I wasn’t assuming the US was faultless in its loss of credibility or weakening terms of trade — quite the reverse. Nor do I suggest the US should be “dictating” anything. The only dictatating in progress is your dictating the interpretation of what I write

My only disagreement with either you or Joseph is on what constitutes a legitimate “trade” issue. Although I agree as a practical matter that we probably have little-to-no bargaining power to negotiate over most of the issues I raised, I’m reluctant to agree that it’s inherently wrong to do so.

What I regret about the “shoving” image is: a) that the US has become a hypocritical bully who might deserve such treatment, and b) that the alternative to US leadership appears to be gang rule. Just not a happy picture for folks like me who really don’t much like “dictating” behavior in any form.

Right now I’m asking the question, suppose China does succeed with its current round of economic reforms. What are the likely problems that will result?”"

I guess it was a part hypothetical question and part Devil’s Advocate musing.

In any case, we all know what will happen. Countries that get their act together grow faster and become more wealthier than those that pursue poor policies that lead them down blind alleys.

If China reforms its banking system, and its banks become more transparent, and if they manage non-performing loans better than the Japanese or the S.Koreans did for example, etc. then not only will their real economy benefit from that openness and transparency with faster growth or perhaps more importantly sustainable growth policies, but the positive feedback loop includes more FDI.

The same as we have seen throughout central and eastern Europe as we saw convergence in the legal structures and banking sectors. Those that reformed the quickest were the first to turn around their economies and grow the quickest, attracting the FDI and strategic investments in banks for example.

This does not surprise me at all. What does surprise me is that alternatives such as The Bolivar Revolution and other populist policies are being offered up as serious alternatives to the stick to the basics approach to reform, and that these alternatives are finding a wide audience despite being largely discredited by past experience?

What drove this home to me was about two years ago when I read two articles on the same day. In one, China was fretting that they did not have enough (cheap) labor in a quickly growing area and they were wondering (planning) how to shift an extra two million workers to this fast growing area from underperforming ones.

The second article was an African leader bemoaning that the global economy had passed them by and that more socialist solutions were necessary to address the failings of the market economy, etc.

It is ironical that China’s fast growth based on a market economy, although nominally socialist, is creating the demand for base metals, energy and commodities that is actually putting money into the coffers of some of these African countries, but African leaders lack the means to put underemployed labor to work to turn more revenue from higher commodity prices into secondary and tertiary economic development.

I criticize China, mostly because I think they are pursuing growth at the expense of sustainable development and storing up environmental problems for the future, but that is their trade-off to make as a sovereign country. On the otherhand, great swathes of under developed countries are either pursuing populist policies that will not be successful in the long run, or alternatively doing nothing. In comparison, China is an unbridled success story! ; – )

“I’m just wondering what (if anything) another country could do that would make you any less enthusiastic about trading with them. As the terms of trade shift against the US we’ll have less and less leverage.”

There is a fundamental assumption in your question that I don’t buy. The assumption is that the terms of trade are turning against America because of – and only because of – the actions of other countries. The US of A is blameless, it is those nasty foreigners who are doing this to us!

Nope.

My conversation was designed to (a) amuse, and (b) show that the rest of the world isn’t about to swallow US values just because we want them to.

If you find something to regret in your own insight that other countries might shove their values down America’s throat, what does that say about the notion of shoving American values down other people’s throats?

Maybe we should all stop trying to dictate to others, hmm?

.

Good question. I’m guessing the ‘problems’ will be with financing the US CA deficit. It’s hard to see successful banking reform as a bad thing for China.

As I replied to Joseph Wang, I agree the US hasn’t got much credibility with anyone lately. I’m just wondering what (if anything) another country could do that would make you any less enthusiastic about trading with them. As the terms of trade shift against the US we’ll have less and less leverage.

Your hypothetical conversation reads to me like: uncle ‘Sam’ had better not try to negotiate for anything ’cause he’s about to have someone else’s “fundamental values” shoved down his throat. Probably an accurate picture, but aside from some rough justice to a hypocritical bully, I see something to regret in that image.

If they put conditions on trade that China finds unacceptable and walks away, they win, even though you haven’t done anything positive for human rights or the environment.

I wouldn’t buy a CDS, but a senior tranche CDO from the China Construction Bank looks good (unfortunately, those aren’t traded outside the Interbank networks). I disagree about not knowing.

We have a very good idea of what the balance sheets of the big four are, and what the risk factors are. Part of the condition for foreign investment in CCB, BOC, and ICBC was spending years and with hundreds of accountants to quantify the balance sheets of the banks.

Also, getting to the point where one was able to issue CDO’s also took years of legal work. It seems solid.

China also has plenty of macroeconomic levers. They just aren’t the same one’s as those in Western countries. The large scale ROI, RRI calculations are done by the “invisible hand.”

As far as sustainability, in the long run no economic model is sustainable, and you will have to change what you are doing to meet different conditions. However, the economic model that China has right now, looks sustainable to me for the next 20 years until that vast pool of labor is industrialized.

The trouble with your scenario is that China is exporting capital, not importing it. Also, the big problem right now is that not that the SOE’s are in financial trouble, it’s the opposite.

If you look at why China has huge saving rates, part of it is household savings, but the bulk of it is because SOE’s are now generating tons of money, and no one has any idea what to do with it.

It’s actually an amusing blind spot. If you go back to the late-1990’s, no one really asked the question, so suppose China does manage to fix the banking and SOE sector, what happens, and even now, I don’t know of too many people that have made the connection between the successful Chinese SOE/banking reform and the imbalances in global economy.

Right now I’m asking the question, suppose China does succeed with its current round of economic reforms. What are the likely problems that will result?

Since China is a bit of a hot button, is it OK if I use Japan, Portugal, South Africa or El Salvador as examples of sovereign nation states that don’t think the US has the right to shove its values down their throats? Does your argument change then?

* * *

Overheard conversation:

Sam: Boys, I know we don’t get along too well, and there are a lot of areas where your national interests and mine conflict. Still, what do you say we sit down and negotiate for rules that comport better with MY fundamental values?

Chirag: I’m thinking it would not necessarily to discuss about that.

Liod : Ag, are you tuning me kak?

Kakuei-san: [Yes, I hear you.]

Bruce: Don’t come the raw prawn with me, Sammy!

Jongchan: [No.]

Jose: [No way, man!]

Zhou: [Why don't you go #&*@ your mother, instead?]

.

I quite agree that the US has no moral authority or credibility at present. And I said nothing about “dictating” anything. Just responding to DOR’s apparent outrage at the idea of *negotiating* for anything. But of course, as Bill Clinton put it at the 2004 Democratic Convention: “we can’t enforce our trade laws against our bankers! I mean c’mon!” But I persist in the hope that the US can recover from its present aberrational leadership.

MrBill:

Is Russia evolving a “French” model? Interesting possibility. More hopeful than the perhaps more likely “Czarist” model.

Reagan’s borrow-and-spend military build up didn’t “win the Cold War”. The overwhelming weight of failure and illegitimacy killed communism. 40 years of containment (including military spending) was important, but had communism been a success, it would have survived.

China’s boom is probably unsustainable for a variety of reasons, but their development path seems like a winning game for a long time to come. Again really a question of their success or failure, not of our cleverly impoverishing ourselves to weaken them. Joseph Wang is right that China has tremendous vision and ambition. I only wish the US government was as farsighted.

As for Asian Development model. I note that Russia is not so much becoming less of a market economy or less democratic as charged by some arm chair liberals in the west, but on closer inspection becoming a lot more like France in its goverence and ties between state and industry and effectively ruled by an inside elite. Given their historic ties, I am not surprised.

I would NOT buy CDS on Chinese banks nor an ABS by Chinese banks to buy protection in the case of default or to get exposure to Chinese real estate. It is a double blind. YOu do not know the state of the bank’s balance sheet and its non-performing loans, and the process of default can be completely arbitrary. These derivatives are complex enough under normal, transparent market conditions, infinitely more complex where you have uncertain legal redress and the state controls the banks, the legal system and allocation of credit, too. IMHO.

May I make an observation from several posts most recently on China-US imbalances? I do not expect an answer, but this struck me as interesting. Essentially, Regan won the cold war by outspending the USSR, which bankrupted them eventually, leading to their economic decline and dissolution. I am not pretending the policy makers in the USA are any smarter, and they seem to lurch from emergency to emergency putting out fires, but in the absense of an efficient system of capital allocation in China, or as Brad put it several days ago, no functioning macroeconomic levers, and certainly no ROE, ROI or IRR caclulations being done on a wide scale in China Inc. how do we know they are making any money or a return on their long-term cost of capital? Perhaps they are spending themselves into a hole through over production of goods that are sold below their real cost of production, and this is masked by the build-up of external foreign exchange reserves as well as non performing state loans and zero returns paid on FDI?

It would be hard to argue that including all future liabilities that the current growth in China is sustainable in the long-term? And their main sustainable competive advantage seems to be only labor, and not land, capital or intangible assets like proprietary know-how or technology?

In this context, over-consumption fuelled by debt to buy from your competitor who is producing at a loss may be no different than taxing to fund an arm’s race? Likely not, but it struck me as one outcome, and not necessarily a good one either.