Trade War will hasten the Reckoning the US and China need
Excellent column on the US China trade war by former Morgan Stanley Chief APAC Economist Andy Xie, asking if the trade war can reverse the worst economic trends in both countries. He discusses the short-term pains for both China and the US, but also sees possible benefits for all in the longer run.
> A lack of external checks has led to rising internal imbalances in both countries. Since the end of the cold war, the US has been marred by surging inequality, while bubbles and ignorant hubris have come to occupy the central ground in China’s economic management and political thinking.
> Financial speculation and corruption have become normalised around the world. The titanic rivalry between the world’s No 1 and No 2 economies will put all on their toes. Some of the most egregious trends could be reversed.
> The short-term pain is quite visible in China. Its stock market is plummeting. And the property market is on edge and may soon follow. It would be wrong to blame it on the trade war.
> China’s stock market bubble didn’t fully deflate in 2015. The government used multiple instruments to prop up the market, and it was trying to revive it with a tech bubble.
> Hence, the market has never reached a sensible valuation. Tech concept stocks came down from a 10-mile high to a five-mile high but never touched the ground. What’s happening to the stock market should be viewed as unfinished business from 2015. The trade war was merely a catalyst.
> Property is the big one among China’s bubbles. Its bursting would have a major impact on the construction industry and, more importantly, local government finance. The current monetary easing is clearly aimed at shoring up the market. There could be more supporting measures to come.
> We can’t rule out a 2008-style stimulus with a very low mortgage rate and small down-payment requirements. While these measures may slow the process, the property market will burst.
> East Asian economies have experienced property bubbles due to export promotion through undervaluing exchange rates, which leads to a monetary boom. When exports slow, the bubble bursts.
> There are arguments about how export dependent China is. At 20 per cent of GDP, China’s export ratio seems much lower than that of other East Asian countries during their boom. The low figure is actually due to China’s hinterland effect. The Eastern Seaboard of four provinces and one city account for two-thirds of the country’s exports.
> They also account for all the financial support for the central government, and the subsidy transfers to the hinterland. The efficient part of China’s economy is as export dependent as the other East Asian economies were.
> The US has suffered little from the trade war so far. The damage to farmers from declining soybean prices is the most visible aspect, and the government is coming up with money to cover their losses. The US stock market has been very resilient despite lofty valuations, rising interest rates and the trade war.
> The key support seems to come from stock buybacks, thanks to Trump’s tax cut and tax amnesty for repatriating offshore profit. I believe the tax cut is merely delaying the market’s fall. The delayed timing, though, has emboldened the Trump administration to pursue the trade war.
> The big cost will come if and when supply chains are moved out of China. The process is inflationary. It is not just inflating the US$500 billion of imports from China. Imports from other countries will also rise, due to less competition from China. Inflation raises living costs for most Americans who live from pay cheque to pay cheque.
> It will also force the Federal Reserve to raise interest rates more than expected. The US has been experiencing one bubble after another for the past two decades. The low interest rate, justified by imported deflation, is the main culprit. The US’ bubbles seem resilient for now. They will soon follow China’s and burst.
> Bubbles bursting is a necessary condition to bring sense to all players. Policymakers have been paying too much attention to asset prices. One major factor is that they hang out with speculators at places like Davos. This is why, despite incredible economic growth since 1989, most people are discontent.
> The world needs a new generation of policymakers who don’t hobnob with billionaire speculators and who understand workers’ concerns. Unfortunately, the change will not come smoothly. Political turmoil in the West is very much about this. A heavy price has to be paid to bring about the change.
> The Sino-US rivalry is the main driving force to bring about the needed global change. The Beijing-Wall Street axis has been driving the global economy towards speculation and inequality.
> In 2008, Beijing and Washington pumped in massive amounts of money to bail out speculators in the name of saving the economy and helping workers. The reality is that they used workers’ money to enrich parasites.
> We are living in a world in which wealth is theft, as Karl Marx once said. The sooner this world ends, the better. People may despair in the coming years over the ensuing chaos, but a better world will emerge.
> As in everything else, competition enhances efficiency. At the end, both China and the US will become better countries.