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Maybe China is a typical creditor after all

by Brad Setser
July 9, 2008

Creditors through the ages haven’t liked to take policy advice from debtors. They generally tend to think that borrowers should listen to the advice offered by those lending them money. And they often think debtors fail to pay sufficient attention to the concerns of their creditors when formulating economic policies.

Sound familiar?

China believes that the US hasn’t paid enough attention to the dollar’s value. That isn’t exactly news. Wen more or less said as much in November. Nor should any American be surprised that China no longer the US financial sector offers the best model for the future development of China’s own financial sector. Securitizing risky mortgages loans into complicated financial structures no longer looks like the highest stage of financial evolution.

But I was still struck by Edward Wong’s front page New York Times article several weeks ago. It highlighted China’s new assertiveness — and China’s increased willingness to criticize US economic policies.

Steven Weisman’s C section article that followed the completion of the Strategic Economic Dialogue wasn’t that different than Edward Wong’s big front page story. The governor of China’s central bank now argues that China needs to learn from the United States’ mistakes as well as its successes. Clever rhetoric. Those who think that the United States needs to learn from its own recent mistakes would have trouble disagreeing with Mr. Zhou.

These articles raise some fundamental issues about how China’s economic and financial relationship with the US will evolve. Right now China has lent — according to the US data — about $1.1 trillion of its savings to the US. Realistically, it has lent a bit more — let’s say $1.3 trillion. The US data tends to undercount Chinese holdings of US assets.

That is a large sum by any measure — it is roughly 10% of US GDP, and it is more like 30% of China’s GDP. given the extraordinary pace of growth in China’s foreign assets — and its large current account surplus — China’s financial exposure to the US is set to increase rapidly.

Many — see Gideon Rachman as well as the FT’s Alphaville — have argued that the growth in financial interdependence between the US and China will reduce political tension between the two. China has a large and growing financial stake in the US economy; the US relies on Chinese financing. Their economic interests consequently largely converge.

I was never fully convinced by this line of argument. The United States and Latin America were financially intertwined for much of the twentieth century. That didn’t mean that the US and Latin American countries always saw eye to eye. Latin debtors and their American creditors often had different interests. That created conflict, or at least tension, in the United States’ relationship with Latin America.

This is true more generally: creditors and debtors often have conflicting interests.

For example, China would like to see the US place more of a priority on maintaining the dollar’s external value — and thus the value of China’s large dollar holdings. That is code for higher US rates. Higher US rates would also make the PBoC’s life easier by reducing the incentive to sell dollars and buy RMB. Falling US rates have combined with the RMB’s appreciation against the dollar to pull huge sums of hot money into China.

The US would prefer to direct US monetary policy at stabilizing the domestic US economy rather than stabilizing the dollar’s external value.

Other areas of potential conflict also aren’t hard to see. The US may believe that China’s institutions for managing its governments external investments should converge with US norms for managing public money (think the norms governing state pension funds or Alaska’s permanent fund). China may prefer to develop its own institutions for managing its external investments — institutions that, for example, may be more inclined to support state firms as national champions than comparable pools of public money in the US.

The US might change its domestic financial regulations in ways that reduce the value of Chinese investments in US financial institutions. Or it could refuse to bailout a bank or broker dealer that China has invested in. CITIC, remember, came close to buying a small stake in Bear Stearns.

Or China may simply want to buy assets that the US doesn’t believe China’s government should own.

China’s policy makers face a particularly difficult challenge. They have invested an enormous share of China’s savings in low-yielding, fairly long-term, dollar-denominated bonds. The value of those bonds — expressed in RMB — is likely to fall over time. Those losses are the cost of subsidizing China’s exports. They were baked in, so to speak, when China decided to hold its currency down and thus overpay for US financial assets.

As Dean Baker noted a while back, Chinese policy makers knew full well that they were taking on the risk of huge (paper) losses when they bought so many dollars. They effectively choose to take large financial losses rather than allow the RMB to appreciate to its market value.

But it isn’t at all clear that China’s public expects to get hit with the (deferred) bill for the last six years or so of export subsidies — and is willing to swallow the huge losses that will be revealed as China lets its currency appreciate relative to the dollar and euro. We can debate whether or not these losses are real or not some other time. Central banks can operate with negative capital, so China doesn’t need to issue bonds to recapitalize its central banks and “realize” the loss any time soon. But it seems clear — at least to me — that there is an opportunity cost associated with using the funds raised by issuing RMB bonds to buy depreciating dollars rather than make domestic investments. And for that matter an opportunity cost associated with holding large government deposits at the central bank (rather than spending those funds at home) to help sterilize rapid reserve growth.

When those losses are realized, there will be a strong temptation for China’s policy makers to argue that the losses reflect bad US economic policy — not bad Chinese currency policy. That worries me.

There are many ironies in the current situation.

The US still acts more like a typical creditor than a typical debtor.* It believes other countries should adopt its economic model to succeed. But if China adopted the US practice of allowing its currency to float, the US might lose access to the financing that allows it to sustain large deficits at low cost. Even analysts — like me — who believe adjustment is essential don’t want it to happen over night.

China increasingly argues that other countries should emulate its own economic policy mix. Yet it isn’t clear that it really wants the rest of the world to model all their policies on China’s own policies. If the US adopted China’s restrictive policies toward foreign portfolio investment or China’s policy of limiting foreign firms ability to take over existing Chinese firms (as opposed to making greenfield investments), China’s government would face serious limits on the kind of US assets it could buy …

* In some ways, the US is a creditor. It has a large accumulated stock of foreign assets – and many Americans want the opportunity to trade some of their stock of existing US assets for assets abroad. In that way, it has much different interests than many other big debtors. But it unquestionably is a big global borrower too.

73 Comments

  • Posted by john j jansen

    Brad,
    This is not exactly on topic but i have not seen this discussed and wonder if you have thoughts on the economics of this.

    China is certainly on the way to becoming the dominant economic power in the world. it may take a generation to get there but the process has begun and I think that the forces of economic inertia will take it there.

    My problem or concern is political. China is still a one party totalitarian state. It flies in the face of reasoning to believe that in this day and age of vurtually instantaneous dissemination of information that the ruling class can maintain that control indefintiely.

    I believe that the biggest risk in CHina is that of political unrest and the reulting finacial turmoil which would ensue if it were unleashed. The Soviet Empire unravelled withalacrity and I can see the system in China undergoing a similiar wrenching event.

    What do you think and what are the financial market implications of that scenario.

    JJJ

  • Posted by bsetser

    JJJ. Interesting points.

    I think The US is now in a position where it would have to worry that any sudden political change in China is a threat to the United States own financial stability, as it could trigger a major readjustment in global financial flows.

    And while i worry about a destabilizing process of political change in China, I also worry about the implications — globally — of a world where the world’s leading creditor is no longer a democracy. The UK and the US were, despite their respective flaws, democratic (tho imperfectly so) during their respective periods as major global creditors.

  • Posted by Twofish

    bsetser: China increasingly argues that other countries should emulate its own economic policy mix.

    I don’t think that China has ever argued any such thing. The whole notion of socialism with Chinese characteristics is that Chinese economic policies need to be tailored to China, and there has never been any assertion since 1978 that Chinese economic policies are generally applicable to other nations.

    In fact, even within China, the concept “one China, two systems” quite explicitly argues that political and economic policies that make sense in Shanghai may make no sense in Hong Kong and vice versa.

    The only thing that China has argued recently is that the United States may have been overly lax in banking regulation, which is hardly a controversial position.

  • Posted by prophets

    brad-

    couple q’s:

    1. what’s your view (or do you have any thoughtful links) of the integrity of the chinese banking system? if their local banks are creditors to an export driven economy that is propped up by an unsustainable currency regime — I can only assume the non-performing loans are going to rise materially in the next few years, just like it happened in japan.

    2. do you have a link or have you done the math on the expected loss on the 1.3 trillion in assets (assuming certain levels of currency adjustment between the yuan and USD — a sensitivity analysis if you will)? i think it might be worthwhile to look at the profitability of the Chinese export biz over time + the theoretical currency loss generated over 10-20 years, to see what the real economic value generated is.

  • Posted by jin

    If the US adopted China’s restrictive policies toward foreign portfolio investment or China’s policy of limiting foreign firms ability to take over existing Chinese firms (as opposed to making greenfield investments), China’s government would face serious limits on the kind of US assets it could buy …
    —————————————-

    Brad, who are you kidding with? I do not want to repeat the same old political pressure over business deal stories again and again…

  • Posted by Twofish

    jansen: It flies in the face of reasoning to believe that in this day and age of vurtually instantaneous dissemination of information that the ruling class can maintain that control indefintiely.

    The PRC is doing a pretty good job of it, and notions that the Communist Party would collapse in the face of the internet are totally wrong. If anything the internet has helped mobilize nationalism in ways that actually strengthen the Communist Party in a number of ways.

    Part of it is that the Communist Party is far more responsive to public opinion and private disagreement than most people in the West assume that it is. As long as you phrase things in terms of “helpful and loyal suggestions to keep the Party in power” you can pretty much discuss anything.

    Jansen: I believe that the biggest risk in China is that of political unrest and the reulting financial turmoil which would ensue if it were unleashed.

    I think it would go the other way in which financial turmoil would lead to political turmoil. In any case, I don’t see a non-Communist government pursuing economic policies that are radically different than the current one.

    Jansen: The Soviet Empire unraveled with alacrity and I can see the system in China undergoing a similiar wrenching event.

    I can’t. The Communist Party, like all human institutions, is mortal, but if and when it goes down, it will likely to do with a mechanism that is quite different from the Soviet collapse. If it happens several decades from now, it will be something that we probably can’t imagine now.

    One thing to remember is that the Soviet Union collapsed after about two decades of economic stagnation, and given the bad state of post-Soviet Russia, there is something of a political consensus that Gorbachev was a fool and an example of what not to do.

    One thing that China has over the Soviet Union is that the Soviet Union claimed that it was more or less perfect, and no one claims that the Chinese system is perfect or even particularly good, just better than any alternative than anyone can propose right now.

  • Posted by Dave Chiang

    Brad writes, “If the US adopted China’s restrictive policies toward foreign portfolio investment or China’s policy of limiting foreign firms ability to take over existing Chinese firms (as opposed to making greenfield investments), China’s government would face serious limits on the kind of US assets it could buy …”

    In reality Brad, the Chinese economy is far more open to foreign direct investment (FDI) than the US Economy is open to Asian investment. Intel, Ford Motors, Motorola, Boeing, General Motors, Dell, and the rest of the SP-500 have multi-billion dollar investments in industrial production plants across China. It’s really almost laughable, the xenophobic reaction upon any state-owned or privately-owned Chinese investment in the US Economy. Was the China CNOOC purchase of Unocal really an US national security threat when Unocal’s primary energy assets were located across Indonesia, Thailand, and Burma. Was privately owned Huawei purchase of 3COM really a US national security threat when almost all of 3COM’s routers and switches are already contract manufactured in China? And why was Hong Kong based Hutchinson banned from ownership of US port facilities by the US federal government? Is Hutchinson also a terrorist threat? Hutchinson is the world’s largest container port management corporation, efficiently operating facilities across the globe from England, the Carribean, to Hong Kong. National security threat is the Washington Consensus buzzword for any “yellow peril” Chinese foreign direct investment in the US Economy.

    Well, no matter who wins the coming US Election, relations are guaranteed to be rocky. Obama calls for US boycott of Beijing Olympics to protest Chinese policies.
    http://www.ndtv.com/convergence/ndtv/story.aspx?id=NEWEN20080056304
    But the Chinese domestic economy today has enough self-sustaining critical mass that the Neo-conservative foreign policy agenda of the Washington Consensus doesn’t matter anymore to China’s economic prosperity. Contrary to US perception, China’s rapid growth is driven by domestic demand more than exports. With a large continental economy, China isn’t export dependent Japan.

  • Posted by bsetser

    DC — Please read exactly what I wrote. I said China has a restrictive policy on portfolio inflows. That is a fact. Think of the capital controls and the qualified institutional investor program. I cannot go out and buy Chinese bonds. I said that China has a restrictive view on foreign purchases of existing Chinese assets, and I differentiated that from its view toward greenfield FDI. China has been very open to greenfield FDI by manufacturing/ tech firms. it has not been open to foreign takeovers of existing Chinese firms.

    The US would be, i suspect, quite open to a huge Lenovo investment in an assembly operation to build PCs in the US. But that isn’t the question. China wants to buy (or buy into) existing businesses abroad — and to have free reign on its portfolio investments.

    2fish. If you look at Zhou’s remarks — and other rhetoric coming out of China – there is a hint that the US could learn a thing or two from China’s more regulated (and more stated-controlled) banking system.

  • Posted by Twofish

    bsetser: I also worry about the implications — globally — of a world where the world’s leading creditor is no longer a democracy.

    This actually doesn’t bother me too much for a number of reasons.

    1) China isn’t making an effort to export its political system or to even make claims that its political system is some sort of universal ideal. Even within the borders of the People’s Republic of China, you have a multi-party liberal democratic system in Hong Kong.

    2) Very few of the institutions that are involved in the world economic system are democratic. Corporations just are not democracies, and have bureaucratic governance structures that are very similar to that of the Communist Party of China.

    Central banks are not democracies. WTO, IMF, World Bank, financial ministries, the US Supreme Court, the Securities Exchange Commission, the Federal Reserve etc. etc. are not democratic institutions, and a lot of effort is made in fact that they do *not* respond to popular pressure.

    The fact that the National People’s Congress is not a multi-party legislature really doesn’t make that much difference as far as economic policy goes. You look at how economic policy is made in China, and it’s really not that much different from how policy is made in the United States. Most of it is dominated by technical experts and interest groups who stand to either lose or make money from a decision.

    3) The Communist Party of China has a lot of faults, but I think it is far more representative of Chinese popular opinion and interests than the US Government. American politicians are elected by American voters, and really don’t care very much about Chinese public opinion since Chinese people just don’t vote in American elections.

    Chinese politicians are not elected in any meaningful sense, but they are deeply worried about losing power in a revolution if they can’t provide jobs and wealth.

    So having a situation in which 1.3 billion of people suddenly have more of a voice in how this planet is run, I think makes the global system far more democratic.

  • Posted by Rien Huizer

    1. The Chinese have -in principle- good reasons to criticize US financial system management. It is inconsistent and appears to have ben captured by industry interest, and that for a long time. This is the view of some excellent US experts.
    2. It is remarkable that Chinese officials should openly join this kind of debate. There must be a good reason and I do not read that anywhere in the post or the links.

    I doubt that China’s diplomats, as arch-realists, would expect that the US will pay attention to their complaints. Perhaps this is to gain influence in the developing world against the globalizing (not in the interests of the Party and the SOE banks) nature of international financial system regulation. That may fall on quite a few sympathetic ears, and for the wrong reasons. Bad financial regulation is bad, whether it is with US or Chinese characteristics..

  • Posted by Rien Huizer

    Twofish,

    Yr #9 : pretty good,exactly the way I look at this and a few other authoritarian but benevolent regimes, but perhaps HK is little less liberal democratic than you state.

    Not that HKers seem to care much about that.

    But this still does not explain this unusual official behavior

  • Posted by RealThink

    Brad, I hope the previous thread is not dead because I’d be interested to know your thoughts on my last comment (#38). Thanks.

  • Posted by Twofish

    Huizer: It is remarkable that Chinese officials should openly join this kind of debate. There must be a good reason and I do not read that anywhere in the post or the links.

    One big reason is that Chinese banks want to do more business in the United States, and the traditional reason they can’t (Chinese banks are badly run and US banks aren’t), doesn’t quite seem to work any more.

    I should point out that this idea that the US is wide open to foreign investment while China is very restrictive doesn’t quite work in financial services. I was at a public talk with a head of a Chinese investment bank that finally got permission to open an office in the US after 12 years of trying.

    Another big reason, is that after spending a decade of getting lectured to, saying “ha ha, you aren’t that smart” just feels good.

    Huizer: I doubt that China’s diplomats, as arch-realists, would expect that the US will pay attention to their complaints.

    It depends who in the US. Most people on Wall Street are quite open to listening to Chinese perspectives on “what went wrong” and a lot of those ideas may make it into US regulation and legislation. Also most politicians are interested in listening to other people’s ideas if it isn’t in a context of “ha! ha! you are an idiot!”

    Also there is the shocking possibility that maybe the Chinese government doesn’t believe that it knows the ultimate truth about everything, and is actually interested in real discussion with American counterparts to figure out what is going on.

  • Posted by RealThink

    “The US … believes other countries should adopt its economic model to succeed.”

    If the Chinese (plus people in other emerging countries) try to adopt the suburban, at-least-1-car-per-family American model, we need several more Earths.

    On the other hand, telling them “Be smart and keep biking, and don’t mind that we losers keep driving cars and SUVs” would not be credible.

  • Posted by anon

    “But if China adopted the US practice of allowing its currency to float, the US might lose access to the financing that allows it to sustain large deficits at low cost.”

    Debatable. The US bilateral deficit should improve, reducing the net supply of dollars. And either PBOC or Chinese commercial banks will be buying up surplus dollars at better FX rates – but continue to use them to buy US financial assets of some type.

  • Posted by Dave Chiang

    Brad, the political turmoil inflicted on the Southeast Asian economies from unregulated capital flows during the late 1990′s Asian Economic crisis has provided China the rationale for continued restrictive regulations on free capital. Wall Street Hedge Funds closely politically connected to the Clinton Adminstration were behind the currency attacks that destabilized the entire Southeast region. In coordination with US intelligence agencies, the US Treasury controlled IMF under Robert Rubin instituted financial measures that impoverished tens of millions of formally middle class Southeast Asians and stripped those respective nations of their economic sovereignty. National oil assets of Indonesia were sold off at pennies on the dollar to close political associates of the Clinton Administration. The Asian Developmental economic model was viewed as a potential strategic threat to US geo-political dominance and Neo-liberalism ideology. For very good reason, the Chinese guard their financial independence from US Treasury controlled IMF. The Hedge Fund attacks by the Sors Fund, Long Term Capital, and the Quantum funds on the Hong Kong dollar peg coordinated by the office of Treasury Secreatery Robert Rubin should be viewed as the equilvalent of a declaration of financial war on the government of China. It is all documented by Professor Chalmers Johnson of the Japan policy research institute.

  • Posted by Rien Huizer

    TwoFish:

    Perhaps just to keep the Americans out. There is not a lot a Chinese investment bank can do (in terms of profitability) domestically in the US. Your final paragraph in #13 is puzzling. No doubt they would like to learn, but the statement about “learning… mistakes” looked more like a slight to me. No one would say this to one’s superior, and as such, it signals a Chinese perception of a horizontal relationship. Brad may actually have picked up a new phase in assertive posturing (with no tangible objectives than simply, and cheaply reducing the visible power of a counterpart in negotiations about many things in bilateral and multilateral settings).
    That could be an excellent reason for those remark (it even looks applicable for domestic consumption in the PRC), especially in a setting where neither party expects anything to be achieved (US gvt momentarily not credible, China has no need or incentive to make concessions). Of course (re the need) I do not belong to the school that believes in missionary liberal capitalism. Looking after one’s own capitalism is hard enough, no need to bother other people with one’s homegrown mistakes. Right??

  • Posted by bsetser

    DC — do you really think Asia would be worse off if the US hadn’t provided a big imf loan to korea and put a lot of pressure on Us banks to rollover short-term loans to korea so korea would be able to avoid a default? Indonesia’s program didn’t work that well — as everyone involves acknowledges. But a flight from Rupiah by indonesians (and demand for $ from unhedged indonesian firms) played a big role in that. Finally, I was at the Treasury and i can assure you that the Treasury didn’t coordinate the double play on the HK dollar. Obviously that won’t change your views, but I want the record to be clear.

    Rien — part of the context here is that the US has been seeking to convince China to liberalize its regime for the financial sector in a host of ways, most notably by allowing foreign banks in.

    2fish — one of the issues that I think came up with ICBC and CCB is that under US law the CIC would be considered a bank holding company (as it controls the banks) … so china’s high level of state control is one issue. and more generally, the integration of china into the world economy is complicated by the gulf between its economic institutions and the economic institutions in many of the countries it now is investing in. Different levels of state control are one example. Policies that limit activities by SOEs will disproportionately impact China.

  • Posted by Dave Chiang

    Brad, there were certainly economic imbalances in the Southeast Asian economies prior to the late 1990′s Asian Economic crisis, but in comparison to the current US financial imbalances, they were minor in comparison. The Thailand current account deficit of 2-3% at the time should not have precipitated an economic depression unless there were extenal factors involved. Perhaps you were not privy to high level Clinton Administration machinations, Robert Rubin and Alan Greenspan were directly phoned by the Thailand Central Bank governor regarding improprieties by Wall Street Hedge funds in the trading of the Thailand Baht currency. Similar to the current subprime fiasco on Wall Street, the Thailand Central Bank was rebuffed by both Rubin and Greenspan with the same “see nothing and know nothing” attitude towards regulation of financial markets. Crony capitalism was in high gear in Washington. Destabilizing the economies of Southeast Asia and impoversihing millions, the Clinton Adminstration is responsible for gross violation of the human rights of the Indonesian people.

  • Posted by bsetser

    DC — thailand’s current account deficit prior to its crisis was far larger than 2-3%; i think it was around 7%, or larger than the US deficit at its peak. And, as you know, I have long argued that the US deficit is a problem, and that asian central banks have treated the US far too generously by buying so much $ debt in their efforts to defend their pegs and in the process allowed the US to ignore serious problems (actually, in my view, the scale of Asia’s purchases contributed to some of US problems, but that is another debate).

    in any case, rather than looking backward, i was trying to look forward — i.e. how will China’s views of the world and of the US change as it becomes a bigger creditor?

  • Posted by s

    It is becoming more clear by the day that the US pulled a jedi trading trick (so devious they didn’t even know they were doing it): suck the long sovs in and the rip the carpet out. For all the bluster about China, they are clearly on the defensive. They have growth, sure, but that growth may well be itself suffocating (or be suffocated under material/cost inflation). The US on the other hand has merely a horse that needs to be broken and will be. That in my view is a more manageable problem. If you knew that your most dramatic compaetitive advanatege, franking privalege, was ending, why not extract maximium advantage? The US, which shares much with an emerging market on the cusp, has the distinct advantage of a highly successful Military industrial Complex.

    The endgame here is pretty clear: the US is simply incapabale of paying back its debt. Period. A restructuring is coming forced or managed. The Chinese are in denial: buy and hold is dead. Reminds me of a home owner who thinks if I just hold out I’ll get my price. Not so, the longer you wait, the lower your price. Finally, lest we ckid ourselves, the whole stability thesis is ideological trash supported by hazy economics (redundant) and a globalist agenda.

    [Rubini has a good piece on inflation vs. currency appreciation,two side s of same coin.]

  • Posted by Dave Chiang

    Brad, what many people in the United States fear is that China’s rising prosperity is being secured at US expense in employment, geo-political influence, rising fuel prices, the cost to the environment. That is the “zero-sum economics” Western imperialist perspective of China’s economic rise. The “sphere of influence or control” is completely a Western cultural concept.

    Chinese culture and society is such that we feed ourselves and are satisfied with ourselves and our own environment. China does not intend to be a threat to the Western nations or any other society in the world. The Chinese also have excellent relations with all Middle Eastern muslim nations. It is simply not the case that Chinese culture is exclusionary. As I have written, in reality China is the most racially intermixed nation in the world. The US is also a mixed race society but black-white intermarriages are really the exception. All Chinese are mongrol or mixed race of multiple Asiatic tribes not by conquest, but through intermarriages into Chinese society.

  • Posted by Dave Chiang

    Carnegie Endowment Research Report on China
    http://www.carnegieendowment.org/publications/index.cfm?fa=view&id=20279&prog=zch

    Albert Kiedel says that the current Chinese leadership is among the best in the world. A word of advise to Americans, don’t elect any more self-proclaimed C student, Frat boy like Bush to be in any position of national leadership :-)

  • Posted by Gregor Neumann

    Brad:
    As a major creditor China has two strategic weaknesses:

    a) Holding too many dollars in your books means, you cannot liquidate them at will, without driving the dollar down even further. What will happen, if China actually needs the money they have lent?

    b) China is heavily overinvested. They need to grow to keep the system running. This is why many companies in the main land seem to pay any price as long as they get their hand on commodities. Inflation is killing internal monetary gains for the normal citizen and stalling internal demand. Inflation kills internal and external growth at the same time. How do Chinese companies pay back their loans, if there is no growth? Michael Pettis’ reports about the informal banking system show that many companies struggle for money.

  • Posted by Twofish

    DC: Chinese culture and society is such that we feed ourselves and are satisfied with ourselves and our own environment.

    Cultures can and do change. No one can with certainty can say what Chinese culture will be like in 2050 since that will be determined largely by the decisions that people make between now and then. People who were born in 1980 have very different behavior than people who were born in 1950.

    Assertions that a group of people are inherently peaceful or warlike are total nonsense.

    DC: China does not intend to be a threat to the Western nations or any other society in the world.

    Once you have power, political or economic, people will tend to view you as a threat and view you with a mixture of resentment, fear, and envy.

    Once you have Chinese companies, diplomats, and soldiers go global, they will encounter the same sorts of issues and reactions as US companies, diplomats, and soldiers, and I see no reason to think that Chinese companies, diplomats, and soldiers will be better or worse behaved than American ones.

    DC: The Chinese also have excellent relations with all Middle Eastern Muslim nations.

    So did the US when Britain and France were the major powers in the region.

  • Posted by s

    DC

    The facts belie your assertion of a benign China. Histroy and current resource polictics, not to mention the rapid military buildup and blue water (String of Pearls) aspirations are the very opposite of the parochialism you assert. What you confuse is strategy and tactics and you should know better. The strategic ends are the same, just diametric.

    China is no different from any other country pursuing its national interest. How it achieves those ends has become more muscular and that in and of itself has implications. The US debt binge was a tactic that seems to have run its course. The question now becomes can China walk the plank alone. The bottom line remains that China needs the US more than the US need China. Oil is imposing the discipline that globalism ideology has resisited so intensely.

  • Posted by Twofish

    bsetser: one of the issues that I think came up with ICBC and CCB is that under US law the CIC would be considered a bank holding company (as it controls the banks)

    12 USC 1841(c)(2)(a) excludes ownership in non-US banks from the definition of a bank holding company. This would be an issue if CCB attempted to get 25% ownership of a US bank, but at 10% CFIUS review kicks
    in.

    The Bank Holding Company Act is one of several dozen laws regarding banks that a Chinese bank would have to go through in order do operations in the US. It also doesn’t help things that there are about half a dozen agencies at the Federal level that regulate banks and each state has its own set of regulators.

    bsetser: so china’s high level of state control is one issue. and more generally, the integration of china into the world economy is complicated by the gulf between its economic institutions and the economic institutions in many of the countries it now is investing in.

    On the other hand, integration of any nation into the world economic system is complex. As of 2008, I don’t see the issues involving economic integration between the US and China being more difficult or complex than that of say the US and Germany, which have radically different economic, financial, and legal systems.

    All of the hard stuff has been done already.

    bsetser: Different levels of state control are one example. Policies that limit activities by SOEs will disproportionately impact China.

    But the curious thing is that I can’t think of many US policies that explicitly limit activities of foreign state owned enterprises in the US.

  • Posted by Dave Chiang

    Twofish,

    ” Unlike the West, China has been predominantly defensive throughout most of its history, trying to keep out barbarian invaders who clamored to join a more advanced civilization, whereas the West since the Age of Imperialism that began in the 17th century has acted as aggressive invaders that conquered, suppressed and destroyed indigenous civilizations and religions.” – Henry Liu

    P.S. From a Middle Eastern friend source, a major reason for the rising energy price in the United States is that Saudi Arabia and other Oil producing states are diverting crude exports from the West to China. Venezuela is also slashing oil exports to the US, diverting supplies to China. Historically Saudi Arabia enjoyed a very close relationship with the US government, but after the Iraqi war fiasco, this is rapidly changing. The relationship between Saudi Arabia and the US is increasing becoming a facade. Saudi Arabia will increasingly favor the Chinese for trade and business.

  • Posted by Dave Chiang

    S,

    Despite the constant barrage of propaganda criticism of China’s military by the Neo-con US media, the Chinese spend only one-tenth of the United States on defense. The only Chinese soldiers deployed abroad are under UN Peacekeeping force command in Haiti, Lebanon, and Africa. The Chinese Navy lacks a single aircraft carrier for forward offensive deployment. Somehow when the Chinese spend on their military for their own territorial defense including the Taiwan straits, it is viewed as a “strategic military threat to the United States” in the words of former Defense Secretary Rumsfeld.

  • Posted by Twofish

    DC: Unlike the West, China has been predominantly defensive throughout most of its history…

    And every single major power in the history of the world has claimed that its wars were defensive and those of its opponents were aggressive.

    Part of being “not totally hated” is to be able to look at your own history through someone else’s eyes and realize that while your actions might look defensive and justified to you, they look quite different to someone else. If you can’t do this, then you are in for a lot of trouble as people increasingly hate you for reasons you don’t understand.

    One advantage that the US has is that because people from everywhere manage to end up in the US, its easier for the US to see how its actions gets perceived in other parts of the world.

    DC: Saudi Arabia will increasingly favor the Chinese for trade and business.

    But until China can deploy three divisions in the Middle East, the House of Saud will rely very heavily on US military power to keep itself in power and keep Iran under control.

    And if we do reach a point in which China can deploy three divisions in the Middle East, I’m sure that people there will grow to dislike China as much as they do the US. This is one of the major reasons that I think that China should let the US act as the world’s policeman. It will keep people from hating China.

  • Posted by Dave Chiang

    Twofish

    “And every single major power in the history of the world has claimed that its wars were defensive and those of its opponents were aggressive.” -TF

    Frankly, the current Iraq war doesn’t even pass the laugh test. No one in the entire world is stupid to believe that Iraq was a threat to the US and the US war is defensive. The Bush Administration is the dumbest imperialist power in world history. $700 billion wasted for absolutely nothing.

    “its easier for the US to see how its actions gets perceived in other parts of the world.” – TF

    Forget about how other parts of the world perceive the Iraq war, the US public overwhelmingly opposes it. Does it make a difference? McCain says stay for another 100 years, Obama is changing his mind about leaving soon.

    “China can deploy three divisions in the Middle East” – TF

    China won’t ever deploy 3 divsions in the Middle East. The Chinese aren’t stupid. You can’t wage a war against 1.3 billion Muslims; that’s more than the number of Chinese. It’s smarter and alot more productive to do business and trade.

    “the House of Saud will rely very heavily on US military power to keep itself in power and keep Iran under control.” -TF

    After seeing 1 million of their Iraqi brothers killed, with some Neo-con think tanks in Washington calling for the overthrow of the House of Saud, how much confidence would you have in the US? Sooner or later, the Middle East will throw out the US military from their territory. It took the Muslims 400 years to throw out the Western Crusaders, I predict it will be alot less time to throw out the overstretched US military. LOL.

  • Posted by Michael McKinlay

    Dave Chiang ~ Thank you for the brilliant analysis of the Chinese situation. I would caution the Chinese that their plunge into a western style capitalist economy will soon be seen as a mistake as Peak Oil rears its ugly head. Peak Oil will negatively effect both domestic and foreign calculations economically.

    Twofish ~ Unfortunately the US is always looking for enemies. This seems to be what Eisenhower warned about in his farewell speech ~ the Military Industrial Complex. Just look at how we are crowding Russia with radar stations, missiles and NATO proxies.We have just reformed the 4th Fleet for action in South America. We are forming Africom and really have no intentions of leaving Iraq.

    The US is destined for bankruptcy not unlike Rome but Rome had a card left to play, the advantage of moving to Constantinople.

  • Posted by anonymous

    bsetser – doesn’t the role of the US dollar as the main reserve currency of the world allow it to flex tis muscles like a net creditor since it has such a handle on the value of its debt? I can imagine the US changing its view if the dollar were to lose its status as the main reserve currency of world.

  • Posted by Twofish

    DC: No one in the entire world is stupid to believe that Iraq was a threat to the US and the US war is defensive.

    Doesn’t matter. What matters is what people in Washington believe. The US has such a large amount of military and economic power, that it can to a large extent ignore the rest of the world.

    China can’t. China is weak enough so that it people perceive it to be a threat and a danger, it limits China in ways that it does not the United States.

    DC: China won’t ever deploy 3 divisions in the Middle East. The Chinese aren’t stupid.

    Power makes you stupid and arrogant. That is the big lesson of Chinese history. Emperors at the beginning of a dynasty are always noble and humble, but power creates arrogance, and arrogance becomes self-destructive.

    DC: It’s smarter and a lot more productive to do business and trade.

    Business and trade requires the use of military force. Right now the United States serves as the world’s policeman that keeps sea lanes and trade routes open. If the US doesn’t do that, someone else will have to fill in for that role.

    If you look at the history of empires, it’s the need to do business that pushes nations to create empires.

    You think that Chinese are incapable of arrogance and abuse of power? Look at the end of any dynasty, and you see a lot of arrogance. Right now China is at the beginning of the dynastic cycle so it behaves more or less humbly. Eventually the rot will set in, and things will fall apart.

    DC: Sooner or later, the Middle East will throw out the US military from their territory.

    Sooner or later the sun will burn out. I’m not expecting the US to get kicked out of the Middle East within the next 20 years. It would be extremely bad for Chinese interests if the US gets kicked out of the Middle East soon because at that point it will suck China into Middle Eastern affairs before its economy is fully developed.

  • Posted by bsetser

    anonymous — well, creditors usually think that they should have a vote when a debtor embarks on an expensive policy course. but so far, yes, the ability of the us to borrow its own (depreciating) currency at low rates thanks to the world’s central banks have given the us the kind of freedom of action more typical of a creditor. i just wonder for how long.

    2fish — i don’t understand the details, but my understanding was that bank holding company issue was an impediment to an ICBC branch. of course, the BoC has long operated in the US, but that dates back a long time and is sort of grandfathered in I guess. i don’t know all the details.

  • Posted by Twofish

    Twofish ~ Unfortunately the US is always looking for enemies.

    Power makes you paranoid since you are constantly worried about people that will take power away from you. Paranoia is bad because it distracts you from the real enemy which is the face in the mirror.

    The US is generally behaving as most imperial powers do, and as China has behaved several times in its history when it has had its moment in the sun. Nothing that the US does would be of any surprise to anyone that has looked at Chinese dynasties at their height of power or who has read Thucycides and the History of the Peloponnesian War.

    For an imperial power, the US is actually I think behaving rather well.

  • Posted by Dave Chiang

    Twofish,

    Please re-learn your Chinese history lessons over again. Unlike the Western counterparts who are still today raping and pillaging the Iraqi people for their oil reserves, the Chinese have never attempted to establish military hegemony over other civilizations including Iran, India, the Middle East, or Africa.

    From Wikipedia,
    http://en.wikipedia.org/wiki/Zheng_He
    Between 1405 and 1433, the Ming government sponsored a series of seven naval expeditions. Emperor Yongle designed them to establish a Chinese presence, impose imperial control over trade, and impress foreign peoples in the Indian Ocean basin. He also might have wanted to extend the tributary system, by which Chinese dynasties traditionally recognized foreign peoples. But Zheng He generally sought to attain his goals through diplomacy.

    Chinese explorer Zheng He Zheng was placed as the admiral in control of the huge fleet and armed forces that undertook expeditions to the Middle East. Zheng He’s first voyage consisted of a fleet of perhaps 300 ships.

    Throughout his travels, Zheng He liberally dispensed Chinese gifts of silk, porcelain, and other goods. In return, he received rich and unusual presents from his hosts, including African zebras and giraffes that ended their days in the Ming imperial zoo. Zheng He and his company paid respects to local deities and customs, and in Ceylon they erected a monument honouring Buddha, Allah, and Vishnu.

  • Posted by Dave Chiang

    For an imperial power, the US is actually I think behaving rather well. – Twofish

    1 million dead bodies of Iraqi citizens isn’t bad enough? Sure, the Iraq occupation isn’t at Hitler levels with 20 million dead Russian civilians.

  • Posted by Dave Chiang

    US Military Hawks panic over China-Taiwan Peace threat
    http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/07/08/EDBH11M1I3.DTL

    That peace has broken out is a nightmare scenario for America’s military hawks in desperate need of an excuse for soaking up more than half of the U.S. government’s discretionary budget. There was real panic when Mikhail Gorbachev formally ended the Cold War and George H.W. Bush announced a 30 percent cut in military spending in 1992. Submarines obviously have nothing to do with fighting terrorists, forcing Sen. Joe Lieberman, an independent who represents Connecticut, where the subs are built, to play the China card: “If we do not move to produce two submarines a year as soon as possible, we are in serious danger of falling behind China,” Lieberman insisted.

    Fomenting fear of China is essential to making the case for the whole range of high-tech war toys that no longer have a legitimate military purpose. But it’s a sick joke. We are paying the Chinese the interest on the money we borrow from them to build very expensive weapons to counter weapons the Chinese have no intention of building. The latest word from the Pentagon is that “The intelligence community estimates China will take until the end of this decade or later to produce a modern force capable of defeating a moderate-size adversary.”

    The only adversary that interested China, according to the Pentagon report, was Taiwan, and as recent events have indicated, that game is over. But don’t shed tears just yet for the denizens of the military-industrial complex. Why should they doubt our continued willingness to throw money at weapons that have no targets, when few in Congress or the media ever bother to notice?

    It took Mikhail Gorbachev, in scathing criticism of President Bush and presidential candidates John McCain and Barack Obama, to note on Tuesday that in the United States, “The subject of military spending has literally been shrouded in the curtain of silence. This taboo must be lifted.”

  • Posted by bsetser

    DC and twofish — your conversation has taken us rather far from the topics i hoped to discuss; it would be great to head back on topic. We all have strong views on Iraq, but the topic of the post was China’s new assertiveness as a creditor. I would hope others are willing to join the conversation too, and it doesn’t remain a dialogue (no matter how entertaining) betweeen you two. thanks

  • Posted by Dave Chiang

    Brad, China isn’t abusing its assertiveness as a creditor. It’s obvious with the sweetheart Federal Reserve bailouts of Wall Street that the US government regulators have been captured by special interest lobbies. It’s obvious to everyone including the Chinese that the US financial system is dysfunctional. Bernanke refuses to regulate US financial markets properly and legally.

    In regards to China, it hasn’t been more or less assertive as a creditor to any poor African nations than the United States. PetroChina does business fairly in Canada tar sands as it does in Africa’s Sudan or Angola. If PetroChina abused its Canadian mining rights, I sure the China bashing story would be front and center stage in the generally hostile US media.

  • Posted by Beau Butts

    Dr. Setser,

    What are the prospects for China to attempt to diversify their currency holdings by buying U.S. commodities either for themselves or for immediate resale in other countires who currency/exports they would prefer? Such an action would enable them to continue to use a limited amount of dollars without damaging their peg without taking too much fx loss (although if they overdo it U.S. inflation would become a big problem).

    I realize that such an action would be outside the scope of the ministires that traditionally have handled Chinese exchange rate policy, but it would provide an obvious way to curb Chinese food inflation.

  • Posted by anon

    http://federalreserve.gov/pubs/ifdp/2008/935/ifdp935.htm

    After narrowing in recent quarters, the U.S. current account deficit should resume widening in coming years, leading to a tripling in U.S. external debt as a share of output, according to a new paper written by a trio of Federal Reserve economists. But that doesn’t mean a disorderly adjustment that would make it harder for the U.S. to finance its debt is in the offing, the authors contend, since external debt is still fairly small relative to total U.S. wealth. “All told, it seems likely it would take many years for the U.S. debt to cumulate to a level that would test global investors’ willingness to extend financing,” Fed economists Carol Bertaut, Steven Kamin and Charles Thomas wrote… the Fed economists project that “beyond the near term, the current account deficit likely will begin widening again and U.S. external debt will rise steadily” from around 20% of GDP now to 60% by 2020.

  • Posted by Howard Richman

    The United States never asked China for these loans. It is one thing for a country to lend money when asked, as the United States did to Europe to help with post-WWII rebuilding; it is quite another thing when a country forces loans on another as part of a policy of sterilizing the other country’s currency in order to prevent exchange rate adjustments which would lead to its people buying the other country’s products.

    The purpose of the Marshall Plan was to rebuild Europe. The purpose of Chinese mercantilism is to build China.

    China gets economic growth and much greater consumption in the long-run, the United States gets more consumption in the short run accompanied by reduced investment and increased debt in the long-run.

    If nothing is done, the increased US debt payments will eventually cause a dollar crash accompanied by high inflation and gasoline and oil rationing.

    But don’t expect the crash at any time soon. The mercantilist countries have only stolen about 20% of US industry so far. And they are now busy working on European industry. We should have at least a decade more before a currency crash leaves us with high inflation, gasoline rationing, and a greatly reduced standard of living.

    When that happens, China will replace the United States as the world’s premier economic and political power. China will have lost some of the money that they invested in the United States, but they will have gained the economic prosperity and political power that they sought.

    Howard Richman
    http://www.trade-wars.blogspot.com

  • Posted by Howard Richman

    Brad,

    I was glad to see your guess that Chinese dollar reserves are currently $1.3 trillion since that was our estimate in a recent American Thinker commentary ( http://www.americanthinker.com/2008/06/straight_talk_from_clintons_tr_1.html )

    Howard Richman
    http://www.trade-wars.blogspot.com

  • Posted by Twofish

    One other thing is that I don’t think that one should mistake style for substance. What gets said to the press is largely political theater, and I don’t think that one can take gloating in the press as a sign the Chinese position on anything has shifted.

    Last year, Chinese officials would have gotten a lecture about financial reform, nodded quietly, and then done something different. This year they are talking back a bit. Whether in China or the United States, it looks good to the people back home to be “acting tough” to foreigners. Whereas last year there were risks in doing so in that Chinese officials complaining about US financial policies would have risked a backlash, there isn’t much chance of that now, since they are just repeating the criticisms that people in the US are making.

    What is interesting is to step back and ask what specifically in the Chinese financial system can the US learn from. There is certainly going to be a call for more regulation, but the question now involves questions of who and how.

    One lesson of the Chinese financial system that might be applicable is that there may be a conflict of interest in having the central bank be the primary banking regulator since the role of the central bank as banking regulator may conflict with its role in stabilizing the business cycle.

  • Posted by Twofish

    Something else that the US might want to look at is the “Central Finance and Economic Leading Group of the Communist Party” which functions just under the Politburo. Basically this body gets all of the regulators in one room, so that they can argue about what to do. Something like that could be formed out of the National Economic Council within the Executive Office of the President.

    BTW, there’s no requirement that you have to tell anyone where you got the idea from. I can’t imagine any US official publicly saying “we are copying this neat idea on financial regulation from the Communist Party of China” just like I can’t imagine any PRC official publicly saying “we are copying Japan on these issues” even when they are.

    You don’t have to mention where you got the cat from as long as it catches mice.

  • Posted by anon

    July 10 (Bloomberg) — The yuan’s gains will slow in the fourth quarter as authorities rely more on interest rates and less on currency appreciation to cool inflation, according to Bank of China Ltd., the nation’s largest foreign-exchange trader. The central bank will shift its policy later this year because a stronger currency will risk hurting exports, Shi Lei, a foreign-exchange analyst at Bank of China, wrote in a report dated yesterday

  • Posted by Rien Huizer

    Brad, 2 fish (and DC of course:
    1) CIC would certainly be considered a bank holding company (as was the previous owner. In order to have ofices in the US, a foreign bank/BHC itself must comply with the Basle accords, and its domestic governance and regulation must also be in accordance with those accords. Then there may be other conditions that a specific US state may impose (most foreign banks operate under a NY state charter). There are quite a few banks with significant government stakes operating in the US (some German Landesbanken, for instance. State ownership should not be an issue, lack of disclosure on the part of a state agency acting as a BHC might, and in this case we hav a BHC controlling several banks that may all want to have an operationally independent charter. Probably there are legitimate US issues (in the sense that legal principles are involved that have been applied consistently over many years and are at odds with the structure adopted by Beijing. That structure was, in my opinion, domestic purposes, see earlier posts. CIC may be called an SWF, but if it is, it is a rather unique . Anyway, a reasonably transprtent CIC holding the state bank shares and POBC as an arms length regulator (at least, formally) is a step in the right direction, I thing from the perspective of US regulatory lawyers. But that leaves the problem that ll these banks are, part of the same BHC. I know of no precedent that a foreign BHC owned multiple banking charters in the US, for banks operating independently. In addition, looking for investment banking powers would complicate matters even further. I think that it would be very difficult for the US to justify an exception, as well s for China to adapt a new structure or not promote the interests of the other (now also equipped with private sector shareholders) banks. In fact an interesting situation, taxing the routinely adversary lawyers mentality of US regulators in the face of foreign authorities that are skilled in not taking no for an answer and (falsely or rightly aware) that they have financial leverage.
    2. The more I think of it, the spirit of assertiveness and nationalism (see also the Olympics/Tibet display of public sentiment) is probably catching on in Beijing (at last a popular theme that costs nothing) and perhaps the people with the green eyeshades have also been recruited to kick a few trashcans. That would be extra interesting if it was about isues no one can rsolve quickly. Yes.
    3. As a non-Chinese with too little knowledge of Chinese history I would nevertheless tend to dispute claims that Zhonghua is/ has been permanently peaceful. During periods of foreign domination (the Yuan and Qing dynasties) the abject foreign rulers forced China into territorial acquisition which the Chinese people gallantly sabotaged, but not with immediate results. Though these foreign dynasties were ultimately overthrown, some territorial gains had to be maintained, out of concern for the fate of the local populations, who, once used to benevolent and enlightened rule, would probably perish once left to their original barbaric political processses. Also, The last two cross border large scale armed conflicts in East Asia involved Vietnam/Indochina. Interesting enough, after the US (the first) had left with a bloody nose, the PRC thought that Vietnam had to be taught a lesson after it invaded (on reasonably good humanitarian grounds) Kampuchea, a Chinese ally. Amazingly, the PLA got an even bloodier nore (shorter, much less expensive, probably many more casulaties) nose. I guess that this blog should not pay too much attention to totally unscientific anthropologies regarding political culture..

  • Posted by Rien Huizer

    Twofish,

    Your# 46: The US regulatory system allocates too much power to entities within the federal reserve system. Best practice is to have a minimum of two: an entity responsible for monetary (and FX) policy, independent of the political leadership/executive (Montesquieu” trio becomes a quartet, with the central bank playing the cello) and an entity for “supervision” of te financial system, that can call on the resources of the monetary entity for lender in last resort functions. Strangely enough, Both the FED model in the US and the best practice model (Bank of England – FSA)in the UK have failed to deal with solvency treats emerging from housing finance, but in different ways. Different cats, no mice. Perhaps a better mousetrap is needed..

  • Posted by Howard Richman

    anon,

    You won’t have to wait until later this year to see the yuan stop strengthening. The pace that the People’s Bank of China was strengthening their currency slowed suddenly at the end of March, as shown in the following graph:

    http://www.x-rates.com/d/USD/CNY/graph120.html

    That was probably when the People’s Bank of China got wind that the US Treasury Department was about to tell Congress that China was not manipulating its currency (see http://www.wtopnews.com/?nid=111&sid=1313359 ) despite China’s $1.3 trillion collected as a byproduct of these “nonexistent” currency manipulations.

    And even when the yuan was strengthening ever so slightly as a result of Bush Administration pressure, the yuan never strengthened fast enough to reduce China’s trade surplus with the United States. In fact 2007 was their biggest surplus year yet up $23 billion to $252 billion.

    Howard Richman
    co-author Trading Away Our Future
    published by http://www.idealtaxes.com

  • Posted by Twofish

    Huizer: as was the previous owner. In order to have ofices in the US, a foreign bank/BHC itself must comply with the Basle accords, and its domestic governance and regulation must also be in accordance with those accords.

    There really shouldn’t be a major issue with this, since China has agreed in principle to the Basel accords, and I don’t see anything within the CIC structure that would prohibit it from acting as a BHC under Federal Reserve supervision.

    Also there are lots of Chinese banks that aren’t owned by CIC.

    One issue here is that a lot of the regulations on foreign banks operating in the US are discretionary, which gives a lot of power to the regulator to prohibit a license if they just don’t like you. Also in the case of the US, there are so many different regulators, that it’s easy for one to just say no if they don’t like you. One of the goals of WTO was to reduce this problem, and a lot of the standards that China agreed to was to reduce regulatory discretion. However, when the WTO accords were being negotiated, no one really thought about or cared Chinese banks operating in the US, so the agreements that China made in opening up the financial services markets aren’t reciprocal.

    Keeping on topic (heh, heh) that might be one of the larger consequences of China as creditor in that the issue of opening up the US financial services market to Chinese banks is now on the table, whereas it was not before. The concept until this year was that US banks would be the intermediaries for Chinese savings since they were supposedly much better run than Chinese banks.

    As a side note, German Landesbanks were a major buyer of mortgage-backed securities. They were required by Basel to have reserves consisting of “high quality” securities, and guess where you can get AAA bonds paying very high interest……. Ooppps….

    Huizer: But that leaves the problem that these banks are, part of the same BHC.

    Hypothetically, the Chinese government could split up ownership of the banks with different holding companies, however in that case, it’s not unclear that this would satisfy US regulators since the different holding companies would ultimately answer to the Communist Party.

    However, this is another consequence of last years events, since last year you could argue that having Chinese banks under the ultimate control of a quasi-governmental agency was a bad thing that would automatically disqualify a bank from operating in the US, since private banks were obviously much better at risk control. You can’t make that argument now without people laughing at you.

    Also, there is a spectrum of effective control among Chinese banks. There are banks that are more controlled by the Party and Central Government and banks which are less controlled by the Party and Central Government. It’s not necessarily the case that the banks that are less controlled are better run.

    Looking at broader issues, the big obstacle I think is to have the US government more or less accept that the Chinese economic system in which the Communist Party makes a lot of the decisions is legitimate way of running a country. It’s not that China is explicitly trying to export its system of government, but rather there is this psychological block that says that the US can tolerate a system of government run by “evil Communists.”

    There is much less of a block on the other side, since there is no psychological block that I can see for the Chinese government to adopt practices by “evil capitalists” if they can see it as being able to keep themselves in power. But there was in 1980. Coming up with theories of government which would allow China to adopt “capitalist” ideas without calling into question the legitimacy of the whole system was a major challenge.

    I suppose what will come out of this is likely the notion that the United States can tolerate a Party run economy, without tolerating the way that the Party treats political dissidents, but even accepting this idea is going to require some time.

    This is the only unique thing I can think about the Chinese situation. There are a lot of challenges in getting the German and Japanese banking system to work the US, but in the case of Germany and Japan, the US can accept that they are not being run by “evil Communists.”

    The problem that the US faces is that if it goes the route of saying “we aren’t going to let the evil Communist Chinese set up banks in the US” it goes against a lot of the other norms that the US has stated it believes in like regulatory transparency or creation of an impartial legal system.

    Huizer: In fact an interesting situation, taxing the routinely adversary lawyers mentality of US regulators in the face of foreign authorities that are skilled in not taking no for an answer and (falsely or rightly aware) that they have financial leverage.

    Also if you have money, you can hire your own lawyers. One thing that is happening is that Chinese banks are very actively recruiting Chinese Wall Street bankers with deep knowledge on how the system works. There have been a number of recruiting efforts in NYC by Chinese banks, and at one of them, I was struck that the bank had recruited into its top management one of the legendary people in Wall Street.

    One problem is that there is still something of a “Cold War” mentality lurking in the US, which is a problem since the issues that China is posing are ones that are very different from the Cold War Soviet Union. The Soviet Union was never in a position to set up banks in the US or to recruit high level US bank executives to run its economy, and there never was a de-facto alliance between American capitalists and Soviet Communists. The Chinese Communist Party has embraced markets and international trade in a way that the Soviets were never able to for the reason that markets generally work better than central planning, but the fact that the CCP has been market-oriented for a generation is now posing some a lot of new issues.

    Huizer: he more I think of it, the spirit of assertiveness and nationalism (see also the Olympics/Tibet display of public sentiment) is probably catching on in Beijing.

    It’s actually not “catching on.” Chinese have been assertive and nationalistic for the last 150 years, and popular Chinese nationalism in 2008 is actually much, much less anti-American than it was in 1994. You have people demonstrating against CNN media bias, but those people are trying to get into American schools so that they can get jobs with American companies. Also in 1994, there were a lot fewer Mainland Chinese in the US.

    The reason this has come up is that people in the US had the expectation that Chinese nationalism would decline over time, when Chinese youth are probably much more nationalistic than their parents since Chinese youth today grew up in a time in which China has been rising.

    The other thing that Americans are not aware of is the degree to which the ideals of “1989 Tiananmen students” have been completely discredited in China. One rough analogy to what has happened in China is a socialist hippie flower child living in the middle of the Reagan revolution. One reason for this is that the Communist Party has embraced markets and globalization, whereas their opponents have tended to be anti-market and anti-globalization (i.e. trade sanctions on China). This is a big problem since it put the Tiananmen students on the wrong side of the tide of history.

    Huizer: As a non-Chinese with too little knowledge of Chinese history I would nevertheless tend to dispute claims that Zhonghua is/ has been permanently peaceful.

    As a Chinese with a lot of knowledge of Chinese history, I would also strongly dispute those claims. You can write a history book in which China has been always peaceful and defensive, and that is the history book you give to elementary school students to indoctrinate them. However, there are other ways of telling the story. If your goal is to make Chinese look evil and warlike and a danger to civilization that must be crushed, yeah, you can write a history book that says that.

    My own view is that to effectively advance Chinese interests in a global world, you *must* read these negative histories so that you can understand how people perceive China negatively, so that you can effectively counter those perceptions.

    I should point out that I don’t think that the type of political indoctrination that Chinese elementary school students get is worse or more factually incorrect than the type of political indoctrination that American elementary school students get. One of the purposes of elementary schools of any national-state is political indoctrination.

    Huizer: During periods of foreign domination (the Yuan and Qing dynasties) the abject foreign rulers forced China into territorial acquisition which the Chinese people gallantly sabotaged, but not with immediate results.

    What gets interesting is when you have multiple and contradictory versions of history within the same book. In the version of history that I tell my kids, the Yuan and the Qing were not “foreign” dynasties, and the Mongol and the Manchu rulers of China were Chinese. Different Chinese, but Chinese nevertheless.

    I do have some personal motives here. First is that the broader you define Chinese, the less likely it is that I’m excluded.

    The second motive, is that by reading about how the Manchu rulers of China were able to be both “Chinese” and “Manchu” and how they were ultimately able to define the term “Chinese” it gives me a notion of what to do in my situation. I’ve found myself in the ruling power elite of the United States, and the strategies that I’ve ended up using to be both Chinese and American and to define what an American is are very similar to the ones that the Manchus used.

  • Posted by Judy Yeo

    Interesting how $ seems such a weapon.

    Mr Richman : forced loans on another

    How? Did China force the Treasury to sell paper for $? Would the rest of the bonds/paper buyers, think Japan and Europe like to buy more?

    Rien

    What would you think of the fact that much of modern europe evolved from states bandied together by former foreign occupiers?

    Sympathy seems that much easier when the issue is a distant one, culturally, socially and historically.

    Brad

    The American model has been upheld as the model poltically and certainly economically for the rest of the world to emulate, not quite surprising that criticism should emerge stronly when chinks in the armour are exposed.

  • Posted by Rien Huizer

    Thks 2 fish and Judy,

    JUst trying to put some ignorant perspective on things. Of course people do not like to be kicked around for 150 years, but that was not you as an individual, OK. And my japanese neighbour (I do not have one) did not spend time in the Imperial Army during the precautionary occupation of Nanjing, OKJ. We all live in the present and we will ahve to solv some problems cooperatively, or gamble on the possibility that some of us will not be around to play the zero or whatever sum game.

  • Posted by RebelEconomist

    Howard Richman: “The United States never asked China for these loans”, “another thing when a country forces loans on another”

    This is what actually happened: Democratically elected US governments asked the market for a loan by selling debt so that they could do some popular spending while minimising unpopular taxes. The US made that debt freely marketable, because it would have cost the US more if it had restricted its liquidity. Asian central banks bought that debt at market prices in good faith.

    No coercion needed; you are trading away your future quite freely.

  • Posted by Howard Richman

    Judy asks whether China was forcing loans on the United States when it bought US Treasury Notes.

    The answer is “Yes.” China did so by buying dollars in the foreign exchange markets in order to “sterilize” those dollars from trade so that yuan would not rise relative to the dollar. The main effects of these loans upon the US have been: (1) to increase imports, (2) to reduce exports and (3) to lower real interest rates. The higher imports and lower exports in turn reduced the investment opportunities available for US businesses causing lower fixed investment in America’s productive sectors. Since Investment = Foreign Savings + Domestic Savings and the increase in Foreign Savings took away investment opportunities, the main effect of the inflow of sterilized dollars was to reduce US domestic savings.

    Howard Richman
    http://www.trade-wars.blogspot.com

  • Posted by Howard Richman

    Rebel Economist:

    I agree with you that the government should increase domestic savings by running smaller budget deficits (except where fiscal stimuli might be needed as was the case in the 2002 recession).

    However, in the age of mercantilism, moving budgets toward balance does nothing to reduce trade deficits, as was proven during the Clinton administration. Moves to increase domestic savings do not balance trade unless the United States tackles mercantilism at the same time.

    Howard

  • Posted by Howard Richman

    RebelEconomist and Judy Yeo:

    A basic principle of economics is that when a change in demand causes an increase in quantity, the price goes up. When a change in supply causes an increase in quantity, the price goes down.

    The interest rate is the price of loans. If US demand for foreign funds (caused by our budget deficits) were causing the incrased inflow of foreign savings (i.e. the increased trade deficits), that real US interest rates would be going up. However, they have been going down since 1996, proving that an increase in supply of foreign funds has been causing them, not increased

    Howard Richman
    http://www.trade-wars.blogspot.com

  • Posted by don

    “Judy asks whether China was forcing loans on the United States when it bought US Treasury Notes.”
    Chinese currency policy forces addtional saving on its local population, which produces a net capital outflow. Although initially denominated in dollars, the U.S. doesn’t have to accept the inflow. For example, during the last oil price boom, much of the oil savings came to the U.S., but instead of staying here, U.S. banks funneled much of it into LDC loans (resulting later in the LDC loan crisis.) There is, however, a tendency for the loans to stay here, because currencies are not perfect substitutes.

  • Posted by Howard Richman

    “not increased demand for foreign funds.” — Somehow my sentence got cut off.

  • Posted by aim

    China a typical creditor? Usually creditors expect to get a return on their investments. It seems to me that China’s demand for US debt was to support the devaluation of the yuan against the dollar. They never cared that much about the return. This twisted demand for US debt is the root cause of easy credit in the US which created the current US credit crisis. What the US needs is balanced trade or no trade.

  • Posted by Rien Huizer

    Judy,

    My apologies for making myself misunderstood. Europe has had warfare betwen literate, Christian societies (perhaps it is time to say, in hindsight, civil war, especially WW II) since the breakdown of the roman empire. The past 60 years must have been the most peaceful in history. One lesson for Europeans has been that chauvinism and nationalism belong on the soccer field. Of course I do not want to diminish any feelings of personal grief people may have, but, look at the Middle East, Kashmir, etc. These may be noble causes but in the end it is the the innocent laobaixing who suffers. But I’ve learned my lesson, on this blog, thou shalt not try to be lighthearted about Chinese history and the many views the literature on that subject affords.

  • Posted by Howard Richman

    aim:

    You are correct in everything you wrote in #62. But I would would vastly prefer balanced trade to no trade. Balanced trade is the best of both worlds. It retains the efficiency that comes from globalization while attaining the mutual benefit that comes from comparative advantage.

    Moreover, a system built on balanced trade is stable. It prevents mercantilism which eventually destroys the economies of the victim countries, ruining the market for exports.

    It would actually be very easy for the United States to switch the world to a system based upon balanced trade. All we would have to do is insist that our mercantilist trading partners reduce their trade surpluses with the United States by 20% per year. Import Certificates to balance trade (originally proposed by Warren Buffett) can force the issue if necessary. (We lay out a plan for achieving balanced trade in our book Trading Away the Future.)

    Balanced trade has the advantage that it discourages government subsidies and tariffs because whenever a country gives preferential treatment to one industry, it hurts its other industries. The current system tries tries to reduce export subsidies and tariffs through international regulation, but fails since every system of regulations has loopholes. The largest loophole, at present, is the one that permits currency manipulations.

    Howard Richman
    http://www.trade-wars.blogspot.com

  • Posted by Twofish

    Richman: Balanced trade is the best of both worlds. It retains the efficiency that comes from globalization while attaining the mutual benefit that comes from comparative advantage.

    The trouble is that it is inherently unstable since while it might collectively benefit everyone, people have very strong incentives for very unbalanced trade. There are about a dozen ways of dealing with this problem that have been tried.

    The way that Bretton Woods envisoned things, you’d have balanced trade through fixed exchange rates.

    Trying to deal with this through bilateral negotiations has tended not to work, because trade limitations are inflexible and because bilateral agreements don’t include third parties.

    Richman: Import Certificates to balance trade (originally proposed by Warren Buffett) can force the issue if necessary. (We lay out a plan for achieving balanced trade in our book Trading Away the Future.)

    I very much prefer tariffs over import certificates. If you slap an 80% tariff on something, your local industry will still feel some competitive pressure. Also import certificates or any other administrative limits are very inflexible. Suppose that there is sudden surge in demand for Japanese cars. If you have a tariff, the system is self-adjusting whereas if you have import certificates, it won’t.

    Also don’t kid yourself about the political realities. You might support balanced trade, but the industries that the tariffs and certificates protect are going to insist that they be kept in place long after trade becomes balanced or highly imbalanced in their favor. Eventually you have more and more certificates and restrictions until the economic just chokes to death, which is what happened in a lot of developing nations.

    This is one big problem with using the threat of tariffs and import certificates as negotiating tools. In a negotiation, you say, if you do X, we do Y, if you stop doing X, we stop doing Y. The trouble is that most of the people who want trade restrictions want them in place regardless of what the other side does. So if you impose restrictions on car imports to force the other side to reduce restrictions on grain imports, and the other side says “fine you win, we’ll remove grain import restrictions” then your car manufacturers will still want the trade restrictions in place.

  • Posted by Twofish

    Huizer: One lesson for Europeans has been that chauvinism and nationalism belong on the soccer field.

    IMO, the post-WWII European system only worked because you had outside policeman the United States which kept order and a common enemy in the Soviet Union. My opinion is that Europeans don’t quite notice this and so draw some lessons which I think are incorrect (namely that you can have a system of law and order without the threat of military force in the background.)

    Huizer: These may be noble causes but in the end it is the the innocent laobaixing who suffers.

    Or maybe not. One reason that Chinese nationalism is tremendously popular in China is that there is a consensus that it has been highly beneficial to the average person. The notion that nationalism is a evil trick by the ruling classes to enslave the poor is not that popular in China.

    To seek what China would have looked like with no nationalism or a “failed nationalism”, just look at the Arab world or for that matter the Soviet Union. Note that regardless of how bad things are in China, no one is crashing planes into skyscrapers.

  • Posted by RebelEconomist

    Howard,

    If trade is balanced, how are countries that are willing to be net importers to expand their capacity to do so? And how would countries that wish to save for the future do so?

  • Posted by Howard Richman

    Twofish: “I very much prefer tariffs over import certificates. If you slap an 80% tariff on something, your local industry will still feel some competitive pressure.”

    The Import Certificate plan that we advocate and the one that Buffett advocates do not apply to specific products, but to the overall value of imports from a specific country. They auction the right to import a value of goods from the country without specifying which goods. Your objections do not apply to our plan.

    RebelEconomist: “If trade is balanced, how are countries that are willing to be net importers to expand their capacity to do so? And how would countries that wish to save for the future do so?”

    If trade is balanced countries can’t follow the practice of mercantilism (maximizing exports and minimizing imports) as a development strategy. They can still grow their exports, but the result will be a corresponding increase in their imports. The result will be that both they and their trading partners will grow and both countries will benefit from comparative advantage and specialization.

    Howard

  • Posted by Howard Richman

    Actually, Twofish, I misspoke in #68. Warren Buffet’s plan does not just apply to a single country, but our does. Ours is just designed to combat mercantilism. His is designed to balance trade overall. As you might expect from a business genius like Buffett, he’s got the incentive angle completely covered.

    You really ought to read Buffett’s article; it’s very straightforward and a good read: http://money.cnn.com/magazines/fortune/fortune_archive/2003/11/10/352872/index.htm

    By the way, we’ve had numerous exchanges on this message board lately and I have found all of your comments to be polite and respectful without sarcasm or twisting of words. I have very much enjoyed these discussions.

    Howard

  • Posted by Howard Richman

    Twofish,

    By the way, in that article, Warren Buffett announced that he was starting to selling the dollar and it was exactly at the top of the dollar’s exchange rate. Pretty amazing!

    Howard

  • Posted by Judy Yeo

    Not sure if anyone’s still reading this particular thread, but, thought some response was in order

    Huizer

    Hmm, the football field huh? Didn’t common belief state that football had it roots in the violent game played by the Inca or Mayan civilisations? Considering how football violence turns into violence in the streets , hard to see the progress!

    Actually, aren’t you forgetting the 1990s conflict in Croatia? Or the fact that the Basque people are still fighting for a Basque homeland?

    Richman

    The equations who support your argument work more as a backflow check. Look, if demand didn’t exist (for those higher imports), the importers on the US side would reduce orders, Would they stockpile excess supplies? Surely not. If you don’t want something, be they cheap or expensive items, collective lack of demand will show up, the importers will find excess stock, they will reduce orders and suppliers will get the message through reduced orders and reduced profits, everyone’s in it for the $. Similarly, if debt levels go down, the Treasury issues less paper, there won’t be the paper to buy, heaven forfend, they might buy something else, more Chrysler buildings perhaps?

  • Posted by Rien Huizer

    Once again Judy, all I wanted to say is that nationalism is not my taste. Neither my own country or anyone else’s. I think that it is OK if associated with games. I am interested in economics and in the politics of international policy making, which is what this blog is about. And sometimes there i a reason to explain fundamental views on isues like nationalism, because I feel that that may spoil the discusion.

    Part of my comments re ironic, and if you have followed the discusion on the CIC, you may have red my comments re mr Lou, who ws in one of his former jobs deputy governor of the province of Guizhou. Now, if you know your Chinese history, you should know that Guizhou, home of the Miao, was historically an area colonized by the Han, but worthless. However, the empire’s benevolence required tht these people would not be returned to barbary. Of course the ferocious Miao tribesmen had their own views on benevolence and they fought for centuries for their “independence”. Hence my pleasant surprise that the CIC has a leader whose final provincial career step, was like President Hu, in an area not traditionally inhabited exclusively by the Han. I hope this satisfies.

    Incidentally, I did mention the conflicts in the Balkans, which includes Croatia. I guess the Basques their cause is even less noble than that of the Miao) are not only fighting for their homeland, the Basques that are fighting (actually blowing things up) are in the business of being terrorist. They need the conflict for their private livelihood, so to say. Nothing romantic about those thugs at all. Anyway, I hate arguing with people about these sorts of things, It just occurred to me that on this blog there are quite a few comments by people who are apparently sensitive to China being talked about in less than flattering terms. I am not Chinese nor American, and I have no prejudice against one or the other. All I want is to stay clear of economic train wrecks and sometimes blogs like this one can help important people to see things a little clearer. Anyway, if you re Singaporean, I let you win. Too Kiasu for my taste.. Cheer up!

  • Posted by Judy Yeo

    Rien

    Oh please, if you’re still going on about Hans and non-Hans, that brings things down to the ethnic level, which, as a Singaporean, I object to.That’s the ugliest side of nationalism – where distinction turns into discrimination, positive or negative discrimination , both are just triggers for trouble, and this I object to. Look, the Balkans comment as well as the Basque comment were not meant to romanticize either, God forbid. I’m strictly against such conflicts , whatever their cause. Sensitivity, which entails keeping off potentially explosive issues and generally not stomping on people’s toes for the fun of it , is very different from defensiveness, as perhaps detectable in your comments.

    If I were a typical Singaporean or fancied myself a non-typical Singaporean, I might have been offended by your last comment. Problem is, I’m neither. Besides, when did this blog become a contest? Oh dear, kiasuism seems to have gone global ;p

  • Posted by Rien Huizer

    Great comment Judy (honestly) and apologies for my allegation of kiasuism. Could not resist . For some reason, my jokes do not get across, but so be it. Singaporeans live in (again honestly) one of the most blessed places (such an incredible difference in living standards with nearly every other large city in the tropical part of Asia) on earth and a lot of that has to to with unusual but effective policies to suppress ethnicity as a political theme, rather than exploit it as some neighbours do. In fact that is one of the reasons I spend quite a bit of time still following what goes on there. It is not quite proper in Western academia to be a fan of this unusual political economical beast, but I find it fascinating, requiring an open mind and a great laboratory for advanced public management. Something which will take China quite a while to attain, if ever. However, I am really not defensive about chauvinistic comments between Americans and (sorry!) ethnic Chinese, because I am neither. But slighting the Ruritanians would get me very cross..

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