400-pound rivals

China views Donald Trump’s America with growing distrust and scorn

And cynics in Beijing hope for his re-election



Zoologists use a mild-sounding term—“displacements”—for moments when a strong, young mountain gorilla confronts the dominant male in his group. Behind the jargon lies a brutal reality: a drawn-out, bloody conflict looms.

China’s leaders similarly use prim, technical-sounding terms to describe their confrontation with America. In closed-door briefings and chats with Western bigwigs, they chide the country led by President Donald Trump for responding to China’s rise with “strategic anxiety” (ie, fear). They insist that China’s only crime is to have grown so rapidly.

However, behind that chilly, self-serving analysis lurks a series of angrier, more primal calculations about relative heft. These began before Mr Trump came to office, and will continue even if an initial trade truce is made formal (Mr Trump says he will sign one on January 15th).

They will endure long after November, when American voters next choose a president. China has spent decades growing stronger and richer. It already senses that only one country—America—can defy Chinese ambitions with any confidence.

Its leaders have a bleak worldview in which might makes right, and it is a fairy tale to pretend that universal rules bind all powers equally. Increasingly, they can imagine a day when even America ducks a direct challenge, and the global balance of power shifts for ever.

Getting hairy

China does not seek a fight now.

Like a powerful juvenile warily sizing up a silverback gorilla—his age and status marked by the silvery fur on his back, and his mighty muscles and teeth—China knows that America can inflict terrible damage, as it wields still-unrivalled economic, financial and military might.

But officials and scholars in Beijing no longer bother to conceal their impatience and scorn for an America they view—with a perilous mix of hubris and paranoia—as old, tired and clumsy.

When addressing foreigners, China’s leaders talk piously of their commitment to free trade, market opening and globalisation. Their domestic actions betray a different agenda: namely, to make Chinese companies dominant in high-value manufacturing sectors, and to hasten the day when they no longer depend on America for vital technologies.

Long before Mr Trump was elected, China pursued such policies as “indigenous innovation” and “civil-military fusion”. Since Mr Trump’s tariff war with China began in 2018, President Xi Jinping and his underlings have accelerated efforts to make China self-sufficient in high-value sectors, creating supply chains that are “autonomous, controllable, safe and effective”, in Mr Xi’s words.

For decades Chinese officials have seen bilateral relations swinging, pendulum-like, between periods of hostility (notably during American elections, when candidates promise to shield workers from unfair Chinese competition) and a profit-driven willingness to engage. Now Chinese and American insiders talk of a downward spiral. Both countries have become quick to assume the other has malign motives.

Where relations were once balanced between co-operation and competition, and China’s rise seemed on balance to benefit both countries, Chinese officials accuse Mr Trump and his team of seeking co-operation only when it serves a coercive, short-sighted “America First” agenda.

They do not see this changing soon—far from it. They view relations with sour fatalism, and America as a sore loser.

Chinese experts talk wistfully of the scores of dialogues and mechanisms that used to underpin co-operation with America’s government before Mr Trump scrapped most of them. But, when pressed, they struggle to explain what a useful agenda for future talks might be. Instead, they prefer to count the ways in which America is to blame for today’s tensions.

In China’s telling, American companies became accustomed to making fat profits in China, but see Chinese rivals catching them up and potentially setting global standards for future technologies. Now American businesses are crying cheat, and demanding that trade rules designed for the rich world be used to keep China down.

Populist election victories in the West are ascribed to domestic failures in the countries concerned. Chinese officials say that America failed to educate workers, allowed inequalities to yawn and never built social safety-nets to help victims of globalisation—and is now scapegoating China for those ills.

In public, Chinese officials call Mr Trump’s tariffs self-defeating and stress their country’s economic resilience. In private, they are both less confident and less focused on tariffs than they pretend. They are less bullish because economic sentiment in China was fragile before the trade war. Worse, the tariff feud has planted seeds of uncertainty about the country in the heads of every chief executive pondering where to place a new factory.

Chinese officials are less focused on tariffs than they maintain in public because they believe Mr Trump will lose his leverage over time, as he frets about the impact on American farm states and other places where he needs votes. Chinese officials fear other forms of competition more than any tariff fight. In Beijing leaders do worry about the consequences of a technology war with America or of an all-out struggle for global influence.

It is not just a figure of speech when officials in Beijing divide foreign grandees into “friends of China”, and “anti-China forces”. China’s rulers take an intensely personalised view of foreign relations. Communist Party bosses have learned over decades that individual foreign envoys, ceos and political leaders can be turned into reliable advocates for China with the right blend of high-level access and reasoned appeals, financial incentives and flattery.

But Chinese officials feel sadly short of influential friends in the corridors of American power.

Within the Trump administration, only the treasury secretary, Steven Mnuchin, is seen as representing the old, familiar American approach of putting profit first when engaging with China.

There are firms that rely heavily on China as a supply base and market, from Apple to General Motors, which sells more cars in China than in America. But the profit motive itself is under suspicion in the new, populist Washington, where even Republican members of Congress urge businessmen to weigh America’s national interests in dealings with China, and not just their shareholders’ dividends.

China can live with “Trump first”

After much study, leaders in Beijing have decided that Mr Trump is neither a friend of China nor a traditional anti-China hawk, in the sense of someone who disapproves of the party’s policies on grounds of principle. In essence, Mr Trump is seen as a friend of Mr Trump—a man whose self-interest is his only reliable guiding instinct.

Famous scholars at elite universities in China who have studied America for years tut-tut about how that makes Mr Trump unpredictable and liable to break any promise he makes to Mr Xi.

More cynical figures, including some close to the national security bureaucracy, unblushingly root for Mr Trump to win re-election in 2020, so that he can continue to upset allies and cast into doubt decades-long American security guarantees in Asia.

Their great fear is that Mr Trump may be captured by sincerely hawkish aides. That includes economic nationalists with trade portfolios, like Robert Lighthizer and Peter Navarro. But unique animus is aimed at the “two Mikes”: the vice-president, Mike Pence, and the secretary of state, Mike Pompeo. In Beijing both are called anti-communist, evangelical Christian zealots, with ambitions to succeed Mr Trump in 2024.




China is sure it is in a worldwide influence war, in which its propaganda about Xinjiang, Hong Kong or Huawei is pitted against an “anti-China” story.

Mr Pence and Mr Pompeo are semi-openly reviled as crazy, ignorant warriors in that conflict.

They are accused of slandering China over its iron-fisted rule in the western region of Xinjiang, and of egging on pro-democracy protesters in Hong Kong, whom China calls terrorists and separatists. Mr Pence and Mr Pompeo are also condemned for leading a diplomatic charge to warn smaller countries to beware of Chinese loans and technology (the results have been mixed).

Chinese officials have not missed the factor that links all successful efforts at American arm-twisting. Countries have proved most tractable when America has real co-operation to offer or to withhold, whether that involves Poland and its yearning for a permanent garrison of American troops to act as a tripwire against Russian aggression, or Brexit Britain dreaming of a free-trade deal with Mr Trump.

Where American envoys merely nag countries to shun China’s investments without offering concrete alternatives, they have fared less well. As one Chinese insider crows, America under Mr Trump looks “self-isolating”.

Chinese officials who favour Mr Trump’s re-election hope that he will feel free in his second term to disavow hawks around him and pursue transactional policies. They fret that a Democratic president may place more weight on human, labour and environmental rights.

All this fulminating does not mean that China seeks to match the hawks in Washington and drag their two countries into a new cold war, in which the world is divided into rival camps. China believes that most other nations do not want to choose between it and America, at least for now.

China is playing for time, as it builds its strength and tries to construct alternatives to such potent tools of American power as the dollar-denominated financial system. China’s interest in developing its own blockchain technology and international payment systems is in part a sign of its fear of American sanctions that would expel Chinese banks from American markets.

Some Chinese voices say their country has not lost interest in an offer China made to Mr Trump’s predecessors, involving a “new model of great-power relations”: code for carving the world into spheres of geopolitical influence, and an end to American carping about China’s ways. Others stress China’s right to help write the rules of globalisation.

That would be reasonable, were it not that China’s aim is to make the world safe for techno-authoritarian state capitalism. Chinese officials want to avoid confronting America for now. But few silverbacks gracefully retire.

Increasingly, America is seen as an obstacle to China’s rise. That means trouble looms.

SocGen: making the case for European bank champions

EU politicians are warming to cross-border mergers. The French lender wants to be at the forefront

Stephen Morris and David Keohane in Paris


© Reuters


Even by the high standards of the École Polytechnique in Paris, founded to educate the country’s future business and engineering elite, the class of 1984 plays a remarkable role in European banking.

The group contains Tidjane Thiam, Jean Pierre Mustier and Jean-Laurent Bonnafé, who run Credit Suisse, UniCredit and BNP Paribas, respectively. It also includes Frédéric Oudéa, the Société Générale boss who is Europe’s longest-serving major bank chief executive.

Still friends, the men occasionally meet to play golf. “We were very bad, all of us,” recalls Mr Oudéa about a round a few years ago with two of his classmates at the La Baule Club on France’s Atlantic coast. “I think our balls went in the water. It was a disaster, but it was for fun.”

Those friendships could turn out to play an important role as the European banking industry considers a new round of dealmaking to create regional champions to take on the American groups that dominate the industry.

In the decade since the financial crisis, Europe’s biggest banks have largely struggled. Ultra-low interest rates, tougher post-crisis rules and the resurgence of Wall Street have made it all but impossible to generate decent returns.

For the most part, European banking executives have eschewed talk of large mergers, deterred by fragmented national laws, rules and the memory of the calamitous combination of RBS and ABN Amro at the height of the crisis.

Frederic Oudea, chief executive officer of Societe Generale SA, gestures as he speaks during a Bloomberg Television interview at the Lisbon Web Summit in Lisbon, Portugal, on Tuesday, Nov. 7, 2017. Portugal is hoping to bolster its reputation as a startup hub in Europe at a time when political instability in Spain’s Catalonia and the U.K.’s decision to exit the European Union are triggering growing interest in the southern European country. Photographer: Daniel Rodrigues/Bloomberg
Frédéric Oudéa, chief executive at Société Générale and Europe’s longest-serving major bank boss © Daniel Rodrigues/Bloomberg


But the dam may be about to break.

Troubled by the parlous state of the financial system, eurozone politicians and regulators have given the first signal in years they may soon dismantle the remaining barriers to cross-border M&A and achieve a true banking union.

While many of his rivals are still wary of deals, Mr Oudéa is one of the few who openly courts the idea.

“At this moment, which might be the turning point for Europe, I want to be able to seize the opportunity,” he said in an interview at one of SocGen’s trio of mirrored towers in La Défense.

“If this consolidation, which is a logical outcome of a completed banking union, happens, you will have very few combinations. Do not imagine a flurry of deals, but Société Générale should be part of it.”

For the Parisian lender, a merger with a continental rival would make a lot of sense, giving it the firepower to invest in new technology and push back against the supremacy of Wall Street in trading and capital markets.

According to Jérôme Legras, managing partner and head of research at Axiom Alternative Investments, European banking regulators have made it clear that “the best way to fight negative rates is mergers, the solution to unprofitable banks is consolidation, so how long can the French resist?”
Lorenzo Bini Smaghi, chairman of Societe Generale SA, speaks during a Bloomberg Television interview in London, U.K., on Tuesday, March 8, 2016. Societe Generale SA remains France's third-largest bank by total assets, with a French retail business making up a third of group revenue and 40 percent of operating income. Photographer: Luke MacGregor/Bloomberg
Lorenzo Bini Smaghi, SocGen chairman: 'Not having a European bank committed to the euro is not desirable, politically or economically' © Luke MacGregor/Bloomberg



Mr Oudéa’s 11-and-a-half years in charge have been bruising.

He has presided over a 59 per cent fall in the share price while enduring a succession of misconduct scandals and a deteriorating operating environment.

SocGen has been on a particularly bad run of late, opening last year with a profit warning and making thousands more job cuts, which have sharpened existential questions about its strategy and size.

While his bank has been punching below its weight for most of his term, Mr Oudéa — who in the 1990s worked for Nicolas Sarkozy in government — is in no mood to quit.

“I was appointed CEO at 45. I’m now 56, which is usually the age when you are appointed. So, I’m in great shape, I sleep very well and I must say I’m perfectly fit,” Mr Oudéa said, flexing his biceps for emphasis.

Many obstacles remain to banking union. National regulations still differ on capital and liquidity, not to mention incompatible bankruptcy laws and treatment of mortgages.

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Yet after many false dawns, bankers finally had cause for optimism last month when a historically recalcitrant Germany dropped its opposition to a common deposit insurance scheme, perhaps the single biggest hindrance to cross-border deals. Mr Oudéa said he could see the remaining problems being solved within three years.

The chief executive thinks that regulators, worried about “too big to fail” institutions, will prevent any bank from running a balance sheet of more than €3tn. But SocGen’s more modest €1.4tn of assets gives it “a margin of manoeuvre . . . a size which offers some flexibility”.

“The supervisor will be very, very prudent,” he adds. “They will want to avoid a catastrophe like we had in RBS,” referring to the £46bn taxpayer bailout of the UK lender after it bought ABN.

Deal rumours have swirled around SocGen for years. In the summer, Mr Oudéa flirted with UniCredit, run by his friend and former colleague Mr Mustier, who lost his job at SocGen over a rogue trading scandal.

However, the deal never advanced because of the probable credit rating downgrade that would have followed a takeover by a riskier Italian bank, increasing funding costs and effectively killing the margins of the wholesale banking business, people familiar with the discussions told the Financial Times.



Olaf Scholz, Germany's finance minister, second left, exits after a Group of 20 (G-20) and finance ministers and central bank governors meeting on the sidelines of the annual meetings of the International Monetary Fund (IMF) and World Bank Group in Washington, D.C., U.S., on Friday, Oct. 18, 2019. The IMF made a fifth-straight cut to its 2019 global growth forecast, citing a broad deceleration across the world's largest economies as trade tensions undermine the expansion. Photographer: Andrew Harrer/Bloomberg
Olaf Schulz (second left), German finance minister, says having stable lenders is a question of 'national sovereignty' © Andrew Harrer/Bloomberg


After also having a look at Commerzbank last year, Mr Mustier has now sworn off deals — in public at least. “No M&A,” he told the FT in December. “How can I be more precise?”

Undeterred, the top brass at SocGen believe there is political and supervisory support for a new European investment banking champion better able to vie with JPMorgan and Goldman Sachs, who have been steadily poaching business from the retrenching French, Germans and British.

A wide gulf has opened up.

JPMorgan’s $436bn market capitalisation makes it six times more valuable than BNP Paribas and 16 times more than SocGen.

In the first three months of last year alone, the US giant made $9.2bn of net profit, more than any of continental Europe’s biggest banks earned for the whole of 2018.

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“When I speak with clients they don’t want to be in the hands of American banks and I think that the regulators will not want to have such a concentration of risk,” Mr Oudéa says. “The risk of the world in three, four, five balance sheets? I don’t buy that.”

SocGen’s chairman, Lorenzo Bini Smaghi, an Italian former member of the ECB’s executive board, echoes these concerns.

“Not having a European bank committed to the euro is not desirable, politically or economically,” he says. “The fact that Deutsche Bank is refocusing is a loss for Europe. The Germans are starting to realise this, after so many years they are realising that having somebody that is committed long term, not just in an opportunistic way, is important.”



Pedestrians walk in past skyscrapers in La Defense business district as the headquarters of Societe Generale SA, second right, stands as the bank announces their fourth-quarter results on Wednesday, Feb. 12, 2014. Societe Generale SA, France's second-largest bank, reported fourth-quarter profit almost double analysts' estimates, helped by earnings at its French and Russian consumer banking units. Photographer: Balint Porneczi/Bloomberg
SocGen's headquarters in La Défense, Paris © Balint Pomeczi/Bloomberg


This fear underpinned German finance minister Olaf Scholz’s ultimately unsuccessful attempt to push together Deutsche and Commerzbank last year. Mr Scholz has said publicly that having stable lenders is a question of “national sovereignty”, stung by the memory of how during the crisis, panicked foreign banks restricted the supply of credit and retreated to their home countries.

“French investment banks with local roots and senior management bring a perspective that is valuable,” says Ross McInnes, chairman of Safran, the French engine maker. “We need also to be mindful of American extraterritorial measures, in particular on legal and conformity requirements, and building alternatives to payment systems involving the US dollar requires strong, broadly-based European universal banks.”

Cross-border deals could provide a partial way out of the slump the European industry has suffered. Europeans’ average return on equity declined to 7 per cent last year, less than half the average 16 per cent generated by big American banks, according to data from the European Banking Authority and Citigroup analysts.

Other potential partners known to be looking for scale and synergies include Dutch lender ING, which had an interest in Commerzbank, while Deutsche Bank and Switzerland’s UBS also discussed a tie-up at the same time, it has been reported.

Before SocGen can ink any deal, however, it must get its house in order.

In an unimpressive field it languishes near the bottom in most financial metrics and is worth 40 per cent of book value. Of the region’s largest lenders, only Germany’s troubled Deutsche and Commerzbank trade at a lower ratio.

Similarly, its RoE has dropped to 6.1 per cent, a far cry from its 9 to 10 per cent target.

The shares plunged after February’s shock profit warning and concurrent drop in its vital core capital level, prompting a strategic review that resulted in 1,600 job cuts and €500m of cost savings at the struggling trading unit, once the group’s main profit centre. “SocGen is now one of the cheapest banks in Europe,” says JPMorgan analyst Delphine Lee.

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If the lender cannot get itself into shape, executives are concerned they risk either missing out and languishing as others combine and grow, or are simply snapped up and absorbed by a healthier rival.

“To be an active player our valuation has to be much better,” says Mr Bini Smaghi. “So we are working on this. And to be fit, prepared and flexible. Then when the opportunities come, we will look at them.”

Mr Oudéa retains a lot of personal credit from big shareholders, such as BlackRock, Fidelity, Amundi and Capital Group, for steering the bank through various financial and reputational crises after his battlefield promotion in May 2008.

First came the infamous rogue trading scandal that led to Mr Oudéa’s appointment, when Jérôme Kerviel lost the lender €4.9bn on bad bets on stock index futures.

Then a series of legal cases hit — bribery in Libya, Libor manipulation and sanctions violations in countries including Cuba, Iran and Sudan — which led to deputy CEO and leading succession candidate, Didier Valet, also being forced out.

Those legal woes are now mostly behind the bank with the exception of the Libyan case, which lingers in the form of an ongoing lawsuit from an ex-managing director of the bank and a key witness for the US Department of Justice, Elyes Jebali, who is suing SocGen for unfair dismissal, alleging he was fired after exposing the bribery scheme.

Pedestrians walk along Wall Street near the New York Stock Exchange (NYSE) in New York, U.S., on Friday, May 24, 2019. U.S. equities climbed at the end of a bruising week in which escalating trade tensions dominated markets. Photographer: Michael Nagle/Bloomberg
Low interest rates, tougher rules and the resurgence of Wall Street (above) have all contributed to the struggle of European banks © Michael Nagle/Bloomberg


Few think Mr Oudea’s job is at risk, even if the board has accelerated succession planning for an eventual retirement, according to one person involved in the process. Net profit has doubled from the level when he took over in 2008 and shareholders voted to extend his contract for four more years in May.

“This is France, Fred won’t be chased out unless there’s another huge screw-up,” says a school friend of Mr Oudéa, who is now the chief executive of another European bank. “We don’t run CEOs out of town here.”

The most recent quarterly results provided some relief as the bank’s core CET1 capital recovered to 12.5 per cent, back above its target, assuaging shareholders’ fears it might have to raise extra cash. SocGen’s other main divisions have also been more stable and profitable. International retail remains a selling point, while the domestic retail business has been generating an RoE of 11-12 per cent, among the best in France. Both are widely praised by analysts, even as the investment bank fails to convince.

William Kadouch-Chassaing, SocGen’s chief financial officer, says a year ago investors and executives had “conversations [that] were not very friendly, we knew we needed to do something” but that now “we don’t have major pushback on our strategy”. He adds: “We still have a lot of people to convince internally and externally.”

The immediate priority is to fix the investment bank. Traditionally known for hiring engineering and mathematics PhDs, SocGen is still ranked number one in Europe for exotic structured finance products, such as equity derivatives, where the returns on offer are comfortably in the double-digits.

However, it has been suffering badly in stock and fixed-income trading, where margins and volumes are in structural decline. Remedial measures have included shrinking its hedge fund services team, shuttering its proprietary trading unit — named after Descartes, the French mathematician and philosopher — and cutting its cash equity trading operations.

“We were the inventor of equity derivatives, and then we were the inventor of structured finance,” says Séverin Cabannes, one of SocGen’s four deputy chief executives. “We must refocus on our core DNA; Société Générale is a bank of engineers, that is the core legitimacy we have.”

The other option would be more disposals. After selling its Balkans consumer network and its Scandinavian equipment finance and factoring business last year, market chatter suggests that Lyxor, SocGen’s €150bn asset management business, could be on the block.

Mr Oudéa acknowledges the business is under strategic review, but says it “is not on sale today”. The preferred route would be forming a partnership with a continental rival to gain vital scale in an industry dominated by trillion-dollar-plus US institutions.

Whether SocGen continues to forge a path alone, partners up with peers or plays an active role in consolidation, the bank still has its fans even among long-suffering investors.

“Over the last 20 years SocGen has never lost money, even when going through two huge crises, so their business model is very resilient,” says Davide Serra, founder of hedge fund Algebris, which owns the bank’s debt and equity.

“It is the most undervalued company in Europe and, for us, it is a core holding. I don’t need a cross-border merger to make money. If they keep going the way they are then I am sure the shares will reprice.”


Additional reporting by David Crow and Patrick Jenkins

The Inequality Debate We Need

The scientific evidence increasingly indicates that the world may soon reach a point of no return regarding climate change. So, rather than worrying almost exclusively about economic and political inequality, rich-country citizens need to start thinking about how to deal with global energy inequality before it’s too late.

Kenneth Rogoff


rogoff189_Alvaro FuenteNurPhoto via Getty Images_coalmineworker


CAMBRIDGE – While denizens of the world’s wealthiest economies debate the fate and fortune of the middle class, over 800 million people worldwide have no access to electricity. And more than two billion have no clean cooking facilities, forcing them to use toxic alternatives such as animal waste as their main cooking fuel.

Furthermore, per capita carbon dioxide emissions in Europe and the United States are still vastly higher than in China and India.

What right do Americans, in particular, have to complain as China increases production in smokestack industries to counter the economic slowdown caused by its trade war with the US?

To many in Asia, the inward-looking debate in the West often seems both tone deaf and beside the point.

Even if Europe and the US deliberately stall their capitalist growth engines – as some of the more radical policy proposals might do if implemented – it would not be nearly enough to contain global warming if emerging economies stay on their current consumption growth trajectory.

The most recent United Nations data suggest that the world has already reached a tipping point where there is little chance of limiting the increase in global temperature to what climate scientists consider the safe threshold of 1.5°C above pre-industrial levels.

In fact, a significantly larger rise is likely. According to a recent International Monetary Fund report, limiting global warming even to 2°C would require a global carbon price of at least $75-100 per ton of CO2 – more than double its current level – by 2030.

Any solution to the problem requires two interconnected parts. The first and more important is a global tax on CO2 emissions, which would discourage activities that exacerbate global warming and encourage innovation.

Equating the price of CO2 emissions globally would eliminate distortions whereby, say, a US-based firm might choose to relocate its most carbon-intensive production to China. Moreover, a worldwide carbon tax would achieve in one fell swoop what myriad command-and-control measures cannot easily replicate.

The second critical component is a mechanism that impels emerging and less-developed economies to buy in to emissions reduction, which can be very costly in terms of foregone growth. In recent years, the biggest contributor to the global increase in CO2 emissions has been fast-growing Asia, where roughly one new coal plant is being built every week.

For advanced economies, where the average coal plant is 45 years old, phasing out such facilities is low-hanging fruit in terms of reducing CO2 emissions. But in Asia, where the average age of coal plants is only 12 years, the cost of taxing plants into oblivion makes doing so virtually impossible without outside aid.

Yes, Europe and the US can impose carbon border taxes on developing countries that do not comply with their standards. But, beyond the associated technical challenges, this would raise issues of fairness, given profound global energy inequality.

One promising idea, which I have suggested previously, would be to establish a World Carbon Bank that would specialize in energy-transition issues and provide technical and financial assistance to poor and middle-income countries.

In principle, either a carbon tax or a quota system, such as the one Europe has instituted, can work.

But, as the late economist Martin Weitzman showed in pathbreaking work in the early 1970s, there are important subtleties depending on the nature of uncertainty.

For example (and greatly oversimplifying), if scientists have a fairly precise idea of the amount of cumulative CO2 emissions that the planet can handle between now and 2100, and if economists are not so sure what price trajectory would induce countries and firms to adhere to those limits, then the case for (tradable) quotas is strong.

Under other assumptions about the nature of cost and benefit uncertainties, a carbon tax is preferable.

One issue Weitzman did not consider is that carbon tax agreements are likely to be more transparent and easier to monitor than quotas; this is particularly important in international trade.

There are good reasons why a succession of multi-country tariff-reduction agreements after World War II sought to strip away regulatory and quantity constraints, and replace them with relatively simple tariff schedules.

In addition, carbon taxes could generate significant revenues to support green research, compensate low-income households within countries for transition costs (for example, by giving car owners incentives to trade in old “clunkers” and buy more fuel-efficient vehicles), and fund transfers from rich to poor countries through a mechanism like the World Carbon Bank.

Quotas could, in principle, be auctioned to achieve the same goal; but they are often given away.

In practice, almost all of the 40 countries that have established national carbon prices have done so indirectly, via quotas. European policymakers are particularly enthusiastic about this approach, arguing that it is much more politically palatable than introducing a carbon tax.

But it is not at all clear that the same is true for a global system, where transparency carries a premium. As the cost of distorting taxes and quotas increases, it makes sense to align across the most efficient possible system.
The scientific evidence increasingly indicates that the world may soon reach a point of no return regarding climate change.

So, rather than worrying almost exclusively about economic and political inequality, rich-country citizens need to start thinking about how to deal with global energy inequality before it’s too late.


Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. He is co-author of This Time is Different: Eight Centuries of Financial Folly and author of The Curse of Cash.

China’s GDP grows at slowest pace in 29 years

World’s second-largest economy grew 6.1% in 2019 as trade war and domestic pressures took toll

Don Weinland and Sun Yu in Beijing

A worker welds a bicycle steel rim at a factory manufacturing sports equipment in Hangzhou, Zhejiang province, China September 2, 2019. Picture taken September 2, 2019. China Daily via REUTERS ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. CHINA OUT. TPX IMAGES OF THE DAY - RC173452F240
Experts fear domestic troubles in manufacturing have yet to take full effect © Reuters


China’s economy last year grew at the lowest rate since 1990 while the country’s birth rate fell to a record low, highlighting the domestic challenges facing Beijing despite a truce in its painful trade war with the US.

Gross domestic product grew 6.1 per cent in 2019, disappointing analysts’ expectations and revealing an economy under pressure from weak consumer spending, rising unemployment and problems in the financial system.

The question looming over the world’s second-largest economy in 2020 is whether the damage of the trade dispute has largely run its course, or, as some experts fear, domestic troubles in banking, manufacturing and property have yet to take full effect.

“Despite the recent uptick in activity, we think it is premature to call the bottom of the current economic cycle,” said Julian Evans-Pritchard, senior China economist at Capital Economics.

“This year could be the opposite of last year, where the external environment improves but domestic stimulus efforts aren’t enough to support higher growth . . . We’re particularly concerned about the property sector.”

China’s CSI 300 of Shanghai and Shenzhen-listed stocks closed on Friday up 0.14 per cent following the data. China’s onshore renminbi strengthened 0.1 per cent to Rmb6.8651 against the dollar, its strongest rate since July.

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The GDP figures, a closely watched gauge on economic health, come just two days after China and the US signed the first step in a trade agreement, putting on hold a nearly two-year trade war while leaving in place tariffs on hundreds of billions of dollars on Chinese imports.

Economists were cautiously optimistic about the pause in the dispute, with the so-called “phase one” deal likely to help improve negative sentiment among investors over the past year.

“It’s not how high the tariffs are; it’s about what the future trend [for the trade war] will be,” said Zhu Chaoping, JPMorgan Asset Management’s global market strategist. “The signing of the trade deal shows that it will not escalate from here and sentiment will improve.”

Economic figures released on Friday provide some evidence for a modest recovery.

Although GDP growth between October and December held at 6 per cent, lower than some economists had expected, several indicators showed that activity picked up in the final days of 2019.

Industrial production, for example, rose 6.9 per cent year on year in December, higher than market expectations. Fixed-asset investment rose 5.4 per cent for the whole of 2019, a sign that capital expenditure was picking up.

The slight increase in some areas of investment were not driven by the traditional powerhouses of growth, namely housing and manufacturing. Instead, parts of the new economy helped drive growth last month.

“Seems investment in services and high tech helped boost the number somewhat,” said Zhou Hao, senior emerging markets economist for Asia at Commerzbank.

Yet Friday’s data contained several concerning indicators for China’s economy in 2020, and for many years to come.

Manufacturing investment, a measure of the health of the factory sector, fell 3.1 per cent last year, a record low underlining the toll the trade war took on China in 2019.

Urban disposable income, which rose just 5 per cent last year, adjusted for inflation, notched another all-time low. China has sought for many years to reorient its economy towards consumption-driven development, away from the investment-heavy growth that has produced a huge pile of bad debt.

Perhaps more worrying, China’s birth rate dropped to a record low of 1.05 per cent in 2019, an ominous signal for a country expected to face a shortage of young and able workers to power its growth in the next two decades.

Demographic decline is a sensitive topic in China, given that it was exacerbated by the Communist party’s longstanding “one-child policy”, which has since been abolished.


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In China’s property sector, which has been plagued by concerns over its long-term health for more than a decade, housing sales by floor space fell 0.1 per cent in 2019.

The housing market comprises up to 25 per cent of China’s GDP, although that figure is contested. A downturn in the market almost certainly will hurt China’s economic prospects.

Ting Lu, Nomura International’s chief China economist, said that a correction in housing was just getting under way in smaller cities across China that, by his count, made up about 70 per cent of the country’ floor space.

“Some people believe that there could be a stabilisation or rebound in the property market this year,” he said.

“But my view is that the correction is not over yet, especially in the lower-tier cities. The correction only started in 2019.”




Additional reporting by Xinning Liu in Beijing and Alice Woodhouse in Hong Kong

Factories Are in a Funk
Despite what seems like an improving backdrop, manufacturers’ moods keep souring

By Justin Lahart




American manufacturers ought to have felt better last month. They didn’t, and that is worrisome.

The Institute for Supply Management said that its manufacturing index slipped to 47.2 in December—its lowest level since the last recession ended in June 2009—from November’s 48.1.

Anything below 50 indicates a contraction in manufacturing activity.

Economists had expected the index to move up to 49, and it is easy to see why. The stock market has been doing well and the trade fight between the U.S. and China has simmered down—both things that should have brightened the moods of manufacturers surveyed by the ISM.
But the report was almost uniformly dour, with subindexes for new orders, production and employment registering declines, and downbeat commentary from a wide range of industries.

Moreover, the report made no mention of Boeing effects, point out economists at Morgan Stanley. With suspension of 737 Max production starting this month, those will likely be a factor in future manufacturing reports.
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A Boeing 737 MAX jet in Renton, Wash. Photo: Elaine Thompson/Associated Press


The message, then, is that despite the apparent improvements in the economic environment, manufacturing remained in a bad place as the year came to an end.

The headwinds the sector faces remain serious, with a strong dollar cutting into manufacturers’ ability to compete globally and economic weakness abroad further damping demand.

Moreover, the de-escalation of trade-fight rhetoric has so far left the tariffs the U.S. has imposed on China in place. Nor does it seem like the phase-one trade deal the U.S. and China have sketched out will provide more than incremental tariff relief for manufacturers.

There is still hope that, with a bit less uncertainty on the trade front and a bit better growth globally, manufacturers will have a better 2020 than 2019.

But the good times haven’t come, yet.