Why is America doing worse than most of the Old Core?

The "race from the bottom," so sayeth The Economist, as the Old Core economies see who can recover with the least awkwardness.

Everybody we know seems to be enjoying better GDP growth and lower unemployment.  So what gives?

The main theories are unsurprising:  differences in fiscal policies, exchange rates and debt levels.

So Germany and the Brits are praised for being stingier with public money, but the mag says that doesn't explain sudden spurts in growth.  

Did the euro's dive limit our exports while helping Germany's? You bet.  Japan's rising yen a problem?  It would seem so.  But the mag says that theory with plenty of holes too.  Our exports rose with strength too, despite all our issues.

And the UK has high debt but not the same unemployment as we do, so the debt explanation doesn't seem to cut across.

And our unemployment, says The Economist, is making the rest of the world pessimistic about the future, figuring if old standby America isn't up for the strong recovery, then how can anyone else be?

After all that exploration, the mag says the real reason is that America's recovery is the most mature, meaning we restocked our shelves faster than anyone else, so I guess we're quasi-double-dipping earliest.

Oh well . . ..

China: Will fail, but too big to let fail

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Guardian op-ed by way of WPR's Media Roundup.  Fascinating piece.

Very sensible run down to start off:

There is no question that China's growth has been anything short of exceptional. However, that success may have run its course. China will have to rise again in order to rebalance growth while reducing inequality and environmental degradation. The plight of 1.6 billion people depends on it, and the entire world economy. The global community should do all it can to help China succeed.

Like Japan, South Korea, and others before, China has deployed a hybrid mix of state and market-led forces to globalise its economy over the past 30 years. Like its East Asian predecessors the Chinese miracle has been built on exports to the west. The results have been unprecedented, with a growth rate of approximately 10% that has lifted 566 million people over the $1.08 "extreme poverty" threshold set by the World Bank.

Yet the Chinese model is not sustainable in the long run. It has created severe inequalities and environmental degradation and has contributed to the global imbalances that were at the root of the financial crisis. There is an across the board consensus that China needs to diversify demand toward its domestic market.

Yilmaz Akyuz, chief economist of the South Centre, estimates that close to 60% of China's imports are used in the export sector and only 15% of imports are for domestic consumption. 

All sensibly rendered, especially noting the non-uniquenes of the China model.

But here's where Chinese incrementalism cannot be condemned:

The west can't have its cake and eat it too. The west can't tell China to increase domestic demand and rebalance its economy through domestic consumption (without increasing carbon dioxide emissions), and at the same time shun China's incremental approach to to monetary policy, strikes and wage increases, policies for financial stability, and green industrial innovation. China should be enabled to succeed. A country of 1.6 billion people that is now one of the only rudders working in the global economy is too big to fail.

So an argument for focusing on direction over degree--as in, is China slowly moving in the right direction?  And not obsessing too much over speed.

Why?  Simply put, no one wants to own the problem of a ship-wrecked Chinese economy.

Excellent, intelligent piece.

Global economic crisis' impact on people flow? Doom-sayers repudiated yet again

  Economist chart

WPR piece on global economic crisis' impact on immigration (slight reduction) and remittances (even slighter).

The opening:

Over the last three decades, international migration has become an important part of the world economy, providing vital labor for industrial countries. Migration has also become a major resource for origin countries, helping to lift millions of people out of poverty and contributing to national income and development finance. The global economic crisis (GEC), which led to massive declines in investment and production all over the world, was widely expected to also lead to a fall in migration. Analysts also expected that many migrants would return to their homelands, and that worker remittances would decline. Although the current fragmentary data means that any assessment must be seen as provisional, some general trends have emerged three years into the crisis. These suggest that in some areas, the effects of the GEC on migration were not as severe as expected, while in others they defied expectations.

Solid piece worth reading.

Bottom line:  alleged deglobalization or immigration "U turn" is completely unsupported by facts.

The clash of the titans, according to The Economist

Economist editorial and briefing on the Indian-Chinese economic rivalry.

Unlike the rising tandem of Japan and Germany a century ago, India and China are akin to entire civilizations and not mere nation-states.  They are also overwhelming poor, despite the booming economies.

And yet, how these two handle their twin rise will likely determine, says The Economist, whether or not great-power warfare returns to the scene.

Neither seems comfortable in their skin, says the editorial.

China, for example, gets resentment whenever it's told it needs to do more for the world.  And yet, how not to involve the world's most populous state, biggest exporter, biggest car market, biggest carbon emitter and biggest consumer of energy?

India's paranoia tends to run toward the Chinese directly:  they see China, at every possible point, trying to undermine its rise by locking in resources the world over, keeping it from a permanent UN Security Council seat, challenging its desired naval supremacy in the Indian Ocean, and the like.  Then, of course, the last time they fought, in the early 1960s high up in the Himalayans, India fared badly. 

From the outside, the Indians seem the better Western partner: its interests do not threaten the West and its long-term prospects seem brighter than China's (would you rather lose 100m workers by 2050 or add 300m?).

For now, only the hyper-nationalists on both sides dream of war between these two rising giants.  Trade, meanwhile, has increased 230-fold since 1990 to a rough $60B this year (although decidedly favoring the Chinese, who, like in so many bilateral relationships, import raw materials from India while sending back finished goods).  The leadership on both sides seems keenly aware that any fight between the two would likely derail both nation's rise.  Still, both are nuclear powers and, between them, have 4m men in uniform, and share a disputed 4,000km border that includes the restive Tibet.  But no confirmed shots in anger since 1967.

China's hubris of recent years has been expressed in its quiet but aggressive development of infrastructure along the disputed line, to include the permanent stationing of a lot more troops.  India pledges to match that effort.

And yet, this is the system America created:  an international liberal trade order that's easy to join and hard to dominate or overthrow, so if India and China continue to rise peacefully, despite all the trappings of power that would suggest the high probability of conflict, then our system is much to be credited, because we're doing what the British colonial order was never able to accomplish--peacefully integrate rising great powers.

My take remains the same: if you get Chinese partnership, it's hard for India to remain outside the larger, resulting process, but if you try the same with India, you get a far more stubborn China. And yet, a certain amount of hedging is called for until China becomes something far more pluralistic in its politics. Simply put, we don't fear rising democracies, only rising authoritarian states.

It would seem that nothing is realistically priced in China

Interesting Bloomberg Businessweek blurb that says most Chinese prices are false ("What's a pork rib really cost in China?"), meaning most people pay more for things--especially food--than the officially-listed prices would have you believe.

Officially, China's consumer price index rose 3.3% in July.  I mean, how can an economy grow 10% and wages go up an average of 8% and consumer goods go up only 3-4%?  With so many rural folk moving to the city, and the second-tier cities taking off, all signs point to rising costs across the board, and yet China's stats remain unusually flat.

The always-solid Michael Pettis says the real inflation rate is more like 6%.

Point being:  either the Chinese government is clueless or is simply ignoring the problem.  Either way, not a good sign, because when inflation saps wage growth in China, social unrest tends to follow.

More than a few experts say China simply likes to repress numbers on inflation and unemployment--no matter what the circumstances.  So expectations are that China's inflation rate--officially--is already set at 3% for the year.

What this suggests to me:  far too much of the Chinese miracle is based on false data, because there exists system-wide pressure to hit certain numbers--with 8% growth being the magic talisman.

New banking rules underwhelm--by default

FT full-page analysis on new banking rules out of Basel, to be known as Basel III (the third great rule-set to emerge over the years).

The main changes:

. . . tightens the definition of what banks can count as highest-quality "tier one capital"--the main assets they hold to protect against losses.  It also requires lenders to hold liquid assets sufficient to see them through a 30-day crisis and sets a global "leverage ratio" to limit overall bank borrowing.

Why many experts are underwhelmed:  on every point, the initial draft of new rules was more stringent, only to be watered down after heavy lobbying by big banks.

But the FT says, on the basis of a quiet survey of the regulators themselves, that the real reason why the rules were watered down was fear of sabotaging the weak recovery--not the lobbying of banks. The initial draft, say the regulators, simply created too much fear across the industry.  The original liquidity rule, for example, was considered exorbitant.  As one regulator put it, "There isn't enough stable funding in the world to meet the requirements."

My take-away:  the global financial system remains too heterogeneous for a tough new blanket of rules.  We have varying levels of maturity across the board--as in, so many frontier economies, so few rules that everyone can follow to the same degree.

The financial crisis hit the system too early for such tough, across-the-board regulations, and so we await the Great Rebalancing (which no one is quite sure how to achieve without great trade protectionism on the part of the debtor states) for such rules to emerge.  Until then, we have too many differing economies trying to do too many different things for uniform rules to emerge.

The non-reciprocity of trade with China frustrates India's outsourcing biz

FT story on the consistent issue with China:  it wants into your markets but ultimately shuts you of its own.  

So China pushes India to let telecom equipment giant Huawei into its big market and yet Indian outsourcers are largely shut out of what should be the lucrative Chinese market.  The frustration leads the Indian industry to speak more of Latin America as the future booming market rather than China, which, like Japan, remains difficult to penetrate.  

With Japan, Indian outsourcers detect a "lack of urgency to innovate," whereas in China, the biggest hurdle is the language barrier for an industry that thrives largely on using English--along with the usual complaints about dealing with state-influenced enterprises.

So India's commerce ministry is pushing China to open up more in this industry.  

Western companies that have done well in China's service sector say you have to indigenize the workforce to succeed, something Indian outsourcing companies are apparently less willing to do.

What I see here: The world's two biggest rising economies are so amazingly different in structure and temperament, and yet everybody, including top players on both sides, are determined to foster more linkages out of the fear that zero-sum competition between them would ruin both.

I know a lot of experts spot a ton of friction in this relationship; I'm just amazed at how much effort is being made on both sides to smooth things over wherever possible.  I mean, compared to part periods where rising rivals endured such dynamics, this thing has gone amazingly smoothly to date.

Australia for sale? The next generation of resource-driven fears

Provocative Bloomberg Businessweek piece entitled, "The deal is simple.  Australia gets money, China gets Australia."  Then the subtitle:  "How's that supposed to make a country feel?"

The stunning factoid:  China's exports, imports and investment annually add 3,400 Australian dollars' worth of value to each household in the country.

Chinese resource investment comes in three main forms: In the year leading up to July 2009, Australia saw A$42.4 billion in export demand, A$3 billion of direct investment in Australian companies, and more than A$4.9 billion in other project financing.

Naturally, the direct investment is the most politically charged. Australia's government, for example, wants no Chinese investment to total more than 49% of a company.  99% of China's investments to date have been in the resources industry.

China's hunger for Australian resources has aggravated the deepest divisions in Australian society over population size, immigration rates, taxation, and infrastructure. Bob Kinnaird, formerly of the Department of Immigration and Citizenship and now a private consultant, warns: "The huge growth of the Chinese presence in Australia, through the mining boom, students, tourism, and permanent migration, has been mismanaged to an incredible degree. The industries involved have urged extraordinary growth, but there hasn't been the infrastructure support to cope with it, and the result is that large numbers of Australians in the cities are worried that while the economic indicators are going one way, their real living standards feel like they are going the other."

Public opinion reflects this ambivalence. In new polling conducted by the Lowy Institute for International Policy, an Australian think tank, 73 percent of Australians say Chinese economic growth has been positive, but 57 percent say there is now too much Chinese investment. Economic power has brought fear, too: 46 percent believe China will pose a military threat within the next 20 years.

If China's eliciting this sort of response from an advanced, democratic country, you know that it'll be replicated elsewhere. The fundamental fear is the mismatch in political systems:  if it was the US making such inroads, you'd see the same concerns but far less fear.  There is simply a distinct fear of colonization with the Chinese, because they have an authoritarian government.  It feels like a mismatch:  "our companies" as counterparties to China's government--the real power behind every national company.  I suppose similarly arranged authoritarian regimes in developing countries might not exhibit the same concerns, but even there, the scale issue must be intimidating--as in, China is so big and we're so small in comparison.

Likewise, if China just bought instead of exhibiting this strong desire to own--resources in the ground, stakes in the processing companies, and the transpo infrastructure in between those resource locations and Chinese markets--then maybe these transactions wouldn't elicit such fears.  But China being China, I don't see either dynamic lessening whatsoever in the near term, meaning angst over China's penetration of resource providers' economies will only grow, and thus inevitably create backpressure of the most nationalistic sort.

I imagine Chinese nationalism will likewise rise as a result, but where will it go?  China has neither the gear nor the political will to--as some Chinese nationalists fancifully put it--take what they need from the world.  And, after a while, global sentiment is sure to turn against the apparent Chinese greed, even as it benefits resource providers.  There will arise this sense of China looting the planet while exhibiting all manner of monopsonistic behaviors (a monopsony is where one buyer dominates a market). Eventually, China all by itself will come off not unlike the West on oil in the 1960s-1970s: producer backlashes will label it a destroyer of national wealth because it'll want to consume everything a country can provide it while paying rock-bottom prices.

So one to watch, this bilateral dynamic, simply because I think it'll provide an early glimpse of dynamics we'll see repeated--time and again--around the planet.  China can mitigate such fears by becoming more democratic and giving off the vibe that's its government's behavior can be modified both from within and without, but I see the looming backpressure making such an evolution less likely in the near term, so things are likely to get very nasty before they get better.  Increasingly, the world will grow to mistrust a China it does not feel it can influence its behavior, and that mistrust will close a lot of doors in China's face, making them all the more determined to own resources in the ground.

The Chinese seem to think they can finesse all this with their cash and promises of non-interference, but that seems decidedly naive.  This is not a world exhibiting more trust in governments, as globalization's super-empowerment of individuals makes everybody more wary of turning their future over to bureaucrats--no matter where they hail from.

To me, this is but another reason why the "Chinese century" will be very short indeed.  While the single-party state model is fine for catching up, it comes with inherent self-limitations for the far more intensive growth required for racing ahead.  China, for all its green investments and fine talk, inevitably symbolizes an unsustainable global future far more than the United States allegedly does.

The slow conversion of the Chinese yuan

First off is a WSJ column by Peter Stein (The view from Hong Kong) that notes that city-state's emerging role as proving ground for how Chinese currency will be traded outside the mainland, as banks there are starting to lend yuan to one another and offering hedging services.

What started this was a June agreement between HK and China on "removing certain limits on usage of China's yuan within Hong Kong."

The result:

In the past, businesses were mostly confined to opening yuan accounts for trade-settlement purposes; now, accounts can be opened for any purpose.  Businesses and individuals alike now can transfer yuan freely between accounts.  Banks also can help businesses convert yuan without restriction.

While the HK dollar (pegged to our own) remains the official currency, yuan is now "sloshing around the savings accounts of Hong Kong banks in bigger and bigger sums."

All of this is practice for how everybody around the world will someday soon use the yuan, with hedging services being the ability to bet on the yuan's direction.  This shift will correct a weird anomaly:  China conducting all its trade in dollars, euros and yen.  

Expect half of China's Gap trade to be done in yuan within a few years, predicts the piece.  As one HSBC banker puts it, "I think this whole process is going to develop faster than most people expect."

That was early August. 

Then in late August the FT runs a front-pager declaring that "a number of the world's biggest banks have launched international roadshows promoting to corporate customers the use of the renminbi [another word for the yuan; renminbi is to sterling (currency name) what yuan (denominating units) is to the pound], instead of the dollar, for trade deals with China."

What this says:  big global banks want to profit "from what is expected to be a rapidly growing line of business in the future."

Finally, an FT editorial puts it this way:

Dominance of the global economy, Beijing believes, goes hand-in-and with dominance of the global monetary system.

Measures to internationalise the renminbi are nothing new. Hong Kong banks have offered offshore renminbi accounts for more than six years, and currency swap agreements with foreign central banks have been in place since 2000. But they have accelerated in recent months . . . 

These are, however, only small steps. Whether China will be able to stomach the rest of the renminbi’s journey to reserve currency status is far from clear.

A reserve renminbi would have to be fully convertible, on the capital account as well as the current account. But this would imply opening up China to the whims of global capital – precisely what it has been protecting itself against (as its huge foreign exchange reserves attest). Freer capital flows may also prove destabilising for domestic banks, creating liquidity bubbles in good times and choking off the credit supply as conditions deteriorate. No longer would the banking sector be an effective instrument of macroeconomic policy, as it has been during the crisis with its government-induced lending sprees. It would be a source of, and not a remedy to, increasing economic volatility.

Even less palatable for the government is the prospect of losing control over the renminbi. Maintaining a currency peg in the face of massive capital inflows is extremely difficult . . .

China will become the world’s largest economy in the next few decades. It is natural that the renminbi eventually attains reserve currency status. China should not push this process forward prematurely, lest it destabilises its economy. But the sooner it starts the domestic reforms that will prepare it for such a shift, the easier it will find its new international role.

Like most things with China, we'd like it to go faster, to even the playing field more.  But as the FT points out, for China to remain stable, such an evolution needs to be that--an evolution.

But you have to see all this as positive:  China opens itself up more and more to profound market forces, but admittedly at a pace whereby the Communist Party hopes to retain power ad infinitum--even as everybody in that system knows this to be impossible.

How so?  Show me a developed country of any size that isn't a democracy.  Yes, you can show me a city-state or two, or a decent-size rich state like Saudi Arabia.  But I'm talking about development--not just wealth, and not some puny emirate ruled over by an potentate or tiny technocratic elite.

China's rise: it takes two to tango--and tangle

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FT op-ed by usually sensible Michael Pettis, who's unusually alarmist here (along with the headline of "The risk is rising of another global trade war"; did I miss the first one?).

Basic logic sound: the great imbalance is still there.  China still relies too much on exports and America's trade deficit is back up there. The kicker is rising unemployment + the election:

In the months ahead, the US will be forced to choose either protection or soaring trade deficits with rising unemployment.

Do we blame the American consumer?  No, says Pettis.  Blame it on the shift in global trade imbalances.

Five countries or regions have largely driven these imbalances in the past decade.   Three of them--China, Germany and Japan--run huge trade surpluses on which they are dependent for domestic employment growth.

Counterbalancing them have been the two trade-deficit champions--the US and trade-deficit Europe, dominated by Spain, Italy and Greece.

The financial crisis has undermined the precarious decade-long equilibrium between these blocs by forcing trade-deficit countries to reduce debt, especially household debt.  As they do, the excess demand they provide to the rest of the world must decline.  Trade-surplus countries have resisted this adjustment fiercely by trying to maintain or even increase their surpluses.

Which makes China lecturing America and Germany lecturing Greece all the more hypocritical.

Because we're such an open economy, we become absorber by default--until Congress steps in, argues Pettis. Currently we lack the industrial, currency intervention and interest-rate management policies that the trade-surplus state use at will.  So we're left with tariffs and import quotas.

Powerful argument.

Second cite, an FT op-ed by John Plender, makes similar points, with historical examples (the 1920s-1930s shift from British to US power) to scare one a bit more.

He sees two likely paths, both of which will increase US trade protectionism:  we go loose fiscally and rack up more debt, or the GOP prevents budget loosening while monetary policy stays lax. Either way, "creditor countries would ultimately see their chief market dry up."

The housing bubble that is China

FT story.

Hard to see how 68% price rise in China is sustainable.  If the central gov's braking efforts are working, then I'd hate to consider the price rise without them!

China's rise 07-09 was amazingly modest compared to the last 12 months, which equates to roughly 4 times as fast a rise as the rest of Asia-Pacific.

The middle class loves movies--3D or not!

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Trio of FT stories.

First one laments future of 3D in Hollywood after recent string of flops that prove only that bad films, when presented in 3D, still suck!  Avatar?  Alice?  Great flicks.  But the rest of the recent crop?  Complete crap--unsave-able by 3D, big surprise.

With roughly 2/3rds of Hollywood's take now from foreign markets, you wonder about the need to push 3D so extensively, especially given the theater costs involved and the higher ticket prices. Neither go well with an emerging global middle class, which is easier to please than that and doesn't necessarily want to shell out more money for fewer viewings.

Second story cites rising impact of India's middle class on theater-going there, as luxury cinemas (basically, a version of the modern US cinema but a big improvement over standard national fare) are going up all over India's big cities.  And even with Bollywood's immense draw there, the article says that the full force of the market is far from being felt to date.  Some chains are reporting 80% growth in attendance over the last year, as more people with more disposable income are flocking to films both native and foreign (Inception, for example, is doing very well in India).

Still, the numbers can only go up.  A blockbuster in the US will get 70m viewers out of a total population of 300m.  In India, a blockbuster gets maybe 50m out of 1.2B.  And we're talking an Indian demo that's half under 25 (or 600m in youth alone!).

Already, according to the third cite, we see Universal planning a big movie-theme park in Mumbai, one that would blend the best of Bolly and Holly.

A trend to watch.

The Gap is Asia's to shrink economically

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Bloomberg Businessweek with goofy title (Really?  The new silk road doesn't lead to the U.S.?  Wow!  I would have expected otherwise, given our geographic position on the planet.)

All this piece confirms is that the economic integration and development of the Gap will be done primarily by the New Core--not the Old.  That's something I've argued for many years now.  It just makes sense:  the last in, the next integration begin.  Think of it as a staircase:  the higher up you are in the production chain, the less sense it makes for you to be the primary agent of slotting in those who come immediately behind you.

So Europe slotted in North America way back when, then we did the same to Asia and the ABCs of Latin America, and now they do the same to the Gap.

As one expert is quoted in the piece, "We saw the same phenomenon with American and European companies 100 years ago."

Yes, this all means more competition for markets and resources for companies across the Core, but the best of the Old Core's companies will clean up nicely--like a Caterpillar.

A good byproduct:  as the New Core-Gap trade explodes, more of it will be done in currencies other than dollars and euros, and that's a good disciplining pressure on the Old Core--especially the US.

Chart of the day: In relative terms, the jobless recovery

Economist chart explaining why Obama feels little love over the recovery.

Compared to previous recoveries, this one is bested only by 2001 as being weaker on job hiring.

Seems to be a pattern in the sense that the best recovery was when we were a far less mature economy, the middlng ones were decades ago, and the worst ones happened in the last decade.

The Economist's verdict:  "Not since records began has so deep a recession been followed by so shallow a recovery in employment"--as in, "slightly fewer Americans are working now, a full year into the recovery, than when the recession ended in the middle of 2009."

So the recovery is what?  Fewer workers working a lot harder.

And that does not equate into political love for anybody.

The growth China needs and that we all want it to have

Pull back that lens, comrade!

One FT op-ed and two full-pager analyses.

The op-ed from Yu Yongding, a Chinese academic and former official of the Chinese central bank:  the fear of lots of wasted investment with this public-spending infrastructure splurge, plus deep concern over the stunning rise in housing costs over the past couple of years.  The good news?  Chinese tightening of the money supply seems to be working.  Problem is, any slowdown always freaks the central gov, which now considers pumping more money back in.

Better the gov stands firm, says Yu, and let housing prices drop. Chinese banks have the assets to deal with even a 30% dive in prices.

The bigger problems:  "over-dependence on investment and external demand, an unacceptably wide gap in incomes, too few social goods and an underdevelopment of the service sector." Reforms and anti-corruption efforts have also slowed.

Over time, Yu says, the investment route (or what I refer to as extensive growth) will reach natural ceilings "imposed by social, environmental and natural resources."  Meanwhile, China's push for more exports is creating a bad backlash abroad.

The conclusion:

China has concentrated obsessively on GDP growth for far too long.  But growth is not a good excuse for postponing much-needed structural adjustment.

And adjustments naturally translate into slowdowns:  hence the op-ed's title that "China needs slower, better growth."

The two full-pagers give some sense of the regional danger (can Asia sustain enough growth to become the engine of the global economy for the next stretch?) and the internal hope (China's second-tier cities in the next geographic band inward from the coast now service as the engine of growth for the nation itself.

I think the latter, which I've talked about years ago in previous books, is finally coming to pass--and just in time.  It's good for China's stability, the region's economic trajectory, and the world economy at large.  As I always say in briefs, we don't want to own the problem of China's interior poor, thus we must accept that China's protectionism and "cheating" will need to continue for some time.

After the interior belt is developed, however, all China is left with is the vast, relatively uninhabited West.

For now, the competition is clear enough:  when the coastal jobs go, do they go to Vietnam and others in the region?  Or do they go inland?

Tricky row for China to hoe.  Can't be too piggy, but need to be selfish enough.

However much China succeeds, its vision is turned somewhat inward--not necessarily a good thing for the world at large.

Eventually, the push comes to shove on the new mercantilism

FT column by David Pilling on why China's telecom equipment giant, Huawei, is distrusted across the Old Core West:  it is seen as a front for the People's Liberation Army--a tie it claims is dead and buried, but many in the West aren't so sure.

Two sides to the larger dynamic, both well argued here:

In the view of Mr Prestowitz, who recently wrote The Betrayal of American Posterity, a book about the country’s loss of competitiveness, the US is repeating the mistake that Britain made at the end of the 19th century. Then, he says, the UK put too much faith in the workings of the free market, throwing away its advantage to mercantilist nations such as US and Germany. Japan and other south-east Asian nations such as Taiwan, got away with similar industrial policies in the context of the cold war. Now China is at it, but on a far larger scale, he says. “I’m not saying the Chinese are wrong to be doing what they are doing. I’m just saying that the US should not be as dumb as the Brits.”

Orville Schell, a China expert at the Asia Society, has a different take. He worries that the US is in danger of being overly wary of Chinese investments. As a result, he fears, it could miss out on the huge amounts of capital now flowing out of China. He points to a recent case in which 50 US lawmakers objected to plans by China’s Anshan Steel to invest $175m in America’s (hardly booming) steel industry. “The river of capital is flowing backwards,” he says of China’s huge foreign exchange reserves and its need to invest in real assets. “I understand national security concerns, but we shouldn’t cut ourselves off from these capital flows.”

This is the dilemma now facing the US. 

You want the kid to grow up and do well, but when he grows up just enough, you begin to fear him--his ambition, and his corner-cutting ways.

But getting in front of the money, as Steve DeAngelis and I like to say . . . well, that's a hard opportunity to pass up.

Since when did government picking winners ever work?

Economist editorial and briefing.

The pertinent reminder of this foolishness:

In the 1980s, the last time industrial policy was in fashion, the West was in awe of Japan and its inexorable rise; now it is in awe of China and its state capitalism.

Deja voodoo

Yet the overwhelming reason for China's miracle is that the state released its stifling grip and opened the country to private enterprise and to the world . . . Part-privatization and competition created in a short time what decades of industrial policy had failed to do.

In the rich world, meanwhile, the record shows, again and again, that industrial policy doesn't work . . . However, many new justifications are invented for the government to pick winners, and coddle losers, it will remain a bad old idea. 

And the kicker:

Thanks to globalization and the rise of the information economy, new ideas move to market faster than ever before.  No bureaucrat could have predicted the success of Nestle's Nespresso coffee-capsule system--just as none foresaw that utility vehicles, vacuum cleaners and tufted carpets . . . would have been some of America's fastest-growing industries in the 1970s. 

And the original sin?

Officials ignore the potential for innovation in consumer products or services and get seduced by the hype of voguish high-tech sectors.

Much the story of our venture-capitalist-in-chief, Obama, and green technologies.  Now we race China to see who can sink more public money on that one, because government investments are the BEST WAY TO GO!

And please, do not cite DARPA's internet as the great counter. Unless you think only the government could come up with that, or that Al Gore invented it, or that it took off primarily because it was kept in government hands instead of turned loose to the public.

In the briefing, four reasons are cited for the current vogue:

1. The weakness of the world economy (in the West, that is)
2. The desire of Old Core economies to rebalance from too many imports
3. Emergency use of industrial policy in response to the crisis has whetted the public's appetite for more, and 
4. The West is mindlessly aping the Chinese, whose "genius" consists of extensive growth and nothing more.

What a world!

Debt hiding, China style

Bloomberg Businessweek story.

Ah yes, China has so many dollars ($2 trillion or so among its $2.5T reserves) that it can buy the U.S. economy--lock, stock and smoking barrel.

Except, of course, the US economy is a bit larger that $2T, and it turns out that China has let its local governments, using shell entities (local investment companies, or LICs, who borrow what the local governments are forbidden to borrow legally on their own), borrow upwards of about $2T, according to the estimable Victor Shih of Northwestern U.

There are 8,000 such LICs in operation across China, and most are used by local governments to finance infrastructure build-outs.  

How many bridges to nowhere--as in, non-performing or unuseful loans?

Who knows.  Certainly the rush to spend was great, so assume tons of waste.

The key bit:

Many of the LICs have borrowed heavily to back the building of roads, railroads, and power plants, as well as hotels, convention centers, office buildings, and more. While some LICs have gotten land from local governments that they can use as collateral, many banks must rely on pledges from local city halls that the loans the LICs secured will be repaid. Shih figures outstanding LIC debt at the end of 2009 was $1.68 trillion—34 percent of China's gross domestic product. "A lot of this money is being invested in money-losing infrastructure projects [as well as] real estate," says Shih. Western investment firms are wondering what impact the LICs will have on Chinese banks if they cannot pay back the bulk of their debts. "Unfortunately, this smells like China's last banking crisis," says Shen Minggao, an Asia-Pacific economic analyst with Citigroup (C).

Point being:  that $2T can go quickly, under the right circumstances.

Cheap money makes dummies of us all.  The Chinese are no different.

Chart of the day: Who adds labor and who doesn't

From WSJ column by David Wessel--always good.

This is the most interesting demo slide I've seen in a long while. Already put it into the brief.

What I note:

1. the decline of Europe and Japan (almost off the chart--pun intended)
2. how closely China's trajectory mirrors Old Core Europe
3. America as Old Core outlier without peer
4. India's fantastically long "golden hour" of declining ratio of dependents to workers--much longer than China's was.

But it's the numbers that jump out at you. Between now and 2050 we add 35m workers, China loses 100m and India gains 300m.

Asia's genius: Keynesism with a piggy bank

FT op-ed in which David Pilling reports that Asia’s Keynesians “take pride in prudence.”

It is an oddly hypocritical logic that Pilling gets around to critiquing:

Chinese officials talk scornfully about US consumers’ proclivity to buy now and figure out the consequences later. Through this prism, the made-in-America crisis is seen as a modern morality tale in which reckless governments and citizens got their comeuppance.

As Pilling points out halfway in the piece, Asian governments have opened their fiscal sluices with a gusto in response to the crisis, remembering that they did too little during the Asian flu of 1997 (on advice of the IMF). In the end, the collective Asian stimulus probably outpaced the West’s.  Of course, the big difference was that they were spending now money and we were spending tomorrow money (I will gladly pay you across the rest of my life for a stimulus package today!).

The hypocrisy I see:  Asia’s miracle (and China’s especially) does not happen without our spending spree of the last couple of decades.  Plus, China in particular ignores plenty of rising “debts” in its system, like the piling up of elders and environmental damage.