China Seeks Ways to Avoid US Sanctions But a Deadly Embrace Complicates Matters – Mish Talk

Deadly Trade Embrace Complicates Matters for China

Tweet Thread by Michael Pettis 

• Beijing is very worried about the potential effects of sanctions on China’s vast holding of foreign assets, but the fact that they weren’t able to come up with any solution shows the extent to which China is locked into a structural problem. https://www.ft.com/content/45d5fcac-3e6d-420a-ac78-4b439e24b5de
• As long as China runs large trade surpluses, it has no choice but to acquire foreign assets in exchange for the surpluses, and as long as it is incapable of rebalancing domestic demand, it has no choice but to run large trade surpluses.
• What is especially interesting, according to the FT, is that “when one official asked Chinese bankers if they could diversify into more yen or euro-backed assets, they replied that the idea was not practical.”
• They are right. It isn’t practical because if China stops acquiring American assets and instead acquires Japanese or European assets, the resulting capital inflows into those countries would cause the huge American trade deficit to shift to those countries.
• Unlike the US, Japan and Europe are unable and unwilling to run the huge deficits that correspond to China’s surpluses. In fact they rely on their own trade surpluses to resolve their own domestic demand weakness.
• It is mainly the US (and the anglophone economies) that are willing to run the huge deficits that allow other rich countries and/or commodity exporters to run surpluses. This means that the US provides the mechanism which allows other countries to repress domestic demand.
• In order that they can continue doing so, the US must run permanent trade deficits and accept the unemployment or (more likely) soaring debt and asset bubbles that balance these deficits. Europe and Japan, rightly, refuse to play this role. The US, weirdly, embraces it.
• The world, and especially the US, would be much better off if the problem of where to acquire foreign assets in exchange for permanent trade surpluses were resolved by preventing the net foreign acquisition of US assets by foreigners.
• This would immediately force surplus countries to choose between either surging unemployment or a redistributing of income domestically that would boost domes
• Put another way, if the US stops countries like China, Germany, and Russia from recycling their export surpluses by acquiring American assets, these countries would have to choose between either exporting less or importing more American products.