China Macro Reporter

<table class="nl_card"><tbody><tr><td class="nl-post"><p>Bill Overholt of the Harvard Kennedy School of Government is a contrarian on China – and, to the chagrin of many, he’s generally right.</p><p>In 1993 Bill Overholt published <em>The Rise of China: How Economic Reform Is Creating a New Superpower</em>. Reviewers called the arguments 'nonsense' and 'too optimistic.' How did that work out for the reviewers?</p><p>Now, almost three decades after <em>The Rise of China</em>, Bill believes that China's future has become 'much more uncertain.' And, he addresses his concerns in a new book, <em>China's Crisis of Success</em>.</p><p>Bill outlines his points in a short essay, ‘How the West is Getting China Wrong.’</p><p>Bill is one of the important interpreters of what’s happening in China and why. You’ll find more his insights in the last entry, including the key points from an interview I had with him.</p></td></tr></tbody></table>

1. How the West is getting China wrong

<table class="nl_card" id="19may2201"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="" alt="CHINADebate"></td></tr></tbody></table><p class="caption">East Asia Forum</p><p class="excerpt">‘The Western conclusion Xi is “president for life” and the most powerful Chinese leader since Mao is diametrically wrong.’</p></td></tr><tr><td class="nl-post"><p><strong>‘The dominant narrative</strong> in the West reads that China has a stable administration run by a “president for life” who is the most powerful leader since Mao Zedong,’ writes Harvard’s Bill Overholt in <a href="" target="_blank">‘The West is getting China Wrong.’</a></p><ul><li><strong>‘China has escaped</strong> the pressures for political change that transformed earlier Asian miracle economies at similar levels of development.’</li><li><strong>‘It has consolidated</strong> a particularly repressive market Leninism,which is destined to grow rapidly for the indefinite future.’</li><li><strong>‘And its increasingly</strong> centralised economic control and ambitious industrial policies are so efficient that they constitute an unlimited threat to the West.’</li></ul><p><strong>‘These arguments</strong> are wrong.’</p><p><strong>‘China has not escaped</strong> the pressures of political complexity that forced political reform elsewhere.’</p><ul><li><strong>‘Rather,</strong> those pressures are so powerful that the whole structure of Xi Jinping’s administration is a reaction to those pressures.’</li></ul><p><strong>‘Around 2005</strong> China’s leadership became fearful that the country was pulling apart. Economic reform lagged.’</p><ul><li><strong>‘Powerful interest groups</strong> were taking control of policy.’</li><li><strong>‘Local governments </strong> were disobedient. ‘</li><li><strong>‘Ministries defied</strong> the premier.’</li><li><strong>‘Corrupt generals</strong> weakened the military.’</li><li><strong>‘Corruption</strong> was undermining Party legitimacy.’</li><li><strong>‘These forces are powerful:</strong> China’s obstreperous provinces and interest groups are often larger than European countries.’</li></ul><p><strong>‘Apprehensive about emergent crises,</strong> China’s leaders designed a new economic plan based on market allocation of resources combined with a desperate centralisation of government.’</p><ul><li><strong>‘To facilitate decision making,</strong> the top leadership would have seven leaders rather than nine and would exclude “extreme” opinions(pseudo-Maoist Bo Xilai and reformist Li Yuanchao).’</li><li><strong>‘Key policy areas</strong> would be controlled by small leading groups,including a new National Security Council,all chaired by a single leader.’</li><li><strong>‘Unlike his predecessor,</strong> the new leader would command the military immediately.’</li></ul><p><strong>‘These decisions</strong> were made by workable consensus separate from the selection of Xi Jinping.’</p><ul><li><strong>‘Contrary</strong> to the Washington meme,Xi is not a Putin.’</li><li><strong>‘Xi is a creature</strong> of the Party.’</li><li><strong>‘Putin’s party</strong> is a creature of Putin.’</li></ul><p><strong>‘Xi was allocated power</strong> along with a difficult reform assignment.’</p><ul><li><strong>‘Market allocation of resources</strong> would damage the power and finances of every major power group:state enterprises,banks,the Party,the government,the military and local governments.’</li><li><strong>‘Xi’s instrument</strong> for dislodging reform opponents — the anti-corruption campaign — not only alienates the leaders of all those sectors but also leaves officials frightened to implement reforms.’</li></ul><p><strong>‘So determined was the opposition,</strong> that supporters hoped — best case — that Xi would spend his first term consolidating power and his second implementing reforms.’</p><ul><li><strong>‘Certainly Xi’s first term</strong> was spent consolidating his position.’</li><li><strong>‘Ferocious opposition</strong> (summarized by a leading executive as “you die or I die”) stimulated fears of personal retribution and reform reversal after Xi’s second term,hence the decision to allow Xi a third term if necessary.’</li></ul><p><strong>‘The Western conclusion</strong> that this makes Xi “president for life” and the most powerful Chinese leader since Mao is diametrically wrong.’</p><ul><li><strong>‘Xi does not have the power</strong> to unilaterally implement his agenda or to remain in power indefinitely.’</li><li><strong>‘His repression of opponents</strong> does not prove his invincibility;it reflects his vulnerability.’</li><li><strong>‘His many titles</strong> reflect insecurity.’</li><li><strong>‘Deng Xiaoping,</strong> confident of power,governed China as honorary chairman of the Bridge Players’ Society.’</li></ul><p><strong>‘Xi’s dilemma</strong> is reflected in his inability or unwillingness to make strategic decisions.’</p><ul><li><strong>‘He advocates rule of law</strong> but strengthens the Party commission that decides verdicts.’</li><li><strong>‘He advocates marketization</strong> of state enterprises but strengthens Party committees’ control of business decisions in both state and private enterprises.’</li><li><strong>‘Faced with a choice</strong> between rapid reform with much slower growth,or rapid growth with much slower reform,he promises both rapid growth and rapid reform.’</li><li><strong>‘This is more</strong> Theresa May than Mao Zedong.’</li></ul><p><strong>‘China’s current leadership</strong> has acknowledged the new economic environment more explicitly and has planned more brilliantly than any predecessor,but politics is inhibiting economic reform.’</p><ul><li><strong>‘Xi is trying to marry</strong> Jiang Jingguo’s economics to Park Chung-hee’s politics.’</li><li><strong>‘But trying to subdue</strong> the political tide creates a cycle of destructive repression.’</li></ul><p><strong>‘Xi is </strong>vulnerable.’</p><ul><li><strong>‘He disappears</strong> from the media for days.’</li><li><strong>‘An adulatory movie</strong> is suddenly curtailed.’</li><li><strong>‘Portraits</strong> are suddenly removed.’</li><li><strong>‘His bodyguards</strong> are suddenly changed.’</li><li><strong>‘Lawyers and students</strong> are increasingly assertive.’</li><li><strong>‘The annual Beidaihe</strong> leadership meeting is contentious.’</li><li><strong>‘This is the opposite</strong> of an omnipotent president for life running an economy inexorably destined for rapid growth.’</li></ul><p><strong>‘US policies</strong> based on that false premise lead Washington to declare defeat for its policy of engagement,declare China a fearsome national security enemy and launch desperate economic warfare against the presumed superior economic prospects of China’s politicized economy. <strong>Sad.’</strong></p><ul><li><strong>‘The US policy</strong> of engagement has not failed.’</li><li><strong>‘It has created</strong> the anticipated social and political pluralism.’</li><li><strong>‘China can continue its cycle</strong> of self-destructive repression at the possible cost of interrupting its rise,it can democratize,or it can find a new way to channel the tide of pluralism.’</li><li><strong>‘Critics of the engagement policy</strong> understand neither the time required for change in China’s vast society nor the reality beneath Xi’s adulatory headlines.’</li></ul></td></tr></tbody></table>

2. Now China's Got Its Own Anti-U.S. Trade War Song

<table class="nl_card" id="19may2202"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="embed-responsive embed-responsive-16by9"><iframe class="embed-responsive-item" src=""></iframe></td></tr></tbody></table><p class="caption">Bloomberg</p><p class="excerpt">“Trade war! Trade War! Not afraid of the outrageous challenge!</p></td></tr><tr><td class="nl-post"><p><strong><a href="" target="_blank">Listen to 'Trade War'</a></strong> and watch Chinese social media support on this video from South China Morning Post. </p><ul><li><strong>Me</strong>, I would have set the lyrics to 'The Yellow River Concerto.'</li></ul><p><strong>‘Perhaps nothing captures</strong> the growing anti-U.S. sentiment in China better than a song about the trade war that is going viral in Beijing: “If the perpetrator wants to fight, we will beat him out of his wits,” says Bloomberg in <a href="" target="_blank">‘Now China's Got Its Own Anti-U.S. Trade War Song.’</a>‘</p><ul><li><strong>‘It begins</strong> with a male chorus singing“Trade war!Trade War!Not afraid of the outrageous challenge!Not afraid of the outrageous challenge!A trade war is happening over the Pacific Ocean!”</li></ul><p><strong>‘The song,</strong> simply called “Trade War,” is set to the tune of an anti-Japanese song from the 1960s film “Tunnel War” -- in which a Chinese town defends itself from invasion.’</p><ul><li><strong>“I chose ‘Tunnel War’ </strong>because that is reminiscent of the similar situation that China is facing today,” says the song’s producer and lyricist Zhao Liangtian,a retired official. “Since the trade war broke out,I felt the urge to do something.”</li></ul><p><strong>‘This privately-produced song </strong>has more than 100,000 views on WeChat and is just one of many signs of brewing anti-American sentiment on Chinese social media as trade talks falter.’</p></td></tr></tbody></table>

3. ‘Trade tensions will persist until global financial imbalances are addressed’

<table class="nl_card" id="19may2203"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="" alt="CHINADebate"></td></tr></tbody></table><p class="caption">East Asia Forum</p><p class="excerpt">‘Foreign leaders may bend to Trump’s will. The laws of economics do not.’</p></td></tr><tr><td class="nl-post"><p><strong>‘US presidents</strong> seem to have ‘selective vision’ when it comes to international economic relations,’ writes <em>Adam Triggs of Australian National University,and the Brookings Institution in </em><a href="" target="_blank">‘Trade tensions will persist until global financial imbalances are addressed.’</a></p><ul><li><strong>‘They watch in horror</strong> as money flows out of their economy to purchase goods and services abroad.’</li><li><strong>‘But they seem blind</strong> to the avalanche of money coming into their economy to bankroll their mortgages,finance their investment and pay for their tax cuts.’</li></ul><p><strong>‘This flow of finance</strong> into the US economy is why it <a href="" target="_blank">runs a trade deficit.</a></p><ul><li><strong>‘A country that invests</strong> more than it is saves,like the United States,imports capital from other countries to finance that investment.’</li><li><strong>‘This inflow of capital</strong> appreciates the US dollar,reducing exports and increasing imports,resulting in a trade deficit.’</li><li><strong>‘There is nothing wrong</strong> with this arrangement and there is no economic case for changing it.’</li><li><strong>‘But a different conclusion</strong> emerges when a trade deficit is being created or worsened by financial distortions,especially when the ensuing trade deficit is inflaming political tensions that are being used to justify trade protectionism and dangerous attacks on the world trading system by a global superpower.’</li></ul><p><strong>‘The IMF’s most recent </strong><a href="" target="_blank">External Assessment Report</a>found that 40 to 50 per cent of the global current account balances were deemed excessive,meaning they could not be explained by countries’ fundamentals and desirable policies.’</p><ul><li><strong>‘Olivier Blanchard and Gian Maria Milesi-Ferretti </strong><a href="" target="_blank">have shown</a>how these distortions result in excessive savings in surplus countries and insufficient savings in deficit economies that distort global financial flows and thus trade flows.’</li><li><strong>‘The biggest distortion</strong> is US fiscal policy and its large unfunded tax cuts and spending promises.’</li><li><strong>‘<a href="" target="_blank">My recent modelling</a></strong> at the Brookings Institution shows that for every 1 per cent increase in the US fiscal deficit,the US trade deficit worsens by .6 per cent.’</li></ul><p><strong>‘The consequences</strong> of Trump’s tax cuts are available for all to see in December’s US trade figures.’</p><ul><li><strong>‘Despite all his talk of tariffs and deal-making,</strong> the US trade deficit <a href="" target="_blank">worsened</a>by 12 per cent since his tax measures came into effect.’</li></ul><p><strong>‘There is no automatic economic case</strong> for reducing the US trade deficit.</p><ul><li><strong>‘But there is an economic case </strong> for addressing the distortions that fuel financial imbalances and political tensions.’</li><li><strong>‘Unless these imbalances are addressed,</strong> the US trade deficit will continue to be excessive.’</li><li><strong>‘And unless 40 years</strong> of US political precedent suddenly changes,these deficits will continue to be a source of political concerns,however misguided those concerns may be.’</li></ul></td></tr></tbody></table>

4. ‘Five Big Myths of China's Belt and Road Initiative.’

<table class="nl_card" id="19may2204"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="" alt="CHINADebate"></td></tr></tbody></table><p class="caption">Bloomberg</p><p class="excerpt"></p></td></tr><tr><td class="nl-post"><p><strong>‘In the West</strong> the Belt and Road initiative gets a terrible press,’ says Andy Brown the editorial director of the Bloomberg: New Economy in the video <a href="" target="_blank">‘Five Big Myths of China's Belt and Road Initiative.’</a></p><ul><li><strong>‘Is that</strong> criticism fair?’</li><li><strong>‘Let's look</strong> at the five big myths of the Belt and Road.’</li></ul><hr/><h2><strong>‘MYTH #1: It's a debt trap.’ </strong></h2><p><strong>‘This is</strong>pretty unfair.’</p><ul><li><strong>‘The idea here</strong> is that China plies poor countries with unsupportable debt.’</li><li><strong>‘And when</strong> they can't repay the loans, it then grabs physical infrastructure.’</li></ul><p><strong>‘Actually</strong> there's only been one clear-cut example of this - in Sri Lanka.’</p><ul><li><strong>‘There the Chinese</strong> helped to build a port.’</li><li><strong>‘The project turned</strong> into a commercial flop.’</li><li><strong>‘And then the Sri Lankan government</strong> was obliged to hand over the port to a Chinese state company.’</li><li><strong>‘But that</strong> was an exception not the rule.’</li></ul><p><strong>‘Having said that</strong> China doesn't seem to have much regard for risk.’</p><ul><li><strong>‘It scatters its loans</strong> around to countries that are already heavily indebted like Pakistan Mongolia and Djibouti.’</li></ul><hr/><h2><strong>‘MYTH #2: The Belt and Road is China’s Marshall Plan'</strong></h2><p><strong>‘Actually </strong>this gets everything backwards.’</p><ul><li><strong>‘The enduring legacy</strong> of the Marshall Plan was that it inculcated free market ideas in Europe and habits of cooperation among former enemies that underpinned democracy.’</li><li><strong>‘To the extent</strong> that Belt and Road is about China's attempts to spread its own values including state capitalism and authoritarian governance it is the exact opposite of the Marshall Plan.’</li></ul><h2><strong>'MYTH #3:Belt and Road is China's grand strategy' </strong></h2><p><strong>‘As a matter of fact</strong> Belt and Road is a sprawling project.’</p><ul><li><strong>‘It's haphazard</strong>; it’s chaotic.’</li><li><strong>‘It's all about multiple actors</strong> jumping aboard a state-funded investment free-for-all.’</li><li><strong>‘They have</strong> multiple different agendas,some of them conflicting.’</li></ul><p><strong>‘Certainly</strong> it has a geopolitical aim to draw China's neighbors more closely into its own economic orbit.’</p><ul><li><strong>‘But this</strong> doesn't add up to a grand strategy.’</li></ul><hr/><h2><strong>'MYTH #4: China has unlimited amounts of money to pour into Belt and Road' </strong></h2><p><strong>‘Not true.’</strong></p><ul><li><strong>‘Over time</strong> it's quite likely that lending will exceed a trillion dollars.’</li><li><strong>‘But this</strong> won't come anywhere near the eight trillion dollars that some people report.’</li><li><strong>‘What is the case</strong> is that Chinese spending is likely to be far less than the trillions of dollars that the United States squandered on fruitless wars in Asia and the Middle East over the past several decades.’</li><li><strong>‘That's why the US can</strong> snipe at Belt and Road but it doesn't have the financial resources to match.’</li></ul><hr/><h2><strong>‘MYTH #5:It's all about yuan internationalization.’ </strong></h2><p><strong>‘The idea here</strong> is that China is going to use Belt and Road to spread use of its own currency and challenge the mighty dollar.’</p><ul><li><strong>‘Well the dollar</strong> is safe.’</li><li><strong>‘It turns out</strong> that a majority of Belt and Road contracts are signed in dollars not yuan.’</li><li><strong>‘And actually</strong> China's access to dollars is dwindling because its current account surpluses are narrowing.’</li><li><strong>‘So it's going</strong> to have less and less money to invest in Belt and Road projects in the future.’</li></ul></td></tr></tbody></table>

5. Trump's 2019 Protection Could Push China Back to Smoot-Hawley Tariff Levels

<table class="nl_card" id="19may2205"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="" alt="CHINADebate"></td></tr></tbody></table><p class="caption">PIIE</p><p class="excerpt">‘If Trump follows through with his threat to impose a 25 percent tariff on most of the rest of US imports from China,the average US tariff toward China would increase to 27.8 percent.’</p></td></tr><tr><td class="nl-post"><p><strong>‘The Trump administration</strong> has begun the <a href="">process </a>expected to lead to a 25 percent tariff on most of the US imports from China so far untouched by his trade war,’ write Chad P. Bown and Eva(Yiwen) Zhang of the Peterson Institute for International Economics in <a href="" target="_blank">‘Trump's 2019 Protection Could Push China Back to Smoot-Hawley Tariff Levels.’</a></p><ul><li><strong>‘Should President Trump</strong> follow through with these additional tariff threats, taxes would go up on a vast array of imported consumer products—like clothing, shoes, toys, and electronics—previously spared by his actions.'</li><li><strong>‘Taken together,</strong> such steps would also raise US tariffs on China to levels similar to those resulting from the infamous <a href="">Smoot-Hawley Tariff Act of 1930 </a>enacted on the eve of the Great Depression'.</li></ul><p><strong>‘Before Trump’s 2018 actions,</strong> US tariffs on imports from China averaged 3.1 percent.’</p><p><strong>‘In 2018, Trump</strong> imposed three major sets of tariffs on China alone.’</p><ul><li><strong>‘The first announcement</strong> of tariffs on imports of $50 billion included 25 percent tariffs, first on $34 billion (imposed July 6) and later on $16 billion of imports (imposed August 23).’ </li><li><strong>‘Then,</strong> on September 24 he imposed 10 percent tariffs on a separate set of imports of approximately $200 billion. When Trump was done applying his 2018 tariffs—on $250 billion of imports from China, as well as imports of steel, aluminum, solar panels, and washing machines from all countries—average US tariffs toward China had increased to 12.4 percent.’</li></ul><p><strong>‘On May 10, 2019,</strong> Trump increased his tariffs on that $200 billion of imports from 10 percent to 25 percent.’</p><ul><li><strong>Once those tariffs</strong> are fully in effect, the United States will apply an average tariff toward China of 18.3 percent.’</li></ul><p><strong>‘Finally,</strong> if Trump follows through with his threat to impose a 25 percent tariff on most of the rest of US imports from China, the average US tariff toward China would increase to 27.8 percent.’</p><p><strong>Read</strong> the entire analysis <a href="" target="_blank">here</a>.</p></td></tr></tbody></table>

6. More from Bill Overholt

<table class="nl_card" id="19may2206"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="" alt="CHINADebate"></td></tr></tbody></table><p class="caption">CHINADebate</p><p class="excerpt"></p></td></tr><tr><td class="nl-post"><p><a href="" target="_blank">Here is Bill’s video presentation</a> on <em>China’s Crisis of Success</em> at the Center for Strategic and International Studies.</p><p><strong>Bill Overholt</strong> is a Senior Fellow at Harvard’s Asia Center and CEO of AsiaStrat.</p><ul><li><strong>His career</strong> includes 16 years doing policy research at think tanks, nine years at Harvard University, and 21 years running investment bank research teams. </li><li><strong>And, he is the author</strong> of eight books, including his most recent - the terrific, <a href="" target="_blank"><em>China's Crisis of Success</em></a><em>.</em></li></ul><p><strong>Here are five insights</strong> from  <em>China’s Crisis for Success</em> from my interview with Bill.</p><ul><li><a href="" target="_blank">You can read the full interview here.</a></li></ul><p><strong>Five Insights </strong></p><ol><li><strong> Fear and simplicity. </strong>A 'sense of terrible crisis was a prerequisite for an Asian economic take off,' Bill says. </li></ol><ul><li><strong>Fear. </strong>Following the events that befell Asian countries - such as, the Korean War and the Chinese civil war - each nation faced the real possibility that it might not recover. This made leaders more willing to take great risks and their peoples more willing to accept them.</li><li><strong>Simplicity.</strong> 'These countries' economies, when they're getting started, are basically agriculture, infrastructure, and some very primitive manufacturing.' This makes the plan simple: ‘stimulate growth, build infrastructure, and open and marketize the economy.'</li></ul><ol start="2"><li><strong> Simplicity to complexity - and new crisis.</strong> With success comes more complex economies, politics, and societies. 'And, then you gradually get to a point of complexity, where there is an economic and political crisis of some kind.' Time for a transformation.</li></ol><ul><li><strong>China's leaders</strong> realized this and reached consensus about the need for reform during Hu Jintao's 'lost decade,' 2002 to 2012.</li><li><strong>The guide for reform: </strong><em>China 2030</em>, jointly prepared by the World Bank and China and adopted by the Third Plenum in 2013.</li></ul><ol start="3"><li><strong> Slower reform, bigger debt.</strong> The decision for leadership: quick reform and lower GDP, or slow reform, maintaining higher GDP but accumulating debt in support of inefficient industries.</li></ol><ul><li><strong>China chose</strong> slower reform, higher GDP, and increasing debt.</li></ul><ol start="4"><li><strong> China's leadership</strong><em> wanted</em> Xi to centralize power. We often hear criticism that Xi Jinping is power hungry. But, in fact, Xi's centralizing of power was part of the consensus leadership plan, what they saw as the only way to push reforms through. </li><li><strong> But, 'Xi Jinping may</strong> have gone well beyond what the consensus originally intended, and the politicization of the reform may not be exactly what some of the designers of the reform intended.' </li></ol><p><strong>Read Bill’s full interview</strong> with explanations of each insight <a href="" target="_blank">here</a>.</p></td></tr></tbody></table>