China hits back after US imposes tariffs worth $34bn


Video:  https://www.bbc.com/news/av/embed/p06cvv5k/44697671

US tariffs on $34bn (£25.7bn) of Chinese goods have come into effect, signalling the start of a trade war between the world’s two largest economies.

The 25% levy came into effect at midnight Washington time.

China has retaliated by imposing a similar 25% tariff on 545 US products, also worth a total of $34bn.

Beijing accused the US of starting the “largest trade war in economic history”.

“After the US activated its tariff measures against China, China’s measures against the US took effect immediately,” said Lu Kang, a foreign ministry spokesman.

Two companies in Shanghai told the BBC that customs authorities were delaying clearance processes for US imports on Friday.

The American tariffs are the result of President Donald Trump’s bid to protect US jobs and stop “unfair transfers of American technology and intellectual property to China”.

The White House said it would consult on tariffs on another $16bn of products, which Mr Trump has suggested could come into effect later this month.

Video:  https://www.bbc.com/news/av/embed/p06d06gb/44707253

The imposition of the tariffs had little impact on Asian stock markets. The Shanghai Composite closed 0.5% higher, but ended the week 3.5% lower – its seventh consecutive week of losses.

Tokyo closed 1.1% higher, but Hong Kong fell 0.5% in late trading.

Hikaru Sato at Daiwa Securities said markets had already factored in the impact of the first round of tariffs.

list of products

Mr Trump has already imposed tariffs on imported washing machines and solar panels, and started charging levies on the imports of steel and aluminium from the European Union, Mexico and Canada.

He has also threatened a 10% levy on an additional $200bn of Chinese goods if Beijng “refuses to change its practices”.

The president upped the stakes on Thursday, saying the amount of goods subject to tariffs could rise to more than $500bn.

“You have another 16 [billion dollars] in two weeks, and then, as you know, we have $200bn in abeyance and then after the $200bn, we have $300bn in abeyance. OK? So we have 50 plus 200 plus almost 300,” he said.

The US tariffs imposed so far would affect the equivalent of 0.6% of global trade and account for 0.1% of global GDP, according to Morgan Stanley in a research note issued before Mr Trump’s comments on Thursday.

Analysts are also concerned about the impact on others in the supply chain and about an escalation of tensions between the US and China in general.

Timeline

 

US-China trade war

16 February, 2018
US Commerce Department recommends a 24%
tariff on all steel imports and 7.7% on aluminium. It’s seen as a policy
directed at China, which is the world’s largest maker of steel.
22 March, 2018
China says it will impose tariffs on US goods worth $3bn.
22 March, 2018
President Trump announces a plan to impose
further tariffs on Chinese imports worth $60bn but grants temporary
exemptions from aluminium and steel tariffs to the EU, South Korea and
other countries.
2 April, 2018
China imposes 25% tariffs on 128 US products including wine and pork.
3 April, 2018
The US Government proposes new additional
tariffs on Chinese imports worth $50bn. These include: televisions,
medical equipment, aircraft parts and batteries.
4 April, 2018
China proposes tariffs on US goods worth $50bn.
5 April, 2018
President Trump announces he’s considering additional tariffs on Chinese products worth $100bn.
15 June, 2018
President Donald Trump announces new
tariffs on goods worth $34bn will come into force on 6 July 2018. He
also proposes a new list of tariffs for imported goods worth $16bn.
15 June, 2018
China says it will respond to these new US
impositions with it’s own new tariffs on agricultural products and
manufactured goods.
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China staunch defender of free trade under WTO, meet the ‘selfish giant’ of global trade


Photo taken on April 12, 2018 shows the World Trade Organization headquarters in Geneva, Switzerland. [Photo/Xinhua]

China staunch defender of free trade under WTO

There can be no order without rules. And trade is no exception to this. The World Trade Organization regulates the trade between nations to ensure that trade flows as smoothly, predictably and freely as possible.

China has spared no efforts in honoring the promises it made to join the WTO, and the country has not only abided by the WTO rules over the past 17 years. It has contributed a great deal to the development of the world economy and is a staunch defender of the WTO trade system.

In contrast, the Donald Trump administration’s unilateralism and trade protectionism pose an ever greater threat to free trade. Under the unjustifiable pretext of national security, it has violated the United States’ WTO obligations by imposing tariffs on steel and aluminum imports, and discriminating among its WTO trade partners.

There is no denying that China has benefited a lot as a member of the WTO, which has facilitated its opening-up and reform. Without integrating its economy with that of the world, it would have been impossible for the country to maintain its double-digit economic growth for more than a decade.

Yet the other side of the coin is that as a rule-abiding member of the WTO, China has also contributed to the world economy. Had it not been for China’s help and support, it would not have been possible for the US and other major Western countries to have emerged from the devastating effects of the 2008 financial crisis so quickly.

And without China’s opening-up, it would not have been possible for so many transnational corporations to benefit from their business in China. And of course, those businesses have provided jobs for China and enabled the country to earn more from international trade.

Free trade is undoubtedly reciprocal. China is a beneficiary of free trade within the framework of the WTO, but it also benefits others. It is a contributor to the development of the world economy and defender of the current world economic order.

Because they fail to appreciate this, some Western countries regard China as simply a free rider on globalization and refuse to recognize China’s status as a market economy as they should.

That the US refuses to settle its trade dispute with China within the framework of the WTO only points to its own lack of respect for the WTO trade rules.

China will continue to abide by WTO rules and firmly defend the current world economic order, as it believes that rules-based multilateralism is essential for the healthy development of the world economy.

By China Daily editorial

Amid trade row, US losing international legitimacy

The Trump administration should find a balance between its
new strategy, which can be partly reasonable, within the existing highly
interconnected world. The US should understand that emerging countries
cannot be treated like in the past.

 Meet the ‘selfish giant’ of global trade

Donald Trump has opened a Pandora’s box which, if not shut soon, will cause mayhem in global trade and seriously undermine the multilateral trading system

At a time when globalization needs to be safeguarded and promoted, some countries are doing exactly the opposite by violating even the normative axioms of international relations. In particular, the Donald Trump administration seems hellbent on instigating a trade war with major economies by using anti-globalization and protectionist measures, which are disrupting the international trade order.

Claiming to resolve domestic structural problems and meet global challenges with a combative approach, US President Donald Trump has become the most powerful force behind the wave of trade protectionism. The trade disputes he has stirred up pose a big challenge to globalization, which is based on the division of labor in the global value chain. Trump’s protectionist moves would disrupt the global production network, leading to a contraction, if not dismantling, of the global value chain. In fact, he has put the global free trade system and international trade order at great risk of being destroyed.

In his one and a half years in office, Trump has not only expedited investigations by the US International Trade Commission into anti-subsidy, anti-dumping allegations under Section 337 of the Tariff Act of 1930, but also used unconventional protectionist measures, such as Section 301 and 201 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962, to order investigations against imports, including those from China, and the trade practices of other economies.


‘Trump trap’ versus ‘Thucydides trap’

No wonder many overseas scholars are more worried about a “Trump trap” rather than the “Thucydides trap”, because the former will harm not only China but also the rest of the world.

Essentially, the Trump administration’s trade policies are not different in nature from those of the Barack Obama administration. But compared with Obama’s trade policies, Trump’s policies exhibit some new features.

First, for Trump, his “America First” policy is more important than international rules and the world trade order. Trump has been exhibiting a tendency to either take advantage of or discard the multilateral global trading system to fulfill US interests. The president’s 2017 Trade Policy Agenda stresses that the efficiency of the open and multilateral trading system, built by the US itself, needs to be reassessed to realize and promote US national interests.

Apart from complaining about China’s so-called restraints on foreign capital’s access to some service industries, including telecommunications, banks and healthcare, the US Trade Representative has also accused China of forcing technology transfers despite China gradually opening up these industries in accordance with the General Agreement on Trade in Services of the World Trade Organization.

Second, the US administration has raised economic security to a new level, by incorporating economic and trade policies into national security, with Trump’s first National Security Strategy emphasizing that economic security is national security. Declaring that the US would use all applicable tools to defend national security, Trump has said the US will adopt a zero-tolerance policy toward any move it considers unfair or harmful to the US economy.

Third, Trump is trying to weaken, even overthrow the multilateral trading system, a system based on rules that has played a central role in promoting cooperation and opening-up of trade and investment, apart from offering a stable and reliable system for WTO members to resolve trade disputes.

Evidently, the Trump administration is making all-out efforts to skirt and marginalize the WTO, most recently by saying appeals against WTO rulings should not take more than the mandated 90 days to deal with. What it has conveniently ignored, however, is that the delay is caused as the US, from time to time, has thwarted the Appellate Body from starting the procedure of selecting new judges, leading to a paralysis in the WTO’s dispute-settlement mechanism.

Trump mantra: Trade good, imports bad

Fourth, Trump is trying to defend fair trade, ironically, through unilateral trade sanctions. The Trump administration has ordered an estimated 94 investigations into so-called unfair trade practices involving dozens of countries in just one and a half years, a year-on-year increase of 81 percent. In fact, the fair trade principle advocated by Trump stresses a kind of equality that promotes a unilateral (as opposed to multilateral) open market and regards trade beneficial but imports harmful.

Generally speaking, the fair trade Trump demands mainly constitutes of even tariffs and competition on an equal footing. Yet the disparity in tariff rates among WTO member states is largely attributable to multilateral trade negotiations. More important, uneven tariffs have enabled smaller economies at a primary stage of development to enter the global trading system.

Since different countries are at different development stages, and have different economic scales, production factors and political sensitivity toward trade liberalization and tariff policies, it is practically impossible to fix a unified tariff rate, which Trump effectively demands.

So, what is the truth behind the uneven Sino-US trade tariff rate? This can be better explained using hard data, instead of selectively ignoring unfavorable facts like the Trump administration has been doing. China’s actual trade-weighted average tariff rate is 4.4 percent, which is almost the same as that of developed economies, including Australia that has a trade-weighted average import tariff rate of 4 percent and the European Union 3 percent.

Correspondingly, more than 3,335 of the US’ most-favored nation tariff rates are higher than 5 percent and 1,120 above 10 percent.

Also, to prevent others from catching up, the US has invoked more than 125 Section 301 investigations since 1974, causing significant damage to other economies-the EU has faced 27 investigations, Japan 16, and Canada 14.

In January 2017, the US President’s Council of Advisors on Science and Technology recommended in a report titled “Ensuring Long-Term US Leadership in Semiconductors” that the US restrain the development of China’s technology industries because China’s rise in the field of semiconductors posed a threat to the US.

China’s high-tech sector a key target

Besides, the US is attempting to thwart the Made in China 2025 plan by launching more Section 301 investigations. And the 578 high-tech products on the US’ sanctions list against Chinese imports, which account for 43.36 percent of the total number and 56.15 percent of the total amount of high-tech products, show the US is indeed trying to contain the development of China’s high-tech industry.

Trump also is seeking to restrict Chinese investment in the US’ high-tech sector, by extending the power of the Committee on Foreign Investment in the US and accelerating the legislation procedure of the Foreign Investment Risk Review Modernization Act.

Do we need more evidence to prove the US is the most potent destructive force in the global market and technology competition?

Furthermore, Trump seems to be preparing to take new measures in the escalating Sino-US trade conflict to restrict Chinese enterprises from investing or acquiring US companies in strategic industries listed in the Made in China 2025 plan, by using the International Emergency Economic Powers Act.

And as part of its new tax reform, the Trump administration plans to prevent US companies from transferring their operating activities, high-value patents, copyright and trademarks to low-tax countries. Particularly noteworthy is a provision in the Senate version of the tax reform plan, which says a tax of 13.1 percent would be levied on global intangible low-taxed income. The move is aimed at foiling the efforts of US companies such as Apple, Google and Qualcomm to transfer their technologies to or conduct innovative cooperation with companies in other countries.

Trump is trying to instigate a trade war without realizing, rather refusing to accept, that a trade war will hurt all and sundry, including the US. The challenge for and obligation of the rest of the world is to find a way, and find it fast, to safeguard the multilateral trading system and protect it from the assaults of Trump Inc.

By Zhang Monan China Daily.  The author is a researcher at the China Center for International Economic Exchanges.

Related: 

China sends Donald Trump a message about free trade and the WTO

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Najib’s US top lawyers, hiccup to choice of new AG as 1Malaysia Development Bhd (1MDB) probe widens


1MDB  EMBATTLED Najib Razak

Najib hires top American lawyers, including former US A-G – Nation …

John Ashcroft was the United States attorney-general during the George W. Bush presidency and oversaw the Department of Justice in the turbulent days after the September 11 terror attacks. – AFP pic, June 2,
2018.

面对人生最严峻的贪腐案指控,以及新政府倾全力的调查,纳吉不惜重金礼聘来自美国的“最强法律团队”,助他及家人洗脱“一马案”罪名。(图:透视大马)

 

Najib hires top US lawyers, including ex-AG, as 1MDB probe widens 

EMBATTLED Najib Razak has engaged the services of a team of top US lawyers, including former attorney-general John Ashcroft and star litigator David Boies, in a clear sign of concern that the widening global probe into 1Malaysia Development Bhd (1MDB) could snare him and his family members.

The United States Department of Justice (DOJ) has been investigating the alleged siphoning of funds from the state-owned entity for several years and even tagged Najib as Malaysian Official 1, but he had enjoyed immunity from criminal charges as the prime minister of Malaysia.

So, even though the DOJ probe stirred occasionally and captured the headlines, he was largely nonchalant about the US probe and even made a widely-publicised trip to the White House last September.

Things have changed drastically since May 9.

Najib is no longer the head of a foreign government, and, therefore, no longer enjoys full immunity from legal action.

Furthermore, Prime Minister Dr Mahathir Mohamad’s administration’s vigour in nailing Najib for the 1MDB scandal and cooperating with US investigators, makes the former prime minister and even his wife, Rosmah Mansor, principal targets in the US.

In the past, the focus of the DOJ investigation was mainly on Najib’s son, Riza Aziz and businessman Low Taek Jho.

But without the immunity of a prime minister and with the focus of the investigation in Malaysia on him and his wife, Najib has moved to hire top lawyers in the US.

Ashcroft was the AG during the George W. Bush presidency and oversaw the DOJ during the difficult days after the September 11 terror attacks.

After the Bush presidency, he set up a powerful lobby group called The Ashcroft Group and The Ashcroft Law Firm.

Checks by The Malaysian Insight show that the law firm registered Najib Razak as client on the Foreign Agents Registration Act register last September. He was listed as the prime minister of Malaysia and under the category of financed by a foreign government/foreign political party and other foreign principal.

It is unclear whether that engagement was for lobby or legal work because the FARA usually covers lobbying work in the US.

The Malaysian Insight understands that in recent days, Najib has engaged Ashcroft as his lawyer. The former PM has also hired David Boies, one of America’s top courtroom lawyers.

He has acted for the US government in its anti-trust case against IT giant Microsoft and aided fallen financiers including AIG’s Hank Greenberg and Enron’s Andy Fastow.

Sources told The Malaysian Insight that also part of the high-powered legal team is Matthew Schwartz. He spent a decade as a prosecutor in New York and handled several high-profile cases including the investigation of ponzi king Bernie Madoff.

In 2013, he was named Prosecutor of the Year by the Federal Law Enforcement Foundation. Schwartz is now in private practice.

These lawyers are expected in Kuala Lumpur soon. – June 2, 2018. The Malaysian Insight
The Malaysian Insight

纳吉聘美法律界“最强团队”辩护 背水一战誓洗一马案罪名

即将面临人生中最严峻贪腐案指控的前首相纳吉,已经做好背水一战的完全准备,重金礼聘来自美国法律界多位传奇人物,包括美国前总检察长约翰阿什克罗夫与明星律师大卫博依斯等人,势必洒尽千金也要洗脱“一马发展公司”(1MDB)案所有指控!

据了解,自早前两名大马律师哈柏星及阿迪慕都从律师团队请辞后,纳吉似乎不太信任本地律师,转而向外国律师求援,这次他筹组的法律团队中,据悉皆为美国籍律师。

纳吉之所以大费周章筹备外国律师团,正是因为新上台的希盟政府,此刻也正倾全力搜集他在一马案中的罪证,不但成立两个特别调查委员会,还积极与美国联邦调查局和美国司法部合作。为应付这铺天盖地的检控网,纳吉务必打起全副精神迎战。

更重要的是,如今已失去免控权的纳吉,无法再张开保护伞,庇护同样受调查的家人,包括妻子罗斯玛及继子里扎等人。他唯有大手笔请来美国最具实力的律师团队,保护他及家人免于牢狱之灾。消息指,这支美国律师团将于近期抵马。

据悉,这个“地表最强”律师团队将由美国前总检长约翰阿什克罗夫带领。约翰是小布什总统任内的总检长,曾在2001年美国经历911恐袭事件后,领导美国司法部度过艰难时刻。

在卸任后,他成立属于自己的游说公司“阿什克罗夫集团”以及“阿什克罗夫法律事务所”,继续在美国政界及司法界发挥影响力。

《透视大马》查悉,“阿什克罗夫法律事务所”已于去年9月,根据美国“外国代理人登记法”(Foreign Agents Registration Act),在外国顾客一栏填上纳吉的大名。其上还注明纳吉的身份是“大马首相”,并由“外国政府/政党”出资。

不过,目前尚未清楚,双方的交易项目是游说事务或法律事务,因为“外国代理人登记法”的注册,常见于美国机构为外国领导人所进行的游说工作。

“外国代理人登记法”,是美国为保障国防,内部安全及对外关系而制定的联邦立法。要求凡为外国政府,外国政党或外国领导人进行宣传或其它活动的人,必须公开其身份,以便美国政府和人民知晓这些人的身份,并对其活动和言行作出考察。

除了约翰,据了解纳吉还聘请了数位知名美籍律师,他们每一位都擅长处理经济、财务及金融界的刑事案件。

纳吉的美国法律团队中,包括明星律师大卫博依斯,大卫曾代表美国政府在反失信案里与世界科技巨头微软对簿公堂。

他还曾担任不少臭名昭著的财经界丑闻人物法律顾问,包括美国国际集团(AIG)前首席执行长汉克格林伯格,以及安然集团(Enron)前首席财务执行长安德鲁法斯托。

消息指出,另一位律师马修史瓦哲也非省油的灯,他曾在纽约担任检控官长达10年,经受过不少知名大案,例如轰动国际的“庞氏骗局”案件。

至2013年,马修获得美国联邦执法基金会颁发“年度检察官”的荣誉,他目前已卸下检察官身份转任律师。- 透视大马

Hiccup to choice of Malaysia’s new AG

King prefers a Federal Court or Court of Appeal judge for top job

Senior lawyer Tommy Thomas as the country’s new Attorney General.

PETALING JAYA: A proposal by Prime Minister Tun Dr Mahathir Mohamad to appoint senior lawyer Tommy Thomas as the Attorney General has sparked a major dis­agreement with the King.

Essentially, Dr Mahathir is adamant about replacing Tan Sri Apan­di Ali, submitting only Thomas’ name to Sultan Muhammad V.

However, the King insisted on more than one name, according to sources close to the royalty.

“The King has suggested four names to Dr Mahathir, including an existing Federal Court judge and a Court of Appeal judge,” said one of the sources.

“The King’s argument is that he wants somebody who has been a judge or even a retired judge. He does not care whether the AG is an Indian, Chinese or Malay,’’ said the source, adding that the King demonstrated this when he accepted DAP secretary-general Lim Guan Eng as the Finance Minister.

The sources also pointed out that the King had once even recommended Thomas to the Kelantan government to act in a case against Petronas.

“The King wants an AG who is able to advise him on Syariah matters too, but Dr Mahathir rebutted that the Solicitor General can handle that job.

“However, the King felt that the AG as the top officer should be the one advising him,’’ said the source.

The Palace felt that it was not right for the blogs to construe the issue as “a constitutional crisis”.

“This is just a difference in opi­nions. The King informed Dr Ma­­ha­thir that if he really wants some­one to prosecute the 1MDB case, he need not make Thomas the AG.

“Thomas could be appointed as a DPP (deputy public prosecutor) just like how it was done with lawyer Tan Sri Muhammad Shafee before this,’’ added the source.

Just two days ago, prominent pro-Dr Mahathir blogger Syed Akbar Ali wrote on Malaysia Today, saying that there seemed to be serious issues developing between the Government and “another party” over the AG’s appointment.

“There is a very strong rumour (which I heard from very strong people) that our Dr Mahathir has already shortlisted one candidate as the new Attorney General,” he wrote, adding that “the candidate is said to be a non-Muslim, male Indian” and “an expert on Federal Constitution”.

Syed Akbar ruled out eminent retired judge Datuk Seri Gopal Sri Ram as the candidate.

He further said that the appointment was being objected to on the grounds that the candidate was neither a Malay nor a Muslim.

He said the new AG was tipped to be on a strict two-year contract with a job focused on institutional re­forms.

Yesterday, news portal Malaysian Insight also reported that the new Government was headed for a clash with the Malay rulers over the appointment.

Thomas could not be contacted to confirm the matter. Neither the press nor his close friends could reach him yet.

A retired senior judge said the matter was far more complicated than it appeared to be.

“A candidate for the AG’s position would have to be as qualified as a Federal Court judge with no less than 15 years’ experience in legal practice.”

Senior lawyer Haniff Khatri Ab­­dulla said the three characteristics that an AG should have to be effective were that he should be able to give general advice on each and every legal policy of the country, assist the Government on every provision of the Federal Constitution and hold two roles as the AG as well as the Public Prosecutor.

“As a Public Prosecutor, the candidate must have experience in criminal practice in order to be effective and not end up being a lame duck.”

Malaysians have come out in support of Thomas as the new AG.

Social media users, in particular, said the Prime Minister’s choice of AG should be respected by the King, saying the Ruler must be above politics.

They also vouched for Thomas’ credibility for the top job, saying he is the most suitable candidate

Facebook user Hirzan Afifi said: “If Tommy Thomas is our new attorney general, I got nothing to oppose. He is the king.”

Another user, Ranendra Bhatta­chary­ya, said: “Haven’t we, Malay­sians, having put in place the Government of our choice, demand the best should be appointed into office for vital national interests. Tom­my Thomas for Attorney Gene­ral of Malaysia.”

Another user Lim Hwah Beng said “Tommy Thomas is the one preferred by PH to be AG. It’s good if they can succeed in appointing Tommy Thomas as AG but I doubt they can … Anyway, we will take it one step at a time.”

Parti Pribumi Bersatu Malaysia su­­preme council member A Kadir Jasin said in his blog that the King should respect the Constitution and act on the Government’s advice. – By Wong Chun Wai – Star

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The global mahjong winner’s curse


There is grave concern that the world economy is slipping into what Harvard professor and former US Treasury Secretary Larry Summers calls the global secular deflation. In simple terms, growth has slowed without inflation, despite exceptionally stimulative monetary policy. Larry’s view is that the advanced countries can use fiscal policy to stimulate growth, using massive investments in infrastructure. If needs be, this can be financed by central banks.

Central bank financing fiscal deficits is technically called “helicopter money”, named by the late monetarist economist Milton Friedman as the central bank pushing money out of the helicopter. Strict monetarism thinks that this would cause inflation.

The simple reason why the world is moving into secular deflation is that the largest economies are all slowing for a variety of reasons. Unconventional monetary policy applied since the 2007 crisis has brought central bank interest rates to zero or negative terms in economies accounting for 60% of world GDP.

Most economists blame current slow growth to “lack of aggregate demand” or “excess of aggregate production”. The rich countries are mostly aging and already heavily burdened with debt, so they cannot consume more. After the 2007 global financial crisis, the emerging market economies have slowed down, as demand for their exports have slowed. We are in a vicious circle where global trade growth is now slower than GDP growth, because the US economy is no longer the consumption engine of last resort. China, which has been a huge consumer of commodities, has slowed. Japanese growth has been flat due to an aging population. European growth has not recovered, partly because the leading economy, Germany, calls for austerity by its southern partners.

The Brexit shock threatens to weaken global confidence and send growth down another notch.

Former Bank of England Governor Lord Mervyn King famously called the global monetary order a game of sodoku, in which national current accounts in the balance of payments add up to a zero sum game. This is because in the global trade game, one country’s current account deficit is another country’s surplus. In the past, if the US runs larger and larger current account deficits, world growth is stimulated because everyone wants to hold dollars and has been willing to supply the US with all manners of consumer goods. This has been called an “exorbitant privilege” for the dollar.

The present global monetary order or non-order is a result of the 1971 US dollar de-link from gold, which gave rise to a phase of floating exchange rates and rising capital flows, which some people call Bretton Woods II. The old order, set at the Bretton Wood Conference of 1944, centered around a system of global fixed exchange rates, based on the US dollar link with gold price at US$35 to one ounce of gold.

But flexible exchange rates has resulted in a system where everyone seems to be devaluing their way out of trouble. Has the global secular deflation something to do with Bretton Woods II?

My answer must be yes. The reason lies in what I call, instead of sodoku, the mahjong winner’s curse. The Chinese game of mahjong has four players with a limited number of chips. If one player is the persistent winner, he or she ends up with all the chips and the game stops. Since the global game of trade cannot stop, the winner has both an exorbitant privilege (of being funded by the others) and an exorbitant curse (of bearing the loss if the others won’t or refuse to pay). To keep the game going, the winner has to give or lend the chips back to the other players, who play with the hope of winning the next round.

Indeed, if the winner is generous, the game can be made bigger, because the winner can issue more chips (defined as a reserve currency), which the others are more than willing to borrow and play.

The current world situation is that the Winners are the four reserve currency countries, the dollar, euro, yen and sterling, all of which have interest rates near zero or even negative. Until recently, the Winners blame China and the oil producing countries as having too high current account surpluses. But recently, after the huge European cutback in expenditure, Europe as a whole is the world’s largest current account surplus group of nearly 5% of GDP.

Herein lies the winner’s curse. The emerging markets should be able to stimulate global growth, but are unwilling to run larger current account deficits because they cannot get financing. The richer economies can stimulate global growth, but they are unwilling to do so, because they either feel that they already have too much debt or because they worry that stimulus would lead to inflation.

However, reserve currency countries have an advantage. As long as they are willing to run current account deficits, there will be little inflation because the world economy has huge excess capacity and surplus savings. If emerging markets run higher current account deficits, they will have to depreciate, which is exactly what Brazil, South Africa and others have done.

The winner’s curse is that if Europe is now unwilling to reflate and spend, the world will continue to slow. Indeed, in a world of greater geo-political risks, money is fleeing to the US dollar and the yen, causing both to appreciate.

What these capital flows into the reserve currencies when their interest rate is zero and they are unable to reflate imply is that the dollar and yen play the deflationary role of gold in the 1930s. As more and more mahjong players hold gold and don’t spend, the world global trade and growth game slows further. The mahjong winner’s curse requires the winners to stimulate and spend, bearing higher credit risks. That’s the privilege and responsibility of winners in the global game. If not, look out for more global secular deflation.

By Tan Sri Andrew Sheng who writes on global issues from an Asian perspective.

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China urges Philippines to quit arbitration; Pushes back against US pressure


China urges Philippines to immediately cease arbitral proceedings

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http://english.cctv.com/2016/06/09/VIDESodRMnJFJdiaDZ3JKzuo160609.shtml

<<< Foreign Ministry spokesperson Hong Lei (Source: fmprc.gov.cn)

BEIJING, June 8 (Xinhua) — China on Wednesday again urged the Philippines to stop its arbitral proceedings and return to the right track of settling relevant disputes in the South China Sea through bilateral negotiation with China.

Foreign Ministry spokesman Hong Lei made the comment at a routine press briefing.

The Foreign Ministry on Wednesday issued a statement saying that disputes between China and the Philippines in the South China Sea should be settled through bilateral negotiation.

Hong said that by unilaterally initiating the arbitration in 2013, the Philippines had turned its back on the possibility of solving the issue through negotiation, leading to a dramatic deterioration of relations between China and the Philippines.

China and the Philippines have reached consensus on settling maritime disputes through bilateral negotiation in a number of bilateral documents, but the two countries have never engaged in any negotiation on the subject-matters of the arbitration, said Hong.

By unilaterally initiating the arbitration, the Philippines has violated its agreement with China as well as its own solemn commitment in the Declaration on the Conduct of Parties in the South China Sea (DOC), he said.

This is an abuse of the dispute settlement procedures of the United Nations Convention on the Law of the Sea (UNCLOS), and is against international law, including UNCLOS, he added.

The door of China-Philippines bilateral negotiation is always open, he said. “China will remain committed to settling through negotiation the relevant disputes with the Philippines in the South China Sea on the basis of respecting historical facts and in accordance with international law.”

“China urges the Philippines to immediately cease its wrongful conduct of pushing forward the arbitral proceedings, and return to the right path of settling the relevant disputes in the South China Sea through bilateral negotiation with China,” Hong said. – Xinhua

BEIJING: China has urged the Philippines to “immediately cease its wrongful conduct of pushing forward the arbitral proceedings” and “return to the right path” of settling the relevant disputes in the South China Sea, through bilateral negotiation.

In an official statement released yesterday, the Foreign Ministry reaffirmed Beijing’s commitment to a settlement via two-way negotiations, rather than an arbitration unilaterally sought by Manila against China in 2013.

Ties between Beijing and Manila were sunk after the initiation of the arbitration. From the very start of the arbitral process, China has refused to accept or participate.

In the wake of recent comments made by various Chinese officials about the arbitration, the statement said “the door of China-Philippines bilateral negotiation is always open”.

Observers and the media have increasingly called on Philippine President-elect Rodrigo Duterte and his expected administration to quit the arbitration and return to the table for two-way negotiations.

The arbitral case is still pending. Some media and observers said the expected ruling by the arbitral tribunal would be made in a few weeks.

China will remain committed to settling through negotiation the relevant disputes “on the basis of respecting historical facts and in accordance with international law,” the ministry wrote.

In the past weeks, Washington has publicly pressed Beijing to accept the ruling.

That also included a call from US Defence Secretary Ash Carter on Saturday at the Shangri-La Dialogue in Singapore.

Wu Shicun, president of the National Institute for South China Sea Studies, said although it remained to be seen if the incoming Philippine administration would quit the arbitration and return to the table for talks, “it is apparent that the arbitration – from its very beginning – has led to increasing, not decreasing, number of problems between Beijing and Manila”.

“Other regional countries will come to the conclusion that embarking on such an arbitration will obtain no benefit, not to mention resolving any of the existing disputes,” Wu said.

Jia Duqiang, a researcher of South-East Asian studies at the Chinese Academy of Social Sciences, said as the arbitration process came to a critical moment, all parties knew clearly that “no good will serve any party if the big picture is damaged”.

He also said the incoming administration was re-evaluating its policies towards China. — China Daily / Asia News Network

China pushes back against US pressure

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SINGAPORE: China rebuffed US pressure to curb its activity in the South China Sea today, restating its sovereignty over most of the disputed territory and saying it “has no fear of trouble”.

On the last day of Asia’s biggest security summit, Admiral Sun Jianguo said China will not be bullied, including over a pending international court ruling over its claims in the vital trade route.

“We do not make trouble, but we have no fear of trouble,” Sun told the Shangri-La Dialogue in Singapore, where more than 600 security, military and government delegates had gathered over three days.

“China will not bear the consequences, nor will it allow any infringement on its sovereignty and security interest, or stay indifferent to some countries creating chaos in the South China Sea.”

The waterway has become a flashpoint between the United States, which increased its focus on the Asia-Pacific under President Barack Obama’s “pivot”, and China, which is projecting ever greater economic, political and military power in the region.

The two have traded accusations of militarising the waterway as Beijing undertakes large-scale land reclamation and construction on disputed features while Washington has increased its patrols and exercises.

On Saturday, top US officials including defence secretary Ash Carter warned China of the risk of isolating itself internationally and pledged to remain the main guarantor of Asian security for decades.

Despite repeated notes of concern from countries such as Japan, India, Vietnam and South Korea, Sun rejected the prospect of isolation, saying that many of the Asian countries at the gathering were “warmer” and “friendlier” to China than a year ago.

China had 17 bilateral meetings this year, compared with 13 in 2015.

“We were not isolated in the past, we are not isolated now and we will not be isolated in the future,” Sun said.

“Actually I am worried that some people and countries are still looking at China with the Cold War mentality and prejudice. They may build a wall in their minds and end up isolating themselves.”

During a visit to Mongolia today, US secretary of state John Kerry urged Beijing not to establish an air defence identification zone (Adiz) over the South China Sea.

Kerry, who will visit China next, said an Adiz would be “a provocative and destabilising act”, which would question Beijing’s commitment to diplomatically manage the dispute.

The South China Sea is expected to feature prominently at annual high-level China-US talks starting in Beijing on Monday, also attended by US Treasury Secretary Jack Lew.

US concerns about Chinese trade policy and the difficulty foreign businesses say they face operating in China will add to what will likely be difficult discussions. — Reuters

Related: 

Philippine politicians, experts, opinion leaders call for bilateral talks with China on South China Sea issue

Politicians,international relations experts and opinion leaders from the Philippines on Wednesday called on President-elect Rodrigo Duterte to start bilateral talks with China on the South China Sea issue as soon as
possible.

 Studio interview: Arbitration will not solve dispute

For more insights into the South China Sea issue, we have as our studio guest Jia Xiudong, a Senior Research Fellow from the China Institute of International Studies. Q1. China insists the Philippines
unilateral arbitration is illegal. So how much do you think the arbitration can help solve the maritime dispute?

Beijing believes Manila is politically motivated

 China believes that there are political motivations behindthe arbitration by the Philippines, as it is an open denial of China’ssovereignty. It brings uncertainty to how China would solve disputes with other countries.

South China Sea FAQ 2: What are China’s historical claims to the South China Sea?

 What are China’s historical claims to the South China Sea?

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The alchemy of money


Former Bank of England governor claims that for over two centuries, economists have struggled to provide rigorous theoretical basis for the role of money and have largely failed.

 

MONEY makes the world go round, so you would have thought that economists understand what money is all about.

The former governor of the Bank of England, Lord Mervyn King, has just published a book called The End of Alchemy, which made a startling claim that “for over two centuries, economists have struggled to provide rigorous theoretical basis for the role of money, and have largely failed.” This is a serious accusation from a distinguished academic turned central banker.

Alchemy is defined as the ability to create gold out of base metals or the ability to brew the elixir of life. King identifies that the main purpose of financial markets is to help real economy players to cope with “radical uncertainty”. But as we discovered after the global financial crisis, financial risk models widely used by banks narrowly defined risks as statistical probabilities that could be measured. By definition, radical uncertainty is an “unknown unknown” that cannot be measured. It was no wonder that the banks were blind to the blindness of financial models, which conveniently assumed that what cannot be measured does not exist. Ergo, no one but dead economists is to blame for bank failure.

When money was fully backed by gold, money was tied to real goods. But when paper currency was invented, money became a promisory note, first of the state – fiat money, supported by the power to impose taxes to repay that debt, and today, bank-created money, which is backed only by the assets and equity of the bank. The power to create “paper” money is truly alchemy – since promises by either the state or the banks can go on almost forever, until the trust runs out.

Today national money supply comprises roughly one-fifth state money (backed by sovereign debt) and four-fifths bank deposits (backed by bank loans and bank equity). Banks can create money as long as they are willing to lend, and the more they lend to finance bad assets, the more alchemy there is in the system.

A good description of financial alchemy is provided by FT columnist Prof John Kay, whose new book, Other People’s Money, is a masterpiece in the diagnosis of financialisation – how the finance industry traded with itself and (almost) ignored the real world. For example, Kay claimed that British banks’ “lending to firms and individuals in the production of goods and services – which most people would imagine was the principal business of a bank – amounts to about 3% of that total”. How is it possible that “the value of the assets underlying derivative contracts is three times the value of all the physical assets in the world”?

The answer is of course leverage. Finance is a derivative of the real economy, which can be leveraged or multiplied as long as there is someone (sucker?) willing to believe that the derivative has a “sound” relationship with the underlying asset. There are two pitfalls in that alchemy – a sharp decline in leverage and a fall in the value of the underlying asset – which were triggers of the global crash of 2007, as fears of Fed interest rate hikes tightened credit and questions asked about risks in subprime mortgage assets that were the underlying assets of many toxic derivatives.

Unfortunately, as we found to everyone’s costs, the banking system itself became too highly leveraged relative to its obligations, without sufficient equity nor liquidity to absorb market shocks.

The real trouble with financialisation is that central bankers, having not taken away the punch bowl when the party got really heady, cannot attempt anything like even trying to move in that direction without spoiling the whole party. Any attempt to raise interest rates by the Fed would be considered Armageddon by those who have huge vested interests in bubbly asset markets. Instead, central bankers like Mario Draghi has to continue to talk “whatever it takes” to continue the game of financialisation.

King’s recommendation that central banks reverse alchemy by behaving like pawnbrokers for all seasons (having collateral against all lending) can only be implemented after the next and coming crisis. Central bank discipline, like virginity, cannot be replaced once lost. The market will always think that in the end, it will be bailed out by central banks. In the end the market was right – it was bailed out and will be bailed out. In the game of playing chicken with finance, the politicians will always blink.

If we accept that radical uncertainty lies at the heart of finance, then money makes the world go around because it provides the lubricant of trade and investment. Without that lubricant, trade and investment would slow down significantly, but with too much lubricant, the system can rock itself to pieces.

The dilemma of central banks today is also globalisation. In addition to the Fed controlling dollar money supply within the US borders, there are US$9 trillion of dollars created outside the US borders over which the Fed has no control. Money today can be created in the form of Bitcoins, computerised digital units that tech people use to trade value. But Bitcoins ultimately need to be changed into dollars. So as long as someone will accept Bitcoins, digital currency become convertible money.

We got into a monetary crisis in which bad money drove out good. The reason was because the financial sector, in collusion with politics, refused to accept that there were losses in the system, so it printed more money to hide or roll over the losses. Surprise, surprise, there was no inflation, because the real economy, having become bloated with excess capacity financed by excess leverage, had in the short run no effective demand. So inflation at the global level is postponed.

But if climate change disrupts the weather and create food supply shortages, inflation will return, initially in the emerging economies, which cannot print money because they are not reserve currencies. In time, inflation will come back to haunt the reserve currency countries. But not before the emerging markets go into crises of inflation or banking first.

Money is inherently unfair – the rich will always suffer less than the poor.

In medieval times, only those with real money could afford alchemy. If it was true then, it remains true today.

Tan Sri Andrew Sheng writes on global affairs from an Asian perspective.

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Modern finance and money being managed like a Ponzi scheme !


Ponzi schemes and modern finance

 

Andrew Sheng says when the originator of a scheme to pass on debt to others is also ‘too big to fail’ – like America – then the global economy is heading for some painful restructuring

 

The dilemma today is that the US is the world’s largest “too big to fail” debtor, with gross international liabilities of US$31 trillion, equivalent to 40 per cent of global GDP. Photo: AFP

THIS global financial crisis is not over, as the volatile start to the New Year showed that 2016 may be a precursor to the 10th anniversary of the 2007 sub-prime crisis, which itself evolved from 1997 Asian Financial Crisis, after which the US Fed cut interest rates and started the rapid financialisation of the US economy.

READ MORE: Don’t listen to the ruling elite: the world economy is in real trouble

Two terms came out of the crisis that we see almost everyday, but have not been explained well by modern financial theory. Most economists think of them as aberrations that are at the periphery of normal economic behaviour. In fact, “Ponzi schemes” and “Too-Big-to-Fail” are at the heart of individual and social behaviour which go a long way to explain what is happening today.

A Ponzi scheme is a scam named after American Charles Ponzi. The term Ponzi scheme started in the 1920s from an American Charles Ponzi, who thought of selling an idea in making money from arbitraging the value of international reply coupons in postage stamps to a larger and larger investor scheme where he made money by getting new investors to pay for promised high returns to old investors. Of course, this is the “borrowing from Peter-to-Pay-Paul principle”, where the music stops when everyone want their money back. Ponzi schemes should in principle collapse naturally because it is of course impossible to pay unusually high returns. By this time, the founder would have run away to the Caribbean with a lot of OPM (other people’s money).

A foreclosure sign tops a “for sale” sign outside a property in northwest Denver in this 2007 photo. The number of homeowners receiving foreclosure notices hit a record high in the spring, driven up by problems with subprime mortgages. Photo: AP

The securitisation (packaging) of sub-prime mortgages into CDOs (collateralised debt obligations) and turbo-charging these into CDO2 (creating a highly leveraged synthetic financial derivative) and selling these to investors with a AAA credit rating was a 21st century Ponzi variant.

In simple terms, this is like selling a box of rotting apples, getting a rating agency to say that the box is worth more than the individual apples, with a guarantee against losses by adding more (rotten apples). In the end, the investor is buying a box of rotting apples, in which all his savings have been eaten up by those who sold the boxes (the derivatives) in the first place.

There are two fundamental elements of Ponzi operations – the promise of very high returns (false expectations) and the widening of the investor circle. Variants of the Ponzi scheme can be found in asset bubbles and pyramid schemes, in which more and more investors (new suckers) are enticed in until they are the ones who bear the final losses. Like the game Musical Chairs, the ones who did not get out when the music stops are the losers.

Actually, Ponzi schemes work by the originator taking profits by selling (or passing) his losses to all his investors – the more suckers, the bigger his profits and the more people to share the losses.

Technically, a Ponzi scheme is sustainable if the new funds that come in actually deliver good returns, but because the Ponzi promises a return higher than anyone can actually deliver, most Ponzis end up as fraudulent schemes.

READ MORE: Bank woes bode ill for world economy as talk of another global financial crisis gains traction

 

Under globalisation, the smaller reserve-currency countries like the euro zone and Japan can engage in quantitative easing, because instead of getting inflation, their currencies depreciate against the dollar. Photo: Reuters

But the Ponzi element in modern finance should be understood with another phenomena – the Too-Big-To-Fail (TBTF) dilemma. We all know that if we borrow US$1,000 from the bank, we are in trouble if we can’t pay, but if we borrow US$1bil from the bank, it is the bank that is in trouble. Thus, if a Ponzi scheme reaches the scale of TBTF, it has to be “rescued” somehow, because if everyone had bought the Ponzi product, everyone ends up being the loser.

This is the essence of modern money. Advanced country central banks can engage in quantitative easing (QE or printing money in whatever way you want to call it) to bail out banks that are losing money, because their banks are TBTF. The difference between QE and Ponzi is that the QE interest rate promised is near zero to negative, but the escalation of scale is the same. I call these Qonzi schemes.

In theory, in a closed economy, if you print too much money, you would get higher inflation. This is why the Germans are very much against the European Central Bank’s QE measures.

However, in a world with excess production capacity, you would not get into high inflation, because there are many more people in the emerging economies who are willing to hold reserve currencies like the US dollar, euro and yen. Under globalisation, the smaller reserve currency countries like the eurozone and Japan can engage in QE, because instead of getting inflation, their currencies depreciate against the dollar. The losers call such action “beggar-thy-neighbour” policy.

In other words, currency depreciation countries gain by passing “losses” to others, because they gain competitive trade advantage. But if everyone depreciates at the same rate, the whole world ends up with more deflation. Remember, when the Ponzi music stops, all losses are crystalised. As Warren Buffett used to say, when the tide goes out, you know who has been swimming naked.

READ MORE: Chinese scramble to safety of US dollar as yuan weakens and forex reserves drop

 
Rail cars and oil tankers sit on railway tracks as water vapour and smoke rise from a steel plant in the distance in Tonghua, Jilin province. The city’s once-vaunted state-run steel mills have slipped inexorably into decline, weighed down by slumping global markets and a changing economy. Photo: Bloomberg

 

READ MORE: The crisis in markets shows how our financial and political leaders have failed since 2008

The dilemma in the world today is that the US is the largest TBTF debtor in the world, with gross international liabilities of US$31 trillion, equivalent to 40% of world GDP (gross domestic product). In a world where interest rates are near zero, the threat of the Fed increasing interest rates causes capital flight into the dollar. But a dollar that also yields near zero interest rate, with the inability to reflate due to political constraints, plays exactly the deflationary role of gold in the 1930s.

Hence, a strong dollar is deflationary on the whole world. As geopolitical tensions rise, flight into the dollar causes its own deflation. The latest US net international investment position is a deficit of US$7 trillion or 40% of GDP at the end of 2014, sharply up from US$1.3 trillion in 2007. A strong dollar in which the US would run larger even current account deficits is clearly unsustainable for the US and its creditors.

During the Asian financial crisis, countries with net liabilities of over 50% of GDP got into crisis. But the US is the TBTF country in the international monetary system. Further QE will not solve this dilemma. The only solution is painful structural adjustment by all concerned. This is why investors are all so downbeat.

Consequently, I see no alternative but a coming new Plaza Accord to ensure that the dollar does not get too strong, with a concerted effort to have global reflation. Otherwise, watch out for more “Qonzi” schemes.

 

– Andrew Sheng writes on global issues from the Asian perspective.

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