Donald Trump’s cold war tactics will not work with China
The Chinese will not crumble as the Soviets did in the 1980s
Jeffrey Sachs
Today’s trade brinkmanship between President Xi (left) and President Trump has rising global costs © Getty
Generals fight the last war, and Washington’s economic war on China is straight from America’s tactics against the Soviet Union and its skirmishes with Japan in the 1980s. Yet China is neither the Soviet Union nor Japan. The US’s aggressive trade actions towards Beijing, unless suspended in the near future, will damage the world economy and America itself.
The overriding aim of US policymakers is American economic and military primacy. Though China remains far poorer than the US (roughly one-third the gross domestic product per capita at international prices), it has pulled ahead of the US in total GDP when measured at international prices and is converging or ahead on technologies such as 5G. A notable upcoming test will be China’s ability to compete with Boeing and Airbus in the market for civilian aircraft during the 2020s. My own bet is it will be able to compete.
In the future, no country will have economic primacy, neither the US nor China. China’s economy will be bigger than America’s by dint of a larger population, yet China will be no hegemon. According to the UN’s medium forecast, China’s population will decline by around 400m between now and 2100. Its population is currently 18 per cent of the world’s and 4.3 times that of America. In the UN forecast, China’s share of the world population in 2100 will be 9 per cent, and just 2.3 times that of America. By 2050, China’s median age will soar to 48 years, more senior citizen than world conqueror.
In short, the US policymakers’ China neurosis is vastly overblown. Moreover, the instruments of America’s economic warfare vis-à-vis China are old-fashioned and unlikely to succeed, though they are potent enough to cause damage to both countries and collateral damage as well.
The US’s core tactic is cold war-style “containment”, pushing its security alliance (Nato plus Japan, Australia, and others) to stop buying China’s high-tech products or selling it advanced technologies. The word has gone forth to stop buying Chinese telecoms equipment — not because of proven backdoors to China but because such backdoors might exist (or perhaps because the US government would have a harder time spying on its own citizens with Chinese equipment). Across the US security alliance, governments are now blocking China’s acquisition of technology firms. Recently, Washington even floated the notion that China might somehow spy on Americans with Chinese-built subway cars.
In the 1980s, as part of its attempt to halt Japan’s manufacturing ascendancy, the US sought to close its markets to exports through quotas and tariffs, while threatening a charge of “currency manipulation” if the yen were to depreciate. From the mid-1980s through the 1990s, the US succeeded in pushing the yen into a sustained overvaluation with threats of the dire trade consequences were Japan to let its currency weaken.
The US is playing the same cards with China: close the markets and mutter about currency manipulation. Since US president Donald Trump took office, the renminbi has appreciated slightly against the dollar despite the trade measures, an indication of Beijing’s reluctance to allow the currency to weaken.
There are, of course, hawks and doves in the US’s trade war. Hawks want to bring China to its knees, to make it a Soviet Union redux. Moderates, meanwhile, are after specific concessions, for example on intellectual property. China will probably grant these, but they will neither stop Chinese growth nor greatly benefit the US. Mr Trump himself is likely to settle for spectacle, a “great deal” (perhaps “the greatest ever”) with little content, in the hope for adulation from his base.
Some apparently believe that a successful deal will return millions of industrial jobs to the US. American manufacturing employment today stands at 12.8m (in a workforce of some 163m), far below the peak of 19.6m in November 1979. Automation, not China, accounts for most of the job losses. Future American jobs will be overwhelmingly in services, not on the assembly line, where robots will do the work.
China will not crumble as the Soviet Union did. Its technology and industrial bases are far too strong and its economic and diplomatic links around the world far too deep. Nor will it bow to US threats. Unlike Japan, China is not part of the American security umbrella, and not dependent on US goodwill. China’s products around the world sell because they are high quality, less costly, and often cutting edge.
Today’s trade brinkmanship has rising global costs. The world economy is gradually being dislocated by Mr Trump’s impetuousness. Business investments are increasingly stymied by uncertainty. The US president may do the remarkable disservice of turning synchronised global growth in 2018 into a synchronised slowdown this year and next. The renminbi will depreciate significantly if China is pushed too hard, causing further dislocations.
If ever there were a time for China to make some clear commitments on intellectual property and market access, and for Mr Trump to declare a great success and move on, it is now.
The writer is director of the Center for Sustainable Development at Columbia University
DONALD TRUMP´S COLD WAR TACTICS WILL NOT WORK WITH CHINA / THE FINANCIAL TIMES OP EDITORIAL
THE U.S.-CHINA TRADE ENTERS A NEW ROUND / GEOPOLITICAL FUTURES
The US-China Trade Fight Enters a New Round
Whether the two sides can come to a deal, and how meaningful it will be, depends in part on just how much the spat contributes to their problems.
By Phillip Orchard
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STOCK MARKET MARGIN DEBT PLUMMETS MOST SINCE Q4 2008 / SEEKING ALPHA
Stock Market Margin Debt Plummets Most Since Q4 2008
Wolf Richter
Summary
•The only form of stock market leverage that is reported monthly is "margin debt" - the amount individual and institutional investors borrow from their brokers against their portfolios.
•Stock market leverage is the big accelerator on the way up, when people and institutions borrow money to buy stocks. And it's the big accelerator on the way down when margin calls and other financial pressures turn these investors into forced sellers.
•The plunge in margin debt in the third quarter took a chunk of margin debt off the table, but unwinding such a huge pile of stock market leverage takes time, usually years, with many sharp interruptions in the opposite direction.
Wow, that was fast. Margin calls.
During the ugly stock market December, whose ugliness bottomed out on Christmas Eve, a nasty November, and the ugliest October anyone can remember, margin debt plunged by a combined $93.8 billion, the most since Q4 2008, after Lehman Brothers filed for bankruptcy.
In December alone, margin debt plunged by $38.3 billion, to $554.3 billion, FINRA (Financial Industry Regulatory Authority) reported this morning. This was just a hair less than October's plunge of $40.5 billion, and both had been the steepest drops since late 2008:
The only form of stock market leverage that is reported monthly is "margin debt" - the amount individual and institutional investors borrow from their brokers against their portfolios. But no one knows the amount of total stock market leverage from all forms of leverage, but we know it's a lot higher than margin debt by itself.
Stock market leverage takes many forms. It includes "securities-based loans" (SBLs) that brokers extend to their clients, and that some of them report annually, though they don't have to. And occasionally, we get a tidbit about an individual fiasco such as when a $1.6 billion SBL to just one guy blows up. And there are other ways to use leverage to fund stock holdings, including loans at the institutional level, loans by companies to their executives to buy the company's shares, etc. But reported margin debt gives us a feel for which direction overall stock market leverage is going.
Stock market leverage is the big accelerator on the way up, when people and institutions borrow money to buy stocks. And it's the big accelerator on the way down when margin calls and other financial pressures turn these investors into forced sellers. The money from the proceeds of those stock sales doesn't then sit on the sidelines or go into other stock purchases; no, it is used to pay down that debt. And these much-hated and feared margin calls apparently have kicked off in Q4.
Margin debt at the end of December 2018, at $554.3 billion, was down by $88.4 billion from December 2017. It is the steepest year-over-year plunge since the Financial Crisis:
During the blistering stock market boom in recent years - part of the "Everything Bubble," so called since nearly all asset classes inflated in unison - margin debt ballooned to $669 billion at the peak in May 2018, up 60% from the pre-Financial Crisis peak in July 2007, and up 117% since January 2012. Since the peak in May, margin debt has plunged by $114.6 billion.
Over the longer term - let's say two decades - the tight relationship between stock market surges and sell-offs and margin debt is clear, though which causes which, and which comes first is less clear because both feed off each other, on the way up, and on the way down. Note the steep decline since May:
With a 20-year chart like this, the absolute dollar amounts are less relevant since the purchasing power of the dollar has dropped over the period. What is important are the movements, up and down, and how they relate to stock market events (white).
As you can see in the charts above, my dictum, repeated on December 22 - "Nothing goes to hell in a straight line" - holds from a historical point of view as well. Plunges are followed by jumps. This creates a lot of noise. But added together over time, they form a trend. The rally since December 26 tells me that people are piling back into margin debt, and that when we get the January data, margin debt levels will have increased.
But this is how margin debt and the stock market feed each other: Surging stock prices give people the urge to pile in, and they borrow money to do so, which drives up stock prices even further. But when the rally ends and stocks head south in a significant manner, and when people are highly leveraged, they will unload stocks to pay down their margin debt, and some will be forced to do so, and this drives down stock prices further.
It is this mechanism that links margin debt and the stock market - but neither is a good predictor for the other because one might occur before the other or simultaneous with the other. But they do move in the same direction over time.
The plunge in margin debt in the third quarter took a chunk of margin debt off the table, but unwinding such a huge pile of stock market leverage takes time, usually years, with many sharp interruptions in the opposite direction.
Bienvenida
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