Posts Tagged ‘U.S. Treasury’

U.S. Treasury Stops Short of Calling China a Currency Manipulator

April 15, 2017

Department’s report does sharply criticize Chinese exchange-rate policies

Chinese 100-yuan notes being counted in Hong Kong. The U.S. Treasury Department said China would remain on a ‘monitoring list’ of trade partners with policies deemed to be a risk to the U.S. economy.

Chinese 100-yuan notes being counted in Hong Kong. The U.S. Treasury Department said China would remain on a ‘monitoring list’ of trade partners with policies deemed to be a risk to the U.S. economy. PHOTO: XAUME OLLEROS/BLOOMBERG NEWS

WASHINGTON—The U.S. Treasury sharply criticized China’s exchange-rate policies on Friday, though it stopped short of labeling the Asian trade giant a currency manipulator, as President Donald Trump said he would do while running for office.

“China has a long track record of engaging in persistent, large-scale, one-way foreign-exchange intervention,” the Treasury Department said in its semiannual report on foreign exchange policies of major U.S. trade partners. Although Beijing has allowed the yuan to slowly appreciate in recent years and actively fought depreciation recently, its past interventions “imposed significant and long-lasting hardship on American workers and companies,” the Treasury said.

The report followed an apparent warming of relations between the U.S. and China following a visit to Washington and Mr. Trump’s Mar-a-Lago resort by Chinese leader Xi Jinping last week. Mr. Trump is counting on Mr. Xi for support in a confrontation with North Korea. After the visit, Mr. Trump told The Wall Street Journal he wouldn’t name China a currency manipulator, a label that may have led to a deepening trade confrontation.

Still, the administration sought to stick to some of the tough themes Mr. Trump laid out as a candidate and as president on trade and currency.

“Treasury will be scrutinizing China’s trade and currency practices very closely, especially in light of the extremely sizable bilateral trade surplus that China has with the United States,” the Treasury report said.

The report has traditionally been used as a diplomatic tool to prod other countries whose currency policies were deemed a threat to U.S. industries. The latest report’s censure of China and other countries, including South Korea and Germany, could be used in the future as a pretext for new tariffs.

“Treasury is committed to aggressively and vigilantly monitoring and combating unfair currency practices,” the report said.

Preserving a two-decade precedent, no country was named a currency manipulator.

Along with Friday’s about-face was an acknowledgment by Mr. Trump and his team that Beijing has been propping the yuan up over the last two years, instead of pushing it down as the president had previously alleged. Building debt problems and a slowing economy has put downward pressure on the yuan, forcing the central bank to burn through $1 trillion, or a quarter of its foreign-exchange reserves, to keep the currency from falling.

“The administration clearly realized this was not the right time to have a fight with China over currency,” said Brad Setser, a senior fellow at the Council on Foreign Relations and a former senior U.S. Treasury official in the Obama administration.

Still, “there’s a clear suggestion that China needs to do more to open up its markets to U.S. goods and services,” Mr. Setser said. “The challenge will be getting real changes that have a real impact on the size of U.S. exports to China.”

Most Western economists agree Chinese authorities in the past used an undervalued exchange rate to help fuel its rise to being the No. 2 economy in the world. A cheaper currency makes products less expensive to produce and more attractive to buyers overseas. That was an essential factor in making China the world’s biggest manufacturing base, but it cost the U.S. and other countries millions of jobs.

During his campaign, Mr. Trump tapped into anger at China that was pent up in major manufacturing states, saying he would label the country a currency manipulator and slap fresh tariffs on its imports.

Amid rising concerns about an increasingly belligerent North Korea sparking a dangerous conflict with U.S. allies Asia, Mr. Trump earlier this week said he decided to treat Beijing with more leniency on trade and currency in exchange for Beijing’s help in reining in Pyongyang.

China was not alone in being targeted in Treasury’s latest report.

Repeating criticisms made under the Obama administration, the Treasury Department also kept China, Japan, South Korea, Taiwan, Germany and Switzerland on a special “monitoring list” that flags trade partners with currency and other economic policies deemed to be a risk to the U.S. economy.

The name-and-shame list can trigger sanctions against offending trade partners if the countries can be shown to intervene in foreign-exchange markets and maintain large trade surpluses with the U.S. and rest of the world. None of the countries met all of the criteria.

Japan and South Korea, two major U.S. trade partners, have long been on Treasury’s radar in part because they have pushed down the value of their currencies in the past. And even though Germany doesn’t control the value of the euro because it is only one member of the European currency union, the country has been targeted because its economic policies and a relatively weak euro have helped the country to achieve the world’s largest trade surplus.

Future reports could step up the criticism, given Treasury’s latitude under the original laws guiding the report to Congress.

China could again allow the yuan to fall, triggering fresh criticism from U.S. manufacturers and renewed political pressure on the administration to label them a manipulator. There are costs to keeping the yuan stable beyond selling exchange-rate reserves. It also makes it harder for the government to meet its growth targets.

Also, the Commerce Department is preparing a study of why the U.S. has such large trade deficits with other nations, and some analysts believe that could lay the foundation for applying countervailing duties against countries that manipulate their currencies. The exchange-rate undervaluation, under a proposal the Commerce Department is considering, would be considered a subsidy.

While some trade experts question whether that plan would be compliant with current World Trade Organization rules, the administration could still use it as a pretense for levying across-the-board tariffs on imports from a currency-manipulating country.

Although many of the findings in the report repeated the basic assessments made under the Obama administration, the report still carried a distinct Trump administration tone. For example, it used sharper language in its warning trade partners against exchange-rate offenses.

“Though there has been a trend in the last two years towards reduced currency intervention by key trading partners, it is critical that this not represent merely an opportunistic response to shifting global macroeconomic conditions…but a durable policy shift away from foreign-exchange policies that facilitate unfair competitive advantage,” the report said.

“The United States cannot and will not bear the burden of an international trading system that unfairly disadvantages our exports and unfairly advantages the exports of our trading partners through artificially distorted exchange rates,” it added.

Write to Ian Talley at


Trump’s Currency Complaints Hit Unexpected Targets

February 17, 2017

Top-five trading partners China, Japan and Germany brush them off; Taiwan and Switzerland seem to be paying heed


Feb. 17, 2017 3:47 a.m. ET

HONG KONG—U.S. President Donald Trump’s accusations of currency manipulation appear to be reaching an audience he may not have primarily intended.

Mr. Trump vowed on the campaign trail to revive American manufacturing, in part by taking a hard line on Chinese trade practices and labeling the country a currency manipulator. Since taking office, the president has accused both China and Japan of consistently devaluing their currencies,…

Mr. Trump vowed on the campaign trail to revive American manufacturing, in part by taking a hard line on Chinese trade practices and labeling the country a currency manipulator. Since taking office, the president has accused both China and Japan of consistently devaluing their currencies , while his top trade adviser Peter Navarro has accused Germany of benefiting from what he termed the “grossly undervalued” euro .

All three countries, which rank among the U.S.’s top five trading partners, have brushed off the Trump administration’s claims.

“No one has the right to tell us that the yen is weak,” Japan’s finance minister Taro Aso told parliament on Wednesday, following last weekend’s meeting between Mr. Trump and Prime Minister Shinzo Abe . Japan hasn’t directly intervened in currency markets since 2011 following a major tsunami and resulting Fukushima nuclear disaster.

“The charge that Germany exploits the U.S. and other countries with an undervalued currency is more than absurd,” Jens Weidmann , the president of the German central bank, said earlier this month.

China hasn’t directly commented on Mr. Trump’s criticisms, but most analysts say Beijing recently has been propping up the yuan by selling foreign-currency reserves rather than looking to weaken it.

Still, some smaller economies look like they are taking notice, notably Taiwan and Switzerland. The U.S. Treasury found in October that both had engaged in persistent, one-way currency intervention, essentially by buying foreign currencies like the U.S. dollar and selling their own to maintain weak exchange rates.

Image may contain: 2 people

Analysts say the central banks of Switzerland and Taiwan are now stepping back from those activities, perhaps to avoid closer scrutiny from the Trump administration. The upshot: The Swiss franc has advanced nearly 2% against the U.S. dollar this year, while the new Taiwan dollar has surged 5.3%. Both have outperformed the euro and yen since the U.S. election in early November.

Taiwan’s central bank bought $500 million in foreign currencies in the fourth quarter, well below its quarterly average of more than $3 billion since 2012, according to Khoon Goh , head of Asia research at ANZ in Singapore, who said he suspects it is stepping back from “currency-smoothing operations.” The central bank said it doesn’t comment on currency policy.

For the first nine months of last year, the Swiss National Bank /quotes/zigman/1379668/delayed CH:SNBN +0.12% intervened heavily in currency markets to slow the franc’s rise, spending an amount roughly equivalent to its current-account surplus for the period, J.P. Morgan/quotes/zigman/272085/composite JPM -0.76% analysts note. Over the following four months, the scale dropped to around two-thirds of the surplus.

“It’s not an entirely fanciful suggestion that the SNB might be tapering intervention in order to the guard against the risk of being cited by the U.S. Treasury as a currency manipulator,” the analysts wrote in a note.

The Swiss National Bank declined to comment.

For the U.S. to label an economy a currency manipulator under the current law, it must have a large trade surplus with the U.S. and a hefty current-account surplus and persistently intervene in the currency in one direction. As of October, no economies met all three criteria.

Recent comments from officials in South Korea, which the Treasury has flagged for its hefty trade surplus with the U.S. and its current-account surplus, suggest they’re similarly eager to avoid U.S. ire, says Govinda Finn , senior analyst at Standard Life Investments in Edinburgh. The Korean won has surged 5.2% against the dollar this year.

But any gains in the Korean and Taiwanese currencies due to U.S. political pressure may not last, he said: “On a longer-term horizon, there’s a pretty strong case to say both of those currencies can and will weaken as the authorities look to support their economies.”

Jenny W. Hsu contributed to this article.

Write to Saumya Vaishampayan at

The CIA Keeps Putin’s Secrets

January 4, 2017

Western governments stayed silent on the U.K. polonium murder of a Putin critic.

The Russian president in Saint Petersburg, Russia, Dec. 26.

 The Russian president in Saint Petersburg, Russia, Dec. 26. PHOTO: GETTY IMAGES

Jan. 3, 2017 7:05 p.m. ET

Here’s one more way U.S. intelligence on Russia may not be up to snuff. Many would like President Obama to repay Russian hacking by releasing secret details of Vladimir Putin’s stolen wealth, estimated at up to $160 billion. They may be disappointed to learn the data don’t exist.

The idea of weakening Mr. Putin by laying out his secrets is a good one. We proposed it here three years ago. But even then, when the U.S. Treasury announced sanctions on Mr. Putin’s “personal bank” after his Crimea grab, it was quoting the 10-year-old allegation of one of Mr. Putin’s domestic opponents. Treasury revealed nothing you couldn’t find from Google.

A second problem may be that Mr. Putin actually owns title to nothing. At least in the latter stages of Russia’s kleptocracy, he merely points to things and people give them to him. Recall Patriots owner Robert Kraft at first acquiescing in the politely diplomatic storyline that he gave his 2005 Super Bowl ring to Mr. Putin as a gift. Later, Mr. Kraft came clean: Mr. Putin asked to try the ring on, then “put it in his pocket, and three KGB guys got around him and walked out.”

The extreme murkiness of who owns what, and for how long, under Putin sufferance is illustrated by the financial coup with which he ended 2016.

To relieve a strained Russian budget and show the country’s appeal to Western investors, his underlings arranged a partial privatization of state-owned oil giant Rosneft. Yet the Italian bank supposedly financing the purchase admitted it was still mulling whether to participate. The key Western participant, Anglo-Swiss mining giant Glencore, was revealed in the Russian press to be off the hook for most of the cash for its $5 billion stake: “Russian banks provided it an exemption from this obligation.”

So where the money came from and who might end up owning many of the shares is about as clear as mud.

Still, critics are not wrong to suspect Mr. Putin is sensitive to corruption allegations. Nobody predicted the Arab Spring, the Ukrainian revolution, the fall of Gadhafi, etc. Mr. Putin cannot be certain when a public eruption might sweep him from his throne.

Igor Sechin, the Rosneft chief and Mr. Putin’s No. 1 ally, has been flinging lawsuits in all directions to suppress Russian media reports about his mansions and yachts. A billion-dollar palace on the Black Sea, allegedly built for Mr. Putin with diverted hospital funds, has been shrouded in murky transactions. Reportedly the property is now owned by a friendly businessman who paid many times its market value.

At least the CIA ought to have complete files on Mr. Putin’s early days when Russia’s media culture was wide open and free-wheeling. His alleged involvement in the disappearance of $93 million in food money as deputy mayor of St. Petersburg was documented by a special committee of the city’s elected legislature.

Ditto the 1999 apartment block bombings that killed 293 Russians and helped cinch his election as president. Even before the attacks, reputable European and Russian newspapers in Moscow reported that such outrages were being planned by Russia’s secret police. Several subsequent scholarly and journalistic studies have endorsed the view that these “terrorist” acts were actually engineered by Mr. Putin’s supporters.

U.S. intelligence agencies surely have definitive estimates on both of these episodes. The CIA may also be able to tell us more than we already know about many convenient murders and suspicious deaths that greased Mr. Putin’s rise and protected him from inopportune disclosures.

OK, let us stop kidding ourselves. Let Rep. Adam Schiff, a top Democrat calling for exposure of Putin secrets, stop kidding himself. Western governments have kept silent even on the polonium murder in London of dissident Alexander Litvinenko, an act of international nuclear terrorism. Why? Because they are unwilling to press hard on the Putin regime, fearing either blowback or his replacement by the devil they don’t know.

Mr. Obama’s sanctions have been precisely calibrated with these fears in mind, and Donald Trump brings only so much room for change. Rest your mind: Nothing in “The Art of the Deal” suggests Mr. Trump would voluntarily surrender the leverage Mr. Obama’s existing sanctions give him in future dealings with Mr. Putin. At the same time, he will stop accommodating Mr. Putin by supplying loud but weak rhetoric that Mr. Putin can play back to the Russian people as evidence the U.S. represents a geostrategic threat that Mr. Putin is manfully and victoriously outwitting.

The best and likeliest outcome if Mr. Trump is successful is that Mr. Putin will stop being an international problem in the run-up to his own re-election in 2018 and a year or so thereafter. Mr. Trump will be freer to concentrate on domestic reform and reacting to whatever emergencies the European Union inevitably throws up in the new year.

This holiday will be temporary. Mr. Putin, who has no realistic hope for a peaceful retirement, and whose society and economy are rotting out from under him, is almost certain to be a bane for the world and Russia in the coming decade.


IranAir to buy 80 Boeing planes in biggest US deal since Islamic revolution

December 11, 2016

Reuters and AFP

© Paul J. Richards, AFP


Latest update : 2016-12-11

IranAir said it signed a deal on Sunday to buy 80 passenger planes from U.S. aircraft maker Boeing, state news agency IRNA reported, in the biggest U.S.-Iran deal since the 1979 Islamic revolution.

The agency quoted Farhad Parvaresh, the chairman of Iran’s flag carrier, as saying that the 10-year deal included 50 Boeing 737 aircraft and 30 777 planes.
Boeing said in June it had signed a tentative agreement to sell 100 jets to IranAir after Iranian statements about the deal.

IRNA said that Fletcher Barkdull, a Boeing regional director, was in Tehran for the signing ceremony. The agency quoted Barkdull as saying that the deal was worth $16.6 billion and had been approved by the U.S. government.

In November, the U.S. House of Representatives passed a bill intending to block the sale of commercial aircraft to Iran, that would bar the U.S. Treasury from issuing licences that U.S. banks would need to finance sales of commercial aircraft.

Congressional Republicans are making efforts to counter last year’s nuclear accord between Iran, the United States and other world powers, that eased sanctions on the Islamic Republic.

The Boeing deal would help modernise and expand the Iran’s ageing fleet, kept going by smuggled or improvised parts after decades of sanctions.

Boeing 777 being built


China Holdings of U.S. Treasuries Drop to Almost Four-Year Low

October 19, 2016

By Scott Lanman

October 18, 2016 — 4:00 PM EDT

China’s holdings of U.S. Treasuries fell to the lowest level since November 2012, as the world’s second-largest economy draws down its foreign reserves to prop up the yuan.

The biggest foreign holder of U.S. government debt had $1.19 trillion in bonds, notes and bills in August, down $33.7 billion from the prior month, the biggest drop since 2013, according to U.S. Treasury Department data released Tuesday in Washington and previous figures compiled by Bloomberg.

The portfolio of Japan, the largest holder after China, fell for the first time in three months, down $10.6 billion to $1.14 trillion. Saudi Arabia’s holdings of Treasuries declined for a seventh straight month, to $93 billion.

China sold an estimated $570 billion in foreign-exchange assets from August 2015 to August 2016 in an effort to keep the currency from plunging, according to an estimate by the U.S. Treasury released last week. It reiterated that China’s efforts to support the yuan were preventing a rapid depreciation that would hurt the global economy.

China’s foreign-exchange reserves fell $16 billion to $3.19 trillion in August, and are down from a peak of close to $4 trillion in 2014. The reserves dropped another $19 billion in September to the lowest level since 2011.

The report, which also contains data on international capital flows, showed net foreign buying of long-term securities totaling $48.3 billion in August. It showed a total cross-border inflow, including short-term securities such as Treasury bills and stock swaps, of $73.8 billion.

Net foreign selling of U.S. Treasuries was $24.8 billion in August, while foreigners purchased a net $2.73 billion in equities, $22.8 billion of corporate debt and $29.6 billion in agency debt, according to the report.

Liberal Media Insists Trumps’s Tax Records Tell Us He’s Evil — But The Truth Is, This Shows How Unfair The U.S. Tax Code Is (And It Drives Businesses Owners and Jobs To Leave America)

October 2, 2016

Trump Tax Return Shows He Could Have Avoided Taxes for 18 Years: NYT

How will NYT article about Donald Trump’s tax records impact race? 4:00

The New York Times has published documents it said were Donald Trump’s 1995 income tax returns, and the documents appear to show the businessman and GOP nominee reported a nearly $1 billion loss.

Trump declared a nearly $916 million loss on his 1995 state income tax returns according to the documents, the Times reported in an article posted online Saturday night.

An unsigned statement from the Trump campaign posted to its website late Saturday did not appear to deny or dispute a single fact in the Times story, but asserted the document was “illegally obtained.”

Trump himself tweeted early Sunday: “I know our complex tax laws better than anyone who has ever run for president and am the only one who can fix them.” Again, he did not deny or dispute the Times’ findings.

Three tax experts hired by the Times said the size of the deduction and tax rules governing wealthy filers could have allowed Trump to legally pay no federal income taxes for 18 years. There is nothing in the report that shows he actually took advantage of the rules to avoid paying taxes.

I know our complex tax laws better than anyone who has ever run for president and am the only one who can fix them. @nytimes

Trump has based his campaign on his experience as a successful businessman, vowing to rewrite trade agreements and make deals with other countries that would ensure jobs return to the U.S.

Trump has declined to release his tax returns, an issue which was raised by his Democratic rival Hillary Clinton at the Sept. 26 presidential debate.

Clinton at the debate suggested the returns might show Trump hasn’t paid any federal taxes, which Trump did not address.

When Clinton said a couple years of returns when Trump was trying to get a casino license showed he didn’t pay any federal income taxes, Trump interjected: “That makes me smart.”

The Clinton campaign pounced on the Times report. Campaign spokesman Brian Fallon tweeted: “Trump’s returns show just how lousy a businessman he is AND how long he may have avoided paying any taxes.”

The Times published the first pages New York, Connecticut and New Jersey state tax returns online. The newspaper said the three pages were emailed to reporter Susanne Craig last month.

Related: Tax Comments Are The Gift Trump Keeps Giving to Clinton

The Trump campaign in a statement after the report was published said the tax document was “illegally obtained.”

“The only news here is that the more than 20 year-old alleged tax document was illegally obtained, a further demonstration that the New York Times, like establishment media in general, is an extension of the Clinton Campaign, the Democratic Party and their global special interests,” the campaign said in a statement.

“Mr. Trump is a highly-skilled businessman who has a fiduciary responsibility to his business, his family and his employees to pay no more tax than legally required,” the statement continued. “That being said, Mr. Trump has paid hundreds of millions of dollars in property taxes, sales and excise taxes, real estate taxes, city taxes, state taxes, employee taxes and federal taxes, along with very substantial charitable contributions.”

The Times also said a lawyer for Trump threatened legal action against the newspaper if the records were published, arguing in a letter to the Times that publishing records without Trump’s authorization would be illegal.

Related: Video of Trump Deposition in D.C. Hotel Feud Released

Trump’s tax returns have become a line of attack among Clinton and her supporters.

Vice President Joe Biden on the “The Tonight Show with Jimmy Fallon” on Thursday ripped Trump for his “that makes me smart” comment.

“What does that make the rest of us? Suckers? I really mean it. Think about it”, Biden told Fallon.

The tax experts hired by the Times said there is nothing in the 1995 documents that suggest any wrongdoing, the newspaper reported.

The Times said it showed the documents to an attorney who has handled Trump’s taxes for three decades, Jack Mitnick.

The paper reported that Mitnick said “This is legit,” referring to the documents.

The Trump campaign in its statement to NBC News criticizing the Times report Saturday used a version of a line he has used in his campaign.

“Mr. Trump knows the tax code far better than anyone who has ever run for President and he is the only one that knows how to fix it,” the campaign said.

Trump in announcing a tax plan in September of 2015, which he later scrapped, said: “I fight like hell to pay as little as possible. Can I say that? I’m not a politician. I fight like hell always because it’s an expense.”


We at Peace and Freedom will not join the mainstream media attack on Donald Trump. What his tax records expose is the failure of your U.S. government.

For decades, there has been a simmering debate on the “unfair” U.S. tax code.Yet the loopholes and problem areas have never been fixed.

The notoriously bad — and unfair — U.S. tax code has contributed to businesses and jobs moving away from American. The corporate leaders of Google (Alphabet), Apple and Pfizer can explain this better than most.

Every American should grow up and ask tougher questions like, “Why has the Obama Administration accused companies of being ‘unpatriotic’ when these businesses are only trying to make a profit amid a notoriously burdensome and unfair U.S. government — and that starts with the U.S. tax code and includes all the regulations President Obama has put into place — without Congressional debate or agreement — that further erodes the likelihood potential new-start companies from getting going and further encourages business owners to flee the U.S. — taking their jobs and tax revenues on to foreign shores.”

As Ronald Reagan said, “Government is not the solution. It’s the problem.”

John Francis Carey
Peace and Freedom



Trump Tax Records Obtained by The Times Reveal He Could Have Avoided Paying Taxes for Nearly Two Decades

Donald J. Trump declared a $916 million loss on his 1995 income tax returns, a tax deduction so substantial it could have allowed him to legally avoid paying any federal income taxes for up to 18 years, records obtained by The New York Times show.

The 1995 tax records, never before disclosed, reveal the extraordinary tax benefits that Mr. Trump, the Republican presidential nominee, derived from the financial wreckage he left behind in the early 1990s through mismanagement of three Atlantic City casinos, his ill-fated foray into the airline business and his ill-timed purchase of the Plaza Hotel in Manhattan.

Tax experts hired by The Times to analyze Mr. Trump’s 1995 records said that tax rules especially advantageous to wealthy filers would have allowed Mr. Trump to use his $916 million loss to cancel out an equivalent amount of taxable income over an 18-year period.


U.S. Transferred $1.3 Billion More in Cash to Iran After Initial Payment

September 7, 2016

First $400 million coincided with Iran’s release of American prisoners and was used as leverage, officials have acknowledged

President Barack Obama after speaking about US-Iranian relations, including the Iranian-American nationals that were freed as part of a prisoner swap, on Jan. 17.
President Barack Obama after speaking about US-Iranian relations, including the Iranian-American nationals that were freed as part of a prisoner swap, on Jan. 17. PHOTO: SAUL LOEB/AGENCE FRANCE-PRESSE/GETTY IMAGES

Updated Sept. 6, 2016 9:38 p.m. ET

The Obama administration followed up a planeload of $400 million in cash sent to Iran in January with two more such shipments in the next 19 days, totaling another $1.3 billion, according to congressional officials briefed by the U.S. State, Treasury and Justice departments.

The cash payments—made in Swiss francs, euros and other currencies—settled a decades-old dispute over a failed arms deal dating back to 1979. U.S. officials have acknowledged the payment of the first $400 million coincided with Iran’s release of American prisoners and was used as leverage to ensure they were flown out of Tehran’s Mehrabad on the morning of Jan. 17.

The revelations come as Congress returns from a summer recess with Republicans vowing to pursue charges that the White House paid ransom to Tehran, a charge President Barack Obama has repeatedly rejected. Sen. Marco Rubio (R., Fla.) introduced legislation on Tuesday that would bar such payments to Iran in the future and seeks to reclaim the $1.7 billion for victims of Iranian-backed terrorism.

The Obama administration briefed lawmakers on Tuesday, telling them that two further portions of the $1.3 billion were transferred though Europe on Jan. 22 and Feb. 5. The payment “flowed in the same manner” as the original $400 million that an Iranian cargo plane picked up in Geneva, Switzerland, according to a congressional aide who took part in the briefing.

The $400 million was converted into non-U.S. currencies by the Swiss and Dutch central banks, according to U.S. and European officials.
The Treasury Department confirmed late Tuesday that the subsequent payments were also made in cash.

“The form of those principal and interest payments—made in non-U.S. currency, in cash—was necessitated by the effectiveness of U.S. and international sanctions regimes over the last several years in isolating Iran from the international financial system,” Treasury spokeswoman Dawn Selak said.

Administration officials from Treasury, State and Justice convened the congressional briefing on Tuesday morning in the basement of the Capitol building in Washington. Staff from the House committees on Foreign Affairs, Financial Services, Armed Services and Appropriations were among those who also attended, according to congressional aides.

The Obama administration previously had refused to disclose the mechanics of the $1.7 billion settlement, despite repeated calls from U.S. lawmakers. The State Department announced the settlement on Jan. 17 but didn’t brief Congress that the entire amount had been paid in cash.

U.S. lawmakers have voiced concern that Iran’s military units, particularly the elite Islamic Revolutionary Guard Corps, would use the cash to finance military allies in the Middle East, including the Assad regime in Syria, Houthi militias in Yemen, and the Lebanese militia, Hezbollah.

Sanctions impair Tehran’s ability to receive payments using the international banking system.

The settlement resulted from a legal arbitration under way in the Netherlands since the early 1980s between the U.S. and Iran. At issue was a $400 million payment Tehran’s last monarch, Shah Mohammad Reza Pahlavi, made to a Pentagon trust fund just months before his government was toppled. The money was earmarked for airplane parts that were never delivered.

Obama administration officials have said they believed the U.S. was set to lose the court proceedings in The Hague and would end up being liable for as much as $10 billion because of accrued interest. Republican lawmakers have argued the initial $400 million shouldn’t be repaid to Iran and instead should have been used to compensate the victims of Iranian-backed terrorism.

The bill introduced by congressional Republicans on Tuesday would block the Treasury Department from making any payments to Iran until Tehran returns the $1.7 billion to the U.S. and pays the American terrorism victims. Three dual U.S.-Iranian citizens are still being held in Iran.

“The U.S. government should not be in the business of negotiating with terrorists and paying ransom money in exchange for the release of American hostages,” Mr. Rubio said.

Write to Jay Solomon at and Carol E. Lee at


 (September 1, 2016)


© Iran’s Revolutionary Guards Website/AFP/File | A picture released by the news website and public relations arm of Iran’s Revolutionary Guards shows US sailors being apprehended by Iran’s Revolutionary Guards on January 13, 2016

The Sinister Side of Cash

August 27, 2016

Paper money fuels corruption, terrorism, tax evasion and illegal immigration—so the U.S. should get rid of the $100 bill and other large notes


Aug. 25, 2016 11:08 a.m. ET

When I tell people that I have been doing research on why the government should drastically scale back the circulation of cash—paper currency—the most common initial reaction is bewilderment. Why should anyone care about such a mundane topic? But paper currency lies at the heart of some of today’s most intractable public-finance and monetary problems. Getting rid of most of it—that is, moving to a society where cash is used less frequently and mainly for small transactions—could be a big help.

There is little debate among law-enforcement agencies that paper currency, especially large notes such as the U.S. $100 bill, facilitates crime: racketeering, extortion, money laundering, drug and human trafficking, the corruption of public officials, not to mention terrorism. There are substitutes for cash—cryptocurrencies, uncut diamonds, gold coins, prepaid cards—but for many kinds of criminal transactions, cash is still king. It delivers absolute anonymity, portability, liquidity and near-universal acceptance. It is no accident that whenever there is a big-time drug bust, the authorities typically find wads of cash.

Cash is also deeply implicated in tax evasion, which costs the federal government some $500 billion a year in revenue. According to the Internal Revenue Service, a lot of the action is concentrated in small cash-intensive businesses, where it is difficult to verify sales and the self-reporting of income. By contrast, businesses that take payments mostly by check, bank card or electronic transfer know that it is much easier for tax authorities to catch them dissembling. Though the data are much thinner for state and local governments, they too surely lose big-time from tax evasion, perhaps as much as $200 billion a year.

Obviously, scaling back cash is not going to change human nature, and there are other ways to dodge taxes and run illegal businesses. But there can be no doubt that flooding the underground economy with paper currency encourages illicit behavior.

Cash also lies at the core of the illegal immigration problem in the U.S. If American employers couldn’t so easily pay illegal workers off the books in cash, the lure of jobs would abate, and the flow of illegal immigrants would shrink drastically. Needless to say, phasing out most cash would be a far more humane and sensible way of discouraging illegal immigration than constructing a giant wall.

To be clear, I am proposing a “less-cash” society, not a cashless one, at least for the foreseeable future. The first stage of the transition would involve very gradually phasing out large denomination bills that constitute the bulk of the currency supply. Of the more than $4,200 in cash that is circulating outside financial institutions for every man, woman and child in the U.S., almost 80% of it is in $100 bills. In turn, $50 and $20 bills would also be phased out, though $10s, $5s and $1s would be kept indefinitely. Today these smaller bills constitute just 3% of the value of the currency supply.

The point of getting rid of big bills is to make it harder to carry and store large amounts. A million dollars in $100 bills weighs approximately 22 pounds and can fit comfortably into a large shopping bag. With $10 bills, it isn’t so easy. Think of lugging around 220 pounds in a giant chest. Hoarders and tax evaders would find small notes proportionately costlier to count, verify, handle and store. The use of cash could be further discouraged by putting restrictions on the maximum size of cash payments allowed in retail sales.


The fact that large notes are used far more for illegal activities than for legal ones long ago penetrated television, movies and popular culture. Viewers of the television series “Breaking Bad,” about a high-school chemistry teacher turned crystal-meth drug lord, got a fair taste of how cash is earned, spent and laundered in criminal activities.

Policy makers have been far slower to acknowledge this reality. They point to the popularity of U.S. currency abroad, particularly in some governance-challenged countries like Russia, where it is not unusual to pay for an apartment with a briefcase full of U.S. $100s. At one time, the Fed and the Treasury insisted that foreign demand explained as much as 70% of the demand for U.S. currency. But this argument has withered in the face of cross-country evidence, which suggests that at least a large fraction of dollars must be held in the U.S. underground economy (as I showed in a research paper almost two decades ago). Even the Fed now estimates that less than half of all dollars are abroad.

If cash is so bad, why retain small bills of $10 and under? For one thing, cash still accounts for more than half of retail purchases under $10, though the share fades off sharply as payment size rises, with debit cards, credit cards, electronic transfers and checks all far more important than cash for (legal, tax-compliant) payments over $100.

Many low-income individuals still rely heavily on cash, although of course they aren’t the ones carrying wads of $100s. It wouldn’t cost much to have the government or financial institutions provide them with debit cards. This would also make it simpler, safer and less expensive for the government to make transfer payments. Several Scandinavian countries have already taken this step.

Retaining small notes alleviates a host of problems that might arise if cash were eliminated entirely. For example, cash is still handy if a hurricane or natural disaster knocks out the power grid. Most disaster-preparation manuals call for people to keep some cash on hand, warning that ATMs might be paralyzed.

But times are changing. Nowadays, cell towers and large retail stores typically have backup generators, allowing them to process bank cards during a power outage. And there are always checks. In due time, smartphone technology is likely to overtake all other media, and one can always keep a spare charging cell for emergencies.


Perhaps the most challenging and fundamental objection to getting rid of cash has to do with privacy—with our ability to spend anonymously. But where does one draw the line between this individual right and the government’s need to tax and regulate and to enforce the law? Most of us wouldn’t want to clamp down on someone’s right to make the occasional $200 purchase in complete privacy. But what about a $50,000 car or a $1 million apartment? We should be able to reduce the problems I’ve described here while also ensuring that ordinary people can still use small bills for convenience in everyday transactions.

Won’t the private sector continually find new ways to make anonymous transfers that sidestep government restrictions? Certainly. But as long as the government keeps playing Whac-A-Mole and prevents these alternative vehicles from being easily used at retail stores or banks, they won’t be able fill the role that cash plays today. Forcing criminals and tax evaders to turn to riskier and more costly alternatives to cash will make their lives harder and their enterprises less profitable.

Some might argue that scaling back U.S. dollars will work only if there is coordination among all the major economies, since American criminals and tax evaders will just turn to euros if they have to. This is very unlikely. Few U.S. retail outlets accept euros, banks already have to file reports on large cash deposits, and there is a $10,000 cap on how much cash you can bring into the U.S. or take out without filing a customs form.

Yes, the U.S. government saves on borrowing costs by printing lots of money as opposed to issuing Treasury bonds, which must pay interest. But the effect of that flood of cash is to make life easier for Russian oligarchs, Mexican drug lords and global human-trafficking operations. The higher revenue from eliminating cash (and thus much tax evasion) would likely exceed the revenue that the U.S. Treasury currently gets from greasing the wheels of global crime, and there would be huge direct and indirect benefits from lower crime rates. In any event, if the U.S. took the lead, other advanced nations would eventually be shamed into following suit.

The tax and crime angle is reason enough to shred the world’s mountains of paper currency. There is, however, a very different and perhaps surprising rationale, having to do with the ability of central banks to deal with financial crises and deep recessions. Why? Because for all the polemical debate surrounding fiscal policy, monetary policy remains much the preferred first line of defense in dealing with recessions.

Cutting interest rates delivers quick and effective stimulus by giving consumers and businesses an incentive to borrow more. It also drives up the price of stocks and homes, which makes people feel wealthier and induces them to spend more. Countercyclical monetary policy has a long-established record, while political constraints will always interfere with timely and effective fiscal stimulus.

Almost 80% of the cash circulating outside financial institutions is in $100 bills


Since 2008, however, monetary policy has started to look less and less nimble. Most central banks found that once they brought interest rates down to (around) zero, their remaining options were very limited. This has left many central banks wishing that they had the capacity to take interest rates below zero.

What does that mean? When a loan has a negative interest rate, the borrower’s payments actually add up to less than the original debt. Several central banks (including the European Central Bank and the Bank of Japan) have experimented with such policies. For savers, it has the opposite effect: Money left in a bank deposit or a money-market fund keeps shrinking because of negative interest rates.

In principle, cutting interest rates below zero ought to stimulate consumption and investment in the same way as normal monetary policy, by encouraging borrowing. Unfortunately, the existence of cash gums up the works. If you are a saver, you will simply withdraw your funds, turning them into cash, rather than watch them shrink too rapidly. Enormous sums might be withdrawn to avoid these loses, which could make it difficult for banks to make loans—thus defeating the whole purpose of the policy.

Take cash away, however, or make the cost of hoarding high enough, and central banks would be free to drive rates as deep into negative territory as they needed in a severe recession. People could still hoard small bills, but the costs would likely be prohibitive for any realistic negative interest rate. If necessary, central banks could also slap temporary fees on any large withdrawals and deposits of paper currency.

Economists generally like the idea of adding negative interest rates to the tool kit of central banks. John Maynard Keynes weighed it quite seriously in his great work “The General Theory of Employment, Interest and Money” (1936). He was writing, however, in an era before electronic banking, so he saw it as a thoroughly impractical idea.

Not everyone likes negative rates. There is particularly strong resistance from the financial sector, which worries about the difficulty of passing negative rates on to small depositors. But these concerns can be significantly alleviated. Banks could be compensated for allowing zero-interest rate deposits of up to, say, $2,000 per citizen.

Others worry that negative rates will push banks, if not the entire financial sector, to engage in reckless risk-taking, which is threat enough with interest rates at zero. But if a strong dose of negative rates can power an economy out of a downturn, it could bring inflation and interest rates back to positive levels relatively quickly, arguably reducing vulnerability to bubbles rather than increasing it.

In sum, there are many issues to take into account, but if done gradually and properly, the balance of arguments is distinctly in favor of becoming a society that depends much less on cash.

Will it ever happen? I believe the time has come. Finance ministries are desperate to collect more tax revenues without raising tax rates. Homeland-security agencies are concerned about how cash facilitates terrorist financing. Justice departments are as worried as ever about the role of cash in crime. For immigration authorities, it sure beats building walls.

Cash is intimately familiar to all of us, woven into the fabric of our lives and our experiences as consumers and businesspeople. But governments have let cash supplies get way out of hand, to the benefit of criminals and tax evaders everywhere. It is time, at last, to get rid of all those $100 bills.

Dr. Rogoff is Thomas D. Cabot Professor of Public Policy at Harvard University and the former chief economist of the International Monetary Fund. This essay is adapted from his new book, “The Curse of Cash,” which will be published in September by Princeton University Press.


 (From June 2015)

G-20’s Focus Shifts From China to Europe

July 24, 2016

Geopolitical concerns allow Beijing to return to role it prefers — showcasing its growing clout

Chinese Premier Li Keqiang and International Monetary Fund Director Christine Lagarde arrived at a roundtable discussion in Beijing on Friday. Mr. Li said his nation is a ‘stability anchor’ for the global economy.
Chinese Premier Li Keqiang and International Monetary Fund Director Christine Lagarde arrived at a roundtable discussion in Beijing on Friday. Mr. Li said his nation is a ‘stability anchor’ for the global economy. PHOTO: MARK SCHIEFELBEIN/EUROPEAN PRESSPHOTO AGENCY


Updated July 24, 2016 12:42 a.m. ET

CHENGDU, China—A few short months ago, China’s economic problems were fueling global panic in markets and drawing unwanted attention and rebuke by the world’s largest economies.

Now, China’s economic challenges have taken a back seat to more pressing geopolitical concerns among finance ministers and central bankers from the Group of 20 largest economies, allowing Beijing to return to the role it prefers: showcasing its growing clout on the world stage.

Britain’s surprise vote to leave the European Union, Turkey’s recent coup attempt, a series of horrific terror attacks, souring global growth prospects and threats of an Italian banking crisis are drawing the scrutiny of the world’s finance chiefs. July’s meeting in Chengdu stands in contrast to the last G-20 finance leaders’ meeting, held in February in Shanghai.

China — Premier Li Keqiang chats with IMF director Christine Lagarde

Then, fears of a China-induced currency war and an economic meltdown in the world’s second-largest economy left the host nation on the defensive. The Chengdu meeting, which ends Sunday, is the last major G-20 event before the financial group’s September summit in Hangzhou.

“The Chinese economy is a ‘stability anchor’ for the global economy,” Premier Li Keqiangsaid Friday ahead of the meeting of the G-20, which acts as the world’s economic executive board. “Prophecy of China’s economy heading for a hard landing is rarely heard now.”

China continues to face questions about its currency policy and its steel exports, amid concern that overcapacity could become a global flashpoint in much the way that currency policy has been over the past decade. Another worry: China’s rising metal exports could worsen the weak inflation problem that central banks are grappling with around the world.

Foreign industries and their governments accuse the country of undercutting their markets unfairly by selling goods at prices below the cost of production. But those worries currently pale against much hotter fires elsewhere in the world.

“Brexit, the Turkish coup, and the U.S. elections have certainly helped redirect attention away from China,” said Standard Life Investments Ltd. economist Alexander Wolf, adding that markets often have a “limited attention span.”

The U.K. vote to leave the EU has cast a pall over the global economy, prompting the International Monetary Fund to downgrade its outlook and warn that growth could slip dangerously lower if U.K. and EU leaders don’t quickly address investor concerns about their future together. The coup against Ankara’s leadership revived political-risk worries in many emerging markets. And Republican presidential candidate Donald Trump’s talk of hiking tariffs is spurring worries the U.S. could pull the world into a global trade war.

China is undergoing an important structural transformation. Any transition has bumps here and there, but the overall direction of the change has been positive

—Italian Finance Minister Pier Carlo Padoan

Meanwhile, G-20 officials say Chinese management of the economy has risen to the challenge. Beijing has recalibrated its communication on exchange-rate policy and monetary and fiscal policies after global markets shuddered under what many said last year were management missteps.

“China is undergoing an important structural transformation,” said Italian Finance Minister Pier Carlo Padoan. Unlike earlier this year and last, no officials at the Chengdu G-20 mentioned China’s economy as a fundamental vulnerability to the global economy, Mr. Padoan said.

“Any transition has bumps here and there, but the overall direction of the change has been positive,” he said.

Beijing has taken active steps to restore confidence, repeatedly pledging since February not to depreciate the currency for competitive advantage. That helped allay fears of an imminent currency war.

The Asian powerhouse has also benefited from the Federal Reserve’s decision to delay an interest-rate increase, allowing authorities here to gradually depreciate the yuan, also known as the renminbi or RMB, without alarming investors.

“China has committed to moving in an orderly way toward a more market-oriented exchange rate,” a senior U.S. Treasury official said. “I’ve observed over the last months…a willingness to actually intervene to support the RMB to keep the RMB from depreciating more.”

China in recent months addressed fears of a financial crisis sparked by a flood of capital leaving its shores by tightening bank supervision, cracking down on unauthorized foreign-exchange traders and making it more difficult for customers to exchange funds. Foreign-exchange reserves have declined by $30 billion to $40 billion a month recently, compared with a $514 billion decline in 2015 and nearly $100 billion in January.

Also fueling the world’s more sanguine view of China, economists say: policy makers’ view that more fiscal spending, greater stability of capital outflows and other moves to curtail volatility are important as global growth slows, issues that play to China’s strength.

Beijing answered global concerns that its economy was slowing faster than it acknowledged by injecting a flood of money into the financial system, frontloading infrastructure spending and easing restrictions on its massive property sector. That saw second-quarter growth match the 6.7% rate in the first quarter, which was the economy’s slowest pace since the global financial crisis.

China on Friday reported 6.7% economic growth for the second quarter, slightly better than expected. Here’s how various sectors performed, by the numbers. Photo: Menglin Huang/The Wall Street Journal

The stimulus keeps China’s economy humming along, allowing Beijing to claim economic stability and put growth on track to hit the government’s annual target of 6.5% to 7%.

But, many economists caution, China may be buying growth now at the expense of output later.

The return to credit-fueled growth pushes up already-high corporate debt levels, fuels the problem of industrial overcapacity, blunts reform efforts and sets back efforts to shift the economy from state-directed growth.

“There is already a big problem of impaired loans which are on banks’ books which have not really been dealt with,” said IMF chief economist Maurice Obstfeld. “There needs to be a re-intensification of efforts in that area.”

Economists warn medium-term risks in China are rising. Standard & Poor’s Financial Services says corporate-credit quality is deteriorating faster than at any time since 2009. Corporate debt levels are estimated at 145% of gross domestic product, up from less than 100% of GDP in 2007.

Those levels, the IMF says, “are high by any measure.”

Write to Mark Magnier at and Ian Talley at



China Pushing Good Economic News in Propaganda Blitz — But Recession Looms — Fundamental flaws in its economy remain

February 23, 2016

BEIJING, Feb. 23 (Xinhua) — Despite slower growth and market volatility, China has plenty of good news to offer.

Skyscanner, a global travel search site headquartered in the United Kingdom, is a case in point to question the fears about China.

The company announced last week it saw a 67-percent jump in Chinese visitors to the site in 2015, helping boost its revenue by 28 percent to 183 million U.S. dollars.

“We have to understand China better,” Shane Corstorphine, chief financial officer of Skyscanner, said in an interview with CNBC on Friday, calling increasing outbound travel from China “a major opportunity.”

Concerns over China are natural, given the country’s economy is in its most protracted downshift since the late 1970s, which has been accompanied by recent stock market fluctuations and a weakening currency.

However, a broader long-term perspective will help companies such as Skyscanner make more sensible strategies for China.

The sources of pressure are undeniable: soft property investment, bloated industries and slumping trade. But sound fundamentals justify a positive outlook for China’s future growth.

That judgment led U.S. computer chip giant Intel to invest 5.5 billion U.S. dollars in its plant in northeast China’s Dalian City last October to produce the company’s most advanced memory chips.

Intel cares more about China’s market demand five to 10 years from now than its GDP growth for one year, said Richard Howarth, vice president of Intel’s Technology and Manufacturing Group and general manager of Intel Semiconductor (Dalian) Ltd.

For the moment, even though China recorded its slowest expansion in 25 years in 2015, employment and consumption remain resilient.

The registered unemployment rate in China’s cities was 4.05 percent at the end of 2015, better than official targets. Consumption contributed 66.4 percent to economic growth, up 15.4 percentage points from 2014.

China also has enough ammunition to stop further deceleration, with the world’s largest foreign exchange reserves, a huge trade surplus, room for monetary and fiscal maneuvering, and a certain degree of capital control.

Those conditions make the possibility of a crisis in China much smaller than in other economies, economist Marie Owens Thomsen of the French bank Credit Agricole wrote on the Chinese website of the South China Morning Post during the weekend.

Chinese vice finance minister Zhu Guangyao asserted on Saturday that China’s economy “will surely continue to grow.”

“China’s fundamentals remain strong, with high resilience, ample leeway and huge potential,” said Zhu at a forum. “None of those has changed.”

There’s a big distance between a slowdown and a crisis, and the former does not necessarily entail the latter.

To avoid misunderstanding, observers who simply base their reasoning on Western experiences need to think out of the box.

In developed economies, new investment opportunities are rare once there is excess capacity, but China is still in the process of industrial upgrading and urbanization, with strong need for investment in urban infrastructure and environmental protection, said Justin Yifu Lin, former chief economist of the World Bank.

Unlike other developing economies, which have investment opportunities but face fiscal constraints, China has plenty of resources, with lower government debt and high household savings, Lin explained.

Reform is another promising hedge against the downturn. China is cutting administrative red tape, overhauling state-owned enterprises, and removing barriers to let the market play a decisive role in resource allocation.

Those measures, along with efforts to reduce corporate burdens, improve financial efficiency and stimulate innovation, will help China increase productivity and overcome difficulties, said Xu Hongcai, an economist at the China Center for International Economic Exchanges.

“Reform remains China’s biggest bonus,” he said.

Thanks to streamlined bureaucracy, 12,000 companies were registered in China daily on average last year, up from 10,000 in 2014 and 6,900 before the reform.

Thriving entrepreneurship attests to market vitality, which is a key force shaping China’s economic trend, said Zhang Mao, head of the State Administration for Industry and Commerce, at a press briefing on Monday.

Jin Keyu, professor of economics at the London School of Economics, saw significant opportunities for China to achieve stable growth based on efficiency and productivity gains from deepening reform, rather than merely consumption.

While acknowledging government reform will be difficult to deliver, Jin believes action will become unavoidable if economic conditions worsen.

“Good times may breed crises in the West,” Jin wrote in an article on news site Project Syndicate. “In China, it is crises that bring better times.”


China’s economic transition ultimately benefits global economy: U.S. Treasury official

WASHINGTON, Feb. 22 (Xinhua) — China’s economic transition to smarter growth would not only put its economy on a more sustainable and healthy growth, but also benefit the global economy, said Nathan Sheets, undersecretary for international affairs at the U.S. Treasury Department.Full Story

Official confident in China’s economy

BEIJING, Feb. 20 (Xinhua) — Chinese vice finance minister Zhu Guangyao said on Saturday he is confident about the country’s economic growth in future.Full Story

Spotlight: Latest statistics show resilience, vigor of Chinese economy

BEIJING, Feb. 19 (Xinhua) — Amid growing concern over the “new mediocrity” of the global economy, China’s latest economic data provide a snapshot that the world’s second largest economy is resilient and full of vigor and vitality.Full Story




FEBRUARY 22, 2016, 4:51 PM EST

It’s forcing banks to lend to bad businesses

The multi-trillion dollar question, literally, for investors these days is, “How poorly is the Chinese economy performing?”

The globe’s second largest economy has been a driving factor in the weak performance of U.S. stock markets lately, as investors fear a so-called hard landing in China could drag the rest of the world into recession.

But the official Chinese economic data is notoriously unreliable. Even if we trust the numbers, we’re faced with the problem of how to interpret them. What’s more, there has never been an economy as important to the globe as China’s that has had a government so willing to use its extraordinary power to prop up economic growth.

In other words, understanding how the Chinese economy will affect the West requires that we correctly predict how the Chinese government will behave in the weeks and months ahead. To that end Deutsche Bank analysts Zhiwei Zhang and Li Zeng recently published a report called “Understanding the Tail Risks in China,” which looked at the regional policy response of the Chinese government to a slowing economy.

Zhang and Zeng isolate data from China’s northeast, a region that’s likely already in a deep recession. That segment of the country’s nominal GDP grew just 1% (factoring in inflation it would have been negative) in 2015, according to Deutsche Bank estimates. At the same time, fixed asset investment fell 11.6%, compared with an average growth of 25.5% in the ten years before. The region is dominated by state-owned enterprises involved in traditional heavy industries, or commodity and energy production, sectors that have come under particular stress in recent years.

Despite this sharp drop off in economic activity, the growth in consumer spending and income did not fall anywhere near as much. Furthermore, northeast China was the only region in the country that saw credit growth, i.e., banks making more loans in 2015 than they did the year before.

Screen Shot 2016-02-22 at 2.58.51 PM

In economies not dominated by the Chinese Communist Party, stuff like this doesn’t happen. As Zhang and Zeng argue that the discrepancy between the huge drop off in business activity and consumer behavior is likely the result of direct central government support, but also “indirect support,” from the folks in Beijing. They write:

The sharp contrast between weak economic activities and strong credit growth shows that banks in the northeast likely supported, through renewed lending, the weak corporate sector regardless of economic viability, which helped to avoid unemployment and bankruptcy. In this case, it is the government’s priority of maintaining social stability that overrode profitability considerations.

Such government support, however, can only be a short-term remedy rather than long-term solution to the structural challenges facing the northeastern region, and it comes with dear efficiency costs. The central government started to talk openly about addressing the risk of “zombie companies” in late 2015. This is regarded as a key part of the “supply side reforms.” One way to judge how serious the government is about the “supply side reforms” is perhaps to see if such credit support to the northeastern region will be contained in 2016.

This is another reason why western observers seem so confused by what they’re seeing out of China. Because the government there has so much more ability and willingness to stimulate the economy than governments in the West do, it’s that much more difficult to predict China’s future performance.

But until China addresses the fundamental flaws in its economy, i.e. it’s over reliance on investment, exports, and debt, it will have to continue to rely on government stimulus to avoid a collapse in employment and the social unrest that would likely be the result. And the longer it does that, the greater the growing imbalances in its economy will get.

Here’s How China Is Trying To Dodge Its Own Great Recession