The China Dance: It Ain’t No One Step

June 2nd, 2013 at 10:48 am

I found this long critique of Chinese expansionary economics in this AMs NYT to be pretty misguided.  Lots of good info and the authors did their homework, but their core thesis seemed wrong to me in the following ways:

–I don’t agree with the assertion that “Beijing’s essentially unlimited financial resources” support China’s pursuit of “… a soft but unstoppable form of economic domination,” allowing “…the country to be a game-changing force in both the developed and developing world, one that threatens to obliterate the competitive edge of Western firms, kill jobs in Europe and America and blunt criticism of human rights abuses in China.”

That’s both non-economic and over-the-top in ways I’ll stress below.

–There’s too little of the Michael Pettis/Martin Wolf style analysis of simple balance-of-payment identities that underlie a lot of what’s going on here.  These imbalances are highly problematic and damaging for sure, but they’re the stuff of demand excesses and shortfalls, not world domination.

–In this regard, let’s be very clear that there’s a two-step going on, with the US and others as willing dance partners.  Our policy makers have happily absorbed excess Chinese (and other surplus countries’) savings, exporting scads of demand/jobs and supporting large US trade deficits (meanwhile, obsessing over far less damaging–to the contrary, necessary in the downturn–budget deficits).

–There’s a vilification of state-owned capitalism and deification of free market capitalism, when there’s no such thing as either—we all exist on continua.  True, China needs more market-driven decisions and particularly, higher living standards through increased consumption of their household sector.  But our policy makers need to take more control of our own international accounts in ways stressed below.

 

Neither China, nor any other country, has “unlimited financial resources.”  Finite resources are, in fact, the core principle of economics.  When you tee up the problem that way, you risk missing the actual problem, which is a combination of state power and the savings imbalances noted above.  As the authors note, it has long been the policy of China to suppress household consumption, virtually insuring both excess national savings (Pettis stresses that Chinese household savings are not unusually high) and wide-spread poverty (though they should have noted that there are at least internal noises in China pushing the other way—we’ll have to see what they amount to).

Those national savings must flow somewhere, and flow they do, to countries across the globe that consume more than they produce.  This is not long-term functional, to be sure–remember the quip during the latter 2000s re this corner of international finance?: China sends us toxic toys and we send them toxic debt.  And, as the authors note, a big part of the problem is China’s mercantile stance, suppressing the value of their currency and jealously controlling capital flows.

But that’s called “globalization” and it isn’t always pretty and not everyone is going to play it the way you want them to.  To wring your hands about China’s outward investment is a bit like complaining that Lebron just dunked over you.  That’s what he does.  Our job then becomes like that of the Pacers: how do we stop Lebron?  Whining about how he keeps slamming it down in our face won’t do it.

In that sense, this passage is key:

…when Chinese state-owned companies go abroad and seek to play by rules that emanate from an authoritarian regime, there is grave danger that Western countries will, out of economic need, end up playing by Beijing’s rules.

They may have a point with developing economies, but why should that apply to advanced ones?  First off, by elevating a strong dollar as a policy goal (which hurts the competitiveness of our tradable sector), refusing to seriously go after currency managers like China, allowing our manufacturing base to erode while promoting “free trade” (whatever that is), consistently and uncritically absorbing savings from abroad—analytically equivalent to exporting demand, deregulating our financial markets and then watching bubble after bubble (dot.com, housing) inflate to offset the lost demand, we have been co-conspirators.  If you’d rather not slog through the balance-of-payments math, a quick look at a two-sided scale should be enough to convince you that imbalances require both sides to offset each other.

But while the math may be unforgiving, the policy set just articulated need not be.  It is within our scope to reverse every one of those policies just noted, reduce our trade deficit and promote more internal demand.  In fact, it is essential if we ever hope to get back to full employment.

Second, and here I thought the authors landed in the right place, we must be vigilant in our regulation of foreign investment.  As long as the imbalances persist, China and other surplus countries will make acquisitions like Smithfield.  The key is that we provide the requisite level of oversight to insure that our standards, not theirs, prevail.  In this regard, and in contrast to conservative anti-regulation mantras, globalization requires higher, not lower, regulatory standards in advanced economies.  And I would very much extend that to financial markets as unregulated global securitization clearly leads to systemically under-priced risk.

Though I wouldn’t bet on the outcome, the Pacers are turning out to be a lot more competitive against the Heat than a lot of folks expected.   We should emulate them in the globalization sphere.

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9 comments in reply to "The China Dance: It Ain’t No One Step"

  1. Neildsmith says:

    In a generally free market like the USA, there exists a basic set of rules by which all companies must play. To be sure they game those rules to the maximum extent possible but there is still a lazy cop on the beat who will, if provoked, will strike back and attempt to punish bad behavior.

    But that cop simply does not exist in the global world. So America and Europe have put their faith in people in China, India, Russia, and even other small countries like the recently in the news Bangladesh. We’ve assumed for 15 or 20 years now that these countries will adopt our model of free market (generally!) capitalism and act in good faith.

    That was, sad to say, a leap of faith with absolutely no evidence to support it. It may yet work out, but why should it? What makes anyone think that they won’t take full unfair advantage? We’ve handed the keys to the world economy to people who clearly don’t share our basic values and then hope they won’t steal everything. It is truly a triumph of naïve thinking over all human experience.


  2. Kevin Rica says:

    Jared,

    Good piece.

    There was an interesting column by Christy Romer in the NYT a couple of years back.

    http://www.nytimes.com/2011/05/22/business/economy/22view.html?pagewanted=all

    According to Romer, even before Obama was inaugurated, Larry Summers was teaching her the catechism of Rubinomics (which certainly worked well enough 10 years previously).

    When he asked about the exchange rate for the dollar, I began: “The exchange rate is a price much like any other price, and is determined by market forces.”

    “Wrong!” Larry boomed. “The exchange rate is the purview of the Treasury. The United States is in favor of a strong dollar.”

    A perfect example of an economic general still fighting the last currency war.


    • Jared Bernstein says:

      To be fair, he was teaching her how to get confirmed by the Senate. I’m sure he agreed with her answer.


      • Kevin Rica says:

        And what did either of them do or say in the four subsequent years to indicate that that was not the sum of their thinking?


  3. Linus Huber says:

    I enjoy this kind of analysis as it brings the complexity of the situation to the fore.

    Whether we like it or not, we do slowly adopt certain aspects of China’s mercantile stance since many years, and this in the sense that we seem to be starving for enhancing the volume of regulatory interference. It is less a question of regulation or not but of the right regulation.

    When world trade agreements are made without considering aspects of monetary and fiscal policy, it automatically will lead to this kind of combative situation. These kind of rules do not require large volumes of details but strict and transparent measuring and enforcement mechanisms. Less rules achieve often more as the obvious endeavour of states as well as companies is focused on achieving a competitive advantage by, under other things, finding ways to circumvent the rules.

    Simply by ensuring that the cost of risk is not transferred to the general population via continuous debauchment of a currency will ensure a much less leveraged and much healthier financial sector and will stem against the vast imbalances created by lose monetary policy. It is the short sightlessness that is promoted when you adopt a money system that can be gamed and this kind of behaviour is transferred to numerous areas of policy making.

    China’s way of producing an advantage is not by chance but by consciously adopting credit inflation and therefore it is producing an even higher degree of violations against the rule of sustainability and at a much faster rate but, as it started from a lower position in the game, could muster corresponding advantages. It therefore enhances the recognition of our own lack of sustainable behaviour that slowly creeps to the fore.

    The root cause the world over is the monetary policy that provided the fuel to a historic credit bubble accompanied by numerous seemingly very social and well thought-out programs that violate the principles of longterm sustainability.


  4. smith says:

    I am puzzled by the critique of the Times article.

    By “unlimited financial resources” I don’t think it was implied literally infinite, and I get this blog’s reference to the Econ 101 definition of economics. I think the purpose of the article was to focus on a unrepresentive government with a very active government involvement in their economy, in the world’s second largest and fastest growing economy. The constraints of size and scope found anywhere else do not apply.

    It’s good to be reminded there’s a balance of payments problem, so it’s possible world domination will just occur because they have excess dollars.

    The two step involves currency manipulation, suppressing internal demand, closing internal markets, oppressive labor conditions, on their side, on our side, corporate profits which flow to the top 20%. Most of America not picking the dance partner.

    State capitalism is much more fearful than private, or which company do you know that has a trillion dollar budget, an army and a navy?


  5. Fred Donaldson says:

    If short-term profits are not always the best reason to make business decisions, then China Inc. will ultimately move ahead of us because they have that one option we regularly ignore. Witness their majority share of oil production from IRAQ, because they are willing to pay larger royalties than American (purely investment return-driven) companies.


  6. purple says:

    The U.S. economy is made up of different sectors and factions. Some are making a lot of money, or think they will, off China and others are not.

    In terms of U.S. economic policy with China, the issue is disputes within the U.S. business elite. And I think people veer close to the “inscrutable” legacy when they start talking about China braking the rules, etc. For one, China has not encircled our country with military bases.


  7. rgrelber says:

    Chinese buying Smithfield is not a problem at all, and does not justify regulation of inward investment by China in agricultural or raw-material producers.

    The problem is China forcing high value-added exporters to China to shift production to China. Low wages alone can’t make that happen, and that sort of pressure is supposed to be illegal under the WTO, but the developed countries let that happen. The developed countries don’t need to bloat Chinese wages or shift the renminbi level, but they do need to avoid the forced or stolen transfer of technology.


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