BEIJING: Seafood sellers in Beijing expressed consternation on Thursday (Aug 24) over Japan’s gradual release of wastewater from the disaster-hit Fukushima nuclear plant into the ocean. Hours before the release began, a store manager named Wang Jinglong in one of the Chinese capital’s biggest seafood markets told AFP there had alreadyContinue Reading
TOKYO — As economists weigh the odds of China becoming Japan, many are drawing the wrong lessons from Tokyo’s lost decades.
The common misconception about the deflationary funk that relegated Japan to No 2 in Asia is that the central bank was too conservative in efforts to revive growth. It’s the opposite, really.
Though the Bank of Japan (BOJ) eased plenty in the early- to mid-1990s, it’s the last 24 years of zero interest rates and quantitative easing that sealed the nation’s fate. All of that monetary stimulus, paired with a fiscal-loosening boom, re-inflated one asset bubble after another.
Each time one of those bubbles burst or fizzled, the BOJ was keen to blow new ones. All those overlapping bubbles, propped up year after year, created the illusion of recovery.
It was all a mirage. Wages flatlined, innovation and productivity stagnated and the animal spirits that once wowed the world went dormant.
That’s because the BOJ’s steroids warped incentives across the economy. Why do the hard work of reinvention, recalibrating, rethinking and reforming when the central bank has your back day in, day out?
So, when economists urge the People’s Bank of China (PBOC) to fight deflation with a monetary easing onslaught, they’re ignoring the examples the BOJ continues to serve up even today, argues independent economist Andy Xie.
In a series of writings, including in the South China Morning Post, and media interviews, including with Peter Lewis’ Money Talk Podcast, Xie has been making the case one can only hope that PBOC Governor Pan Gongsheng is heeding.
“Market-driven restructuring is driving China’s deflation,” argues Xie, formerly a top Morgan Stanley economist. “It leads to more efficient allocation of resources and greater purchasing power for consumers.”
Xie continues that “if China can resist the reflationary pressure from those who lose out due to the deflation of property bubbles, a healthier and more sustainable growth cycle is coming, which will turn China into a high-income country.”
The thing about so-called “Japanification,” Xie explains, is that Japan’s malaise was less about the level of the money supply than a slow-moving economic system unable to see that its competitiveness was waning.
“As the generation of entrepreneurs who built Japan’s economy retired in the late 1980s and early 1990s,” Xie writes in SCMP, “their successors have behaved like bureaucrats, hanging onto what they have. They were paralyzed as Japan’s neighbors peeled off its industries one by one with better tech and lower prices.”
By 1999, when then-BOJ governor Masaru Hayami slashed rates to zero and began pioneering QE, a first for a Group of Seven nation, several years of political apathy were already stymying what was then Asia’s biggest economy.
Around 2011, when China first surpassed Japan in gross domestic product (GDP) terms, Tokyo had a chance to reboot — an opportunity to rekindle its entrepreneurial mojo. It doubled down on monetary easing instead.
In 2013, Haruhiko Kuroda took the reins at BOJ with a mandate to supersize Tokyo’s QE experiment. Kuroda did just that, hoarding government bonds and stocks as never before. By 2018, the BOJ’s balance sheet topped the size of Japan’s US$5 trillion economy.
Yet even this asset-buying onslaught failed to end deflation. Vladimir Putin’s war in Ukraine did that with its resulting spikes in energy and food costs. Wages didn’t respond the way Kuroda and the ruling Liberal Democratic Party expected.
There was a moment of optimism earlier this year when annual Shunto negotiations with unions resulted in the biggest pay hikes in 30 years. But great uncertainty about Japan’s 2024 prospects means the average 3.91% wage hikes might not live on.
As economist Richard Katz, publisher of Japan Economy Watch newsletter, observes: “Wages in Japan disappointed again in June, rising less than economists had forecast.
“Moreover, real wages adjusted for inflation fell year-on-year for the 15th month in a row. As a result, real consumer spending fell year-on-year for the fourth month in a row, bringing spending during April-June 5% below its 2018 level.”
Tokyo’s response? An even weaker yen to boost exports, not a bigger push to recalibrate growth engines and alter economic incentives. Yet, this too may backfire — again.
In an interview with Bloomberg, the head of Japan’s stock bourses warned the yen has fallen too far, too fast this year.
“This level of exchange rate is a bit too weak for the Japanese yen,” says Japan Exchange Group CEO Hiromi Yamaji. He said the 10.5% drop is taking a toll on investor confidence in Japan’s economy.
Negative side effects, including pushing up Japan Inc’s import bill, are doing more harm than good, Yamaji notes. The nation, he adds, can withstand interest rates rising away from zero.
Current BOJ leader Kazuo Ueda has so far refused to take that step. And odds are Tokyo officials won’t step into the market to tame the yen until it blows past the 150 level to the US dollar (from 145 now), says Atsushi Takeuchi, who led the BOJ’s foreign exchange division during Tokyo’s assertive 2010-2012 intervention efforts.
“When to intervene has always been an extremely political decision in Japan,” Takeuchi tells Reuters. “Nowadays, it’s the prime minister that ultimately makes the call.”
Trouble is, it’s not clear that even Japan has learned the lessons from Japan. Economic growth jumped 6% year-on-year in the April-June quarter thanks to robust exports. The risk is that the lesson Ueda and Prime Minister Fumio Kishida take from this dynamic is that a weaker yen is helping.
As DBS Bank economist Ma Tieying observes, Kishida’s team will surely notice that Japan’s “outperformance is primarily driven by exports and tourism-related sectors.” And that the “assertion that a weak yen has a positive net impact on the economy gains support from data.”
But these dynamics mask Japan’s underlying frailties, including a deep addiction to free money and the biggest public debt burden among top economies.
“The important thing to remember when assessing trade flows is that trade is about relativity,” says economist Robert Brusca at advisory Fact and Opinion Economics.
“It’s not about Japan’s prices; it’s about Japan’s prices compared to foreign prices. It’s not about Japan’s growth; it’s about Japan’s growth compared to foreign growth. It’s not about Japan’s export growth; it’s about Japan’s export growth compared to its import growth… and so on,” says Brusca.
Absent, though, are any moves in Tokyo to, in Xie’s words, promote a “more efficient allocation of resources and greater purchasing power for consumers.”
China needs to go the other way. This helps explain why the PBOC under Yi Gang (2018-2023) and Pan today is resisting aggressive easing moves.
Bold monetary stimulus would be the quickest and easiest way to defuse default risks in China’s troubled property sector.
Concerns that Country Garden, once China’s largest builder, might miss a series of bond payments have global investors on default watch. That came the same week China Evergrande Group, the country’s largest property company, filed for bankruptcy protection in the US.
Are more Chinese shoes about to drop? Let’s not forget, too, that the China Securities Regulatory Commission last week launched an investigation into possible violations of disclosure rules by Evergrande’s onshore unit, Hengda Real Estate Group, observes analyst Sandra Chow at advisory CreditSights.
As China’s real estate crisis deepens, the pressure is on President Xi Jinping, Premier Li Qiang and Pan to bail out the property sector. Yet doing so might just re-incentivize bad behavior, increasing financial leverage and setting back efforts to weed out corrupt speculators.
Here, the value of the yuan is a key indicator of how the PBOC is addressing the challenge. Yet, as Xie argues, it would be a mistake for the PBOC to give in to short-term concerns.
After all, Xie says, it was a “misallocation of resources during China’s boom years” that stands as the “cause of today’s challenges. A vast property bubble hijacked the country’s macroeconomic policy.”
As those bubbles “threatened to take down the country with it,” policymakers “danced around it again and again” using PBOC policies, without addressing the underlying problems, Xie argues.
The message speculators took away was that Beijing “would never let the bubble burst, which supercharged it in every upturn,” he said. This fed a bubble in asset bubbles, including shadow banking reaching 100% of GDP at its peak.
But this machine is breaking down, Xie notes. After a decade-plus of frenetic stimulus and giant infrastructure projects, many local governments lack the fiscal space to support growth this time.
Chinese households still reeling from Covid lockdowns are keener to pay off debt than buy property. Over time, these trends are likely to depress retail sales.
Yet, Xie stresses, many of the deflationary pressures China is exhibiting have more to do with rampant competition than economic gloom. He points to the “price war” driving change in the auto sector, mainland coffee houses giving Starbucks a run for its money and rabid competition in the tourism space.
Xie thinks it matters, too, that the first generation of Chinese entrepreneurs is still “working and hungry,” offering timely case studies of success and failure for the millennial set and Generation Z.
As Japan continues to live off ever bigger doses of monetary and fiscal steroids, it’s clear that the “key to China’s future is to focus on real economic activities, not reviving bubbles.”
In the years after the 1997-98 Asian financial crisis, Xie adds, South Korea and Taiwan pivoted to tech innovation and private- and service-sector-driven growth. As a result, they morphed into high-income economies.
“China must not revive bubbles using stimulus,” Xie says. “Letting them go is half of the success story. Time will do the rest.”
It’s a bit of wisdom that hasn’t appeared to seep into the halls of power in Tokyo. But at PBOC headquarters in Beijing, officials are holding their fire in ways to which history may be kind.
Follow William Pesek on X, formerly known as Twitter, at @WilliamPesek
This article is derived from the author’s new book, Crisis in Sri Lanka and the World: Colonial and Neoliberal Origins: Ecological and Collective Alternatives (Berlin: De Gruyter, 2023).
Sri Lanka has been faced with an unprecedented political and economic crisis since the beginning of 2022. The dominant narrative attributes the crisis to the confluence of the Covid-19 pandemic, the Ukraine conflict, China’s “debt trap diplomacy” and – most importantly – the corruption and mismanagement of the ruling Rajapaksa family.
Western mainstream media celebrated the so-called aragalaya (struggle, in Sinhala) protest movement that led to the ouster of the Rajapaksas and upholds the International Monetary Fund (IMF) bailout as the only solution to the dire economic situation.
The aragalaya protests emerged from genuine economic grievances, but failed to develop an analysis beyond the “Gota, Go Home” demand for Gotabaya Rajapaksa to resign as president. Influenced by local and external interests with their own agendas, the protesters exhibited little to no awareness or critique of the global political economy and the financial system at the root of the country’s crisis.
In 2022, the United Nations Conference on Trade and Development (UNCTAD) reported that 60% of low-income countries and 30% of emerging market economies were “in or near debt distress.” While the details differ from country to country, the historical patterns of subordination that have given rise to global crises are the same.
The Sri Lankan crisis is an illustrative example of convergent global debt, food, fuel and energy crises facing much of the world. It is corporate media bias and narrative control that deflect from this analysis.
The island’s severe debt and economic crisis must be seen in a broader global context as the culmination of several centuries of colonial and neocolonial developments, and the disastrous and inevitably self-destructive capitalist paradigm of endless growth and profit.
Debt is not “a straightforward number but a social relation embedded in unequal power relations, discourses and moralities … and … institutionalized power.”
The development of export agriculture and the import of food and other essentials under British colonialism turned Sri Lanka into a dependent “peripheral” unit of the global capitalist economy.
Adopting ideologies of modernization and development and theories of comparative advantage, the capitalist imperative integrated self-sustaining indigenous, peasant, and regional economies into the growing global economy, through the appropriation of land, natural resources, and labor for export production.
Monocultural agriculture, mining, and other export-based production disturbed traditional patterns of crop rotation and small-scale subsistence production that were more harmonious with the regional ecosystems and cycles of nature. Plantation development contributed to deforestation and loss of biodiversity and animal habitats.
While a small local elite prospered through their collaboration with colonialism, most people became poor, indebted, and dependent on the vagaries of the global market for their sustenance.
Although colonized countries including Sri Lanka gained political independence after World War II, unequal exchange continued under neocolonialism. Terms of trade disadvantaged the ‘Third World” with their labor, resources and exports grossly undervalued and imports overvalued.
The dynamic is better understood as poorer countries being over-exploited rather than underdeveloped. Rising populations combined with corruption and inefficiency of local governments gave rise to endemic foreign-exchange shortages and economic crises in Sri Lanka and many other countries.
The debt relief and aid given by the IMF, the World Bank and other institutions from the Global North have been mere Band-Aids to keep the ex-colonial countries tethered to the global financial and economic structures. Post-independence Sri Lanka went to the IMF 16 times before the current 2023 bailout, which seeks to perpetuate further the county’s cycle of debt dependence.
The transfer of financial and resource wealth from poor countries in the Global South to the rich countries in the North is not a new phenomenon. It has been an enduring feature throughout centuries of both classical and neocolonialism.
Between 1980 and 2017, developing countries paid out more than US$4.2 trillion solely in interest payments, dwarfing the financial aid they received from the developed countries during that period.
Currently, international financial institutions – notably the IMF and the World Bank – remain outside political and legal control without even “elementary accountability.”
As critics in the Global South point out, “The overwhelming power of financial institutions makes a mockery of any serious effort for democratization and addressing the deteriorating socioeconomic living conditions of the people in Sri Lanka and elsewhere in the Global South.”
Corporate and financial deregulation that accompanied the rise of neoliberalism starting in the 1970s has given rise to financialization, and the increasing importance of finance capital.
As more and more aspects of social and planetary life are commoditized and subjected to digitization and financial speculation, the real value of nature and human activity are further lost. As a 2022 United Nations Report points out, food prices are soaring today not because of a problem with supply and demand but due to price speculation in highly financialized commodity markets.
A handful of the largest asset management companies, notably BlackRock (currently worth $10 trillion), control very large shares in companies operating in practically all the major sectors of the global economy: banking, technology, media, defense, energy, pharmaceuticals, food, agribusiness including seeds, and agrochemicals.
Financial liberalization advanced when interest rates dropped in the richer countries after the global 2008 financial crisis. Developing countries were encouraged to borrow from private international capital markets through International Sovereign Bonds (ISBs), which come with high interest rates and short maturation periods.
Although details are not available to the public, BlackRock is reportedly Sri Lanka’s biggest ISB creditor. Most of Sri Lanka’s foreign debt is ISBs, with more than 80% of the country’s debt owed to Western creditors, and not – as projected in the mainstream narrative – to China.
IMF debt financing requires countries to meet its familiar structural adjustment conditions: privatization of state-owned enterprises (SOEs), cutbacks of social safety nets and labor rights, increased export production, decreased import substitution and alignment of local economic policy with US and other Western interests.
These are the same aims as classical colonialism – they are just better hidden in the more complex modern system and language of global finance, diplomacy and aid.
A vast array of policies exacting these aims are well under way in Sri Lanka, including the sale of state-owned energy, telecommunications and transportation enterprises to foreign owners, with grave implications for economic independence, sovereignty, national security and the well-being of its people and the environment.
The IMF approach does not address long-term needs for bioregionalism, sustainable development, local autonomy and welfare. A small vulnerable country such as Sri Lanka cannot change the trajectory of global capitalist development on its own.
Regional and global solidarity and social movements are necessary to challenge the deranged global financial and economic system that is at the root of the current crisis.
Since the 1970s, major collaborative projects have been initiated by developing countries and UNCTAD to develop a multilateral legal framework for sovereign debt restructuring.
Yet they are futile in the face of the powerful opposition of creditors and the protection given to them by wealthy countries and their multilateral institutions, and the UN has failed to uphold commitment and implement a debt restructuring mechanism.
Sri Lanka was a global leader in efforts to create a new international economic order, the Non-Aligned Movement and the Indian Ocean as a Zone of Peace in the 1960s and ’70s.
In the early years of their political independence, countries throughout Asia, Africa and Latin America sought to forge their own paths of economic and political development, independent of both capitalism and communism and the Cold War.
These included African socialist projects such as Tanzania’s Ujamma, import substitution programs in Latin America, and left-wing nationalism and decolonization efforts in Sri Lanka and many other countries.
Almost without exception, these nationalist efforts failed, not only because of internal corruption and mismanagement but also persistent external pressure and intervention.
Massive efforts have been made by the Global North to stop the Global South from moving out of the established world order. A case in point is the nationalization of oil companies owned by Western countries in Sri Lanka in 1961 and the backlash against the left-nationalist Sri Lankan government that dared to make such a bold move.
The Western response included the 1962 Hickenlooper Amendment passed in the US Senate stopping foreign aid to Sri Lanka and to “any country expropriating American property without compensation.” As a result, Sri Lanka lost its creditworthiness, the domestic economic situation worsened, and the left-nationalist government lost the 1965 elections (with some covert US election support).
Observing those developments, political economist Richard Stuart Olsen wrote that “the coerciveness of economic sanctions against a dependent, vulnerable country resides in the fact that an economic downturn can be induced and intensified from the outside, with the resulting development of politically explosive ‘relative deprivation’”
These observations resonate with Sri Lanka’s current repetition of the same vicious cycle: an externally dependent export-import economy; worsening terms of trade; foreign-exchange shortage; policy mismanagement; external political pressure; debt crisis; shortages of food, fuel and other essentials; mass suffering; and political turmoil.
Sri Lanka’s present economic crisis – the worst since the country’s political independence from the British – must be seen in the context of the accelerating neocolonial geopolitical conflict between China and the US in the Indian Ocean. Many other countries across the world are also caught in the neocolonial superpower competition to control their natural resources and strategic locations.
There is much speculation as to whether the debt default on April 12, 2022, and political destabilization in Sri Lanka were “staged” or intentionally precipitated to further the United States’ “Pivot to Asia” policy, the Indo-Pacific Strategy and the Quadrilateral Alliance (US, India, Australia and Japan) in its competition to confront China’s $1 trillion Belt and Road Initiative and counter China’s presence in Sri Lanka.
It is widely recognized in Sri Lanka that “the policy of neutrality is the best defense the country has to deter global powers from attempting to get control of Sri Lanka because of its strategic location.”
Although former president Gotabaya Rajapaksa claimed to pursue a “neutral” foreign policy, the Rajapaksas were seen as closer to China than the West.
After prime minister Mahinda Rajapaksa and president Gotabaya Rajapaksa were forced to resign, Ranil Wickramasinghe – a politician who was resoundingly rejected in the previous elections by the electorate but is a close ally of the West – was appointed as president in an undemocratic transition of power.
To what extent were Sri Lanka and its people victims of an externally manipulated “shock doctrine” and a regime-change operation, sold to the world as internal disintegration caused by local corruption and incapability? While it is not possible to provide definitive answers to these issues, it is necessary to consider the available credible evidence and the geopolitics of debt and economic crises in Sri Lanka and the world at large.
As the locus of global power shifts from the West and a multipolar world arises, new multilateral partnerships are emerging for development financing, such as the New Development Bank (NDB) – formerly referred to as the BRICS (Brazil, Russia, India, China and South Africa) Development Bank – as alternatives to the Bretton Woods and other Western-dominated institutions.
However, given controversial projects such as China’s Port City and India’s Adani Company investments in Sri Lanka as well as their projects elsewhere, it is necessary to ask if the BRICS represent a genuine alternative to the prevailing political-economic model based on domination, profit and power.
Dominant political power in our era is about propaganda, control of narratives and exploiting ignorance and fear. In the face of worsening environmental and social collapse across the world, there is a practical need for a fundamental questioning of the values, assumptions and misrepresentations of the dominant neoliberal model and its manifestations in Sri Lanka and the world.
At the root of the crisis we face is a disconnect between the exponential growth of the profit-driven economy and a lack of development in human consciousness, that is in morality, empathy and wisdom.
Ultimately, dualism, domination and the unregulated market paradigm need to be examined to find a balanced path of human development, based on interdependence, partnership and ecological consciousness.
Such a path of development would uphold the ethical principles necessary for long-term survival: rational use of natural resources, appropriate use of technology, balanced consumption, equitable distribution of wealth, and livelihoods for all.
In April 2022, the United States launched its “Declaration for the Future of the Internet.” It asserts that human rights and democratic values must remain central to future technological development, innovation and investment.
Along with Japan, South Korea and 58 other signatories, the United States argued that universal values should be embedded and enhanced at every stage of technological design, implementation, and diffusion.
It’s time for the United States and its allies to match words with actions and ensure that developing countries have access to the resources they need to make that future a global reality.
The year following the declaration’s release saw numerous instances where Washington and its allies took steps laying the groundwork for an international digital ecosystem that better reflects liberal ideals, such as the establishment of a multilateral code of conduct surrounding export controls on tech with the potential to harm human rights.
As two of the United States’ closest allies, Japan and South Korea are particularly well-placed to lead the charge, both within and outside of their shared region, given their respective global reputations as democratic tech leaders.
Both countries rank highly as competitive hubs of scientific and technological innovation via the Bloomberg Innovation Index and the United Nations’ WIPO Global Innovation Index.
Moreover, in a joint statement announcing South Korea’s plan to host the third Summit for Democracy, the United States and Korea promoted “ensuring new and emerging technologies work for, and not against, democratic societies” as a priority.
Yet, despite this capacity and commitment to bring more countries into a global and free internet architecture, much work remains to meet the vast needs of the developing world.
Global GDP growth has reached pre-pandemic levels, but a combination of rising inflation, dollar-induced depreciation, and loss of trade demand has given way to cost-of-living crises that exacerbate preexisting inequalities worldwide.
While all countries lost out on growth that never materialized, emerging economies are expected to lose more within the same 2020-2024 period: from an estimated cumulative output loss of 30.4 to 33.8%, compared to advanced economies’ loss of 15.6% to 18.3%.
This, in turn, reflects the uneven spread of quality technological development. According to the World Economic Forum, over one-third of the global population remains detached from the digital economy despite 95% being “in range of some form of connectivity.”
More worrying is that many of these developing nations lacking in tech infrastructure are often already debt distressed. An estimated US$2.5 trillion in financing is needed through 2026 for these countries to continue servicing pre-existing debt, not to mention any new debt from the pandemic-induced growth rut.
Comprehensive technological development—if spearheaded now by the United States and its strongest tech-enabled allies like Japan and South Korea—can play an immensely impactful and equalizing role for these nations. By 2025, the evolution of the digital economy is due to reap an expected value of $100 trillion.
China stands as one of the few major powers attempting to meet the technological and infrastructural demands of the developing world at scale, such as via its Belt and Road Initiative (BRI).
This effort has not been without its controversies, however, with critics alleging that it seeks to reshape the world in an increasingly illiberal image most benefitting China’s interests by diluting and, ultimately, dismantling the long-standing multilateral development-finance institutions, norms, and standards predicated on the preservation of human rights and liberal values.
Recent international convenings, such as the 2023 Munich Security Conference and the subsequent G7 Hiroshima Leaders’ Summit, affirmed growing consensus views that China’s efforts to equip the developing world with tech is something that must be countered. The 2023 Munich Security Conference Report, for example, purports that “China is spearheading a group of autocratic states intent on promoting their techno-authoritarian vision.”
Wealthy democracies must step up and offer a feasible tech alternative to developing countries. Regardless of Beijing’s underlying motivations, its indigenously developed technologies tend to come embedded with certain behaviors, standards, and norms that clash with values central to modern liberal democracy.
Constant government surveillance is a feature with authoritarian applications—enabled by pre-made virtual “backdoors” (such as the secretly installed one allegedly used by Beijing to spy on the African Union’s headquarters after its construction) and the expansive mandate of China’s 2017 National Cybersecurity Law (which allows the government unfettered access to data held by any Chinese entity).
Constrained personal privacy and limited freedom of speech are other standards that could be detrimental to human rights if exported to newly digitized developing countries.
The reality, however, reveals China as the only country willing to get involved as a creditor and investor at the scale that is needed globally. There are countless examples of digital connectivity projects across the globe—involving smart cities, fiber-optic cables, 5G, and other ICT infrastructure—where Beijing has taken the lead via its enterprising tech companies.
Aiding these companies, like Huawei, ZTE, Hikvision and Xiaomi, was their significant first-mover advantage from being long-established players in emerging markets that traditional investors wrote off as unprofitable.
The United States should thus work with its tech-proficient partners to provide a concrete, credible, and compelling alternative. As countries with national champions that are highly competitive in the tech field, the United States, Japan, and South Korea are uniquely well-placed to enter the market to advance developing countries’ tech sectors while also encouraging norms more in line with democratic values.
Google, Samsung and Sony, for example, are all massive players in the sector capable of providing high-quality tech consumer goods as well as fundamental infrastructure critical for digital transformation.
An area of significant partnership potential for the trilateral grouping lies in focused, joint investment in local tech companies across Asia that show a significant commitment to democratic norms, processes, or values.
The US-led Tech4Democracy initiative, which involves a series of challenges for local startups across the globe to compete for funding and recognition, presents a ready framework that South Korea and Japan could tailor specifically for the Asian region.
An Asia-centric version of the initiative would galvanize grass-roots investment in the types of values-centric technology that the original Declaration for the Future of the Internet calls for.
Successful Tech4Democracy Asia participants would go on to benefit from the wealth of technological knowledge and expertise enjoyed by Seoul and Tokyo, eventually creating future technologies capable of competing with Chinese options lacking in democratic safeguards.
Overall, investing nations should ensure that the eventual “democratic option” presented is an equally affordable alternative to Chinese tech; this conversation should be a continuing one that empowers emerging economies as agents of their own development, and not as passive vehicles within the wider great power competition.
The private sector of each investor nation, then, will need to be incentivized and mobilized to engage within these markets in new and meaningful ways; something that undoubtedly will be more difficult for democratically governed states than authoritarian ones, but well-worth the normative impact in the end.
In this regard, the United States would benefit significantly from leaning on the experience of South Korea and Japan, both of which have long histories of public-private partnerships with their domestic tech sectors.
Declaring the norms of a digital future is meaningless if not paired with complementary action—and developing country leaders have evidently become disillusioned with the rhetoric-first approach.
Until wealthy democracies are willing to front the costs of enriching emerging markets with technologies currently largely segregated to high-income markets, there is simply no reason for developing nations to deny the only other option out there.
As host for the next Summit for Democracy, South Korea faces a huge potential opportunity to drive the crafting of an alternative to Chinese tech in a dynamic region eager for investment and competition.
Fostering the next generation of democratically minded tech stands as one promising avenue, but such an initiative will undoubtedly take significant time, money, and effort. For now, leaders across the developing world—regardless of regime—know that to get cheap, ready tech to improve the lives of their citizenry, China is the way to go.
Tabatha T Anderson ([email protected]) is a master’s student in international cyber policy at Stanford University and a geopolitical analyst at a cybersecurity firm. Views expressed in this piece are hers alone.
This article was first published by Pacific Forum. Asia Times is republishing it with permission.
The article was developed as a part of the United States-Japan-Republic of Korea Trilateral Next-Generation Leaders Dialogue to encourage creative thinking about how this partnership can be fostered. For the previous entries, please click here, here, and here.
David P Goldman observes that China’s financial markets remain stable despite crisis talk in Western media. Chinese equity returns have diverged due to Beijing’s focus on digital transformation, benefiting telecoms while sectors like industrials and consumer discretionary stocks decline.
James Davis writes that Ukrainian forces have struggled to breach Russian defensive lines despite committing more reserves, while the transfer of F-16 aircraft from the Netherlands and Denmark to Ukraine might be less significant than it seems.
Scott Foster assesses labor union opposition to TSMC’s efforts to bring technicians from Taiwan to Arizona to accelerate the construction of a new semiconductor fab. Meanwhile, reports suggest that Huawei is secretly building chip fabs, potentially using different names to evade sanctions.
“The discharge will mean trouble for us. We will not be able to make a livelihood. We will not be able to attract successors,” he said.
He added that while fishermen like himself are grateful for subsidies from the government, they are still against the release of the wastewater.
Mr Egawa assured consumers that the fish going out to the market and consumed by the public is safe, with stringent screening constantly conducted.
At one of four labs operating in Fukushima since the nuclear meltdown, fish samples are sliced up and placed into a machine where the level of radiation is measured, with results revealed in five minutes. Only those that pass the test can be sold.
Mr Egawa said the local fishery industry has set a maximum permitted radiation level of 50 Bq/kg, much stricter than the 100 Bq/kg cap by the national government.
That means that seafood sold at local markets, for instance, have met tougher safety standards than at the broader national level.
Contributed to reduction of 420 tonnes e-waste, saving 46 bil gallons of water
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Pan-Asian venture capital firm, Gobi Partners, has taken on the lead investor role in the Series A funding round of Malaysian based Southeast Asian focused integrated recommerce platform, CompAsia.
Since 2016,…Continue Reading
As recently as just a few years ago, China was an unstoppable juggernaut. The budding superpower’s economy was growing at supersonic speed. By some measures, it had overtaken the United States economy as the world’s largest.
So meteoric was China’s rise that some pundits were calling this century “the Chinese century,” echoing Henry Luce’s 1941 declaration that “the 20th century is the American century.”
There’s less of that talk these days. China has hit a rough patch. Growth is slowing. Debt is piling up. The Shanghai and Hong Kong stock markets are tumbling. Exports were down double-digits in June and July.
Big property developers are struggling to stay afloat as the long-running crisis in China’s property sector worsens. One of the largest, Evergrande, recently filed for bankruptcy protection.
Some economic statistics are looking so bad that the government has decided to hide them. After the youth unemployment rate hit 21.3% in July, China stopped releasing the figures in July.
Fixing what’s broken in China’s economy won’t be easy. The central bank is slashing interest rates but some analysts believe government stimulus won’t turn the economy around. The underlying problem, they say, is lack of confidence.
One prominent economist with a particularly pessimistic view is Adam Posen, president of the Peterson Institute for International Economics, a Washington-based think tank. Writing in the journal Foreign Affairs, Posen argues that heavy-handed government intrusion in the economy has spooked Chinese consumers and investors.
The government, Posen says, has violated an unwritten bargain: The Chinese people are free to do business as long as they stay out of politics.
Since Premier Xi Jinping took power in 2012 he has brought prominent capitalists to heel, given party and state more say in the management of private companies and tipped the scales in favor of state-owned enterprises.
There’s only one reliable cure, Posen says: “credibly assuring ordinary Chinese people and companies that there are limits on the government’s intrusion into economic life.” That cure, he maintains, is “undeliverable” because the government’s repeated heavy-handedness has undermined its credibility.
Xi’s “extreme response” to Covid – total lockdown – was the final straw, but the credibility problem predates the pandemic. Durable goods consumption and private fixed investment began declining four years before Covid. The 50% rise in new household bank deposits as a percentage of GDP – a sign of fear – began two years before Covid.
Xi’s regime has intruded so often, Posen argues, that it can never assure people that it won’t intrude again. “Once an autocratic regime has lost the confidence of the average household and business, it is difficult to win back,” he writes. “A return to good economic performance alone is not enough, as it does not obviate the risk of future interruptions or expropriations.”
Posen’s highly political explanation of China’s economic problems is, to be sure, subject to challenge. His premise that an autocracy can’t win back lost confidence is debatable.
Yet even a purely economic analysis with no political spin makes China’s problems appear hard to solve, some analysts say. Michael Pettis, an American professor of finance in Beijing, is one of them.
Pettis argues that the policy that once helped drive China’s torrid growth – suppressing consumption in favor of savings and investment – has in more recent years led to “nonproductive investments,” like those in the property sector.
The only cure is “rebalancing” the economy to emphasize consumption, he maintains. But that will be hard to do and will, if successful, depress economic growth.
Some Americans will be tempted to take pleasure in China’s misfortune. It would be natural enough. Even were China not a rival, Americans don’t want their country to be number two to anyone in any way.
It’s a temptation to be resisted, though. China may be down, but it is not out. Its economy’s growth, while slow by its standards, is still likely to be faster than the US economy’s. It’s still a superpower despite its considerable problems.
And, of course, not every analyst is as convinced as Posen and Pettis that the problems are unsolvable.
Still, there will be consequences. US agriculture product exports to China could be among them. That said, even an economically healthy China is likely to be an increasingly challenging market for US agriculture. The Chinese are looking to rely less on US suppliers, just as Americans are looking to rely less on China.
More broadly, the world economy will miss the considerable economic stimulus a healthier China has provided in the past. And one other worrisome thing: A troubled China could be a more dangerous China. Rulers have been known to deflect domestic discontents with foreign adventurism.
Blessed with huge numbers of industrious people, China ought to be able to pull out of this downspin. That there are serious analysts suggesting it can’t is testimony to how serious the country’s problems are.
Former longtime Wall Street Journal Asia correspondent and editor Urban Lehner is editor emeritus of DTN/The Progressive Farmer.
This article, originally published on August 21 by the latter news organization and now republished by Asia Times with permission, is © Copyright 2023 DTN/The Progressive Farmer. All rights reserved. Follow Urban Lehner on Twitter: @urbanize
According to calculations by 132 domestically listed developers by Chinese data provider Wind, combined sales revenue fell by 8.3 per cent last year – the first since 2005 – while their debt ratio was 78.99 per cent in 2022, only slightly lower than 79.03 per cent in 2019. The data,Continue Reading
At some point, investors might conclude that Chinese authorities are simply toying with global markets.
On Monday (August 21), People’s Bank of China Governor Pan Gongsheng knew full well that punters everywhere were braced for major easing. A bold step seemed warranted as the property slump deepens, consumer spending craters, credit growth tumbles and deflation takes hold.
Yet Pan surprised markets with more restraint. Though the PBOC trimmed its one-year lending rate, it left the more consequential five-year rate unchanged.
Such disappointments — and a widening gulf between market expectations and Beijing’s actions — are becoming a common theme. It speaks to a balancing act that President Xi Jinping seems determined to pull off.
The strategy: tightly targeted efforts to relieve tension in credit markets while avoiding stimulus explosions like those in 2009 and 2015. The response to both episodes led to new asset bubbles and boom-bust cycles.
Strategist Masayuki Kichikawa at Sumitomo Mitsui DS Asset Management speaks for many in concluding Xi’s government is too “concerned about downward pressure on the yuan” to greenlight a fresh stimulus boom.
The risk, of course, is that the “disappointing” size of Monday’s loan prime rate cut “wouldn’t help with building confidence” as Chinese authorities endeavor to stabilize sliding gross domestic product (GDP), says economist Maggie Wei at Goldman Sachs.
This abstemiousness, Wei worries, “can even backfire if market participants interpret these easing measures as policymakers’ unwillingness to deliver even moderate policy stimulus.”
Yet it’s a risk that Xi, Pan and Premier Li Qiang seem willing to take as the world’s top central bankers head to Jackson Hole, Wyoming for this week’s annual US Federal Reserve retreat.
Though nominally a Fed-centric exercise, the symposium in the Grand Teton mountains often serves as a brainstorming session in times of turmoil. This was the case in the late 1990s as Asia’s financial crisis and a Russian default shook the world.
It was true in 2008 and 2009 as the “Lehman shock” shook markets and in 2015 when China’s last displayed signs of financial stress panicked Wall Street. Jackson Hole served as a chance for leaders at the Fed, European Central Bank, Bank of Japan and others to spitball on ways to address Covid-19 fallout.
This weekend, chatter about the contours of the Fed’s inflation fight may be drowned out by China’s cracks. Deepening troubles in the world’s second-biggest economy are the last thing officials from Washington to Seoul need right now.
Xi, Pan and Li are grappling with much more than a Covid reopening that’s been more of a small pop than a boom. Global uncertainty is reducing demand for Chinese goods at the same time domestic fissures like record youth unemployment are complicating efforts to revive slumping property markets.
Fears that property giant Country Garden might default has global punters fretting about contagion risks in China. It’s the first time since 2021, when major developer China Evergrande Group missed bond payments, that global elites came to fear China’s frailty more than its strength.
Odds are such risks will have the PBOC lowering the one-year loan prime rate (LPR) again — on top of Monday’s cut to 3.45% from 3.55%. “We are penciling in a 10 basis-point cut in one-year LPR and 20 basis-point cut in five-year LPR to further shore up the property sector,” argue Citigroup analysts.
Carlos Casanova, economist at Union Bancaire Privée, adds that “looking forward, we expect that the PBOC will also follow through with additional 50 to 75 basis points in reserve-requirement ratio cuts and balance sheet expansion to mitigate risks in key sectors, such as local government financing vehicle (LGFV) debt and regional housing markets.”
Pawel Borowski, analyst at Fitch Ratings, says that “China’s macroeconomic activity indicators have deteriorated sharply in recent months, following a strong rebound earlier this year after Covid-19 pandemic restrictions were abandoned. Renewed deep falls in property starts and sales have led the downturn, but retail sales and consumer confidence have also weakened.”
Economists at JPMorgan write that “second-hand home prices remained low, with consistent declines both month-on-month and year-on-year across all tiers of the city. This further narrowed the price gap with new home prices. If second-hand house prices fall below new house prices, this could be a game-changer in that new house prices and second-hand house prices could become mutually reinforcing, helping to materialize the risk of Japanification.”
Caveats abound, of course. As Asia Times’ David Goldman observes, comparisons to 2015, when plunging Shanghai stocks spooked the globe, are belied by financial trends on the ground.
Despite extreme stress in mainland property, rates for five-year credit protection on the Chinese sovereign debt aren’t skyrocketing. Though the yuan is weakening – it’s down 5.6% this year – the trend is less remarkable than the yen’s decline.
All this could change, of course, if global investors decide that the PBOC under Pan – who only started the job on July 25 – is asleep at the wheel. That alone could accelerate the yuan’s decline, putting property developers with high ratios of dollar-denominated debt in harm’s way.
An even weaker yuan might put Beijing on Washington’s radar for currency manipulation, just as the 2024 election cycle heats up. It also could imperil Xi’s long-term vision for increasing the yuan’s role in global trade and finance.
It hardly helps that these fissures exist in a “world where America is determined to contain China’s rise but is no longer assured of its success,” says Diana Choyleva, chief economist at Enodo Economics. “A world where other countries and international businesses do not want to choose sides but will have to.”
But Xi’s balancing act is a tantalizing one. At the moment, Xi is resisting bailing out developers and other key sectors as China did in 2009 and 2015. Instead, his economic team is staying focused on Beijing’s bigger plans to squeeze extreme leverage out of the system and for China to grow better, not just faster.
It’s a risky approach, particularly as the PBOC attempts to wean the economy off Japan-like ultra-easy monetary policies.
“Protecting banks’ net interest margins is the main motivation behind the smaller-than-expected cuts to LPR in our view,” Goldman’s Wei says. “Having said that, confidence remains key to an economic recovery, and the disappointing cut to LPR would not help with building confidence.”
What would build trust is for Xi and Li to make clear and tangible progress in recalibrating growth engines, incentivizing private-sector investment, increasing innovation and productivity and creating broader social safety nets. Instilling confidence that this is indeed happening is key to offsetting efforts to choke off property speculation and related lending.
At the moment, China confronts an “expectations recession,” as Bert Hofman, former China country director at the World Bank, told Bloomberg. “Once everybody believes that growth will be slower going forward, this will be self-fulfilling.”
Hence the intensifying chatter about Japanification risks for China. As former US Treasury Secretary Lawrence Summers writes in the Washington Post: “There can now be little doubt that just as the conventional wisdom way overstated the economic prospects of Russia in 1960 and Japan in 1990, so have China’s prospects been greatly exaggerated in this decade.”
Yet missing from such takes from the West is the other half of Xi’s calculation. Along with squeezing out speculation and leverage, Team Xi is working to prepare the ground for more efficient and productive investment.
For years now, the World Bank, International Monetary Fund and US Treasury – including during Summers’ day – implored Beijing to improve the quality of economic growth. That means disincentivizing prefectural leaders from engaging in an infrastructure arms race.
Since the Lehman Brothers crisis, metropolises around the most populous nation raced to build skyscrapers, six-lane highways, international airports and hotels, white-elephant stadiums, sprawling shopping districts, amusement parks and vied for museum projects from the likes of Guggenheim to impart a “Bilbao effect” in the Chinese hinterland.
After the 2008-2009 subprime crisis, this strategy shifted into overdrive. At the time, Xi’s predecessor Hu Jintao relied on local government public works projects as a key engine to avoid the worst of the global financial crisis. The same with Xi’s men when financial turmoil hit Shanghai in 2015.
Xi’s remedy to the challenges of 2023 stands in sharp contrast. Rather than take a throwing-the-kitchen-sink approach to this year’s turmoil, Beijing is prioritizing reform over indiscriminate stimulus. A same-old-same-old approach might just reward bad behavior, enabling a new wave of re-leveraging that leads to bigger and more numerous boom-bust cycles.
The good news is that thought leaders like economist and former politician Jiang Xiaojuan are intensifying the argument that the key is bolder efforts to build a more vibrant private sector.
Jiang, who’s with the University of Chinese Academy of Social Sciences, argues that private entrepreneurship, not the state sector, must be China’s future. Not the newest idea, but her gravitas carries weight in policymaking circles.
As William Hurst, a China development expert at the University of Cambridge, puts it: “Massive new spending and/or lending now would make those asset price bubbles even worse. It would continue to crowd out consumption and more productive investments. And it would make it more difficult and costly down the road – maybe even prohibitively so – to do this again.”
Ultimately, Hurst adds, “inflection points and critical junctures can only be clearly spotted in hindsight. But what we’re seeing in China is not the start of something new and probably not the very end of an unwinding of export-led growth that began 15 years ago.”
“We’ll likely see serious debate – or at least evidence that it’s happening behind the scenes – and possibly a meaningful shift in at least short-term economic policy in China over the coming days and weeks. But any really big macro-level change will be slower in coming and harder to see in real-time.”
Economist Michael Pettis, a Carnegie Endowment senior fellow, observes that the “costs of maintaining high GDP growth rates have become so obvious in recent years, not least in the extent of the debt burden they have created, that it’s no longer possible to ignore the extent and severity of the underlying imbalances.”
But, Pettis explains, “while most analysts now recognize that China must urgently raise the role of consumption in generating demand, and an increasing number recognize the institutional constraints in doing so, the real shocking imbalance” is “China’s extraordinarily high investment share of GDP – now 44% of GDP.”
Pettis says “there is no remotely comparable historical precedent. Among other things, this means that China can deliver high GDP ‘growth’ only as long as it maintains impossibly high investment rates.”
All the more reason for Xi and Li to push ahead with policies to reduce the amplitude of bullish-to-bearish financial swings. It’s a pivot for which the Jackson Hole set has urged for years.
The PBOC focusing more on the big picture than achieving this year’s 5% growth rate – and showing a poker face in global markets – speaks volumes about how China is prioritizing building economic capacity at home.
The same goes for China’s outlier status in Jackson Hole. Unlike the PBOC, Fitch analyst Borowski notes, major central banks have continued hiking rates.
The Fed raised its benchmark to 5.5% in July, while the ECB raised its key refinancing operations rate to 4.25%. The Bank of England recently raised rates to 5.25%.
The PBOC is going the other way, though not nearly as fast or as drastically as the doctrinarians in Wyoming this weekend might have expected. But then, Team Xi seems to be making confounding the conventional wisdom on China’s economy its brand – and not a moment too soon.
Follow William Pesek on X, formerly known as Twitter, at @WilliamPesek