being better able to help a relative who is between jobs.
Or China could create more leisure time. Surely people do not enjoy working the hard hours they do work. The social tensions in China are not just the result of high unemployment, but also of low wages and long hours.
What Western policymakers should be saying is that a stronger renminbi is good both for China and for the world, first because it’s true and second because it recognizes that China is very unlikely to do anything that it believes to be against its interest.
Anyway, what you write is always of interest. Thanks for posting it here.
[Crossposted from RGE Monitor]
The difference in saving between US household and China household is more likely due to cultural difference.
The US residents know that social security safety net plus k401 can help them in their retirement. They feel financially-secured mentally.
The Chinese traditionally rely on children to prepare for a peaceful retirement. Since the one-child policy, it is hard for one child to support 2 parents, and 4 grandparents.
In this case, the deep sense of financially insecurity causes them to save.
The government of China has a deep-rooted fear of farmers’ revolution. The long history of 5,000 years showed that dynasty collapsed because of the hungry and angry farmers.
The urban-rural gap is a big problem for China. Many rural students lack the means to go for extra tuition. A year of college is equivalent to a year of household income. It is hard for the rural students to compete with the urban students for the top colleges.
This is a potential friction between urban dwellers and farmers, since Chinese traditionally “worship” higher education.
Professor, another excellent assessment put forth by you. We are in a vicious cycle: the US consumer is dried up. They are holding back spending, in spite of the fact that China continues to fuel production and stock the shelves of Walmart. The American consumer has been saving money, and paying down debt. For many, saving is more like a Piggy Bank. President Obama wants Americans to save, but their wages are stagnant or in decline, if they are still employed. Next year looks bad for jobs. How he plans to promote savings is a good question.
I see the US becoming an economic and military paper tiger. We are bogged down in two wars, which are draining investment from the real economy, and a financial sector, which, too, is draining money from the real economy by investing in foreign currencies, Wall Street, and commodities, and holding back lending. It is forecasted that a large number of businesses and corporations will likely find themselves in bankruptcy over the next 18 months. Credit will really freeze up and inflows to the treasury will shrink even more.
China may eventually see the US as too high a risk and rethink their commitment to a close partnership.
http://eye-on-washington.blogspot.com
[...] China and the U.S. lecturing each other on trade (Pettis) [...]
Judy,
The book strongly suggests that in the late 80s the Party made a conscious choice to encourage urban, export driven enterprise by flooding those areas with strong state support. At the same time, the amount of loans issued to the rural population collapsed. Taxation increased, and social spending was slashed.
[...] China and the U.S. lecturing each other on trade (Pettis) [...]
There is a good article by Andy Xie relating to this topic.
“Yes, there is an employment crisis in the US. However, monetary stimulus won’t solve the problem. During the globalisation of the past decade, the US economy has lost manufacturing jobs and replaced them with “bubble” jobs in finance, property and retail.
The bubble has popped, and yesterday’s jobs are gone. Tomorrow’s jobs will be created by entrepreneurs who discover new technologies and new sources of demand. This process will take time and no stimulus can be a substitute for it.”
http://www.my1510.cn/article.php?id=405698d572fcea56
Dennis
Question is, could China have come so far so fast without the urbanization bias and push ? Hard to imagine foreign direct investment being any more enthusiastic about investing in rural concerns. Not abvout to say that those policies are without negative aspects, just that pragmatism dictates a great part of political policies, one suspects.And unfortunately you cannot have your cake and eat it. I’m constantly grateful that there is no fondness on my part for cake!
1st of all, congratulations on the music festival, it’s a great tour.
I agree with you on the statement China is not on the verge of crisis. But not sure about the future. Could you please explain your rationale for believing China can avoid a crisis?
Also I’d like to learn the list of best stuff you’ve read on financial credit booms and crisis.
Thank you very much. It’s a great post.
To borrow from the “climate change” guys and risking being just as irritating, in regards to China’s economic status and possible outcome “the debate is over”.
Only two questions remain – what form will the “landing” take and what will the geo-political stress and requirements for global security and stability result.
There really is not much point in debating “bubble” or “imbalance” – if there is one thing we are all getting very good at is understanding what instability a la Minsky looks like these days and what a bubble looks like.
China is a bubble which has either already fully formed or is close to fully forming. The problem is that being an overshoot by definition and the lack of recognition by those which it will most impact as being a bubble being another attribute of a bubble – timing is always tough in these things. Could be in weeks, could be in years as the national will and strength of China is not questioned, so the current status could be maintained for years.
It seems the basic Chinese hope is that the USA gets back into the uncritical consumption game and “Chimerica” re-emerges and all are happy happy with the bubble cheerfully passed backed to the USA.
But even a cursory read of today’s financial press in the USA indicates that this is very very unlikely. Instead of continueing the funding of China’s emergence onto the world stage, the USA now is going to wrestle with domsetic funding of the new liberal programs in the setting of the current crisis damage control. Looks like just too much tax increase and deficit financing will result to allow the USA to sustain the massive trade imbalances that are required for China to give the USA back the bubble.
So, China will digest this bubble in the end and like Japan will find that basically the USA “took them”, taking goods which were priced incorrectly and too cheaply – likely even below costs – and accepting slips of paper of which China has no control in the maintaining of value. That as soon as the Yuan is adjusted to some semblance of “fair” value – China will almost immediately lose 30% or so of the wealth held in these US dollar assets. This is likely equivalent to the “value” the Chinese handed over to the US consumer.
In the end, balance sheets are double sided and any trade flow amount which was the results of an incorrectly set Yuan will eventually be booked as a loss on the Chinese national account. This was Japan’s fate, via a process to correct the yen value that was mandated, obvious in hindsight, by the USA since the Plaza Accord in the 1980s.
This will be China’s fate as well.
Mercantilism is always extremely unstable and usually untenable as it requires either an exploitation of a “colony” with a significant “hard power” to allow this policy to carry on and thereby is a statist policy whoch eliminates the Hyak like information from price changes. More often than not the mercantalist will be conducting trade with terms which are actually a net loss – this is Jane Jacob’s “transactions of decline”.
The USA allowed first Japan and the Asian Tigers to impose mercantilist terms on the USA to reach USA geo-political goals (fencing in USSR Eastern expansion, Maoist China’s exportation of revolution, North Korean craziness etc etc….) but since Japan and Asia Tigers were completely dependent on USA “hard power” so as to exploit USA consumption of their trade goods ( a bizarre first in world trade history) they had no choice when the USA decided the game was over.
Fortunately great parts of the industrial base of these emerging countries had achieved such levels of efficiency that while set back, much of the gains established since the 1950s were maintained. Most of those gains were from the establishment of complete industry, from raw commodities like iron ore to finished ships, rail cars, autos, and high tech goods. In fact the elimination of much of the favorable terms of trade helped these countries take the necessary and final step to self sufficiency and even greater efficiency and productivity required. Domestic consumption also started to have greater legs in these economies with the emergence of large middle classes – not in terms of numbers but in terms of proportion of the country GDP.
With China, the same mercantilist terms of trade with the USA were also allowed and basically are dependent on the setting of the Yuan to untenable cheapness versus the dollar. But unlike the previous Tigers and Japan, China is not completely lacking “hard power” and perhaps is in a dangerous phase where the hype as to the level of this Chinese hard power vis a vis the USA is actually believed in Beijing. Bismarck came across some plans created by the newly formed German General Staff of the Army which involved planning for a war with the USA – after all they had ones in place for every European power as well as UK, they felt they required one for the USA. This enraged Bismarck and he insisted the plans be destroyed stating that the USA is not just a country but is a continent. Japan’s Admiral Yamamoto had the same input after his decades in the USA working on behalf of Japan in all important areas of the USA from Detroit to Texas oil fields to Harvard – but he was not only ignored but charged with carrying out the fateful war plan to attack the USA (a war which was obviously “caused” by trade frictions).
China does seems more in the Japanese camp than Bismarck’s, with great pride expressed and some confidence emerging in their “hard power”.
Therefore when the USA decides that their own self imposed mercantilist exploitation by China of USA consumption is no longer in USA interest, the elimination of USA hard power supporting that mercantilism may not lead to China thinking they have to change their industrial model and will ty to continue the mercantalism with Chinese hard power threat.
So, with the “debate over” – realizing a bubble is a bubble is a bubble – and understanding the mercantilist aspects of Chinese success to date – the questions to ask going forward are ones of geo-political security, not economics.
If there was ever a time for the USA to run elaborate ‘war games” in the south Pacific, to show constant testing of high tech “interceptors” and other goods in the area – it is now. Not to be belligerent but to make sure China has a realistic idea as to their own hard power’s level. This is of course what the USA did to the USSR.
Furthermore, the transition the Asian Tigers and Japan had to make once mercantilist terms of trade were either eliminated or reduced, may not be so easily made in China where growth has been investment not so much in industry process but in infrastructure, raw goods, and semi-finished goods. China has acted often more like a merchant than a producer, assembling semi-finished goods from other efficient Asian economies into finished products and then exported to the USA. The other Asians, understanding the terms of trade China enjoyed, were only too happy to accept US dollars for semi-finished goods (they were no longer at risk fo their currency appreciating 30% aving already gone through that adjustment decades ago) and have the goods “laundered” into finished goods and sold at prices they could not realize for export to the USA. China will find that much of their exports that were these assembled goods will be replaced cheerfully by the other Asians who will just revert back to the final finished form for export to the USA. China has also not developed the middle class consumer which could step into the permanent drop in exports to the USA. I think this suggests what form of landing China will have.
Finally a brief word on Africa. It seems China is indeed behaving badly in Africa, especially in the “heart of darkness” of the upper Congo River basin. The model they are pursuing is not the hypocritical one of the Brits or French pre-1960s colonists – who at least had to give lip service to such concepts as “rule of law” or civilization – but rather the one of King Leopold which is that of total brutal exploitation.
Four million folks have died in this area of the Congo River since 1996, from war or the immediate consequences of war. It is a tribal war with the major players being stateless ‘war lords” for the most part. Often these people are the most fantastic, bizarre, and evil people imaginable. This is the land where mau-mau is not a just a poltiical groupu but a religious force. This war is funded for the most part by “artisanal mining” ( a poor damned miner with a pick axe and shovel who is worked to death under terms of slavery), as the minerals produced are the incredibly critical “rare earths” and cobalt required for the post-oil digital industrial age we are entering. Ironically the richest of these deposits of “rare earths” is in this Congo River basin. The Chinese have improved on King Leopold’s model, seeing his major mistake was in putting any Belgium personnel in the area which thereby forced accountability in the end. China merely backs the most powerful war lord in commercial transaction and then buys off the actual legal national setting with no strings attached “loans”. The war lords that China is financing make the Columbian drug cartel fellows look like choir boys. The old measures of hand chopping that Leopold implemented are now being repeated, along with mass rape, and even, a new twist or return to that which existed before Leopold, cannibalism as a form of terror. This is really as ugly a conflict as one can possibly imagine and is alreayd one fo the world’s most devastating conflict in history in terms of loss of life.
The importance of “rare earths” to exporters like China and to any country involved with the “digital age” industry, combined with the cloak of anarchy and horror that the Congo area provides, starts to present a clearer understanding of China’s interest in the area. The USA is also keenly interested in this area, nominally because of the terrorist risk from Somalia down to Kenya, with the creation of “AfriCom” in 2007 – a designated military command to define and allow “hard power” planning. But I suspect the real reason for AfriCom are the concerns of geo
My first visit to this blog. My compliments.
I especially like your materialistic approach to something like Smoot-Hawley. As you say, the issue isn’t tariffs per se, but the efforts of a surplus country to boost its surplus. I am reminded of those apocalyptic wackos who talk about “signs” that the end is near. For me, a sure sign of coming trouble will be the rehabilitation or dismissal of Smoot-Hawley as either unimportant then or irrelevant now. I don’t claim to know about the former, but I agree with your view of the latter. Either way, without the “Smoot-Hawley Redux” argument, the free trade guys have way less ammo.
While policies certainly affect events, I want to offer a higher-altitude view. The South has a comparative advantage in labor over the North. Until recently in historic terms, logisitical concerns offset that advantage, in part by making the development of entrepreneurial skills and a capitalist legal infrastructure infeasible. But technology has now made distance irrelevant, and that has made entrepreneurial skills and a place to ply them worth the trouble to develop. As a result, the South has become the source of all things labor-intensive. Even if we could get China to end its subsidies, direct and monetary, we would still end up selling only the capital- intensive goods in which we have a comparative advantage. That’s no way to feed a workforce, especially one that thinks “progress” means two earners per household.
Tariffs are the only way that we can sustain industries that employ a lot of people. They are coming, and the Chinese better get ready for them.
[...] China & the US: Lecturing each other on trade – China Financial Markets [...]
All Roads, I think analysts are increasingly beginning to see the issue as one of constraints on household income growth, and as rising savings as simply a consequence of the growth differential between household income and national income. As for your second point, I think the conclusion is that we should expect commodity price volatility to be greater than the impact of demand volatility. In other words of Chinese growth slows, the decline in commodity prices is likely to be greater than expected.
China Law, it depends on what other countries do. If China revalues and nothing else happens, there will be a small increase in US jobs at the expense of a small increase in the price of cheap goods. In that case most of China’s job losses will benefit other exporters. If a Chinese revaluation permits other Asian and developing countries to revalue (which they can’t now for fear of losing export competitiveness to China), the result should be a larger contraction of the US trade deficit, a larger increase in US jobs, as well as what is in effect a consumption tax on US consumption. This will reduce the real income of US households but it will also raise their savings rate. Unfortunately it is hard for one not to require the other.
OGT, one way of weaning the US from oil dependence would be, of course, to raise oil prices through taxes. That this would act as a consumption tax and automatically raise the US savings rate is an important secondary impact. In doing so it would also, unfortunately, do terrible damage to the Asian development model, but one way or the other the US should force up its savings rate, and the only way to do so will be to remove the subsidies to consumption, provided in part by large exporting nations.
Anonymous, I think it is fairly well understood here that a higher RMB will raise living standards for those with incomes, but there is also the fear that in the short term it will come at the expense of rising unemployment. Aside from the political reform implicit in weaning the SOE and large companies off various subsidies, there is a real trade-off for Chinese households in which the optimal choice isn’t obvious.
Scheng, although I think your point is widely accepted in the press, I am afraid I don’t agree with it at all. It seems to me that you have only to look at other countries around the world to see that high savings are sometimes associated with strong social safety nets (mainly among countries that followed similar industrial policies as China) while there are many countries in the world with much weaker social safety nets and almost no savings. In fact unless you believe that conditions changed dramatically in the past decade or two, you would have a hard time explaining why the Chinese savings rate surged, especially corporate savings.
YZ, I defined a crisis in this case as a balance sheet collapse. These occur because of “inverted” mismatches between the asset and liability sides of the balance sheet. In China’s case, although such mismatches seem apparent, especially in the banking sector, I think there are enough impediments to rapid withdrawal of deposits that the liability side is much less liquid than we assume.
Lawrence Kramer, the South may have a comparative advantage in labor, but I am not sure this explains everything here. Aside from the fact that the exchange rate itself is part of the determinant of whether a country’s labor costs are higher or lower than its labor productivity would imply, Chinese growth is capital intensive, not labor intensive. This reflects the fact, in my opinion, that in China the price of capital is so heavily subsidized that for borrowers with access to bank lending it is practically free.
Thank you very much. Very helpful perspective.
The gap between household and national income is indeed crucial in explaining the imbalance. But in examining how this comes about, don’t we overlook the fact that China, consciously or not, is emulating Marx’s description of the way capitalist societies are supposed to behave in the early accumulation phase? At that stage there are enormous inequalities as capital is created in a few hands. The fact that this process is being compressed into just a few years makes it all the more violent.
The fact that the sort of oppositional forces which grew up in the west, such as free trades unions and political parties seeking to spread wealth can’t exist outside the CPC means that the process may go further than it did in the west.
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