Here are three chart to give a feel for the current state of the US-China economic relationship (via the econ team at Action Economics):
Politics and policy from inside Washington
Ed Yardeni takes note:
The S&P 500 is one of the ten components of the Index of Leading Economic Indicators. It seems to be forecasting a robust V-shaped economic recovery. This has got to be the most contrary scenario of all right now. Everybody is hung up about the anemic outlook for employment. I am too. So what is the S&P 500 seeing out there? How about yet another global bubble boom? This one is led by China, where M2 was up 28.5% y/y in June. Professor Copper seems to agree with this outlook. The price of this basic metal rose to $2.52 a pound at the end of last week, the highest since October 7, 2008. China’s Dow Jones Shanghai Composite is up 53% since March 6, well ahead of the S&P 500. It actually bottomed on November 4, 2008, and is up 122% since then to 383.78. That’s certainly an impressive meltup. Even more impressive would be if it recovers back to its record high of 588 on October 16, 2007. Anything is possible in a bubble.
Chinese and American officials meet today in the latest edition of the “strategic dialogue” between the two nations. Here is an interesting 1998 take from Alvin Rabushka of the Hoover Institution about the role of tax policy in China’s economic ascent.
In 1978, the late Chinese leader Deng Xiaoping launched economic reforms that set China on a path of rapid growth. … Deng’s reform package included the establishment of coastal economic zones, increased investment by foreigners, liberalized trade, and a free market in agriculture. But the application of supply-side tax policy was the main component. In 1978, total government revenue consumed about 31 percent of GDP. Deng’s policies reduced China’s tax burden relentlessly, year in and year out. By the end of 1995, the tax burden had fallen to 10.7 percent of GDP, a cut of more than 20 percentage points, or two-thirds in relative terms.
Tax cuts fueled the privatization of the economy. Deng’s policy of massive tax reduction shifted one-fifth of all resources from government hands to the emerging town and village enterprises and private firms, which productively used those resources. The private sector grew faster than the country’s 10 percent annual average. Since the government didn’t tax away the private sector’s prosperity, the fruits of growth were plowed back into expanded activity. This had a snowballing effect, speeding the transformation toward private ownership.
Here are several great charts from Wachovia looking at the Chinese economy in an effort to determine if the nation is experiencing a lending bubble. The firm doesn’t think so — at least not yet — but given government influence in its capital allocation system and the need to keep growth high in a weak global economy, I have to wonder.
David Goldman of the great Inner Workings blog loves the Chimerica concept, a furthering of the economic relationship between China and America. He even thinks it would make a great stimulus and long-term economic recovery program:
We recommended a firm link between the US dollar and the Chinese yuan, in which the yuan would have full convertibility, with a solemn commitment by the two countries to maintain a fixed exchange rate forever. That would instantly link the two countries’ capital markets. The demographic problem that creates a Japan-style deflationary bias in the US would disappear, because the demographics of China would be open to the American capital market. … In effect, the world’s two largest economies would establish a full partnership. … The :trouble is that Americans can’t spend. They have to save. The combination of a catastrophic decline in wealth and a sudden bulge in retirements gives America the profile of Japan during the lost decade of the 1990s. … If we follow Robert Mundell and throw out the single-country model of the Keynesians, it is obvious that Americans can save in another fashion, that is, by exporting. China’s underdeveloped interior is potentially the world’s biggest export market, flanked by similar markts in Asia and elsewhere in the developing world. The transition would still be painful, and the frictions considerable, but America could reorient itself to th global market. There would be a recovery. As matters stand we face a lost decade.
There was a bit of a kerfuffle about the new Fortune global 500 rankings which showed that the number of U.S. businesses fell to lowest level ever while more Chinese entries appeared than ever before. A few thoughts:
1) While I realize what the trendlines are, remember that there were still 140 U.S. companies on the list. That is almost as many as China (37), France (40), Germany (39), and the UK (26) combined (142). And where are the powerful Chinese global brands?
2) While the focus of the past year has been on American economic weakness, let’s not forget China has a wildly inefficient capital allocation system, a quickly aging population, and a repressive political system out of sync with the 21st century economy it wishes to have.
3) But I think the one amazing advantage China has, in addition to all those engineers it is graduating and its lower business and investment taxes, is a sense of urgency about economic growth. That country’s leaders have to maintain a high-octane economy that will continue to pump out millions new jobs and increase incomes every year to meet rising expectations. Here in America, the priority seems to be capping carbon emissions and universal health insurance and redistributing wealth from the top 1 or 2 or 3 ( or 4 or 5 …) percent of Americans via higher taxes. China can’t afford zero-sun thinking or policies.
OK, so it looks like Rising Asia is trying to get on the same currency page. Now lots of people think rumblings of the region dumping the dollar are empty threats. Where are they going to go, right? The euro? Please. David Goldman of the fantastic Inner Workings blog thinks he has it figured out bold is mine):
The Asian exit from the dollar will be turtle-slow and gradual. China and Japan between them have nearly $2 trillion worth of US Treasury securities and will do nothing to jeapordize their existing investment. But the collapse of governance in the United States and the Obama administration’s response have turned the US into a zombie economy, and the dollar into a zombie currency. The Euro offers no alternative. Demographically Europe is dying, and Europe’s economic misery is worse than America’s. … Apart from the problem of protecting a massive existing investment in the dollar, Asia has another problem in existing from the dollar: there exists no natural alternative. An alternative would have to be constructed. … Asia may have passed a milestone in monetary cooperation, but China, India and Japan never will establish the sort of political rapport that allows for currency union along European lines. To link their currencies would require an agreement to employ an objective benchmark for monetary policy, and the obvious choice would be some basket of commodities. … This is a five, perhaps a ten-year project, to be executed very gradually and very carefully as the Treasury’s largest foreign investors gradually reduce exposure to the US market and create their own financial markets.
Daniel Ikenson of the Cato Institute makes a great point on the Hummer deal:
The willingness of this Chinese company to purchase Hummer serves as a stark reminder of what could have been. Had George W. Bush not allocated TARP money to GM last December, in circumvention of Congress’s rejection of a bailout, then GM likely would have filed for bankruptcy on January 1. At that point, there would likely have been plenty of offers from foreign and domestic concerns for individual assets to spin off or for equity stakes in the New GM. There would have been plant closures, dealership terminations, and jobs losses, as there is under the nationalization plan anyway. But taxpayers wouldn’t be on the hook for $50+ billion, a sum that is much more likely to grow larger than it is to be repaid. It is also a sum that will serve as the rationalization for further government interventions on GM’s behalf.