When I started this blog one year ago, I was at the time working on several projects related to China’s growing influence in global affairs, as well as Chinese relations with the United States.  I sought a place to gather my thoughts and a forum for my research and ideas.  In the course of developing China Redux, I found these things, and much more. 

This will be the final post on China Redux.  Simply put, I have come to realize that I am no longer able to set aside the time required to consistently create good posts.

I want to thank the site’s readers, especially those of you who contributed with comments, emails, and links.  I learned a tremendous amount from you, and from the many outstanding bloggers writing in and about China.  You have challenged me to strengthen my ideas and ways of thinking about these issues.

This has been a tremendously rewarding experience for me.  China Redux has provided countless opportunities to continue learning about China. Blogging has taught me a great deal about being a publisher.  In the process, I have learned a lot about myself, as well.  My hope is that this blog has played a positive role in increasing understanding of China’s role in the 21st century.

If you have any final feedback or just want to stay in touch, drop me a line. Thanks again to all of you who have supported me.

Regards,

Ben Landy

The NYT reports on Defense Secretary Gates’ trip to China, where he is fighting an uphill battle to convince China that it is the rightful inheritor of America’s Wilsonian views on collective security in a multi-polar world. “China’s increasing political and economic stature calls for this country to take on a greater share of responsibility for the health and success of the international system,” he said.

This of course depends on an underlying faith and belief in the rightness of the international system. Gates, along with a host of other administration diplomats (including John Negroponte and Robert Zoellick), have been seeking to demonstrate through empirical means that China needs a healthy and successful international system as much as it needs them.

But does it? Or is it that the U.S. needs China to need the international system, more than it really does?

In the long-term, as China’s share of global production increases, will it rely more or less on the international system to achieve its national goals? Perhaps this question, more than other, will impact the way our world looks in the future.

“Far, far worse things can happen than for China to come to the west bearing the chequebook it has earned by its people’s remarkable efforts.” This observation, which concludes Martin Wolf’s recent column on sovereign wealth funds (SWFs), seems rather obvious.  The real question is whether there could be anything better for the U.S. After all, China continues to buy dollars even as the value of its greenbacks falls; now the Chinese government is planning to take its excess savings – more than $200 billion worth – and invest it back into the U.S and elsewhere!  That sounds like a heck of a deal for the west to me.

Wolf and others focus on the policy problems posed by these big investment funds, which are run by cash-rich governments as diverse as China, Norway and Russia.  SWF investments certainly may raise thorny issues around corporate governance and national security, but my view is that these things will be worked out in a (mostly) sensible way.  Some deals with go through and some will not, and for good reason.

One input which has not been duly considered is that of the Chinese public, i.e. the real owner of this sovereign wealth.  What does it think should be done with the money? Does the Chinese government, and other governments for that matter, have an obligation to secure a higher rate of return? If so, what is it, and how should they go about it?

I wonder what China’s poorer denizens think about the creation of this fund, named the CIC (China Investment Corporation).  Perhaps they think the savings would be better used to invest in domestic education, health, environmental or other needs.  After all, in a Communist-run country, it would seem hard to justify chasing after an 8 percent or 14 percent or XX return while comrades are going hungry.  Of course, they hardly have a voice in the matter.

One thing is certain: China’s citizens would not likely respond well to losses incurred by the SWF.

The social and political risk China is taking in setting up the fund could hold clues as to how its plans to manage the portfolio.  Investments in Chinese businesses would be a political plus, and indeed, it appears that the CIC has already committed some funds to domestic firms.  And I wouldn’t expect anything too risky.  But that depends on the extent to which China’s wealth funds open their books.  Early indications are that portfolio holdings will not be very transparent; in such a case portfolio managers would answer to the Party, but not the public.

That, of course, would be bad news for everybody.

Chris at Eyes East sees a nascent space race to get back on the moon emerging between the U.S. and China.  Personally, I’m not sure it really matters — that is, who gets back first.  The moon is old-hat, even though it would still be a positive symbolic achievement for China.  What’s more interesting is to see the way the moon race is being manipulated in the U.S. for political gain. 

It’s part of an annoying and, some might say, virulent trend that has turned China into the bogeyman of 21st century American life.

The hallmark of the bogeyman is that it is normally pops up when a special interest must be fed.  To return to the example of space:Need a rationale for promoting investment in aerospace? Cite China’s recent progress there (as Sen. Kay Bailey Hutchinson did a few weeks back in the Houston Chronicle – h/t Eyes East).  Think the American education system is challenged? China churns out a lot of engineers. Sarbanes-Oxley too cumbersome? Not in China. Infrastructure crumbling in America’s cities? China is sure spending a lot to build its roads and airports.  The list goes on and on; I could literally spend the whole day thinking of examples and finding substantiation on the web, and not get them all. 

That is not to say that these interests are not valuable; in fact, some if not all represent genuine challenges and needs faced by the U.S.  For example, I personally do believe the U.S. should invest more in updating its public infrastructure.

On the other hand, it must be emphasized that evaluating this issue has little or nothing to do with the relative state of China’s infrastructure. It just doesn’t tell me about the marginal value here in the U.S.

I have probably been guilty of this in past.  These false comparisons should stop. They are cheap tricks that perpetuate and reinforce the idea of competition and rivalry between the U.S. and China.

The moon is just not worth fighting over.

In Sudan, the FT reports that China will provide the al-Bashir government with a new loan for $200 million, which will constitute two-thirds of a planned Sudanese compensation payment to the war-devastated region of Darfur (full text here):

If the loan from China is provided specifically for compensation, it would mark a significant departure for a country whose financial support to African countries is normally provided for trade and infrastructure projects.

Significant departure, indeed. It seems to me that characterizing Chinese aid to Africa as earmarked for “trade and infrastructure projects” is a generous description. For example, providing an interest-free loan to build a new presidential palace in Sudan would hardly seem to count as either trade or infrastructure.   No matter; China’s growth projects in Africa start to look a lot better in light of a peace-facilitating, stabilizing loans such as this one.  Kudos to China for stepping up to the plate. 

Still, we should not rush to give too much credit.  This affair has the air of the sinner purchasing an indulgence.  China is making a concerted (some would say obvious) effort to buy its way into the good graces of the international community, especially in light of activist attacks in the lead up to the Beijing Olympics. It’s a good strategy for China and one that’s likely to be effective, at least in the short run.

That doesn’t mean it’s enough.  If I was a rebel group, knowing what China’s offering, I’d negotiate for a whole lot more than what’s on the table.  The same goes for the international community, which needs to raise expectations for China’s behavior rather than being thrilled when it changes its course. That sort of tough negotiation won’t be popular or easy.   But it’s the best way to ensure that China’s recent promises in Sudan and elsewhere become lasting committments.

Interesting report in the Washington Post today disclosing that China is supplying Iraqi police forces with $100 million in light military equipment (click here for full text).  It seems China has stepped in to fill a gap caused by America’s inability to produce/deliver fast enough to meet Iraqi demand for weapons and other materiel.

U.S. Defense Secretary Gates said this worries him only for the reason that the U.S. has a harder time tracking non-American weapons than it does American ones.  So, for example, when weapons are confiscated from enemy hands, it’s harder to trace their origins.

Gates also claimed he didn’t particulary mind that the country Iraq turned to for more weapons was China.  That’s a cool comment by an experienced Cold Warrior; Gates knows it’s not worth blowing up this one arms sale into something bigger than it really is. 

That’s what blogs like this are for.  Are you serious? China is not jumping into Iraq with a massive weapon sale. Talk about gaining a seat at the table in a hurry! The United States already has Iran, Syria, Turkey among others, to contend with in Iraq; now it has China has well.  And China, unlike some others, has the money and production capacity to make a difference.

Looking beyond Iraq, China has been less than scrupulous in the past with its arms sales. What will it do in the future? Selling to the Iraqi government is a no-brainer. But where will all the weapons go when China has a surplus of weapons?

I wonder for how long this sale has been in the works.  It makes for an interesting coincidence that just two weeks ago, the Pentagon announced plans to sell $2 billion worth of advanced weapons to Taiwan (via NYT here).  China reacted very unfavorably to the announcement.  Now it’s entering Iraq with a newsworthy weapons sale.

Seeing as I’m currently taking business economics, statistics, etc., it seems only right to start back with a post on U.S. monetary policy and how it is affecting the U.S.-Sino relationship. I’m a beginner at this, but will give it my best shot.

As you know, last week the Federal Reserve cut the Fed funds rate by 50 basis points, to 4.75%. The move was unexpected — observers expected a cut half that size, or none at all, but very few saw this coming. China, in particular, must have felt like it was blind-sided.First, China’s central bankers and politicians are surely gritting their teeth as they watch the value of their $1 trillion+ investment in U.S. treasuries slowly evaporate. Then their is the delicate subject of the Chinese currency, the yuan, which has already appreciated by about 10 percent against the dollar over the past two years, and is likely to continue to strengthen in the face of a falling dollar. That helps make Chinese exports less attractive, while U.S. goods are becoming a better buy in China and the rest of the world. All in all, China can’t be happy.

I was interested in learning how the Fed’s decision might go beyond the current credit crisis, so I went back and found Ben Bernanke’s speech on September 11, 2007, roughly two weeks before the big rate cut, entitled “Global Imbalances: Recent Developments and Prospects.”  In this speech, the Fed chief updates an earlier argument from 2005 on the cause of global economic imbalances, and makes the case that responsibility for correcting this imbalance in no small part lies with China (and other developing economies). Here are some key excerpts (emphasis mine):

The increase in the Chinese surplus can be attributed primarily to an increase in the saving rate between 2004 and 2006. The increase in China’s saving rate could, in part, be a consequence of the rapid pace of growth in the country. That is, with income growing very rapidly, but with consumer credit not readily available and precautionary motives for saving remaining strong, consumption is failing to catch up. Also contributing to high saving rates was the authorities’ decision to limit currency appreciation, thereby restraining import demand and boosting exports….

… As the global perspective makes clear, the reduction of the U.S. current account deficit also requires efforts on the part of the surplus countries to reduce the excess of their desired saving over desired investment. Over the longer term, the current account surpluses of the emerging-market countries seem likely to narrow as domestic spending catches up with income. Economic policies in these countries can assist this process. For example, the oil exporters have collectively saved much of the windfall arising from higher crude prices in recent years; they should spend more in the future to develop and diversify their domestic economies. China has officially recognized the need to increase its domestic spending and scale back its reliance on exports. Measures that could help achieve these goals include further reforms of the financial sector; increased government spending on infrastructure, environmental improvement, and the social safety net; and currency appreciation. [click for full text]

One could take this be a nicer way of saying that the U.S. account deficit is China’s doing. It’s the policies of developing countries that are driving this savings glut, not America’s excessive spending. And so it’s China’s responsibility to work towards a solution.

One of the convenient things about this formulation is that there is a solid bipartisan political consensus behind it. Republicans and Democrats alike blame China for the deficit (among other things), though they have slightly different ways of rectifying the situation. The Bush Administration has always seemed to feel that the yuan’s weakness was unfairly harming its economic record. Of course, the displeasure on the Republican side is matched if not surpassed by indignation from Congressional Democrats, who have made an unseemly habit of threatening China with punitive trade measures.

So it’s worth noting that the Fed’s thesis on global imbalances as stated above ties in with a major political dynamic at home; that is, frustration and agitation over China’s fiscal policy. Furthermore, the perception in the U.S. is that despite our most patient efforts to work out a political compromise on these issues, China refuses to budge.

The U.S. may hope, need, or expect China to make “efforts…to reduce the excess of their desired saving over desired investment.” But the efforts and measures that Bernanke cited in his speech are going nowhere. China isn’t going to move its currency any more than it already has.  Nobel Prize-winning economist Robert Mundell has been telling Chinese business leaders that it is time to stabilize the RMB against the dollar and study the results of the recent appreciation before moving forward with more changes (story via Xinhua). My guess is that China will listen.  In another key area, it’s apparent that opening up China’s financial sector is likely to be a long, hard slog. And I don’t think China has had too many reasons to stop buying U.S. debt.

But maybe things have changed, with the rate cut playing a big role in the new formula.  The Fed’s weak dollar policy would seem to do some correction work on its own, with or without China’s cooperation.  Don’t look now, but the U.S. trade deficit has been falling, albeit slowly.  Maybe the rate cut will spur China to diversify its currency holdings at a faster rate, and to increase domestic consumption.  Maybe U.S. exports will rise around the world as the weak dollar makes them more competitive.  Any combination here could have a lasting impact on the U.S. account deficit.

What do you think? How will the weakening dollar affect China and the global economy?

I’m back after a summer full of fun and adventure. I just recently started my first year at the University of Chicago Graduate School of Business. It’s a lot of fun to be back in school, and I think the next two years will be a blast.

During that time, I am hoping to blog daily. Given the demands of the program, we’ll see what happens.  I will try to my best!

I have not posted for a while now, and it is not for any lack of China-related news and developments. In the past few weeks we have seen mild success from the US-China Strategic Dialogue; China’s foray into private equity; the release of a new Pentagon report on the state of China’s military capabilities; China’s explanation of its military budget and intent, and much, much more. Sadly, I have been away from much of this.

I recently decided to attend graduate business school at the University of Chicago, beginning this fall. Between moving out of my home, leaving my job, getting ready for school, and preparing for a full slate of summer travels, I have not been able to keep up with the dizzying pace of China’s development. The volume and importance of China-related news seems to grow by leaps and bounds every day. I have fallen behind.

I am headed out on a couple overseas adventures this summer; the first begins this Thursday, June 7. So, I will be contributing to China Redux only intermittently over the next few months.

I plan to return at full speed in September. My thanks and apologies to all the loyal readers.

With its economy a complete disaster and nature’s bounty rapidly diminishing, Iran is studying Chinese growth with the hope of jumpstarting its own economy (and without opening up political processess).

The Journal’s story notes that Iran is very unlikely to succeed on export-growth because it is not a low-wage economy. So, while it still needs to diversify away from near-total dependence on energy revenues, the “Chinese model” isn’t going to cut it in Iran.

This story makes me think that there are truly two certainties these days:

1. All countries are chasing (lusting) after China’s high, sustained growth rate.

2. Anti-American governments are magnetically attracted to China.

This situation will likely persist for many years to come. How awkward!