Tuesday, October 19, 2010

 

China and Inflation


Bloomberg has a nice elementary macroeconomic analysis of Chinese inflation.
Where did all that money come from? It came from Chinese banks being allowed to draw down on their reserves, which opened up a cascade of new lendable funds throughout the entire system. China’s lending boom was, in effect, a massive monetary stimulus, or “quantitative easing.”
The pressure behind this monetary eruption had been building for some time. For years, China has been running big trade surpluses. To maintain the yuan’s peg to the dollar, its central bank must buy up the excess dollars earned by Chinese exporters, to be stockpiled as foreign-exchange reserves, and issue yuan in exchange. Normally, that newly issued yuan would add to China’s domestic money supply and fuel inflation.To prevent that, authorities try to “sterilize” the monetary expansion by forcing banks to hold higher levels of reserve deposits and buy special central-bank bonds. In short, there was a huge reservoir of liquidity bottled up in China’s banks, just waiting to be let out. The low loan-to-deposit ratio of Chinese banks, often touted as evidence of their financial solidity, is really a product of pent-up inflation.

Saturday, October 16, 2010

 

The trauma of constrained ascendancy


Mark thinks that Chinese leadership has become dangerous disconnected from its environment (in a Boydian sense):

Most observers have attributed China’s recent aggressive diplomatic behavior on matters of trade, the South China Sea… and the Korean penninsula to be a direct result of confidence in China’s economic power and status as a “rising power”. Perhaps. China has been “rising” for a long time. That’s not new. The real novelty is Chinese incompetence in foreign affairs, an area where Chinese leaders have been admirably astute for decades since the “China opening” of the Nixon-Mao meeting. Chinese statesmanship has previously been noteworthy for it’s uber-realistic calculation of power relationships and strategic opportunities.
Mark correctly identifies a shift in Chinese behavior over the the past year or so. Where Mark’s analysis falls short lies in presuming that incompetence or short-sighted factions are responsible for this shift. The international relations theory of power cycles offers a richer way of understanding China’s position in the international system and how that has produced a change in its behavior.
Briefly, China’s relative rate of growth has begun to slow. After roughly 30 years of (accelerating) relatively faster growth than the major powers in the system, this trend has reversed itself. This is confusing, since in absolute terms China continues to grow and - by these same absolute measures - it came through the global financial crisis much better than the U.S. In tension with these trends, however, are a host of systemic factors that are constraining its growth (including demographic shifts, environmental degradation and inefficient capital allocations). The transition from early to late stage growth (or from labor-intensive to extensive or innovation-based growth) confronts China with new challenges. It becomes harder to accurately discern its place in the system and its trajectory of growth. This leads to more internal dissent among leaders trying to interpret these disparate trends and creates incentives to discard the cautionary policies of Deng (hide brightness, nourish obscurity). Before the first inflection point, time was on China’s side. A post-first inflection point China, on the other hand, begins to feel pressure to realize some of its ambitions before its window of opportunity closes. Hence, we begin to see cracks forming in the implementation of Deng’s strategy.
So, yes, China has shifted its behavior in some ways that have frightened its neighbors and made them much more interested in hedging against it. That shift, however, is an emergent effect from a complex system and not a simple result of incompetent leadership or factionalism (factionalism, by the way, is another emergent effect of the difficulty of managing the first inflection point). For some related content to all of this, see Brock Tessman’s latest [1].
[1] Brock F. Tessman, “The Evolution of Chinese Foreign Policy: New Incentives with Slowing Growth,” Asian Security 5, no. 3 (2009): 296.

Wednesday, October 06, 2010

 

It doesn't work like that


Iran threatens to take Russia to some unspecified court because Russia won’t deliver the S-300s that Iran wanted. That’s the thing about international business - absent some system for adjudication, you have precious little recourse if a deal goes bad… and Iran doesn’t have many options on that front since it is so isolated from the structures of globalization. Isolation has consequences.
Containment looks better and better. They have an anemic arms industry (are we supposed to get scared of their re-engineered F-5s and flying boats?), an economy largely dependent upon energy production and its regime is shedding its ideological and religious legitimacy.

Monday, October 04, 2010

 

Solipsistic innovators


From Gladwell’s latest:

Innovators tend to be solipsists. They often want to cram every stray fact and experience into their new model. As the historian Robert Darnton has written, ‘The marvels of communications technology in the present have produced a false consciousness about the past…’
This rings true for a great deal of the treatment of history by the RMA debate.
On that note, Rolf Hobson’s latest [1] contrasts the historical accounts of Blitzkrieg in the RMA literature with current historical research (conducted over the past ten years) into the Wehrmarch’s way of war and finds the former to be narrow and incomplete. Hobson’s article includes a more nuanced portrayal of the French pre-WWII than the caricatures of a “Maginot-line mentality” that are often trotted out during RMA-type discussions. The French made horrible errors in 1940 (and these do much to explain why they failed so spectacularly in 1940) but their defense posture was more nuanced and broader than the Maginot fortifications. For example, their broader defense plans included building armored units to serve as a strategic reserve and modernizing their air force, a point that I’ve rarely seen addressed by RMA advocates. But then, to paraphrase Darnton, they often have a false consciousness [and a false consensus] about the past.
[1] Rolf Hobson, “Blitzkrieg, the Revolution in Military Affairs and Defense Intellectuals,” Journal of Strategic Studies 33, no. 4 (2010): 625.

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