Asia Decouples From The West

The Big Family # 3

One of the great macro-economic debates is whether the rapidly growing Asian economies have decoupled from the recessionary problems of America. I have argued that they have, but Prof. Roubini has strongly suggested that we are heading into a global slowdown brought about by the U.S. credit crisis.

If the art auction held last night in Hong Kong by Sotheby’s is any indication of the mood among the wealthy in Asia, they have definitely decoupled.

Sotheby’s sold $51.77 million worth of Chinese contemporary art in three auctions in Hong Kong on Wednesday, allaying concerns that the global economic slowdown would depress the prices.

The record for a Chinese contemporary artist was set by Zhang Xiaogang’s oil, “Bloodline:Big Family No.3” (above), a somewhat ironic rendering of the Cultural Revolution. Although I have been pessimistic about the economic future, I am beginning to feel that the extraordinary moves by the Fed are inducing some liquidity into our system. Brad Delong also points out the continued attraction of U.S. Treasuries and coastal properties to foreign players.

The rise of Asia and the resulting demand by the rich and by governments for U.S. assets to hedge political risk is likely to keep savings glutting for decades. We aren’t building more superhighways, there are no major transportation improvements on the horizon, America is filling up, and so land-value gradients are on the rise. If the income distribution continues to erode, we will wind up with higher prices for scarce positional goods–chief among which is location, location, location.

A small satisfaction for those of us with a good view of the Pacific Ocean.

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0 Responses to Asia Decouples From The West

  1. Rachel says:

    When I was in Beijing last year I spent a lot of time in the 798 district and some of the other galleries around town. What’s happening in Chinese contemporary art made my head explode – it’s extraordinarily vibrant and complex. An Italian friend of mine likes to contrast China with Italy: the Italians have old masters, but a lacklustre contemporary art scene, while the Chinese had a lot of their older art destroyed in the Cultural Revolution but now have a wonderful crop of contemporary artists. I have no idea of whether there is any real link there, but I was completely floored by the quality of current Chinese art. I guess if you can only be in the top 1% of all the artists in China, that still leaves a lot of artists.

    As for the flood of Asia into foreign assets, yes, the Canadians and Australians have also noticed this effect on real estate for quite some time. Vancouver went berserk about ten years ago, and has never stopped growing. And Sydney is exploding with apartment blocks advertised for sale exclusively in Chinese. Last time I was in San Francisco it seemed like there was a lot going on there too.

  2. Fentex says:

    I don’t think the actions of the abnormally wealthy can be used as a barometer for general economy. They just don’t operate with the same constraints and incentives as most people.

  3. Jon Taplin says:

    Rachel- I noticed the same thing in Sydney.

    Fentex-Brad Delong’s point is that certain Western economies (U.S., Canada, UK, Australia) are seen as a hedge against potential political and economic instability for the well off Communists of China.

  4. Mark Maglio says:

    “Western economies (U.S., Canada, UK, Australia) are seen as a hedge against potential political and economic instability” well, at least our economy gets the benefit of the East offshoring some of their wealth here–until they wise up like our Western super-rich and pump it into banks in the Caymans.

  5. Rachel says:

    Mark, don’t worry about the Chinese super rich. There’s nothing the Western super rich can teach them that they aren’t already doing better.

    They are already using the Caymans. For example, f you want to invest in a telecommunications company in China (which is protected from foreign ownership under Chinese policy) you don’t buy into the company directly. If you want to make an investment in these industries what happens is that – after a “getting to know you” period in which they establish the your reliability and your capacity to invest cash – you will be offered an opportunity to invest in a Caymans-registered company that “develops” software, which is controlled by some wealthy Chinese investors, and offers an IRR with some pretty astounding numbers. The software is licensed to the Chinese telco, which expatriates large amounts of revenue to the Caymans through these licensing deals. The deals are extremely attractive. Extremely. But you need a buy in of at least 7 figures in US$.

    These sorts of deals were common in the mining and oil industries in Western countries back in the 1950s and 60s, to offset tax, although in those cases the deals involved purchasing equipment at vastly inflated prices, which was easier for tax authorities to police. But software licensing deals are much harder to disqualify (even if the Chinese Government wanted to). How do you quantify how much a billing system for mobile phones should cost? Bespoke systems can cost in the tens of millions in Western nations.

    It’s this money (and money from other industries that I’m sure have equivalent scams), which easily gets around the Chinese regulations on export of currency, that is then used to purchase hard assets in places like Sydney, Vancouver, and San Francisco.

    Of course the risk for investors in these schemes is that the Chinese telcos can easily repudiate the licensing deals (what are you going to do?). Or the Chinese Government could nationalise the industry (less likely given current trends). But so long as the recoupment period is sufficiently short, and there are enough well-connected Chinese in the investment mix for each offering, there is relatively little risk in subscribing any of these schemes – at least relatively little risk compared to the tax-protected returns.

    It’s definitely still a Wild West investment market in China. Contemporary art wasn’t the only thing that exploded my brain while I was there.

  6. Mark Maglio says:

    Thank you, Rachel. And thank you, Jon. This blog has been teaching me a lot about the underbelly of economics.

    And Jon, I’m about to give a ring to the admissions office at USC Law. Feel free to throw some weight around for a loyal reader, eh?

    ; )

  7. Morgan Warstler says:

    “But Western attitudes will change as well, with a likely shift to the political Right. White liberal guilt, the driving force behind political correctness, will subside as Westerners feel threatened by the global order changing, and their supremacy slipping away.

    Anti-Americanism will disappear as Europeans realise how much better it was to have a world super power that was a democracy (however flawed) not a dictatorship.

    There is even speculation that the intense economic pressure on countries such as Britain will cause them to trim down their bloated welfare state, simply because it will no longer be affordable at present levels.

    Western attitudes of superiority to China and the rest of the East will also subside, as Westerners realise they are no longer the masters of the world.”

  8. Hugo says:

    “Westerners…no longer the masters of the world”? Who cares? But the Chinese are masters of nothing. They are a nation of slaves. When Japan stood on China’s neck, and on the neck of Korea and Southeast Asia and the Central Pacific and most of East Asia proper, still the Japanese were well-off slaves. They only thought they were masters.

    China’s days are numbered. Long live China.

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  10. Jon Taplin says:

    Hugo- I teach a lot of Chinese Students and Rachel’s view of their business culture seems very correct to me. Your comments misjudge the ambition and the private enterprise of their citizens.

  11. Jon Taplin says:

    Morgan- I thought the article you linked to was quite good. I don’t necessarily agree with the conclusion you quoted. 20 years ago we thought Japan would take over, but they lacked a creativity input and floundered. I just think we will live in a tri-polar world–The US, China and Europe. Balance of Power Politics return.

  12. Hugo says:

    To butcher the Bard, “Men have fought and men have died, but not for love” of enterprise. The junta isn’t going down without a fight, but it’s going to go down.

    I’ve taught a lot of Chinese students too. We taught them to love liberty and to bow only to things higher than gangsters in uniform. Some of them took these things very seriously. What they didn’t take seriously was the capitalism-as-silver-bullet rhetoric of Mssrs. Kissinger, Haig and GHW Bush.

    And now too many have died or disappeared, and too many others have survived despite Beijing’s best efforts, and still others continue to learn too much here before they go back there.(Their watchers be damned.)

    These empty Olympic Games soon will have been seen as a swansong unawares. I wouldn’t bet on the favorite.

  13. STS says:


    You seem to be conflating people and nations in an odd way. Chinese people are indeed — the great majority of them — slaves. (I hesitate to claim much more for most human beings.) China as a nation, not so much. The big question for the 21st century is whether liberty of the kind Jefferson & Adams used to argue about can survive the ascendancy of global capital.

    I hope you are right that China’s rise will be given some modest check by a failure to decouple from American economic distress and that ordinary Chinese begin to assert themselves politically. Our liberty as citizens of the United States depends in a very real way on this test of Friedmanite Economic Determinism.

    If economic success can justify tyranny indefinitely, then forget ever recovering your rights from the maw of the Bush Unitary Executive. On the other hand, if Friedman was right, we should expect Chinese economic success to lead ineluctably to agitation for political freedoms. That in turn will help to create what JK Galbraith called countervailing power in the form of a coalition of global citizens capable of resisting the arbitrary authority of impersonal global capital.

    At any rate, the Davos crowd rolled credits on The End of History a little prematurely. We may yet find we live in uncomfortably interesting times.

  14. Hugo says:

    Yours is very lucid as always, STS, and thank you for its precision. I wasn’t speaking of economics, but of politics and intrigue. Lou Reed may change things, but Toyotas won’t. China’s liberalization of trade is not the result of its opening to Nixon; it is the result of that which caused its opening to Nixon: Nixon’s heroic willingness to declassify whole intelligence systems to convince China that the Soviets were massing for invasion across China’s northern border.

    The revolt of the universities didn’t just happen either, and it didn’t start in those universities. Much has happened since then, so the algorithms have changed somewhat for both sides, but it doesn’t have much to do with the modernization of the Chinese kitchen, as it were, or the price of Clintons in China.

    The focus on China solely in the context of the American implications of China’s newfound prosperity is at some point a blithe neglect of the fact that ultimately every business in China is controlled by its military, which takes a cut from every deal and plows it largely into countermeasures over against U.S. defenses. China’s prosperity is our undoing. For now.

    It’s the capitalist triumphalism, a la mode Friedman, that I’d sought to dispel a bit. I’m not saying that it’s wrong; I’m saying that it’s just as likely to end up in the back of Somoza’s Mercedes like Joe Baittiner did.

  15. anandkrishna says:

    In an increasingly global economic system that is much more inter-connected than the world ever has been, I submit that it is hard to state with any degree of conviction that Asia or indeed, any other region, is “decoupled” from the US or Europe.

    I am not an economist or a boffin of any sort. But living as I do in India (and I must admit I was surprised that India found no mention in your blogs), it is obvious that today’s global interdependence cannot be wished away. For instance, the sub-prime crisis may have originated in the US. However, Indian banks and other entities too have taken exposure to CMOs/CDOs and other complex derivatives. And although the losses run into the tens and hundreds of millions of dollars and not billions as they do for some Wall Street financial services firms, their very disclosure have spooked Indian stock markets about the financial health of these banks. Not surprisingly, many of these stocks have tanked, In fact, Indian stock markets, which, till 3 months ago, were arguably the world’s best performer, have lost close to 30% in market capitalization since mid-January 2008. Conversely, the sub-prime pressure on financial position has forced several US and European funds with investments in Indian stocks to book profits and recoup some of their losses. This process exerts even more selling pressure on Indian stocks, driving prices even lower.

    At another level, Indian outsourcing companies are servicing US and European companies, dispalcing incumbents. Equally, western automobile majors like Ford, GM, VW etc. are turning to emerging markets like India to rev up sales and profits. Retail majors like Walmart, Tesco etc. are looking to establish a presence in the large and untapped Indian market. All this will only serve to increase interdependence, which reinforces my original argument.

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  17. Jon Taplin says:

    anandkrishna-You make a very good argument for the phrase “when America sneezes, the world catches a cold”. However, I think there is a certain internal growth dynamic in the BRIC’s (Brazil, Russia, India, China) that will keep their domestic growth rates stronger than the US.

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