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How the Euro crisis can end

Chinese protesting against Japan, even a Japanese-made police vehicle not spared (Shenzhen, Sept 16, 2012, Apple Daily)

Recent protests in China over Japan’s “nationalization” of the disputed Diaoyu Islands (in Japanese, Senkaku), especially with calls for boycotting of Japanese products, has made Obama’s “Asia pivot” a resounding success. Remember, the goal of the ‘pivot’ is to dominate the Asia Pacific both economically and militarily. The Trans-Pacific Partnership is designed to ensure a bigger proportion of Asia’s trade volume heading America’s way. Getting hawks in Japan to be belligerent on the dispute has worked wonders. Toyota’s auto sales in September compared to a year ago has dropped by 49% in China! Other Japanese auto-makers have faced drastic drops in sales too.

General Motors on the other hand has sold more cars in September than ever in its history in China, making it the largest foreign automaker in terms of sales.

Militarily, the recent tension serves the ‘pivot’ as well. As James Holmes, associate professor of strategy at the U.S. Naval War College in Newport, Rhode Island, recently told The Asahi Shimbun on whether Japan should do more militarily:

Yes, well, I mean, to me, the big thing that you all need to do is bust through the 1 percent cap on defense spending. I don’t see that you can do all the things you need to do to defend those islands and, indeed, to contend with the Chinese … . To me, 1 percent is not a serious commitment. That’s not a serious commitment to defense.

For years, the U.S. have been pressuring the Japanese government to pay more for the military alliance. For example, Japan pays for a portion of U.S. troop expenses stationed in Okinawa, which they call “host expenses.” While not widely covered in the American press, protests by Okinawans against the U.S. military bases have been fierce. The heightened tension helps to mitigate that issue.

If what Holmes suggests become reality, U.S. costs in maintaining the 7th Fleet and her over-all military footprint in Asia will come down.

As we have written about Diaoyu Islands previously, the current dispute really arose out of U.S. giving administrative control to Japan in the 1970s. In the Chinese eyes, this was a strategic ambiguity created by the United States on purpose for exploitation at a future opportune time. During a crisis, the United States even have the luxury to take a “moral high ground” by saying it is a neutral party and urge “restraint” on both sides. On one hand she says she takes no side on the sovereignty dispute. On the other hand, some U.S. officials say if there is a military confrontation, existing treaties obligate America to act.

On the receiving end (China and Japan), such a strategic ambiguity on the U.S.’s part is divide-and-conquer! In some ways, this is what geopolitics is all about, and America is expected to behave in such a way. Britain’s foreign policy towards the European mainland has always been about undermining the strongest state.

So, China and Japan should think longer term and not let the current dispute get out of hand. China gets a lot of technology from Japan which the U.S. is not willing to export. Many Japanese also wonder how much longer is their country to be occupied by the United States. 100? 1000? When former Prime Minister Yukio Hatoyama argued for an Asian Community, it was a clear sign there is a growing camp within Japan for a more integrated Asia. The two countries cannot lose sight of such an idea.

(WARNING: facetiousness starts from here on!)

So, how is this situation suppose to help save the Euro?

Given the rhetoric from Romney and Obama about China being a ‘cheater’ and ‘currency manipulator,” (which, by the way, Kissinger recently criticized as “deplorable”) and the seemingly blatant protectionism against firms such as Huawei and ZTE, it really seems America is on a trajectory towards undermining the relationship.

Okay. Here is a suggestion for Germany. Germany should be riling up the Chinese against American companies in China. Have them beat up GM cars. BMW is already selling like hot cake there. Sympathize with the Chinese on U.S. battle groups roaming up and down China’s coast with Japan is belligerent. Have Chinese protesters pressure Chinese airlines to buy Airbus and not Boeing.

Voila! Euro saved.

China’s trade with Europe dramatically expands while with Japan and U.S. decline. Let America refocus on the Japan trade deficit (i.e. Japan-bashing) just as she did in the 80s. We’ll get to see how predictable our world is. Perhaps there may even be a Plaza Accord version 2.0.

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  1. October 10th, 2012 at 01:09 | #1

    For the effort I’ve put into this post, I hope to get some laughs out of our readers! 🙂

  2. October 10th, 2012 at 11:47 | #2

    Most Japanese actually hate the subordinate relationship they have with the US. Even arch nationalist like Shintaro Ishihara want a normal and equal relationship with the US. Yukio Hatoyama got elected by running on being more Asian centric (closer relationship with China and Korea) and relocation of the Marine Corps Air Station Futenma (more say in Japan-US relationship). Unfortunately, the US called his bluff on the base relocation. Hatoyama was unable to keep his campaign promise and has to step down due to money scandal (let’s face it ALL Japanese politicians need financial support from industrialist to even campaign, so he is not more guilty then the other guys). In reality it is US refusal to move the base that let to him being sidelined in Japanese politics.

    Shintaro Ishihara then try to put pressure on the new Democratic Party of Japan under Yoshihiko Noda by proposing to buy the disputed Diaoyu Islands. Yoshihiko Noda escalated the issue by saying that the federal Government will buy the islands leading to open protest from mainland China and Taiwan. The two initial goals of the Democratic Party of Japan have now been totally derailed by domestic and petty Japanese local politics. By confronting instead of negotiating with China on the Diaoyu issue, Japan will always be subordinate to the US as it needed the backing of the latter. Same thing with the islands dispute with Russia. However, by upholding the same confrontational stand with Korea and Taiwan, the Japanese actually put themselves and the US in a no win scenario. Who should the US back if there is confrontation with Korea and Taiwan?

    It is only by settling the disputes amicably with all its neighbours that Japan can have an equal relationship with both China, US and all the neighbours. By then there will be no raison d’Etat of US military bases in Japan. So in reality there is no real friend or foe in international politics.

  3. October 10th, 2012 at 12:11 | #3

    In reality, other than protection on banking, mass media and telecommunication China’s market is relatively open. The US and Europe protect those industries as well. If Chinese government want to nurture its own auto industries, they would have stopped buying all foreign brand cars. The US government never buy any foreign brand vehicle even if those brand have higher domestic content than local brand. Same with French, German and Italian government.

    Frankly, the only reason GM and its Chinese government partner can sell so many cars (over 2 million in 2011) is because of unresolved dispute with Japan. In all other world market Japanese cars outsold GM cars by at least 10 to 1. In Korea and Japan, US car manufacturers have less than 1%of the market (unless you add Daewoo and Suzuki which is controlled by GM).

    If the Chinese government is to really start trade protectionism, they should buy only domestic brand or Volvo, which is controlled by Geely. However, I think they should buy up stock in Germany’s big 3 auto VW, Daimler and BMW, which is a win-win situation, many Middle Eastern sovereign wealth funds has already done so. Euro 5 billion for each make is enough for around 10% stake.

    Post corrected: In all other world market Japanese cars outsold US cars by at least 10 to 1.

  4. Zack
    October 11th, 2012 at 01:38 | #4

    the Americans who are the instigators of these troubles in east Asia must not be allowed to reap the benefits of their machiavellian schemes. If Japanese companies are to be targeted, then so must American firms and companies.

    y’know, i refused to believe that Washington was stupid enough to declare economic war on China, but it seems that i’m proven wrong and Washington really is that short sighted and stupid enough to declare economic war on China. At this rate, the depiction of America in ‘Looper’ becomes more than prophetic.

  5. Sleeper
    October 11th, 2012 at 09:56 | #5

    @Ray

    It your idea is right, I wonder what Japan will retrieve after gaining “independence” and “equal relationship with U.S”; for Japan has offended every neighbor during the process in this region. In the past, Japanese empire rose when all his neighbors were weak, but now Japan is almost no match for Korea, not to mention Russia and China that arm with nuclear weapons.

    Or shall I consider Japanese’s brain is so sepcial that hard to unstandood by others?

  6. October 11th, 2012 at 11:31 | #6

    @Sleeper
    Well, there are two major issues that hurt Japan’s relationship with ALL its neighbours. Basically, it is the same and can be classified as no.1. territory dispute and no.2 historical issues (Yasukuni Shrine, history text, denial of war crimes etc). If no.1 is solved then the 2nd one is much easier because both are linked in some way.

    If you are a statesman in East Asia, you will realized that this region including the Russian Far East is home to 1.5 billion people (4 times that of EU and 5 times that of N.America). On top of that Russia and China can provide nearly all the natural resources needed for development. Although small compare to China, Japan with 120 million population has twice the population of UK, France, Italy etc and 50% more than Germany and still has lots of fortune 500 companies.

    Visionary leaders in China, Japan, Korea all see the potential of a closer East Asian cooperation. Even voters in Japan voted for the Democratic Party of Japan because they want change too. Unfortunately, the no.1 issue got in the way again. Frankly, there will be no revival of Asia unless all these countries come to normalize relationship first. And you can’t have a strategic partnership if you allow territories dispute got in the way. The PRC compromised their territory claim with all central Asian states and Russia. It paves the way for the Shanghai Cooperation Organization. Granted all those countries are mostly still “poor” developing with lots of resources.

    The biggest problem with Japanese government position is because they are vote driven and partly controlled by the US. The opposition party will always try to sabotage the ruling party by raising sovereignty issue whenever the latter try to do something never done. In Korea, opposition will always attack the ruling part on DPRK, Lee Myung-bak came into power by attacking the previous administration “weak” stand with DPRK, and when his popularity dropped he visited Dokto. In Taiwan, no ruling party dares get close to the mainland for fear of being called sell out, the only times all parties stand together is on the Diaoyu issue. Of course now the consensus is that economic relationship with the mainland is vital for Taiwan’s well being hence we will see more top opposition leader visit the mainland. Frank Hsieh of the DPP just visited using the title of honorary president of cocktail association of Taiwan (correct me if I am wrong in my translation).

    The only way to get around this is when Japanese industries are hurting and the people realize something bigger is at stake. This is probably the only way that will work as the US cannot intervene.

    Korea decides not to extend currency swap with Japan.
    http://www.chinadaily.com.cn/world/2012-10/09/content_15803747.htm

    Korea and China expands currency swap.
    http://english.caijing.com.cn/2012-09-29/112163986.html

  7. October 11th, 2012 at 11:38 | #7

    yinyang
    The protest that gone out of control and breaking the law is really stupid. How does smashing Chinese police cars hurt Japan in anyway? In the end the Chinese taxpayers have to foot the bill.

    Also if the Chinese government is behind the boycott and can brainwash the Chinese people, wouldn’t the sales of Japanese brand products dropped 99% instead of just 30-50%?

    The mainstream western press are either ignorant or malicious when they reported that it is the Chinese government who instigate the protests and boycott.

  8. N.M.Cheung
    October 11th, 2012 at 13:30 | #8

    I was a student in the mid 70s when we protested on the Diaoyu islands issue in U.S.. Most of the students were overseas Chinese from Hong Kong, Taiwan and Southeast Asia. Chinese government was ambivalent on the issue and Teng decided to postpone the issue in normalizing diplomatically with Japan. If Japan not reopened the issue under pressure from right on electoral weakness I suspect China would have leave it alone for future resolution with possible Chinese sovergnity but join exploration of possible undersea oil and natural resources. Similarly China was willing to cede Eastern boundary to India in return for Western Kashmir area. The mass protests will make Chinese government’s response harden and more difficult. It’s up to Japan to decide whether it want to re-militarize and waste resources to confront China. For a so called democratic country like Japan or U.S. with cheap appeals of nationalism it will always be duffucult to make decisions with long term benefits like green resources but short term electoral disadvantges.

  9. October 11th, 2012 at 22:30 | #9

    Japan is in such a fiscal funk. After the interest payments on its bonds each year, if it doesn’t spend a dime on anything else, at its current pace it will take 25 years just to pay off its current debts. Even it wants, it simply can’t spend that much more on military. Even the 4 F-35s it budgeted for this year was a sorry on and off deal. It’ll take several years just to stash enough money to pay for a squadron of F-35s — but Lockheed is helping as well, the first delivery today is pushed to 2017. Hey, as things are going, PLAAF may field J-20s earlier than JAF fields F-35s. How the world has turned…

    Euro’s problem isn’t its economy but rather its structure. The pan-Eurozone macro numbers (fiscal/trade balance, debts, etc.) are actually prettier than those of the US. However, even if Germany is doing better, PIGS aren’t.

  10. October 11th, 2012 at 22:46 | #10

    @Ray

    Actually native American brand names, e.g. Chevy, Ford, are doing pretty well compared to their Japanese peers in Latin America and Europe, unlike in non-China/Japan part of Asia.

    American carmakers’ single biggest problem prior to the recent global financial meltdown was its legacy cost. Embedded in each vehicle it sold was US$2k of pension cost mandated by its union contracts. To make up the difference and still goose up the profit, they were forced to cut corner in design and quality, and engineer more earnings from its financial arms, e.g. GMFC.

  11. October 11th, 2012 at 22:47 | #11

    @Ray
    Right. The picture in the OP says it all. I’d like to see the Western press try to explain how the Chinese government encourages the protesters to beat up that police car. The Western press is malicious in saying the Chinese government instigated the protest. They have gotten so used to spewing nonsense without any sort of evidence; it’s always he said she said.

    If anything, there is discontent among the Chinese population that the Chinese government has thus far been too meek in confronting Japan.

    @jxie
    As long as both Japan and the U.S. are in fiscal funk (to borrow your words), it makes for their alliance more precarious. The U.S. will continue to pressure Japan to chip in more as Holmes argued.

    Some of my friends in Japan really lament this fact. They feel Japan is forced to contribute yet wield no independent political power on the world stage.

    @N.M.Cheung
    Agreed.

    @Ray
    Always insightful.

  12. October 12th, 2012 at 09:29 | #12

    @jxie
    Chrysler have no significant world present. GM is only profitable in China, and a few countries that its operation is protected by monopolistic policy. The car market of the world is now owned by the German, Japanese and Korean. China is new to the fray exporting close to a million cars and truck last year. And then there is India. Ford is the only bright spot with profitable world operation, so it is no surprise that it did not need government aid in 2009. Although GM is still the biggest it is barely profitable.

    However, the auto companies ownership now transcend national border. Chrysler is controlled by Fiat. Nissan is controlled by Renault, Mitsubishi by Daimler; Daewoo, Opel, Suzuki by GM etc. Hyundai/Kia has now displaced Ford to become the 4th largest auto manufacturers. So it can be hard to ascertain national ownership.

    GM and Chrysler biggest problem is their products are supposed to be mass market but have problem competing with Japanese and Korean brands. And in the high end market they also can’t compete with the German and Japanese except in their home market. GM sales in the US is 4.9 million in 2000 but dropped to 2.5 million in 2011. Ford sales in the US dropped from 4.2 million in 2000 to 2.1 million in 2011.

  13. October 13th, 2012 at 20:35 | #13

    China already buys a lot more European stuff than American. I think it has something to do with cultural differences, and regulatory similarities between the Chinese and European systems.

    The basic problem with this facetious scenario is that China is more dependent on the US than the US China. China has to at least maintain the pretense of buying US goods, otherwise the US has nothing to lose by starting a trade war.

    Also, @jxie had a good point. Buying more German goods won’t help Europe, unless there is some way to get the money out of Germany.

  14. October 14th, 2012 at 19:48 | #14

    @Ray

    Ford is the #2 car brand (by volume) in Europe, and Opel is #4. None of the Japanese/Korean car makers are top 10. In Brazil, VW, GM (mostly locally made Chevys), and Fiat are top 3, and Ford is a distant #4. I’ve driven American-branded cars in these places, and surprisingly they are very good.

    It’ll be a long discussion, and my take is mostly due to auto unions. In short, it’s only American-branded cars made by Americans suck. Foreign brands made by Americans in the South tend to have better quality ratings. Being good at car making you need to have a disciplined and reasonably well educated workforce, with a car culture and history. It’s hard to make a case that American Southerners are better than American Northerners in making quality cars, but the reality is that a Toyota made in Kentucky typically is of better quality than a Chevrolet made in Detroit — but not necessarily one made in Brazil or China!

    American corporations are incredibly flexible. The Opel Corsa platform has turned into hot selling car Buick/Chevy Sail in China, and various models with the Chevy name in Brazil — yet such flexibility had not been able to get into Detroit. Detroit was still churning out SUVs in the mid-00s when the oil price shot up. It’s not that their executives didn’t know the customers wanted smaller cars with higher mpg, but rather they couldn’t afford to idle the SUV plants — even if the auto workers sat idle, they would still have to be paid.

    Well, if the near-death experience of the American auto makers did break the union shackle, then the future of GM/Ford is bright; if not, then don’t be surprised in a decade, these companies move their HQs to somewhere like Hong Kong or Shanghai.

  15. Sigmar
    October 15th, 2012 at 08:54 | #15

    @maofucious
    “… China is more dependent on the US than the US China. China has to at least maintain the pretense of buying US goods, otherwise the US has nothing to lose by starting a trade war.”

    Do elaborate. Why is China more dependent on the US? Why has the US in your own words “nothing to lose” in a trade war? And does your scenario play out in the short term or the long term?

  16. October 15th, 2012 at 20:37 | #16

    @jxie
    That’s why I leave out Ford, since it is actually competitive worldwide. GM’s worldwide sale is around 8.5 million with US and China market accounting for 5 million. There is something seriously wrong with this distortion. GM is mostly losing money on Opel’s sales and most other market. If GM is a Chinese company, it will be hit by serious dumping claim.

    Europe is no longer a significant car market, due to price of petrol there. On top of that the market is in a recession and growth is in developing countries.

    Here’s the 2010 sales figure:

    • Toyota: 8.42 million
    • General Motors: 8.39 million
    • Volkswagen AG: 7.14 million
    • Hyundai Kia: 5.74 million
    • Ford Motor: 5.31 million
    • Nissan: 4.08 million
    • Peugeot: 3.6 million
    • Honda: 3.56 million
    • Renault: 2.62 million
    • Suzuki: 2.54 million

    http://wheels.blogs.nytimes.com/2011/01/28/hyundai-kia-overtakes-ford-while-g-m-threatens-toyota-in-2010-global-sales/

    GM took over the lead as No.1 in 2011 due to the earth quake in Japan. However, I believe Toyota will retain its crown this year. Peugeot sales have dropped so badly this year that they delisted their stock (I think Peugeot would be dead by the end of the decade). If we look at the overall big picture, the Japanese, the German (VW, BMW, Daimler) and the Korean will be the biggest players driving out the rest except maybe Renault-Nissan. Sadly, this mean very little room for domestic Chinese brand too.

    I believe you missed this trend because you did not pay attention to the “third world” markets. The Japanese and Korean are very strong in these markets while The German totally dominate the luxury segment.

    PS: GM has retired the Daewoo brand in Korea this year and switched to Chevy. IMO, a bad move as Korean are among the most “indoctrinated” in patriotism by education and upbringing.

  17. JJ
    October 15th, 2012 at 21:04 | #17

    I recently read about this interesting fact:

    An important exception to this rule is China, which has displayed a willingness to negotiate in many such situations. In just over 60 years, China has gone from 23 land disputes down to just six. In the majority of its settlements, China accepted less than one-half of the territory it originally claimed.

    From This Land Is My Land: How much of the planet is disputed territory?

  18. albinosprouts
    October 15th, 2012 at 23:07 | #18

    @JJ
    Nice find. I doubt this fits into the Western “China-is-evil” worlview.

  19. no-name
    October 17th, 2012 at 19:45 | #19

    Could editor at HH find some free time to do an article on Tom Coburn’s 2012 Report on Government Waste ? It may/may not be relevant to this topic but it is simply too important to miss.

  20. October 17th, 2012 at 22:32 | #20
  21. October 18th, 2012 at 04:04 | #21

    Sigmar :
    Do elaborate. Why is China more dependent on the US?

    This is a simple consequence of its trade surplus (or America’s trade deficit).

    Why has the US in your own words “nothing to lose” in a trade war? And does your scenario play out in the short term or the long term?

    “Nothing to lose” was a conditional statement, if China restricts imports from the US. I imagine that if a tipping point were reached, you could end up with a MAD-type scenario and things could happen quite quickly. It seems unlikely in practice, but if Romney or Krugman (an odd pair) got their way, then it would be possible.

  22. October 18th, 2012 at 08:29 | #22

    @maofucious
    Not exactly true. China can export $100,000 to US and make just $2,000 profit. US export to China of $50,000 would be making $5,000 or more, to top it off, many fortune 500 US MNC needed China’s market not to go into the red. Examples are GM, Yum Group, Boeing, AMD, Intel etc. It might not seems like much but when Toyota’s sales dropped by 10% in 2009, it goes into the red for the first time since WWII.

    http://www.kfsy.cn/thread-311340-1-1.html

    US’s GDP is also not what it appeared to be. Finance and investment made up close to 1/3 of its economy. Any world financial crisis would be a repeat of 2008. Of course a crisis would hurt China too but contrary to most believe, China’s export industries employ “only” 40-50 million workers out of around 800 million.

    http://www.thechinamoneyreport.com/2012/08/18/american-gdp-the-fantastic-fiction-of-american-economic-strength-2/

    One major reason Chinese manufacturers thrives is because it cost the importers in US, EU or rest of the world less to manufactures those products. If those products were to be made in US or EU, the raw material cost alone would cost more than the China’s factory price. And in time of crisis, people would want cheaper goods hence Chinese export has been growing since 2009. However, nearly all the growth are in market other than the US or EU.

  23. October 19th, 2012 at 05:39 | #23

    Ray :
    @maofucious
    Not exactly true. China can export $100,000 to US and make just $2,000 profit. US export to China of $50,000 would be making $5,000 or more, to top it off, many fortune 500 US MNC needed China’s market not to go into the red. Examples are GM, Yum Group, Boeing, AMD, Intel etc. It might not seems like much but when Toyota’s sales dropped by 10% in 2009, it goes into the red for the first time since WWII.

    This is the MBA fallacy that profits are the only measure of anything. If China exports $100,000 worth of stuff to the US, then (by definition, if that $100,000 was contributing towards its trade surplus) China gains $100,000. It doesn’t matter how that’s distributed between labor and capital.

    To take this point a step further, the US would make $10,000 in profit off of that $100,000 export. But the problem with its economy right now is sort of that corporate profits are too high, out of proportion with the rest of the economy. This reality (or perception, as the case may be) is hindering the Fed’s ability to put more money into the economy.

    Meanwhile, China may make only $2,000 off of $100,000 worth of exports, but that $2,000 is really a critical success factor for its economy. There’s no cushion for things to go wrong.

    http://www.kfsy.cn/thread-311340-1-1.html
    US’s GDP is also not what it appeared to be. Finance and investment made up close to 1/3 of its economy.

    Investments (whether through business or government) make up about 2/3 of China’s economy.

    Any world financial crisis would be a repeat of 2008. Of course a crisis would hurt China too but contrary to most believe, China’s export industries employ “only” 40-50 million workers out of around 800 million.

    But these are some of the most productive people in the economy.

    Also, during a crisis, individuals want the cheapest possible products. However, more importantly, they tend to want others to buy their own expensive products. There is a difference between the individual and collective perspective. This is (a version of) the Paradox of Saving.

  24. October 19th, 2012 at 09:09 | #24

    I think you need to go back to school. In this case $98,000 is the raw material cost which pollutes China’s environment. And when US company got the $100,000 goods purchase from China they sell the products for $130,000 creating that amount in the US economy (and for the rest of the world). Extreme case in point, Apple iphone leaves the Chinese factory for $200 (profit of $15 to China) but sell for $700 in the market.

    A contractor who quote you $20,000 on a renovation project would get maybe $4,000 in labour. If a lawyer billed you $20,000 in fees he will get more than $10,000 in labour. China is the labourer in China/US trade. To top it off you also have a bunch of US MNC that makes a fortune from China. You totally forget how much that contribute to the US economy. China’s economy will be around US$8.4-8.7 trillion by the end of 2012, export made up only 1/5 and the profit on that is barely $40-50 billion on worldwide sales not just the US. So it might be important to China but also to all MNC who contract their manufacturing to China and export to the rest of the world making several time the profit.

    And please stop making unsubstantiated statement like “But these are some of the most productive people in the economy.” The OEM manufacturers who make up the bulk of the manufacturing industries help their importers make many times their profit, they have razor thin margin and go in and out of business by the thousands monthly. Except for company like Sany, Huawei, ZTE, XG etc none of them can be considered anchored industries.

    You also totally got it wrong that investments made up 2/3 of China’s economy. Here’s China economy by sector in 2011 (by CIA fact book): agriculture: 10.1%, industry: 46.8%, services: 43.1%.
    Chinese government share of the economy is 1.7 trillion which is around 1/5 of the economy. The US government share of the US economy includes expenditure 3.6 trillion, social contribution 1 trillion, social benefit 2.3 trillion totalling 6.9 trillion which makes up nearly half of the economy (the figure I got is 46%, I suspect this the figure Romney used when he said 46% of American is on government aid).

    Here’s a case study of financial services in US economy.

    http://techtv.mit.edu/videos/20213-the-continued-economic-decline-of-the-west

  25. October 19th, 2012 at 20:59 | #25

    I can show that export labor is the most productive labor in the Chinese economy, using your own numbers. You said that export industries are 20% of the economy, while 5-6% (“‘only’ 40-50 million workers out of around 800 million”) of its labor. This means that those 40-50 million workers are more than twice as productive as the average worker.

    As for the pricing concerns, these are already included in the trade statistics. American products are more expensive; this means we sell comparatively even less. True, the pricing doesn’t include the environment. But if that we’re China’s main concern, they wouldn’t have run the surplus up so high in the first place.

    I watched most of the video. One interesting chart (25:00) showed that gross fixed capital formation was almost 50% of China’s GDP, while being almost negligible in the US and UK. This means that 50% of the economy is in investments (not 2/3…I know that 1/3 of the economy is household consumption, and the rest is being made up somewhere.) Whether or not these investments are controlled by the financial markets, the math will have to add up the same.

  26. October 19th, 2012 at 23:03 | #26

    @maofucious
    No, by using these you cannot show that they are the most productive. Almost half of China’s labour force is still stuck in subsistence agriculture, that’s what pulling the average down. To say that you are smarter than a down syndrome kid does not mean that you are brilliant. By your measure the Chinese government generate even bigger share of the economy than manufacturing, so must be more productive. Those OEM are industries that China is gradually phasing out. Like I have said in most manufacturing the number one cost is material cost. The most important OEM is Foxconn. Simply compare it to Apple, which companies do you prefer to have? To count productivity, you look at profit level not sales.

    “But if that we’re China’s main concern, they wouldn’t have run the surplus up so high in the first place.” Your statement here is devoid of human emotion. Entry level factory owners invested in factories and become OEM because it is the business model phased out by Japan and Korea. It is what they can afford at this stage. If I say if the US government care so much for its citizens would it locked up 2 millions of them in prison? This doesn’t make sense to me, so don’t try to use simplistic argument like that. Japan, Korean and Germany MNC do all of their low level manufacturing in China. If you take out the export of those MNC, China’s trade surplus is not that high. Just check the product content of an iphone, either Korean and Japanese content is higher than China’s.

    US politicians are trying to keep their voters stupid by concentrating their focus on China. They should focus on competing with Japan, Germany, France and other EU countries or even Korea, those are the economies that create high quality jobs. However, the truth is not that popular so nobody discuss it.

    You are wrong when you said China’s level of investment is 2/3, it is not. You are also wrong when you said 1/3 is consumption. Please come back with proper numbers before we go further.

    Just a reminder that investment in infrastructure is substantially different from investment in finance. In case you don’t know, the average Chinese workers in China has been able to save around half of their income for the last 30 yrs or so. This is one major reason that is driving the growth in China. Again a fact totally ignored by western press. All I keep hearing is how this hurt consumption in China. The reality is, if most of the money is spent on consumption, there will be less money to spend on investment like business, shop, houses, education etc would generate a bigger return in the future. Same thing happened with Korea, HK, Singapore and Japan. The rich people in EU and US are savers too.

    I am just writing in respond to your statement that China is more dependent than the US, it is not. You have offer no prove of that. My earlier example simply showed you that the US economy is boosted mostly by consumption, government spending and finances. If you think that is good, keep it up.

  27. October 20th, 2012 at 03:37 | #27

    “No, by using these you cannot show that they are the most productive. …To say that you are smarter than a down syndrome kid does not mean that you are brilliant…” No, it just means that you are smarter.

    “To count productivity, you look at profit level not sales.” Productivity is a ratio of production output to what is required to produce it (inputs)

    “Your statement here is devoid of human emotion.” I’ll grant that a trade showdown would help China’s environment. However, a financial crisis of any kind is usually a boon the environment.

    “US politicians are trying to keep their voters stupid by concentrating their focus on China. They should focus on competing with Japan, Germany, France and other EU countries or even Korea, those are the economies that create high quality jobs. However, the truth is not that popular so nobody discuss it.” China (along with the oil addiction, another important factor) is where the US trade deficit currently comes from.

    “You are wrong when you said China’s level of investment is 2/3, it is not. You are also wrong when you said 1/3 is consumption. Please come back with proper numbers before we go further.” You can look at the chart here (and you might also read the article as well.) Investment is half, consumption is within a couple points of 1/3, and the other 1/6 is made up of government spending (even worse) and net exports (which we are eliminating for the sake of the thought experiment.)

    “Just a reminder that investment in infrastructure is substantially different from investment in finance.” Not really. The same time value of money principles apply. The main difference is that it’s less transparent.

    “In case you don’t know, the average Chinese workers in China has been able to save around half of their income for the last 30 yrs or so. This is one major reason that is driving the growth in China.” Then, with a couple percentage points worth of financial repression over 30 years, the government has taken a similar amount, probably half of their incomes (as a very rough guess) over that time.

    “The reality is, if most of the money is spent on consumption, there will be less money to spend on investment like business, shop, houses, education etc would generate a bigger return in the future.”

    No, no, not necessary, and yes. Higher consumption would help service businesses domestically, while keeping the price of real estate from rising too high.

    “Same thing happened with Korea, HK, Singapore and Japan.” Actually not to the extent as in Mainland China.

    “I am just writing in respond to your statement that China is more dependent than the US, it is not. You have offer no prove of that. My earlier example simply showed you that the US economy is boosted mostly by consumption, government spending and finances. If you think that is good, keep it up.”
    No it’s not…and it’s China that’s financing a good part of it.

  28. October 20th, 2012 at 09:05 | #28

    @maofucious
    I think you have no idea of what you are talking about. By your definition the US military is very productive by using up over $700 billion in the US budget? You have not shown any facts that says the manufacturing/export industries is the most productive in China.

    No, trade slow down would not help the environment. Only quality economic growth will allow that. In the poorest region of the world, people has to cut down trees for cooking and warmth. Also modern sewage system is needed to keep the environment clean. The biggest problem with most advanced economies and developing countries is too much emphasis on consumption type spending. Germany, Japan, Switzerland etc have the cleanest manufacturing industries.

    You still don’t get it do you? US trade deficit comes from over consumption, not from China or those oil producing countries! I have already shown you the US trade deficit with China is a combination of deficit by many foreign MNC. For example, the deficit was switch from Germany, Japan, Korea, Taiwan etc when manufacturing was switched to China. If US factories were to make those consumers good, the material costs alone would cost more than the deficit that you say are from China! It is not. The only way the US can lower the trade deficit is to use less fuel and be less wasteful.

    The chart you presented is outdated, the 2011 figures for service industry in China is 43.1% which is not 1/3. In reality it is much higher due to under reporting by the service industries. And government expenditure is 1/5 not 1/6.

    “Not really. The same time value of money principles apply. The main difference is that it’s less transparent.”

    Financial industries that use money to generate profit is not the same as industries that uses infrastructure, manufacturing or services to generate profit. For contrast simply compare the economy by sector of UK and Germany.

    “No, no, not necessary, and yes. Higher consumption would help service businesses domestically, while keeping the price of real estate from rising too high.”

    High consumption level from year 2000 onward in US, and most of EU economies did not prevent the rapid rise of the real estate prices in those countries. In fact, high consumption directly create a bubble in the stock and real estate market. The late 1980s economy of Japan is a clear example. Please give me a real life example of this theory you just stated.

    “No it’s not…and it’s China that’s financing a good part of it.”

    What good part is China financing? What percentage is a good part by your definition?

  29. October 20th, 2012 at 13:02 | #29

    @maofucious

    Productivity is a ratio of production output to what is required to produce it (inputs)

    The “output” is value-added, not the value of output. In case it is confusing, look at a set of Chinese stats for 2010:

    * Total output of “Enterprises of Designated Size”: 70 trillion yuan
    * GDP: 40 trillion
    * Industrial value-added: 16 trillion
    * Export volume: 10.7 trillion

    It’s conceivable that the labor productivity in the export industries is the higher than the national average… but certainly not by your reasoning.

    BTW, Ray, profit is only a portion of the value-added, which also includes labor cost, tax, interest, depreciation, etc.

    Investment is half, consumption is within a couple points of 1/3, and the other 1/6 is made up of government spending (even worse) and net exports (which we are eliminating for the sake of the thought experiment.)

    First, methinks China severely understates its private consumption — this will be a lengthy discussion. I also think the thesis that now China is suffering from over-investment will be laughed in the future. In my opinion, the macro economic policy decision makers in China (the peers of Tim Geithner and Ben Bernanke) don’t particularly pay attention to what those numbers read out, but rather on other numbers such as the profit growth of “Enterprises of Designated Size” (规模以上企业利润). In 2011, it was 25.4%. If China really has an over-investment problem, the profit margin thus the profit growth should decrease.

    PS. “Enterprises of Designated Size” are enterprises with annual revenues more than 20 million yuan.

  30. October 21st, 2012 at 03:59 | #30

    “You still don’t get it do you? US trade deficit comes from over consumption, not from China” China has severe oversupply problems in many of its industries. Banks are continuing to lend to bankrupt customers, just so they can get their original principal back. Few are going bankrupt, like they should. Does this have nothing to do with their trade surplus?

    “If US factories were to make those consumers good, the material costs alone would cost more than the deficit that you say are from China! It is not.”
    I’m not sure I understand this point. Are most commodities not global markets? They should cost pretty much the same everywhere – and whether raw or packaged into products (minus the processing costs.)

    “The chart you presented is outdated, the 2011 figures for service industry in China is 43.1% which is not 1/3.”
    The chart showed figures for consumption, not the service industry. These are different things.

    “Financial industries that use money to generate profit is not the same as industries that uses infrastructure, manufacturing or services to generate profit. For contrast simply compare the economy by sector of UK and Germany.”
    You’ll have to explain this point further.

    “High consumption level from year 2000 onward in US, and most of EU economies did not prevent the rapid rise of the real estate prices in those countries. In fact, high consumption directly create a bubble in the stock and real estate market. The late 1980s economy of Japan is a clear example. Please give me a real life example of this theory you just stated.”
    The real estate bubble in the US was not a very large pricing concern. At the time, people thought the market was in for just a minor correction. The problem turned out to be in how the banking sector handled things. The problems in Japan and China, OTOH, were really that people were being priced out of the market. (Japan at the time was still very much an export and investment-oriented economy, similar to China today.)

    “What good part is China financing? What percentage is a good part by your definition?”
    $2 trillion in USD reserves will go far.

    “The ‘output’ is value-added, not the value of output.” Yes, and the figure I used in the numerator would be value-added, not straight revenues. Ray had said, “China’s economy will be around US$8.4-8.7 trillion by the end of 2012, export made up only 1/5.” Any time you are using GDP figures, those are value-added figures.

    “I also think the thesis that now China is suffering from over-investment will be laughed in the future. In my opinion, the macro economic policy decision makers in China (the peers of Tim Geithner and Ben Bernanke) don’t particularly pay attention to what those numbers read out, but rather on other numbers such as the profit growth of “Enterprises of Designated Size” (规模以上企业利润). In 2011, it was 25.4%. If China really has an over-investment problem, the profit margin thus the profit growth should decrease.

    PS. “Enterprises of Designated Size” are enterprises with annual revenues more than 20 million yuan.”
    Is this based on your intuition, or information you have? …My intuition agrees with this as well. A big problem with this method, however, is that it is backwards looking, as companies get to depreciate (potentially losing) investments over several years. In fact, it is really difficult to tell what goes into that number, from manipulated interest rates to tax benefits and other quirks of Chinese accounting.

    As for the specific numbers you cited, I wouldn’t trust those at all without same-firm comparisons. I have no idea what biases might be introduced by the size cutoff.

  31. October 21st, 2012 at 13:57 | #31

    @maofucious

    [H]owever, is that it is backwards looking, as companies get to depreciate (potentially losing) investments over several years. In fact, it is really difficult to tell what goes into that number, from manipulated interest rates to tax benefits and other quirks of Chinese accounting.
    As for the specific numbers you cited, I wouldn’t trust those at all without same-firm comparisons. I have no idea what biases might be introduced by the size cutoff.

    You probably never heard of the quirky Chinese term “Enterprises of Designated Size” and a host of other such terms, and have no clue of the whole lifecycle of Chinese macro economic data, and the evolution of the collection methods — and more importantly how they compare with the data of other countries, but it didn’t stop you from writing a blog, voicing your opinions, and judging certain policy decisions as “backwards looking”. Ain’t the Internet grand?

    Typically you can get a feel how a corporation, or the corporations of a nation do by examining 2 sets of data: one for the earning announcements and quarterly/annual reports, and the other for reporting to the tax authorities. The former tends to look better — the executive teams typically want to use all accounting tricks at their disposal, some even illegal (Enron, WorldCom, Freddie Mac, etc.), to goose the numbers. When they report to the tax authorities, the real tax bills are due, so the built-in incentive is reporting as little profit as you can… I will let you guess which set of data that 25.4% growth was for. BTW, in 2011, the fiscal revenue of China grew 24.8%, and for the first time overtook the US federal fiscal revenue on an apple-to-apple basis (not counting SS tax, which a fee in China.).

  32. October 22nd, 2012 at 05:34 | #32

    If you want to make a point, you’re going to have to show me data that doesn’t measure two things (same-firm growth and number of companies above a certain cutoff size) at once. Note that I’m not even criticizing the Chinese government here, because I strongly suspect they have access to much better data themselves than they release publicly.

  33. October 22nd, 2012 at 13:47 | #33

    @maofucious
    Why are you switching the subject, you are the one saying that China and oil import caused the US’s deficit, I said otherwise. Of course, you don’t understand because you have no experience in trade. The volume dictate the price. Walmart get different pricing from a smaller chain.

    You are the one that states consumption is 1/3. The chart of 2011 shows consumption closer to 40%. I am simply telling you the service industries is 43% and I believe it is much more.

    Simply compare the economy by sector of UK and Germany then compare their balance sheet.
    “The real estate bubble in the US was not a very large pricing concern. At the time, people thought the market was in for just a minor correction. The problem turned out to be in how the banking sector handled things. The problems in Japan and China, OTOH, were really that people were being priced out of the market. (Japan at the time was still very much an export and investment-oriented economy, similar to China today.)”
    So how does this proved your point that high consumption lead to lower real estate price. I have shown you high consumption lead to real estate bubbles all over the world. China has among the highest home ownership rate in the world.

    Again, you don’t know what you are talking about. China has over $3 trillion in forex reserve but only around 1/3 are in US$. The US debt is over $15 billion. Less than 10% is not a good part. Look up who own more than half of those debt, more than half is what I would define as a good part.

  34. October 22nd, 2012 at 13:52 | #34

    @jxie
    Yes, that’s why I always emphasis the job figures in industries as well.

    However, profit is ultimately the deciding factor whether those industries will continue to exist.

    Funding will always go toward a more lucrative industries in an economy. In the US, it goes to a lot of tech upstart and to financial services. Both offer much greater return than low level manufacturing.

    In fact, in some hi-tech industries such as mass market semi-conductor, US companies don’t even bother with it anymore.

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