–Edward
No, I’m not talking about Rumsfeld’s dream. I’m talking about China’s growing reality. Via Instapundit comes this assessment on Defense Tech of China’s impressive advancements in posing a challenge to US superiority in East Asia.
An emerging consensus among long-time PLA observers, including within the US intelligence community, is that the Chinese military has successfully achieved a far-reaching qualitative advancement in its war-fighting capabilities since the beginning of this decade. The PLA is quickly becoming an increasingly credible threat against Taiwan and could even begin to pose a challenge to US military preponderance in East Asia in the next decade if the momentum is sustained.
The country’s leadership has given strong backing to the PLA’s transformation and force-regeneration efforts, which has translated into a hefty and sustained increase in military spending over the past few years. The officially published defence budget has risen on average by 15 per cent over the past five years from ¥121 billion ($15 billion) in 2001 to ¥220 billion last year…
The Pentagon and US intelligence community estimates that these published figures represent between one-third and one half of actual Chinese military expenditures.
What it all adds up to in the more or less near future is a Chinese military capable of taking Taiwan before the US can do anything about it, leaving us with the option of just letting it go or starting a much larger conflict with China. As The New York Times put it last week:
A decade ago, American military planners dismissed the threat of a Chinese attack against Taiwan as a 100-mile infantry swim. The Pentagon now believes that China has purchased or built enough amphibious assault ships, submarines, fighter jets and short-range missiles to pose an immediate threat to Taiwan and to any American force that might come to Taiwan’s aid.
Some American military analysts believe China could now defeat Taiwan before American forces could arrive at the scene, leaving a political decision about whether to attack, even though Taiwan would already be lost.
Even the most hawkish officials at the Pentagon do not believe China is preparing for an imminent invasion of Taiwan. Nor do analysts believe China is any match for the United States military. But as neighboring North Korea is erratically trying to play the nuclear card, China is quietly challenging America’s reach in the western Pacific by concentrating strategically on conventional forces.
"They are building their force to deter and delay our ability to intervene in a Taiwan crisis," said Eric McVadon, a former military attaché at the United States Embassy in Beijing. "What they have done is cleverly develop some capabilities that have the prospect of attacking our niche vulnerabilities."
What it all adds up to in the long run, however, is something potentially more worrisome. My infamous conspiracy theorist friend, Dr. V, noted back in the first few days after 9/11, when I was still convinced the US would not invade Iraq, that our long-term military objectives were mainly focused on China. That seemed like loony talk back then, but not any longer. As Dr. V noted then, what could spark a conflict (and why we’re really positioning ourselves in the Middle East) is oil. As Nayan Chanda noted recently:
China’s thirst for energy is dictating its turn to the Indian Ocean and the Persian Gulf. Since 1993 China has been a net oil importer; as its need has grown to 40 percent of total consumption, so has its dependence on oil from the Middle East. Eighty percent of China’s oil imports pass through the Malacca Straits, the closing of which would wreak havoc upon the Chinese economy. To reduce this dependence, China has been working to build alternative supply routes through Myanmar to the south and Pakistan to the west. A road, and eventually a pipeline, from Gwadar could give China an alternative energy route that it urgently needs and spur the development of its westernmost provinces. Hence its plan to provide more than a billion dollars in aid and loan guarantees for building at Gwadar.
China’s search for energy security also dovetails, however, with its long-term strategic effort to expand its regional influence and box in India. Analysts see Chinese-operated listening posts in Myanmar’s Coco Islands, China’s support for a port near Yangon for handling 10,000-ton ships (of which the Burmese have only a few) and another deep-water port at Kyaukpyu in western Myanmar, Chinese aid to the Bangladeshi port of Chittagong and plans to improve Cambodia’s Sihanoukville as part of an incremental effort to build a "string of pearls" presence on the Indian Ocean rim.
Many believe it is only a matter of time before the Chinese Navy, much strengthened by recent purchases of ships and technology, arrives in Gwadar. Pakistani officials boast that Gwadar’s Chinese connection will help to frustrate India’s domination of regional waterways. A Chinese maritime presence in the area would enable the mainland to monitor naval patrols by the United States and protect Chinese sea lines of communication. China Economic Net, an online news outlet sponsored by China’s leading business paper, calls Gwadar "China’s biggest harvest."
Everyone is being careful to note that this is not necessarily a reason to sound the alarm bells. On one hand, China is an emerging economic superpower and like any superpower simply preparing for a bright future that will benefit its trading partners as well as itself. On the other hand, we don’t well understand the Chinese, and their government is not one we appreciate (they are, after all, still communists) or have much praise for in many respects (see this story on religious persecution in China, for example).
The long and short of it though, is China is rising, and in many areas making rather mature decisions that should reassure us (see this story for example). It’s just hard to shift from seeing them as this dangerous force to one we can work with, and their military maneuverings, while understandable, are still somewhat alarming.
In all humility I want to hazard a prediction. Within 5 years Taiwan will agree to rejoin China semi-voluntarily. We (the US) are going to cooperate with this outcome in order to continue to fund our national debt.
It’s not just their leaner meaner military. With China owning a significant portion of our debt, we don’t dare oppose them in anything. Considering their intrinsic evil – and they are evil, I don’t subscribe to the liberal view that they’re vaguely misguided but otherwise OK -, we’re f%^&ed. And so is most of Asia.
A) Does anyon have link to the WH strategic doctrinal document of 2002-2003? The one that argued for premptive war but also IIRC stated that we would not allow any strategic military competitors to arise. I am not sure how to google it, and hoped it might be at someone’s fingertips. I am also not sure the exact language matters, for I consider it complete bs anyway.
B) And along that theme of the lying sacks in the WH, it is always important to watch what people do, rather than what they say. Bush “looked into Putin’s soul”, and then set about destabilizing and disaffecting Russian border states. Bush said a nuclear NK was unacceptable, and then left them alone.
In other words, for all the tough talk and superficial action, have the US and China acted more like allies than
enemies? Overt cooperation might induce countermeasures, so an occasional problem in the UNSC might be a useful deception. A new bi-polar world, with the US/China-India-Far East/SA-Iraq-Iran/Central Asia/Subcontinent opposing Europe and especially Russia?
I think that China’s military focus is less on Taiwan and more on oil fields in the politically turbulent nations in central Asia.
bob is this it?
The current anti-Japan riots are pretty terrifying. Has anyone seen a smart analysis of those that they could refer me to? (While we’re using this thread to beg for links…)
I don’t subscribe to the liberal view that they’re vaguely misguided but otherwise OK
That’s a liberal view? Every time I start speculating on the dangers here I’m told by conservatives that the sky’s not falling and anti-China rhetoric is alarmist.
Which is it?
I think that China’s military focus is less on Taiwan and more on oil fields in the politically turbulent nations in central Asia.
Long-term, perhaps, but if the assessments are right, they didn’t invest in all those amphibious assault ships and submarines to invade land-locked Central Asian nations.
I think so travis. Thanks.
“Considering their intrinsic evil – and they are evil”
Interesting. Do you think the evil is hereditary, meaning it’s actually ensconced somewhere in the genome of the Chinese, or do you think the evil is dutifully passed on from parent to child in an ongoing cultural transmission?
re: evil.
Are cambodians intrinsically evil because of their internal genocide? how about us americans? turks?
What little I know of China suggests that it is lead by an authoritarian regime that is primarily interested in managing a huge wave of industrialization. Dissent is crushed, through military power and show trials. Corruption, human rights abuses and worker rights abuses are pervasive, contract law is weak, and intellectual property rights are routinely violated. However, apparently China’s entry into the WTO has resulted in increased scrutiny on all these issues.
in other words, sounds a lot like Russia.
they didn’t invest in all those amphibious assault ships and submarines to invade land-locked Central Asian nations.
Hahahaha. Insert “Polish Navy” jokes here.
The sky’s not falling e, but you’re not being alarmist either.
The papers here all discuss the recent India/China trade discussions in the terms of IT, development in India and production in China. I’ve read that India may not be as comfortable with a trade relationship with China as Wen would like. I think India will be very careful, especially since India itself has been outsourcing some development work to China and seems to be exporting raw materials which China would like to import more of as value-added products.
The current anti-Japan riots are pretty terrifying.
To me too. I don’t claim to have seen any intellignet commentary, except that it seems to me that China would do well to force the US to choose between India and Japan (for UNSC). IMHO, choosing one over another, or perhaps being “forced” to block India in retaliation for China’s block of Japan would be bad news for us.
Oh? How so? They’ve basically invested heavily in Treasuries; what’s the downside to us in any conflict with them, in terms of finances?
Will someone remind me of America’s national interest in preventing China from annexing Taiwan by force?
Anderson- Taiwan make a lot of computer chips and electronic components that no one else makes. They are a sole source for components for some of our military hardware.
Slarti- That depends partly on whether we still need financing or not. Bush has us on course for a national debt of 10 trillion dollars by the time he leaves office. We got rid of the 20 year treasury securities. So soon we will be financing 1 trillion a year just to turn over our debt. Add to that continuing deficits and interest payments which could get interesting if people start demanding an inflation premium, and we could be needing to finance 3 trillion dollars a year at 10% interest.
Oh? How so? They’ve basically invested heavily in Treasuries; what’s the downside to us in any conflict with them, in terms of finances?
A sell-off by the Chinese would cause a devaluation of the US dollar. As that begins to happen, other Asian national banks would have to dump both their US debt and US currency in order to minimize their losses, further devaluating the US dollar.
Two billion dollars are being pumped into the US every day from foreign investors. That’s a pretty big spigot, and turning it off would have serious economic consequences to both the US and global economy. It may be argued that there’s a big economic incentive for continued funding of the US defecits, but there may also be other political incintives to turn off the tap.
double-plus-ungood- There is an economic incentive as well. How long should asian workers spend making peanuts so asian investors can buy what President Bush calls “worthless IOUs.”
A sell-off of what, exactly? Just trying to understand the train of thought, here.
Slarti- US treasury bonds and US currency are negotiable all over the world at the moment, but I think the Chineses’ best bet would be using them to buy American firms and real estate.
“A sell-off of what, exactly?”
Of their existing store of T-bills. If they were to dump them on the market, it would deplete the store of assets seeking to purchase new T-bills (as old T-bills are to a greater or lesser extent a substitute for new T-bills) and cause US interest rates to rise to attract new buyers of T-bills.
Who’d sell, once a conflict began? Indeed, who could sell?
Let’s suppose the Chinese did dump our debt on the market in whatever form it took…who could mistake that as anything other than an attack on our currency, as opposed to a loss in intrinsic value? And who could doubt that devaluation of the US currency would have serious consequences for every other country in the world?
I admit to complete ignorance of currency issues, which ought to have been obvious to start with. So I’m asking because I want to know, and don’t.
Ah, good answer. I’ll have to consider that for a while.
Oh? How so? They’ve basically invested heavily in Treasuries; what’s the downside to us in any conflict with them, in terms of finances?
AngryBear explains. As a bonus, he imagines how the conversation might go…something like, “Nice economy you’ve got there. I’d hate to see anything happen to it”.
It’s not an attack on the currency. It is an attack on US interest rates, given that the US has to come up with billions of dollars of foreign investment every day, and China has been providing a large portion of it. If China reversed course and began selling that debt, or even stopped acquiring it, or even slowed the pace at which it was acquiring it, the US would have to attract that money from somewhere else. Interest rates would need to rise sharply to do this. Details explained at the above links.
The problem basically is that if the Chinese chose, they could announce a lack of confidence in our bonds and either stop investing or start dumping the Treasuries. While this would give China some economic beating, it would be worse for the US, as it would basically force the Treasury to increase interest rates in order to attract bond-purchasing capital from elsewhere in the world to sustain our continued deficit. This would drive up interest rates in the US, shooting our economy in the face.
Angry Bear has a good post on this, assuming I’m doing this right…
http://haloscan.com/tb/angrybear/111307252607523240
A fellow AngryBear fan…who types even more slowly than I.
Slartibartfast said:
Let’s suppose the Chinese did dump our debt on the market in whatever form it took…who could mistake that as anything other than an attack on our currency, as opposed to a loss in intrinsic value? And who could doubt that devaluation of the US currency would have serious consequences for every other country in the world?
It can be a blatant attack on our currency, but if the deal is good, there are people who will go for it. Lots of economic actors do what is good for them without caring what they might do to the market in the process.
People are very good at closing their eyes to consequences. Or of deciding whatever damage they do to their homeland in some broader sense, it won’t matter because they’re going to make out like bandits.
If the Chinese suddenly decided to dump those bonds, I have not the slightest doubt that people with money enough to buy them would show up, whatever actions governments might take to defend US currency.
Is there an echo in here?
This is an interesting line of thought, but an even more interesting line of thought is this: what if the Chinese government suddenly went insane and decided to give away all of our debt holdings. A more severe effect than selling? I’d think so. So, what’s something like that going to do to our currency? I don’t know, but I’d imagine it wouldn’t do much. I mean, would you stop investing in bonds if someone just handed you a whole pile of them at a discount, or for free?
I have no idea. Probably more damage would be done when they stop being a market for Treasuries, but that’d mean an end of the large US market for Chinese exports, too, and a huge brake on cash flow into China. And a not insignificant amount of damage would be done by the fact that low-priced imports would have to be replaced by higher-priced goods made domestically, and by the fact that we’d have to revive the industrial base to replace it with. Which would eventually be a good thing, I think, but could be bad over the short haul.
Again, ignorant. I probably don’t need to say that, but I don’t want to come off as an ignorant guy who thinks he knows.
“I mean, would you stop investing in bonds if someone just handed you a whole pile of them at a discount, or for free?”
Perhaps not. But that’s an unlikely scenario. The better question is would you prefer to use a limited store of money to buy existing treasuries or new ones. For each actor, there may be different answers, but as a whole, the amount of money looking to buy new treauries would drop.
Anderson- Taiwan make a lot of computer chips and electronic components that no one else makes. They are a sole source for components for some of our military hardware.
Permit me to doubt that we couldn’t manufacture those components ourselves in short order. I mean, is that really supposed to be a justification for going to war with China?
But brighter minds than I are taking this necessity for granted on this thread, so doubtless I am indeed missing some more compelling reason.
Is that necessarily a bad thing? I mean, this is debt, here. What’d we do to sell Treasuries before we started having this huge trade imbalance with China?
Slarti,
We had higher interest rates, which reduced monies available to buy other things. For example, I have lived in my house for about 5 years. In that time I have refinanced my mortgage twice, reducing my monthly payment by over $300/month. This is money I can now spend on other things. If interest rates increase, it is money other homeowners cannot.
but that’d mean an end of the large US market for Chinese exports, too, and a huge brake on cash flow into China
There might be some of that, but probably less than you think. When interest rates shoot up, are people going to sell their houses so they can continue to shop at expensive stores, or are they going to shop at Wal-Mart so they can keep their houses?
To the extent they do the latter, it will mitigate the effect on China.
What’d we do to sell Treasuries before we started having this huge trade imbalance with China?
First of all, as dan pointed out, interest rates were higher. That’s what we’re arguing – interest rates would have to rise, and they would have to do so quickly if China moved quickly. Second, we didn’t need to sell as many during the 90s due to fiscal conservatism. What’s happening now is uncharted territory for the US. When levels of debt as a % of GDP have gotten to a similar point in other countries, they have experienced severe issues. People argue that the US is different, and in many ways it is, but we shall see.
So, you think that when the Chinese attack our currency, we’ll continue to keep the flow of trade with them? I rather doubt it.
But I think I see where you’re going, here. It doesn’t have to be an attack; it can simply be a gradual selloff (although the volume could be pretty huge) of assets, discounted just a bit.
So, you think that when the Chinese attack our currency, we’ll continue to keep the flow of trade with them? I rather doubt it.
You could always bring back Smoot-Hawley and see how that works out. That would be the greater danger.
And no, I don’t think it would need to be a massive sell-off to have an effect. They could simply threaten to reduce future Chinese purchases of US debt by 50%. Or simply put out a rumor that they were considering it…
Not what I had in mind, felix. I just couldn’t envision trade with China continuing after an attack on our currency, and while we were engaged in standoff or even open war with them.
Some people including Angry Bear have used the term attack for China selling its US treasuries.
If your credit card company decides not to raise your limit anymore is it an attack? How about if they increase your interest rates to say 36%? If they sell your debt to a collection agency?
If the Chinese decide we are deadbeats they’ll have some reason for their thinking.
I see it as more of a barganing chip. The Chinese are in a good position to set US interest rates. If they have to they can cut us off. Mutual dependence makes that painful for both of us, but while I don’t like Wal-Mart, I think having empty shelves there would be very awkward for us. I’m not sure how much it would hurt the Chinese, but I’m not really eager to find out.
I’m sure even the Chinese have read Debt of Honor.
A sell off of US debt, even if it were an attack, wouldn’t look like one. It would look more like a bank run.
US debt held by foreign banks is a bit tricky, because the debt is repaid in US currency. So if the currency begins to fall, owners of that debt are going to take a financial bath. Eventually, one of these national banks is going to start to sell, because earlier sellers will be hurt the least by declining US currency value. Once that starts, you’ll either see a massive sell-off as banks try to cut their losses, or you’ll see cooperation on a massive scale to prevent the dollar’s slide.
Prisoner’s dilemna. One can also imagine China thinking they can put a big dent in Japan’s economy if they devalue the dollar by selling off first. That’s pure speculation, of course. Mixing politics and economics is tricky.
Daniel Drezner has had some good posts on this.
So have I, Catsy. Debt of Honor is not a manual on what to do when attacking someone else’s currency. Well, and get away with it.
Slart:I mean, would you stop investing in bonds if someone just handed you a whole pile of them at a discount, or for free?
Intreguing question. Now if they were sold at a discount that would still impact the new bond market. Prehaps the money saved would go into a riskier investment since the money you were going to invest in the new bond is already taken care of.
The free senario is more interesting. But I think that the end result would be millions of bondholders would be out there willing to sell their bonds for low, low prices (everyday). The US issuing new bonds would have to compete with these people/governments holding the old bonds which they go for nothing, therefore anything they sell them for is pure profit. The new-new purchasers would in turn mark them up a little more and re-sell them. And this would continute until those old bonds expire or the mark-ups bring them back in line with the new bonds.
But while this was happeneing no investor in their right mind would buy new bonds unless there was a high interest rate attached.
Good point, Fledermaus.
arrgh! a thread very close to home and I have to go to work. I’ll try and give some links to analyses of the anti Japan riots, but for now Japan focus has a wide range of articles about issues related to Japan. Also, though Steve Clemons is busy with the Bolton hearings, he is an old Japan/Asia hand and his observations are well informed by his experience. (btw, one might want to look at his latest rebutting Kristol’s pro Bolton editorial)
Slarti — other people have said this already, more or less, but: Asian central banks, with the Chinese central bank playing a large role, are currently not just not attacking our currency, but actually helping to keep our interest rates low by continuing to buy our bonds. The idea is that as long as our interest rates are low, we will keep buying stuff from them. There is, of course, a limit to how long they can go on dong this without going broke; and all they have to do to cause us serious pain is to slow their purchases of treasuries, not stop them or start selling them off.
Also: as the Asian central banks keep buying treasuries (denominated in dollars) while the dollar slides, they are all taking a loss. But they would take a much greater loss if some other central bank stopped buying before they did. So all of them have an incentive to keep buying as long as they can afford it, but also to be the first to pull out. This is very, very unstable. And it could have serious consequences for us.
Think of it this way: the interest rate on treasuries is the price we pay other people to lend us their money. Price reflects supply and demand. Asian central banks are artificially providing demand for our bonds, which equals supply of money for us to borrow. The price we have to pay for this money is therefore lower than it would be otherwise. Any reduction in the supply of money made available to us will cause the price we have to pay for that money to go up, aka interest rates to rise. This would be very bad news, since a hike in the interest rates on treasuries would lead to hikes in interest rates generally — e.g. on mortgages, credit cards, etc. So then the housing market goes down, bankruptcies go up, the amount of money it costs companies to take out loans for investments goes up, etc. This is bad news no matter what, but it is especially bad news if you think two things: first, that we are in a housing bubble (since then if the housing market tanks, it’s not just a downturn but a bursting bubble, which is worse), and second, that Americans have in general started to rely on appreciating asset prices (largely real estate prices) to take the place of savings. (In other words, that instead of saving up for stuff, we’re relying on our ability to refinance every few years and take money out.) If those assumptions are right, things will be bad.
As to what we did before: people are right to say: we had higher interest rates. But also: we didn’t run such big deficits. We have put ourselves in a position in which China could cause us real, serious problems any time it wanted to. We were not in that position before, because we were not borrowing at this sort of alarming rate. And to me, the idea of placing ourselves in that position vis a vis the PRC is just unfathomably stupid, especially since all we had to do to avoid it was to behave with some basic level of responsibility. But noooo…
(And to Susan: “the liberal view that they’re vaguely misguided but otherwise OK” — huh? Which liberals, exactly, do you have in mind? Not me.)
Well said, Hilzoy, that fills in a lot of the technical blanks quite nicely.
One can also imagine China thinking they can put a big dent in Japan’s economy if they devalue the dollar by selling off first.
That’s rockin good speculation IMHO.
That’s rockin good speculation IMHO.
Jest a wild-eyed “for intsance” to illustrate other incentives to devaluate. I have no idea about the intricate policies in the region.
Jest == Just in the post above.
I appreciate a good “wild-eyed for instance”.
In re China’s internal stability: I can dimly see a way for the CCP to execute this maneuver without losing control. It’s something like this (apologies for crappy terminology in advance):
* Continuing investing the dollar, thus artificially devaluing their currency and keeping Chinese exports competitive in Asia.
* When the stars are right — specifically, when they think that Japan and the US are both overextended — start the bank run. But — and this is key — the trick is to start the bank run, not try to win it; that is, they’ll trigger it by dumping small billions of US T-bonds, then ride with everyone else as the run spreads.
* The US economy tanks as interest rates rise and the housing bubble bursts. Japan undergoes similar economic woes (sorry, don’t know much about their economy, but the idea is to keep them entangled with internal economic maneuverings and not able to invest in other Asian markets).
* The Thai, Korean, and Philippine economies stagnate having lost the bulk of their foreign investment (US, China, Japan). Burma, Malaysia, Vietnam &c get their manufacturing capacity crippled as their economies collapse around them. Taiwan will also take a beating because it’ll lose a lot of its export market.
* Now, the three-part tapdance. This is where things get tricky:
– The CCP invokes its extensive centralized authority to keep its internal economy moving (e.g. artificially forcing internal interest rates to remain low)…
– Likewise, it forces factory workers &c to accept massive cuts in wages…
– …while starting a massive propaganda campaign to convince the populace that it was the foreign bankers who collapsed the economy in an effort to undercut the waking dragon.
The idea, IOW, is to emulate much of what happened politically in SE Asia after the currency collapses of the late ’90s.
[This latter point is why they can only trigger the run not win it: plausible deniability must be maintained.]
* If need be, hypernationalistic postures can be taken against Taiwan — and any US intervention can be portrayed as still further foreign hostility against China — Korea, Japan or India depending on the particular need for a safety valve.
* Everyone takes a beating, but China keeps on its feet long enough to remain the sole, or at least dominant, manufacturer in Asia. If it can surmount the initial hurdle, it can take advantage of the presumed subsequent collapse of the Russian economy to invest heavily in Siberia, f’rex, or try to move into the voids left in SE Asia by faltering foreign investment. Again, the ability to force this kind of investment — normally a severe economic drag — can act as China’s New New Deal, both internally and externally.
* The upshot is a Chinese Co-Prosperity Sphere, only economic instead of military: by strategically targeting the foreign investments, they gain a stranglehold over the economies (and hence much of the politics) of SE Asia, including vast amounts of resources and investment opportunities which the CCP can then try to use to jump-start their economy and return to pre-run levels.
Like I said, this is just the dim outline of a plan here and I’m not at all convinced the CCP would try it. I’d be curious to hear what other people though, think.
Anarch- A very interesting story. I don’t think it flies because on the whole the SE asian economies are very very dependent on exports. If China could substantialy increase worker wages instead of decreasing them and make their internal market work, they might be able to pull it off. Their internal market could more than replace the US as the consumer engine for not just SE asia, but the world since 1.3 billion needy consumers > 300 million satiated consumers. I think they need much more infrastructure investment as well as a world economy prepared to regard the remembi as at least on par with the euro if not in the dominant position of the 2000 US dollar.
If they did, they’d no longer have the export market they do.
Slarti- They wouldn’t need them as much, but if you think China could or would lose them altogether I think you are mistaken. A 30% re-evaluation of the reminbi will let some of the low cost producers in latin america and africa eke out a living, but it won’t make Chinese production uncompetitively expensive. The main problem for their exports would be that America is their main customer, and in this scenario America wouldn’t be able to afford many imports from anywhere anymore.
Frank & Slarti — the idea behind my scenario, whichever way the central government would maneuver, would be to run China as an autarky for as long as possible while pushing exports into foreign markets whose demand is still high but whose manufacturing bases have been undercut. [It’s essentially a variant on the old Japanese market-share principle.] By coupling this investiture to the economic restructuring and regrowth of the smaller economies, China can put itself into a position of unparalleled political dominance over those countries, which in turn can be used to feed the rekindling of Chinese economy.
Now as I understand it, increasing worker wages hurts one’s export markets only if a) there’s competition and b) prices are naturally set by supply-v-demand. The whole point of this scenario, though, is that there won’t be meaningful competition and the CCP will try to run an undercutting monopolistic strategy on the rest of Asia, which means that the usual rules vis a vis wages, currency and export markets might not apply. That said, I don’t think they could get away with a substantial increase of wages as the balancing act would become too precarious to be stable.
Anarch- Yeah I got the point of the scenario. Its the standard mercentile approach. One problem with China trying it is that all the other asian “tigers” are already running mercantile policies. Europeans aren’t shy about applying protectionist policies either.
Sure raising wages would hurt Chinese exports some. I’m not sure cutting wages is really possible though, my impression is that lots of people are already at starvation wages there.
The point I was trying to make is that the world doesn’t really need another big mercentile economy. It needs consumers with money to buy things. America is passing off funny money.
The idea is that as long as our interest rates are low, we will keep buying stuff from them. There is, of course, a limit to how long they can go on dong this without going broke
As long as they run a trade surplus with the US, they can keep buying Treasuries. What is the limit?
There is a limit from the US side on how much debt as a % of GDP can be serviced, but what do you see as the limit from the Chinese side that would cause them to go broke? No doubt they have lost financially by dollar devaluation, but the Chinese central bank is not buying US debt to make money.
Felix- No they are not doing it to make money, but at this rate at some point they will be spending 300+ billion to buy treasury notes while writing about the same off in depreciation on the treasuries they already have. That would just about have to get on their nerves. Spending the money to get real assets makes more sense in the long run.
“but what do you see as the limit from the Chinese side that would cause them to go broke?”
There are limits. They have to deploy the vast amounts of capital flowing in, and there appear to be limits on how much rural-to-urban labor they can profitably employ. They build a jeans factory, they need to provide housing, goods & services to those employees which will eventually cut their exports. And I think there is a potential inflation problem. The “Shanghai Triangle” is experiencing a housing bubble similar to West Coast US.
They build a jeans factory, they need to provide housing, goods & services to those employees which will eventually cut their exports
But they have tens of millions of unemployed/underemployed workers in the cities, and over 100 million in the countryside. Those people are already getting housing, already being fed. Think opportunity cost here. For it to be a net positive for China, those workers only have to be more productive working in the new factory than they are doing little or nothing.
The “Shanghai Triangle” is experiencing a housing bubble similar to West Coast US.
Brad Setser argues that the two are related…the US is exporting its housing bubble…
Interesting. I read the whole thread and nobody has mentioned oil.
a)Presuming the Chinese sell-off of T-Bills, two questions:Does an instant interest rate spike by the Fed keep the dollar high? Does a rapid decline in the dollar make the price of oil skyrocket? If the price of oil in dollars does spike, this hurts China, who is the second largest oil pruchaser in the world. Of course, they have lots of dollar reserves to buy oil with.
b) China is building oil pipelines, I think I read today(don’t ask me where, I visit all the macro blogs) thru Pakistan and thru Myanmar. Could it be that their naval buildup, which includes expanding a deep port at Gwadar, is simply sane protection of their oil-sea routes?
c) Nobody responded much to my first comment, I guess China remains the loathsome enemy or something. But I ask hypothetically, which looks like the safest most economically beneficial alliance over the next fifty years:Russia/EU or China/India? China buying our debt got them dollars with which to buy oil from ME who now have billions of dollar assets.
And if we are to Wolfowitzian-Transform the Middle East, the process will look more like China than Europe. An economic transformation of SA and Iraq from resource exporters to goods-exporters is absolutely essential, and China/India can be the developing market to sell to.
Russia/EU or China/India?
China/Russia, specifically over Siberian developmental rights, is currently what I’ve got my money on. China and India have too much of a history, I think, and too many opposed interests to bond; Russia’s too unstable for the EU. YMMV.
[And I could have sworn someone mentioned oil in this thread, which is why I didn’t. Where is Gwadar, btw?]
“Where is Gwadar, btw?]”
Baluchistan? 🙂 Southern Pakistan, on quick google
Remember, this is a country where labor is cheap. Labor is so cheap that they’re still using hand labor to dig foundations for large buildings. Literally, guys with shovels and wheelbarrows are digging holes for concrete pilings and carting the dirt away with small trucks. Takes longer, sure, but I don’t think they care all that much about time.
Doesn’t mean no one’s thinking about it. I’m not sure if this gives us an edge, but the ME oil nations all are interested in cash or cash equivalent in exchange for oil. So who gets the oil is whoever has sufficient cash with which to buy it. Could be a wash; I really can’t even speculate.
As for the secret alliance theory, I have no idea. Remember, not only are they lying sacks of shinola, they’re stupid lying sacks of shinola. You’ve got to keep the conspiracy theories consistent with each other, at least.
Oh, and more about China: pollution is very, very bad. We were fortunate enough both times we were there to have the air cleaned by rainstorms, but it was easy to see the brown clouds rolling back in by the time we left. I can’t imagine anything bad enough to induce rioting. I mean, your family might have to buy the bullet.
Slarti
Shine a light on the USA back in the 19th century and save for comunism China doesn’t look half bad in comparison. China is developing at a rapid pace economicaly and militarily and causing a lot less damage to indigenous populations and the environment than its US counterpart achieved. Their system of government stinks but it’s a logical extension of their totalitarian nature which I hope will be moderated as they grow larger on the international stage. Wishing it away or hurling abuse from the sidelines won’t cut it, we need to seriously engage to shape and not confront merely as an article of faith in the superiority of our system for all countries in all situations.
I’m not sure what Posit means by “indigenous population.” If he (or she) means to include the Tibetans, then I think their treatment of indigenous people has been every bit as devasting to the ppeople as our historical treatment of native Americans. The Tibetans have lost everything–language, religion, freedom, control of their own territory. It’s cultural and literal genocide.
Who’s hurling abuse? It’s well-known that China has cheap, cheap manual labor; it’s well-known that China has a pollution problem, and it’s well-known that China deals harshly with lawbreakers. Maybe implying that in China one could earn execution for rioting was an exaggeration; so be it.
China Reserves
Brad Setser’s daily 🙂 post on Chinese monetary policy. Slart asked why the Chinese cannot continue to build reserves forever; Setser here I think hints that inflation could be a problem; and links to a subscriber FT article.
I just remembered Greenspan saying in 2001 that the US budget surpluses could be a big problem. Whether or not he was lying to sell the tax cuts, I am sure he supplied reasonable sounding arguments…I just can’t remember them.
It’s well-known that China has cheap, cheap manual labor; it’s well-known that China has a pollution problem, and it’s well-known that China deals harshly with lawbreakers
Sounds like the GOP party platform, what don’t you like about it?
Everyone takes a beating, but China keeps on its feet long enough to remain the sole, or at least dominant, manufacturer in Asia.
This is assuming that we won’t send anything to flatten China’s manufacturing capabilities as the run is occuring.
A Nguyen- True. That type of action would likely lead to nuclear retaliation, and probably everyone here already understands MAD. (Maybe this explains the Bush administrations plans to spend $600 million on bomb shelters.)
bob mcmanus: China is building oil pipelines, I think I read today(don’t ask me where, I visit all the macro blogs) thru Pakistan and thru Myanmar. Could it be that their naval buildup, which includes expanding a deep port at Gwadar, is simply sane protection of their oil-sea routes?
You don’t have to go all the way to Asia for Chinese-financed pipelines, Bob. There seem to be several Chinese-financed pipelines in the works through through northern Alberta and BC. And they’ve just made a substantial investment in oil sand extraction. Plus they’re talking seriously with Chavez.
++ungood,
Interesting about the oil sands. I wondered when $50/bbl oil would finally put them in play.
Even more interesting was the statement that ChevTex agreed to buy Unocal. I didn’t read anywhere that it had been a target of CNOOC. So, I guess the plan is to what, allow the oil companies to become monopolies again, as long as their OUR monopolies?
er make that AN oiligarchy 😉 multiple monopolies doesn’t make too much sense.
Frank: Its the standard mercentile approach.
I wouldn’t have called it the “standard” mercantile approach, though it’s certainly a variant on economic imperialism. Mercantilism implies, to me, a use of force or political leverage (either indirectly in sovereign nations or directly in colonies) to open and maintain markets; here, the markets are being used to establish political leverage and some kind of colonization.
Slarti: Maybe implying that in China one could earn execution for rioting was an exaggeration; so be it.
It’s a little hyperbolic, but only a little. At least the CCP has, I think, stopped charging families for the bullet used to execute their kin.
A Nguyen: This is assuming that we won’t send anything to flatten China’s manufacturing capabilities as the run is occuring.
Of course, but I think that’s highly unlikely under my outlined scenario: China triggers the run but doesn’t ride it as hard as possible. Provided they can plausibly (or even semi-plausibly) deny that this is an economic attack against the US — which in this scenario it really isn’t, it’s an attack on the Asian economies — I think US military retaliation won’t be on the table. And frankly, absent a Pearl Harbor-type miscalculation I don’t see the US rousting from its economic torpor to intervene overseas; our native isolationism will kick in and, at worst, we’ll go beat up a few South American nations.
Anarch- Sounds about right. Of course China had to apply considerable political leverage to join the GATT as a most favored nation, but I can see where you would regard that as different from the East Asia Tea company.
postit: causing a lot less damage to indigenous populations and the environment than its US counterpart achieved
This is simply not true. In big parts of China, they’ve killed all the birds. All. Think about it.
The population pressure on the land is many, many times what has ever been true in U.S. history up to now, much less in the nineteenth centry.
There is no rosy upside to the Chinese environmental story.
Also, about the possibility of flattening China’s manufacturing capacity, since I think a lot of it is joint ventures with multinationals, I’m not sure if the US would be willing to flatten Coke, Nike et al’s investments.
Let’s just think about that for a second: Chine has nearly the same land area as the US, supporting four times our population. And industrialization there is accelerating. If you think LA in the ’70s was bad, you haven’t seen anything yet.
Here’s a few articles on Sino-Japan relations as promised earlier. One from the Economist, some translated Asahi Shinbun op-eds and a short piece discussing the role of history texts
Let’s just think about that for a second: Chine has nearly the same land area as the US…
That comparison, however, incorporates Alaska into the land area of the US; for all intents and purposes, China’s got roughly 10% greater area. The point about population still holds, though.
[And if you think that’s bad, consider that India’s got roughly one-third the area of the continental US and just shy of four times our population…]
_Oh? How so? They’ve basically invested heavily in Treasuries; what’s the downside to us in any conflict with them, in terms of finances?_
None. It’s not like they can force pre-payment or anything. Let’s say you owe your neighbor $10,000. Come the day, if you and he get into a fist-fight, that IOU is of no immediate use (unless you wrote it on a 2×4.) Further, it stands a good chance of being expropriated. As in, “I’m not gonna pay you, you $%&^$#.” (For a historical example involving equity, see Bayer and WWI)
The only strategic use it serves for the Chinese is during any period of rising tensions, prior to actual hostilities. At that point, threats to conduct a fire-sale might start forcing up domestic rates, putting political pressure on the U.S. administration. Frankly, though, I’d expect the overarching anticipation of the damage to trade and business in the event of a Sino-American War to far outweigh the simple effect of Chinese sales of Treasuries, anyway. It amounts to nothing more than a way for the PRC to send us a forceful signal that they don’t like what we’re doing, but not much more.
(I generally don’t buy this Norman-Angell-Lives business. Economic disruption is bad, but no soveriegn state can afford to ignore actions by another that might jeapordize its very existence or viability. And both threats to territorial integrity and threats to allies certainly call viability into question.)
Let’s say you owe your neighbor $10,000. Come the day, if you and he get into a fist-fight, that IOU is of no immediate use
And what happens to your neighbor’s reputation in that instance? Does anyone else lend him money ever again? Now suppose that neighbor depended for his daily expenses on borrowing money. What is likely to happen to him?
Further, it stands a good chance of being expropriated.
Again, on the next day, who steps forward to buy new US debt offerings? Nobody. When people pay dollars for US government debt, they are buying a reputation.
The only strategic use it serves for the Chinese is during any period of rising tensions, prior to actual hostilities.
It can be used at any time for any reason. The example that AngryBear gave was the sale by the US of a new weapons system to Taiwan. China could diplomatically tell the US that the US has the right to sell whatever weapons it wants to whomever wants, and oh by the way, just for informational purposes, our central bank is going to be putting $10 billion dollars of Treasuries on the market every day for the next four months. Thought you might like to know in advance. Hope it doesn’t ruin the midterm elections for you.
If you think that would amount only to a forceful signal, you might want to think about what US interest rates would need to be to attract foreign money if $10 billion in US debt was coming onto the market every morning in addition to the Chinese not making any new purchases of the same.
“And what happens to your neighbor’s reputation in that instance? Does anyone else lend him money ever again? Now suppose that neighbor depended for his daily expenses on borrowing money. What is likely to happen to him?”
Don’t be silly. If and when things progress to an actual shooting war, reputational effects are no longer dominant, nor are they likely to last 5 seconds beyond the end of hostilities. Going back to the example I cited, you’re claiming that the expropriation of Bayer by the U.S. government once it became an Allied co-belligerent was going to adversely impact the chances that a foreign company would direct FDI towards the U.S. both during and after hostilities. After all, they might get expropriated themselves, right?
“Again, on the next day, who steps forward to buy new US debt offerings? Nobody.”
Felix, this is my point. The day after that whopping big war (and it can’t help but be exactly that) starts, nobody’s going to be buying that debt, anyway. That’s ok, because we’re not going to be trying to finance shipments of toys with “made-in-China” stickers on them. All bets are off.
One more url about Japan’s defense policy and such (not directly related to the recent attacks on the Japanese embassy) is
here
I don’t particularly agree with the take in the article (I think that the pacifist streak in the Japanese is a lot deeper than he gives credit for and I thought the phrase “Tokyo must accept that any failure to deploy an effective missile defense system or shoot down missiles bound for the United States because of constitutional niceties could rupture or severely weaken the alliance.” a lot like ‘constitutionality for me (i.e. the US) but not for thee”), but it is ironic that the phrase he uses in his conclusion (doshu imu, lovers in the same bed dreaming different dreams) is actually a borrowing from Chinese (though I have seen it batted around for the situation he mentions, so I’m not accusing him of making things up)
The day after that whopping big war (and it can’t help but be exactly that) starts, nobody’s going to be buying that debt, anyway.
I think Felix’s use of “the next day” actually meant “after the war is over” not literally the next rising of the sun.
Another thought about oil and the dollar:
Right now oil is priced in dollars. If OPEC were to decide to price oil in, say, Euros, the effect on the US economy would be pretty devestating.