Economic War between China and the US

Sputnik Radio interviewed me by phone on whether the US and China are ready to wage economic war. The audio of the interview is here.

They wrote a short piece based on the interview as below.

The United States formally launched a probe into China's trade practices to find out whether the country's actions may harm American commerce, US Trade Representative Robert Lighthizer said on Friday.

Radio Sputnik discussed the issue with Dr. George Koo, founder and former managing director of International Strategic Alliances as well as a director of New America Media.

“I don’t think China has expressed any desire to wage economic war with the United States. However, I think China is very interested in continuing its very healthy robust economic growth and there may come a time, maybe 10 or 20 years down the road that China’s economy will be larger than the US. But it’s not a zero-sum game, it’s not like one economy grows at the expense of the other one,” Koo said.

He further said that what former White House chief strategist Steve Bannon disclosed about the covert economic war with China is not what is happening.

“If the US fails to keep up with China’s growth there will be domestic causes, such as not investing in education, not believing in science, not investing in innovation and not encouraging technological advances,” the expert said.

© REUTERS/ JASON LEE

US to Lose 'Economic War' Against China Amid Loss of Global Leadership

According to Koo, Trump’s administration is “on the wrong approach in terms of the economic policies.”

Talking about the consequences of the world’s two largest economies going head to head in an “economic war” with one another, the expert said that all the world’s economies will be affected and suffer as a result.

However, the expert doubts that this will occur. “I doubt that it’s going to happen. China is emphasizing its One Belt, One Road initiative, which is really trying to create and spread the wealth among the less developed countries to create situations which will be win-win and mutually beneficial,” Koo said.

He further said that the world’s economies are so tied together that it is like “Siamese twins” – if you kill one, the other one will die too.

Earlier in the week Steve Bannon said that the US has been locked in a covert economic war with China. The official said the next few decades would decide who would be the "hegemon." 

He also insisted that an investigation of China’s trade practices under US President Donald Trump’s order ought to take place. The probe will look into whether Beijing improperly requires foreign companies to hand over technology in exchange for market access. 

Steve Bannon Is Out as the Trump Administration’s Revolving Door Spins

However, after his resignation on Friday, the question remains whether the new US trade policy toward China is here to stay.

After US media reports of Trump's plans to investigate China’s alleged intellectual property theft from US companies, the Chinese Commerce Ministry criticized Donald Trump’s decision saying that it violated international law. The Chinese Foreign Ministry called US plans to crack down on trade with China "unacceptable."

Recently, US President Donald Trump has stepped up criticism of China amid Pyongyang's numerous ballistic missile launches. Trump said last month that he was "very disappointed in China" over its failure to put pressure on North Korea to halt its nuclear and missile tests.

A Foreign Policy Black Eye for Obama

This piece was first posted in newly reformatted online Asia Times.

Month of March has not been kind to the worldwide image of Uncle Sam. First Bibi Netanyahu came calling, uninvited by President Obama, and proceeded to tell him how the U.S. should deal with Iran.

Obama declined to appoint Netanyahu as America’s special envoy to Iran, but Bibi got the last laugh as the afterglow of his appearance before the joint session of Congress in Washington gave him a landslide mandate in Tel Aviv.

At least Obama can console himself that Bibi didn’t single-handedly make him look bad but was much abetted by Speaker John Boehner and the House Republicans. This merry band on the hill didn’t care much for the niceties of diplomatic protocol if it means they could embarrass their own sitting president.

Obama’s stand on China’s Asian Infrastructure Investment Bank, AIIB, on the other hand, was a self-inflicted black eye with no better explanation than as another consequence of American hubris.

Officially, Obama proclaimed that with Asian Development Bank and World Bank functioning just fine under American and Japanese leadership, there is no need for AIIB. He asked America’s European allies, Australia, Japan and South Korea not to join the new bank.

The first to bolt was U.K., America’s heretofore closest ally. All the rest pile in so as to not miss out being a founding member.

When the formation of AIIB was announced in October, there were 21 countries that signed on.  By the March 31 deadline, 46 countries have applied to be founding members. (The final tally of founding nations was 57.)

Every country Obama asked not to join, has, except a wavering Japan that almost caved.

Obviously, the prestige of the American presidency was not enough to dissuade the allies of the perceived importance of becoming a founding member of AIIB.  

How the infrastructure investments in Asia will reward the members of the bank remains to be seen. But clearly the forty some countries have confidence in China’s leadership and did not want to miss the boat. Their stampede makes the American position seem petty and hollow.

Everybody sees Asia to be the fastest growing region in the world. Infrastructure investments will accelerate and facilitate that economic growth. People of Asia will enjoy unrivaled prosperity and rest of the world will benefit by doing business with Asia.

China has already demonstrated that they know how to make large infrastructure investments in China and turn such investments into unparalleled economic growth. They have a proven track record to lead the new investment bank.

Alas for the U.S., the American leaders from the president on down are so imbued with the belief of American exceptionalism that America finds it hard to conceive that others can be exceptional in their own ways. 

Since the collapse of the Soviet Union and the end of the Cold War, the U.S. has gone around the world as the only hegemon standing. The American foreign policy is basically one of “do as I tell you.”

After the financial crisis of 2008, China as America’s largest creditor had quietly approached Washington for a more equal role in dealing world problems of common interest. However, even if the Obama administration was receptive, Congress was having none of that. America’s rebuff had caused China to find other ways to exert their influence.

One of the most prominent ways has been for China to make investments in hospitals, schools, roads and other infrastructure around the world to be paid with resources, most notably in Africa and Latin America. Their win-win approach has been popularly received and may be another reason why other countries find AIIB appealing.

America’s win-lose approach to world affairs has cost the U.S. trillions in Afghanistan and Iraq and created a vast zone of instability from Ukraine through the Middle East to sub-Sahara Africa. To restore stability, the U.S. needs to revise the my-way-or-the-highway approach and admit that they need to collaborate with other stakeholders.

Internationalization of the renminbi

From time to time, I have reported on the growing use of the Chinese currency, the renminbi, in international trade. See here for my most recent update. The latest 3rd party update came from a recent issue of Wall Street Journal.

According to the WSJ report, nearly 25% of all the transactions across China's borders in 2014 were settled with the yuan. Fifty countries used the yuan for at least 10% of their trade with China. It is now the seventh most used currency according to Swift international payments.

According to China's central bank, the amount of renminbi used for international payments for 2014 was equivalent in value to $1.6 trillion in dollars.

A later Financial Times article gave an overall view of all the world currencies used in international transfers. The Chinese renminbi has now risen to 5th overall in volume of use.

Update on Internationalization of the Renminbi

Even though I have not said much about China's bilateral swap agreements in recent months, I have been following the development with interest. My last count revealed that China had entered into about 20 such swap agreements. Everybody understands that swap agreements bypasses the need to convert payables into dollars from one currency and then reconvert the calculated dollars into the other currency--or pay the bill in dollar and not in either local currency. By doing able to deal directly, the two trading partners can skip having to hold dollars in their reserve to pay bills.

Experts on international monetary policy also say that the swap agreement is a way for China to gradually open the door for the renminbi to become an internationally accepted reserve currency, even before the yuan becomes freely convertible.

The latest news indicate that China has also signed multiple currency swap agreements totaling 2.9 trillion yuan (472 billion U.S. dollars) with 26 overseas monetary authorities. "Monetary authorities" rather than countries because the list includes Hong Kong and Taiwan.

The main reason for the news bulletin was to announce direct trading of the renminbi with the Singapore dollar beginning October 27, 2014. The Sing dollar is the latest to be added to the major currencies that China can do onshore trading. Others are U.S. dollar, the euro, British sterling, Japanese yen, Australian dollar, New Zealand dollar, Malaysian ringgit and Russian ruble.

This move is said to help Singapore become a "renminbi offshore center." The same article goes on to say that the PBOC has also authorized offshore renminbi clearing and settlement arrangements in Singapore, London, Frankfurt, Seoul, Paris and Luxembourg, as well as Taiwan, Hong Kong and Macao. The article from official source in China does not clarify the difference between clearing and settlement and just plain center.

The article also said China's foreign exchange reserve as of June 2014 totaled $3.89 trillion.

Reuters recently reviewed China's possible strategy on internationalization of the renminbi that I thought was rather informative. The article was specifically referring to Canada and Middle East as next likely offshore centers, but the discussion was generally useful in understanding what China is doing. On November 8, China and Canada announced swap agreement up to 200 billion yuan for three years and Toronto will be the first city in North America to clear renminbi based transactions.

Another report indicated that Qatar is the 24th country to enter a swap agreement with China. In this case, the swap would enable the use the renminbi for purchase of oil in lieu of the dollar.

A comprehensive discussion on the move to internationalize the renminbi was recently published on the blog for China's central TV. This post indicate that China has swap agreements in place with 29 monetary authorities. Even though the renminbi is not yet freely convertible and far from becoming a reserve currency like the dollar, the growth in the use of the yuan for trade settlement has leaped more than a thousand fold from 2009 to 2013, from 3.58 billion yuan in '09 to 4.63 trillion yuan in '13. The amount in first three quarters of '14 has already exceeded the total for 2013.

RMB developing quickly as major world currency

Just earlier this month, I posted a progress report on the rate of globalization of the Renminbi. In today's China Daily is an update that suggests a rate of development faster than expectation. (The headline of the CD article is the same as the title of my post.)

Last year 4.63 trillion yuan ($746 billion) were used in cross border trade settlement, up 57.5% from 2012. According to the article, the RMB is already the fifth most used international currency after the dollar, the Euro, the British pound and the Japanese yen, accounting for 2.5% of cross border trade settlement.

By the end of 2013, the amount of international bonds and bank notes denominated in RMB increased by nearly 25% YOY to a total worth $71.9 billion.

By year end 2013, China has entered currency swap agreements with 23 countries and regions.

China is Practicing Paycheck Diplomacy

On the front page of recent issue of Wall Street Journal was an article titled, “An Arc of Instability Unseen Since the ‘70s.” The piece pointed out that In the past month alone, the U.S. has faced twin civil wars in Iraq and Syria, renewed fighting between Israel and the Palestinians, an electoral crisis in Afghanistan and ethnic strife on the edge of Russia, in Ukraine. The horror of shooting down a civilian 777 in Ukraine airspace followed shortly after the publication of the aforementioned article.

While Obama was busy fighting diplomatic fires around the world, China's president Xi Jinping was conducting his version of a globe trotting charm offensive. His first stop was Seoul, reciprocating an earlier visit to Beijing by South Korea president Park Geun-hye. The two leaders have met previously and have developed a warm personal friendship. Even more significantly, Xi's not stopping in Pyongyang to or from Seoul, is widely regarded as a deliberate downgrade of China's relations with North Korea.

The next step is up to Washington. If Obama is willing to seize this development as an opportunity to strike a deal with China and settle the Korean peninsula conundrum, he should begin a China-U.S. dialogue. The basics of the deal as I have suggested is peaceful reign of an unified Korea under the leadership of Seoul in exchange for American guarantee to vacate their military presence on the peninsula. (See this link.)

For the deal to reach a desired conclusion, a lot of conversation, negotiation and trust building would have to take place between the two superpowers. The plum prize is for Obama to go down in history as the first president to truly reap a peace dividend. Instead of instability, he would have brought stability in northeast Asia and no longer having to deal with one of Bush's axis of evil.

From Korea, Xi returned to Beijing long enough to welcome Germany Chancellor Angela Merkel to China before embarking on a week long jaunt to Latin America. First order of business was to attend a leaders' summit among the BRICS nations (Brazil, Russia, India, China and South Africa.)

Even before the formal summit conference, Xi renewed his acquaintance India's newly elected Prime Minister Narendra Modi. At this side meeting, the two leaders promise to strengthen the bilateral relations with frequent exchange of visits and explore Chinese participation in India's much needed infrastructure investments. No doubt, based on impressions from Modi's previous visits to China, he had to come away impressed by the scale of China's infrastructure investments.

A direct outcome of the BRICS summit was an agreement to establish the New Development Bank (NDB) for the expressed purpose of "mobilizing resources for infrastructure and sustainable development projects in BRICS and other emerging and developing economies." The initial subscribed capital of $50 billion was to be shared equally by the five founding nations. 

The BRICS members account for nearly 30% of world's territory, more than 42% of world's population and 21% of world's GDP and their economy has been growing twice as fast as the developed countries. The formation of NDB will provide alternate view to the U.S. dominated World Bank and IMF in setting priorities for assisting emerging economies.

This was the sixth summit for BRICS. Outside observers were caught by surprise. They expected a lot of haggling and bargaining among the members before they could agree to the formation of NDB. Instead it was a done deal after two days of wide ranging discussion.

Outside of the summit venue, Xi was also busy networking with other leaders from Latin America. In one of the bi-lateral meetings, Xi raised the idea to Peru's President Ollanta Humala of building a transcontinental railroad from Peru to Brazil, linking the Pacific to the Atlantic with a vital trade corridor. Both leaders of Peru and Brazil were intrigued by Xi's idea and held high regard for China's expertise on building railroads in challenging environments.

Indeed after the conclusion of the BRICS summit, Xi stayed in Brazil for an official state visit. One of the items in the resulting memorandum of understanding between Xi and Brazil's President Dilma Rousseff was for China to assist Brazil in railway construction and make significant improvement in Brazil's infrastructure.

Another fallout of Xi's visit was the official establishment of the China-CELAC Forum. CELAC stands for Community of Latin American and Caribbean States. Canada and the U.S. are not members. In welcoming this new forum, Xi proposed a $20 billion fund to finance infrastructure projects and $10 billion credit line to the community of nations. 

China is already the largest trading partner to Brazil, Peru and Chile. Xi's goal is to help all the countries in the western hemisphere increase their ability to participate in international trade because of infrastructure improvements.

Xi has won high praise for his vision of how China can help developing countries help themselves. China is proposing closer cooperation via assistance in infrastructure development. Improvements in infrastructure leads to economic expansion. Expansion creates jobs. Xi's message translates into paycheck diplomacy.

Developments on the Renminbi Becoming a Reserve Currency

Sometime ago I began to track bilateral currency swap agreements between China and its trading partners. (See this blog and others that precede it.) The idea was that this trend could be the beginning of the Chinese yuan becoming a global currency and qualify as a reserve currency. Some recent developments provide some indicators of the progress the Renminbi has made towards this end.

Recent WSJ article reported on the increase use of Renminbi (RMB) instead of dollars to settle their cross border transactions. The US has surpassed Taiwan to become the fourth largest trading hub for the yuan, after Hong Kong, Singapore and U.K. To put this into perspective, Hong Kong accounts for 71% of all the world wide payments in yuan, Singapore 6.8% and London 5.9% while the U.S. only 2.6%.

The next day, China Daily followed with a related story on use of RMB. According to HSBC, about 17% of the U.S. companies settled their trade in RMB this year, nearly double the previous year. though it is below the global average of 22%. Poll of German companies revealed that 23% of the companies settled their accounts in RMB, a jump from mere 9% in 2013.

Reasons for for using the yuan include lower cost of doing business and better pricing. Not long ago, the Chinese seller would rather get paid in dollars but apparently no longer. It's a reflection of the confidence in the stability of the RMB that they now prefer to get paid in their own currency and not to have to worry about exchange rate fluctuations.

So is the RMB ready to take over as a preferred reserved currency? A paragraph from the WSJ article says not yet: Usage of the yuan has taken off globally. More than 18% of China's total trade is paid for in the currency, up from less than 1% give years ago, according to Bank of China Ltd. The Bank for International Settlements reported last year that the yuan is now the ninth most actively traded currency in the world.

Fading American Expectation and Exceptionalism

Since the financial tsunami of 2008, I have been monitoring the bilateral currency swap agreements that China has entered into. According to the most recent report, China has 24 such agreements in place, the recent agreements with EU and UK are probably the most significant.

Most significant because EU represents a major portion of global economic activity, second only to the US and because UK is unabashedly and proactively going after opportunities associated with becoming a swap center for Renminbi (along with Hong Kong and Singapore) and bending over backwards to entice Chinese investments into UK.

There was a time when UK was the leading economic power of the world--you know, when the sun never set on the British empire. The pound sterling was at the time the world's reserve currency of choice. That was then.

Since then America has overtaken UK and became a superpower and after the collapse of USSR, the world's only superpower. The dollar has replaced the pound as the reserve currency.

Despite the fact that the financial collapse of 2008 was caused by American greed on Wall Street, the dollar was still considered the safest currency to have and hold. Foreign money piling into the US did its part in keeping the interest rate of US Treasury bills low.

Since that time, however, the US Congress has twice threatened to renege on the national debt which would in effect render the foreign holdings of US Treasury bills worthless. Each time, Congress kept the world watching with abated breath and backed off as the clock was about to strike midnight.

Congress has not offered a permanent fix to the circus revolving around the fiscal budget and debt ceiling but merely kicked the can down the street with yet another deadline looming on December 13. Some wags have suggested that Congress lacked sense of humor and did not select February 2, Ground Hog's Day, for the deadline.

Watching the US fiddle with the prospect of default is no joking matter but the world clearly appreciated that Washington has become one big joke.

As Wall Street Journal, among others, have pointed out, Asian countries in particular are now busy doing their own side deals in bilateral currency swaps to avoid additional dollar exposure. The most prominent next to China has been South Korea. They have been cutting one deal after another with their major trading partners. Their central banker said Korea is following China's lead.

The worldwide trend is obvious to anyone except members of Congress. American exceptionalism is fraying along with the declining desirability of the dollar. When enough countries decide holding on to the dollar is too risky, the American dollar will cease to be the reserve currency of choice.

When China is courageous enough to make the Renminbi freely convertible, the appeal of the dollar could take a quantum dump. When the world ceases to want dollars for their rainy days, the value of the dollar will go kaput. The American taxpayers will rue that day but it will be too late to throw the rascals out of Washington. The damage would be beyond repair.

Does Shutdown Presage Global Meltdown?

An edited version appeared in New America Media.

The mightiest democracy in the world has grounded to a screeching halt by the tyranny of few.

Somehow the Tea Party members, roughly 10% of the House, were able to hold the Speaker of the House of Representative hostage and force him into an impasse with the White House.

The US Federal government can no longer operate because the political leaders of the two political parties cannot find common ground and agree.

Instead the parties are now feverishly engaged in explaining to the public why the other side is to blame. Nobody has a solution.

Befuddled observers around the world watch in morbid fascination even though they are hard put to explain how or why this can happen to the only superpower still standing.

The US is worse off than Italy: not even a person of Silvio Berlusconi’s ilk is around to bail out the American impasse and avert a government shutdown. (Berlusconi “saved” Italy by not bolting from the ruling coalition.)

The people of Lebanon are saying, “Hey, you Americans come and learn from us, we have gotten along without a functioning government for decades.”

To the Egyptians, this was an aha moment, namely how to get rid of a government without bloodshed.

Other western democracies such as France, Germany and U.K. are congratulating themselves for having the parliamentary form of democracy where the prime minister stays in power so long as a majority of the parliament supports him or her.

When the prime minister no longer has majority support and loses the confidence vote, the government falls. But, unlike the U.S. a minority cannot violate the basic tenet of democracy and shut the government down.

The bloggers in China seem to be having the most fun seizing the shutdown as an opportunity for a twofer.

On the one hand, the bloggers are praising the American civil society to the sky for its ability to go about business as usual, in contrast to China where a shutdown would assuredly lead to chaos and disorder.

On the other, some slyly suggested that a shutdown of the Chinese government wouldn’t be such a bad thing.

Tourists visiting the U.S. do not find the shutdown amusing. Many from China left for the US around October 1, China’s national holiday and the beginning of China’s Golden Week.

For many that scrimped for the trip of their lifetime, they will be going home without the customary photos of Yosemite and Statue of Liberty and other popular icons from the land of the free.

The bad taste of disappointed tourists is hardly the only damage to international relations for the U.S.

Because of the shutdown, Obama had to cancel his visit to Malaysia and Philippines and possibly the entire trip to Southeast Asia just to pivot back to Washington—further shaking the confidence of the region in the leadership of the U.S.

In contrast, China’s President Xi Jinping went to Indonesia and became the first foreign leader to address Indonesia’s parliament where he spoke for nearly an hour (and then he went on to Malaysia).  

The Taiwan based Apple Daily made a fuss over one of the phrases Xi used in his speech. He said jilidangjitianxiali, which the English China Daily has translated as, “The interests to be considered should be the interests of all.”

The cause of the excitement is because the same exact phrase used to be one half of the operating motto belonging to Chiang Ch’ing Guo when he succeeded his father, Chiang Kai Shek, and became the second president of Republic of China in Taiwan.

Indonesia would seem to be an unlikely venue to send a coded message to Taiwan. More likely Xi was using a phrase in common usage to emphasize the principle that one should consider the greater good over the narrow interest of a select few.

This, of course, is the very message that the political leaders of the U.S. are ignoring, namely, total focus on their individual agenda and not at all on national interest.

The gridlock continues and the U.S. is expected to hurtle over the fiscal cliff around October 17.  Without a Congress to work with the White House and raise the debt ceiling, the U.S. will have to default.

When the world sees the full faith of the U.S. Federal Government as worthless, there will be a worldwide financial Armageddon. Perhaps the crazies in Congress relish the idea of an Armageddon, but no one else will.

The self-inflicted wounds to American prestige will take time to recover. But if the United States actually defaults, the damage will be fatal and the world will never trust the U.S. ever again.