Puzzling Out China’s Saber Rattling

One of Winston Churchill’s oft repeated saying was, “I cannot forecast to you the action of Russia. It is a riddle wrapped in a mystery inside an enigma.”

Of late, China has become a Russian-level conundrum to the wider world. Developed economies are troubled by Middle Kingdom’s increasingly aggressive economic stance; neighboring countries are rattled by its recent belligerence. China’s recent use, or as some might characterize it, overuse of force, is a departure from past policies. As the :

“In the last 12 months, they have managed to undermine everything they achieved in the past 12 years around China’s periphery in terms of smoothing diplomatic relations,” says Prof [David] Shambaugh [a China expert at George Washington University].

The Financial Times piece,”China: View from the inside” and a Foreign Policy article by Kerry Brown, “” (hat tip reader Don B) both endeavor to shed light on this behavior change. The FT story covers ground that is familiar, in that it rings the changes on issues often presented by Chinese leaders and spokesmen, that of a misunderstood power seeking to claim its rightful place on the world stage. By contrast, the Brown story makes it clear that China is going through a political transition that makes it particularly hard for outsiders to read. And that greatly increases the odds of misunderstanding and miscalculation.

The Financial Times’ framing is conventional:

…the country is being challenged on central parts of its foreign policy, economic strategy and domestic political system – all at the same time…

The proliferation of disputes is unlikely to lead to a breakdown in international relations. However, it does suggest China’s ascendance in recent years has been so dramatic that governments around the world, as well as Beijing itself, are still struggling to adjust.

To the Chinese leadership, the tension sometimes appears to stem from the discomfort of a developed world demoralised by the financial crisis Yet in many capitals the situation looks very different – more like a confluence of domestic caution and diplomatic overconfidence resulting in miscalculations on Beijing’s part.

And this conventional posture means it leaves some assumptions on the part of the West unchallenged:

Beijing abandoned its dollar peg in June – but then allowed the renminbi to rise by only 0.5 per cent over the following two months.

“They were very slow to see how this would play in US politics,” says one European diplomat in Beijing. “If they had just let the currency rise by 2 or 3 per cent in the first month or so, which would not have affected exporters that much, this dispute would not have come alive again in the same way.” After renewed pressure from Washington, the renminbi has now risen 2.5 per cent since June.

Yves here. As we’ve indicated, the “abandoning the dollar peg” interpretation of the June announcement was dead wrong; we parsed the Chinese statement and concluded it committed China to do absolutely nothing, and were pretty much alone in correctly deeming the widely celebrated statement as a headfake. China has allowed the renminbi to increase in the last month or so only because criticism in the US has reached a fever pitch, and Congress took a baby step towards retaliation.

But as we have pointed out in the past, many Chinese exporters operate on such thin margins that they will become unprofitable if the renminbi rises much (see this and this on the lack of competitiveness of many Chinese exporters). Per the :

Mr Wen hit back at international criticism of China’s currency policy, saying that acceding to demands for a faster rise in the renminbi could cause social unrest in China.

“Do not work to pressurise us on the renminbi rate,” Mr Wen said, departing from prepared remarks. He said Chinese export companies had very small profit margins, which could be wiped out by actions such as the currency import tariffs the US Congress is threatening to impose.

“Many of our exporting companies would have to close down, migrant workers would have to return to their villages,” Mr Wen said. “If China saw social and economic turbulence, then it would be a disaster for the world.”

A story today from the (hat tip reader Kevin R) provides further support:

According to a recent survey by the Central University of Finance and Economics in Beijing, 57 per cent of small and medium-sized export companies are having to survive on profit of less than 5 per cent.

A rise in the yuan’s value of just 3 to 5 per cent could wipe out the profit of most of these companies or even plunge them into the red. Since Beijing announced in late June that it was abandoning its temporary peg to the US dollar, the dollar-yuan rate has already strengthened 2 per cent.

Local media in some coastal cities have already reported an outflow of capital from traditional manufacturing areas because of fears that the yuan’s gains will cause trading losses.

Chinese-language media have been calling for the government to draw a clear “red line” for the dollar-yuan rate. One column in Securities Daily, signed by Wang Yong, argued that the government should not allow the yuan to appreciate more than 3 per cent in 2010. Once the so-called “red line” was broken, the government must intervene. If the change is as large as 5 per cent, experts say, even the top companies will suffer losses. “All their advantage would vanish,” Wang said.

The implication is that a meaningful number of Chinese businessmen and their employees feel deeply threatened by foreign pressure for a stronger currency. This strong-arming plays into an already volatile political dynamic. Per Foreign Affairs:

The real power is in the Politburo of the Communist Party — and, to be precise, in its nine-member-strong standing committee…

This Chinese “elite of elites” is somewhat distracted at the moment. In about two years’ time, seven of the current nine will have reached retirement age and will need to step aside. Every five years, during the party congress, the next generation of leaders is elevated, and 2012 is going to be a big year: We will see a shift from the “fourth generation” of Chinese leaders under President Hu Jintao and Premier Wen Jiabao to a “fifth.” A new era will start…

Only this time there are a couple of problems. The first is that there is no powerful elder patron who can direct this whole process smoothly…. So the transition this time will be without a patriarch’s guiding hand. That means that while politburos before have had high turnovers, the impact of a large number retiring this time could be far more destabilizing.

No one knows what kind of battles might be taking place now in the central government compound in Beijing where the key leaders live and work. The politburos under Hu and Wen have been watertight. Nothing much gets out about who supports whom, and who is in favor, who in danger.

The article stresses that the Chinese leadership is so hermetic that China watchers probably will not be able to identify the dynamics of the current power struggle even after the fact.

Needless to say, this is a very large blind spot at a crucial time. And there are reasons to suspect the obvious, that the new found international aggressiveness is a useful outlet for domestic tensions:

As in other political cultures, foreign policy is an easy way for Chinese leaders to outmaneuver their opponents….Of all the many things we don’t know about who the next leaders of China might be, there are a few things we can be certain about. Whoever the leaders are, they will not be technocrats the way the previous generation was. There will be political scientists, economists, and lawyers running China into the future now — very much like in the West. The era of the engineers and geologists is coming to an end.

China’s new leaders will have no immediately obvious link to the military. None of the likely candidates for leadership after 2012 has ever served in the army, or ever directed it. But most ominous of all, because of their age (mid-50s onward) they will all be people who were brought up and educated during the 1966-1976 Cultural Revolution, the most closed, xenophobic era in post-1949 Chinese history. None will have studied abroad for any length of time, and they will all have limited international experience.

Yves here. This situation is ripe for miscalculation: virtually no international insight into the transition dynamics in China; an incoming leadership with scarce foreign experience and possibly deep seated animosity; particularly high stakes on both sides. Reader Vlad Ender warned via e-mail how situations like this can easily devolve into overt conflict:

I remembered what game theory says about brinkmanship and bargaining – both parties want to avoid the worst outcome, yet if their belief of their costs are lower than their opponents, it will end up in tears.

I think the situation is made yet more dangerous by US increasing threats (again, brinkmanship), but by so small steps that China disbelieves credibility of any of those. Thus it disbelieves that the situation actually moved – but from US perspective it does. At some time US may think it has to commit an action which from its perspective is only small escalation, but from China’s (who might have ignored all the previous signals) it’s a huge jump.

The worst of this situation is that reducing the degree of US and Chinese economic co-dependence would be a fraught task even with much more seasoned internationalists at the helm of both countries. The shifting political tides here and in China increase the already uncomfortably high odds of a bad outcome.

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38 comments

  1. Alllen C

    “A rise in the yuan’s value of just 3 to 5 per cent could wipe out the profit of most of these companies or even plunge them into the red.”

    Can someone answer me this? I see some hard working Chinese girl slaving night and day on PBS to produce designer jeans for her boss’s gross revenue of $4 per jean! Who is clipping off the profit? And if I pay the poor girl double, does the $200 jean go to $400 or $201? Hmmm???

  2. Often unstated is the central role of the US middle class in absorbing the world’s overcapacity for many decades. With this middle class bankrupt, husked out, and roundly mocked internationally and within the U.S. elite (under what I call the ‘fat American’ syndrome), there is simply no one else that is capable of taking over the same role.

  3. John from Concord

    @Alllen C: I suspect that if you investigate a little further you’ll find that the vast majority of those $4 jeans aren’t $200 designer jeans, they’re $18 Walmart jeans.

    1. DF

      The three pairs of cheap Wal-Mart jeans (that actually have been surprisingly good) I’ve bought have actually been made in Mexico.

      Sorry to be pedantic, but I’ve developed sort of a side hobby of watching where my stuff comes from. Similarly, I probably wind up buying more made-in-USA stuff at Walmart than I do at Target.

      1. bob

        There are many other stories on the Rubbermaid Walmart scandal.

        I have also spoken to lots of actual US producers. They make things in America. Everyone of them that is still alive has a strict no big box strategy. Too many examples of the big boys killing their competition.

        They also go as far as to look at who their suppliers are dealing with. A heavy dependence on Walmart, or any big box retailer, and the downstream producers have to make changes in suppliers order to stay alive.

  4. M.InTheCity

    Yves – thanks for putting a snip of that foreign policy article up. I hadn’t realised we were on the cusp of the 5th generation taking over and their specific background. Very enlightening. Doesn’t give me much hope on how this is going to end up, however.

  5. Angel Koachev

    you should be thank-full for the prices of the products they are supplying you with. and the big business in US is making enormous profits by selling them to your people.. with the level of unemployment and income for the majority of the US population I see no other way to replace these goods. someone is playing very silly game at home.. beware, you have plenty of semi-brainless morons who believe they know what they are doing.. and your administration cannot afford more mistakes. tell them not to blame others for their own stupidity. pure criminals are running organizations where only very wise people should be allowed.. the Chinese know it, the Russians know it.. to expect the world to believe in some instigated by lobby groups fake story for “currency war” is pure self-delusion. your government did almost nothing to improve the situation after the shock. helping the parasites who pretend to run banks is of no use. I do agree the situation is result of previous mistakes and idiotic ideology imposed over the state by the so called political elites in Washington, but trying to blame others for something you have been more then happy to do some years ago is going to fire back. wasn’t it the neo-liberal crappy ideology for ultra-low price products that brought you here? most of the world population has been literally enslaved to provide those goods for you. tell this to the ready to fight the “currency war”. you are running out of time.

    1. Borealis

      …but trying to blame others for something you have been more then happy to do some years ago is going to fire back.

      Yup, the U.S. has been stupid, and the “neo-liberal crappy ideology” crappy. Doesn’t change the fact the status quo can’t be maintained. Something’s gotta give, and it will, regardless of the U.S. refraining from “currency wars”. (And by the way, no foreign companies have enslaved Chinese labor without the full complicity of the Chinese.)

      you should be thank-full for the prices of the products they are supplying you with. and the big business in US is making enormous profits by selling them to your people.. with the level of unemployment and income for the majority of the US population I see no other way to replace these goods.

      The U.S. population will have to replace those goods one way or the other eventually, because the unemployment and low incomes are themselves part of the same process that brought about those low, low prices and “big business in the US making enormous profits and selling them to your people”.

      I agree that U.S policy-makers of the last few decades have been idiots and incompetents beyond compare, but…here we are. We can argue all day about whether the rest of the world’s leaders comprise a class of wise and holy innocents (ha ha ha), but…here we are. Refraining from “blaming others”, by whatever means, and letting the current trade situation roll on, on the understanding that cutting off cheap imports will hurt ordinary people in a country undergoing economic decline will change…nothing. They’ll keep getting poorer, and unemployment will keep rising, and all the cheap imports in the world won’t fix that. If it’s not a currency war it’ll be something else, because, to beat a hackneyed phrase to death, what can’t go on, won’t.

      1. Angel Koachev

        agree, what disturbs me most is the way the “transition” is executed. going from “Don’t worry guys, “free” trade is The Way, The Only Way and any problems will be solved by the almighty market.” to “You bad boys are manipulating you currency, so you are hurting our labor market situation..” is not helping the chinese in any way, especially in providing suitable arguments for their government to justify reforms and adjustments. more, if they increase their domestic consumption this will reflect on the pool of resources you can access and by taking into account the way your government is treating the poor inhabitants of any country who are having the misfortune to live nearby some place the US government consider of strategic value this will translate in delivering “peace and democracy” /read it war/. now, the fiscal stimulus failed to appear for third consequential year after the fiasco. instead more monetary measures are introduced. there are few possibilities for this. you have sadists determined to punish the US population /hiding it behind “reforms” label/, the government insist of raging economic war to the rest of the world /read it “the bad boys who dare to steal our resources on our own planet”/, they ARE idiots, this a way to divert domestic attention from the incapability of the “elites” to deliver the promised /doe’s “trickle down” read any bells?/, the status quo is making great effort to keep afloat + few more reasons or all of them combined? any suggestions how supporting their actions will deliver nice deserved kick at these bums /read the cohort of sociopaths ho there to call themselves banker and statesman/ ?

    2. Avg John

      I had a girlfriend years ago that sounded a lot like like you. She was always getting really angry with me, especially because I wouldn’t stand still while she beat me up. Biting, scratching, pulling hair and throwing anything she could get her hands on, then wondered why I was no longer interested in her. She thought I was lucky to be in a relationship with her. Yeah, right.

      1. Angel Koachev

        :))) Oh, dear.. You are dialing wrong number.. The analogy is complete nonsense.. Not to mention I have never looked for your attention.. A bit of narcissistic reaction is what I see. If you have something to say about mu comment, please go on.. But to try to suggest that I have any aspiration toward your personae is.. well.. But I will be glad to read your opinion over the specific issue.. if you have one..

        1. Angel Koachev

          And I do apologize if I am not the recipient of your comment.. Still facts are better then analogy with relatives..

          1. Avg John

            Angel, yes it was you I was directing the analogy to. But I did not mean to imply that you would imply such tactics in your personal relationships. So sorry, please accept my apology. The situation I described happened many years ago and I kind of laugh it off now, but it wasn’t funny at the time.

            I wish the best for the average person in China and am a bit ashamed that America has exploited them as a source of cheap labor. I have personally opposed our trade policies for decades but I am just an average American and I don’t set trade and tax policy.

            Never the less, what I am saying is, if the downside of a relationship, of any kind, far out ways the upside, then it’s time to rethink whether you want to continue it. I believe the downside of continued cheap imports is high unemployment, over dependence on foreign markets, and the eventual demise of our economy which, I believe, far out ways the benefits of consuming a bunch of cheap electronics, toys, and clothing and other goods.

            One of the other commenter said it clearer than I did. Basically saying that the trade relationship just isn’t working for us any more, no matter how you slice it or dice it.

          2. Angel Koachev

            no replay option under your message, so I will you use this one. sorry for the inconvenience.

            so you think you are going to make all these goods at home? really? can you please tell me how this is going to happen? imagine you have these 10-15 or 20% revaluation? do you believe these factories will pop-up in the states? who will build them? why? is the problem the imports? or the exports? what are you exporting? weapons, “financial” services..? they did turn out to be rubbish? fake derivatives.. and considering the late approach of the so called “banks” their price will go even lower? another bailout? who’s going to be next to be blamed?

          3. jonboinAR

            Not so long ago we made these things, so, yes, we can again. As the factories magically disappeared in the US only to magically pop up in China, can not the process reverse? We may not individually be able to consume as much as we have in the past couple of decades, but everyone employed, we can all live more or less content, as we did before.

          4. Avg John

            How long did it take to build China from a poor, emerging market country to an industrial/financial power house?

            Consider. America already has the industrial infrastructure in place to begin the process of restoring their manufacturing/industrial sector. Railroads, airlines, shipping, mining, power and communication grids, technology, university and technical training centers. Just waiting to be set in motion once again. Sure, upgrading, building and renovating communication and transportation grids will take a lot of capital investment, but it’s the kind of investment that will lead to good paying jobs and rebuilding America’s middle class. Restoring America will create a boom for the entire world.

            I’m not saying we have to stop all trading with China, Russia and other countries. It just has to benefit both countries. To me its a matter of balance. And I believe that by and large, America can restore her standing in the world, can clean up the corruption on Wall Street and in Washington, and can be a good global neighbor. But whether she has the confidence and will to do it is another matter. We need leadership to accomplish this, and I agree that there is currently a short supply in Washington D.C.

          5. Angel Koachev

            It is not possible particularly because of the infrastructure. Do you believe you will find americans eager to work for salary equal or close to the one chinese are happy with? I don’t think so.. Going toward even greater automation is not going to improve the employment picture.. So?

            Restore it then.. what are you waiting for? Santa? And don’t forget the “green” stuff.. Apart from the “climate warming” lie, these products will find their market in Africa and other undeveloped countries. Don’t worry how will they afford them. This is why we have the international organizations. Better to have electricity and clean water then guns and bombs.. So you take care for the dead-masters at home..

          6. Borealis

            Angel, now you’re just being silly. On the one hand you believe that it is *absolutely impossible* that Americans ever ever ever start making things for themselves again. It’s simply inconceivable! On the other hand you believe that we can go on with no jobs living on credit and cheap imports indefinitely. Readers may decide for themselves which is the more fantastical view.

          7. Angel Koachev

            “absolutely” and “ever ever ever” is your projection over what I think.. ;) I do expect you to do much more then making “stuff” for yourself.. going backward is silly, not me trying to explain you the reality.

  6. fjf

    My understanding is that Chinese inputs to most goods are around 5%. A product that retail for $100 would therefore include $5 of Chinese inputs and say $35 of retail markup. Add $5 for materials and $5 for transport and half of the value accrues to the US “producer.”
    The Chinese are reported to be attempting to relocate production to hinterland areas with even lower production costs but there will be frictional costs associated with such a move and also with a move to another low-cost nation such as Vietnam.
    I am not sure what that $50 of assumed US prodcution costs covers? Managers, logisticians, designers, marketing, advertising, patent lawyers? These are the well paid jobs of the middle class aristocracy. If costs for raw inputs increase and assembly labour increases then margins will collapse. Which suggessts equity valuations are being pushed up to an unsustainable level similar to the 2006 stage of the housing bubble.

    1. Shipping in China is slow and expensive – it usually costs 2-3x as much and takes at least 2-3x as long as the same distance in the US. For heavy product, those costs could outweigh labor savings.

      When something’s sold at retail, it’s usually marked up at least twice. A professor told one of my classes once that Nike buys a $65 shoe from a manufacturer for $16.75, with a 6% profit to the manufacturer. Nike sells it to the retailer for $32.50. (He said he got the figures from the Nike website when they were being unusually transparent years ago.)

      1. Also, that’s ignoring whether the raw materials are supplied from China or not. Direct labor input is only 3% of the finished product. Materials are about 16%.

  7. This, the margins, sounds about right to me. I have a friend in the import business which loves to regale me of the competitive nature of Chinese manufactures. His favourite stump is the pricing to 100th of a cent on *manufactured* goods. That tells me that a 3% move in valuation could have the magnitude of effect being suggested here.

  8. Jim the Skeptic

    We don’t even need to go into the statistics of how much of the products are Chinese labor or material.

    The only important statistic is that US dollars are leaving the country to purchase manufactured goods. If more of those US dollars stayed in the country to recirculate, our economy would improve. Jobs would be created.

    Arguing that those dollars come back to finance our debt is arguing an irrelevance. That increasing debt can not continue.

    To at least some degree, the rest of the world has based their economies on exporting more to the USA than they import from the USA. We have no moral or legal obligation to import more than we export. We have trade treaties which can be abandoned if the need arises, and it has.

    The rest of the world has a problem, they can not force us to take their exports. To paraphrase, they should just buck up!

  9. plschwartz

    Yves
    The concern for marginal exporters reminds me of the old saw about the man who shot his parents, Then threw himself on the mercy of the court because he was an orphan.
    Those very businesses survive exactly because of the continued
    undervalued Yuan.
    It is absolutely clear from this message that the value of the Yuan is an export subsidy.

    We are in an escalating confrontation with China. And there is no indication that China will be appeased. China is China- as it was and as I believe it will be. Mao tried his damnedest to break the traditional Chinese culture finally in the Cultural Revolution. He failed. We are back to old China
    Mao’s descendants are now the PRC dynasty. Which continues to pursue the millennial-old aims of the Middle Kingdom.
    All we are doing now is giving China the where-with-all to extensively rearm

    1. Externality

      Actually, the Chinese government has been trying to bring back traditional Confucianism as its teachings, such as hard work and respect for authority, help to reinforce the Communist Party’s authority. Ironically, these efforts have been strengthened by US economic policies: Chinese citizens who obeyed another party-sanctioned tenet of traditional values, buying gold, have done very well with the recent increase in gold prices.

      “Confucius, the venerable sage who lived in the 6th century BC, is enjoying a 21st century revival. His rehabilitators? The Chinese Communist Party. Yes, that party, the one celebrating the 61st anniversary of the founding of the People’s Republic of China on Oct. 1. The same party whose chairman, Mao Tse-tung, vilified Confucius’ “stinking corpse” during the Cultural Revolution and ordered the Red Guards to destroy all temples, statues, historical landmarks and texts associated with the sage. But, as China turns 61, the Great Helmsman is out and Confucius, who would have turned 2,561 on Sept. 28, is in.”

  10. Hugh

    Interesting that China is opting for the same kind of narrow minded fuck ups that are now running our and most other industrialized countries.

    I suppose that transition could have to do with China’s current belligerence. But more generally belligerence has to do with distraction from internal weakness. So yes, transition would be a part of that, but so would concerns about China’s economic condition. Its current course is unsustainable. It has been blowing bubbles like mad for the last couple of years. It has a tremendous production capacity overhang. If it gives up the dollar peg, it’s dead and it knows it. Exports are all it has left and if those go, political instability is likely. Chinese leaderships have been terrified of this (political instability) for something like 2,000 years.

    So what I see is more the Chinese version of extend and pretend. Politicians always think saber rattling is a good way to reassure the public that they are in control and to direct public attention toward external “enemies” to blame for any problems. But as I said, this is a sign of weakness. While this particular mix of nationalism, protectionism, and belligerence is peculiarly Chinese virtually every other industrialized country on the planet is running its own variation, including, of course, us.

  11. Angel Koachev

    Oh, please don’t start with “us” and “them”.. If you talk for “them” as a culture, don’t forget theirs is thousands of years old.. compared with what? ;) And no, not every other industrialized country. Have a look at Netherlands or Denmark, or Norway.. The militaristic neo-colonialism is US specialty at present.. By saying US I don’t mean the people of US.. only narrow group is responsible for the atrocities. Unfortunately they are operating in an “everything goes” environment. Responsibility is forgotten word..

    1. Hugh

      The Dutch probably aren’t the best example for your argument since they and their banks are up to their eyes in the north-south divide in Europe. And if Denmark and Norway are the best you can do, what really is your point?

  12. lark

    Much of this is a problem of low wages, across the world.

    China is supposed to ‘consume more’ but they can’t, because their wages are too low. Wages can’t rise as much as needed to raise the consumption share of the economy, because China would lose jobs to lower wage countries.

    American wages have been stagnant to declining for decades, below the upper crust. That is a result of the dominance of financial elites, politically and ideologically.

    The rise of free market global capitalism has pummeled labor. That weakness now undermines the consumer economy and may even threaten world peace.

    Basically, we’ve driven the world economy into a dead end, and we can only change direction with political and economic upheaval.

    Globalization: probably it will have to break, in some major way.

  13. kevinearick

    what does China’s credit growth look like across traunches vs output economic activity growth?

  14. Anonymous Comment

    One thing that I think Americans are going to have to factor into their thinking… It’s hard to put into words easily…

    OK – Think of the current mortgage-fraud crisis. Many, many people around the world knew of the crisis for years. For those years, they have looked at us [America/Americans] as denialists. How can one realistically negotiate when the other party is in denial?

    Now there can be no more denying. Look around and see what fruits have come of the insane greed that over-took our culture/society/hierarchy. Bring this attitude to the negotiating table, and we might get somewhere.

    1. Borealis

      Unfortunately, the state of denial of Americans in general and the insane greed of their klepto-class was a feature, not an oversight, in the “business model”, if you will, of the negotiators on the other side of the table. No brownie points for recognizing the denial but playing right along for one’s own benefit. *Everybody* has been in denial about how this was all going to end. And you can count on all the erstwhile cheerleaders of this globo-rama to now start pretending that they knew it all along and thoroughly disapproved every step of the way.

  15. emca

    To paraphrase:

    “I come not to praise, nor to bury China”

    China is a fascinating topic for the outsider, so I thought I add a few thoughts to further the enigma.

    China doesn’t operate under the same constraints or dogma as the U.S. While it has it own peccadilloes, one of them is not that it sees herself as moral manager of the World Stage, as final judge and arbitrator on right and wrong with another’s problem. This is presumably is a legacy of being on the winning side of two world wars and third war of perception against a largely manufactured monolithic Communist menace; partly a function of related Christian and/or democratic righteousness and requisite demonology [quote by Maggie Nichols,”As years passed demonology expanded to include Bolsheviks, radicals, Franklin D. Roosevelt, the New Deal, Government work programs or aid programs of any kind”].

    While historic deep-seated animosities exist between China and her Asian neighbors, Taiwan is the only source of friction between the U.S. and China; it is hardly going be the template for other bilateral (economic)determinations. Conflicts now are on a real-time basis, nation pride due to military aggressions has yet to significantly complicate issues, as per say a dispute over uninhabited islands in the East China Sea. [interestingly, the Senkaku Islands are claimed by both the PRC (China Mainland) and the ROC (Taiwan) in addition to Japanese claims].

    I came across a short personal history of Huang Neng a welder working in China. Among his achievements are participation in three notable trophy skyscrapers in Shanghai. A former farmer, Mr. Neng’s work means he ‘on the road’ throughout the year, he only sees his wife and two sons once during that time, usually on Chinese New Year. He works 12 hour shifts, 7 days a week (no day of rest) for about $350 per month. He shares of dormitory room with 9 other migrant workers. Heat exhaustion is a common problem due to high temperatures of during the day and heavy clothing required by the work.

    Leaving aside salary, is there anyone in the U.S. working this regime of physical labor under these conditions? Is it possible or will it ever be possible? We’re not talking about being available for cell phone calls on off-hours, air conditioned offices and million dollar salaries, now are we? Moreover I serious doubt his labor is inferior to that which can be had in the West. And although is fruits of his labor is not exportable, at the very least, his efforts show the difficulties in importing a product produced outside the country, which presumably would be required to correct trade imbalances.

    The above ‘low tech’ product is what China has mastered, but is seeking to move beyond, much in the same vein as Japan moved away from the production of tin toys sold in the West circa the ’50s, to the recognized merchants of quality electronics, machinery and the like.

    Current events show China’s recognition of that deficit, but Japan’s effort in the late-middle 20th C. are not re-traceable. China’s enormous success at manufacturing “Tubby Turtle Friends” and the like to successful automobile builder, will prove a much harder transition to follow, given the disparities inherent in time and place or Japan having already mucked-up the waters.

    Along that line some commentators have suggested that China’s economic fate will be that of Japan’s, i.e. internal bubbles within the apparatus are being blown that can only sustain so much air. China is not Japan (or the U.S.) and while this may be one scenario its not the only. Look to the unexpected, as it seems to be the author of achievement and folly.

  16. fromchina

    Apparently people at Foreign Policy have no clue about China. Ever since Mao’s passing China has been reversing Cultural Revolution and moving full speed back to Confucianism. To think the fact that the next (fifth) generation of leaders were brought up during the Cultural Revolution means anything is absurd. What do they think the current leaders were doing at that time?

    There is a simple reason China is so confident in its bargaining position: US government officials have repeatedly told them there’s going to be no trade war. In fact right after the House passed the Chinese currency manipulation bill Geithner told them the Obama administration didn’t support the bill. He was practically saying it is all a show for the November elections.

    The whole issue of trade war is overblown. Wall Street doesn’t want it. And everyone knows Wall Street rules America.

  17. Allen C

    If one accepts US devaluation as certain and necessary, the impact is one of demand and relative currency valuations. As demand declines, the relative currency values are of greater concern. It is silly to presume that an already thin margin producer has to eat the delta.

    I presume that there is some point when the issue is less competitive currency valuation and more of whether your customer is good for the payment in a stable currency.

  18. Sundog

    Terrific post. This is one to clip and save. I wonder also about the Cultural Revolution generation in the PLA which is certainly a player to be considered.

    This piece at NYRB, referencing five recent titles on power within China, is probably worth reading if your media budget allows.

    Ian Johnson, “The Party: Impenetrable, All Powerful”

    The FT’s China bureau chief, Richard McGregor, gave a talk at LSE earlier this year on his book “The Party”. Well worth a listen IMHO.

    Richard McGregor, LSE public lecture: “The Party: The Secret World of China’s Communist Rulers”

    Along with the South China Sea, I recommend keeping an eye out for Chinese actions in northern Pakistan, northeastern India, and Myanmar. The Chinese are happily following the Israeli model of creating facts on the ground (perhaps that should be called the US banks’ model).

    China is quite aware that while Pakistan can successfully negotiate by holding a gun to its head, China cannot.

  19. mtm

    There is a disconnect between what is actually happening in China and what gets reported in the West.

    A great deal of foreign reporting on China consists of merely rewording someone elses’ story with very little fact checking and a over reliance on anonymous sources and rumours. Consequently, it is very susceptible to hoaxes and factual errors. Compounding this is a demand for China related news with very little ability on the part of foreign readers to judge the accuracy of said news and willingness to believe the fantastical.
    Add in language barriers, Party propaganda organs, “experts” with an agenda, and lazy journos desperate for a story to file and you get the horsesh*t fed to you as news.

    Just bear in mind 9/10 of all China related stories come from the same source. You can tell when all the stories are the same.
    Beijing is incompetent and shifty at making it’s case even when they are being angels.

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