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Posted at 3:41 PM ET, 01/25/2011

Elephant in the Room in Davos: China

By Kevin Lu

As various pre-Davos activities gear up this week and the main conference starts on Wednesday, not surprisingly, one topic that is likely to dominate many of the Davos sessions is China.

In my conversations with people here over the past 24 hours, I found an interesting phenomenon. When people discuss their immediate concerns on issues related to China, there is very little “us vs them” mentality, but once the topics move to long-term and ideological issues, you feel deeply rooted worries.

In the short term, everyone seems to be in the same boat. What will happen if the inflation in China, which stands at 4.6 percent as of Dec 2010, gets out of control? What ripple effects will there be? What about the apparent real estate bubbles in China, especially in cities like Beijing, Shanghai and Shenzhen? How about a hefty PE ratio of 40 for companies listed on Shenzhen Stock Exchange? Is that kind of valuation sustainable in the long run? How would be the impact of the potential burst of these asset bubbles? Why is the Chinese government not more proactive in dealing with some of the trade-related issues? On issues like these, everyone’s interest seems to be aligned. They want to see the Chinese inflation in check. They wish that the bubbles won’t burst, or even better there is actually no bubble. Many foreign firms want to the Chinese government to take a more engaging and effective stance on trade-related issues, because if the Chinese don’t engage, the ones who are getting hurt would be not only the Chinese themselves but also many international companies which are producing in China.

However, once topics move away from the short-term issues and get into geopolitics, such as the roles of the state in domestic and international economy, the temperature immediately rises, and you almost feel a quasi cold-war reaction. Would Chinese export their model of state capitalism to African countries? How could a country do so well economically when there is no democracy? Do the widely practiced neoliberalism ideas still hold, in spite of the success of the “China Model”? What does the success of the China Model mean to the political ideology of the Enlightenment, which has been the cornerstone of the Western way of governing? Honestly, no one in China has been talking about “exporting revolution” for the last thirty years, but one almost gets a sense that the anxiety today is that China is going to somehow export their model, while not exactly revolution.

I had an interesting chat with Joshua Ramo at a session for Young Global Leaders. Joshua runs Kissinger Associates’ office in Beijing, and he actually coined the phrase “Beijing Consensus” back in 2004. We mused about how far the Beijing Consensus/China Model has gone -- from something purely conceptual in 2004 to what today seems to be touching every major business, not to mention politics. After President Zuma’s visit to Beijing last August, a lively discussion is taking place in South Africa whether the China Model should be formally adopted. Countries such as the United States will obviously not adopt a China Model, but the recent story about the U.S. Export-Import Bank matching China Development Bank’s financing terms in order to help GE to win a train contract in Pakistan indicates that one cannot escape from the China Model, whether you like it or not.

Kevin Lu is the World Bank Group's Multilateral Investment Guarantee Group's (MIGA) Director for the Asia-Pacific Region. In this capacity, Mr. Lu serves as the senior representative of MIGA in the region, manages relationships with key regional clients and partners, oversees regional business development activities, and runs MIGA’s regional presence in Hong Kong, Singapore, Beijing, and Tokyo. Mr. Lu is a member of MIGA’s Senior Management Team.

By Kevin Lu  | January 25, 2011; 3:41 PM ET
Categories:  Kevin Lu  
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Comments

China’s Innovative Way of Skinning the United States!

Mark Twain is credited with an early use of the cliché "more than one way to skin a cat" in A Connecticut Yankee in King Arthur’s Court, as follows: “she was wise, subtle, and knew more than one way to skin a cat, that is, more than one way to get what she wanted”. Thefreedictionary.com defines beggar-thy-neighbor as: an international trade policy of competitive devaluations and increased protective barriers that one country institutes to gain at the expense of its trading partners. Under the guise of fostering ‘indigenous innovation’, the Chinese government has creatively used a non-conventional, subtle version of beggar-thy-neighbor. Its version doesn’t entail the competitive devaluation of its own currency, which would enhance China’s exports and inhibits its trading partners’ exports. China’s version perpetrates an over-valuation of the currencies of one or more of its trading partners. This negatively affects all the trade of the pegged trading partner(s), not just trade with China. During the recent period China pegged its currency to the U.S. Dollar, its version of beggar-thy-neighbor was 8 times as damaging to the U.S. economy as what the media refers to as “China keeping it currency undervalued”.
In November 2003, Warren Buffett in his Fortune, Squanderville versus Thriftville article recommended that America adopt a balanced trade model. The fact that advice advocating balance and sustainability, from a sage the caliber of Warren Buffett, could be virtually ignored for over seven years is unfathomable. Until action is taken on Buffett’s or a similar balanced trade model, America will continue to squander time, treasure and talent in pursuit of an illusionary recovery.

Posted by: HJCampbell | January 26, 2011 8:19 PM | Report abuse

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