The State of the Chinese Economy

First, some house cleaning.

My current schedule doesn’t allow the long-winded, big picture style that I seem so fond of. I like blogging, and I plan to continue blogging. That said, for this blog to work, I need to shorten the scope to something that fits my schedule and feels somewhat unique. Pursuant to that idea, I plan to post more pictures that I take in Beijing with a somewhat regular frequency- at least once per week.

Knowing myself, I will certainly try to fit small, localized anecdotes into a bigger picture of understanding China, however the economic talk is anticipated to dull to a mummer. Since I am anticipating economics to dull to a mummer, I am deciding now to go out with a bang and give my general economic thoughts regarding China as of Sunday, July 23rd.


Since 1978, when China began its process of reform, China’s share of world GDP has increased more than 600%. Powered by huge amounts of investment, China surged to ‘catch-up’ to the world that seemingly left it behind. With fervent nationalism that extols the arduous  journey of a lovable underdog, the Chinese economy is often seen as a well oiled machine, destined to set the rules of the developed world. Rule sets be damned- there is a new ideology and way to do business.

China’s Share of Population and GDP


Chinese Real National Income Per Person


McKinsey has reported for more than a year that Chinese consumer confidence is at an all time high. As speculative asset prices soar, Chinese purchasers feel on top of the world.

But as I sit in my small apartment in Beijing, my view of the Chinese economy couldn’t be more bleak. I don’t believe China is the next super-power. I doubt if the country can survive the next decade in its current form.  Forget any foreign powers. Forget trouble in the South China Sea. Forget China’s aide to North Korea. Look at one graph: China’s growth in debt.

Chinese Debt

Now, this is the part where a lot of people will list my implicit assumptions about the nature of Chinese growth- which I have no mention of here- or compare Chinese debt to other regions of the world. Ignore that for just a moment.  I personally don’t believe, based on anything I’ve seen in China, that debt growth can stop. I think it must rise, and I don’t think debt can rise forever.

I don’t believe that economics is a cannon taught to students and the outside world. Instead, economics is a set of theories that try to explain the world as we see in evidence and mechanisms. So, for example, some people believe in the capital asset pricing model (CAPM)- which, in non statistical language, states that an asset with a high co-variance with the other assets in the portfolio adds to the risk of the portfolio. The asset’s returns move in the same direction as the returns of the other assets, and these movements are large or volatile. The problem is that this financial economic cannon is not observed or perhaps true. For further reading go here or here. You could also read this pdf.

In fact, I believe accurately valuing capital and risk will be the death of China with the dagger itself being a continuous rise in debt.  As countless others have stated, Chinese households share an incredibly low share of China’s GDP. This means that China’s wealth is increasingly tied to speculative assets and promises of future wealth creation.


But it get’s worse and more difficult to explain. Even if China fixes the nationally directed causes of it’s lack of household wealth, it hasn’t built modern institutions at a local level to price correctly or lessen its debt burden.

It is true that interest rates, state owned enterprises, pollution, lack of credible investments, a large population (this deserves more mention), and law have led to China’s lack of household consumption at the national level. Although many of these factors have already changed and many could be changed quickly (if Beijing was able to control its vested interests, and as I look at coal use and increased business with North Korea, you’ll have to excuse me for having doubts) the culture these factors have created and the lack of local institutions will ensure that the factors for debt creation and price distortions continue.

Let me give you examples.


1.) Beijing can’t enforce an indoor smoking ban.

2.) Do you remember that woman that was mauled by a tiger last year in Beijing, the one that exited her car in a carnivorous animal enclosure (video). That same enclosure makes headlines with relative frequency.  Examples include this family that exited their vehicle in March and this black SUV feeding a bear yesterday.

lets get killed.jpg

lets feed a bear

3.) There isn’t developed code enforcement. Companies that break rules or operate inefficiently aren’t proportionally dealt with. On Thursday, July 20th this year an estimated 50 policeman raided a street with popular nightlife destinations. The Beijinger reported that all stores on the street were ordered to hand-over POS systems. The Beijinger also reported that three divisions of police were present for the shake down. The police descended on the street for code enforcement. The code in question: outdoor seating. It took 50 police from 3 divisions to tell restaurants and bars to remove patio furniture from the sidewalk.


4.) This Caixin article that describes perhaps the most valuable real estate in China.

From the article:

Beijing) – An unsettled land deal between a subsidiary of Anbang Insurance Group and the Beijing city government has left several real-estate developers in limbo and the land they paid billions of yuan to sit idle for more than six years. Across the street of the busy construction site of the 118-story China Zun tower, which will be the tallest building in downtown Beijing, several land plots enclosed by brick walls have remained barren and empty, surrounded by mushrooming skyscrapers in the city’s central business district, where land available for construction has always been scarce and pricey. “It has been idle like this since I came [to work] here about five or six years ago,” a gate guard said. The four plots, labeled by city land authorities as plots Z3, Z4, Z5 and Z6, are adjacent to one another in the same block, within sight of the landmark World Trade Center towers in the eastern part of Beijing. They were known as the last untouched land in the central business district. In a highly-watched auction in December 2010, the four plots, with combined construction space of 580,000 square meters, were sold to different companies for a total of more than 11.8 billion yuan ($1.72 billion). But construction on the plots never began. Sources close to the matter told Caixin that development has been hindered due to “government reasons,” as the Beijing Municipal Bureau of Land and Resources hasn’t been able to transfer the land to the bidders.

According to a document from the Beijing land and resources bureau seen by Caixin, CBD Development said it won’t transfer the land because needed work hasn’t been finished for preliminary development and it wants a larger fee for its job. The dispute has blocked further development on the land. A fixed rate – usually 8% of the total costs of initial development – is paid to preliminary developers as profit. But “Anbang is not willing to take the fixed-rate payment,” an industry source said. “We have repeatedly negotiated with the government, and officials have talked with the preliminary developer many times – but nothing works,” said Xu Li, chairman of Shanghai-listed Beijing Vantone Real Estate Co., which bought the Z3 plot with partners. Beijing Vantone and partners made a full payment of 2.5 billion yuan for the plot as early as January 2011 and planned to start construction of a commercial and office complex on the site in 2012. The Z3 winners estimated that the complex would generate about 700 million yuan in rent every year for investors. But not a single brick has been laid on the ground for the project, leaving the investors holding losses and unpredictable risks.

The most valuable land in Beijing was sold years ago and remains undeveloped. The CEO of Anbang is currently under arrest. There is no new information about this land deal. 1495884731555028

My purpose of this blog post is to show the difficulty of rebalancing, and I believe the course is already set. China won’t rebalance. The inefficiencies and institutional constraints are simply too great.  The problem is that the scope is seen as a national problem: national income accounting, national policy, the centrality of a Marxist state.

This is wrong. I highly recommend reading this article from the Economist. Some key points from the article:

1.) There are still more than 150,000 SOEs in China.

2.) Two-thirds are owned by local governments.

3.) These state owned enterprises eat about half of all bank loans though they represent less than one-fifth of the economy.

4.) State owned enterprises are largely holding China’s increase in debt.

From The Economist: Chinese SOE fixed asset investment


Chinese private companies can’t find valuable investments within China, but China is leaning on them to keep investment going. State owned firms aren’t efficient, and they’re largely distorting at a local level that didn’t develop institutions necessary to help private firms.

The Chinese government has done nothing but obfuscate for 4 years, although there have been countless buzzwords and reassuring speeches.

Also from The Economist:

Back in 2013 Mr Xi seemed to grasp that change was needed. He vowed that market forces would play a “decisive role” in allocating resources and declared that reform of SOEs was a priority.

Decisive role indeed. I believe the course is set.





Pierce Norton is a corporate trainer living in Beijing, China. Before moving to China he served 5 years with the United States Army.











位于“锈带”上遭遇国际不平衡的州似乎从未在经济未来中获得同等机遇的描述也足以使得该自以为是的全球主义者获选。但是,扭转对结构政策的不满也颇具难度。中美每年的贸易额达650,000,000,000美元,无论中美关系当前的问题如何,美国出口到中国的大豆和飞机,企业管理中复杂的全国供应链以及消费者购买的服装和iPhones 手机都将因此转变而受到严重影响而趋向更严峻的方向。当选总特朗普的主张存在着非常明显的缺陷。



















由Business Insider 提供的图表全面的展示了整体走向:


中国国内的经济弱点造成了资本的大量流失。中国的增长模式并非全新而独树一帜的,也非难理解的,它通过人为低利率将资金从储蓄者和消费者转移到投资和生产者;缓慢的收入增长;隐藏的税收;环境退化,以及货币低估。其结果就是阻碍家庭收入的增长,导致一个国家具有更高的储蓄率(这是一种经济重复性)。 我们可以非常清楚地看到这种经济模式对家庭消费占GDP的影响。

Consumption  - China.PNG








Of US-China Trade Wars

Before today’s post, I would like to list the websites that I find critical to staying recent on the Chinese economy. I have taken graphs and data from them at various points in my blog:

Tariffs, Trade Wars, and Confusion

Donald Trump is now the President Elect of the United States of America. Although he lost the American popular vote, Trump, a Republican, was able to win the presidency through securing traditionally Democratic states, the Rust Belt, of Wisconsin, Michigan, Pennsylvania, and Ohio. Trade was the deciding issue.


Trade imbalance from Asian economies are forced on America, resulting in asset inflation

Indeed, international trade is now dominating headlines, and Trump, who is still days away from assuming his position in the White House, is already being touted as ‘tough on China.’ The economic discourse regarding Trump’s promise to label China a currency manipulator and impose a unilateral 45% import tariff on Chinese goods is muddled at best. At its worst, laymen and pundits alike are seeing great opportunity for US-China conflict regarding trade.

The problem with current analysis is that it directly addresses the populist rhetoric that won Trump the White House, but Trump’s rhetoric is just that- rhetoric. One of the many reasons main stream media fundamentally misunderstands President elect Trump is those  on the left take him literally and not seriously. Trump supporters took him seriously but not literally.

So how can we better understand coming conflict and possibility of a trade war? How can businesses hedge for the future? How can we understand trade between America and China in 2017?

On America

Donald Trump sees the chronic U.S. trade deficit as a problem that puts limits on growth. Most noteworthy, he has missed the deep-seated structural imbalances of the world only to abrasively confront the symptoms of those structural imbalances .  Identifying and attacking symptoms of globalization’s deals is what he has done : stopping the 12-nation Trans Pacific Partnership (TPP) signed last year and on similar talks with Europe, insisting he will renegotiate NAFTA, talking tough on China, and threatening to impose tariffs on U.S. companies that relocate jobs abroad. Changing the structure of the world’s largest economy is going to be a long, contentious affair, so if there is a US- China trade war I expect to see the first policy signs from China. There may be noise from the Trump administration, but that should not be confused with effective, enforceable action.

Identifying international imbalances to those left behind in the Rust Belt who were never given a fair chance at the economic future described by smug intellectual globalist may be enough to get elected. However, turning that anger to structural policy is going to be difficult. There is $650 billion in trade between the U.S. and China each year. Whatever the shortcomings of the current relationship, American exporters selling soybeans or airplanes to China, companies managing complex global supply chains, and consumers buying the clothing and iPhones they make could all be severely affected if it took a turn for the worse. There are very simple gaps in President Elect Trump’s propositions.

The most dramatic move being considered is the so-called “border adjustment tax”: exempting exports from the corporate income tax, while imposing it on the value of all imports. Exporters would obviously see a big tax cut, while companies that need to buy inputs or merchandise from abroad could end up paying more taxes, even at a lower rate. Even if exchange rates eventually shifted to cancel out the impact, as many anticipate, the price adjustments could be highly disruptive, with some better able to cope than others, both at home and abroad. This border tax seems to be the first large trade weapon, and it will take, at best, months to materialize. I firmly expect meaningful trade action regarding the value of RMB to be implemented before any Trump tax policy. Trump’s tax policy is looming large, but numerous questions have yet to be answered.

How does President Elect Trump choose to address the fact that 37% of China’s exports to the United States in 2015 consisted of value-added imports from other countries? Trump’s top advisers put great emphasis on closing the U.S. trade gap as a way to boost growth. Which growth do they intend maximize, employment or GDP?

Trade imbalances reflect patterns of consumption, savings, and investment embedded in the broader economy, at home and abroad. Ironically, Trump’s other policies—debt-funded fiscal stimulus and encouraging U.S. companies to bring home overseas profits, for another—affects these factors in ways that are actually likely to widen the trade deficit.

Deutsche Bank has given a list of industries that President Elect Trump may target.


Deutsche Bank has also given a list of industries that China may retaliate against.


Will these companies, representing the lives, fortunes, and hopes of many, go quietly into the night? Whatever the talk of trade war, the democratic process of changing the way these billions of dollars move is going to be long and contentious. Because the United States political process will take a long time, I fully expect important trade policy to first come from China. These first Chinese policies, which RMB seems the most immediate, will shape American response. 

Americans should be more concerned about market access (shown below), and how to create value in China’s inevitable economic rebalancing.


As he enters office, Donald Trump faces a difficult set of choices. The key to growth—not just in America, but in China, Europe, Japan, and elsewhere—lies in tackling challenges, and laying foundations, that often come at a short term cost, in exchange for a longer term payoff.

No country has such an immediate decision to make regarding short term cost in exchange for a longer term payoff as China.

Change is coming to China

Donald Trump has appointed Peter Navarro, author of Death by China and The Coming China Wars, as the head of a new United States national trade body. Navarro has written that China practices economic warfare on the United States through mercantilism. In his book Death by China, Peter Navarro estimates that the RMB is overvalued by 40%. Don’t panic.

It foolish to panic and speculate about Chinese international policy from America for three reasons. First, China has a more urgent timeline to address domestic economic imbalances (large capital outflows, low consumption,and soaring debt). Second, China has more meaningful policy firepower at its disposal. Third, American policy will take longer to draft, ratify, and implement due to obvious political realities. No one has more need to address economic distortions resulting in large trade surpluses than China, and domestic changes from the Xi administration have a measurable deadline.

No economic issue looks to be more contentious than Trade between America and China in 2017, because it will change how we frame the Chinese currency debate in which President Elect Trump has often referred.

Due to a wide range of poor economic conditions, money is leaving China. In December $82 Billion left China. Roughly $800 Billion left China in total in 2016.  Instead of allowing large changes in the exchange rate, China is selling foreign exchange reserves and pursuing harsher penalties against capital outflows. There are at least two immediate problems with this strategy: foreign exchange reserves can’t last forever, and the largest trading country in the world, which is equipped with a $33 trillion banking sector, cannot  implement complete capital outflow control. Chinese reserves will deplete before the United States could make a justifiable case of currency manipulation that entails corrective action.

This image from Business Insider illustrates the overall trend well.


Capital is leaving China due to economic weakness at home. The Chinese growth model, which is not new; unique; nor difficult to understand, transfers money from savers and consumers to investments and producers through artificially low interest rates; slow rising wages; hidden taxes; environmental degradation; and an undervalued currency. The effect of this has been to retard the growth of household income, which results in a country having a higher savings rate (this is an economic tautology).   We can see the effects of this economic model very clearly in the household consumption share of GDP.


Personally, this chart is surreal to me. It is the most important chart that describes China today, and few people understand its depth and think it is normal. I digress.

This chart from the world bank shows that Chinese household consumption is about half of the global average. If Chinese household capture a global historically low percentage of wealth  created in their country, where does the money go? It goes to investment. Here is the rub; the investments aren’t returning money; the investments haven’t been returning money for years. For the year 2016, debt rose by 40-45% of GDP while nominal GDP grew by less than 8%. Chinese debt cannot rise at this pace for much longer. Decreasing the national savings rate (not to be confused with household savings) is in America’s interest, but China’s interest is immediate. Crippling debt would hinder Chinese growth, as it did in Japan and much of Latin America in the 70’s-80’s, for at least a decade.

So, what’s the point? America is unhappy with absorbing Chinese economic imbalances, however China has the largest and most urgent stake in solving its own economic imbalance in capital outflows and debt growth.  These two problems must be solved in the immediate future to avoid flat economic growth and rising unemployment. The domestic policy firepower that Chairman Xi Jinping wields is greater than America’s ability to influence Chinese distortion symptoms. The point for those interested in China is to track changing domestic policy and the winners/losers it will create. For example, raising interest rates will have a greater effect on companies that are leveraged or  unleveraged. Raising the value of the RMB will hurt exporters, but raise the purchasing power of Chinese consumers. I don’t want to speculate of domestic policy in China. Only a select few people in the entire country have a voice in the process, and economic analysis here increasingly turns to political speculation. It is worth repeating due to its importance: yes, the value of the RMB will be contentious, however domestic Chinese policies will be more important than words or actions from a Donald Trump administration. Chinese businesses should focus on the many ways that the Chinese economy must rebalance in the immediate future.

Encouraging the use of “comrade” in China

During the past month many Western news sources have carried stories about increasing the use of the word “comrade” in China.  However much mainstream media attention has been abstruse and often times virulent in painting current caricatures of Chinese life.

For example, here is China daily on the subject:

…in March this year, the Shanghai government published a notice to all officials encouraging them to set an example to the people and start calling each other “comrade” (tongzhi,) once more. According to the brief, comrade was deemed preferable to the more hierarchical term “boss” that has been adopted in China’s halls of power. Comrade, the notice stated, should be adopted both for spoken and written forms of address.

If you compare the China Daily piece to this New York Times piece, you will find similarities. Perhaps most strikingly is their differences, most notably time. The China Daily piece was published in 2003. The New York Times piece was published on November 16th, 2016.

This ‘comrade’ article has been circulating in some form for more than a decade by various news sources, and it shows an absence of basic world knowledge.  The annual publication of appall at the encouragement of comrade besmirches Western media and provides evidence of an inability for media to think outside its borders. Let me explain further.

Using the term comrade has been law for party members since 1965, when the party declared hierarchical titles “a decadent practice of the old society.” Using ‘comrade’ is not a fashion statement.  It is law. It has been law for years. It’s a communist country, and this is the law.

Where does the confusion come from?

So why is some variation of this news story reported so often? There are two reasons. First, comrade (tongzhi 同志) is a common word to describe a homosexual in China. Here, in 2012, is CNN describing how official dictionaries only list the “traditional” meaning of tongzhi and not its homosexual slang:

“It’s unacceptable that the ‘gay’ meaning of ‘tongzhi’ was excluded from the dictionary, a reference book written for all, simply because of the compilers’ own preferences and values,” Nan Feng, a gay rights activist told the state-run news agency Xinhua.
“Tongzhi” serves as a substitute for “tongxinglian,” which is the formal Chinese term for homosexuality. The 2005 edition of the Contemporary Chinese Dictionary defines “tongxinglian” both as same-sex love and as a psychosexual disorder, according to Xinhua.
Homosexuality’s classification as a mental disorder was removed in China in 2001, despite the dictionary’s definition.
Tongzhi gains interest in a news story because it can easily extend into a gay rights issue. It, to Western media, is an antiquated sign of homosexual repression. How can laws made in 1965 trump the identity of homosexuals in 2012?  I’ll tell you. The idea of self-righteous party members devoid of material lust is an important national identity and source for legitimacy in China.  A source of legitimacy for the party is more important than homosexual identity in China. It’s a single party state.
Here is a link describing encouragement of comrade to civil servants that aptly describes party attitude (my emphasis added):
A local government in Central China’s Henan Province has asked all of its civil servants to address each other only as “comrade,” in a bid to strengthen political life within the Communist Party of China (CPC), the Henan Business Daily reported on Tuesday.
…A subdistrict of Jiujiang district, under the city of Wuhu, Central China’s Anhui Province launched a series of activities to promote the use of comrade among CPC members, with the aim to “purify the Party.”
This is a recent publication explaining Chairman Xi Jinping’s meaning (my emphasis added):

General Secretary of CPC Central Committee Xi Jinping advocated simple and clean interpersonal relationships within the Party at a group study session of the Political Bureau of the CPC Central Committee in June, reports

The report added that addressing each other as comrade will help promote equality and mutual trust among CPC members; and it will also help strengthen political life within the Party and set an example for purifying social conduct.

Notice how the onus here is directed to conduct within the party and maintaining ethical standards, and notice how the party’s needs supersede that of homosexual identity.

The second source of confusion is speculation regarding future usage. Let’s return to the first China Daily article posted above. The end is purely speculative and somewhat frightening:

Does this mean people will soon be stopping for a Starbucks latte served by Comrade Barista, before hopping into a cab driven by Comrade Driver and apologizing to Comrade Boss for being late for their meeting?

Whether this is a trend that will catch on anywhere other than the halls of power, however, remains to be seen, and given the current trend for opening “communes” for the ultra chic in urban centers around China, you never know – it may well just catch on once more.

Many articles make this same muddled speculation. We have the luxury of hindsight to see that, indeed no, people didn’t start calling their barista ‘comrade,’ because the political system and economic system have natural conflicts. The state must encourage self-righteousness as a source of legitimacy, but everyone else is to compete for material wealth. As previously stated, the use of comrade is intended for party members, not the general public.  To clarify this point, it is useful to examine two pictures from my second home – the Beijing subway.


I’m on the subway for a minimum of two hours every weekday. This has been the most striking advertisement I have seen due to its incredible simplicity and complete nonsense.

花更少, 飞更远,选的多      。 买个机票,8元钱,高高兴兴做公主。

Spend less, fly further, enjoy many choices. Buy one ticket for RMB8, happily become a princess. 

Changing a young woman’s ideal image from princess to comrade must be the hardest task in the world, and most importantly, it is not something the CPC is trying to accomplish.  Drop any notion you may have of descriptive titles and their effects, and solely consider the effort it would take to transplant wealth ideas in a capitalist country. Baristas don’t want to be comrades. They want more money.


Lastly, consider this young woman on the subway. In her lap is her sleeping young son. They are taking two seats. Notice how the elderly woman, a complete stranger, moves to the edge of her seat to provide the most possible room for the sleeping child. Everyone in the subway car did what was necessary to ensure the child’s comfort. Do you think the mother dreams of a time when her son can grow up to   “curb paternalism and sectarianism that have spread within the Party during the last three decades since the reform and opening-up,”as Su Wei, a professor at the CPC Chongqing Municipal Committee Party School, recently told the Global Times?

The party may encourage its members to use the word comrade. Average people are encouraged to be princesses.

The politics of China and economics of China have natural conflicts, however it does not excuse Western ignorance. Balking at priority between homosexual identity and state legitimacy in a country with China’s history is embarrassingly small minded. Mistaking actions meant for party members which follows a law from 1965 for rules of the general public is inexcusable.

Thus ends my polemic. Let’s hope to see a more insightful media next year.

The sky isn’t grey today.

The Value of the RMB: I Told You So

What a time to be alive. Donald Trump is POTUS, and although policy specifics aren’t set in stone, the world is abuzz considering his first 100 days in office. Commentary regarding his initial policy push centers around Mr. Trump’s “Contract with the American Voter.” This contract has rightfully drawn much attention, however some simple foreign policy objectives have been overlooked.  Here is the contract (emphasis mine):

To “protect American workers,” Trump would renegotiate or withdraw from NAFTA, pull out of the Trans-Pacific Partnership, label China as a “currency manipulator,” direct the executive branch to “identify all foreign trading abuses,” lift restrictions on fossil fuels, allow the Keystone Pipeline, and remove the U.S. from climate change agreements.

There is real possibility for Chinese and American conflict over trade and currency values in the near future.

The history of the conflict

The situation that we currently find ourselves is not new. Due to financial repression and hidden taxes on savers and consumers in the Chinese economy, China has an extremely low consumption share of GDP. To offset this historic low share of consumption, Chinese households must save an ever increasing share of their inadequate income. Consumption and demand in China is weak, so China is forced to export it’s goods. So although China had extremely high investment rates, they have an even higher savings rate.

The following graph shows the growth of the Asian savings glut. Note the trend grew in 2002 following a peg to the United States dollar. Note how it increased year on year as the Chinese economy became more and more imbalanced. Note that it briefly declined during 2008 financial crisis. Note that is now rising again to previous highs.


How does this effect the United States?

There are two ways. First, China would use United States Government bonds to help sterilize Chinese banks. Second, the increased capital flows from China inflated American banks.  It is no coincidence that the American real estate bubble coincided with increased capital movement from China to America. Chinese money fueled speculative asset inflation.


The following graph shows a rise in the Asian current account surplus matching an american deficit.


What benefit does America receive?

China uses the open American system in order to transfer money from savers to producers.  The Chinese economic system needs someone to absorb their surplus. The Chinese economic system needs someone to sterilize their banks. So what does America receive?  American corporations are allowed to operate in China. That’s it. Market access.

If something can’t go on forever, it must end.

There are two constraints to the Chinese growth model: debt growth from high investment rates and unwillingness to absorb trade surpluses.

Both of these things are happening now.

Even if we ignore Trump’s calls, an increasing number of influential economist are calling for an end to this model. It is a mathematic fact that it is bad for America. Here is Brad Setser (emphasis mine):

The combined savings of China, Japan, Korea, Taiwan, and the two city-states of Hong Kong and Singapore is about 40 percent of their collective GDP, a thirty-five-year high. No other region of the world currently contributes more to the global glut in savings that has brought interest rates around the world down to record lows…Without a policy push to bring down savings, East Asia’s excess savings will continue to give rise to new economic and financial risks, both inside the region and globally…The traditional U.S. economic agenda in East Asia—aimed at liberalizing trade, investment, and exchange rates—needs to be complemented with a push for the policies needed to bring East Asia’s savings down to a level that the region can more easily absorb internally. The adjustment should be centered on China, where exceptionally high levels of savings no longer serve the same purpose as during the country’s catch-up phase of economic development.

I told you so. On July 28th I wrote in opposition to George Magnus. I wrote the following:

George Magnus gave a prediction of the RMB devaluing to 7:1 by the end of the year. My prediction is a little different. I believe that Chinese investment levels will drop by the end of the year, and Chinese savings rates will not change. Thusly, China’s current account surplus will rise.

I believe that this time next year, China will run an increasingly large trade surplus with the world. I believe this trade surplus will grab international attention and be received poorly. The current account surplus will put upward pressure on the RMB.

Step one of my prediction is a rise in China’s current account surplus. Look for it to rise over 3%. Step two involves international backlash. The main party would be the United States. Look for the United States to start mentioning key phrases such as “currency manipulator” during and after the election.

The RMB has been devaluing since 2014 ,and this devaluation is due to capital flight. Because there is more supply of RMB than demand, the markets are pressuring the RMB to a lower value. This pressure is huge. Although a bit outdated, this article from Zero Hedge  accurately shows Beijing’s dilemma. On one hand, Beijing is facing the impossible trinity. On the other hand,  the United States is showing an unwillingness, as they should, to absorb China’s domestic imbalances.  This cannot happen forever. In fact, it could, at best, only last another year before China runs the risk of losing all foreign exchange reserves. The value of the RMB is going to be a political struggle, and I am keeping with my initial bet.


Future Implications

The Chinese growth model is ending. Domestic imbalances are causing an unstable increase in debt, and foreign nations are increasingly unwilling to absorb these imbalances.  What are the odds that the United States refusal to accept Chinese domestic imbalances are used to explain to the domestic Chinese population why the growth model has failed. With the current administration completely failing to reform by any serious metric, what are the odds that “foreign black hands” are used as a tool redirect domestic discontent?

The value of the RMB and geopolitics of an East Asian economic rebalancing looks to be the defining foreign policy test of the Trump administration.

Top 6 Chinese Stories from Rio 2016

After a few weeks of thinly veiled nationalism, another Olympics is in the books, and what an Olympics it was! From beginning to end, Rio 2016 didn’t disappoint.  The world reeled from fear of Zika. Olympic boxing cemented itself as a beacon of international corruption for a new generation. Phelps won, again- and again. Ryan Lochte did – well, I’m sure you know.

However, in all of the Olympic noise, it is easy to miss the trial, tribulation, and success of the world’s second largest economy- China. Fear not, dear reader for I am here to give you the top 6 Chinese stories from Rio 2016.  Grab a coffee – perhaps tea is more appropriate – and relax; the emotional spectrum from the Chinese Olympic camp is wide.


#6 – China’s First Gold via  张梦雪 (Zhang Mengxue)

China is obsessed with gold medals, so that is why Miss Zhang Mengxue’s gold medal, China’s first of Rio, starts our list at number six. It is hard for those outside of Chinese to appreciate China’s lust for gold medals, only gold medals. Chinese celebrities of all types were out in force this year to tell their country to appreciate silver and bronze medalists. Here is internet superstar Papi Jiang on the topic:


She goes as far as to say that non medalist *insert gasp* deserve praise and national appreciation. However, a collective 1.37 billion sighs of relief reverberated through China when the first gold medal was captured. There were two additional bonuses. First, miss Zhang was not expected to medal, which created a perfect narrative for the success hungry country. Second and most importantly came this picture quickly turned meme:

“你再说一句试试” roughly translates to “I dare you to speak.” For giving China the first gold and creating an iconic photo miss Zhang comes in at number 6 on our list.

#5 – Drugs, disappointment, common cold, and Sun Yang (孙杨)

Sun Yang is a freestyle swimming specialist. He is well known for his Olympic record in the 400 meter freestyle and his world record in the 1500 meter freestyle. He’s also known for a few other things: allegedly harassing female swimmers, referring to himself as ‘the King,’ and testing positive for a banned substance, Trimetazidine.

Sun Yang, despite all of the negative stories (facts?), is a national treasure in China, and his picture is everywhere. This Olympics changed Sun Yang from a national treasure to a symbol of nationalism, violent nationalism, and it starts from our friends-turned- enemies-down south. Of course, I am talking about Australia.

Mack Horton is an Australian swimmer. He is also a swimmer that doesn’t appreciate competing against those who test positive for banned substances. Horton was asked how he felt about doping violators Sun Yang and South Korean Park Tae-Hwan competing at the Games, and responded: “I don’t have time or respect for drug cheats.”

This prompted an entirely reasonable, well articulated series of points from the Global Times (it is worth a read).  To be against Sun was to be distinctly anti-China. What was surprising to some was the scope and ferocity to which this notion caught on in China. Mack Horton is a racist who hates Chinese people; in fact, Australians in general are second class. This is NOT an uncommon opinion.

Mack Horton is now among the most hated men in China. In fact, I cannot think of a more disliked person.

Sun Yang, ‘the king’ of the 1500 meter freestyle, came down with a cold. So after he lost in the 400 meter to Mack Horton and cried, he didn’t make the 1500 meter finals, his best race.

Sun’s disappointing medal haul,  ESPN headlines with Mack Horton, and disturbingly nationalistic support grant him the number 5 spot in our list.


Frankly, this was a disappointing Olympics for China. In the 2008 Beijing Olympics, China dominated the gold medal count collecting 51 golds. China went from topping the medal count in 2008 to placing second in medals in London 2012. Not only did China lose the overall medal count in London, they collected 8 less of the extremely coveted medals than the United States.

How was China’s medal count in Rio? China earned 26 gold medals, almost half of their 2008 performance. This puts them third in the medal column behind Great Britain with its whopping population of 61,000,000.

Here is China’s medal count over time.


With friction in the South China sea, a slowing economy, political contradictions, and a war of words with Olympians from other countries, China needed a win. The situation was prime for China to show up in Rio and shut the world up.  The numbers simply did not meet national expectation.

This is a good place to talk about my biggest personal disappointment:

Zhang Guowei

Zhang is my favorite Chinese Olympian. He might be my favorite Olympian of any country. I had the pleasure to watch him place second in the 2015 high jump world championship here in Beijing. The crowd in the Bird’s Nest only had eyes for him. No one could compete with the showmanship of Zhang. Don’t buy the hype? Watch these gifs and try not to smile. I dare you.


He placed 2nd in the world championship in 2015 and only qualified in the top 25 in Rio. He was a favorite to medal. I hope he has continued success in the future.

#3 – The Proposal

This one might be too easy as it instantly attracted international headlines, but it is worth mentioning. No. It is above mentioning; it is worth the number three spot on our list.

He Zi (何姿) was minding her own business, collecting a silver medal for the three meter spring board, when Qin Kai ( 秦凯), a bronze medalist, proposed to her.



The proposal on the medal stand ensured plenty of cameras were around to grab pictures.

As an aside, it is nice to see such a simple and human moment at the Olympics. It is very easy to think of these young adults or kids as symbols of countries, people to pin national hopes on. What a beautiful way to remember the true scope of it all.

#2 –  Fu Yuanhui (傅园慧)

I really struggled with the top two stories. However, every story can’t be a top story, so that is why the incredible Fu Yuanhui is gifted our number two spot. Let’s start with a picture. Can you guess which is her?

It is sometimes easy to forget that China is a communist country. Official statements from the government have their own dialect- 客套话。 客套话 is the bureaucratic, robot like language of China, and it is often devoid of any meaning. That is why the smiling and unfettered emotion of one woman, Fu Yuanhui, took China by storm.

It all started with an interview.  The link I provided shows her interview and some basic translations, and it will make your day better. This interview is iconic. Her reaction is now a meme for online marketing everywhere.

Wechat (微信), the popular communication app in China, has a series of emoji’s for her.


Countless companies now use her reaction as a marketing tool. Don’t believe me?

Her reactions are on Wechat. Her reactions are advertisements for private equity. Her reactions are EVERYWHERE. As another aside 12.5 gives me a different emotional response: incredulous disbelief.

“So, the number two story goes to a woman with an adorable interview? Got it. Seems straight forward.” Oh no, imaginary viewer used to advance my story line, that’s not all.

She admitted she swam while on her period. Many people rightfully applaud her confidence to talk about the taboo topic. Even more Chinese men probably responded with, “hey, what is that anyway?”

Sexual education in China is growing, but is largely- um, what’s a nice way to say this- nonexistent. From banning dating in schools to wide spread misconceptions about health, sexual education, or even basic anatomy knowledge, sexual education is lacking. For Fu Yuanhui to compete while on her period and then openly discuss it is courageous. To do it as a Chinese woman in the public eye is paving roads.

For her iconic interview, wide smile, entertaining medal ceremonies, and not shying about female anatomy to a country that so often does, Fu Yuanhui, the Chinese swimmer who is now a social media darling, earns the number two spot on our list.

#1 – Volleyball

First, congratulations for making it this far. Second, here is a brain busting thought exercise: what Olympic sports other than swimming does China typically excel at? I’ll give you a few minutes to get a pen or perhaps call Alex Trebek.

Ok, what did you come up with?  Ping Pong? Badminton? These are sports that western countries are more likely to call ‘sport-like-event-that-is-not-really-a-full-fledged-sport.’  There is indeed a stereotype of Asian countries excelling at repetitive sports, diving and swimming for example. The stereotype extends to sports with small playing balls. Chinese people know this stereotype. They know it well.


“In China, ” Zheng Wang, author of Never Forget National Humiliation writes, “history is religion.” Xi Jinping has outlined, in an unbelievably vague way mind you, the Chinese dream. It is a dream based on ‘rejuvenation.’ China is obsessed with its history, and it largely based on two ideas. First, China is the oldest and greatest civilization in the world. Second, for more than one hundred years, China suffered national humiliation and was figuratively and literally raped by imperialism.

Currently, the communist party’s source of legitimacy is rejuvenating the country to its former and rightful place atop the world, a world which has done everything it can to hurt China. Zheng Wang’s book has an entire chapter devoted to Olympic politics. In 1959, a table tennis player named Rang Guotuan became the country’s first world champion in any sport. Mao Zedong praised the victory as a ‘spiritual nuclear weapon.’

Their history and national identity involves being a professional victim on the way to regain former glory. Silver medals are nothing. We want gold. We want gold in everything. China was the pinnacle of civilization. Of course we should receive gold in every sport.

It is this concept that is key to understand why the Chinese women’s volleyball team deserves the number one spot on our list: nationalism and national identities.

China beat the world at a sport it wasn’t ‘supposed’ to win. China is good at sports with small playing balls.  Volleyball has a large playing ball. So how in the face of dwindling medal counts did China further it’s national identity?   Winning at a new sport. Being the best at a sport that breaks a stereotype. Moving from humiliation to mythical greatness.


For their highly publicized win and for helping rejuvenate China, the Chinese women’s volleyball team and their gold medal deserves the number one spot on our list.

The Future of Global Institutions

International arbitration at The Hague recently ruled against China’s south sea claims. In other news, I’ve decided to issue a ruling against my neighbors for their encroaching garbage system- system is a generous word to describe a trash pile outside your front door. I have yet to decide the exact pecuniary punishment or how it will be enforced.

Does anyone really care about what the International Court of Justice has to say? I, for one, certainly do not.  Did anyone at any point in time think that The Hague ruling would resolve the situation?

*Persons who answered in the affirmative are highly encouraged to email the writer what hallucinogens they take.

The biggest result of the ruling has been to increase nationalism and establish an ‘us versus them’ dialogue in China. I just can’t help but think that it all feels so 1930’s.


(中国一点都不能少: This is China, not one bit less)

In no way is globalization ending or receding, however it is worth considering the efficiency of our current global institutions which were built after WWII.  For example, the World Trade Organization is far from useless, but the WTO is increasingly taking a back seat to bilateral and multilateral trade deals.  Whether it is the political boxing that has characterized the TPP or China’s freeze on Philippine bananas, current global institutions seem unfit and too archaic to be a place to resolve disputes for countries that need it most.


If these facilities cannot resolve disputes, what good are they? Furthermore, these institutions hardly seem able to enforce global standards. Even writing the phrase ‘global standards’ feels disingenuous.

So what we are left with is individual countries pursuing common ambitions via closed door policy making.  It is all extremely reminiscent of The Great Game.  Which country isn’t ‘pivoting’ to Asia now?  Even Asian countries are pivoting towards Asia. Which Asian country isn’t trying to create the new silk road?  Perhaps more poignant to my topic today, which pivoting country is using post WWII global institutions to further their goals? We have to look no further than China’s Asian Infrastructure Investment Bank to get an answer. Globalization’s frontier is working bilaterally or creating new institutions.

We, a rather ambiguous term for the world, have already done this. It was not long ago that globalization’s frontier; then defined as North America, Europe, and Japan; was characterized by extreme nationalism, increasing international capital flows, and no official channels in which to resolve disputes. So it should be no surprise to see the same nationalism and economic conflict rising in the new frontier.

In the same way that emerging countries that have defaulted on their debt repayment obligations in the past are more likely to default again in the future than are non-defaulters, globalization’s frontier players (emerging countries) are less likely to use post WWII global institutions. In short, global institutions on the frontier are not wanted and toothless. This is why The Hague’s ruling is so eye roll inducing.

It took two world wars and economic collapse to create our current institutions, but now their rulings seem like a grandfather scolding an inattentive pre-teen.  He is just too old. He just doesn’t get me. 

Worse yet, global institutions have done an incredibly poor job at predicting the future and aligning expectations with the public. Looking at political frustration in developed countries or economic stagnation in developing ones, it’s easy to understand an unwillingness to play via old rules.

The lack of organization is disconcerting.  It all feels so 1930’s.