PROF. LAL MONTHLY „BUSINESS STANDARD“ COLUMN
Access to American savings through the US securities marketsprovides China a lifeline without having to deal with its debt trap
Ifirst met Janos Kornai in Beijing in 1985 at a conferenceorganised by the World Bank and theChinese Academy of Social Sciences (CASS), duringwhich we had an audience with Zhao Ziyang, thegeneral secretary of the Chinese Communist Party(CCP) and the major reformer seeking to turn Chinaaway from the Plan to the market, as signalled by theparamount leader Deng Tsiao Ping. Kornai then lefton a week’s Yangtze cruise on the S S Boshan organisedby Zhao through CASS, which was to provideChinese economists with the views of various invitedWestern economists on the working of capitalist marketeconomies.
Kornai was the star of the meeting as JulianGewirtz (in Unlikely Partners,Harvard, 2017) documents. Heremained a trusted advisor toChinese reformers even after Zhaowas purged following theTiananmen Square massacre. Hewas the primary intellectual influenceon the Chinese reformers whocreated the Chinese miracle. Yet in arecent letter to the Financial Times(“Economists share blame forChina’s ‘monstrous’ turn”, 10 July2019), he laments his and otherWestern economist’s role asFrankenstein’s creating a fearsomemonster under Xi Jinping. “We all agreed that newlife would be brought to China, which had frozenunder Mao, by the electric shock of marketisationand private property. Now the fearsome monster ishere”. Its “aim is to become the hegemonic leader ofthe globe”. Kornai advocates George Kennan’s policyof containment of communism. He concludes, “Whathas happened already cannot be undone. But herewe must stop, and we must take far more care to avoidcarrying on the role of Frankenstein”.
The need to contain China was also the conclusionof my recent book, War or Peace. It noted the evengreater role played by the Frankensteins of Wall Streetin China’s rise. Investment banks led by GoldmanSachs and legal firms like Linklaters and Paine were“the creators of the New China of the twenty first century”.(C E Walter and FJT Howie: Red Capitalism,Wiley, 2011)
The model was provided by the creation of ChinaMobile in 1997 by Goldman Sachs out of a poorlymanaged assortment of provincial post and telecomentities. Its initial public offering (IPO) raised $4.2billion. There was no looking back. China’s oil companies,and insurance companies sold billions of dollarsin shares in IPOs. “All of these companies wereimagined up, created, and listed by American investmentbankers”. By 2009, 44 of the firms in China’sNational Team were on the Fortune Global 500 list.
Today, China has 700 companies listed in the USstock and bond markets. These include egregious badactors like Hikvision, responsible forfacial recognition technology monitoringthe concentration campsholding two million Uyghurs inXinjiang. Unwittingly, US investorsare funding these technologies, andweapons systems for the People'sLiberation Army (PLA) “because theUS has no security-minded screeningmechanism for capital marketswhich have roughly $35 trillionunder management.” (Roger WRobinson Jr. “Why and how the USshould stop financing China’s badactors”, Imprimis, October 2019).
One of the largest public retirement funds, theFederal Thrift Savings Plan (TSP) with 5.7 millionenrollees — including US military personnel — totals$578 billion. It is planning to switch its $50 billioninternational portfolio (on the advice of a Wall Streetconsulting firm) to the MSCI All Country World Index,which includes Chinese “companies such as AVIC,which makes fighter aircraft for the PLA and is China’sbiggest producer of ballistic missiles”. This decisionshould be reversed.
Furthermore, Robinson Jr, who served on USPresident Ronald Reagan’s national Security council,suggests using a tactic to contain the Soviet Union,also in China. The Soviet Union faced a funding gapof $16 billion annually, which was financed by Westerngovernments and banks. Reagan succeeded in terminatingthis flow of discretionary cash, which ledto the end of the evil empire.
China too has a serious internal debt crisis. JimRickards (“The great Chinese crack-up starts now”,Strategic Intelligence, November 2017) has estimatedthat China’s total debt (including official, corporateand individual) to productive gross domestic product(GDP) (normal GDP minus investment in ghost citiesand white elephant projects) was 873 per cent in 2016.But this “will not necessarily cause a collapse anytimesoon. As long as the WMP Ponzi ( wealth managementproducts held by individuals sold by banks offeringhigher deposit rates, with new WMPs sold to pay offold ones when investors want their money back— aclassic Ponzi scheme) continues and banks aren’theld to account for issuing new loans to replace baddebts, the game can go on. China also has $1 trillionof liquid reserves to sort out its debt mess.” However,if China uses these precautionary reserves “to bailout its bad debt, the country will jump out of thefrying pan into the fire of a currency crisis.”
It is in this context that the access of Chinese companiesto American savings through the US securitiesmarkets, currently provides China a lifeline withouthaving to deal with this domestic debt trap. Robinsonsupports the simplest solution of eliminating accessto all Chinese enterprises to US capital markets. Thiswould bring the Chinese “evil empire” to its knees asReagan’s actions did in denying Western technologyand capital markets to the bankrupt Soviet Union.No doubt this would lead to howls from Wall Street.But these should be ignored in US national interests.
For their argument that closing US capital marketsto China will lead it to go to another internationalexchange is implausible. For the US capital marketsare roughly the size of the rest of the world’s combined,and the US holds 60 per cent of the world’s liquidity,“no other country has anywhere near the depth andvolume” of US markets. “China’s need for dollars isso voracious that it would likely use up the volume ofa Frankfurt or London in months not years. There isnowhere for a player of the size of China to go.”
In a speech to the Hudson Institute on October4, 2018, US Vice-President Mike Pence laid out whatis being termed the Pence Doctrine. “Pence madeit clear that the current struggle between the USand China goes far beyond trade and tariffs”; it was“an epic struggle between an atheistic communistideology bent on hegemony in Asia and the WesternPacific and a democratic America that seeks balancedrelations in a rules-based system along withthe promotion of liberal Western values”. He predicted“a protracted and existential strugglebetween Western liberal values and a totalitariandisregard for human rights.” (Jim Rickards: “Beyondthe US-China trade war : Cold War II”. StrategicIntelligence, July 2019).
In this new Cold War, the liberal world needs toremember and use the major instrument which deliveredvictory to the West—the use of its control of theworld’s money which allowed it to bring the last illiberalempire to its knees.
Source: Business Standard