Mad Man Trump Intentionally Provokes China, China Pushes Back Hard

As we now know, when Donald Trump conducted a phone call with the Premier of Taiwan, in contravention of the US-China “one state” policy, he did it intentionally.  He was demonstrating to China that he is willing to take a hard line over trade and the South China Sea.

Never mind that he changed the policy of the current administration -- Trump is serious in taking a more contentious position with China.



Long Live the Victory of the Korean People's Army and the Chinese People's Army!




Trump says that China “takes advantage of us” when it engages in free trade and sells us things at prices so low that we cannot refuse.  He is apparently ready to confront China economically and militarily, no matter the consequences.  This is a dangerous game.

Now China has hit back – hard.

Today, the Chinese renminbi fell by about 10 percent against the dollar, one of the biggest single-day moves since Beijing allowed its money to partially float.  This is a clear, intentional signal on the part of a China that carefully controls the daily changes in its currency exchange rate.

A one-day 10% reduction in the renminbi versus the dollar is huge.

Such a currency move by a major international trading partner and competitor has serious economic consequences.  The US already has enough trouble competing in international trade, and now Trump’s foolishness has resulted in China reducing its prices even more!

Trump’s recklessness will have adverse consequences for all of America.  We have trading partners, you dunce.  You made our competitive position in world markets even worse!

China is not going to back down.  They have all the trump cards.  They can undercut America and will flood our markets until Trump and Congress raise tariff barriers against them.

The Chinese People Cannot Easily Be Humiliated!



What will the American people say a year from now as American exports fall even more, and China grabs an even greater piece of the international trading pie?  What will they say as prices rise and their meager wages are stretched even tighter? 

What will Americans say as Mad Man Trump plunges the US into another recession? 

Trying to change the US-China-Taiwan relationship before he is President is radically disruptive to US policy and harmful to American workers.  He will be sadly surprised by both domestic and international repercussions.

If he escalates this offensive into a military confrontation, it could be catastrophic.

The Yuan Takes a Step Forward

It didn't make much of a ripple in the news at the time, but a couple of weeks ago Chinese regulators approved HSBC and Bank of East Asia as the first foreign banks to sell yuan-denominated bonds in Hong Kong.

A spokesman for HSBC China characterized sales of yuan bonds as provding a benchmark that other banks can use for yuan trade settlement, and a spokesman for Standard Chartered in Hong Kong said that the move will promote yuan liquidity. Benchmarks and liquidity will support China's goal to increase the use of the yuan for trade and investment, and to reduce risks of dependency on the US dollar.

As reported on Bloomberg, China announced a pilot project on April 8 to allow international trade settlement in the yuan in Shanghai and four cities in Guangdong province. Although Hong Kong's official currency is the Hong Kong dollar, bank deposits denominated in yuan have been accepted in the city since 2004.

If the process continues, China will eventually establish the enviable position of routinely settling international trades in yuan. Readily pricing trade goods in yuan would reduce China's need to maintain a narrow band on the exchange rate with the US dollar.

While the ability to sell yuan bonds in Hong Kong is hardly the same as making the yuan freely convertible to other currencies, it is a step in that direction. Given the rapid economic growth of China, it seems only a matter of time until the yuan is established as a major international currency. Such an event would be another step in the gradual but inexorable process of lessening the world's dependence on the US dollar as the common unit for pricing in international trade.

Over time, that will mean yet greater erosion in the premium that international banks and traders place on holding dollars -- i.e., more dollar weakness and a decline in American influence relative to developing countries like China.

Chinese Survey of Laborers Returned to Rural Villages

The Spinning Wheel, by Wang Juzheng, Northern Song Dynasty (960–1127)


The Chinese government has presented some revealing statistics concerning the impact of the global economic slowdown on unemployment among migratory workers. Because the Chinese news source is in Chinese (and my Chinese language studies haven't progressed that far), I'll summarize from Victor Shih's posting on RGE Monitor yesterday. Dr. Shih is an Assistant Professor of Political Science at Northwestern University.

His post, Unemployment in China...Oh Boy, comments on a press conference by Chen Xiwen, the vice head of the office of the important Central Finance and Economic Leading Group. Chen's presentation concerned a Ministry of Agriculture survey which drew samples from 150 villages located in 15 provinces which exported more rural labor. The survey concerned the 38.5% of laborers who returned home before the lunar new year.

Chen's presentation interpreted the survey findings as saying that, of the urban workers who had returned to their villages for the holiday:

• 60.4% still had jobs in the cities, and they will return to their jobs after the holiday.


• 39.6% had lost their jobs or not found a job.

Chen applied these findings to the population of 130 million rural laborers working elsewhere. He estimated that 15.3% or 20 million have lost their jobs or have not found a job. According to the survey methodology, these 20 million are only the most recent "pulse" of unemployment occurring just before the lunar new year.

Based purely on official government statistics, Dr. Shih estimates in his RGE Monitor post that total unemployment is around 36.8 million, consisting of 20 million rural migrants, 15 million urban unemployed, and 1.8 million recent college graduates. The numbers were not converted to percentage terms, as is usual for US unemployment statistics.

I do not understand Dr. Shih's mathematics. If 20 million is the number of migrant workers who have recently lost their jobs, what about those who had lost their jobs earlier and were still unemployed? It looks as if his estimate follows the usual Chinese government practice of counting rural individuals living at home as employed, because they can be employed in agriculture, even if their contribution is marginal.

Whatever the unemployment numbers now, we will have to keep watch as they develop over the next few months. As average income declines, much about Chinese domestic stimulus programs, foreign exchange, and other policy matters may depend on those numbers.

Economic Unrest in China Is Much More Common Than Reported

Listening to the Wind by Ma Lin (1127-1279), Southern Song Dynasty

Because news in China is so closely controlled by the government, it is worth paying attention to stories from unmanaged sources. The Sunday Times just published an report on research that it had sponsored on the impact of the worldwide financial crisis on the export-oriented provinces of Guangdong, Zhejiang and Jiangsu.

Violent unrest rocks China as crisis hits confirmed what most outside China already believed -- that bankruptcies, unemployment and social unrest are spreading more widely in China than officially reported, and there have been "dozens of protests that are never mentioned by the state media".

The article provided examples of recent strikes, protests and violence, as well as examples of foreign-owned businesses that have closed and left behind unemployed workers and often unpaid debts. Here are only few of the examples:

• When unpaid workers demonstrated in one town, officials were so concerned that they ordered the factory owner to pay the wages and sent armed police to accompany the withdrawal from the bank.
  
• There were "pitched battles" between striking textile workers and security guards in the city of Dongguan.
  
• When teachers in Yangjiang were not paid, they confronted police in a street protest.
  
• Police had to stop creditors breaking in to seize equipment in lieu of debts at several factories in southern China.
  
• Labor rights groups have long reported owners hiring thugs to threaten workers who demand payment of wages, and this practice is reportedly continuing as owners' purses are pinched in the downturn.

The latest issue of the Far Eastern Economic Review focuses on flaws in China's economic strategy. Emphasizing cheap labor in export-oriented industries has caused income inequality and prevented the development of domestic consumer demand. Now the worldwide economic downturn is stifling income growth.

The Sunday Times warns that problems may intensify after the Chinese New Year, when migrant workers return to their workplaces only to find that they no longer have jobs.

Financial Crisis Raises International Risks

Dongtian Mountain Hall, by Dong Yuan (c. 934-c. 962), a painter in the Southern Tang Kingdom of the Five Dynastics and Ten Kingdoms period. National Palace Museum, Taipei.

The downturn spawned by the US financial crisis is causing severe economic problems and the threat of social unrest in developing nations around the world.

China's Slowing Economy

We know that China's export sector is being hit hard, and according to the Bloomberg story Roubini, Edwards Predict Slump in S&P 500 on China, the downturn is severe. Economics guru Nouriel Roubini said that China is in recession despite government data showing 6.8 pct 4th-quarter growth rate. Societe Generale's global strategest Albert Edwards, investment strategist of Societe Generale, said rising unemployment among factory workers will fuel social unrest, threatening the Communist Party’s survival and increasing the risk authorities will devalue the yuan to boost exports.

Slower Growth to Continue

The Financial Times reports in China data to show slowest growth in decade that economists are lowering their estimates of 2009 Chinese economic growth. After adoption of an aggressive policy of fiscal stimulus and deep cuts in interest rates, "recent figures for credit and money supply growth have encouraged hopes among some economists that the stimulus efforts are beginning to gain traction". Not all economists are impressed. RBS and Morgan Stanley lowered estimates of 2009 growth to "below 6 percent". This compares to 13% in 2007 and would be the lowest GDP growth rate in 20 years.

US Deleveraging Hits Trade Partners Hard

There are good reasons to forecast a continued slowdown in China, as Paul Kedrosky argued in Watch out, world: Americans are saving again. He noted that the US savings rate rose to 2.8% in November from zero at the start of 2008, and further opined that the savings rate could rise to 4% at the end of 2009 and 7% by late 2010. Even if the savings rate held at 3%, the capital flows to US banks would be five times the total of China's current Treasury holdings. As Kedrosky says, "all that money has to come from somewhere", meaning from China and other US trading partners. His prediction: "It will be biggest story of 2009: How will rest of world restructure in face of US hell-bent on replenishing its bank accounts?"

China Already Faces Political Problems

Even without the pressures of the global financial crisis, China already has problems with social and political stability. The New York Times reported recently in China Sees Separatist Threats that China's cabinet, the State Council, issued a white paper saying that it sees threats from independence movements related to Taiwan, Tibet and the western desert region of Xinjiang.

Tension in US-China Relations

The US will have to steer a careful course with respect to trade, as shown by China's sharp response to recent comments by the new US Treasury Secretary, Timothy Geithner. Mr. Geithner wrote to a senate finance committee that "President Obama, backed by the conclusions of a broad range of economists, believes that China is manipulating its currency" and "President Obama has pledged as President to use aggressively all the diplomatic avenues open to him to seek change in China's currency practises." The chief economist at China Construction Bank, Hua Ercheng, responsed "I was very disappointed and surprised at the remarks. We are concerned about rising trade protectionism in the US."

Risk of Competitive Devaluations

There is always the risk that countries will try to protect domestic jobs by devaluing their currencies to make exports more competitive. In Alliance Bernstein's Asian Weeekly Insights, Anthony Chan reports Fear of Jobs Crisis Keeps Beijing Under Pressure to Depreciate RMB . Chan believes that the depreciation of the Renminbi against the dollar by about half a percent in the last two months signals a Chinese policy to move toward a weak currency, and that this policy is motivated by the need to create jobs:

With export growth falling off a cliff and the closure of small- and medium-sized factories becoming rampant along the export-dependent coastal regions, a strong exchange rate makes no sense from a political-economy perspective. China needs to create 10–15 million urban jobs each year to absorb the millions of rural workers migrating to the cities. Failure to do this would jeopardize social and political stability, and pose a serious challenge to the Communist Party’s one-party rule.

Widespread Unrest Predicted around the World

The Times warned recently that riots in Iceland, Latvia and Bulgaria are a sign of things to come. Speaking to a protest meeting in a Reykjavik cinema, Robert Wade of the London School of Economics warned that world was approaching new tipping point. He predicted large-scale social unrest starting in the period March-May 2009.

It will be caused by the rise of general awareness throughout Europe, America and Asia that hundreds of millions of people in rich and poor countries are experiencing rapidly falling consumption standards; that the crisis is getting worse not better; and that it has escaped the control of public authorities, national and international.

The article warns that Ukraine could be next because of its gas pricing deal with Moscow. Bulgaria has seen its worst riots since the fall of the Socialist government in 1997. Since the time of Wade's address, Iceland's government has fallen.

Capitalism Freezes in Worldwide Winter of Discontent

This was the headline of a Bloomberg article saying that, around the world, social strains are threatening the established political order, putting some countries’ very survival at risk. In past month, Nigerian rebels threatened renewed warfare against foreign oil producers, Russia sent riot police from Moscow to quell anti-tax protest in Siberia and China’s communist leadership warned of social agitation as 20th anniversary of Tiananmen Square massacre looms.

The article quoted Louis Michel, the European Union's development aid commissioner as saying that disillusionment and spillover effects of the global recession “are not only likely to spark existing conflicts in the world and fuel terrorism, but also jeopardize global security in general.” The effects threaten countries around the world, including: instability in Pakistan, a more aggressive if economically stricken Iran, a collapsing Somalia, civil disorder in copper-dependent Zambia, a strengthened, drug-financed insurgency in Colombia, a more warlike North Korea, and “blood and tears” in Pakistan.