Yuan prospects

Read this in John Authers’ missive:

On the yuan, I found this point from Michael Howell of CrossBorder Capital very interesting:

The China currency is getting traction and could displace the USD in Asia (China’s stated aim). What is not well understood is that China still has an immature financial system which forces it to accumulate USD (from trade which is USD denominated) and manage them centrally via the State. Domestic institutions, unlike in the West, have predominantly Yuan liabilities and so cannot afford to take this forex risk. China initially used forex reserves to buy US Treasuries, but now invests via FDI, e.g. Belt and Road. This external infrastructure programme will help to establish the wider use of the Yuan across Asia and get China off the US dollar hook. Do not underestimate the value of this seigniorage for growth.

He could even back it up with an anecdote:

I attended the LSE launch of George’s book. There I met an ex-Central Bank Governor from Central Asia who shared my scepticism about George’s Yuan point. “I will show you,” she said and pulling out her iPhone she shared a photo of her at a formal signing ceremony for a several billion Yuan swap line with the Chinese Finance Minister. Proof she claimed that this underlying use of the Yuan is already the reality across Asia.  [Link]

Let me now do what my good friend Amol Agrawal of ‘Mostly Economics’ usually does.


A response to Martin Wolf

Mr. Wolf wrote:

The US focus on bilateral imbalances is economically illiterate. The view that theft of intellectual property has caused huge damage to the US is questionable. The proposition that China has grossly violated its commitments under its 2001 accession agreement to the World Trade Organization is hugely exaggerated.

Response #1

“A landmark study by the MIT economist David Autor attributed the loss of 985,000 manufacturing jobs in the United States from 1999 to 2011, or about 20 percent of the total job losses in the sector during this period, to the so-called China shock of exposure to increased competition from China.” (Source: https://www.theatlantic.com/international/archive/2018/08/china-trump-trade-united-states/567526/)

Response #2

“When China entered the WTO in 2001, it promised to sign the Government Procurement Agreement, which requires government purchases to be made on a non-discriminatory and transparent basis, “as soon as possible.” Sixteen years later, this has not happened. As a first step, the Trump administration should demand that the Chinese government sign the GPA without further delay. But down the road, the administration may be forced to ask Congress for additional authority. If turning over our technological crown jewels to a foreign power is against the national interest, then our government should have the power to prevent it. But wielding this power without blowing up the international trade regime will not be easy.” (William Galston, Wall Street Journal, 9th August 2017)

Response #3

“This paper links the sharp drop in U.S. manufacturing employment after 2000 to a change in U.S. trade policy that eliminated potential tariff increases on Chinese imports. Industries more exposed to the change experience greater employment loss, increased imports from China and higher entry by U.S. importers and foreign-owned Chinese exporters. At the plant level, shifts toward less labor-intensive production and exposure to the policy via input-output linkages also contribute to the decline in employment. Results are robust to other potential explanations of employment loss, and there is no similar reaction in the EU, where policy did not change.” (Source: ‘The Surprisingly Swift Decline of U.S. Manufacturing Employment’ by Justin R. Pierce and Peter K. Schott – https://www.aeaweb.org/articles?id=10.1257/aer.20131578)

Response #4

“This paper examines the relationship between county-level mortality rates and exposure to an important economic shock, the trade liberalization associated with the U.S. granting of Permanent Normal Trade Relations to China. We calculate exposure to PNTR as the employment-weighted average exposure of the industries active in each county. We then estimate the relationship between PNTR and mortality using a differences-in-differences framework that nets out any time-invariant county characteristics, as well as annual shocks that affect counties identically. We find that exposure to PNTR is associated with an increase in mortality due to suicide and related causes, particularly among whites. These results are consistent with that group’s relatively high employment in manufacturing, the sector most affected by the change in trade policy. We find that these results are robust to various extensions, including an alternate empirical specification that places no restrictions on the timing of the effects of the policy change as well including controls for changes in state health care policy and exposure of other counties in the surrounding labor market.” (“Trade Liberalization and Mortality: Evidence from U.S. Counties” by Justin Pierce and Peter K. Schott, Federal Reserve Board, November 2016 – https://www.federalreserve.gov/econresdata/feds/2016/files/2016094pap.pdf)

Martin Wolf #2

“the best way for the west to deal with China is to insist on the abiding values of freedom, democracy, rules-based multilateralism and global co-operation. These ideas made many around the globe supporters of the US in the past.”

“This is the most important geopolitical development of our era. Not least, it will increasingly force everybody else to take sides or fight hard for neutrality. But it is not only important. It is dangerous. It risks turning a manageable, albeit vexed, relationship into all-embracing conflict, for no good reason.”

Response #1:

“the West’s 25-year bet on China has failed.” (‘The Economist’ March 1, 2018 – https://www.economist.com/leaders/2018/03/01/how-the-west-got-china-wrong).

Response # 2

“in negotiations with then-President Barack Obama, China’s president Xi had agreed not to turn a series of manmade islands that China had created in the South China Sea into military installations. But then China did just that.” (John Pomfret, Washington Post, 23rd August 2018)

Response #3:

“I believe that we have no adequate economic playbook for competition with China. Last time we competed with or had a long difficult strategic relationship with a large communist country was during the Cold War, and our approach to that was simply not to trade with them. Now, one of our largest trading partners is in fact a communist country, and I don’t think that the economists have given us much of a playbook to protect our companies and our people.” (Ash Carter, Defence Secretary in the Obama Administration, Interview to ‘Politico’, February 19, 2018 – https://www.politico.com/magazine/story/2018/02/19/ash-carter-defense-global-politico-transcript-217023)

Huawei and US Intelligence briefing

(1) Thanks to Andrew Batson’s blog, I discovered a speech delivered by the former Chief Economist of the China Agricultural Bank. That speech, in turn, led to a speech by a Professor of Law at Tsinghua University. Both are worth reading. They are good translations from the original Chinese. Not all Chinese are enamoured of Xi’s economy or politics, to put it rather mildly.

(2) What is important about this news is that a bipartisan group of senators facilitated it. Yet, several newspapers from the US and elsewhere continue to insist on calling it a Trump trade war. The obstinate refusal to learn and admit one is wrong appears to be a hallmark of those who paint themselves ‘Liberals’.

US intelligence chiefs have held a series of classified briefings with American companies and other groups to warn them of the dangers of doing business in China, a further sign of Washington’s increasingly hawkish stance towards trade between the two countries.. ….

… The meetings have been facilitated by a group of senators from both major parties, including Mark Warner, the Democratic vice-chair of the Senate intelligence committee, and Marco Rubio, the Republican senator from Florida. [Link]

(3) Amnesty International was refused to be allowed to move into a building called ‘Wall Street Plaza’ at the last minute by its owner – China’s Cosco Shipping because the NGO had been critical of human rights abuses in China. [Link]

(4) Gautam Chikermane has strong words in response to Xi Jinping’s speech on civilisational respect. He points out that China’s behaviour has been one of civilisational contempt.

Who or what torpedoed the trade deal?

A long-form NYT article by Chris Buckley and Keith Bradsher somehow fails to convince, in the sense that it makes it out that Xi backtracked. If Xi and his emissary took the deal to near-completion, the motivation for him backing out (‘last minute switch’) is not well laid out. That is the article’s major weakness. Therefore, it is quite likely that the truth might lie elsewhere.

That is what Nikkei Asia Review articles have been trying to establish. I had already blogged on one of them earlier. Frankly, I found those articles more interesting and insightful than the one by these two gentlemen. The second article I read in NAR points out that Xi’ colleagues rejected an ‘unequal’ deal. Indeed, the article clearly exposes the lie that Trump was always desperate to do a deal. In fact, a deal was as much in Xi’ interest as it was in Trump’s interest, if not more. But, China’s nationalism and mistaken aggression trumped (pun intended) Xi’s intentions to settle the trade dispute.

Perhaps, it was Xi or his Communist Party or both believe that China’s moment under the sun cannot be denied. In fact, Chris Buckley and Keith Bradsher point out how China’s strident aggression against South Korea backfired:

Mr. Xi’s strategy of engaging in a war of words against other countries has often overreached. In a dispute with South Korea over Seoul’s decision to let the United States deploy an antimissile system, China struck a hard line against the country — only to find itself a year later in a losing position with limited options.

It does look like, however, that Xi is far less in control than is commonly accepted. After all, during this recent Washington trip, his Trade emissary was no longer called Xi’s ‘Special Representative’.

A friend wrote that something similar happened in 2014 during his visit to India:

There were unmistakable signs that his views were not going down well with the foreign policy bureaucracy, or with the think tanks dealing with India. His sin: to call for a settlement of border dispute with India at an early date. The Chinese have taken the position since at least the 1980’s that it would take long to find a solution.

Another thing that stood out: he did not know that his Army was intruding into Indian territory even as he was launching his talks with our Prime Minister. He has made large-scale changes in the structure of the PLA, and has tried to make the other Arms less unequal vis-a-vis the Army, but as late as 2017, the problems had not gone away.

Even the ‘Belt and Road’ initiative was less about a grand strategy but more a series of attempts by local governments and their enterprises to drum up businesses for themselves:

Those who defend the Belt and Road against the charge of debt-trap diplomacy are technically correct. But those same defenders also tend to portray the lack of competitive tenders and over-reliance on Chinese construction companies in Belt and Road projects as “problems” that detract from the initiative’s promise. They miss the central role of the SOE infrastructure-complex interest group in driving the Belt and Road. Structures that funnel projects funded by state banks to Chinese SOEs aren’t “problems” from China’s perspective–they are the whole point. [Link]

In other words, according to Andrew Batson, there is no strategy to trap partner countries in debt through diplomacy. All that Xi did, according to him, was to:

The fact that this model was dubbed the “Belt and Road Initiative” and turned into a national grand strategy by Xi Jinping effectively gave the SOE infrastructure complex carte blanche to pursue whatever projects they can get away with. These projects were no longer just money-makers for SOEs, but became a way to advance China’s national grand strategy–thereby immunizing them from criticism and scrutiny. [Link]

Whether or not there is a grand strategy to trap countries in debt, that is the result and that is how I would interpret critics of the OBOR project like Brahama Chellaney.

Anyway, that is a digression. But, the key is that Xi may have projected himself China’s strongman and may have anointed himself the core and also removed term limits on himself but he may not be fully in control. That is what may have torpedoed the US-China trade deal.

Postscript: It is not going to be easy for the United States to win this cold war compared to the earlier one. As Andrew Batson points out, for political rivals, China and the United States are far more economically integrated than they should be. In my view, that is a consequence of a huge strategic miscalculation on the part of America and of the capture of American elites by China.

Fear is the key

I had left the following comment below a Andrew Batson blog post of January 2019 on fear being the key to economic development.

This is very interesting. Applies to India as well. Whether it is ‘fear’ or ‘crisis’, the biggest pre-requisite for economic development is ‘fear’ or ‘crisis’. They go together. Two leaders stand out for invoking them successfully. One is Andy Grove of Intel. He used to say that the only paranoid survive. Another leader who invoked this and maintained a constant fear of being swallowed up or being overtaken in economic terms using it as a lever to propel his country into materially higher standards of living was Lee Kwan Yew.

In a way, both India and China are failing to harness the potential of ‘fear’ or ‘crisis’ by overstating their economic growth numbers. If only the economic growth numbers reflect the true growth, without being embellished (intentionally or otherwise) by statistics or artificially spruced up by orchestrated credit growth (as distinct from voluntary commercial decisions of lending institutions), then they would serve as a wake-up call for political and industrial leadership or even labour leaderships in the countries.

You are right, therefore, about the prospect of China succeeding with its environmental clean-up rather than with continued economic growth beause a sense of crisis (or, fear) is driving changes there.

India is failing to harness these fears either with respect to economics or with environment. The danger is that easier, off-the-shelf populist answers are being thought of (e.g., interest rate cuts).

Rosenberg tweets

Today’s Fed Senior Loan Officer Survey for Q2 showed credit contraction right across the board. Another canary in the coalmine. [Link]

That ‘data stability’ in China I keep hearing about. Meanwhile, we see that auto sales there slumped 11.3% YoY in Q1. If that’s ‘stability’, imagine what ‘instability’ would look like. [Link]

The 163% first-day surge for Beyond Meat was beyond comprehension for a company that’s never turned a profit. There have been 20 IPOs like this before, 19 were in 1999 and 2000. [Link]

You know things are getting bubbly when a food producer with no earnings sees its market cap balloon to over $4 bln in just days after its IPO, and with a price/sales ratio of 50x! For veggie burgers!! [Link]

STCMA – 16.05.2019

America wants binding and enforceable commitments from China on trade and intellectual property. China wants America to trust it. America wants to keep duties on to ensure enforcement. China thinks it is infringement of sovereignty. On past form, America’s insistence is fair and correct. Good piece in WSJ.

This piece in Nikkei Asia Review says the following:

Sources say the original 150-page document, compiled through five months of painstaking negotiations, was cut up and reduced to 105 pages. … According to sources familiar with U.S.-China relations, Chinese leadership deemed legally binding parts of the draft text to be tantamount to “an unequal treaty.” All of the sections judged “unequal” were deleted or revised. [Link]

Similar to the situation in Australia, Canada is facing the onslaught of China influence:

“Canada is importing corruption along with money” from China, Manthrope maintains – though he adds that China-related corruption has a long history in Canada. The difference today is one of scale. [Link]

Jonathan Manthrope has a new book titled, ‘Claws of panda: Beijing’s campaign of influence and intimidation in Canada’.

The world’s biggest smartphone makers are stepping up their marketing and manufacturing efforts in India as the escalating trade war puts pressure on their operations in the U.S. and China.

After slowly increasing its manufacturing and supply chain presence in India over the past several years, Apple is close to choosing a site for its first retail shop in India, according to a source at the company.  [Link]

A 32-year low for birthrates in the United States. Still higher than it was during the Great Depression and at the end of WW II.

This article – summary of a book on the topic – discusses how boomers have bequeathed misery on the millennials, in the United States.

Niranjan Rajadhyaksha has a good piece on the parallels between emergence of fast bowlers in India and economic development.

Shankkar Aiyar on the unpaid workers in Jet Airways despite a plethora of labour laws. As usual, specific, precise and thoughtful.

Finally, this blog post is a description of Nominal GDP targeting. It is simply about printing money until revolution comes.