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Monday 15 March 2010 | Ambrose Evans-Pritchard feed
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Comments 69 | Comment on this article
US President Barack Obama shakes hands with Chinese ambassador to America Zhou Wenzhong on the Great Wall of China Photo: ReutersChina has succumbed to hubris. It has mistaken the soft diplomacy of Barack Obama for weakness, mistaken the US credit crisis for decline, and mistaken its own mercantilist bubble for ascendancy. There are echoes of Anglo-German spats before the First World War, when Wilhelmine Berlin so badly misjudged the strategic balance of power and over-played its hand.
Within a month the US Treasury must rule whether China is a "currency manipulator", triggering sanctions under US law. This has been finessed before, but we are in a new world now with America's U6 unemployment at 16.8pc.
"It's going to be really hard for them yet again to fudge on the obvious fact that China is manipulating. Without a credible threat, we're not going to get anywhere," said Paul Krugman, this year's Nobel economist.
China's premier Wen Jiabao is defiant.
"I don’t think the yuan is undervalued. We oppose countries pointing fingers at each other and even forcing a country to appreciate its currency," he said yesterday. Once again he demanded that the US takes "concrete steps to reassure investors" over the safety of US assets.
"Some say China has got more arrogant and tough. Some put forward the theory of China's so-called 'triumphalism'. My conscience is untainted despite slanders from outside," he said
Days earlier the State Council accused America of serial villainy. "In the US, civil and political rights of citizens are severely restricted and violated by the government. Workers' rights are seriously violated," it said.
"The US, with its strong military power, has pursued hegemony in the world, trampling upon the sovereignty of other countries and trespassing their human rights," it said.
"At a time when the world is suffering a serious human rights disaster caused by the US subprime crisis-induced global financial crisis, the US government revels in accusing other countries." And so forth.
Is the Politiburo smoking weed?
I let others discuss the rights and wrongs of this, itself a response to the US report card on China. Clearly, Beijing is in denial about is own part in the global imbalances behind the credit crisis, specifically by running structural trade surpluses, and driving down long rates through dollar and euro bond purchases. No doubt the West has made a hash of things, but the Chinese view of events is twisted to the point of delusional.
What interests me is Beijing's willingness to up the ante. It has vowed sanctions against any US firm that takes part in a $6.4bn weapons contract for Taiwan, a threat to ban Boeing from China and a new level of escalation in the Taiwan dispute.
In Copenhagen, Wen Jiabao sent an underling to negotiate with Mr Obama in what was intended to be - and taken to be - a humiliation. The US President put his foot down, saying: "I don't want to mess around with this anymore." That sums up White House feelings towards China today.
We have talked ourselves into believing that China is already a hyper-power. It may become one: it is not one yet. China is ringed by states
By Ambrose Evans-Pritchard Published: 5:33PM GMT 14 Mar 2010
Comments 69 | Comment on this article
China has succumbed to hubris. It has mistaken the soft diplomacy of Barack Obama for weakness, mistaken the US credit crisis for decline, and mistaken its own mercantilist bubble for ascendancy. There are echoes of Anglo-German spats before the First World War, when Wilhelmine Berlin so badly misjudged the strategic balance of power and over-played its hand.
Within a month the US Treasury must rule whether China is a "currency manipulator", triggering sanctions under US law. This has been finessed before, but we are in a new world now with America's U6 unemployment at 16.8pc.
"It's going to be really hard for them yet again to fudge on the obvious fact that China is manipulating. Without a credible threat, we're not going to get anywhere," said Paul Krugman, this year's Nobel economist.
China's premier Wen Jiabao is defiant.
"I don’t think the yuan is undervalued. We oppose countries pointing fingers at each other and even forcing a country to appreciate its currency," he said yesterday. Once again he demanded that the US takes "concrete steps to reassure investors" over the safety of US assets.
"Some say China has got more arrogant and tough. Some put forward the theory of China's so-called 'triumphalism'. My conscience is untainted despite slanders from outside," he said
Days earlier the State Council accused America of serial villainy. "In the US, civil and political rights of citizens are severely restricted and violated by the government. Workers' rights are seriously violated," it said.
"The US, with its strong military power, has pursued hegemony in the world, trampling upon the sovereignty of other countries and trespassing their human rights," it said.
"At a time when the world is suffering a serious human rights disaster caused by the US subprime crisis-induced global financial crisis, the US government revels in accusing other countries." And so forth.
Is the Politiburo smoking weed?
I let others discuss the rights and wrongs of this, itself a response to the US report card on China. Clearly, Beijing is in denial about is own part in the global imbalances behind the credit crisis, specifically by running structural trade surpluses, and driving down long rates through dollar and euro bond purchases. No doubt the West has made a hash of things, but the Chinese view of events is twisted to the point of delusional.
What interests me is Beijing's willingness to up the ante. It has vowed sanctions against any US firm that takes part in a $6.4bn weapons contract for Taiwan, a threat to ban Boeing from China and a new level of escalation in the Taiwan dispute.
In Copenhagen, Wen Jiabao sent an underling to negotiate with Mr Obama in what was intended to be - and taken to be - a humiliation. The US President put his foot down, saying: "I don't want to mess around with this anymore." That sums up White House feelings towards China today.
We have talked ourselves into believing that China is already a hyper-power. It may become one: it is not one yet. China is ringed by states - Japan, Korea, Vietnam, India - that are American allies when push comes to shove. It faces a prickly Russia on its 4,000km border, where Chinese migrants are itching for Lebensraum across the Amur. Emerging Asia, Brazil, Egypt and Europe are all irked by China's yuan-rigged export dumping.
Michael Pettis from Beijing University argues that China's reserves of $2.4 trillion - arguably $3 trillion - are a sign of weakness, not strength. Only twice before in modern history has a country amassed such a stash equal to 5pc-6pc of global GDP: the US in the 1920s, and Japan in the 1980s. Each time preceeded depression.
The reserves cannot be used internally to support China's economy. They are dead weight, beyond any level needed for macro-credibility. Indeed, they are the ultimate indictment of China's dysfunctional strategy, which is to buy $30bn to $40bn of foreign bonds every month to hold down the yuan, refusing to let the economy adjust to trade realities. The result is over-investment in plant, flooding the world with goods at wafer-thin export margins. China's over-capacity in steel is now greater than Europe's output.
This is catching up with China, in any case. Professor Victor Shuh from Northerwestern University warns that the 8,000 financing vehicles used by China's local governments to stretch credit limits have built up debts and commitments of $3.5 trillion, mostly linked to infrastructure. He says the banks may require a bail-out nearing half a trillion dollars.
As America's creditor - owner of some $1.4 trillion of US Treasuries, agency bonds, and US instruments - China can exert leverage. But this is not what it seems. If the Politburo deploys its illusiory power, Washington can pull the plug on China's export economy instantly by shutting markets. Who holds whom to ransom?
Any attempt to retaliate by triggering a US bond crisis would rebound against China, and could be stopped - in extremis - by capital controls. Roosevelt changed the rules in 1933. Such things happen. The China-US relationship is no doubt symbiotic, but a clash would not be "mutual assured destruction", as often claimed. Washington would win.
Contrary to myth, the slide to protectionism after the 1930 Smoot-Hawley Tariff Act did not cause the Depression. Trade contracted more slowly in the 1930s than this time. The Smoot-Hawley lesson is that tariffs have asymmetrical effects. They devastate surplus countries: then America. Deficit Britain did well by retreating into Imperial Preference.
Barack Obama has never exalted free trade. This orthodoxy is, in any case, under threat in the West. His top economic adviser Larry Summers let drop in Davos that free-trade arguments no longer hold when dealing with "mercantilist" powers. Adam Smith recognized this too, despite efforts by free-trade ultras to appropriate him for their cause.
China's trasformation has been remarkable since Deng Xiaoping unleashed capitalism, but as ex-diplomat George Walden writes in China: a Wolf in the World? you cannot feel at ease with a regime that still covers up Mao's murderous nihilism. He reminds us too that China has never forgiven the humilations inflicted by the West when the two civilizations collided in the 19th Century, and intends to exact revenge. Handle with care.
Comments: 70
Delusional Many of the respondents are delusional if they think the US or the Chinese (for that matter) have control over or can use economic persuasion on the other side (all the time). Stupid events lead to other events that are not as calculated as one might think. We always think that people act and react with a normal response -- that is not so, for if it were we would not be in the mess we are in. What the US needs now is not China to do something first but for the US to change the House and the Senate to a body of higher standard people. They already have the standards they need people with higher standards to see them through. GR
Ambrose, are you insinuating that VietNam and the US are allies....otherwise you are asking some very pertinent questions. VietNam will ally itself with any counterweight to China. And this is because of concern over resources in the neighbouring maritime areas. But it would be a bit much to declare them as allies. VietNam is slowly drifting away from Marxism because they are discovering that Marxism results in stagnation and selfishness within bureacratic mazes.
For Peter Ramsey: "China can't spend all that U.S. currency or buy tons of gold because it will backfire." I'd love China to chase all the gold in the world. Utterly useless stuff for them to buy. They can give all their people gold plates to eat their rice from.
Major T - what a load od nonsense. { the Far Eastern and German surpluses, underpinned by massively undervalued, pegged currencies, are the cause of destabilising, structural imbalances which precipitate the blow offs } Actually the success of the Far East and Germany are the result of hard work and diligence. But in the case of the Germans, Med politicians who love to patronize the local population, and who are incapable of running a banking system honestly, provides a lot of help. If you want your country to be an export superpower - just export to a country dominated by liberal marxists. For example Spain or the UK.
How much sting can the US really have? Only the self destructive kind IMHO. Lets see, they make up 18 pct of China's exports (a contracting number) it's doubtful US buyers are going to have an impact at all on China's output soon and in the future. They have made potential enemies all over the world in the last 10 years. As a nation, they are entering the phase of an ageing population. They have no cash except what they print. They could of course adopt policies of "selling the family silver", but it is not in their humility at present to take this view. Oh yes, and they run the markets through a combination of rating agencies and exceptionally dexterous manipulation. Without question this is the most effective source of their firepower on "dissenting" trading partners, but it does cost money, money they don't have. Any damage they think they can do to China will hurt them out of any reasonable proportion. Obama doesn't strike me as a Bush type of personality, so how much trouble can he really cause?
Great, stop importing Chinese goods, who wants a computer, shoes, TV, need I go on. Look around your homes, cars, offices see what is made in China! The west has left it too late can they really manage without Chinese imports? Long live the Yuan! PAT (British Expat Hainan, China)
Dr Jonathan Wilson - you talk a mountain of good sense. I was in France 18 months ago. France is a disintegrating society. Crossing the border from France into any of it's neighbours is a revelation. Crossing from France into Germany is like moving three decades. Even moving from France into Italy is a step forward, and Berlosconi has been in charge of Italy for most of the past decade. France is fascinating for German and Dutch tourists, because it is a place that has stood still since the 1970s. Villages with shops that sell 'Asterix' comics and silver coins from the De Gaulle era, Citroen 2CVs parked outside, workshops promising cheap repairs, farmers selling cheese from barns, etc... The French state was successful in a time gone past. But the idiots on the left marched into the institutions and turned everything in on itself. France has become steadily more dysfunctional. Without the massive EU agricultural budget, France would be a complete basketcase. Rural France is in a desperate state even with all the subsidies. Just compare what you see in France with what you see on your travels through Wales, Italy south of Rome, or Eastern Germany, other heavily subsidized regions. For some reason France is incapable of getting it's act together. Just look at the results of the regional election. Across the board gains for the Socialist Party and the Looney French Green Party. 80% of French MBAs chasing government jobs, and the other 20% chasing jobs in companies where their parents have significant roles. France is a classic example of so much of what the West is doing badly. Watch Obama and the US Democratic Party try to adopt the French model to vast sections of the American economy.
Ambrose, What weed are you smoking? I too would love to see the world through delusional, rose-tinted glasses. Sooo reassuring!!! But I am afraid reality is very different. Better be prepared for some very unpleasant surprises.
The USA isn't finished yet, despite Obama's dismal leadership. China can't spend all that U.S. currency or buy tons of gold because it will backfire.
Sorry, I have no idea on which side hubris runs higher. The rest of the world is well advised to stay on the sidelines of this fools' game.
"Driving down long rates by buying US and European bonds". Do we want China to stop buying bonds? War either economic or actual would not be constructive for either side I fancy. How far do the USA, Europe and the UK want to go with currency devaluation. Is the borrower really stronger than the lender? If the Dollar drops over a period by 50% why hold it? China could diversify if, they bought gold it could double and the dollar drop by half in no time at all and China loose none of its cash. Simplistic I know but so is the view that the USA is all powerful. I think eventually the USA will put two fingers up and stay at home, make its own stuff and grow its own food.
China is more resilient than most people realise. Yes there are internal issues. Very serious internal issues. But even with a stronger Yuan, China is very powerful. Over the last ten years we have seen Chinese expansion, anywhere the West is weak. For example, doing deals in Sudan, Sri Lanka and Africa, Latin America. China helps out regimes that incurr the wrath of the West because of their position on human rights. China is moving away from Marxist ideology, and discovering that this brings more wealth. Slowly China will become more Confucianist and less Communist. I also think that commentators completely underestimate the competence of all levels of government in the US. Also people underestimate the intellectual bankruptcy of the West, not so more against competitors like India and China - but against the historical development of the West. And this is directly attributable to the spoiled brat revolution in the 1960s.
"The Chinese military have stated publicly that they are prepared for a nuclear war." And now we have D.Rumsfeld spouting his usual, US-bashing bunkum. The notion that we should pay the slightest bit of attention to fatuous, imbecilic nuclear sabre-rattling by a bunch of brain-dead Chinese generals is RIDICULOUS. A nuclear war with America would bring about the total destruction of 5000 years of Chinese civilisation. They would literally be bombed backed to the Stone Age. Whatever America does, China would not be the first to trigger off a nuclear war. And as far as conventional war is concerned, America cannot be defeated. I have no idea what's going on in your head, D.Rumsfeld, but your hatred of America is plain. I, a Brit, do not believe for a moment that America is in terminal decline. History has shown that it has an endless capacity to solve its problems. I am sure it will do so again. It is a mistake to bet against America.
Just a note on floating the Yuan : the West has for many centuries existed on a subsidised basis . Back a few hundred years it was slavery . We then replaced that with low exchange rates . A low value Yuan actually subsidises our life style . We operate on the basis of extremely cheap products with a short life span and often low quality . If the Yuan goes up we will then have a cost benefit problem - more expensive products with a short life span and with low quality . Granted this may encourage movement of manufacturing into the West but there would have to be a corresponding increase in quality and longer life span of product in order to justify the purchases .
"Support a military strike on Iran to stop their nuclear ambitions" You're mad, Nick. The only people who would benefit from this would be the Israelis, who've been pestering the Americans for years to do their dirty work for them. The Israelis are desperate to keep their cosy nuclear monopoly, are too feeble to take on the Iranians by themselves and would much rather American lives were lost in any war than Jewish lives. Any war on Iran would be even more costly, more damaging, more messy and more protracted than Iraq. And what for? To help the brutal, oppressive Terrorist State of Israel, whose treatment of the Palestinian people has been so vile?
Whilst your (Ambrose's) economic analysis is one I am always interested to read, your understanding of international geopolitics and the history of America's role in the world is basic and flawed and is an area he is not qualified to comment on. The Chinese premier's comments echo those made Vladimir Putin over the last many years and are a very diplomatic assessment of the truth. Use of torture, illegal invasions of sovereign countries, 800+ military bases around the world, support for the most abusive regimes - the record of the US is unrelievedly hideous. It is a shame that self interest from association with the US prevents more countries from taking a similar stance.
Ambrose suffers from the same etnocentrism that he accuses de chinese of. China's main problem is not the US, its to raise the standard of living of hundreds of million of its citizens to prevent a revolt. In the other hand, another of Ambrose premises, that China is guilty of its surplus, its again false. Global retail corporations are the ones to look at, which by the way, have taken most of the proffit.The western consumer has won nothing, being sold goods at the same previous price, and China's advantage has been limited Second problem for China is what to do with its dollars, f they are worthless, as we many think, they will have a problem, being paid with flat paper
A fabulous article, AEP! China is not a superpower. Not yet. Its economy has been jerry-built, without the institutional foundations to support its febrile growth. America could crush it like a beetle in so many ways, from closing its markets to capital controls to outright default on the US treasuries China is sitting on. The power lies with America, and for China to arrogantly threaten America shows how drunk with hubris it has become. For China to pick any sort of fight with America would be the making of America and the breaking of China. But beware Taiwan. When unemployed Chinese workers are rioting on the streets, the corrupt, unelected Chinese dictatorship will be tempted to do what all corrupt dictatorships in trouble do - stage a foreign adventure to distract their people.
China's dollar reseveres are internally usless unless they change them to Yuan (currency appreciation) or a commodity that can be used within China (hence investments in Ozzy and African commodity producers). The USA could re-classify Chinese US treasuries to say "Monetary Stabilisation Bonds" and then raise a 20% withholding tax on them. (Effecitively ring-fencing China's dollar reserves and devaluing them 20% against the Yuan.)
I never understood why the world gave all their money to China. The world look at the 1bn+ people in China and salivated at the market they hoped they could break into. But they didn't seem to realise that China was 99% dirt poor who were nobody's market. To solve this problem they made China the World's Factory and paid the Chinese to make everything for them. The world gave China all their money so that the Chinese could buy their products and services. But they also gave away their knowledge, technology and jobs to China. So now China has all of the world's money, and all of the world's IP products, but apart from some high end consumer goods won't actually buy anything from the rest of the world, except their natural resources. Someone please explain to me why the collective brains in the rest of the world thought this would be a good idea. If the world insisted on exporting their jobs and manufacturing, why didn' they diversify the investment and risk, instead now everyone has all of their eggs in the Chinese basket.
If the US continues to fly in China's face on this issue and others (arms to Taiwan, etc.) I foresee a humiliating defeat with the US exposed as a paper tiger that no longer rules the world as it thinks.
Stop this nonsense. I'm aghast that in this day and age, after over a century of discriminations, these inner feelings of superiority of the West over the East still prevail. There's no attempt in understanding where the other culture is coming from. Truly shameful. The Chinese people has contributed to the building western U.S. and have never been given credit. The Chinese has the potential to elevate the living standards of millions of people around the world. Maybe not right away but definitely a possibility. The British have never helped to stabilize or promote the economic well-being of the Chinese poor but only criticize. Remember, the communist ideology is also a western one. Sometimes, 'If you can't say anything nice. don't say anything'. It just shows how small minded you can become,
The US is very good at being self-righteous, but the truth is that it holds very few cards in any struggle with China. WIthout sales of Treasuries to them all they can do to fund Federal debt is to print money. That will immediately lead to hyperinflation (but then the Weimar Republic was great for all those who lived there, wasn't it?). In any event, if the Chinese were to stop accepting USD for transactions with them the USD would collapse overnight (bankers aren't sentimental, except about value for money). The US has long been loathed (ask Pew Research if you don't believe me), and it wouldn't take much to persuade Opec to sell oil in some other currency. Were that to happen the US would face penury almost immediately.
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