As China Economic Roundups are to be occasional, I’ll resist apologizing for the gaps between editions. Still, there is some good stuff in this one, so I hope it was worth the wait.
Howard French hasn’t put much original material on his blog recently, which is unfortunate as I usually enjoy his outside-the-NYT material. Still, he still remains one of the best reproducers of content this side of the China Digital Times. Today, he republishes a gem from the Economist on the myth of China Inc… why America shouldn’t fear Chinese takeovers… and also why it should:
…this group of elite (Chinese state-owned) companies is not guided by a
single, controlling hand. Take telecoms: China’s early decision to
deregulate the sector and break up the state monopoly into four
competing firms—two fixed-line (China Telecom and China Netcom) and two
mobile (China Mobile and China Unicom)—was widely admired. It made
China the world’s largest telecoms market and created fat profits for
operators. Yet Beijing’s bureaucrats now threaten to undo this good
work. Frightened by the growth of new services and a price war, they
recently forced the bosses of the four firms to take each other’s jobs
to discourage competition, to the amazement of some independent
directors.
Infighting among bureaucracies with competing agendas crops up again
and again across China’s industrial landscape. It made life so
difficult in the power industry, that some foreign investors quit in
disgust, causing power shortages….
The contrast with Japan is stark. The Japanese government had less
direct control over its corporations, but its officials co-ordinated
their domestic development before earmarking sectors for overseas
expansion. The Chinese bureaucracy, while in direct charge of more of
the national economy, is riven by factional infighting.
Fears that Chinese firms are acting as the commercial arm of an
expansionist state are thus belied by a more complicated and disorderly
reality. The real reason to fear China’s overseas expansion is quite
different. Because Chinese firms have grown up in an irrational and
chaotic business environment, they may export some very bad habits. As
Mr Gilboy puts it: “when Japanese companies took over American ones,
they mostly made them better. If the Chinese run foreign firms like
they operate at home, driving prices down, misallocating capital and
over-diversifying, that is genuinely something to fear.”
Fear of takeovers killed the CNOOC bid for Unocal, and as an article translated at Danwei notes, part of the fear may have stemmed from the fact that CNOOC was seen as acting irrationally.:
It’s really too bad that after it came up against the pressure of
negative public opinion, CNOOC overreacted as badly as it had been
underprepared. When the US made known its unease about the takeover,
CNOOC immediately explained that it could separate off the American
portions, and it would retain all workers. But at the same time, CNOOC
also said that it could increase its bid price, preserving its
unyielding sense of inevitability.
To the American business world, this was very hard to understand.
Even in a takeover you have to consider value. If you don’t lay off
workers, and if you turn down larger profits, then there is no reason
to take over a company. No legitimate corporate takeover would portray
itself as quite so inevitable; this would remove any area for
discussion amongst competitive bidders. The more you disregard all
costs in pursuit of an acquisition, the harder your opponent will find
it to comprehend your motives, the more he will understand it as coming
out of political goals, and the more he will see you as an arm of the
government. The entrance of China’s foreign ministry on the scene dealt
another blow to the deal.
Part of AsiaPundit’s real job is to condense research notes for publication. Last week one of my colleagues in Beijing asked if I could do that for another "sky-is-falling" report from Morgan Stanley’s Andy Xie. I said, "Yes, I always enjoy Andy’s stuff. And I particularly enjoyed the two from last week, the first was noted by the Eclectic Econoclast here, writing from a North American perspective in my former college town of London, Ontario. Below are some of the key points for China and Asia. But you’d still be bettter off reading the full report here.:
The world may be in the middle of the biggest bubble in history. The bubble (e.g., property, stock, commodities) could exceed 50% of global GDP in value. The key cause of the bubble is that the major central banks failed to lower inflation targets to account for the combination of productivity acceleration due to IT and the new upward stickiness in wages due to the influx of three billion people into the global economy since the mid-1990s….
Production-driven Asia has benefited tremendously from the global demand boom. Recently, it has also seen over $700 billion in hot money inflow, which is part of the global liquidity bubble. When the global bubble bursts, Asia could fare worst, as a global demand slowdown and hot money leaving may happen together. Indeed, the seeds for another Asian Financial Crisis have been planted, in my view. It will take proactive policy measures, especially ones that stop sudden money outflow, to prevent such a crisis….
The Anglo-Saxon bubbles have underwritten the global trade boom. Asia, and China in particular, has been the main beneficiary. With high savings rates, Asia has turned the export income into new capacity to keep inflation low. The booming trade has triggered monetary excesses in the region also. It occurred first in Southeast Asia in the mid-1990s. When foreign investors became scared of the property bubble there, capital flight caused the burst and the Asian Financial Crisis.
After the bubble deflated in Southeast Asia, China began to experience a property bubble. As the trade boom shifted to China from Southeast Asia, the liquidity excess made the same switch. A property bubble in an emerging economy is usually about putting up new buildings. China has not been different. This has also caused excess investment in commodity industries. Overall, China may have invested 30% of GDP in excess….
Asia could be the trigger for a global adjustment. If the hot money in Asia (over US$700 billion) is scared of something like 1998, it could rush out of Asia and into the US. The dollar would strengthen and the US bond yield would decline. The combination could prop up the US property market and the US economy. The world would look like it did in 1998.
The second Andy Xie piece is here. A summary: China’s most recent boom has peaked. It has been led by government-backed policies that favor fixed-investment-led growth, at the expense of wider income distribution and consumption. Because of this, a further yuan appreciation will not boost production and could be a disaster. There’s much more in the full item, but below, a preview.:
…China is taking tentative steps towards reforming
its exchange rate. Many observers applaud the direction and believe
that a strong Chinese currency would shift China’s growth model towards
consumption. This is quite wrong, I believe. Without reforming the
political economy to spread.
income and wealth, a strong currency would only turn China into a poor
version of Japan. This is why I believe that China must be careful in
reforming its currency regime…
…state-led investment has become the primary
instrument for the supervision of local government achievement by the
central government. China’s political incentives function on awards for
development success or punishment for development failure. A commonly
used metric is GDP at city or province level. The easiest way for a
city to create GDP is through fixed investment. Also, popular opinion views physical transformation as the most important
benchmark for the success of a government. Hence, political incentives
are heavily biased towards fixed investment.
China’s power structure is a gigantic pyramid. It is
quite difficult for such a top-down linear power structure to run a
vast country with 1.3 billion people. Fixed investment is tangible and
can be a reasonable instrument for the top layer of political power to
supervise the lower levels.
When politicians are motivated to do something, they
tend to overdo it. Fixed investment in China is just one example.
Hence, China tends to experience excess capacity. When there is excess
capacity, it is inevitable that government will promote exports by
keeping the currency low or providing financial incentives. But, when export growth absorbs the excess
capacity, the same political incentive could lead to another wave of
excess capacity. This is why fixed investment and exports become bigger
over time relative to China’s economy…
\r\nfor the economy. They also have a tendency to use the money for further\r\ninvestment or speculation, which may exacerbate the overcapacity\r\nproblem.
\r\n China still has a labor surplus. Without special\r\nskills or privileges, market competition ensures that most receive low\r\nwages. When government introduces a layer of cost either through a\r\nmonopoly, unfair land allocation, or awarding construction contracts,\r\nit spreads among all the workers in the form of lower wages for all.\r\nThis sort of distortion is very negative for consumption development.
\r\n The trade sector has a better multiplier effect for\r\nconsumption but it is not large. Most factory workers receive low\r\nwages. If the sector adds three million workers a year, the total\r\nincome for these factory workers is less than US$5 billion or 0.4% of\r\nGDP. Far more of the trade income goes into debt service for the\r\nsupporting infrastructure and equipment.
\r\n Many observers urge China to increase the value of\r\nits currency to boost consumption. This is a dangerous suggestion, in\r\nmy view. Currency appreciation may boost consumption in a market\r\neconomy but only when the appreciation is not artificial. China is not\r\nyet a market economy. Artificially boosting the currency value would\r\nnot serve the purpose at all. A stronger currency is likely to boost\r\nthe value of bank deposits controlled by a small minority. Their\r\nincreased purchasing power for foreign goods might lead to more imports\r\nof luxury cars or more shopping trips to Paris. It won\’t boost mass\r\nconsumption.
\r\n Instead, a strong currency would kill economic\r\ngrowth, I believe. Monetary liquidity would decline for two reasons:\r\n(1) fewer exports due to cost increases, and (2) lower value of exports\r\ntranslated into local currency. China\’s overinvestment has kept returns\r\non capital low. The funds for new investment depend on new money from\r\nexport growth. Without reforming the political economy first, a strong\r\ncurrency policy would turn China into a poor version of Japan.”,1]
);
//–>Those with access to power enjoy a disproportionate
share in national income growth. The rising income inequality is
unfavorable for consumption development. A small number of rich people
who control most bank deposits tend to consume expensive items that
have a low multiplier effect for the economy. They also have a tendency to use the money for further
investment or speculation, which may exacerbate the overcapacity
problem….
Many observers urge China to increase the value of
its currency to boost consumption. This is a dangerous suggestion, in
my view. Currency appreciation may boost consumption in a market
economy but only when the appreciation is not artificial. China is not
yet a market economy. Artificially boosting the currency value would
not serve the purpose at all. A stronger currency is likely to boost
the value of bank deposits controlled by a small minority. Their
increased purchasing power for foreign goods might lead to more imports
of luxury cars or more shopping trips to Paris. It won’t boost mass
consumption.
Instead, a strong currency would kill economic
growth, I believe.
I don’t fully agree with Andy on the currency. It’s not that I don’t think revaluation isn’t risky, but a measured appreciation could help alievate some other pressures - such as high energy and commodity prices. Plus, putting more power in the hands of the central bank wouldn’t, at present, be a bad thing. The PBoC isn’t perfect, but for moving China towards a more market-oriented economy, I trust them much more than the macro-economic control freaks at the National Development and Reform Commission (NDRC).
Of course, acording to Brad Setser, July’s mild revaluation likley hasn’t really increased the central bank’s hand at all.:
…China’s new basket peg looks an awful lot like a dollar peg in practice. Rather than pegging at 8.28, China is now seems to peg at 8.095-8.11.
Sun-bin’s empirical work
lends analytical support to the conclusion one draws from eye-balling
the data: the implied dollar weighting in China’s exchange rate is
above 85%. i have not done the math, but I don’t think the recent tick up in the RMB to 8.095 (an appreciation of 0.2% since July 21)
changes the basic conclusion. The dollar has slumped a bit
against the euro since July 21 (when the dollar/ euro was at 1.211),
Katrina and all. As I understand it, with a basket peg, when the
dollar falls v. the euro, the renminbi should rise v. the dollar to
limit the renminbi’s fall v. the euro. Note this would work in
reverse if the dollar rose v. the euro — the renminbi would need to
fall v. the dollar. That would not go down so well on the
hill … .
But the bottom line is that the renminbi has not moved much, and it
basically remains tied to the dollar at a level that can only be
sustained so long as the PBoC intervenes massively.
That is why I am a bit surprised that both John Taylor - and the World Bank
- have claimed that China’s (trivial) move has increased China’s
monetary policy flexibility. I don’t quite see where the
flexibility will come from. Interest rate parity does
not hold in an economy with capital controls. But it still
provides some useful insights. In broad terms, if China wanted to
raise interest rates above US rates to reduce investment (and perhaps,
by increasing the return to savings, increase the savings rate),
it could only do so if it let its currency appreciate to the point
where investors expected a future RMB depreciation. China is a
long way from that point.
Also from Setser, a look at how high oil prices haven’t been hurting China’s current account surplus.
Speaking of which, all the oil in China is worth about 33 percent less than it is on the global market. Martyn updates his post on China’s price fixing.:
…here in China, a barrel of oil is about US$25 cheaper than Monday’s
closing crude price of over US$70 dollars on the New York Mercantile
Exchange.
Put simply, the government can’t continue to arbitrarily keep
domestic prices low if global oil prices remain at very high levels.
China relies heavily on cheap fuel and other subsidized raw materials
to prime its manufacturing growth and keep its exports the cheapest in
the world. Indeed, low-cost inputs have been one of the cornerstones of
China’s economic growth, much to the chagrin of competing economies.
However, any rise in domestic prices would have a huge and negative
impact on the economy, as explains:
Soaring global crude prices have backed China into a corner, where it
faces the tough choice of risking serious damage to its own oil
industry or allowing surging inflation that could devastate the economy
And even the PBoC governor agrees with Xie that China needs to have more domestic-demand-led growth. As Logan Wright notes, "If Zhou Xiaochuan says domestic demand is weak, it’s weak."
From the Financial Times today:
But
Mr Zhou said that a priority for China was to increase domestic
demand-led growth, to help reduce the current account surplus.
"Our investment demand has been very strong for several years, so we
are now trying, to some extent, to slow down investment and enhance the
household consumption demand to improve the economic structure."
Fast growth of investment, compared with the slower growth of
household spending, has led to productive capacity that serves the
export market, rather than domestic consumption. This has resulted in
the widening trade balance.
The Chinese savings rate has approached 45 per cent of gross domestic product, a level seen as too high.
"This is the adjustment China must do. I think exchange rate policy
does work to some extent to achieve a more balanced economic structure,
but domestic demand policy is more important than the exchange rate."
Mr Zhou said that China and some other Asian countries needed to
co-ordinate their efforts to promote domestic demand-led growth.
With that noted, I suspect the more fiscal-oriented NDRC and Ministry of Commerce will soon seek to gain a bit more control . According to this AFP item, . Well… it doesn’t say that but the economists are arguing for fiscal stimulus and not an interest-rate cut.:
While China has spent two years battling to rein in its runaway
economy, senior economists and government advisers now warn the
economic powerhouse needs fiscal spending if it is avoid a looming
slowdown.
Despite impressive headline numbers, there are big underlying problems which need to be confronted, they say.
They echo calls to relax China’s fiscal stance, dust off the
policies of former premier Zhu Rongji and start issuing a greater
number of treasury bonds to finance public works, helping to mitigate
what they say is a dangerously slowing economy.
Cooling import growth, worryingly low inflation and shrinking
industrial profits all suggest the expansion which began in earnest
three years ago is under threat said He Fan, a researcher with the
Chinese Academy of Social Sciences (CASS) and adviser to the government
on economic matters.
Further on the theme raised earlier by Xie, although from a diffrenet perspective, Mark Thoma points to an article arguing that China’s boom is being built on the backs of the workers.:
Workers pay price for China’s economy, by Li Qiang
Guest Columnist, Seattle PI:
With Chinese President Hu Jintao’s first stop of his U.S. visit here in
Seattle, it is appropriate to greet him with some observations that
will probably not be made in his tour of corporate facilities or in
meetings with government officials….China’s roaring economy is being
built on the back of millions of Chinese workers denied their most
fundamental rights. And it is being built within a political system
subject to greater and greater stress from this same economic growth
that it does everything to promote. …China’s rapid economic growth is
… without parallel. But China’s current economic system could not
exist in a democratic nation. … [D]ecisions … in China do not
require democratic discussion, and the government of China has put
aside all other considerations in order to develop the economy. Only
under such authoritarian rule is it possible for the market to be so
tightly controlled and for there to be this kind of trade surplus.
Imagethief asks, when is the middle class not the middle class?
A: When it’s the Chinese middle class, which is, apparently, the upper class.
I pose this rhetorical question because I stumbled onto an article
on the website of China Radio International, which explains that the
“middle-class” in China comprises 11.9% of “all employees in the
country”:
The size of the middle class in China has
grown to include 11.9 percent of all employees in the country,
according to a recent survey.
China Youth Daily reported on Friday that Social Sciences Academic
Press in Beijing has published the results of a survey on the middle
class in China.
Professor Zhou Xiaohong, Department Chair of Sociology Studies at
Nanjing University, led a research group called the Social Changes in
China and the Urban Middle Class Growth. The researchers surveyed 3028
people, selected at random, from Beijing, Shanghai, Guangzhou, Nanjing
and Wuhan.
The study group’s definition of "middle class" was a person with a
monthly income of 5000 Yuan, or about 617 US dollars; with a bachelor
degree or above; and who works as a civil servant, company manager,
technician or private business owner.
From: Middle class on rise in China: Survey, September 2, 2005
This rewrites my perception of what the middle class is. I always
figured it was the great hump in the bell curve. What was left after
the head of really rich people and the tail of destitute unfortunates
was pared away.
The EU and China have reached a deal on textiles, which was anticipated in the below item from the Globalization Institute. As the GI notes, this is not really a win-win situation.:
The Press Association has put out the story
that China and the EU will each engage in "sharing the burden of
releasing millions of garments currently held at customs into the
shops, with half being counted against future import quotas from China
and half being accepted in excess of current limits."In the short term, this is a victory for EU consumers and Chinese
producers alike. But what will happen next year? The deal brings
uncertainty for retailers wishing to order next year’s stock.
Presumably Mandelson is hoping retailers will chose to place their
orders with countries other than China. In a year supposedly dedicated
to making poverty history, it is truly remarkable that the EU is
restricting trade with a country containing 160,000,000 people living
on less than a dollar a day.
Also of interest:
Sun Bin translates Joseph Yam’s questions on the Yuan.
Eight Diagrams looks at loose monetary conditions and high oil prices.
Featuring a group of ambitious young men and women confined in a house and given
Reporters Without Borders
- sorry, just couldn’t pass that one up
)
Marines, gays and Korean men smoke at rates far above the average of all Californians, according to a study released today.
Weirdness. Mr Wang Says So, perhaps the most critical Singapore blog this side of Edinburgh, is the Straits Times ‘blog of the week.’ And on the ‘infantile’ side of the S’pore bloggosphere, XiaXue finds her muse (with help from Miyagi).The blithering idiot/s, who called the police hotline at 999 &
Via Jakarta Post, Rupiah fails to gain on Bank Indonesia rate hike
A huge quantity of
