It is risky indeed for someone like me, on the other side of the world, commenting on a country with spotty economic data (a function of size and maturity of its information gathering apparatus, as well as possible intent to put lipstick on pigs) to take issue with an emerging consensus. Nevertheless, I will stick out my neck a tad.
Reports of China being on the mend, such as “China’s Economy Shows Signs of Recovery on Stimulus,” on Bloomberg are overdone. I suspect way overdone.
Consider some basics. China’s economy is not as export dependent as many believe, but exports have made a significant contribution to growth. Commercial real estate development has been another big driver. Those two have gone into reverse.
Let’s deal with the notion of “stimulus” making up for the slack. The famed half trillion dollar plus package announced some months ago was largely spending already budgeted and planned. Analyst views vary (and further input welcomed) but from what I have seen, only 1/6 to 1/3 was new spending, and most of that occurred in the second year of this two-year program.
The latest bit of news that the markets have seized upon is that China has been pushing its banks to lend, and loan growth has been impressive. However, Michael Pettis tells us that appearances are deceiving:
I have three very serious problems with the optimism associated with the latest numbers on credit expansion.
First, this credit expansion is not all that it may seem. Aside from the fact that a lot of this new credit has consisted of an increase in bill discounting, in order to understand what is really happening to total credit in the Chinese economy we need much better data. There are persistent rumors that part of the increase in bank lending consisted of putting back on balance sheet loans that were taken off balance sheets in 2007 and 2008 when the PBoC was trying to constrain bank lending. It isn’t really new credit…
What is more, there is clearly an increase in lending games aimed at making policymakers happy by showing fat loan books. One of my students just visited me today with an example that involved his father. I don’t want to get into too much detail, for obvious reasons, but the net effect of the transaction involving his father was that an entity was created to borrow money from a bank, the proceeds of which were deposited in a CD, which was then assigned in ownership to the real borrowing entity, which then used the CD as collateral for the “real” loan. Aside from the complications used probably to get around credit restrictions, one single loan was recorded as two loans plus a CD deposit. Apparently the lending bank knew about all the intermediate steps. Surprise, surprise! It turns out that if your career prospects depend on increasing the total amount of loans outstanding, with less focus on the quality or structure of the loans, in fact it isn’t hard to show very nice, fat loan book.
One of the readers of this blog, yesterday gave another very interesting example of what might be included in this new lending. He says:
As for the sudden surge in lending, this looks to me to be an accounting exercise, clearing or otherwise funding non-bank debts piled up by SOEs. Many large SOEs (not central ones, regional/local ones, though the central ones win no prize themselves) are behind on paying wages, suppliers etc, and the stimulus provided by this lending surge is really just to ease the log-jam of triangular debts. This implies that there will not be much “bang” for all of this lending
Second, exploding credit may provide a fillip to growth in the short term, but if it leads to a future increase in bad loans, it will have exactly the opposite effect in the near future. As I discuss in my previous blog entry, this represents a big bet on the duration of the slowdown.
Third, the biggest problem has to do with how much credit expansion will make a difference. Andrew Batson at the Wall Street Journal (sorry, I don’t have the link) makes this point when he discusses the “string of dire profit warnings has signaled a rapid deterioration in the financial health of Chinese companies.” His relevant paragraphs
Corporate investment is hugely important to China’s economy, where capital spending accounts for more than 40% of annual output, one of the highest ratios in the world. The profit decline will have major effects across the economy as companies have less money to buy new equipment or expand their businesses.
…Economists have long warned that Chinese companies’ heavy reliance on retained profits would tend to exaggerate swings in the nation’s investment cycle. Official statistics show that 63% of investment in China last year was financed by what are called “internally generated” funds, which include retained profits. That’s up from just below 50% a decade ago.
Basically Chinese corporate profitability in China is dropping sharply, and nearly everyone expects the trend to continue over the rest of 2009. If nearly two-thirds of investment in China was funded by retained earnings, a sharp drop in profitability should result in an equally sharp drop in investment funded by retained earnings. I don’t know the magnitude, but I would guess that a very large increase in real bank lending aimed at real investment, far more than has been reported, would be needed just to make up for the decline in investment out of retained earnings
Pettis also took issue with the rosy spin Xinhua tried to put on the wretched January trade numbers.
Now that’s merely one man’s opinion, albeit a well informed one who is also on the ground.
Yes, the Chinese stock markets have rallied, but the US in the Great Depression had six rallies of over 20% on the way to its bottom. Some perkiness on the investment front isn’t conclusive.
If we look at the Great Depression for analogies, it was the manufacturing power and big FX reserve (in this case gold) accumulator, the US, that was one of the very worst hit by the Great Depression and had one of the hardest roads out. Admittedly, that was in part due to it being comparatively late to depreciate its currency. Trade deficit countries that defaulted on sovereign debts had much shallower downturns.
Perhaps most important, economic downdrafts are not linear affairs. There are upticks and down moves within an overall trend. But the optimists are eager to find signs of improvement and declare it a recovery.
China’s economy is showing signs that a 4 trillion yuan ($585 billion) stimulus package is taking effect.
The world’s third-biggest economy may expand 6.6 percent in the second quarter after slowing to 6.3 percent in the three months to March 31, the weakest pace since 1999, according to the median estimates of 14 economists surveyed by Bloomberg News…
“China looks set to be the first major economy to recover from the current global meltdown,” said Lu Ting, an economist with Merrill Lynch & Co. in Hong Kong. “China is the only economy in the world to see significant growth in credit to corporate and household sectors after September 2008, when the financial crisis worsened to a near collapse.”
The government’s stimulus plan, announced in November, is beginning to gather momentum. Projects such as the building of 3.5 billion yuan of public houses in Shaanxi province and Shanghai began in December, while Shandong province started work on three new railway lines the same month….
Even if the global recession is protracted, China has the ammunition to maintain growth, said Merrill Lynch’s Lu. It has public debt of only 18.5 percent of gross domestic product — compared with 75 percent in India — foreign currency reserves of $1.95 trillion, and a balanced budget.
“China has perhaps the deepest pockets in the world,” said Lu. “It can relentlessly ramp up spending to create jobs and meet its growth target.”…
“The economy is bottoming,” said Tao Dong, chief Asia economist at Credit Suisse AG in Hong Kong, citing the PMI, the surge in bank lending, and spending on construction and machinery because of the infrastructure projects….
Companies fired workers at a faster pace in January than in December and most businesses faced tougher conditions, said Stephen Green, a Shanghai-based economist at Standard Chartered Bank. “Less bad news is not good news,” he said.
Even if stimulus spending creates 8 percent growth this year, meeting the government’s target, “it will unlikely be healthy, job-creating growth” because mostly it will boost demand for steel and cement and provide little support for consumption, said Green.
Eh, didn’t you just assert that there were imminent riots and civil unrest in China?
Make up your mind.
Cnn Money should be beneath you. Try for Bloomberg! I see no reason why you should not be a regular commentator.
Thanks for the Bloomberg suggestion.
As to this post, I am unclear as to what your issue is. There is unrest, although directed mainly against former employers, and to a lesser degree, provincial officials. Even government officials have warned of threats to social stability.
This post questions the notion that recovery is around the corner.
Stephen Green got it right, “Less bad news is not good news”, indeed.
China is a big question mark, it could go either way. Politically it is fubar but not as much as during “cultural revolution”, environmentally also quite fubar but economically seems to be quite healthy.
Riots are pretty much everyday happenings but who cares in a 1300 000 000 people nation if even a couple of millions are rioting here and there. No meaningful resistance movement at least for now.
FYI, USA did take a big hit during Great Depression but now it will take even bigger one. In a global economy today most Americans are de facto maxed-out, cake-eating spoiled princesses with no useful job skills to offer. Those hordes of former real-estate agents and nail salons consultants are now during this depression as useless as fish bikes.
Only about 12,5 million out of 155 million are working in manufacturing sectors, relatively even less than in the UK! That figure should be at least 22-25 million when compared to production powerhouses such as Germany or Japan.
I think that China will stop making junk for the American market and move upscale with their manufacturing like Japan did in the 50-60s. They have challenges but are better positioned as a country than the US, IMO. It will depend on how much more screwed they let themselves be by the printer (hear them going in the background?) of the Reserve Currency.
Yves, I like your blogs. However when come to China you were not entirely honest to yourself. You once said that it was China’s strategy to have double digit annual inflation rate. Couldn’t be further from the truth.
Anon of 2:06 AM,
I don’t recall saying any such thing, nor does a search of my posts turn up such a statement. Can you provide a link?
What I did say was to pick up on what Nouriel Roubini had said, that China was past the point where it could make a one-time currency revaluation (which it was under some pressure to do at the time, since the level of its dollar purchases, which it could not effective sterlize, was leading to rapid money supply growth and stoking inflation. A currency revaluation would have lowered the trade surplus and with it, the scale of dollar purchases).
However, Roubini said it was too late, but China was going to eventually achieve the same result (reducing export competitiveness) via the same inflation (ie, if the price of your goods goes up by 40% in local terms in 3 years, and your currency is rising or at least not falling, and your main trade partners aren’t running the same level of inflation, your goods are less competitive than they were. That would eat into the trade surplus).
I wouldn’t call that a strategy, I’d call it following the path of least resistance.
“Yes, the Chinese stock markets have rallied, but the US in the Great Depression had six rallies of over 20% on the way to its bottom.”
That is a provocative little factoid. Wow. I knew it hadn’t been stagnant, but I didn’t realize there were this kind of “false dawns”.
Really interesting Yves, thanks.
your courage and integrity keeps us all informed and leaves us wiser. keep up the work.
I appreciate that you are not a China watcher, and I fear there is not a lot of good data available. What data there is (containers shipped, imports) has been wretched.
I am not a China watcher either, so I would be going even further out on a limb than you, but since we all seem to value the dialog, here I go too.
The aspect that I have found strange about working with China is their incredibly thin margins, and how little they do to gain pricing power. There are some exceptions, some of their semiconductor operations are very capital intensive, and so they make it up with passable margin. But by-and-large, the best case percentage margins are much thinner than any western entrepreneur would risk.
My working theory is that this thin margin is an artifact of an investment bubble. Borrowed money did not put the entrepreneur at much risk, as we are seeing with the labor riots (from unpaid wages as the companies even used payday as a float).
The government also participated in the investment bubble because it needed – above all – employment. The excess savings gave the government the cash to lend and control the currency.
When excess capacity turned ponzi – the margin could not even support the interest – then it turned viscous. I am not talking about the American downturn harming the Chinese, I am talking about their own investment bubble getting burst.
People talk about China as if it is somewhat more vulnerable to world downturns. If only they would spend their savings they could even save the world.
I fear that their downturn is greater than a simple multiple of the worlds pain, and they already have spent their savings – but just not realized it yet.
Please tear me to shreds if there is a big hole in the logic. There is just too much agreement amongst bloggers regarding China, with too little data.
Only about 12,5 million out of 155 million are working in manufacturing sectors, relatively even less than in the UK! That figure should be at least 22-25 million when compared to production powerhouses such as Germany or Japan.
Manufacturing has been declining in almost every economy. From about 27 % of world GDP in 1970 to 18 % now. The U.S.’s fall is only slightly above average the world average.
China is the exception not the rule. Manufacturing is too costly to be considered a profitable use of capital, long-term, when the economy is run by competing private interests. China was even trying to dump their low end manufacturing before this crisis.
The financialization of the ‘developed world’ , in an era of global capital movements, was very predictable.
If they have any brains in China they are sitting there with their nice savings and watching the West implode from overconsumption, unsustainable debt and corrupt financial and politcal sytems.
China will be quite happy consuming at a much lower level of Maslow’s hierarchy of needs for some time. They will be a lot happier than Aericans having to rachet their “needs” back to fit their shrinking income.
I thought 20 million had lost their jobs and were returning to the countryside, and most, if not all, had had manufacturing jobs.
China reports numbers about as well as the US Government or the Federal Reserve. Cheerleading with happy talk direct from Fantasyland.
For my own good, Congress here, will approve spending (including interest) over a trillion before I get to read about where it is all going.
When I looked at this in terms of actual numbers rather than percentages then I came up with a different perception of what is going on. As far as I understand it banks have increased lending by 1.6trillion RMB or 234billion dollars. We know in the case of ICBC that it plans to lend 530billion this year and lent 252billion in January which means the bank lent almost half of its yearly target in 1 month,which raises the question of sustainability.
We know that imports dropped 17 percent to around 90billion dollars and imports dropped to 43 percent to 51billion dollars when compared to January last year. I did think that most of the drop in imports was due to commodity prices except that, certainly with iron ore buying contracts and price setting are often yearly. Having said that China ought to be in negotiation now with aim for prices to be set from January 1st and prices being reset quarterly. This raises a question of whether the drop in imports is a one of for this quarter. With Chinese stockpiles of iron ore now exhausted and spot prices rising again and with the increased demand from railroad steel due to stimulus money in china then you have to wonder.
We know 50 percent of imports are used for export goods which suggests that exports ought to fall further providing the import falls are not mainly due to commodity price falls. What many fail to take into account with china is the impact of inventories. Just how much export stock is piled up in docks in China and the US and will there be a drastic cut back in orders as is being experienced by other Asian economies. As for internal consumption then I do think that some of that 252 billion lent in January will ramp up infrastructure projects with corresponding demand for steel and cement.
Another strand of complexity will undoubtedly be currency fluctuations and protectionism. Any further drop in Sterling and the Euro relative to the dollar is going to do further damage to the Chinese economy. Protectionism damage is unlikely to overt but Japanese and other countries may favour home factories over Chinese ones when it comes to the crunch.
Looking into the crystal ball for April time after commodity price renegotiations I would not be surprised to see exports at around 50 billion while imports begin to rise to 65 billion. I expect I am alone in forecasting such a rapid switch but enough unexpected things have happened for it to be within the realms of possibility. Time to give some thought to whether the FED is really going to monetize debt if I am right.
Pettis is ‘the’ authority on the China economy IMHO – thanks for utilizing his insights to bring perspective to reports such as this one from Bloomberg.
Roubini on the risks of a Hard Landing in China
I want to point out to the readers this interesting article on the “The New Depression” and the role of China, by Martin Jacques.
I would say I agree on most of what he says. What do you think about it?
and also this on Chinese GDP calculations
Chinese GDP – Why 0% Growth is the New 6.8%
I should be very much surprised if commercial re in China has even deflected into its real decline phase yet, let alone bottomed. Yes, the decline probably started 18 mo ago, but the real trough in trade volume is only just tanking now, and real estate values in much of the coast were a function of a) hot money, and b) trade concern ripple effects. Very surprised. Late 09, maybe.
China’s stock market was bound to bounce; it had crashed so far from the top one might have been tempted to delist everything and do a reboot. And volatility Down East is mucho, so a fat 20% needs to be seen in that context, also.
If there is a No. 1 Way China could screw up it’s crisis response/recovery action plan, that would be bulk issuance of shoddy loans. In a down economic environment, profits are going to be thin, so loan opportunities need to be watched closely. Silly lending will do the ole esploding cigar trick, just in time to decap the top of the first recovery upswing if it happens.
One further point: Since China’s Top Men at Davos all but proclaimed, “There will be growth to 8%,” we can expect that numbers coming out of China regarding growth will be, what’s a tactful phrase?, wanting scrutiny. If official statistics were opaque before, they may need fumigation before analysis over the next six-ten quarters, methinks.
I say all that as someone who believes, still, that the bust will be notably less severe in China than the worst case scenarios which have gotten more typical resort. That does not mean I believe they will have no bust; obviously, then are in a down cycle now. Let’s see where they are in Q3 before anyone starts making happy talk about ‘recovery’ in China.
“The famed half trillion dollar plus package announced some months ago was largely spending already budgeted and planned. ”
This is a myth. Well, lots of projects had been planned or “shovel ready”. But either they were not budgeted or had a budget for a distant future. The half trillion plan made these projects happened or happened earlier. That is the difference.
Michael Pettis is a smart economist. But it is either they made up the loan data as Michael Pettis said, or they made lots of new bad loans. If the new loan can lower financing cost and save firms whose margin depends on the lower financing costs and liquidity, then it would be considered as a successful strategy.
not to be a cynic but is there a chance this Bloomberg article was positioned in the context of the American Stimulus package? e.g. it worked their so it will work here
“The famed half trillion dollar plus package announced some months ago was largely spending already budgeted and planned. “
you should pose your question to Pettis on his blog – he generally responds to comments
I’m honestly fascinated by the meme that modern China can somehow strike a pose of financial superiority vis-a-vis the US and others.
Individual Chinese citizens might well be careful with their money, but oh boy, get it into the hands of officials and corporate management and watch the shenanigans fly- not to mention the 125th luxury condo complex in a city of 500,000 populated mostly by migrant workers.
Increased lending shows a sign of economic recovery? I’m sure political pressure has absolutely nothing to do with that. No way. China is as free market as they come. Ayn Rand’s paradise.
From a personal perspective, I think Chinese development in the 2000s is as good a representation of the global credit-driven orgy as anything going on in the US.
In the US, people were buying homes they couldn’t afford and stuffing the pockets of the middlemen.
In China, people were being forced off their land to make way for luxury developments they couldn’t afford, of which a good amount would sit empty and whose inflated notional value would stuff the pockets of middlemen.
Nice little tangle we got our planet in!
Yves, similar viewpoint posted on this blog with a look at Baltic Dry Index inserted as well
Anonymous @8:46 AM
I am a regular reader of Michael Pettis’s blog and debated a lot previously. Right now I really do not need to ask him about questions on China. He has been a doom sayer for, like 2 years…
Despite fiscal stimulus, in the end, its corporate profitability that drives capital investment and thus economic growth.
“capital spending accounts for more than 40% of [China’s] annual output, one of the highest ratios in the world…Official statistics show that 63% of investment in China last year was financed by what are called “internally generated” funds, which include retained profits. That’s up from just below 50% a decade ago.”
From FT, commenting on China’s most recently reported PPI:
“…[china’s 6.3%] drop in prices of goods leaving at the factories level was likely to depress further corporate profits, which are an important source of funding for investment in China. Producer prices could fall by as much as 10 per cent, said Yu Song at Goldman Sachs, which “would make industrial profits look very bad.”
“What the [Chinese] government has to contend with is a slowdown in every other sector of the economy…Since the Chinese government accounts for only some 20% of GDP, “how it will make up for a slowdown in the other 80% is beyond me.”
“…Since the Chinese government accounts for only some 20% of GDP, “how it will make up for a slowdown in the other 80% is beyond me.””
It won’t, nor does it intend to. The gov spending is to 1) reduce the negative impacts caused by lower growth in the other 80% 2) reduce the long term production costs (transportation and energy) so that the profitability would increase in long term. 3) redirect the talents to inland areas (education and healthcare)
Weather the gov spending can be relatively efficient is the key.
” 2 + 2 = 5 “
Nineteen Eight-Four, George Orwell
Can we put to bed the notion that “the US doesn’t manufacture anything anymore so we’ll disappear as an economy”… look it up. The US is the largest manufacturing country in the world by a long shot (accounting for 20% of all manufacturing in 2007… China was second at 12%: UN Statistics). The reason why employment is going down is because our productivity and mechanization is far superior than most of the planet.
You are very intuitive if that is your uninformed guess on China. China did not invent a new economic model… they are using the same playbook that everyone else has to use.
Manufacturing requires a lot of capital investment up front… and in order to pay off the cost of that capital, the manufacturer needs to operate at a certain margin and at a certain utilization rate in order to break even and hopefully make a profit. For reference, in the US, the breakeven utilization rate is usually around 80%.
In China over the last decade, they have built up massive manufacturing capacity predicated on the assumed double-digit growth trajectory forever and aided by loose borrowing and Foreign Direct Investment. What got built over there was a lot of plants that had very optimistic growth plans, had one or two customers, and operated at a 50% utilization rate… but they had a “build it and they will come” mentality.
When I asked someone how they could stay in business at 50% utilization rates, they told me they were getting floated by investors and banks until the time they can bring on more business. That worked, until they lost one of their customers and their investors pulled their money when the markets turned. Now, thousands of companies in China are going out of business. Accounting always catches up eventually.
So now there is this majorly destructive undercurrent working its way through employment and the economy in China. They essentially blew their own manufacturing capacity bubble and now they have to go through the painful adjustment.
JS Rogers: Can we put to bed the notion that “the US doesn’t manufacture anything anymore so we’ll disappear as an economy”… look it up. The US is the largest manufacturing country in the world by a long shot (accounting for 20% of all manufacturing in 2007
And that, folks, is the plain truth!
“Weather the gov spending can be relatively efficient is the key.”
My point was, and feel free to call me a skeptic, but I have a hard time beliving Beijing apparatchiks can expertly allocate that capital, enough to reverse 10+ years of operating, full-tilt, as an exporter, all within a half a dozen or so months (much less years).
Just to add…and this has to do with skepticism with respect to statistics that come out of China…from the Chinese publication “The Economic Observer”:
“Premier Wen Jiabao has said that new loans in 2009 had reached 900 billion yuan by January 20, it is hard to imagine how these financial institutions extended yet another 700 billion yuan in new loans in the last few days of January, especially since January 26 was Chinese lunar New Year, which kick-started a seven-day public holiday.”
When I said efficient, I mean if the money can be distributed to the projects that create jobs and provide transfer payments, i.e., was the money sent to the railroad construction or public healthcare plans right away. If only a small portion of money ended up in a non-productive hand, it could be seen as a success. The standard is not very high, again, in today’s world you got to be amazed that how money can be spent by everyone.
I think you are right Yves. Bottom line is China has savings. Right now thats a small amount of black vs uncountable red. Furthermore China and Japan and Korea should form economic monetary Union. But hey. I’m just an amateur.
What amazed me was that this news was rushed out in headlines based primarily on an increase in easy credit. Commentators are way too quick to equate credit growth with economic growth – wait a minute – that is all of our problem just now, isn’t it? The other thing China is doing is stocking up on commodities and trying to ensure their resource pool in the future. This is why, for instance, they are making a play for Rio Tinto and why the Baltic Dry has revived due to their demand. But it does not equal true economic activity.
China’s lack of a real upwardly mobile middle class is the main reason their growth will not resume so quickly as the Bloomberg cheerleaders are hoping for. They have tried hypercapitalistic development. What they have done is to build mega-cities that have destroyed their environment, not to mention all of the half-finished buildings they have around. Beijing tries to move quickly for development, but corrupt layers of bureaucrats pocket the money or spend it on pet projects for their cronies. Meanwhile the rural population languishes.
All of this cannot be changed quickly. Yves your contrarian view is well founded.
If any simulas package can bring in results so quick….we should rewrite economics.
A large, truly global slump — By bsetser
China’s GDP growth stalled in the fourth quarter, which represents an enormous deceleration from its typical fast growth.
This is a great blog a recent bit and link:
China Financial Markets
A blog about China’s Financial Markets by Prof. Michael Pettis
China’s trade surplus for January was a mind-blowing $39.1 billion, just a smidgen under November’s all-time high of $40.1 billion (or about 25% higher, if we want to play the day-count game), and edging out December’s $39.0 billion for second place. That puts the trade surplus over the past four months $153.4 billion, well over half of all of last year’s record-smashing $297.5 billion trade surplus.
At any rate whether recent Chinese moves to lower interest rates, to increase dramatically the provision of credit to manufacturing companies, to reduce export tax rebates, to reduce corporate taxes, and to stall the earlier discussions over increasing minimum wages, should be considered “resorting to protectionism” is something one can debate extensively, but the fact is that all of these moves are aimed at boosting manufacturing output and employment. Matters are made worse by the fact that most of the stimulus package so far seems to consist of an explosion in bank lending (by the way last week’s rumors were confirmed – bank lending in January was up by RMB 1.62 trillion), and aside from the problems I discussed in my post earlier this week, bank lending is directed almost exclusively towards investment and manufacturing. Whatever effect it might have in increasing consumption could easily be exceeded by the impact it has on increasing output.
Of course the government can point to consumption-boosting measures too, and there is a lot of discussion about providing Chinese consumers with coupons to be used to consume before some expiry date (although whether these create new consumption or simply substitute for old consumption would be a tricky issue), the fact is that the transmission from domestic demand enhancement to import demand is, for whatever reason, very weak. China is still exacerbating the global overcapacity problem.
The thing to remember is that for the rest of the world it doesn’t really matter what explanation Chinese policymakers give for this high and rising trade surplus. They will consider the fact that with China’s export of overcapacity extremely high, and growing even further, anger within their political constituencies cannot help but rise. Of course China needs to fight rapidly rising unemployment, but so does nearly every other country in the world. At all costs China must move quickly to defuse the threat of trade war, but unfortunately I see little evidence that Chinese policymakers are even beginning to understand China’s role in the Great Global Imbalance.
Charles Frith: “Furthermore China and Japan and Korea should form economic monetary Union.” Yes; they should, exactly. And they are working on it. However, politically this has been a bridge too far just yet. It would require the Japanese to give up considerable control of their internal finance, not that they have done such a bang-up job now. It would require that China actually take into account the needs of its partners, a proposition very much not in evidence in recent or long-term history, so that would require a learning curve for them, and a leap of faith for the others. Korea can get in or get wiped; they know it, and they’ll get in. Once it’s up, if Taiwan is on the outside that’s a major *ouchieee*, so although there is an intense minority political sensibility against this, they will have to come to terms with it. There is, of course, still lingering but deep antipathy from the genocides of the Great Pacific War; these are non-negligible, but the advantages of currenty decision makers from ignoring them are reaching a critical mass.
Given those obstacles, it would take a crisis to push the Scalar Three into a currency union . . . Why look at that: Here comes Crisizilla stomping through the seaboard megalopolis, breathing sub-atomic, export withering fire! Quick, seal the currency shield!!!