Handing In Homework
The first group of items agreed between the US and China on trade and economic matters were announced a few days ago. As part of the results under the 100-day pledge at the Xi-Trump summit on April 6 – 7, some of these items dramatically demonstrate the benefits of win-win cooperation.
There were as many as 250 items under discussion before Donald Trump became President. So even though he still only has a skeletal team, the Chinese will make sure more results will be achieved by July 17, 2017 at the end of the 100 days since the summit.
Out of those announced already, Items （1） and （2）below are particularly significant.
One of Trump’s advisers, James Woolsey the former head of the CIA, had expressed the opinion that one of the most strategic areas for US-China cooperative partnership is energy. In recent years, the US has reversed its status of an energy-importing nation to becoming an energy-exporting nation, particularly in natural gas. For China, the world’s largest energy-importer, natural gas has an added appeal as a relatively clean form of energy, compared to oil and coal. It has struck major deals with Russia on the long-term supply of Siberian natural gas, but is always wary of the Bear’s history of dishonoring contractual commitments or using them to extort. Another geopolitical fact important to the US is：the country in the world that currently has the largest natural gas reserve is Iran which is more than willing to accept RMB and China’s investment. Well, you can draw the conclusions from these.
In any case, Chinese purchase of natural gas from the US will potentially reduce the US trade deficit by a significant amount, and help shore up the finance of the energy sector, while giving China a diversification of suppliers. The win-win is particularly strategic for the US to the extent that it helps buttress the US dollar status in the world. The deal is that the US will ensure China that it can purchase as much as any other buyer, at nondiscriminatory pricing （i.e. on a best-deal basis）. It is possible that China will be allowed, even encouraged, to invest in the industry in the US.
China has agreed to allow US credit agencies, i.e., Moody’s, Standard and Poor’s, and Fitch, to operate in China. The significance of this may not be apparent to laymen. From my perspective, this lays the foundation for the US-China Currency and Monetary Cooperative Framework that I have staunchly advocated, because it is one of the prerequisite steps in the detailed roadmap.
On the surface, this will greatly boost the three US credit agencies’ business for years and decades to come, as China grows to be a huge capital and financial marketplace. Likewise, it will open up a lot of trading, investment banking and asset management businesses for Wall Street. But the significance goes beyond that.
（a）We must remember that 80% of the world’s capital transactions today are conducted in US dollars, including as the intermediary currency for those denominated in other currencies. China has become one of the major foreign sources of US dollar funding and will play an increasing role in the liquidity of monetary, financial and capital markets. At the same time, it will become a big user of international capital and a major financial trader. As such, the growth in Chinese financial instruments in the international funding and capital pools will be vital. Regardless of currency denomination (USD or others), the standardization of the credit quality and valuation benchmarks for these instruments is necessary. Only then will the market knows how to trade them and price them. Since the capital market is still substantially a USD world, the application and availability of US credit agencies’ ratings on Chinese issues are key, despite these agencies’ tarnished reputation in the 2008 financial tsunami. The Chinese had established their own international credit-rating agency, Dagong, after 2008. Its interactions with the US agencies will be very interesting.
（b）The opening up of the Chinese financial markets in an orderly fashion, and the introduction of Chinese financial instruments and assets into the international pool, are vital to the world’s future progress. An understanding has been reached that China does not intend to challenge the role of the USD as the de facto world currency. Even the AIIB intends to use USD in its financing of long-term projects. In fact, China is using “foreign” standards and requirements in order to spur effective and much-desired reforms in its own domestic systems that would not happen otherwise (the history since joining the WTO and the dramatic reforms and real transformations that took place in China as a result, demonstrated this characteristically Chinese phenomenon).
（c） If (a) and (b) above happen, which I believe they will, the Framework for Currency and Monetary Cooperation between the two largest economies in the world will be the logical next step. As someone who participates in the input process, I have already given a list of detailed steps in implementing that reality. While the Chinese will maintain the dual status of the RMB as distinct domestic and foreign-exchange currencies, a schedule of large currency exchange arrangements and mutual clearing mechanisms will be negotiated between the two countries. That way, we will gradually enter an era of world financial order based on joint credit, where neither can singly shoulder the full responsibility and challenge of the well-being of the world, but both can act as the paired pillars to prevent major collapses. This fusion of the financial markets is the beginning of that framework.
At the same time, both sides are opening up the banking, electronic payment and securities settlement businesses further. Watch Jack Ma’s efforts to extend the eWTP （electronic World Trading Platform）to America. That could bring a lot of Chinese consumers to buy direct from the US inland, leading to a wave of new cottage industries and employment opportunities. Also, China removed the restriction on US beef imports (imposed years ago as a result of foot-and-mouth disease) while the US lifted the import ban on Chinese cooked poultry (for concerns over avian flu), a deal which is a Chinese give-away since there are many more Chinese wanting to buy American raw beef than Americans wanting to buy Chinese cooked chickens.
Compared to a couple of months ago, the situation in the Korean Peninsula has stabilized substantially, thanks to a series of delicate diplomatic efforts. In fact, North Korean representatives and US representatives are conducting secret talks in Norway, thanks to skillful orchestration by Chinese diplomats.
The process leading to the current situation is roughly as follows：
China warned North Korea not to go ahead with its sixth nuclear test. As for missiles tests, it will have to bear the consequences of “crossing the line” with America, generally taken to mean successfully testing anything that goes far enough to threaten the US. That is why the North Koreans fired their missiles recently and let them blow up. The “successful” one yesterday was only 450 km, which would barely hit Japan. For as long as the US military exercises continue, the North Korean will not stop the missile tests.
Meanwhile, the Trump administration stated that the US is not seeking a regime change, and set no precondition for resuming contact. That is a breakthrough. North Korea always wants to talk directly with the US, which the previous US administrations had refused to do. Now, that is happening unofficially in Norway.
That does not mean the crisis has gone away. North Korea is unlikely to terminate its nuclear program. China is asking both sides to suspend their current missile-testing versus military exercises, as a condition to convene multilateral negotiation under the UN aupices. That will depend on how the talks go in Norway between the two main antagonists.
Many of you know that I have long characterized the US-China predicament with each other as the plight of the Chain Gang. With the recent positive developments, I can now temporarily abandon that characterization. While we are not quite “off to see the wizard”, at least we may be following some sort of “yellow brick road”.