Unrest in Xinjiang - live discussion

From the inbox:

The Director of George Washington University’s International Development Studies Program and Cultural Anthropologist Sean Roberts will be available to discuss the growing unrest in Uighur. He has studied the region for 20 years.

The live discussion will take place today (July 8th) at 1 pm ET at the following link:

http://www.washingtonpost.com/wp-dyn/content/discussion/2009/07/07/DI2009070701491.html


Kicking off the discussion, Roberts says:

"The current unrest in Xinjiang is another chapter in a long history of tensions between Han Chinese and Uighurs, but it is mostly the result of the frustrations experienced by Uighurs over the last decade as the rapid pace of Chinese development in the region has brought scores of Han Chinese migrants to Xinjiang and has displaced Uyghurs from their traditional livelihoods and communities. While the violence that has emerged on both sides of the conflict is shocking, the most surprising aspect of the events may be that the tensions had not boiled over into direct confrontations until now.”

Please feel free to submit questions, or share this discussion with your readers. If you have any questions please let me know.

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Chinese lending - a recovery built of sand

China is new to the capitalism game and I have been concerned for some time about the size of the stimulus plan. One problem is that the spike in lending is resulting in more risk being taken.

The Chinese recovery may well be built on sand and stimulus packages. This leaves me uneasy. The problem (as it was in the previous stockmarket bubble) is the lack of alternative investment homes for all the cash that is still sloshing around.

Risks Emerge as Bank Loans Hit Overdrive [Caijing.com.cn]

(Caijing.com.cn) Record bank lending in China is spawning systematic financial risks that may lead to a credit crisis.

New lending in the January-May period totaled 5.84 trillion yuan, 3.72 trillion yuan more than during the same period last year. That's an unprecedented pace for new loans, as lending levels never even reached 5 trillion yuan for an entire year between 2001 and '08.

This huge influx of borrowing, aimed at stimulating China's sluggish economy, is leading to overcapacity.

Most scholars believe China's recovery is solid and strong, but economic statistics suggest otherwise. Industrial enterprise profits and trade volume have fallen remarkably.

Between January and May, industrial enterprises with annual revenues of more than 5 million yuan booked a combined decline in profits of 22.9 percent year-on-year. Profits for big state-owned enterprises declined 41.5 percent year-on-year.

Meanwhile, China's trade volume fell between January and May by 24.7 percent year-on-year, with imports off 21.8 percent and exports down 28 percent.

Those numbers show that the world market for made-in-China products is shrinking. If China's production-driven growth model continues, the country soon may face a predicament that combines "low interest rates, high capacity and finally low growth" – a scenario that's plagued Japan since the early 1990s.

The global economy is now caught in a vicious cycle: The world expects China to lead a recovery, while China is relying on the international market to absorb its products.

And if excessive lending is a power keg, an interest rate hike will be the fuse that sets it off. Indeed, a credit crisis would ensue if China's central bank raises its interest rate.

Interest rate increases were the immediate causes of the 1988 U.S. credit crisis, implosion of Japan's economic bubble in the 1990s, and the 2007 subprime credit crisis.

China's central bank will be reluctant to raise the interest rate, however, so overcapacity in the real economy will continue.

Due to a lack of investment opportunities in the real economy, speculative investment appears to be a reasonable alternative. That leads to high prices on the stock and real estate markets. Meanwhile, low bank interest rates encourage people to transfer cash from savings deposits to asset markets.

In May 2009, total bank deposits increased by a mere 188.6 billion yuan – down 47.8 billion yuan from the same period last year.

If enterprises and individuals use bank loans and deposits to engage in high-risk speculation, assets bubbles can be expected. Commercial banks would then reduce lending to avoid high credit risks, and market interest rates would rise, puncturing asset bubbles and ruining a financial system pillar.

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WTO looking closely at Chinese trade restrictions

After spending so long trying to get into the WTO China now spends a long time trying to get around the rules.

Even in the face of a global recession or indeed perhaps because of the global recession the US and EU are fighting back over the Chinese restrictions on exports that are aimed at protecting the domestic steel industry.

This is really a none issue and will not save global trade. China will dig in and the US and Europe will give up.

Duties call [Economist]

DESPITE the periodic sighting of green shoots elsewhere in the economy, the landscape of global trade remains resolutely bare. The World Bank said on June 22nd that world-trade volumes, reeling from a drastic collapse in global demand (see chart), will shrink by nearly 10% this year. That would be the sharpest fall since the Depression, and the first decline in trade since a small dip in 1982.

Unsurprisingly, tempers are fraying as governments struggle to find ways to protect their own. The latest salvo was fired on June 23rd by America and the European Union, which complained to the World Trade Organisation (WTO) about China’s restrictions on the exports of nine minerals, including bauxite, coke, magnesium and manganese. These are important raw materials for the steel industry, among others, and China restricts their exports on the grounds that they are exhaustible resources. But America and the EU argue that by hindering their export, China is unfairly favouring domestic industries.

John Veroneau, a former American deputy trade representative, believes the case against China is a strong one. He also argues that this week’s move can be seen as an effort to foster more trade (as there surely would be if China were to ease its export restrictions) at a time when trade is in a great deal of trouble. In practice, it is unlikely to have that effect. If the case proceeds to the stage where a formal WTO panel is formed to decide on its merits, it could drag on for several years, by which time trade will, with luck, have recovered from its current moribund state.

Jeffrey Schott, a trade expert at the Peterson Institute for International Economics, a think-tank, says that the case against China may also help the cause of open trade in other ways. If Ron Kirk, America’s new trade representative, demonstrates that he is actively enforcing the agreements already in place, he may get “the authority to negotiate Doha and other accords”.

That may be too sanguine. True, America and the EU are not resorting to imposing fresh barriers of their own in this dispute; for that matter, China’s export restrictions are not new either. But trade experts warn that protectionism remains a serious worry. Of particular concern are the so-called “Buy China” requirements added to China’s stimulus package this month. These require recipients of money from China’s mammoth fiscal expansion to choose domestic suppliers “unless products or services cannot be obtained in reasonable commercial conditions in China”. This sounds like out-and-out protectionism. But America, which included similar “Buy America” provisions in its own stimulus bill, may find it hard to raise a stink.

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China, Iraq and the collapse of the dollar

A title to chew over that is for sure.

This is an interesting New York Times article. The implications are potentially very serious. Imagine China selling up it's US paper - work it through and the dollar is in deep trouble. Will China risk it? Perhaps it will for oil.

As Iraq Stabilizes, China Bids on Its Oil Fields [New York Times]

HONG KONG — Oil companies from China, the world’s second-largest and fastest-growing consumer of oil, bid aggressively on Tuesday as Iraq began auctioning licenses in six large oil fields.

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It is common in the oil industry for initial auction results to be followed by weeks of dickering over details. But the bidding in Baghdad on Tuesday was particularly contentious, as multinationals demanded that the Iraqi government allow them to keep more of the revenue from each extra barrel of oil they pump beyond levels previously sustained by Iraq’s chronically corrupt and technologically weak national oil industry.

Few Americans or Iraqis may have expected China to emerge as one of the winners in Iraqi oil, particularly after six years of war. But signs of stability in Iraq this year, and a planned American military pullout from Iraqi cities on Tuesday, happened to coincide with an aggressive Chinese push to buy or develop overseas oil fields.

The Chinese companies “have been interested in Iraq,” said David Zweig, a specialist in Chinese natural resource policies at the Hong Kong University of Science and Technology. “They were interested in Iraq before the war, and now that things have improved somewhat there, it’s on their agenda.”

Some experts contend that the West should not be concerned about a substantial Chinese presence in Iraqi oil fields, because it gives China greater stake in improving stability in the region.

“If you want China to be a responsible stakeholder in the world, you need to let China buy stakes in the world,” said Mark P. Thirlwell, the program director for international economics at the Lowy Institute for International Policy in Sydney, during a speech in Hong Kong on Tuesday.

The Iraqi government originally tried last year to award oil fields to Western companies through a no-bid process. That prompted objections from a group of United States senators, who wanted greater transparency, and the plan was replaced with the auction, which had the effect of letting Chinese companies play a much larger role.

China’s leaders were surprised by the steep rise in commodity prices early last year, which exposed the vulnerability of their country’s huge manufacturing sector to high raw material prices. When oil prices plunged in the autumn, China began buying, importing and storing oil in huge quantities, helping to drive a partial rebound in world oil prices in spring. And China stepped up its hunt to acquire foreign oil.

Chinese officials, economists and advisers have been almost unanimous in recent weeks in saying that their country needed to invest more in natural resources, while also voicing concerns about the long-term creditworthiness of the United States and the buying power of the dollar.

China has $2 trillion in foreign exchange reserves, mostly invested in dollar-denominated bonds, and has been looking for ways to diversify gradually into other assets like commodities, said a Chinese government adviser who spoke on the condition of anonymity because of the secrecy of Chinese reserve policies.

China’s central bank, the People’s Bank of China, called Friday for the development of an international currency other than the dollar that would be a safe repository of value, in the latest sign of China’s search for other ways to invest its international reserves.

Philip Andrews-Speed, a specialist in China’s oil industry at the University of Dundee in Scotland, said Iraq was clearly attractive for China and its oil industry.

More on the second page.

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Chinese IPOs are back - but for how long?

Here we go again. The thirst of Chinese investors to own stocks appears undiminished despite the recent bloodbath.

I have been surprised by the strength of the recovery in the stockmarket and the return of IPOs is an interesting development that needs watching carefully.

Thirst-quenching [Economist]

IT IS like a downpour after a drought. In 2007 and early 2008, hundreds of Chinese companies worked feverishly with accountants and bankers to prepare for initial public offerings. Their work came to nothing. Collapsing share prices, a contracting economy, unrealistic expectations on the part of sellers and, finally, restrictions from regulators crushed the IPO market. Now the companies and bankers that have managed to survive a brutal year are once again seeking capital, through listings on bourses in the mainland and beyond.

The first raindrop in China has been Guilin Sanjin, a manufacturer of Chinese medicine, which is expected to issue shares on June 29th on the Shenzhen Stock Exchange, the market for the country’s smaller companies. The size of the offering is likely to be a bit under $100m—a mere rounding error compared to the mega-deals of two or three years ago, but a sign, nonetheless, that business has resumed.

Another 30 companies have reportedly received regulatory approval to list and have begun final preparation and marketing; 400 more sit in a queue waiting to be approved. Several state enterprises that went public on offshore markets, including China Mobile and CNOOC, an oil firm, are also expected to list at some point in Shanghai. So too may a handful of non-Chinese companies, with interest already expressed by HSBC, in deference to its Shanghai roots, and the New York Stock Exchange (NYSE).

In Hong Kong, a few companies did manage to float in the past few months but the going was tough, with price estimates cut repeatedly prior to the offering, buyers corralled from friends, families and affiliates, and a lacklustre aftermarket. Conditions have turned. Many of these deals are now up significantly. Three small companies have gone public since June 16th, with shares in each case rising by at least 20%.

Bawang, a Chinese toiletries company, is in the final stages of a roadshow and appears likely to price at the top of its pre-marketing estimate. More sizeable deals are expected by the year’s end, including a listing of the Asian life-insurance operations of AIG, and dual China-Hong Kong listings for Agricultural Bank of China and two Chinese electrical-distribution firms.

America’s capital markets are benefiting too. Two Chinese companies, one producing specialty chemicals (Chemspec) and another water-treatment equipment (Duoyuan Global), made splashy debuts on the NYSE on June 23rd. In every case, regardless of where the listing venue might be, the underlying appeal is the same. Says Jonathan Penkin of Goldman Sachs in Hong Kong: “People are looking for growth. You can find it here.”

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University productivity in China

There is no doubt that Chinese Universities are rapidly increasing in quality. However, there remains a productivity and quality gap with US and UK Universities. This interesting topic is discussed in a recently China Economic Review paper.

I am not keen on the techniques employed in this paper but the results that productivity is increasing but from a low base matches my expectations (always a good sign) :-)

Efficiency and productivity growth in Chinese universities during the post-reform period

Ying Chu NG and Sung-ko LIa

Abstract

The social science research performance of Chinese universities is examined using panel data. The universities are found to be very inefficient in general, with not much difference between regions. By far the largest single cause of universities′ overall technical efficiency is pure technical efficiency, along with a considerable amount of scale inefficiency and a modest amount of congestion. No obvious regional differences in the universities′ productivity growth are apparent between 1998 and 2002. Decomposition of the Malmquist productivity index indicates that although there has been technological progress over the years, poor scale efficiency and technical efficiency have resulted in deterioration in the universities′ average productivity. There are signs of increasing congestion during the period studied.

Keywords: Technical efficiency; Congestion; Malmquist productivity index; Research; Chinese universities

JEL classification codes: I20; L30

Why Do Institutions of Higher Education Reward Research While Selling Education?"

One of the initial motivations for this blog was to ensure that prospective Chinese students wanting to study abroad made sure that they invested wisely in the highest quality education at the top Universities.

To that end, the side bar on the right lists some of the top courses in the UK.

The Universities listed tend to be the "best" Universities in terms of research. That raises the question of why or if the best research Universities offer the best education.

My advice holds. A degree from a "top" University is a signal of the quality of the student (given these Universities are often harder to get into). If a student is to invest heavily in human capital accumulation then the returns need to be maximised. Employers are far more likely to take students from the well known "top Universities".

The following paper sheds light on this interesting topic.

Why Do Institutions of Higher Education Reward Research While Selling Education?"

NBER Working Paper No. w14974

DAHLIA REMLER, City University of New York - Baruch College - School of Public Affairs, National Bureau of Economic Research (NBER)
Email: Dahlia_Remler@baruch.cuny.edu
ELDA PEMA, Naval Postgraduate School
Email: epema@nps.edu

Higher education institutions and disciplines that traditionally did little research now reward faculty largely based on research, both funded and unfunded. Some worry that faculty devoting more time to research harms teaching and thus harms students' human capital accumulation. The economics literature has largely ignored the reasons for and desirability of this trend. We summarize, review, and extend existing economic theories of higher education to explain why incentives for unfunded research have increased. One theory is that researchers more effectively teach higher order skills and therefore increase student human capital more than non-researchers. In contrast, according to signaling theory, education is not intrinsically productive but only a signal that separates high- and low-ability workers. We extend this theory by hypothesizing that researchers make higher education more costly for low-ability students than do non-research faculty, achieving the separation more efficiently. We describe other theories, including research quality as a proxy for hard-to-measure teaching quality and barriers to entry. Virtually no evidence exists to test these theories or establish their relative magnitudes. Research is needed, particularly to address what employers seek from higher education graduates and to assess the validity of current measures of teaching quality.

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