An ongoing China v. Japan/US row is getting interesting, and probably not in a good way. Readers may recall that we took note of a ban on shipments of rare earths raw materials to Japan, which in many ways was also a shot across the US bow. Even though so-called rare earths are not that hard to find, they are nasty to mine, and it would take years to gear up production to replace Chinese output. Developed economies have allowed China to obtain a 93% share of this market, and many of these elements are important for production of advanced technology goods. The New York Times noted that China was trying to use this stranglehold to force its way into the production of higher-value-added end products:
But no ban has been imposed on the export to Japan of semi-processed alloys that combine rare earths with other materials, the officials said. China has been trying to expand its alloy industry so as to create higher-paying jobs in mining areas, instead of exporting raw materials for initial processing.
China had denied that a ban was underway (the New York Times had mentioned that in its initial report; they clearly didn’t buy it, and got confirmation from executives in a separate story).
The proximate cause was the detention of the captain of a fishing trawler in disputed waters; the Japanese agreed to release him, which if this was really the main bone of contention, things should be back to normal. But tensions appear to be rising rather than diffusing. As Bloomberg noted yesterday:
China and Japan continue to wrangle over islets in a gas-rich part of the East China Sea, three days after the release of a trawler captain who sparked the worst deterioration in their relations in five years.
Japan rejected China’s demand it apologize and pay compensation for the seizure of the trawler and its crew, with both nations claiming sovereignty over the uninhabited islands, known as Diaoyu in Chinese and Senkaku in Japanese. China and Japan have yet to implement an agreement signed in 2008 to jointly develop the natural gas fields.
This also occurs against a backdrop of China trying to forge stronger ties with traditional US allies in the region. For instance, even though Canberra had called China Australia’s biggest strategic threat last year, Australia participated in Chinese naval war games this week (hat tip reader Skippy).
During the eurozone crisis last May, a remarkable number of senior statesmen and respected policy makers weighted in the Financial Times, with the paper serving the odd role of a forum for posturing and floating trial balloons. The FT is a much less likely venue for that sort of thing in a Asian row, but a wee bit of that seems to be happening again. Yesterday, an FT comment from Jonathan Holslag, “China’s muscle-flexing is a sign of weakness,” noted:
Similar concerns exist about China’s economic nationalism, which feeds on a strong historical sense of vulnerability….excess capacity and reliance on foreign consumer markets impelled Beijing to strive to make its national champions truly global and to back them with an assertive trade policy.
While industrialised nations see this as unfair competition and try to straitjacket China into large regional organisations, developing countries are alarmed about Beijing’s attempts to buy and bully itself into their markets. They are determined to keep China’s champions at bay…. Central Asian countries have refused a free trade zone with China, while south-east Asian nations have demanded further concessions for a trade accord that came into force this year. China looks increasingly like a trapped giant.
In the past 30 years, the People’s Republic has mainly sought to regain its leading status in the international community by becoming a part of it. But, today, its economic model has become unsustainable: in spite of six years of bold declarations and experiments, it has got only more addicted to export-led manufacturing and investment in fixed assets. Unrest from Xinjiang to the factory halls of Shenzhen has cast a shadow over the harmonious society doctrine of Mr Wen and President Hu Jintao. Beleaguered by ambitious oligarchs on the right and a revival of communist patriotism on the left, the leadership is weakened. This reduces Mr Hu and Mr Wen’s scope for making compromises and raises the question of how the next generation of leaders will reinvent Chinese nationalism.
We have seen outbursts of assertiveness before, but this episode is the product of a bottleneck in China’s domestic transition, which, if not managed well, could lead to a return of destabilising patriotism. China flexes its muscle at a moment when other powers feel less confident about their future and are under pressure to stand strong. In such a climate, distrust could turn into a self-fulfilling prophesy, because it weakens the position of moderate leaders, stirs mutual fear of aggression and, above all, strengthens the belief that shifts in the balance of power inevitably lead to greater global rivalry.
Today, in an interview in the Financial Times, Japan’s new economics and fiscal policy minister, Banri Kaieda, said the ban was still on and Japan would look for other sources of materials:
China’s de facto ban on rare-earth exports to Japan imposed during the two countries’ diplomatic feud will propel Tokyo to seek new sources of the strategic minerals, according to Japan’s new economics and fiscal policy minister.In an interview with the Financial Times, minister of state Banri Kaieda called on China to lift export restrictions “as soon as possible”.
Mr Kaieda added that Japan would try to develop substitutes for their use in high-tech products….
He said that Japan was willing to continue to be a major buyer of rare earths from China, which accounts for more than 90 per cent of global supply.
However, Mr Kaieda noted that Japan had been ill-prepared for what he called the “surprise attack” of Chinese export curbs.
“[It seems] there’s a need to put effort into developing substitute products,” that could play the same role as rare earths in high-tech products, he added.
Tokyo would also look to develop alternative sources of supply for rare earths, Mr Kaieda said. Such a policy could prove “effective” in helping reduce upward pressure on the exchange rate of the yen.
Yves here. The last remark is code for “we are prepared to throw a ton of money at this initiative.”
Even if China wins this round, this is an extraordinarily heavy-handed and short-sighted move. China is telling the world loud and clear that it is an unreliable partner. China is conducting this ban apparently without issuing formal regulations, which would subject it to WTO sanctions. But for it to think this action won’t lead to retaliation is naive, when political pressures abroad make China an easy target.
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Excellent article focusing on the true even of the week. It ties in very neatly with your excellent call-out of Friedman several days ago: Specifically your highlighting of the fact that GM sold Magnaquench to the Chinese in 1995. Magnaquench, of course, was the world leader in using certain rare earths to produce high-efficiency magnets vital in building electric car motors. They also use to drive demand for some rare earth mining in Canada, which I can only pray is this very minute being restarted.
There is a view that China is doing a “kill the chicken to scare the monkeys” trick where the monkeys are the black marketeers of rare earths in China. Similar to the Stern Hu incident where the monkeys were rogue steel mills not following the Leadership’s directions. But you have to wonder why China is killing some “prized” chickens to assert control over its grey/black/private markets. It may suggest that the control issue over private industry may be more serious than previously thought.
Does this mean my next iphone will cost more?
But for it to think this action won’t lead to retaliation is naive, when political pressures abroad make China an easy target.
The political pressures within China seem to be overweighing the opinions of the outside world. Being on the losing side of a factional dispute in Chinese politics is historically a risky business and 2012 approaches.
Completely in keeping with an insecure authoritarian regime. Expect to see much more of this in the months to come.
“Insecure” regime? I don’t think so. I think China is beginning to show that it is boss in Asia and that Japan is, well, an underling and better adjust to that fact. As for the US, Japan is our cat’s paw in Asia and we’d better be careful too. Flying in China’s face is not smart these days.
“Flying in China’s face is not smart these days.”
Sounds like you’re taking a page from the Obama playbook. First admit defeat then negotiate. Otherwise the opposition may say unkind things about you! BTW, exactly what is big bad China going to do?
I can’t say what China might do, but I can think of some things that it might do. It might work against us in Pakistan and Afghanistan to drive us out of its back yard. It might make it difficult for us to do business in China and effectively shut us out of the only really booming market in the world. It might confront Japan over the disputed islands and put the US in a quandry about how supportive we should be of Japan. It can take away our influence and markets in S. America and already is doing so. The idea that the one rising power in the world is defenceless vs. an obviously declining one seems daft to me.
Well for starters, it could wage a war with India.
China can’t fight with Japan since it’s a protectorate of USA. No one with a sane mind will get involved in Afghanistan, it’s too messy. Pakistan is an old friend of China owing to its suspicions about India.
China has already made it clear that it has its own agenda when it comes to parts of India, be it parts of Pakistan controlled Kashmir or Arunachal Pradesh, or its involvement with Myanmar.
Note that none of these regions are protected by the USA as a part of a treaty.
Waging war with India means no meaningful damage to its ability to continue its trade policy while paying off the nationalist groups internally.
Start selling India!
The first mogul emperor once lamented after conquering India: “this land has no good horses, no good dogs”. That may explain China never has any big conflict with India in several thousand years.
Horses and dogs. Right. Then there’s some silly little geographic feature called the Himalayas.
Great post! I agree with Alan. Yves has been on a streak recently. It’s interesting to try to appreciate a developing situation that is outside a familiar sphere. In Japan we have a giant that is stumbling a bit. China has been on a steroidal rip upward into the ranks of the mighty. After being called out about steroid use by the still reigning champion, the USA, China is diverting anger at its nearest rival. Let’s hope cool heads prevail.
China is telling the world that it will not budge on issues of sovereignty and territorial integrity. This is China’s way of trlling world that it is prepared to screw things like olympics, trade or economy if it has to prevent the natiomal shame of being cannibalised by foreign powers, colonial or otherwise.
China precisely wants other countries like the US to produce their own rare metals. So china could lower it’s pollution at the same reduce trade surplus with US.
“So china could lower it’s pollution at the same reduce trade surplus with US.”
Right. Of course China could always take some silly approach to reducing pollution like strengthening or enforcing its own laws. And if their concern was an excessive trade surplus, they could stop manipulating their currency.
Why am I even responding to this nonsense. Your post was a parody, right?
China could ban export of rare earth metals to US or Japan whenever it likes it.
In the end, China is a communist dictatorship. It is, therefore, headed by bullies exactly as criminal organization, e.g. mafias, are run by bullies.
Bullies bully. One can get into rather complex discussions of national, historical, cultural and inspirational arguments. In this case, I believe that bullies are the best-crystallized answer.
Why bullies? There is legal agreement that requires japan to return to China territories thaf japan occupied illegally before ww2. This is just China’s way of telling wannabe opportunist that China will not budge on issues of sovereignty and it’s territorial integrity, and ig is not a matter for anyone to dictate China’s ownership of it’s territories just like during the colonial days.
“territories thaf japan occupied illegally before ww2.”
1895 was a long time before WW2. What next, China is going to find some obscure claim to Honshu? Chinese never inhabited the Senkaku islands and China’s claim is tenuous at best. China is going out of its way to pick a fight over this. Japan is simply refusing to roll over.
The diaoyutai was given to Jaan after Ww2 just like that. Who the f is US to dictate who owns what?
The victor in WW2.
victor against Japan but not for China
US is the greatest saboteur if world peace and stability. Everwhere it goes it cause troubles and destruction’s and deaths.
Sincere apologies for playing the largest role in defeating Japan in WW2, and so causing Japan to withdraw from its empire (including China).
w/o China tying down few millions japanese troops, US could be a Japanese colony now. You forgot how US was trashed by Japan in Pearl Harbour.
Nah. China is a nation state, which as the “realists” correctly point out acts in its own interests.
(There are some exceptions, of course, e.g. US vis-a-vis Israel.)
I would say the Chinese government is more popular with its citizens than the US government is with its. The Chinese government can make needed decisions to deal with problems; the US government is paralyzed and can’t do much of anything. We stagnate; China moves ahead. Of course it makes us feel better to tell ourselves how terrible the Chinese have things and how oppresive its government is. You might read Steven Roach on China and learn something.
what is this propaganda b.s.? China routinely tortures its political prisoners, it has a stupid one child policy, no free press, and the people are “satisfied” because they better be. they eat their own babies in China. Sounds like their communist dictatorship is great! China wouldn’t be anywhere on the power map today if greedy American corporations didn’t sell us out
how can you say that it’s a dictatorship/headed by criminals. Are you in the Chinese Communist Party? Yes. there are officers in the party that are not very “innocent” people, but you can’t just generalize over the entire party. Unless you have statistical/ valid evidence for your claim, it seems that your description/comment is just result of biased education aka post red scare syndrome.
Posts like these are why I read Naked Capitalism daily.
Meanwhile Britain can’t afford their guns and bombs, they’re broke,
http://www.bbc.co.uk/blogs/newsnight/paulmason/2010/09/fox_i_am_concerned_we_do_not_h.html
All we need is for the US shoe to drop and then the New new world order is in place, and not a moment too soon.
OK WORLD. What’s it going to be? Everybody going to roll over and do it China’s way? Which will eventually lead to a China-type leadership and culture imposed on the rest of the world in my opinion? OR….the other countries going to side with the US for a more western type world leadership? The signals are clear, what’s it going to be Vietnam, Japan, Austrailia, and the rest??? This is a telegraphed signal of things to come and it is not going to get any easier from here in my opinion.
What do you mean. China is where it has always been. Egress the US are busy invading country after country, war after war. Musg have been millions lives lost due to US hegemonic and imperialist behaviors.
Your government should take note of people like you and conscript in first instance when there is war you or members of your family so as put your life where your mouth is.
It seems to me that every Spring the North Koreans becomes very belligerent and every Fall they become more conciliatory. In the Fall they fear what Winter will bring for their population and that they might require additional food and fuel aid. But in the Spring they are released from those fears, their belligerence returns and they proceed toward their goal of becoming a nuclear power and a weapons broker. Our negotiators have rewarded this strategy to some extent, when they did not embargo supplies for a year in the Spring and follow through in the Fall.
China is starting to display a similar behavior. Why the belligerence with Japan over the islet now if they have a 2008 agreement to develop the gas fields around Senkaku? Does any thinking person actually believe that the Chinese give a damn about that ship or it’s captain? No, the Chinese are angry about our attitude toward their currency manipulation so they get into an angry exchange with Japan. They can not really get very belligerent with the US without terrible consequences for them, so they take their displeasure out on our friends. We need to be very careful not to reward these maneuvers in any way.
We should immediately push them to allow their currency to float more than a few percent. If they lose face, well they have only themselves to blame for not acting sooner.
Or we can accept the status quo while our economy is destroyed. If they don’t change now, why would they change later when their economy is stronger?
Toyota Tsusho Corp., a trading company affiliated with the carmaker, has formed a joint venture with Sojitz Corp. and a Vietnamese state-run mining company to export rare earth metals to Japan from 2012, spokesman Katsutoshi Yokoi said. The company acquired Tokyo-based rare earth metal importer Wako Bussan Co. in December 2008, which will import materials from India from next year, Yokoi said.
http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=awh5La8v9nuQ
Why is the big huh hah here when China only has 30 over % of the world’s rare earth reserve. Why the row, particularly US, not producing the other 60 over %? Is it because US want cheap rare earth and at the same time blame pollution on China? Talk about having a cake and wanting to eat it too.
Oh, poor China the victim of American imperialism. Of course another way to look at it is that China produces rare earths so cheaply because of its lax environmental regulations on their mining and a manipulated exchange rate. Yet another reason it was foolish for the US to grant PNTR to China or push for its WTO membership.
P.S. Not that I see the US as a victim. Basically it was American political corruption and shortsightedness that caused us to do something as stupid as treating China as though it would trade in good faith or seriously pursue the reforms it promised for WTO membership.
China is doing what it is entitled to do. What is your problem?
Most articles reporting on the current dispute between China and Japan seem muddled in logic. The key question here is who owns Diaoyutai? If there is a dispute, countries would do well to find ways to resolve it in a good way and should refrain from taking action that assumes ownership because this could only lead the opposing site to do the same to escalate the dispute. In the current case, Japan is the party to detain Chinese fishing boat captain for over 20 days despite more than a dozen protests from Chinese government. What did China do wrong here and not Japan?
There is legal agreement that requires japan to return to China territories thaf japan occupied illegally before ww2 but with the support of US, japan did not. Dream on that the Chinese will cave it to pressure from the west and their propaganda in the media which constantly propagating lies.
What does stopping the export of rare earth minerals have to do with a chinese boat running into a Japanese coast guard in neutral waters?
China threatened rare earth ban to force japan to release it’s fishing boat captain after more than a dozen requests failed.
“Japan is the party to detain Chinese fishing boat captain for over 20 days despite more than a dozen protests from Chinese government”
Right, and the Chinese boat just happened to be fishing there and refused to halt under orders from the Japanese Coast Guard. Please spare us the Chinese nationalistic sanctimony. BTW, when is China going to cease its occupation of Tibet or recognize the sovereignty of Taiwan?
You are assuming japan owns diaoyutai but that is your business. China owns diaoyutai for hundreds of years at least. Why would Chinese fishing respond to foreign ships intruding into it’s territory?
China is bullying all its neighbors-they invaded Tibet, forced Chiang Kai Shek to flee to Taiwan (and continue to demand that Taiwan re-integrate), bully Japan (the fishing trawler reportedly intentionally rammed the Japanese Coast Guard boat), claim that N.E.states of India are really theirs, dispute offshore oil fields with Vietnam…I could go on and on. If you simply let them do it one day they will claim even Hawaii.
While I really enjoy much of NC on financial and economic analysis, it’s coverage of China is in line with the rest of western media, in short ignorant and biased. China will do things in its own interest. Do not think that the CCP did not think through and understand all their options. Meanwhile, pundits in the western media look at this one issue from the surface and proclaim the end of Chinese prosperity is near (and let’s not go into how much of western media is staffed by shallow sad excuses for journalists who are beholden to political and corporate interests).
China does have massive issues it needs to deal with. However, the the spate of silly shallow analysis and conclusions by the western media based on this one incident would be comical if it weren’t such a sad indictment about how little the west really knows and understands about china.
Ahhh, now I get it, they are just misunderstood!
Hey, Officer Krupke ……………….
This is exactly the self centered, arrogant, condescending western attitude on China that causes so much ignorance. China doesn’t care that you misunderstand them. It does things according to their own interests. You misunderstand them, however, to your peril.
There’s all this talk in the media and political circles about what should be done to address this and that imbalance, but the pundits don’t even know what really drives the Chinese and their actions. So what is expected from all this rhetoric and “gas-baggery”? Absolutely nothing.
With all due respect, I don’t buy your claims of superior knowledge of the CCP. The Chinese leadership is way overplaying its hand, period. If their various belligerent moves, whether on the the political or trade front backfire, the result is an escalating trade war. The US will come out OK, arguably even ahead, trade restrictions are a good remedy with a country running as much economic slack as the US is. China is export dependent, less so by virtue of massive investment spending, but it is not taking $7 of borrowing for every $1 of GDP growth in China. That’s a terrible ratio for a supposedly emerging economy. Even the US is only $4 or $5 of borrowing for every $1 in GDP growth.
This movie has ended badly for everyone who has tried China’s game plan. It has the largest FX reserves relative to GDP of any country EVER. Next two are the US on the eve of the Great Depression and Japan at the end of its bubble era.
You have this calculation wrong. China is in a position of vulnerability, big time. You seem to presume it can call the shots. All it is doing it slowly uniting most of the world (save maybe Australia) against it. You think that is wise given its precarious economic position? You honestly seem to think so.
And with the utmost respect from me. But you’ve just recited the main pundit points circulating in the media. There’s 2 explanations for China’s actions. 1) It goofed big time, or 2) they’re playing other cards or have other intentions that are not seen or understood by the western punditry. When was the last time the top leadership made a huge mistake? In fact, they are more calculating and longer-term thinking than most other nations. Most people in the west seriously underestimate their abilities. ‘After all, what good can an “authoritarian commie 2-bit dictatorship” ever come up with?’
I in no way claim I know China better than anyone else here. I only say that most western pundits don’t know nearly enough to be making many of their analysis and pronouncements. Time will tell which of the scenarios above turn out to be the case. I just think that given their track record so far, why they should start goofing big time now and depart from whatever plans and strategies they have towards their OWN well being?
I must note you have not engaged my argument at all. You’ve merely recited “the Chinese know better.” And your claims re their concern re ‘well being” extend only to the ruling classes. Had a look at the pollution levels and related rising health problems and birth defects?
China is NOT dealing from a position of strength here, and its belligerent moves strongly suggest it has misread its hand. It depends on US demand. We don’t need them to buy our bonds (read our many posts on MMT on this one). We have every reason to cut restrict access to our, it’s politically expedient as well as a sound economic move right now. US multinationals would normally object, they want access to the Chinese domestic market, but they are increasingly saying (and more important, actually saying it out loud in the media, which means they regard the situation as close to irreperable) that they no longer regard China as a good partner or place to do business.
Now you can say China has no reason to cater to them, but as pointed out, it is still dependent on US demand. It’s showing its true colors by pushing its supposed partners well before it has adequately secured its position. If it does not back down, the consequences will be far worse for China than those that decide to retaliate.
Please, Yves, you need to to better than this….
Can you tell us the last time Chinese leadership has goofed up in recent times?? Their leaders have been making a point of signing big deals each time Wen or Hu visits a country…
Meanwhile, US is
*making enemies in the Muslim world at the behest of a foreign parasitic nation;
*losing is entire manufacturing and industrial base.
Yeah, US is in a great position to dictate terms here.
Japan WILL bow to China, just as they did when China raised a stink about Koizumi’s worship of war criminals, an insult to China AND clueless Western nations. Japan are not our “ally”; they are just
*sell their stuff to US while closing their own markets;
*use US to intimidate China and get us to waste our resources in Asia making US pay for it!!! Nice ally…
Every nation has their interests—China is acting on its own interests, US needs to understand them and act on their own interests…
whoami,
Did you read the post, or what Michael Pettis has been discussing for some time?
Creditor nations (the ones in China’s position) suffer the most in financial crises. That has not happened yet because the world (including China) has engaged in massive monetary stimulus and China has kept its currency artificially low via currency manipulation. That means it has maintained its trade surplus at the expense of others (most notably Japan, but other developing economies have suffered too).
The rest of the world tolerated China’s mercantilism because everyone was in growth mode. But is HAS made a monstrous mistake, and it is a fundamental, strategic error. It has no plan to change from a mercantilst model. It somehow honestly seems to think that if it can avoid what happened to Japan , ie being forced to revalue its currency (per the 1985 Plaza accord), all will be well. It actually has been moving to a LOWER consumption share of GDP post crisis, the reverse of what you’d see if it were trying to rebalance the economy.
Everyone understands that switching to more consumption is a very long term project. China could get away with a ton of foot dragging if it were making legitimate moves in that direction, as it NEEDS to. It has NO commitment to that effort, so it is effectively exporting goods and related unemployment to other countries. In a period where everyone expects protracted low growth, when there is already a large overhang of unemployed workers, that will not wash. If China does not get with the program, you will see other countries start retaliating on the trade front. And China will lose, big time.
What else is there to understand here? China simply does not have a strong hand. You keep insisting that they do, but they are increasingly uniting the world against them, despite the well deserved unpopularity of the US.
Japan has been trying to make nice to China, it will play both sides of the street to the extent it can, but the war criminals issue is mere symbolism with no economic ramifications You seem unaware of the fact that it was controversial in Japan (as in the visits to the shrine got a lot of criticism domestically in Japan’s largely controlled press). This was hardly a meaningful concession.
Japan is a military protectorate of the US. The Bank of Japan takes orders from the Fed. This is WELL known in Japan in banking circles. You are misreading the relationship of the major players. The rare earths move is thus clearly a proxy battle with the US. That is also pretty widely recognized.
whoami: “Can you tell us the last time Chinese leadership has goofed up in recent times?”
Ergo they never make mistakes? I think you’re falling prey to a superman mythology. Everybody makes mistakes. All governments have their short term internal concerns which can override wiser thinking.
And, as Yves suggested, you should look at what Pettis has written about “high flyer” economies and instability. His analysis is much more thoughtful and detailed than the ones that are limited to debt/GDP and recent growth record. Not that long ago Ireland was the Celtic Tiger.
Right, I intentionally avoiding challenging you on economic grounds, because that’s not my profession or expertise. Instead, I contend from the perspective of interested parties and their motivations, which everyone can understand. Again, why would China, whom has so long and hard built an image of friendly rise and not rocking the boat, choose to diverge from that? It makes no sense according to the analysis of the western punditry to screw themselves so royally. Unless, the punditry does not see the entire picture.
Yes, you could well be right. Maybe they just had a brain fart. I’m not convinced though. Time will tell what really happened and how this will play out.
whoami,
If we could just transport you back seventy years I suppose with similar reasoning you would be defending Hitler’s launching of Operation Barbarossa, aka the invasion of the Soviet Union. After all, at that time, the Fuhrer hadn’t goofed up for a while. In fact he had just conquered most of Western Europe and in the process had just defeated the French army which was the strongest army in the world at the time. So surely his move eastward was the right move, correct?
A more realistic view of leadership and power would posit that any group that has experienced a string of success like the Chinese have are well overdue for a bout of overreach and errors.
A second point is that you seem to see the Chinese leadership as homogeneous. Surely there are factions and power struggles within any small elite. I would imagine that there is a globalist / nationalist split within the highest levels of Chinese power. I would speculate that it has been the globalist portion that has held sway for the last 20 years. But all the Chinese buying of Western bonds has to start pissing the nationalists off at some point and surely pressure is building. With the current crisis the globalists may just be stepping back a bit to allow the headstrong nationalists to rush forward and make fools of themselves. But be sure the globalists will shut them down before any permanent damage is done to long-term Chinese interests. This way in future policy debates the Chinese globalists can just tell the nationalists to STFU if they dare open their mouths again.
Kevin,
Your point re an internal split is a good one and you are correct; some evidence of it has spilled out into the Western media. I hope you are also correct that the nationalists can be reined in when signs of backfires start. Unfortunately, that can sometimes instead lead to more aggressive implementation of bad policies.
Call me paranoid if you like, but I think he might have a superior knowledge of the CCP. Look at his response to my reply immediately above.
I have become a little suspicious of some of the comments on any post dealing with China on your blog. They are just a little too strident.
I really think one needs to step out of the Anglo-American media’s echo chamber to piece together what is actually happening.. See this post for an alternative and a far more compelling narrative (she has done a LOT better than any china analyst in the mainstream media)…
http://emsnews.wordpress.com/2010/09/28/obama-kills-his-own-supporters-while-asia-draws-daggers/#more-8284
Elaine Supkis has hosted the Chinese leadership many years ago. She is smart but a bit nuts and does not understand economics and also takes very extreme positions (she is openly anti Semitic, her stance goes well beyond reasoned criticism of Israel’s policies) She thinks the US needs China to buy its bonds. Wrong. So she assumes they have more leverage than they do. Michael Pettis (who is in China not upstate New York, where she is) is vastly better than her on this topic.
Wow, quite a find. Been reading quite a bit of her posts. Much of what she says rings true to me. Thanks.
The current Chinese incident reminds me of my little 14 lb dog treeing a 100+ bear a couple of years ago. (I’m not sure my dog realized the foe could easy have shredded her, but then again, the bear didn’t seem to have that recognition either). The bluff charge pantomime was a show of strength in the instance and loyalty to the pack, not a means to overpower the opponent.
Several points from the previous link on this topic:
China has not completely cut-off Japan from its ‘rare earths’. Two Chinese ports, one of which is Hong Kong are unaffected. How much of the trade runs through these ports may make the controversy moot as far as effectiveness.
Japan is not going to find alternative ‘rare earth’ substitutes. According to the USGS, such substitutes, while available, are not economically or otherwise viable. This is the counter-bluff. A more likely alternative is Japan, if needed, will pass the costs along as much as possible, nurture other sources and be better off in the long run not wholly dependent on China. Which brings up the third point:
China needs trade as much as it needed to control its burgeoning population (which it handle quite successfully to date, at minimum much better than the U.S. where such a monumental task would be unapproachable). Any threats to this activity will be, as has been pointed out, counter-productive to the extreme. This fact can not be lost on China’s leadership, nor Japan’s.
Leaving other points aside, I’m not trying to minimized China’s role in the trade and sovereignty disjuncts that are going on today. China is not guiltless; her concerns outside own internal advancement are suspect, it not nil. Time may prove me wrong, but I don’t see it (rare earth embargo?) in any way as jeopardizing Japan’s investment in this Asian powerhouse or will result in reciprocity in any way involving trade relationships between these two giants of the economic world.
China’s role in preserving and fomenting its own interests are historic, if nothing else, but in a time when the U.S. has embarked on a crusade to save the World and Global non-national-centric interests, China rides as the counterpoint to this evangelical bent (read above links to China’s activities in the Middle East).
Who will triumph? Whether present posturing bares fruit or not, whether I like the way the nation is run in instance or in summe, whether I lack endearment to the Chinese character or contrariwise, my bet is China.
People would be wise to pay attention to someone who knows about China and the USA:
http://www.chinadaily.com.cn/opinion/2010-09/29/content_11362291.htm
Oh please, Roach talking his book again and wrapping it in a morality tale. He contradicts himself. First he lauds China’s stimulus, then criticizes the US for considering more stimulus. Huh? And he needs to study his geography – Japan is Asian. The telltale absurdity is him embracing the doctrine of immaculate transfer, and talking about the Chinese savings glut and US savings shortage as the source of trade imbalance. Just to highlight the ridiculousness, he does it in the same paragraph where he endorses government currency manipulation as a “stability” policy!
Well, frankly, I’d take Roach’s expertise any day vs. yours. China, due to its ability to act in its best interest, had enough stimulus soon enough to come out of the recession very nicely and is now booming again while the US government, in near paralysis, had far too little stimulus and may well sink back into another recession. A growth rate of near 10% (I haven’t checked at the moment) vs a growth rate of maybe 1%? You must be kidding that we are doing things right and China is doing them wrong. BTW the House just passed a bill to punish China for not appreciating its currency. I’d love to see a trade war break out. I think the US would learn a very painful lesson about its sinking position in the world from that. Painful and necessary.
http://tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=CNY
A bit over 10%. China is trying to slow it down while the US can’t manage to get its GDP rate up. So….
Jim,
Roach is notable for, frankly, sucking up to the Chinese officialdom. And Alex is right, Roach’s generalizations about Asia have led to a lot of raised eyebrows among real Asia experts. You can live in a Western firm in Asia and still not get the real scoop; I saw it happen all the time in my Japan days.
And there are Chinese experts such as Victor Shih who have done extensive and pretty hard to put together analysis who come to grim conclusions about China’s debt expansion.
As for China’s reported GDP, we have commented repeatedly that its figures are bunk. GDP growth in particular is typically well in excess of what are reliable benchmarks of economic activity, in particular, power usage.
And what about sustainable don’t you understand? China’s growth is dependent on a manipulated currency and continued access to export markets. Its trade partners are rebelling against its refusal to back down in its mercantilism and if this erupts into trade retaliation, China loses. The record and the underlying gives and gets on this are very clear. Its other source of growth, investment, is equally questionable. No economy, and no large economy, has EVER had exports + investment equal to 50% of GDP. This is a train wreck waiting to happen.
Now you’ve got me worried. I am scared to death China is going to implode. Oh me oh my…what on earth will China do. Down the drain so soon. A flash in the pan. Very frightening, for sure. LOL
This will happen by sometime in 2012 at the latest unless China makes a big course change. I note you have no counterargument, and resorting to ridicule shows your lack of command of the relevant facts.
Jim,
Everything you’re saying about the Chinese Tiger was being said about the Celtic Tiger just a few years ago. Or the other Asian Tigers before the Asian Crisis of the late 90’s. And about Japan in the 80’s.
As they like to say about mutual funds, past performance is no guarantee of future returns. A little more substantive analysis is needed rather than simply standing in awe of recent events.
“I’d take Roach’s expertise any day vs. yours.”
Pure argument from authority. Do you believe everything Roach writes because he’s an “authority”? What do you do when an equally qualified authority, like Pettis, disagrees with Roach?
“China, due to its ability to act in its best interest, had enough stimulus soon enough to come out of the recession very nicely and is now booming again while the US government, in near paralysis, had far too little stimulus and may well sink back into another recession.”
And therefore it’s a bad idea for the US to consider more stimulus? That’s what Roach wrote.
“You must be kidding that we are doing things right and China is doing them wrong.”
I would be kidding if I’d actually said the US was doing things right. Did you read my post?
“I’d love to see a trade war break out.”
Why, so the US could redeem its manufacturing sector and China could have massive unemployment from the loss of their biggest export market?
Read Pettis. Look at his historical analysis of what can make high growth economies subject to crashes. Everything you’re saying about the “Chinese juggernaut” is what was said about the “Japanese juggernaut” in the 80’s.
Interesting juxtaposition in above comments, almost polar in its opposites. Does the West (American influenced GFC) immediacy trump China’s long slow climb (until recently) out of diminish global status (to the benefit of over a billion humans vs. 310 million living in better circumstances), both could do with a bit of “A Lesson to Fathers” vice versa….ummm.
Skippy…both are more alike than not, me thinks.
I thank you for your comments and I apologize if I came off harsh.
Regarding your comments:
1. I would totally agree with you on Japan being subservient to the US IF
*Japan had not totally destroyed Detroit helped by keeping Yen low, Plaza accord nothwithstanding, AND
*prevented US companies to have a meaningful presence within their borders.
If the Fed is controlling/enabling that, there must be a real cunning plan. It seems to me that Japan is no Latin American country.
2. Michael Pettis’s comments are limited to Chinese financial markets (as far as I can tell from reading seekingalpha), but he misses geopolitical and historical forces at work. China will of course lose some financially, but in its eyes it would be worth the price for imbibing technology from the West and then leap ahead. In addition, the Chinese government has enough resources, financial and political will to tackle crises that would paralyze Western countries (where financial lobbies prevent real refrom). For instance, capital flow control (already in place) and and other measures frowned upon by the economic punditocracy here would be used unhesitatingly and would calm matters (which countries reamin essentially unaffected by the Asian financial crisis?India and China with “primitive” financial markets).
Finally, there is a misleading impression in the West that Chinese are just “copiers”. Check out the rankings of the countries in the International Mathematical Olympiad: http://www.imo-official.org/results.aspx. I can assure you winning a gold medal is impossible without being an exceptional prodigy, and China has them in abundance. And it is also remarkably meritocratic, more so than America in many areas that matter..
China could overplay, of course, but they do not seem to have made major mistakes yet. Picking on the Japanese (who have not apologized sincerely (to them and fellow Asians who have not forgotten)for their terrible crimes, unlike Germany) will not cause them long-term problems within Asia and Middle East for sure (maybe some parts of US and Europe, but would they sacrifice cheap China Inc goods over this?), and yes, it is a proxy move against US as well. It is a multi-polar world…
whoami,
You need to get on top of the record. The fatal blow to Detroit was in the early 1980s, when the dollar strengthened rapidly in a very short period of time in the wake of Volcker breaking inflation in the US. In a mere 30 months, Japanese automakers gained tremendous ground in the US. The US let it happen because Reagan had just come in and it would have opposed his “free markets” ideology to intervene. But unemployment and the loss of capacity did force even an ideologue like him to act, hence the Plaza accord of 1985. But the game was already lost.
You also need to recall the beliefs of the time: Detroit as old and badly managed (which was true to a significant degree; they had hurt their own interests by fighting rather than embracing the trend to greater fuel efficiency) and Japan and Germany as ascendant. The big response in the US was a belief in DC that the US could not compete in manufacturing, which became a self-fulfilling prophecy (our trade partners supported their manufacturing industries, we more or less abandoned them).
I too am a bit skeptical of Yves’ blanket claim that the “Bank of Japan takes orders from the Fed”. Elsewhere I think she’s spot on.
“Michael Pettis’s comments are limited to Chinese financial markets”
As recent events have shown here, crashing financial markets take the rest of the economy with them.
“he misses geopolitical and historical forces at work”
Geopolitical? Is there any neighboring country that isn’t concerned about China’s Pacific territorial claims/expansion? How will that benefit them?
As for historical forces, I always dismiss “grand sweep of history” arguments about current events because I don’t think you can see the grand sweep of history while you’re embroiled in it. You need the perspective of looking backward. The supposed “grand sweep of history” has changed too many times in my lifetime for me to think otherwise.
“in its eyes it would be worth the price for imbibing technology from the West and then leap ahead”
I’m sure they’re willing to accept loss of value of their Treasuries in exchange for technology and investment, but a crash is another story. Is China too fragile to survive it? I honestly hope not (I’m definitely not rooting for a Chinese implosion) but do worry about it.
And as for the leap ahead, why will they necessarily be able to do that?
“the Chinese government has enough resources, financial and political will to tackle crises that would paralyze Western countries (where financial lobbies prevent real refrom)”
China has its own vested interests. The fact that our demons are not their demons doesn’t mean they don’t have their own demons.
“Finally, there is a misleading impression in the West that Chinese are just “copiers”.”
The usual soft bigotry and ethnocentricism. It’s especially funny when people say it about China, as historically so many inventions have come from there. That doesn’t guarantee a “leap ahead” though.
“Picking on the Japanese (who have not apologized sincerely (to them and fellow Asians who have not forgotten)for their terrible crimes …”
Current fears have a remarkable way of making old enemies into allies. How long did it take former enemies Germany and Japan to become staunch US allies in the Cold War? Vietnam is now basically an ally. Many countries are worried about Chinese claims in the Pacific.
Alex,
You forget I worked for the second largest bank in the world and was the first Westerner hired into the Japanese hierarchy.
The Fed has given orders to the BoJ to buy Treasuries. The Fed turned around to Japanese banks, which dutifully complied. I was there when it happened.
Now my impression is the Fed makes these, ahem, requests, only in times of extremis, it does not routinely treat the BoJ like a trading desk at the NY Fed, but don’t kid yourself. This happens.
Yves,
I’m aware of your history and don’t doubt that the insight of your personal experience is vastly greater than most (especially Westerners). Nevertheless it seems like you may have overstated the case, and made it sound as though the BoJ was the Fed’s lapdog.
Interesting comments, Alex.
“…crashing financial markets take the rest of the economy with them.”
Only for countries where financial markets are too large and unregulated and unfettered. Again, Asia financial crisis did not affect China and India. Why? Those countries have strong colonial memories and while there is LOT of corruption at lower level, not at the highest levels.. (unlike US, for instance). They are strongly suspicious of advice from foreigners; they won’t behave like Korea did letting free capital flow. Capital controls and the like, for instance, are a sure fire way to end currency manipulation instabilities. It is not that hard..
“..Geopolitical?”
It is obvious to the rest of the world that US era of dominance is over. That does not mean they love China, but they know US is all talk and little action, be it militarily (obvious), politically (note grovelling to Israel, in contrast to Turkey), and economically. They will adjust to the new power, just as they adjusted to the power of US for the past few decades. Might is right, always has, always will be.
“And as for the leap ahead, why will they necessarily be able to do that?”
Because they produce many top-notch scientists/engineers, and they have the energy, enthusiasm (much as US did in the past, for instance). Here in US (in the high end) we are producing mathematical gamblers (yeah, I know about Black-Scholes BS), not engineers.
“Germany and Japan to become staunch US allies in the Cold War? Vietnam is now basically an ally.”
They are sucking US dry (FTAs and all), so (in public) they are pretending to be US allies. Be sure they will all dump the US when the US stops bribing them; they are already planning/plotting.. “There are no permanent friends, only permanent interests.”
5 year change in stocks.
SP500 down 5.8%
Alum Co of China up 73%
China Life Ins. up 402%
China Mobile up 128%
China Petroleum and Chemcial up 104%
Petrochina up 45%
I’m in a real panic. Why was I ever so dumb as to invest in Chinese stocks five years ago? Idiotic me. Ramen and dogfood future for me.
Aha, I thought as much, an emotional investor who is long China
The hallmark of a great investor (Soros is particularly noted for this, as is David Einhorn) is not be wedded to any investment idea and to reweigh it constantly in light of evidence.
As Alex said, past performance is no predictor of the future. You have yet to make a substantive argument and can point only to trends. The trend would not be your friend in Japan in July of 1989, or the NASDAQ in January 2000, or the US in June 2007, to list a few of many examples.
The fact that you are 1. getting heated and 2. pointing to trends and single sources like Roach is not a sign of acumen. You’ve been fortunate, good luck with pressing it.
The disputed China’s reserve of 2.5 thrillions, will be spent one day I am sure. What good is it if it would be spent. No rule states that trade surplus must be spent within a year or so such that trade can be balanced. What is wrong with taking a couple of years longer to think about and work out good ways to spend those reserve?
It’s not even wrong. Sigh …
China’s FOREX “reserves” are not a big pot of gold China can spend on a whim.
See Michael Pettis on the subject :
http://mpettis.com/category/reserves/
It’s not even wrong. Sigh …
China’s FOREX “reserves” are not a big pot of gold China can spend on a whim.
See Michael Pettis on the subject :
http://mpettis.com/category/reserves/
That was to Tc (above)