The key measure of credit-market stress in China has widened to its worst level since Bloomberg started measuring it in 2007. As Paul Krugman pointed out this morning, the news is reminiscent of the TED spread in the United States, which was an early alarm of the coming financial crisis. The Chinese credit bubble…More
Category: China economy and business
By all accounts, former Washington Gov. Gary Locke was a highly effective and popular ambassador to China. As the first Chinese-American to hold the post, he received intense coverage in Chinese media.
The Chinese people loved his common touch. Photos of Locke standing in line at a Starbucks and carrying his own backpack went viral, a noticable contrast to the “princelings” that run the country and enjoy lavish lifestyles. He also cultivated a good relationship with China’s new reforming President Xi Jinping.
Locke also irritated the Communist bosses by making public Beijing’s air quality with the popular PM 2.5 air quality report and granting protection to Chongqing’s former police chief and blind activist Chen Guangcheng.
And his decision to resign and return to Seattle so he could be with his children in high school is perfectly understandable.
No ambassador can be detached from the administration whose policies he carries out. For Locke, this meant explaining to Beijing the Obama “pivot to Asia,” while also working for a healthier balance between the world’s No. 1 and No. 2 economies. With China becoming more assertive, including against U.S. allies, this can’t have been easy.More
Earlier this month, I wrote a column about Beijing’s plans to shift the Chinese economy from its heavy dependence on manufacturing, investment and exports to more consumption and service jobs. More urbanization means more purchasing power and a more sustainable economy. But Professor Kam Wing Chan of the University of Washington, who studies labor, migration and urbanization in China, points out that the scheme, which depends on moving millions of people into cities, faces serious challenges. “You have totally overlooked China’s hukou, or household registration system, which has largely prevented Chinese rural-urban migrants from joining the middle class,” he told me.
Approximately 230 million migrants work in cities, but are denied the hukou, “a little red booklet that entitles the bearer to truly live like an urbanite.” Without it, these migrants are ineligible for many jobs, can’t get social security benefits, public housing or admittance to a public school for their children. The status is hereditary by law, perpetuating inter-generational poverty.
In the South China Morning Post, Chan wrote, “This gargantuan Chinese labor force without urban residency rights has supplied the global economy with the largest ever army of super-exploitable labor; it has also driven the country’s boom over the past 30 years. Without the hukou system, there would be no China as we know it today. Some have said that it is China’s most potent dirty, secret weapon.” It is also a caste system that is socially and politically explosive.More
In Sunday’s Seattle Times, I’ll be writing about the potential sea change that might emerge from China’s determination to rebalance its economy from one heavily dependent on exports and investment to one with much more consumer spending and service jobs. That means settling for slowed growth. It’s unclear how the winners and losers will shake out worldwide, including in Washington. We’ve been a rarity among American states: A net winner since China’s entry into the World Trade Organization; we even run a trade surplus. If Beijing can stay the course, China’s reboot will shake a world accustomed to the nation’s double-digit growth.
So if you’re willing, tell me how China figures into your business:
Read on for some of the business and economy stories you might have missed this week and the haiku:More
The stock market isn’t happy with the prospect of the Federal Reserve backing off its stimulus of $85 billion a month in purchases of mortgage-backed securities. The hot money from the Fed, along with the rock-bottom borrowing rates for its member banks to get money for “trading,” has been one of the big drivers behind the market’s remarkable post-recession run. Bernanke apparently made things worse with a press conference aimed at transparency, as opposed to former Chairman Alan “Bubbles” Greenspan’s Yoda-like pronouncements.
Greenspan rarely followed the advice of his legendary predecessor William McChesney Martin, who ran the central bank from 1951 to 1970. Martin famously said it was the role of the Fed “to take away the punch bowl just as the party gets going,” Bernanke hinted that his Fed is going to do just that, albeit slowly. The markets are mindful of one Greenspan attempt in 1994, which shocked the system and led to widespread losses and slowing. The difference is that the ’94 move involved raising interest rates from a then record-low 3 percent to 6 percent. Bernanke has pledged that rates will remain at essentially zero until unemployment falls below 6.5 percent. But pulling back on the bond buying, and presumably shrinking the huge money supply, is enough to spook big investors. Or at least cause a period of rebalancing with plenty of instability.
But there’s a back story. The markets are also worried about China, where growth is slowing and the banks and shadow banking system are showing signs of serious trouble. China’s central bank is failing to infuse capital into the system and inter-bank funding is freezing up.More
Japan’s Nikkei has entered bear territory. Other Asian markets have suffered sell-offs, too. The Dow Jones Industrial Average swooned Tuesday and is staging only a cautious recovery today. The Wall Street Journal’s estimable David M. Wessel wrote, “The tectonic plates of the world economy are shifting, moving the yield on the 10-year Treasury to the highest level in more than a year and shaking financial markets from Tokyo to Mumbai and Johannesburg to São Paulo.” Is the world returning to something like normal, where America grows again, China does a soft landing to slower growth and the Japanese economy can finally find its footing?
Or is it a harbinger of more volatility in financial markets—perhaps the result of a misreading of the Federal Reserve’s policy intentions by the markets or a premature move by the Fed to cut back on easy money—that yields an unwelcome increase in market interest rates before the U.S. economy achieves what Fed Chairman Ben Bernanke once called ‘escape velocity’?
The question of what the Federal Reserve will do is rightfully a preoccupation. Can it make the pivot to slightly tighter money without tanking the markets? And can emerging markets continue to thrive on the “hot dollar” trade now that Treasuries are becoming more appealing? A couple of charts explain what is not happening.More
President Obama is meeting today and tomorrow with Xi Jinping, the new president of China, at an estate in Rancho Mirage, Calif. Today’s forecast high: 113. Who thought this was a good idea, when the mild Northwest would have provided a more pleasant venue. Anyway, the leaders of the world’s No. 1 and No. 2…More
The $4.7 billion bid for Smithfield Foods by China’s Shuanghui International might seems like a replay of Japanese acquisitions in the 1980s. After all, those dollars in the trade deficit have to come back some way. Japan’s ascension was abruptly cut short and it has never recovered. China’s situation, however is fundamentally different. As an encyclopedic piece in Sunday’s New York Times illustrated, China’s rise is driven by state capitalism and a billion savers with no options to invest elsewhere:
By buying companies, exploiting natural resources, building infrastructure and giving loans all over the world, China is pursuing a soft but unstoppable form of economic domination. Beijing’s essentially unlimited financial resources allow the country to be a game-changing force in both the developed and developing world, one that threatens to obliterate the competitive edge of Western firms, kill jobs in Europe and America and blunt criticism of human rights abuses in China.
Seattle and Washington business interests might protest that this is more China bashing. After all, China is Washington’s largest export customer, buying not just airplanes but also agricultural products and timber. But most of America is in a different situation. The Economic Policy Institute estimates that at least 2.4 million U.S. jobs were lost between 2001 and 2008 as a direct result of China entering the World Trade Organization (yet playing by its own rules). We have a China conundrum.More
Alan Tonelson, research fellow at the U.S. Business and Industry Council, has been one of the few expert observers to push back against talk that rising wages in China, increased transportation costs and technological advances at home foreshadow a major turnaround for American manufacturing. President Obama consistently pushes advanced manufacturing at home as part of his economic agenda. The Brookings Institution has devoted its brainpower to the topic. But outside of a few coddled companies (hello, Boeing), is manufacturing even holding its own, much less turning around, particularly as an employer? Tonelson says no.
In a new paper, Tonelson lays out the data showing how China kept increasing its market-share penetration in the United States through 2011. To put a fine point on it:
These Chinese gains have occurred in a wide range of capital-and technology-intensive industries, including semiconductors and other high value electronics goods, machine tools, sophisticated industrial machinery, fabricated metal products, and chemicals, where producers in high income countries like the United States are supposed to enjoy overwhelming natural advantages. Yet China’s inroads in these capital- and technology-intensive sectors are mirroring earlier trends in labor-intensive industries like apparel and toys, where significant U.S.-based presences have all but disappeared.
North Korea has been the crazy aunt in the attic of southeast Asia for so long that it’s easy to ignore its latest string of threats, which are now backed by nuclear weapons. After the Iraq debacle, a war sold on phony intel, it’s also easy to be skeptical of intelligence that shows the…More