China And US Seek Their Own Win-Win In Davos

 

OUR MAN IN Davos sends word that he can barely pick his way through the crowds at the annual gathering of the world’s great and the good at the World Economic Forum without tripping over yet another member of the largest government delegation China has ever sent, not to mention more than 50 leading Chinese chief executives and their entourages.

Their presence is even more noticeable in the absence of a US delegation, US officials being instructed by President Donald Trump not to attend because of the US government shutdown.

The ‘optics’, as they say, of the US president rubbing shoulders with the global elite at a time when many of the 800,000 US federal workers furloughed by the shutdown were queuing at soup kitchens or for unemployment cheques, would not look good to his still-adoring domestic electoral base. However, it is easy to imagine also that Trump would not find the Burning Man of globalisation much to his ‘America First’ tastes, or his reception particularly warm.

Vice-president Wang Qishan, leading the Chinese delegation and vying with outgoing German Chancellor Angela Merkel as the star political turn this year, certainly gave the United States the thinnest of thinly veiled workings over.

While painstakingly mentioning neither Trump nor the United States by name, his speech relayed a self-confident message of the great renewal of the Chinese nation and how China was duly asserting its place in the world, one that was a leadership role.

In essence, that message was:

It is a new world. China’s is back. It is a world player and you, United States, had better realise that not only do you no longer rule the roost alone, but we and the other developing nations are no longer going to be takers of the rules of the global order that you alone write, but givers of those rules. And, by the way, don’t bully us over technology, and don’t interfere in our national sovereignty or economic and industrial policy, i.e., lay off Made in China 2025. We can run our economies as we choose, not how you say.

Wang did not, of course, use any of that language; it is entirely our man’s decoding.

How Wang expressed it was:

Adjustments need to be made both economies and societies domestically and to the rules of the international order of economic governance…[China has] the right to take part in the global technological governance system as equals…It is imperative to respect national sovereignty and refrain from pursuing technological hegemony, interfering in other countries’ domestic affairs, and conducting, shielding or protecting technology-enabled activities that undermine other countries’ national security…We reject the practices of the strong bullying the weak and self-claimed supremacy.

Those are lines that do not take much reading between.

Wang also said:

Many countries are increasingly looking inward when making policies; barriers to international trade and investment are increasing; and unilateralism, protectionism and populism are spreading in the world. All these are posing serious challenges to the international order. Will economic globalisation move forward or reverse course? …What we need to do is make the pie bigger while looking for ways to share it in a more equitable way. The last thing we should do is to stop making the pie and just engage in a futile debate on how to divide it.

Even though US officials were not in Davos to rebut Wang, plenty of Western business leaders are there, and have let senior Chinese officials know in the private dinners that are the real power centres of Davos of their concerns over the way intellectual property protections are abused in China and the legal or illegal acquisition of Western technology IP in support of Made in China 2025.

And one US government heavyweight still managed some pre-emptive retaliation, US Secretary of State Mike Pompeo, who addressed the forum by video link the previous day

Pompeo rehearsed his stump speech from his recent swing through what Washington now calls the Indo-Pacific, where he warned of China’s state-centred economic model, its belligerence towards its neighbours, and its embrace of a totalitarian state at home, before holding out an olive branch of sorts:

There are those who say that conflict, superpower conflict between our two countries is inevitable – we don’t see it that way. We want to find places where we can work together.

The old win-win. The question is, will there eventually be just one winner?

Unintended Consequences Of Yuan Revaluation

Our man with his ear to the ground moving and shaking the global elite at the World Economic Forum’s annual meeting in Davos sends word that amidst a general half-glass full/glass half empty sentiment towards China’s commitment to revaluing its currency, there is some concern that a revalued yuan against the dollar would be a mixed bag for U.S. firms. U.S. exporters would find their products becoming relatively cheaper in the Chinese market. In the other direction, American firms with Chinese operations would find their exports from China becoming relatively more expensive. Foreign-affiliates account for 54% of all China’s exports, according a finance ministry report last year. Against that, foreign affiliates would also be repatriating higher profits in dollar terms from their domestic Chinese sales, and their margins would be helped by getting cheaper raw materials when those are imported.

It is on the investment rather than trade account that a yuan revaluation may have the greatest unintended consequences. It would become more expensive for U.S. companies to invest in setting up Chinese operations, giving an advantage to those already there. It would also likely boost China’s outward foreign direct investment (FDI), as it lowers the cost to Chinese firms of buying overseas assets. This Bystander recalls that that is what happened in Japan after Washington arm-twisted Tokyo into allowing a 50% revaluation of the yen against the dollar in 1985-87. Japan’s overseas FDI went from barely $6 billion in 1984 to nearly $50 billion by 1990.

In China’s case, the drive overseas is led by the search for natural resources. Manufacturing accounts for less than 10% of Chinese firms’ FDI. Some labor-intensive manufacturers are looking abroad for cheaper labor in the face of rising wages at home; more than 700 Chinese companies had invested in operations in Vietnam as of last July, according to Vietnamese officials. That is a drop in the bucket of the country’s manufacturing cohort, and they are mostly small or low-value-added manufacturers from Guangdong and the provinces bordering Vietnam. Yet a rising yuan could sweep along more in their wake. If Japan’s experience were to be replicated (and Beijing has resisted such a rapid forced appreciation having seen the effect on Japan’s domestic economy), the bigger flood of Chinese firms looking beyond natural resources to invest in access to foreign markets, brands and technology would be likely to prove much more troublesome for Western competitors, and to expand trade friction into investment friction.

Slowing China Growth Remains A Global Risk, WEF Says Again

The yearly Global Risk Report issued by the World Economic Forum ahead of its annual meeting in Davos (again) lists “China’s growth falling to less than 6%” as one of the key risks facing the world economy. The report doesn’t give a probability of that happening, beyond indicating it is unchanged from a year earlier, though it does lay out how it could occur:

[China’s growth] derives from high credit growth, which entails an increased risk of misallocation of capital and renewed bubbles in financial asset prices and real estate. These can always carry the risk of a sharp and potentially recessionary correction.

Not an unconventional concern.

The report lists the drivers and developments to watch as follows, with a plus sign denoting drivers of increasing risk; minus signs drivers that reduce risk:

+ Excess ex-ante savings over-investments in China
+/- Chinese government’s ability to stabilize domestic demand in the wake of loss in export momentum
+/- Ability of Chinese government to maintain stable renminbi in the wake of high foreign reserve accumulation
+/- Ability of Chinese government to maintain political stability in the wake of sizable loss in growth momentum.

China’s growth falling to less than 6% has turned up in each of the five past Global Risk reports, a fact that the WEF acknowledges in its latest one:

The implication of a decline in China’s growth has been a constant since the first edition of the report. Thus far, this risk has not materialized but it is clearly one that would have considerable implications for China and also for the global economy.

Nor an unconventional analysis.

One other table that caught our eye in the report was a listing of stimulus packages for the energy sector. China has committed $46.8 billion for 2009-11, second only to the U.S.’s $66 billion, but way more than third placed Japan’s $8 billion. America’s money is going to clean energy generation; China’s to energy efficiency.