China's skyrocketing trade surplus causing compulsive xenophobia in Congress - 13-May-07 - Generational Dynamics

China's February trade surplus soared nearly tenfold compared to the same month last year, hitting $23.76 billion, according to China's General Administration of Customs. The trade surplus for February was nearly 50 percent higher than in January. Much of China's trade surplus represents exports to the United States.

The fact that China's economy continues to grow explosively is not considered to be a good sign by many policymakers, even within China, who recognize that the economy is becoming dangerously overheated. China has been trying for five years to slow down the economy's growth, and to engineer a "soft landing" for the economy, rather than risk a "hard landing" that would throw millions out of work and create massive social unrest.

Howeve, China's attempts to slow down its economy have been a total failure. To the contrary, the economy's growth has been accelerating dangerously.

Manic Shanghai Stock Market investors

The wild growth in exports represents a mania in China's internal economy that isn't really visible to the West. However, there's one place where the height of the mania is glaringly visible: In the Shanhai Stock Market.

You may recall that on February 26, I posted an article describing that the Shanghai stock market bubble appeared close to bursting. Manic Chinese day-traders would sell their homes and borrow money to invest in the stock market. Then the Shanghai stock market fell 8.8% in one day, causing a brief worldwide panic.

Shanghai stock market index, past 5 years, as of 11-May-2007 (Source: MarketWatch)

This week, the Shanghai stock exchange index hit the 4,000 mark - just three weeks after passing 3,000 and up more than three times from a low of 1,200 less than two years ago.

Already this year, more than 10 million Chinese small investors have opened broking accounts allowing them to trade shares on the Shanghai stock exchange, compared to 3 million during the whole of 2006. Ordinary people continue to borrow money, and to sell their homes and assets, and put everything they have into the stock market bubble.

You know, I hear the financial gurus talk about this on TV. One says, "It looks like a bubble." Another says, "Well maybe it isn't a bubble, and it has a long way to go." Another says, "The Chinese people have so few places to invest money that they put all their savings into this one place, and there's plenty more money to invest, so it'll keep going up, so it's not a bubble."

And these idiots are supposed to be experts. Yes, it is a bubble, and yes, the Chinese are putting all their money into it -- that's why it's a bubble. And bubbles burst.

He supports his "absurd" evaluation by making some computations that indicate that he doesn't understand compound interest.

But the reason I'm quoting this is to make the point that Americans do have some kind of national memory of the 1929 crash and the Great Depression of the 1930s, even though some people don't believe it could happen again.

But China is different. The Chinese people apparently have NO IDEA what's about to happen to them.

And any kind of bad news could be the trigger that will cause people to panic and pull their money out of the Shanghai stock market, causing a fall possibly much larger than the 8.8% collapse last time. What would, say, a 20-30% collapse in Shanghai do to the the New York Stock Exchange? Only time will tell.

Congressional xenophobia

On this web site, I keep illustrating how people around the world are following their generational scripts, almost as if they were robots. We see this in the Mideast, in Darfur, in Europe, and in global finance. No one can predict what one individual or a group of politicians will do, but Generational Dynamics can and does explain and predict the actions and behaviors of large masses, entire generations of people. The actions of politicians are important insofar as they reflect the behaviors and attitudes or large groups of constituents.

Even so, it's astounding to watch Congress repeating history in the worst possible way. Congress is "losing patience" with China, and is close to imposing punitive trade tariffs on China in retaliation for its large trade surplus.

Now, anyone with common sense will tell you that if China is going to self-destruct, we shouldn't help it along, if only so that we won't get blamed. But we never have to worry about common sense when we talk about Congress, do we?

In 1931, Congress passed the Smoot-Hawley tariff law, supposed to prevent American jobs from being taken by foreigners. As I described last month, this law ended up seriously harming Japan, and was a major factor leading to the bombing of Pearl Harbor.

Now we're apparently going to be doing exactly the same thing, this time targeting China. Plus ça change, plus c'est la même chose.

"Even the old timers in the Congress had never seen anything like it. On May 9, the US House of Representatives held what was billed as a tripartite hearing of three subcommittees on “Currency Manipulation and Its Effects on US Businesses and Workers.” I was one of the “expert witnesses” at this hearing – invited to submit a written statement and then, along with the other six members of the witness panel, to present a five-minute oral summary in front of the assembled legislators.... The hearing concluded with an extensive question and answer session. It was an experience I will never forget. My worst fears were realized. At the end of over three hours of grueling give and take, I left Capitol Hill more convinced than ever that the protectionist train has left the station. ...

I suspect this hearing could well mark a major turning point in America’s mounting resistance to trade liberalization and globalization. ... The opening comments of Sander Levin (Democrat from Michigan), who chaired this session, underscored the determination of Congress to take its long-standing concerns over US trade policy to a different level. In his words, "This is an exceptional issue and an exceptional problem that hasn’t been resolved. We need to consider the next steps. This is the real thing." ...

In terms of the substance of the debate, three things surprised me about this hearing: First, while the bulk of the discussion was about China, anti-Japan sentiment was formally brought into the picture for the first time. The issue was the yen – characterized by the Congress as the world’s most undervalued major currency. While the absence of explicit intervention by Japanese authorities over the past three years was duly noted, many representatives took the position that there has been unmistakable "implicit manipulation" of the yen. Second, the case against China was framed mainly around the concept of the "illegal subsidy" – WTO-compliant jargon that frees up Congress to impose sweeping countervailing duties on Chinese exporters. ... Third, the congressmen present at this hearing were highly critical of the US Treasury’s bi-annual foreign exchange review process and its failure to cite China for currency manipulation....

Notwithstanding these new developments, the most important message is that Congress remains unwavering in its determined approach to move from rhetoric to action in 2007 on matters of trade policy. Contrary to what most believe, this is not a case of anti-trade Democrats now taking over Congress. I continue to stress that there is broad bipartisan support for anti-China "remedies." While the Democrats are now in charge of the Congress, on matters of trade policy they have been joined by many Republicans in their crusade. ...

I didn’t go to this hearing with the naïve expectation that I would be able to change any minds. And there was no surprise on that count. There was little sympathy on the part of the Congress for linking trade deficits to domestic saving shortfalls. To the contrary, there was a broad consensus that bilateral pieces of the massive multilateral US trade deficit are fair game – in essence, an opportunity to whittle away at the US external gap one country at a time. The consensus of congressman at the hearing was that China was the problem – even though the non-Chinese piece of the overall US trade deficit slightly exceeded $600 billion in 2006, over two and a half times the size of the Chinese bilateral deficit with the US. Many congressmen were especially upset with my characterization of "China bashing." One gentleman asked me to strike any such references from my testimony, claiming that, "We’re not China bashers. We are just trying to seek the truth." At the same time, literally no once responded to the concerns I voiced over the unintended consequences of protectionism – namely that China bashing could backfire in the US, the rest of Asia, and the broader global economy. The bottom line here is very clear: The US Congress just doesn’t do [macroeconomics]."

Reading this is very discouraging, but not at all surprising. History makes it clear that Congress enacted the Smoot-Hawley law in 1931, during America's last generational Crisis era, against the advice of many economists, and that the law had incredibly destructive results.

Now America is a new generational Crisis era, and we're exhibiting exactly the same destructive xenophobia.

For readers of this web site who are still skeptical about its conclusions, here you have a specific, glaring example. The countries around the world that fought World War II as a crisis war are now in a new Crisis era, and xenophobia has been increasing around the world: between Anglos and Latinos in America, between Europeans and Muslims, between Jews and Arabs, between Pakistanis and Indians, between Chinese and Japanese, between Koreans and Japanese, between Chinese and Americans.

It's always the same in every cycle. The generations of people who survive a crisis war like WW II come out of it believing that "hate" is the cause of war, and that if we can only eliminate "hate," then we can prevent a new crisis war. And actually they stick to that belief throughout their lives. But when those generations are replaced by new generations, "hate" returns. In the previous paragraph, you can replace the word "xenophobia" by the word "hate," and you'll see what I mean.

A lot of people don't understand this. I received an e-mail message from a web site reader last year, in which he mentioned that his European girlfriend "hates / loathes Moroccans." Several months later, he wrote to me on a different subject, and said that today's young people can't understand why blacks and whites used to hate each other, since they get along so well now. Fortunately, I save old e-mail messages, so I was able to write back and remind him about his girlfriend (who, it turns out, is now a former girlfriend).

The point is that people don't see themselves as having "hate." The people in Congress who are going to pass punitive measures against the Japanese don't see them as "hate" laws; they see them as justified by the facts.

"It is not "protectionist" (I am a longstanding free trader) to complain about policies that are predatory; China's are just that. The logic of free trade is that comparative advantage ultimately benefits everyone. Countries specialize in what they do best. Production and living standards rise. But the logic does not allow for one country's trade systematically to depress its trading partners' production and employment. Down that path lies resentment and political backlash.

Everyone complains about America's trade deficits, but they actually symbolize global leadership. Access to the U.S. market has promoted trade by enabling other countries to export. But the deficits cannot grow indefinitely. Imagine now a trading system whose largest member seems intent on accumulating permanently large surpluses. Nor, it might be added, are these ultimately in China's interests. They drain too much of its production from its citizens and contribute to growing domestic economic inequality. What everyone needs is more balanced Chinese economic growth, less dependent on exports."

This may well be quoted as "hate speech" in some future era, just as supposedly "fact-based" ancient articles about blacks are regarded as hate speech today. He says, "Down that path lies resentment and political backlash," without noting that the resentment comes from people like him.

I also have to laugh at the moronic statement, "Everyone complains about America's trade deficits, but they actually symbolize global leadership." This is like Fed chairman Ben Bernanke's idiotic 2005 statement that America’s exponentially increasing rate of public debt is everybody’s fault but ours, because other nations are guilty of a "global savings glut."

But of course it takes that kind of warped reasoning to justify something like the punitive tariff actions: "I'm over my head in debt, but it's not because there's anything wrong with me; it's because there's something wrong with everyone else. So let's punish the guilty party - the one who keeps lending us so much money."

Conflict risk level for next 6-12 months as of: 9-Feb-2006

W. Europe

Arab Israeli

Russia Caucasus

Kashmir

China

North Korea

Financial

Bird flu

Key:

1=Low risk 2=yellow

2=Med

3=High 4=black

4=Active

Now we're once again headed for a new world war, the Clash of Civilizations world war, as predicted by Generational Dynamics. The question is, what will trigger that war?

But if we pass punitive legislation targeting China, and that punitive legislation is viewed in some future time as triggering the inevitable financial crisis, which then leads to a world war, then America will be blamed for the world war. That isn't good. But that's what's happening.

Are we just weeks away from a crisis?

As I always say, Generational Dynamics tells you what your destination is, but it doesn't tell you what path you'll take or how long it will take to get there. For that you have to look at day-to-day signals, and make probabilistic assessments.

This gives rise to the question: Has the Chinese economy bubble gotten so huge that a crisis is now imminent?

As far as I personally is concerned, I'll quite honestly tell you I don't know. I've said many times that I don't see how the financial crisis hasn't begun already, in view of how the global financial bubble has gotten as big as it is now. There's just no way to predict timing, even when the facts indicating a crisis seem overwhelming.

The article makes the following argument: China's stock market bubble and international trade surpluses have gotten so large that the Beijing government is now politically forced to do something about it. (The word "forced" is in a similar sense to the way Congress is "forced" to pass xenophobic tariff laws.)

One reason is to head off action by the American Congress. If China can do something reasonably forceful, then the Congress may be convinced to wait a while. Another reason is that the danger of the bubble bursting is too great, and something has to be done to let some air out of the bubble.

"Six months ago, total transaction volumes on the Shanghai and Shenzhen exchanges were less than US$5 billion per day. That figure now stands 10 times as high, at $50 billion per day. This volume is something China can be proud of, barring one minor detail, namely that the central bank and various policymakers would much rather not see it happening.

Even as central bankers exhort the country's citizens to beware of bubble-like conditions in the stock markets, investors appear unruffled, reversing the policy impact of any announcement. Be they students, farmers or construction workers, every Chinese living in the two big cities of Shanghai and Shenzhen appears now to have a brokerage account. Conversations in the normally noisy dai pai dongs in Guangdong province and Hong Kong drop to a quick hush whenever the subject of stock tips comes up. In short, the stock market today represents a revolution against the diktat of the PBoC [People's Bank of China], questioning its very authority.

Experience from the rest of the world shows that stock-market bubbles are neither infrequent nor unpredictable; in most cases, they are compounded by the mistakes of policymakers. ...

The US housing and stock bubbles positively pale in comparison to the ones being observed in many other markets, including property and stock markets across Asia. There are some notable exceptions such as Thailand, where a combination of policy missteps has left markets relatively stable rather than rising, but in most other places the boom is all too apparent. Even in straitlaced Singapore, house prices have risen broadly over the past two years, wiping out pent-up equity losses from the previous 10 or so years. ...

More than India, it is China that faces the threat from investors chasing too few stocks. India's markets have a much longer history and, more important, many investors still remember the stock-market scandal of the early 1990s that wiped out the nest eggs of a few thousand people. China's problem is also one of magnitude: with more than 100 million investors directly participating in the markets, the impact of any downturn will be broad, and politically suicidal. ... Chinese investors have shrugged off recent [interest] rate rises, and banks have circumvented restrictions on lending through other means. ...

China will have to choose between the lesser of two evils, namely the protection of employment in its export-dominated industries or the safety net being created by investments in property and stocks by millions of its citizens. I believe it will choose to protect people's wealth more than lower-end manufacturing jobs; therefore a sharp revaluation of the Chinese currency, the yuan, is certain in the next few weeks."

According to Chan Akya's argument, China is trapped between two choices -- doing nothing, or sharply revaluing the yuan, which would make China's exports so much more expensive in other countries that the trade surplus would be cut.

If China does nothing, then sooner or later there'll be a downturn, causing stock market crashes whose impact "will be broad, and politically suicidal."

If China decides to revalue the yuan in order to reduce exports, it will protect the stock and real estate bubbles (according to Chan), but will only result in the loss of "lower-end manufacturing jobs."

Now of course he's wrong about this choice; a bubble is a bubble, and the bubbles will burst no matter what Beijing does. And when it does, huge masses of people will lose their investments AND their jobs.

What's intriguing about this argument though is the prediction that a sharp revaluation of the yuan "is certain in the next few weeks."

If Chan's argument turns out to be correct, and China sharply revalues the yuan in the next few weeks, then there will certainly be a major reaction in markets around the world, and this may cause the generational panic which is now well overdue. Or if he's wrong, then we might go on as we have, although I can't see how the Shanghai stock market bubble can go on much longer. But who knows.

It's not possible to predict when a panic will occur, but from the point of view of Generational Dynamics, we're now overdue for a generational panic and crisis. It could happen next week, next month or next year, but it's coming with certainty. It will destabilize densely packed populations in China, India and around the world, and will lead to the Clash of Civilizations world war. As usual, Generational Dynamics tells us our final destination, but not how we'll get there. (13-May-07) Permanent Link
Receive daily World View columns by e-mail
Donate to Generational Dynamics via PayPal

Generational Dynamics Web Log for 13-May-07
China's skyrocketing trade surplus causing compulsive xenophobia in Congress

Manic Shanghai Stock Market investors

Congressional xenophobia

Are we just weeks away from a crisis?

Web Log Pages

	Generational Dynamics
	Forecasting America's Destiny ... and the World's

\| HOME \| WEB LOG \| COUNTRY WIKI \| COMMENT \| FORUM \| DOWNLOADS \| ABOUT \|

Generational Dynamics Web Log for 13-May-07 China's skyrocketing trade surplus causing compulsive xenophobia in Congress

Manic Shanghai Stock Market investors

Congressional xenophobia

Are we just weeks away from a crisis?

Web Log Pages

Generational Dynamics Web Log for 13-May-07
China's skyrocketing trade surplus causing compulsive xenophobia in Congress