US Calls for Tougher Stance on China From IMF, World Bank

US Treasury Secretary Scott Besson has called on the International Monetary Fund and the World Bank to take a tougher stance on China. Joining us to discuss is Daniel Lai, chief economist at Treases Hedge Fund, international financial analyst and author of the book Freedom or Equality. Good afternoon, Daniel. Always great to see you. So, how is it that Let me ask you this. How is it that even though China is already the world's second largest economy, it continues to apply for low interest loans from the World Bank as a developing country? >> It's it's pretty amazing, isn't it? I think that what Secretary Bessant is saying makes absolute sense is that it makes it completely uh disadvantage for the rest of the world to compete with China when China is at the same time getting all of the benefits of an emerging economy when it is not an emerging economy. It's a fully developed economy and it's uh also uh maintaining a number of barriers both to trade and to uh capital flows that are uh generating a very very significant uh competitive advantage for China that certainly is not enjoyed by any other of its competitors. Imagine for Germany to see China that is now uh taking over the automotive sector and everything that has to do with electric vehicles seeing that China is getting tremendous loans at very very low rates uh to develop their industry while Germany is suffering from regulatory and taxation burdens. >> So Daniel I want to point to something specific. uh Besson urged the organization to take tougher stances on China's statedriven economic practices. Can you describe for us some of those practices? >> Oh certainly. Uh we all know that China is on the one hand an open economy and at the same time it is exceedingly closed. So number of practices that are directly involving government intervention is that the government is consistently bailing out industries with elevated levels of working capital challenges. At the same time, it is also directing the investments of me most of those businesses and those businesses have to report uh what they do to the government and and their strategies have to comply directly with what the government requires of them. And also the two elements that I think are very very significant particularly for exporters is having uh fixed uh rate for the currency and at the same time capital controls. So if you think about it, it's almost like an economy that is very open to the outside world, but at the same time it is exceedingly closed and enjoys a number of state subsidies that go well beyond the direct subsidies. is not a is not a subsidy in itself in which you can say the they have received such grant but you're getting a tremendous subsidy both in the financing and also in the currency fixing so those elements are very very significant enormous for an exporter think about it uh relative to uh the US German French or UK exporters no >> so those actions that you just described um do they conflict with the IMF's core mission or does it align with its mission >> with the IMFs in particular? Very they can conflict directly because it's all state aid and one of the things that the IMF is trying to promote is that there is as little state aid for international trade as possible and that there is a a free movement both of capital to start with. that is the entire uh core of the strategy of the IMF. So freedom of movement of capital and uh freedom also of and and open uh currency movements all of those things are critical. So in essence, China is working within the boundaries of the World Bank and the within the boundaries of the IMF, but with completely different rules compared with all of its other uh economies and and the peers and the competitors. >> I mean, so it's good that the Treasury Secretary is calling for a tougher stance. Um but can can you talk to us about what leverage does the US or the Treasury Secretary have uh over the IMF or the World Bank's policies? >> It's very limited, very limited. Unfortunately, as you know and we have discussed a few times, uh international bodies have been moving toward uh a very dangerous uh approach to China, which is we're going to let them enjoy all these benefits and we're going to allow them to work with all these privileges relative to other nations because it will end up benefiting everybody through higher growth and higher international trade. However, as we have seen throughout all of this trade tensions, all of that has generated enormous levels of imbalances. Now, the European Union is very worried about the fact that they're going to be flooded with exceedingly cheap Chinese products that are sold at lower prices than the production cost. All those things are important because uh one can understand that the IMF, the World Bank, the uh the World Trade Organization, all these international bodies when China was a country that started opening its economy. They actually uh wanted to in in good faith support the economy so that uh poverty would decline, so that the economy would open etc. However, something happened between 2011 and 2014, which is that the Chinese economy stopped opening. It started closing and it started closing very very rapidly with all the different uh rulings of the communist party and in particular President Xi Ping is is very very concentrated on this view of what is a state organized economy that resembles an open economy but in reality is state statism disguised as uh open. No. So, so all of those things are are a challenge. Unfortunately, the US has very very little uh leverage in this in this sense because um a lot of the trading partners of the Chinese regime and also a lot of the partners in the in the BRICS nations uh are in a sense playing along with this with this privilege that we have mentioned. So it's it's very very concerning. It's very difficult. It's very difficult to undo uh something that was a mistake at the beginning from the beginning which was to consider a fully developed economy as China has been for a long number of years as a developing economy and getting all the benefits that you know African or Latin American nations that are way behind in terms of development uh are getting and obviously at a much larger scale. So Daniel, I just want to ask you one more question and perhaps this is one of the mo more important ones. How did China can you explain this for us? How did it get such preferential treatment from these organizations? >> Ah that's a very good question and the answer is complex but let me summarize it as much as I can. uh the Chinese regime has been exceedingly good at selling to the world something that it was not implementing inside. So basically you read it all the time. You hear it everywhere. The Chinese government is talking about harmony. It's talking about open relationships. It's talking about multilateralism. It's talking about free trade. All these things all the time. was talking about open economies and talking about uh an open financial system while at the same time it's actions are completely different and uh it's so interesting because within the mainstream media within uh financial uh the financial sector investment banks international bodies they seem to want to believe this message of openness of harmony of of uh let's say multilateralism and uh support for each other when in reality what is going on is as a book that I have behind me which is great called we have been harmonized is that the economy has been closing and closing and closing almost at a feverish pace particularly in the past in the past 8 to 10 years. Well, all right, Daniel. Very good analysis today. Thank you very much. >> Thank you very much, Don. Always a pleasure.