Reno Hayek Symposium

In the second of three major Stratfor’s geopolitical updates Peter Zeihan treats, China: Crunch Time. (Note: last month’s predictions on Germany were prescient. See: Germany’s Upcoming Remake of the European Union.) In this analysis of China Zeihan discusses the rebalancing that the major commercial nations are currently undergoing and indeed striving to attain.

China’s economic system is inherently unstable. It is closed, highly regulated, overly export dependent, without private capital allocation, and dependent on a controlled currency. Historically this is much like Japan and East Asia in the ’90s. China “funnels these massive deposits via state-run banks to state-linked firms at below-market rates. It’s amazing the growth rate a country can achieve and the number of citizens it can employ with a vast supply of 0 percent, relatively consequence-free loans provided from the savings of nearly a billion workers…It’s also amazing how unprofitable such a country can be. The Chinese system, like the Japanese system before it, works on bulk, churn, maximum employment and market share.” The consequent effects include: inefficient capital use, a large number of property bubbles, regional disparity, a tiny consumer base, and over-dependence on exports, foreign consumption.

A major structural factor in the global economy that has the past 30 years protected China is also a core tenet of U.S. foreign policy: Bretton Woods. Bretton Woods was essentially an agreement between the U.S. and the Western allies that gave the allies near duty-free access to American consumers in exchange for the right of the U.S. to call the shots in security and foreign policy of the rebuilding allied nations. “In essence, the Americans took what they saw as a minor economic hit in exchange for being able to rewrite first regional, and in time global, economic and military rules of engagement.” Thus was the USSR contained. China eventually benefited.

The Obama administration is rethinking Bretton Woods, ostensibly to update the global financial system, but in reality the National Export Initiative is much more mercantilist calling for the doubling of U.S. exports in five years and targeting countries like China. While the NEI is vague as to method and optimistic in aim,  it spells a policy shift. Trade policy will no longer be subordinate to foreign and military policy but potentially “a beast unto itself!” Zeihan gives the 1980s Japan as his perfect analogy, not a good outcome for China.

China has no good options. “China, which unlike Japan is not a U.S. ally, would have an even harder time resisting should Washington pressure Beijing to buy more U.S. goods. Dependence upon a certain foreign market means that market can easily force changes in the exporter’s trade policies. Refusal to cooperate means losing access, shutting the exports down.” China’s only recourse would be to stop purchasing U.S. debt which is unlikely: a. Beijing can’t safely invest in China’s undeveloped capital markets. b. And the bond purchases largely fuel U.S. consumers’ ability to buy China exports. We are China’s market with more disposable income than all China’s other markets combined!

“STRATFOR sees a race on, but it isn’t a race between the Chinese and the Americans or even China and the world. It’s a race to see what will smash China first, its own internal imbalances or the U.S. decision to take a more mercantilist approach to international trade.”

For another somewhat similar perspective see the Economist article, Hope at last.

This report is paraphrased in part and republished republished in part with permission of STRATFOR. I highly recommend becoming a member.