PUBLISHED ONDecember 17, 2015 1:00 AMByLinda Lim
As a United States-based academic "expert" on the Asian and global economies, I am often asked by the international business media to comment on Asian regional and world economic developments. In the past several months, the dominant narrative shaping most of these media requests, regardless of their country of origin, is a US versus China battle for hegemony in the Asia-Pacific.
Frustratingly, journalists and editors tend to ignore economic analyses of trade, investment and currency developments, instead selectively highlighting much more simplistic (but more headline- grabbing) interpretations that support this narrative of intensifying political contention between a supposedly declining superpower and a "rising" one. Such rhetoric also unfortunately emanates from the two governments themselves.
TRADE AND DOMESTIC POLITICS
Take, for example, the recently concluded but not yet ratified Trans-Pacific Partnership (TPP) trade deal. In both the US, a TPP member, and China, not a TPP member, this is invariably presented as a grand attempt by the US to prevent China from "setting the rules of the game" for intra-Pacific trade.
Nobody seems to know - or care - that the TPP was originally initiated in 2005 by four smaller Pacific nations - Brunei, Chile, New Zealand and Singapore - or that many of its provisions derive from what were once called "Singapore issues" - trade-related investment measures, competition policy, government procurement transparency, and trade facilitation - that the World Trade Organisation (WTO) declined to pursue.
The US is just one of the 12 Pacific nations which have signed on to the TPP. It and others have said that China and other current non-members, like South Korea and Indonesia, are welcome to join the deal if they accept its terms, collectively negotiated over many years. Even China has said it does not rule out joining the TPP, unlike US ally India, which is likely to stay out for the foreseeable future.
The US is the largest and most influential member of the TPP, and President Barack Obama has promoted it as necessary to "prevent China from setting the rules of the game".
But this is simply a bow to domestic political realities in a highly charged presidential election year, when trade liberalisation is never popular. It is also an attempt to elevate a unifying national interest over divided domestic business interests: for example, US agribusiness supports TPP but the auto industry has opposed it - both because it includes Japan.
Economically, the TPP, like any preferential free trade area (PFTA), is a "second-best" option to multilateral trade liberalisation. But the WTO's failure to advance trade liberalisation on a global scale has led to the proliferation of many PFTAs: it is easier for fewer countries, already relatively open and closely linked with one another, to agree to further economic integration measures.
INVESTMENT AND THE AIIB
In the investment arena, the China-led Asian Infrastructure Investment Bank (AIIB) has caused some controversy.
There is no question that many Asian developing countries have pressing infrastructure needs that more external funding would help meet. But the US initially opposed the AIIB, on grounds that a China-led venture would not follow the "best practices" developed over decades by the multilateral World Bank (headed by an American), International Monetary Fund (IMF, headed by a European) and Asian Development Bank (ADB, headed by a Japanese).
These "best practices" are supposed to include rigorous financial standards, observance of human rights and environmental protections, and prevention of corruption - though in practice many funded projects have not met these requirements.
Despite US objections, 57 countries have joined the AIIB, variously interested in obtaining more funds for infrastructure development, contracts for home-country companies, and better business relations with China itself. This is not unusual in the world of international development assistance: foreign policy goals of donor/lender/ investor nations always play a role, especially where their taxpayer funds are employed.
China is no different from the US, Japan or European countries in seeking benefits for its own banks and infrastructure companies through AIIB, especially given slowing growth and excess capacity at home for its mostly state-owned steel, railway and construction companies.
It deviates from other donor/lender/investor nations mainly by using high-profile China-centric imagery such as the "One Belt One Road" project and "New Silk Road" fund, which are not part of AIIB but closely associated with it.
Contrary to intentions, the strong identification of these projects with China, when it is also asserting territorial rights in the South China Sea, could backfire on its foreign policy goals. Some backfiring happened with decades of bilateral development assistance by the US in Latin America and the Middle East, and China itself in Africa more recently. A multilateral organisation like the AIIB is less likely to rouse similar resentment among recipients, especially if properly and transparently governed.
The participation of many experienced donor/lender/ investor nations in the AIIB - to which China will contribute 26 per cent of the funds, without a veto - should help ensure that international "best practices" are adopted, for example in risk management.
Sufficient checks and balances within the AIIB operation should mitigate concern that large-scale foreign debt incurred for insufficiently well-evaluated projects might pose a systemic financial risk to the regional and world economies.
So far there is no indication that Chinese lenders are offering financial terms that are too lax for infrastructure projects in South-east Asia and Central Asia; the opposite may even be true; although the projects themselves may be cheaper with Chinese contractors and inputs. China will also continue to be involved in the World Bank, where the US has a veto, and the ADB.
From an economic perspective, both the TPP and AIIB are not "zero-sum games". Despite the internal operational challenges that each faces, both have the potential to benefit China and the US, neither of which is precluded from joining either.
Rather, it is the current domestic political context in each country that has transformed both institutional innovations into an apparent struggle for international dominance.
CURRENCIES
Thus the so-called "rise of the yuan" is presented in the Chinese media and online discourse as reflecting China's successful ascent to global economic leadership, "rivalling the dollar". This narrative was boosted by the IMF's recent acceptance of the yuan as an official reserve currency in its Special Drawing Rights (SDR) basket that already includes the US dollar, euro, yen and pound.
Never mind that there is less to this move than meets the eye. The yuan accounts for only 2.5 per cent of global payments and 1 per cent of foreign exchange reserves (versus 64 per cent for the dollar), despite China's 12 per cent share of world trade (similar to the US share); most of this use occurs in Hong Kong and among affiliates of Chinese companies operating abroad.
SDR status has not stemmed the ongoing massive capital outflow from China, and the yuan has continued to weaken despite the authorities intervening to stem its slide - chiefly by selling record amounts of US Treasuries - as the US dollar continues to soar.
The causes of flight from the yuan are many, including China's gross domestic product (GDP) growth slowdown and monetary stimulus; Chinese asset-holders' insecurity following the aggressive anti-corruption campaign; expected continued yuan weakening as the government increasingly allows its value to be set by market forces, in line with the longer-term requirements of a global reserve currency; and the attraction of higher yields on dollar assets given strong US GDP growth and the Fed's impending interest-rate hike.
This last factor has spawned a conspiracy theory widely held in China and among Chinese nationals overseas: the belief that the dollar is the source of much of the US' global power, which it will go to any lengths to defend, including, in one version, destabilising the Middle East via the Iraq War to undermine the euro. Chinese conspiracy theorists accord particular relevance to the value of "seigniorage" - the difference between a currency's face value and its production cost - which the dollar's popularity as a reserve currency has enabled the US to enjoy for decades.
In this narrative, the Fed is raising interest rates not to contain potential inflationary pressures in a full-employment economy - as standard Keynesian economic theory would prescribe - but rather to deliberately weaken the yuan to deflect its "challenge" to the dollar's supremacy. Never mind that the US supports the yuan becoming a reserve currency - believing, like the IMF, that this will accelerate financial liberalisation in China - or that the strong dollar is already detracting from US GDP growth and corporate profits.
Interestingly, the Chinese belief that the US government controls the value of the dollar dovetails with the belief of American libertarian fantasists who demonise the Fed and have convinced many mainstream legislators that its powers should be curtailed. Both groups have difficulty understanding that it is global financial market actors representing millions of individual savers and investors responding to ever-changing risk/return calculations, who decide the value of freely floating currencies (which the dollar, euro and pound are, but the yuan is not).
Such conspiracy theorists are not alone: during the 1997-98 Asian financial crisis, legions of senior bankers, industrialists and politicians in South-east Asia and South Korea believed a "Wall Street-Treasury-IMF" cabal was responsible for engineering the collapse of their overvalued fixed currencies.
More seriously, every recent US presidential election year has seen Chinese "currency manipulation" become a major issue. Even the 2012 Republican nominee Mitt Romney, an alumnus of Harvard Business School and Bain Capital - who should therefore know better - declared that his "first act as President" would be to "brand China a currency manipulator", thereby justifying the imposition of stiff penalties on Chinese imports.
Targeting of Chinese currency policy early in the current presidential election season has waned, in part because of the strong US economy, low unemployment, and crowding out by other, even sillier, issues. But next year, as higher interest rates begin to bite, the long US economic expansion wanes, and the yuan continues its forecast depreciation, the issue is likely to resurface. Never mind that any "currency manipulation" the Chinese government undertakes is likely to be intervention to strengthen, not weaken the yuan.
SCARY GOVERNMENT POLICY
Market forces may be non-transparent and scary, but not any more so than government policy actions, especially when, as in China's case recently, they are accompanied by a strict clampdown on information and its purveyors. This suggests that economic problems might be worse than they appear, and that policy can aggravate them by retarding reforms, increasing uncertainty, and paralysing both state actors and private investors.
No doubt the US and China have their differences, and compete for global influence. But politicians and pundits on both sides of the Pacific should ratchet down their rhetoric that privileges domestic political myth over international economic reality.
If not, a rising risk of conflict over the other's hegemonic aspirations that each rails against, might make the rest of us both poorer, and less secure.
stopinion@sph.com.sg
This article was first published on December 16, 2015.
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