“What—you want a piece of me, punk?”: In China, if you kill a panda bear—
even by accident—you will be executed. So DO NOT fuck with the pandas.
So getting an actual document which spells out in black-and-white what the Chinese are really thinking is an eye-opener: Not so much for what it says—which on the whole is predictable—but for the emphasis it has.
Recently, I got handed a copy of the Chinese economic evaluation of Japan, the European Union and the United States. The document was written for and by Chinese government officials who will be attending the G-20 summit in Seoul next November. This document will be the basis for their discussions with their trading partners, and outlines China’s concerns about those countries.
I wouldn’t be surprised to learn that the document was deliberately leaked—in fact, I am treating it as such. The material does not contain any sensitive or actionable information—no tidbit like, “Psst! Next December 5? We’re buying 10,000 tons of gold on the open market!”
Actually, the evaluation was much more fascinating—and important—than mere insider trading information: The document shows what the Chinese economic leadership is thinking, vis-à-vis the current economic situation of their major trading partners.
In the notes I read, the U.S., the European Union, and Japan were all discussed in broad detail—but with curious accents:
Insofar as Japan was concerned, the evaluation said—literally—“We approve.” They considered Japanese sovereign debt risk “negligible in the short-term”, and generally lauded the Japanese government’s efforts to prop up internal demand; their only concern was that these efforts not be withdrawn too quickly, in case such a hasty withdrawal kills what they see as a nascent Japanese recovery.
The Chinese are concerned about Japanese deflation, though, and whole-heartedly approve of any measure to prevent the yen from further appreciating, up to and including creative measures by the Bank of Japan to inject liquidity into the markets.
What was interesting was how, in passing, the Chinese notes mentioned the Japanese current account surplus which, by the language used, they consider a negative thing. They wanted the Japanese to “avoid exacerbating” the current account surplus and trade imbalances. The language was such that it was clear how the Chinese are very concerned that they not become Japan in a next recession: They look to the Japanese Lost Decades as something that could befall China, and an object lesson to be avoided at all costs.
This gives some insight into their mania of keeping the renminbi weak versus the dollar. It’s not only so as to encourage exports—it’s so as to avoid renminbi deflation.
However—natch—the evaluation makes no mention of current political tensions with Japan. Furthermore, it olympically ignores how China is goring the Japanese economy with its beggar-thy-neighbor trade, capital flow and monetary policies. My guess is, the Chinese won’t be spending much time jawboning with the Japanese in Seoul: It’ll be the quick handshake, the polite few words, then move on.
As to the European Union, the evaluation makes it clear how nervous the Chinese were at the ad hoc approach Europe used when dealing with the Greek crisis. They want the EU to strengthen its Stability & Growth Pact so as to “prevent and resolve fiscal imbalances”. At the same time, they see an “urgent need” to set up a whole host of mechanisms to assure “financial stability”—id est, prevent another Greece, or at least to have the mechanisms and structure in place to efficiently handle another Greece.
They also suggest that internal EU barriers be completely eliminated, as well as the application of other measures to further strengthen internal EU bonds—a suggestion which highlights a curious blindspot of the Chinese: They don’t seem to understand why the European Union Commission simply doesn’t order about the wayward elements of the Union, and make the whole of the peninsula more homogenous.
They don’t seem to understand the political realities which define certain idiosyncrasies of the EU. A blindspot which I suppose is understandable—in China, they’d just shoot the dissidents. My guess is, they’d have shot the Greeks by now. (They’ll shoot you if you kill a panda, even if it’s by accident—so what’s shipping a few thousand Greek or Spanish or French protestors six underground?)
Regarding the United States, the Big Kahuna: The Chinese are very worried—but they also view America with a bit of contempt.
In their very first sentence, the Chinese state that U.S. fiscal deficit reduction is based on “over-optimistic and unrealistic growth assumptions”—that’s diplomat-speak for “Are you outta your fucking mind?” The second sentence tears apart U.S. GDP growth projections for 2010 and 2011, both the U.S. government’s, and that of leading U.S. economists.
U.S. debt reduction is the big bugaboo of the Chinese—it permeates everything they write about America. They see it as an “imbalance” that will eventually affect all of the world’s economies. They think that American government claims that the deficit will be reduced by 50% by 2012 are “not entirely realistic”—again, diplomatic politesse that masks a real contempt for American self-deception.
The Chinese are really exasperated that the U.S. does not seem to have the political will to tackle the enormous deficit. They do not think that the U.S. can achieve fiscal deficit reduction by spending cuts alone—they see the need to increase fiscal revenues. They worry that the U.S. fiscal deficit—which they believe will deteriorate in the medium term—will lead to increase interest rates.
Most crucial of all, they see the U.S. failure to take concrete policy steps to curb the deficit as having a greater impact on the world’s economies than any trade issues American officials might be bitching about. It’s hard for a third-party observer to disagree with this assessment.
Furthermore, the Chinese point out—sensibly—that the U.S. talks about increasing exports and reducing dependence on consumption—but the U.S. makes no mention of concrete steps as to how to achieve this, besides talk of “reducing foreign barriers to trade”. The most striking point here is, the Chinese view as “misdirected” the U.S.’s blaming foreign trade barriers for America’s failure to export. Again, third-party observer says? Score for China.
Though they superficially laud the financial reform package the Obama administration recently passed, the Chinese are very worried about the TBTF banks, Freddie Mac and Fannie Mae. They think that the U.S. government has no exit strategy for its meddling in the financial system, or a clear directive as to the role of the intervened institutions in the financial system, or how they will be regulated. (Yes, I can see the irony: The Chinese genuinely worried about America’s meddling in its financial institutions. WTF?)
Finally, they characterize both the U.S. government’s fiscal policy and the Federal Reserve’s monetary policy as “doubly-slack”. They wonder how the U.S. will ever fix its trade deficits and fiscal deficits, if both the government and the Fed are—to their eyes—asleep at the wheel.
In other words, they don’t see the Fed’s and the government’s bailouts and stimuli (TARP, QE, and all the rest of it) as heroic measures that saved the system—they view the bailouts as policy weakness: Gymnastics that kicked the can down the road, but didn’t solve anything. Which, again, seems accurate: It was easier to save Fannie and Freddie and the Too Big To Fail banks, rather than letting them fail and going through the painful process of cleaning and purging the system.
Bottom line: They don’t see either the Federal government or the Federal Reserve actually implementing concrete steps to achieve medium- to long-term solutions to the problems at hand, especially deficit reduction. And this makes them really nervous.
That’s the upshot of this evaluation of their trading partners.
As to themselves, the Chinese’s self-evaluation is rather interesting: First of all, they see their own easy money policy as having been a great thing. They consider it to have been the reason for sustained rapid growth during the last two-three years. Unlike Jim Chanos’ very smart evaluation—he thinks they are in a bubble, overheating and heading for a fall—the Chinese see their easy money policy as having been essential to keeping their economy going. They have no intention of tightening money anytime soon.
As to their exchange rate policy, they’re also keen on it, viewing its “stability” as having been essential to China’s making its way safely through the Global Financial Crisis.
They talked up their capital control policy—a lot: And it wasn’t convincing. They highlighted their efforts to change “slack controls” to “balanced management”, but for all the talk of “widening capital outflow channels”, the Chinese were intent on “strengthening [. . .] statistical monitoring and advance warning systems, [. . .] [so as to] ensure steady and orderly liberalization of capital [. . .] provided that risks can be controlled.”
In other words, it wasn’t the Roach Motel model of capital controls (“Capital checks in, but it don’t check out!”) It was more of a Checkpoint Charlie capital control model: “You can pass through all you want—but we can shut you down whenever we want.”
But what they seem to be keenest of all on is their domestic demand. They don’t worry that their current account surplus fell over the last few years with the crisis—they seem to view it as a natural byproduct of increased internal demand, something they are obviously very pleased with, and are trying to further foment. They highlight that 76% of GDP growth in 2005 was from domestic demand—and contrast that with 2008, where 91% of GDP growth was from domestic demand.
This is how the Chinese see their own economy.
Now of course, none of this is novel or remotely new. And you can take it or leave it as to my own reliability—I could be well making this all up.
But assuming I’m not, the take-aways from the Chinese evaluation are really interesting—and make a lot of sense:
One, the Chinese don’t want their economy to fall into the Japanese Lost Decade syndrome—which would make their own monetary and easy-money policies that much more understandable. It’s not merely to boost exports, it’s to prevent deflation. They will continue to keep the renminbi weak against the dollar, and if they can, weaken it further via expanding credit.
This means that China’s bubble—which as I said, smart people like Chanos and now Nouriel Roubini are thinking might pop soon—might stay inflated a lot longer than anticipated. After all, the Chinese have the current account surplus to pay for such a bubble. So I wouldn’t bet against them.
Two, the Chinese think America is a basket case—and they’re worried about a spike in interest rates crashing the American house of cards. Furthermore, they have a palpable contempt for American policy slovenliness—they don’t like the American self-deception, or their habit of blaming everyone but themselves, or their habit of outlining broad policy goals yet doing absolutely nothing to achieve them.
Three, and I think most imporant of all, they are clearly intent on developing their internal markets: Anyone claiming otherwise doesn’t get the Chinese or their priorities. It’s not that they claim they want to foment domestic demand for the sake of political window-dressing, or to assuage American calls to “reduce import barrier”—it’s that the Chinese are highlighting domestic demand as an increasing component of their GDP’s growth because they are proud of this growing domestic demand.
They clearly want this domestic demand to continue to expand, and become the engine of China’s future growth. That is where they see the future of their economy—not exports.
If this is indeed what the Chinese are thinking, then their mercantilism would seem to be a stepping stone towards achieving a self-sustaining economy, where internal demand is satiated by internal production—in other words a balanced (and hermetic) economy.
Now, is this evaluation on the up-and-up? Like I said at the beginning, I would treat this document as likely a deliberate leak. But none of the points—except for the Japanese omissions—are all that surprising, and in context make a lot of sense. So deliberate leak or not, I’d treat this as accurate and true.
So when the G-20 summit takes place in Seoul next November 11, this is what the Chinese will be thinking when they chat up their largest trading partners—or at least claim that they’re thinking.