**: China Macroeconomic Forum (CMF).
Zhao Yong is a professor at the School of Economics, Renmin University of Chinese, and a key member of the China Macroeconomic Forum (CMF).
The following views are compiled from Zhao Yong's speech at the 2023 World Economic Forum.
1. Three basic facts
In terms of policy, after Biden took office in the White House, the United States' China policy has been greatly adjusted compared with the Trump period. Biden has continued the overall restriction strategy against China during the Trump period, but in terms of specific means, in order to reduce the cost of "suppressing China" as much as possible, Biden has reshaped the global production pattern by promoting the return of manufacturing, as well as "nearshoring" and "friendly shoring", with the intention of reducing the dependence of the United States on China's ** chain and achieving the so-called "de-risking" and even "decoupling" from China.
In terms of capital flows, the scale of global direct investment has shrunk since 2015 and will fall further by 12% in 2022. The decline in China's foreign capital inflow has attracted great attention in the market, and voices worried that China's manufacturing position in the global division of labor will be challenged.
In the financial sector, long-term bond interest rates in the United States have been rising in the past year, financial markets have been in turmoil, and financial shocks represented by the collapse of Silicon Valley Bank have occurred from time to time. At the same time, many developing countries have abandoned dollar settlements, and the "de-dollarization" of the international monetary system has accelerated.
The above three basic facts are not isolated, but there is some kind of connection. We think,It is likely that the U.S. efforts to reshape the global industrial chain will not achieve the desired results, and if the United States forcibly pushes through this process, it will pay a huge price, that is, the reshaping of the global industrial chain will have a backlash against the U.S.-led global financial system.
2. The current role and status of the United States in the world economy
Over the past 100 years, the role of the United States in the division of labor in the world economy has undergone important changes. In the 40s of the last century, the United States was in a similar position to China in the world economic division of labor, producing products and selling them all over the world. After the 80s of the last century, the role of the United States in the world economic division of labor has changed from the product side to the product demand side, and its continuous profit power is not only in the first interests, but also began to turn to the financial benefits under the two-way circulation of capital. In the process, the United States has ceded ** interests to a certain extent, thereby obtaining excessive privileges in the financial sphere.
Because developing countries are less risk-averse, they can only invest in assets with high safety and low yields, such as U.S. bonds. At the same time, the United States has the most developed financial market in the world, which can provide good support for risk diversification in the investment process, so the United States has a comparative advantage in venture capital. This has led to a pattern of U.S.-led international capital flows, in which the U.S. finances through the issuance of low-interest bonds, which are then converted into high-yield direct or equity investments that flow into other countries, which is also known as "U.S. excessive privilege."
From the point of view of global resource allocation, such a privilege is efficient;At the same time, from the perspective of the distribution of interests, the United States is the party that has the advantage of interests.
3. How did the reshaping of the global ** chain lead to a financial backlash?
If the United States tries to promote the reshaping of the global ** chain, it may have an impact on the global financial system dominated by it. Specifically:
On the one hand, in the process of such a two-way circulation of capital, "de-risking" needs to rely on the US financial market to achieve. Whether it is foreign direct investment or equity investment, the risks can be mitigated in the U.S. financial market. However, if Biden transforms the functional subject of "de-risking" from the market to the market, it will not only have limited effect, but may also bring unnecessary damage to the global capital flow pattern.
Since 2015, the scale of global direct investment has continued to decline, although this cannot be fully attributed to the shift of the functional body of "de-risking" from the market to **, but it cannot be denied that this factor has played a certain role. If the United States continues to promote the reshaping of the global chain, it means that it will be more involved in the process of "de-risking", which will bring about a backlash against the financial interests of the United States.
On the other hand, in the process of two-way capital circulation, the United States needs to keep its financing costs low, that is, the interest rate level when issuing bonds should not be too high, so as to ensure a reasonable rate of return. At the same time, lower interest rates are a guarantee of the status of US Treasuries as a safe asset. If U.S. bond interest rates rise, the pattern of international capital flows that dominate them, and the resulting earnings, could be undermined.
Long-term U.S. Treasury yields have been falling since 2010, but have recovered significantly this year. Of course, the rise in bond yields this year is not necessarily caused by the reshaping of the global industrial chain, but is mainly driven by the Fed's interest rate hikes. The problem is that if the U.S. continues to reshape the global industrial chain, higher long-term Treasury yields will be a high probability event, and they may remain high even in next year's interest rate cut cycle.
From the supply side, passive fiscal subsidies will lead to an increase in the supply of U.S. bonds. If we forcibly reverse the global division of labor to guide the return of the industrial chain, we cannot completely rely on market logic, and must rely on the promotion of industrial policies. This requires support in the form of taxes, subsidies, etc., to change the relative returns of the manufacturing sector in different countries. But at the same time, the fiscal deficit will increase passively, and the willingness to borrow will be further strengthened, thereby increasing the supply of bonds.
On the demand side, the rebalancing of the global ** chain will lead to a decrease in demand for U.S. bonds. With the transfer of the ** chain from the most "efficient" country to the so-called "safest" country, it will inevitably bring about a shortage of product production and ** capacity, and the result can only be the shrinkage of the global ** scale, as well as the slow growth of surpluses and foreign exchange reserves in developing countries, which inhibits the demand for US ** bonds in developing countries on the demand side.
Therefore, if the reshaping of the global ** chain is carried out in the direction expected by the United States, then the supply of U.S. bonds will increase and the demand will decrease, which will eventually push bond rates higher for a long time.
In summary, if the United States continues to promote the reshaping of the global industrial chain, it will lead to the "de-risking" function of the ** alternative market, and push the long-term interest rate of bonds higher, and ultimately undermine the international financial system dominated by the United States.
Fourth, it may be difficult for the United States to achieve the goal of reshaping the global ** chain
We believe that the reshaping of the global chain promoted by Biden is more of an attempt to compete with China, and there is great uncertainty about the extent to which it can achieve the desired effect. Specifically, there are three logics:
1. Historical logic
Historically, the world has undergone many first-chain reconstructions, from Britain in the 70s of the 19th century to the United States in the 40s of the 20th century, and then to the transfer of the American continent to the Asian continent in the 80s of the 20th century, and then from Japan to China. Each round of global ** chain restructuring is not driven by policies, but due to changes in the economic conditions of various countries, which is the result of marginal expansion of the market.
2. Economic logic
The restructuring of the industrial chain reflects the change in the thinking of the domestic political elite in the United States, and after Sullivan put forward the so-called "New Washington Consensus" this year, the abandonment of liberalism by the domestic political elite in the United States is very obvious. From a pessimistic point of view, such a main line of security and confrontation may exist for some time, and the disturbance of US policies to the world economy may continue to play a role. But in the optimistic run, the logic of security will eventually give way to the logic of economics in the long run.
3. The essence of the chain
The corresponding result of globalization is the survival of the fittest, and to realize the restructuring of the global industrial chain, it means replacing the original division of labor system with a new division of labor system, and the original division of labor system is actually in line with the interests of the United States itself. In the absence of major technological and institutional innovations, the United States can only make small-scale policy efforts, because any kind of subversive change in the division of labor system is essentially the destruction of the original division of labor system by the new division of labor system, which means damage to its own interests.
4. Policy recommendations
There is also the possibility of misjudgment in the U.S. policy, which may not always meet its own policy expectations. This means that we cannot enter the policy rhythm of the United States, we must maintain strategic focus, focus on ourselves, and devote ourselves to the improvement of our own business environment and economic environment, as long as there are no problems with our own policies, there will be no problems with the status of China's economy in the world economic division of labor.