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CiteMany have noted that the White House botched the stagecraft of Hu's not-quite-a state visit. Forget Falun Gong. Focus on announcing China's national anthem as the anthem of the "Republic of China" …
But focusing narrowly on the staging of the not-quite-a state visit I think misses a much bigger point. The "optics" or "visuals" of the entire trip were terrible, and the rhetoric not much better.
I'll start with China. Hu seemed to spend his entire trip with China's friends in corporate America. The leader of the world's most profitable property company (China's communist party) started out his trip with a visit to America's richest man, and promised to make him even richer (by paying for his software). And the China's top real estate baron proceeded to spend many more hours cavorting with the corporate titans (See this WSJ article) who are the biggest beneficiaries of America's new gilded age.
China likes to reward its American friends. But rewarding those already "winning" from the US-Chinese relationship isn't going to help those who are not sharing in the benefits created of the current China trade. The alliance between Chinese bureaucratic capitalists, American CEOs and Wall Street bond traders betting on the continuation of Bretton Woods two leaves a lot of folks out.
Yes, American consumers benefit from cheap Chinese goods. But Chinese demand for commodities has also pushed up the price Americans pay for things like gas. China cuts both ways for low-income consumers. Real wage growth for most Americans has stalled; median real compensation growth hasn't kept up with productivity growth. Yes, American homeowners benefit from rising home prices, in part because of cheap Chinese financing. But not all parts of America shared equally in the windfall – those in manufacturing flatland for example. And more importantly, rising home prices don't help those who don't (yet) have homes. They actually are worse off.
I recently saw a graph showing the widening discrepancy between urban and rural income in China. Both are growing, but urban income is growing much, much faster. So income inequality is growing. I suspect if you did a similar graph plotting the compensation of the median US manufacturing worker in Ohio against the median wage of a US CEO over time (See Martin Wolf today) or the median compensation (including bonus) of a Wall Street prop bond trader since 2001 the discrepancy would be even more striking.
You say manufacturing is a dead industry in the US. Fine. If you did the plot with median wages in the service sector, it wouldn't look much different.
The concentration of US income growth at the top doesn't stem primarily from China's integration in the world economy, or even from China's decision to integrate at what looks to an increasingly undervalued exchange rate. China impacts Europe too, and European CEOs aren't paid quite as much. China didn't force Exxon's shareholders to pay Exxon's CEO nearly $700 million for his services. Lee Raymond didn't exactly discover that there is money to be made pumping oil out of the ground: I would think the going price for someone who denies global warming should be a bit less.
But directionally, China's unwillingness to reap the rewards of its own productivity growth through a real appreciation of the currency ((see Menzie Chinn's graph – China may not be formally outside the confidence interval, but the RMB sure looks undervalued to me) isn't helping. China is one reason why the fortunes of firms and workers are diverging throughout the industrial world. And talking primarily to the "haves" and "have mores" isn't going to defuse the US political debate over trade with China – particularly if the have-mores don't do more to help those on the losing end of the China trade.
The US complaint that China is trying to "lock up" the world oil supply struck me as every bit as blind to the broader political context as China's courting of corporate America. After all, America – not China – currently has an army sitting on the world's second largest known source of petroleum reserves. Plus, most of the proven reserves of American-owned petroleum firms are located outside the US while Chinese-owned petroleum firms have very few offshore reserves.
The oil "haves" basically told the oil "have-nots" not even to try.
China has lots of spare capital, so it shouldn't be a surprise that China might want to invest some of its money in oil producing assets that may offer higher yields than US Treasuries. Chinese investment to meet Chinese demand doesn't really take oil off the global market either – If China buys all of say Angola's oil, there will be less Chinese demand for Saudi oil. I would worry more about China's policy of keeping domestic oil prices low, which encourages energy inefficient development. That pushes up Chinese demand, and pushes up the global price.
Chinese oil firms are the new kids on the block, and they are willing to bid a bit more than the US and European oil majors for the right to develop various oil fields. Fair enough. If I had oil, I would want to sell it to the highest bidder. Not to the highest American or European bidder. It Chinese firms are willing to invest for an expected 5% or 10% return rather than the 15% (or more) return US firms want, they will get the business.
The real problem isn't that China is taking oil off the market, it is that the US wants to keep US, European and Chinese oil companies out of certain places. The US wants to wall off some of the world's oil – that in say Sudan and Iran — from foreign investment capital.
China hasn't been willing to go along. No doubt that complicates the Bush Administration's foreign policy. Bad regimes often have good oil. And they are willing to sell it a bit more cheaply than others. But unless the US wants to sell China some of the existing reserves of US-owned companies, China doesn't have too many options.
OK, it could sit back and allow the US and European oil majors (along with Russian, Saudi and other national oil companies) to supply China's needs. But in a world where China saves and the US doesn't, it should not be a total shock that rather than lending Chinese savings to US oil firms who invest in the oil fields and infrastructure needed to meet Chinese demand, China wants to lend Chinese savings to Chinese firms who invest in the oil fields and infrastructure needed to meet Chinese demand.
I'd put it this way: China doesn't want the US to have a monopoly on the "dark matter" created by Chinese demand for oil. And China doesn't have to pay its oil CEOs quite as much as Lee Raymond to manage the investments needed to meet Chinese demand either …
Interesting and provocative piece.
Brad – I beg to differ slightly on the comment, “… bond traders betting on the continuation of Bretton Woods two …” The continuation of BW II and the concomitant purchases of US bonds of all stripes by the Chinese has kept US interest rates down.
This has enabled the US consumer to fund housing purchases, extract home equity, and generally get cheap credit. This has been virtually an unalloyed benefit to the American man-on-the-street.
Some men-on-the street don’t own homes. And home prices in your average Delphi-town USA aren’t quite what they are in Greenwich and other prop trade haunts.
Finally, borrowing to consume is different than using higher real wages to consume; borrowed money has to be paid pack. No doubt, though, subsidized Chinese credit has generated big gains for those on the coasts who already had lots of home equity.
Yes, some men in the street don’t own homes. But I believe home ownership is at all time record highs (as a % of the population) so low interest rates have been very beneficial to a lot of men-in-the-streets. Now, if home prices tank, they might not be so beneficial, but that’s for another day.
And yes, loans have to be repaid, but if the Fed allows inflation to go up from here, then all those borrowed dollars will be paid back in depreciated dollars. A good thing for a borrower.
The American consumer has borrowed cheaply (sometimes as low as 0%), laid off a great deal of inflation risk to our creditors, and fixed up his kitchen! Seems to me the positives outweigh the negatives.
Brad,
I think that Standard Chartered’s Wang Zhihao thinks much of the trade surplus is “disguised” inflow, but I only read it in a news story and have not been able to locate the original quote. If anyone has the link to the source, please share.
If China couldn’t balance its own domestic interests and neither could US, what obligation or hope does China have to balance US domestic interests? Isn’t that US politicians’s job through tax policies?
gab,
yes inflation risk has been outsourced but not credit risk. it remains to be seen how Fed plans to end the bubble it created.
Brad,
You keep hitting the nail on the head. It is a real pleasure reading your blog.
Dr. Setser -
The picture you paint of income disparities in the U.S. and China is so depressing it makes me forgive the whining all over the dial in Tokyo this morning about the increase in income inequality during the five years of Prime Minister Koizumi’s tenure.
brad:
all too true
but told
in a very cranky manner
my ear hears a voice
with overtones
almost
like those
of a fan who sees the play
on the field
in his favorite sport
growing ever more stale
and dirty
http://www.atimes.com/atimes/Global_Economy/HD26Dj01.html
here is stephen roach on income disparity.
Come on, Brad, be fair. If Hu Jintao is China’s No. 1 real estate baron, the same should be said of Dubious (i.e., national parks and military bases)?
“Yes, American consumers benefit from cheap Chinese goods. But Chinese demand for commodities has also pushed up the price Americans pay for things gas.”
—Not sure what “gas” is supposed to imply, but . . . China accounted for 28.2% of the increase in oil consumption in 1995-04, as compared to 37.3% for the OECD. Over 20 years, the shares were 22.8% and 51.9%, respectively. The point is that China is the NEW consumer, not the largest or even the largest share of expanded demand.
“Yes, American homeowners benefit from rising home prices, in part because of cheap Chinese financing. But not all parts of America shared equally in the windfall – those in manufacturing flatland for example.”
—Fair enough. Not all parts of China benefit from exporting to the American market, either.
“And more importantly, rising home prices don’t help those who don’t (yet) have homes.”
–And, China’s trade surplus with the US doesn’t help those Chinese who don’t have jobs.
“The concentration of US income growth at the top doesn’t stem primarily from China’s integration in the world economy, or even from China’s decision to integrate at what looks to an increasingly undervalued exchange rate.”
—China decided to integrate with the world economy in 1978-82 (the 1982 12th National Party Congress was definitive). Not in 1993-94, when the dollar was very weak, nor in 1997-98 when the rest of Asia was deflating faster than a balloon in a pin factory, nor in the last quarter of 2002 when the dollar began its run against the euro.
And, “China is one reason why the fortunes of firms and workers are diverging throughout the industrial world.”
—I almost get the feeling that you consider this to be a new phenomena. Didn’t Marx write about that? I think a better description might be “China is one reason why the fortunes of consumers and workers are diverging throughout the industrial world.”
Can’t resist this one: “China hasn’t been willing to go along. No doubt that complicates the Bush Administration’s foreign policy.”
—Thank God SOMEONE is complicating Dubious’ foreign policy!
.
DOR –
After reading Newsweek, it sure seems like Dubya is more interested in being Baghdad’s biggest landlord. The big new embassy in the international zone. The choice airbases. And so on.
I meant to say “like gas” but in many ways China’s impact on other commodities — copper, iron ore — has been more profound. I am fully aware that 300m people in the us use 20 mbd of oil, and 1.4 trillion people in China use 8 — and, as I tried to make clear, it isn’t obvious to me that a situation where US and European firms control most oil reserves not earmarked for national oil companies and Chinese firms are left with the dredges is going to be sustainble. The US wants US firms to have a piece of the overseas action; I think China’s desire for a piece is reasonable as well.
I do think something changed after 2001 — tho arguably it changed before that but the impact was masked by the .com boom. Namely, the gains from higher productivity have not acrued to a broad swath of the population. More folks probably benefitted from rising home equity than from rising real wages … And Dubya’s policies only exacerbated this.
gcs — yes, I am a bit frustrated. Maybe even cranky. I apologize if I let that seep into my analysis. I grew up in a much more equal time (see Martin Wolf’s graphs), and in a place that had, even by standards of the time, a much more equal income distribution. And I don’t like certain trends that are now very obvious. This play has become stale. If all the gains from growth acrue to a few, it shouldn’t be a surprise if a lot of people decide they want a different game.
And more personally, my youngest brother just got fired from a job that hardly paid a lot to begin with (he cooked steaks). For being 8 minutes late. The joys of an “at will” economy. Flexibility you say. But in this case, I suspect he had been around long enough that he was paid far more than the average chef. 8 minutes = nice excuse for cutting costs.
brad
i’m with ya 1000%
i call “at will”
job systems
the free fire zone
the point
it don’t have to be this way
no god of optimal marketeering requires it
brad,
You didn’t come cross as cranky to me. You’re entitled to an opinion the same as everyone else. The have’s make the rules, so it’s no surprise the rules favor the have’s. Bush doesn’t look long term at anything. As long as our imbalances don’t implode before Nov 2008, they’re OK. As long as we don’t run out of oil before Nov 2008, we’re OK. Just keep things good until the republicans can win the next presidential election. That’s his goal.
Are you really surprised at the way Bush treated Hu? Bush only knows how to bully his enemies. And make no mistake, he doesn’t consider China to be an ally. Sorry to hear about your brother. I would guess steak cooking has a fairly high turnover rate, so he shouldn’t have to wait too long to get a new job.
Brad,
Awesome post. I don’t think it came across as cranky. Rather, it had the kind of incisive synthesis and brevity packing a punch that is lacking in so much media commentary. I’m glad to see you still countering the increasingly popular meme of positively spinning the structurally maladjusted Chinese (et al) interest rate bonanza. There is nothing about massive accumulation of debt that is positive, especially when leveraged valuations depend upon greater fools rather than income streams. On another note, it is not surprising that a repressive authoritarian regime only views those at the top of other regimes as being important. The popular unrest that could result from global rebalancing will probably not be crushed with tanks domestically in America, even if such is the modus operandi in China. Rather it will manifest in the election of populist economic nationalists frothing at the mouth for protectionism, wealth redistribution, xenophobia and vengeful imperialism.
“Yes, some men in the street don’t own homes. But I believe home ownership is at all time record highs (as a % of the population) ” (gab)
now try it again. this time ask not how many people ‘own’ their own homes – but what percentage of their home the average home ‘owner’ ‘owns’.
if mortgage lending is at record highs – is this at record lows ?
Hmm…I don’t think Bill Gates is a Chinese toady with all of MSFT’s complaints over intellectual property law enforcement there. Perhaps some of the others, but not Gates.
Very sorry to hear about your brother. While we’re being anecdotal, I’ve been working since I was 17 (23 now) and used to work very hard. The effort just wasn’t paying off; there’s a huge glut of seniority due to demographic trends, and the distribution of money is even worse. It makes it extremely hard to stay motivated since I can make much more money through much less productive pursuits, like speculation.
Keep trying.
One should point out that cheap products that come from China primarily benefit people on the low end of the income scale.
Also, there is nothing that prevents a government from liberalizing trade and at the same time putting in place national healthcare, having massive government spending on education, or generally redistributionist income policies.
As far as the oil is concerned the situation is almost farcical I think China is alot like the Richard Pryor character in Brewster’s Millions he has to spend $30 million dollars in 30 days in order to inherit $300 million. If doesn’t spend the money he gets nothing.
I China (and any other substantial holder of dollars) is truly in the same situation as Richard Pryor in Brewster’s Millions spend the money or watch it turn into nothing. That’s why Bretton Woods II continues because any serious large scale attempt to diversify out of the dollar would destroy the value of China, Japan or Saudi Arabia’s dollar assets. It really is alot like Brewster’s Millions.
With so many dollars in circulation in relation to the number of dollar denomiated assets hard assets dollar based hard assets should be grossly overpriced.
However since foreign reserves of dollars are around $3-$4 trillion dollars there probably aren’t enough hard assets in the US to support all the dollars in circulation. I think you can look at the situation as being either under-asseted or overdollared.
“The real problem isn’t that China is taking oil off the market, it is that the US wants to keep US, European and Chinese oil companies out of certain places.”
I would beg to differ with you there Brad the real problem isn’t China or the US its the elasticity of the oil demand curve. If you look at current production figures Brad I would argue that its very difficult for the world’s oil producers to boost production. Even if prices doubled how much more oil can oil producers put on the market.
Of course demand is also relatively inelastic so even if crude prices doubled how much would demand drop. Probably not more than 10% I would imagine.
Not only is crude oil demand relatively inelastic its growing while production seems to be relatively inelastic.
As far as oil is concerned OPEC production is down for March versus July and OPEC has said that it its powerless to contain high crude oil prices.
I would like to elaborate on a point that I had made earlier:
With so many dollars in circulation in relation to the number of dollar denomiated assets hard assets dollar based hard assets should be grossly overpriced.
Its no wonder that the commodities markets are booming if there are too few hard assets for dollar holders to park their dollars the price of those assets should be under ridiculous inflationary pressure. Commodities are priced in dollars so with so few places to park dollars is it any wonder that we are in the middle of commodity boom?
a while ago someone asked about how to repatriate profit made in China. he should talk to David Novak of the Yum! Brands.
They brought in US$50M each quarter and growing.
http://sun-bin.blogspot.com/2006/04/billion-people-market-dream-comes-true.html
Now how to factor in the $200M+/year profit repatriation of Yum!/etc into your trade deficit calculation?
“The US complaint that China is trying to “lock up” the world oil supply struck me as every bit as blind ”
I also find it funny that Cheney blasts Russia for being, dare I say, capitallist? When Halliburton sold Iraquis gas for 10 cents while charging the US tax a buck is OK as long as the money winds up in a US friend of Cheney’s pocket.
“Yes, some men in the street don’t own homes. But I believe home ownership is at all time record highs (as a % of the population) ” (gab)
I wonder what the forclosure rate is now?