Presidential Candidates Don’t Need to Hire China Specialists

About two weeks ago, Dr. Josh Dorfman published the following post on LinkedIn:

Dear presidential candidates: You cannot ignore China! Do you disagree with our current strategy? All of it? Are you sure? You need to be sure. Because I haven’t heard much about it from any of you. It’s sort of like you don’t understand how much the US-China relationship will shape the coming decades. Seriously. A lot. Please, please hire China advisers that value evidence over ideology. Yes, like me. And many much better than me, like Shaun Rein, Jessica Beinecke, Kaiser Kuo, Eric Olander 欧瑞克, Bill Bishop, Dan Harris, Samm Sacks, John Pabon, Benjamin Shobert, Paul S. Triolo, Damien Ma. And I’d be happy to recommend many others. You can’t afford to get China wrong. Seriously. Let us help you. Our proud nation will be forever grateful. Kindest regards, An honest-to-goodness American

Josh Dorfman LinkedIn

Dan Harris disagreed on China Law Blog.

After much thought, I believe Dr. Dorfman’s well-intentioned post about national strategy is misplaced.

Coming decades will be shaped by a clear sense of American values and commitments to the region, situating China within a broader Asia policy. I look forward to hearing candidate alternatives to America First, not who they’re hiring for China.To this end, presidents and presidential candidates would be wrong to prioritize recruiting China specialists.

The Obama administration should be credited for the US Pivot to Asia, which prioritized rebalancing Pentagon resources to Asia. Administration success in resource allocation obfuscated deficiencies in strategy. What was the goal of the pivot? Was China a competitor? Ask John Kerry, Ash Carter, and Susan Rice these questions and there would be three different answers.

The Trump administration has been clear: China is a competitor and we are entering an era of great power rivalry. Tools and resource allocation, however, has been lacking. East Asia policy is not confined to the Pentagon. Congress affirmed this in the recent NDAA (read this). Broader trade and diplomacy guidance (the State Department doesn’t have a permanent Assistant Secretary to East Asia) have been abandoned.

American presidents and presidential candidates should prioritize the administrative responsibility of determining American values and commitments to Asia at large, not China. Consider the ‘China problems’ of fair trade and military conflict in the South China Sea.

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American allies Japan, South Korea, and Taiwan are just as guilty as China for imbalanced and unfair trade. American approach to Chinese trade, based in national values, should mirror that of our allies.

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Presidents should not view Chinese militarization of the South China Sea as a China problem.

Presidents should gather allies and commit the nation’s resources to policy reflecting American values.

 

 

 

 

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Certainties From Tsinghua: $3 Lunch and Evidence Donald Trump Won’t Secure a Meaningful Trade Deal with China.

When I was a student at Tsinghua, I remember constantly complaining about the cafeteria food. In general, I struggled getting the amount of protein I needed, and a  lot of the food was oily. Picking which vegetables to eat was always difficult, because so many of them seemed to just soak in salty, oily brine.

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Campus has a number of cafeterias; this one was my favorite. Each floor has perhaps 10 stalls, and each stall on a floor is loosely affiliated with one style/region of food. This cafeteria was my favorite because the fourth floor is devoted to Sichuan cuisine.

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热饮冷饮 – Hot Beverages and Cold Beverages 西式面- Western Style Bread

Although I consistently fretted over protein and oily vegetables, the food was good and -perhaps most importantly- cheap. Here are examples of what I ate:

 

I spent an average of RMB 20 per meal (something akin to $3).  I’m certain that this is the best cafeteria food that one can buy for $3.

Tsinghua also taught me another certainty: Donald Trump is set for failure regarding the coming trade deal with China. Let me show you:

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Consumption-led growth. The decisive role of the market. Tsinghua has an amazing library. I was floored that there were so many books in foreign languages (the English selection is enormous).  I was also floored to see that many Chinese think-tank publications on economic reform were translated into English. I devoured them, nodding my head in agreement and proud at the tough policy recommendations they made: transfer state wealth to Chinese people in order to have a balanced economy.

The Chinese economic model is built upon transferring wealth from households, consumers, and savers to corporations, producers, and investors. This is best seen in China’s comically low household consumption rate.

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As China’s economic model has progressed, Chinese households have enjoyed an increasingly small share of the nation’s wealth. Corporations, both ‘private’ and state-owned, have enjoyed an increasingly large share of the nation’s wealth (as has the richest in China). This ‘problem’ has been on the Chinese government’s radar since at least 2007.

In 2007 Premier Wen Jiabo cautioned, “”the biggest problem with China’s economy is that the growth is unstable, unbalanced, uncoordinated, and unsustainable.” This prompted IMF economists to write, in 2007, about strategies to have consumers share a larger percentage of national wealth.

However, economic reform wasn’t planned until Chairman Xi Jinping took over in 2013. Economic reform plans were immediately organized:

1.) The market had been defined as a “basic” role in allocating resources since the country decided to build a socialist market economy in 1992. In 2013, The Communist Party of China defined the market’s role as “decisive” in allocating resources. This importance cannot be underestimated.

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It is common for state-owned enterprises to have pictures to pay homage to Chairman Xi in their lobby (Forgive the poor quality).

2.) On November 12, 2013 in the Third Plenary Session of the 18th CPC Central Committee, Chairman Xi said the following regarding China’s economic reform:

The key to establishing a sound socialist market economy lies in striking proper balance between the role of the government and that of the market, so that the market can play a decisive role in allocating resources and the government can play its own role more effectively… Letting the market play a decisive role in allocating resources will mainly require economic reforms, but it will also inevitable affect politics, culture, society, ecological progress, and Party building.

3.) On April 8, 2013 at the Boao Forum for Asia Annual Conference, Chairman Xi said the following regarding China’s economic reform:

We will continue to enhance the rule of law and actively improve our investment environment so that all enterprises can enjoy equal access to the factors of production, market competition, legal protection. The Chinese market can become fairer and even more attractive… China will never close it’s door to the outside world… We will open up new areas and enable deeper access… We firmly oppose protectionism in any form, and we are willing and ready to solve economic and trade differences with other countries through consultation.

4.) On May 26th, 2014 at the 15th Group Study Session of the Political Bureau of the 18th CPC Centeral Committee, Chairman Xi said the following regarding China’s economic reform:

We should reduce the government’s involvement in resource allocation and its direct interference in microeconomic activities. We should step up efforts to develop a uniform market system characterized by openness and orderly competition, and set fair, open, and transparent market rules.

Xi in Davos

5.) In 2017 at the World Economic Forum in Davos, Chairman Xi said the following regarding ‘free trade:’

Whether you like it or not, the global economy is the big ocean that you cannot escape from. Any attempt to cut off the flow of capital, technologies, products, industries, and people between economies, and channel the waters in the ocean back into isolated lakes and creeks, is simply not possible.

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These books which I vociferously read at Tsinghua are remnants, relics of this forgone economic reform. Chairman Xi’s economic reforms, as I have been writing about for the past two years, have been complete failure. China is backtracking on reform, encouraging state-backed growth, reducing competition, and exacerbating the economic slowdown already underway. According to Ruchir Sharma at Morgan Stanley Investment Management, it now takes $3 of debt to create a dollar of growth in China. In the face of economic reform failure, China is pumping debt into large state-backed corporates while the private sector is squeezed out.

A Chinese dictator tried to force reform. That reform failed.

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The United States is seeking the following changes in the Chinese economy: trade deficit reduction, IP protection, cease market distorting subsidies, end of cyber intrusions, and end technology transfer.

The idea that the United States would be able to force large, structural reform in China when a Chinese dictator could not is absolutely ridiculous. The idea that Beijing is unable to move on the US requests, most made 9 months or even years ago (IP Protection), and that another 60 days will be enough time for them, seems somehow more ridiculous.  The hubris of the United States position is overwhelming. The Xi speeches, the policy reports from think tanks, these are fossils of failure that the United States should heed.

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CNBC is also reporting that President Donald Trump said he will be discussing the criminal charges against Huawei with US attorneys and attorney general in the coming weeks. Is the United States judiciary no longer independent? If the United States accepts a trade deal that backs Chinese purchases of US goods to reduce the trade deficit, America is run by a spineless swamp with no sense of the lack of economic freedoms that put the US in this position to begin with.

The White House would do well to look at Chinese economic planning relics from 2013 or read Chairman Xi’s speeches.

Thanks for reading.

 

Huawei and A Bifurcated Tech Future

I thought more than I would like to admit about how I could fit the following phrase into this blog post:

It’s my way or the Huawei.

And with that off my chest, lets get to today’s topic: the near future of tech.

Any definition of emergent technology should include the following: information technology, robotics, green energy and vehicles, aerospace equipment, oceanic engineering, new materials, medicine, medical devices, agri-tech. Very conveniently, these are the sectors explicitly slated to gain state support in China under Made In China 2025.

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Crucial to emergent technology is infrastructure to move vast amounts of data and information. Only a few telecommunications companies are positioned to provide the complex solutions these new industries demand. 5G (telecommunication networks), mobile devices, and global services are necessary is securing the success of emergent technology.

Luckily for the world, China’s Huawei is positioned to provide such solutions.

The Pride of China

I studied Chinese at Tsinghua University. The view from my chair was that of a large blackboard. 20180403_113153

Note the camera on the top left. There was also a camera in the back of the room. 

Sitting to my left in one of my classes was a young Swiss man. On a Friday morning, he told his language partners that he was in the market for a new phone. On Monday morning he walked into class with a new Huawei phone. My teacher, a brilliant young graduate student at the neighboring Beijing Language University (北京语言大学), was floored.

“Why didn’t you buy an iPhone?” she asked.

He replied, “Huawei phones are much cheaper and just as good. I don’t like iOS anyway.”

“As a Chinese, I am so proud. Huawei is the pride of China,” She beamed.

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The ‘pride of China’ should be its food. This was a normal lunch at Tsinghua. It was delicious.

She was right. National champions, large companies that enjoy massive amounts of state subsidies and are protected from competition, are a distinct part of the national identity. Apple is not a competitor. Apple is America. Huawei is China.

Huawei is China

So lets expand on Huawei. Their Wikipedia page is absolutely fascinating:

Wiki capture

A warning about buzzwords and advertising? The following quote is worth thinking about. From Huawei’s Wikipedia:

Although successful internationally, Huawei has faced difficulties in some markets, due to allegations – particularly from the United States government – that its telecom infrastructure equipment may contain backdoors that could enable unauthorised surveillance by the Chinese government and the People’s Liberation Army (citing, in particular, its founder having previously worked for the Army).

Huawei has faced difficulties in some markets, due to allegations- particularly from the United States government. Does this hold water? Let me list some links.

Huawei blocked from bids in England.

Germany is drafting new rules for how to deal with Huawei.

Norway’s PST warns against Huawei.

The Czech Republic’s cyber security agency reports that Huawei is a national security threat. (This is particularly worth following because China has invested heavily into the Czech Republic, and Huawei has had a contract to fulfill the communication needs of the president and his staff for the past four years.)

Lithuanian intelligence reports that Huawei is an intelligence arm of China.

Rumors in Italy of banning Huawei from 5G infrastructure are ongoing.

Last month in Poland, a Huawei employee was arrested as spy for China. Huawei has responded by offering to build a cyber security center in Poland.

FBI raids Huawei’s San Diego Office.

It is certainly true that the United States was early in its concern of Chinese (Huawei) infrastructure investments. However, to say now that concern is solely or mostly propagated by America is dishonest.

Bifurcated Tech

I said something to this point relatively recently on China Unscripted (episode 20): there is a growing Cold War between China and America. That Cold War is not being waged in proxy wars or through arms races. The new Cold War is being waged through a race to emergent tech, economics, and business access.

The truth about Huawei is pretty simple. If the new Cold War is being fought in emergent tech, Huawei is going to play a key role. It is an arm of the Chinese Communist Party.

Huawei Capture

Examples of communist control include the following:

1.) Huawei has a party secretary. Party control of Huawei is explicit. Its in their Wikipedia page.

2.) Huawei enjoys lending at the direction of Central Huijin.

3.) Huawei enjoys price setting and input discounts from the NDRC.

Given these facts, it is almost intuitive that Developed countries decouple from Huawei and Chinese tech in general. What we are witnessing across Europe, North America, and Australia is decoupling at a time when Africa, South East Asia, Russia, and the Middle East are increasingly embracing Chinese tech. We are witnessing a technological divide. With that tech divide, we are seeing a divergence in public opinion and thought.

Consider Chairman Xi’s recent trip to visit the new media operation of People’s Daily, the party’s mouthpiece. He spoke at length on the importance of “boosting integrated media development and amplifying the mainstream voice” in public communication. Mainstream voice indeed.  The mainstream voice seems to be Xi’s way or the Huawei.

(Nailed it).

Thanks for reading.

 

 

What Caused The Great Recession

Savings, Investment, and My Worldview

Riemann Surfaces are pretty neat. Frankly speaking, anything with complex numbers – sometimes referred to as imaginary numbers- is just cool. I think there is just something intrinsically pleasing when they are modeled.

riemann surfaceCool, right?

Economics, like Math, has many tools . This blog has tended to use one or two tools when addressing China and Chinese trade policy. The most noteworthy of which is the following:

(M – X)   =   (I – S) +   (G – T)

Don’t panic. The function above states that a trade deficit (imports-M- less exports-X) is equal to the savings deficit (investment-I- less saving-S) plus the government’s fiscal deficit (government spending-G- less its tax revenue-T).

This blog has consistently talked about policies that influence national investment, savings, and consumption rates, because that is a key tool for how I understand China. Consider the picture below:

jinanxi station

My first corporate training with DuPont Pioneer actually took place in Shandong Province.  I took a bullet train from Beijing to Jinan (Google Maps link) to train Pioneer staff. The picture above is one of Jinan’s railway stations. I was awestruck by how large it was. I was awestruck by how empty it was.

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In China you return tickets to your company in order to get reimbursed for travel expenses. I wish I could have kept all of my train tickets. Thanks to DuPont for the first class travel.

One could look at the empty infrastructure in Jinan and see wasted money (NY Times link – Good read), but I believe a better mental exercise is to determine what it says about the relative power of different parts of the economy. China and its state banks deploy large swaths of capital to local infrastructure projects, so China’s investment rates are quite high. Investment rates are so high because of a set of policies that force money from savers and consumers to investors and producers: environmental degradation, artificially low interest rates, tariffs, and state owned enterprises – to include banks. This means that Chinese people receive a smaller portion of GDP so household consumption is low and savings are high. If there are 4 sectors to an economy- normal households, wealthy households, businesses, and governments- we can observe the ratios of investment, savings, and consumption to paint a story about who is benefiting in a given economy.

This ratio of investment and savings also fits into trade. I have previously written about how domestic policies – like tariffs – affect the balance of investment and savings in an economy and can impact foreign trading partners. This reasoning- domestic imbalances leading to foreign trade friction- has been a theme of my blog. It greatly contributes to my worldview.

Tsinghua University and What Caused The Great Recession

pierce at tsinghua

I was blessed to study at Tsinghua University (清华大学). At Tsinghua I, unsurprisingly, found myself attending meetings with the Tsinghua Economics Club. It was there that I inevitably talked to my Chinese peers about the real economy and how China’s domestic imbalances affected America. China, I contended, was unfair.

My thoughts were met with poignant questions: is there a link between the real economy, trade imbalances, and East Asian capital account surpluses with America’s financial stress and the Great Recession?

I found the answer from BIS, the Bank for International Settlements. Consider the following pictures that show trade flows and banking flows.

china banking flowschina trade flows

What imploded in 2007-2008 were not Sino-American financial relations, but the interlocking claims between American and European banks. I’ve written about this previously. My favorite math, my worldview based on investment and savings rates, was lacking when confronted by questions at Tsinghua.

gross capital flows Discussions at Tsinghua taught me that gross capital account flows matter. They matter a lot. In 2007-2008 Europe’s banks were at least if not more dangerous than their American counterparts. They straddled three giant credit bubbles: in the US, in the hot spots of the Eurozone, and in Eastern Europe. Their leverage was enormous, their capital laughably thin, and unlike their US counterparts they had considerable currency mismatch on their balance sheets. They needed to raise dollars to hold huge portfolios of America subprime. Their primary home funding sources were in European currencies.

european leverage

European banks went to great lengths to underwrite mortgage backed securities. Did you know that from 1997 to 2007 it was not an American bank that was the top underwriter for MBSs?

underwriters of mbs

Furthermore, we can clearly observe European banks changing safe assets to short-term, speculative assets in a different currency.

european changing investment

When emerging markets like China acquired US safe assets, they crowded out other investors and created the opportunity for private financial engineers to launch the securitization boom. The industry generated a new, private source of safe assets. European banks bought into short term gross flows (both in and out) while comically leveraged. In fact, the earliest sign of coming collapse was Paribas’s announcement in 2007 that it was closing its US real estate funds, for lack of liquidity in the market. Following as it did on the difficulties of several smaller German banks, one might think of this as a moment of European crisis.

So, again, what caused the Great Recession? It is worth repeating. Emerging markets like China acquired US safe assets, crowding out other investors and creating the opportunity for financial engineers to launch the securitization boom. The industry generated a new, private source of safe assets. European banks poured money into America to shuffle assets into MBSs. A European banking glut was a crucial – if not the crucial- driver.

There exists different rule sets for different economic segments. In 2008 central bank liquidity swap lines were deployed within a familiar trans-Atlantic frame. The swap lines still mapped the contours of the cold war and world war II. On the new frontier of the global economy none of that soft tissue is present- Russia, India, and China still have no swap lines. Rule set mismatches are always friction points. I see less-and-less global savings-glut imbalances, while I increasingly see global rule set imbalances. I am pessimistic about our ability to resolve these discrepancies.

BIS study links (all worth reading):

Tracking the International Footprint of Global Firms

Global imbalances and the financial crisis: link or no link?

A key currency view of global imbalances

My favorite studies on the Banking Glut:

Global Banking Glut and Loan Risk Premium

ABS Inflows to the United States and the Global Financial Crisis

 

Chinese Propaganda Insights

The key take away from Chinese propaganda is, rather intuitively, in the messages propagated. This blog post examines the four most common themes: communist party events, morality, prosperity, and Chairman Xi Jinping.

Honestly, I have an unhealthy fascination with Chinese propaganda due to two reasons. First, most foreigners don’t speak Chinese and are unable to differentiate propaganda from normal marketing advertisements.  Second, propaganda in China is everywhere. Let’s look at a few examples.

In 2017 I lived east of Beijing proper in the Tongzhou District (Google maps link). This blog post’s photos were taken in Beijing around that time.

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The picture above is an average street in Tongzhou and is indicative of how most tier two cities appear. The posters covering the walls are separate propaganda pieces. How many propaganda posters can you count? This scene, streets lined with propaganda, is a common occurrence in China, and mass volume of propaganda isn’t limited to print. Electronic billboards are used in the center of the city to spread propaganda messages. Note the dozen red backed electronic billboards below (also note the air pollution).

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Some propaganda is used to herald Communist Party events. The above signs reads, “喜迎十九大 创造新辉煌” or “Happily greet the 19th Party Congress. Bring about new glory.”  Perhaps what is most impressive about Chinese propaganda is how much the size of medium being used varies to fit into available public space. Propaganda posters are often posted on walls and are the size of standard movie posters found in theaters across the world. Walled off construction sites present a larger space to fill.

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中国梦 安全梦 抓好安全生产 建好‘北京城市副中心

Chinese dream – Peaceful dream – Successfully create safety – Build Beijing

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中华圆梦 万马奔腾 – Realizing China’s Dream – Full steam ahead

These large posters, again usually lining the walls of construction sites, have always been the most fascinating. This medium has the most room and is much more likely to advertise morality. The left most piece of propaganda in the picture above lists the 12 Socialist Core Values, a topic I will discuss later.

 

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诚信经营 讲诚信有良心

Operate honestly, Speak the truth and be good-hearted

The large, perhaps 18 foot, poster above is fascinating. The moral message is simple: be honest. The bowling ball is labeled “honesty.” The bowling pins are labeled foreign trade scams, pyramid schemes, illegal advertising, fakes, and illegal fund raising.

I would be remiss if I didn’t mention the 12 Socialist Core Values (Wikipedia link). The values include prosperity, democracy, civility, harmony, freedom, equality, justice, rule of law, patriotism, dedication, integrity, and friendship. The poster below has three separate advertisements, all of which list the 12 Socialist Core Values, i.e the characters of the three posters are exactly the same.

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In the above photo, again on a large 18ft wall, we can see two propaganda pieces. The left piece lists the Socialist Core Values. The right piece is hard to see clearly. I can clearly infer the characters “邻里守望” or “community watch” across the top. One has to admire fitting a message of morality and call to action for the communist party so casually into daily life.

20170412_08300520170412_083009Most Chinese propaganda isn’t explicitly violent. In fact, the most common message or repeated noun I see is “safety” or “安全” in Chinese. The key to safety, always implicitly, is communist party guidance. The ICBM and dove images above are painted on a community wall. The wall depicts China’s advancements in flight technology, starting at the kite and ending in satellites. These types of images, again, are not common. On a side note, police were called when a Chinese man saw me taking photos of this wall. Community watch indeed.

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The last propaganda that I will outline today is Chairman Xi Jinping propaganda. It is constant.  The red banner above reads, “紧密团结在以习近平同志为核心的党中央周围不断开创中国特色社会主义事业新时” or “Closely unite around the Party Central Committee with Comrade Xi Jinping as the core and continue to pioneer socialism with Chinese characteristics in the new era.” The Chinese digital landscape is absolutely saturated in quotes extolling Chairman Xi. Here are three news sources that I searched today. I have highlighted the Chairman Xi Jinping news section in green. It is always the top section extolling the same qualities and prowess.

I’m constantly amazed at Chairman Xi propaganda that borders on idol worship:

Xi

今年我和习近平握过手  This year I shook hands with Xi Jinping

Before closing, I think it is important to point out that much of the propaganda above is focused on legitimizing the communist party and creating a narrative of national success and optimism. China, through the lens of its propaganda, is unstoppable. It is wholly responsible for all economic prosperity and safety. It is a path, a legacy to be fulfilled. Legacy is not built upon change. Propaganda posters with red heroes stoically facing challenges does not hearken to a government capable of addressing 21st century challenges.  As China enters a new era of change, these propaganda posters and the legacy they claim looms large in my mind.

Thanks for reading.