Chinese Relations: Scruting the Inscrutable ChiComs

    Discussions about President Hu Jintao's recent visit to the United States have been remarkably shallow, given the importance of the relationship between the two countries and the availability of information. Perhaps it is a European bias in our East Coast media or our current sense of national financial angst that prevents a meaningful discussion. (It did give Obama an "investment" theme for his State of the Union address.)  I will provide a perspective on this most important relationship nurtured out here on the West Coast.

    The Chinese leadership - not a single dictator; a Politburo of a couple dozen members - must feel quite good about themselves. With the past decade's annual 9% GDP growth they have lifted 300 million people out of poverty and passed Japan as the world's second largest economy. They have had no wars. They were little affected by the 2008 global financial meltdown. They enjoy the traditional "Mandate of Heaven".

    The century before this had not been so harmonious for the Middle Kingdom: the Boxer Rebellion; Sun Yat Sen's overthrow of the Qing Dynasty in 1912; World War I; Mao's Revolution; World War II; the Korean War; the Great Leap Forward; and a few million casualties from other internal and external conflicts. Today's leaders grew up in these latter days. They like peaceful, prosperous order.

    China's self-image has been helped by the shaking of the Western economic system, but they do have their problems. They have lost their family-based social security system as hundreds of millions have migrated for jobs and government policy has required a single child; thus a high personal savings rate. Lack of confidence in the currency and the stock market has driven a real estate bubble. Highway construction has not kept up with 12 million auto sales per year. Pollution abounds. Despite a population four times the US, their GDP is still only about one third of ours - one tenth in per capita terms.  

    So what do we need from them?

        1. Support for a soft landing while we get our financial house in order. That means reasonable currency and export policies and continued purchases of our debt.  In exchange they'd like to see a plan. (So would I.)

        2.  Peace in East Asia. Mostly this means corralling North Korea. A low profile in neighborhood disputes would be a bonus. (Their recent test of a "stealth" aircraft matches where we were 30 years ago.  Our military budget is six times theirs.)

        3. A market for our agricultural and tech stuff. We are still the world's largest manufacturer and have a comparative advantage in computers, telecom, pharma, aircraft, and a number of other industries.

    And what do they need from us?

        1. A continued market for their lower end stuff. They still have a couple hundred million more folks in the interior to get off of the farm and become consumers and they need jobs to soak up internal migration.  And as their labor costs increase, global manufacturing of textiles, shoes, and plastic junk moves to Bengladesh and Vietnam. But WalMart still becons.  

        2. No meddling in their internal affairs.  Democracy activist  Liu Xiaobo and Tibet independence leader The Dalai Lama do have more Nobel Peace Prize "cred" than Barack Obama, but there is understandable resentment that the West would focus on a developing democracy rather than more worthy honorees in Russia, Pakistan, Africa, or Latin America.

        3. Respect. This was the gift of Obama to the Chinese, as "parity" was trumpeted in the Chinese press.  The reciprocal gift?

    It is ironic that we have been lurching toward an enlarged central government which intervenes extensively in the economy while the Chinese success is driven largely by an adoption of capitalism. (Their favorite presidents are probably Nixon who opened relations and George W who allowed a massive trade imbalance.) We will inevitably compete with the Chinese for natural resources and we need to stand up for our friends in the neighborhood, but the Chinese have never had global military ambitions. They do not export religious zealots. And they don't insist that the rest of the world adopt a One Child Policy, outlaw the burning of coal, or speak Mandarin. We could do a lot worse for a partner with whom to share global leadership in the new century.

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    This week's video is Paul Ryan's ten minute response to President Obama's State of the Union address.  Obama has apparently made the political calculation to ignore the recommendations of his Deficit Reduction Commission, put on a sunny face, and defer to the leadership of Ryan and the Republicans on all matters financial.  While that may be good cynical politics, the experience of Chris Cristie suggests that the American people are at the point where they will reward adult supervision. Let's hope.

bill bowen - 1/28/11  

Comments

[Bill McCormick]

Egypt-----were are we now?

Well so far I've missed the mark on the stock market falling but we're not out of the woods yet. After the initial miscue by Biden and Hillary I give the President a qualified plus on his handling of the fence he is straddling. However, today it appears that the more he supports the protestors the more bold they become and the more likely it is that this thing deteriorates into something that does not transition orderly. What we don't need is an Al Queda attack on the Suez canal or the emergence of the brotherhood as the dominate ruling party. hopefully, the Billions of dollars we have paid to support Mubarak have actually gone and continue to go to support the military and they will retain control. A bigger worry is that support of the protestors triggers more protests in Yemen, Jordan, etc and the whole region explodes. When is Gibbs last day?

[Bill McCormick]

The Economic Hits Continue:

With a President and Senate determined to drive the country to alternative and clean fuels our economy will take more hits in terms of higher costs for energy. Meanwhile China and India continue to buy up petroleum assets around the globe. And, now we have the troubles in Egypt. What do we do tomorrow morning with gold headed skyward and stocks pointing down?

Are we are about to see the emergence of more Middle East democracies? Is this the reward from Iraq? Will Egypt's trumoil spread to others or will other populations of Muslims simply reflect the sympathetic rallies in the US? Or, is this more economic warfare and western disruption from Al Queda? Can radical Islam take control of Egypt and Yemen? The likely outcome of this is a prolonged uncertainty about stability in the middle east and security of the Suez Canal driving world oil prices up significantly. And, this, combined with our own policy of restricting oil production, ignoring natural gas viability and increased competition for oil from India and China is going to show up in our economy as higher gas prices, higher food prices, higher plastic prices, etc. Not what the doctor ordered for an economy trying to come back. Quietly the administration authorized an increase in ethanol in gasoline from 10% to 15%. Cleaner air? Likely. But, food prices will reflect it.

Perhaps it is time for the US to listen to Palin and others who want a program of safe domestic expansion of our resources regulated by a willing but vigilant government agency. Let's get the revenues from our resources for ourselves, our states and create the jobs here at home and lower our net balance of payments and trade. Let's listen to those on both sides of the aisle who call for the development of infrastructure to utilize the domestic natural gas that we produce. Increasing prices offer the opportunity to price in the safety measures we need to expoit the resources at home. Anyone know that the Obama administration loaned Brazil a few billion dollars to do offshore drilling? While restricting the US drilling offshore. Hypocritical? Hmmm

Egypt is run tightly by the military so my guess (low odds on this one) is that Mubarak will be moving on and a new leader will replace him. One of military background, more in tune to the young Egyptian population. Perhaps the military has already caved in a little to the Muslims by emptying their prisons of the "Brotherhood's" members. This may all come about slowly but it looks unlikely that this thing can be turned around under Mubarak.

So, how low will the market go tomorrow and in February? I'm afraid to watch.

[Bill McCormick]

I agree they are consistent and predictable in their behavior. They follow the plan. If we are vigilant then we may successfully share power with them. Vigilance is key here in that their principles and motivations--as you point out-- are considerably different than ours under this form of government and this difference is what makes them untrustworthy to me. Semantics perhaps.

[bbowen7]

"Untrustworthy" implies a lack of understanding of motivations. I believe that the Chinese leadership are totally consistent with their principles and objectives. If our agreements with them are in line, there is no problem. If you ascribe your principles and motivations to them there is a big problem. Thus this positng about what motivates them.

[Bill McCormick]

China is indeed interesting

Smart, huge, hungry, Communist and untrustworthy are some of the things that come to mind for me when I think of China. They are indeed smart people willing to work hard to succeed at whatever they do. The country and it's population are huge making their emergence as an industrialized player in the world very significant based on the depth of the population they can employ at low wages now that they have been capitalized. They are hungry for success and recognition.they will soon consume 50% of the world's food supply. And perhaps most dangerous to the government, they are hungry for individual freedom. Communist means they are a controlled society and economy with central planning. This conflicts with the desire for individual freedom that comes with economic success and international communications and travel. They are untrustworthy. They steal secrets. They fail to support international efforts to cooperate. They copy patented products, they undermine international markets, they deny human values and dominate the neighbors they either occupy or influence.

With all this comes the intrigue of what China will become? When the westernized culture and the increased personal income brings the falling of their wall what will China be? Assuming Russia is the best model will it be another poor half sociaist dictatorship, half poor Democracy run by the remnants of the secret police? Another country that struggles to find an identity? Will it divide into it's regions as the USSR did?

Nixon was a brilliant man. He knew before Reagan did that the best strategy to destroy communism was to engage it economically. Wrap it's well being in the American economy so it's interests were parallel to ours until our culture could foster a lust for freedom inside our enemy. Freedon after all is what brings down the walls. It did in the USSR and it will here as well. Reagan used economic competition in military and space based systems recognizing that Gorbechev already knew the outcome to come to destroy the USSR. But, the freedom imported into the USSR by all those Russian acquistions through conquest is really what beat down the wall. Nixon planted the seed long before in the post Vietnam era. So, it falls to Obama and his successors to keep China invested in American markets and technology poor while freedom eats away at the
control of the Communist party. And, then the transition will occur. How far away are we? Bill, says they have 200,000,000 more people to get off the farm. Maybe that long. But if they keep inviting in the Olympics, keep turning on the internet and keep jumping on planes to conduct business in the west then perhaps long before the farmers come to the city. Most of us will never forget the guy standing in front of the tank many years ago. When 200 Million students stand in front of tanks then the guns will turn around and face the leaders.
That's my view. And it hasn't changed for 40 years. What's yours?