The budget next time
As on previous similar occasions, beginning next week I shall suspend further discussion of the topic under present consideration in my Sunday columns, in order to present an evaluation of the 2011 National Budget. Having taken time for considered reflection, it is my goal to try and add value, from an economists’ perspective, to the very spirited debates on the budget, which started within minutes of its presentation on Monday, January 17.
Naïve conclusion
The disappointment which I had conveyed in last Sunday’s column on the policy positions adopted by China and other emerging economies, now sharing their new-found authority in the governance of international economic affairs with the G7, under the G20, should not lead readers to the naïve conclusion that their cooptation to the neo-liberal and neo-colonial paradigm of the G7 club of rich countries, has been a smooth and untroubled process.
The evidence clearly suggests otherwise. As promised last week, I shall address in this week’s column a few of the bones of contention, which have arisen recently.
One of these has been China’s huge official holdings of US and other G7 countries’ financial securities. Chinese authorities now hold about one-third of the approximately US$3 trillion of US Treasuries held by all foreign authorities. These are kept as foreign reserves and used for regulating the country’s external accounts and exchange rates. Strong concerns have been raised over this situation by US observers and there is strong opposition to the enormous expansion of US government debt, which is held by China, seen as an emerging super power in competition with the United States.
The Chinese authorities have done everything they can to dampen these concerns. They have portrayed US Treasuries as the most liquid and secure in the world; boasting that US government securities are stable and virtually riskless. This is a far cry from the financial imperialism which China had previously portrayed the US as practising.
As China’s holdings of US government securities have expanded it has developed self-interest in the US government’s financial credibility. This is akin to the old adage that if a borrower owes a relatively small amount he/she is in severe problems, if unable to repay. However, if the debt is large and the borrower cannot repay, then both the lender and the borrower are in trouble.
Illegal and illicit trading
A second bone of contention is over China’s increasingly dominant role in global markets trading in illicit and illegal products. At present, China accounts for nearly all the production and export of rare earth elements. These are critical inputs to key areas of technological expansion, especially military applications and green energy innovations. China has been using its monopoly power over these products for strategic economic leverage around the world, just as other global monopolists have done in the past (oil and nuclear energy). Like other monopolists, the regulation of production, use of export quotas, the satisfaction of home country economic needs first, and, maintaining a technological head start at all costs, have become the primary considerations; the comparison to the Organisation of Petroleum Exporting Countries (OPEC) readily comes to mind.
In addition to rare earth elements, China’s role in the illicit/illegal trading of other products has also risen dramatically. These products include ivory; tigers, tiger parts and tiger-derivatives; counterfeit and pirated brand-name products (especially electronics and personal items); and regulated wildlife.
Most of the public charges against China on these matters have been made by concerned international and local non-governmental organizations (NGOs). This has allowed China’s responses to be low-key, because the Chinese authorities, as a rule, do not have a high regard for NGOs. While the issues might have been raised privately at the state to state level in diplomatic exchanges, I have no evidence of this. Part of China’s rebuttal of NGO allegations has been to point out that the US is similarly a dominant player in the illicit/illegal global trade in arms, munitions, and intelligence equipment. Despite this, however, the evidence suggests some effort, albeit limited, is being made by China, to regulate its domestic trade in these items.
Currency manipulation
A third bone of contention is one which has prompted vigorous responses from both sides. That is, the allegation by the United States that the Chinese authorities are actively manipulating their currency (the yuan) in order to steal a competitive advantage for China’s export of goods and services in global markets. China has responded to this by claiming the United States is doing the same, if not directly through its intervention in foreign exchange markets trading the US dollar, then indirectly, through intervention in its domestic money and credit markets. To be fair, all countries, in one form or another, directly or indirectly, intervene in their economy with the intent of affecting the traded price for their national currency.
Direct intervention would include both regular and sporadic actions by their authorities in trading in foreign exchange markets. Indirect intervention involves massaging their general economic conditions in a manner to sustain a preferred exchange rate. Thus fiscal policy (that is, government spending, taxing, or borrowing) can be used to indirectly influence the market for foreign exchange.
Alternatively, the authorities may use more direct administrative measures, such as the imposition of capital controls or edicts/directives governing foreign exchange transactions in the market place.
What often distinguishes the method of approach adopted by the authorities is the level of liquidity and sophistication of the financial markets of the country under consideration. There is no doubt that US financial markets are exceptionally liquid and therefore it is very easy to ensure the transmission of impulses from domestic policy to the foreign exchange market.
As indicated above, next week I shall turn to the evaluation of the 2011 Budget and resume the discussion on these matters at a later stage.
