CardSharp
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We all have a sense of what the Chinese are thinking about the rest of the world but we dont really know. Of course, they tell us what theyre thinking but thats as polite and meaningless as when you ask your dinner guests hows the food: They might look green around the gills, but theyll invariably say, Why, its wonderful thank you.
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 Chinas concerns about those countries.
I wouldnt 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? Were 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 US, 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lauded the Japanese governments efforts to prop up internal demand; their only concern was that these efforts not be withdrawn too quickly, in case such a hasty withdrawal kills what they see as a nascent Japanese recovery.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. Its not only so as to encourage exports its 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 wont be spending much time jawboning with the Japanese in Seoul: Itll 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 and 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 dont seem to understand why the European Union Commission simply doesnt order about the wayward elements of the Union, and make the whole of the peninsula more homogenous.
They dont seem to understand the political realities which define certain idiosyncrasies of the EU. A blindspot which I suppose is understandable in China, theyd just shoot the dissidents. My guess is, theyd have shot the Greeks by now. (Theyll shoot you if you kill a panda, even if its by accident so whats 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 US fiscal deficit reduction is based on over-optimistic and unrealistic growth assumptions thats diplomat-speak for Are you outta your f***ing mind? The second sentence tears apart US GDP growth projections for 2010 and 2011, both the US governments, and that of leading US economists.
US 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 worlds 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 US. does not seem to have the political will to tackle the enormous deficit. They do not think that the US can achieve fiscal deficit reduction by spending cuts alone they see the need to increase fiscal revenues. They worry that the US fiscal deficit which they believe will deteriorate in the medium term will lead to increase interest rates.
Most crucial of all, they see the US failure to take concrete policy steps to curb the deficit as having a greater impact on the worlds economies than any trade issues American officials might be bitching about. Its hard for a third-party observer to disagree with this assessment.
Furthermore, the Chinese point out sensibly that the US talks about increasing exports and reducing dependence on consumption but the US 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 USs blaming foreign trade barriers for Americas 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 (FMCC.OB) and Fannie Mae (FNMA.OB). They think that the US 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 Americas meddling in its financial institutions. Why?)
Finally, they characterize both the US governments fiscal policy and the Federal Reserves monetary policy as doubly-slack. They wonder how the US 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 dont see the Feds and the governments 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 didnt 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 dont 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.
Thats the upshot of this evaluation of their trading partners.
As to themselves, the Chineses 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, theyre also keen on it, viewing its stability as having been essential to Chinas making its way safely through the Global Financial Crisis.
They talked up their capital control policy a lot: And it wasnt 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 wasnt the Roach Motel model of capital controls (Capital checks in, but it dont 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 dont 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 Im not, the take-aways from the Chinese evaluation are really interesting and make a lot of sense:
One, the Chinese dont 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. Its not merely to boost exports, its 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 Chinas 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 wouldnt bet against them.
Two, the Chinese think America is a basket case and theyre worried about a spike in interest rates crashing the American house of cards. Furthermore, they have a palpable contempt for American policy slovenliness they dont 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 important of all, they are clearly intent on developing their internal markets: Anyone claiming otherwise doesnt get the Chinese or their priorities. Its 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 its that the Chinese are highlighting domestic demand as an increasing component of their GDPs 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 Chinas 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, Id 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 theyre thinking.
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 Chinas concerns about those countries.
I wouldnt 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? Were 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 US, 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 governments 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. Its not only so as to encourage exports its 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 wont be spending much time jawboning with the Japanese in Seoul: Itll 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 and 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 dont seem to understand why the European Union Commission simply doesnt order about the wayward elements of the Union, and make the whole of the peninsula more homogenous.
They dont seem to understand the political realities which define certain idiosyncrasies of the EU. A blindspot which I suppose is understandable in China, theyd just shoot the dissidents. My guess is, theyd have shot the Greeks by now. (Theyll shoot you if you kill a panda, even if its by accident so whats 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 US fiscal deficit reduction is based on over-optimistic and unrealistic growth assumptions thats diplomat-speak for Are you outta your f***ing mind? The second sentence tears apart US GDP growth projections for 2010 and 2011, both the US governments, and that of leading US economists.
US 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 worlds 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 US. does not seem to have the political will to tackle the enormous deficit. They do not think that the US can achieve fiscal deficit reduction by spending cuts alone they see the need to increase fiscal revenues. They worry that the US fiscal deficit which they believe will deteriorate in the medium term will lead to increase interest rates.
Most crucial of all, they see the US failure to take concrete policy steps to curb the deficit as having a greater impact on the worlds economies than any trade issues American officials might be bitching about. Its hard for a third-party observer to disagree with this assessment.
Furthermore, the Chinese point out sensibly that the US talks about increasing exports and reducing dependence on consumption but the US 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 USs blaming foreign trade barriers for Americas 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 (FMCC.OB) and Fannie Mae (FNMA.OB). They think that the US 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 Americas meddling in its financial institutions. Why?)
Finally, they characterize both the US governments fiscal policy and the Federal Reserves monetary policy as doubly-slack. They wonder how the US 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 dont see the Feds and the governments 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 didnt 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 dont 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.
Thats the upshot of this evaluation of their trading partners.
As to themselves, the Chineses 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, theyre also keen on it, viewing its stability as having been essential to Chinas making its way safely through the Global Financial Crisis.
They talked up their capital control policy a lot: And it wasnt 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 wasnt the Roach Motel model of capital controls (Capital checks in, but it dont 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 dont 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 Im not, the take-aways from the Chinese evaluation are really interesting and make a lot of sense:
One, the Chinese dont 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. Its not merely to boost exports, its 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 Chinas 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 wouldnt bet against them.
Two, the Chinese think America is a basket case and theyre worried about a spike in interest rates crashing the American house of cards. Furthermore, they have a palpable contempt for American policy slovenliness they dont 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 important of all, they are clearly intent on developing their internal markets: Anyone claiming otherwise doesnt get the Chinese or their priorities. Its 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 its that the Chinese are highlighting domestic demand as an increasing component of their GDPs 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 Chinas 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, Id 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 theyre thinking.
