Matthews Asia Weekly
China's U.S. State Visit
Week of January 21, 2011
The analysis surrounding Chinese President Hu Jintao’s trip to Washington has so far focused on the subdued tone of the visit, the lack of major policy initiatives and the reverence for vague ideas such as harmony. The press has drawn the conclusions that: 1) this reflects a diminished President Hu, a “lame duck” trying to emerge from a disastrous foreign policy year with an uncontroversial U.S. state visit, or 2) a confident China at ease with itself as a major player on the world stage. Sound contradictory? Well, the press is not paid to come up with the obvious conclusion that President Obama and President Hu don’t have much to talk about.
Perhaps that is unfair. They do have a lot to talk about—just not much scope for agreement, I suspect. China is probably still annoyed at the fuss that Secretary of State Hillary Clinton helped stir up in August, over islands in the South China Sea, when she offered to “mediate” any disputes between China and its neighbors. In addition, President Obama is probably still peeved that China did not more publicly scold the North Korean regime for its attacks on both South Korea’s navy and territory last year.
But the main bone of contention between the world’s two top dogs is the economy. Imbalances are often criticized for the recent global financial bubble and its bursting. Plenty of U.S. senators contend that the fault lies with China for saving too much, forcing down global interest rates and igniting the bubble. China’s leaders have blamed the U.S. for spending their savings recklessly. Those in the “China is to blame” camp have a simple solution—appreciate the Chinese currency. That will make the Chinese better able to afford U.S. goods, helping China to spend more and save less. It would also have the salutary effect of dampening China’s overheated property prices. The Chinese remain unconvinced, retaining an attitude that suggests: “The U.S. would say that, wouldn’t they?” Those who think the case for aggressively appreciating the renminbi (RMB) is obvious, claim that Chinese leaders are being recalcitrant and are bending to the will of politically powerful urban elites and exporters.
And yet, couldn’t it just be that China is proceeding to the beat of its own drum? China will make the claim that it is already allowing wages to rise, which is increasing household purchasing power. But that capital market liberalization is a more difficult and longer-term problem. Step by step, China wishes to open up the relationship between its capital markets and the rest of the world. Incremental steps to allow more non-governmental mainland investment in foreign equity securities; allowing certain global banks to issue RMB debt and complete trade settlement transactions in RMB; McDonald’s Corporation has issued RMB debt; the Chinese government and Chinese companies are issuing long-term debt of 30- to 50-year durations; and now in New York and Los Angeles, the Bank of China allows business customers to exchange about US$3,000 per day and up to a maximum of US$15,000 a year. The deposit base will therefore take time to grow. But Hong Kong, where a similar scheme has already been in place, saw deposits more than quadruple last year to about US$46 billion.
As my colleague, Richard Gao, said to me recently: “China moves deliberately and carefully. The pace may seem very slow, but then you look back and see how far they have come.” The U.S. and Europe are going through their own painful adjustments, and it may indeed seem obvious to politicians in those countries that a stronger Chinese currency can do much to ameliorate their economies’ path to full employment and sustainable growth. Yet it seems just as obvious to China, I suspect, that the Chinese path to a globally traded currency, deeper capital markets and a more sophisticated wealth management industry to help steer private capital more efficiently is a path fraught with pitfalls. Move too fast and you may see capital leave because there is still a dearth of diversification opportunities within China’s borders. Move too slowly and (aside from the obvious global political ramifications) you may strangle the growth of a nascent industry. So I suspect there will be much polite nodding and agreements in principle during President Hu’s visit. But he will likely then return home and carry on as usual.
Robert J. Horrocks, PhD
Chief Investment Officer
Matthews International Capital Management, LLC
As of 12/31/10, the Matthews China Fund held a 2.5% position in BOC Hong Kong Holdings, Limited, a subsidiary of the Bank of China Limited. As of 12/31/10, the Matthews Asia Funds did not hold a direct position in the shares of either the Bank of China Limited or McDonalds Corp.
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