Economist: "The Old Chinese Myth"

The Economist looks at China's ability to weather any fall in demand from the US if, as seems likely, it heads in a recession with consumers tightening their belts.

The issue is whether domestic consumption can be encouraged to offset any decline in exports.

An old Chinese myth [The Economist]

Contrary to popular wisdom, China's rapid growth is not hugely dependent on exports

MOST people suppose that China's economic success depends on exporting cheap goods to the rich world. If so, its growth would be seriously dented by a stuttering American economy. Headline figures show that China's exports surged from 20% of GDP in 2001 to almost 40% in 2007, which seems to suggest not only that exports are the main driver of growth, but also that China's economy would be hit much harder by an American downturn than it was during the previous recession in 2001. If exports are measured correctly, however, they account for a surprisingly modest share of China's economic growth.

When measured correctly (although the methodology employed is still debatable) then the ratio of exports to GDP falls to 10%.

But what about employment (and then all important political stability). Not such a problem:

Employment figures also confirm that exports' share of the economy is relatively small. Surveys suggest that one-third of manufacturing workers are in export-oriented sectors, which is equivalent to only 6% of the total workforce.

However, 6% of the Chinese work force is a seriously large number of people that you would not want camped out on your doorstep.

Many of China's foreign critics remain sceptical. They argue that China's massive current-account surplus (estimated at 11% of GDP in 2007) proves that it produces far more than it consumes and relies on foreign demand to buy the excess. In the six years to 2004, net exports (ie, exports minus imports) accounted for only 5% of China's GDP growth; 95% came from domestic demand.

The economist correctly goes on to link exports with investment. Whilst China moves up the quality ladder via increasing investment in high technology and high valued added products a lot of this investment is driven by export potential.

China's economy is driven not by exports but by investment, which accounts for over 40% of GDP. This raises an additional concern: that weaker exports could lead to a sharp drop in investment because exporters would need to add less capacity. But Arthur Kroeber at Dragonomics, a Beijing-based research firm, argues that investment is not as closely tied to exports as is often assumed: over half of all investment is in infrastructure and property. Mr Kroeber estimates that only 7% of total investment is directly linked to export production. Adding in the capital spending of local firms that produce inputs sold to exporters, he reckons that a still-modest 14% of investment is dependent on exports. Total investment is unlikely to collapse while investment in infrastructure and residential construction remains firm.

Again, things are not so simple. Property is built for a reason and needs to be sold to someone. Likewise with infrastructure. A fall in exports could trigger a reversal in more than just exports as the fall in confidence reverberates around the economy.

The article concludes:

Dragonomics forecasts that in 2008 the contribution of net exports to China's growth will shrink by half. If the impact on investment is also included, GDP growth will slow to about 10% from 11.5% in 2007. This is hardly catastrophic. Indeed, given Beijing's worries about the economy overheating, it would be welcome.

I think this is an overly optimistic forecast. For one a recession in the EU or Japan would have an effect of a similar magnitude to the US. Second, the asset bubbles in China do not require much encouragement to burst.

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"A Bull in China": New book of the month

Jim Roger's new book on China is called "A Bull in China: Investing Profitably in the World's Greatest Market".

A Bull in China: Investing Profitably in the World's Greatest Market

This book is now the current book of the month (it was book of the week but I am too lazy, so much so that it really should be book of the 1/2 year).

The reason I have been jolted into action is that Jim Rogers is one reason for my interest in China after reading his previous book "Adventure Capitalist".

Adventure Capitalist: The Ultimate Road Trip

If the book contains the vision of his previous book it will be a valuable read. It will also be an entertaining read I am sure.

I have similar concerns to the reviewers on Amazon. It seems a little late to bring out a book on buying Chinese equities given the current bubble. Moreover, buying Chinese stocks in not that easy for foreigners. However, I said this about commodity stocks in 2002 and got that spectacularly wrong as prices soared.

Click HERE for an interview with Jim Rogers from August this year.



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Measuring Green Productivity

A recent paper published in the Asian Economic Journal (average quality journal) looks at green productivity in Chinese manufacturing. The results are not particularly surprising but it is useful to take externalities into account when considering China's consistently high growth rates of above 10%.

Weak environmental enforcement is, as always, important.

Measuring Green Productivity Growth for China's Manufacturing Sectors: 1991–2000*

Jing Cao
School of Economics and Management, Tsinghua University, Beijing, China

Over the past two decades, China has sustained rapid economic growth of 8–10 percent, part of which is attributed to the positive total factor productivity (TFP) growth. However, this extraordinary economic performance has been accompanied by severe environmental pollution and associated health damage. The conventional TFP method is biased in interpreting the progress of technology change because it does not consider non-marketable residues, such as environmental pollution, and, hence, efficiency improvements in terms of pollution abatement technology and environmentally friendly management are ignored. This bias might direct our attention to less efficient use of environmental friendly abatement technologies or send wrong signals to policy-makers. To address this issue, the present paper applies a modified welfare-based green TFP approach, treating environmental damage as non-desirable (negative) residual output. Therefore, environmental efficiency is taken into account to accurately interpret technological progress from a social welfare point of view. Based on a national time-series input–output table, historical capital and labor input data for China and sectoral level air pollution emission data from 1991 to 2000, the empirical results suggest that with increasingly stringent environmental regulations, many pollution intensive sectors, such as electricity, primary metal and chemical industries, improved their environmental efficiency in the late 1990s. However, because of the weak environmental regulations in construction and transportation, and in sectors primarily composed of small private or township and village industrial enterprises, firms within these industries contributed to increasing environmental degradation.

FDI in China: Quality over quantity?

There is a significant body of economic literature looking at various aspects of FDI in China. The standard approach is to examine the determinants of FDI using regional or city level data. Papers examine the role of SEZs, environmental regulations, corruption, networks etc.

In the background and all too often ignored by economists is the role of government policy and the governments attitude towards overseas FDI.

This is an important document and one that economists need to digest and comment on when they next come to analyse the FDI data.

This article from China International Business shows how policy is developing.

Quality over Quantity [China International Business]

The National Development and Reform Commission (NDRC) has just completed the final step in a dramatic revision of China’s foreign investment strategy set forth in November 2006 with the adoption of the 11th Five Year Plan. On November 7, the NDRC released a new and substantially revised “Catalog for the Guidance of Foreign Invested Enterprises,” which became effective December 1, 2007 and replaces the former catalog adopted in 2004. It is crucial for potential investors to understand the drastically changed approach to foreign investment in China embodied by the catalog.

The keystone of the new policy is an emphasis on quality, as opposed to a past emphasis on quantity. The catalog divides foreign investment into encouraged, restricted and prohibited investments. The new catalog greatly expands and clarifies encouraged investments, with the goal of focusing investment in those areas and greatly limiting foreign investment falling into other categories.

There are five key policy approaches embodied in the new catalog:

1. Continued encouragement of investment in all advanced technology and modern manufacturing, and discouraged investment in traditional enterprise sectors. Access to the services business is expanded by adding modern logistics and service outsourcing to the encouraged category. Meanwhile, foreign investment is no longer encouraged in industrial sectors in which China has already mastered basic technical skills or in which China already has adequate facilities in place.

2. Encouragement of investment in sustainable resources and environmental protection. Foreign investors are encouraged to support the newly implemented Circular Economy (i.e. sustainable development) and Cleaner Production policies, as well as invest in the area of environmental protection, sustainable resources and anti-pollution. The 2007 catalog greatly expands the list of encouraged investments in this area. On the other hand, foreign investment in high resource-use, high-energy-use and high-pollution enterprises is restricted or prohibited. In addition, foreign investment in mining of certain rare minerals and energy resources (coal) is also restricted or prohibited.

3. Discouragement of investment in export-oriented enterprises. Due to the current and increasing problem of trade imbalance and excessive accumulation of foreign exchange, investment in enterprises solely devoted to export processing will no longer be encouraged. This is a dramatic reversal of the former policy, which strongly encouraged or even required investment in export-oriented enterprises.

4. Encouragement of coordinated development among regions within China. The emphasis in earlier catalogs on development of China’s western regions has been abandoned. The new Catalog places all the regions in the same footing with respect to encouraged investment.

5. Continued stress on protection of the national economy. China continues to take a cautious approach to the opening of investment in areas that involve national security or sensitive areas of the economy, as reflected in the “prohibited” category of the new catalog. The prohibition of foreign investment in various forms of publication, broadcasting and media production will be of particular concern to many investors. In keeping with changes in technology, investment in internet based businesses is added to the category. The traditional prohibition in investment in golf courses, gambling, pornography and armaments is maintained.

The dry and technical nature of the catalog notwithstanding, the new policy is a radical change to China’s stance on foreign investment. Successful foreign investment in China in the future must work in support of China’s attempts to create a development framework that on the one hand remains open to foreign participation and investment, but on the other grows firmer in its intention to direct foreign investment to promote rather than hinder its own vision of the development of China.

H/T: China Law Blog (again - just catching up on a months posts).

Update:

Here is a recent paper that might be of interest. Journal of Comparative Economics is an average journal. Not great but not too bad either.

How does FDI affect China? Evidence from industries and provinces

Jimmy Rana, Jan P. Voona and Guangzhong Li
Lingnan University, Tuen Mun, Hong Kong
Chinese Academy of Finance and Development, Central University of Finance and Economics, Beijing, PR China
Department of Finance and Economics, Baruch College-CUNY, New York, NY 10010, USA
Received 9 August 2005; revised 25 April 2007.

Abstract

Using the latest panel data from 19 industries and 30 provinces in China, we found it is not true that more FDI necessarily brings about more output growth across the board. Local industries without foreign participation lose while those with some participation gain from the inflow. Provinces in western and central regions lose while those in the eastern and coastal regions appear to be the major beneficiaries. While the net effect of FDI is still positive, the regional disparity has been growing. It casts doubt on the rationale of haphazard and lavish policies to compete for FDI in China. Journal of Comparative Economics 35 (4) (2007) 774–799.

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Plagiarism in Chinese Academia

Although not specifically related to economics, plagiarism by students is a major concern in UK academia.

It appears in China the problem is not only with the students but also some of the academics.

There is an interesting blog run by friends of Fang Shimin aka Fang Zhouzi, who

...has been fighting a lonely crusade exposing the many frauds in China's scientific and academic communities. His efforts has gained as many enemies as friends.

I must say I have had some doubts and always ask my students and colleagues about academic life in China. When discussing publishing in journals one colleague quipped that allegedly some journals pay you to publish in them (the good ones) and the others you have to pay the journal to publish in them (the bad ones). I am sure this is not strictly true.

Does that rule make economic sense?

The only papers that can really be trusted are those in peer reviewed international journals. I suspect that other academics in China already know this.

China's Scientific & Academic Integrity Watch

Some examples of the stories of this blog:

An Academician Who Plagiarized

Yale Professor Criticizes Wide Spread Plagiarism at Peking University

This is an excellent post and contains a letter from the Professor complaining about student plagiarism. It appears to be institutionalised which may explain some of the problems we face in the UK. If a student has done an undergraduate degree in China and comes to the UK to undertake a postgraduate degree it might be argued that certain bad habits travel with them.

H/T to China Law Blog

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Exchange rate update

China Financial Markets has posted a series of excellent articles on Chinese exchange rates.

What is good about Pettis is that he actually knows what he is talking about which makes a change from reading newspaper article and US press releases on this topic.

For example, in the post below he writes:

By now I think the old argument about whether or not the RMB needed to appreciate is more or less over. The mistake made by many was that contrary to the assumptions of many the need for China to appreciate had little to do with the direct impact of the value of the RMB on the relative prices of Chinese exports and everything to do with China’s lack of domestic monetary policy.

I concur entirely although I suspect there is also the fact that China seems social stability and job creation as far more important that US complaints or rising cash surpluses. Moreover, I am not so sure the the "hot money" issue will be such a problem but as Pettis points out, it needs to be carefully watched.

This post is for those needing a quick catch up on current thinking and is a very insightful article.

Is China sneaking in a revaluation? [CFM]

The RMB keeps strengthening, to 7.2948 as of yesterday. This has it rising at its fastest pace since the peg was broken in July, 2005. According to my friends, some local currency traders see the burst of appreciation we have experienced recently as a sort of back-door “revaluation”. By forcing up the currency over the past few weeks at its fastest pace (2.3% in the past two months), the PBoC is effectively engineering a revaluation over several weeks, while seeming not to violate its promise that it would not do so after the first revaluation in July 2005.

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Internal Migration in China

Interesting video discussing the internal migration in China and the difficulties faced by many. The prediction is that there are over 100 internal migrants.

http://current.com/items/76373322_the_big_move_part_2#

This article gives more information on the closure of schools for migrant children. Why are they being shut down? As a negative incentive to migrate? Migrants also pay taxes.

Chinese Migrant Children Face Educational Hurdles


(H/T: China-Crossroads)

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