From today's FT:
Brazil and China will work towards using their own currencies in trade transactions rather than the US dollar, according to Brazil's central bank and aides to Luiz Inácio Lula da Silva, Brazil's president. The move follows recent Chinese challenges to the status of the dollar as the world's leading international currency.
Read the online article here, or click on the picture.
What is China's stance toward the world? What does it plan to do? What kind of a world actor is it, will it be, does it want to be? What are its intellectual orientations toward its social and natural environments? All these questions basically boil down to wondering what China thinks about itself in relation to the world around it. History as it appears to be, I think China's mindset is the most fundamental question facing US intelligence.
In today's NY Times, Paul Krugman gives us his insight into China's mindset. And the sense Krugman portrays is that China considers itself an economic power with certain economic entitlements that outweigh world initiatives:
[T]he rate at which greenhouse gas emissions are rising is matching or exceeding the worst-case scenarios.And the growth of emissions from China — already the world’s largest producer of carbon dioxide — is one main reason for this new pessimism.
. . . .
So what is to be done about the China problem?
Nothing, say the Chinese. Each time I raised the issue during my visit, I was met with outraged declarations that it was unfair to expect China to limit its use of fossil fuels. After all, they declared, the West faced no similar constraints during its development; while China may be the world’s largest source of carbon-dioxide emissions, its per-capita emissions are still far below American levels; and anyway, the great bulk of the global warming that has already happened is due not to China but to the past carbon emissions of today’s wealthy nations.
So China is modeling itself after post-1980 America???
Nouriel Roubini, in today's New York Times:
The 19th century was dominated by the British Empire, the 20th century by the United States. We may now be entering the Asian century, dominated by a rising China and its currency. While the dollar’s status as the major reserve currency will not vanish overnight, we can no longer take it for granted. Sooner than we think, the dollar may be challenged by other currencies, most likely the Chinese renminbi. This would have serious costs for America, as our ability to finance our budget and trade deficits cheaply would disappear.Traditionally, empires that hold the global reserve currency are also net foreign creditors and net lenders. The British Empire declined — and the pound lost its status as the main global reserve currency — when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running huge budget and trade deficits, and is relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets. The resulting downfall of the dollar may be only a matter of time.
. . . .
Idle factories, moored container ships, widespread bankruptcies, massive migration back to the hinterlands, strangely clean air—the signs of depression are everywhere in China. Because it makes so many of the goods the world isn’t buying now, China stands to be worse hit than the rest of the world —just as America was during the Depression, when it was the world’s sweatshop. But like America then, China will use tough times to design innovative products that will get it the high profits and the high-value jobs Americans kept to themselves for decades. And that is very bad news for the United States, unless it uses tough times to reinvent itself, too.
. . . .
China faces big problems, and its modern history has been marked by the unforeseen. Perhaps we will look back at the spectacle and choreography of the Beijing Olympics opening ceremonies as the last time the world thought there was no limit to what China could achieve. But I am betting the other way.
This article suggests Mr. Fallows -- America's preeminent journalist covering China -- thinks that country's future is (a) promising, and (b) not that good a thing for America, unless America makes major changes to its mode of operation to keep up. This is the least confident I've found Mr. Fallows on the subject of China-US.
The WSJ had a story yesterday headlined, 'Global Search for Growth Will Turn to U.S.' The focus of this article is a question -- who will the world economy rely on for its consumer base, more specifically, will America remain that base or will we contract relative to others as the only indispensible consumer? As I see it, the answer will have a lot to do with where America sits, economically and socially, in five or ten years. The question is up in the air because America just created a global recession that threatens to turn into a world depression, just as other nations are developing new consumer bases, i.e, China. You never want to piss off the world, but especially not right as an alternative to you is in the process of emerging.
So, what do we know. We know there will be a fierce contraction this year and next, and then a slow recovery will take over after that. Let's call that a total of three or four years. What about year five and beyond? What about the medium-term?
One deciding factor about year five and beyond could be whether the US remains by far the most significant consumer basis in the world. Right now there is the thought that China might eat into that significance. So the question is, while the US will remain the most important, will it remain as important, as central, as unilaterally determinative? That, we might say, is another question. If China eats into American demand -- in other words, if the world's producers, investors, and bankers transfer a certain amount of the world's business to China as their population, already enormous, creates an-ever growing middle class of consumers that, just by numbers, could swallow us Americans -- our standard of living will go down. We will have to produce more and consume less. We might even feel it, and it will make our lives different than they are now, and have been. Specifically, it would be less access to easy money and less than limitless consumer items.
Of course, the above scenario is but one alternative. The WSJ article suggests another. The article reports the world's elite believe the system still depends on American consumers, and bad. I gotta say, whether they are right or wrong on that, this WSJ story is fabulous. It uses the word 'elite.' I get disappointed when people shy away from using it, in a sociological way. I don't like the political use of the word -- as if anybody should be ridiculed because he or she's an elite. But when just talking about how society works, the word, or something like it, is necessary. Anyway, here's an excerpt and the question is: what do elites think?
Two questions preoccupy the world's economic elite here: Will the government money pledged to prop up national economies be enough to keep the world from going into a prolonged slide? And where will the growth come from, once bottom is touched?At the start of the five-day World Economic Forum, the broad outlines of answers are emerging. Economists say the fiscal-stimulus packages from Washington to Beijing will cushion the downturn but fall short of preventing a world-wide recession. And global growth, when it comes, will still be powered in part by U.S. consumers -- though they'll spend far less than they did in the debt-fueled years of the recent boom.
Chinese Premier Wen Jiabao, the first Chinese leader to attend a Davos meeting in the event's 38-year history, will likely seek to lower expectations that China can extract the world from the economic crisis. Despite its rise as a global production hub, China -- like emerging Asian economies such as India -- is too small, too poor, and too export-dependent to provide much of a buffer for the global economy in the next few years.
Asia's inability to compensate for the drop in U.S. consumption means any global recovery will be slow in coming and marked by lower growth rates than the world has seen in recent years.
But again, the real question with US-China and who is the world's consumer is not today. It is five, ten years from now, and beyond.
According to Brad Setser, the Chinese government is buying fewer ten-year treasury notes and replacing them with three-month treasuries. This strikes me as something to pay attention to. That the Chinese are transitioning to shorter-term purchases of US dollars signals to me they are less commited to maintaining their reserves in US currency over the long term. Or perhaps not. But if the dollar is increasingly being financed by short term debt that constantly has to be reproduced, then at a minimum there is greater opportunity for foreign investors to slow or retract US debt holdings. As a result, the US is at the very least increasingly vulnerable to a quick movement out of the dollar by foreign investors. Why is this important? Because of the significant extent to which US economic performance over the past two-three decades has depended upon foreign (i.e., Chinese) financing of the dollar.
The British historian Niall Ferguson has a new book out, called The Ascent of Money: A Financial History of the World. It's also a PBS documentary. I haven't got my hands on the book yet, but I will in the next few weeks and will write about it here in this blog.
In the meantime, this week I read the NY Review of Books review of it, by Robert Skidelsky. (Here's a link, but access to read the whole thing is subscriber only.) According to Skidelsky -- again, I haven't read the book yet -- Ferguson coins a term to convey the significant integration between the Chinese and American economies: Chimerica.
Here's a quote about 'Chimerica' from Ferguson's book, via Skidelsky's review:
"Chimerica" -- China plus America -- seemed like a marriage made in heaven. The East Chimericans did the saving. The West Chimericans did the spending. [Cheap] Chinese imports kept down US inflation. Chinese savings kept down US interest rates. Chinese labour kept down US wage costs. As a result, it was remarkably cheap to borrow money and remarkably profiable to run a corporation. Thanks to Chimerica, global real interest rates . . . sank by more than a tird below their average over the past fiftenn years. Thanks to Chimerica, US corporate profits in 2006 rose by the same proportion above their average share of GDP. . . .The more China was willing to lend to the United States, the more Americans were willing to borrow. Chimerica, in other words, is the underlying cause of the surge in bank lending, bond issuance, and new derivative contracts that Planet Finance witnessed after 2000. It was the underlying cause of the hedge fund population explosion. [It] was the underlying reason why the US mortgage market was so awash with cash in 2006 that you could get a 100 percent mortgage with no income, no hob or assets.
In sum, the standard of living that American business, consumers, and families came to enjoy over the last few decades -- and particularly this past decade -- was made possible by Chinese financing. But now it appears we face a shift in this arrangement. Indeed, evidence suggests the relationship between China and America is changing, if ever slowly. My sense tells me that shifts in the structural arrangements between China and the US is as significant an event as any that shapes America today. What will come of these shifts -- how quickly the shifts will occur, and what they will initiate -- is an open-ended question. But we should be aware, and we should plan. We should do what it takes to bend the effects of the shift in the general direction of our interests. Again, this takes planning, not ideological belief that whatever the free-market creates is naturally right.
The NY Times today says, yes.
China has bought more than $1 trillion of American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home, a move that could have painful effects for American borrowers.. . .
China’s voracious demand for American bonds has helped keep interest rates low for borrowers ranging from the federal government to home buyers. Reduced Chinese enthusiasm for buying American bonds will reduce this dampening effect.
Brad Setser says, not so fast.
In some sense China’s purchases of US debt has to fall from its current level, as the current level of purchases is unsustainable in a context where China’s reserve growth seems to have slowed. The TIC data show a $44.4b increase in China’s US holdings in September and a $67.5b increase in October, with nearly all the increase coming from the rise in China’s short-term Treasury holdings.That said, the available data from US suggests that China has yet to lose its appetite for either dollars or Treasuries, despite all the talk coming out of China.
We don’t have data for November or December, so the US data are by now a bit stale. But China’s $67.9b of purchases of Treasuries in October were exceptionally high ($43.5b in September isn’t shabby either). That level of Treasury purchases suggests, if anything, that China was shifting funds into dollars, as China’s recorded US purchases almost certainly exceeded China’s October reserve growth. I suspect that China wasn’t shifting into the dollar so much as holding more dollars in ways that register in the US data, so I would discount this data point a bit. But the raw October data certainly doesn’t indicate any shift away from either the dollar or Treasuries. Rather the opposite.
I find it hard to believe that China is not in the slow process of reducing its US debt holdings. One of the significant consequences of our 2008 Wall-Street collapse is that US debt is no longer worth what it used to be.
So get ready: Without China's financing of our debt, America will have to raise its own revenues (interest rates, taxes), cut spending, and engage in real inflation-battling for the first time in decades. It seems likely to me that, slowly and steadily, this is our coming reality.
China's leading investment official, Gao Xiqing, suggests we Americans take such advice to heart. Read an interview between Mr. Xiqing and one of America's leading journalists, James Fallows, here.
An excerpt:
Mr. Fallows: With so much of China’s money at stake, did U.S. officials consult the Chinese about the rescue plan?Mr. Xiqing: Not directly. We were talking to people there, and they were hoping that we would be supportive by not pulling out our money. We know that by pulling out money, we’re not serving anyone’s good. Including ourselves. [This is the famous modern “balance of financial terror.” If Chinese officials started pulling assets out of the U.S. and touched off a run on the dollar, their vast remaining dollar holdings would plummet in value.] So we’re trying to help, at least by not aggravating the problem.
But I think at the end of the day, the American government needs to talk with people and say: “Why don’t we get together and think about this? If China has $2 trillion, Japan has almost $2 trillion, and Russia has some, and all the others, then—let’s throw away the ideological differences and think about what’s good for everyone.” We can get all the relevant people together and think up what people are calling a second Bretton Woods system, like the first Bretton Woods convention did.
From the economist Brad Setser, at his very helpful Council on Foreign Relations blog:
Foreign demand for any US bond with a smidgen of credit risk has disappeared. Indeed, the fall in demand for Agencies over the past three months is more severe than the fall in demand for US corporate bonds (think securitized subprime mortgages and other securitized housing and consumer debt) last August.Normally, this kind of fall-off in foreign demand would be associated not just with a credit crisis but also with a currency crisis. A country cannot finance a trade and current account deficit without financing, and two big sources of financing for the US deficit — foreign purchases of Agencies and foreign purchases of US corporate bonds — have disappeared. The US, though, isn’t a normal country. The fall in demand for risky US assets was offset by a rise in demand for Treasuries and the sale of foreign assets by Americans.
American debt is less valuable today than it was two, three months ago. Therefore there is less capacity for Americans to borrow and make more debt. This is the heart of why our credit crisis has gotten worse the past few months. As dependent as we've been on foreign financing of our debt, we are now facing that large of an economic restructuring. When the dust settles, we won't have as much wealth as we are used to. We won't have as much credit as we are used to. We won't have the standard of living we are used to. We will have to pay our way as we go, for the first time in about four decades. This is scary in the short-term, but will make us a better, more sustainable country in the medium- and long-terms.
In the meantime, we need to increase savings, as we are starting to do, and adapt our culutral norms to fit better with the changing facts. No longer can we find our identity, both collectively and as individuals, in excessive consumption and spending.
A very interesting sociological question is, what new cultural norms will emerge? And where in who we are now will these new norms come from? Who will we be?
China, Economic Growth, and Smog
Yesterday the financial papers had top-of-the-paper headlines reporting significantly lower growth rates for the Chinese economy.
The FT: 'China growth rate slows sharply.'
The WSJ: 'China Slows, World Feels the Pain.' From this report: "For the year, China's growth is likely to be below 10% for the first time since 2002."
So I found it interesting this morning to read one of my favorite blogs -- by James Fallows, an American journalist who writes on and lives in China -- and receive a first-hand account of China's environmental issues. Mr. Fallows wrote:
Beijing, 3pm, October 22, 2008 -- 32 days after the Olympic/Paralympic emergency "clean air" rules came to an end. Feels like home again!
And he included the picture above, which I have taken from him.
My thoughts turned to China's willingness to prioritize environmental challenges in the face of what seems like a firm commitment on their part to maintan double-digit (or at least very high) growth rates. I don't consider economic growth and a livable environment to be a choice of either/or. But in China's case they don't seem to have yet figured out how to have both.
