News: Can Xi, Trump seal a Sino-US grand deal?

Victor Nee says that, despite their starkly different personalities, Donald Trump and Xi Jinping actually have much in common. Now, with reciprocal visits all but sealed, it remains to be seen how the two presidents steer the bilateral relationship.

By Victor Nee
via South China Morning Post

US President Donald Trump has embarked on an unprecedented form of foreign policy, using his Twitter account to remake the world order. One pole of any emergent world order is China. Here, his provocations, including the phone call with Taiwan’s president, Tsai Ing-wen, off-the-cuff remarks on rethinking the US stance on the one-China policy, and campaign charges labeling China a currency manipulator, are nothing less than confrontational.

Yet, Trump has had what he describes as a very friendly phone conversation with his Chinese counterpart, Xi Jinping (習近平). What does this mean for the future of an uncertain US-China relationship?

Politics aside, Trump and Xi could bond as ‘strong men’

Under the surface of Trump’s bluster and China’s quiet diplomacy are two countries led by men who have much in common. Both are nationalists seeking to restore their country’s greatness. Trump’s campaign to “make America great again” and Xi’s “Chinese dream” both aim to achieve nationalist restoration.

Both men inherited the capital that launched their careers. Trump came into his financial capital from his father’s real estate business, and Xi was a princeling and heir to the political capital of his father, a respected leader of the Chinese communist revolution.

Both men used their inherited capital to launch ambitious careers in their own ways. Trump built a global brand, and far-flung real estate and brand-name empire. Xi turned to a political career after graduating from Tsinghua University, first serving as personal secretary to a powerful member of the Politburo and then taking an unusual turn in assuming a job in Hebei ( 河北 ) province, as a deputy party secretary of a rural county. From there, he began a swift ascent from provincial leadership to the commanding heights of the country’s political elite.

However, though Trump and Xi inherited their respective forms of capital, both believe they are self-made. Of course, similarities in personal background come with obvious differences in personality. Trump is impulsive in responding to perceived criticism. He is thin-skinned, and quick to hit back with insults and counterpunches vented through hyperbole. Xi, by contrast, is an engineer by training, and is methodical and detailed in his planning and political moves.

Trump, as the self-proclaimed consummate dealmaker, and Xi as the chemical engineer, see in their newfound relationship an opportunity for a grand deal between the US and China. This is, after all, what was behind their mutual invitations to visit each other’s countries, with Xi reportedly set to visit Trump at his Mar-a-Lago estate in Florida early next month.

The outline of a bilateral deal has yet to be negotiated, but there is little doubt that it will involve Taiwan, bilateral trade and national security.

How can Xi Jinping project strength in first handshake with Trump?

What will be the elements of a grand deal revitalising a strained relationship between the US and China? First, that there won’t be a war between the two over shoals in the South China Sea or the uninhabited Diaoyu, or Senkaku, islands, claimed by both China and Japan. Second, Trump will have the bilateral trade deal he wants from China, even while the Chinese economy gains momentum, stimulated by free-trade agreements with other countries in the Asia-Pacific

Taiwan will not become independent and, with other East Asian “tigers”, will move towards closer social and possibly political accommodation with the mainland. Taiwan’s economy is already closely linked with that of the mainland.

North Korea’s nuclear blackmail will be curbed, if not checked, through effective sanctions imposed by China and the US. This could make the installation of a US-South Korea anti-missile shield (THAAD) a lower priority, given reduced tension on the Korean peninsula.

Why the US won’t label China a ‘currency manipulator’

What contributes to the likelihood of a grand deal boils down to good feng shui shared structurally by the two Pacific Rim superpowers. The US and China are separated by a vast ocean, but their economies are tethered by an increasingly wide range of mutual interests and dependence – and by two leaders who surprisingly share much in common.

Victor Nee is the Frank and Rosa Rhodes Professor at Cornell University. He is completing a decade-long study of the emergence of modern capitalism in China, and author of Capitalism from Below: Markets and Institutional Change in China.

Read more at South China Morning Post

New Book Launch - Gaining Currency: The Rise of the Renminbi by Eswar Prasad

Gaining Currency: The Rise of the Renminbi (Oxford University Press, October 2016;, a new book by Eswar Prasad, will be launched at the Brookings Institution on Friday, September 23rd, 2:00-3:30 p.m. 


Caroline Atkinson, Head of Global Public Policy, Google, and former Deputy National Security Advisor, White House

Ben Bernanke, Distinguished Fellow, Brookings Institution, and former Chair of the Federal Reserve Board

Jin Zhongxia, Executive Director for China at the IMF, and former Director General of Research Institute, People’s Bank of China

Eswar Prasad, Cornell University and Brookings Institution

Moderator: Greg Ip, Chief Economics Commentator, Wall Street Journal


The event will be webcast live (and will also be archived at):

ISS Project to Study Economics, Politics of China Urbanization

By Lori Sonken

via Cornell Chronicle

One in 10 people on Earth live in China’s cities. Over the past decade, nearly 200 million people in China have moved from rural to urban regions, and 8 million more are expected to relocate every year between now and 2050. Just what this means for China and the world has the attention of the Institute for the Social Sciences’ newest collaborative project, China’s Cities: Divisions and Plans.

“Our lens into China’s cities is focusing on the economic, political and social phenomena at play in China’s urbanization,” says Jeremy Wallace, project leader and associate professor of government.

Joined by Jessica Chen Weiss, also in government; Shanjun Li, Dyson School of Applied Economics and Management; Panle Barwick, economics; and Eli Friedman, international and comparative labor, the interdisciplinary team is examining the factors that divide migrants and native city dwellers, including access to social services, crime, environmental policies and health consequences.

“When migrants move to cities, they face economic as well as cultural and discriminatory barriers that make the move and integration even harder [than in other countries],” Wallace says.

Using surveys, ethnographies and interviews, the team intends to get a better understanding of the issues and attitudes at play in China’s lesser-known cities, such as Zibo and Shenzhen, similar in size to Philadelphia and Chicago, respectively, but practically unknown to anyone outside China. Using interviews, Wallace, Friedman and Chen Weiss will explore attitudes toward social inclusion and exclusion in urban China and their connections with nationalism.

The project also will examine whether environmental policies in China’s cities are effective in curbing pollution and the impact that regulations are having on firms’ behavior and economic policies.

Lori Sonken is the staff writer at the Institute for the Social Sciences.

Read full article at Cornell Chronicle

Ownership Is Key to Fixing China’s SOEs --- Eswar Prasad

Increasing competition and private ownership would help spur the changes needed to reform the country’s state-owned enterprises.

By Eswar Prasad
via The Wall Street Journal

China’s state-owned enterprises remain one of the biggest challenges facing Beijing today. SOEs play an outsize role in the country’s economy, even though they are a major source of corruption and inefficiency. So it was encouraging when the Communist Party’s Third Plenum in late 2013 announced new reform plans.

But Beijing has been going about things the wrong way. Instead of forcing SOEs to operate as commercial entities free of political interference, Beijing is increasing state control. Recent reforms with Chinese characteristics do more to impede rather than promote the changes that are needed

Consider some steps the government has taken. Beijing has increased SOE oversight by Party committees, which play critical roles on the ostensibly independent boards of SOEs. Among other things, this is meant to prevent asset-stripping by unscrupulous managers.

But Party officials themselves are often well-connected and have little relevant managerial or technical expertise. They are hardly the buffers needed against political interference and have little interest in promoting competition.

The government has also cut the salaries of top bosses. The CEOs of major SOEs now make about one-third of their previous salary, equivalent to less than $100,000 a year. Those in the U.S. who support government-mandated egalitarianism would salivate at the prospect of cutting CEO pay to such levels. But there is a cost. Pay compression has led competent middle- and senior-level managers to decamp to the private sector. And pay cuts have hardly improved the incentives facing CEOs.

Beijing has tightened SOE budgets by reducing direct government subsidies, but this is not a viable reform strategy by itself. In the mid-2000s, this led to millions of workers being laid off. The process was then left incomplete, and the surge of bank-financed investment during the global recession of 2009 and 2010 effectively rolled back the changes.

China’s reluctance to reform SOEs is in part related to concerns about social stability. Laying off even tens of thousands of workers, a fraction of the necessary retrenchment, without a strong social safety net and at a time when other employment opportunities are limited could lead to social upheaval.

China should target spending toward a better safety net, one that could provide a buffer for laid-off workers. SOEs aren’t the venue for subsidizing employment and social services such as education and health care.

But Beijing has been reluctant to do this. Instead, it emphasizes fiscal restraint, which makes the government’s fiscal position look stronger than it actually is but has some undesirable side effects.

One consequence is that fiscal costs are diverted through the financial system in the form of cheap and abundant credit, perpetuating inefficiencies. The International Monetary Fund estimates that the traditional SOE sector accounts for about 20% of China’s employment and output but soaks up more than 50% of bank loans. This leaves the more dynamic, employment-generating parts of the economy, such as small- and medium-size firms and service-sector firms, starved of bank credit.

It also distorts the market. Many SOEs are state-sanctioned monopolies and receive subsidized energy and land from provincial governments eager to boost investment. These are the state firms that are most likely to show a profit.

Beijing needs to reduce both its explicit and implicit subsidies to SOEs and open them up to a greater share of private ownership. Opening up protected sectors to more domestic and foreign competition would also spur change.

The financial sector, too, needs reforms. Reducing the incentives for banks to lend to SOEs, including those already technically insolvent, and making corporations more reliant on equity and bond markets, would over time drive them to improve their corporate governance and adopt better auditing and accounting practices.

Allowing corporate defaults would bring discipline to both SOEs and bond markets. But fear of financial-market turmoil appears to be holding back Beijing. In fact, such defaults could force both firms and financial markets to more carefully scrutinize the balance sheets and financial operations of both SOEs and banks.

China’s government has said all the right things about the necessity and urgency of SOE reforms. Now it must act. If these reforms don’t take hold, the country’s financial liberalization and opening of its capital account could end badly.

Mr. Prasad is a professor in the Dyson School at Cornell University and a senior fellow at the Brookings Institution. His new book, “Gaining Currency: The Rise of the Renminbi,” will be published in September 2016 (Oxford).

Read more at The Wall Street Journal

Professor Shanjun Li Chosen for the ACSF Faculty Fellowship

Professor Shanjun Li is chosen for the Faculty Fellowship for Social Sciences, Humanities and Arts supported by Atkinson Center for a Sustainable Future (ACSF). This fellowship program supports Cornell faculty in the social sciences, humanities, and arts who are working in the sustainability arena. The in-residence fellowship provides faculty with teaching leave for one semester and a small research budget as well as opportunities to engage with a broad, interdisciplinary audience on and off campus.

Professor Shanjun Li's  recent research leverages big data to investigate the causes and consequences of China’s most pressing environmental and urban challenges such as air pollution and traffic congestion and examine policy options. During the ACSF residence program, he will evaluate the effectiveness of rapid and large-scale subway expansion in Beijing on reducing traffic congestion and air pollution.

Testimony at U.S. China Economic and Security Review Commission --- Eswar Prasad

Public Hearing on China’s 13th Five-Year Plan: Fiscal and Financial Reforms
China’s Economy and Financial Markets: Reforms and Risks


By Eswar S. Prasad

Chairman Shea, Vice Chair Bartholomew, and honorable members of the Commission, thank you for the opportunity to share with you my views on the status of market-oriented economic reforms in China, with particular emphasis on financial market reforms and capital account liberalization, along with a discussion of the risks the economy faces. In this testimony, I will also discuss China’s efforts to expand the international use of its currency, the renminbi (RMB), and how this is tied in to the domestic reform agenda.

These developments have taken place against the backdrop of a challenging domestic environment. Over the past year, China’s GDP growth has slowed significantly, producer prices continue to fall, and various other indicators of economic activity have weakened, including growth in industrial production, investment, and imports. However, the most recent data on GDP growth as well as industrial and services sector activity suggest that the economy has stabilized. Still, some further macroeconomic stimulus might be necessary to hit the government’s growth target of 6.5 percent.

On a more positive note, there has been some progress over the last 2-3 years on growth rebalancing, an important objective of the 12th five-year plan. The consumption to GDP ratio has gone up slightly, the service sector’s share in the economy has risen to over 50 percent, and the household saving rate has declined. China’s current account and trade surpluses have declined from their levels in 2007, although the merchandise trade surplus has climbed back to nearly 6 percent of GDP in the last half of 2015. 

Read full testimony       
Read more about Hearing on China’s 13th Five-Year Plan

Elevating the Yuan’s Global Status --- Eswar Prasad

Ultimately its international value will be determined by the market, but this could help spur further reforms in China.


By Eswar Prasad
via The Wall Street Journal

A burning question in international finance is whether China’s yuan should be inducted into the highly selective group of currencies that constitutes the International Monetary Fund’s reserve currency basket, known as the Special Drawing Rights (SDR). The group now includes only the U.S. dollar, euro, Japanese yen and British pound sterling. By the end of this year, the IMF will decide on the yuan’s fate.

This has far-reaching implications, but not, as many believe, because it will signal the yuan’s challenge to the dollar as the dominant global reserve currency. The yuan won’t become a safe-haven currency unless China undertakes the substantial political, legal and institutional reforms necessary to build trust among foreign investors. These changes are unlikely to happen anytime soon, so the dollar’s position is secure for now.

But the IMF’s decision could effect China’s progress on banking and other market-oriented economic reforms. These reforms will determine whether China’s economy gets on a better, less-risky growth path. If China’s reforms stall, global markets will feel the pain.

Chinese leaders have lobbied for inclusion in the SDR basket. Perhaps they hope to free themselves from reliance on the U.S. dollar by elevating the yuan, but the more immediate endgame is their domestic economy. Economic reformers in China have built public support around the idea that the yuan’s status in global finance should match China’s size and prominence in the world economy.

For the yuan to become a major international currency, China needs a raft of domestic reforms. These include a better and well-regulated banking system and a broader range of financial markets, including basic currency derivatives, fewer restrictions on capital flows and a truly market-determined exchange rate. Such reforms would improve financial markets and the allocation of resources in the Chinese economy, yielding more balanced and sustainable growth.

But there is fierce opposition to these reforms, which challenge vested interests that have enormous political clout. The government has used globalization of the yuan as a rallying cry to overcome this opposition and push forward with reforms.

The People’s Bank of China has already committed to fully freeing up interest rates on bank deposits in 2015. This will increase competition for deposits, driving up rates and benefiting savers. Small banks will be able to compete more effectively with large banks. Large banks oppose these reforms, but the PBOC has noted that market-determined domestic interest rates are an important criterion for the yuan’s inclusion in the SDR basket.

In principle, this entire debate is a nonstarter. Since the yuan isn’t freely convertible and its exchange rate isn’t fully market-determined, it is technically not a viable reserve currency. But this matter is more about international geopolitics than economics.

For the IMF, however, the decision is a matter of its own long-term survival. The IMF has had a contentious relationship with China on currency matters, and ignoring China’s explicit desire to join the SDR would create more bad blood.

The agency also wants to avoid another knock on its legitimacy, already tainted by the lack of progress on giving emerging markets their rightful voting shares. Excluding the yuan from the SDR could crystallize the concerns of policy makers in emerging markets that the IMF remains an institution run by and for the benefit of advanced economies.

The IMF’s imprimatur would certainly help, but ultimately market forces will drive the yuan to be adopted as a reserve currency. Foreign investors, including foreign central banks, will hold the yuan if they are convinced of its worth. Unless China develops its financial markets, the IMF’s seal of approval won’t do much for the yuan’s stature.

The U.S. government should welcome the yuan’s claims to reserve-currency status. After SDR inclusion, China’s central bank would find it harder to manage or manipulate the value of its currency to gain a competitive edge for its exports. China will also have more reason to maintain the primacy of the IMF, where the U.S. has considerable influence, in international finance. And China’s financial market opening could create opportunities for U.S. firms, from banks to insurers.

The yuan’s inclusion in the SDR basket might be premature on technical grounds but is timely given its broader ramifications. A positive outcome would be good for China, the U.S. and the international monetary system. There is no good reason to delay.

Read more at The Wall Street Journal

CICER won a grant from the 2016 Jeffrey S. Lehman Fund

Cornell Institute for China Economic Research (CICER) won a grant from the 2016 Jeffrey S. Lehman Fund for Scholarly Exchange with China. The institute will host regular seminars on Chinese economy, organize annual conferences (on campus and in China) around specific topics, and provide research opportunities for undergraduate and graduate students. The Lehman Fund will support some of these institute activities.

The Lehman Fund grant is established in honor of former President Lehman's commitment to fostering Cornell's global linkages, and in particular to building partnerships with Chinese universities, the Lehman Fund supports exchanges and/or research collaborations between Cornell faculty and graduate students and their counterparts at China's major research universities. Through an annual competition, the Fund provides a small number of grants to initiate qualifying research projects, sponsor research-related conferences or workshops, host visitors from China, or support faculty travel to China to work with colleagues there on collaborative research projects. 

CCCI & CICER STUDENT SYMPOSIUM: Topics in Contemporary China Studies

The 2016 CCCI & CICER Student Symposium took place on Saturday, April 9, 2016. Our keynote speaker is Professor Shiping Tang, Professor in the School of International Relations and Public Affairs (SIRPA) at Fudan Univeristy (Shanghai, China). Panel 1 discussed diaspora, market institutions, and the arts in contemporary China. And Panel 2 discussed food Safety, land rights, and automobiles. 

"China’s Cities” Chosen for Cornell Institute for the Social Sciences’ Collaborative Project Funding

The “China’s Cities” project was recently chosen for funding by the Institute for the Social Sciences.  Each collaborative project is comprised of 4-5 Cornell faculty members, researching a cutting-edge and significant social science issue or topic. Priority is given to “shovel ready” projects that build bridges between researchers across the university. 

The “China’s Cities” project is lead by Jeremy Wallace, Associate Professor, Department of Government. Jeremy Wallace is a member of the Cornell Institute for China Economic Research, while team Members, Panle Jia Barwick and Shanjun Li, are the founders and co-directors of the Cornell Institute for China Economic Research.

The Institute for the Social Sciences has fostered excellence in the social sciences at Cornell since its founding in 2004. The ISS encourages collaboration among social scientists across Cornell, supports cutting-edge research on core social science topics, and helps recruit and retain top social science faculty at Cornell. 

For more information about the ISS Collaborative Project and past themed projects click here.