An odd fixation on China

SCMP December 18 2006


It is hard to believe that much good has come from the mission that US Treasury Secretary Henry Paulson has just led to Beijing. Sitting in Hong Kong, one may miss benefits seen in Washington. Just possibly, the sight of six Cabinet secretaries and the Federal Reserve chairman being assertive with China may keep at bay the protectionist sentiments, boosted by the results of last month's election, in the US Congress.

But, viewed from here, the event looks to have reinforced prejudices on both sides. The US is more than ever convinced that China is the main source of its trade imbalance. And Beijing is ever-more determined not to be seen to succumb to US pressure on currency and other economic issues, even if that might actually be in its interest.

The Chinese may have privately taken away the message that they must do more to appease US complaints, whether on the currency or trade issues such as intellectual property. If that helps slow the protectionist push, some benefits may result.

But one could equally well argue that, by sending such a high-powered delegation, the US has raised unrealistic expectations of what China can be persuaded to do - and the impact that will have on the trade imbalance.

The size and weight of the delegation suggests an obsession with China that displays a dangerous ignorance in Washington of the dynamics of global trade and investment. China is only one part of a system that reflects the growing dominance of East Asian economies in global manufacturing.

Mr Paulson's obsession with China seems to stem from his many visits there drumming up business for Goldman Sachs. But the two-dimensional view that investment bankers have of the world is ill-suited to the complexity of international trade and payments.

The headline US trade deficit may be bigger with China than with any other partner. But it is only part of a mammoth East Asian surplus, and cannot realistically be separated from the surpluses of Taiwan, South Korea and Japan. They are the principle investors in China's exporting industries, and the suppliers of the more sophisticated components. Nor can it be separated from the profits of US middlemen and retail chains.

One should ask why Mr Paulson did not also take his delegation to Tokyo, whose currency on a real, effective exchange-rate basis has fallen 40 per cent in the past decade. Or to Taiwan, which has kept its currency almost as tightly pegged to the US dollar as has Beijing. He could have gone to Seoul and learned how accepting a steep currency appreciation - as South Korea's has done over the past three years - does little for the US trade imbalance with that country.

Concerns about the size of China's foreign exchange reserves also seems rather strange coming from a delegation headed by Mr Paulson and US Federal Reserve chairman Ben Bernanke. Most of the increase in reserves over the past two years has come not from the trade surplus, but from capital flows of the sort that the likes of Goldman Sachs thrive on.

If anyone should be complaining about China's excess foreign exchange reserves, it is the Chinese themselves: they are acquiring low-yielding assets in a currency whose own masters want it to decline! East Asia generally could benefit from a currency realignment that reflects the region's economic strength. It would be of even more benefit if the adjustments were led by the giant economies - China and Japan - rather than by the smaller ones (South Korea, Thailand and Singapore) as has been the case so far.

But none of this detracts from the facts that Mr Paulson's team seems quite unwilling to face: the US deficit is a global one, deriving from inadequate savings, excessive consumption and cheap money.

Singling out China for blame is a diversion from the real issues, domestic and global. The US does have legitimate grievances over intellectual property rights, service-sector access and so forth. But these are still marginal in the overall trade context.

The Iraq war started with the notion: identify a bogeyman and go for him. Spare us a trade version of a policy that upset America's friends more than its enemies.

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