China
The cost of US debt and rebalancing Asian growth
Author: Peter Warr, ANU Since the Asian financial crisis of 1997–98, the countries of East Asia have, in aggregate, run huge annual current account surpluses. The counterparts of these surpluses, including Europe and the US , have been correspondingly huge current account deficits. This process has continued for over a decade and a half, and huge stocks of debt have accumulated. Much of this is US government debt owed to the central banks of the East Asian countries. About half of it is held by China . It is expected that the debt will eventually be repaid and this implies that the surpluses must eventually turn into deficits, and vice versa. Indefinite accumulation of debt is unsustainable. Current account imbalances are not necessarily a problem. They reflect what international economists call international inter-temporal trade. One country (the surplus country) is exchanging current goods and services for financial assets, which are claims on goods and services in the future. The other country (the deficit country) is doing the reverse. Mutual gains from trade arise from these transactions because the initial circumstances of the countries involved are not the same. For some countries it makes sense to save more now, because they have a younger working age population, for example, in order to consume or invest more later. For others, the reverse applies. In this respect, inter-temporal trade is not fundamentally different from contemporaneous trade in goods and services. But basic differences do exist. The time dimension can mean that the individuals obliged to repay a debt may not be the same as those who incurred it. So the outcomes chosen by this generation of Americans, for example, can create an unwelcome problem for the next generation. Many observers regard the present global imbalances as unsustainable, even in the short run. First, East Asian countries may be unwilling to continue to accumulate US debt and even wish to reduce the stock they hold. Second, the US may be unwilling to allow this accumulation of indebtedness to continue and seek to reduce the stock of debt they currently owe. The two are not mutually exclusive and could happen at the same time. They both rest on the fear that the burden of debt servicing might suddenly become intolerable for the debtors, notably the US, meaning an unexpectedly rapid adjustment becomes necessary. East Asia’s current account surpluses may have to decline, and even turn into deficits, very quickly. This must happen eventually — the question is when . It might not be a problem if it happens ‘gradually and predictably’. But if it happens ‘soon’, at an unexpectedly rapid rate, there may be a serious adjustment problem involved. If the problem is anticipated it might be possible to avoid the large-scale unemployment and other social costs that would otherwise result. But these events are uncertain, and ‘growth rebalancing’ is essentially a problem of risk management. From the perspective of the East Asian countries, the interest in growth rebalancing is motivated by two concerns. First, there is the possibility that current account surpluses (positive flows) will turn into deficits (negative flows) quickly, leading to social disruption and other adjustment costs. Second, there is the fear that the stock of debt owed to them may become so high that it becomes impossible to repay. The first concern is more immediate. Especially since the Asian financial crisis, the countries of Asia and the Pacific have, to varying extents, focused their production towards exports and away from their domestic markets. But if the current account surpluses are to be reduced significantly, or even reversed, then resources must be reallocated towards production for the domestic market to avoid massive unemployment. For the deficit countries the problem is exactly the reverse. The policy imperative is similar in both cases: avoid the disruption — especially large-scale unemployment — resulting from having to adjust too rapidly. The issue is not really whether such growth rebalancing will occur, but when, at what rate and by what means. In the current global environment Asia is vulnerable to such an adjustment problem arising at short notice. Some ‘rebalancing’ now — away from reliance on external demand and towards domestic demand — can reduce this vulnerability by reducing Asia’s export dependence. A simple model of the global demand and supply of loanable funds can be used to bring out a key feature of the adjustment options. Suppose the deficit countries, principally the US, wish to reduce their current account deficits. Is it better for the US to make the adjustment itself or attempt to induce Asia to adjust by reducing its surplus? If the US adjusts, its excess demand for funds declines, the level of its current account deficit declines and world interest rates fall. If Asia contracts its excess supply of funds, the same combination of current account balances may result, but with an increase in world interest rates. Given the huge level of its stock of debt, the US has a strong interest in low world interest rates. It should therefore do the adjusting itself and not be berating Asia to reduce its current account surpluses. Peter Warr is John Crawford Professor of Agricultural Economics and Head of the Arndt-Corden Department of Economics in the Crawford School of Economics and Government at ANU. How should G20 help global rebalancing? Asian Development Bank and the invention of a new Asian growth paradigm The Greek tragedy: Global debt crisis and balance sheets
Author: Peter Warr, ANU
Since the Asian financial crisis of 1997–98, the countries of East Asia have, in aggregate, run huge annual current account surpluses.
The counterparts of these surpluses, including Europe and the US, have been correspondingly huge current account deficits. This process has continued for over a decade and a half, and huge stocks of debt have accumulated. Much of this is US government debt owed to the central banks of the East Asian countries. About half of it is held by China. It is expected that the debt will eventually be repaid and this implies that the surpluses must eventually turn into deficits, and vice versa. Indefinite accumulation of debt is unsustainable.
Current account imbalances are not necessarily a problem. They reflect what international economists call international inter-temporal trade. One country (the surplus country) is exchanging current goods and services for financial assets, which are claims on goods and services in the future. The other country (the deficit country) is doing the reverse. Mutual gains from trade arise from these transactions because the initial circumstances of the countries involved are not the same. For some countries it makes sense to save more now, because they have a younger working age population, for example, in order to consume or invest more later. For others, the reverse applies. In this respect, inter-temporal trade is not fundamentally different from contemporaneous trade in goods and services. But basic differences do exist. The time dimension can mean that the individuals obliged to repay a debt may not be the same as those who incurred it. So the outcomes chosen by this generation of Americans, for example, can create an unwelcome problem for the next generation.
Many observers regard the present global imbalances as unsustainable, even in the short run. First, East Asian countries may be unwilling to continue to accumulate US debt and even wish to reduce the stock they hold. Second, the US may be unwilling to allow this accumulation of indebtedness to continue and seek to reduce the stock of debt they currently owe. The two are not mutually exclusive and could happen at the same time. They both rest on the fear that the burden of debt servicing might suddenly become intolerable for the debtors, notably the US, meaning an unexpectedly rapid adjustment becomes necessary.
East Asia’s current account surpluses may have to decline, and even turn into deficits, very quickly. This must happen eventually — the question is when. It might not be a problem if it happens ‘gradually and predictably’. But if it happens ‘soon’, at an unexpectedly rapid rate, there may be a serious adjustment problem involved. If the problem is anticipated it might be possible to avoid the large-scale unemployment and other social costs that would otherwise result. But these events are uncertain, and ‘growth rebalancing’ is essentially a problem of risk management.
From the perspective of the East Asian countries, the interest in growth rebalancing is motivated by two concerns. First, there is the possibility that current account surpluses (positive flows) will turn into deficits (negative flows) quickly, leading to social disruption and other adjustment costs. Second, there is the fear that the stock of debt owed to them may become so high that it becomes impossible to repay. The first concern is more immediate.
Especially since the Asian financial crisis, the countries of Asia and the Pacific have, to varying extents, focused their production towards exports and away from their domestic markets. But if the current account surpluses are to be reduced significantly, or even reversed, then resources must be reallocated towards production for the domestic market to avoid massive unemployment. For the deficit countries the problem is exactly the reverse. The policy imperative is similar in both cases: avoid the disruption — especially large-scale unemployment — resulting from having to adjust too rapidly.
The issue is not really whether such growth rebalancing will occur, but when, at what rate and by what means. In the current global environment Asia is vulnerable to such an adjustment problem arising at short notice. Some ‘rebalancing’ now — away from reliance on external demand and towards domestic demand — can reduce this vulnerability by reducing Asia’s export dependence.
A simple model of the global demand and supply of loanable funds can be used to bring out a key feature of the adjustment options. Suppose the deficit countries, principally the US, wish to reduce their current account deficits. Is it better for the US to make the adjustment itself or attempt to induce Asia to adjust by reducing its surplus? If the US adjusts, its excess demand for funds declines, the level of its current account deficit declines and world interest rates fall. If Asia contracts its excess supply of funds, the same combination of current account balances may result, but with an increase in world interest rates.
Given the huge level of its stock of debt, the US has a strong interest in low world interest rates. It should therefore do the adjusting itself and not be berating Asia to reduce its current account surpluses.
Peter Warr is John Crawford Professor of Agricultural Economics and Head of the Arndt-Corden Department of Economics in the Crawford School of Economics and Government at ANU.
- How should G20 help global rebalancing?
- Asian Development Bank and the invention of a new Asian growth paradigm
- The Greek tragedy: Global debt crisis and balance sheets
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The cost of US debt and rebalancing Asian growth
China
Q1 2024 Brief on Transfer Pricing in Asia
Indonesia’s Ministry of Finance released Regulation No. 172 of 2023 on transfer pricing, consolidating various guidelines. The Directorate General of Taxes focuses on compliance, expanded arm’s length principle, and substance checks. Singapore’s Budget 2024 addresses economic challenges, operational costs, and sustainability, implementing global tax reforms like the Income Inclusion Rule and Domestic Top-up Tax.
Indonesia’s Ministry of Finance (MoF) has released Regulation No. 172 of 2023 (“PMK-172”), which prevails as a unified transfer pricing guideline. PMK-172 consolidates various transfer pricing matters that were previously covered under separate regulations, including the application of the arm’s length principle, transfer pricing documentation requirements, transfer pricing adjustments, Mutual Agreement Procedure (“MAP”), and Advance Pricing Agreements (“APA”).
The Indonesian Directorate General of Taxes (DGT) has continued to focus on compliance with the ex-ante principle, the expanded scope of transactions subject to the arm’s length principle, and the reinforcement of substance checks as part of the preliminary stage, indicating the DGT’s expectation of meticulous and well-supported transfer pricing analyses conducted by taxpayers.
In conclusion, PMK-172 reflects the Indonesian government’s commitment to addressing some of the most controversial transfer pricing issues and promoting clarity and certainty. While it brings new opportunities, it also presents challenges. Taxpayers are strongly advised to evaluate the implications of these new guidelines on their businesses in Indonesia to navigate this transformative regulatory landscape successfully.
In a significant move to bolster economic resilience and sustainability, Singapore’s Deputy Prime Minister and Minister for Finance, Mr. Lawrence Wong, unveiled the ambitious Singapore Budget 2024 on February 16, 2024. Amidst global economic fluctuations and a pressing climate crisis, the Budget strategically addresses the dual challenges of rising operational costs and the imperative for sustainable development, marking a pivotal step towards fortifying Singapore’s position as a competitive and green economy.
In anticipation of global tax reforms, Singapore’s proactive steps to implement the Income Inclusion Rule (IIR) and Domestic Top-up Tax (DTT) under the BEPS 2.0 framework demonstrate a forward-looking approach to ensure tax compliance and fairness. These measures reaffirm Singapore’s commitment to international tax standards while safeguarding its economic interests.
Transfer pricing highlights from the Singapore Budget 2024 include:
This article is republished from China Briefing. Read the rest of the original article.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at china@dezshira.com.
China
New Report from Dezan Shira & Associates: China Takes the Lead in Emerging Asia Manufacturing Index 2024
China has been the world’s largest manufacturer for 14 years, producing one-third of global manufacturing output. In the Emerging Asia Manufacturing Index 2024, China ranks highest among eight emerging countries in the region. Challenges for these countries include global demand disparities affecting industrial output and export orders.
Known as the “World’s Factory”, China has held the title of the world’s largest manufacturer for 14 consecutive years, starting from 2010. Its factories churn out approximately one-third of the global manufacturing output, a testament to its industrial might and capacity.
China’s dominant role as the world’s sole manufacturing power is reaffirmed in Dezan Shira & Associates’ Emerging Asia Manufacturing Index 2024 report (“EAMI 2024”), in which China secures the top spot among eight emerging countries in the Asia-Pacific region. The other seven economies are India, Indonesia, Malaysia, the Philippines, Thailand, Vietnam, and Bangladesh.
The EAMI 2024 aims to assess the potential of these eight economies, navigate the risks, and pinpoint specific factors affecting the manufacturing landscape.
In this article, we delve into the key findings of the EAMI 2024 report and navigate China’s advantages and disadvantages in the manufacturing sector, placing them within the Asia-Pacific comparative context.
Emerging Asia countries face various challenges, especially in the current phase of increased volatility, uncertainty, complexity, and ambiguity (VUCA). One notable challenge is the impact of global demand disparities on the manufacturing sector, affecting industrial output and export orders.
This article is republished from China Briefing. Read the rest of the original article.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at china@dezshira.com.
China
Is journalist Vicky Xu preparing to return to China?
Chinese social media influencers have recently claimed that prominent Chinese-born Australian journalist Vicky Xu had posted a message saying she planned to return to China.
There is no evidence for this. The source did not provide evidence to support the claim, and Xu herself later confirmed to AFCL that she has no such plans.
Currently working as an analyst at the Australian Strategic Policy Institute, or ASPI, Xu has previously written for both the Australian Broadcasting Corporation, or ABC, and The New York Times.
A Chinese language netizen on X initially claimed on March 31 that the changing geopolitical relations between Sydney and Beijing had caused Xu to become an expendable asset and that she had posted a message expressing a strong desire to return to China. An illegible, blurred photo of the supposed message accompanied the post.
This claim was retweeted by a widely followed influencer on the popular Chinese social media site Weibo one day later, who additionally commented that Xu was a “traitor” who had been abandoned by Australian media.
Following the publication of an ASPI article in 2021 which exposed forced labor conditions in Xinjiang co-authored by Xu, the journalist was labeled “morally bankrupt” and “anti-China” by the Chinese state owned media outlet Global Times and subjected to an influx of threatening messages and digital abuse, eventually forcing her to temporarily close several of her social media accounts.
AFCL found that neither Xu’s active X nor LinkedIn account has any mention of her supposed return to China, and received the following response from Xu herself about the rumor:
“I can confirm that I don’t have plans to go back to China. I think if I do go back I’ll most definitely be detained or imprisoned – so the only career I’ll be having is probably going to be prison labor or something like that, which wouldn’t be ideal.”
Neither a keyword search nor reverse image search on the photo attached to the original X post turned up any text from Xu supporting the netizens’ claims.
Translated by Shen Ke. Edited by Shen Ke and Malcolm Foster.
Asia Fact Check Lab (AFCL) was established to counter disinformation in today’s complex media environment. We publish fact-checks, media-watches and in-depth reports that aim to sharpen and deepen our readers’ understanding of current affairs and public issues. If you like our content, you can also follow us on Facebook, Instagram and X.
Read the rest of this article here >>> Is journalist Vicky Xu preparing to return to China?
- Q1 2024 Brief on Transfer Pricing in Asia
- New Report from Dezan Shira & Associates: China Takes the Lead in Emerging Asia Manufacturing Index 2024
- Is journalist Vicky Xu preparing to return to China?
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- China Unveils Plan to Upgrade Industrial Equipment
- China deepens engagement with new Indonesian president as top diplomat visits Jakarta
