China wants to decouple from US tech, too

Washington’s restrictions have only sped Beijing’s development of its own ecosystem

Rana Foroohar

© Matt Kenyon

It was perfect ju-jitsu. After weeks of watching US president Donald Trump pressure Chinese tech company ByteDance to sell its social media app TikTok to Microsoft, Beijing struck back, using one of Mr Trump’s own weapons of choice — export controls. Chinese authorities expanded the Middle Kingdom’s list of controlled exports to include algorithms, which are of course TikTok’s main asset.

As the mother of a teenager who spends too much time watching 15-second bursts of physical comedy on the app, I can tell you that they are very good at keeping you hooked.

The move is in large part political. TikTok is hardly as strategic as, say, the 5G equipment maker Huawei. Yet as one Chinese investor put it to me, it wouldn’t do for Beijing to allow the Trump administration to appear to “force a liquidation sale” of the viral video app, even at a time when Chinese authorities are clearly keen to avoid any build up of tensions between the countries before November elections.

But the use of export controls by Beijing to potentially thwart a deal also underscores that it is not just America, but also China, that is moving to decouple its technology industry. Already, emerging nations represent a larger export market for China than the US, according to Gavekal Dragonomics/Macrobond data. Beijing’s Belt and Road Initiative and its trade-based diplomacy in places such as Africa and the Middle East, combined with the rise of the digital renminbi, will make it ever easier for China to grow its exports to places other than the US.

The Trump administration has tried to offset these efforts by denying Huawei the US-made chips and software that it requires for its ambitious global 5G rollout. But no expert that I’ve spoken to on the topic thinks that this will prevent China from executing a longer term decoupling from the US tech ecosystem. If anything, the restrictions have only sped up China’s efforts to develop its own chip industry.

Meanwhile, the Chinese have been able to access things such as US patents, scientific papers, and even American corporate innovations. That includes groundbreaking work on artificial intelligence, some which has been published or developed open-source. This is happening at the same time as China’s own legal protections around things like intellectual property and patents have been getting stronger by some measures.

That raises an interesting question: America is still home to the most cutting-edge technological innovations, but which country will be better at inventing the new new thing in the future?

You could argue, as Chinese technologist and venture capitalist Kai-Fu Lee has, that it will be easier for China to ramp up innovation using its existing resources, and slap its own consumer brands on products churned out by an already robust and largely self-sufficient manufacturing industry.

Certainly, it sounds simpler than what the US is now trying to do, which is rebuild the supply chains it has spent the past several decades outsourcing to the East. That is the advantage of having a coherent national industrial policy, as China does. The US abandoned such planning decades ago with the rise of neoliberalism, which held that capital, goods and labour should flow freely without any government restriction.

The problem is that the free market first approach doesn’t work quite as well in a crisis. Right after the pandemic began, for example, I interviewed the chief executives of numerous apparel companies, who were ready and eager to retool to make masks in order to fill the shortage in hospitals.

They were the ones prodding the White House to help them co-ordinate these efforts, rather than the other way around. Nobody in the administration had a clue about what manufacturing resources might be immediately available to fill the PPE gaps, or how to better deploy them in a crisis.

The Trump administration’s mishandling of the pandemic has, of course, been singular. But over the past few decades, US policymakers have turned a blind eye as parts of the industrial supply chain were outsourced, downsized, or monopolised. They gave little thought to what the ramifications might be in a time of emergency.

The focus on economic efficiency rather than resiliency led American companies to retrench in recessions with mass firings, rather than using such periods to retrain and retool, as other countries, most notably Germany, have done. 

That is why the economic trajectories of the US, China, and Germany are so similar now to what they were right after the 2008 financial crisis. Then, as now, Germany furloughed workers, and enjoyed a V-shaped recovery, in part by grabbing new business in Asia as China recovered. 

Chinese exports surged back quickly in both time periods, thanks to quick and co-ordinated loans and fiscal support to small and large businesses. America, meanwhile, languished for years after 2008 in a jobless recovery, which was followed by a flat pay cheque one.

Now, the US looks like it is heading towards a deeper recession. Perhaps that is why China decided to call Mr Trump’s bluff on TikTok. Both countries have technologies to protect, and economic weapons to do that.

But China’s immediate future looks a bit brighter. Decoupling, it turns out, is a two-way street.

Investors vent frustration over Fed’s balance sheet inertia

Chairman Jay Powell demurs when urged to revamp central bank’s debt purchase plans

Colby Smith in New York

The Federal Reserve’s balance sheet ballooned from $4tn to just over $7tn, but its growth has stalled © AP


The Federal Reserve is the $7tn gorilla in the financial markets, and investors wish it was willing to throw its weight around a bit more.

The US central bank showed little hesitation in wading into the market during the pandemic panic in March, and investors took comfort from knowing that the Fed and its chairman Jay Powell had their back. But this week they were frustrated by his reluctance to promise more specific actions.

Equities sold off sharply during Mr Powell’s press conference on Wednesday, and again on Thursday. Although the Fed pledged it would not raise interest rates until inflation had outstripped its 2 per cent target — which is likely to be years away — no new guidance came on how it might adapt its balance sheet policy to generate that inflation and aid the US economic recovery.

“That was something the market was hoping to get more clarity on and they failed to deliver it,” said Michael Kushma, chief investment officer of global fixed income at Morgan Stanley Investment Management.

The March turbulence prompted the Fed to begin a programme of unlimited asset purchases and to set up 11 lending facilities to shore up a broad swath of hard-hit debt markets. What resulted was an unprecedented expansion of its balance sheet. Between March and early June, it ballooned from roughly $4tn to a peak of just over $7tn. But since then, its growth has stalled.

Line chart of $tn showing Fed's balance sheet growth stalls

The Fed’s bond-buying programme currently involves purchasing $80bn of Treasury securities per month and $40bn of agency mortgage-backed securities. Having decided last month to pursue a new monetary framework in which it allows inflation to run above its 2 per cent target, expectations were elevated for a broader rethink of that strategy.

While the Fed did reframe the purpose of its purchases — from strictly an issue of market functioning to one tied to supporting the economic recovery — Mr Powell did not signal an imminent adjustment either in the scope or scale of the programme.

One cohort of investors had believed it necessary for the Fed to shift the focus of its purchases specifically to long-dated Treasuries in order to ensure borrowing costs remained low, while another subset thought a larger programme was warranted.

“There was an inconsistency with the super-strong forward guidance on rates and quantitative-easing, which was a little more loosely defined,” said Mike Stritch, chief investment officer at BMO Wealth Management.

Krishna Guha, vice-chairman at Evercore ISI, called the Fed’s current approach to bond-buying “weak”, and urged the Fed to “deploy all its instruments”.

Fed's emergency facilities

Mr Powell also faced questions about what many had hoped would be an important pillar of its coronavirus response so far: the Main Street Lending Program.

This is one of the 11 lending facilities rolled out since March under powers that allow the central bank to make asset purchases in “unusual and exigent circumstances.” It differs from the sorts of programmes it has run in previous crises because it involves purchasing loans made by banks to small and medium-sized businesses — hence the “Main Street” name.

While usage has remained modest across all of the Fed’s facilities — a phenomenon investors largely attribute to the robust rebound in financial markets — the failure of the $600bn MSLP to gain traction has provoked concern because it suggests that smaller companies that are the backbone of the US economy are not benefiting as much as larger ones from the reopening of capital markets.

According to Financial Times calculations based on Fed data published on Thursday, just $93.8bn of the Fed’s balance sheet firepower is being deployed through the various emergency facilities. That is down from a high of $107bn in July and is less than 4 per cent of the minimum $2.6tn the central bank said it would make available.

For the MSLP, only $1.45bn has been lent out so far, or 0.2 per cent of its total capacity.

“For smaller corporations, survival is something that is a point of concern not only in terms of potential bankruptcies but also delinquencies as we go forward,” said Leslie Falconio, senior strategist at UBS Global Wealth Management.

Investors acknowledge that the Treasury department, which has provided a backstop for the MSLP, may also have to change its approach. Part of the reason for its limited use stems from the fact that the Treasury wants to “minimise losses”, said Ms Falconio.

On Wednesday, Mr Powell said the Fed may make further adjustments to the MSLP and will continue to work with banks to ensure they are on board to extend out credit.

“We also want them to take some risk, obviously, because that was the point of it,” Mr Powell said of the banks. “And the question is, how do you dial that in? It's not an easy thing to do . . . 

We’re continuing to work to improve Main Street, to make it more broadly available.”

One of the reasons investors are itching for more from the Fed is that they are resigned to getting so little from Congress. Policymakers have been locked in a stand-off over a new stimulus package for months and now economists fear relief will not come until after the US election in November.

The extent of the additional support required by the Fed hinges largely on Congress, said Praveen Korapaty, chief global rates strategist at Goldman Sachs.

“So long as the fiscal authorities are being proactive, it takes pressure off the central bank to deliver something at every meeting,” he said. “They can’t always surprise the market to the upside.”

The Uncertainty Pandemic

Policymakers’ most important task is to try to reduce the massive lingering uncertainty regarding COVID-19 while continuing to provide emergency relief to the hardest-hit individuals and economic sectors. But the insecurity fueled by the pandemic is likely to weigh on the global economy long after the worst is in the past.

Kenneth Rogoff

rogoff197_dowellGetty Images_coronavirusquestionmark

CAMBRIDGE – The next few months will tell us a lot about the shape of the coming global recovery. Despite ebullient stock markets, uncertainty about COVID-19 remains pervasive.

Regardless of the pandemic’s course, therefore, the world’s struggle with the virus so far is likely to affect growth, employment, and politics for a very long time.

Let’s start with the possible good news. In an optimistic scenario, regulators will have approved at least two leading first-generation COVID-19 vaccines by the end of this year. Thanks to extraordinary government regulatory and financial support, these vaccines are going into production even before the conclusion of human clinical trials.

Assuming they are effective, biotech firms will already have some 200 million doses on hand by the end of 2020, and will be on track to produce billions more. Distributing them will be a huge undertaking in itself, in part because the public will need to be convinced that a fast-tracked vaccine is safe.

With luck, rich-country citizens who want the vaccine will have received it by the end of 2021.

In China, virtually everyone will have been vaccinated by then. A couple of years after that, so will the bulk of the world’s population, including those living in emerging and developing economies.

This scenario is credible, but realizing it is far from assured. The coronavirus could prove more stubborn than expected, and the first-generation vaccines may be effective only for a short period, or have worse-than-anticipated side effects.

Even in that case, improved testing protocols, the development of more effective anti-viral treatments, and better adherence by the public and (one hopes) politicians to behavioral guidelines would lead to gradual normalization of economic conditions.

It’s worth recalling that the horrible 1918-20 influenza pandemic, which killed at least 50 million people worldwide – many in a deadly second wave of the kind we currently fear today with COVID-19 – eventually faded and disappeared without any vaccine.

But in a more pessimistic scenario, other crises – a sharp uptick in US-China trade frictions, a cyberterrorist attack or cyberwar, a climate-related natural catastrophe, or a massive earthquake – could occur before this one ends.

Moreover, even the optimistic scenario does not necessarily imply a rapid return to end-2019 income levels. The post-pandemic expansion – if there is one – may take years to meet the modern definition of recovery (a return to initial per capita income) in the aftermath of a deep recession.

Although the pandemic has underscored the huge problem of inequality in advanced economies, poor countries are suffering far more. Many emerging markets and developing economies will likely be struggling with COVID-19 for years to come, and face the real possibility of a lost decade of development.

After all, few governments have the capacity to provide emergency fiscal support on the scale that the United States, Europe, and Japan are doing. Prolonged recessions in lower-income countries will likely lead to an epidemic of debt and inflation crises.

But the COVID-19 crisis could leave deep and lasting scars in advanced economies, too. Businesses may be more skittish about investing and hiring, owing to concerns about a public-health relapse or another pandemic, not to mention the huge political volatility that the crisis has amplified.

Although there may be an initial “catch-up” surge of consumer spending in advanced economies, in the longer run, consumers are likely to save more. In an interesting paper presented at the recent annual Jackson Hole symposium, Julian Kozlowski, Laura Veldkamp, and Venky Venkateswaran argue that the pandemic’s cumulative long-term costs for the US economy are likely to be an order of magnitude greater than the short-term effects, partly because of a long-lasting heightened sense of unease among the public.

Their analysis, which I discussed at the symposium, is especially convincing with respect to consumers. Anyone with a parent or grandparent who lived through the Great Depression of the 1930s knows that this scarring experience affected their lifelong behavior.1

In addition to its direct impact on investment and hiring, COVID-19 will impose longer-term productivity costs. By the time the pandemic is over, a generation of children, particularly those from lower-income households, will in effect have lost a year of schooling. Young adults who struggle to find their first job in a still-moribund labor market can expect to earn less in the future than they might otherwise have done.

There are some bright spots. Although the pandemic has triggered a collapse in the value of commercial real estate in many cities, it could lead to a huge wave of new building and investment in suburban areas, as well as in long-suffering small and midsize cities.

In general, businesses that had been loath to allow telecommuting are now recognizing that it can work well and has many benefits. And although we shouldn’t hold our breath, the pandemic could spur policymakers to find ways to provide universal broadband Internet and give less privileged children much better access to personal computers.

The global economy is now at a fork in the road. Policymakers’ most important task is to try to reduce the massive lingering uncertainty while continuing to provide emergency relief to the hardest-hit individuals and economic sectors.

But the insecurity fueled by COVID-19 is likely to weigh on the global economy long after the worst is in the past.

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.


We Are Still Living the Legacy of World War II

Act III of the war — After the War — is now simply part of our daily reality, in America and globally, writes Tom Hanks.

By Tom Hanks

Preparing for the 1939 World’s Fair; praying in a bombed-out cathedral in Cologne, Germany, April 1945.Credit...By Margaret Bourke-White/the Life Picture Collection Via Getty Images

For our “Beyond the World War II We Know,” documenting lesser-known stories from the war, and to commemorate the 75th anniversary of the end of the war, we asked the actor Tom Hanks to write about the complicated narrative of the conflict — and its aftermath.

In the spring of 1939 — “Before the War,” as folks of that generation would say — the New York World’s Fair began a gloriously naïve celebration of “Mankind’s Progress” and visions of America’s future. President Franklin D. Roosevelt opened the fair in a ceremony that was, no lie, broadcast on television.

In fact, there were early versions of TVs on display at the fair, along with state-of-the-art railroad trains, airplanes, ocean liners, Crosley radios, a giant typewriter and the new Ford sedans fairgoers could drive themselves on the “Road of Tomorrow” — an upbeat adieu! to the Great Depression, to what was the first act of many American lives.

If you are a Boomer, born in, say, 1956, the adults you grew up around all framed their lives in a three-act structure, told like a biopic, narrated by an All-Knowing Chorus who bids us to, please, clear our minds of all we have seen and learned since 1945. To comprehend the full experience of World War II we must forget all we know.

In Act I (Before the War) most families did without — without enough food, without an extra pair of shoes, without going to a dentist. A father’s job, if he had one, might allow a life within modest means when modest means was an accomplishment. Act I was characterized by a quest for progress: huge dams were built; federal programs improved lives; mass communication was as simple as listening to a radio; and the art and technology of motion pictures provided a cheap but wonderful escape. At the same time, a child with a common cold could die of pneumonia in a few weeks.

Before the war, Americans faced one-thing-after-another-obstacles as the country was crippled by widespread poverty, overt racism and institutionalized discrimination. And yet, the 1939 fair proved that we the people remained bent on forming a more perfect union — and a better world.

As in all drama, bad omens abounded. At the 1939 fair, Fascist Italy and Nazi Germany had halls of their own. The Japanese hall — a replica of a Shinto Shrine — was “Dedicated to Eternal Peace and Friendship Between America and Japan.” Poland was represented, but within five months of the fair’s opening, its borders had been redrawn by Germany and the U.S.S.R.; by the end of the fair, there was no Polish pavilion because there was no longer a Poland.

By then, Germany had been operating its concentration camps for years. With Italy’s help, the nations of Europe and whole peoples were enslaved by Nazi terror. Imperial Japan had established a “Greater East Asia Co-Prosperity Sphere,” a cleaned-up name for what was actually an imperialist undertaking that included horrors like the Rape of Nanking.

Act II (During the War) began on a day of infamy just before Christmas, 1941, when Americans learned our Navy had a base at Pearl Harbor (in Hawaii, the dispatches felt obliged to add) which had been devastated by attacking Japanese planes. The pledge of eternal peace and friendship with America proved to be as permanent as what it was at the fair — writing on a wall.

“Well, you have to understand,” says the Chorus, “that was During the War, when time stood still in the hang-fire of stasis. Our equilibrium was swamped by civil strife. Americans were relegated to purgatory, between a victory and Heaven or a defeat and Hell.”

No questions posed in Act II had answers. How far would the field of battle extend? How many people were going to die, by starvation, by freezing, by drowning, by cannon or bomb — and who would those unfortunates be? If Pearl Harbor (in Hawaii, you say?) can be attacked, will Seattle be next? Or San Diego? If London can be set afire by Nazi bombers at night, imagine the flames when Boston is raided.

Conscientious, able-bodied Americans enlisted in the armed forces “for the duration of the war, plus six months,” as the draft messaging had it. The War Department had estimates for the number of casualties, schedules for how many weeks battles would go on, and long-term strategies for how the war would be won, but those were ballpark figures.

By Christmas of 1943, the fighting was raging on both sides of the planet. The sayings that emerged were indicative of just how hazy the conflict’s end was: “Out of the sticks in ’46”; “Not done ’til ’51”; and even “Keep alive til ’55.”

Information came by newsreels and ever-changing maps, the dispatches of war correspondents, and, via the radio, the words of a calm, informed president. Luxuries were rare; commodities were rationed.

A common saying, to anyone selfish enough to complain, was “Don’t you know there is a war on?” which got a guffaw at the filling station where there was neither fuel nor tires. Hanging above factory shop floors were warnings that “He who relaxes is helping the Axis.” “Do your part” was a duty that most people lived up to.

That might all sound cute to modern ears, but the war years were anything but. Black markets sprang up. Japanese-Americans — U.S. citizens — were forced into detention camps at the cost of their livelihoods, freedom and dignity. The segregation of the armed forces was so systemic that violence against Black soldiers by white soldiers was not uncommon, though often hushed up.

Boys who had just graduated from high school — the classes of ’41-’44 — died in North Africa, in the mountains of Italy and on the coral reefs at Tarawa. Death-by-telegram came knocking at your neighbor’s door, if not yours.

From our seats in 2020, we know how this Second Act ends. We’ve seen the movie; it’s no surprise that Humphrey Bogart and Claude Rains team up in the fog at the Casablanca airfield. But for those who tell of it — who survived the Second World War — the end of their second act was never scripted.

Three and a half years after the Pearl Harbor attack, the Allies had ended the Nazi reign, razed city after city, killed many Germans and exposed the barbarity of National Socialism. For millions, V-E Day — May 8, 1945 — was a dream come true, a joyful roar in a grand moment for humanity, a day of parades and peaceful flyovers with sailors kissing nurses in the streets.

If only V-E Day had been the conclusion to Act II. But to the thousands of Americans still slugging it out in the Pacific Theater (and their families back home), V-E Day warranted but a few paragraphs in Stars and Stripes, the armed forces newspaper. There was, still, a war going on in places with more of the unfamiliar names Americans had to search out in the World Atlas, more tiny specks of black ink in a blue map. Where, exactly, is Okinawa? Why is there a battle at some place called Balikpapan?

“For the duration” muted the ebullience of V-E Day, even as magazines and newspapers carried ads for TVs and new fashions. War bonds were still being advertised to “Help Finish the Job!” opposite pages with a puff piece extolling the charms of a recent debutante. Pretending the war was over was imagining it would miraculously disappear.

In the winter of 1944 and ’45 and spring of ’45, America’s new B-29 bombers dropped incendiaries on Japanese cities that ignited maelstroms of fire, burning to death thousands of men, women and children in hellscapes straight out of Dante. Plans for the invasion of Japan had been drafted that would dwarf the D-Day landings at Normandy the previous spring. American troops — many of them veterans from the battlefields of Europe — were being assembled on the West Coast.

As late as the first week of August 1945, the end of World War II was but a patch of clear sky on the horizon. From hell to heaven in ’47? Maybe.

Without notice, in a moment beyond the comprehension of ordinary people, a most hideous week brought the war to a shocking, sudden end. In the blink of an eye, something reduced the city of Hiroshima into a landscape of molten glass, disappearing tens of thousands of its inhabitants, leaving no trace of them but their shadows. Three days later the city of Kokura would have suffered the same destruction, but smoke obscured the bomb drop, so Nagasaki, the backup target, was annihilated instead.

Days later, the Japanese emperor announced the end of the Greater East Asia Co-Prosperity Sphere. Just like that, the war was over, though upheaval continued in various parts of the globe. Though peace came much too late for millions of souls, the cue was called for the Act II curtain.

Japan agreed to surrender on Aug. 15, 1945. Everyone who remembers V-J Day carries the emotional baggage and physical muscle memory of the war like so many stones in their pockets. What they saw, how they served, their luck and good timing, the miracles and daily drudgery of those years, why they survived when so many didn’t, remain traced in their synapses.

The U.S.S. Missouri and Allied planes in Tokyo Bay on Sept. 2, 1945, the official day of the Japanese surrender. 
The U.S.S. Missouri and Allied planes in Tokyo Bay on Sept. 2, 1945, the official day of the Japanese surrender. Credit...National Archives

Act II ended 75 years ago in a defining moment of unconditional surrender. Most of the victors are gone now, all those sailors and soldiers, airmen and nurses. Younger eyewitnesses to the war are passing on.

Those of us alive now acknowledge, sadly, that Act III — After the War — which began before the ink was dry on the Articles of Surrender — will never end, not in any equal measure of satisfaction.

Disinformation is now a weapon and a currency. Tyrants reign around the world. Wars are waged in stalemates. Seventy-five years ago, it seemed that a grand contract had been agreed upon by all the nations of the world, that our common efforts had created a common purpose, born of the horrible lessons learned in World War II.

The Times’s World War II project is, in part, about both Act II, the culmination of it, anyway, and Act III, the war’s endlessly complicated aftermath. There are too many actors competing for the role of that all-knowing Chorus. The cast of characters is far too large, for it includes everyone reading these words.

Here We Go Again


For the past few years, the US financial system and the Fed have been playing a game of chicken in which the Fed tries to tighten (or at least stop easing) and the stock market behaves like an addict deprived of its heroin.

In 2018, for instance, the Fed started raising interest rates and shrinking its balance sheet, though in both cases only a little. The S&P 500 did this:

S&P 500 2018 flash crash

In response, the Fed relented and began cutting rates and, on the pretext of a “repo crisis,” aggressively expanding its balance sheet.

Normality – in the form of rising tech stock prices – returned. 2019 was a very good year.

But in early 2020 the coronavirus outbreak didn’t immediately send the Fed into a rate-cutting, asset buying frenzy, and the S&P did this:

S&P 500 March 2020 flash crash

Once again the Fed capitulated, expanding its balance sheet by an amount that dwarfs any previous stimulus program. Stocks were pleased and went on a tear that has lifted Big Tech to dot-com bubble levels.

Now the Fed, apparently recognizing the rules of the game and trying to anticipate, has preemptively capitulated by announcing that it will refrain from raising interest rates for years to come in order to engineer much higher levels of inflation.

But – remember we’re dealing with an addict – the markets noted that the Fed did not promise to actually cut rates or expand its QE program.

That sounds like a stable rather than an increased dosage. Which means it’s not good enough.

In the past two days the Nasdaq (where those Big Tech stocks dominate) has done this:

Nasdaq September 2020 flash crash

What does the latest flash-crash mean?

Well, first it means that the markets might be in withdrawal until they get lower, preferably negative interest rates, and expanded QE that includes direct purchases of equities by the Fed.

Those are big asks, and the Fed might dither for a while. But in the face of stocks heading back to their intrinsic value of maybe one-third of today’s prices – in a year of pandemic, civil unrest and a presidential election – the Fed will almost certainly cave.

So once again it comes down to The Number.

How far will stocks have to fall to keep the game going?

History says not too far, but we can always hope for something more interesting.