Saturday 22 December 2007

Problem of "Over education" in China

There are numerous studies in the UK and the West looking at the problem of over education - that is, having a higher level of educational qualification than is required for current employment.

This problem is often associated with recent immigrants and University graduates. Crucially for UK Universities the supply of Chinese postgraduate and undergraduate students brings in large amounts of money.

More recently there have been less Chinese coming despite an growing middle class in China. We have discussed many of the reasons on this blog before (better Universities in China, visa costs, exchange rates, low wages in China, high cost of fees in the UK, lack of jobs in China etc.).

The relatively low wages, especially in relation to the cost of education, is a primary reason.

This post from Silk Road Blog provides an excellent real world insight.

Think of the economics behind this post.

Shanghai'd! [The Silk Road Blog]

I always learn new things on business trips, and this trip to Shanghai has been no different.

First, after a day at a tradeshow I love to break the bank and fork over the big money and have a $10 two-hour foot massage. But this time I got more than the foot massage, I got an education. The 24-year-old girl that massaged my feet was a recent college graduate. She had a degree in Computer Science and had very very good English—good enough that for the entire two hours we could talk about everything: politics, economics, Shanghai pop culture and why she was rubbing feet instead of working elsewhere. Why? She explained that she can get 3x the money every month doing massages (even with no “special” services for customers) than she could working for a computer company, doing retail sales or even selling real-estate; all of which she’s done in the two years since graduation. The glut of (sometimes unqualified) college graduates and the uncontrolled migration into Shanghai have, predictably, made a buyers market for college graduates here. The going monthly rate in Shanghai is somewhere around $250 for someone with a college degree, decent English and some specialized skills (accounting, computers, etc.)

This should be a warning for America! How long do you think that 1-2 million college grads each year are going to be satisfied rubbing feet? Even with good money my bet is not for long. Due to this glut, there is a huge opportunity for entrepreneurialism in China’s immediate future. This has been one of the biggest critiques of China “they just aren’t creative or independent thinkers.” And I agree. But as an American I also believe that necessity is the mother of invention. There just aren’t going to be millions and millions of satisfied college educated graduates every year, year on year. Is not going to happen. You’re been warned.


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Economics of Pollution in China

Globalisation and the environment look at the New York Times article.

China Grabs West’s Smoke-Spewing Factories

The economic issue is how China deals with massive overcapacity if many sectors not just steel.

China Chokes - pollution haven or comparative advantage [Globalisation and the Environment]

China has 77 large steel mills like Hangang, and hundreds of smaller rivals. They have so much excess capacity that production of some basic steel products has become unprofitable at home and abroad. Worse, steel pollutes more than any other industry in China, perhaps in the world.


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Friday 21 December 2007

On the Evolution of China Exchange Rate

Since July 2005 when China officially moved from a US peg to a "basket of currencies" the behaviour of the Chinese currency has been closely observed with many newspaper and blog column inches being devoted to this subject.

For those with an academic bent, the following paper by Funke and Gromwold take an econometric approach to predict where the US-RMB exchange rate will be in a years time.

They predict:

Our estimation results imply that the RMB/USD exchange rate will likely be about 7.42 RMB/USD in summer/autumn 2008.


It I was a currency trader and believed these results I could take some fairly large positions. It will be interesting to watch for developments over the next year.

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"The Undisclosed Renminbi Basket: Are the Markets Telling us Something About Where the Renminbi - US Dollar Exchange Rate is Going?"
BOFIT Discussion Paper No. 20/2007

Contact: MICHAEL FUNKE
University of Hamburg - Faculty of Economics and
Business Administration, CESifo (Center for
Economic Studies and Ifo Institute for Economic
Research)
Email: funke@econ.uni-hamburg.de
Auth-Page: http://ssrn.com/author=494050

Co-Author: MARC GRONWALD
University of Hamburg
Email: gronwald@econ.uni-hamburg.de
Auth-Page: http://ssrn.com/author=491898

Full Text: http://ssrn.com/abstract=1027868

ABSTRACT: On 21 July 2005 China adopted an undisclosed basket exchange rate regime. We formally assess and envisage the gradual evolution of the renminbi over time. We utilize nonlinear dependencies in the renminbi exchange rate and describe the smooth transition of the renminbi/U.S. dollar (RMB/USD) exchange rate using the family of time-varying autoregressive (TV-AR) models. Specifically, the nonlinear models allow for a smooth transition from one optimal level to another. Our estimation results imply that the RMB/USD exchange rate will likely be about 7.42 RMB/USD in summer/autumn 2008.

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Modelling Regional Inflation in China

Apologies for my recent lack of posts - sometimes academic life can result in lumpy work loads and reading 80,000 word PhDs takes considerable time even if they are related to China Economics.

This paper provides a good example of how academics are approaching the Chinese inflation issue. I have my doubts about the validity of this paper than comes out of the Bank of Finland although I am sure it is competently done.

"Modelling Inflation in China - A Regional Perspective"
ECB Working Paper No. 829
BOFIT Discussion Paper No. 19/2007

Contact: AARON N. MEHROTRA
Bank of Finland - Institute for Economies in
Transition (BOFIT), European University Institute -
Economics Department (ECO)
Email: aaron.mehrotra@bof.fi
Auth-Page: http://ssrn.com/author=355749

Co-Author: TUOMAS A. PELTONEN
European Central Bank (ECB)
Email: tuomas.peltonen@eui.eu
Auth-Page: http://ssrn.com/author=355041

Co-Author: ALVARO SANTOS RIVERA
European Central Bank (ECB)
Email: alvaro.santosrivera@ecb.int
Auth-Page: http://ssrn.com/author=508522

Full Text: http://ssrn.com/abstract=1010629

ABSTRACT: We model provincial inflation in China during the reform period. In particular, we are interested in the ability of the hybrid New Keynesian Phillips Curve (NKPC) to capture the inflation process at the provincial level. The study highlights differences in inflation formation and shows that the NKPC provides a reasonable description of the inflation process only for the coastal provinces. A probit analysis suggests that the forwardlooking inflation component and the output gap are important inflation drivers in provinces that have advanced most in marketisation of the economy and have most likely experienced excess demand pressures. These results have implications for the relative effectiveness of monetary policy across the Chinese provinces.

Friday 14 December 2007

Outsourcing to China: A Business Perspective

A decent commentary on the issues that go beyond "cheap labour" when a firm decides to outsource.

The post concludes:

Is Sourcing in China Safe? [China Business Success Stories]

Whether you source domestically or offshore, always perform due diligence. It is naive to assume that every supplier in the world interprets quality standards the same way; that every country, company and person handles disputes the same way; or that quality can be considered a given. It is also naïve to assume that, just because it is in the U.S., a domestic source will meet your quality standards.

The savings from low wages can pale in comparison to the costs of a recall. The loss of customer trust can knock a company out completely. Those statements are true regardless of whether you source domestically, in China or anywhere else in the world.


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The 15th Global Finance Conference May 18th 2008

Good to see the 15th Global Finance Conference being held in China this year. In recent years it has been held in Ireland, Germany and the US.

There is pretty much a topic for everyone. There is no doubt that with global finance so much in the news that there will be plenty of interesting papers.

THE 15th GLOBAL FINANCE CONFERENCE

May 18 - 20, 2008

HOSTED BY:

Zhejiang University of Technology,
Hangzhou, China

http://www.glofin.org

SUBMISSION DEADLINE: JANUARY 20, 2008

The 15th Annual Meetings of the Global Finance Conference
will be hosted and held at College of Business
Administration, Zhejiang University of Technology, in
Hangzhou, China on May 18-20, 2008. The theme of the
Conference is "Global Capital Markets & Risk Management."


TOPICS:

The GFC 2008 solicits submissions (papers or proposals for
workshop, tutorials) in global financial economics
including:

- Asset Allocation/Country Mutual Funds/Hedge Funds/ETFs
- Accounting Standards, Regulation; Tax Issues & SOX
- Chinese Stocks, Futures and Funds
- Globalization & Government Service Innovations
- Globalization of Capital Markets & Linkages
- Cross-country Movement of Intellectual Capital
- FDI and Cross Border M&As - Overseas Investment & Risks
- Currency valuation and related issues
- Financial Support of the Technology Innovation
- Overseas Listing of Chinese Firms
- Red Chips and H-shares Return-Fund Investment
- WTO and Financial Innovation and Trade Issues
- Exchanges and Sovereign Wealth Funds
- BOP and Foreign Exchange Reserve Structure & Management
- Supervision and Governance of Listed Companies
- Advances in International Trade: Theories vs. Practice
- Rural Financial Innovation & Private Bank Development
- Financial Crises - Sub-prime Loan Crises & Implications
- Inflation and Macro Economic Control Issues
- Financial Market Integrations and Interest Rates
- Education/Curriculum/Distance Learning - e-Learning
- Emerging Markets and Privatization Issues
- Entrepreneurship/Venture Capital
- Microfinance - Microcredit - Finance and Global Poverty
- Micro Structures and related issues
- Advances in Financial Engineering and Derivatives
- Insurance/Reinsurance - WTO and China Financial Service
- Interest-Free Banking/Islamic Finance & Banking
- Behavioral Finance
- Corporate Governance/Ethics/Social Responsibility
- Valuation/Pricing/EVA and MVA
- Legal and Regulatory Issues (SOX)

Wednesday 12 December 2007

Politics of China's Energy Hunt

In a follow on from my previous post relating to China's increasing interest in Africa comes a Financial Times editorial that touches on many of the same issues that I raised in my introduction.

How Western multinationals and countries react is of political importance. China's defence is also valid - the US is not entirely guilt free when it comes to working with corrupt regimes.

Dark side of the hunt for energy [FT]

China's apparently insatiable thirst for energy to fuel its industrialising economy is having severe consequences for international security and the global environment. In both areas, Beijing needs to develop and then demonstrate a sense of responsibility to match its awe-inspiring demand for oil and electricity.

To secure supplies of oil since the country became a net importer 14 years ago, Chinese companies have scoured the globe and not hesitated to strike deals with unsavoury regimes such as the one in Sudan. This week, Gholam-Hossein Nozari, Iranian oil minister, announced a $2bn contract with China's Sinopec to help develop the Yadavaran oil field. Mr Nozari issued a pointed warning to other countries that hesitated to invest. "They will lose opportunities," he said.

The effect of China's indiscriminate dealmaking in energy is often to undermine concerted international efforts to make resourceexporting countries change their behaviour, whether the target is Iran's nuclear programme or suspected genocide in Sudan.

Another victim of China's energy demands is the global environment. So far this year, China has added 90 gigawatts of new electricity generating capacity, more than the entire installed capacity of the UK grid. Almost all the new capacity is in coal-fired power stations, which produce large amounts of carbon dioxide (a contributor to global warming) and other pollutants.

By any measure, China's overall production and use of electricity is grossly inefficient and its pollution controls are poor. Chinese leaders, however, are reluctant to accept that China must play a leading role in tackling climate change, the subject of the international talks now under way in Bali.

There is some logic to Beijing's defensiveness. The US buys much of its oil from corrupt states in Africa and human rights abusers in the Middle East, and US protectionism prevented CNOOC of China from buying the respectable oil company Unocal. It is also true that western countries have contributed most over time to the accumulation of carbon dioxide in the earth's atmosphere. Even so, the evil, folly or carelessness of others are no excuse for China to behave irresponsibly.

Fortunately, there are tentative signs that China is beginning to grasp the geopolitical and environmental implications of its energy needs. Beijing is investing heavily in renewable energy, for example, and has shut some of China's least efficient coal-fired power plants. But these are small steps towards the distant goal of becoming a responsible superpower.


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China's Changing Trade and Production Structure

I have linked to this paper as it an area of research that is of particular interest to me personally. In this sense, this blog represents a kind of diary of must read papers.

The analysis in this paper is basic and descriptive but it provides usesful background information and details of data sources.

--------------------

"The Shifting Structure of China's Trade and Production"
IMF Working Paper No. 07/214


Contact: LI CUI
International Monetary Fund (IMF)
Email: lcui@imf.org
Auth-Page: http://ssrn.com/author=343401

Co-Author: MURTAZA H. SYED
International Monetary Fund (IMF)
Email: msyed@imf.org
Auth-Page: http://ssrn.com/author=907780

Full Text: http://ssrn.com/abstract=1033207

ABSTRACT: This paper uses disaggregated trade data to assess how the expansion of China's production capacity and its changing production structure may be affecting its trade linkages with other countries. It finds that China is moving away from traditional assembly operations in its processing activities and its exports have started to rely more on domestically sourced components. In turn, China's imports and exports have begun to delink, with increased domestic sourcing contributing to the recent increase in its trade balance. In addition, as China moves up the value chain, both its imports and exports have become more sophisticated than in the past. As a result of these shifts, China may be becoming more exposed to fluctuations in the strength of the global economy, and changes in its exchange rate could have a bigger impact on the trade balance and the domestic economy than commonly believed.

What Drives China's Growing Role in Africa?

China's role in Africa has important economic and political implications. In one sense, China is filling a gap left by the West who tend to tie aid and FDI to good governance. Therefore China could be criticised for helping to support corrupt and inefficient regimes. Finally, Chinese involvement is part of a wider "land grab" for resources. China knows that to support its current rapid rate of growth it will require huge quantities of natural resources. Africa at the moment provides easy pickings. The reaction of Western multinationals will be interesting to watch as they try to free themselves from the constraints Western governments to ensure they continue to win contracts against the Chinese. Not easy.

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"What Drives China's Growing Role in Africa?"
IMF Working Paper No. 07/211


Contact: JIAN-YE WANG
International Monetary Fund (IMF) - European
Department
Email: jwang1@imf.org
Auth-Page: http://ssrn.com/author=348512

Full Text: http://ssrn.com/abstract=1012994

ABSTRACT: What role does China play in Africa's development? What drives China's increasing economic involvement in the continent? This paper attempts to provide a quantified assessment of China's multifaceted influence as market, donor, financer and investor, and contractor and builder. Though in the past official development aid predominated, the paper argues that government policies, markets for each other's exports, Africa's demand for infrastructure, and differences in China's approach to financing have together moved commercial activities - trade and investment - to the center of China-Africa economic relations. While China's public sector, state financial institutions in particular, has been instrumental in the process, the influence of its private sector is increasing. Implications for the future of China-Africa economic relations are briefly noted.
______________________________

Tuesday 11 December 2007

Inflation hits 11 year high

Articles on the new inflation figure:

China's inflation rate hits 11-year high [Reuters]

BEIJING (Reuters) - China's annual consumer price inflation hit an 11-year high in November, with new signs that price pressures are spreading from food to the broader economy, raising the prospect of more aggressive monetary tightening.


China Inflation Reaches 11-Year High, Trade Gap Grows [Bloomberg]

Dec. 11 (Bloomberg) -- China's inflation accelerated at the quickest pace in 11 years and the trade surplus swelled, underscoring government concern that the world's fastest-growing major economy is at risk of overheating.


Even the new inflation rate of 6.9% masks considerable differences across products - food for example climbed 18.2 percent. Non-food prices rose 1.4 percent. Utility prices rose 5.6 percent.

The miz across this products spells trouble for the poor. Social unrest can not be far away.

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Big Fees, Little English

As part of our education series comes an article in Education Guardian that lifts the lid on the practice of taking Chinese overseas students with sub-standard English qualifications.

This article is also interesting for the fact that the writer of the article, Victoria Adams, is a pseudonym. The writer teaches in a Chinese University.

The issue here is an important one. Students for fail to get pass their English listening can still get onto a UK course. The key here is that this is NOT possible at the top UK Universities that stick to STRICT guidelines (IELTS 6.5-7.5 usually).

The most interesting aspect is that the very best students will go to DOMESTIC Chinese Universities. The second string students, instead of going to second rated domestic Universities are sent abroad. The best UK Universities are therefore not getting the best Chinese students.

This quote shows the extent of the perceived problem:

Chinese students who cannot listen, speak or write after around eight years of formal English lessons may well still find themselves on their way to Britain.


The article concludes:

The more China prospers, the more students will come to UK universities. Yet, in the current system, the British universities that keep their China links to a minimum will almost certainly be the ones that prioritise quality over cash cows.


Full article here.

Holy Cash Cow [Guardian]

Picture this: a top 30 university in China is just completing its mid-term exam week in its "international programme" for students preparing for degree courses in the UK. The results are not good. In the listening skills exam, for example, only four out of 54 students in two classes managed to pass. Is this a crisis? Are the student dreams of education in England fading away? Perhaps that should be the case, but it isn't.

That pitiful standard is typical for thousands of Chinese students heading for university in a city centre near you. These students may not be able to understand lectures; they may not be able to write a grammatical sentence or answer questions. But they can contribute something that keeps the door to the UK open: they can subsidise new British universities ranked outside the top 60 and thus keep fees for British students at a lower level. Their financial contribution is significant. Thousands of students across China take these Sino-UK courses every year, run by dozens of Chinese schools and universities.

Demand for places

Most Russell group universities and many others in the top 50 protect themselves to a certain extent. They insist on a high score from the International English Language Testing System (IELTS) - a level 7 or 7.5 - as part of the admission criteria. Demand for places at these universities, which have the best reputations, is such that they can afford to remain more discriminating. But, sadly, other universities are very willing to accept IELTS 6, thus welcoming students who may struggle to do well on courses.

The huge rise in China's middle class provides the context for this impact on the UK education system. At China's end, this is what happens: every summer, the country runs its national university entrance exam. Most high-school students who do well in the maths, Chinese, English and science tests taken by millions, will go to a respected domestic university. But not everyone can get into a well-regarded establishment such as Beijing University or Qinghua University.

So what is the best option for those children of managers, local and central government officials and entrepreneurs who don't get in? Putting your offspring into those considered to be second-string Chinese universities would involve a loss of face. Better, then, to stump up the cash to ship them off abroad. The top 30 Chinese universities might not let these students join the ranks of their normal intake, but they will accept the students' money and offer a place in a private school they run that has an international link with a British university.

Since the late 1990s, the numbers of Chinese students coming for undergraduate and postgraduate studies in the UK has ballooned. The problem early on in this trend was that 40% of Chinese students were failing their British exams. Something had to be done to keep the reputation of the British university system high within China, and so followed the establishment of "international foundation programmes", designed to act as a transition between the Chinese education system and ours. In these programmes, Chinese students are expected to learn to listen, work in teams, contribute their ideas in class discussions, analyse texts and write in paragraphs.

These programmes, on the surface, are an excellent idea. The pre-masters course run by the Northern Consortium of British universities has its strengths in training areas such as research methods and presentations skills. However, as these programmes have proliferated, the standards have not been maintained. In the mid-term exam on one programme in China, a business teacher said that in one of his classes, 75% of students failed. There is an unwillingness to grapple with the problem. This particular Chinese university initially stated that students who missed three classes before the mid-term exam would be excluded from the test; it didn't happen. Staff say that sent a message to the other students that they, too, could stay up till 3am, miss class and face no consequences.

Grey hairs

The mid-term exam results will add a few grey hairs to the heads of frustrated foreign teachers on these international programmes. However, there are many vested interests in making sure the system continues and that those who fail are rescued. Chinese students who cannot listen, speak or write after around eight years of formal English lessons may well still find themselves on their way to Britain. Their inability to do well means more students for British university pre-sessional courses from June to September. These charge thousands of pounds - a nice little top-up for British universities already charging £10,000-£15,000 for tuition fees for the actual course.

British universities boast on their websites about links with Chinese counterparts. They rarely highlight the mismatch between expectations and results on both sides. Nor is there a focus on why those links exist. It is not to diversify student intake, in most cases. The links are, as one teacher ruefully says, about "cash flow".

It seems that, whether or not the international programme is good, the teachers and programme organisers face exactly the same issues: unmotivated students and pressures from British universities to increase the numbers taking up places. Unsurprisingly, some students on some programmes realise low-ranking UK universities are desperate to have them, so they have even less reason to raise their game.

The more China prospers, the more students will come to UK universities. Yet, in the current system, the British universities that keep their China links to a minimum will almost certainly be the ones that prioritise quality over cash cows.


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Monday 10 December 2007

Chinese paradise unmasked

Over at "The Life as a US Lawyer in a Chinese Law Firm" our resident hero Jeff decides to lift the lid on life in China.

Jeff pulls no punches and gives it to us straight. This is car-crash blogging at its very best. If this blog is not in your reader then you are missing real life drama where the boundaries between the good guys and the bad guys are becoming increasingly blurred.

He describes the "good" about living in China and then lists the "bad". I repost all seven "bads". There are economic implications to be gleaned from all 7 points. See if you can spot them. Comments most welcome.

Please don't shoot the messenger (figuratively or literally).

Only Mentally Ill People See Flaws In The Chinese Paradise
Now, the bad. Where to start?

1. Scientific progress. Though nearly everyone here in this country with 1/5 of the human population is pushed to study science, no Nobel Prize has ever been awarded to someone raised here, and they don’t create much that’s new or innovative.

2. Broken toilets. The flushing arm on the damn western toilet has been broken in my office bathroom for 8 months. Jesus. After someone uses the toilet each morning, the cleaning lady manually flushes it, but nobody demands that management fix it. Good thing the squat one next to it works.

3. New products. Every factory I visit makes rip-offs of foreign products, but never develops anything new of their own. The reason? Why pay a scientist to develop something that might not make money, when you can spend money paying people to produce more products that do make money, albeit rip-offs that are less profitable than innovative, new products.

4. Dangerous intersections. Every hundred yards in China is another extremely dangerous intersection, where I see people getting hit, daily, by passing cars. Simple functioning pedestrian walkways are needed everywhere, or lights, but nobody ever says anything, or demands a review of the planning.

5. Environmental disasters. Have you read today’s news about the three gorges dam? Seems like the Beijing thugocracy messed up the design, budget and everything else, because nobody was allowed to question the moronic first plan for this environmental disaster. The government told everyone about ten years ago that the design and budget were accurate, and nobody second guessed them–wrong again! Compare that with the law making process in the USA–political parties argue, senators and congressman argue, Capitol Hill argues with the President, and this is how we make laws by consensus.

6. Can’t walk freely. The Chinese put up gates, with guards, everywhere, that temporary block traffic at random street and neighborhoods, but people soon find ways to avoid these barriers, so again and again China has developed cities of gates that are everywhere, rusting, and serious eyesores that just add to life’s frustrations.

7. Social pressure. When my firm’s partner Wang Lihua told me that Zhong Lun didn’t owe me money when they did, she reinforced what I had known: you are supposed to shut up even when you are right. If you challenge that, Chinese are accustomed to being told they have mental problems.


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China makes the most of the Iranian boycott

China is not to be underestimated when it comes to securing future commodity stocks. While the West take the moral high ground over Iran's nuclear developments China is busy behind the scenes signing lucrative oil deals.

An entirely rational decison but one that may undermind the US' position on Iran.

Iran signs $2bn oil deal with China [FT]

Iran signed a $2bn oil contract with Sinopec of China on Sunday, sending a signal to western companies that they might miss out on potentially lucrative contracts with one of the world’s biggest energy exporters if they continued to heed US-inspired sanctions against Tehran.

“If other countries who like to invest in oil and gas hesitate, they will lose opportunities,” said Gholam-Hossein Nozari, Iran’s oil minister.


It will be interesting to see whether Western policy changes in light of this deal and those like it that are sure to come in the next few months and years.

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Sunday 9 December 2007

The dead get short changed due to high fuel costs

It is rare to find a story that combines the high price of fuel and the dead.

It just goes to show, when price increases really begin to bite it is those groups in society without a voice that suffer first. These usually include animals and the poor. We now add to that list "the dead".

The question is whether the half burnt body dumping was a direct result of the increase in fuel costs or merely poor management and poor "quality control". Perhaps this is merely a result of cutting one corner to many.

The old adage "dead men don't talk" is only partially true in this case.

China cremator dumps half-burnt bodies to save fuel [Reuters]
HONG KONG, Dec 7 (Reuters) - China's worst fuel crunch in years has led a crematorium to dump half-burnt corpses to try to save on diesel costs, a Hong Kong newspaper said on Friday.

Villagers in Hengyang county, in the southern province of Hunan, discovered the practice when an "unbearable stench" started coming from the site, and tried to block a road on Wednesday to stop funeral vehicles from delivering more bodies.

The village sent people to investigate the smell and the South China Morning Post said they saw "crematorium workers putting half-burnt human remains and organs in plastic bags and throwing them into a nearby ditch".

"As the price of diesel rose, we saw more and more bags thrown out from the crematorium," the paper quoted Xiao Gaoyi, a village representative and one of the witnesses, as saying.

China was hit by its worst fuel supply crisis in four years from October to November, as a widening gap between low, state-regulated domestic prices and market-driven international prices forced Chinese refiners to cut output.

Fuel in many parts of the country was rationed and there were long queues at petrol stations.

An increase of nearly 10 percent in the prices of domestic diesel and gasoline from Nov. 1, the first in almost a year and a half, failed to lift refining margins back into the black. (Reporting by John Ruwitch; Editing by Sanjeev Miglani)


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Friday 7 December 2007

The imminent China CRASH

There is nothing an economist likes better on a Friday night that a little bit of doom and gloom. We are not called "dismal scientists" for nothing.

Asia Times has come up with a good one. I have reprinted it in full as it is a real pleasure to read. I will not argue the the opposing bull case here suffice to say I am in total agreement with a lot of the text that Martin Hutchinson at Prudent Bear has to say.

The coming China crash [Asia Times]

While the Chinese stock market, as measured by the China Securities Index 300, is down 18% since October 16, that follows a period of almost two years, since January 1, 2006, during which the CSI 300 soared 535%. Chinese economic growth is currently running at more than 11% and the big money is convinced that it will continue. At the same time, the country’s foreign exchange reserves have grown to US$1.4 trillion, the largest in the world.

A crash would appear to be imminent!

Bears on China have been common for the last decade, and their track record has not been good. To take just one unfair example, Henry Blodget, the former Internet genius, wrote in Slate in April 2005: "You've probably been daydreaming about the fortune to be made in Chinese stocks. Well, keep dreaming ... you'll eventually conclude that you could have done better selling insurance in Toledo." That was about six months before the Chinese market took off, and if anybody has made 500% on their investment by selling insurance in Toledo during that period, I haven't met him.

To see why a crash may be coming, it is worth examining the behavior of the China Investment Corporation, the US$200 billion sovereign wealth fund set up by the Chinese government in September. Now $200 billion is a fair chunk of cash; you could almost buy all but three US corporations with that (at today's prices, ExxonMobil, General Electric, Microsoft – there are four or five others including Google that barely top the bar.) Six weeks ago, the power of sovereign wealth funds was celebrated and China Investment's moves into the market were awaited with bated breath.

Well, so much for that. A third of China Investment's portfolio is to be invested in Central Huijin Investment Company, a purchaser of bad loans from the Chinese banks, and another third will recapitalize China Agricultural Bank and China Development Bank, to shape them up for privatization. About $3 billion of the fund was invested in the private equity manager Blackstone in May - that may have bought China useful political contacts, but it is now worth $2 billion. And the remainder is being invested very carefully, primarily in US Treasury securities - which are also losing money steadily in yuan terms.

The lackluster investment strategy of China Investment exposes a central flaw in the Chinese economy, its lack of a rational system of capital allocation. For more than a decade, Chinese state-owned companies have made losses and have been propped up by the banking system. Since 2004, loss-making state-owned companies have been joined by overbuilding municipalities, erecting white-elephant office blocks in attempts to turn themselves into the next Shanghai. None of these losses have resulted in bankruptcy; instead the cash flow deficits have been covered by the Chinese banks. As a result, these banks have an enormous volume of bad loans $911 billion at May 2006, according to a later-withdrawn estimate by Ernst & Young, which must surely have ballooned to $1.2 trillion to $1.3 trillion now.

That explains why China Investment is somewhat unaggressive in its international investment strategy. China's $1.4 trillion of reserves will in fact almost all be required to prop up the banking system when the inevitable liquidity crisis occurs. If the banks are to survive, China Investment will have to be followed by six more sovereign wealth funds of equal size, each of which will have to abandon its attempts to take over Exxon or Google and pour its money down domestic rat-holes.

A $1 trillion problem in subprime mortgages has caused even the US money market to seize up and has required frequent applications of sal volatile by the Fed. Since China's economy is around one fifth the size that of of the United States, the Chinese banking system's bad debt problem is in real terms about five times that of the United States, or about 40% of its gross domestic product.

We have seen this movie before; the Japanese banking system's bad debts after 1990 totaled around $1 trillion, about 30% of Japan's GDP. The result was the bursting of the 1980's bubble and a period of little or no economic growth that lasted well over a decade. Admittedly the Japanese authorities made matters worse by refusing to face up to their bad debt problem and issuing more government bonds to fund witless Keynesian public spending schemes.

Nevertheless, we can have very little confidence that the Chinese authorities, once the same problem stares them in the face, will do any better. After all, at least one of the alternative policy mixes, that tried by Herbert Hoover and the Federal Reserve in 1930-32, proved very much worse. Per capita US gross domestic product was no higher in 1940 than it had been in 1929, as in the Japanese case, but in the interval it had declined by a horrifying 28% and had recovered very slowly. If China faces the choice between a decade of stagnation, as in Japan from 1990-2003, and a decade of economic collapse, as in the United States from 1929-1940, it will rightly prefer the Japanese alternative.

It may not however have the choice. One of the factors that kept Japan out of real trouble in the 1990s was continued strong growth in the US and world economies; thus its magnificent export industries were able to continue growing, albeit at a slow rate, and provide a certain amount of traction for the economy as a whole. However, China will find it difficult to do the same, since the next decade does not seem likely to be a period of robust world growth. Far from it. The United States seems fated to endure at least a few years of very sluggish growth due to its housing market crash, and Britain appears to be in a similar mess, so even relatively robust growth in the resurgent economies of Germany and Japan may not be sufficient to keep Chinese exports growing.

At that point, China will have two alternatives. It can allow the banks to work their way out of their bad loans, condemning the domestic economy to probably a decade of little growth and extremely tight credit (high Chinese savings would alleviate this problem, but they will be trapped in the Chinese banks because the authorities foolishly do not allow Chinese citizens to invest abroad). Alternatively, it can inject more or less its entire foreign exchange reserves into the domestic banking system in order to recover its bad debts, which would allow the Chinese economy to continue expanding, but at a cost of devastatingly high inflation from the additional money pumped into the system (the $100 billion plus of Chinese bank initial public offerings carried out in 2006-07, pumped into the domestic economy, already appears to be worsening Chinese inflation and China Investment’s $130 billion will doubtless further aggravate the problem.)

We have seen societies with low economic growth, very high inequality (as China has now) and persistently high inflation; they are collectively known as Latin America. Since China also has much of the corruption that bedevils Latin America and its government lacks any genuine understanding of the free market and is increasingly dominated by special interests, it may indeed be fated to follow a Latin American growth path for the next few decades, with a tiny entrenched elite enriching itself at the expense of the disfranchised masses. That would be the worst possible outcome for the Chinese people, but it is not by any means impossible.

Many observers of the current US financial market downturn comfort themselves with the thought that the world now has more than one growth engine, and that China, with four times the US population, can because of its very high growth pull the world economy along sufficiently even when the US stalls. However, if China is about to incur the inevitable backlash from its recent debt and equity bubbles, during which practices have flourished that have no place in a well-functioning free market, then we may be entering a world in which the two main growth engines of the last decade are both broken. Growth in such a world will be truly sluggish and inflation high, as the world struggles to cope with the effects of an excess of cheap money now grown toxic.

The problem with major recessions is that they tend to produce foolish political reactions. In the United States, it seems likely that a major recession if we have one will produce resurgent protectionism and an aversion to world trade, which to the voting public will appear to have been responsible for the loss of millions of good US jobs without any corresponding gains to the living standards of the majority. Japan, bless it, remained admirably politically stable during its sluggish decade, and eventually found a leader in Junichiro Koizumi who was able to lead it back into renewed growth.

In China, there can be no assurance whatever that a populace whose living standards have suddenly stopped improving will not turn to violent nationalism and/or counterproductive economics. Since the country is not a democracy and not likely to become one, the authorities are likely to react to hardship as did Vladimir Putin to the chaos of late 1990s Russia, imposing even more draconian repression and seeking a military adventure abroad to occupy the masses of disaffected youth and distract the public from its new poverty. That too would produce a future in the West far worse than would be cased by a mere domestic recession.

Bears who weary of observing the chaos in the US financial markets can cheer themselves up by looking at China. There will be more than one source of the oncoming world downturn!

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Insider Trading and Chinese cultural differences: real or imaginary?

One aspect of working in academia is the claim of "cultural differences" in student approaches to higher education.

Although this excuse has previously be used as a defence for plagiarism this is the first time I have seen such a defence used for "insider trading".

The judge said she was ``mystified'' why the couple, both ``classic overachievers'' raised in China, would trade on inside information. Wang's lawyer, Catherine Redlich, said there may have been a ``cultural'' basis for the crime.


The defence lawyer then stated:

``In the People's Republic of China, insider trading is only rarely, and not until very recently, prosecuted as an offense,'' Redlich said.


This story gives us an insight into the behaviour of the Chinese stockmarket and to me is another bear signal. The Chinese stockmarket is a sell at current levels in my opinion. With corruption clearly rife, current share prices resemble of classic ponzi scheme.

Ex-Morgan Stanley, ING Couple Sentenced to Prison [Bloomberg]

Dec. 4 (Bloomberg) -- An Ex-Morgan Stanley vice president and her husband, a former ING Investment Management analyst, were sentenced to 18 months in prison as a judge assailed the ``pure greed'' that drove them to trade on secret stock tips.

U.S. District Judge Colleen McMahon in New York today turned aside a request by Jennifer Wang, of Englishtown, New Jersey, that she get probation so that she may care for her infant son. Wang and her husband, Ruben Chen, faced as long as 37 months in prison after admitting in September that they made $611,000 through three trades based on inside information.

``A clear message does need to be sent to everyone who works in this industry,'' McMahon said. ``You are both culpable. You are both going to do prison time.''

U.S. prosecutors this year have stepped up efforts to combat insider trading. A former Bear Stearns Cos. broker last week became the ninth person to plead guilty in a wide-ranging insider case that also involved UBS AG and Morgan Stanley employees. In August, a former Goldman Sachs Group Inc. associate pleaded guilty to making more than $6.7 million through illegal trades.

McMahon ordered the couple to pay $611,000 in restitution. She staggered the couple's prison terms, ordering Wang to prison after Chen completed his sentence.

The judge said she was ``mystified'' why the couple, both ``classic overachievers'' raised in China, would trade on inside information. Wang's lawyer, Catherine Redlich, said there may have been a ``cultural'' basis for the crime.

Rarely Prosecuted

``In the People's Republic of China, insider trading is only rarely, and not until very recently, prosecuted as an offense,'' Redlich said.

``Pure greed,'' McMahon replied. ``That's all I'm left with.''

Wang and Chen were arrested in May for trading in the securities of Town and Country Trust, Glenborough Realty Trust and Genesis Health Care based on information Wang learned from New York-based Morgan Stanley. They made their illegal trades from December 2005 to March 2007.

According to the government, Morgan Stanley was advising its Morgan Stanley Real Estate unit on the acquisition of both Town and Country and Glenborough. Wang learned about the firm's failure to acquire Town and Country and the successful purchase of Glenborough before the transactions became public and tipped her husband to the news.

``The people who committed this crime, like most criminals, didn't believe they'd get caught,'' Assistant U.S. Attorney Reed Brosky told McMahon at the sentencing hearing. ``That's a sad reflection on our society and Wall Street.''

`Take the Fall'

Wang and Chen each pleaded guilty to one count of conspiracy and three counts of insider trading. Chen, a former hedge fund analyst, had asked to be sentenced to 30 months in prison.

McMahon said she wouldn't permit Chen ``to take the fall'' for his wife, who was ``more culpable.''

``You are a thief,'' McMahon told Wang.

The couple was arrested on the same day that Randi Collotta, a former Morgan Stanley compliance officer, pleaded guilty to insider-trading charges. Collotta was sentenced to probation and 60 days in custody on nights and weekends. Her husband, who also pleaded guilty in the case, was sentenced to six months of home-confinement.

Redlich cited ``the other Morgan Stanley couple case'' when she sought probation for Wang.

Neither defendant spoke during the sentencing.

Representatives of ING Groep NV, the largest Dutch financial-services company, and Morgan Stanley have said their firms cooperated with federal investigators.

The case is U.S. v. Wang, 07-cr-730, U.S. District Court, Southern District of New York (Manhattan).


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Family background, financial constraints and higher education attendance in China

Research paper looking at Chinese participation in higher education. The results appear to be fairly intuitive and fit the anecdotal evidence of a large expansion in the higher education sector.

Family background, financial constraints and higher education attendance in China

Wenli Li

Institute of Economics of Education, Graduate School of Education, Peking University, Beijing 100871, China

Available online 1 October 2007.

Abstract

Using data from the 2004 China College Student Survey, conducted by the author, this paper finds that long-term factors such as scholastic ability and parental education are significantly correlated with higher education attendance. By contrast, short-term financial constraints are also significantly associated with higher education access, but to a lesser degree. Furthermore, in recent years China's higher education expansion has provided broader access to students from lower income families. However, the tuition fees and “net prices” of elite universities are lower than those of medium quality universities, while the tuition fees and “net prices” of medium quality universities are lower than those of relatively low quality universities and colleges. This has led to a reverse relationship between family income and attendance costs, such that lower income families now shoulder a much higher burden for their childrens’ university education than higher income families.

Keywords: Demand for schooling; Student financial aid

JEL classification codes: I21

Quality and trade: US fights back

One inevitable consequence of the "Chinese low quality" or "Quality fade" debate over Chinese exports was that the perception that goods made in China were poor quality would mean opportunities for exporters TO CHINA to play on the "UK or US produces quality" card.

And so it has come to pass.

This article also touches on transport costs - an important element of trade theory. The implications of such asymmetric costs requires a little thought.

The final comment in this article is also worth highlighting:

“The Chinese customs are very good at sending goods out of the country,” says Mr Kashani. “They’re not so good at getting goods in.”


Welcome to the world of non-tariff barriers.

Quality issues open gap in Chinese retail [FT]

For the past two decades, John Kashani has been buying cheap goods from Chinese factories and exporting them to the US. Now he wants to sell made-in-the-US goods in China, and to do it from Yiwu, a provincial city that has become a shop window to the world for Chinese manufacturers and one of the country’s main export hubs.

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As the quality and safety of Chinese-made products are questioned, Mr Kashani sees an opportunity to enter China by picking out the US-made goods he sources from Wal-Mart – from chocolates to toilet cleaners – and selling them to a growing Chinese middle class with its own quality concerns about Chinese goods.

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China shipped $287.8bn (£141.9bn, €196.6bn) worth of goods to the US last year, while US exports to China totalled just $55.2bn, according to US statistics. What this means for Mr Kashani is that while shipping one container from China to the US costs $3,000, going the other way – a trip many container ships are normally forced to make with empty containers – costs only $900.

../
“The Chinese customs are very good at sending goods out of the country,” says Mr Kashani. “They’re not so good at getting goods in.”


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Trade Integration in East Asia: The Role of China and Production Networks

A new research paper of interest.

---------------------

"Trade Integration in East Asia: The Role of China and Production Networks"
World Bank Policy Research Working Paper No. 4160


Contact: MONA HADDAD
World Bank - EASPR
Email: mhaddad@worldbank.org
Auth-Page: http://ssrn.com/author=766424

Full Text: http://ssrn.com/abstract=969237

ABSTRACT: Production networks have been at the heart of the recent growth in trade among East Asian countries. Fragmentation trade, reflected mainly in the trade in parts and components, is expanding more rapidly than the conventional trade in final goods. This is mainly due to the relatively more favorable policy setting for international production, agglomeration benefits arising from the early entry into this new form of specialization, considerable intercountry wage differentials in the region, lower trade and transport costs, and specialization in products exhibiting increasing returns to scale. The economic integration of China has deepened production fragmentation in East Asia, countering fears of crowding out other countries for international specialization. International production fragmentation in East Asia has intensified intraregional trade but has depended heavily on extraregional trade in final goods. While production networks centered on China have contributed significantly to growth in East Asia, they also breed vulnerabilities. They have not automatically led to technology spillovers and have led to an extreme interdependence across East Asian countries.

Is China "dumping steel"?

It appears that the EU is back on the anti-dumping trail.

Definition:

"Intended to discourage importation and sale of foreign-made goods at prices substantially below domestic prices for the same items."

China has undoubtedly been guilty of such practices in the past. This article signals the EU's intention to keep the EU's growing trade gap under close observation. Tensions are sure to rise in the coming months. Any hint of a recession in the EU and you will see a deluge of politicians screaming for more protection.

Given that this dumping case means we can all buy cheaper cars it does not make it an easy one to negotiate. The bottom line is that it is all about jobs - who are the winners and who are the losers (and crucially which group is the largest).

This is only the beginning.

EU probe into dumping claim [FT]

The European Union is set to launch an investigation into whether China is dumping underpriced steel, in the latest sign of increasing trade tensions.

Brussels diplomats said that national government trade officials would discuss today a recommendation from the European Commission, the bloc's executive arm, to probe imports of hot-dipped galvanised steel from China, used for car bodies.

Eurofer, which groups EU steel producers, complained formally in October that its members had lost sales to cheap steel from China after its domestic market became saturated.

Imports of the metal from China hit €1bn this year, double last year's figure, grabbing a bigger share of a €16bn (£11.5bn) market.

The Commission has nine months from the date it begins any probe to conclude if the industry has been harmed and recommend interim punitive measures, usually tariffs or quotas. Peter Mandelson, the EU trade commissioner, recently warned China publicly that the rapid expansion of its steel exports, fuelled by subsidies, could trigger such moves.

In a statement Eurofer said: "Exports of the products concerned have inundated the EU market. Massive volumes have been dumped on the EU market at dumping margins of up to 40 per cent. EU domestic prices have been undercut by up to 25 per cent."

This had led to capacity being underused, putting jobs at risk, it said.

Mr Mandelson faces a tricky political balancing act over the issue. Car companies, which employ far more workers, welcome the low prices Chinese imports create.

Anti-dumping measures must be backed, or at least not be opposed by, a majority of the 27 member states, which tend to split according to whether their companies benefit from the duties.


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Further tightening of monetary policy

China continues to be concerned with the effects of an overheating economy.

The answer? To tighten monetary policy but what does that really mean?

China is currently worried that inflation that has been rampant in the food sector will spillover into the rest of the economy.

The primary tools that China is employing is tightening of bank lending (growth of bank lending has slowed from 17 to 13% - still high).

Interest rates have risen 5 times but with little effect. The question is how high will interest rates have to go? I suspect a lot higher.

China acts to tighten economy [FT]

China has announced it has shifted its monetary policy stance from "prudent" to "tightening" in another sign that Beijing is concerned about the acceleration of an economy already growing at double-digit rates.

The decision, formally taken at an annual economic conference in Beijing this week, signals growing concern that investment, the prime driver of growth, is picking up pace again on the back of rising construction.

The government is also concerned that inflation, which has so far been confined to food, could spill over into other sectors. The change in language symbolises such concerns and will give policymakers, including the central bank, greater leeway to dictate the lending practices of local financial institutions.

../

The government's most important policy tool to keep construction in check is curbing the rate of growth in bank lending, from about 17 per cent year on year so far in 2007, to about 13 per cent in 2008. This will have a limited impact on overall investment, as about half of it is now funded through retained earnings, and only about a third to 40 per cent through bank lending.

There is no sign that profits as a source of funding are about to be choked off, with earnings of listed companies in the Shanghai market rising 74 per cent year on year in the third quarter and by 89 per cent in Shenzhen.

China has already raised interest rates five times this year, mainly in an effort to keep pace with inflation, with little appreciable impact on the real economy.

"You may see more rate hikes, depending on how the inflation figures pan out," said Mr Anderson.


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Tuesday 4 December 2007

Red Student Riots

In an attempt to cover all stories educational comes news that riots have broken out in China over the worthless nature of recently received qualifications.

Students riot at China military academy over claims degrees not to be recognized [China Post]

BEIJING -- Civilian students at an artillery academy run by China's People's Liberation Army have rioted over reports their diplomas would not be recognized, a radio station reported Friday.

Protests broke out Wednesday at the PLA Artillery Academy in the eastern city of Hefei among self-funded students who are not military cadets and have not been accepted into formal degree-earning programs, according to Radio Free Asia, a private broadcaster funded by the U.S. Congress.

The report follows scattered reports of campus unrest around China, often sparked by anger over phony degrees, weak job prospects and primitive living conditions.

RFA said students began smashing dormitories on Wednesday after word spread that their diplomas would not be recognized either by the Defense Ministry or the Education Ministry.

Police and military officers sent to calm the situation were driven out amid clashes that left several people beaten and bloody, the report said.


The International Herald Tribune get closer to the economics. Clearly, the emphasis here is the "cut throat" market. Education is very important and in some respects students can not afford to make a mistake. One wrong course as a result of poor research and lead to financial and academic disaster. Given the cost of education and the decreasing returns it is crucial to get it right. These riots are understandable. Moreover, with parents getting into high levels of debt to fund their single child's education as an investment (and pension substitute) the pressure on the student is also immense.

Report: Students riot at China military academy over claims degrees not to be recognized [IHT]

Civilian students at a Chinese military academy smashed windows and clashed with authorities in protest over reports their diplomas would not be recognized in the increasingly cutthroat job market, a radio station reported Friday.

A duty officer at the People's Liberation Army Artillery Academy in the eastern city of Hefei said violent protests broke out on Wednesday, but refused to give his name or say what sparked the unrest.

He said calm had returned by Thursday afternoon and some students had returned to class on Friday morning. He denied that any students had been injured, but wouldn't say whether any had been detained or expelled.

Radio Free Asia, a private broadcaster funded by the U.S. Congress, said the campus disturbances were led by activists among self-funded students who are not military cadets and have not been accepted into formal degree-earning programs at the school.

Police and military officers sent to calm the situation were driven out amid clashes that left several people beaten and bloody, the report said.

The accounts said that while students were able to gain admission with relatively low scores on the national college entrance exam, their families were required to pay placement fees totalling around 40,000 yuan (US$5,4000; €36,640) in addition to tuition of 8,800 yuan (US$1,190; €807) per year — about double that charged by similar schools.

Altogether, costs associated with completing the four-year program constituted a huge burden on most parents, the reports said. Such practices reflect broader concerns over families going deep into debt to fund their children's educations to give them a step up amid surging numbers of job applicants.

Similar complaints have sparked scattered rioting on other campus, along with other unrest blamed on high fees and primitive living conditions.




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Monday 3 December 2007

The Dragon and the Elephant

David Smith (Economics Editor of the Sunday Times) will be giving a talk tomorrow afternoon at 5pm at the University of Nottingham.

If you are in the UK and can make it I am sure it will be an excellent talk. I may well be there (anonymously of course).

The talk is entitled:

‘The Dragon and the Elephant: China, India and the New World Order’

Tuesday 4th December 2007 at 5pm

B63, Law and Social Sciences Building,
University Park

No tickets required; all welcome

Poster PDF.

Friday 30 November 2007

Stockmarket off 20% since its peak

The bubble had to burst - whilst I got the final size of the bubble wrong its eventual bursting remained inevitable and whilst large profits were made on the way up those mug punters who bought for the first time at the peak are already nursing loses of up to 20%.

Shares trading on a PE of 46 are still way overvalued. China has specific issues relating to asset allocation and the choices available then may limit the fall but this should not detract from the overvaluation and small investors move in a herd it may be hard to reverse this downward trend in a hurry.

The question is whether a large deflation will have knock on effects across global stock markets.

Chinese stocks face biggest monthly drop since 1995 [China Post]

SHANGHAI -- Chinese stocks are poised for their steepest monthly decline in more than 12 years as the government deflates a bubble that caused prices to quadruple in a year.

The Shanghai Composite Index has fallen 16 percent in November, the most since February 1995, when Bloomberg started keeping records of the benchmark. Shares in the index trade at an average 46 times earnings, according to data compiled by Bloomberg. The MSCI Asia Pacific Index and the Standard & Poor's 500 Index are valued at 18 times.

While this year's rally turned Beijing-based PetroChina Co. into the biggest company by market value and made Industrial & Commercial Bank of China Ltd. the largest bank, five interest rate increases by the People's Bank of China and higher taxes on trading shares sent the index down 18 percent from its Oct. 16 record. The past five times the Shanghai Composite Index dropped 20 percent or more from a high, losses deepened to an average 35 percent before recovering, Bloomberg data show.

"The risk facing the stock market is considerable now, as the government is trying to squeeze an asset bubble," said Zhang Ling, who manages the equivalent of US$1.1 billion with ICBC Credit Suisse Asset Management Co. in Beijing.

U.S. billionaire Warren Buffett said last month investors should be "cautious" about China's stock market. Six months ago, Li Ka-shing, China's richest man, said it "must be a bubble."

The decline in China compares with a 21 percent decrease in Japan's Topix index from its February record to Nov. 22, the first of the world's 10 biggest stock markets to enter a bear market since the summer's U.S. subprime-mortgage collapse. A 20 percent drop within 12 months is considered by traders as the start of a bear market.

The two-year-old CSI 300 Index, which tracks shares on the Shanghai and Shenzhen exchanges, fell 21 percent from its Oct. 16 peak through Wednesday, and rose 4.2 percent Thursday. It's still the world's best-performing national index of the 90 benchmarks followed by Bloomberg.

"It's far too early to talk about a prolonged bear market as domestic demand is still strong," said Leo Gao, who helps manage the equivalent of US$2.3 billion at APS Asset Management Ltd. in Shanghai. "We could see a rebound when banks get their fresh quota of loans in the new year."


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Wednesday 28 November 2007

EU-China Summit

The EU and China have shared interests in a large number of areas - exchange rates, climate change, commodity prices to name just three.

The current US political aggression towards China gives the EU a window of opportunity to take a more conciliatory approach. This will not be easy, but as Sakozy has shown (previous article), China can benefit greatly from closer ties and cooperation with Europe.

Given our interest in education, this is an interesting statistic.

More than 100,000 Chinese students studied at European universities in 2003 and 2004; there were 60,000 at US universities in the same years.


The UK and Europe should build on this strength and increase Europe's lead over the US. This means looking carefully at visa costs and access to higher education.

Stumbling towards mutual understanding [FT]

Whether it is commodity prices or exchange rates, nuclear non-proliferation or climate change, the European Union and China are discovering that there is virtually no economic topic or international security issue these days on which their interests do not intersect – and sometimes collide.

In the 32 years since China and the then European Economic Community established diplomatic ties, the Beijing-Brussels relationship has evolved from a one-dimensional, trade-based affair into a complex partnership that combines growing interdependence with various points of friction and residual misgivings.

From a European perspect­ive, a sense of awe at the rapid expansion of China’s global economic power is matched by uncertainty over how Beijing will cope with the domestic consequences of growth and shoulder its ever greater international responsibilities.

“Even if the EU assumes that China will remain a success story, it is not clear what kind of power it will become,” says Charles Grant, director of the Centre for European Reform, a think-tank.

“Europeans will hope that China takes its place in the multilateral sort of world that they would prefer. But China may not want a rules-based international system with strong multilateral institutions.”

There is no fundamental conflict of interest between the EU and China, and the EU has been China’s biggest foreign trade partner since 2004. Each would like to put the partnership on a solid strategic foundation rather than lurch into rivalry.

But with the EU’s trade deficit with China growing by €2bn ($2.97bn) a week, economic tensions threaten to become serious. Other misunderstandings persist, deriving in the final analysis from the two sides’ different political systems and cultures.

While both embrace economic pluralism, the EU sees itself as a bloc of 27 democracies with a commitment to human rights and the rule of law, quite distinct from China, with its one-party state and communist ideology.

But a more subtle difference is China’s emphasis on the integrity and sovereignty of the nation state, which contrasts with the pride that many EU member states take in having diluted their own sovereignty in favour of European reconciliation and co-operation after the past century’s two world wars.

“China sees sovereignty and non-interference in domestic affairs pretty much as non-negotiable, whereas the EU thinks its success is built on pooling sovereignty and going beyond the principle of the nation state,” one European diplomat says.

This difference of outlook explains why the European leaders who are visiting China this week intend to tread carefully when they talk about the need for a revaluation of the renminbi or more effective Chinese action to protect intellectual property rights.

“What we are aiming for is structured macroeconomic dialogue with China, because we don’t have one yet,” Jean-Claude Juncker, chairman of the eurozone’s finance ministers’ group, said last week. “We will be explaining why the Chinese economic leaders should perhaps change tack. We will make sure we are very explicit this time round.”

Mr Juncker and the eurozone’s two other highest-level officials – Joaquín Almunia, the EU’s monetary affairs commissioner, and Jean-Claude Trichet, the European Central Bank president – will set out the case that it is in China’s own interests to permit a stronger renminbi, boost domestic demand and reduce the huge savings levels in the banking system.

“I don’t think we should be lecturing them on how to grow economically, but surely it is they, not we, who are saying they need a different balance in their growth model. That’s not an idea that we came up with. They came up with this idea,” Mr Almunia told a European parliament hearing last Wednesday.

“China has constantly increased its foreign reserves. That is the backdrop to the dialogue, which we trust will be fruitful, and which we trust will also take place on a regular basis. We are not going to solve all the problems on a one-off trip. That would be unrealistic.”

EU officials acknowledge the eurozone leaders’ visit and the EU-China summit on Wednewsday will be test cases of how much progress Europe is making in speaking to China with a single voice.

Leaders of individual EU member states, especially France, Germany and the UK, have long made a habit of promoting their own political and commercial relationships with the Chinese at the expense of a common position.

Like Russia and the US, China sometimes seems ­frustrated with the internecine squabbles and convoluted decision-making procedures that often constitute EU policymaking. Slowly, however, Europeans and Chinese appear to be learning more about each other. More than 100,000 Chinese students studied at European universities in 2003 and 2004; there were 60,000 at US universities in the same years.

Sarkozy in $30bn trade deal

A rejuvenated French economy under Sarkozy seem keen to expand their sphere of influence. It is good news that France is becoming more active in China as Europe seeks to counter US influence in the region.

The airbus contract is particularly welcome and, given the dollar-Euro exchange rate, a good time to sign as the Airbus finds it harder to compete on price with Boeing.

Sarkozy nets US$30 bil. in trade deals with China [China Post]

BEIJING -- French President Nicolas Sarkozy on Monday oversaw the signing of about US$30 billion in aviation, nuclear and other deals in what he described as an unprecedented day of trade with China.

The two major agreements announced on the second day of Sarkozy's visit to China were contracts for European aerospace giant Airbus to deliver 160 aircraft and French firm Areva to build two nuclear reactors.

Sarkozy said the value of all the deals, signed after he met Chinese President Hu Jintao in the Great Hall of the People, was worth about 20 billion euros (US$29.6 billion).

"The total amount of these contracts has never been matched before," Sarkozy told Hu shortly before the official signing ceremony, according to an AFP journalist there.

"I want to thank President Hu for his personal involvement," he said afterwards.

The most lucrative contract was for Airbus to deliver 110 A320s and 50 A330s in a deal a spokesman for the European firm said was worth US$17.4 billion, based on the list price.

Airbus spokesman Robin Tao said the agreement was its biggest ever in dollar terms with China, which has the world's fastest-growing aviation market.

Areva said its agreements to build two third-generation nuclear reactors for China Guangdong Nuclear Power Corporation (CGNPC) in southern China was worth eight billion euros (US$11.9 billion) and was also historic.

Those deals also included the delivery of uranium from three African mines controlled by Areva and a joint venture to market the third-generation technology in China.

"It's a record. In the history of the civilian nuclear industry, there's never been a deal of this magnitude," Areva chief executive Anne Lauvergeon said.

With China seeking to rapidly build up its nuclear power industry, the deal was important for Areva after losing out in July to U.S.-based Westinghouse Electric in a bid to build four other nuclear reactors.

Other deals announced on Monday included a 750-million-euro telecommunication contract between Alcatel of France and China Mobile, and oneworth 80 million euros for Eurocopter to provide China with 10 helicopters.


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Friday 23 November 2007

The trade deficit that is growing at €15m an hour

It is no longer just the US who are keen to bash China over its growing trade deficits at every opportunity.

Today's FT reports on Peter Mandelson's warning to China that it is prepared to use good old "anti-dumping" measures to "defend" itself against Chinese exports.

The statistic trotted out in the article is that the EU's trade deficit with China is growing at 15million Euros an hour. That is a good statistic and does sound impressively scary.

The hook is that Peter Mandelson is happy with Chinese exports and is spinning this as a demand for freer trade. Leaving the exchange rate issue aside (which we have covered many times before) one of the criticisms is that China is putting limits on market access for foreign countries. This argument does have legs.

However, Mandelson is also keen to explain that he sees the current growth in the trade deficit as "unsustainable". What does that really mean?

The EU also has issues over intellectual property rights, fake goods and cumbersome bureaucratic procedures.

It is a sign of China's coming of age that it is no longer appears to be allowed to play the "still developing" card. It seems the patience of China's trade partners is beginning to wear thin and they are gearing up to play hard.

Make no mistake, China can ill-afford to become embroiled in a trade war with the EU and the US. For all its hard line rhetoric it still has to create millions of jobs in the manufacturing sector a year and it needs markets to sell these products.

Finally, I do not really understand what Peter is talking about in this paragraph.

Mr Mandelson said Chinese leaders needed to act to reduce non-tariff barriers, regulation and discrimination against European companies, saying that "when we pin them to the actions, they respond in terms of trade fairs and investment promotion". He added: "I don't want takeaways or overnight presentational devices. I want real sustained action to remedy the problems."


Is he talking about fast food? What is an overnight presentational device? I am lost.

Mandelson warns China on trade gap[FT]
Peter Mandelson, the European Union trade commissioner, warned China yesterday that the EU could be forced to use anti-dumping measures to defend itself against Chinese exports if Beijing failed to help cut an "unsustainable" trade deficit growing by €15m an hour.

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EU frustrations with Chinese limits on market access for foreign companies, and an exchange-rate policy seen as undervaluing the renminbi, have been fuelled by the growth of its trade deficit with China to €86bn ($128bn, £62bn) in the first seven months of the year.

"Europe is becoming more open to China, but I can't sustain that unless China shows the same openness to us," Mr Mandelson told the Financial Times. He pointed out that he would come under increasing pressure to take tougher action if Beijing did not move to clear market barriers.

"During the six days that I spent in China, the trade deficit will grow by over €2bn, or €15m an hour," he said. "That is what I call unsustainable. There are real issues of market access, legal protection, as well as the other issues we are dealing with - like counterfeiting and export of fake goods."

Mr Mandelson's call to China reflects frustration among European companies at what they see as Beijing's failure to act on a host of long-standing complaints.

Mr Mandelson said Chinese leaders needed to act to reduce non-tariff barriers, regulation and discrimination against European companies, saying that "when we pin them to the actions, they respond in terms of trade fairs and investment promotion". He added: "I don't want takeaways or overnight presentational devices. I want real sustained action to remedy the problems."

He made clear that a Chinese failure to deliver change could force Brussels to resort to trade defence measures, such as anti-dumping duties or - in extreme circumstances- complaints to the World Trade Organisation.

China should also "manage its currency better", both for its own economic good and to address the widening trade gap.

A survey of EU companies by the European Chamber in Beijing yesterday highlighted corporate dissatisfaction with China's lack of transparency, its record on intellectual property protection and its cumbersome bureaucratic procedures.

"The investment climate is unfortunately not getting better," said Jörg Wuttke, the chamber's president. Intellectual property rights protection remained a problem for 66 per cent of responding companies, despite Beijing's promises to address the issue, he added.

Despite such complaints, 61 per cent of European companies in China reported being profitable and 73 per cent were optimistic about future growth, the chamber survey found.

The summit comes shortly after Germany's finance minister cancelled a trip to Beijing after his counterpart refused to see him in apparent protest over a meeting between Angela Merkel, the German chancellor, and the Dalai Lama, the exiled Tibetan spiritual leader.


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Thursday 22 November 2007

China Environmental Round-up 21/11/2007

There is no doubt that China has serious environmental problems. It is also true that environmental degradation is limiting Chinese growth with the problem promising to get worse.

In this post I merely emphasise the importance of the environment by providing links from just 1 days PlanetArk news to illustrate the size and importance of the problem. Note again, this is just one days environmental news for China that has managed to make the mainstream news reports.

China's Energy Saving Efforts Gather Pace in Q3
BEIJING - China's efforts to cut the energy it uses to generate each dollar of national income, a key pillar of Beijing's argument that it is tackling carbon emissions, gathered pace in the third quarter, government sources said.


China Takes Pollution Fight to Threatened Villages
BEIJING - Pollution in China's vast countryside is threatening health, water and arable land, the government said on Wednesday, vowing to stop toxic industries shifting pollution to villages.


China Three Gorges Landslide Kills One, Two Missing
BEIJING - A landslide near China's huge Three Gorges Dam trapped four workers, killing one, state media reported, as officials announced efforts to counter environmental fallout from the controversial project.


China Coal Fire Put Out After More Than 50 Years
BEIJING - An underground coal fire in remote northwest China that has raged unchecked for more than 50 years has finally been put out, state media reported on Wednesday.

More than 12.43 million tonnes of coal had been consumed in the fire and an estimated 651 million tonnes saved at the Terak field in Urumqi, capital of Xinjiang autonomous region, the Coalfield Fire Fighting Project Office was quoted as saying.


China to Hold Asia Climate Change Meeting in 2008
SINGAPORE - China will hold a meeting in Beijing next year for Asian countries to discuss climate change, as it faces the risk of more droughts and floods and seeks common ground on a potential successor to the UN Kyoto Protocol.


India, China Sign Deal to Stabilise Greenhouse Gases
SINGAPORE - Leaders of Asian countries, including top polluters India and China, on Wednesday signed an agreement that aims to stabilise greenhouses gas emissions.

Tuesday 20 November 2007

You have to be a genius to read China Economics Blog

This is amusing.

You enter your blog address and it tells you the reading level of the blog.

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Interestingly, Joshua Gans over at CoreEcon gets a "High School" rating.

The implications are as follows:

1. Only clever people read this blog (is that so bad?)
2. I could get more readers if I simplified the language (is that so good?)

Opinions?

Monday 19 November 2007

The China Fantasy

The "China Fantasy" by james Mann is currently causing a stir in the corridors of power.

The book covers old ground but puts forward a strong argument. The conclusions should also surprise no one and I am surprised that it appears to have caused such a fuss. I doubt the American public really feel victims of a fraud over the handling of US-Chinese relations.

The issue of democracy in China as a result of increased trade and FDI was naive - the question is whether anyone really believed it in the first place.

New book on China raises a storm [International Herald Tribune]

Indeed, a recent book, which argues that on human rights grounds, American policy toward China has been both a failure and a fraud, is making a considerable stir among China policy makers and scholars in the United States.

The book is "The China Fantasy" by James Mann, a former correspondent in Beijing for The Los Angeles Times and now author in residence at the Johns Hopkins School for Advanced International Studies.

Mann's thesis, adamantly rejected by many, though not all, experts on China, is that the American policy of what is called "engagement," pursued with some fits and starts by every administration since Richard Nixon's in the 1970s, has not delivered on its main promise, which was Chinese democratization.

When, for example, the Clinton administration ended linkage between trade benefits for China and progress in human rights, the argument to skeptical members of Congress held that delinkage would lead to more economic growth, more economic growth to the emergence of a middle class and the emergence of a middle class to real political reform.

Andrew Nathan, a China expert at Columbia University who supports the Mann thesis, put it this way in an interview: "The strategy of engagement has been incredibly successful in supporting the stability and prosperity of China and allowing the regime to survive as an authoritarian, repressive regime, but the American people are not being told that that is the strategy."

According to Nathan, everybody involved in the debate would be perfectly delighted if China were to turn into a stable democracy, but in the meantime policy makers are actually pretty happy with the regime in China that they have.

"That's because they know who to call in Beijing and who to talk to about problems like currency, trade, North Korea and Taiwan," he said. "There's somebody in charge and they're basically pretty cooperative with us."

In many respects Mann's book reprises an argument that has been raging among China policy makers and experts since Nixon restored relations with China in 1972.

The questions have always been: How much should the United States publicly criticize China for its numerous, egregious human rights violations and how much does the human rights goal have to be accommodated to China's power and importance?

But because Mann's book accuses China policy makers of a kind of broken promise, it seems to have generated an especially angry response on the Internet and in such specialty journals as The China Quarterly, which published a lengthy exchange between Mann and David Lampton, a leading figure on China who is also at the School for Advanced International Studies.

Mann also touches what may be a sore point in stressing that, with a few exceptions - Nathan one of the most prominent among them - China scholars and policy makers have tended to be rather silent on Chinese human rights abuses, though many of them say that they bring these matters up forcefully with Chinese officials in private.

And this, in turn, has long been part of a complicated debate about how to apportion priorities on China. Administration after administration has come to power in Washington pledged to be tougher on China only to retreat once it needed China's cooperation on other matters.

The China specialists' retort to Mann builds on two elements, one of which is the need for that cooperation. The bilateral relationship faces tough times, some of them say, not least on trade where the ever-growing deficit is bound to lead to calls in the United States for sanctions.

In addition, some China experts are concerned over the trend toward what has come to be called "strategic hedging" on China, building relations with countries on China's periphery as a way of containing what conservatives in the Bush administration regard as a looming military threat from China, a threat that a lot of experts (including Mann) believe to be largely imaginary.

On human rights in particular, some China scholars criticize Mann for concentrating so much on political reform that he has failed to appreciate the enormous beneficial changes that have occurred in China over the past decade, where a middle class of perhaps 200 million to 300 million people has come into existence enjoying a degree of personal autonomy that would have been unthinkable 15 or so years ago.

"Jim's image of China is stuck in the Tiananmen crackdown period," said David Shambaugh, a China scholar at George Washington University. "He thinks China today is the same as China in 1990."

Among Lampton's arguments is that Mann overestimates the centrality of the United States to political developments in China, that if democracy takes hold there it will be because of developments in China itself, not because of pressures from outside.

"The Chinese middle class is not now a wedge pushing for democratization," Lampton said. "In the short run they may be more afraid of the underclass than of the elite, and the middle class is key.

"I think we should be supportive of underlying economic developments that will build a middle class, but there are limits to what U.S. policy can accomplish," Lampton said. "Jim seems to be more implicitly optimistic that if U.S. policy were different, there would be a Chinese reality more to our liking."



Saturday 17 November 2007

Institutions and Foreign Investment: China Versus the World

Interesting NBER paper looking at the apparent paradox between FDI inflows and the state of China's institution. One would expect a negative correlation. The conclusions of this paper are intuitive and should not be surprising to those with a good knowledge of China.

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"Institutions and Foreign Investment: China Versus the World"
NBER Working Paper No. W13435


Contact: JOSEPH P.H. FAN
Chinese University of Hong Kong - School of
Accountancy
Email: pjfan@cuhk.edu.hk
Auth-Page: http://ssrn.com/author=28125

Co-Author: RANDALL MORCK
University of Alberta - Department of Finance and
Management Science, National Bureau of Economic
Research (NBER)
Email: randall.morck@ualberta.ca
Auth-Page: http://ssrn.com/author=71368

Co-Author: LIXIN COLIN XU
World Bank - Development Research Group (DECRG),
Peking University - Guang Hua School of Management
Email: LXU1@worldbank.org
Auth-Page: http://ssrn.com/author=122631

Co-Author: BERNARD YIN YEUNG
New York University - Department of Economics
Email: byeung@stern.nyu.edu
Auth-Page: http://ssrn.com/author=71371

Full Text: http://ssrn.com/abstract=1016346

ABSTRACT: Weak institutions ought to deter foreign direction
investment (FDI), and mass media stories highlight China's
institutional deficiencies, yet China is now one of the world's
largest FDI destinations. This incongruity characterizes China's
paradoxical growth. Cross - country regressions show that China's
FDI inflow is not exceptionally large, given the quality of its
institutions and its economic track record. Institutions clearly
determine a country's allure as an FDI destination, but standard
measures of institutional quality can be problematic for
countries undergoing rapid institutional development, and can
usefully be augmented by economic track record measures. Deng
Xiaoping's 1993 southern tour heralded sweeping reforms, and this
regime shift is insufficiently reflected in commonly used
measures of institutional quality. China's FDI inflow surge after
these reforms resembles similar post-regime shift surges in the
East Bloc, and so is also unexceptional. Recent arguments that
China's FDI inflow is inefficiently large because weak
institutions deter domestic investment while special initiatives
attract FDI are thus either unsupported or not unique to China.

Thursday 15 November 2007

"China is poorer and smaller than we all think": Discuss

Interesting FT piece today on the Asian Development Bank's announcement that China is in fact a lot smaller and poorer than at first thought.

Hence the justification for the World Bank to continue lending money to China when, at the same time, China invests billions in US paper and and has potentially lost millions on the recent dollar decline.

The limits of a smaller, poorer China [FT]

In a little-noticed mid-summer announcement, the Asian Development Bank presented official survey results indicating China’s economy is smaller and poorer than established estimates say. The announcement cited the first authoritative measure of China’s size using purchasing power parity methods. The results tell us that when the World Bank announces its expected PPP data revisions later this year, China’s economy will turn out to be 40 per cent smaller than previously stated.

This more accurate picture of China clarifies why Beijing concentrates so heavily on domestic priorities such as growth, public investment, pollution control and poverty reduction. The number of people in China living below the World Bank’s dollar-a-day poverty line is 300m – three times larger than currently estimated.

Why such a large revision in the estimates of China’s economic condition? Until recently, China had never participated in the careful price surveys needed to convert accurately its gross domestic product into PPP dollars.


This article is potentially important for US-China relations as well as for the Chinese domestic policy. This article deserves maximum coverage as it sheds light on an important issue. As the article concludes:

Finally, both Congress and the Treasury department should recognise the limitations and opportunities revealed by these more accurate data. For example, risks to its impoverished rural hinterland from a sudden large revaluation of its currency loom larger in Beijing’s eyes than in Washington’s. Acknowledging this could smooth negotiations.


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