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(Bloomberg opinion) – If the goal of the trade war is to level the playing field for US companies, President Donald Trump is not doing the right thing. China's easy access to US dollars over the past decade has fueled the asset bubble, increased external debt, and laid the foundation for a low-cost, export-oriented economy. Only the removal of the supply of cheap money will reverse the situation.
So, while Trump is pressuring Federal Reserve Chairman Jerome Powell to lower interest rates – questioning the central banker's patriotism and calling him "a bigger foe than Xi Jinping, "the way to extract fair behavior from China is for the Fed to stay the course.
Basically, the money will go where he can find a return. And whatever capital the world has, China has shown a desire to absorb it. In the longest years of quantitative easing in the United States, the return on foreign currency research went to China under the name of "trade" and "investment".
From 2009 to 2014, China may have cashed up to $ 2 trillion in hot money from the Federal Reserve's low interest rate policy. My company has only examined one measure – the over-invoicing of exports via Hong Kong – in just one year, in 2013, and has generated flows of this type of $ 390 billion in China.
Since Beijing's capital controls sought to exclude foreigners from wagering on a steadily rising yuan, speculators were trying to avoid circumvention: for example, some trading companies in China would inflate the value of their exports, allowing for more money to enter the country. countries as "export earnings". The exaggerated foreign direct investment was also a popular channel for incoming speculative money, as was the debt.
China's economic history begins and ends with liquidity; With so many assets dying to refinance each year, the country needs more and more capital. Much more than cheap labor, this cheap capital is what has created the cheap export products. It also promotes anti-competitive behavior. Domestic firms can operate at a much lower cost than their US counterparts and are rewarded in the capital markets, despite mounting evidence of IP theft.
Consider what the near-zero interest rate policy has done for China over the last ten years:
IPO: Chinese companies listed in the United States now have a value of about 890 billion dollars. Even the very serious charges of striking and impeaching China MediaExpress Holdings Inc. and Sino-Forest Corp. could not prevent the hype from the IPOs of Alibaba Group Holding Ltd., JD.com Inc. and Vipshop Holdings Ltd. of bonds: investors are hungry for the yield have exhausted the bonds issued by China's riskiest companies. This has allowed companies such as China Evergrande Group, one of the country's most indebted developers, to continue to exploit US markets. Chinese companies have raised more than 90 percent of the Asian dollar high-yield debt issued this year. Developers in mainland China have about $ 110 billion in outstanding offshore debt. Dumping: A steady influx of dollars into China has fueled investments that have led to the manufacture of very cheap exports, ranging from DVD players and TVs to solar panels. China's history of leniency with regard to borrowers – its first on-site default occurred in 2014 – has allowed companies to sell their property at discounted prices without worrying about how which they would repay their loans.
All this means that the best way to limit Chinese excesses is to limit the availability of the dollar. Trump's request to reduce Powell's rates by one percentage point goes against what seems to be the goal of the trade war anyway.
There are other, more focused measures that the United States can pursue in tandem. These included:
Stop new Chinese IPOs in the US US regulators have already stepped up control of these listings, which dropped to $ 2.8 billion this year from $ 29.1 billion in 2014. United States must close the door to all sales of shares until China agrees to allow investigation and further fraud by listed companies. Require US auditors and securities regulators to have access to auditing documents of Chinese companies owned by US listed entities, on pain of delisting. The Public Company Accounting Oversight Board, a Washington-based non-profit corporation that controls audits, should also be allowed to control its members in China, a goal that the Securities and Exchange Commission pointed out in a recent comment. Chinese investment tax (and other foreign investment) inbound. US senators Tammy Baldwin and Josh Hawley presented a bill in late July that would allow the Fed to impose a flexible tax on capital inflows. This measure would make reserve money less attractive in US assets, thus reducing the imbalance in the capital account and, by extension, the trade deficit.
Depending on whether Trump gets a reduction in its rate, the slowdown in China will be fast or slow. By allowing new stimulus measures, cheap dollars would give the Chinese more rope to hang on. Holding the line will mean austerity and unemployment for China. In this case, there would be no other way out of the economic recession than an ambitious economic reform program.
To contact the author of this story: Anne Stevenson-Yang at [email protected]
To contact the editor responsible for this story: Rachel Rosenthal at [email protected]
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Anne Stevenson-Yang is co-founder and director of research at J Capital Research Ltd., a provider of investment advisory services.
For more articles like this, go to bloomberg.com/opinion
© 2019 Bloomberg L.P.
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