China Redux

With its economy a complete disaster and nature’s bounty rapidly diminishing, Iran is studying Chinese growth with the hope of jumpstarting its own economy (and without opening up political processess).

The Journal’s story notes that Iran is very unlikely to succeed on export-growth because it is not a low-wage economy. So, while it still needs to diversify away from near-total dependence on energy revenues, the “Chinese model” isn’t going to cut it in Iran.

This story makes me think that there are truly two certainties these days:

1. All countries are chasing (lusting) after China’s high, sustained growth rate.

2. Anti-American governments are magnetically attracted to China.

This situation will likely persist for many years to come. How awkward!

For the most part, I have stayed away from the issue of Taiwan since I started writing this blog. The main reason for this is that it is hard to write about relations between China and Taiwan without grossly offending a lot of people.

Since I don’t have strong personal beliefs on the subject, I figured it wasn’t worth it. [For the record, I support whatever the people want (a nebulous little phrase). If that means reunification, that's great. If it means another arrangement, that's fine too. At a fundamental level, I think democratic governance is a good thing. As to hammering out the details -- how to get all the diverse interests and views in China and Taiwan together on the same page -- I am happy to cede this work to the politicians in Taipei and Beijing, with help from Washington.]

My primary interest in cross-Strait relations as a policymaker is in maintaining international security and US interests in East Asia. First and foremost, this means avoiding conflict in the Taiwan Strait.

I was fortunate to hear three experts on Asian security policy discuss how Sino-American friction around cross-Strait relations could result in conflict — and how to avoid it — at an event at Washington’s Brookings Institution on April 26. Richard Bush, Senior Fellow and Director of the Center for Northeast Asian Policy Studies at Brookings, and Michael O’Hanlon, Senior Fellow in Foreign Policy Studies, presented their new book, A War Like No Other (available here).

This important new book is based, somewhat contrapuntally, on the authors’ belief that in spite of the disjunctions caused by China’s rise, the US and China can work together to build a strong, mutually beneficial relationship. But there is one issue, more than any other, which threatens to derail the entire bilateral relationship: friction in the Taiwan Strait. Read the rest of this entry »

Top Chinese officials are openly warning of a bubble in the stock market. At least three state-run papers ran major stories about a recent warning from Zhou Xiaochuan, governor of the People’s Bank of China, who said that he was concerned about the bubble, reports the Financial Times.

But investors were unimpressed and the market didn’t skip a beat, rising three percent in trading Tuesday.

In a post three weeks back, I wrote that “there’s a lot of complacency” in the market and that Chinese officials didn’t seem to be doing much to address the situation. The reality is proving a bit more complicated, of course.

Chinese officials are trying to talk down speculators, but to no avail. In the past, strong statements about the market have strongly influenced share prices (as with the Federal Reserve in the United States). But times have changed, the FT notes, and “the admonitions of senior officials seem increasingly impotent.”

So why have investors stopped listening to official warnings? One explanation is that they’ve become desensitized to all the talk. Officials have so far resisted any decisive moves, such as ticking up China’s low interest rates.  But authorities appear unwilling to do anything that could actually slow the country’s torrid growth.

So China’s investors are calling their bluff.

Of course there are other, less rational reasons to disregard the advice of China’s top economic officials and stop worrying about the bubble: some people just like to gamble.

No, we’re not talking about manufacturing facilities or foreign direct investment.

Japanese Prime Minister Shinzo Abe has decided to send a sakaki plant to the Yasukuni Shrine, rather than visit the controversial Shinto war memorial himself.

Abe, who took office just eight months, had said in the past that he was unsure whether he would follow his predecessor, Junichiro Koizumi, in making annual visits to the memorial for Japan’s wartime dead, which includes Class A war criminals from World War II. Those visits became a leading source of acrimony and distrust between Japan and China.

It’s worth noting that this is not just any old plant, but a six-foot-tall sakaki, a type of evergreen used in Shinto rituals, for which Abe forked over $425 (via the NYT).

And while government spokesmen would not comment because “the offering was made by Mr. Abe as a private citizen and not in his capacity as a Japanese leader,” officials did note the plant bore a placard that read “Prime Minister Shinzo Abe.”

In doing so, Abe chose not to completely renounce Koizumi’s actions, but to scale them rather dramatically. It’s a sensible political compromise from Abe. And Chinese officials seemed heartened by the fact that Abe stayed away from the shrine’s grounds, if not thrilled with the $425 offering.

This should help keep Sino-Japanese relations on track following the “thawing” after Wen Jiabao’s visit in April.

Poor Mr. Paulson. He must have known what he was in for when he agreed to take the job of US Treasury Secretary in June 2006. He must have felt compelled to accept the challenge, and in doing so, follow in a long line of Goldman Sachs executives who left the firm for prominent positions in government (including Jon Corzine, Robert Rubin, and John Whitehead, among others). Paulson’s mandate upon assuming his new role was to solidify the United States’ economic relations with China. That increasingly looks like mission impossible.

A note of dire warning has crept into the Secretary’s speeches. At the Petersen Institute in Washington on Wednesday, Paulson argued that “time is of the essence” for Chinese economic and currency reform (via the FT). The point he was making, that China is throughly integrated into the world’s goods and services markets but way behind in terms of integration into global currency and and capital markets, is a fundamentally sound one.

The problem is that Paulson’s sense of urgency is wholly political, not economic. “Clearly there is not just the possibility but the likelihood of legislation” on Capitol Hill, he said. This is not an idle threat. Paulson has no interest in seeing legislation come to pass. It’s simply political reality.

Here’s Morgan Stanley Chief Economist Stephen Roach discussing Congressional attitudes towards China at a recent World Economic Update panel of the Council on Foreign Relations:

…Congress believes that you look at a huge trade deficit like the U.S. has and you connect the trade deficit to the pressures on the workforce, and then you take the biggest piece of the trade deficit–34 percent of the which late last year went to China–and so you point the finger at China and say ‘All we’ve got to do to help American workers is bash China.’

So it would seem that Congress can hardly wait to pull the trigger on legislation to punish China. Remember, it was Congressional Democrats who last year proposed a 27.5 percent tariff on Chinese imports.

Ultimately, Paulson’s biggest problem is that currency reform will not solve the US trade deficit with China. China knows it; the Bush administration knows it; even the Congress even knows it. Paulson said it himself Wednesday. “I don’t think there is much they can do with the currency that would make a big difference in the trade balance,” he stated.

But that’s just not the point. This is about forcing China to play by America’s rules. It’s about reminding (or teaching) Chinese officials that US political will and whim is as great a global force as F-16 fighter jets. It’s about looking every which way but in the mirror.

And it makes Secretary Paulson’s job much, much harder. He now must find a way to convince China to act swiftly — not for economic reasons — but as a goodwill gesture to American legislatures who prefer pointing the finger at China to actually devising proposals to grow America’s savings.

It’s not a desirable position for a policymaker to be in.

With the next major meeting of the US-China Strategic Economic Dialogue coming up, this may be Paulson’s last chance to beat back Congress and keep US-China economic relations on track.

While the paper of record tracks down poisoned medicines from China (here), the Internet Journal of Toxicology here takes a look at the disturbing case of “faked eggs” in China. The piece examines “eggs that cause problems:” Red-yolk eggs, Soil-filled eggs, and Human-made eggs. Scary stuff.

H/t to Shanghai’s GB for passing this one along.

For all the hardcore intellectual property watchers out there, here is the 2007 “Special 301″ Report of the US Trade Representative, the annual global review of intellectual property rights (IPR) protection and enforcement. This year’s report underscores growing concerns about China and Russia. No surpise there.

The report identifies several “Notorious Markets” for counterfeiting and piracy. Among these:

In the virtual realm, the 301 report cites Baidu.com as “the largest of an estimated seven or more China-based ‘MP3 search engines’ offering deep links to song files for downloads or streaming.” Famed Russian site allofmp3.com also makes the list of notorious virtual markets.

As for physical markets, the report identifies the Beijing’s Silk Street Market and the China Small Commodities Market in Yiwu as prominent symbols of China’s enforcement problem.

The report also includes a special provincial reviw of China’s IPR protection and enforcement at the local level, which provides a far more nuanced look at China’s progress and challenges on these matters.

“Leadership at the provincial and local levels is critical to improving China’s IPR climate,” US Trade Representative Susan Schwab said. “By highlighting local problems and also giving credit where it is due, we encourage local leadership.”

Seems like a sensible enough strategy. But given political constraints in Washington, will there be enough time to execute subtly, with patience and wisdom?

Hard-hitting op-ed from Steven Pearlstein of the Washington Post on how and why the US is losing out in the bilateral trade relationship with China.

I disagree with many, if not all, of Pearlstein’s points. His evidence is one-sided, and many of the points against trade are shaky. Nonetheless, this piece succeeded in forcing me to rethink my assumptions.

Money quote:

There is a reason that, when it comes to trade and globalization, more Americans believe Lou Dobbs than Hank Paulson and Ben Bernanke — and it’s not because they’ve been bamboozled. The reason is that Americans perceive, correctly, that in recent years liberalized trade has not delivered as promised, that education alone is not the answer, and that neither party has come up with economic policies as tough and effective as China’s.

What do you think? Dobbs or Paulson? Is the US getting the short end on trade with China?

On March 11, Halliburton, the giant oilfield-services provider, announced that it was moving its corporate headquarters to Dubai, from Houston, Texas, in an effort to expand its business in the Middle East and Asia. Halliburton CEO David Lesar explained the move thusly (via Bloomberg): “Growing our business [in Dubai] will bring more balance to Halliburton’s overall portfolio…This is a market that is more heavily weighted toward oil exploration and production opportunities.”

Around the time of this announcement, I had the opportunity to listen to a seasoned US business executive and policymaker, who also happens to serve on the Board of Directors of a Fortune 50 technology company, speak about China’s growth and the future of American entrepreneurship. One of the things this executive talked about was what I call the 70/30 principle: for decades, large US corporations earned 70 percent of revenues from North America and Europe, while just 30 percent came from Asia and the rest of the world. In the future, this ratio could very well be turned upside down: North America and Europe might provide companies like Microsoft and Cisco with just 30 percent of revenues, while Asia would account for 70 percent.

These are merely projections. But they are projections that American companies are using to plan for the future of their businesses.

And what is clear is that as the global economy continues to grow, markets become less concentrated, which means that multinational corporations are less reliant on earnings from more advanced markets such as the US and Europe.

Example: on April 26, General Electric Chairman Jeffrey Immelt announced that for the first time, more than half of GE’s revenue is expected to come from outside the US this year.

There is nothing inherently bad about this economic trend. Jobs are still going to be created in the United States, although there may be more competition for them. And if moving to Dubai is going to help a company such as Halliburton compete more successfully, then the relocation should benefit shareholders (including many Americans).

But it’s not altogether good for US taxpayers. Since income earned abroad and paid to a company based abroad is not subject to US taxes, Halliburton may escape significant annual tax payments to the US Treasury — and all the public goods these taxes help create. Some members of Congress are in a huff over the move (via the Post); Senator Byron Dorgan wondered whether Halliburton is seeking to escape bad publicity from its recent contract troubles in Iraq, avoiding US tax obligations, or evading restrictions on doing business with certain countries (could it be all of the above?).

And then there are real concerns about American jobs, innovation, and more.

The question is, how important is keeping corporations in the US for the American economy? And assuming the US wants to keep corporations at home, how can do it so?

If the 70/30 principle holds true, China could begin to look like an attractive home for prominent US corporations.