China and globalisation – part 2

Hardly a minute had passed when I received an email from a friend with the following queries with the clarification that they were not rhetorical statements disguised as questions but genuine questions seeking answers:

So… The $ 11 Trillion question is… Why did the US do it?

At what point did they realise they were enabling some bad habits like currency manipulation and debt addiction and IP theft?

And what have they done about it beyond bluster?

And holding the mirror to oneself is not easy! So, I would like to ask…

How has the US gamed the openness of the international trade and finance regimes in order to secure profit for its corporations… And to push its foreign policy agenda?

I know intuitively that China’s gaming of today is somewhat more dangerous than the historical wrongs of the US. But how do I explain this in a calm, logical and data-driven  manner?

Actually, the last question is a genuine question, not rhetorical. Any insights would be appreciated.

My responses:

I understand your questions and I did not think that it was rhetorical.

Indeed, I hold no brief for American behaviour. I was stating it as a matter of fact. Before Americans, European powers, including the UK, have resorted to such selective patronage of nations and policies, garbed in the rhetoric of open markets.

On currency manipulation too, Western nations are not paragons of virtue. Raghuram Rajan is correct that zero or negative rates too are a form of currency manipulation.

Post-1980s United States is all about capital at the expense of labour and therefore, trade deficits and financial openness were instruments in aid of boosting returns to capital. Combination of lazy and predatory capitalism. Have written on numerous occasions on it and a book is coming out later this year, I hope.

That is what emboldens nations like China to cock-a-snook at the international order because its guardians and creators have turned unilateral and unfair exploiters.

>> I know intuitively that China’s gaming of today is somewhat more dangerous than the historical wrongs of the US.. But how do I explain this in a calm, logical and data-driven  manner? 

Fair question. My responses:

(1) The United States did play by international order for at least two decades, that it helped craft after WW II.

(2) The UK lived up to the rules of the Gold Standard before it demanded others countries do so. It tolerated a painful and long period of deflation to restore competitiveness instead of resorting to devaluation (19th century)

(3) Despite a valid and cynical evaluation of U.S trade imbalance, the fact that it has run persistently large (and even increasing, on occasions) trade deficit is a valid testimony to its relative trade openness. Its M&A track record on foreign companies acquiring American companies is far better than that of China.

(4) After 2008, barring the propping up of SIFI, it did allow its banking sector to restructure. That is why its banking system is arguably more resilient than that of Europe or China’s.

(5) Paul Volcker risked two recessions in two years to control overheating and inflation.

>> ​Why did the US do it? 

I do not think I have answered it. I doubt if John Pomfret too answers it convincingly.

Boils down to several factors:

(1) Japan was becoming too successful for its own good. A counterweight. The U.S. does ensure that its potential rivals balance each other. (Example: Bet on India but make sure that Pakistan is there to keep India checked.)

(2) ‘Capitalising’ China will help neutralise the Soviet Union and also remove the long-term threat of communism

(3) Taiwan was too small to be of benefit to the United States economically – for its financial interests.

(4) Not to leave out a certain naive idealism or hope that getting a potential ‘rogue’ nation into the system will make it a responsible stakeholder and it cannot be a threat to a system (that still largely served Western interests) that it is part of.

Finally, all these are open to debate and different interpretations and weights.


China and globalisation

David Lipton (IMF)’s tweet:

China’s leadership in support of globalization also means addressing its own restrictions on trade and investment, including protecting intellectual property rights. [Link]

Dani Rodrik’s tweet (in response):

As the leading beneficiary of globalization by far, perhaps China has a few things to teach the rest of us on how to do it, including the IMF? [Link]

Chris Balding’s (tongue-in-cheek) tweet:

He has a point. I propose everyone become mercantilists and run 5% of GDP surpluses to increase savings. [Link]

Dani Rodrik’s ‘clarificatory’ tweet:

And in case people misunderstand, my point is not that others should replicate specific Chinese policies (patents, CA surpluses). It’s that each country needs its own domestic policy space to leverage globalization. [Link]

In spite of this ‘clarification’, several others have pushed Dani Rodrik back and correctly so.

Globalisation had many dimensions. In the main, it was about free trade, free capital flows and a bit about immigration. Asian societies were never hot on immigration. They were mostly beneficiaries of the on-off immigration policies of the West. I do not blame them. Many historical wrongs, etc., are involved here. Just a matter of fact.

On financialisation, well, the record of China is mixed. It has relied on debt finance even if it did not take the Wall Street route on other matters. Further, its infamous and blatant interventions in 2015 summer to shore up the stock market are not worthy of emulation at all.

Specifically, with respect to globalisation, China was the biggest beneficiary and not a contributor. So, it is an entirely valid criticism of his remarks that, on globalisation, the IMF should look at China and recommend the template to other developing countries. That is utterly infeasible and incorrect too.

IMF policies on capital flows, financial sector liberalisation and on the effectiveness and transmission of monetary policies with a failure to recognise asymmetry, etc. are undesirable. Clearly, China with respect to globalisation is not to be held up as an example.

I am not even sure if China could be held up as an example for several things in economics. Their sheer size, brazen unilateralism, beggar-thy-neighbour exchange rate policy, debt addiction have played no mean part in their economic growth. Their emphasis on primary education, technological openness, execution efficiency, mindfulness on scale are worthy of emulation.

Last but not the least, the United States was China’s biggest benefactor. That is a fat and that made a huge difference. John Pomfret’s book is a MUST READ on this. Without the support of the USA, there may not have been much to emulate about China.

China trade surplus and other links

In absolute dollar terms, China’s trade surplus with the United States reached USD275bn in 2017. The previous high was USD260bn in 2015. Clearly, the United States matters to China. If the United States monetary policy remains loose in the guise of supporting economic growth and employment, because inflation is not showing up and if financial instability risks are disregarded, clearly it is to China’s benefit. Just saying.

A fascinating and even somewhat frightening report on China’s appetite for commodities. The geopolitical influence that this buys China will be hard, if not impossible, to match.

I read a piece by Mohamed El-Erian in FT. He is permitting himself economic optimism and less discomfort with asset prices. I wonder how he would react to this story about the ‘shocked’ market reaction to the tiny shift in the asset purchases by the Bank of Japan. In other words, how durable is this so-called global recovery?

This page gives details on the asset purchase programme of the European Central Bank. The 10-year Greek bond yield is at 3.75%. There has been no big improvement in its unemployment rate or in its debt ratio. This table gives the youth unemployment rates in European Union countries. Check out the statistics for Greece, Spain, Italy, Portugal and France. This is annual data up to 2016. This table gives you the figures as of August 2017. You can compare the numbers for the above countries and figure out the improvement, if any and decide for yourself whether this is the stuff of a sustainable recovery that justifies Mr. El-Erian’s optimism.

India’s consumer price inflation data for December 2017 was a bit of a worry. JP Morgan finds the momentum in core CPI (headline minus food and fuel) surprising and concerning. Among States, Tamil Nadu and Kerala contribute quite a bit to the inflation rate with their 7% inflation rate and a combined weight of 11%. That means nearly 80 basis points of inflation out of an inflation rate of 5.2%. That is nearly 16% contribution. Inflation in Uttar Pradesh is well behaved. Is hoarding by intermediaries an issue in Tamil Nadu and Kerala? Just asking.

Industrial Production data for November, notwithstanding the outsized contribution by the Pharma sector (and that too, antacids!), was more encouraging than that of the inflation data because motor vehicles, other transportation equipment and basic metals constitute 20% of Industrial Production. They are growing nicely. Pharma with a weight of 5% was growing at an annual rate of 40% and that gives you a contribution of 2% to the annual IP growth rate of 8.4% – almost 25%.

The rather poor growth in textiles and apparels must be worrisome for a country that is looking to light manufacturing to create jobs. It is not that they command a high percentage in the index. In fact, their should increase and they should be productive.  There is a role for policy action here?

Speech by Liu Qibao

On October 26, 2017, Andrew Batson had blogged about the low-key celebrations of the October revolution in the modern day Russia. He had recommended that readers go through the speech by Liu Qibao made in September. I did and it was time well spent. It is a fascinating speech for its innate contradictions. See the highlighted phrases, for example.

Some extracts:

Communists should take enough “spiritual calcium” to strengthen their minds so that they can consciously resist corruption by decadent ideas.

History and reality have incontrovertibly proved that only socialism can save China, only socialism with Chinese characteristics can develop China and realize the great renewal of the Chinese nation.

Because of the increasingly manifested superiority of the world socialist movement and the socialist system, many capitalist countries had to make constant adjustments in their ruling strategy and seek improvement through the introduction of some measures from the socialist system so as to mitigate the increasingly sharp basic contradictions in the capitalist system.

The reasons behind the Soviet breakup are many, including rigidity and conservatism; yet, the root cause was its turning away from Marxism-Leninism and from the socialist path created by the October Revolution.

The whole Party should have strong political staunchness in ideals and convictions, consciously become firm believers and faithful practitioners of the exalted ideal of communism and the shared ideal of socialism with Chinese characteristics.

We must further improve and develop the socialist system with Chinese characteristics, promote the modernisation of the state governance system and capacity in governance, all of which are aimed at continuously accomplishing, safeguarding and developing the fundamental interests of the overwhelming majority of the people. We must unswervingly hold high the banner of reform and opening up, and strive to promote innovations in theories, practices, systems and in other aspects of innovation, continue to liberate and develop social productive forces, emancipate and enhance social vitality, make socialism with Chinese characteristics more efficient than capitalism, make it more able to stimulate enthusiasm, initiative and creativity of all the people, more able to achieve social justice and common prosperity, and more able to gain competitive advantages on the international stage.

General Secretary Xi Jinping said firmly, “In today’s world, if we want to point out which political party, which country and which nation can be confident, the answer must be: the CPC, the People’s Republic of China and the Chinese nation have the best reason to stay confident.”

The full speech is here.

Blase Blasio and other links

New York Mayor decides to sue oil companies for climate change. Seems like a publicity stunt to me.

Stephen Gandel points out that Intel CEO’s share sale – in the context of the problems revealed with computer chips – does not pass the smell test. Quite. Do not miss the chart on Intel CEO’s shareholding before and after the revelation of problems with computer chips.

A Social network company in  China for Truck Drivers decides to slip ‘blockchain’ into the conversation and the stock jumped. Well, it is almost two decades since companies pulled this trick on financial markets. What would poor investors do? They are rational, at one level. They are not buying because they expect this or that company to pull it off. They simply hope to be early buyers so that they stand a very good chance of finding someone else to dump the stock on them, at a higher price, of course. What about the last guys who hold these stocks before they go down? They just happen to suffer from amnesia or they were born after the year 2000. In this context, Roula Khalaf has a good piece on millennials and the crypto-currency craze.

Eastman Kodak said that it would use blockchain to help photographers protect their copyright. The stock jumped 119% during market hours and more after.

Citing precedence from the way that stocks that had dotcom in their names jumped from 1998 until 2000 before the bubble burst, Andy Mukherjee thinks that the collective market value of the stocks of companies using ‘blockchain’, ‘crypto’, etc., may still go up before they go down. But, he does not advocate betting on it. Good for him.

Jamie Dimon says he regrets calling Bitcoin a fraud. May be, JPM wants to facilitate trading in Bitcoins.

Madan Sabnavis has a useful table on how much interest rates had come down in India and yet how little credit growth to industry has revived. But, no amount of evidence would persuade believers that, in the presence of balance sheet constraints, lower interest rates do zilch to revive lending and investing. They may help create asset bubbles and make some richer.

In economics journals, papers written by women authors are more readable. The review process for their papers is longer than it is for male authors. Women authors become more readable as they age. It is not so, for men. Well, damning evidence that male economists-authors are undeservedly privileged. But, will it change things? Unlikely.

MINT has a good Edit on how China is ‘bribing’ its way to superpower status. May be. But, it won’t be the first time nor the last time. There is little outsiders can do about it except to whine. They have to grow their own financial muscles. Is India doing enough on that? I doubt. India, by and large, has retained the control mindset rather than the enabling mindset.

Books I read in 2017

During the year, I read several books:

1.       The Money Formula (Paul Wilmott + 1)

2.       Advice and Dissent (Dr. Y.V. Reddy)

3.       The Beautiful Country and the Middle Kingdom (John Pomfret)

4.       Journey Continues (Sri. M)

5.       Asia’s Reckoning (Richard McGregor) – in parts, because I was not persuaded to read the whole thing

6.       War by other means (Robert Blackwill + 1)

7.       Aadhaar (Shankkar Aiyar)

8.       Reflections on the Revolution in Europe (Christopher Caldwell)

9.       I do what I do (Raghuram Rajan)

10.   The Fix (Jonathan Tepperman)

11.   An Extraordinary Time (Marc Levinson)

12.   A Capitalism for the People (Luigi Zingales)

13.   Sapiens – a brief history of humankind (Yuval Harari) – brilliant in parts

Advice and Dissent, The Beautiful Country…, Reflections on the …., Sapiens and The Fix deserve special mention. My comment on John Pomfret’s book are here. For the spiritually inclined, Shri. M’s ‘Journey Continues’ is utterly fascinating.

A short review of Pomfret’s book, ‘The Beautiful Country and the Middle Kingdom’ appeared in MINT:

Among the many books I read this year, I would pick The Beautiful Country and the Middle Kingdom by John Pomfret as the best.

It was slow to start as the book traced the history of the Sino-American relations from several centuries ago. But, once the book entered the contemporary era, I perked up. What comes out rather clearly in the book is that China has played America like a fiddle over several decades–from President Nixon to President Obama. It appears that America won the Cold War not because of but in spite of the State Department. Nixon reflected later that he might have created a Frankenstein monster. Too late. When President Trump told Xi Jinping that China did what was right for it and that his predecessors had to be blamed for the unequal relationship, he was spot on.

It is interesting that Mao waived Japan’s apologies for its crimes against China but that did not stop his successors from making it a big issue. The amount of damage that Nixon and Kissinger have done to America’s (and India’s) interests thanks to their utter cynicism is considerable. We learn from the book about the origin of Siamese twin. The lesson that comes out rather clearly is that China views solicitude as a sign of vulnerability. Being nice is unrequited diplomacy with China. The book is a must read for India’s diplomatic community that includes both policymakers and starry-eyed commentators. [Link]

Fifth largest economy

I have been away from Singapore since the afternoon of December 14. A journey that took me to Delhi (transit), Udaipur, Chennai, Kumbakonam-Mayiladuthurai (Temples), Chennai (December South Indian Classical Music Festival) and now finally in Coimbatore. It was time to give blogging a break. Now, it is time to slowly get back into the familiar routine.

I wrote on the FRDI Bill in India for the MINT on December 12. Even gave an interview in Tamil on that. You can find them here and here.

Donald Trump named China a ‘strategic competitor’ and he is dead right. I just finished reading John Pomfret’s ‘The Beautiful Country and the Middle Kingdom’.  When Trump said that previous Presidents had let America down, he was spot on.

This article in Bloomberg Quint on the implications of U.S. tax laws for outsourcing and offshoring operations of American companies in India and elsewhere suggests that the impact of U.S. Tax Reform Bill is mostly negative for India.

President Donald Trump delivered on his pledge to lower taxes for American companies, reducing and even eliminating the need for many American companies to resort to complicated structures in multiple overseas jurisdictions to avoid paying high American corporate income tax. There is also the reduction in the amount of interest that can be charged to taxable profits. The same goes for mortgage interest deduction. These are welcome provisions in the Tax Bill. See here and here. Foreign exchange markets are not pricing in the positive impact on the U.S. dollar correctly, IMO.

One would hardly have expected even this grudging acknowledgement from the FT on Trump’s first year. Could be behind a firewall.

This story in Wall Street Journal about China, in its most recent economic strategy document, talking of slowing down the delta in debt stock rather than bring down the stock of debt should not surprise anyone, except those who chose to ignore historical evidence in China on debt reduction vs. economic growth targets.

What do all of these have to do with the title of the post? Well, India is expected to overtake the GDP sizes of France and the UK in 2018 to become the world’s fifth largest economy – based on the size of the economy (Gross Domestic Product) measured in U.S. dollars. Indian newspapers were breathless on this development, this morning. Only America, Japan, China and Germany will be ahead of India. But, the reality is a bit more complicated than that. More on that in the coming days and in the coming year.