The Wu Yi/Hank Paulson photo-op a.k.a. the Strategic Economic Dialogue, has come to an end.
Obviously, the purpose of a two-day meeting is not to negotiate—even if one counts Secretary Paulson jawboning Mdme. Wu over dinner about the merits of opening up China’s financial markets to his eager buddies on Wall Street.
The meeting is political theater—meant to announce agreements and concessions previously negotiated.
And for whatever reason, we came up with a whole lotta nuthin’.
The Great White Whale of PRC-US economic relations—RMB revaluation—escaped our Ahabs once again, leading to appropriately dismissive coverage of the meager catch our negotiators hauled in.
Considering I read somewhere that China seriously considered cancelling the summit as an expression of displeasure at the US CVD and WTO complaints that sprouted like weeds earlier this year, expectations should not have been too high.
However, Henry Paulson is the great white hope of the Bush administration as far as a sophisticated, adroit, and effective China policy is concerned, so it was disappointing that so little came of the meeting.
Steve Clemons’ The Washington Note reprinted a column from the Nelson Report alluding to the apparent frostiness of the meeting, and blaming Paulson for a gaffe:
...witnesses agree that something definitely was "missing" today. Commented one, privately, "it was as cold as ice in there. The Chinese just looked like they wanted to get off the stage quickly. They really didn't bother to put on a show for the cameras back home."
...
One normally hesitates to ascribe too much to the theater of body language, but here's something that just bashes you right between the eyes: Paulson, the guy with 72 private trips to China, all that hands-on experience, he who told the White House, State and USTR not to worry, that he would be the China Guy in this Administration...at the closing press conference, Paulson stalked in, well ahead of Wu Yi, and then started reading his statement before she even reached the podium.
Excuse me? An American or European would have cold-cocked the President for such calculated rudeness! In China (Japan, Korea, etc.) you watch older married couples walk into someplace. . .the husband is 10 feet in front, and the subservient wife is dutifully plodding behind. You think for one minute that elderly maiden lady Wu Yi didn't catch the insult here?
It seems that Mr. Paulson might have been disappointed that his friendly efforts on behalf of China over the years had yielded him little more than a middle finger salute at the SED, and he used the setting of the closing statement to convey his unhappiness.
But he shouldn’t be surprised.
He should be chastened.
In my experience with Chinese bureaucrats, they respect power and admire those who can combine friendship and power.
But to attempt to extract through friendship concessions that should only be demanded from a position of power is a blunder, even an insult.
Right now, with a Democrat-controlled Congress considering 27 different pieces of anti-China legislation and President Bush scraping along in the polls at under 30%, Henry Paulson doesn’t have much of a negotiating position.
The Chinese, for all their Pollyannish wonder at the independence of our legislative branch, know full well that the unpopular, lame-duck Bush administration can deliver very little on China policy.
So if the Chinese were frosty, it was a calculated frostiness, designed to show that Secretary Paulson can’t use his weakness as a negotiating point and ask the Chinese to make substantial or face-saving concessions so he can save them from the big bad Democratic Congress.
I think China will be facing some hard decisions on its economic future—which may require serious engagement with a US government that can negotiate seriously and deliver on its promises--so they aren’t going to make concessions that only enable the continued, directionless flailing of an impotent administration on the wrong end of a dysfunctional relationship with Congress .
The Chinese attitude is probably, How about Paulson showing he’s still got some mojo by slapping around Chuck Schumer a bit before he asks us help him out.
And Mr. Paulson should reflect on the lesson that weakness makes it difficult—and dangerous—to presume upon a friendship.
Showing posts with label Paulson. Show all posts
Showing posts with label Paulson. Show all posts
Thursday, May 24, 2007
Tuesday, May 22, 2007
China's Great Speedbump of Cash
From McClatchy’s article on the US-China strategic economic dialogue now going on in Washington, I learned that China’s immense foreign exchange reserves have earned the nickname "The Great Wall of Cash".
In keeping with China Matters’ kneejerk tendency to question conventional wisdom and conceptual shortcuts, I was compelled to calculate how big a wall of one-dollar bills equal to China’s forex reserves would be.
Based on greenback dimensions of 6” x 2 ½”, 312 bills to an inch,1.2 trillion bills would build a wall 4000 miles from Shanhaiguan to Lop Nor 30 feet wide...
...and 0.55 inches high.
That’s not a wall.
That’s a speed bump.
Despite the fact that China’s greenback barrier is too low to give an invading barbarian even a twisted ankle, Beijing has taken a big step in moving part of its cash hoard into overseas financial markets.
As McClatchy reports:
Cash-rich China rattled the U.S. bond market Monday with the announcement that it was taking a 10 percent stake, worth $3 billion, in the Blackstone Group, one of the world's largest private-equity companies.
Some analysts saw the move as a sign that China intends to diversify from Treasury securities. If true, that could spark investors to demand higher interest rates from Treasuries and could increase the amount of interest that the United States must pay on its debt.
China’s US$ holdings have become a headache for the Chinese government.
There are only a few ways Chinese government bureaucrats can safely and efficiently off-load the billions of trade dollars pouring through the door every month.
Traditionally, the only practical destination was US Treasuries, which made the Chinese government (in their view) hostage to the US government. No matter how annoyed Beijing became with Washington, Bank of China would have to continue to buy Treasuries in order to find a safe haven for its forex, and maintain the value of existing holdings of US debt.
The Chinese government took a small step to allocate central forex reserves through market forces by involving "qualified investors" but I expect was properly anxious about the sticky fingers on the invisible hand.
They also tried to buy our stuff (a.k.a. direct interest in corporations that own or make things) but the CNOOC debacle taught them high profile asset purchases can attract US domestic political opposition and push up the price (or make the deal impossible).
So the Blackstone deal looks like a smart way out of the forex dead end.
Smart, greedy capitalists allocate the capital more efficiently and profitably than any BOC bureaucrat ever could.
They provide the public face of acquisition, with the Yellow Menace just one of many silent partners.
Wall Street types hungry for their bite of the China asset eggroll create a political constuency for a moderate China policy in Washington.
And the Chinese government gets more leverage over the business community through a continual presence as owner, rather than an occasional buyer of US products.
I, for one, would be interested to see if China puts a chunk of change into Cerberus, the investment firm that made big headlines for grabbing the Chrysler anvil and plunging into the deep and stormy waters of the global automotive business.
Cerberus—owned by ex-Secretary of the Treasury John Snow—is also the main shareholder in NewPage Corporation, whose countervailing duty (CVD) complaint was adopted by Treasury to argue the case that China’s paper industry enjoys a de facto subsidy through preferential lending policies by China’s sclerotic state-controlled banks.
It looks to me like this complaint is more likely to seek increased access to Chinese financial markets for US companies as a competition/rationalization measure, than it is to achieve relief for US manufacturers.
In other words, tit for tat.
If China wants to pump forex into our investment houses, we want to do the same over there.
This is a state of affairs that Hank Paulson—who seems to run our China policy these days—can understand, and perhaps even appreciate.
And, so we can better understand--and perhaps appreciate--the US-China trade and economic relationship, I've added China Economics Blog to the blogroll.
In keeping with China Matters’ kneejerk tendency to question conventional wisdom and conceptual shortcuts, I was compelled to calculate how big a wall of one-dollar bills equal to China’s forex reserves would be.
Based on greenback dimensions of 6” x 2 ½”, 312 bills to an inch,1.2 trillion bills would build a wall 4000 miles from Shanhaiguan to Lop Nor 30 feet wide...
...and 0.55 inches high.
That’s not a wall.
That’s a speed bump.
Despite the fact that China’s greenback barrier is too low to give an invading barbarian even a twisted ankle, Beijing has taken a big step in moving part of its cash hoard into overseas financial markets.
As McClatchy reports:
Cash-rich China rattled the U.S. bond market Monday with the announcement that it was taking a 10 percent stake, worth $3 billion, in the Blackstone Group, one of the world's largest private-equity companies.
Some analysts saw the move as a sign that China intends to diversify from Treasury securities. If true, that could spark investors to demand higher interest rates from Treasuries and could increase the amount of interest that the United States must pay on its debt.
China’s US$ holdings have become a headache for the Chinese government.
There are only a few ways Chinese government bureaucrats can safely and efficiently off-load the billions of trade dollars pouring through the door every month.
Traditionally, the only practical destination was US Treasuries, which made the Chinese government (in their view) hostage to the US government. No matter how annoyed Beijing became with Washington, Bank of China would have to continue to buy Treasuries in order to find a safe haven for its forex, and maintain the value of existing holdings of US debt.
The Chinese government took a small step to allocate central forex reserves through market forces by involving "qualified investors" but I expect was properly anxious about the sticky fingers on the invisible hand.
They also tried to buy our stuff (a.k.a. direct interest in corporations that own or make things) but the CNOOC debacle taught them high profile asset purchases can attract US domestic political opposition and push up the price (or make the deal impossible).
So the Blackstone deal looks like a smart way out of the forex dead end.
Smart, greedy capitalists allocate the capital more efficiently and profitably than any BOC bureaucrat ever could.
They provide the public face of acquisition, with the Yellow Menace just one of many silent partners.
Wall Street types hungry for their bite of the China asset eggroll create a political constuency for a moderate China policy in Washington.
And the Chinese government gets more leverage over the business community through a continual presence as owner, rather than an occasional buyer of US products.
I, for one, would be interested to see if China puts a chunk of change into Cerberus, the investment firm that made big headlines for grabbing the Chrysler anvil and plunging into the deep and stormy waters of the global automotive business.
Cerberus—owned by ex-Secretary of the Treasury John Snow—is also the main shareholder in NewPage Corporation, whose countervailing duty (CVD) complaint was adopted by Treasury to argue the case that China’s paper industry enjoys a de facto subsidy through preferential lending policies by China’s sclerotic state-controlled banks.
It looks to me like this complaint is more likely to seek increased access to Chinese financial markets for US companies as a competition/rationalization measure, than it is to achieve relief for US manufacturers.
In other words, tit for tat.
If China wants to pump forex into our investment houses, we want to do the same over there.
This is a state of affairs that Hank Paulson—who seems to run our China policy these days—can understand, and perhaps even appreciate.
And, so we can better understand--and perhaps appreciate--the US-China trade and economic relationship, I've added China Economics Blog to the blogroll.
Wednesday, April 04, 2007
“Managed Trade” with China: Managed by the Treasury Department?
The countervailing duty (CVD) determination against China for subsidizing its paper industry points to the emergence of a new approach by the Bush administration.
With the Democrats in control of Congress and political pressure from both sides of the aisle to “do something” in response to the ballooning trade deficit with China, the Bush administration appears to be offering an alternative to a fireeating attack on China’s undervalued yuan by the Chuck Schumers of this world.
The alternative looks a lot like “managed trade”, the nibbling attack on Japan’s structural impediments, non-tariff trade barriers, and non-market self dealing begun in the reign of Bush the Elder.
The CVD decision itself eschewed claims of government subsidy of exports through the exchange rate. Instead, it appears to be responding to specific assertions by the US paper company, NewPage, that Chinese banks were propping up the Chinese pulp and paper industry with credit at preferential rates, and also by forgiving dud loans.
This is a reasonable approach—if difficult to prove in the case of the two Chinese paper companies that got whacked with the high CVD tariffs—and is reminiscent of U.S. gripes about Japanese industrial policy, with its overt and hidden promotion of certain export industries through preferential credit access in the 1980s and 90s.
The door is now open to a slew of similar complaints by every American industry under pressure from Chinese imports. And I suppose the U.S. government can be selective in which of these cases it chooses to support , and thereby use them as bargaining chips in negotiations with the Chinese government, both over trade and other economic concessions.
If the Bush administration has an objective in China, I imagine it would not be an apocalyptic political struggle over the yuan exchange rate that would provoke the Chinese to accelerate its switch from the dollar to the Euro, threaten to reduce purchases of U.S. government debt, and destroy life as we know it on this planet.
Maybe something more modest and welcome to Republican donors in the financial service industries—like greater opportunities in China’s protected financial markets for foreign firms, with the not unlaudable benefits of, in addition to enriching our deserving banks, insurance companies, and stockbrokers, accelerating the reform of China’s dismal domestic banking industry, compelling increased transparency in the equities markets, and heightening the pressure on China’s undervalued yuan from within the Chinese financial system.
The amazing thing is that the Bush administration, even with its house of cards crumbling around it, actually might have a China trade policy. And for this, I suppose we can thank Henry Paulson, Secretary of the Treasury.
Indeed, a recent article in the Financial Times identified Paulson, together with Secretary of State Rice and SecDef Gates, as the “Gang of Three” who might “leave office in January 2009 with higher standing” than when they came in.
It is perhaps both because of Paulson’s energy and focus and because the ultimate goal of the Bush policy is to open China’s financial markets to greater foreign participation, that the Treasury Department seems to be taking a lead role in China trade policy.
And the Treasury angle also raises the interesting question of there was any backscratching and logrolling involved in the fact that NewPage, filer of the paper complaint is controlled by Cerberus Capital, the finance firm run by ex-Secretary of the Treasury John Snow.
In the perceived context of a protracted negotiation process conducted through the carrot-and-stick tactics of “managed trade” given teeth by the threat of runaway protectionist political sentiment within the U.S. Congress, this Treasury press release from February is worth quoting in full:
Treasury Department Names Alan F. Holmer as Special Envoy for China and the Strategic Economic Dialogue
With the Democrats in control of Congress and political pressure from both sides of the aisle to “do something” in response to the ballooning trade deficit with China, the Bush administration appears to be offering an alternative to a fireeating attack on China’s undervalued yuan by the Chuck Schumers of this world.
The alternative looks a lot like “managed trade”, the nibbling attack on Japan’s structural impediments, non-tariff trade barriers, and non-market self dealing begun in the reign of Bush the Elder.
The CVD decision itself eschewed claims of government subsidy of exports through the exchange rate. Instead, it appears to be responding to specific assertions by the US paper company, NewPage, that Chinese banks were propping up the Chinese pulp and paper industry with credit at preferential rates, and also by forgiving dud loans.
This is a reasonable approach—if difficult to prove in the case of the two Chinese paper companies that got whacked with the high CVD tariffs—and is reminiscent of U.S. gripes about Japanese industrial policy, with its overt and hidden promotion of certain export industries through preferential credit access in the 1980s and 90s.
The door is now open to a slew of similar complaints by every American industry under pressure from Chinese imports. And I suppose the U.S. government can be selective in which of these cases it chooses to support , and thereby use them as bargaining chips in negotiations with the Chinese government, both over trade and other economic concessions.
If the Bush administration has an objective in China, I imagine it would not be an apocalyptic political struggle over the yuan exchange rate that would provoke the Chinese to accelerate its switch from the dollar to the Euro, threaten to reduce purchases of U.S. government debt, and destroy life as we know it on this planet.
Maybe something more modest and welcome to Republican donors in the financial service industries—like greater opportunities in China’s protected financial markets for foreign firms, with the not unlaudable benefits of, in addition to enriching our deserving banks, insurance companies, and stockbrokers, accelerating the reform of China’s dismal domestic banking industry, compelling increased transparency in the equities markets, and heightening the pressure on China’s undervalued yuan from within the Chinese financial system.
The amazing thing is that the Bush administration, even with its house of cards crumbling around it, actually might have a China trade policy. And for this, I suppose we can thank Henry Paulson, Secretary of the Treasury.
Indeed, a recent article in the Financial Times identified Paulson, together with Secretary of State Rice and SecDef Gates, as the “Gang of Three” who might “leave office in January 2009 with higher standing” than when they came in.
It is perhaps both because of Paulson’s energy and focus and because the ultimate goal of the Bush policy is to open China’s financial markets to greater foreign participation, that the Treasury Department seems to be taking a lead role in China trade policy.
And the Treasury angle also raises the interesting question of there was any backscratching and logrolling involved in the fact that NewPage, filer of the paper complaint is controlled by Cerberus Capital, the finance firm run by ex-Secretary of the Treasury John Snow.
In the perceived context of a protracted negotiation process conducted through the carrot-and-stick tactics of “managed trade” given teeth by the threat of runaway protectionist political sentiment within the U.S. Congress, this Treasury press release from February is worth quoting in full:
Treasury Department Names Alan F. Holmer as Special Envoy for China and the Strategic Economic Dialogue
Today, US Treasury Secretary Henry M. Paulson announced he has appointed Ambassador Alan F. Holmer as Special Envoy for China and the Strategic Economic Dialogue. In that role, Ambassador Holmer will lead a strong Administration team managing the bilateral economic relationship with China.
Ambassador Holmer was Deputy U.S. Trade Representative under President Ronald Reagan, ran the anti-dumping and anti-subsidy programs at the Commerce Department, chaired the international trade practice at a major international law firm, and most recently was President and CEO of the Pharmaceutical Research and Manufacturers of America (PhRMA), where, among other responsibilities, he led efforts to improve intellectual property protection around the world, including in China. He has co-authored three books on international trade law.
"Alan brings a wealth of international and leadership experience that will allow him to hit the ground running, and lead successful efforts to help the Chinese government move toward a balanced, growing economy that is not reliant on large external surpluses," said Paulson.
President Bush and President Hu established the Strategic Economic Dialogue to manage our bilateral economic relationship effectively. The first meeting of the Dialogue was held in Beijing last December. After frank conversations on a range of cross-cutting economic issues, we agreed on work plans for services, investment, transparency, health care, and energy and the environment. Work has begun in each of these areas since the December meeting.
The second meeting will take place in Washington, DC, May 23 and 24.
"I believe that the Strategic Dialogue, where we speak with one voice with the highest levels of the Chinese government, is the most effective way to make progress on immediate issues and on the longer term issues that we face with China," said Paulson.
Beyond the quite remarkable fact that Paulson was able to recruit the head of Big Pharma, the most potent industry lobbying group on the planet, to descend into the smoking crater of the Bush administration for its last few months of existence—and the fact that Holmer ran anti-dumping and anti-subsidy programs at one time at Commerce but will now lead the charge from Treasury instead--the emerging outline of managed trade in the “Strategic Economic Dialogue” with Henry Paulson speaking as the "one voice" of the US on this issue make it possible that we might see something interesting and even productive from this administration with regard to China trade.
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