May 20, 2005


The Chinese Connection (PAUL KRUGMAN, 5/20/05, NY Times)

Over the last few years China, for its own reasons, has acted as an enabler both of U.S. fiscal irresponsibility and of a return to Nasdaq-style speculative mania, this time in the housing market. Now the U.S. government is finally admitting that there's a problem - but it's asserting that the problem is China's, not ours.

And there's no sign that anyone in the administration has faced up to an unpleasant reality: the U.S. economy has become dependent on low-interest loans from China and other foreign governments, and it's likely to have major problems when those loans are no longer forthcoming.

Here's how the U.S.-China economic relationship currently works:

Money is pouring into China, both because of its rapidly rising trade surplus and because of investments by Western and Japanese companies. Normally, this inflow of funds would be self-correcting: both China's trade surplus and the foreign investment pouring in would push up the value of the yuan, China's currency, making China's exports less competitive and shrinking its trade surplus.

But the Chinese government, unwilling to let that happen, has kept the yuan down by shipping the incoming funds right back out again, buying huge quantities of dollar assets - about $200 billion worth in 2004, and possibly as much as $300 billion worth this year. This is economically perverse: China, a poor country where capital is still scarce by Western standards, is lending vast sums at low interest rates to the United States.

We're not big on the notions that economic actors are particularly rational nor that the Chinese have any clue what they're doing, but there's a simple question that Mr. Krugman fails to ask himself: if your understanding of a situation offers up perverse results isn't there a distinct possibility you've misunderstood?

Consider an alternative possibility: by assembling goods far more cheaply than any free society could the Chinese are managing to generate large exports, but they recognize that to invest the incoming capital in their own unstable system would be to waste it, so they are seeking out the only reliable securities on the planet: American. Such a scenario not only fits the facts but makes perfect economic sense, rather than yielding perversion.

Posted by Orrin Judd at May 20, 2005 8:45 AM

Well it works for us and it works for China ... right now. It's not a permanent situation nor will it unravel catastrophically nor unexpectly. In the meantime it serves as a political stabilizer beneficial to all parties on the Pacific rim. That's the long view from these granite hills.

Posted by: Genecis at May 20, 2005 9:26 AM

If the occupant of the White House would listen to the name Kerry, Krugman would be writing columns about the economic genius of the president.

Posted by: Peter at May 20, 2005 10:55 AM

OJ, exactly. This is the same reason so many Chinese Communist "leaders" make sure they have private family ties and secret bank accounts in the United States. When the crap finally hits the fan, they'll have a chance to escape to the most politically stable country in the world.

During the Tiananmen demonstrations so many years ago, what enraged more than a few Communist Party "leaders" was that the students had made public a list of the private bank accounts those "leaders" had in the United States. That one unforgiveable act, which exposed the complete hypocrisy of the Party, probably did as much as anything to doom the Tiananmen movement.

A great many people pay lip service to the vision of a stable and powerful China under Communist rule. Some naive souls even believe in this vision. But hundreds of millions of Chinese, including the dictators who rule over them, know better.

Posted by: X at May 20, 2005 11:10 AM


As always, you have to live here to think socialism works...

Posted by: oj at May 20, 2005 11:50 AM


Hadn't heard the story about the financial disclosures intensifying the Tiananmen response, but it makes perfect sense. My time in China is obviously more limited than yours, but even I know that the yuan peg to the dollar (and resulting advantage in Chinese exports to America) has meant huge sums flowing to Chinese elites (read sons of generals and party leaders) who control those export companies. This fact of financial corruption, however, apparently escaped the attention of Mr. Krugman. The result is not, as Mr. Krugman would have it, 'economically perverse'. To the contrary, it is economically enriching to those running the show.

A few months ago, the Beijing government released figures that showed (in a previous quarter) that Chinese foreign investment (i.e. in other countries) grew by 25% or so. That likewise, on its face, is economically perverse. If, as Beijing publically alleges, the Chinese GDP is growing at 9% a year, who in the world would not invest in China. As Orrin surmises (and correctly I believe), the ChiCom elites prefer to invest their 'hard-earned' money in more stable countries. I'd go a step further, however. I believe it is plausible, if not a certainty, that the Chinese elites know damned well that their GDP figures are illusory, if not downright fraudulent. I don't know of many con men who invested in the swamp land they were touting.

As a footnote, and apropos your observation about American bank accounts, I represented some Taiwanese clients years ago and traveled there. I was told that the most precious asset of a Taiwanese elite was an American passport (Singapore a close second, then Phillipines, etc). I don't imagine that the value of such passports has declined given China's recent saber-rattling.

Posted by: Fred Jacobsen (San Fran) at May 20, 2005 10:19 PM

Fred, your comment about the value of an American passport is spot on.

Several decades ago, when Taiwan was still a military dictatorship controlled by the KMT, there was an immense amount of native Taiwanese resentment about "toothbrushism." This was short-hand slang for the attitudes of many mainland Chinese supporters of Chiang Kai-shek who had fled to the island with him, but who were basically treating it as a hotel from which they could flee to America and other countries if it ever looked as if the Chinese Communists had a real chance of invading.

The difference between Taiwan then and China today was the very different relationship between society and the ruling political party. In Taiwan, the Chinese Nationalist Party's mainland Chinese supporters concentrated on making careers in the military and the civil service. By and large, the KMT left the economy to the native population, who came to dominate industry and business overwhelmingly in both numbers and wealth. In China today, as you say, it is the princelings of the Communist Party who have the inside track on lucrative business deals and who control the country's levers of money and power.

As a result, the motives of many of those in Taiwan and China today who, out of fear, are planning an escape route to America are also different. In Taiwan, it is because the elite are afraid of the Chinese Communists, who have done nothing to assure anyone they still aren't the same incompetent, rapacious, and power-hungry oppressors they have always been. In China, it is because the Communist elite is afraid of the people.

What an irony! In the People's Republic, the "leaders" are afraid of the people!

Posted by: X at May 21, 2005 9:45 AM

Krugman's Communist elites are like OJ's monarchs: dedicated solely to the good of the country.

Posted by: David Cohen at May 21, 2005 10:56 AM

No, communists care only about the party, the economy and the classes. They're incapable of considering the nation as a whole.

Posted by: oj at May 21, 2005 11:01 AM

Remember when all the Hong Kongese were flying to SF and Vancouver to have their kids so they'd be able to come here if the transfer went too badly?

Posted by: oj at May 21, 2005 11:07 AM