The Korea Liberator (TKL) offers a sympathetic interview with Gordon G Chang, author of Nuclear Showdown: North Korea Takes on the World and The Coming Collapse of China. Naturally, TKL focuses on events relating to the peninsula, although Chang also briefly reaffirms his belief that the Chinese Communist Party is collapsing.:
Chang: Or all of the above [laughter].
I don’t believe that the communist party will be ruling China very much longer. I think it will fall from power by the end of this decade. But my crystal ball is not clear enough to provide a specific answer as to what happens next. Over the long term, China will develop representative institutions and a free economy, but perhaps not in the time frame you mention.
I don’t think China will fragment, but I do see Taiwan becoming recognized as the independent state that it actually is today. But apart from that, China won’t fragment. There will be a great period of uncertainty and turbulence in China, but 10 years are not enough to produce a democracy and the free market.
AsiaPundit has both of Chang’s books and would recommend them. While AP does not fully subscribe to to Chang’s view that the CCP will collapse — particularly in such a short timeframe — a deep economic correction would not be a surprise. Although there is hyperbole, even six years after publication Chang’s text still well illustrates the fragility of the modern Chinese state and, moreover, offers a welcome antidote to China hype.
China’s state-run broadcaster, CCTV is now producing a documentary on the Coming Collapse of America.:
A China Central Television (CCTV) unit is developing an epic, fall-of-Rome-flavored documentary TV series around the theme of America in decline.
Unlike the crude state-sponsored videos that glorified the September 11 terrorist attacks as a humiliating strike against an arrogant superpower, the planned multipart production promises to be a slick dissection of American economic and military might.
Production notes for the CCTV series, which is tentatively scheduled to air in 2007, are said to provide a revealing glimpse of how certain government officials see the US–namely, as a dying hegemon. The Chinese view is that a number of factors, including “structural” economic problems and imperial overstretch, are combining to end US global supremacy.
In an effort to support and promote this point of view, the CCTV documentary plans to cover all the bases, to use an old American expression borrowed from baseball.
For example, the producers plan to devote at least one episode to the US immigration crisis and attempt to draw historical parallels between a commonly perceived cause of the fall of ancient Rome–unchecked immigration and invasions–and the flood of illegal immigrants pouring into the United States from Mexico and Latin America.
In an ironic twist, the segments on the US economy will supposedly highlight the gloom-and-doom opinions of some smart, successful citizens–fund managers, investment bankers, and analysts–who argue that the country has entered a long period of decline, an economic twilight of sorts, from which no escape is realistically possible. The talking heads of finance are expected to make the case for aggressively investing in emerging markets, especially the so-called BRIC countries (Brazil, Russia, India, China) that are destined to dominate the global economy by 2050, according to an increasingly fashionable Wall Street concept.
It’s unfortunate that this production will not likely air on the English-language CCTV station. It could have been interesting.
AsiaPundit doesn’t see a major decline of the US in the near future. But he is concerned about the States’ debt position and asset bubbles. A major correction would not be a surprise
That said, AP also enjoys talk of China’s Coming Collapse.
Via the Opposite End of China, the Economist Intelligence Unit looks at political risk in China. And, in spite of the recent stories of rising protests and increasing ‘mass incidents,’ the EIU says the risk of a coming collapse is low to moderate under four different scenarios.:
Mishandling of protests in Hong Kong destabilises the Chinese leadership (Low Risk)
The Chinese government accepted the resignation of Hong Kong’s chief executive, Tung Chee-hwa, in March 2005. Mr Tung’s unsuccessful attempts to force through unpopular national security legislation in 2003 had prompted demonstrations attended by several hundred thousand. The appointment of a new chief executive, Donald Tsang, previously a leading civil servant, eased tensions, and pro-government parties did well in September 2004 elections for the Legislative Council (Legco). However, Mr Tsang’s plans for electoral reform were voted down in December 2005 by pro-democracy parties, who wished to see a faster move towards universal suffrage. The Chinese government has ruled out early moves towards full democracy, and there are fears that clashes between China and Hong Kong politicians over democracy in the territory could have repercussions for political stability in China as China’s leadership struggles to reassert its authority. (image )
Local protests broaden into a wider movement (Moderate Risk)
Local protests will continue to be sparked by a number of issues including lay-offs, failure to pay workers, environmental pollution, corruption and illegal seizures of land. The local government’s failure to properly compensate peasants for seized land was, for example, the cause of recent protests in Shanwei, in Guangdong province, in which several demonstrators were shot dead by police. To date the government has faced down such protests by addressing some of the complaints raised and arresting most of the leaders, but this tactic may not be so successful in the future. The size and number of protests appears to be growing, and the spread of mobile phones has made organisation of demonstrations easier. (image here)
The continuing political transition results in a struggle for power or policy paralysis (Low Risk)
Major shifts in the balance of power are unlikely, and would only occur in the context of a specific controversy (for example, the mishandling of a major health crisis or a collapse in growth could prompt a realignment of power). While most factions within the CCP seem to support the current policy stance, businesses should be aware that the emphasis of policy could change if such a shift occurred. (image via here)
Further disease outbreaks occur, creating public anger and leadership disunity (Moderate Risk)
The growing risk posed by bird flu has been recognised as one of the key threats to China’s strong economic growth rates. The World Health Organisation (WHO) has noted that bird flu appears to be widespread among the country’s poultry population, and outbreaks have occurred in numerous provinces in 2004-05, both among wild birds and among birds raised domestically and commercially. If these outbreaks spread they could devastate the country’s poultry and egg industries, which are among the largest in the world. … This category of risk is also increased by the partisan nature of the press, which can be relied upon to suppress facts deemed unhelpful to the party leadership. Companies should consider establishing contingency plans to cope with a potential health crisis that could render a large proportion of employees ill or disrupt logistics systems. (image via here)
AsiaPundit admits to being a bit of a bear on China. It’s not that China’s economic growth is a myth. The ‘miracle’ is very measurable. However, anything that can be measured cannot be called a miracle.
There will be a crisis, it could be sparked by bad policies at home or abroad. A collapse of US housing markets, for instance, could easily plunge the Middle Kingdom into despair. When the crisis happens, the interesting thing will be how it plays out socially and politically.
The US tends to solve its problems quickly and has the political flexibility to dismiss bad administrations by ballot. Japan’s biggest crisis sparked a decade of deflation. After the Asian crisis Indonesia emerged a democracy, the Philippines never really found its feet, while South Korea made a wonderful transformation.
Perhaps a European historian can tell us what happened when the Weimar Republic collapsed, European history isn’t one of AsiaPundit’s areas of expertise.
Predicting when a crisis will occur is a crap shoot, although there are indicators that can provide warning signs. Guessing what happens after a crisis hits in next to impossible.
China Law Blog earlier this week posted a response challenging Minxin Pei’s doom-and-gloom article on China’s problems. Today Dan Harris, the blog’s author, notes that Tom Barnett and James Na have replied.:
I blogged a few days ago about a recent article by Minxin Pei predicting China’s enivitable fall. At that time I talked about the article having generated "quite a bit of buzz in the blogosphere." The buzz is even louder now.
I posted Dr. Pei’s article because I found it thought provoking, but I did not sign on to its pessimistic conclusion. I suggested that those interested in these sorts of "big idea think pieces" on China should read "big idea" bloggers like James Na, Dan Drezner and Tom Barnett, whose views range all over the China optimist-pessimist map.
Barnett and Na both took me up on my suggestion and both ran posts on the Pei piece. Na liked Pei’s thesis. Barnett did not.
Separately, Tyler Cowen adds.:
I will go on record in agreement (with Pei). More specifically, how about a bone-crunching, bubble-bursting, no soft landing, Chinese auto crash-style depression within the next seven years? This is also my biggest worry for the U.S. economy, I might add.
If you are not convinced, raise your right hand and repeat after me: “China in the 20th century had two major revolutions, a civil war, a World War, The Great Leap Forward [sic], mass starvation, the Cultural Revolution, arguably the most tyrannical dictator ever and he didn’t even brush his teeth, and now they will go from rags to riches without even a business cycle burp.” I don’t think you can do it with a straight face.
Making a guess on when the crisis will occur, AsiaPundit will agree with Gordon Chang that China will collapse in 2005. That is inaccurate, but it does put AP in good company.
Speaking of Mr Chang, AsiaPundit will take this opportunity to gripe that he will miss one of Chang’s speaking engagements in Shanghai due to a scheduling conflict caused by the National People’s Congress. Worse still, AP will miss Tiara Lestari’s photo exhibit in Bali because of those darned ‘commies.’ Tiara had even offered an invite to AP.
China should collapse. It deserves it. The leadership of the Chinese Communist Party has - by refusing to reschedule its silly parliament - prevented AsiaPundit from meeting a really hot Indonesian model and former Playmate. This is personal.
Oddly, Mrs AsiaPundit doesn’t seem upset with the CCP over this latest outrage.
Via Richard, a welcome dose of antidote for China hype from Foreign Policy.:
Western investors hail China’s strong economic fundamentals—notably a high savings rate, huge labor pool, and powerful work ethic—and willingly gloss over its imperfections. Businesspeople talk about China’s being simultaneously the world’s greatest manufacturer and its greatest market. Private equity firms are scouring the Middle Kingdom for acquisitions. Chinese Internet companies are fetching dot-com-era prices on the NASDAQ. Some of the world’s leading financial institutions, including Bank of America, Citibank, and HSBC, have bet billions on the country’s financial future by acquiring minority stakes in China’s state-controlled banks, even though many of them are technically insolvent. Not to be left out, every global automobile giant has built or is planning new facilities in China, despite a flooded market and plunging profit margins.
And why shouldn’t they believe the hype? The record of China’s growth over the past two decades has proved pessimists wrong and optimists not optimistic enough. But before we all start learning Chinese and marveling at the accomplishments of the Chinese Communist Party, we might want to pause for a moment. Upon close examination, China’s record loses some of its luster. China’s economic performance since 1979, for example, is actually less impressive than that of its East Asian neighbors, such as Japan, South Korea, and Taiwan, during comparable periods of growth. Its banking system, which costs Beijing about 30 percent of annual GDP in bailouts, is saddled with nonperforming loans and is probably the most fragile in Asia. The comparison with India is especially striking. In six major industrial sectors (ranging from autos to telecom), from 1999 to 2003, Indian companies delivered rates of return on investment that were 80 to 200 percent higher than their Chinese counterparts. The often breathless conventional wisdom on China’s economic reform overlooks major flaws that render many predictions about China’s trajectory misleading, if not downright hazardous.
Brad Setser, who should be a daily read for everyone who enjoys economics, has posted an excellent summary of an RGM Monitor item on China’s coming economic crisis, and how it will differ from other emerging-market crises. AsiaPundit has no disagreements.:
One thing is clear: the trigger for financial crisis in China will differ from the trigger for the last Asian crisis. China simply is not vulnerable to sudden pullback of international bank credit. China’s reserves exceed China’s short-term debts by factor of six to seven and its total external debt by a factor of almost three.
The core question, of course, is whether China’s external strength will protect it from a domestic banking crisis. My answer is no.
Crisis though is an imprecise term. Bank crises can happen if bank depositors - or a bank’s short-term external creditors - pull their funds out of the bank. Or they can happen if a large share of the banks’ loans go bad, leading to large losses for the banks equity investors and even its depositors (if the government does not step in). The two types of crises are of course related - depositors are more likely to run if they worry that the banks are bad. But the link is not perfect. So long as a bank is backed by a credible government guarantee, for example, depositors may be happy to keep their funds in a rotten bank. China’s banks, for example, still carry tons of bad loans from their lending to state owned enterprises in the 1990s. But those bad loans have not stood in the way of a vast increase in the bank’s deposit base - or a lending surge.
Lending booms often are followed by a surge in bad loans. That happened in the Asian tigers after their boom. Chinese banks do not have quite the same vulnerabilities: they are not as exposed to a large currency move, for example. Most of the deposits and loans of the banks are denominated in RMB, not in dollars. That limits the banks’ “balance sheet risks” from a hidden currency mismatch. And it is hard to see how the RMB would depreciate significantly in any case.
The triggers for a surge in bad loans are more likely to come from the real economy. And the longer China continues on its current path of export and investment led growth, the bigger the risks. And if a slowdown in investment or exports is not offset by a surge in consumption, China’s growth could slow sharply.
That in turn would lead to a surge in bad loans, and a surge in bad loans might make the banks more reluctant to lend - and make depositors more reluctant to keep piling their savings into the banking system. Both developments in turn would lead to slump in new lending - aggravating the cyclical slowdown. Boom would turn to bust.
AsiaPundit has always intended on reviving the China Economic Roundup feature. Time constraints have prevented that from happening yet, and AP regretfully admits to withholding great economic posts for roundups that had not been forthcoming. That will cease.
Agam’s Gecko has a thoroughly good wrap-up of mainstream press coverage of the situation in Dongzhou village, and a birthday message for a toothless document.
Happy birthday, Universal Declaration of Human Rights! Today is a big day for you — your 57th birthday! Although it seems you were misnamed at birth, as there was nothing particularly universal about you either then or now. Human rights are universal, the Declaration was, and is not so. Mrs. Roosevelt and the many other of your laudable parents may have better given you the grand, all-encompassing term as a middle name instead. The Declaration of Universal Human Rights would sound more suitable for you.
As if to mark the special day (along with Mr. el Baradei getting his Peace Prize), the Chinese Communist Party has held a special event this week. For the first time since the Beijing Massacre of 1989, Chinese police have shot and killed a number of village protesters in southern Guangdong province. Dongzhou village, a small town near the city of Shanwei had seen public protests in recent weeks over confiscation of property by the government for the purposes of industrial development, offering the villagers only meager compensation. One fellow quipped that “it wasn’t even enough to buy toilet paper.”
UPDATE: ESWN has a very thorough roundup of articles.
More at Timur-I-Leng (multiple entries), Anton Traversa, Peking Duck,
A violent crackdown on peasant protesters in Dongzhou may have been much worse that reported. Initial foreign press reports said that at least two protesters were shot and killed. Now, Howard French writes in the New York Times that the incident may be the largest use of lethal force against civilians in China since 4 June 1989.
SHANGHAI, Dec. 9 - Residents of a fishing village near Hong Kong said that as many as 20 people had been killed by paramilitary police in an unusually violent clash that marked an escalation in the widespread social protests that have roiled the Chinese countryside. Villagers said that as many as 50 other residents remain unaccounted for since the shooting. It is the largest known use of force by security forces against ordinary citizens since the killings around Tiananmen Square in 1989. That death toll remains unknown, but is estimated to be in the hundreds.
The violence began after dark in the town of Dongzhou on Tuesday evening. Terrified residents said their hamlet has remained occupied by thousands of security forces, who have blocked off all access roads and are reportedly arresting residents who attempt to leave the area in the wake of the heavily armed assault.
“From about 7 p.m. the police started firing tear gas into the crowd, but this failed to scare people,” said a resident who gave his name only as Li and claimed to have been at the scene, where a relative of his was killed. “Later, we heard more than 10 explosions, and thought they were just detonators, so nobody was scared. At about 8 p.m. they started using guns, shooting bullets into the ground, but not really targeting anybody.
“Finally, at about 10 p.m. they started killing people.”
A Scotsman item, datelined today from Beijing, is also estimating there have been from 2-20 deaths, citing residents and Amnesty International and again raising comparisons with June 1989.:
Estimates from residents and rights groups put the number of dead between two and 20.
China’s Communist Party brooks no dissent but protests are becoming increasingly common, caused by disputes over land rights, corruption and a growing gap between rich and poor.
Many of the protests turn violent, but Amnesty said police opening fire marked a different turn.
“Police used guns on protesters the last time in 1989,” said Chine Chan, the east Asia campaigner for Amnesty International, referring to China’s military crackdown on pro-democracy demonstrators.
Morgan Stanley’s chief economist Stephen Roach lays out quite well what is wrong with the Chinese economy and, moreover, why it is difficult to judge when a downturn will take place. To simplify, the state may seek to use market-boosting measures to prevent a significant slump. As Roach notes, this will not just forestall the downturn, it will create a more precarious situation for China and the world when an inevitable downturn happens.:
The die is now cast for a significant slowing of Chinese GDP growth in 2006. At work is likely to be a downturn in China’s all-powerful investment cycle.
About six weeks ago, I threw in the towel on the ever-elusive China slowdown call (see my 21 October dispatch, “Wrong on the China Slowdown”). In doing so, however, I cautioned that we simply may have been too early in looking for a downshift in Chinese economic activity. Based on intelligence gathered during a recent visit to Beijing, I am increasingly convinced that is, indeed, the case. In my view, the die is now cast for a significant slowing of Chinese GDP growth in 2006. At work is likely to be a downturn in China’s all-powerful investment cycle, driven by an important and surprising contraction in bank lending.
China’s booming investment cycle is on an unsustainable path. For 2005, we estimate that fixed asset investment is likely to exceed 46% of Chinese GDP — astonishing by historical standards for China or any other economy. Given China’s special investment needs as a large developing country — namely, urbanization, industrialization, and infrastructure — there is every reason to look for an investment-led growth dynamic. But the Chinese investment cycle has gone well beyond what those fundamentals might suggest. Even in the heydays of their own development booms, the investment shares of the Japanese and Korean economies never got much above the low-40% range. I very much agree with Andy Xie who recently argued that China is now at a point where its ever-rising investment share is a recipe for excess capacity and deflation (see Andy’s 22 November dispatch, “China: Toward a Deflationary Landing”).
The consensus view in the markets is that China will sustain its investment boom through the 2008 Beijing Olympics — that it will simply not accept the potential embarrassment of a growth slowdown until after that momentous event is over. Old China hands also note that the Chinese economy never slows immediately after the unveiling of a new development plan. With the 11th five-year plan covering the 2006-10 interval, this historical tendency also suggests any slowdown could be deferred until after 2007. Consider the implications of that possibility: If China stays the course of its investment-led boom, then the fixed asset investment share of its GDP could well be in the 55-60% range by 2008 — a recipe for a monstrous overhang of excess capacity. With Chinese inflation already quite low — the CPI increased at only a 1.2% y-o-y rate in October 2005 — China is not that far away from outright deflation. Should its capacity overhang continue to build through 2008, a deflationary endgame in China would be more likely than not, in my view.
If you read the whole thing, you will note that Roach is optimistic that financial sector reforms will mitigate the Chinese tendency or ability to continue to use its state-owned banks (SOBs) for pump-priming. He also notes that cynics doubt that governments will permit the SOBs to act according to shareholder interests when loan and investment growth stalls. AsiaPundit is generally among the cynics, and his cynicism is amplified as ‘the state’ is a far more complex beast than Roach mentions in his note.
The PBoC would no doubt be keen to see the end of policy loans, but NDRC economists have already been hinting that pump-priming may be needed. Further down the chain, it must also be considered how much control the central state has over regional banks, and how much control the big state lenders have over their branches (for that matter, AP is also concerned about the head offices).
Martyn at the Peking Duck points to a Newsweek item that caught my attention earlier this week. Arguing that China is not necessarily the place to be putting your money right now.:
Recently words such as ‘collapse’ have been replaced with, for instance, ‘unsustainable’ and speculation that China’s stunningly successful economic formula of massive domestic investment, cheap money, use of existing technology, export-led growth, cunningly hidden protectionist policies, the hard-selling of the mythical ‘China market’ and huge amounts of FDI cannot last forever and is consequently starting to show cracks. After all, what goes up, must come down, or so says this *must read* article.
Despite “insatiable” domestic demand and government measures to curtail investment in overheating sectors, China now has an overproduction of, for example, steel, cement and cotton - all this during the biggest building boom in history. Likewise, China’s factories are churning out too many finished consumer goods like cars, mobile phones, textiles and clothes. Adding to the gloom includes higher manufacturing costs, sluggish domestic demand, anti-dumping quotas, razor thin profit margins, fierce competition, rampant intellectual-property theft and a weak legal system. Furthermore, fixed-asset investment (infrastructure projects, factories, apartment blocks, office towers etc.) will likely top a staggering 54% of GDP this year. Comparisons with the investment frenzy that led to the 1997 Asian Crisis are inevitable.
AsiaPundit is often asked what he would recommend as an investment strategy for China. AP does not usually offer investment advice, but if he is plied with a few beers he will often offer nuggets such as this.: “China really reminds me of what Korea was like a decade ago, I’d probably wait for the crash and then buy into high-quality distressed assets.”
Via the Horse’s Mouth, a Clinton adviser says that China will have an economic collapse.:
China’s economy faces a "collapse" over the next decade owing to a high savings rate and over-investment in industrial capacity, according to a former economic advisor to previous US president Bill Clinton.
"At this moment China is saving too much and is investing too much in factories which the world does not need. Like this it is certainly heading for a great fall, a collapse," former advisor Robert Wescott told the Portuguese business daily Jornal de Negocios on Monday.
"It could be in 2007, maybe in 2014, I don’t know. But what I know for sure is that China will have over the next ten years a great fall in economic activity," he added.
AsiaPundit agrees. There are serious bubbles and imbalances here that are not being corrected rapidly enough and there will be a day of reckoning. The open question is what will happen after the ‘collapse.’ There are many possibilities. When the Indonesian economy imploded there was regime change. When Japan’s bubble burst there was stagnation. South Korea re-emerged stronger and improved.
As well, one interesting difference between China’s ‘coming collapse’ and the humbling of South Korea and Japan is that this will have implications that are much more global. The South Korean and Japanese problems were domestically created - but China’s overcapacities are often due to excess foreign investment. Korea’s crisis meant the end of DaeWoo, but when China falls General Motors and Volkswagen will be feeling the pain.
Bingfeng has a very good roundup, of both blogging and blog commentary, on the beating of activist Lu Banglie outside of Taishi village and the controversy surrounding the reporting of accompanying Guardian correspondent Benjamin Joffe-Watt.
The Guardian, in the article linked to here from Howard French’s site, notes that Joffe-Watt was not the only one to have thought Lu was dead. While the paper’s credibility is being questioned, this is still worth noting.
A second witness to the attack, whom the Guardian cannot name to protect his safety, last night said that he believed Mr Lu had been left for dead. “A group of men attacked Lu with fists and legs. We thought he was dead,” the witness said. “An ambulance came [and] left without him. We were fearful for our lives; we thought they might kill us.”
Mr Lu told the Guardian there was nothing anyone could have done to help him.
To AsiaPundit, it seems the Anglo side of the Sino-blogosphere is more divided than usual on this matter - possibly driven by a split in knee-jerk CPC bashers and knee-jerk MSM bashers.
Optimistically, despite the divide and the distraction from the core issues in the Taishi dispute, I’m hopeful that this incident may produce results. I believe the Chinese public, and the central government, are taking notice more serious of the Taishi situation.
Why? For starters, this site, which also has a good roundup, stops loading in Shanghai if attempts to access it without a proxy are made. The stalling is more indicative of filtering than a block. A trace-route test showed access is allowed and proxies will allow full access. Without proxy, the site stops loading when the Taishi incident is mentioned. This is indicative of keyword filtering.
I haven’t yet confirmed filtering through sufficient testing - although attempts to load Simon World also briefly caused similar problems in the same manner - if filtering is (or was) in place that would mean that the central government was trying to prevent discussion of the issue. In turn, that would mean that it finally has Beijing’s attention.
I’m not a fan of the central government. However, the central CPC is better by far than the fiefdoms that litter the country, and an intervention in Taishi would be beneficial.
If other Sinobloggers can provide notice of possible filtering of Taishi/Lu Banglie it would be welcome.
First the good news. Lu Banglie, the Chinese activist who was beaten to near-death outside of Taishi village is alive. Whether or not he’s ‘fine’ has yet to be fully determined.
Lu, a People’s Congress representative who had fallen afoul of village officials, was beaten while escorting Guardian foreign correspondent Benjamin Joffe-Walt to the village. Joffe-Walt’s account of the incident is here.
Chinese blogger Michael Anti, in a translated post provided by ESWN, accuses Joffe-Walt of negligence and, in a round-about way, racism.
As for The Guardian’s Benjamin Joffe-Walt, how the fuck did he still have to nerve to write this kind of report? Perhaps he is young and does not yet know that reporting in certain areas of China is just like in a war zone. He should not have gone there against the advice of others, and he should not have brought Lu Banglie to the village. Since he was being taken out by the police, why didn’t he insist on rescuing Lu Banglie as well? It is alright to beg for mercy when it happened. But the more important thing is that you have a duty and you must assume responsibility for your companion. Or is that Chinese person just a guide dog?
Thus, we the Chinese people are treated like dogs by the government and we are also treated like dogs by certain arrogant and ignorant foreigners. I have no idea how this tragedy can be changed.
Full disclosure, I am a foreign correspondent in China and have a tendency to defend my brethren against accusations. I also have lower different ethical standards compared with most of those brethren - and most bloggers for that matter - so my comments should not be taken as representative as those of my profession or the English-language blogosphere.
I was also invited to the Guardian’s house-warming in Shanghai on the day of the Taishi incident — though I didn’t attend and have never met Joffe-Walt (ergo, this defense of his actions cannot be attributed to payola from free drinks. Not that such a thing has ever happened before … I’m in wires, so I always file before the free drinks.)
As ex-CNN china bureau chief Rebecca McKinnion notes in the first link in this post, there has been considerable criticism of Joffe-Walt in the SinoBlogosphere - much of it reflecting Michael Anti’s comments that he did not respect his ‘fixer.’ Fons is fence-sitting (or, in more respectful terms, contemplative), while Running Dog, a more opinionated but anonymous Shanghai-based journo (anon for good reason given the specific blocks on his website), does not discuss Joffe-Walt’s role but sees this as another failure of China’s central government.
Although I cover finance and would never likely be in a similar situation, AsiaPundit believes he would have done the same as Joffe-Walt in the same situation. Protecting sources is important, and I have in recent months, to my shame or credit, asked a Chinese-national source to review some of his on-the-record comments that were highly critical of the central government. He did and it almost ruined a great story, but I feared they were a risk to his livelihood, albeit not his life.
I would never put my staff at risk, but I’ve personally always ignored the most-sound advice and taken insane risks (usually with my own life and typically during leisure activities). And it seems from Joffe-Walt’s account that the risk was taken willingly by Lu and not taken at the correspondent’s request. Indeed, it was after his repeated objections.
There is a healthy debate on the Shanghai Foreign Correspondents’ Club mailing list about Joffe-Walt’s probable responsibility, and how to protect sources. The harshest post, which shall remain unattributed, is this:
Please tell Joffe-Walt and other foreign correspondents in Shanghai that I am shamed by his conduct. He risked the life of Lu Banglie and his own Chinese assistant, stood watching Mr. Lu being beaten so that he can fabricate a report about the beating and then he runs away to save his skin. He makes us excuse him for doing nothing because we do not know what we would have done in his place except that we won’t have been so stupid as to take a Chinese with us on sensitive assignments in the first place. My Chinese friends are asking me “How can you do something like that?”
But it seems clear to me that Joffe-Walt cannot be blamed in any way for this. Lu, who had his own agenda, was insistent about accompanying the Guardian correspondent, and Lu - likely more that Joffe-Walt - knew the risks involved.
I would never instruct any of my Chinese staff to take any political risks - they face penalty of jail while I, at worst, face deportation - and I will advise sources to remain anonymous or alter sensitive quotes rather than take what I deem unnecessary personal risks (though this is very rare as getting a decent comment in China financial journalism is like pulling teeth… with tweezers).
Lu did have an agenda to push, and was taking his own risks to achieve his goals. I’m largely sympathetic to these goals and, I actually believe most senior-level central government officials also are. However, this means Lu was a political figure and he cannot have the same status as an employee or even a trusted or coaxed source.
That said, this is not to put the responsibility on Lu.
Lu was beaten by hired goons! The responsibility for the crime is on the hired goons and their employer(s)!!
THIS SHOULD BE OBVIOUS!!!
Much thanks to GI Korea for all of the posts in my unexpectedly long absence, normal service will resume shortly, featuring more tabloid sensationalism, no introspection and fewer exclamation marks!!!!
UPDATE (12 October 19:12 Shanghai time):
Sun Bin posted in the comments that “the bigger controversy is about the ‘exaggeration’ or ‘inaccurate description’ of Joffe-Walt’s story.” I didn’t address this yesterday and I’m still reluctant to do so in definitive terms. I haven’t fully made up my mind on the matter and probably won’t until I see a thorough update on Lu’s physical condition or some sort of follow-up from Joffe-Walt.
I’m reserving judgement on the accuracy of the report until I have more information. By ‘accuracy’ I mean whether it is poor observation caused by panic or whether it was simply blatant exaggeration.
As well, for argument’s sake, I will suggest that it is possible that what Joffe-Walt says he witnessed may be a relatively accurate retelling of what he thought he saw. I haven’t seen many beatings, and no serious ones. However, I have had friends in such things as motorcycle accidents. Someone who looks near death can look almost normal after a quick cleanup in the hospital. Head wounds, because of the concentration of blood vessels, very often look much worse than they actually are.
An inspection of the apparently-not-lifeless body would have been helpful, as would have been a camera (though that may seem ghoulish). But given that there were allegedly 30 thugs standing around, it is understandable that he did neither of these things.
The primary thing that bothered me yesterday was not the report, but the matter of blaming Joffe-Walt for the beating, That is not a rational response. It’s not quite like blaming a rape on the dress of the victim - as Lu was the real victim - but to point accusing fingers at a bystander rather than the assailants shows a serious lapse of judgement.
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
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
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
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
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:
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
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
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
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.
In recent months
the mainstream media has been overflowing with articles discussing the
economic threat that China poses to the global economy in industries
ranging from textiles to autos. In response to these anxieties and
fears, many politicians on both the left and right are pressing for
ill-conceived tariffs on Chinese exports and limitations on Chinese
investment into key industries.
While it is true
many Americans and Europeans face the possibility of layoffs and lower
wages caused by intense Chinese competition, I have watched this
growing backlash against China with a mixture concern and dismay. As
an American instructor of business management in Beijing and Shanghai
for the last five years, I’m becoming increasing convinced that the
Chinese economy in the years ahead will not be as strong as many
so-called Western experts would like readers to believe.
Westerners get carried away with irrational exuberance about the number
of new Shanghai skyscrapers going up or the millions of new cars
clogging the streets of Beijing, foreigners would do well to gain a
greater understanding of the massive economic challenges its Communist
leaders need to tackle in the next few years.
I’ve long argued that the hype about China’s promise - as well as the hype on the China threat - is all overdone. Schwarz has a good round up on why. On a similar theme, another must read is this MacLean’s article reproduced by Shanghai’s NYT bureau chief Howard French.:
At its apex, Japan’s economy crumbled like a house of cards. The yen,
which had been kept weak to promote exports, was engineered upward to
rein in fast growth, igniting a speculative real estate bubble. When it
burst, the banks, which had lent money to companies based on their real
estate equity, were left virtually bankrupt. Trillions in personal and
corporate wealth disappeared overnight. The implosion revealed
structural rot beneath the economy’s seemingly ironclad exterior. The
upshot was 15 years of stagnation that Japan is only just now emerging
China is, in many ways, following in the footsteps of Japan’s early
success. Nobel prize-winning economist Robert Mundell recently compared
China’s ramp-up to Japan’s beginnings as a low cost manufacturer in the
1950s and ’60s. And now, like Japan was in the 1980s, China is focused
on expanding into international markets and on developing its own
technology for sale to the world.
But other similarities are more disturbing. Andy Xie, chief Asia
economist with U.S. investment bank Morgan Stanley, points to the
US$350 billion in speculative “hot money” that has poured into China in
recent years on the expectation that its currency, the renminbi (or
yuan), would appreciate. Much of that money has been parked in real
estate as the recently privatized housing market goes through an
unprecedented boom. In Shanghai, prices skyrocketed by 28 per cent last
year, with sleek condo towers, office high-rises, hotels and malls
being thrown up at a breakneck pace. The vacancy rate officially stands
at 2.7 per cent, but anecdotal evidence suggests up to 40 per cent of
the new space sits empty.
And with those cheerful thoughts in mind, this week’s comment from Morgan Stanley’s Stephen Roach has left me feeling a bit more bearish than usual.:
Non-Japan Asia… which accounts for fully 28% of world GDP as
measured on a purchasing power parity basis — is likely to be hit
especially hard by the combined impacts of its inefficient energy
consumption technology as well as its excessive dependence on the
is the most obvious case in point. Its oil consumption per unit of GDP
was double that of the developed-world average in 2004. China, like
many Asian countries, tends to subsidize the price of retail energy
products. While that means the cost of higher oil prices is deflected
Chinese consumers, the impact falls more acutely on its government
finances. At the same time, in the face of
soaring energy costs, China’s subsidy structure has already caused
serious disruptions to retail supply — resulting in long petrol lines
that are strikingly reminiscent of those experienced in the 1970s.
Moreover, about a third of China’s total exports go to the United States.
That means one of China’s largest and most dynamic sectors — exports
currently account for more than 35% of Chinese GDP and were still
surging at close to a 30% y-o-y rate through July — is very much a
levered play on the staying power of the overly-extended American
consumer. That’s a tough place to be for any economy in an energy shock — even China.
With the possible exception of Japan and India, the rest of Asia may not be in much better shape.
Also oil-related, Ben Muse looks at China’s energy security, and exposes part of the reason why it’s looking at Central Asia and nearby sources. Currently, about 80 percent of China’s oil has to travel through the Malacca Straits, if Canada’s oil sands become viable they’ll have to pass through an area that’s free of pirates, but closer to the US military.:
Because the earth is round, the shortest route from Canada’s west coast
to East Asia passes across the Gulf of Alaska and through the
Aleutians into the Bering Sea at Unimak Pass, returning to the North
Pacific through the far western Aleutians. Once past the Aleutians,
shipping would still have to pass around or between the Japanese
Islands, and between Japan and Korea.
It’s hard to imagine the U.S., Japan, or Korea interfering with the
rights of innocent passage through these waters. But the Chinese can’t
be entirely comfortable about this source and route. Canadian oil
would certainly be vulnerable in the event of a conflict over Taiwan.
AsiaPundit earlier agreed with Bingfeng’s analysis that the problems with healthcare in China are not caused my the growing privatization of services, but that market-oriented services are still developing. Sun Bin has further evidence.:
"When Gao Qiang, China’s health minister, responded to scathing
criticism of his country’s health system this month he turned his ire
on local hospitals, saying they had put profits ahead patients. Mr Gao
raged that patients were being billed for drugs to cover the cost of
everything from wages to building maintenance, leaving an increasing
number of citizens unable to afford to see a doctor.
From the hospital’s perspective, however, the picture is very
different. A squeeze on government funding and strict price controls on
most services mean they are forced to rely on drug sales for up to 70
per cent of their budgets.
"The problem with hospitals centres on the draconian capping of
doctors’ fees and in-patient beds," said a foreign pharmaceuticals
executive. "The result is that they run these services at a loss and
have to make up the money elsewhere." The cost of a bed in China’s
hospitals, even in large cities, can be as little as Dollars 1 a day.
Prices are kept low in the name of maintaining what the government
calls "social stability".
Peking Duck guest blogger Martyn really should have his own site. The latest offering takes a look at China’s swelling foreign exchange reserves.:
Some Chinese officials argue that the money would be better spent
recapitalizing the state banks or to import oil and build up strategic
reserves, of which it has none. Others say the money should be used to
fund overseas acquisitions by Chinese firms.Conservatives want to keep
the money in financial instruments. They say, quite rightly, that the
inflow of hot money is only a temporary phenomenon and point to the
billions of dollars of liabilities in bad loans held by the state
banks, pension and welfare liabilities and debts owed by securities
firms.There is also the possibility of trade disputes or a trade war
with the US or the EU, which would sharply reduce the trade surplus, or
a financial crisis at home or in Asia.
Further on China’s reserves, Brad Setser points to some useful posts on the end of Bretton Woods II.
It seems like some in Asia are a bit worried that so much of the
world’s wealth is denominated in the currency of the world’s largest
debtor. Cynic’s Delight highlights their concerns well in a recent
"Chalongphob Sussangkarn, president of the Thailand
Development Research Institute, a Bangkok based think-tank, said, "It
is quite hard to understand why the world’s largest debtor (the United
States) is the one that controls the world’s financial system. We (East
Asia) always monitor what the US Federal Reserve says about interest
rate movements. (East Asian) creditors should be the ones who determine
the world’s fate."
Frankly, the United States’ Asian
creditors should be worried. The Fed has made it clear that its
preferred solution to the US trade deficit is a big dollar
depreciation. And the required depreciation could be large indeed.
See Rogoff and Obstfeld.
Yu Yongding is always worth listening
to as well - and while his voice is only one of many that matter in
China, the fact that he think China already has too many reserves is
The New Economist points to a Bank of Japan paper on China’s revaluation, which endorses the PBoC’s cautious approach.:
We analyze the impact of Japan’s exit from its peg
on exports and investment. The results point to sizeable effects of
the yen’s revaluation on both variables, especially investment. While
our analysis suggests that a rapidly-growing, export-oriented economy
can operate a heavily managed float despite the presence of capital
controls and the absence of sophisticated foreign currency forward
markets, it underscores the importance of managing the exchange rate
with domestic conditions in mind and avoiding the kind of large real
appreciation that would sharply compress profits and damage investment.
For China this suggests starting with a modest band widening and
a limited increase in flexibility, and not with a large step
revaluation which could have a sharp negative impact on investment and
growth. Our results thus provide support for the kind of measures
taken at the end of July
Analysts emphasized that the plan should not be construed as an
indication that the government has embraced wholesale privatization.
The majority of the companies that trade on the Shanghai and Shenzhen
exchanges are small arms of giant firms that remain wholly controlled
by the state, or inconsequential and poorly managed firms … The
government’s decision to put more of these shares into private hands
does not signal an intent to relinquish control over the largest and
most strategically important state-owned firms, which still dominate
key sectors of the Chinese economy such as steel, auto-making,
telecommunications and commercial aviation. "This is basically a
mechanism to get the stock market to function, which it has not done in
four years," said Arthur Kroeber, managing editor of the China Economic
Quarterly. "This is the state privatizing junk that it’s not interested
in but retaining control over the core companies.
Also of interest: Tyler Rooker looks at China’s GDP and purchasing power parity; Danwar ponders a link between China’s bank bailouts and the revaluation; and Logan Wright examines recent statements from the People’s Bank of China, and tries to weigh how much the central bank is intervening in the currency market.:
Brad Setser asks if Alan Greenspan is promoting moral hazard… in China.:
Listen to one Chinese fund manager in this morning’s Wall
Mr. Zhu (who helps manage US dollar investments for the
Bank of China) expresses confidence in the US dollar and the health of the US
home market. Housing is so vital to the US
economy, Mr. Zhu and some of his counterparts at other Chinese banks reason,
that US authorities will prevent a bust."
Sounds like Chinese fund managers believe in the Greenspan
(Hubbard? Lindsey? Bernanke?) put …
I also suspect Mr. Zhu would be on to something. If
interest rates ever were really to rise, I
would not be surprised if (some) homeowners - if one can call folks
debt and little equity homeowners - started to demand, loudly,
higher rates. And i suspect politicians here in the US
would take notice. Florida likes to flip condos — and it is a
If you haven’t already seen it, Martyn at the Peking Duck has a great post on China’s fuel subsidies.:
That’s the ‘how’ of it, as to the ‘why’, we need only to glance at the
balance sheets of the mainland’s oil refiners. Together they lost 4.19
billion yuan in the first half of this year. Compare that to a profit
of 16.38 billion yuan for the same period last year (figures from the
China Petroleum and Chemical Industry Association). No wonder there are
few happy bunnies among the executives at Sinopec and PetroChina. Their
crude oil refining companies have been sacrificed for the greater good
of society, i.e. to bear the losses incurred in providing cheap
subsidized oil. Technically, China’s domestic crude and refined oil
prices are linked to the international benchmarks but, in reality,
domestic price increases have only been applied to crude, domestic
refined oil prices have not closely followed those of the international
market and have therefore fallen way behind in the last couple of years
as international prices have sky-rocketed.
Also at the Duck, Lisa notes a report on China’s widening urban-rural income gap, as usual for the site, the comments are worth reading, commenter Dylan notes that a lack of labor mobility is a major part of the problem:
..there is no unified labour market because people are not free to become
permanent residents wherever they please. Rather a system of residency
permits and exclusions from social services and rights operates to
systematically disadvantage those born in rural communities. That is
why farmers working in urban areas are referred to as a floating
population - they have no rights to permanent residence in the city.
This is no accident. Urban Chinese fear few things more than an
"invasion" of "rude peasants" seeking jobs, housing, social services,
and political power.
China Confidential offers a brief look at a planned tax cut.:
China plans to eliminate income taxes for low-income workers. But
experts say the measure will mainly benefit poor people in the cities
rather than the majority of China’s poor in the countryside–a
reflection, perhaps, of increasing concern that the urban underclass
could represent a more serious threat to social stability than the
left-behind rural poor, despite recent violent protests in the
The government plans to help some of the country’s poorest by nearly doubling the threshold for paying personal income tax.
media reported on Tuesday that China’s parliament agreed to raise the
lowest taxable income to $185 a month, from the current $99.
The Globalization Institute blog looks at EU hypocrisy and the damage caused by textile quotas.
first it was the butter mountains and the wine lakes; then the food
dumped on developing countries; now 54m Chinese-made sweaters and 14m
pairs of trousers are sitting in warehouses, banned from the shops,
because of the latest idiotic policy from the European Union (EU).
These garments will soon be joined by millions of bras and blouses,
Chinese imports that have been paid for by European clothing retailers
but cannot be sold.
In June, after most of these items had already been ordered, the
European trade commissioner, Peter Mandelson, went native and agreed to
quotas on Chinese textiles - in other words, rules limiting the number
of Chinese garments that can be imported. These quotas, which went into
effect on 12 July, have started to be met, leaving retailers unable to
sell their autumn product ranges until next year.
The EU’s stance is perverse and immoral and will hit the weakest and
poorest hardest, both in Europe and in China; it shows that Brussels’
supposed commitment to economic development and solving world poverty
is utterly worthless. In theory, since 1 January, the world has enjoyed
free trade in textiles, a welcome development. But the EU is still
allowed to impose anti-Chinese quotas until the end of 2008 as part of
the Textile Specific Safeguard Clause which China agreed to as part of
its ascension to the World Trade Organisation.
Should Chery Motors survive the intellectual property lawsuit brought on by General Motors, how would the car fare in western markets? The Stalwart takes a look.:
Sub-$4,000 Chery cars might just, excuse the bad joke, wevolutionize the
auto industry. Just the fact that a car can be so easily copied, with a
level of quality which competes with the world’s biggest brands, this
should set of alarm bells at the automakers. The Chery QQ is using many
of the same parts as GM’s Spark since these are becoming more
standardized, and available due to the fact that their manufacture is
increasingly outsourced to third-parties.
Is Taiwan investment in China slowing or surging? Michael Turton takes a look, and admits that it’s hard to get a good answer:
While year on year figures for June double, YOY figures for July
fall. The difference is $410 million to $371 million, so the real
difference is between the figures for last year, it looks like.
However, good numbers are hard to obtain, as this 2002 article points out:
estimates, however, have always put actual investment much higher given
that many Taiwan companies circumvent government supervision by
investing in China through a subsidiary in a third country, in
particular tax havens such as the Bahamas and the Virgin Islands.
Imagine Taiwanese circumventing the authorities. That just never happens….
Welcome to the oil edition. A larger picture of the side picture - a queue at a petrol station in Dongguan, China’s Guangdong province - as well as others can be found at Bingfeng Teahouse. China is facing an energy shortage. Imagethief posts an Asian Wall Street Journal article that has useful background on the situation in the South.
It isn’t just high international prices that’s causing China’s energy shortage, Mark Thoma at the Economist’s View points to two NY Times items explaining how the shortages relate to China’s transition to an overregulated market economy from an overregulated command economy.
The diesel and power shortages have one thing in common: they are
largely the result of the clash between China’s Communist past and its
increasingly capitalist present. The government has set retail prices
too low for diesel and electricity. So businesses, facing high world
oil prices, are supplying less of both.
Simon, with his always excellent Daily Linklets, covers much of the discussion, saving Asiapundit the trouble.
The oil shortage in China is getting global attention: Brad DeLong reproduces a NYT article, Gateway Pundit (via Instapundit, who is taking more of an interest in China these days…part of China’s rise?) and Bingfeng have photos, Economists View talks about China’s oil price controls, Barcepundit dregs up a 1998 article on a sex/oil swap in Ningxia. As I noted in yesterday’s linklets, the SCMP puts
some of the blame on supply bottlenecks as well as the price control
system. Article below the jump.
(UPDATE 18:34) Sun Bin, as always, has worthwhile insights.:
Mark Thoma also looks at alternative measures of growth and an article that questions China’s record of human development.:
Better news comes from the economies of China and most of the OECD
(Organization for Economic Cooperation and Development) countries: they
have grown in terms of both GDP per capita and wealth per capita. … It
would seem, therefore, that during the past three decades the rich
world has enjoyed sustainable development, while development in the
poor world (barring China) has been unsustainable. One can argue,
however, that the above estimates of wealth movements are biased. Among
the many types of natural capital whose depreciation do not appear in
the World Bank figures are freshwater, soil, ocean fisheries, forests
and wetlands as providers of ecosystem services, as well as the
atmosphere, which serves as a sink for particulates and nitrogen and
sulfur oxides. Moreover, the prices the World Bank has estimated to
value the natural assets on its list are based on assumptions that
ignore the limited capacity of natural systems to recover from
disturbances. If both sets of biases were removed, we could well
discover that the growth in wealth in China and the world’s wealthy
nations has also been negative.
At the Shanghaiist, Dan Washburn talks trade, investment and takes a piece out of Senator Charles Schumer.:
foreign investors’ complaints have almost always been related to
restrictions on the size of investments allowed — percentage of foreign
ownership — when it comes to Chinese companies and joint ventures. We
have heard of deals going awry with Chinese partners running off,
illegally, with intellectual property. (China also has a history of
obtaining, illegally and legally, and subsequently squandering
technology, never actually building upon this know-how to develop its
own advanced technology.) But we can’t imagine that any American
companies in industries involving technology would ever come to China
if giving up all of their trade secrets was required to do business
here … especially not companies in the aviation industry where
sensitive technology could have implications for China’s own military
The New Economist notes that, for some, Europe’s textile quotas are economic suicide.:
As an armada of Chinese cardigans and trousers
lies stranded in European ports (by some estimates, around 60 million
items), some European politicians are finally starting to oppose this
madness. This morning’s Financial Times (subscribers only) features an article by Swedish, Dutch, Finnish and Danish ministers attacking the import ban.
Karien van Gennip, Bendt Bendtsen, Thomas Östros and Paula Lehtomäki
argue that the import quotas "were introduced, without proper regard
for the realities of modern commerce." The ministers don’t pull many
punches; these quotas will cost jobs.
(18:43) Logan Wright compares the strategic investment plans of foreign banks in China.
August 16, 2005—Speeding from the scene of the crime, a
Chinese boy tows a floating plastic bag of stolen natural gas last
week. Flouting a government ban, farmers around the central Chinese
town of Pucheng frequently filch gas from the local oil field.
I live in Shanghai, China’s international financial capital. Today at the office I needed to visit the Morgan Stanley Capital International (MSCI) website, one of the leading international stock indicies.
I couldn’t access it. So I ran a test from a Shanghai-based virtual trace route site. The results are contained on the image on the left. A trace on this site, which is accessible in China, is on the right (click either image to enlarge).
For MSCI, the connection failed at the ChinaNet backbone server. This is the same result that you get when you enter the URL for banned blogs, such as RConversation, or blocked news sites, such as the BBC. Right now, I’m assuming that MSCI is blocked in Shanghai.
I can’t say whether this is a deliberate blockage or an accident, but I will say that this is a frequent event in China. Sites that ‘the party’ would likely find innocuous are often inaccessible - either due to the Great Firewall or related stresses that the filtering system puts on connectivity.
I’m in China’s financial capital and I cannot access a relatively important financial website without using a proxy.
There are people who argue that Shanghai will soon overtake Hong Kong. It may eventually do so. But it won’t be anytime soon. Censorship - of publications as well as the Internet - is part of the reason why.
Mainland China lacks the openess and transparency that a real financial center needs. So long as the CPP remains fearful of freedom, Hong Kong’s future is secure.
Constructive reading via Howard French, a Foreign Affairs item called “The Myth behind China’s Miracle.”
Washington need not worry about China’s economic boom, much less respond with protectionism. Although China controls more of the world’s exports than ever before, its high-return high-tech industries are dominated by foreign companies. And Chinese firms will not displace them any time soon: Beijing’s one-party politics have bred a timid business culture that prevents domestic firms from developing key technologies and keeps them dependent on the West.
On a related note, Simon points to a letter in this week’s Economist noting that the magazine was guilty of serious hyperbole in saying that China rules the world.:
SIR - You propagate the canard that, economically, China now rules the world ("From T-shirts to T-bonds", July 30th). It does nothing of the kind. In real dollar terms (purchasing-power parity valuations are at best controversial, at worst misleading) China has made a continuously declining contribution to global GDP growth from 10% of the total growth registered in 2001 to an estimated 6% in 2004-its share of real global GDP was an estimated 2.2% for 2004. There is also some quantitative flaw in your argument that cheap Chinese exports kept global inflation down, as China’s share of global trade (an estimate unencumbered by PPP considerations) stood at 6.6% of global exports and 6.2% of global imports in 2004.
It is the speed of the rise of China’s share in global economic and trade flows, as well as the growth of its demand for commodities, that has obscured the fact that China consumes, for example, less than 10% of the global output of oil. So what is truly special about China? Its average position in the scheme of things is still very small, although its absolute speed of growth and its opening economy are a harbinger of growth to come. But all of this is a far cry from controlling the world economy.
Great discussion at the Becker-Posner blog on the risks that Chinese ownership of US companies may bring through several posts . Here Gary Becker outlines a possible benefit, Chinese investment on the US may limit - rather than increase - security risks.:
Chinese ownership of American companies may not be sufficiently important "hostages" to discourage a military attack on Taiwan or elsewhere. But the point I tried to make on this issue is that China, not America, bears the economic risk from ownership of American assets, since these assets would be taken over by the US in the event of any military conflict, the way German assets in the US were taken over during world War II.
There is evidence, in studies by Solomon Polochek and others, that trade does reduce the probability of conflict between nations, but many other factors are also relevant. So a few examples are not decisive, whether they go in one direction or another. I believe that even the quantitative studies by Polochek and others are far from decisive, but they are the best we have so far.
With a merger of Anshan Iron & Steel Group Co Ltd and Benxi Iron & Steel Group confirmed, the Business China blog reproduces a Xinhua item in which an industry representative argues the necessity of consolidation for the industry in China.:
Although the prices stabilized to some extent recently, Yang maintained that the industry was still facing a gloomy future, predicting that the small and less competitive manufacturers would be put into a tight corner.
So it is urgent for them to be regrouped with bigger and stronger ones, Yang noted.
In addition, many international iron and steel producers have invested heavily in the country’s industry over the past years.
At Destructonomics, a look at what China’s growing grain shortage may mean for global commodity markets.:
…it’s rather remarkable that China’s been able to feed 20% of the world’s population with 7% of the world’s arable land for as long as they have. However, the dynamic has now changed as China’s production is now lower than consumption. China’s economy is in transition. As a result of this growth, China will simultaneously be growing less grain and consuming more.
It was a positive for free trade that the Bush administration was able to secure approval of the Central American Free Trade Agreement (Cafta), but it will be a negative for China’s textile producers. The Big Yuan says it’s payback time.:
Rep. Robin Hayes, R-N.C., said he changed from opposing the free trade deal with six Latin American countries to supporting it because of commitments the administration had made to provide relief to the U.S. textile industry. “Not until the administration said it would work with the industry on the issue of exploding imports from China was I able to support (CAFTA).”
The administration has been handling quotas on a category by category basis since a comprehensive trade deal ended last Jan. 1, but China is currently on pace to export $24 billion of textiles to the U.S. (a 60% increase over 2005).
From the article: Gary Hufbauer, a trade expert at the Institute for International Economics in Washington, said he estimated that a comprehensive agreement limiting a broad array of Chinese clothing imports could raise U.S. clothing prices by $6 billion annually, or about $20 for every American. Consumers have been benefiting from falling clothing prices over the past year, reflecting a big surge in cheaper-priced Chinese products.
Sun Bin argues that China has an advantage over India in that it’s more of a meritocracy (due to the absence of a caste system), and one where women have greater opportunity to work.:
Fair play is the fundamental of capitalism. China is still far from perfect, it is hardly the model for fair play. Singapore is. There are so much more that China needs to do. But China learns about fair play very fast and practices it better than other developing countries. The unfairness in India and those other countries is so enormous that it makes China looks like a saint. Such unfairness is sociological and cultural, rather than political or policy driven.
On a related note, Barbarian Envoy
points to an excellent Business Week series of articles from its newest
edition on China and India and offers summaries of several notable items.
Logan Wright notes that China is getting serious about possible inflation, or is at least talking about it.:
Lin Yifu, director of China Center for Economic Research (CCER)of Beijing University, said that owing to the overproduction in most manufacturing sectors since 1998 and the to-be-overcapacity from over-investment in some sectors in 2003 and 2004, China is expected to see deflation caused by overcapacity in the latter half of 2005.
Evident deflation is apparent to appear in the fourth quarter this year, said Wang Jian, deputy secretary general for the Economic Research Institute under State Development and Reform Commission, predicting overcapacity to take place likely in 2007.
So deflation in the latter half of 2005, or the latter half of 2007, or never. One interesting fact is that Chinese economists are now repeating the "overcapacity" mantra more frequently than before; maybe they’re just reading Andy Xie and trying to sound cool for their domestic media, but maybe the problem is more fundamental and structural, and it’s become okay to talk about it publicly, to shift the balance of domestic priorities toward controlling the problem.
At China Era, the last chapter in a six-part essay "The Rise of a New Power":
For all its talk about market magic, China’s overpopulated state sector is a massive job bank compared with western governments, which leaves some of the Beijing’s byzantine ministries woefully inefficient. One Indian software supplier, for instance, tried to sell the Chinese government a program to automate parts of the state-owned railroad industry, which employs 20 million people. The idea flopped. "Greater efficiency creates a social problem," explains an executive for a major American software company. "Yes, 20 million are inefficient, but a more efficient system lops off heads."
The gasoline prices are RMB4.14-4.62/liter in a middle tier city like Chongqing on Jul23 (after the RMB revaluation), for RON 90-97 (Research Octane Number, corresponding to Pump Octane Number PON 87-93 in US); Using conversion factors of 1Gallon=3.785L and 1USD=8.11RMB, the gasoline prices translate into USD1.93-2.16/Gallon
According to eia.doe.gov, average price in US is US$2.289/Gallon on July 25th
If we factor in the un-tradable cost in operating a retail gas station, we could say the prices are pretty much the same in these two countries
The lack of competition should mean higher retail price and less efficient operation, which might have annihilate any cost gap in labor and rent costs
This means China, being a country of much less access to oil fields domestically and internationally and one that car travel is not a survival essential as in US, is as generous as US in oil tax/etc. It surely has one of the lowest price for oil for a net importer.
Again, the next time someone mentions that China’s environmental regulations are better than those of the US, remember to mention that China subsides the use of fossil fuels.
And that includes Coal:
Meanwhile the death toll (from mining disasters) continues to rise, while people such as me benefit from cheap power, 2/3 of which comes from coal. I figure my wife and I pay about 1200 yuan a year for electricity in Beijing, or about $150 bucks. And we have a big fridge and TV, air conditioning and a washer/dryer. In Singapore I typically had US$100 monthly bills. Singapore had to import all its energy, and I’d expect prices there to be higher for other reasons as well.
China’s economy in 2005 is not what it was in 2000.:
China always has depended on export-led growth. It is a core reason why China has been so successful. China is just trying to hold on to the core of its success in the face of political pressure from Washington DC
China always has saved a lot. It is cultural - all of East Asia saves a lot.
I hear those arguments a lot.
I think they miss a key point. Even by Chinese standards, China is now exceptionally dependent on exports. Exports are now about twice as large a share of China’s GDP as they were in 2000. And even by Chinese standards, China now saves a lot. By my calculations, savings are up by more 15% of GDP relative to 2000.
The Big Yuan has further reaction to the aborted CNOOC bid for Unocal, including this noteworthy quote.:
From the article: One executive summed up how some in the oil industry felt about political involvement. Lee Raymond, chief executive for Exxon Mobil, said early in the takeover battle that it would be a big mistake” for Congress to interfere with the Cnooc bid because it might backfire for American companies seeking to do business abroad. “If you start to put inefficiencies in the system, then all of us pay for that,” Raymond said.
Welcome to the first of what will be a semi-regular feature, a roundup of blogging on China’s economy.
Here’s where the China connection comes in. A major reason why mortgage rates have stayed low is that there’s a lot of money around. And much of that money has been coming from abroad. China and the rest of Asia have been putting their spare cash into America, in order to prop up the dollar and make it easier for them to export to us.
But that’s about the change. We’ve been pressuring them to let their currency rise, and they’re getting the message. We don’t know yet how much they’ll let it rise. But the writing’s on the wall, in Chinese characters. And other Asian nations are following China’s lead.
You don’t have to be a zen master to see this means less Asian money flowing into the United States. Which in turn means long-term interest rates — including mortgage rates — will start to rise. It’s just supply and demand: less money around, and the cost of borrowing goes up.
Incidentally, Asiapundit warns that Shanghai’s property bubble is being fueled by speculative inflows.
In the wake of failed takeover bid’s for Unocal and Maytag, Horse’s Mouth
anonymous guest blogger Martyn notes that China hasn’t been creating many world beaters even when acquisitions have been successful.:
Fortune 100 list 2004 of China’s top listed companies predicts that fewer than five will become global leaders ten years from now. However, George Baeder of international strategy consultants Monitor Group says, “That’s probably an optimistic view.” I would tend to agree with him.
Chinese companies have also, to date, made some horrific foreign investment decisions and not just related to paying inflated prices for extremely dodgy assets. TCL purchased French multinational Thomson last year, including America’s 86-year-old RCA. “We thought we could sell RCA as a premium brand, but in fact it had already deteriorated into pretty much a low-end brand,” says TCL’s Vincent Yan. TCL had forecast a turnaround at RCA by the second half of this year. That has now been moved back to the first quarter of 2006 and looks extremely optimistic.
The Big Yuan reports that China’s loans from the World Bank are coming under fire.:
The World Bank, whose charter aims to fight poverty in developing nations, continues to lend about $1 billion to China annually, and according to the International Herald Tribune, these loans are increasingly coming under fire. Duncan Hunter, chairman of the House Armed Services Committee, feels that while these loans are being used to develop roads and infrastructure the PRC is able to invest more into its own armed services. He says, “We have to be very vigilant.”
But, Talk Talk China muses that corporate China may have some advantages, although these stem from a lack of ethics.:
While the West is mired down in debates over globalisation and corporate social responsibility, conservative governments in the US restrict stem cell research, and EU governments dither over GM food safety, one begins to see a real opportunity opening up for China to take the lead in these areas, perhaps finally finding its own place in the world — and leaving the West behind in the dust, nursing its ethical qualms.
At the Economist’s View, a look at the winners an losers from China’s currency revaluation.:
If employment and manufacturing do increase, there are transitional costs to consider as the article notes. Rising interest rates will cause less activity in sectors such as housing and more activity in other sectors such as (hopefully) computer chips. But during the transition unemployment could potentially increase. Nevertheless, to the extent that such rebalancing is healthy for the economy in the long-run, there is a long-run benefit that follows the short-run cost, but the cost does need to be acknowledged.
While a stronger yuan may cut into China’s manufacturing exports, there’s one export that might see an increase. After all, ill-gotten gains just became two percent more valuable. (Update: the five billion yuan figure was reported in the Standard, Xinhua is reporting the amount is 50 billion dollars) :
4,000 Chinese officials fled China last year with an estimated 5 billion Yuan [HK$4.80 billion-US$600 million] in graft money in tow. The currency figure seems a little low to me since this only amounts to US$150,000 for each of the 4,000 fugitives, not enough to even buy a house in Canada or the US. I figure that this figure is probably substantially understated since a higher number would imply that the problem is nowhere near under control.
There have always been two Chinas: a maritime China, caught up in the economic growth of modern times and looking beyond her frontiers; and a continental China, agrarian, bureaucratic, conservative, and unaware of the economic advantages of international capitalism. It is this second China that consistently controls the political power within Beijing. Economic growth has mainly been concentrated in maritime cities, while the vast hinterland remains very unevenly integrated into a national economy. Given its size and rate of growth, this inequity between reformed and unreformed areas may greatly distort free-market trading systems.
Via Peking Duck, a report of more village militancy in China but with a significant degree of escalation. Villagers reportedly were stockpiling "firearms, ammunition, explosives, detonators and machetes."
This one sure sounds different. The villagers were apparently , with the local government trying to stop them. How’s that for a twist?
About 800 policemen clashed with armed villagers during a pre-dawn raid and arrested 47 people in southern China after residents resisted a crackdown on illegal mining and went on a rampage, a newspaper reported on Friday.
Police raided several villages in Hezhou in Guangxi province at dawn on Thursday and seized firearms, ammunition, explosives, detonators and machetes, the Legal Express said.
It did not say if any policemen or villagers were killed or injured…
… sounds like these villagers were arming themselves to the teeth. Which makes me wonder, how many other villages are doing the same? Are they preparing for war against the government?
The International Energy Agency (IEA) reported that China’s consumption of oil has declined by about 1% after increasing 11% and 15.4% the previous two years. The quick and dirty analysis might point to a slowing Chinese economy while other experts attribute the stagnation/decline in oil demand to the highly regulated Chinese energy market that has supposedly set a relative gas price at $1.63 a gallon. Read the whole story from the New York Times.
Many experts agree that China needs to maintain >8% growth a year to sustain its burgeoning economy and if this decline in oil consumption means a slowdown in growth this could be an indicator that world oil prices are beginning to slow down some if not all of the worlds major economies. Although the U.S. economy has managed to post some gains both in economic growth and through job creation it’s service based economy is relatively slow to respond to high raw energy prices where as more industrial based economy like China’s will have a quicker and much harder hitting reaction to high oil prices.
Lisa points out an LA Times item on a slowdown in Dongguan.:
Is it the natural maturation of an industrial region, or signs of trouble ahead for China’s economic miracle? The Los Angeles Times reports today on the slow-down of growth in Dongguan, where thousands of foreign businessmen, mostly Taiwanese, had helped to create a Pearl River manufacturing export powerhouse:
year Dongguan’s minimum wage jumped more than 27%. Even with the
increase, employers are struggling with worker shortages. Government
inspectors are making the rounds at factories, enforcing work-hour
rules and pension contributions that officials paid little attention to
in the past. Electricity is in short supply, as is fuel.
These conditions, along with rising tensions with the West and Japan,
have led many Taiwanese businessmen to invest instead in places like
Vietnam.Moreover: After four years of booming growth,
foreign direct investments into China have flattened this year. That
signals the waning of massive capital inflows, particularly in the
electronics sector, that followed China’s ascension to the World Trade
Organization in 2001.
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