from Follow the Money

Bad optics

April 25, 2006

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

Many have noted that the White House botched the stagecraft of Hu's not-quite-a state visit.  Forget Falun Gong.   Focus on announcing China's national anthem as the anthem of the "Republic of China" ...    

But focusing narrowly on the staging of the not-quite-a state visit I think misses a much bigger point.   The "optics" or "visuals" of the entire trip were terrible, and the rhetoric not much better.

I'll start with China.   Hu seemed to spend his entire trip with China's friends in corporate America.    The leader of the world's most profitable property company (China's communist party) started out his trip with a visit to America's richest man, and promised to make him even richer (by paying for his software).    And the China's top real estate baron proceeded to spend many more hours cavorting with the corporate titans (See this WSJ article) who are the biggest beneficiaries of America's new gilded age.

China likes to reward its American friends.   But rewarding those already "winning" from the US-Chinese relationship isn't going to help those who are not sharing in the benefits created of the current China trade.  The alliance between Chinese bureaucratic capitalists, American CEOs and Wall Street bond traders betting on the continuation of Bretton Woods two leaves a lot of folks out. 

Yes, American consumers benefit from cheap Chinese goods.   But Chinese demand for commodities has also pushed up the price Americans pay for things like gas.   China cuts both ways for low-income consumers.   Real wage growth for most Americans has stalled; median real compensation growth hasn't kept up with productivity growth.   Yes, American homeowners benefit from rising home prices, in part because of cheap Chinese financing. But not all parts of America shared equally in the windfall - those in manufacturing flatland for example.  And more importantly, rising home prices don't help those who don't (yet) have homes.  They actually are worse off.

I recently saw a graph showing the widening discrepancy between urban and rural income in China.  Both are growing, but urban income is growing much, much faster.  So income inequality is growing.   I suspect if you did a similar graph plotting the compensation of the median US manufacturing worker in Ohio against the median wage of a US CEO over time (See Martin Wolf today) or the median compensation (including bonus) of a Wall Street prop bond trader since 2001 the discrepancy would be even more striking. 

You say manufacturing is a dead industry in the US.  Fine.  If you did the plot with median wages in the service sector, it wouldn't look much different. 

The concentration of US income growth at the top doesn't stem primarily from China's integration in the world economy, or even from China's decision to integrate at what looks to an increasingly undervalued exchange rate.  China impacts Europe too, and European CEOs aren't paid quite as much. China didn't force Exxon's shareholders to pay Exxon's CEO nearly $700 million for his services.  Lee Raymond didn't exactly discover that there is money to be made pumping oil out of the ground: I would think the going price for someone who denies global warming should be a bit less.

But directionally, China's unwillingness to reap the rewards of its own productivity growth through a real appreciation of the currency ((see Menzie Chinn's graph - China may not be formally outside the confidence interval, but the RMB sure looks undervalued to me) isn't helping.  China is one reason why the fortunes of firms and workers are diverging throughout the industrial world. And talking primarily to the "haves" and "have mores" isn't going to defuse the US political debate over trade with China - particularly if the have-mores don't do more to help those on the losing end of the China trade.

The US complaint that China is trying to "lock up" the world oil supply struck me as every bit as blind to the broader political context as China's courting of corporate America.   After all, America - not China - currently has an army sitting on the world's second largest known source of petroleum reserves.  Plus, most of the proven reserves of American-owned petroleum firms are located outside the US while Chinese-owned petroleum firms have very few offshore reserves.

The oil "haves" basically told the oil "have-nots" not even to try.    

China has lots of spare capital, so it shouldn't be a surprise that China might want to invest some of its money in oil producing assets that may offer higher yields than US Treasuries.   Chinese investment to meet Chinese demand doesn't really take oil off the global market either - If China buys all of say Angola's oil, there will be less Chinese demand for Saudi oil.  I would worry more about China's policy of keeping domestic oil prices low, which encourages energy inefficient development.  That pushes up Chinese demand, and pushes up the global price.   

Chinese oil firms are the new kids on the block, and they are willing to bid a bit more than the US and European oil majors for the right to develop various oil fields.   Fair enough.   If I had oil, I would want to sell it to the highest bidder.  Not to the highest American or European bidder.  It Chinese firms are willing to invest for an expected 5% or 10% return rather than the 15% (or more) return US firms want, they will get the business. 

The real problem isn't that China is taking oil off the market, it is that the US wants to keep US, European and Chinese oil companies out of certain places.  The US wants to wall off some of the world's oil - that in say Sudan and Iran -- from foreign investment capital.  

China hasn't been willing to go along. No doubt that complicates the Bush Administration's foreign policy.   Bad regimes often have good oil.  And they are willing to sell it a bit more cheaply than others.  But unless the US wants to sell China some of the existing reserves of US-owned companies, China doesn't have too many options.

OK, it could sit back and allow the US and European oil majors (along with Russian, Saudi and other national oil companies) to supply China's needs.  But in a world where China saves and the US doesn't, it should not be a total shock that rather than lending Chinese savings to US oil firms who invest in the oil fields and infrastructure needed to meet Chinese demand, China wants to lend Chinese savings to Chinese firms who invest in the oil fields and infrastructure needed to meet Chinese demand.

I'd put it this way: China doesn't want the US to have a monopoly on the "dark matter" created by Chinese demand for oil.  And China doesn't have to pay its oil CEOs quite as much as Lee Raymond to manage the investments needed to meet Chinese demand either  ...

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