Raw Finance

From Nouriel Roubini’s RGE Monitor:

Greetings from RGE!

This week’s note is excerpted from a longer analysis piece RGE has just published examining U.S. President Barack Obama’s current trip to East and Southeast Asia. The full piece, which includes analysis of U.S.-North Korea relations, the U.S.-South Korea free trade deal, APEC’s integration process and looming questions about Myanmar, is available to RGE’s premium clientele here: “Obama Tours Asia with a Full Agenda” (login required).

President Obama embarked on his highly-anticipated maiden visit to Asia last week, furthering his efforts at global outreach. The trip comes as global leaders are reckoning with an unsynchronized exit from economic policies that have helped end the worst recession of the post-war era. Policy changes in Asia, particularly among major U.S. creditors, will be essential to rebalance global growth: APEC members (including those in the Americas) absorb 55% of U.S. goods exports and provide a major market for U.S. service exports, while Asia depends on U.S. consumers and foreign direct investment (FDI) to drive economic growth. With the trip, Obama aims to renew U.S. political and economic influence in a region that analysts claim was ignored by the previous administration, addressing key issues like economic cooperation, climate change, free trade and the regional balance of power. By spending nine days abroad as domestic issues like health care and unemployment vie for his attention, the president acknowledges the growing importance of the U.S. relationship with a rising Asia.

Obama’s first stop was Japan, a key U.S. ally and the host of a large (and increasingly contested) U.S. military concentration. Next, Obama stopped in Singapore, where he attended the APEC meeting. Obama, whose cap-and-trade legislation is stalled in Congress, was among the world leaders who accepted that a binding carbon emissions deal was unrealistic, saying the best that could be hoped for was a “politically binding” deal. On the sidelines of the APEC meeting, Obama met Russian President Dmitry Medvedev to discuss U.S.-Russia ties, the new arms control treaty and possible sanctions on Iran and North Korea. While in Singapore, Obama attended the first U.S.-Association of Southeast Asian Nations (ASEAN) summit, which was also attended by Myanmar’s leader, before arriving in China. His final stop will be South Korea, where talks of disarming North Korea may overshadow discussions on the U.S.-South Korea trade agreement.

Tensions and Reassurance in China

Ahead of Obama’s visit to China, U.S. officials have focused on a new goal of “strategic reassurance” that China will seek to maintain global stability as the country’s influence grows. A bilateral deal on climate change would have sent a powerful signal on this accord. Although U.S. and Chinese leaders signed several agreements on clean energy initiatives, in part because of job creation goals, neither side was ready to make any binding commitments on carbon reduction.

Similarly, the U.S. sought Chinese support on Afghanistan, Iran and North Korea, but no meaningful cooperative agreements have been aired publically. Over the past year, however, Chinese and U.S. leaders have been meeting more often than they have during past U.S. administrations, and linkages at all levels of governments have increased.

Trade and currency issues dominated the U.S.-China meetings, as they have in past meetings, though the relevant discussions were brief. The U.S. claimed a weak renminbi (RMB) would prevent the correction of global imbalances that both sides seek, but China put the blame on U.S. debt levels. This visit comes as market actors are increasingly pricing in a renewed gradual appreciation of the RMB over the next six months, as detailed in the recent RGE Analysis What Is China’s Exit Strategy? by Adam Wolfe and Rachel Ziemba.

Just before Obama’s arrival, a senior Chinese official criticized the loose U.S. monetary policy for the first time. As in their trade meeting in Hangzhou last month, China and the U.S. pledged to work together to avoid a trade war as pressure builds in both countries’ export sectors. As the global economy has begun to stabilize, the number of anti-dumping complaints has grown. Calm heads may prevail in the end, but, again, no strong commitments came from Obama’s visit or the meeting of trade leaders on October 29.

China sent a political message by skipping some of the goodwill gestures that usually accompany a U.S. presidential visit. Ahead of the visit, Chinese dissidents were reportedly rounded up, a striking contrast to the token prisoner releases that tended to precede visits from Presidents Clinton and Bush. Likewise, Obama’s “town hall” meeting in Shanghai was not televised live across China as past U.S. presidential speeches were. In addition to asserting China’s desire to level the political playing field, the moves may reflect insecurity on the part of China’s leadership, stemming in part from concern that the domestic economic recovery remains “unstable, unbalanced and not yet solid.” Even if it is better positioned to resist U.S. pressures, China still has a limited ability to alter policy in Washington, in part because China’s pursuit of macroeconomic stability from the dollar peg constrains other policies, including reserve diversification. U.S. Secretary of Commerce Gary Locke has bluntly defended the designation of China as a “nonmarket economy” for antidumping cases.