♠ Posted by Emmanuel in China at 12/04/2008 12:03:00 AMFor the last time, US Treasury Secretary Henry Paulson (AKA "The Great Paulsonio") will anchor the US diplomatic team at the fifth US-China Strategic Economic Dialogue (SED). Given the imminent handover to the Obama administration, it is still unclear whether these meetings will continue. Obama has not signaled their continuance even if China indicates a generally positive view of the SED as evidenced by its official publication. Since they were organized through Paulson's initiative, the incoming Democratic administration may take a not-invented-here view of these gatherings.
It may seem like ancient history now, but it's still worth recounting: one of the selling points of Goldman Sachs's former head Henry Paulson becoming the US Treasury Secretary was his good relations with the Chinese business community. Having visited China seventy times or so as Goldman chief, it was then argued that he would be the best bet for opening up China's financial markets to American banks. Let's just say this hasn't really panned out. The obstacles thrown in the way of foreign banks wishing to do business in China remain rather onerous. Plus, it is no surprise that countries like China are now reluctant to adopt the American business model given where it has landed its main exponent. Not only is the US economy suffering recession via "financial innovation," but China is also suffering from previous efforts to participate in its joys. While watching Bloomberg, I came across a chart indicating that the Blackstone and Morgan Stanley shares purchased by its sovereign wealth fund, the China Investment Corporation, are both down more than 70%. While I'm certain other SWFs aren't doing much better, I suspect the CIC is still ahead in the money-losing sweepstakes.
Given the fun I've poked at Paulson for his debt-fueled excesses, it may surprise you that I buy his idea that China can benefit from liberalizing its financial services industry. Like the great Buddha said, moderation is one of the cardinal virtues. When it comes to consumption and credit, the US and China couldn't be farther apart. Consumption accounts for over 70% of the US economy; in China it's 35%. You may say these countries are at undesirable extremes from a Buddhist POV. China's amazingly low figure is attributable to a number of things--cultural factors, weak social safety nets, a rapidly greying population due to the "one-child" policy, and most importantly for this post--relatively undeveloped markets for consumer credit. Given the US credit implosion, Paulson is well advised not to harp on this theme as it would seem rather hypocritical as the WSJ notes:
With U.S. markets battered by risky mortgage-backed securities, and the U.S. economy in recession, Mr. Paulson faces stiffened Chinese resistance to his argument that Western investment banks, insurance companies and other financial firms will bring economic growth...Of course, talking about the SED without mentioning the value of the yuan is like talking about Amy Winehouse without referring to her pharmacological adventures--it's pretty hard to do. Once more, the WSJ has something to say on this:
"They were looking at their teacher, and the problems we've had in our capital markets have certainly not been a good example to them as to why they should proceed with more reform," Mr. Paulson said in an interview Monday. He said he plans, nonetheless, to press China "to avoid the mistakes we've made but to continue with reform..."
For Mr. Paulson, that meant opening China's market to Wall Street firms, among other reforms. "Increased openness in financial services can be a catalyst for investment and growth in all sectors of an economy," Mr. Paulson said at the first round of talks, in December 2006.
It's an argument Mr. Paulson made for the next two years with limited success. "Did Paulson convince them to open up their domestic financial markets to international financial-services firms and a broader range of supposedly more-sophisticated financial products?" asked Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics, a Washington think tank. "Definitely not."
China has wielded nearly every tool it has to fight an economic slowdown, except one: the yuan. Now some think a weaker currency is in store, after its biggest one-day drop against the dollar in years. China sets the yuan's exchange rate daily, and for three years has let the currency gain ground against the dollar. One dollar is now worth 6.85 yuan, roughly the same as in early July. Investors are betting Beijing will let the currency depreciate 5% against the dollar in the year ahead.I've already described how Obamanite allies are baying for Chinese blood over the yuan's value. Even Paulson is signaling some displeasure over the yuan's rate of appreciation (or lack thereof). To put things mildly, the yuan is being closely monitored. Much has been made of China recently launching a $586B plan to help stimulate domestic activity. While a large part of it will go towards infrastructure projects, some of it will go towards encouraging domestic consumption. In a welcome move, the previous IHT link also highlights how China will try and institute social safety nets in line with this objective. It thus puzzles me why China is possibly contemplating a pronounced yuan devaluation at this time. Not only does it raise the ire of a large trading partner, but it also counteracts efforts to spur domestic demand by making imports into China costlier.
That view is based on China's trying to bolster its exporters, which account for close to 40% of gross domestic product. But the Chinese currency hasn't experienced a large devaluation in at least a decade. Such a move would go against the realities of geopolitics and against signals that Beijing is more focused on boosting domestic consumption than on stimulating exports. After all, the kind of move needed to make China's exporters significantly more competitive with Asian rivals is hard to imagine. South Korea's won is down 36% so far this year against the dollar, India's rupee is down 22%, and the Malaysian ringgit is down 9%.
I was again watching Bloomberg when guest Uwe Parpart suggested that the Chinese export lobby is at loggerheads with efforts to encourage domestic consumption. Obviously, the yuan's exchange rate is a point of contention between those wishing to promote consumption at home and the "exports R us" set. In any event, a China Daily headline probably depicts the official line best on currency matters: "US urged not to harp on currency issues at talks" [!] Ultimately, I don't think Paulson will press the matter very hard as a representative of a lame duck administration. All the same, China will probably miss Paulson's harping if and when "China Currency Coalition" Obama gets into gear on this issue.