By Sebastien Canderle, an investment consultant, a lecturer at Imperial College London, and the author of Private Equity’s Public Distress
The Trump administration has shown much resistance to Huawei’s and ByteDance’s American expansion due to the risks the former’s 5G technology and the latter’s TikTok video app cast over national security and user privacy laws, respectively. Not for the first time, Washington is applying a bog-standard policy template to protect its domestic market.
Immediately after World War II, Japan received the support of America to rebuild and modernize its economy. As Richard McGregor points out in his book Asia’s Reckoning, this strategy was so successful that, by the 1980s, CIA analysts fretted over Japan’s techno-nationalism, seen as a danger to U.S. security.
Washington worried about Japan’s industrial policies, which had enabled the country to surpass the U.S. not just in low-wage manufacturing but also in high-tech industries like telecoms and semiconductors.
At the outset of the Reagan administration, Japan held 100% of America’s video recorder market, two-thirds of its motorcycle market, and one-fifth of U.S. demand in the automotive sector.
Confronted with a growing trade deficit with Japan, Washington engineered the Plaza Accord in September 1985 to manipulate the $/yen exchange rate. But it wasn’t enough to stop Japan’s tech ascendancy.
Two years later, Reagan imposed 100% tariffs on Japanese electronic goods, complaining that the Japanese Government was guilty of turning a blind eye to counterfeiting of American products. ‘Japan-bashing’ was in full swing – when Sony bid for Hollywood studio Columbia Pictures in 1989. To placate political opposition, the electronics-to-entertainment conglomerate announced its intention to leave the business under American management.
To counter the influence of Japanese industrial groups, such as Toyota and Honda in car manufacturing, Sega and Nintendo in video games, or Sony, Canon and JVC in consumer electronics, America proactively offshored its production to low-cost countries.
The move was so successful that, by the mid-2010s, almost half of Apple’s suppliers were based in China and a quarter of them came from other Asian countries outside Japan. Nowadays, even if designed in California, the iPhone is assembled in China.
Like Japan in the post-war period, after initially forging its credibility in low-value items, China moved rapidly up the value chain, frequently copying U.S. technology in the process. In 2011, China dislodged America as the largest manufacturing country in the world.
Today, China accounts for 61% of the U.S. electronics import market. In the first quarter of 2019, more than a quarter of TV sets shipped to North America were from a single Chinese brand: TCL.
The similarities between the two Asian countries are striking. Both today’s China and Japan in the 1980s operated a state-sponsored strategy to protect home-grown industrial champions and establish market leadership. Japan’s keiretsu system, which saw the corporate and banking cartels woven together with the apparatus of government, is analogous to the way the Chinese Communist Party dictates economic policies.
Eventually, to counteract the most harmful effects of the Plaza Accord, Tokyo had eased monetary policy. Unfortunately, that led to rampant inflation in asset prices. Thus, in 1990 Japan decided to boost the yen and burst its domestic asset bubble by raising interest rates. This self-flagellation led the country into a protracted stagnation that lasted two decades.
Partly because it saw how much harm these policies did to Japan, today’s China is reluctant to comply with Washington’s bullying. But there are other reasons to explain Beijing’s resistance:
-First of all, China has not yet caught up with U.S. standards of living, whereas Japan had done so by 1990. Japan recorded a GDP per capita of $23,400 that year versus America’s $24,000. By contrast, last year the average American generated four to five times more wealth than a Chinese citizen. Realistically, it will take China another generation before its population can enjoy the material comfort and social well-being of Americans.
-China is not under the yoke of the U.S. the way post-war Japan was seventy years ago. It does not owe its re-emergence on the global stage to the international community’s benevolence. Rather, China’s size and independence give it a unique chance to share geopolitical influence with America. In 2017, the U.S. accounted for only 8% of China’s imports – individually, Japan, Taiwan and South Korea were bigger import markets. By contrast, the U.S. represented a quarter of Japan’s imports in 1990. Similarly, while 19% of China’s exports were assigned to America in 2017, almost a third of Japan’s exports went to the U.S. in 1990.
-America’s blacklisting of Huawei – preventing the latter from purchasing components from major U.S. suppliers – has taught Beijing that they should not leave themselves at the mercy of U.S. policies and regulations. Chinese tech groups are now working hard to develop a fully-integrated supply chain that will guarantee better insulation from Washington’s whimsy political maneuvering. Its recent decision to remove foreign hardware and software from government offices also shows that the Chinese Communist Party is willing to take up the challenge.
-Despite the numerous copycat attempts from all corners of the globe, China is the only country in the world that has successfully promoted, by forming Special Economic Zones in the 1980s, credible rivals to Silicon Valley. Shenzhen, for instance, is the home of telecom groups Huawei and ZTE and of China’s leading social networking and online gaming group Tencent. Naturally, Beijing is taking part in this major push in new technologies, with telecom operator Xiaomi, ride-sharing platform Didi Chuxing, and ByteDance all headquartered in the capital. These tech champions’ national clout easily matches the prestige bestowed to Japanese electronics groups three decades ago.
-Since the Global Financial Crisis (GFC), China has taken a proactive role to impose its economic model, portrayed as an alternative to the discredited deregulated market approach. The Belt and Road Initiative to rebuild a Silk Road across Central Asia as well as regional programs to partner up with African and Eastern European countries have set the tone for a collaborative style.
-Finally, with a population of 1.5 billion, China represents a consumer market a lot more enticing to foreign corporations than 120 million Japanese ever were in the 1980s. To maintain its growth agenda, the West needs access to the Chinese market. With an economy heavily dependent on continued globalization, the world depends on China’s cooperation to manufacture cheap goods and meet worldwide demand. For that reason alone, Beijing is unlikely to fall in line with Washington’s trade rebalancing act.
No longer satisfied with being the workshop of the West, since joining the World Trade Organization in 2001, China has chosen its own path, making sure to protect national corporations, allowing them time to build impregnable competitive positions. Without regulatory barriers enforced by Beijing, firms like Xiaomi and e-commerce retailer Alibaba would not have gained the market supremacy they enjoy today.
Benefiting from quasi-exclusive access to the largest domestic demand in the world, China’s state-owned enterprises and tech giants, be they the BAT (Baidu, Alibaba and Tencent) or the next generation known as TMD (Toutiao, Meituan, and Didi Chuxing), represent a formidable challenge to America in emerging technologies.
America’s present hostility towards China is uncannily similar to its tactical moves against Japan in the 1980s. Trump’s cookie-cutter trade policies show that, when under threat, the largest free market in the world will not hesitate to adopt protectionist measures. Yet, this time around, it seems Washington has found its match. The GFC and the ensuing Great Recession permanently impaired America’s dominance the way, one hundred years ago, the Great War sapped the strength of European nations.
With the 21st century widely expected to see China overtake the U.S. as the next economic superpower, what is at stake is global market leadership. The world should get used to Washington’s jingoistic, defensive agenda. Action against Huawei and ByteDance is likely just the start. ‘China-bashing’ has replaced ‘Japan-bashing’ for the foreseeable future.
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Since we are comparing China and Japan we also need to point out what has been going on in Japan since the late 80’s. Japan built up a large debt level that was unsustainable and have been dealing with the after effects ever since.
Fast forward to today and China now has an even larger debt level relative to GDP than Japan did at their peak. The past few years has seen China raise their debt level yet their growth is slowing meaning that they are reaching debt saturation. When that debt bubble pops the whole world will be affected.
Another factor that has caused Japan to slow since the late 80’s is an aging population with slowing population growth. Just as China will soon be facing.
China tried to get rich before they got too old and looking at their debt levels I don’t think that will happen.
Unsustainable? Can you back up your use of that word?
A Twitter thread from Michael Nicoletos
China’s Total Debt to GDP has skyrocketed to ~276% from 168% in 2008. Since then, both government & corporate leverage have ballooned to unforeseen levels
11/ #China’s economic growth has depended so heavily on debt that it now needs 7.68 units of credit to produce 1 unit of GDP growth, 5x more than 10 years ago. If we “adjust” this for the GDP overstatement the number comes out to ~9.74 units of credit for 1 unit of GDP growth.
12/ So, #China needs more and more debt to produce the same GDP growth rate. Chinese banking assets are now ~50% of Global GDP. At their respective peaks, #US banking assets reached 32% of Global GDP (in 1985) & #Japan’s banking assets were 27% of Global GDP (in 1994).
According to this chart of debt/gdp for G20 countries:
Japan: 240%
US: 105%
China: 50%
Russia: 15%
And China owns tons of state owned enterprises that it can sell if and when it needs to raise money. I am currently reading How Asia Works by Joe Studwell, which addresses these issues in depth and is just terrific – but I have not gotten to the chapter on China yet.
The point is that they do not need to sell these enterprises, they just have to forgive themselves their own debt.
That OFC unless they cave in to the demands of junk economics.
Funny how you get that run up in debt and the population suddenly stops growing. Almost like its a plan. Only the rich can reproduce.
Could you break the Chinese dept into private and public sector debt?
From 2018 but informative: Bloomberg
See also: Household debt survey
All numbers from the PRC come with some big caveats of course. Not all debt is reported and there is a substantial difference between debt denominated in Dollars and RMB. Unlike Greece the PRC can control its own debt more through money printing and financialization.
Additionally China has a much greater degree of non-bank lending than many other countries including company-to-company lending or guarantees which often goes unreported and which can create other problems see here.
So the exact numbers are unclear but everyone agrees it is big and growing.
Unlike Greece the PRC can control its own debt more through money printing and financialization.
This is true to an extent but China has pegged their currency to a basket of foreign currencies. To truly tackle their debt they will have to let the Yuan float and devalue. Since they are a top down command economy I can’t see China easily giving up control and letting the market have more of a say in the value of the Yuan.
The PRC can control its own debt more through money printing and financialization.
MMT applies, and public “debt” creation is not debt but money in circulation. It cannot be called by a creditor.
The observation about Chinese “debt” need to be cast considering sovereign “debt” and non sovereign debt.
What’s the private level of debt? That’s the number that matters.
I think you are misreading my comment. When the PRC prints more RMB (i.e. devalues its currency) it is increasing money in circulation and this is one way to address debts, particularly debts by government agencies. Indeed in the PRC this can be quite direct as the central government has full power to not just print money and give it to banks but to hand it to any SOE or state at will without the need for public budgeting.
But that does not undermine the fact that there is public debt because debt is still a promise to pay someone at some point be they a foreign financial institution or a local state or a company. That promise is still debt even if it can be alleviated by money printing. That debt matters even if it is denominated in local currency because the creditor will use the expectation of payment to make other decisions and if the original debt is not paid off, or is paid off with vastly devalued currency, then problems arise.
While I think MMT makes sense in general I don’t see how it truly eliminates the issues of debt as a distended promise.
As to your second question the first link I provided attempts to give some estimate of that though as I said the longstanding habit of non-bank lending in the PRC can make estimates imperfect.
Also, China has been down-low promoting the RMB as an international reserve currency in its Belt&Road projects. The value of the RMB is now important to a lot of third world countries and investors in those countries.
I mistyped this as Gelt&Road and OMG is that a great typo.
The Japanese central bank acted in an extreme way that made the debt destruction and recession much worse, while removing much of the Japanese development state. There is an excellent documentary on this “Princes of the Yen” based on a book. Basically the central bank gained its independence and power by destroying the Ministry of Finance development state. It may have been the case that the central bank consciously stoked the bubble and then crashed it.
The documentary is on youtube:
https://www.youtube.com/watch?v=p5Ac7ap_MAY
While informative this article glosses over the fundamental difference between China and Japan which is their political system. Japan may be more protectionist than the US but they are not the same kind of centralized system that the PRC has. And while the large merged organizations were closely connected to the government they were not SOEs nor did they have the kind of central mandate for party cadres the way that the PRC requires. In Japan it was more that the big businesses were leaning on the government to get the kinds of outcomes they wanted while in the PRC the government leans on them.
Thus Japan was and is a lot closer to the US or the UK than China. At one time China was heading in that direction when they loosened the cadres and moved to reduce the SOEs but now they are stepping up the requirement that party functionaries be involved in business decisionmaking and strengthening the hand of the SOEs and the party in all things. In this respect they are acting much more like Russia did when they used the Soviet system to export their industrial capacity to neighboring states and tried to create a market that they direct that was separate from western institutions.
There are of course similarities and debt is a huge one. But, we cannot underestimate the role of politics and ideology at work and it is irresponsible to pretend that they are just the same because some moves that are open to China (e.g. building a separate financial structure) were not available to Japan, and some that were available to Japan (e.g. replacing a Prime minister or weakening government control to pursue opportunities) are simply unthinkable in the PRC.
+1. Yes, they are similar. But I definitely wouldn’t use the world “striking”—PRC is in a league of its own
Yes, the more you delve into the systems of each country the more complex they are. Japan has a very centralised industrial system, but also includes companies that were and are very much outside the ‘system’, Sony as a well known example. China never had the institutional depth of Japan so delegated far more industrial policy to regional governments, its been more content to experiment and encourage creative internal competition, with the understanding that once a company became big and successful enough to be useful, its owner/CEO could expect to be called to Beijing to be called ‘onside’.
But both have in common a focus on maintaining strong national control over key industries and a firm belief that manufacturing in its broadest definition is central to the prosperity and security of any major country.
The Chinese Communist Party tend to learn very well from other’s mistakes – such as the disaster of the shock therapy in the USSR/Russia. I am sure that they have studied the Japanese case. A lot of the debt is between state entities (the state still owns a lot of the “commanding heights” of the economy), so it is easier to manage – the state basically owes money to itself. The central bank is also subordinated to the development state, so MMT style policies can be used. In addition, there are capital controls in place to limit foreign currency flows. So China may have a difficult time managing things, but not a crash.
In the US the focus on keeping growth alive at any cost, and massively leveraging up corporations to buy back stock (one of the major reasons stock prices have risen), plus leveraging up the state to give tax breaks to the rich, does not look tenable. The Federal Reserve is in full on QE (although trying not to call it QE) right now to stop things turning ugly. With the underfunding of public pensions at the federal and state levels, a big market correction could cause some major social issues. So I don’t see the US getting of the currency debasement wagon any time soon.
So who blinks first? I would bet more an the Chinese staying strong than the US.
This is an excellent documentary on the advantages that China has in the technology space and how their are getting ahead in technology innovation.
https://www.youtube.com/watch?v=SGJ5cZnoodY&t=17s
What worries me about China isn’t so much its economic power (we’ll see how that goes when the one-child policy effects really kick in, they are already starting), as that it uses it to export its political views (or rather to supress any critical discussion of its regime).
The article says “Eastern European countries have set the tone for a collaborative style.”
Nope. Not colaboration – even less so that the US I’d say (US doesn’t colaborate on trade, it dictates to all but a few).
It’s “you’ll get some economic advantages, and the price is uncodintional support of Chinese policies”. A good example of that is the Czech Republic, where the company of the richest Czech (Peter Kellner) now runs a pro-China PR in the CR as the price of being one of the few (if not the only one, at one time it certainly was) foreign financial institutions that can lend to households in China.
And they probably don’t even have to be told explicitly to do it, just all of suddely a few court cases in China went against it, and it’s not a small deal, as I believe Kellner’s company is the only foreign company that ever won a significant lawsuit in Russia against a local Russian oligarch, even though Deripaska was not high on Putin’s list of friends at that time, unlike now.
Has America so soon forgotten its own protectionist past?
See Michael Hudson’s “America’s Protectionist Takeoff 18-15-1914”
It’s not always a bad thing, and arguably necessary where strategic interests are concerned.
It’s not always a bad thing, and arguably necessary where strategic interests are concerned.
I’d be more direct:
It’s never bad thing, and always necessary, for the Public good.
I think that protectionism is in effect necessary for the Public good but much more doubtfully necessary where strategic interests are concerned. In fact, the kind of protectionist measures to be taken would differ depending on what is being defended. Public good and strategic interests are not exactly the same thing IMO.
America forgets everything. Part and parcel of having a national identity rooted in consumerism.
That is not exclusive to the U.S. If there is one thing that is consistent about national pride anywhere it is the value of selective interpretation, or outright revisionism.
The author should take a look at the hollowing out of US manufacturing to see that “Not for the first time, Washington is applying a bog-standard policy template to protect its domestic market.” has not been the rule for much of the last 40 years.
The actions against China that Washington is taking seem more guided by the Washington Intelligence community than any desire to “protect its (USA’s) domestic market.”
Perhaps better phrasing is Washington wants to “protect some domestic markets the intelligence community wants to be able to control”.
Yes to that better phrasing.
To the extent that the intelligence community wants to control the information/big data industries, its efforts are now up against the opportunism of tech executives and investors. See, e.g., the financial flows channeled by PE firms such as Sequoia and NEA: https://techcrunch.com/2019/12/03/setting-politics-aside-sequoia-raises-3-4-billion-for-us-and-china-investments/. Hard to see how these players would have developed any nationalist tendencies while accruing wealth in the globalizing economy over the past 40 years (save for certain state-sponsored individuals from both east and west who are pushing and pulling over deals, market access, etc.).
“Confronted with a growing trade deficit with Japan, Washington engineered the Plaza Accord in September 1985 to manipulate the $/yen exchange rate. But it wasn’t enough to stop Japan’s tech ascendancy.”
But why did they even try? If the status of the dollar as global reserve currency is based on permanent trade deficits, why even attempt to fight?
Jobs?
Since when do US politicians, especially Republicans, truly care about US jobs?
My understanding was too unleash non traditional banking – lending – capital formation, hence why traditional banking then went on a C/RE tare to recoup lost income streams.
Because rational agent models said Capital was … wellie … rational thingy.
‘To counter the influence of Japanese industrial groups, such as Toyota and Honda in car manufacturing, Sega and Nintendo in video games, or Sony, Canon and JVC in consumer electronics, America proactively offshored its production to low-cost countries.’
Excuse me for saying this but this reads to me that the US burnt down their industries in order to save them. Sure profitability remained with the corporate leadership – but at the cost of the workers and the social cohesion that they brought to the table. But then again, perhaps that was the idea – to break that cohesion and resistance.
U.S. corps started looting themselves [see bill black] in earnest once neoliberalism became dominant. You know sorta around the time some stimulant fueled novels were written and became a cult, which is just post all the boys coming home jacked up, and various social stimulants became all the rage for Übermensch ….
This gets to.show the sheer pointlessness of our global system. If a country can produce better products then instead of it being a boon it’s considered a threat! We desperately need a better system. This. Won’t. Do.
What this article misses entirely is that the Communist Party of China (CCP) and the People’s Liberation Army (PLA) are executing a modern warfare strategy against the U.S. and its allies. Japan did not build the commensurate military power or asymmetric weapons that the PLA is deploying. Neither was Japan expanding and claiming massive extraterritorial claims against its neighbors.
The Chinese banking system has over $40 trillion in assets, M2 is $25 trillion against a $14 trillion GDP economy and only $3 trillion in reserves. China is a Ponzi scheme allowed to exist because corporations want subsidized sourcing and access to a market the Chinese will never let them have.
We are in a war and the CCP deception is working magnificently. The CCP has purchased private equity leaders, corporate execs and Wall Street to be their advocate in the U.S.
The U.S. is slowly responding, but the lobbyists for the CCP are impeding this effort. The U.S. has the tools and allies to prevent the CCP from achieving its dream of world dominance–a dream that contemplates the obliteration of American power.
Unfortunately, this article muddies the water and advances CCP interests.
Sorry rc, you seem to believe that I have a vested interest in China beating the US at the international trade game. I am a neutral observer.
The aim of my article is simply to point out that China is determined to win this global competition (as is America) and is giving itself the tools to do so. It will never agree to a modern version of the Plaza Accord because it sees how much damage it did to the Japanese economy. No one can blame the Chinese for it.
Trump is implementing protectionist measures to advance America’s interest, and China is doing the same to build a formidable opponent to the leading economy in the world. That is what free markets are all about, although I note that both sides use ‘protectionist’ tactics, which is hardly in the spirit of free trade.
We are seeing a conflict between America’s shareholder capitalism and China’s state capitalism. Of course, we could debate which of these two models is the most acceptable, but that wasn’t the purpose of the piece.
As for the issues related to China’s military agenda, they go beyond the scope of this article. What is happening in the South China Sea is not related to Trump’s opposition to China’s emergence as a technology superpower.