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[Editor's Note: For today's guest column, we are pleased to present analysis by Sam Park with the New York investment and business development advisory service of R. W. Wentworth & Co. While his article doesn't focus on Asia, Mr. Park writes fluently from an economist's perspective on subjects in which the readers of this weblog, especially those residing in Asia, have expressed keen interest. Indeed, American markets, the trade deficit, the movement of the dollar and Mr. Greenspan's comments are perhaps of even greater moment to the businessman residing on the left coast of the Pacific as on the right. Many thanks as well to Mr. Alan Rude, President of R. W. Wentworth, as well as his staff, for permission to post.]

February Minutes of the Federal Open Market Committee

The Federal Open Market Committee (FOMC) continued with its effort to increase transparency by revealing the minutes of its February meeting. The minutes disclose the discussion among the members as they had decided to raise fed funds rate 25 basis points to 2.5 percent. This transparency allows the public to scrutinize and analyze reasons behind the Committee¹s decision on their recent monetary policy.

During the meeting, the consensus was that the economy steadily expanded in recent months. Real consumer spending continued to expand as real disposable personal income rose moderately and consumer confidence remained favorable. New and existing home sales maintained their robustness, however at a decelerating rate. Business fixed investment grew in the fourth quarter and was bolstered by favorable fundamentals. Since the recent data indicates a solid economy, the FOMC has some freedom to raise rates closer to their neutral level that ranges between 3.5 and 4 percent.

A Large Trade Deficit and a Weak Dollar

The U.S. international trade deficit continues growing to record levels, both in nominal terms and percent of GDP. Recent data suggests that the U.S. trade deficit had swelled in the fourth quarter, which had resulted from a decline in exports of goods and increases in imports of oil and consumer goods. Despite the optimistic view of the U.S. economy suggested in the February minutes, the current trade deficit may pose a threat to the ability of sustaining high Federal deficit levels and to the continuing of the economic expansion.

Large deficits typically cause worry that they could hurt the U.S. industry, eliminate jobs, and cause "hard landing" scenarios. Growing deficits could burden future generations with overwhelming foreign debt, leaving the U.S. susceptible to foreign pressures. This could discourage foreign investor confidence in the U.S. and may trigger capital flight, causing a downward spiral of the dollar.

However, according to America's Record Trade Deficit, large trade deficits are typically accompanied by improving economic conditions because of the link between trade deficits and rising investments. The primary cause of the U.S. trade deficit is due to insufficient domestic savings to fund all available domestic investment opportunities. This insufficient savings is filled by inflow of foreign capital, which allows the U.S. to buy more than it sells resulting in a trade deficit. Trade deficits are sustainable as long as the U.S. remains a safe and profitable designation for the world¹s savings.

Several factors challenge the sustainability of the trade deficit. Historically, the U.S. dollar and Treasuries have been viewed as safe and profitable. While the dollar is still safe, several major dollar-holding foreign central banks had recently issued statements of the dollar¹s unsatisfactory returns. These central banks have also indicated their plans of decreasing their exposure to the dollar, and these banks may diverse themselves away from the dollar. The weakened dollar must turnaround to avoid a possible capital flight and recession.

Inflationary Pressures

Another major focus on the Committee's minds is inflation. The weak dollar has caused import prices to rise. This combined with record high crude oil prices are creating inflationary pressures. High productivity growth rates have previously eased such pressures; but as the productivity rates decelerate, core inflation to the consumer will begin to increase.

The latest core Producer Price Index rose .8% (its highest monthly jump in nearly a decade). This implies that costs to firms have risen. The rise in the latest core Consumer Price Index was more moderate. However, unit labor costs had accelerated over the last year; and if this trend persists, core CPI is likely to increase.

The FOMC puts more focus on CPI figures than that of the PPI, and the Committee does not currently seem to be in a panic situation. Then again, some firms/producers have indicated their ability to pass cost increases to product prices, which directly causes higher core CPI figures. FOMC members probably understand this possibility and may take a more aggressive monetary stance in the months ahead.

Contradictory Interest Rate Situation

As shown in previous newsletters, consumer inflation levels affect FOMC's policy stance and decisions on fed funds rates. Given so, the upward inflationary pressures will force the Committee to take a tighter stance, which will effectively increase short-term interest rates. Nonetheless, consequences result from actions.

Greenspan has mentioned how he faces a conundrum seeing the recently declining long-term Treasury rates after having raised rates six consecutive times. Rising short-term rates not only causes a flattening yield curve, but the low long-term rates also accelerates the process. This implies that economic outlook appears uncertain. If the curve becomes inverted (when short-term rates exceed that of loner-term Treasuries), then we are likely to face a dismal economic situation.

Where Fed Funds Rates Are Headed

As mentioned, the FOMC tends to focus majority of their attention on consumer's inflation. Granted so, they will continue raising target rates. Currently, the fed fund futures is pricing approximately 65% probability of a 50 basis point increase in fed fund rates during the upcoming FOMC meeting and implies that at least 25 bps rise is virtually definite in their meeting on March 22nd.

Summing It Up

The Federal Reserve forecasts real GDP to expand between 3.5 and 4 percent for 2005, and the Committee expects the pace to slightly decelerate and range between 3.25 and 3.75 percent in 2006. Firms surveyed by the Fed have indicated more confidence about the economic outlook, and a significant reduction in capital spending is not anticipated in the early part of 2005. Both firms and consumers have taken advantage of low longer-term nominal interest rates, which is partly attributable to well-contained inflation expectations.

The low rates have discouraged savings and helped sustain spending trends. The current low savings rate appear to have resulted by expected income gains, low interest rates, and higher household wealth. The rise in equity and housing prices were major factors in creating that wealth. A reversal of home price appreciation trends would adversely affect household wealth.

A downward spiraling home price or bursting of a housing bubble is possible only if a negative catalyst occurs (i.e., unemployment rates taking a sudden and sharp hike). Since this scenario appears doubtful in the foreseeable future, downside economic risk seems contained. A bleak economy can be avoided as long as imbalances do not force the FOMC to considerably deviate fed fund rates away from neutral levels.

The Federal Reserve Board will most likely raise rates 25 bps on March 22nd. However, if Greenspan fears that increasing inflationary pressures to the consumer is eminent, the FOMC may opt to raise more aggressively by 50 bps during the March meeting.

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[Editor's Note: For today's guest column, we welcome back Sam Park with the New York investment and business development advisory service of R. W. Wentworth & Co. Sam's post of March 9, 2005, "Dealing with Greenspan's Conundrum," may be found here. Many thanks as well to Mr. Alan Rude, President of R. W. Wentworth, as well as his staff, for permission to post.]

Can't Blame the Fed for Everything

The Fed's Duties

Contrary to the belief of many bullish investors, the Fed has not increased rates simply to put an end to the party. Greenspan has been marked as the villain because he¹s an easy target to blame for the flattening yield curve. It is true that the Federal Open Market Committee's decision to push short-term rates higher contributed to the flattening curve. However, it is highly doubtful that the Fed ever intentionally tries to put an end to a good thing. If anything, one key word is probably in the forefront of the FOMC's thinking minds, and that word is stability.

According to Jack Guynn, President of Federal Reserve Bank of Atlanta, the Fed must strategically "act before the appearance of widespread price increases to keep inflation and inflation expectations firmly in check." The objective, which eludes laymen, is to make preemptive moves before excessive inflation is present. If high inflation appears in core inflation benchmarks, then the Fed has not moved aggressively enough. By then it would be too late, and the Committee would be forced to take a tighter stance and make steeper hikes.

However, the Fed does not always make all the right moves. The Committee has in the past pushed rates too high, which have triggered a slowdown or even a recession. Monetary policy is not an exact science; indeed it is more like chess match with the outcome in doubt. While the Fed carefully and diligently observes relevant data, and develops a strategy that they feel is best, the outcome is not always what is desired. The following topics are some matters that the Fed and Wall Street are taking into consideration before they make their moves.

Shades of the Golden Horde? The hysteria continues into the 21st century:

"'Over the next couple of years, 10 Chinese [oil] rigs - and crews to operate at least half of those rigs - will be imported from China to the Rocky Mountain region of the U.S.,' said Bill Croyle, a partner in Western Energy Advisors."

In response, "Rep. John Salazar, D-Colo., whose district includes some of...[Colorado's]...largest gas fields, is not happy about the trend.

'I am totally against the Chinese government running the jobs in our country,' Salazar said. 'With the Chinese government getting involved, it's not even a competitive business model. Outsourcing has already claimed millions of jobs. We cannot allow that to happen within our own borders.'"

The Pipefitters Union naturally offered to protect its turf and its membership. But is reported to have stated, incredibly, that "importing Chinese crews could raise issues much like the controversy raised in the 1800s when Chinese laborers were used to build most of the West's railroads."

After all, in the 19th century, violence against Chinese the western U.S. was commonplace. "Attacks began in the 1850s against Chinese gold miners and continued throughout the century. In 1871, for example, a white mob descended on Los Angeles's Chinatown. Fighting erupted and when it was over, 15 Chinese were found hanged. Six years later, arsonists attempted to burn down the entire Chinatown in Chico, California."

I have a good deal of trouble deciding whether this union utterance, if accurate, is simply a bald-faced assertion of labor unrest or a veiled threat at something even less enlightened.

UPDATE, July 11, 2005: The Washington Times carries the story.

Click the little triangle to hear today's post.

American cabinet officials will travel to China to "press for changes in Chinese economic policies long criticized by the administration and Congress, officials said Wednesday."

At long last, another Magical Mystery Tour. The mystery is that they should believe in the power of their magic at all. Chinese can be awfully stubborn when asked to take actions they see running contrary to their interests. (Was that too subtle?)

You may remember that the film was panned with gusto. We await the film of this trip with bated breath.

UPDATE to this post: More silliness from Washington. [One is sorely tempted to employ the perjorative "stupidity," given the continued emphasis upon ineffective strategies.] The Chinese government will give scant attention to strident but empty-fisted pronouncements.

Token offers of appeasement, like the single digit percent movement of the value of the RMB, effected over years -- we have heard similar promises about revaluation since the early 1990s -- should be taken as mere off-putting tactics which many in the American business community have come to understand for what they really are.

Why should China move when there is little genuine pressure upon their position? American investment money flows into China like the proverbial honey. Americans purchase ever increasing quantities of China-made products, even as their own manufacturing base has suffered terribly.

Change in yuan policy will come only when export revenue diminishes and inbound investment falls. Chinese understand that American pols are, frankly, impotent -- none will attempt to curtail U.S. domestic consumption of Chinese product or the massive capital outflows from the U.S. into China that do more to strengthen the Chinese position than anything the Chinese could do themselves.

More renminbi revaluation silliness from Washington... Click the little triangle to listen to today's post.

Tim Adams has left Treasury. Is Mr. Paulson about to announce a shift in Treasury's China policy?

All the news that fits, we print:

"The People’s Bank of China said in a statement posted on its Web site that it would allow the currency, known as the yuan or renminbi, to rise or fall up to 0.5 percent in each day’s trading. The current daily limit is 0.3 percent."

WOW!

***

UPDATE (May 19, 2007): Here we go again!

"There was hope that broader cooperation was on the way, but a lot has changed in a few months. On the American side, with Democrats in control of Congress and a presidential campaign gearing up, there's a growing impatience with the pace of economic reform in China and a slew of anti-Chinese trade bills pending."

Does Miss Cha mean that under the Republicans progress could have been made?

"In recent months, official rhetoric on U.S.-China trade has grown increasingly hostile."

Rhetoric is an empty tide that ebbs and flows between China and the U.S. For all the hot air, the Americans have been entirely unwilling or incapable of acting. As I have written for years, empty American threats prove worthless in the face of Chinese political administrators who are just as canny and talented (or stupid incompetent, as the case may be). The money continues to roll in. How can the Chinese be expected to step in and stop it?

Now, however, ammunition has passed up to the front lines. The melamine-in-the-pet-food scandal (see my post and podcast) has already galvanized the American consumer to avoid Chinese food products, and the FDA's response appears to be earnest. Will an American negotiator in a position of substantial authority make the link between the food impurities case and the trade war at large?

UPDATE (May 20, 2007): This morning's Washington Post picks up on this thread. The strong language of this front-page piece made me stutter for a second - I thought it was an editorial!

For years, U.S. inspection records show, China has flooded the United States with foods unfit for human consumption. And for years, FDA inspectors have simply returned to Chinese importers the small portion of those products they caught -- many of which turned up at U.S. borders again, making a second or third attempt at entry.

Now the confluence of two events -- the highly publicized contamination of U.S. chicken, pork and fish with tainted Chinese pet food ingredients and this week's resumption of high-level economic and trade talks with China -- has activists and members of Congress demanding that the United States tell China it is fed up.

Chinese food imports are a serious public health concern. Some have begun to see the extraordinary value of the pet food scandal in the context of trade negotiations. Let us hope the American negotiators are hammering away at it with the clobberingest mallet they can find.

UPDATE (May 21, 2007): Bloomberg:

``Paulson, as somebody who understood China, was trying to reach a conciliatory approach,'' says Nobel laureate Joseph Stiglitz, an economics professor at Columbia University in New York. ``The question is, has the political pressure taken away his freedom to move?''

With respect to Mr. Stiglitz, that is not the question. Rather, it is the validity of conciliation in negotiation. Conciliation is ineffective with Chinese, unless paired with its subtle black sheep twin brother, Threat.

And neither can be made of straw -- they will both go up in flame. As we've written in the past, one hand must caress while the other is held ready to strike.

WSJ's article on Treasury Secretary Hank Paulson notes his frustration, not in dealing with Chinese officials, but with Americans. With respect to Social Security:

Mr. Paulson says it's "frustrating to be in an environment where well-meaning people on both sides of the aisle see there's a problem" but don't have the political will to act. "I've been asking people to come to the table, saying all options are on the table, and I'm getting a little tired of playing solitaire."

As to China, he appears to think that patience will, over time, result in the gains he is looking to achieve.

Under pressure to take a tougher stance, the administration has unilaterally imposed sanctions on China for alleged improper pricing of exports, and in a World Trade Organization complaint, has accused China of lax enforcement of copyright violations. Mr. Paulson didn't oppose the moves, although he knew it would be an obstacle to discussions, Treasury officials say. The Chinese reacted angrily, and Mr. Paulson spent about four hours on the phone with Ms. Wu to smooth over tensions, people familiar with the conversation say.

A quote verbatim would have been more revealing than this paraphrase. Did Mr. Paulson really say that the WTO IP complaint was an obstacle to his discussions with China? Isn't it, instead, a valuable tool of negotiation with China? The article thus leaves the reader wondering about his priorities and methods.

UPDATE (May 24, 2007): Chinese authorities have proven as incapable of restraining its prolific counterfeiting as American federal departments were of providing humanitarian assistance during hurricane Katrina.

On Tuesday, Ms. Wu said that efforts by some to “politicize” the Chinese-American relationship were “absolutely unacceptable.” This was taken as a reference to the American challenges to Chinese subsidies of exports and piracy of DVDs.

IP is precisely the kind of issue that the U.S. can not let go of. US representatives in China have been banging away on IP -- with words alone -- for at least 4 years, but it is chopping a redwood with an invisible axe.

The hot air -- the new Trade Winds? -- that has blown forth and back between these two Great Nations has accomplished scant little over these many years.

Action -- even if it is only symbolic -- will speak far louder. [Symbolic acts are typical of Chinese political tradition, e.g. to disarm an enemy by executing the leaders of the group and not the entire group itself.]

Susan C. Schwab, the United States trade representative, speaking at the conclusion of the talks Wednesday, made it clear that her own session with Chinese leaders had done little to narrow differences on these issues. “Suffice it to say we had a healthy exchange of views,” she said.

Meaning that the banquet was terrific.

But this quote gives us serious gastric distress:

Mr. Paulson said he was impatient for more concrete results himself and hoped there would be further progress before the third session of the dialogue, in Beijing in December.

“I have no doubt that we’re getting more results than we would have without this dialogue,” he said.

More of the old back and forth.

Only a piddling amount of money is involved -- as yet -- if any. It appears to be a simple statement without any details of the offending shipments. Did it really occur, i.e., is it an agressive tactic or only a mouthful of threat?

But that's not the most important question. Instead: who'll cave when the stakes are truly high? Will the Americans even last that long?

UPDATE (June 28, 2007)

From the New York Times:

The Food and Drug Administration today issued an alert challenging imports of five major types of farm-raised seafood from China, including shrimp and catfish, because testing found recurrent contamination from carcinogens and antibiotics.

The alert means that the fish will be allowed for sale in the United States only if testing proves that it is free of certain antibiotics and carcinogens

UPDATE (June 29, 2007):

American consumer reaction to Chinese food imports has been overwhelmingly negative. See for example this page.

Over the last few years, the American ardor for China has cooled. Even I need a sweater. In speaking with Americans, the topic often turns to China. My partner in conversation, whoever it may be -- home improvement contractor, local attorney, bank teller, teacher -- is now, as a rule, adamant that China is not a friend. Of course, that person may delight in friendships with individual Chinese, but to many Americans, China has become more than just an adversary. And I believe I am right in saying that Chinese are similarly disposed towards the U.S. A dreadful state of affairs.

China has become a focal lens for the distress, anger and helplessness that Americans can no longer tolerate directing inwardly. No longer do we read encomia touting the virtues of ancient Chinese philosophies practiced in modern life, the beneficially high rate of savings and lack of debt, the care and respect towards the elderly, the veneration of education, the tolerance for long hours and hard work.

Instead, we read only that Chinese are rapacious money-makers who intentionally employ toxic materials to improve profit, dirty spitting pedestrians who copiously litter with no sense of public morality, brutal authoritarians who control the freedom of speech, association and worship that Americans believe God gave Man, and the like.

Now, mind you, there is truth in both viewpoints. But, over the past few years, Americans have focused on the latter, seemingly in forbearance of all knowledge of the former. There should at least be balance.

Historically, Americans have always expected that the next generation would enjoy an improvement in the quality of life -- until my generation, who expect its decline. The American senses narrowing opportunity amid heightened competition. What can one truly eat from the communal pie that always seems to shrink?

The hackneyed phrase is "the American dream." It originally referred to the desire of lifelong tenants to own their own home. It now seems to be used to describe a paradigmatically American ideal of plenty, a cornucopia of whatever the individual would wish for himself. But for the American individual today, there is no boom, only the residual smoke of a bust. And someone must be held to blame. Why not China? They're enjoying -- so goes the thought -- an incredible run, and entirely at our expense.

Even long held American commercial tenets may go the way of the perpetual Republican vow to cut taxes. According to this WSJ poll, even the Republicans are beginning to sluff off the centuries old hallmark of "free trade."

By a nearly two-to-one margin, Republican voters believe free trade is bad for the U.S. economy, a shift in opinion that mirrors Democratic views and suggests trade deals could face high hurdles under a new president.

Incredibly, China obliquely takes its licks in this article devoted to American politics:

We're seeing a lot of jobs farmed out," said Mr. Pirtle, whose father works for General Motors Corp. Rankled by reports of safety problems with Chinese imports, he added, "The stuff we are getting, looking at all the recalls, to be quite honest, it's junk.

Mr. Pirtle's comment is sadly typical in American society today. If it's junk, why are we're buying it? If it's of poor quality, why have we eagerly exported the work to cultures where standards are different? If it's unsafe, why have we authorized a branch of the federal government, proven time and again to be incompetent or incapable in so many aspects of life, to perform tasks it can't even begin to complete?

The decisions Americans have made, as a people, over the past generation are more the cause of our predicament than anything manufacturers across the globe could have possibly done. We will have rid ourselves of what we value most before it is over. But, for the instant moment, we deny ourselves the serious critical look at our own ideas and actions, which require far greater correction than we demand of our neighbors.

Riddle me this, Caped Crusader:

What American official puts pressure on the yuan by not putting pressure on the yuan? This just in:

"What we've said before in the report ... is if we were to designate China as a manipulator, the remedy would be to negotiate with China directly and through multilateral bodies including the IMF, which is exactly what we've been doing for some time," Paulson said. "We've been making the case as strongly as we know how."

In other words, the U.S. Treasury Secretary will not officially label China as a currency manipulator, but will continue to act as if it had. One supposes that this is how the old China hands in the US administration believe it has to be done -- avoid public shaming, put forth rosy statements, fight the good fight in private. And yet, where are the results? Can any be expected, except marginally, when change would directly harm China's interest?

Just a few years ago, container ships returned to China with much of their capacity unfilled. This situation has apparently changed.

Does a shortage of containers used to export product from the US imply a notable change in the balance of trade, as this article posits? or, is it simply that, as the article states:

Many shipping lines, including Maersk, have shifted container capacity away from the U.S., just when U.S. producers need them most.

Massive non-performing loans that force major financial institutions into insolvency. Significant state investment in manufacturing industries. National governmental leadership in product planning. Taxpayers "profiting" from equity investments in quasi-private enterprises.

What nation do you think I'm referring to? Could be China, but no.

The United States has apparently embarked upon the creation of a quasi-capitalist economy with socialist characteristics:

The Democratic lawmakers said federal aid should come with "strong conditions," such as requirements that car makers build more fuel-efficient vehicles, and equity stakes for the government so taxpayers could profit if the companies recover.

A re-run of the last 25 years of a Chinese state-led market economy, Americanized?

The animus towards China -- specifically imported products -- has never, in my lifetime, been as acute nor as widespread than it is today.

This article and the popular comments below it show the depth of contrary feeling. Chinese products are blamed for being injurious to human health, cheaply made, made with slave labor, anti-American, etc., requiring strict import regulation or even the outright ban of Chinese imports.

Few American internetizens appear to have much to say that's postive about China. One can't foresee anything but greater kickback from Americans. Importers will need to diversity their sources, if they haven't already.

As further evidence of the negative feeling towards China, read this piece.

Citing three economists (Bernanke, Rogoff and Laurence Myer), as well as a handful of non-economist political figures, its authors claim that "some" American economists now view Chinese capital inflows into the U.S. as a necessary element of the credit collapse.

[Some. Indeed, three can mean "some." But the implication throughout the copy is that such sentiment is widespread among economists. What is going on in this article, anyway? Where is the editor?]

For the past five years, China has been one of the most prolific bidders [of Treasuries]. It holds $652 billion in Treasury debt, up from $459 billion a year ago. Add in its Fannie Mae bonds and other holdings, and analysts figure China owns $1 of every $10 of America’s public debt.

Evidently, these capital inflows are a root cause of America's current woes. Not only does there exist popular aniimus against Chinese goods, but among rational thinkers (economists) and decision-makers (senators) as well. At least, this is the claim.

Typical of the modern New York Times style, one which I find difficult to stomach, its authors ramble from reportage to opinion.

In the past decade, China arguably enabled an American boom. Low-cost Chinese goods helped keep a lid on inflation, while the flood of Chinese investment helped the government finance mortgages and a public debt of close to $11 trillion.

But Americans did not use the lower-cost money afforded by Chinese investment to build a 21st-century equivalent of the railroads. Instead, the government engaged in a costly war in Iraq, and consumers used loose credit to buy sport utility vehicles and larger homes. Banks and investors, eagerly seeking higher interest rates in this easy-money environment, created risky new securities like collateralized debt obligations.

“Nobody wanted to get off this drug,” said Senator Lindsey Graham, the South Carolina Republican who pushed legislation to punish China by imposing stiff tariffs. “Their drug was an endless line of customers for made-in-China products. Our drug was the Chinese products and cash.”

Mr. Graham said he understood the addiction: he was speaking by phone from a Wal-Mart store in Anderson, S.C., where he was Christmas shopping in aisles lined with items from China.

Very cute, that last paragraph. Another oft-employed stylistic device that brings the Op-Ed into the Front Section. This is rhetoric, employed to persuade. So what is the point?

My reading of the opinion burrowed deeply within this article is this: China's investment decisions are really of little consequence. Instead, American economists, political leaders and regulators -- the supposed anchors of our system -- have taken to foolishly blaming the hard-working people of China whose exports allowed us to live well, but cheaply. It is our own government administrations who are to blame.

While some [note my strategic and misleading use of "some"] of the claims in this article may be supported in fact, the trick of hiding political criticism in the World Section is a sham, a disservice to the reading public. Together with the cynical appeal to reader emotion and peppered with snide observations, one must question whether to rely upon the factual information the article purports to convey.

Federal Reserve Board Vice-Chairman Donald Kohn before Congress on the importance of keeping secret the names of the recipients of the American banking bail-out.

Gasp. I don't think I can muster up even a single comment on this one.

Paulson's Legacy: Geithner:

Timothy F. Geithner, who moved closer to confirmation as Treasury secretary on Thursday, told senators that President Obama believed China was “manipulating” its currency,

Again? Since 2006, we've discussed Treasury's desire to move the RMB, but, by now, it's become a dreadful bore. [Search this page or click the Foreign Exchange category of this blog.]

Perhaps Washington believes that China has been weakened and leverage may be exerted where popular opinion supports the administration. Watch out for the push-back!

UPDATE (8 hours later):

Sure enough, the Chinese have fired back.

A Chinese ministry Saturday strongly denied Obama administration claims that China "manipulates" its currency, as the first contact between the new administration and China takes a markedly sour tone.

American lawmakers appear to have shelved the frightful idea of "nationalizing" failing banks. However, they've now settled down to discuss -- from media commentary, frantically -- a plan that mimics the experience of modern Chinese banking regulators: the creation of a "bad bank" to remove toxic assets from the system.

You may remember that the Chinese banking system was (and remains) functionally bankrupt. [This article from 2005 is worthwhile reading.] Through deft financial sleight-of-hand, a satisfactory percentage of non-performing loans (NPLs) were removed to a state-controlled holding companies (AMCs), thus allowing, among other benefits, quasi-state-owned financial institutions to list on foreign stock exchanges, sporting "acceptable" NPL ratios. But NPLs continue to rise, despite Chinese statistics (read "notorious.") to the contrary. (Whom to believe?)

PWC Hong Kong's China NPL Investor Survey 2006 -- evidently the last issued, for good reason (remember that Ernst & Young retracted its NPL report of 2006 under pressure from Chinese regulators) -- states:

The size of the China NPL market is extensive. Based on the statistics provided by the China Banking Regulatory Commission ("CBRC") as at the end of the 3rd quarter of 2006, the total number of NPLs in China's commercial banks was approximately RMB1.3 trillion (US$160 billion). However, this amount does not include the NPLs that are presently held by the AMCs -- the only NPLs from China's banking system that to our knowledge are available for sale to investors.

It is difficult to estimate the amount of unresolved NPLs within the AMCs as they generally only report the amount disposed from their initial 1999 transfer loans of RMB1,400 billion (US$170 billion), and not amounts disposed from the various subsequent transfers made in 2004/05 which, based on press reports, we estimate total approximately RMB1,225 billion (US$153 billion). Recent press reports indicate that as of the second quarter of 2006, the AMCs have resolved approximately RMB1,169 billion (US$145 billion and paren of the 1999 transfer loans. That leaves a balance of RMB231 billion (US$30 billion) of the 1999 transfer loans that still need to be resolved and an unknown number of the RMB1,225 billion (US$153 billion) subsequent transfer loans requiring disposal. Whatever way you look at it, the AMCs still have a large number of NPLs on their books that they need to resolve.

It shouldn't surprise that foreign investors are no longer in the market for NPLs:

The China NPL market for foreign investors is very quiet and we expect it to remain so for some time. While there is supply and demand, only a handful of transactions have been completed this year and foreign NPL investors are leaving the market in droves. In addition, we have not noticed any new entrants to the market.

Now, with the U.S. very likely to purchase its own children's toxic assets, perhaps it will turn to China for expertise? With similar "success?"

And who will buy these assets, if they can be called that, from the proposed "bad bank?" And for what prices: who will determine them and by what method? Mark to market? What market? what astronomical sum would it, in fact, cost? No one, it seems, really knows...

The Bad Bank (see yesterday's post) has hit a snag and may not progress past the light bulb stage. Executive regulators don't seem to know how it would work in practice.

Federal Deposit Insurance Corp Chairman Sheila Bair is apparently pushing for the top post of Baddest Banker:

FDIC Chairman Sheila Bair is pushing to run the operation, which would buy the toxic assets clogging banks’ balance sheets, one of the people said. Bair is arguing that her agency has expertise and could help finance the effort by issuing bonds guaranteed by the FDIC, a second person said.

Surely this sounds like Iraq all over again: a massive invasion frantically cobbled together with little planning as to the "after party."

I've now had a chance to review the complaint in Van Etten v. Mitsui, 09 CV 1071, a reverse discrimination class-action suit brought by an American executive of Mitsui USA fired in 2006.

While I was originally favorable toward the idea of such a claim, the complaint itself tends to move me in the other direction. Avoiding the legal issues for the moment, let's look at a number of relevant cultural issues indicated in the text which render much of the complaint less persuasive than hoped for.

Hackle #1

The first hackle on my sensitive spine raised itself in profound discomfort in only the second paragraph of the first page:

Plaintiff brings this action to challenge a pattern and practice of race and national origin discrimination and retaliation committed by Mitsui USA and Mitsui Japan against current and former non-Japanese/non-Asian employees.

This last phrase -- non-Japanese/non-Asian -- is curious in itself. Does this equate Japanese with all Asians? Or does it make a distinction between the two?

And besides, what is an "Asian?"

For several centuries, the word “Asia” referenced a geography of indistinct determination, stretching from Syria to Japan, and from Siberia to the Andaman Islands, encompassing all nations, races, skin colors, languages, cultures. Essentially, a mishmash, due in large part to the impoverished understanding of Western explorers and mapmakers.

However, no Chinese I know would wish to be lumped together with a Japanese, or mistaken for him, and vice versa. Nor would a Taiwanese wish to be lumped together with the Shanghaiese, etc. But Westerners who didn’t know better, for no fault of their own -- they were only just coming in contact -- essentially classified everyone who lived in basically the same place: faraway.

Along comes 20th-century America, with its increasingly fractious ethnic and racial "melting pot," the elements of which, despite their occasional averments to the contrary, make strong demands for what they see to be their own people, community, tribe, but not for the community at large. Over time, the law recognizes certain races and ethnic groups, providing benefits to those with specific attributes. A census must be taken every decade and various groupings are statistically analyzed. It is a convenient shorthand to group Indians, Chinese, Japanese, Papua New Guinean aborigines, Uzbeks and Fijians into one mother lode of a political grouping, the sheer weight of which would seem to have somewhat nearly the political capital other large groups like blacks and Hispanics would have.

But there is no such thing as an "Asian." (Well, perhaps there is under federal law, but that fantasy I will avoid for the moment.) Things are too complex for this now rancid simplification.

In the complaint under discussion, the phrase “non-Japanese/non-Asian" is particularly troublesome.

Note this paragraph 18:

One of the central elements of the pervasive discrimination at Mitsui USA and Mitsui Japan is the use of and favorable treatment towards "rotational staff," who are employees of Mitsui Japan set to take tours or rotations with Mitsui USA, usually for a term of three to five years.

Rotations are common in international corporations, especially among Japanese companies, for whom the practical experience of in-country work and residence has always been held to be invaluable. It is a practice Americans have cut out of their budgets, much to their discredit and disadvantage. The bias away from direct in-country knowledge within the American company is, in my opinion, a substantial reason for American loss of market share globally. How is it, do you think, that the Japanese automakers have learned so much about operating successfully in the United States, while we now see the American automakers on bended knee begging for government assistance?

Generally speaking, who is rotated out of Japan? A young Japanese with some in-country skills or scholarship who shows promise -- someone who is marked for his potential to rise perhaps 10 or 20 years down the road.

I very strongly doubt that any non-Japanese -- the “Asian” referred to in the complaint -- would be drawn from India or China into a rotation into the United States. In fact, none is mentioned. No one without a Japanese surname, with the exception of a reference to two former complaints by Americans against the company, is even mentioned in the entire complaint.

To what classification is the complaint referring with the phrase "non-Japanese/non-Asian?" It is this ill-defined phrase, which recurs dozens of times in the complaint, that thoroughly confuses things for me. The fact finder may not find it so, relying upon the common Western conglomeration of all things "Asian."

But if I were the defense, I would attack it.

Hackle #2

My jaw dropped when I read paragraph 67:

Mr. Van Etten was also disadvantaged within Mitsui USA by the fact that Japanese was used to communicate, orally and in writing, throughout the day by top Mitsui USA/Mitsui Japan executives as well as with/by their underlings. This practice was rampant, notwithstanding the fact that non-Japanese/non-Asian employees would not be able to understand, leading to greater isolation and exclusion of non-Japanese/non-Asian employees. By way of example only, Mitsui USA held monthly, quarterly and annual business meetings where Mr. Van Etten's business was discussed, but the meetings were conducted in exclusively Japanese and no national staff were included.

This is an extraordinary assertion and, in my eyes, damns the plaintiff and not the defendant. Essentially, it makes the claim that, for purposes of employment discrimination claims, all communication must be made in the English language.

The plaintiff, thus, despite having worked for a Japanese company for 18 years, had never learned the language of its parent company. In his position, most likely, he would not have to. But what language would he speak if were he to become a top-level executive having to make his reports to headquarters in Japan? English? If the plaintiff had been thoroughly fluent in Japanese, had lived and worked in Japan and possessed the very significant in-country skills required of a top-level manager, I would give greater credence to his claim.

But it is entirely unpersuasive to suggest that an American employee of a Japanese subsidiary without such skills is thoroughly qualified to take on a senior role, which would include significant, perhaps daily, contact with headquarters, and an understanding of Japanese practices in the home office. Life is very different in the office in Tokyo than it is in Manhattan.

Hackle #3

By his own complaint, Mr. Van Etten was extremely accomplished -- a producer. He claims that his termination for discrepancies in expense reports dating to 5 years prior was, in a nutshell, trumped up because he complained vociferously about discriminatory practices.

In and of themselves, these factual allegations, as written, do not portray him as one particularly suited to the resolution of a major dispute within a Japanese company. He must have some skills, because he lasted in there a long time, and life is tough going in a Japanese company.

But the complaint shows him to be repeatedly complaining, over the course of several years, orally and in writing, while hinting at a distinct lack of respect for many of his colleagues. While the record of complaints may be necessary evidence to show notice, it, on the other hand, gives us a clue as to the tension in the office that appears to have surrounded this issue.

Read this from paragraph 84:

...Defendants admit that Mr. Van Etten complained that the rotational employees were not qualified for the positions they held and that the practice of bringing Japanese/Asian executives from Japan amounted to discrimination against non-Japanese/non-Asian employees could have been awarded these positions. They also admit that Mr. Van Etten complained that he should have been promoted to general manager and was not because he is not Japanese/Asian.

Numerous incidents, involving HR and executive management, are detailed in the complaint.

While Japanese are more likely to expect open friction within an American workplace, and rather more tolerant of it, it is still considered at the very least unpleasant. Often, when taken to extremes, it becomes a distinct mark against the one who breaches that etiquette.

This is not to say that resolutions are always possible in a Japanese company -- often not -- but simply that jousting is the art of remaining hidden, while advancing in plain sight. Mr. Van Etten may be a complete gentleman in an American sense and he may have comported with the law, but the facts as related by his attorneys give the impression that his repeated straightforward complaints to HR and, more importantly, to Japanese senior colleagues accelerated the movement of the grindwheel, upon which the ax was finally sharpened.

The complaint raised other hackles as well, including the assertion that discipline was more tolerant of Japanese than of Americans, which assertion I find -- based on my own experience and that of other foreigners I know in Japanese enterprises -- almost totally incredible.

I am eager to read Mitsui's answer. More on this case as it develops.

Now what might this be about?

The Obama administration will propose a series of measures "over the next several months" to reform taxes on the foreign profits of multinational companies, and to crack down on abusive offshore tax shelters used by firms and wealthy individuals, Mr. Geithner said.

[UPDATE (March 26, 2009): The American response here and here.]

Zhou Xiaochuan (周小川), Governor of the People's Bank of China, has proposed a supranational currency to which national currencies shall be linked and valued according to a system of "rules." Remember China's concern (panic?) over its enormous U.S. dollar reserves and investments in U.S. Treasuries [See: China's Holdings of U.S. Securities: Implications for the U.S. Economy] The New York Times provides a brief overview; WSJ here and here.

Pie in the sky. From WSJ:

Large, deep, and highly traded markets involving a particular currency "don't spring up spontaneously just because the Chinese central bank governor suggests this would be a good idea," says Barry Eichengreen, an economist at the University of California at Berkeley.

This is a shot over the bow. My initial reaction is that, given the statements of Treasury Secretary Geithner, this public announcement of an attack on the dominance of the US dollar indicates a worsening government-to-government relationship in economic matters between the U.S. and China.

Zhou Xiaochuan's comments in full appear below:

Reform the International Monetary System

Zhou Xiaochuan

The outbreak of the current crisis and its spillover in the world have confronted us with a long-existing but still unanswered question,i.e., what kind of international reserve currency do we need to secure global financial stability and facilitate world economic growth, which was one of the purposes for establishing the IMF? There were various institutional arrangements in an attempt to find a solution, including the Silver Standard, the Gold Standard, the Gold Exchange Standard and the Bretton Woods system. The above question, however, as the ongoing financial crisis demonstrates, is far from being solved, and has become even more severe due to the inherent weaknesses of the current international monetary system.

Theoretically, an international reserve currency should first be anchored to a stable benchmark and issued according to a clear set of rules, therefore to ensure orderly supply; second, its supply should be flexible enough to allow timely adjustment according to the changing demand; third, such adjustments should be disconnected from economic conditions and sovereign interests of any single country. The acceptance of credit-based national currencies as major international reserve currencies, as is the case in the current system, is a rare special case in history. The crisis again calls for creative reform of the existing international monetary system towards an international reserve currency with a stable value, rule-based issuance and manageable supply, so as to achieve the objective of safeguarding global economic and financial stability.

I. The outbreak of the crisis and its spillover to the entire world reflect the inherent vulnerabilities and systemic risks in the existing international monetary system.

Issuing countries of reserve currencies are constantly confronted with the dilemma between achieving their domestic monetary policy goals and meeting other countries' demand for reserve currencies. On the one hand,the monetary authorities cannot simply focus on domestic goals without carrying out their international responsibilities; on the other hand,they cannot pursue different domestic and international objectives at the same time. They may either fail to adequately meet the demand of a growing global economy for liquidity as they try to ease inflation pressures at home, or create excess liquidity in the global markets by overly stimulating domestic demand. The Triffin Dilemma, i.e., the issuing countries of reserve currencies cannot maintain the value of the reserve currencies while providing liquidity to the world, still exists.

When a national currency is used in pricing primary commodities, trade settlements and is adopted as a reserve currency globally, efforts of the monetary authority issuing such a currency to address its economic imbalances by adjusting exchange rate would be made in vain, as its currency serves as a benchmark for many other currencies. While benefiting from a widely accepted reserve currency, the globalization also suffers from the flaws of such a system. The frequency and increasing intensity of financial crises following the collapse of the Bretton Woods system suggests the costs of such a system to the world may have exceeded its benefits. The price is becoming increasingly higher, not only for the users, but also for the issuers of the reserve currencies. Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws.

II. The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies.

1. Though the super-sovereign reserve currency has long since been proposed, yet no substantive progress has been achieved to date. Back in the 1940s, Keynes had already proposed to introduce an international currency unit named "Bancor", based on the value of 30 representative commodities. Unfortunately, the proposal was not accepted. The collapse of the Bretton Woods system, which was based on the White approach, indicates that the Keynesian approach may have been more farsighted. The IMF also created the SDR in 1969, when the defects of the Bretton Woods system initially emerged, to mitigate the inherent risks sovereign reserve currencies caused. Yet, the role of the SDR has not been put into full play due to limitations on its allocation and the scope of its uses. However, it serves as the light in the tunnel for the reform of the international monetary system.

2. A super-sovereign reserve currency not only eliminates the inherent risks of credit-based sovereign currency, but also makes it possible to manage global liquidity. A super-sovereign reserve currency managed by a global institution could be used to both create and control the global liquidity. And when a country's currency is no longer used as the yardstick for global trade and as the benchmark for other currencies, the exchange rate policy of the country would be far more effective in adjusting economic imbalances. This will significantly reduce the risks of a future crisis and enhance crisis management capability.

III. The reform should be guided by a grand vision and begin with specific deliverables. It should be a gradual process that yields win-win results for all.

The reestablishment of a new and widely accepted reserve currency with a stable valuation benchmark may take a long time. The creation of an international currency unit, based on the Keynesian proposal, is a bold initiative that requires extraordinary political vision and courage. In the short run, the international community, particularly the IMF, should at least recognize and face up to the risks resulting from the existing system, conduct regular monitoring and assessment and issue timely early warnings.

Special consideration should be given to giving the SDR a greater role. The SDR has the features and potential to act as a super-sovereign reserve currency. Moreover, an increase in SDR allocation would help the Fund address its resources problem and the difficulties in the voice and representation reform. Therefore, efforts should be made to push forward a SDR allocation. This will require political cooperation among member countries. Specifically, the Fourth Amendment to the Articles of Agreement and relevant resolution on SDR allocation proposed in 1997 should be approved as soon as possible so that members joined the Fund after 1981 could also share the benefits of the SDR. On the basis of this, considerations could be given to further increase SDR allocation.

The scope of using the SDR should be broadened, so as to enable it to fully satisfy the member countries' demand for a reserve currency.

Set up a settlement system between the SDR and other currencies. Therefore, the SDR, which is now only used between governments and international institutions, could become a widely accepted means of payment in international trade and financial transactions.

Actively promote the use of the SDR in international trade, commodities pricing, investment and corporate book-keeping. This will help enhance the role of the SDR, and will effectively reduce the fluctuation of prices of assets denominated in national currencies and related risks.

Create financial assets denominated in the SDR to increase its appeal. The introduction of SDR-denominated securities, which is being studied by the IMF, will be a good start.

Further improve the valuation and allocation of the SDR. The basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies, and the GDP may also be included as a weight. The allocation of the SDR can be shifted from a purely calculation-based system to a system backed by real assets, such as a reserve pool, to further boost market confidence in its value.

IV. Entrusting part of the member countries' reserve to the centralized management of the IMF will not only enhance the international community's ability to address the crisis and maintain the stability of the international monetary and financial system, but also significantly strengthen the role of the SDR.

1. Compared with separate management of reserves by individual countries, the centralized management of part of the global reserve by a trustworthy international institution with a reasonable return to encourage participation will be more effective in deterring speculation and stabilizing financial markets. The participating countries can also save some reserve for domestic development and economic growth. With its universal membership, its unique mandate of maintaining monetary and financial stability, and as an international "supervisor" on the macroeconomic policies of its member countries, the IMF, equipped with its expertise, is endowed with a natural advantage to act as the manager of its member countries' reserves.

2. The centralized management of its member countries' reserves by the Fund will be an effective measure to promote a greater role of the SDR as a reserve currency. To achieve this, the IMF can set up an open-ended SDR-denominated fund based on the market practice, allowing subscription and redemption in the existing reserve currencies by various investors as desired. This arrangement will not only promote the development of SDR-denominated assets, but will also partially allow management of the liquidity in the form of the existing reserve currencies. It can even lay a foundation for increasing SDR allocation to gradually replace existing reserve currencies with the SDR.

关于改革国际货币体系的思考
周小川

此次金融危机的爆发与蔓延使我们再次面对一个古老而悬而未决的问题，那就是什么样的国际储备货币才能保持全球金融稳定、促进世界经济发展。历史上的银本位、金本位、金汇兑本位、布雷顿森林体系都是解决该问题的不同制度安排，这也是国际货币基金组织（IMF）成立的宗旨之一。但此次金融危机表明，这一问题不仅远未解决，由于现行国际货币体系的内在缺陷反而愈演愈烈。

理论上讲，国际储备货币的币值首先应有一个稳定的基准和明确的发行规则以保证供给的有序；其次，其供给总量还可及时、灵活地根据需求的变化进行增减调节；第三，这种调节必须是超脱于任何一国的经济状况和利益。当前以主权信用货币作为主要国际储备货币是历史上少有的特例。此次危机再次警示我们，必须创造性地改革和完善现行国际货币体系，推动国际储备货币向着币值稳定、供应有序、总量可调的方向完善，才能从根本上维护全球经济金融稳定。

一、此次金融危机的爆发并在全球范围内迅速蔓延，反映出当前国际货币体系的内在缺陷和系统性风险

对于储备货币发行国而言，国内货币政策目标与各国对储备货币的要求经常产生矛盾。货币当局既不能忽视本国货币的国际职能而单纯考虑国内目标，又无法同时兼顾国内外的不同目标。既可能因抑制本国通胀的需要而无法充分满足全球经济不断增长的需求，也可能因过分刺激国内需求而导致全球流动性泛滥。理论上特里芬难题仍然存在，即储备货币发行国无法在为世界提供流动性的同时确保币值的稳定。

当一国货币成为全世界初级产品定价货币、贸易结算货币和储备货币后，该国对经济失衡的汇率调整是无效的，因为多数国家货币都以该国货币为参照。经济全球化既受益于一种被普遍接受的储备货币，又为发行这种货币的制度缺陷所害。从布雷顿森林体系解体后金融危机屡屡发生且愈演愈烈来看，全世界为现行货币体系付出的代价可能会超出从中的收益。不仅储备货币的使用国要付出沉重的代价，发行国也在付出日益增大的代价。危机未必是储备货币发行当局的故意，但却是制度性缺陷的必然。

二、创造一种与主权国家脱钩、并能保持币值长期稳定的国际储备货币，从而避免主权信用货币作为储备货币的内在缺陷，是国际货币体系改革的理想目标

1、超主权储备货币的主张虽然由来以久，但至今没有实质性进展。上世纪四十年代凯恩斯就曾提出采用30种有代表性的商品作为定值基础建立国际货币单位 “Bancor”的设想，遗憾的是未能实施，而其后以怀特方案为基础的布雷顿森林体系的崩溃显示凯恩斯的方案可能更有远见。早在布雷顿森林体系的缺陷暴露之初，基金组织就于1969年创设了特别提款权（下称SDR），以缓解主权货币作为储备货币的内在风险。遗憾的是由于分配机制和使用范围上的限制，SDR 的作用至今没有能够得到充分发挥。但SDR的存在为国际货币体系改革提供了一线希望。

2、超主权储备货币不仅克服了主权信用货币的内在风险，也为调节全球流动性提供了可能。由一个全球性机构管理的国际储备货币将使全球流动性的创造和调控成为可能，当一国主权货币不再做为全球贸易的尺度和参照基准时，该国汇率政策对失衡的调节效果会大大增强。这些能极大地降低未来危机发生的风险、增强危机处理的能力。

三、改革应从大处着眼，小处着手，循序渐进，寻求共赢

重建具有稳定的定值基准并为各国所接受的新储备货币可能是个长期内才能实现的目标。建立凯恩斯设想的国际货币单位更是人类的大胆设想，并需要各国政治家拿出超凡的远见和勇气。而在短期内，国际社会特别是基金组织至少应当承认并正视现行体制所造成的风险，对其不断监测、评估并及时预警。

同时还应特别考虑充分发挥SDR 的作用。SDR具有超主权储备货币的特征和潜力。同时它的扩大发行有利于基金组织克服在经费、话语权和代表权改革方面所面临的困难。因此，应当着力推动 SDR的分配。这需要各成员国政治上的积极配合，特别是应尽快通过1997年第四次章程修订及相应的SDR分配决议，以使1981年后加入的成员国也能享受到SDR的好处。在此基础上考虑进一步扩大SDR的发行。

SDR的使用范围需要拓宽，从而能真正满足各国对储备货币的要求。

●建立起SDR与其他货币之间的清算关系。改变当前SDR只能用于政府或国际组织之间国际结算的现状，使其能成为国际贸易和金融交易公认的支付手段。

●积极推动在国际贸易、大宗商品定价、投资和企业记账中使用SDR计价。不仅有利于加强SDR的作用，也能有效减少因使用主权储备货币计价而造成的资产价格波动和相关风险。

●积极推动创立SDR计值的资产，增强其吸引力。基金组织正在研究SDR计值的有价证券，如果推行将是一个好的开端。

●进一步完善SDR的定值和发行方式。SDR定值的篮子货币范围应扩大到世界主要经济大国，也可将GDP作为权重考虑因素之一。此外，为进一步提升市场对其币值的信心，SDR的发行也可从人为计算币值向有以实际资产支持的方式转变，可以考虑吸收各国现有的储备货币以作为其发行准备。

四、由基金组织集中管理成员国的部分储备，不仅有利于增强国际社会应对危机、维护国际货币金融体系稳定的能力，更是加强SDR作用的有力手段

1、由一个值得信任的国际机构将全球储备资金的一部分集中起来管理，并提供合理的回报率吸引各国参与，将比各国的分散使用、各自为战更能有效地发挥储备资金的作用，对投机和市场恐慌起到更强的威慑与稳定效果。对于参与各国而言，也有利于减少所需的储备，节省资金用于发展和增长。基金组织成员众多，同时也是全球唯一以维护货币和金融稳定为职责，并能对成员国宏观经济政策实施监督的国际机构，具备相应的专业特长，由其管理成员国储备具有天然的优势。

2、基金组织集中管理成员国储备，也将是推动SDR作为储备货币发挥更大作用的有力手段。基金组织可考虑按市场化模式形成开放式基金，将成员国以现有储备货币积累的储备集中管理，设定以SDR计值的基金单位，允许各投资者使用现有储备货币自由认购，需要时再赎回所需的储备货币，既推动了SDR 计值资产的发展，也部分实现了对现有储备货币全球流动性的调控，甚至可以作为增加SDR发行、逐步替换现有储备货币的基础。(完)

The New York Times reports:

Exports from mainland China slumped 22.6 percent in April from a year earlier, official statistics showed — a fall that was not only larger than economists had expected but also bigger than that in March, when overseas shipments declined 17.1 percent.

Further to this September, 2008 post, a Tennessee University researcher has been sentenced to four years in prison for violation of the Export Control Act. Doug Jacobson writes about it on his excellent trade law blog, here. The court did not assess any monetary penalties.

NY Times:

A World Trade Organization panel ruled on Wednesday that China had violated its international free trade rules by limiting imports of books and movies,

WTO Findings and Conclusions here. (Beware: although written in what appears to be English, it is generally impervious to understanding by those with graduate school education. You may need to hire a specialist.)

UPDATE: China to appeal.

Over the past 8+ years, this blog has welcomed readers from the White House, State Department, Department of Defense, Department of Homeland Security, Department of Commerce and numerous Virginia-based servers the origin of which one can only guess. Perhaps policymakers even read what is written here -- I do not flatter myself.

But when I see, the day after a pointed question asking when Secretary Geithner will "press China on trade," an article entitled, "U.S. to Press China on Trade Geithner Will Seek Freer Markets in Beijing Talks; Euro Crisis Damps Yuan Issue," it is almost as if this maverick voice in the wilderness has been heard.

Alas, not. A search of "geithner press china trade" returns articles delineating administration plans to influence China from late 2008, at which time Mr. Geithner was installed as Secretary of the Treasury. I do not even wish to search for the names of other Secretaries in conjunction with "press china trade," or any confluence of similar words. That would be a sheer waste of time. We all know how "pressing" this issue has been for this (and other) administrations.

[For those not born and raised in the U.S.: Maverick, in the link above, is a cartoon character, the silent, ever-nodding in agreement sidekick to Yosemite Sam. A lovable character, co-starring in "Oily Hare," one of my personal favs. However, a maverick is really an unbranded animal, free to roam the range, from which the term has come to mean "a free-speaker" in the best American sense.

In my (nearly) exalted position as Writer of Blog, I receive press releases from organizations and individuals. Everyone is selling something: a book, a political point of view, world peace and freedom. But I do not generally wish to help anyone flog on this blog, if only to maintain the maverick objectivity I think I at least try to imbue in each post.

I often respond to press releases asking for further information. If I get what I'm looking for -- not an answer which agrees with me, but which illuminates the topic and allows me to write on it -- I make use of them. Today's post represents an exception: taking a press release as it is and simply announcing it. Or at least portions of it. I don't think I need much more to write on this subject.

We find ourselves awaiting, with bated breath [Shall I bend low and, in a bondman’s key / With bated breath and whisp’ring humbleness,..], the US Treasury Department's annual report. Is or is not China a currency manipulator? Year in and year out, the political gamesmanship has amused and frustrated, much like one might watch a Marx Brothers movie without sound. Inevitably, China is pronounced NOT a manipulator of its currency. This year's report has been delayed since the spring, as Sec'y Geithner waited, as many Secretaries of the Treasury have since time immemorial, for Chinese decision-makers to go the way of Washington.

Once again (here is a discussion of the bill offered in 2007 and one in 2009), Congress proffered in March a bill entitled the Currency Exchange Rate Oversight Reform Act, this time of 2010.

Alas, the play has once again run its course, the climax, reached. China made announcements of only superficial changes to its currency exchange policy and the proverbial ball is back in the American court. Here's how it should end: Treasury reports that China is not a currency manipulator and the bill dies. One doubts that the writers of this annual Everyman have penned a new ending. Pull the cord, bring down the curtain and send in the jesters!

Now come forth the lobbyists, having seen the play and loving it, who demand a replay of its traditional ending (which this Chinadrama critic believes the audience will find themselves applauding quite soon). And here is where the press release comes into play, because I have received one from the Retail Industry Leaders Association (RILA). RILA is

...a trade association of the largest and most successful companies in the retail industry. Its member companies include more than 200 retailers, product manufacturers, and service suppliers, which together account for more than $1.5 trillion in annual sales. RILA members operate more than 100,000 stores, manufacturing facilities and distribution centers, have facilities in all 50 states, and provide millions of jobs domestically and worldwide.

Phew! That's a big one (association, not paragraph). Quite clearly influential. The letter RILA sent to US lawmakers, which I was copied on -- many thanks to RILA's press officer -- was also signed by the following:

Advanced Medical Technology Association (AdvaMed)
American Apparel & Footwear Association (AAFA)
American Council of Life Insurers
American Meat Institute
Business Roundtable
Coalition of New England Companies for Trade (CONECT)
Coalition of Service Industries
Consumer Electronics Association
Emergency Committee for American Trade (ECAT)
Fashion Accessories Shippers Association (FASA)
Financial Services Forum
Financial Services Roundtable
National Chicken Council
National Retail Federation
Pacific Coast Council of Customs Brokers and Freight Forwarders (PCC)
Retail Industry Leaders Association
Securities Industry and Financial Markets Association
Sporting Goods Manufacturers Association
TechAmerica
Travel Goods Association (TGA)
United States Association of Importers of Textiles and Apparel (USA-ITA)
U.S. Chamber of Commerce
US-China Business Council

[Note that last one there.]

Down to brass tacks: what does the RILA have to say to American lawmakers about China and currency manipulation?

RILA: ...we urge [lawmakers] to reject legislation that sanctions the application of antidumping and countervailing duties to address the U.S.-China exchange rate.

Why?

1) Antidumping or countervailing duties on Chinese imports are unfair.

RILA: Estimations of the "correct" currency value would be inherently subjective, unilateral and potentially politicized since there is no agreed upon method to determine what a country's exchange rate should be in the absence of a market-based determination.

But China wishes to control the value of its currency, has done so "forever" and will not move unless doing so is in its interest, which it is not.

2) The act is unlawful under international law and China could challenge us.

RILA: The proposed legislation would also appear to violate the United States' commitments under World Trade Organization (WTO) rules governing the calculation of antidumping duties and the types of subsidies that are subject to countervailing duties.

I think we need a specialist to argue this point. It is beyond my knowledge to comment. But, is it not in the interests of the United States to clarify the legality of its duties at a world body established for that purpose, rather than to pick up its own gauntlet before it is even thrown down?

3) The exchange rate doesn't matter.

RILA: ...the United States' non-market economy antidumping methodology already adjusts for currency undervaluation, as margins are calculated using market-based values from a third country and does not use Chinese costs or prices.

At least, I think that is what this sentence means. Clarification from RILA might help.

4) Pressing China will succeed.

RILA: ...work multilaterally and bilaterally to press China to allow market forces to determine the value of its currency.

No, this methodology has not worked -- over DECADES -- and it won't. Not unless Chinese decision-makers see that doing so is in their interest. Yes, we see far greater influence upon decision makers from non-state, i.e. "market" forces now than we did 30 years ago, but only because there was no market other than that which the state had created. (Whatever changes Westerners foolishly believe they have brought about in mainland China -- in the legal system, and education, and the arts -- these are slim accomplishments and, in my humble opinion, of little to no account.) Chinese decision-makers will exert control wherever they have the capacity to ensure that control remains in their hands. In other words, they will never "cave." At least, that is my reading of the top men. They will move as other powers wish them to only in the face of a crisis of extraordinary proportions and no other choice appears to suit their interests.

Andy Grove's op-ed at Bloomberg discusses, in an appealing conversational tone, the necessity for American on-shore manufacturing:

You could say, as many do, that shipping jobs overseas is no big deal because the high-value work -- and much of the profits -- remain in the U.S. That may well be so. But what kind of a society are we going to have if it consists of highly paid people doing high-value-added work -- and masses of unemployed?

Blue-collar workers can be retrained for white collar work: this rubric was a pinion of the argument of the 1980s justifying the trend towards a service-based economy. [Retrain 2 million fired since 2007?] But some men work with their hands and are unsuited to office or retail work. We see the effects of "re-training" throughout American society, as, for example, at big box stores where we see those who should be on a factory assembly line tending very badly to customers. [And I will no more than mention the generally poor English and math skills -- are these really high school graduates? -- and discourteous behavior of those who are supposed to tend to the customers who pay their wages...]

It is not only blue collar workers who have suffered. Over the past decade, many American white-collar executives -- genuinely capable business administrators -- have lost their jobs at age 50 or 55 and, without many possibilities for further employment in their speciality, find themselves compelled to "retrain," becoming full-time EBay sellers, elementary school teachers and even waiters. America's inefficient use of its own talent is, I find, the most shocking realization I have ever come to, and, while I acknowledge it in virtually ever nook and cranny of American life, I can not accept it. Neither should you.

Unlike yesterday's RILA announcement (see post below), Mr. Grove comes out with both fists swinging:

The first task is to rebuild our industrial commons. We should develop a system of financial incentives: Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars -- fight to win.)

Read it all.

This article claims 10,000 Americans hired by Chinese-invested US enterprises, a pittance for a population of over 307 million. Will Chinese investment create significant employment opportunities in the US? The test will be whether PRC Chinese cultivate an ability to manage Americans, which they have traditionally done very badly. In the minds of American employees, Chinese managers are autocratic, overly demanding, unrewarding and incapable of building cooperative teams. In the minds of Chinese managers, American workers are lazy, unresourceful, overpaid and slow. There is a good deal of relative truth in both perceptions.

But when in Rome... If one can't get the best out of his employees -- usually done through a practical understanding of makes people tick -- he is doomed to get only mediocrity or worse. PRC Chinese in their native environment enjoy a freedom of action they simply will not obtain here: they will find themselves handcuffed in a highly regulated workplace without that necessary understanding. They are not (yet) able to adapt management style to the new environment. That is why PRC Chinese in the US prefer to hire Chinese immigrants. But I don't think most PRC Chinese are capable of such adaptation. It is not simply about language. Despite their generally admirable resourcefulness, PRC Chinese, unlike Japanese, do not, in my experience, possess the behavioral flexibility necessary for outward cultural adaptation. (I have worked in Chinese and Japanese companies in the US, Japan and China.) The adult PRC Chinese mindset, especially for those who have only arrived in the past few years, is set in stone almost.

Chinese investment in the US is not at all likely to create jobs for Americans. Now if the federal government would only create the real, substantial incentives to encourage domestic manufacturing rather than the expansion of unproductive government bureaucracy, we might see some American jobs created.

"I'll quote George Buckley, the CEO of 3M," said MacMillan. "He [made] a great comment to me about a year ago, and he's British, for the record. He said: 'I've never lived in a country where you feel like the government is on the other team's side.' " The regulatory agencies "are enforcing a level of regulation on U.S. companies that they are not enforcing on European companies or on other companies. We have companies in our industry that actively count the fact that they don't belong to the U.S. trade association because it means they can play by a different set of rules in this country. That is very troubling, to feel that the U.S.-based companies are at a competitive disadvantage in our own country."

Despite glib promises about regulatory review committees -- the harbinger of bureaucratic delay -- comments such as this from Obama's people make distressing reading. Why are these smart Ivy grads so dumb?

Over the past few days, re-reading Orwell (again) discurse on the British elite of the 1930s, I have been struck by his conclusion. While the working classes, in his analysis, favored their nation and despised fascists, the British elite worked against their own people, preferring, even actively supporting, fascists (autocratic, destructive of individual liberty) both internally and on the Continent, whether Hitler, Franco or Stalin.

Economic theory aside, after decades of political inaction to the disadvantage of American manufacturing, one is sorely tempted to conclude that the elite of American political administration has, over the past 40 years, intentionally eviscerated a bitter enemy -- the productive capitalists and their workforces -- in order to expand its realm of control.

The US is the locus of a generation-long battle fought without weapons among Americans in which the elite (subject to definition), co-opted and bought off by bureaucratic institutions, have undercut the wallets and the liberties of productive members of society, replacing their own initiative and hard work with unemployed who must turn to the state as suckling mother which has promised them the world. But a tidal wave of opposition, growing off in the distance for years, has already hit the beach in places. Cutting government administration and developing serious manufacturing policy to regrow goods production in the US would go a very long way in tamping the spark of revolt which threatens to explode in ways we have not seen in over a century.

Small companies, generally speaking, should not source product in China. Aside from logistical difficulties, they don't have the volume orders to command signficantly low price points nor even the quality control larger buyers can insist upon (and must fight to ensure is implemented). This Wired article on the subject is worth reading.

Rising labor costs do not present a major problem to manufacturers in China, even as they have risen over the past decade, because they comprise a minor percentage of product cost. The government-led tax incentives are the major drivers -- and the drooling (over an undersupplied consumer market not even nearly the size of the EU, but with the dreamlike possibility of "limitless growth "). Manufacturers may complain all they like, but quality concerns and theft of intellectual property have not moved them en masse out of China because they are making money in the short term.

Surely, the return of some manufacturing capacity to the US is not presently a trend of great significance. When Walmart starts sourcing its clothing in the mills of the Carolinas or when Pep Boys buy OEM replacement auto parts in Michigan -- that will be the sign of great change. And nothing like that is happening or looks like it will.