Confucianism and Trade Imbalances

The enlightened dictatorship of money

Do either of the US presidential candidates care about the economy?

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If they do, they might want to take a careful look at a situation that’s developing in this part of the world.

Chovanec writes about a standoff that’s developing between US and Chinese stock regulatory authorities.  China is refusing to let Chinese accountants turn over information about Chinese companies listed on the US stock market, on the basis of “state secrets.”  As he writes, the current baseline scenario is for the SEC to simply delist all Chinese companies, within the next year or so.

This is very bad for the US economy – particularly if there are any long-term precedents being set here.  It will hinder efforts to increase American exports, a goal Obama has committed himself to.  Romney also agrees that exports are important to US economic growth, as he has promised a muscular response to currency manipulation.  Guess what?  This is currency manipulation!  Currency manipulation involves restrictions on the capital account.  If US companies can’t invest in China, while Chinese companies and the government can invest in the US, then the difference will be made up in the current account, or the trade balance, for reasons too complicated to explain here.  (It’s an accounting identity, holding a couple of other minor factors constant.)  A few billion dollars of investment money to China a year would translate to an equivalent amount of export sales to the US.  These numbers add up quickly.

So this is a very important issue from an American perspective – particularly thinking about what the American-listed Chinese stock market could become in the future.  But how about from the Chinese perspective?  It is also just as important.  The Chinese stock market has been stagnant for three years, largely because of accounting irregularities.  In response, companies tried to come to the US, using reverse mergers to avoid regulatory scrutiny.  After some scandals last year uncovered by short-sellers Muddy Waters, that tactic also failed, and Chinese companies have been largely unable to raise money on Wall Street either.  One of the main problems with increased transparency is that party officials don’t want their assets to be revealed (i.e. – an example from the last couple of days that apparently got Bloomberg banned from China.)  They are extremely sensitive to accusations of elitism – see the uproar over the fact that US Ambassador to China John Locke actually buys his own coffee at Starbucks.  So US negotiators should be able to push this point; the Chinese have zero bargaining power.

What can be done then (on the US side)?  Chovanec offers the following solution.

I was pondering the irresistible-force-meets-immovable-object dilemma here last night when I happened across a seemingly unrelated passage in Jim Fallows’ new book China Airborne, which offered a glimmer of hope.

In 1997, Jim relates, three Chinese airlines — Air China, China Eastern, and China Southern — had just been awarded or applied for very prestigious and strategically important routes to the United States, and had purchased brand-new state-of-the-art Boeing planes to fly those routes, with many further orders expected.  However, the safety record of Chinese airlines in the 1990s was atrocious.  In order to actually fly those routes, the airlines required approval from the U.S. Department of Transportation (DOT), the parent body of the FAA.  The DOT, at the FAA’s urging, demanded “confirmation that China’s regulatory standards, as applied by the CAAC, conformed to the worldwide guidelines laid out by international agreements.”  Until then, it was no fly.

The Chinese were furious, believing the Americans had double-crossed them by selling the planes and then reneging on the routes.  The whole thing could have concluded in respective chest-beating and a very ugly, damaging stand-off.  Instead, Boeing took the initiative (since its future sales were on the line) through a series of seminars, tours, and training sessions to reconcile the two points of view.  Key to its success was the way it handled Chinese sensitivities…

With due respect to his idea, I’m quoting it because it’s the exact wrong way to conduct the public diplomacy on this issue.  Airplanes convey the idea that something is complex, beyond the reasoning of the average citizen.  If that’s the attitude Americans or Chinese have towards this problem, it will be forgotten, and the status quo solution will prevail.  The message that needs to be conveyed is that Chinese companies are already capable of doing the actions required (no matter if they’re not world class), but that the government has been standing in their way, for no legitimate reason.  American politicians should take a stand here on principle, not let this become some kind of technical negotiation.  The more awareness there is for this issue, the better for the American position.  This issue gives politicians an opportunity to talk about the trade deficit, human rights, and foreign policy leadership all in one sentence – and all during an election year.  There’s no way they could screw this one up, is there?

There is much at stake here.  I’m going to go out on a limb to say that this is the most important economic crossroads for China since it joined the WTO in 2001.  In some ways, accountants are even more powerful than reporters, because nobody accuses them of bias.  It’s always possible that this is being used as a negotiating point for something else, some part of China’s grand scheme, and that things will smooth over naturally in due time.  But it really appears to be a larger culture clash: the Chinese side has been digging their heels in ever since the Muddy Waters incident – which they apparently blame on the investigators rather than the perpetrators. Whatever the case may be, until that part becomes more clear, this should be the American position.


Written by Maofucious

July 1, 2012 at 11:39 PM

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