Brad Setser

Brad Setser: Follow the Money

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Almost unimaginably large

by Brad Setser
November 19, 2006

Those are the worlds Robert Rubin used to describe the US current account deficit.

They also are words that could easily be used to described China’s current account surplus. 

Nick Lardy thinks China is on track for a $250b current account surplus this year, or around 9% China’s GDP  The World Bank says $220b, and I rather suspect that they believe that is on the low side.  I am looking at $240b. 

That current account surplus is lent out to the rest of the world, in one form or another. 

China also attracts significant equity inflows, which are recycled back into the global fixed income market.  In the first half of 2006, China attracted about $30b in net FDI inflows (inflows of $40b, outflows of a bit under $10b) and around $15b in gross portfolio equity inflows.    Assume that continues, and that both the net equity inflows and China’s current account surplus is used to buy debt.   

Total Chinese demand for the debt of the rest of the world will likely top $300b in 2006.  $240b or so of that demand will come from the PBoC.  And $80b or so seems likely to come from various Chinese banks and state firms, who are buying dollar and euro debt for reasons that – frankly – remain a bit of  mystery to me.    Whatever their motivation, they are clearly doing the PBoC a favor.  Without those outflows, China’s reserve growth would easily top $300b.  

No matter how you cut it, $240-250b is a lot of money (leaving out the equity inflows that are sent back in the form of debt) for a poor country with a very small (per capita) capital stock to be exporting to rich countries with much higher (per capita) capital stocks.  Particularly since China is buying relatively low-yielding dollar and euro denominated securities.    The low-yields matter.   But the fact that China is taking on the risk that the euro and dollar will depreciate against the RMB also matters.   Most creditor countries prefer to lend in their own currency – and push the risk on to others.

Moreover, there isn’t much evidence China’s surplus is going to fall in the near-term – or for that matter in the long-term – barring bigger policy changes than we have seen so far.  Restraining investment to keep China from overheating without letting the currency move just pushes the current account surplus up.   I suspect China’s 2007 current account surplus will easily top $250b, and easily could approach $300b. 

Fred Bergsten likes to point out that China’s cyclically adjusted current account surplus is well above 10% of GDP.  Its current surplus has come even with investment rates that are well above China’s historic norm and in the face of a rapidly rising commodity import bill.   If investment falls and savings stays high — or commodity prices fall significantly — China's current account surplus could get even bigger.

It doesn’t matter too much whether outsiders – even influential ones like Nick Lardy and Martin Wolf – think ongoing current account surpluses of 10% of China’s GDP are in China’s interest.  What matters is what China’s leadership thinks is in China’s interest. 

I would though note that 10% of GDP current account surpluses are something new.  

For China.   Its current account was in rough balance until a few years ago.   Like Martin Wolf,  I rather suspect that China’s real depreciation since 2002 has something to do with the emergence of this surplus.  Chinese export growth certainly took off around then – see the chart on p. 2 of this Danske paper.  Others think the rise in China's current account surplus reflects a shift in Chinese savings that happened for reasons unrelated to the depreciation of the RMB.   I won't try to settle that debate right now.  No matter what the cause, China hasn't typically has surpluses as big as it has now. 

And for fast-growing Asian emerging economies.   Asian tigers typically have had high savings rates which have supported high rates of domestic investment.   But they typically haven’t saved so much that they could both finance exceptionally high rates of domestic investment and extend “vendor financing” to their customers.

Look at Korea during the 60s and 70s.   It wasn’t running large current account surpluses.  It actually had deficits for much that period.   It only moved into a surplus in the late 80s, when oil prices fell.   And it was running current account deficits again by the mid-1990s, during the last Asian boom.  Japan also did not have sustained current account surpluses of anything like 10% of its GDP during its catch up period.  

For good or for ill, China is now sailing on uncharted water.

Are current account surpluses the key to Asia’s miracle?

48 Comments

  • Posted by MCS

    From my limited knowledge of China, you are dealing with a group of historically aware leaders who trace their history back over 3000 years. I would expect them to be thinking a bit further than the 2007 numbers.

    As a potential blog topic, it would be interesting to look at the last 10 years and then project the next 10 years under a couple of scenarios. I would love to read your thoughts on the potential CAD impact.

    Here are a couple of scenario suggestions:

    Scenario 1: BW2 stays in place for another 10 years (Yow!)
    Scenario 2: Measured Chinese currency devaluation vis a vis the dollar
    Scenario 3: Rapid devaluation to a new status quo
    Scenario 4: Some sort of oil shock – Oil at $150?

    I bet it would make for interesting reading!

  • Posted by HK

    Brad–Certainly, China has entered into uncharted sea. That means that it is extremely difficult to predict the outcome of the global imbalances. The only available measures to guage the water is theory (or theorizing) of various players. Now, we have some substantial theory of households’ and firms’ behavior, but the current situation is such that they have already, as expected, practically stopped accumulating the dollar, while it is central banks and governments in emerging economies who are buying the dollar. We need political economy theory of the central banks’ and governemnts’ behavior. This is also uncharted water for economists!

    MCS–My tentative comments on your scenarios.

    Scenario 1; BW2 is very unlikely to be sustained ten years, though could be a few more years.

    Scenario 2; Measured (I mean, annual 6-8%) appreciation of the renminbi against the dollar is the best way to resolve the problem if started right nowand continued several years. But this is unlikely, and the Chinese leaders would wait (waste?) a few more years until the situation becomes realy serious.

    Scenario 3; Rapid (two digit) appreciation of the renminbi could be detrimental to the Chinese economy as well as the world economy, and should be avoided. But, China is wasting time and may face this scenario.

    Scenario 4; For the time being, oil prices are likely to fall rather than rise. However, if the US and China continue to consume oil at the current rate, oil prices will rise to $150 in a few decades.

  • Posted by Rueff

    #1 Governor Zhou let it out at the G20. China’s leadership is awed by the demograpic bust coming within 10 years.
    #2 China has adopted the USD zone for no better solution. Look at it as outsourcing of the central banking. The problem is 15% nominal GDP growth vs 5% Fed funds.
    #3 US nominal GDP vs China GDP is critical to longevity of BWII. A low differential is required. However if US nominal GDP slows to new lower plateau (housing bust/lower trend growth/lower participation/lower productivity growth)the imbalance will get unsustainable.
    #2 and #3 together mean nominal appreciation will be the escape valve no matter what. BWII makes China the unlikely 13th district of the Fed system.

  • Posted by MrSel

    Just an extent:

    I don’t see how the FDI coming from the Eurozone would start to decrease in the coming years.

    The urge to outsource in a dollar zone has been terrible for the past two years and nowadays industrial difficulties (such as the Airbus one) will only enhance the investment in China coming from the Eurozone…

    There probably is no decrease in the Eurozone component of FDI in China to be expected anytime soon.

  • Posted by Guest

    Foreign Capital flows into the US Economy rapidly collapsing
    http://www.informationclearinghouse.info/article15545.htm

    “Just a few days ago the US Treasury reported that the net capital inflows from the rest of the world into the US fell for a 6th month in a row. Private (purchases) from abroad fell to $34.7 billion in August and from $72.9 billion in July. Asian central banks made up for the shortfall. If they hadn’t the current account deficit would have exploded. The NY Times quoted Ashraf Laidi, a currency analyst at MG Financial Group as saying, “foreign central banks saved the dollar from disaster. The stability of the bond market is at the mercy of Asian purchases of US Treasuries.”

    “An interesting theory, but it can’t be verified since we the Fed stopped printing the M-3 (which would provide the relevant facts about the current cash inflows) and since China and Japan have slowed their purchases of UST Bonds.”

    “Behind the scenes are the many illicit London-based firms busily buying US Treasury Bonds with freshly-printed money from the Dept of the Treasury. Their tracks are covered by the blackout on the money supply statistic. (M-3) An isolated US government with a well-oiled printing press as the primary support device makes for a dangerous currency situation.”

    “Of course, there could be another explanation for the irregular activity in cash inflows, (purchase of US Treasuries) that is, that we’re still living in a “faith-based” Wonderland where our overseas trading partners are more than willing to buy an endless supply of worthless paper from a well-meaning Goliath who is busy spreading democracy to the “great unwashed” in developing world.”

    “This is an utter fiction. The world is backing away from the dollar and whether one accepts the conspiracy theories or not, it’s clear that the Federal Reserve is trying to cover its tracks and conceal its shadowy maneuverings.”

  • Posted by Laurent GUERBY

    Just a data point: since 01Aug2005, CNY spot has gained 3% on USD and lost 2% against EUR.

  • Posted by Guest

    “…A Deutsche Bank AG index that tracks CTAs, hedge funds and mutual funds that invest in currencies has dropped 2.8 percent this year… Fluctuations in financial markets have lessened, eroding the profit potential for commodity trading advisers, partly because of greater predictability in economic growth and inflation… “Price swings also have been curbed by more transparent and gradual moves by central banks”… Some currency speculators say they long for 2004, when the dollar set its record low against the euro and lost 6 percent or more against a dozen major currencies… O’Friel at Appleton said he expects business to improve next year because the Federal Reserve will start cutting interest rates to revive economic growth, boosting the volatility in currency markets…” http://www.bloomberg.com/apps/news?pid=20601109&sid=a0oP8S4otCEU&refer=home

  • Posted by Gheorghius

    China’s surplus is not the key to its miracle.

    Proof: the fact that other Asian miracles, as you point out, were not based on (large) surpluses. “Export-led” models are based on rapid growth of both imports and exports, as you implicitly point out. Only mercantilists believe large net exports are the basis for growth.

    Current China’s growth is based largely on high net exports. But the cause of growth is not net exports. If net exports ceased to be large, China would still grow very fast… as it already did before the staggering growth of its net exports.

    Capital controls make the current strategy sustainable for a while more. And China is starting to slowly adjust (nominal appreciation, wages rising, environmental regulation rising, ecc.).

    Past comparison based on GDP ratios are even misleading, as current global financial mkts capitalisation ratios to world GDP are much higher thanm in the past, so they can sustain much larger global imbalances… but they wont when countries become solvent. So the greatest problems are elsewhere.

  • Posted by Gheorghius

    insolvent

  • Posted by Dave Chiang

    The US wants only the Chinese yuan to revalue so an across the board devaluation of US Dollar hegemony can be avoided. Other nations especially India and Mexico would not be required to make an equilvalent currency revaluation. Why should the Chinese agree to castrate their own economy? China would become even less competitive in labor intensive industries that are already losing significant marketshare to India, Vietnam, Mexico, and Cambodia.

    If the Chinese were to revalue, would the US government permit global oil sales to be denominated in Chinese yuan. Clearly not. Therefore the Chinese are clearly justified in maintaining the current policy of building foreign exchange reserves for the purchase of strategic commodities that remain priced only in US Dollars. The Washington Consensus cannot have it both ways; demanding US Dollar hegemony but also demanding that the Chinese castrate their exports by significantly revaluating their currency .

  • Posted by abhi

    dave chiang,
    the indian rupee does not have a peg to the dollar. it is not fully convertible but it is being gradually eased to full convertibility, and this is because of the 1997 asian melt down.

  • Posted by kaan

    Gheorghius,

    you asked me long time ago to provide some data to support my view that liquidity distorts the fundamentals.

    http://www.hussmanfunds.com/rsi/profitmargins.htm

    sorry for the delay

  • Posted by Cassandra

    There is no way whatsoever the Eurozone will quietly allow the status quo to continue in the event Asian currency appreciation is limited to dollars. Although they are free-riding at the moment, forcing Asian CBs to hold/soak-up the marginal USD of European trade surpluses vs. USA, that are inevitably dumped into the market. When the USD breaches their pain threshold of low 1.30s, vs. the Euro (whether by a benign neglect policy or market-induced adjustment), trade sparks will fly and it will rapidly become a north-south issue with EU calling for tariffs, quantitiative restrictions on Asian exports, at the same time as crowing more loudly for saner fiscal policy in the US.

    BOTH the US & EU would find themselves somewhat in agreement to an “adjustment nirvana” given realignment of north v. south x-rates, higher US taxes (income, consumption, & energy taxes) to reduce deficit-driven & commodity-driven inflationary pressure(s). This would result marginally re-align north/south terms of trade, cause a downward shift in both USD & Euro yield curves thereby stabilizing nominal real estate values at not far from current levels in all but the most over-heated of locations, and reduce northern debt-service costs.

    I am not certain one could call it a soft-landing scenario, per se, but should domestic demand remain healthy in BRICs in the face of the rather deterministic contractionary policy options facing USA, it might just result in a “tepid-epoch” for the north, rather than the all-out, debt-deflating implosion characterized by some here. This outcome would necessarily keep asset prices buoyant at their current levels by not overly penalizing historical debtors – something that appears to be what the leveraged buyers of assets are implicitly betting upon in their latest acquisition binge.
    http://nihoncassandra.blogspot.com/

  • Posted by Guest

    re: “what China’s leadership thinks is in China’s interest”

    might it be more insightful to say ‘what the CCP thinks is in its best interests?’ as China is not a democracy. Given some of the headlines we see, it’s difficult to determine if the majority of Chinese people think the the CCP is truly acting in their best interests – or feel empowered to communicate, or do that much about it. The CCP’s actions within and external to it’s borders, including ‘greater China’ may be governed by different motives and relationships than those we typically associate with a democracy.

  • Posted by Amitra

    >>The US wants only the Chinese yuan to revalue so an across the board devaluation of US Dollar hegemony can be avoided. Other nations especially India and Mexico would not be required to make an equilvalent currency revaluation. Why should the Chinese agree to castrate their own economy? China would become even less competitive in labor intensive industries that are already losing significant marketshare to India, Vietnam, Mexico, and Cambodia.

  • Posted by Charles

    Brad, does this remind you of Britain and the opium trade– in reverse, with us as the Chinese?

    Charles of MercuryRising
    http://www.phoenixwoman.blogspot.com

  • Posted by Dave Chiang

    “Given some of the headlines we see, it’s difficult to determine if the majority of Chinese people think the the CCP is truly acting in their best interests” – Guest

    Is the elected Bush Administration acting in the best interests of the American people by occupying the sovereign nation of Iraq? Led by Neo-liberal Thomas Friedman, the New York News media always castigates the Chinese for not submitting to the mandates of the Washington Consensus, but what have the Chinese done to the average American citizen to deserve such contempt? At a news conference, former Chinese President Jiang Zemin reportedly stated to then President Bill Clinton, “If you think the Chinese government is doing such a Sh!tty job, we would be more than happy to let 10% of China’s population emigrate to the United States. Let’s see how you would feed and clothe an extra 120 million population”. The rest of the world is sick and tired of Neo-liberals and Neo-cons telling them how to run their nations and live their lives.

  • Posted by Guest

    Do you think the majority of Chinese people want to be part of an economy that thrives or dies on its government’s capacity to utilize them as the world’s cheapest workforce?

    How many Chinese people are being ‘exported’ and how many are leaving voluntarily, I have no way of knowing. But our democratically elected government is being asked by its very large and growing Chinese population to press the CCP for better human rights. And you saying that all Chinese citizens and people of Chinese heritage should not be allowed to talk about, or press for interference with what the CCP does inside or outside of China?

  • Posted by HZ

    Dave C,
    No governmental officials (China or U.S.) grow a single grain of food or weave a single thread of cloth — it is rather silly for Jiang to claim to clothe and feed the Chinese people. The opposite is true, the Chinese people clothed and fed him and his government.

  • Posted by Guest

    Interesting that, so far, 4 of today’s 12 NYSE new lows appear to be Japanese financial firms.

  • Posted by Dave Chiang

    Do you think the majority of Chinese people want to be part of an economy that thrives or dies on its government’s capacity to utilize them as the world’s cheapest workforce? – Guest

    The Chinese people support a strong central government that has given them the greatest period of peace and prosperity in their history. The Neo-liberal Thomas Friedman and his Washington Consensus cohorts promote Western democracy ideals in Iraq and China, but the ulterior motive is really for the deconstruction of other civilizations to preserve US Global hegemony. Pundit Thomas Friedman led the military drumbeat for the Iraq invasion. Today, Iraq is a disaster of biblical proportions with over 500,000 children dead. If Thomas Friedman really cared so much for human rights in Indonesia or China, why doesn’t he even contribute a few dollars of his millions to AIDS orphaned children in those respective nations. Why wasn’t Thomas Friedman in his rubber boots helping the tidal wave victims in Indonesia? The rest of the world is sick and tired of Neo-liberals and Neo-cons telling them how to run their nations and live their lives.

  • Posted by Dave Chiang

    No governmental officials (China or U.S.) grow a single grain of food or weave a single thread of cloth — it is rather silly for Jiang to claim to clothe and feed the Chinese people. The opposite is true, the Chinese people clothed and fed him and his government. – HZ

    The Neo-liberal Washington Consensus is always talking about how evil the Chinese government is to its people. The same distorted logic, “bombing the Iraqi people into democracy”, was used as justification in the prelude to the Iraq invasion. In fact, the US and China relations almost deteriorated into a Nuclear War when the Clinton Administration deployed several aircraft carrier battlegroups near the Taiwan straits only to be repelled by the Chinese Navy fleet of stealthy attack submarines. The rest of the world doesn’t appreciate the US foreign policy agenda of bombing them into democracy.

  • Posted by Guest

    “…Japan’s concern about a rising currency may be realized if central banks shift out of U.S. dollars into yen… Last week, there were indications the People’s Bank of China, which has $1 trillion in currency reserves, has been doing just that. Asked by reporters whether the central bank had been purchasing yen, Deputy Governor Wu Xiaoling said: “We have.”…” http://www.bloomberg.com/apps/news?pid=20601039&sid=ah0GjbF_o.A0&refer=columnist_pesek

  • Posted by algernon

    kaan,

    The Hussman post constitutes pretty strong evidence. Thanks.

  • Posted by Guest

    Have to question the Pesek article, as it starts out stating that “Japan prefers the yen as weak as markets will tolerate” and doesn’t speculate as to how a (possibly sharply) stronger yen may reverberate through the Japanese, Asian and global economies.

  • Posted by Guest

    Oh – and good to know D.C. applauds and deeply appreciates everything ‘America’ has done to help facilitate what he considers to be “the greatest period of peace and prosperity in [China's] history”.

  • Posted by gillies

    “Scenario 4; For the time being, oil prices are likely to fall rather than rise. However, if the US and China continue to consume oil at the current rate, oil prices will rise to $150 in a few decades. ”

    this is a rubbish prediction. the consumption of oil does not drive oil prices, any more than oil prices drive the level of consumption. (the cycles are more complex and more circular.) 1. the best predictors of oil prices – the markets – are not signalling this scenario. 2. if on the other hand you know better than the markets, why waste time here blogging ? head for town, and get rich . . .

  • Posted by gillies

    “The rest of the world is sick and tired of Neo-liberals and Neo-cons telling them how to run their nations and live their lives.”

    . . . . so is america. did no one tell you about the election results ? ?

  • Posted by Guest

    The easiest way to cripple a country is to destroy it`s currency, because that means, that trust in that country is destroyed.

    If trends continue, China will be able to destroy the US in a couple of months, economically, what they need to do now is: buy at least 500 Billion US$ of Euro denominated European debt and 300 Billion US$ of Japanese Yen government debt and 300 Billion US$ of GBP government debt. Than it has the west and its alley Japan at their balls. In my opinion, China is going to reach that goal in 1 or 2 years.

    The US know that, their answer is simple: We print money like hell, and the chinese are going to sit on an amount of useless paper money.

    If those scenarios will come true and China is going to throw all their currencies on markets, the US$ would stop being worlds reserve currency n. 1, the Eurozone would fall apart and the west would be headed for a long dark time. Still, China needs about 2 years, and who knows, what the west is doing.

  • Posted by Gheorghius

    Kaan,

    the Hussman post was good reading, thankyou.

    It seems however that it is high profit margins and high stock prices that distort equity fundamentals. Whether the former are due to liquidity is anyone’s guess…

    But in another way, liquidity has a clearer impact. The financial sector record profits are boosting total high profit margins: given that the correlation between [high liquidity] and [financial sector profits] is well established, one may come to your conclusion this way. No disagreement here. So, you proved your point.

  • Posted by Dave Chiang

    Oh – and good to know D.C. applauds and deeply appreciates everything ‘America’ has done to help facilitate what he considers to be “the greatest period of peace and prosperity in [China's] history”. – Guest

    The Chinese have never demanded nor have they ever accepted even $1 of foreign aid from the US government, so you can take your welfare check for China theory and shove it. Every dollar of China’s foreign exchange is a product of hard work and effort. The portrayal of the Chinese people as welfare recipients and criminals who have cheated their way to success has been perpetrated by certain Neo-liberal editors at the New York Times especially Thomas Friedman and William Safire. From the massacres of ethnic Chinese in Indonesia during the Asian economic crisis which Thomas Friedman thought they deserve, to the lambasting of Wen Ho Lee as a Communist Chinese spy by Thomas Friedman and William Safire, the New York Neo-liberal based media continues with its disinformation agenda to smear the Chinese people. Wen Ho Lee was found innocent in federal district court with the Federal judge stating that, “the solitary confinement treatment of Wen Ho Lee by the Clinton Administration was just as bad as any third world dictatorship.” In order to start a new Cold War targeting China, the Clinton Administration utilized Wen Ho Lee as a political prisoner. Not surprisingly, like the Monica sex scandal and Whitewater S&L embezzlement cases, the Clinton Administration received yet another free pass from their criminal conduct in the Wen Ho Lee federal trial.

  • Posted by JohnH

    Any thought that we are witnessing a return to age old trading problems that have haunted the West for milennia? Ferdnand Braudel noted that in the 16th century “whatever their origin, precious metals…were fed into the stream that continually flowed eastward. Trade with the Far East was only possible thanks to exports of gold and silver, which depleted Mediterranean bullion reserves. It has even been suggested, not unconvincingly, that the vitality of the Roman Empire was sapped by the haemorrhage of precious metals…The Mediterranean did, however, constantly try to stem this ruinous flow…[Those] attempts merely underline the necessity, exhausting in the long run, of making repeated payments to the Far East, which exported a great deal…and imported comparatively little in exchange.” For the West the outcome was debasement of their currencies and frequent crises.

    Let’s also not forget the Opium Wars of the 19th century. “Europeans bought porcelain, silk, spices and tea from China, but were unable to sell goods in return.” [Wikipedia] Opium sales solved the Europeans’ problem and probably hastened the fall of the Chinese empire.

    With the return of stability and sovereignty, perhaps China is simply resuming their ancient role in the world. We in the West may have forgotten, but I doubt that they have.

    Not a pretty picture, if you happen to live in the West.

  • Posted by bsetser

    Cassandra — I generally agree with your scenario. The key question is whether BRIC domestic demand can be sustained with less external support ….

    MCS — your scenarios are interesting, but I am not sure I can do them justice in a blog post — a paper may be needed. Here is a quick way of doing ballpark math tho.

    right now global reserves are around $5 trillion and increasing by about $700b a year –

    sustaining BW2 in my view implies that reserves grow in line with the US CAD … i.e. as the US CAD rises in nominal terms to say $1,500 over the next ten years, CB reserve growth has to rise too … suppose it gradually rises to $1200 (seems high, i know, but .. that implies reserve growth is falling relative to the US CAD). Even $700b a year over 10 years implies another $7 trillion in reserves … a higher number over time implies $10 trillion in reserve growth over the next ten years, basically reserves need to go from $5 trillion to $15 trillion, financing about 1/2 (including some flows into europe) of the cumuluiative US CAD over that period.

    As china — assume $250b over 10 years and it would account for $2.5 trillion of the increase … assume its reserve accumulation rises over time and it would account for say 3.5 trillion – 4 trillion of the increase ($400b a year seems high, but, well think of a 10% of GDP plus CAS over the next ten years … plus capital inflows). So continuation of Bw2 implies Chinese reserves might go from $ 1 trillino now to $4-5 trillion (ballpark) in 2016 …

    in any Bw2 scenario, higher oil shifts the global current account surplus (and reserve growth) from asia to oil …

    a gradual appreciation scenario (much faster than now) might allow a gradual slowdown in Chinese reserves growth, but, well, I don’t see how china avoids adding an huge number of additional dollars to its portfolio if the adjustment is going to gradual. the imbalances on both sides have gotten too large.

  • Posted by JohnH

    I should add that historically the Far East was apparently quite happy to receive gold and silver in exchange for goods. It does beg the question of how much longer the current situation will persist before China starts demanding something with intrinsic value from the West.

  • Posted by dryfly

    I should add that historically the Far East was apparently quite happy to receive gold and silver in exchange for goods. It does beg the question of how much longer the current situation will persist before China starts demanding something with intrinsic value from the West.

    They HAVE BEEN getting something of intrinsic value from the west – technology & capital. Even if the the trillion dollars in reserves went up in smoke tomorrow – the plants & experienced workers would still be there. It would still be a bargain.

    Remember when all this started say 10-15 years ago (such a short time ago) China had little more than lotsa hungry people. The technology transfer has been hugely valuable – they now can now compete with or without the US market. And the Chinese bought this with sweat equity.

    But that was then. The point is where do we go from here. It isn’t like it was ten years ago & China & the west BOTH have to realize a new relationship has to be struck. A new bargain. China needs to stop working for nothing (a currency reval would sure help there) and the West needs to start paying its own bills (balanced budgets anyone?). The deal that we teach them how to make stuff if they give it to us for free (which considering the reserve build up & financing of US debt amounts to ‘for free’) has to stop – it won’t provide value going forward.

    So how do we get there, to a new mutually beneficial bargain? Because the alternatives of not reaching that new bargain are far worse.

  • Posted by HZ

    dryfly,
    What you said has a lot of truth. However anyone who wants to project far into the future must take demographics into account. East Asia and esp. China, will be experiencing a demographic shock not even two decades out, so I don’t think they see much reason to do things differently. China will run out of cheap labor in a decade. The problem is for the West, to maintain the same standards of living, to find another younger country to take over the baton. If not we will have no choice but to cut back to living within our means – not that that is so bad. Will Vietnam/India do? We will have to see. East Asians are used to authoritarian governments historically and produce disciplined workers. Vietnam may be in the same mold, but with much less population than China. India is probably a different story.

  • Posted by Guest

    Multinational US Corporations squeeze Asian labor and working conditions
    http://www.atimes.com/atimes/Southeast_Asia/HK22Ae02.html

    The shameful American corporate lobbying campaign is inconsistent with our country’s commitment to promote respect for fundamental worker rights everywhere … It also discredits the long-professed claims of many US corporate leaders that US companies and investors in China de facto are leading by example, to respect the basic human rights of all Chinese workers and improve their working conditions and living standards.

    US puts squeeze on Vietnamese labor
    By Brendan Smith, Tim Costello and Jeremy Brecher

    Surely the American Chamber of Commerce (AmCham) and the corporations they represent – including Nike, Coca-Cola, FedEx, Pfizer and Exxon – have been living up to their promises to the US Congress and the American people to raise labor standards and wages in Vietnam.

    Well, not quite. ”

    Edited by BSetser to reduce the length of the quote.

  • Posted by Guest

    Thinking 10 years out, do any ‘peak oil’ projections include forecasts for ‘peak petrocurrency’ – assuming that at first, depleting energy reserves would lead to predicted price spikes, but what after that?

  • Posted by Guest

    re: “So how do we get there, to a new mutually beneficial bargain?”

    convince all sides to focus on learning to do a much better job of actually creating and allocating (real) wealth.

  • Posted by Guest

    re: “East Asians are used to authoritarian governments historically and produce disciplined workers”

    only to suggest that “workers” be replaced with “labourers”, while the West produces the creative workforce that has excelled at inventing the technology, brands and financial infrastructure that creates value and markets for stuff. I don’t think authoritarianism inspires the creativity that is central to the knowledge based economy.

  • Posted by bsetser

    1) guest – please do not post a full article in comments. small excerpts are all.
    2) hz — not quite sure how China runs out of cheap labor in 10 years; the demographics may put the overall population into a slide, but wouldn’t there still be lots of potential rural to urban migration?

  • Posted by HZ

    bsetser,
    Single child policy kicked into high gear in late 70s. In 10 more years population in the age group of 20-40 will be going into a steep decline, even though the total population may still be going up for quite a while longer. Even now the villages in many parts of the country are populated mostly by the elderly and the children (NYT has done recent reporting on this). Labor surplus will become a thing of the past in China.

  • Posted by HZ

    Considering that China is not only the most populous nation in the world, but will also become the most rapidly aging nation in history, a couple of trillion dollars worth of extra savings parked in Fx suddenly don’t look all that outrageous.

  • Posted by HZ

    Here is an animated version of projection of Chinese population by age group:
    http://www.china-profile.com/data/printing/pr_ani_pop_1.htm

    I wish it played a little slower between frames to give people more time for details. Anyway the largest bulge in population is 30-40 as of 2005. The following group is quite a few tens of millions less, and after that you have a bit of an echo boom.

  • Posted by smekhovo

    Yes, the demographic shock has already happened. The last numerous age cohorts are already over 30. So that won’t do as a motivation for doom. And neither will guff about authoritarianism vs. creativity.

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  • Posted by philipp

    China is securing dollars, to have a hand on world raw materials.

    Food and Water supply will be a bigger problem in Chinese near Future and oil is the second one, it is good to have a lot of money for that. The West has enough food and water, but oil is a big issue.

    On the other hand, China really faces some serious problems 10 years from here.

    The outcome is extremly unclear.

  • Posted by DOR

    Not much has changed around here after a week of turkey worship . . .

    JohnH,
    “With the return of stability and sovereignty, perhaps China is simply resuming their ancient role in the world. We in the West may have forgotten, but I doubt that they have. Not a pretty picture, if you happen to live in the West.”
    — Most people don’t live in the West, which might explain variations in the aesthetical appreciation of said picture.

    – - – - – - – - – -

    dryfly,

    The Second Chinese Revolution (the economic one) began over 25 years ago, not 10-15. That timeframe only gets us back to the missile tests and military exercises vis-à-vis Taiwan, the unification of the Rmb and FEC exchange rates and Tiananmen. Time flies, my friend!

    – - – - – - – - – -

    Brad,

    I agree with HZ: There is a huge demand for young women to work in factories, but not enough supply (women are better at certain types of garment and electronics assembly work). The demographic bulge is moving too fast, and likley to cause not only economic problems, but also social ones.

    The only way China can avoid a serious disruption in labor supply growth is to very rapidly mechanize agriculture.

    – - – - – - – - – -

    HZ,
    Interesting perspective on the demographic importance of forex and savings!

    .