I just got back to Beijing three days ago and am still seriously jet-lagged, but I wanted to post a piece today anyway. Last night I celebrated the new year at D22, where a group of very cool musicians (including the amazing Snapline, for one of their very few shows this year and perhaps one of their last ever) serenaded the passing of 2009. What a great show.
I suppose it is traditional to dedicate the new-year piece to evaluating the “year that was”, or to make predictions for the coming year, but my only concession to this tradition will be to make the very (I think) obvious prediction that trade tensions are going to rise dramatically in 2010, and even more so in 2011 as interventions initiated in 2009 and 2010 come to fruition. I am no expert on the subject of criminal law or the environment, and so have little to add beyond all that has already been said, but the huge amount of angry criticism China has received on the very visible subjects of the Copenhagen meeting and the execution of a British subject caught smuggling drugs will make it easier for tariffs and restrictions aimed at China to generate popular approval in Europe, North America and the developing world, especially since protectionists can easily add a “moral dimension” to their arguments.
I am not sure Chinese policymakers fully understand how vulnerable China is to trade war. This is perhaps because the “success” of the stimulus package has convinced them that they are less vulnerable to external demand than they originally thought. But this would be a serious misreading. The stimulus package has postponed the effect of declining net foreign demand on Chinese unemployment, but has actually increased its vulnerability by increasing the future gap between what China produces and what it consumes. China needs foreign demand to keep absorbing its excess capacity for several more years while it engineers the difficult transition to domestic consumption-led growth, but I don’t see either China taking the necessary steps to force the transition or foreigners looking very eager to help China through the process.
As if to confirm my pessimistic trade expectations, the US on Tuesday announced that it would impose tariffs on Chinese steel grating. According to press reports this is a pretty tiny market, so it won’t seem to matter too much to the overall economy, but even though US trade measures against China have generally been so far much milder than Asian or European measures, US measures have far more symbolic meaning and will affect behavior elsewhere. Here is what the South China Morning Post had to say about it:
The US Commerce Department said overnight on Tuesday it has set preliminary anti-dumping duties of up to 145.18 per cent on steel grating imported from mainland to offset unfairly low prices.
The United States imported about US$91 million worth of the product from mainland last year. Steel grating is used in industrial floors, docks, ramps, drainage covers, staircases and other applications. The trade case is one of about a dozen brought by US companies this year against goods made in mainland, saying they have benefited from government subsidies or are being sold in the United States at less than fair value.
Worse yet, the very influential Paul Krugman has been focusing more than ever on China’s role in the imbalances, and he is clearly arguing that Chinese trade interference (via industrial policies and the currency regime) must be met with US protection. His most recent piece in the New York Times makes the case that the supposed costs of protection are fictional.
China has become a major financial and trade power. But it doesn’t act like other big economies. Instead, it follows a mercantilist policy, keeping its trade surplus artificially high. And in today’s depressed world, that policy is, to put it bluntly, predatory.
Krugman has an enormous amount of influence in the US and Europe, so his arguments should be worrying a lot of people. Even more worrying to me however was an alarming article in yesterday’s Xinhua which discusses the incredibly difficult year SME’s faced in 2009.
China‘s small and medium-sized enterprises (SMEs) are facing an alarming credit and economic crisis that, by one estimate, has driven at least 20 percent of them to the wall since the global financial crisis began. Officially the numbers are relatively low, and Minister of Industry and Information Technology (MIIT) Li Yizhong said in March that 7.5 percent of SMEs went bankrupt as a result of the global economic downturn in 2008.
However, a report by the Chinese Academy of Social Sciences (CASS) said 20 percent of SMEs had crashed and another 20 percent went to the brink of bankruptcy during the climax of the global financial crisis from October 2008 to March this year. “According to my research, to date, most of the 20 percent on the brink of failure have been revived thanks to the recovering economy,” said Chen Naixing, an economist and director of the SME research Center at the CASS, on Wednesday.
Chen, also deputy executive director of the China (Hainan) Reform and Development Research Institute, said most SMEs, especially small businesses, were financially overstretched by falling orders at home and abroad. The impact of the economic downturn on SMEs has been compounded as they were squeezed out of the massive credit flow unleashed by China’s banks.
There has been a lot of discussion within China about the impact the fiscal stimulus has had on accelerating a process that by some accounts began in the mid-1990s, and by others in the early 2000s, in which the entrepreneurial private sector in China has been squeezed out in favor of the SOE sector. This seems to have found confirmation in the PBoC numbers, according to the article:
The crisis seems to fly in the face of the government’s “relatively loose” monetary policy introduced to battle the economic downturn. However, the explosion in bank credit has been weighted toward large, state-owned companies, and the small firms’ share has been shrinking, despite their vulnerability in the economic crisis.
According to the People’s Bank of China, the central bank, new loans to SMEs totaled 3.08 trillion yuan (451 billion U.S. dollars) in the first nine months, accounting for 45 percent of the 6.83 trillion yuan corporate loans.
…However, in 2008, SMEs accounted for 51.9 percent of corporate loans, said governor of the central bank Zhou Xiaochuan in March. However, capital-deprived SMEs, mainly small businesses, contributed 60 percent of GDP, 50 percent of tax revenues and 80 percent of jobs in urban areas, according to the NPC report.
“Less than 20 percent of small businesses have access to bank loans,” said Yin Zhongqing, deputy director of the Financial and Economic Affairs Committee of the NPC. “This is unreasonable given their contribution to the economy and their pressing need for funding.”
Unless you manage an SOE, it is getting tougher than ever to do business, it seems. Separately, two days ago Premier Wen warned again about the “bumpy road” ahead for China, and yesterday Governor Zhou (of the PBoC), rather than celebrate the end of the crisis, worried publicly that “2010 is a crucial year in strengthening the stabilization and recovery of the economy and defeating the international financial crisis.” Here is what Bloomberg says about the latter:
Chinese central bank Governor Zhou Xiaochuan said that 2010 will be a crucial year for strengthening the recovery in the world’s third-biggest economy and “defeating” the financial crisis. Zhou’s New Year message, posted on the central bank’s Web site today, reiterated that a “moderately loose” monetary policy will continue.
Here is what Xinhua says about the former:
Premier Wen Jiabao Sunday urged the Chinese people remain aware of possible hardships and crises in the upcoming year and to work hard for a more promising future.
Wen told Xinhua in an exclusive interview that the way ahead for the Chinese people would be “a bumpy road,” but the nation had made transparent achievements in tackling the global economic downturn. ”The Chinese people have gone through so many disasters. And one eminent tradition of our nationality is to be independent and indomitable without fear,” he said.
Meanwhile the People’s Daily reported yesterday that Fan Gang, member of the central bank’s monetary policy committee, said that the rising inflow of speculative capital, or “hot money”, into China could lead to “asset bubbles”, a topic that seems to generate discussion every day in the financial press here. In the same edition the People’s Daily also warns about a related risk, inflation:
China‘s CPI growth rate may widen to 1.5 percent in December, after the CPI picked up its upward trend in November, said some experts. Ha Jiming, chief economist of the China International Capital Corporation Limited, predicted that December CPI may grow 1.6 percent year on year, spurred by hiking food prices. Qi Jingmei, a senior economist with the State Information Centre, earlier noted that the CPI growth rate would be higher than 1 percent.
“Judging from price rally in November, CPI may increase more than expected,” said Jiang Chao, an analyst with Shanghai-based Guotai Junan Securities Co. (GTJA). He predicted that due to holiday factors, food prices will continue to rise in January. Meanwhile, non-food prices will also add pressure to consumer prices.
So far in this entry I haven’t provided a lot of good news. It would be totally curmudgeonly to begin the year on a pessimistic note, and I won’t, but before moving on to two more hopeful pieces, I do want to mention an article in yesterday’s South China Morning Post by my friend Jack Rodman, in which among other things, he warns that the true exposure the banking system has to real estate may be underreported, and may be as high as 40% if correctly recorded. He says:
Most of this lending is policy-directed with an implicit government guarantee. Despite thousands of closed factories in South China resulting from the global financial crisis, and hundreds of empty office buildings, retail centres and hotels that are not meeting their debt service payments, banks are still not foreclosing on these properties nor calling the loans due.
The banks prefer to rollover or extend the loans to avoid having to report an increase in non-performing loans. It is not uncommon for Chinese banks to extend a loan for as much as one year without interest payments if the lender “believes” the ultimate recovery value of the assets will be greater than the outstanding principal and interest. However, it is nearly impossible for a bank to value an empty office building, in a market with a reported vacancy rate nearing 40 per cent (30 to 40 million square feet) and declining rents.
Bank exposure to the real estate sector has been at the root of previous financial crises worldwide including the savings and loan crisis in the United States, Japan’s bubble economy, the Asian financial crisis, and now Dubai World. All these crises share in common aggressive and exuberant real estate lending, an abundance of liquidity and the false belief that real estate can only rise in value. If total exposure to real estate secured loans was transparent within the Chinese banking sector, it would approach 40 per cent of total lending – the same level of total loan exposure reached in Japan in 1989, when it was believed Japan would dominate the economic landscape for decades.
So much for year-end pessimism. The first piece of good news is that a recent revision shows that China’s economy, and more importantly its service sector, was larger than originally thought, even though the service sector is still much too small to support healthy Chinese growth. According to an article in last week’s Financial Times:
China on Friday revised up its 2008 growth rate to 9.6 per cent, taking it well above the originally reported 9.0 per cent after calculating that the service sector had been more productive than previously thought. The upward revision underscored that China was well on track to surpass Japan as the world’s second-largest economy in 2010, if not sooner, and has burnt through less energy to deliver each additional ounce of growth.
…The hidden strength found in China’s services sector was a modicum of good news for policymakers in China and abroad, who have said that promoting the development of the country’s non-tradeable sector is a key ingredient in rebalancing the global economy.
But it was still far from mission accomplished on that front. China’s services sector accounted for 41.8 per cent of gross domestic product last year, up from the previously reported 40.1 per cent. In developed economies, services often contribute more than 70 per cent of GDP.
Needless to say it is very important that China’s service sector grows elative to the economy. In a sense one can argue that Chinese overcapacity in the tradable goods sector comes with serious undercapacity in the non-tradable sector, and the rebalancing process involves a shift from the former to the latter. Easier said, than done, of course, since a shift would require a real restructuring of both the banking system and the whole governance framework, but it will happen one way or the other..
The second last thing I want to mention is a lot more macro. Last week on the day after Christmas (I wonder if many people read it), Robert Schiller published in the New York Times a very interesting piece on what he calls “trills” – bonds whose coupon would be determined by current GDP growth. Here is how he describes them:
Each trill would represent one-trillionth of the country’s G.D.P. And each would pay in perpetuity, and in domestic currency, a quarterly dividend equal to a trillionth of the nation’s quarterly nominal G.D.P.
If substantial markets could be established for them, trills would be a major new source of government funding. Trills would be issued with the full faith and credit of the respective governments. That means investors could trust that governments would pay out shares of G.D.P. as promised, or buy back the trills at market prices.
In my book, The Volatility Machine, I discuss the same things, arguing that developing countries typically put on what I called “inverted” debt structures, which automatically exacerbate volatility. The worst sources of this kind of inversion are either external debt, short-term domestic debt, or contingent liabilities arising out of the banking system. All of these forms of debt perform better than expected during good times and much worse than expected during bad times, and so they are an important part of the reason why developing countries, especially highly indebted ones, seem to veer so easily from boom to bust.
One of the things developing countries need to do to help break this cycle is to restructure their balance sheets in order to reduce embedded pro-cyclical structures and so reduce volatility. The best way would be somehow for countries to sell “equity”, the closest thing to which has been long-term, fixed-rate local currency debt. Schiller’s “trills” are an even better example. The main point is that these kinds of capital structures force the users of capital to pay more when times are good and less when times are bad. This provides an important cushion for when times are bad, and the very existence of this cushion not only will reduce the tendency for capital to flee a country just when it needs inflows most, but it should reduce the overall cost of capital by reducing financial distress costs.
I think “trills” are a great idea, and I remember writing a piece many years ago for the Financial Times (“A stake in Argentina’s future”, July 2, 2003) in which I praised the attempts – however minimal – to embed such a structure in bonds issued by Argentina as part of its 2003 debt restructuring. The Argentine structure was a tiny first step (it only involved a minimal amount of GDP warrants), but if a major developed country were to issue these “trills” and make them respectable, this would be very positive for developing countries who, like China, are much too volatile, tend to fly back and forth between periods of intense growth and intense despair, and have very few options for building hedges into their national balance sheet. Schiller mentions other economists who have made similar proposals:
Proposals for securities like trills have been aired many times over the years. I argued for them in “Macro Markets,” my 1993 book. The Nobel laureate Robert Merton has had similar proposals. Other ideas for G.D.P.-linked securities have been advanced by John Williamson at the Peterson Institute, by a group at the United Nations Development Program, by Kristin Forbes of the Council of Economic Advisers under George W. Bush, and by Eduardo Borensztein of the Inter-American Development Bank and Paulo Mauro of the International Monetary Fund.
For what it is worth I enthusiastically add my vote. For all of the associated problems (most importantly, bad data) “trills” are a great idea and would, if actively used, provide a huge boon for investors and, more importantly, risky developing countries.
[...] Excerpt from: China brand brand new year, as well as a single some-more opinion for GDP-adjusted bonds [...]
[...] See the rest here: China new year, and one more vote for GDP-adjusted bonds [...]
Having appeared to be a weak president and lost some real grounds to China during his visit to China and in the whole dealing of the economic crisis, Obama is dying to score some brownie point to show his fellow Americans. The trade war by Obama will backfire as higher domestic US steel prices will actually force steel customers to move their factories to China where raw material steel prices aren’t inflated by trade protectionism. America’s steel demand will slow and price pressures will increase on everyone using those products. In aggregate, more jobs will be lost as a result of these tariffs than gained. And that is just on the surface. Think China will not react? A nice clear message would be for China to cancel plane orders from Boeing or industrial goods from GE. Even if China is not so overt in its message, it is foolish to think there will be no repercussions over this. The rising tide of US trade protectionism is not a good thing. Obama is flat wrong, trade protectionism never works.
If issued in too-high quantities, “trills”, and, to a lesser measure, inflation-linked bonds prevent the “usual” way for government to default though monetization. If used in significant size in debt management strategies, they must come with a formal mechanism for default on sovereign debts.
There is an important symbolic dimension in here : monetization, debasement, or postponement of principal payment and interest deduction are “face saving” default mechanism that have been used by all countries (including all g7 countries without exception). Foregoing that flexibility is not necessarily a good thing.
The most important message to convey to any investor is that there is no such thing than a risk-less investment.
Michael Pettis, regarding your comments regarding Western government anger over the executed British Drug Dealer caught with 5 Kilograms of pure heroin, the overwhelming Chinese people support the government’s execution of drug dealers. No one disputes that the criminal attempted to smuggle the heroin into China. Can you imagine that the Western newsmedia are calling an execution of a UK Drug Dealer caught in China, a violation of “human rights”? What about the destruction and murder of children that illegal drugs do to any community. Are Columbia and Mexico better than China for mafia drug cartels that terrorize those respective nations? Vietnam also just executed 5 Chinese nationals for illegal drug dealing, the Chinese government didn’t protest or complain. The bottom line: don’t attempt to deal in illegal drugs like heroin or cocaine in China.
http://worldfocus.org/blog/2009/12/30/in-poll-overwhelming-majority-of-chinese-support-execution/9047/
I am truly perplexed. If as stated:
“…20 percent of SMEs had crashed and another 20 percent went to the brink of bankruptcy during the climax of the global financial crisis from October 2008 to March this year.”
And “…SMEs, mainly small businesses, contributed 60 percent of GDP, 50 percent of tax revenues and 80 percent of jobs in urban areas…”
How then could it possibly follow that “China on Friday revised up its 2008 growth rate to 9.6 per cent, taking it well above the originally reported 9.0 per cent…”
I am too hung over to even attempt the maths but what growth rate for SOEs would be required to compensate for the cratering of the SMEs ?
[...] The rest is here: China new year, and one more vote for GDP-adjusted bonds [...]
[...] This post was Twitted by pkedrosky [...]
Michael,
Could you offer a description of how exactly a trill would work, how it would be priced, etc.? For instance, if the Treasury wanted to raise $100B this year through Trills, approximately how many would it need to issue?
Since the cost of the old debt in terms of GDP would rise with GDP, wouldn’t it inhibit the raising of new debt?
David Merkel has a critique of the concept up on his blog:
“I would not want the US Government to issue trills. Why? They suck a lot of money in, and do not consider what it will do to the government in future years. I can say with confidence that a large issuance of trills would lead to the demise of the US Government. There is no way that the government could keep up with the payments, because most finance today relies on the idea that the economy can grow out of the debt burden. With trills, that is not possible.”
http://alephblog.com/2009/12/27/not-so-cheap-trills/
“Less than 20 percent of small businesses have access to bank loans,” said Yin Zhongqing, deputy director of the Financial and Economic Affairs Committee of the NPC. “This is unreasonable given their contribution to the economy and their pressing need for funding.”
“The banks prefer to rollover or extend the loans to avoid having to report an increase in non-performing loans. It is not uncommon for Chinese banks to extend a loan for as much as one year without interest payments if the lender “believes” the ultimate recovery value of the assets will be greater than the outstanding principal and interest”
Fascinating.The same scenario’s are evident in the US. NFIB(SME) outlooks are trending down as the Fed’s PMI indexes(SOE)are trending up.
Extend and pretend,delay and pray, have also been the US’s approach to RRE and CRE. The US and China are on a collision course of varying degrees. A second round of paper wealth evaporation is in both their future’s.
The idea of a bond that pays dividends based on one trillionth of a nation’s quarterly nominal GDP sounds interesting.
Is it necessary to create an international standard on how GDP is measured before such a security can be issued?
How will governments deal with GDP revisions especially in developing countries where the economic data is not as reliable?
It seems to me that there would only be a market for these in developing countries where there is a potential for very high growth for many years to come. A country like Japan would not find many interested investors.
Michael, while I like the idea of trills they do have the problem of being reliant upon locally produced statistical data. Anyone familiar with the Argentine inflation-indexed bonds knows how this can pan out when the guy who cuts the cheque can also fudge the bill.
Local currency debt markets are way better, but, in order to be viable they need to have compelling interest rates which means capital has got to be priced properly. China just can’t seem to find a way around that issue in the long term as you have mentioned many times.
What does China think they are doing?
In terms of dealing with trade tensions, this is no help at all:
“Copenhagen was a disaster… The truth is this: China wrecked the talks, intentionally humiliated Barack Obama, and insisted on an awful “deal” so western leaders would walk away carrying the blame…. What I saw was profoundly shocking. The Chinese premier, Wen Jinbao, did not deign to attend the meetings personally, instead sending a second-tier official in the country’s foreign ministry to sit opposite Obama himself. The diplomatic snub was obvious and brutal, as was the practical implication: several times during the session, the world’s most powerful heads of state were forced to wait around as the Chinese delegate went off to make telephone calls to his “superiors”.”
http://www.guardian.co.uk/environment/2009/dec/22/copenhagen-climate-change-mark-lynas
I respectively suggest that goods producing employment in the US has fallen from around 30% in the 1970′s to under 14% owing to weak currency policies first by the Japanese subsequently by the China. Not many would argue that the Yen and the Yuan have been freely traded. Although your model seems to discount the currency effects, I’d like to suggest that the enroads made first by Japan and in more recent years by China have been aided significantly by currency policies.
I was surprised by your analysis that showed that mfr goods in the US has remained fairly constant despite fewer goods producing jobs. Has productivity been that good or is it a case where mfg goods that are produced in the US count as full domestic content the assembly that is made up of imports produced off shore?
Michael, I ordinarily agree with you on almost everything economic, but I can’t agree on the trills. I believe in asset-liability matching, even at the government level. Try to match term risk and liquidity risk to what is being funded.
I have argued that the debt structure of the US government has been getting too short, and recommended that the US Treasury lengthen its funding policies — I even said that to the Treasury officials that I met with in November.
http://alephblog.com/2008/11/25/issuing-debt-for-as-long-as-our-republic-will-last/
http://alephblog.com/2009/11/04/my-visit-to-the-us-treasury-part-2/ (2 of 7)
But trills have exceedingly long duration — the remind me of some structured settlements that I have had to model, but these are perpetuities — even longer for the coupon to grow. Duration looks like it would be north of 40 — it depends on the assumptions used.
A perpetuity growing at GDP rates saddles our posterity with debts that they cannot bear. Cheap debt up front — really costly on the back end.
http://alephblog.com/2009/12/27/not-so-cheap-trills/
But, thanks ever so much for your blogging. I learn so much from you. Keep it up.
Social comments and analytics for this post…
This post was mentioned on Twitter by remarkcoble: China new year, and one more vote for GDP-adjusted bonds: According to the People’s Bank of China, the central bank… http://bit.ly/7mFsO2...
I completely agree with the suggestion for the trill and GDP adjusted bonds. To make it work though, governments would have to stop playing the game of gradually devaluing their own currencies over time, as the US has done since WWII, and which China is doing now in order to keep the spark of hope equated with export growth alive.
How to do that?
As to your statement that developing economies took on inverted debt structures which exacerbated volatility, I would venture that that happened because governments were attracted too much by “upside stories”, starting with Japan, then the “four tigers”, then China, and bought into the success story thesis. These instruments were sold to them by investment banks and other service providers. Basically these governments gambled, and many of them lost.
GDP adjusted bonds would sell if they saw that the chance of these kinds of success stories are relatively remote, so instead of gambling on volatility, they would go for a GDP adjusted bonds as volatility dampeners. The only way this will happen is if the world economy continues to contract over time, as it is doing now.
The problem with the current globalization situation is that there has been way too much froth. To me, it seems that there is only one solution, which is happening now: economic contraction. The problem with this round of globalization is that it was used to export/hide country-specific problems, and created bubbles in the process. Now these bubbles have popped, and remaining excess needs to be squeezed out of the system.
Economies have to contract, and get their own domestic economies in some kind of balance before they can revisit globalization and go for the next round of economic expansion, which we can hope, will be more honest and healthier.
[...] This post was Twitted by alexdong [...]
[...] no other economy even comes close to competing. But this growth is predicated on there being a large base of consumers who have money to buy these things, either overseas (mainly in the US), or in China (as has not yet [...]
Dave Chiang, China may very well react by interfering even more with trade, but that would be the worst possible strategy. Trade contraction, depending of course on how it happens, is usually expansionary in the short term on GDP and employment for trade deficit countries and contractionary for trade surplus countries. The US learned this the hard way in 1930 with the passage of Smoot-Hawley, and China will probably be forced to learn it now given current currency-undervaluation and trade-subsidies policies. Fortunately Chinese policymakers understand this, which is why the reaction has consisted mostly of strong words. As for the impact on the US, trade contraction caused by increased protection is, in my opinion, against US long-term interests, but it is hard to argue that it will hurt the economy in the short term. As for your second comment, it completely misses the point. By the way I am not sure you should so easily appoint yourself aggrieved spokesman for China. I am pretty sure the Chinese can speak for themselves, and the Chinese contributors to this site seem to do a better job.
Charles, defaults usually occur because debt burdens are growing faster than the economy’s ability to service it (for which GDP is a proxy) and there is a very low expectation that conditions will change soon. The advantage of trills is that the debt burden cannot grow faster than GDP. I am not suggesting that trills form the only financing mechanism. Clearly there will always be demand for nominal bonds and governments can use these, thus preserving the monetization option (although some studies have suggested that the monetization option is much less than people think). The point is that a well-structured balance sheet should have different types of payments indexation.
Nada, I believe the SME report by the Chinese Academy referred to the performance of SMEs in 2009, whereas the revision was for 2008. By the way the report wasn’t clear but my (reasonable) working assumption is that the 20% refers to numbers, and since it is the smaller SMEs that are more likely to go bankrupt, its impact on output was far smaller. In addition one of the repeated criticisms you hear here in China is that the direction of the fiscal stimulus forced SOEs to increase their share of the market at the expense of SMEs. At least part of the business lost by SMEs was simply assumed by expanding SOEs.
Bob (and Eric), this is still an idea more than a concrete proposal, but trills would be priced by the market just like equity. In other words if you believe the issuing country is going to see rapid GDP growth (e.g. China in the past decade), you would price the offering at a higher multiple of the current coupon payment. If you believe it will experience low or even negative GDP growth (Japan in the past decade), you would price it at a lower multiple. One welcome side effect, of course, is that the price of trills would give us a daily record of the market’s best estimate of future GDP growth, and these estimates than can be used to create some incredibly useful hedge instruments.
And I am not sure why trills would inhibit the raising of new debt anymore than the existence of an equity base inhibits the ability of corporations to issue debt. Remember than in tough times when GDP contracts, like now, the US would see its debt payments on trills decline, unlike currently when US debt payments are fixed and US GDP is contracting (which means that the US debt burden is automatically rising even without expansionary fiscal policy). This would make US creditors better off, not worse off. The point is that the payments vary directly with the state of the US economy, so the US only pays more when it is in better shape, and less when it is in worse. By the way I think I might disagree with David Merkel that “most finance today relies on the idea that the economy can grow out of the debt burden.”
I would argue that most financing assumes that the debt load is sustainable. Remember that over the long term the interest burden on the two types of debt should, ignoring default risks, be roughly the same, since over the long term nominal interest rates are equal to nominal GDP growth rates. It is only over the short term that there will be a difference, and the difference works in the favor of creditors when times are bad (which is when they need protection) and in the favor of trill-holders when times are good (when creditors don’t need the protection). This reduces the risk of default, of course, so that in the aggregate total financing costs might be even lower.
Nemo, of course getting reliable data is key, and perhaps this is a role that the IMF can play. In other words participants agree to use IMF data to set the coupon payments, even acknowledging that the data can include noise (LIBOR serves a similar coupon-setting function and it often includes noise too). The market would quickly recognize that some countries are more prone to manipulate data and adjust via a discount on the multiple. By the way, what a bonanza for research economists, who would have a lot of great new analytical tools.
John Moffatt, I know it is widely believed that the US has seen its manufacturing base shrink dramatically over the past several decades, but a lot of economists who are much smarter than I am about these things (I don’t know how to create the right index) have made the opposite argument – that there has not been much change in the GDP share of manufacturing, only in the employment share, and this represents increased productivity and should be welcomed. If you look anecdotally at older industries, like car manufacturing, US output has certainly declined in relative terms. If you look at new industries (mostly higher tech industries), output has of course surged (true almost by definition). In the aggregate total manufacturing value-added seems to have stayed pretty constant over long periods of time. I know many people dispute this, but I am not sure I understand why.
My main point is that at least part of the anger in US discussions with China is based on the fear that the US has seen its manufacturing base collapse in recent years, and since that is at the very least a hugely exaggerated fear, perhaps we can cool down a little. The discussion over trade should be seen as a discussion about what works best over the long-term future, and not as a desperate attempt to save us from ruin. The US has done pretty well out of globalization, and the current crisis is no more evidence of the end of US economic dominance than any of the more than fifteen sharp economic crises experienced by the US over the past 200 years, many if not most of them more severe than the current (the 1970s and the 1930s, for example, were worse in terms of output loss).
David Merkel, I try to discuss part of your concerns in my response to Bob, and as a hard-core balance sheet guy (I am a serious Minskyite, am writing a handbook on balance sheet strategies for corporates and sovereigns, and even created and ran a liability management group at Bear Stearns before moving to China in 2002), I fully agree with you on the need for asset-liability matching. That is, I think, the point of trills. Since the main long-term “revenues” of a country consist of its ability to tax economic wealth creation, it makes sense to index debt payments to wealth creation.
GDP is the best proxy we have for the latter. Remember that nominal coupons have no relation with the growth of the tax base, so they are at best neutral (and may even be slightly negatively correlated for many countries when we include default risk). Since GDP is the measure of wealth creation, and therefore of the value of government revenues, the coupon on trills would be positively correlated with the government’s revenues. This achieves the asset liability matching that we would want.
“[T]he huge amount of angry criticism China has received on the very visible subjects of the Copenhagen meeting and the execution of a British subject caught smuggling drugs will make it easier for tariffs and restrictions aimed at China to generate popular approval…”
And you didn’t even mention the recent sentencing of Charter 08 founding member Liu Xiaobo.
The importance of public sentiment in shaping China’s relations with the West should not be underestimated. I read recently that European views of the U.S. have returned to pre-W. levels now that Obama is president. It seems to me, however, that public opinion of China in North America and much of Europe has steadily worsened during the last two years or so following the crackdown in Tibet, the torch relay fiasco, Chinese threats of boycotts of western companies, the rise of China’s “angry youth,” shoddy Chinese goods, more ethnic unrest in Xinjiang, the public imprisonment of several high-profile dissidents, and the percieved failure of the Copenhagen talks.
If Paul Krugman’s idea that the Chinese are engaging in predatory merchantilism (is there any other kind?) should begin to take wider hold, trade relations between the West and China could get pretty ugly indeed. Moreover, ugliness in the realm of trade and economic relations will pollute every aspect of our relations with China. I remember reading an essay some years ago that suggested that China’s membership in the WTO would lead to considerable friction in the short and middle terms, friction that would very likely give rise to increasing nationalism as the Chinese government and media framed trade disputes with the West as anti-Chinese foreign aggression. Could it be that this is part of what’s happening now? Surely, tarrifs on steel pipe are just the beginning.
American and European views of China aren’t linked to a specific figure (as were European views of the U.S. during Bush’s tenure). That being the case, Hu Jintao’s departure in a couple of years is unlikely to mitigate against the kinds of suspicion and outright hostility that are likely to grow if Krugman’s views become dominant. (I also worry that a more difficult economic climate and increasingly fractious relations with the West will lead to less press and speech freedoms, something that would further poison tensions.)
Have you ever read “Fragile Superpower” by Susan Shirk? In part, the author talks about how China’s relationships with countries like Japan and the U.S. are closely linked to notions of Chinese nationalism and so are followed closely by the Chinese people (who typically reject any willingness to compromise on the part of the Chinese government as a sign of weakness). This being the case, China’s relations with the U.S. and Japan are not determined by China’s foreign ministry the way that relations with most other countries are. In short, China’s relations with the U.S. and Japan have been hijacked by popular opinion (Remember the anti-Japanese protests in 2005?) and so must be managed differently, and often in ways that exacerbate tensions. My guess in that China’s economic/trade relations with the U.S. and certain other countries are subject to similarly unreasonable popular forces.
MIchael Pettis, US industry receives plenty of subsidies from the government. Obama provided $60 billion of taxpayer funds to General Motors, $20 billion to Chrysler, $180 billion to AIG, $40 billion to Citibank, $200 billion to Fannie Mae/Freddie Mac and trillions more to other politically connected corporations. The bigger any US Corporation screws up, the bigger the bailout check from Obama. What happened in this economic crisis was the biggest transfer of risk from the private sector into the public sector and that transfer is not done yet! Of course, the transfer of profit from the public to Wall Street is not done yet! Regarding the US Steel industry, it is really bad corporate management that cries “unfair trade” and slaps a protectionist tariff on a competitor’s product. This hasn’t worked for GM, Ford, and Chrysler and it’s not going work the US Steel sector. That US Industry cries for taxpayer bailouts and trade protectionism is pathetic!
Michael,
I have three points:
First, I think the comparison with corporate equities is a mistake. Trills have a permanent claim on some percentage of GDP, but a share of IBM doesn’t represent anything so assured. It represents a share of ownership, but the percentage that share represents can be changed at any time, look at Citi and BAC, or worse, RBS and Lloyds. And the payout is set by the equivalent of total revenue (GDP) not profit (tax revenue), and the payments are cumulative. What corporate equity offers anything in comparison?
Second, since the Trill represents a permanent share of GDP, there is obviously some finite cap on the number of trills that can be issued, based primarily on the tax revenue that government can generate.
Third, the cost during this recession wouldn’t have fallen nearly as much as the cost of Treasury debt has fallen. The payment for a trill would have peaked in 2008Q3 at $14.55 and fallen to $14.15 2009Q2, down 2.6%. Interest on Treasury debt fell from $451B in FY2008 to $383B FY2009, down 15%, even with the massive new issuance.
Why not just create a security like a TIP but with the value changing with nominal GDP instead of the CPI?
I would also like to offer my 2 cents on the execution of the drug smuggler. Personally, I am against the death penalty, but mainly because of the real chance of executing an innocent person rather than because I see a definitive moral problem with executing a guilty one.
But it seems to me it’s a real mistake for outsiders to focus on this. This obviously plays into the hands of the Chinese who want to use nationalistic feelings as a cover for oppressive policies–the West objects to the jailing of both political protesters and drug dealers. Clearly they simply want to dictate their values to the Chinese.
[...] Read it here. [...]
An additional advantage of correlated debt securities such as trills is that they help government avoid the irrestible temptation to spend surpluses during good times, while bond payment outflows are reduced in times of difficulty.
It is preferable that the variable coupon be paid out quarterly rather than compounded to expand the principal to be repaid at some future date.
If GDP is considered unsatisfactory, other more reliable source data such as tax receipts, exports and imports, or the value of a commodity specifically correlated to the economy of the issuer may be used.
“Volatility” is a great read, I’m looking forward to your new book.
In 2010, when the credit time bomb, inflation and Peak Oil merge to create the perfect storm, the crisis in China will be massive. This dire prediction for 2010 is a must read http://www.thecactusland.com
Ma Bole, I don’t know if you saw James Fallows piece “Krugman, protectionism, and the RMB”. If not check it out. I think we are definitely just at the beginning of a long and ugly process. I haven’t read Susan’s book but I have a copy and plan to. I have heard very good things about it, including from my students.
Dave Chiang, the question is not whether there are subsidies in the US (or indeed in every other country). Of course there are. The question here is whether these are large enough to have a significant net impact on the trade balance, and so become a problem for other countries. As the leading trade deficit country in the world (in history), the US is in a strong position to argue that its subsidies, although often idiotic enough, do not create a major draw on global net demand. I agree with you that crying out for trade protection may often be pathetic, but it seems to me that anger should be directed most at countries that engage most heavily in protection. It is pretty obvious from the US trade balance that the US is pretty far from being one of the major offenders.
Bob, actually a share of equity has a pretty specific claim on profits. If I own 1% of IBM’s shares, I have the right to 1% of its net profits, either in the form of dividends or of retained earnings. As to your second point, of course there is a cap on the total amount of trills that can be issued, but that is true of plain vanilla debt too. Because it reduces overall volatility (it pays more when times are good and less when times are bad), the US can in principle issue more in trills than in straight debt. Corporate finance theory is pretty clear that hedging (matching revenues with expenses) always allows a borrower to increase its optimal debt level. By the way your idea for a GDP equivalent of TIPs is a good one. The point is that when payments are indexed to a proxy for revenues, the quality of the balance sheet improves.
If the value of money cannot be inflated away, there is no point in using money. Gold would do just as well.
Why is it so CRUCIAL that money can be inflated away?
BECAUSE, if there appears economic subjects who accumulate money for the sake of accumulation, these actors will eventually cause a deflationary spiral where they in the end become the owner of the world.
That is why gold as a currency does not work.
That is why trills would not work.
The only way to combat mercantilism is by using soverieign currencies controlled by sovereign countries. If mercantilism does not appear, there is no need to inflate it away, if it does appear, IT MUST BE INFLATED AWAY.
Michael Pettis, as you are probably well aware, the countries of Southeast Asia and China have formed a regional free trade bloc starting Jan 2010. Soon the ASEAN+3 trade bloc will be established as the largest “free trade” region in the world. The Chinese continue to initiate major strides establishing free trade across the globe. Already China is the largest trading partner of Japan, South Korea, Brazil, and Australia. By stark contrast, the earlier free trade agreement negotiated by the Bush Administration between South Korea and the United States was all but declared by Obama as “Dead on Arrival (DOA)”. Obama violated his promise to other G-20 leaders that he would oppose US protectionist measures. Obama’s unprovoked declaration of a hostile trade war with the Chinese will seriously damage economic and political relations between the United States and Asia for the remainder of his administration. Moreover, the WTO will most certainly rule that 150% import tariffs on Chinese steel are both protectionist and illegal. China’s stance is still the same – that it opposes trade protectionism and embraces free trade.”
In addition to the points made by Dave Chiang, Professor Pettis fails to point out the fact that China’s trade surplus is falling sharply – not rising. In the first 11 months of 2008 China’s trade surplus was $258 billion. In the first 11 months of 2009 it was $161 billion – a decline of $97 billion or 38%. Indeed China’s trade surplus has been falling throughout the the whole of 2009. As China’s economy has been accelerating throughout this period this demonstrates.
1. That as China’s trade surplus is contracting and not expanding those who wish to stoke up trade tensions and protectionism are doing so for reasons that are not to do with objective trade trends.
2. The claim that China’s economy recovery requires a large trade surplus is simply factual false, as well as wrong from the point of view of economic theory.
David,
Consider that ‘ASEAN+3 trade bloc’ will need to have members that are willing and able to sustain trade deficits. None have the ability and will to do so.
Also you have this backwards “US steel prices will actually force steel customers to move their factories to China where raw material steel prices aren’t inflated by trade protectionism”. The price differential is not due to US protectionism, it is due to Chinese mercantilism. The costs for raw materials is controlled. Environmental and labour laws are nearly non existent. Capital is heavily subsidised. Canada is one of the largest producers of met coal and iron ore in the world , China can undercut Canadian producers of nails by 30-40%. There is next to none savings in labour to be had. The price advantage is entirely synthetic.
You might want to have a look at this article….
http://www.nytimes.com/2009/12/10/world/asia/10jakarta.html?_r=2&hp
You say that you are “not sure if Chinese policymakers fully understand how vulnerable China is to trade war”, but my information, based mostly on the MoF and PBC people I know, is that they are very aware. That is why they have not reacted so strongly as they say they will.
Hey, is Dave Chiang and John Ross the same guy? Or are they going to get into a fight over which of them gets the Foreign-Fen-Qing award? Do we need foreign fen qing? I think our own are silly enough.
Michael, have you read Scott Sumner’s critique of the Pual Krugman piece?
Dave Chiang,
You said: China’s stance is still the same – that it opposes trade protectionism and embraces free trade.
Are you serious? So if a country announces it embrace free trade, then there is no reason to dig any further? It must be true? So what would happen if the US raised 50% tarriffs on all imports and simultaneously announced that it embraced free trade?
As some of the overexcited comments that follow these and similar postings in other blogs indicate, those of us who have been writing that the trade imbalances are going to be very difficult to resolve, and will almost certainly result in rising trade tensions, may be in the process of being proved right, but this comes with a rather alarming tendency of the nationalist morons on both sides (and, apparently as in the case of my blog, their foreign proxies) to insist that warning about the rise of trade tensions is the same as promoting it.
It isn’t. Let me summarize. It will be very difficult for China to restructure its economy quickly enough so that domestic consumption is the main driver behind its growth. China is overly reliant on foreign net consumption and will continue to be so for many years. It was a good strategy for growth during the past two decades, but it can no longer be the strategy for China’s future.
However, given high and rising unemployment in Europe and the US it will also be very difficult for policymakers there to accept large trade deficits for much longer. But if deficit countries are going to demand structural change faster than the surplus countries can manage, we will almost certainly finish with a very nasty trade dispute that will slow the global recovery and poison relationships for many years.
Both the refusal by trade protectionists in the West to see how difficult the transition will be for China and other Asian countries, and the refusal by trade protectionists in China to recognize that its policies are creating distortions in other countries, can only exacerbate the problem. This sort of stupid screaming may make each side feel immensely virtuous, but it must necessarily lead to the worst possible outcome. Those of us who are warning about the nearly-inevitable rise of trade tensions are actually the only ones working to reduce it.
Stefan, I am not sure what the connection is between mercantilism and trills. Inflation may very well be useful for inflating away debts, but inflation does not improve trade competitiveness. It reduces it by raising domestic prices.
Dave Chiang, I am not aware of many countries that have a different stance from that of opposing trade protection and embracing free trade. However it might be more interesting to look at what each country does rather than what the official stance is.
John Ross, as usual you are more interested in grandstanding than in discussing the issues. I am surprised that you would say that I have claimed the Chinese trade surplus has grown – anyone interested in engaging in serious debate would have been very reluctant to make such an idiotic claim. Of course the Chinese trade surplus has declined – something I’ve pointed out in many other blog entries – and of course it had to decline. It isn’t credible to assume that the US trade deficit, which represents about two-thirds to three quarters of the global trade deficits, could have declined by over 50% (from $610.8 billion in January-October 2008 to 304.0 billion during the same period in 2009, according to the BEA), without forcing trade surpluses around the world to come down by exactly the same amount. What is perhaps surprising is that the country with largest trade surplus by far saw it decline by so much less than the decline in global trade deficits. Trade policies can be distortionary and still not result in expanding surpluses if the counterbalancing deficits are contracting. This shouldn’t need explanation.
As for your point 2, thanks very much for your assertion, but apparently it is not something Chinese policymakers seem to believe. Neither do I.
Jackie, yes, and perhaps my statement was badly worded. It is very clear that a lot of people in the think tanks, the universities, and in certain agencies like the PBoC, are very aware of China’s vulnerability and are extremely worried about the rise of protection, but the same was true of the US in 1930, which did not prevent less sophisticated but more powerful domestic constituencies from completely misunderstanding and in the end forcing through the disastrous Smoot-Hawley.
TR, yes, I know scott and often read his blog, and although we disagree on quite a few things, I find his arguments very interesting and insightful. Perhaps at some point I will respond to it on my blog.
Michael Pettis, Saudi Arabia can produce oil at a lower cost than anyone else by simply sticking a hole into the ground. China can inexpensively produce labor intensive consumer products at a lower cost than the United States because labor costs are significantly lower. Saudi Arabia’s “comparative advantage” is oil production, and China’s “comparative advantage” is labor intensive industrial production. As a high labor cost nation, the US “comparative advantage” would be the production of high-technology and capital intensive products. But it remains the US government on National Security policy that bans and prohibits the export to China of supercomputers, satellites, aircraft carbon composites, helicopters, machine tools, and numerous other industrial products. The Chinese are essentially punished by being forced to purchase those same high-tech products from European or Japanese suppliers. No one is advocating selling bombs or missiles to China, but even commercial communication satellite exports are held hostage to “Cold War” mentality pervading the US political elites. Free trade should include all commercial products and services. Obama’s protectionism is flat wrong and illegal under WTO international regulation.
The tariff on steel grating is ridiculous. I dont believe that it wont have an impact on the economy. It will definitely drives up the construction cost.
If this trade war between US and China continue, I wonder whether the world will suffer a double dip recession.
Dave Chiang,
Is it not wonderful to see the style of commenting that used to grace Brad Setser’s blog here! I do hope here you will be even more judicious though. Otherwise people may wonder: who sent you and if no one sent you, why these comments?
Great piece Mike. I think many European states issued perpetual bonds paying fixed interest (and during economically difficult times coupon payment can be interrupted). So the “thrill” idea is not something completely new, and historically the total return record for those instrument depends on how long the issuing government could last ( eventually all government will have a day either to be overthrown or default). Besides nominal GDP is subject to government controlled statistical bureau and its tolerance of inflation. So this type of bonds might be a good instrument for government to arrange funding, but might not be a good investment choice for the bond holders. How do you think?
Michael,
Apart from the difficulty in ensuring that GDP accounting and consequently, Trill dividend fixing, will be satisfactory (in a corporation, current shareholders decide how much profit to dedicate; what would the role be of parliaments etc?) there are interesting aspects to this: how would the swap market deal with this? What kind of perverse incentives does this present to powerful debtor governments? Perhaps the PRC would be happy to own trills, if their yield had a floor equivalent to the long bond and were collateralized by genuine USTP?
For domestic purposes (and easy for a country with effective FX controls such as China) a claim on a fixed portion of GDP, paid by the State, out of taxation sale of state assets or issue of more conventional debt instruments, might have all kinds of interesting applications and drawbacks. A well diversified portfolio of SOE stock should give similar returns (given the SOE weight in the economy) as long as the current regime applies. Hence if the state would issue trills, it might hedge the SOE revenue stream??? Etc.
Michael,
“However, given high and rising unemployment in Europe and the US it will also be very difficult for policymakers there to accept large trade deficits for much longer. But if deficit countries are going to demand structural change faster than the surplus countries can manage, we will almost certainly finish with a very nasty trade dispute that will slow the global recovery and poison relationships for many years.”
Bravo!
I think people underestimate the importance of technology transfer to China) that has come about because of outsourcing. The Chinese themselves understand its importance, which is why they’re so obsessed with technology transfer and why they condition market access to transferring technology to JV partners.
The Chinese economy, like the Soviet one, does not have effective incentives to encourage innovation. The Chinese favor piracy consciously, in order to encourage the quick and cheap transfer of Western technology. But, if you’re a potentially-innovative Chinese company and your innovation is ripped off right away, you have little incentive to spend on R&D. Thus, they’re critically dependent on new technology coming in from the West.
In my view, the most important consequence of lower trade is that China’s technological catchup will slow down significantly. A corollary is that one of the most effective measures that the West can take, and one that would get attention in China, is to impose coordinated restrictions on technology transfer to China. Such measures would be much better in providing leverage than any tariff.
I’ll add that post-Copenhagen, continued technology transfer to China is just providing more rope to hang the world.
The U.S. framework in place–all that would be required is a substantial increase in scope and enforcement effort for the EAR and ITAR regulations. Europe also has export control rules in place.
[...] Michael Pettis also has a longstanding interest in this idea, and comments on Shiller’s essay: In my book, The Volatility Machine, I discuss the same things, arguing that developing countries typically put on what I called “inverted” debt structures, which automatically exacerbate volatility. The worst sources of this kind of inversion are either external debt, short-term domestic debt, or contingent liabilities arising out of the banking system. All of these forms of debt perform better than expected during good times and much worse than expected during bad times, and so they are an important part of the reason why developing countries, especially highly indebted ones, seem to veer so easily from boom to bust. [...]
Along declaring an unprovoked trade war on Chinese exports, if Obama dares to sell new weapons to Taiwan and meet the Dalai Lama to advocate Tibet’s independence, it will seriously rupture diplomatic relations between China and the US into a very Cold War. Perhaps that is real ulterior motive of the US political elites. Obama has no idea what he is doing and is totally out of his league. The Chinese economy is the second largest in the world and the fastest growing. A hardline US foreign policy promoting hostility against the Chinese will actually backfire by reducing global US economic and political clout. A diplomatic rupture between the US and China will place US corporations at a serious global disadvantage to their European and Asian competitors. Europe’s Airbus has already established an A330 aircraft assembly line in Tianjin China so the Chinese could easily dump Boeing as an aircraft supplier. Obama better be careful what he wishes for. The Washington Consensus Elites are flat wrong supporting blatant trade protectionism, flat wrong supporting Taiwan’s and Tibet’s formal independence, and flat wrong promoting some sort of neo-conservative US foreign policy hegemony over the world. Hasn’t the US already made enough enemies across the Middle East without picking a fight against the Chinese.
Michael
I have only been following your posts for a few weeks but in that short period I have learned a great deal more about the current economic climate in China and the immense challenges being faced the Chinese government.
Thank you for the time and effort you put forth to create your posts. Thank you too for persevering in the face of the provocative posts by what have accurately been described as “Fen-Qing”
It is nice to see that David Chiang has returned to this blog with vigor so early in 2010. His posts are, however, still as silly, for the most part as witnessed during 2009. China has always been protectionist, and to compare the fact that it has not put up new barriers while others have is nonsensical. The baseline was and is always high. And, let’s face it: if China has excess steel capacity equal to that of the second largest producer in the world, Japan, then some of it is going to get dumped abroad. That is in no way an unreasonable assumption. Why don’t people like Chiang bother to consider whether dumping might actually have taken place? The USTC has to publish a rationale for its findings, and apologists like Chiang have never provided any for their whingings. As for the ASEAN+China FTA, China’s dumping of commodities will result in a far stronger reaction from its regional trading partners than there has been from the US or EU. A glut of capacity results in huge inventory levels, or dumping, generally. So, if Indonesia brings cases against China at the WTO, or tries to protect its producers from a flood of low-end exports from China, I hope that Chiang’s response will at least have some logic to it rather than simply assuming that the US measures are baseless. ASEAN trade spats, and currency ones, will happen and soon because China is a mercantilist nation. I use that term simply to denote a model, not to say it is bad or good. But if that is the way the government wants it, and it wants to trade, then it is going to have to accept that others who are generally open (the US for example is generally open, and occassionally stupid with politically motivated restrictions) cannot accept the consequences of some aspects of China’s model as its goods flood the world. All in all, the US measures could be baseless, and protectionism is bad, but China signed on the WTO agreement and a set of rules, which it has never liked to follow.
Dave Chiang, Chinese businesses’ biggest cost advantage is not labor but capital, or else why would China’s economic growth be so heavily capital intensive and not labor intensive? At any rate, the relative price of labor is itself partly a function of the currency value. If the RMB were revalued by 10% for example, China’s labor costs would immediately rise by 10% relative to foreign labor costs.
Scheng, I agree that the steel grating tariff is pretty ineffective, but I think it is a harbinger of things to come. I just don’t see either side being terribly realistic. I don’t know if the result will be a double dip, but I do think the recovery will be slower and more difficult than he are expecting.
Thanks DJ. I see you are reading up on your financial history. Yes, perpetual government bonds were very common in the 19th Century and could easily be retired any time the government wanted simply by purchasing them on the open market (in some cases they were also unilaterally restructured, like in the famous Goschen conversion in 1887, in which the coupon on British consols was lowered). I am not so worried about whether or not investors will buy them since in any auction there is some price at which the bonds will sell. This depends largely on market expectations for GDP growth, comparable yields on straight bonds, and the credibility of the coupon-fixing process.
Rien, yes, the hedging possibilities that this opens up are huge, and would cause the cost of capital for businesses to be reduced.
Finally, as you can see above, my post has been cited by Scott Sumner at a blog called “The Money Illusion”, and readers who click on his site in the referent comment will see that he has also written about trills (and a week earlier, a piece disagreeing with the Krugman article I cite above). I like his blog a lot and read it often.
Let’s make this perfectly clear. It is the Obama Administration that has imposed blatant protectionist tariffs on legitimate Chinese exports of steel, tires, and textiles in violation of its WTO international commitments. A significant percentage of the tire exports were manufactured by Western multinational factories in China. That is why America’s Goodyear Tire actually opposes US trade protectionism. If it is claimed that China is dumping product in the United States, then Goodyear, Intel, Dell, IBM, Hewlett Packard, Walmart, Apple computer, etc are responsible for those Chinese exports. Since Herbert Hoover, the Obama Administration is becoming the most trade protectionist government in US history. Protectionist Larry Summers of the Obama Administration demanded that the Chinese agree to “not so voluntary”, voluntary quotas on most Chinese exports. Not surprisingly, the Chinese told Larry Summers that no deal was possible to an illegal and trade protectionist quota system.
Professor Pettis, you pretend to be concerned about trade imbalances and yet I think you always manage to come up with more reasons why cheating by the Chinese should be permitted for a few more years. Here in Brazil our manufacturing sector has been destroyed and replaced by commodity exports – and our history shows why this will be once again a disaster for us. China has been mercantilist for years, and this resulted first in a run-up of debt in the US and other countries and now in an increase in unemployment, and the way they flout their own laws to punish dissidents shows how little respect they will have for ours. Enough already! The US must take the lead in stopping this. There are many other poor countries whose exports manufacturers are being destroyed by unfair practices, and maybe they cannot do it for a few more years.
Dave Chiang, you say: “Let’s make this perfectly clear. It is the Obama Administration that has imposed blatant protectionist tariffs on legitimate Chinese exports of steel, tires, and textiles in violation of its WTO international commitments.”
What a bunch of bullshit. Aside from the fact that China has more tariffs on imports than the US, if you exclude from the definition of protection everything except tariffs, then it is easy but meaningless to prove that only countries that have none of the very powerful alternative ways of protection – undervalued currencies most obviously – are protectionists since only they resort to tariffs. Why you would define protection so narrowly so as to penalize the West and exclude China is pretty obvious, but it would be fairly stupid for anyone to take that dubious definition very seriously. Oh, and none of the US tariffs are in violation of the WTO commitments or they would have been struck down by law. In the US strangely enough legal commitments are binding.
David, it is interesting that you bring up tyres and airplanes. Perhaps you can explain why Cooper-Kenda plant (Kunshan Jiangsu province) was obligated to export 100% of production for the first 5 years?
You might also want to investigate China’s long term state goals for aircraft production. The future of it does not include Airbus or Boeing.
John Wax, Even Obama promoter Paul Krugman doesn’t hide the fact that US trade tariffs on Chinese exports are “Trade Protectionist”. Paul Krugman calls the 150% import tariffs, “modest trade protectionism”. At least Paul Krugman is honest enough to admit that the US trade tariffs were imposed for “Trade Protectionism”. Even admitted “modest trade protectionist” is illegal under the WTO commitments made by the United States. Regarding the Chinese yuan, it has already appreciated by 30% over the past 5 years, more than enough to overprice Chinese exports to many 3rd world markets. Already millions of textile and toy manufacturing jobs have been lost by Chinese migrant workers. Obama blatantly lied to the other G-20 leaders about his commitments to a global free trade regime.
John Wax, by the way, the Chinese are taking the Obama Administration to WTO international court for illegal “trade protectionism” for the 150% import tariffs on steel exports. How can it be possible to under price steel exports by 150%? The Chinese would have to be giving the steel away for free and paying the customer a lump sum cash payment to take the steel which they are not. The 150% “trade protectionist” steel tariffs don’t pass the laugh test and will surely be overturned by WTO international court. If the Obama Administration refuses to abide by WTO international law, the Chinese can “legally” impose 150% import tariffs on a broad range of US exports to China.
Dave Chiang wrote: “As a high labor cost nation, the US “comparative advantage” would be the production of high-technology and capital intensive products.”
One problem with that argument is that, in China, you sell high-tech good once. After that they rip you off.
Even the Russians have figured it out, and have stopped selling advanced weapons to the Chinese: http://english.pravda.ru/world/asia/19-11-2009/110601-china_russia-0
The Chinese have not been playing by the rules for decades. Their cheating is catching up to them. The chickens are coming home to roost.
Another shot in a trade war?
On January 5, the Department of Commerce (Commerce) announced its affirmative preliminary determination in the antidumping duty investigation on imports of wire decking from the People’s Republic of China (China). From 2006 to 2008, imports of wire decking from China increased 49 percent by value and
amounted to an estimated $317 million in 2008.
http://ia.ita.doc.gov/download/factsheets/factsheet-prc-wire-decking-ad-prelim-010510.pdf
Interesting to see the Brazilian contingent piping up here – this is the odd thing about the dynamics of this trade issue. Countries like Brazil etc have been hammered thanks to a free-floating currency and are likely to happily join a schoolhouse manouvre to trade protection as soon as Obama breaks the ice on the issue.
I think it is perfectly clear that David Chiang is one of the tens of thousands (literally) of people who get paid to write things that are nice to China, and negative about anyone or anything that might be critical, even in an objective fashion. It is impossible to fight against this wave of information, and it is and will continue to be bigger than the waves of cheap exports that are a function of industrial over-capacity. The post about Brazil’s manufacturing sector is just a hint about what is next to come where trade friction is concerned, and it will be between China and its neighbors. But its neighbors will always be wrong in the eyes of people like David Chiang. We should seek truth from facts, and not make up the facts and then peddle them as truth. With reference to the most recent case of duties by the US on steel pipes imported from China, I have seen nothing to convince me whether this was in fact a targetted protectionist measure (China has provided nothing but propaganda, and no numbers), and the US ITC has not made their assumptions used in the calculation of whether dumping is taking place clear ebough. So I will wait to make up my mind, but will still remember that China has enough excess steel capacity to supply all of the rest of Asia.
China to expand pilot property tax program
By Zhao Qian
China will expand a pilot property tax program nationwide, according to an unidentified source at the State Administration of Taxation quoted by the Shanghai Securities News Tuesday, but analysts said it remains uncertain when the program will be expanded and whether or not it will cool the real estate market.
The pilot program has already been run in Beijing and Liaoning Province for more than six years, the newspaper reported. Currently, China does not have the sort of property tax present in Western countries like the United States, where a tax is levied annually on the value of property holdings.
Calls to the State Administration of Taxation’s press office were not answered.
Patrick Chovanec, an associate professor at Tsinghua University’s School of Economics and Management, said he is optimistic about the program, and the Chinese government could learn from the Western world, especially the United States.
“In China, local governments are dependent a lot on land sales as a kind of revenue source, and that means they have the incentive to boost the property price, but it is not a sustainable kind of revenue, because land sales are a one-time thing,” Chovanec said.
“Ideally, I think the property tax goes to replace land sales income.”
But analysts said some issues remain to be resolved before a property tax is put into practice nationalwide.
The issues of how to estimate property values and how to create a full database of properties to be shared with developers and taxation administration departments need to be resolved, Ding Yun, a professor at Capital University of Economics and Business, said Tuesday. She added that educating citizens about the tax would also take time.
The Shanghai Evening Post said in its report that there are two methods for calculating property taxes. One is imposing a tax of 1.2 percent on 70 percent of the estimated property value; another is imposing a tax of 12 percent of the property’s rental returns. The tax threshold for the pilot program has not been decided on.
Zheng Xinye, a professor at Renmin University of China, said Tuesday that resolving such technical issues would be easy but that other problems, like the huge cost involved in implementing a property tax, would be tougher.
Property developers, afraid that the tax will decrease property demand, and homeowners, wary of additional expenses, would likely challenge the program, Chovanec said.
Analysts also said expanding the pilot program would have little immediate impact on the hot real estate market.
Zheng, of Renmin University of China, said the program was just another warning from the central government to the property sector.
Chovanec said the government was moving cautiously because the real estate industry has contributed to a large percentage of the country’s GDP.
Property sector shares dropped in response to the news. Vanke slumped 2.26 percent to 10.36 yuan ($1.52) on the Shenzhen Stock Exchange. Poly Real Estate Group, the second largest developer, declined 2.9 percent to 21.27 yuan ($3.12) on the Shanghai Stock Exchange, its lowest close since August 31. And Greentown China Holdings dropped 1 percent to HK$11.72 ($1.51) in Hong Kong.
If the US Steel producers were really competitive, they would be able to export to other 3rd markets such as Latin America, Southeast Asia, or the Middle East. But they won’t because they can’t. US Steel producers have underinvested for decades, and simply aren’t competitive globally. And if Chinese steel pipes were really of such poor quality as the US Trade Protectionists claims, then the global oil industry simply wouldn’t buy those defective steel pipes that would endanger their multi-billion dollar investments. Now other steel consumers will be forced to pay inflated prices.
The thing that I don’t like about GDP linked anything is that GDP is generally an output measure, and any kind of payout should be tied to income flows. People don’t pay enough attention to income side accounting. Income flows, especially those accruing to governments, are derived from output related activities, and that is as good as it get where it comes to executing an enforceable contract. It is already hard enough to recover anything from a sovereign if they default, and there is little that gives me comfort in having recourse to GDP. If we look at the US municipal market, there are securities issued against very specific income streams, and this is more attractive to me because it matches my asset with an identifiable income flow. Assuming that ministries of finance and treasuries would pay out on a trill, they would do so from general funds, which are easily overspent and hard to claim, when the government has to pay for things like retiree benefits and health care…before paying out on a trill. The more I think about it the more a trill sounds essentially like an option on growth, a strange form of leverage that is secured by nothing really. Give me a strong legal environment and secured cash flows from a specific tax, for example, and I am better off.
Hi Michael, Your blog had been censored since the Olympic games in China. I wonder how you can access your own blog. Recently, I noticed a vicious “self-appointed” spokesman for China in almost everything, Dave Chiang, appeared numerous times. This is a typical public security bureau’s “Wu Mao Dang”, someone gets RMB0.5 for every posting. Therefore, readers do not get distracted by his comments.
Chiang does not realize that most tariffs are punitive, not equalizing to a fair-play state of the world. They are meant to hurt and hurt bad because prosecuting this behavior takes time and money.
“Is it not wonderful to see the style of commenting that used to grace Brad Setser’s blog here! I do hope here you will be even more judicious though. Otherwise people may wonder: who sent you and if no one sent you, why these comments?”
Rien, you’re beautiful! I thought his hectoring style seemed familiar…
Sorry, but I have had to delete more comments than usual, some because they were purely abusive and others because they merely repeated the same rants as in previous comments without adding much new. Unfortunately discussions about trade are like catnip to internet flamers, and the quality of discussion too quicly degenerates to high-school levels of outrage and half-digested information. Unless they contribute to a real discussion I will be deleting more comments. For those who find value in participating, please bear with me.
Congratulations Mr. Chiang but you have single-handedly lowered the average intellectual content of this site by several points. First, as you cleverly point out, “even” Paul Krugman “doesn’t hide the fact that US trade tariffs on Chinese exports are ‘Trade Protectionist’ (sic).” Of course he doesn’t. No one does. US import tariffs are obviously protectionist, as are Chinese import tariffs, the undervalued yuan, and the very low cost of financing. The point of protection is precisely to counteract China’s predatory protectionism. And by the way Asian competitors have even more tariffs against Chinese goods for exactly the same reason, as do European and, I assume, Latin Americans. If China were even marginally serious about free trade it would dismantle its own protectionist barriers so that we don’t plunge into a nasty round of beggar-thy-neighbor, but the probability of China doing so is almost nil. It is too heavily addicted to trade protection so all it can do is whine hypocritically whenever its trade partners put in their counter-protectionist measures
Second, and even sillier, your math is execrable. I am assuming given your excited argumentative style and weak knowledge base that you are an unpopular high school student, but the biggest criticism you can make against the US is the fact that you have managed to get through high-school with such weak math. You say: “How can it be possible to under price steel exports by 150%? The Chinese would have to be giving the steel away for free and paying the customer a lump sum cash payment to take the steel.”
No, you dolt, a 150% tariff implies that Chinese subsidies are equal to 75% of the true cost of producing steel, which allows Chinese steel producers to sell steel at 25% of its true cost and still make a profit. Sheesh!
I’m a history guy, so I have to work a bit to understand some of the more technical aspects discussed in posts/comment threads such as this. Even so, I’m increasingly convinced that the next 30 years will be far bumpier than the last 30. (And by “bumpier,” I mean “hellish.”) It seems to me that the Chinese economy has expanded just about as far as it could without meeting significant resistance from the West and other developed nations. In other words, the West and other developed nations appear to me to have reached the end (i.e., hit the wall) of their ability/willingness to accommodate Chinese growth, particularly as Chinese growth depends so much on preserving the weakness of the yuan and maintaining enormous trade surpluses with the U.S. and Europe.
If the attitudes expressed in this thread (and many others) are any indication, things are going to become very, very nasty. I’m interested in how current trends in finance and economics will influence politics and society in China and abroad. In particular, I wonder how increasing trade friction may negatively influence the prospects for continued political reform in China. China is virtually certain to characterize any efforts made by the West to protect their economies as yet more foreign hostility. In turn, this is likely to exert an adverse affect on such things as burgeoning media freedoms and the emergence of a genuine civil society. The liberalization that has taken place in China as a result of 30 years of constant economic growth may very well reverse course as economic growth becomes more difficult. Of course, any regression by China will be characterized as a return to form by the West. A vicious (vicious!) cycle will develop in which foreign criticism and perceived (actual?) anti-China policy-making will lead to “hurt Chinese feelings” and recriminations galore. The connection between CCP legitimacy and continued economic growth means that we may witness a very ugly side of Chinese politics as the government scrambles to consolidate/shore-up its rule in the face of difficult global economic conditions. As Tsinghua University professor Sun Liping has written, societal breakdown is the real threat in China, not the collapse of the regime.
On a side note, Robert Fogel is estimating that the China’s economy will be US$123 trillion by 2040. Any thoughts? It seems patently outrageous to me, but I’m often clueless when it comes to economics. Read Fogel’s article yourself at
http://www.foreignpolicy.com/articles/2010/01/04/123000000000000
(Pardon me for not offering much in the way of substantial economic and/or financial commentary.)
“On a side note, Robert Fogel is estimating that the China’s economy will be US$123 trillion by 2040. Any thoughts?”
He’s obviously clueless. The world has finite natural/environmental resources, which is partly why economic growth is becoming more of a zero sum game. We saw a hint of this with the oil price spike of 2008. We’ve already switched to the flattening part of the global S-curve, where growth is constrained from the outside rather than inside (if you take the simple example of goats on an island, it’s the part of the curve where the number of goats is constrained by the available grass rather the number of goats). Much of our economic thinking was developed during the exponential part of the S-curve. That’s one of the reasons for concern that continued fast growth in China necessarily will lead to lower standards of living in the West. And why a strategy of containment is the natural one for the U.S., even though that’s not what our administration is doing (yet).
To clarify the previous posting, a GDP of $120 trillion (in today’s dollars) might be impossible for the world as a whole given our finite natural resources, never mind for China alone. I don’t know what the world limit is, but surely it’s around there, given that world GDP is now well under 100 trillion. Fogel is just extrapolating like a turkey before Thanksgiving.
Ma Bole,
‘(Pardon me for not offering much in the way of substantial economic and/or financial commentary.)”
Who needs economics and finance in this case? But your positive feedback system (China meeting external friction and (predictably) responding in such a way that friction increases, etc) does not have to get going of course. History is usually not about what was easy to predict taking place. Look at Australia’s (cricket) victory over Pakistan..
Apart from the fact that the Chinese have pretty smart people at the top, with lots of discretion and good intelligence. I guess many researchers pick a not implausible scenario and build a theory under it. In the case of a country that has become so big that its economic environment can no longer be treated as inert to what it does, but rather a complex set of strategically operating actors, one has to assume that the leadership is aware of that change in situation and changes its approach to strategy. Most likely, China will try to free ride the world trade system as far as it can (it does have a much more centralized system and is hence capable of coordinating its business actors far more than the “western” countries (with question marks for Korea and Japan). That means that the stress points that would set off the positive feedback mechanism will likely be avoided, unless something goes wrong. It is not hard to avoid on or two reefs, but it becomes much harder if reefs and currents cooperate intelligently..
China is serious about free trade. It has dismantled its own protectionist barriers over the past 2 decades bringing about the world’s biggest economic boom. The Chinese economy now does more free trade globally than the United States. China has just signed free trade agreements in the past year with all of Southeast Asia (ASEAN+3), Africa, Brazil, and even Peru. The US trade protectionist arguments fall flat on their face. The US foreign policy agenda toward China is increasingly obstructionist, and targeted to derail the high economic growth economies of Asia, viewed as a strategic threat by US political elites. Obama’s proposal at Copenhagen for a global carbon tax on Chinese exports based on greenhouse effect “junk science” was laughable. This year’s winter in China and Europe is the coldest in 50 years. Good for Chinese Prime Minister to tell Obama where to stick his idiotic global carbon tax proposal. LOL.
As I see the nor the Chinese ,nor the US economy will not collapse due to internal reasons.
They need external reasons, without that they just run the current scheme for years,until they reach same strict limit (probably the loss on the assets will be higher than the GDP growth?).
For me it mean possibly 3-5 years more strugling before we reach the next “crisis”.
Or possibly we will reach it earlier,if there will be same change in the flow of the international founds (trade protection?)
So interesting
A harbinger of Asian relations? This is from today’s edition of a newspaper that in he past has been more eager to criticize the US and support China.
New Straits Times (Malaysia) January 7, 2010 Thursday, local, p. 17, by Frank Ching
China cannot tango alone on global stage
ON Dec 30, the International Trade Commission, which arbitrates trade disputes between the United States and other countries, imposed tough new duties on Chinese steel piping imports. That is only one sign that a new period of friction, dominated by trade disputes, lies ahead in China’s relations with the United States and Europe. Since its inauguration, the Obama administration has bent over backwards to accommodate China, playing down Chinese human rights offences, refusing to brand China a currency manipulator, and toning down criticism of crackdowns in Tibet and Xinjiang. However, this policy of accommodation, designed to encourage China’s willingness to accept greater responsibility for global affairs, hasn’t had much success.
The Copenhagen United Nations conference showed that Beijing puts a much higher priority on its own economic development than on climate change. And Chinese actions, in Copenhagen and elsewhere, suggest that Beijing feels it no longer needs to pay as much heed to the US as before. European countries were particularly enraged by Chinese behaviour in Copenhagen. The British climate change secretary, Ed Miliband, publicly accused China and several other countries of trying to hijack the climate conference and “hold the world to ransom”.
China’s image has also been affected because it executed a British citizen widely believed to be mentally ill for drug smuggling, despite high-level appeals for clemency and calls for the examination of psychiatric evidence. These are signs that Western countries are losing patience with China. And at a time of global economic problems, there is growing annoyance with China’s policy of continuing exports-based growth. While Beijing is quick to criticise what it calls “protectionism” in other countries, it insists on the right to maintain the value of its currency at an artificially low level, giving itself a built-in trade advantage.
Premier Wen Jiabao said in a year-end interview with the official Xinhua news agency that China “will not yield to any pressure of any form forcing us to appreciate” the value of its currency.
Barak Obama during his presidential campaign, had accused China of manipulating its currency but did not do so after assuming office, evidently hoping to achieve progress with Beijing in other areas. However, the Obama administration may now be ready to take a tougher stance. Certainly, it is being encouraged to do so. In a New Year’s Day op-ed piece in the New York Times, Nobel Prize-winning economist Paul Krugman declared that China “follows a mercantilist policy” that is, “to put it bluntly, predatory”.
The Chinese currency, he pointed out, is pegged about 6.8 yuan to the dollar and, “at this exchange rate, Chinese manufacturing has a large cost advantage over its rivals, leading to huge trade surpluses”. “Chinese mercantilism is a growing problem,” Krugman wrote, adding: “The victims of that mercantilism have little to lose from a trade confrontation.” Krugman’s position strengthens the hands of those calling on policymakers in the United States and Europe to take action. It comes at a time when unions such as the United Steelworkers accuse China of protecting its own jobs by increasing exports, resulting in the layoffs of American workers. Similarly, Carolyn Bartholomew, chairman of the US-China Economic and Security Review Commission, a body that advises Congress, has castigated the for “refusing to acknowledge even that China is manipulating its currency”.
In effect, she said, the administration is “providing cover to the Chinese government and depriving itself of a tool to create desperately needed jobs here at home”. Relations with China are bound to be affected in other areas as well. The Obama administration has deferred any announcements on new arms sales to Taiwan. However, such an announcement is long overdue and China is bound to react strongly to it.
Moreover, President Obama, who previously refused to meet with the Dalai Lama for fear of jeopardising his Beijing trip, has now promised to meet the Tibetan leader, and any such meeting will anger Beijing.
It is true that Washington needs Chinese cooperation on global issues such as Iran, North Korea, the global economy and climate change.
While China is to be treated with respect, however, the US – and Europe as well – should not create the impression of dependency on Chinese favours.
China is an important country, but it needs the US and Europe at least as much as the West needs China.
Hi Mr. Pettis,
I really enjoy reading your blog. One of the best I’ve seen in this area.
One suggestion though – in a future blog could you discuss the roles of the WTO, IMF, and other global organisations’ roles in the previous and the current global recession? I think that this is one of the biggest problems – international regulations versus national regulations.
Generally, the process of globalisation and free trade either advances or retreats. It rarely maintains the status quo. Global regulatory overhaul is needed to prevent regulatory arbitrage and enforce trade rules.
The current system, whereby some countries “play by the rules” and others try to work around them (least certainly the spirit of them) is flawed and will most certainly contribute to the next crisis.
How can such a big country as China which treats itself as a developing country, but which has such a huge influence on global trade continue to excuse itself?
Please write a blog with your thoughts and some suggestions on global institutional reform.
Regards,
Tony
[...] http://mpettis.com/2010/01/china-new-year-and-one-more-vote-for-gdp-adjusted-bonds/ [...]
As Paul Krugman said in his NY Times column, it will be a China year, but it’s not going to be pretty for international trade frictions.
This is perhaps the direct result of naïve wishful thinking of US MNCs “globalization” in the 1980s, believing all third world country workers to be robotic slaves in cranking out products that were price uncompetitive to make in the US. In addition to up-rooting manufacturing jobs in US to greener pasture, all in accordance with the capitalism text book principle of “relentless pursuit of cheaper labor”.
Trade protectionism is not limited to the obvious imposition of import tariffs. There are subtle tricks such as stringent FDA requirements, safety requirements (mostly are over-kill nonsense excuses), human rights standard (not quite comprehensible by Chinese workers, who are more interested in having work and to earn honest wages),…etc. However, the worst form of protectionism comes from government invisible hands of Mercantilism, namely; currency exchange rate manipulation to make it artificial low, government subsidies to manufacturing exporters, i.e. low interest loan financing, lower energy/utility consumption rates, lower land cost, products made by foreign JV must be exported (isn’t that what MNCs globalization wanted in the first place?), Dickensian sweat shop working conditions as viewed by Americans. Not just China, almost every developing countries in Asia, including developed economies such as Singapore, Taiwan, Hong Kong, governments have manipulated their currencies, mostly pegged to US$, with the exemption of S$ pegged to a basket of currencies with a limited (manipulated) trading band. The point here is hardly anyone screams loud about all these tiger, wolf, hyena economies, but a fast emerging giant dragon, since it is the biggest sweat shop in the world with one fifth of humanity, big enough to inflict disruptive and destructive damage in trade imbalance.
Obviously, on surface, it is unfair to the American work force that job losses are mounting , as Krugman worked out on the back-of-envelope calculation, he estimated US would have lost 1.4 million jobs in the coming two years if the current Chinese mercantilism predatory behavior continues. He is beating the drum for a trade war ahead, but would it solve the problem? The answer is flatly NO. Firstly, China would never budge on any finger pointing demands (uniquely CCP culture, not Chinese’s), such as floating the RMB in open market, SOE subsidies and production cost transparency, JV laws restrict products must be exported, collective bargaining in the form of organized unions, any trivial (as PRC perceives) human right issues of US standards. Secondly China would retaliate selectively with import tariffs on America products (not that many except for Boeing planes, doubt that they would pick wheat!). At the end of the day, every one becomes loser in a trade war.
What if, hypothetically suggested, Krugman’s 1.4 million US job loss translates into equivalent US$ figure of Chinese exports, which China agrees to slash in the next 2 years. US is to compensate the Chinese worker jobs loss, say 2X1.4 million = 2.8 million for their low efficiency, as a result of export withdrawal. Then US would end up with hell of a deal for cost effectiveness on otherwise unemployment and welfare payouts to 1.4 million US workers, as well as saving jobs, since US worker earns 10 times more than a Chinese counterpart. Nice and clean on this back-of –the-envelope calculation. Unfortunately, it no longer works that way, because US workers had already lost the skill, urge, dedication, and incentive to make the real “stuff” that used to be, simple “stuff” such as cast iron cooking pan, pots, kitchen utensils commonly found on Wal-Mart shelves, and you don’t expect these 1.4 millions workers to turn out another Bill Gates either. Pick a recent example of oil and gas drill pipe and casings, China had practically cornered the entire world market for making oil well pipes with API standards, of course supported by all its mercantilism know-how. As long as the pipes meeting API standards, there is no difference if it is made in Japan or China, or USA. However, there is still a difference, a large quantity of the pipes is tagged as API certified, but they are fakes. The nominal API built-in safety factor is at least 1.6, Japanese pipes are made for 2.2, the fact that who needs safety factor more than 1? Anything beyond 1 is bonus for expectation of a very slim probability of failure. Even with the US tariff imposed, SOE factory made pipes (fake and real) could still make profit. Accusation of dumping therefore seems to be groundless.
So, what are we getting into? Trade frictions? This is pathetic situation that US and China are effectively bundled together by themselves for a bungee jump of fate. The original culprit is “globalization”. Since the reform instituted by “paramount leader” Deng Xiaoping 30 years ago, he had no idea what would this lead to because he just wanted “change”. China had no plan or ambition to corner the world on commerce and trade, as always claim, they had been just “feeling the way when crossing the river” since then. They have absolutely no innovative idea other than making fast buck, conspiracy, strategy, future plan for the country and its people, even until the present day. What the west facing today is not cold war devilish communist, but Dickensian exploiter mafia of fake communists. Real communists are friends, fake communists are foes!
Surely, the dual bungee jump is not going to be pretty!
[...] spent a bit of time this morning catching up with a couple of unread Michael Pettis posts ( here and here are the links). Lots of good stuff and some particularly fascinating thoughts on trade surpluses, [...]
Trills could be an interesting solution to the world dependence of bond rating agencies. I see two flaws in prof. Shiller’s proposition:
1) it gives incentives to government to misreport GDP growth. New agencies need to be created that are going to objectively calculate nominal GDP growth. Also, an expansion in nominal GDP growth doesn’t necessarily lead to an increase in tax collection.
2) What happen to the countries, which expected GDP growth is too low. What if they don’t have find enough investors. Interest rates should be defined by the market.