What Can Obama Really Hope to Accomplish on His Upcoming China Trip?

If you had committed to spend $787BN of your constituents hard-earned tax dollars under the premise of getting the economy back on its feet and had woven tales of fancy to justify your actions, it would seem a pretty good time to skip town when the official number of unemployed ratchets north of 10%, lest people begin to wonder if you really have a handle on the problem, especially when two major off-year elections were just won by candidates from across the aisle.

The problem is that when our President travels to China he’s not going to get the warmest reception as a number of trade disputes - tires, nylon, steel pipe, pigs and industrial acid - have raised tensions between the two nations just when a “We’re all in this together so let’s help each other get out of it” mindset might be a bit more helpful.

Instead, Leo Gerard, United Steel Workers President, added some fuel to the fire by saying: “China’s government and exporters are being told we are fed up with their cheating on our fair-trade laws, and penalties for these transgressions are long overdue.”

China’s Ministry of Commerce's retort was no less vehement, posting the following on its website: “China resolutely opposes this abusive protectionism and will take action to protect the interests of domestic industries.” With regard to the number of trade disputes, the Ministry said they had been “rarely seen in history.”

The boys in Beijing are also of the opinion that Barack Obama has not done what he should have to fix what’s broken with the U.S. financial system and as the largest single foreign holder of U.S. government debt, they would like to be a lender that is listened to.

Kenneth Lieberthal, a Brookings Institute fellow who was a special assistant on Asian affairs for Bill Clinton, said; “This is the first time in the history of our global relationship, global issues are at the top of the agenda. This is new territory for us.”

Yan Xuetong, professor of international relations at Tsinghua University says: “We are business partners who share material interests rather than common values. Obama wants us to become strategic partners or friends but we aren’t either of those.” Not warm and welcoming words from somebody that holds roughly $800BN of your IOUs!

Just about the only positive thing to come out of the Sino-American relationship recently was the go-ahead from China’s central government to Walt Disney Co. (DIS) to build a theme park in Shanghai. But then, who can hate Mickey Mouse?

Two plus years after the first cracks appeared in the global financial system, the recovery is almost as different in each part of the world as the cultures and traditions of each country.

India’s Prime Minister said Friday that the country is aiming for an annual growth rate of between 9%-10% for the next few years. This growth is expected even as the country’s central bank raised the amount of reserves it is requiring commercial banks to hold in the form of bonds.

Vietnam’s central bank said it will extend its subsidized-lending program until the end of 2011, fully aware that they risk overheating the economy by doing so. Additionally, in late October Korea posted 3Q09 GDP growth of 2.9% prompting thoughts of when the central bank there might begin to raise rates. Meanwhile Japan’s central bank predicted the economy will remain in deflation over the next two fiscal years.

The E.C. said this past week they expect the U.K.’s GDP to expand 0.9% in 2010 and 1.5% in 2011 which is better than their outlook for the 16 nation E.U. which they say should grow 0.7% and 1.6% respectively. Part of this could be the result of business volume in the U.K.’s financial services sector posting their first rise since 2007.

There is also evidence that bank lending, so prevalent in Europe ,is returning to pre-crises levels. “The market is thawing like others and we do anticipate further supply into the final quarter.” Suki Mann, deputy head of credit research at Societe Generale said recently.

Norway’s Norges Bank recently raised its key rate to 1.5% from 1.25% accompanied by bank governor Svein Gjedrem's statement that, “it has been appropriate to start to wind down the unconventional measures earlier than in other countries.” Australia raised its main interest rate to 3.25% earlier in October and Israel preempted even that move by raising its key rate up by 25bps in August to 0.75%.

Brazil just announced a 2% tax on foreign investment in domestic stock and bonds in an effort to slow the rise of the Real, hoping to keep the nation's powerful export sector doing the Samba.

While the U.S. posted GDP growth of 3.5% for 3Q09, a closer examination of the number revealed it to be mostly a product of the various stimulus spending programs enacted by the current administration and as such, very much less than organic.

Hence, the continued use of the words “accommodative” and “extended” in the Fed announcement last Wednesday which now looks like the right thing to have said given an unemployment rate of 10.2%.

Our best wishes go out to our President for a fun and fruitful trip to China.

The CDS on the U.S. of A. closed at 23bps on Friday, up from its low for the year of 20bps set on 10/21. China’s low CDS print came on 9/23 at 58bps and closed Friday at 83bps. Norway’s CDS closed at 14bps on 10/27 and 16bps Friday. Australia’s CDS closed Friday at 33bps having seen 27bps on 10/16. There is no CDS for India.

DIS’s CDS had been rising of late after bouncing around in the high 30bps range for a good part of September and October. The stock had been rising during this same period in contrast to the usual negative correlation seen between these two asset classes. That changed on 10/19 when the stock closed at $29.87 only to fall to $27.24 by 10/28. DIS closed at $28.56 on Friday as the CDS closed at 48bps.

Enjoy the week.

Comments

[Tony Petroski:]

The title of the article:

"What Can Obama Really Hope to Accomplish on His Upcoming China Trip?"

Several things come to mind. It used to be that a presidential trip was a big deal. I think of Henry Kissinger making a secret trip in preparation for Nixon to go to China. Now Obama and his fellow citizens of the world like to see each other, much like one may have traveled across town to see a friend in the old days. I assume he just likes travelling at public expense and wants to go to China to make new friends. Where has he not gone?

Another explanation is that he feels compelled to go to foreign soil to apologize to another dictator. Our support for Chiang Kai-shek? I don't recall if Bill Clinton apologized for that already, but why take chances?

Lastly, I think it may be possible that Obama, knowing that he's done nothing comparable to Reagan going to Germany and giving his famous speech at the Brandenburg Gate will go to the Great Wall and make a dramatic utterance, perhaps something like "Mr. Hu." Extend this Wall!"

I doubt he's going to China to discuss interest or exchange rates.

Nov 09 05:31 PM

[Ben Gee:]

China will not let President Obama to go home empty handed. China will not be known as an ungracefull host. That was never the Chinese style. But if the US expect anything substantial, it will be disappointed. The US hold no bargaining power over China. And China had never submitted to threats. China will respond much better to sweet talk than lecture. President Obama is a very smart person, he will do the right thing. China will never insult him at least not in public. We will see smiles at the end even if somewhat forced.

Nov 10 11:11 AM