TIME for a corruption update

Good little corruption story from TIME's China blog.

Whilst there is nothing particularly new here the following quote is of most interest. As far as I am aware there is no evidence of such behaviour although it would make for interesting research.

I was talking last night to a senior international economist in town for meetings with top Chinese practitioners of the dismal science and he said one of them went to pains to stress how worried he was personally about the corruption problem, particularly the prevalence of children of top leaders among the new business elite.

Here is the blog post in full:

Corruption on the Run.......? [TIME]

So Chi Yaoyun, a deputy director general of the Communist Party's Discipline Inspection Commission, says corruption is declining. Taking reporters on a tour of the Commission's new building in Beijing, the official who is one of those charged with keeping Party members in line and graft-free, apparently admitted there was a problem but said the Party was dealing with it firmly. I'm not sure what he based his cheery estimate on, but it certainly goes against anecdotal evidence. And the only statistical evidence I know of --about 30,000 arrests for corruption a year-- point to no change. Actually, corruption is probably the biggest challenge to both China's Communist rulers staying in power and the continued astonishing growth of the country's economy, two things which are inextricably linked. I was talking last night to a senior international economist in town for meetings with top Chinese practitioners of the dismal science and he said one of them went to pains to stress how worried he was personally about the corruption problem, particularly the prevalence of children of top leaders among the new business elite. I wonder whether anyone has done the Green GDP style calculations for the cost of corruption to the economy. Between the environmental destruction (calculated to cost 10-12 pc of GDP a year) and the corruption tax, China's economy is probably actually contracting but these are bills that won't have to be paid for a while.

Anyway, my economist friend (and I am being discrete here, not coy) said that despite all the rhetoric about the rural urban income gap (3-4 times, depending on who you believe), he said he thought it was the urban income gap that was the real danger to China. "Not even rich societies like America have managed to avoid having a large underclass of urban poor and China will be no exception. But if the gap gets too big and you have these young guys driving around in their Ferraris flaunting it in front of the permanently under- or unemployed urban poor, it could be very dangerous for social stability." One more thing for President Hu Jintao to worry about, poor fellow. It's a wonder he can sleep at night.

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IP in China - record fine for French company

Today's FT has an interesting article about patent infringement under Chinese Law. Historically, IP enforcement has been weak and only small fines have been levied. However, things appear to be somewhat different when the guilty party is foreign.

Whilst this individual case holds only minor interest the general trend and IP protection in China is an important one.

As an aside, the current iMEGA vrs US government online gaming row may turn on China's threat to weaken copyright law. This is a complex case but the rest of the world is seeking up to £100 billion from the US for violating WTO rules. If no compensation is forthcoming China may retaliate. This would bring other US lobby groups into play that would overpower the current anti-gambling lobby. Hollywood and the software industry have considerable clout. See Netbetblog for the full story.

China fines Schneider $45m

A Chinese court has ordered France’s Schneider Electric to pay a Chinese company $45m in damages for infringing its patent, the largest amount ever awarded in an intellectual property case in the country.

Intellectual property violations are one of the main sources of friction between China and the rest of the world, and in the vast majority of IPR cases involving foreign players, the Chinese company is the defendant.

The Intermediate People’s Court in Wenzhou city, eastern Zhejiang province, told Schneider to stop making five types of miniature circuit-breakers, which it ruled were based on patents held by low-voltage equi­p­ment maker Chint Group of Wenzhou. The court also awarded Chint Rmb334,869,872 ($44.6m) in damages.

“This is the biggest amount by far granted in an intellectual property case in China,” said Larry Sussman, partner at O’Melveny & Myers lawyers in Beijing. “It’s a startling development and could mean we are embarking on a new path in China.”

Lawyers say China is notable for awarding tiny sums in IP rights cases and while there has been a number of high-profile rulings in favour of foreign companies, the wins have been largely symbolic and the am­ounts awarded inconsequential.

The fact the ruling was made by the hometown court of the plaintiff could have affected the outcome, lawyers say.

Schneider said yesterday it was “disappointed” by the verdict, but intends to appeal and is challenging Chint’s patents in a separate case. The company “strongly contests the validity of Chint’s utility model” and “will continue working closely with the related Chinese judicial authorities to clarify the dispute”. It asserts it has been using the technology in the disputed circuit-breakers since the early 1990s, before Chint’s patent applications in 1999.

In spite of the record size of the damages a Chint spokesman said yesterday the ruling was “very normal in the process of the law” and showed the company was justified in protecting its intellectual property rights.

The damages were based on Schneider’s profits from sales of the products from August 2004 to July 2006, according to a copy of the verdict obtained by the FT. Last month the Supreme Court in Beijing upheld the Zhejiang Provincial High Court ruling ordering Chinese motorcycle manufacturer Zhejiang Huatian to pay Rmb8.3m to Yamaha of Japan for infringing its trademark. That was the largest pay-out to a foreign company in an IP case in China and was seen as a watershed, said August Zhang, a lawyer at Rouse & Co.

Why do the Chinese consume so little?

Interesting paper from the IMF attempting to explain the low level of consumption in China (relative to exports).

Such a pattern leaves China open to external macroeconomic shocks and the Chinese government is unlikely to change its exchange rate policy unless domestic consumption increases. Of course, saving will still be an important part of Chinese behaviour until the social security system improves. This paper suggests that surprisingly that this second reason is of minor importance.

I will need to read the paper carefully to see if the authors make a convincing case.

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"Explaining China's Low Consumption: The Neglected Role of Household Income"
IMF Working Paper No. 07/181


Author: JAHANGIR AZIZ
International Monetary Fund (IMF) - Asia and
Pacific Department
Email: jaziz@imf.org
Auth-Page: http://ssrn.com/author=100768

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

Full Text: http://ssrn.com/abstract=1007930

ABSTRACT: The Chinese government has recently focused on the need to increase consumption to rebalance the economy. A widely held view is that despite China's remarkably high growth, the share of consumption in total expenditure has been low and declining due to high and rising saving rate of Chinese households as uncertainty over provision of pensions, and healthcare and education costs have increased since the mid-1990s. This paper finds that the rise in saving rate has been a minor factor. Much larger has been the role of the declining share of household income in national income, which has occurred across-the-board in wages, investment income, and government transfers. The paper finds that financial sector weaknesses, by restricting firms' access to bank financing for working capital, have played quantitatively a major role in keeping wage and investment income shares low and on a declining trend.

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From Exports to Domestic Consumption

IPE Zone brings together a number of papers looking at China's rebalancing act as it moves from exports to domestic consumption.

Articles on China's Rebalancing Act

The September issue of the IMF publication Finance & Development has a whole bunch of articles on the need for Chinese rebalancing from investment and exports to domestic consumption. This is a longstanding refrain. Premier Wen Jiabao, for instance, has stated that China's current growth path is "unstable, unbalanced, uncoordinated, and unsustainable." Yes, we keep hearing this, but is anything different happening? I am afraid that I see very little change or improvement. Nevertheless, this bunch of articles from Finance & Development makes for interesting (and relatively light) reading:

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Inflation in China - a global issue?

Good summary of the causes and consequences of an increasingly inflationary China.

Thomas Pally has nailed down the feedback mechanisms at work and also highlights the influence of stock and property asset bubbles that are working against current Chinese efforts to curb inflation.

It is inconceivable that China is not aware of these issues - the question then is how much more will the currency appreciate and will it be too little too late.

China's inflation policy stirs the world [Asia Times Online]

China's government recently announced that inflation hit a 10-year high of 6.5% in August. This increase in inflation is directly related to global trade imbalances, yet China is trying to control inflation without addressing that problem.

That carries two consequences. First, it is doubtful this strategy can work, which likely signals rising Chinese inflation. Second, the strategy aims to shift the onus of global trade adjustment on to the United States, which may come back to haunt China and the global economy.

China's current inflation is a textbook case of prolonged undervaluation of a fixed exchange rate in tandem with export-led growth. As such, significant exchange rate revaluation should be a central element of its anti-inflation policy.

However, instead of making such an adjustment, China's authorities are hoping to control inflation by exclusive reliance on tighter domestic monetary policy. It is doubtful this strategy can succeed because it leaves intact the inflationary impulse from China's trade surplus and undervalued exchange rate.

One important contributing factor in China's inflation is the rise in global commodity prices, including oil and base metals, which are now feeding through into prices. Food prices are also on the rise because of increased global prices for wheat and corn. Furthermore, China has been hit by a virulent outbreak of swine flu that has decimated its hog population, driving up the price of pork, which is China's favored meat.

In coastal areas, which have been the hub of China's export-led growth, wages have started going up in response to rising living costs and to the gradual elimination of extreme surplus-labor conditions.

Most important, China is beset by significant asset-price inflation that borders on an asset-price bubble. This asset-price inflation is the product of massive expansion of the money supply caused by China's trade surplus and foreign-investment inflows.

Dollars earned by Chinese exporters have flowed back to China and been converted into local money by the central bank, which has bought them at the fixed exchange rate to prevent appreciation.

Holders of these money balances have then bought stocks and real estate to gain higher returns and to protect against potential inflation. This has driven up real-estate prices, triggering a massive construction boom that has in turn caused inflation.

The implication is clear. China is suffering from imported inflation caused by higher global commodity prices, domestic-demand inflation caused by excess demand in export industries, and asset-price inflation due to an increased money supply caused by China's trade surplus.

The undervalued exchange rate is a key culprit, since it contributes to excess demand in export sectors, and it also drives the money-supply increase via the trade surplus - which has hit record highs in 2007. That suggests significant exchange-rate revaluation should be a central component of China's anti-inflation strategy.

Moreover, revaluation would also diminish the impact of global commodity-price inflation because commodities are priced in US dollars, so that a revaluation lowers their domestic price in yuan.

Instead, China has chosen to rely exclusively on monetary tightening, raising interest rates and reserve requirements on bank deposits. This strategy is unlikely to work. First, there is already significant asset inflation and extensive debt-financed speculative investment, which means the monetary authorities are constrained from sufficiently meaningful tightening for fear of triggering a financial collapse.

Second, raising reserve requirements on bank deposits lowers the return on deposits and makes them less attractive. That provides an incentive for depositors to spend their money or invest elsewhere, which spurs more inflation.

Third, and most important, continuation of China's undervalued exchange rate means continuing trade surpluses and large inflows of foreign direct investment, which means further monetary expansion in China.

Putting the pieces together, the picture is one of rising Chinese inflation, and with that comes the risk of inflation-triggered social and political problems. In this regard it is worth recalling that the Tiananmen Square disturbances of May 1989 were in part caused by industrial-worker unrest over erosion of living standards by inflation.

As for the global economy, China's anti-inflation policy and continued refusal to adjust its exchange rate place the burden of trade-imbalance adjustment squarely on the US. This adjustment will likely happen via recession, and there are signs that process may already be under way. This is a sub-optimal approach that could injure all.

Thomas Palley is founder of the Economics for Democratic and Open Societies Project.

Thomas L. Friedman on China, capitalism, democracy and the environment

Interesting article from Thomas "Flat Earth" Friedman.

A good read. There is nothing particularly new in here - but it is useful to have it reiterated that what the Chinese government wants is steadily increasing GDP. The environment, whilst of concern, is of secondary (at best) importance.

This is not a surprise. Stability, both economic and political, is required before China can turn to seriously addressing the pollution issue.

It was interesting to note that the recent "no car day" in Beijing was a total failure. What does this say about the current influence of the Chinese public? 30 years ago you could guarantee that there would not have been a car on the road.

Economically speaking, the Kuznet's curve should kick in when China becomes rich enough (the richer a country gets the higher the demand for a clean environment). It could however still be some way off. The world may not be able to wait.

China in Three Colors [New York Times]

After a week of meetings with Chinese energy, environmental and clean-car experts, I’m left with one big, gnawing question: Can China go green without going orange?

That is, can China really undertake the energy/environmental revolution it needs without the empowerment of its people to a whole new degree — à la the Orange Revolution in Ukraine in 2004? The more I see China wrestling with its environment, the more I’m convinced that it is going to prove much, much easier for China to have gone from communism to capitalism than to go from dirty capitalism to clean capitalism.

For China, going from communism to its state-directed capitalism, while by no means easy, involved loosening the lid on a people who were naturally entrepreneurial, risk-taking capitalists. It was tantamount to letting a geyser erupt, and the results of all that unleashed energy are apparent everywhere.

Going from dirty capitalism to clean capitalism is much harder. Because it involves restraining that geyser — and to do that effectively requires a system with some judicial independence, so that courts can discipline government-owned factories and power plants. It requires a freer press that can report on polluters without restraint, even if they are government-owned businesses. It requires transparent laws and regulations, so citizen-activists know their rights and can feel free to confront polluters, no matter how powerful. For all those reasons, it seems to me that it will be very hard to make China greener without making it more orange.

China’s Communist Party leaders are clearly wrestling with this issue. I could hear it, feel it and see it. I could hear it while interviewing government officials. They’ve always wanted a steadily rising G.D.P., which is essential for China’s stability and for the legitimacy of the ruling Communist Party, whose abiding ideology is “G.D.P.-ism.”

But more and more I heard these same officials now saying they want a better environment and a higher G.D.P., because the air has become so filthy here, and the damage to China’s health, rivers, landscape, glaciers and even G.D.P. has become so severe, that the legitimacy of the communist regime, for the first time, is in some way dependent on making the air cleaner. And China’s leaders know it.

For now, though, they want to address this problem without having to change the basic ruling system of the Communist Party. They want to be green and red, not green and orange. I could feel it the minute I arrived.

“Hey, is it a little warm here in your office, or is it just me?” I found myself repeatedly asking in Beijing. No, it wasn’t just me. In June, China’s State Council dictated that all government agencies, associations, companies and private owners in public buildings had to set air-conditioning temperatures no lower than 26 degrees Celsius, or 79 degrees Fahrenheit. Air-conditioning consumes one-third of the energy demand here in summer.

The government just ordered it from the top down. Sounds effective. But then you pick up the Shanghai Daily and read: “More than half of the city’s public buildings have failed to obey power-saving rules setting air-conditioning at 26 degrees Celsius, according to local energy authorities.” Hmmm — seems to be a little problem with follow-up.

In 2005, China’s leaders mandated a 20 percent improvement in energy productivity and a 10 percent improvement in air quality by 2010. You can see why — or maybe you can’t.

I was at the World Bank office in Beijing, meeting with a green expert, and outside his big bay window all I could see through the brownish-gray haze was the gigantic steel skeleton of the new CCTV skyscraper — spectacular six-million-square-foot headquarters reaching to the heavens — one of 300 new office blocks slated for Beijing’s new Central Business District.

I play a mental game with myself now as I am stuck in traffic in Beijing. I look at the office buildings I pass — which are enormous, energy-consuming and architecturally stunning — and I count the ones that would be tourist attractions if they were in Washington, but here in Beijing are just lost in the forest of giant buildings.

And that brings me back to China’s leaders. Right now they want it all — higher G.D.P., greener G.D.P., and unquestioned Communist Party rule. I don’t think you can have all three. I also don’t think they are going to opt for democracy. I am not even sure it is the answer for them right now. So they are seeking a hybrid model — some new combination of red, green and orange. I hope they find it, but right now the vista is mostly an ugly shade of brown.

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Corruption crackdown

One of the most significant economic problems facing continued Chinese development is the level of corruption (real and perceived).

The Chinese government is committed to tackling corruption at all levels. Previous crackdowns have had limited short term success before levels pick up again.

Today's news I imagine is China putting a positive spin on the most recent crackdown.

China Exclusive: 140,000 Chinese officials voluntarily turn bribes over to higher authorities [People's Daily]

A total of 140,660 Chinese officials have voluntarily turned bribes they have accepted over to higher authorities in past five years, China's disciplinary watchdog said here Saturday.

The bribes, including cash, marketable securities and pay orders, were valued at about 676 million yuan (89.18 million U.S. dollars), according to the Central Commission for Discipline Inspection (CCDI) of the Communist Party of China.

During the same period, 6,828 officials have been punished for taking cash, marketable securities, pay orders, gift moneys by violating government anti-corruption regulations, while 16,411 officials have been punished for gambling, sources with CCDI said.

China has beefed up its fight against corruption. During this period of time, China has punished 16 ministerial-level or higher officials for "serious corruption" including Chen Liangyu, former Shanghai Party Chief,Zheng Xiaoyu, former head of State Food and Drug Administration and Qiu Xiaohua, former head of the National Bureau of Statistics.

At the same time, China introduced more approaches to tackle the thorny problem. Besides the government investigation and people's tips, China have encouraged people to confess their wrongdoings and turn over the bribes they have accepted.

CCDI issued a set of regulations targeting corruption that took effect on May 30, urging officials who have traded power for money to confess their crimes before the end of June in return for leniency.

Just in one month alone, 1,790 persons voluntarily reported their misconduct, involving 77.89 million yuan (10.2 million U.S. dollars), Gan Yisheng, CCDI spokesman, said at a press conference.

Gan said the regulations were effective since they laid the basis for the government to investigate cases involving violation of party discipline and they also provided an opportunity for those who had made mistakes to make corrections.

The penalties for corruption are still extremely severe as this article shows:

Former bank official sentenced to death for corruption

Huang Jinjiang, a former bank official in southwest China's Sichuan Province, has given death sentence for accepting bribes, local court sources said on Saturday.