Intro: China’s accumulation of foreign currency is a hotly debated topic. Secretary of Treasury Geithner recently characterized it as “currency manipulation,” a legal term of art which allows the United States to take retaliatory measures.
I have written a paper that approaches this practice from a different angle, and recommends a different solution. The paper can be downloaded here http://ssrn.com/abstract=1332842
In this paper, I revisit the historic ideas surrounding miserliness and usury. I explain why these were economically pernicious activities, and why they were socially stigmatized or made illegal. The paper then moves onto international relations. I argue that China has been acting as miser and usurer on the world stage, at the expense of its own needs and global productivity. The world needs to balance spending vs. saving/investing/lending, and if there is too much of the latter then a rebalancing is inevitable. China has been doing too much of the latter, and the current economic crisis is that rebalancing.
The preferred solution to this problem is not trade protectionism, but rather increased trade. Over the past decade Americans have spent trillions of dollars on Chinese goods and services. This created employment in China and helped the country achieve its potential. The Chinese have responded by hoarding and lending that money. But a relationship where Americans spend and Chinese save and lend is not viable. Only when China takes the dollars Americans spend to employ Chinese, and uses it to employ Americans, will there be a sustainable relationship that can tap the productive potential of both countries. The United States has taken the first step and spent to establish this relationship. It is now China’s turn to spend, to advance that relationship.
I am interested in comments before the paper is published, so please do not hesitate to write me at the link above with any feedback.
Note: post title and content changed per the author’s request. -admin
Netizen K says
This is really a conventional analysis. I say that because it only touches on trade in goods. What about trade in investments?
The Chinese currency reserves can be used for 3 purposes: buy foreign goods, foreign debts, and foreign productive assets.
China is welcoming foreign capital but the US is not welcoming Chinese capital except buying treasury bills and mortgage debts.
Foreign capital controls a huge portion of China’s productive capacity but the Americans resist Chinese investment in American productive assets.
Netizen K says
China needs to buy foreign productive assets instead of foreign debts.
Otherwise, China should buy up the foreign control of productive assets in China so that when capital flee becomes a non-issue if the assets is in Chinese hand.
Netizen K says
China has 2 trillion dollars of foreign currency reserves.
It needs to keep one trillion in place in case of foreign capital flees during crisis.
It needs to spend 500 billion to buy productive assets in Taiwan, Japan, South Korea, the US and the EU. Chinese President Hu Jintao needs to tell the heads of these regions and countries to open their doors to Chinese capital or China will shut its to their capital.
It needs to spend last 500 billion on American and EU goods. Again Hu Jintao needs to tell the US President Barack Obama and European heads of governments to lift ban on dual-use technologies and other high-tech products. Otherwise, the trade imbalances will never be able to be resolved in an efficient way.
AG says
What about trade in investments?
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Thank you for your comment. I address that in the paper. Spending money and investing money are different things. Although everyone wants to be an investor, you need spenders. If everyone invests and no one spends then the investments have to fail. A world with an inordinate desire to save (miserliness) and make money by investing or lending (usury) is dysfunctional.
In the old days, society understood the value of spending money (hence the stigmatization of misers and usurers), but today that difference is forgotten and we’re seeing the consequence.
At some point China is going to have to realize that hoarding money is a lose-lose gameplan, and start spending to employ Americans. If they don’t, the relationship is doomed and all that money will go to waste. Although debt slavery used to be common in the world, it is not possible anymore. Today the debtor can repudiate debt if the creditor abuses the relationship. I go through this history in detail in the paper. China would be better off using that money to pay Americans for goods and services than risk having the debt made worthless. If Chinese spend, Americans will spend right back and both countries will prosper. If they don’t, the relationship will end and both countries lose.
In summary, it’s time for China to realize it’s rich and go on a global spending spree.
Thank you for reading the paper and for your comment.
Netizen K says
I don’t think you answered my question fully.
How much do the US and other countries control productive assets in China? Do you have a figure on that?
Why did the Americans resist China buying Unocal, 3M and other assets?
Only when China controls its own productive capacity or has a proportional share of other countries’ productive assets, then the Chinese will be able to spend its money on consumption.
AG says
Hu Jintao needs to tell the US President Barack Obama and European heads of governments to lift ban on dual-use technologies and other high-tech products. Otherwise, the trade imbalances will never be able to be resolved in an efficient way.
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That’s interesting. I spoke with a Chinese friend who said something similar. He said that the only thing Chinese want to buy from America is military technology.
But is that the only thing Americans make that Chinese could buy? Americans make lots of other products, like food, movies, infrastructure, education, specialized machinery, software, intellectual property and lots of other stuff. Americans make tons of stuff that is worth more to China than money (which is ultimately a worthless piece of paper.)
I think China could be a hero, help the world and help itself if it started to spend. But I worry that they are too committed to the ancient and lose-lose strategies of miserliness and usury to do so.
AG says
Why did the Americans resist China buying Unocal, 3M and other assets?
Only when China controls its own productive capacity or has a proportional share of other countries’ productive assets, then the Chinese will be able to spend its money on consumption.
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That’s more investing and not spending. China can buy every company in America, but as long as people don’t spend money on the products produced by those companies, then the Chinese investments will fail. American shareholders would love to have Chinese buy up their companies, but the Chinese checked the balance sheets and income statements and refused to do so. I recall the head of China’s sovereign wealth fund rejecting America’s request for additional investment.
Also, regarding using investments to control. I talk about this in detail in the paper. In the old days you could enslave a person or a country with investments and debt. But that was centuries ago. Today an excessive desire to invest and lend will only lead to losing your money.
The solution to this whole mess requires taking off the “investor” hat and putting on the “spender” hat. Spending money brings productivity to all. If I spend money to employ you, and you spend money to employ me, then we’re both better off. If I spend money to employ you, and you hoard that money, then soon we’ll both be unemployed.
Netizen K says
China has control over the production in China.
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That’s patently false. Coca-Cola, KFC,GM, Motorola, the list can go on and on, control immense productive assets in China.
If China buys a big stake of GM or some other American companies, a uproar will surely occur.
The idea that Chinese don’t consume is really a false one and without merit.
If China can balance the investments in the ownership of production with other countries, its foreign currency reserves will disappear overnight.
AG says
Coca-Cola, KFC,GM, Motorola, the list can go on and on, control immense productive assets in China.
….
The idea that Chinese don’t consume is really a false one and without merit.
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Oh come on, do you really think Coca-Cola and KFC control China? And as I wrote in the paper, the idea of using investments and lending to enslave and control is from centuries ago. Debt slavery and peonage are things of the past. The world has evolved past that. Today people who try to use investments and loans in an abusive manner just wind up losing their money. If KFC or Coca Cola acted abusively in any way the Chinese government could shut them down with the snap of a finger, and their shareholders would bear the loss.
And China’s excessive savings and lack of spending are documented. I got my numbers from the IMF, but it’s in lots of locations.
AG says
Netizen,
I have to run right now but thank you for reading my paper and commenting. I enjoyed the discussion.
Netizen K says
AG,
Do you know the US has a veto in IMF? If someone in the IMF doesn’t follow American policy dictates, they will be out of a job.
Do you know IMF doesn’t has purview in assessing the US financial system and policies? Now we suffer a global financial crisis as a result.
In my view, IMF has no credibility.
AG says
I meant I got the bal. of pmnt., FOREX and savings rate numbers from the IMF. These are (I think) objective numbers that no one disputes. I’ve seen the same numbers in other locations.
Speak with you later.
TonyP4 says
Money is the king now, and China as a country has a lot (not much free money per capita though). It should be used wisely. Some good examples.
1. American Super Conductor (could be a typo). China licenses its technology initally for the grid between Mongolia winded-generated power to other Chinese cities. It is great technolgy that China may never obtain from its own researches (or hard to catch up). Building products with this technolgy would create jobs for internal use/international markets. However, China needs to make world-class products based on this technolgy that takes a lot of further research.
2. Buy Volvo from Ford. It is the fastest way to open US/EU market with a proven product. The current autos built in China cannot compete in these markets. Building a car and marketing a car are two different stories. Buying a division of GM is another option. It is a big investment and big risk/benefit!
This could be once a century opportunity for China.
Netizen K says
AG,
According to Wikipedia, China has the stock of 700 billion US dollars foreign direct investments from aboard and only 67 billion to abroad. Thus 633 billion net FDI. It can easily be worth 1.9 trillion dollars of China’s foreign currency reserves now. So, if you combine both current and capital accounts, China is in balance with the rest of the world.
Your analysis clearly missed this key component.
Charles Liu says
Oh boy, remember what happened when the Chinese, in their miserliness, sold tea, silk, and hoarded gold and silver? I see a parallel in this line of thought.
At least our worthless T-bill isn’t addictive, or is it? The HUD sold a lot of MBS to China, and I suspect the Chinese took a big hit as part of the mortgage bubble and world-wide financial melt-down. As to investment, remember Blackstone? And what happened when they wanted to “Buy American” – remember Maytag and Lenovo?
Steve says
Hi Charles~
I’m not sure what you mean when you mentioned Lenovo. I always thought Lenovo’s purchase of IBM’s ThinkPad was a very smart move on their part. Hasn’t it been profitable for Lenovo? It sure upgraded their technology base. I took a look inside an old Legend computer back in 2001 and the components were garbage. These days, they make a great laptop.
Charles Liu says
Steve, I was refering to the terms of the IBM purchase – ThinkPad brand only for 5 years (or some crappy terms like that.) Those laptop were already OEM’d in China.
And I forgot to mention when they wanted to byy Chenvron. Remember the reaction we had?
Netizen K says
It was Unocal. China’s CNOOC wanted to buy the company whose assets were mostly in Asia. Despite that, the xenophobic US Congress cried foul. CNOOC had to withdrew its higher offer and Chevron bought Unocal at the end.
Steve says
@ Charles: Terms are always negotiable and IBM probably wanted some protection of a name that is associated with IBM itself. If Lenovo agreed to crappy terms, that’s their decision. Was there more to it than that? Since the merger, Lenovo’s laptops get great ratings but they’ve had some problems with service issues. Overall, it was probably the best investment any Chinese company has made in terms of acquisition. Most don’t realize that 70% of all foreign acquisitions fail.
Netizen K is correct; it was Unocal. I’ll go to bat for the “xenophobic” Congress on that one, though. If CNOOC was a public corporation, then I think the deal would have gone through. Because it was owned by the government, that made the process inherently political and the offer was more strategic than straight business. SOCs are political by nature.
Whatever happened with Maytag? When last I heard, Whirlpool had topped Haier’s offer so Haier withdrew from the process. I seem to remember the big controversy being that Haier wanted to buy the name and the service, but bring the production to China which would have turned the factory town into a ghost town. That seemed to be the dilemma at the time.
Speaking of ghost towns, I read earlier today that migrant labor had gone from 10 million to 20 million lost jobs over the last few weeks, way beyond previous expectations. I just hope it’s peaked and things will stabilize soon.
Netizen K says
I think Whirlpool put up a higher bid and Haier didn’t match it. Haier made the right decision because the idea of Haier wanting the Maytag brand name was not sound.
A company with two main brands is not going to work efficiently. For example, the parent company of Panasonic finally dropped the second brand National after many years of promoting both brands.
Haier would have the same dilemma if it won the bid.
Allen says
@AP,
First of all, as someone who has published in 2 law review journals, I applaud your effort.
I agree with your overall point. The more collaborative and mutually beneficial we can make the trade relationship between U.S. and China to be – the more stable and prosperous we can make the world.
Here is my suggestion on making the paper a little stronger. Instead of simply accusing China of hoarding money and not being clear about its intent – and asserting that America makes lots of products, like food, movies, infrastructure, education, specialized machinery, software, intellectual property and lots of other stuff that China ought to buy – you should include some analysis on why China is “hoarding money,” i.e. why China is not buying American products.
The way you have it now, I can easily apply the same logic to the British of the 19th century. There is a reason for the trade imbalance now as well as back then: and the answer is not that China likes to hoard money.
BC says
Allen,
It is interesting the author didn’t analyze the US unsustainable model. He put all the blame on China. It is clearly a bias attempt shifting blame.
Allen says
@BC,
Well … yes the U.S. side needs examination, too. But I think the author’s focus is not necessarily on the current economic crisis – but on the long-term ramifications of sustained trade imbalance between the U.S. and China.
I think the author did analyze in good faith: from an American perspective, China some times does seem like a Scrooge. Why don’t they buy more from us? Don’t they know that we can’t keep buying if they don’t buy from us? (The same imbalance also propelled the British to fight the Opium War; from the European perspective, China was hogging up all the Silver reserve in the world.)
I just don’t think that even from the American perspective, the analysis should stop at saying China is a Scrooge – but continue on to why China is such a Scrooge. Why is China not buying as much American things as Americans allegedly would like to sell? The answer to that question would be much more insightful and useful than a simple accusation, in my opinion.
AG says
According to Wikipedia, China has the stock of 700 billion US dollars foreign direct investments from aboard and only 67 billion to abroad. Thus 633 billion net FDI. It can easily be worth 1.9 trillion dollars of China’s foreign currency reserves now. So, if you combine both current and capital accounts, China is in balance with the rest of the world.
Your analysis clearly missed this key component.
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The current and capital accounts have to balance by definition. My argument is that they should balance because China buys as much from the world as the world buys from China.
AG says
I can easily apply the same logic to the British of the 19th century.
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You certainly could. This is partly the point of the paper. Most of the world evolved to realize the fruitlessness of this strategy.
As far as why China saves, I don’t know and that’s why this is so perplexing. From what I know about China, it’s not a country that should be saving money. It’s a country with immediate needs that only spending can fix. I analogize it to a family with hungry children and without indoor plumbing, where the father uses all of his salary to buy treasury bonds. That family should not be saving money, and neither should a country where 1/3 of the population lacks safe drinking water. In addition to depriving itself of needed goods and services, there are numerous other reasons why China’s excessive savings don’t seem to make sense: it threatens world trade, it deprives the world of employment (including China) and it may have sent the world into a depression.
My guess is that the government has a tight grip on the country.
AG says
I agree with your overall point. The more collaborative and mutually beneficial we can make the trade relationship between U.S. and China to be – the more stable and prosperous we can make the world.
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Thank you. This is ultimately the point.
If you have further comments please feel free to email me.