Archive for the ‘Investment’ category

Keeping Our Eye on the Ball

March 2, 2010

There has been an increase in friction between the US and China in a number of areas.  As any reader of this blog (read:  hi mom!) would know, I am no China basher.  But I must say I place the weight of responsibility for the current situation on the Chinese side.  I think there are a complex set of factors driving Chinese behavior now, though I will save that discussion for another time.

The important thing for policymakers and observers now is to distinguish between bilateral issues where increased frictions are mainly rhetorical and those where there is a real substantive problem.  I put issues such as Taiwan arms sales and Tibet in the former category.  There seems to be hotter rhetoric from the Chinese side, but the fundamentals of the issues have not changed.

Bilateral economic relations are another matter however.  I am not talking about the RMB exchange rate issue, which I happen to think is worth only a small fraction of the time the US government spends on it.  This issue will continue to be the subject of much rhetoric and perhaps, unfortunately, concrete action on the US side (though I concur with observers who believe that China will allow the RMB to appreciate this year somewhat, based on their domestic concerns).

But the real story has to do with the Chinese view of the role of foreign companies in the Chinese economy:  Over the past few years the strong momentum behind the “reform and opening” policy in China has slowed.  This is not to say China is going backward toward a planned economy, but the voices in China most supportive of increased competition and openness as the way to fuel innovation and economic growth have been pushed into the background.  Instead, we have seen a surge in the voices of those who favor government intervention (aka industrial planning), as the way to propel China’s economic future.  This has been coupled with a noticeable rise in economic nationalism and increased influence for propaganda and security officials (who tend to be more suspicious of foreign influence than the average Chinese official).

Foreign tech firms have felt the brunt of these developments.  Under the rubric of promoting “indigenous innovation”, the Chinese government has undertaken numerous policies, in areas such as technical standards, government procurement, taxation, and M&A policy, to support local firms and disadvantage those from abroad.  Even non-tech firms have felt the sting of the changed environment, with some major foreign acquisitions of well-known Chinese firms in non-sensitive sectors foundering on the rocks of Chinese domestic political concerns.

But here’s the really significant part:  I’ve been involved in US-China relations for 25 years and I have seen commercial issues come and go even as major US companies remained excited about China and worked strenuously to avoid crazy actions by the US Congress and all administrations.  Over the past several months, for the first time, I have begun to hear some major firms express the view that their very future in the China market could be at risk.  They are not proposing to pull out of the market, which they still see as important.  However, their frustration level is so high that some are questioning whether the business community should sit on the sidelines the next time strong China legislation is moving on the Hill.  Such a “neutral” stance by major US companies could pave the way for some truly awful, anti-China legislation.

It’s not that there are any companies today demanding that their industry and trade associations stay out of the next major China legislation fight.  Nor is there anything close to a consensus on taking such action.  However, the fact that some major firms would even pose the question for discussion represents a striking shift in mood.  And of course, a decision by the business community to withdraw from its active efforts to prevent serious anti-China actions would have a significant destabilizing impact on bilateral relations.

I don’t know how this will develop nor where we will eventually wind up.  But I am sure that something is happening with regard to US China economic relations as it relates to the role of foreign companies in the Chinese economy.  I am also sure that in this area we are seeing an issue of substance, not mere rhetoric.  This is the one to keep an eye on.


Understanding Trade

June 10, 2009

Just saw a great piece on the website called “The Myth of Made in China” (

The article, in unusually clear language, makes the point that most of what China ships to the US consists of components sourced all over the world and merely assembled in China.  For this reason, it does not make sense to view the trade deficit with China as an indicator that we are big losers in this flow of products across the Pacific.  The piece also notes that much of what we import from China used to be produced in other Asian economies, not in the US anyway.  Here’s a sample from the article:

“…”Made in China” is a bit of a misnomer these days. Over the last 20 years, supply chains have fragmented across the globe — with one part made here, and another made there. Rarely is any one product made in any one country. China often specializes in the final stage of production: putting components together before exporting to the final users. Indeed, much of the value of U.S. imports from China, and similarly from Mexico, includes parts and components made in other countries — the United States among them. According to our recent study, domestic content (the stuff that directly contributes to domestic economic growth) makes up about 45 percent of Chinese exports and 34 percent of Mexican exports to the United States. The rest comes to China from abroad to be assembled and sold. A tag like “Made in China, Vietnam, the United States, Japan, and China again,” might be more apt.”

The article makes points that sophisticated analysts of trade flows have been trying to make for some time.  Unfortunately, it is much more satisfying (and beneficial) for politicians to rail about the US-China trade deficit and assert that it is a substantial cause of the problems facing US manufacturers over the past decade or so.  Too bad it’s just not true.  Read the full article.

Ten Feet Tall?

June 7, 2009

When a major Chinese SOE bids for or completes an acquisition involving natural resources outside of China we hear a lot about the unfairness of such deals (the big SOEs have unlimited access to cheap credit from the Chinese government!) and the threat these crafty Chinese pose in buying up resources around the globe.

But then we get something like the recent collapse of the Rio Tinto – Chinalco deal (WSJ article on this here (subscription required, but lots of articles on the web on this):

What to make of it?  As the WSJ put it:

“The collapse Thursday of Aluminum Corp. of China’s $19.5 billion effort to boost its stake in Anglo-Australian mining-giant Rio Tinto shows that cash-starved producers of everything from oil to metals have more alternatives than they had just a few months ago.

Back then, China looked like one of the few ready sources of funds. But a rally in commodity prices in recent weeks — oil Friday traded as high as $70.32 a barrel for the first time this year — has drawn new investment opportunities, and funding is becoming easier to find as the credit crisis eases.

Both factors doomed the bid by the state-owned Chinese company, known as Chinalco. While deal watchers don’t predict an end to China resource deals, they see a more competitive landscape and expect smaller moves.

“Chinalco saw an opportunity and, unfortunately, the market turned against them before they could execute,” says Antony Dapiran, a partner in the Shanghai office of law firm Freshfields, Bruckhaus Deringer LLP.”

Wait a minute.  If this deal was part of the central government’s plot to buy up the world’s resources (using their huge foreign exchange holdings), why didn’t Chinalco just up its price and pay whatever it took?  And for that matter, if the masterminds in Beijing are so smart, why didn’t they move more quickly to nail down this deal before the market turned?

I have long believed:

1)    The acquisition of natural resources by Chinese SOEs abroad is consistent with the policies of the Chinese government, which is risk averse and believes (mistakenly) that owning the resources gives them greater security of supply

2)    However, the individual deals are not directed by the Chinese government and the Chinese government is not writing unlimited blank checks for the SOEs on these deals

3)    The Chinese SOE managers are smart and sophisticated, but no smarter or more sophisticated than their counterparts at the global companies with which they are dealing; they will win some and lose some

4)    To the extent that Chinese bureaucrats are involved in the process this is a net negative for the Chinese SOEs because these officials, like government officials everywhere, are not as sophisticated or knowledgeable about global markets as their private sector counterparts.

So I say, let’s write about the big successful acquisitions, but keep episodes like this in mind as we think about how quick, smart, tough, relentless, and well funded China’s SOEs are.

Bad Analysis

May 31, 2009

Some of the reporting on US-China relations in the US media is good and some not so good.  But every now and then something comes along that is really awful.  My most recent example of the latter category is an AP story titled “Geithner Lacks Much Leverage in China Talks” (full text here (via Fox news):  Time does not permit an exhaustive presentation of all the misunderstandings offered in this piece, but I will point out a few.  I’ve got quotes from the article in bold, followed by my comments:

“…Mired in a brutal recession, the United States needs Beijing to boost its purchases of U.S. goods, let China’s currency rise and take other steps to narrow an enormous trade gap. And it needs China’s help to combat any military threat from North Korea…”  Comment:  This misses the whole point of the interdependent dynamic that exists between the US and China today.  China “needs” the US economy to recover as much (more actually) than the US “needs” China to increase imports from the US.  Even on the political front, the North Korea situation is just as much a problem for China as it is for the US.  On both the economic and political fronts we need to be working together.  Of course when you get down to specific policy approaches the issues we will have different perspectives based on each country’s concrete situation.  The challenge is to work through these differences and come up with coordinated approaches on the common problems we share.

“…The problem is Washington’s leverage has waned just as China’s power over the U.S. has grown…”  Comment:  Ugh.  This whole “leverage” myth really gets to me.  The notion of “leverage” is increasingly outmoded in an interdependent world, especially among the major countries.  And it certainly does not apply in US-China relations.  Per para. above, the goal is for two major countries to seek win-win solutions that advance both countries’ interests and address global challenges.

“…Even so, as Geithner headed Saturday to China to meet Monday and Tuesday with top Chinese officials including President Hu Jintao, he brings an ambitious U.S. goal: persuading Beijing to adopt policies that would transform its nation of savers into spenders…”  Comment:  China’s leaders recognize they need to increase domestic consumption as a main driver of their economy (and they are taking steps in that direction).  They now view this goal with increased urgency because of the global downturn in demand for their exports.  No doubt Geithner will discuss this issue with China’s leaders, but describing this as an “ambitious goal” of “persuading China’s leaders” of the wisdom of the US view sounds dramatic, but it’s just not consistent with the situation.

“…Those comments, plus remarks by the head of China’s central bank about whether the world needs a new top reserve currency to replace the dollar, jolted financial markets…”  Comment: maybe my memory is off here, but I recall those comments created a lot of discussion, but don’t remember they “jolted” financial markets, which have much bigger issues to be jolted about.

“…But the fact that the administration’s chief economic policymaker is going hat-in-hand to the Chinese to explain the soaring deficits shows how much has changed since his predecessor, Henry Paulson, met with the Chinese as the Bush administration’s treasury secretary in 2006…”  Comment:  this is really obnoxious.  No “hat in hand” here.  China and the US have a common set of problems.  China needs the US economy to recover and the US (and the world) needs China’s economy to continue to grow.  Our relations today are not the balance of power politics of 19th century Europe 

“…Back then, Paulson managed to arm-twist China into agreeing to a new round of economic talks. Those talks were aimed at prodding Beijing to move faster to let its currency, the yuan, rise in value against the dollar. Doing so would make U.S. exports cheaper for the Chinese to buy…”  Comment:  great example of a journalist creating drama from nothing.  Chinese did not need “arm-twisting” to establish the SED with Paulson.  They were happy to do it because they saw it as a useful forum for dialogue.  And the SED was not “aimed at prodding Beijing to move faster to let its currency” rise.  Paulson raised that issue (under political pressure from the Hill) but it was never a major focus of the SED.

“…But this time, Geithner is expected to adopt a softer tone on the issue, even though some U.S. lawmakers want to impose tough sanctions on countries like China that are deemed to manipulate currencies to gain trade advantages…”  Comment:  Geithner’s tone on this will be similar to Paulson’s I’ll wager.  Currency is not now and has not been a significant issue with regard to employment in the US.  The main pressure on the currency issue has come from some manufacturing groups and the Congress.  But it is more of a political than an economic issue and is treated as such in US-China interactions.

“…Though the crisis has given Geithner a weak hand, Treasury officials said he’ll push for something of a grand bargain. The United States would work to reduce its budget deficits once the crisis ends and urge U.S. consumers to save more and shrink the trade deficits that are pumping dollars into the hands of Chinese and other exporters.

But to replace diminished U.S. spending, the administration will push for the Chinese to step up their own spending and stop saving so much. The administration says this can be done if Beijing improves pensions and health insurance so Chinese households don’t feel pressured to save so much…”    Comment:  Again with the “weak hand”!  This is not an arm wrestling match.  “Grand bargain”?  Both the positions stated here (US to reduce deficits after the crisis ends and encourage savings; China increase consumption) are already the stated positions of both governments.  I’m sure each side will want to reassure the other on its goals, but our interests are aligned here already, as are our stated policies.

I think you get the idea.

The story as I see it should read something like:  “The US and China (and the world) are facing the worst economic crisis in two generations.  Both sides have made clear they understand this and are working closely together to contribute to a recovery.  Of course, there are some differences of view on specific policy prescriptions.  Also, each side wants the other to move more quickly than it is to make changes in its economy to ensure sustained global growth going forward.  But the huge changes each side needs to make will inevitably take time.  Geithner on his trip will explore all these issues and work to coordinate even more closely with China on this set of critical issues.  We can expect announcements from the trip reiterating both sides commitment to addressing the current crisis.”

I understand the imperative to make a story exciting and create dramatic tension (Geithner is going hat in hand!  Will he prevail?).  But this is important stuff and deserves more thoughtful treatment.

Role of the Government

May 20, 2009

I have previously opined in this blog that issues such as the exchange rate of the RMB and the size of the bilateral trade deficit are matters upon which have been lavished far too much attention by the US Congress and others (and if I have not made this explicit before, I should have).  In terms of the US-China economic relationship and the future of China’s economy itself, a much more important question is the scope and nature of the role of the Chinese government in its domestic economy and international trade and investment. 

A central issue facing China’s leaders in this regard revolves around questions of industrial policies and how best to promote innovation in China.  I have previously in this blog noted my view that while the US needs to “re-regulate” our financial services industry, China needs to continue to deregulate in virtually all areas.  The recent tendency of the Chinese government to continue, or increase, the use of industrial policies in certain industries runs in the opposite direction.

I have also noted that over the long run I believe a greater use of competition, transparency of regulations, strong IPR protection, freer flow of capital, etc. will help China best achieve its goal of promoting innovation.  An approach that has government bureaucrats picking winners from the vast array of emerging technologies and companies and nurturing them with government supports and protective policies is a sure loser in my view.  Yes, increased competition, etc. will improve the access for foreign companies in the China market, but I happen to believe this is ultimately to the benefit of China.

Having stated these views previously, some friends (and some not-friends) have cited the example of Japan to argue that industrial policies can be successful in propelling a country to the front ranks of technology.  In response, I have noted that I think China wants to develop an economy as dynamic and innovative as the US, not Japan, and anyway, outside of autos, how many successes has Japan had in becoming a global leader in industries due to its industrial policies?

With all of this background in mind, I direct readers to a fascinating article in the NYT today ( that examines issues related to industrial policies (in the US and Japan) and assesses its benefits and (substantial) limitations.  (Note:  When I say “fascinating” I mean it supports my previously stated positions.

One of the very points made in the article is the following:

“…Problems [with industrial policies], [economists] say, are typically byproducts of what economists call “political capture.” That is, an industrial sector earmarked for special government attention builds up its own political constituency, lobbyists and government bureaucrats to serve that industry. They slow the pace of change, and an economy becomes less nimble and efficient as a result.

Economists say the phenomenon is scarcely confined to nations with explicit industrial policies and cite the history of agricultural subsidies in America or military procurement practices.”

I agree with the analysis of US agricultural subsidies and military procurement practices.  However, I would note the scope of “industrial policies” in the US (until very recently, as discussed in the article) has been exceptionally limited, even when compared with Western European economies, not to mention China.

To me, continued broad government involvement in the economy and use of industrial policies by China will undermine China’s efforts to develop the dynamic, innovative economy it wants.  It will also lead to increasingly sharp trade frictions with the US and other trading partners.

I believe China’s leaders broadly recognize that in a country where the government’s role in the economy is huge the opportunities for “political capture” are also huge (just substitute “corruption” for “political capture” in this sentence).   The question is:  can those who specifically understand the damaging role industrial policies play in this equation overcome the substantial pressure that well-connected Chinese special interests are already bringing to bear?  For the sake of China’s continued economic development and the smooth development of bilateral economic relations, I hope the answer is yes.

More Huntsman

May 20, 2009

For those of you who can’t get enough of my views on the Jon Huntsman nomination, see my further comments on this subject in an interview at


May 16, 2009

I know the world is holding its breath waiting to hear my comments on the nomination of Utah Governor Jon Huntsman as US Ambassador to China:

I think he’s a great choice (note:  though I don’t know him personally).  I have opined in this blog that what we need in Beijing is a heavy political hitter who is smart and open-minded on China.  Huntsman’s sole shortcoming is a lack of deep Congressional experience.  On the other hand he:

  • Is a Governor and rising star in the Republican party.  The former underscores his political savvy and weight and the latter will hopefully help ensure we pursue a bipartisan approach to China (remember the outrageous Republican smear campaign against the Clinton Administration over alleged laxness on satellites and nuclear weapons technology transfers to China (aka The Cox Commission Report)?  Ugh.  Hopefully Huntsman can help us avoid having China used for such dishonest and damaging partisan attacks.)
  • Knows China and speaks Chinese.  I have made the case that knowledge of China and Chinese language are not the most important qualifications for Amb. to China, but it certainly is a very welcome plus, on top of the political smarts and stature that Huntsman brings.
  • Knows well the bilateral trade and investment issues that are near and dear to my heart.  In addition to understanding the impact of international trade from his on-the-ground perspective as governor, he previously served as Deputy US Trade Representative.  Prior to that he held the job that was my last position in the US government, Deputy Assistant Secretary of Commerce for Asia (and anyone with experience in that job has to be great).
  • Has diplomatic experience as US Ambassador to Singapore.  Significantly, I know some career Foreign Service Officers who served under him there.  Career folks can be pretty skeptical of politically-appointed ambassadors, but the folks I know had great respect for Huntsman for his external efforts with the Singapore government and his management of the Embassy.

Now let’s just hope that:

1)    Congress acts quickly on his nomination

2)    He gets a terrific DCM to help him manage the sprawling US mission in China

3)    The Chinese government takes advantage of the Obama Administration’s great choice to work with him to advance issues critical to both our countries.

Note:  among the many pieces now re this appointment, I found the following ABC News piece interesting for the quotes from a speech Huntsman gave a couple of years ago on China: