Mr. Paulson Goes To China...
...And Will probably get his backside kicked again.
By blackhedd Posted in China | Economy | exchange rates | inflation | Paulson | yuan — Comments (11) / Email this page » / Leave a comment »
Treasury Secretary Henry Paulson will be in China at mid-week for high-level discussions with Chinese government officials.
The topic is exchange rates. Mr. Paulson wants the yuan to appreciate against the dollar. The Chinese want the dollar to rise against the rest of the world's currencies, among other things.
Paulson won't get what he wants. But it's worth unpacking things a little, to get at the underlying issues. In particular, there are interesting political implications to some of the things China would like to do next.
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This will be Mr. Paulson's fifth trip to China since becoming Treasury Secretary. Each time, the agenda and the cast of characters have been roughly the same. He'll probably make the obligatory visits to the Shanghai stock exchange and talk to various Chinese business leaders. But his primary interlocutor is Vice Premier Wu Yi.
And in their talks, he'll stress to Madame Wu that the yuan has been appreciating at too slow a rate.
China pegs its currency to a basket of foreign currencies that in effect simulates the dollar, and they allow exchange rates to fluctuate in a narrow range, determined on a daily basis. Even though yuan have appreciated more in the last twelve months than they have in years, the currency is still strongly undervalued against the dollar.
The headline effect of an over-weak yuan is that it makes China's exports cheaper to foreign buyers. American politicians wrongly assume that this effect hurts American workers. But China's primary export is low value-added manufactured goods. On this basis, they don't compete against the US. Rather, they compete against countries with lower labor costs, like Thailand and Vietnam.
[Sidebar: how big would you guess Vietnam actually is? I was surprised to find that Vietnam has about the same land area and population as Germany, which has one of the largest economies in the world. I won't be surprised if Vietnam becomes a major economic power over the next few decades.]
But there is a problem with currency manipulation: it violates the laws of nature. (Chief among these is that markets are free and will ruthlessly counteract efforts to control them.) Foreign exchange rates are remarkable things. Not only do they exquisitely measure the balance of global trade and the relative competitiveness of national industries, but they do so nearly at the speed of light. It's as if an oil supertanker were nimble enough to make a 180-degree turn at full speed, in the blink of an eye.
In China's case, the price of currency undervaluation has been extremely high food-price inflation, and an extraordinary asset-price bubble. (They don't have significant energy-price inflation because they tightly control retail prices for fuel. This inflation is coming out of the earnings of the country's large energy producers, which are all government-owned anyway.)
This is the case that Mr. Paulson will be making in China this week.
If Madame Wu is true to form, she'll repeat recent public statements that China wants the dollar to rise, instead of the yuan. Of course, she would like to see the US reverse our recent improvement in export performance. But Paulson understands as well as anyone that currency markets are far too big for governments to control. That's why he won't (and shouldn't) take any concrete steps to support the dollar.
She may also repeat remarks of her own, rejecting recent calls for a higher yuan by the Europeans. If you think Americans are pushy and aggressive about what we want, that's the perception of the rest of the world, too. And European finance leaders' demands for currency reform in China have become uncharacteristically strident, leading Wu to pronounce herself "very disappointed" in them, partly for acting like Americans.
This week's meeting will probably end up producing little of substance beyond the standard photo of Hank Paulson shaking hands with Wu Yi, a woman who almost small enough to fit in his pocket, with broad smiles all around.
But the Chinese really do need to do something about their inflation problem. They are systematically undertaking broad changes in their economy, which is a topic for another post. But in the near-term, they face a diminution in the value of their huge holdings of dollar assets, mostly US Treasury debt. They also face the prospect that the US economy will slow, which will certainly have an effect on world markets.
So they've started talking about buying assets in the US. From the news-service story I linked above:
``China at this stage needs to be looking to opportunities provided by the weakening U.S. dollar,'' Ha Jiming, chief economist in Beijing at China International Capital Corp., the nation's largest investment bank, said in an interview last week. ``Very recently the government is becoming more interested in channeling money out of the country.''
The Ministry of Commerce said last week it will encourage businesses to buy American assets. Twenty insurers were granted licenses to invest overseas. China Investment Corp., the nation's $200 billion sovereign wealth fund, said it will be a ``stabilizing force'' in markets rocked by credit losses, signaling it may invest in American banks.
Lest you think this is a new idea, China has already invested billions of dollars in the Blackstone Group and in the Bear Stearns Companies, two major Wall Street firms.
There should be no need to connect the political dots for you. If you think resentment against Chinese imports is bad, just wait till you see the headlines about Chinese ownership of America's greatest businesses and signature properties.
Like most businesspeople, I'm not afraid of foreign direct investment. Again, I trust markets to reflect reality and balance everything out. Additionally, one of the greatest (and perhaps underappreciated) strengths of the US economy is flexibility. When business conditions change, American businesspeople adapt. They change their mix of investments and production to fit their best advantage in any environment.
Frankly, we could use China's capital. And they have nothing better to do with it. I'm absolutely certain that they will have learned from the mistakes that the Japanese made two decades ago. You're not going to see Rockefeller Center or the golf course at Pebble Beach majority-owned by interests controlled by the Chicom regime.
But politicians here will make a great deal of noise about being "taken over" by China. Already a hot issue, expect it to get worse. And expect it to play in favor of the economic populists in the Democratic Party.
But Chinese capital in the US is not what you need to fear. As long as we stay competitive and flexible, we won't be at a disadvantage. You need to fear a decrease in our competitiveness, which will happen if the Democrats enact many of their economic and social proposals.
By the end of the lifetime of most of the people reading this, China will be the world's most powerful nation, politically and economically. That's inescapable unless they really screw up (and I never underrate my opposition). Our job is stay even with them by being tough competitors. That will preserve living standards and a leadership role for us. If we take ourselves out of the game, they will take us over, and they will deserve to.
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Mr. Paulson Goes To China... 11 Comments (0 topical, 11 editorial, 0 hidden) Post a comment »
The country was founded by real estate swindlers and smugglers. Sure they bought the buildings Columbia University owned the land.
And there was a populist outcry over this deal being bad for us.
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"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
You probably already knew this, but the Japanese acquirer didn't originally buy the whole property. But the Rockefellers made the Japanese sell them a put option on the rest of it, at the original price.
Two years later, the price of Manhattan real estate had crashed. And the Rockefellers exercised their put.
Rapacious, evil, and brilliant. They had the Japanese figured for suckers from day 1.
No need to rehash the same conversation, all over again. I'll note this: You give me a $70-billion-over-five-years budget, and I could have China in five warring provinces by year seven. I'm just a dumb lawyer. If we want to trip China, our window may be closing, but the toolkit is right there, and will be as long as their regime works the way it does.
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We are all heroes, you and Boo and I. Hamsters and rangers everywhere, rejoice!
If that scenario actually had upside.
Mostly that would be a last ditch scorched earth end type of tactic. You would have nuclear armed political units surrounded by other nuclear armed political units, some at war, some near the brink of war, all with long standing hatreds of each other.
I guess the question would be 1/6th or 1/3rd of the worlds population gone ?
You could probably get the environmentalists to back the idea.
______________________________
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
It's a mixed bag.
For the world's sake, a bloody Chinese civil war beats the hell out of decades of Chinese hegemony.
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We are all heroes, you and Boo and I. Hamsters and rangers everywhere, rejoice!
Stare decisis is fo' suckas -- Feddie
Are you relying on a CIA or DIA that actually have the ability and (more importantly) the desire to pull this off?
Don't forget that your operation, if successful, would create an unambiguous win for the United States of America. For that reason alone, the political class will either sabotage it or won't even attempt it.
Or are you thinking of a non-government-sanctioned operation?
Aren't too many places to get that kinda bling.
I'm aware of all of the hurdles, not least that there's no way I could get the CIA -- which somehow became committed to "stability" after that rotting-in-Hell-Frank-Church got done with them -- to do this effectively. To do this right, I'd need the kind of CIA we had back before Patrice Lumumba did a body dance on some bullets.
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We are all heroes, you and Boo and I. Hamsters and rangers everywhere, rejoice!
...private raises in history. Maybe one of the top three. No business syndicate would do it for obvious reasons. No private foundation has anything like that kind of might, nor could they withstand the jealousy of their home government if they did.
One thing is for sure, though. It's been hundreds of years since the last time China felt confident enough to aggressively colonize big parts of the outside world as they're doing now. They're basically in uncharted territory.
The problem with essentially-private enterprises like the Chicom regime is that, no matter how powerful they get, they're always susceptible to screwing up because they have no internal diversification. Over a broad sweep, say the next 100 years, this risk is probably overwhelming.
But can we outlast them? I'd rather switch than fight, so long as we stand ready to exploit any weakness. We're not in a cold war, since the Chinese threat is not existential. (I know plenty of people disagree with that.)
page postings. I've learned more about currency markets by reading your posts than I could with months of listening to the talking heads on CNBC. And they understand the stuff FAR better than any of the politicians(1) who are calling for the government to "DO SOMETHING!" about the balance of trade and foreign investment.
Thanks.
(1) I was going to write Democrats, but we have some guys on our side who don't seem to understand trade and the negative economic consequences of protectionism either.
Socialism doesn't work. It looks nice on paper, but it's been tried and it's failed miserably every time (usually accompanied by widespread death and suffering).
Proud member of the V.R.W.C.
I'm with Fred!