Raphael Stevens

China owes a lot to foreign investment. Long before Foxconn started making iPhones for Apple, manufacturers from Hong Kong tiptoed across the border to Guangdong in search of cheap labour. In 1982 Jetta, a toymaker, opened a spray-painting plant among the nearby lychee orchards of Dongguan, according to “Toy Town”, a book by Sarah Monks. Water for a shower was boiled in a wok; the plant was in a tin shack. At another firm, Ms Monks reports, the workers decided that Mickey Mouse’s nose should be red, not black.image: The EconomistBy the end of last year, the accumulated stock of direct investment in China amounted to almost $3.5trn. But in the third quarter of this year, something remarkable happened. The flow of fdi turned negative, for the first time since quarterly data began in 1998 (see chart 1). Foreign investors removed more money from the country than they put in, through a mixture of repatriated profits, repaid intra-firm loans and asset sales.This reversal may reflect foreign disillusionment with China’s economic prospects and policymaking. Although the country will most probably meet its official growth target of 5% this year, it could shrink in dollar terms, according to the imf’s latest forecasts. China’s government has unnerved many investors with its overbearing reaction to the covid-19 pandemic, its regulatory crackdown on technology companies and its investigations of foreign due-diligence firms, including Bain, Capvision and Mintz.Intensifying geopolitical rivalry has not helped either. It is becoming harder for foreign investors to find opportunities that are both commercially exciting and politically palatable in their home and host countries. In a survey of its members published in March, the American Chamber of Commerce in China found that 24% were considering relocating manufacturing out of China or had already begun to do so, up from only 14% the year before.But the sharp reversal in the third quarter may also reflect a technical calculation. As interest rates remain high in America and fall in China, multinational companies have an incentive to spirit spare cash out of the country and unwind any loans to their subsidiaries that can be replaced with Chinese funding. “Many firms can now borrow more cheaply in China and nearly all can earn a higher return on their financial reserves by moving them offshore,” points out Julian Evans-Pritchard of Capital Economics, a research firm.The combination of an interest-rate gap and a geopolitical gulf has, then, hurt one kind of globalisation. But it may be helping another kind: the embrace of China’s currency, the yuan (or “redback”, as it is sometimes called outside the country).In a report last month, China’s central bank pointed out that the cost of borrowing in yuan had fallen relative to other big economies. As a result, foreign firms had issued 106bn yuan ($15bn) worth of yuan-denominated “Panda bonds” in China during the first eight months of the year, an increase of 58% compared with the same period in 2022. Indeed, in September the yuan surpassed the euro to become the second-most-popular currency for trade financing, with 6% of lending, according to swift, a payments-messaging firm.image: The EconomistA meticulous new report on China’s overseas lending by AidData at William and Mary, an American university, also shows how government-owned lenders have made a “strategic pivot” away from the dollar in their lending to low- and middle-income countries (see chart 2). The share of new commitments in yuan soared from 6% in 2013 to 50% in 2021.Many of these loans were made by China’s central bank to countries that are in debt distress. The recipients were then able to use the yuan to repay Chinese creditors and the imf, preserving their scarce dollar reserves for other needs. The authors of the AidData report wonder if China’s rulers saw a chance to “kill several birds with one stone”—preventing defaults and encouraging the international use of the yuan at the same time.After all, countries that borrow in the yuan are more likely to use the currency for international payments, according to work by Saleem Bahaj of University College, London and Ricardo Reis of the London School of Economics. Forty economies have now signed a swap agreement with China’s central bank, which obliges it to temporarily exchange yuan for an equivalent amount of the other party’s currency. Signing such an agreement increases the yuan’s share in a country’s international payments by 1.3 percentage points, they find.The sanctions imposed on Russia by America and Europe have also helped the yuan. Indeed, more than half of mainland China’s transactions with the rest of the world are now settled in its own currency, points out Mr Evans-Pritchard. In the pioneering province of Guangdong the share is even higher, at over 54% in the first three quarters of this year. Guangdong’s workers never got Mickey to embrace a red nose. But the province has at least persuaded some foreigners to embrace the redback. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

No tradition is sacred—not even trick-or-treating. In recent Halloween festivities, many Americans switched to trunk-or-treating. Instead of going door-to-door on neighbourhood streets, children shuffled between cars in parking lots and collected candy from their open boots, which were bedecked by giant spiders and terrible ghouls. It was the latest demonstration of something that has long been true: cars have a remarkably tight grip on American life. America is far more car-reliant than any other big country, averaging roughly two vehicles per household. This, in turn, is linked to many ills: obesity, pollution, suburban sprawl and so on.Despite such horrors, more Americans than ever are consigning themselves to a car-defined existence by choosing to live in the suburbs. Census figures reveal that after decades of steady growth, a little more than half the American population is now based in the ‘burbs. It seems a classic case of elite opinions (cars and suburbs are awful) diverging from mass preferences (people quite enjoy them). For many, the main attractions of suburbia are lower housing costs and greater safety. Yet recent research sheds light on how cars are a crucial part of the equation, making America’s suburbs both impressively efficient and equitable.Start with convenience. It is well-known that American cities are configured for vehicles, a process that began in the 1920s with the Model T. Car-centric urban designs became dominant throughout the country, involving wide roads, ample access to expressways and parking galore. To varying degrees, other countries have copied that model. Yet America has come closest to perfecting it. In a paper released in August, supported by the World Bank, a group of economists examined road speeds in 152 countries. Unsurprisingly, wealthy countries outpace poor ones. And within the rich world, America is streets ahead: its traffic is about 27% faster than that of other members of the oecd club of mostly rich countries. Of the 20 fastest cities in the world, 19 are in America.It is not that American roads are better in and of themselves. Rather, speed is a testament to America’s love affair with both suburbia and smaller towns that feel suburban. Compared with those in other oecd countries, American cities are 24% less populous, cover 72% more area and have 67% more large roads. All this enables drivers to zip around. New York, the country’s densest city, is an outlier, as anyone who has sat in its gridlock knows. But most of American suburbia more closely resembles Wichita, Kansas, and Greensboro, North Carolina, where drivers rarely face jams.Driving speed shrinks distance. One fashionable concept among urban planners these days is the “15-minute city”, the goal of building neighbourhoods that let people get to work, school and recreation within 15 minutes by foot or bike. Many Americans may simply fail to see the need for this innovation, for they already live in 15-minute cities, so long, that is, as they get around by car. Most of the essentials—groceries, school, restaurants, parks, doctors and more—are a quick drive away for suburbanites.The car’s ubiquity has another rarely appreciated benefit. A recent study by Lucas Conwell of Yale University and colleagues examined urban regions in America and Europe. They calculated “accessibility zones”, defined as the area from which city centres can be readily reached. Although European cities have better public transport, American cities are on the whole more accessible. Consider the size of accessibility zones 15-30 minutes from city centres. If using public transport, the average is 34 square kilometres in America versus 63 square kilometres in Europe. If using private cars, the difference is much starker: 1,160 square kilometres in America versus 430 square kilometres in Europe.Just as it is easier to get into American city centres, so it is easier to get out of them. Over time that has sapped vibrancy from their downtown cores as people flee offices at the end of the day for far-flung homes. However, there is a more positive way of looking at this phenomenon: it is precisely such accessibility that has put larger homes and quieter streets within reach for a remarkably wide cross-section of the country. In his analysis of the census from 2020, William Frey of the Brookings Institution, a think-tank, showed that suburbia has become far more diverse over the years. In 1990 roughly 20% of suburbanites were non-white. That rose to 30% in 2000 and 45% in 2020.Not that cars are a panacea. Owning or renting one costs plenty of money, and is an especially big burden for the working poor. It is therefore common to hear laments in American cities about the sorry state of mass transit. Yet this general perception, though widespread, is not entirely accurate. Even if primarily built for private cars, roads are a shared resource and can be viewed as the “tracks” for buses. In their study Mr Conwell and his colleagues conclude that bus-based transportation in America is surprisingly effective: public-transit options between distant suburbia and city centres are roughly comparable in America and Europe. Although America could do more to improve its bus services within its urban cores, the crucial point is that cities designed for cars can also support mass transit.Honk for motorsToday some things are in flux. Younger Americans are driving less. More cities are building walkable neighbourhoods. New York may soon introduce congestion charging. It is, in short, possible to imagine an America that is less addicted to cars.At the same time, though, covid-19 has changed lifestyles in ways that may favour vehicles. People are venturing into offices less often. That has reduced demand and revenues for public transit while making roads less congested and thus more pleasant for drivers. If the rise of remote work enables families to drift ever deeper into suburbia, cars will become more indispensable. How will it all shake out? Given how ingrained cars are in American life, trunk-or-treating is probably here to stay. ■Read more from Free exchange, our column on economics:The Middle East’s economy is caught in the crossfire (Nov 2nd)Israel’s war economy is working—for the time being (Oct 26th)Do Amazon and Google lock out competition? (Oct 19th)For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter More

Advocates of industrial policy have long argued that manufacturing possesses special powers. Industry’s demands lead to technological progress; the goods it produces must pass the muster of global markets, which drives up efficiency. Some then take things further. When countries grow richer, manufacturing moves overseas as firms seek to reduce labour costs. This, they say, justifies tariffs and subsidies to protect manufacturing and boost growth. “Making things matters,” argued a recent column in the Wall Street Journal by Oren Cass, who runs American Compass, a think-tank at the vanguard of the Republican Party’s new-found protectionism.The problem is that, of late, manufacturing’s powers seem to have vanished. Figures published on October 26th show that America’s gdp jumped by 4.9% at an annualised rate in the third quarter of the year. Nearly 80% of output is now made up of services, but one might expect manufacturing at least to pull its weight, given its supposed powers. In fact, labour productivity in manufacturing fell by 0.2% at an annualised rate, meaning that the boost to growth was driven by services. To make matters worse, productivity in the manufacturing sector has been in secular decline since 2011—the first decade-long fall in the available data (see chart 1). Some economists think it is probably also the first such fall in American history.image: The EconomistWhat has prompted the reversal? Mr Cass’s favourite explanation, trade policy, can be dismissed. American manufacturing employment fell sharply in the early 2000s, in part owing to the integration of China into global trade. Some think that this “China shock”, which led to a wave of outsourcing, also caused productivity to decline by reducing the incentive for American firms to invest. Yet productivity grew until 2011. Moreover, it also subsequently declined in sub-sectors that are mostly domestic and immune to trade, including cement and concrete production.A better clue is provided by what went well in earlier decades. During the 1990s and 2000s manufacturing productivity soared, with the production of computers and electronics, especially semiconductor chips, leading the way. Gains seem to have topped out at around the time things went wrong more broadly, in the early 2010s. All told, more than a third of the overall slowdown in manufacturing since 2011 is accounted for by computers and electronics.Yet problems with computers are not the whole story. Productivity has fallen in both durable manufacturing, which includes most tech, and the non-durable sort, which includes items like cigarettes and clothes. Fourteen out of 19 manufacturing sub-sectors, from machinery to textiles, saw declines during the 2010s.Perhaps all those computers have been put to poor use. America may be a technology superpower, but when it comes to using tech in the physical world it lags behind others. It ranks seventh out of 15 countries in the adoption of robots per worker, according to the Information Technology and Innovation Foundation, a think-tank. South Korea, the world leader, uses over three times more robots per worker. And after adjusting for average wages—richer countries tend to be more advanced—America ranks 11th.But it is not clear whether there was a big change in American manufacturers’ adoption of tech, compared with other sectors, in the early 2010s. Indeed, the evidence points in the opposite direction. As Chad Syverson of the University of Chicago notes, the ratio of capital to labour has actually grown slightly faster in manufacturing than in the private sector as a whole.If investment has not plummeted, it must then be paying fewer dividends. Low-hanging fruit might have been plucked more eagerly in manufacturing. This idea is supported by the fact that industrial productivity growth has slowed across the rich world, even if not by as much as in America (see chart 2). The extra bit of American underperformance is trickier to explain. Economists throw out a boatload of hypotheses. America is known to have laxer antitrust enforcement than its peers; perhaps scrutiny was especially needed in the manufacturing sector. Maybe American manufacturing was more advanced when robots arrived on the scene, so had less to gain. Some have even argued that because America’s software and internet sectors have been so lucrative, talent has been diverted away from older industries.Could things change? Industrial-policy advocates hope that America’s subsidies for chip production and green tech will lead to a manufacturing renaissance. The idea is to boost productivity by enticing companies and investment to cluster in a given region, much as Shenzhen in China used its status as a special economic zone to become an impressive manufacturing hub. A breakthrough in robotics or artificial intelligence could push things along, just as information technology led to a surge in productivity from 1995 to 2004. For the moment, though, this is just speculation. And American manufacturing needs all the help it can get. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

The Federal Reserve’s interest-rate rises are causing pain in the land of casinos: Nevadans are googling how to return their car more than folk in any other state. Yet while their pain is acute, it is not unique. Across America, the share of high-risk auto borrowers that are behind on payments by at least 60 days reached 6.1% in September, its highest in three decades (even if just a little higher than in 2019).This spells trouble for an unglamorous yet increasingly important institution: the credit union. After all, one in three Americans who borrowed to buy a car during the covid-19 pandemic did so from such an organisation. The sector is now looking at a liquidity crunch of its own, as investments struggle and regulators demand bigger buffers. America’s 4,700-odd credit unions provide members with generous deposit rates and lending terms, and are run on a not-for-profit basis—an approach that won over savers during the low-rate era. All told, they now hold deposits worth more than 10% of those in traditional banks.image: The EconomistIn response to current difficulties, credit unions have been forced to break with their business model, and have raised deposit rates more slowly than banks (see chart). Although they usually benefit from the fact that members, who tend to be associated with an institution such as a government bureaucracy or university, are patient types, that patience is now being tested. Average deposits in credit unions fell by 3.5% in the year to July, an unwelcome trend in a sector that has enjoyed near-continuous growth since the 1970s.Despite raising deposit rates slowly, credit unions are showing less restraint elsewhere. Outstanding loans grew by 12% in the year to July, and growth is not slowing. A fifth of union savings are in outfits where loans exceed deposits, up from an 80th at the start of 2021—meaning they need greater liquidity to ensure safety.Indeed, regulators are monitoring the sector’s liquidity. Just four unions went under in the first half of the year—consistent with recent trends—and in aggregate balance-sheets look healthy. There are some worrying shifts, however. Cash and cash equivalents have fallen by half as a share of assets from a high reached during the pandemic, as unions have sought to meet loan demand. Although they also face higher interest rates, co-operatives are nevertheless taking on debt: their borrowing is now equivalent to 6% of assets, up from an average of 3.5% over the past decade.This has led credit unions to seek other sources of funding, including by selling loans. Normally they trade among themselves, notes Steve Rick of TruStage, a mutual-insurance company. But such is the state of the sector that few co-operatives have the cash to buy others’ loans. Some have thus turned to the asset-backed securities market, in which they can exchange their car loans for cash upfront at the same time as offloading credit risks from their balance-sheets. Unfortunately, they can do so only on particularly bad terms.Since 2017 credit unions have raised $2.8bn in such markets, some $1.6bn of which has come in the past six months. This represents a large increase in costs, and as a consequence signals that there is little chance of better rates on deposits for members in the months to come. Like Nevada’s car-owners, many may end up simply walking away. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

For the past month, American diplomats have been trying to stop the Middle East from falling apart. Ever since Hamas attacked Israel and Israel retaliated, they have lobbied Jerusalem to allow aid into Gaza, shuttled between Gulf capitals to meet Arab leaders and stopped off in Amman and Cairo to ask Israel’s neighbours to help with refugees and the injured. Antony Blinken, America’s secretary of state, is looking a little tired.A regional war has so far been avoided. But otherwise American policymakers have frustratingly little to show for their many flights. Few people have made it out of Gaza, insufficient supplies of food and medicine have made it in and countries in the region remain reluctant to discuss how the war might come to end, especially what could come after Hamas. Following his second tour of the region, which finished on November 5th, Mr Blinken stressed that “all of this is a work in progress”.America’s economic might has been a cornerstone of its diplomacy for decades. At the start of the war, the hope was that financial rewards might persuade Egypt to accommodate Gazan refugees and squeeze more co-operation from Jordan and Lebanon. All three countries are teetering on the edge of financial ruin—they need help. The problem is that Washington no longer has the tools required to compensate governments; certainly not for things that risk upsetting their own people, such as being seen to abandon the Palestinians’ cause by softening to Israel or taking refugees.Over recent decades, American diplomacy in the Middle East has changed. The superpower used to be accused of being too hard-nosed and seeking to control other governments via imf programmes. Since then, imf bail-outs have become more common, and they arrive with fewer strings attached. American loans have turned into aid worth billions of dollars. In 1991 America and its allies held half of Egypt’s external debt; today Washington holds none. Before the war, the country’s officials preferred to talk about poverty reduction rather than geopolitical favours.Behind America’s shift was the hope that prosperity would stabilise allies, such as Jordan’s monarchy and Egypt’s dictatorships, and improve its own reputation, which had been battered by wars in Afghanistan and Iraq. Yet little economic growth has materialised. The Middle East is home to some of the world’s most troubled economies. Lebanon has fallen over the edge: the government defaulted on its debts in 2020, and lacks the political stability required to negotiate with creditors. Inflation is now raging at more than 100%.Others are doing little better. Unemployment in Jordan is higher than at any point in the past 25 years, except for during the covid-19 pandemic, and the state relies on support from America and the imf to escape default. Similarly, Egypt has been flirting with default since a foreign-currency crunch last year. Three separate imf bail-outs in the past decade have stalled owing to the country’s refusal to dismantle loss-making firms run by the armed forces.Marching ordersThis bleak picture is a problem for America, and not only because it represents a failure of its aid policies. The country would once have been able to forgive debts in return for favours, as it did in 1991 in thanks for Egypt’s involvement in the Gulf war. In 1994, when Jordan was negotiating a peace treaty with Israel, King Hussein’s first ask of President Bill Clinton was to forgive debts. Now there is no lending for America to forgive. Moreover, the few American investors and firms left in Egypt and Lebanon packed up at the onset of financial turmoil. Thus there is little that officials can do by influencing business, too.Another option would be for America to offer a truly enormous amount of aid as its side of a grand bargain. Inevitably, however, such a package would face fearsome political opposition in Washington. Meanwhile, any attempt to induce co-operation by threatening to pull the plug on aid to Egypt and Jordan would not be credible. In Egypt, most of America’s money goes to the army, making it too important to play games with given the security situation. In Jordan, more cash goes directly into the government’s budget, but this is widely seen as compensation for the hundreds of thousands of Palestinian and Syrian refugees that the country shelters. Policymakers in both places believe they are entitled to their grants as fair payment for keeping the peace with Israel and a grip on their populations. “We take the grants because they keep things balanced,” says one. “[Americans] I speak to know this.”What Lebanon gets from America is now mostly humanitarian aid, which came to $92m in the year to June. Such funds bypass government coffers and go straight to the population, meaning that they offer little financial leverage—and the country’s government is so fragile it is not in a position to bargain. Hizbullah, a militia-cum-social-movement, controls swathes of the country, has its own bank and has amassed tens of thousands of troops, which are firing rockets into Israel. Since America lists the group as a terrorist organisation, officials can hardly offer it economic goodies.Without ways to entice allies into good behaviour, America’s financial diplomats must occupy themselves with punishing bad behaviour. America now enforces ten times as many sanctions globally it did two decades ago. Since October 7th its Treasury department has slapped on two rounds of restrictions covering everything from the Iranian state to Turkish construction companies. Unfortunately, Gaza’s most pressing problems, such as the provision of humanitarian aid and safety for refugees, cannot be solved by sanctions, and Hamas’s finances are sufficiently opaque as to be resistant to American measures. Many of the organisation’s financiers find a haven in Turkey—a country whose president, Recep Tayyip Erdogan, is reported to have refused Mr Blinken’s request for a meeting during his recent travels. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More