It has been months since AsiaPundit posted a China economic roundup, but the void has been filled brilliantly at the New Economist.
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.
This should be included in a China Economic Roundup, which AsiaPundit hopes to resume soon, but the Economist article noted by Mark Thoma very much relates to the incident in Taishi and is worth reading now for context.:
China’s leaders may finally be readying themselves for a change in the mercantilist, growth-at-any-cost model that has prevailed for decades. The Communist Party leaders’ annual meeting on economic policy ended on Tuesday with word of a strategic shift: from now on, there will be more emphasis on redressing the inequality and social disruption that market reforms have left in their wake. The most immediate worry for China’s leaders is social unrest. Last year, the government documented more than 70,000 demonstrations, attended by some 3m protesters. … It needs the export sector to continue booming, in order to absorb surplus labour from the countryside and moribund state-owned companies. But it is aware that the rapid growth of recent years has opened fractures that could grow even wider.
… details are sketchy, it seems improbable that China’s move towards more balanced economic growth will be anything like the kind of radical leap that foreign observers would like. There are some brands of wealth redistribution that would make foreign investors very jittery, such as higher taxes. Hu Jintao, China’s president, is still consolidating power; even if he had a radical vision of a China less dependent on the cravings of the American consumer, it would have to wait until his command of the party was firmer. More importantly, it would have to wait until Chinese consumers became sufficiently confident in the social safety-net and the provision of affordable health care and education that they were willing to save less and spend more. … And though the rising tide of China’s economy undoubtedly has the power to lift all boats, there are worrying rigidities in the system, caused by the under-development of its financial system and the fact that economic reform has not been accompanied by political reform. Officials rightly fret that further economic changes could undermine the stability of the party’s rule. Amid all the talk of addressing the wealth gap, the party’s plenum reiterated a commitment to rapid growth by restating a goal of raising China’s GDP to double its 2000 level by 2010…
While China could use a more egalitarian system of wealth distribution to support a consumer culture and domestic demand, AsiaPundit is concerned that Hu Jintao’s attempts to bring this about will be through a tightening of central planning rather than a loosening.
One of the reasons China is suffering from unequal wealth distribution is because the state still holds far too many of the economic levers (i.e., 66% of domestically listed companies are state-held and private ownership of land does not exist). Part of the reason wealth is not distributed equally is because, as in many third-world countries, power is held by a political elite and not a meritocracy.
This has been changing, especially in coastal cities such as my home in Shanghai, but when you move outward and inland the disparities worsen. I cannot think of any way the problem can be easily solved. A punitive ‘wealth’ tax that upsets the newly ‘rich’ would possibly be more politically risky than allowing the dissatisfaction among the rural poor to fester. An angry and over-taxed Shanghai or Hangzhou could be far more attention grabbing than the beating of any peasant activist.
The Jiang Zimen/Zhu Rongji tag-team wasn’t perfect, not by a long-shot, but I’m concerned that the Hu/Wen Jiabao team may be damaging for China. This is not a comment on politics - neither Jiang/Zhu nor Hu/Wen are or were democratic reformers - but the former, in terms of both rhetoric and action, seems a less-interventionist and more-reformist team economically.
Private wealth and a relatively more-equal system of wealth distribution exists in the cities because it has been allowed to. There is no government policy enforcing it. In the villages and towns, wealth is often concentrated because it is not permitted to be distributed beyond those who head the CPC ’s fiefdoms in those areas.
I have some hope that central government figures realize this. Some government people I have met have been more market oriented than many US Republicans I have encountered (though the latter are running double deficits and sponsoring protectionist bills in Congress, so that shouldn’t be surprising).
While I would testify that the central bank is far more market-oriented than the NDRC, factions in ministries are easier to spot than the thoughts of those at the top. I’m not really sure where Hu’s economic influences lie.
A while back, on the basis of an unsourced item, I expressed some hope that Hu would reverse a mistake of Jiang. Today, I’m worried that he will make it worse.
As the economist said, “it seems improbable that China’s move towards more balanced economic growth will be anything like the kind of radical leap that foreign observers would like.”
AsiaPundit, a foreign observer, awaits the next five-year plan.
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.:
Peter Mandelson "Protectionist of the Month" August 2005
Peter Mandelson went to Brussels riding a wave of goodwill for a new liberalising agenda, promising an era of "free and fair" trade
as EU trade commissioner. Less than a year later he has managed to land
Europe in a protectionist mess. A continent of 450 million people is
permitted to import only 105 million pairs of trousers from China.
As one wit put it, "a shortage of trousers and a surplus of wine is a great strategy for a party, but a crazy way to run Europe’s economy".
Mandelson’s plan for clothes rationing means that domestic producers,
who had 10 years to prepare for the opening of the textiles trade to
international competition, will be able to continue to charge Europe’s
consumers high prices for products.
The fact that western businesses and bureaucrats had a decade to prepare for the end of the quota regime is a point that’s worth making. Many businesses did prepare, mostly by moving their production and sourcing operations to China, and the quotas are now punishing them for it while rewarding those who lacked long-term strategic planning skills.
On which, Sun Bin has excellent observations on how the EU still has no long-term, or even immediate-term, vision:
The problem EU encountered today is a direct result of lacking
a clear and longer term rule. How can you impose quota all at a sudden,
leaving no time for merchants to plan? They need to at least waive
quota for all those who have already signed the contract prior the
quota implementation. I thought this is common sense for any
policy setter, apparently not for the EU bureaucrats. Prior this year
exporters need to "buy" quota before they could ship out the
merchandise, and the buyers are clearly aware of and prepared for that.
Now all of a sudden the quota is set at the EU border and no one knows
when it is filled. Importers just continue with their orders. Perhaps
the Chinese negotiators already saw through this a couple months ago
but they just kept quiet.
In spite of strict capital controls, or more properly because of them, China has a problem with money laundering.
We’ve heard many stories, told second and third hand, usually over a
cocktail or two (or three), of outrageous sums of Chinese cash,
laundered transationally. The "invoice trick,"
a common and ancient method, involves a domestic company purchasing
overpriced product sold by an overseas "seller." The outflow of cash
over and above the instrinsic value of the product, being, of course,
the laundered sum. Taiwanese authorities in the 1980s became rather
expert at spotting these value discrepancies.
Of greater concern are the major cases — and in China there have
been an extraordinary number. Take the train shipments case as an
example. Originating at the Luo Wu station in Shenzhen, cardboard boxes
filled with RMB 8 Million (US$ 1 million) were transported daily to a
Hong Kong bank for nearly a year. A cool million a day for a year. One
can hear the clinking of the glasses and shouts of "A toast to China Rail!"
… maybe the word “overheated” is misleading. It might be more accurate
to say that public attention is over-focused on some recent price
changes, or over-accepting of some high market values. Whatever one
calls it, it is a problem.
Fortunately, people also tend to
trust their national leaders. For this reason, it is all the more
important that the leaders not remain silent when a climate of
speculation develops. Silence can be presumed to be tacit acceptance
that rapid increases in long-term asset price are warranted. National
leaders must speak out, and they must match their words with concrete
actions, to help signal to the public that the speculative bubble
cannot be expected to continue.
That is what the Chinese
government has begun to do. The real-estate boom appears to be cooling.
If the government continues to pursue this policy, the salutary effects
in terms of public trust in the country’s businesses and institutions
will help ensure stable, sustainable economic growth for years to come.
I’m not as convinced and think the slowing property market may be arriving after the damage is done. I lean toward the Andy Xie point of view that the cooling property market, and over investment and overcapacities in materials production, will help tip the country into a corrective slowdown .
Further on property, the Big Picture picks up on yesterday’s top item, Asian buying into the US property bubble, and notes:
Front page story in yesterday’s WSJ, titled "
Housing-Bubble Talk Doesn’t Scare Off Foreigners."
Funny thing is, foreigners are notorious for their bad timing in buying both equities and real estate in the U.S.
Examples: Rockefeller Center purchased by the Japanese at
the top of the 1980s Real Estate run; Foreigners dumped U.S. equities
in the summer of 2002, after piling into them in 1999.
An interesting post at the Oil Drum argues that China has bought into the peak oil theory, or at least has decided that oil isn’t fungible.:
At that point China may well get what it needs, only if it has the
rights to the oil through the companies that it controls. And that may
become an issue. Countries such as Indonesia are already having
problems because "their" oil is leaving, and they can’t afford to buy
it back. This may lead to different national policies. After all, in
the past, a number of countries took over the oil from foreign
operators, and there is nothing to say that existing arrangements
cannot be changed, by state fiat in many cases.
AsiaPundit doesn’t buy the peak oil theory, or at least not yet. I had the pleasure of living in Kuwait when prices crashed in the late 1990s and I see conditions for another crash around the corner. For the second time in a post, I’m in agreement with Andy Xie.:
China’s total oil imports eased 1.2 percent in the first five
months of 2005, Xie said, and they could fall further next year as new
power plants help prevent the electricity outages that inflated demand
for diesel and fuel oil in 2004.
Last year’s fall in the U.S.
dollar was often cited as a factor behind higher oil prices, since it
makes fuel less expensive in non-dollar economies and as it wooed
investment from speculative hedge funds. But with the greenback near an
eight-month high versus the euro, that too has faded.
these factors gather pace, the market may ultimately be doomed to crash
by the growing dependence of financial institutions on oil trading
profits, Xie writes.
"As oil has worked for so long, the
financial community is hanging on to this position," he says.
Speculative funds have been increasingly active in commodity markets
over the past two years and are often blamed by OPEC for keeping prices
"They will likely keep prices up until an oil market
collapse. That day is not too far away, I believe… What is occurring
now is probably the final frenzy, in my view.
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….
It’s all smiles and handshakes when Wen Jiabao and Manmohan Singh meet, but the two emerging powers are competing for influence in South Asia - both diplomatic and economic. Via CDT, Japan Focus has a very in-depth article on the trade and economic ties between China, India and the region.:
India, as the resident power of South Asia, considers the region its "near
abroad," and does not want Beijing to intrude on to its turf. What unnerves
India most is China’s eye on South Asia’s biggest prize: the Indian Ocean. While
India would like to prevent China’s advance into its sphere of influence, it
lacks the regional or international clout, diplomatically, militarily or economically,
to stem Beijing’s march on South Asia or the Indian Ocean.
China, however, has sought to calm Delhi. Prime Minister Wen Jiabao’s four-day
visit to India on April 9-12 attests to growing efforts to woo Delhi. China’s major goal is to keep India from forging military and strategic alliances with the U.S. that might undermine Beijing’s goal of reunification of Taiwan. Well aware of India’s historic concerns for its territorial integrity, China deftly plays on India’s nationalist instincts and its visceral aversion to domination by foreign powers. China’s deft diplomacy is facilitated by the current U.P.A. (United Progressive Alliance) government of India that rests on a liberal-left coalition, many of whose members are more suspicious of western powers than of Beijing.
The Oil Drum notes that China’s south has received oil deliveries, and further evidence emerges that (as was widely noted last week) the shortage was caused by price controls, and ’solved’ by government intervention.:
Global prices have risen by about 30 per cent
this year but Chinese prices by about half that, leaving local refiners
such as Sinopec suffering large losses on sales of imported fuel.
Sinopec official in Beijing, speaking on condition of anonymity, said
Wednesday the company had been forced by the government to order its
refiners to produce fuel for the local market, even though it was not
Simon picks up on this theme from another article, noting that the big refiners’ refusal to supply the market at a loss may have much bigger ramifications.:
One other interesting part of the article that is mentioned in passing but has greater significance:
Sinopec and PetroChina have listed many of their business operations in
overseas securities markets, they are increasingly able to cite
"shareholder interests'’ as an excuse to defy government orders.
market economics can triumph over Communism after all? The writer is
implying that Sinopec and PetroChina are using shareholder interests as
a fig leaf to ignore orders. What if, perhaps, they actually believe in
creating shareholder value and subverting Government orders is a means
to that end?
Indeed, one of the most frequent dreams/fears I hear from economists and analysts is that much of China’s semi-state sector is increasingly behaving according to market rationale not because of government pressure — but because the top-management has desire to do so.
While this doesn’t mean much while China continues to boom, a day may soon come when Chinese banks start to call in loans made to insolvent SOEs and refuse to endorse policy loans. If that happens, there could be a real shakeout with the next downturn.
This loosening of state control is hinted at in an article reproduced by Mark Thoma: a Business Week interview with economist Fan Gang.:
There has been some progress in the banking sector. There still is
political interference, but control of the banks has been centralized
[away from local governments]. As a result, the whole system is more
independent of the local politicians. The managements of local branches
aren’t appointed by local governments any more.
The reform has started — but maybe too late. The government
has injected money into the banks to float shares. To improve the
capital market, 20% to 30% of their shares have to be sold to the
public. But [more state injections are likely].
Also at the New Economist, another Business Week item on the costs of China’s energy subsidies on the environment. Mark Thoma notes.:
According to the World Bank, six of the world’s ten most polluted
cities are in China. It is also a very inefficient user of energy
requiring 4.7 times as much energy to produce a unit of GDP than in the
U.S., a consequence of subsidized fuel in China leaving little
incentive to implement energy saving technology and lax environmental
regulation. The energy subsidies and the lack of environmental
regulation contribute to the cost advantage enjoyed by Chinese
producers. And, according to BusinessWeek, China is becoming even less efficient in its energy usage.
As well as environmental concerns, but something that isn’t too distantly related, Martyn at the Peking Duck looks at a damning report on China’s healthcare system. Bingfeng notes that China is coming under pressure - from the public, media and branches of government - to rollback healthcare privatization. Bingfeng’s solution, one which I agree with, is to stay the course.:
The problems of the marketization, such as overcharge, unevenness,
etc. are the same ones of any industry going privatized, and they will
diminish over time as the industry has more money and players in and
services become more competitive. even health care sector has its
uniqueness, the therapy for the misplaced reform is to further advance
the marketization but not to halt it.
the public, mostly don’t
have that knowledge and vision, are proposing to draw back to the safe
and cozy position of government-take-care-of-all, and with the help of
mass media, their voices are without doubt reach the ears of top
policy-makers. in my view, the public opinons are an indispensable part
of the policy-making process but they are just counter-productive in
the health care reform.
On currency and central bank matters, Sun Bin offers a look into the composition of the yuan’s guidance basket.:
The fact that RMB is still so highly correlated to USD is still puzzling. Maybe PBC is smoothing out the transition, by adjusting the USD basket weight slowly from 100% down to the the target weight
of 50% or 43%. In other words, in July, USD might have still been the
sole content inside the basket, or RMB continued to peg to USD alone
for a few more days, until the peg is slowly loosened. If Jen’s implied
weight at 85% is correct (the average over the period), USD weight
might have decreased from 100% down to around 70-80% now.
Logan Wright, meanwhile, offers some sobering comments to those who put too much faith in People’s Bank of China governor Zhou Xiaochaun.:
I understand that all bureaucracies are beset by compromises, with
various agencies seeking out turf in conflicts that often produce
decisions that are essentially "satisficing" results that are "good
enough" but not utility-maximizing for all parties involved.
My argument in this debate is that China’s economic bureaucratic
institutions effectively lack autonomy, because there is no single
institution capable of fomulating its own goals regarding China’s
position and stance toward the international financial markets.
Instead, policymaking becomes concentrated in the State Council, and
political compromises emerge that essentially convey mixed messages to
the global marketplace….
PBOC, in contrast, has to respond to directions from the State Council,
even while attempting to win more turf for its own bureaucratic
empire. The result, I believe, is that international economic policy
effectively loses credibility.
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.
The Big Yuan points to a profile on China’s central bank Governor Zhou Xiaochuan, noting the increased influence of the People’s Bank of China and how the governor is being groomed for higher office.
Zhou has an engineering degree from Beijing Chemical Engineering Institute and a doctorate in economic engineering from Tsinghua University in Beijing, according to the central bank’s Web site. He speaks fluent English and is the first central bank chief with a doctorate degree.
Zhou began advocating step-by-step changes toward a fully convertible yuan as a means to promote economic growth, says Guan, the lawyer. In academic journals in 1995, he wrote that the first move should be to give trading companies and "weak" industries like steel making greater access to foreign exchange, Guan says.
"Many people felt the yuan should be free-floated but disagreed on how it was to be done," Guan says. "Zhou’s voice was a pioneer in the debate back then."
With the formation of Huijin, however, the PBOC stands to regain substantial clout in the appointment arena. Huijin itself is directly answerable to the Central Leading Group on Reforming State-Owned Commercial Bank, and the person running the daily affairs of the Leading Group is none other than Zhou Xiaochuan, the governor of the PBOC. Moreover, most of Huijin’s management comes from the PBOC/SAFE bureaucracy and dares not anger Zhou Xiaochuan. As Huijin becomes a majority shareholder of an increasing number of financial institutions, it can weaken if not deprive altogether the appointment power of rival agencies.
Not everyone is pleased about the PBoC’s increasing influence, as the Jamestown brief author notes on his blog, the National Development & Reform Commission isn’t happy. Logan Wright has more.
Survived Sars also points to a People’s Daily item on China’s potentially slowing export growth.:
Second, export growth is likely to see a remarkable slowdown in the
second half year, which will impose heavy pressure on the economic
growth in the short term. It will be seen in two aspects: first,
industrial growth to be pulled down, leading to falling employment
growth and slowed GDP growth; second, slowed growth of the production
of export goods combined with accelerated release of the output
capacity of products in excessive supply constitute greater pressure of
deflation. These will not impose a big impact on China’s economy in the
long run. Favorably, slowed export growth will force domestic
enterprises to improve the quality of their products for export and
Software piracy isn’t really hurting Microsoft in China, Tyler Rooker argues, because it is preventing the emergence of domestic competition.:
…from one point of view, is that by continuing piracy, Microsoft is able to sustain its monopoly in China. There are no Chinese operating systems. There are none even in the works. Why? Because they will be pirated as well. Piracy undercuts Microsoft but it also undercuts would-be Chinese entrepreneurs who could (undoubtably) create a Chinese proprietary operating system that could sell for 200 yuan ($25). That is the threshold price that would keep Chinese entrepreneurs profitable and return their investment costs. But why doesn’t Kingsoft, the Microsoft of China, attempt it? Piracy.
Piracy, in the case of China, does take profit from Microsoft. But I would argue that Microsoft also benefits, and even profits (as the proverb predicts) from piracy. Without piracy, 100 operating systems, like Chairman Mao’s flowers, would bloom. They would undercut and eventually end Microsoft’s monopoly over the operating systems.
At the Globalization Institute blog, a reports that European retailers are being punished by the EU’s protectionism.
The Wall Street Journal today reports that some European retailers are being left stranded without clothes they have paid for thanks to EU quotas on textiles:
In June, countries with large textile industries, led by Italy, pressed for and got a quota to restrain the impact of a huge surge in imports that followed the removal of global trade barriers on textiles in January. However, the quota for trousers and sweaters already was filled by August, leaving some European retailers without clothing they had paid for. Since then, nations in northern Europe with large retailers have protested.
The European Commission has no business interfering with the textiles trade. In a year supposed to be about making poverty history, it seems odd that the EU should protecting Italian and French special interests at the expense of the world’s poor - and at the expense of European consumers, too.
Brad DeLong posts a review of a book on economic change in pre-Communist China (1900-1950).
James Hamilton at Econobrowser takes a look at the supply-demand imbalance in China’s oil market.:
Chief among the questions here are: (1) how could Chinese oil demand have grown 17% in 2004 despite a 35% increase in the price of crude oil; (2) how could this demand growth suddenly be reduced to a 1.4% growth rate in the first half of 2005 despite real output growth continuing at 9.5%; and (3) what do these trends imply is going to happen to Chinese oil demand over the next year?
In the wake of Baidu’s blistering IPO and Yahoo!’s big deal with Alibaba, The Big Yuan takes a look at China’s new media companies. Meanwhile, Fons notes a potential cultural and legal clash of intellectual property rights, pointing to a nicely titled Forbes article: ‘Alibaba’s Thieves threaten Yahoo.‘ DotCom-bust survivor Imagethief is experiencing Deja Vu:
There is no mistake so colossal, so notorious, that people won’t make it again. In fact, the opposite is probably true. The bigger, the balder, the more idiotic the situation, the more likely it is to be repeated. How else to explain that China is whipping up Internet speculation frenzy version 2.0?
I lived through the first one. I started doing professional Internet work in 1995, joined an e-commerce firm in 1997 (in Singapore) and rode the rise and fall of the bubble. The day the CFO took me through my stock option letter is gouged into my memory. “You’re going to be a millionaire,” he told me, after walking me through the numbers in a meeting in 1999. Richard Li had put US$25 million into our company, and the investment bankers were sniffing around. So I believed I was going to be rich. We all did.
I can say with total authority that, to this day, I am not rich. Nor are any of my ex-colleagues from that company. We went from 220 people to 10 in a heartbeat. I remember; I fired forty of them myself.
Logan Wright says that pressure for China to further revalue will continue, noting that the 2.1% revaluation hasn’t placated DC’s lobbyists.:
A coalition committed to maintaining a strong U.S. industrial base today released data reflecting that China has managed to maintain a flat exchange rate following the People’s Bank of China’s long-awaited July 21 announcement of a change in currency policy. The
change, involving a minuscule 2% appreciation of the yuan and the adoption of a basket of unidentified currencies to determine the yuan’s value, potentially incorporated a flexibility mechanism that could steadily increase the value of the yuan over time to a level that would reflect underlying economic fundamentals.
Thomas Barnett spots the buried lead on China’s revaluation, the end of Bretton Woods II.:
In effect, the emerging markets of Developing Asia had, by and large, replicated the same sort of currency stabilization strategy that America used in its post-WWII resurrection of the West (better to peg than to float).
Most economies there had, by now, moved off strict pegs and allow some level of controlled float. With China joining that dynamic, the synchronization of Asia’s internal economic rule sets with the global economy’s growing rule set will be accelerated.
In many ways, this is a real tipping point in Asia’s progressive integration with globalization’s more mature Functioning Core of the West. In effect, Asia reached the point of diminishing returns with that pegged strategy, meaning it achieved a level of economic development in which more control is to be had through allowing the currency to float than keeping it fixed, presuming the economy has the necessary institutions needed to offset that float dynamic. Done well, your economy will self-correct better, avoiding either overheating or hard landings.
The Times of India has picked up, and hyped, the Business Week series on India and China, with an article titled "India is a better model than China." Gerald Hibbs suggests the article is a touch too optimistic from the Indian perspective.:
Alright, now the guy did qualify this statement as “over time”, that slack being cut let me state that this is pure piffle. At the beginning of the 20th century America had 70% of its workforce working in agriculture by the 21st century that figure had dropped to less than 1%. China is still sowing and reaping by hand (peasants’ hands) and has a huge backlog of people who can’t wait to leave the farm and go to the city to lead the “noble life” as the magazines portray it. Add in that China is just beginning to utilize all the talent of Chinese women who are taking the colleges by storm. Sure, sure. . .over time. But that time is a long way off.
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.
This speech by Richard Fisher, president and CEO of the Dallas Federal Reserve, is one of the most cited in the English language Sinoblogosphere today. With good reason, it’s one of the finest presentations on the benefits of Chinese economic growth I’ve seen and it avoids pitfalls about the ‘China threat.’ Read the whole thing.
…even if China were to reach the knowledge-driven rung on the income ladder of nations, there is no reason to assume that China will overtake the United States in size and influence. Do the math. Were China to keep growing at 9 percent and the U.S. to keep growing at, say, 3.5 percent, it would take them nearly four decades to catch us in terms of GDP.
Thirty-eight years to be exact, starting from their base of $1,300 in per capita GDP (the Little China view) and ours of $40,000. It would take 83 years if their growth slowed to an average rate of 6 percent, well over a century if it slowed to 5 percent, a more probable trajectory for growth. Even then, it’s not certain to happen. Remember that Japan grew much faster than us for three decades after World War II, then slowed as it converged to U.S. per capita GDP levels. Same for Germany, same for Korea. There’s a good reason for that. It’s one thing to run down the path already cut by the leader, a whole other one to become the leader yourself.
If you’re not willing to eliminate protectionism, reduce red tape and regulation, encourage free markets for capital as well as goods and services, live by the rule of law, punish public corruption and corporate malfeasance, if you’re not willing to let old jobs go by the wayside and otherwise unleash the competitive forces that make an economy nimble, you won’t keep pace with the leaders.
China has revealed the currencies, but not the weightings, for its guidance basket for the yuan. Simon has a great roundup, and also asks:
At the same time the PBoC have liberalised financial markets, allowing more participants in the spot forex market, introducing interbank forex forwards and allowed the trading of yuan swaps. Below the fold is a Reuters article on these changes. But at the same time, the PBoC announced it is tightening its supervision to ensure a "stable, orderly market". Liberalising with one hand, but tighter supervision with the other. How can you tighten supervision when previously the market was Government controlled or banned?
Huawei Technologies is offering $1 billion for Marconi, while I disagreed with the ’security threat’ assessments over CNOOC’s bid for Unocal, HK Dave notes that there may be greater reasons for worries with this bid:
Marconi has a rich history of not only being in the telecommunications business, but being a major contractor over the years for defense industries - its employees played crucial roles in defeating the Nazis in World War II. Its founder, in fact, invented the radio. And today, Marconi sells as part of its product line the Ovum-RHK series of networking encryption technology used by the US military and its intelligence agencies. So what, you might ask? Well, here’s the problem - Huawei Technologies was spun off from the People’s Liberation Army.
Via China Digital Times, the FEER is this month offering a must-read item from economist Stephen Greene which argues that - should reforms be effective - China may produce the next Alan Greenspan.:
So, here are three questions: First, why does monetary policy not work that well in China at present? Second, is the pegged exchange rate really causing the authorities serious monetary problems, as standard macroeconomic theory predicts? And what will a China with “free” interest rates and a more flexible currency look like?
China’s two-percent solution to demands that it revalue hasn’t placated critics in the US Congress, but the Treasury seems pleased:
Yesterday I posted about a renewed congressional push to impose flat tarrifs on Chinese imports, and today the Treasury Department officially announced that they approve of the method that China is using to value its currency.
The Washington Post quotes Tim Adams, Treasury’s undersecretary for international affairs, “I think you have to argue that the change in currency regime is a significant step and one of which is the beginning of a long-term process which I think is appreciated in this building and is probably appreciated more on the Hill (Congress) than many want to admit.”
The Paper Tiger looks at China’s energy crisis and how it is in part due to decades of communism.:
Making steel in China in 2003 consumed 10 percent more energy per unit than in the United States, according to state statistics. China’s electrical generators consume one-fifth more energy per unit of output than American plants, said Long Weiding, an expert at Tongji University in Shanghai. Chinese air conditioners — now the fastest-growing draw on power — are roughly one-fifth less efficient than the world average, Long said.
The reason for this striking wastefulness is "the hybrid nature of its economy, which is caught between its communist roots and a free-market future, experts say. More and more of the demand for energy comes from companies that operate on market principles, but the majority of the supply is generated by state-owned monopolies forged in the time of central planning and with little incentive to increase efficiency."
(UPDATE 19:25) Bill Bishop has some good analysis of the one-billion-dollar Yahoo Alibaba deal:
Yahoo is now the most entrenched US media company in China. Forget Viacom, Disney, Time Warner and News Corp and their small deals for programming sales and the like. Yahoo, which in the end is a direct competitor of those guys, has done a much more comprehensive job of getting into China. What remains to be seen is whether the price they just paid was worth it, or whether they are just another Western company that got stuck with a China premium by a very savvy local operator. The Yahoo guys are very sharp too, so it must have been an interesting negotiation.
This deal is potentially disastrous for Ebay in China. Taobao was eating its lunch on a small budget; now they have the backing of Yahoo to ramp up their efforts several notches. Some people thought if things got really bad for Ebay they could always buy up Alibaba (Ebay is rumored to have offered Alibaba $1B a few months ago). Now that option is gone and there is not another auction player they can buy that would be meaningful. The Alibaba transaction may be the deal that leads Yahoo to ‘Japan-ning" Ebay again, this time in China.
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.
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