from Follow the Money

Are US trade politics really driven by the profits US banks hope to earn in China?

October 6, 2006

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Guy de Jonquières seems to think so.  He argues that US-Chinese bilateral relationship politics will be driven by primarily by the speed of China’s financial sector reform: 

Durable improvement in bilateral economic relations will hinge on whether China buys into Mr Paulson’s core agenda of faster market-oriented reforms, particularly of its financial system.

If “particularly the financial system” means that the most important factor in the US/ Chinese relationship will be how quickly China liberalizes its domestic interest rates and how quickly it allows foreign bankers to buy into China’s banking system I think de Jonquières is a bit off.     

I would bet that the pace at which China liberalizes its domestic financial system – and particularly its willingness to allow US banks to compete directly with China’s domestic banks -- will prove to have limited political resonance in the US.    That also applies to opening up China’s broader financial system, and letting non-Chinese firms offer Chinese savers alternatives to bank deposits.  Those reforms may have a big impact over the long-term if they lead to changes in how Chinese savings is allocated inside the Chinese economy, but I doubt their short-term political resonance.    

And if it turns out that the rational thing to do at current exchange rates is to allocate capital to China's export sector, they might not even have much of a long-term impact. 

By contrast, I suspect that exchange rate reform (meaning the pace of RMB appreciation) does have broad political resonance.   The China price – not China’s closed financial system – has made China into a symbol of the dislocations and wage pressure many feel have accompanied the most recent wave of globalization. 

Paulson certainly has put a lot of emphasis on opening the Chinese financial system to US firms – a bit too much emphasis for my taste.  I understand why almost every bank lusts after an opportunity to repeat the (huge) profits that the early “strategic investors” in China’s state banks now are sitting on.  Goldman certainly wants to try to repeat the paper profits on its ICBC stake

But I don’t think the US political system is driven by the size of Goldman’s bonus pool.    At least not entirely.

I-bankers are not exactly among the losers of the new global economy.  Nor are they worried about losing their M&A, IPO and structured product jobs to someone working out of Shanghai.

I would argue that the domestic US politics of the China trade will instead be a function of: 

Whether a housing hard landing leads to a broader slump – and a rise in unemployment.   The huge surge in imports from China has been easier for both the US and Europe to absorb in part because the housing sector has, until recently, been hiring workers leaving manufacturing.   That may change.

The pace of RMB appreciation. 

The extent Chinese production – whether production of small cars or auto parts – becomes central to the survival plans of GM, Ford and Chrysler (and the extent to which European auto firms move production to China to take advantage of the RMB’s weakness v the euro).

The success of the first wave of Chinese-made cars marketed under Chinese-brand names in the US market. 

A cynic might interpret the huge windfall gains that China has provided Goldman (and others) as the danegeld that China pays Goldman (and others) to use their political clout to fend of the protectionist hoards in the industrial Midwest.   So far, that strategy has worked.

I just doubt a political strategy based largely on rewarding those who already winning from China’s integration into the world economy will continue to work.

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