Tuesday 27 March 2007

China's Labour Costs: How Low Can You Go?

Hot on the heels of my post on "The China Price" comes this new article in the World Economy (an excellent academic economics journal dealing with globalisation issues including a good selection of empirical and policy papers).

Note again that the exchange rate gets a mention - low wages as previously mentioned are not the sole driver of China's growth in exports and manufacturing production.

Library registration required to get full text PDF.

Just How Low are China's Labour Costs? by Janet Ceglowski and Stephen Golub

This paper provides a new perspective on Chinese international competitiveness in manufacturing using relative unit labour costs. We find that Chinese unit labour costs are about 25–40 per cent of US labour costs. They are also low relative to costs in the EU, Japan, Mexico, Korea and most other newly industrialising countries. However, China's relative unit labour costs indicate a substantially smaller cost advantage than that implied by a comparison of wages alone. China's cost advantage derives from large currency devaluations that preceded the establishment of a de facto peg around 1995, and rapid productivity growth in the period since 1995.

Saturday 24 March 2007

China and "New Development Economics"

Abhijit Banerjee posts on the future of development economics. This is an excellent article for anyone interested in Development Economics, more specifically the issue of "property rights".

The China quotes have been extracted (from the Boston Review):

Inside the Machine: Toward a new development economics

On the topic of WHY foreign direct investment in China is so high:

Is it all a matter of luck? Perhaps people are investing in China because everyone else is. Or is it something deeper? After all, despite being run by a party that calls itself communist, China offers a pro-business environment, security of property, and a docile labor force. Is this what investors are looking for? Or is it China’s ability to produce a seemingly endless supply of competent entrepreneurs who run China’s industry (including most of what foreigners nominally run)? Or should we entertain an altogether more daring possibility: that China’s is a healthy and relatively well-educated labor force, tolerant of the inequalities that markets produce because it has known equality—the accidental gift of 30 years of communism?

The truth is that the Chinese machine has so many potential drivers that it is anybody’s guess why it runs. Moreover, no one really knows why all the forces that should have pushed China the other way—a corrupt and opaque system of governance, a decrepit banking system, dwindling natural resources—have not done more damage. But, then, explaining what happens in a country by examining it in isolation is always an unfair challenge. It is easier and also more useful to look for patterns that hold across a large number of countries.

"Chindia" - China and India's Growth and the Environmental Impact

This post is simply a direct link from Ecological Economics. No further comments required - the links speak for themselves plus I am still suffering from post-censorship shock (see previous post).

Willem Buiter's Doubts on Continuing China/India's Meteoric Rise

After airing his positive Morning Coffee spin on China and India's remarkable growth, Brad DeLong highlights Willem Buiter's pessimism re: China and India's recent stellar rise. Buiter identifies financial "credit boom" risks, political risks, and most importantly environmental risks going forward. In follow-up commentary, DeLong adds a fourth, intertwined with Buiter's first: "The People's Bank of China is acting like the world's most enormous hedge fund in reverse."

Willem Buiter
[comment following Ft.Com Economists' forum post, 3/20/07]
Both India and China are in the terminal stages of a credit boom…. If the monetary and fiscal authorities act in time (they appear to be well behind the curve in both countries) and if they have the right instruments and the political will and freedom to use them (doubtful in both countries) the credit boom can end with a whimper. A hard landing seems more likely, however.

Second, a domestic political question mark… political risk to growth is seriously under-priced by the domestic and global communities of investors. In China economic liberalisation is proceeding side by side with continued political repression through the monopoly on political power of the Communist Party…. The sustainability of such a social-political-economic configuration has never been tested. India has had an open and representative form of government for sixty years. I believe this to be an important socio-political safety valve….

Third and probably most importantly, an environmental question mark. Environmental supply-side constraints on growth in Chindia… invalidates the growth accounting exercise by Bosworth and Collins, reported by Martin [Wolf]…. [O]utput is seriously mis-measured and a key input - the services yielded by the stock of environmental capital - is ignored completely. For Chindia, this omission matters even in the medium run…. It is the local (national) natural resources of clean fresh water and fertile land (some would add clean air as well) that are not only important domestic 'consumer durables' but also key inputs into the production of the goods and services that are captured by conventionally measured GDP indices…. The water constraint is likely to be the first one to become binding in both China and India, certainly within 10 years. It will impair even the production of those goods and services included in conventional GDP measures….

Chindia urgently needs to re-orients its growth policies towards environmental sustainability. Pricing all water and power use (including agricultural) at long-run marginal social cost would be a good start. Without such a radical re-orientation, the 21st century may well become the century of China and India for a very different reason from the one prophesied by the current uncritical Chindia cheerleaders…

Brad DeLong, again in follow-up comments to the FT.com Economists' Forum post, says:

Brad DeLong
I would add a fourth worry, in addition to the environmental, infrastructure, education, and political legitimacy worries that have already been aired. The People's Bank of China is acting like the world's most enormous hedge fund in reverse. Unless there is significant inflation in China or a rapid reversal of global imbalances, the PBoC is likely to have to write off the largest amount of capital of any institution anywhere, anytime, anyhow—with either China's savers or China's taxpayers holding the bag. The political consequences of that may be a further important source of risk.

Finally, a DeLong reader points to Bill McKibbon's recent Mother Jones commentary, Reversal of Fortune, and highlights:

Bill McKibbon
… If we do try to keep going, with the entire world aiming for an economy structured like America's, it won't be just oil that we'll run short of. Here are the numbers we have to contend with: Given current rates of growth in the Chinese economy, the 1.3 billion residents of that nation alone will, by 2031, be about as rich as we are. If they then eat meat, milk, and eggs at the rate that we do, calculates ecostatistician Lester Brown, they will consume 1,352 million tons of grain each year—equal to two-thirds of the world's entire 2004 grain harvest. They will use 99 million barrels of oil a day, 15 million more than the entire world consumes at present. They will use more steel than all the West combined, double the world's production of paper, and drive 1.1 billion cars—1.5 times as many as the current world total. And that's just China; by then, India will have a bigger population, and its economy is growing almost as fast. And then there's the rest of the world.

Trying to meet that kind of demand will stress the earth past its breaking point in an almost endless number of ways ….

So many environmental concerns, so little time!

China Economics Blog Blocked in China

It was rather a shame yesterday to discover that "China Economics Blog" has been blocked in China.

The aim of this blog is to report on economics issues and to actively help Chinese students considering further education in the UK (by means of supplying links to University rankings, MSc Economics courses, British Council etc.)

Whilst we acknowledge that we may cover subjects that are politically sensitive such as corruption and environment degradation we aim to report the economics and not the politics in which we aim to maintain a neutral position.

This website seems to be the place to test whether your site has been blocked or not.

The Great Firewall of China

Putting in my website confirmed my initial fears. Of course there is the problem of a loss of potential readers but more importantly this censorship, by removing access to important information on students future educational choices, has a cost in the long run to the Chinese economy (a very small one granted but you can see the point) and to the individual student.

Any information on how or if such blocking is ever lifted would be useful or any other comments on those sites that have suffered a similar fate.

Although I will not say which ones, slightly less than half of my China Blog Roll are currently blocked. How did the others escape? Are google blogspot blogs more liable to be blocked (it would appear so)? Who grassed me up ;-)

This article from earlier in the month may provide some explanation:

China ramps up blog censorship
China will intensify controls of the growing numbers of bloggers using the internet to lay bare their thoughts, politics and even bodies, the country's chief censor has announced.

The director of China's General Administration of Press and Publication, Long Xinmin, said the administration was forming rules to further regulate internet publishing, including the country's legions of bloggers, the Beijing Morning Post reported on Tuesday.

"We must recognise that in an era when the internet is developing at a breakneck pace, government oversight and control measures and means are facing new tests," Long told members of China's national parliament on Monday, the report said. Long singled out bloggers as one challenge.

Long said "citizens' freedom of expression would be fully protected".

But China's restless blogging population has been a headache for the ruling Communist Party, which has sought to extend long-standing censorship to the country's fast-growing internet.

By last September, the number of blog sites in China reached 34 million, a 30-fold increase from four years before.

Chinese bloggers have detailed their political views, hobbies and grudges. One famed pioneer, Mu Zimei, a young journalist, attracted a storm of publicity in 2003 by chronicling -- names and all -- her complicated love life. Another blogger, calling herself Liu Mangyan, published nude photos of herself.

More sober-minded bloggers publish combative investigative journalism and punditry on current affairs.

The press and publishing administration and other authorities would be casting new rules to cover internet "publishing activities", Long said.

"The publishing administration authorities have been paying attention to this new mode of Internet dissemination," Long said.

China does not lack rules controlling the Internet; an army of competing agencies often issue regulations.

Last year, China's Ministry of Information Industry issued rules on Internet news content that analysts said was aimed at extending regulations governing licensed news outlets to blogs and Internet-only news sites.


UPDATE: It appears that China has blocked all "blogger" sites and that now we are back up and running in China. It is good to see sense prevail. I assume this means that google have been on a charm offensive.

Thursday 22 March 2007

China: purchases of yen not a real option

I have been reading quite a lot recently about Professor Peter Navarro (University of California), specifically his Economist's Voice article "Deconstructing the China Price" - [access free I think, certainly it is for academics]

I was about to post a review on this article - which is well worth reading - when I noticed that Navarro had an letter to the FT published today which also makes excellent reading on the whole "China Surplus" and what to do with it question. A brief article review is now included below.

FWIW I tend to agree with this letter wholeheartedly.

China: purchases of yen not a real option
Sir, Fred Bergsten's recommendation that China should diversify its foreign currency reserves into the Japanese yen shows a fundamental misunderstanding of the current monetary policies of both the Chinese and Japan ("The yen beckons China's dollar billions", March 13).

China directly manipulates its currency by maintaining a fixed dollar-renminbi peg through the recycling of large sums of US dollars back into the US bond market. The broader goal is to sell as many exports as possible to the US so as to create jobs in China, where the unemployment rate remains stubbornly high. As a defensive measure, Japan, as well as Taiwan and South Korea, must likewise manipulate their own currencies in order not to lose competitiveness or market share to China. However, in a floating exchange rate system, Japan achieves manipulation indirectly through maintaining artificially low short-term interest rates and tacitly supporting the so-called "carry trade", which helps to keep the yen low.

Any attempt by China to prop up the yen through currency purchases would be interpreted as a wildly provocative and mercantilist act by the Japanese as it would enhance China's ability to take US market share from Japan. The more likely scenario is that China will increasingly use its foreign currency reserves to buy equity shares in US companies and, over time, the US companies themselves. By gaining control of US companies, China will therefore gain more control over the decisions of US companies to offshore and outsource to China. Such a strategy will also accelerate technology transfer from the US to China.

Where Dr Bergsten does get it right is in his insistence that China let its currency "rise to a level that would no longer require intervention". In the absence of such a policy shift by the Chinese, the road ahead will be bumpy for both the US and Japan.

Navarro also has a project looking at the China Price - HOW can China undercut most other manufacturing countries by up to 50%?. This is something I want to return to, suffice to say, they identify 8 drivers of the Chinese low price for manufactures:

1. low wages (a large, disciplined (crucial) and generally well educated population).
2. network clustering

These 2 alone account for 55% of the China - US cost difference. So where does the rest come from?

3. export subsidies (17%)
4. undervalued currency (11%)
5. piracy (9%)

The rest include lax environmental regulations and health and safety (small effect perhaps surprisingly so) and FDI.

The surprise perhaps is the extent to which piracy is playing such a large role whilst the currency effect may not actually be that large - even if the currency were allowed to appreciate it suggests that China's comparative advantage would remain a strong one.

The West and the rest of Asia should therefore stop fixating on this issue and to try and address some of the other points - such as the positive clustering affect and the education of its population.

A full PDF of the report can be found here:

China Price Project

Peter Navarro's website is here (a bit of an ugly entrepreneurial site though).

Peter Navarro

Wednesday 21 March 2007

The Pollution induced death of the Yangtze River

Quotes taken from:

WWF Says Pollution, Dams Threaten Rivers

China is already suffering from serious water shortages and desertification of certain regions. These quotes give a little flavour of the problems caused by China's break neck growth.

The Yangtze River gets more than half of China's industrial waste and sewage.

In China, pollution in the main stem of the Yangtze River has increased by more than 70 percent over the last 50 years. Almost half of the country's industrial waste and sewage is discharged in the river, the report said.

Garbage heaps, pig waste and discharge from factories, hospitals and mines -- possibly including radioactive waste -- lie at the bottom of the reservoir at the Three Gorges Dam, the world's largest hydroelectric project, the WFF said.

We will post regualary on the impact of economic growth on China's environment. For numerous articles on this topic see the China category on "Globalisation and the Envrionment blog".

Breaking Environmental news:

US's Paulson Sees More China Environment Talks

LIMA - US Treasury Secretary Henry Paulson said on Wednesday discussions about ways to improve China's environment will become a more prominent part of his US-China "strategic economic dialogue".

Paulson told reporters on a visit to Peru that a key focus for such discussions is clean coal technology that could help slow the rapid growth of carbon and greenhouse gas emissions from China's power generation sector.

"This is a key part of our dialogue and I think it will be increasingly clear to you," Paulson said.

The dialogue was launched in December to bring together top US and Chinese economic and finance officials, partly as a means to persuade Beijing to be more flexible in the valuation of its currency, the yuan .

But Paulson has also used the dialogue as a forum for promoting liberalization of China's financial services sector to open it to more foreign competition.

He said China in 2009 will produce more greenhouse gas and carbon emissions than any other economy and is the only one where the growth in such emissions is exceeding the nation's overall economic growth. Much of that is due to coal-burning power plants.

US President George W. Bush has taken a particular interest in improving the health of China's environment.

"Whenever I talk with him about the strategic economic dialogue in China, he pushes me pretty hard in terms of getting some results there (on the environment)," he said.

But Paulson also said that economic growth, globally, was important to sustaining the environment. Poorer countries that fall on hard times economically tend to put more pressure on their environments, he said.

Tuesday 20 March 2007

Is China the environmental "Elephant in the Room"?

This post from John Elkington and Jodie Thorpe posted on ChinaDialoguetells us nothing new. However, as an overview of the general issues of climate change and China's place in that debate it is a useful starting point (with some good links).

A few choice paragraphs have been quoted here but the article is worth reading. For what it is worth I think that China is being taken seriously but I believe this article has a point - there are so many column inches and air time given to how us, as individuals, can save the planet by changing to energy saving light bulbs - many commentators are missing the point - such actions will be trivial if China and India continue on their current growth and energy consumption paths.

Does this mean we throw our hands up and give in?

Climate’s elephant in the room

The “elephant in the bedroom” is a phrase used to describe a problem that is looming large, but is too overwhelming to be engaged—and is therefore ignored. As the climate change debate goes into overdrive, one elephant in the global bedroom is China. The rate of growth in China’s energy demand is so intense that it threatens to wipe out much of what the rest of the world does. At the same time, however, there are those who predict that China, because its problems are likely to become so severe, will become an incubator for solutions that can be applied worldwide.

China and India, for various reasons, have been blowing hot and cold as they talk about tackling climate change, but both want accelerated transfers of clean technology to their emerging economies. Zhang Xiaoqiang, vice chair of China's National Development and Reform Commission, emphasized this need when he told one Davos session that cement producers in his country are only about half as energy efficient as Western competitors—at a time when the country uses something like 40% of world cement production.

More information on China and the Environment can be found on the "Globalisation and the Environment" blog (click the China category).

Monday 19 March 2007

Interest rates rise in China

At the weekend the Chinese government increased lending and deposit rates by 0.27% to 6.39 per cent for the benchmark one-year lending rate while the deposit rate would be set at 2.79 per cent.

What is interesting is that the PBoC increased the minimum reserve requirement that banks must leave on deposit. This is used to control the money supply by restricting the bank lending multiplier - the more that a bank has to keep on reserve the less it can lend out and in theory, the less that it spent (thus slowing down an overheating economy). Such methods are little used in the West where reserve requirements have generally been decreasing. One reason is that banks usually find other ways of lending out money if the demand is there (Goodhart's Law).

The issue, is how credible are the PBoC policies? They seem to be making a drive to increase their credibility in the eyes of the world's financial markets by acting decisively and quickly.

The question is how many more rises will be needed and what will happen to growth? In theory an increase in the rate of interest will attract financial flows and push up the exchange rate...

See the FT article for details:

China raises interest rates

The People’s Bank of China raised lending and deposit rates by 0.27 percentage points at the weekend, the latest in a series of tightening measures by an increasingly activist central bank.

The PBoC said in an announcement late Saturday that the benchmark one-year lending rate would be increased to 6.39 per cent while the deposit rate would be set at 2.79 per cent.

The rate hike went into effect on Sunday and was the third increase in less than a year. The PBoC has also lifted the reserve requirement - the percentage of funds commercial banks must leave on deposit with the authorities - twice this year.
The decision to raise rates underlines the government’s concern about the country’s torrid economic growth, specifically excessive liquidity in the financial system and mild inflationary pressures.

The PBoC said in a statement that the move was necessary to balance growth, stabilise prices and improve the overall structure of the economy.

China’s leaders have suggested on many occasions that they are now focused on the quality, rather than just magnitude, of growth. Stimulating domestic consumption is another key goal.

Beijing uses a combination of monetary and administrative curbs to regulate its economy. In recent years, growth has mainly been driven by fixed-asset investment and exports.

Gross domestic product expanded 10.7 per cent last year, the highest rate in over a decade.

The weekend’s rate hike suggests policymakers are increasingly “willing to use market-based measures to manage the economy, and also able to tighten policy when the first signs of overheating begin to emerge, much earlier and more decisively than before,” said Hong Liang of Goldman Sachs, in a research note.

“This move will help further strengthen the central bank’s credibility, and help improve investors’ confidence in the duration of the cycle,” added Ms Liang.

Wen Jiabao, premier, said at his annual press conference on Friday that China’s economic development was becoming unsustainable. “Looking into the future, it is not a time for complacency,” Mr Wen said. “My mind is full of concerns”

The premier admitted credit issuance and investment had been excessive and noted China’s imbalance of trade and international payments. China’s trade surplus reached $23.8bn last month, the second highest monthly total on record.

Fixed-asset investment growth in cities has been slowing slightly this year compared to 2006, but money supply growth is at a six-month high and consumer inflation reached 2.7 per cent in February.

Many economists expected the latest rate rise and believe more could follow in the months ahead. The central bank raised rates in August and April of last year.

Sunday 18 March 2007

Studying in the UK: Cost of Accommodation

The cost of taking an undergraduate or postgraduate degree in the UK is not cheap.

We have covered the cost of fees in a previous post (for MSc Economics):

"MSc Economics": How much does it cost?

The fees noted above are also relevant for the majority of University fees although Economics and finance degrees are often more highly priced.

In this post we consider accommodation costs.

In a recent article in the Mail on Sunday it was stated that the average weekly rent is now £82, or around £3,190 a year (this may be higher for postgraduates who have to live over the summer). Multiply £82 by 52.

For London the average price is over £100 a week or £4,038 a year.

One reason for the steep increases in recent years is the move into the University sector by private providers. There is no doubt that the quality of accommodation is good and will include en suite and broadband Internet connection (for free) and basic satellite television.

For other posts on studying in the UK see:

World University Rankings: Rankings and text

Which UK University to study in? "Academic Ranking of World Universities"
MSc Economics: Google listings and sponsored advertising
Studying "Economics in the UK": General Links

China's Corporate Bond Market: A Solution to Inefficient and Underdeveloped Financial Markets?

Good post over at Economist's View discussing China's inefficient and underdeveloped financial system and the subsequent inefficient allocation of capital. Does the answer lie in firms issuing corporate bonds to raise funding? It would certainly sidestep the banking system.

Galina Hale (San Francisco Fed) argues that the banking system needs to develop BEFORE the corporate bond market can develop.

FRBSF: Prospects for China's Corporate Bond Market

Linking to the original article (includes figures):

Prospects for China's Corporate Bond Market

While China's economic reforms have engendered much success since they were undertaken in the late 1970s—real GDP growth has averaged roughly 10% per year over the period—the development of its financial system arguably lags behind. Very high investment (over 40% of GDP) has fueled much of the recent growth, but, as some claim, it also has generated excess capacity in the economy, a sign of inefficient allocation of capital. With the saving rate in China even higher than its investment rate, the development of a financial intermediation system that would allow more efficient allocation of capital is key to sustaining China's economic growth.

Currently, China's banking system is the main source of external corporate financing, and much has been done to reform it through the transfer of nonperforming bank loans to specialized asset-management corporations and through initial public offerings by five of the six largest banks. However, as Dobson and Kashyap (2006) argue, it is far from being able to provide efficient capital allocation, because it still lacks incentives for profit-maximizing lending, it is short on competent risk analysts, and it frequently acts as the financial agent of the government, directing government funds to inefficient state-owned enterprises (SOEs).

An alternative way for firms to borrow is by issuing corporate bonds. However, China's corporate bond market is currently very small. Is it likely that the bond market can develop as an alternative to bank financing for private firms? This Economic Letter argues that, while demand for corporate bonds is likely to rise, both theory and other countries' experiences suggest that the supply of corporate bonds is not likely to grow until the state of the banking system improves. Thus, the bond market should not be viewed as a potential substitute for bank financing. Rather, improvement in the banking system will be needed before China's corporate bond market can develop.

How big is China's corporate bond market?

Figure 1: Bond market structure in ChinaWhile China's bond market is 27% of GDP, about the same as in other East Asian countries (excluding Japan), most Chinese bonds are issued by the government and government-owned policy banks. As Figure 1 shows, only 6% of bonds, including commercial paper (CP), are issued by nonfinancial enterprises (including SOEs). The corporate bond market provides only 1.4% of the total financial needs of corporations in China (about 85% is financed by banks and about 14% by equity). These numbers are extremely low by comparison to most countries.

Bank lending and the bond market: Theory

There are two main reasons why firms might want to borrow in the bond market rather than take loans from banks, and both reflect cost advantages of the bond market. First, as Diamond (1991) demonstrates, firms that develop a reputation for being either the safest or the riskiest borrowers do not benefit from the monitoring services provided by banks, and therefore they are better off borrowing in the bond market and thus avoiding the monitoring costs that banks would pass on to them. Second, as Rajan (1992) shows, issuing a bond disseminates information about the firm to a large number of lenders, which can overcome the information-based monopoly that a bank has over the borrower, thus lowering the information rent that banks can charge the firm. (Both theories appear to hold empirically for U.S. firms, as shown, for example, in Hale and Santos 2005, 2006.)

In these theoretical models, both sources of cost advantage require that banks price the loans they make to firms in accordance with the firm's creditworthiness. If the banks do not engage in credit risk analysis or the interest rates are not flexible, there will be no competitive forces to lower the cost of borrowing for the firm after it disseminates its information in the bond market. Clearly, such conditions are not yet fully met in China, so, as I will discuss below, the models would predict little, if any, cost advantage for firms to tap into that country's bond market.

Bank lending and the bond market: Global evidence

Using the data for 37 countries, excluding China, for the period between 1995 and 2004 from the World Development Indicators database, I find that, on average, a 10% increase in the ratio of private sector bank lending to GDP is associated with an 11% increase in the ratio of bond market capitalization to GDP. That is, countries that have larger markets for bank loans also tend to have larger bond markets. While this statistical relationship does not imply that larger bank loan markets necessarily lead to larger bond markets, it shows that these two markets are more likely to be complements than substitutes in practice, consistent with the implications of the theory.

Figure 2: Bank lending and the size of bond marketTo illustrate this result, Figure 2 shows the relationship between bank lending to the corporate sector and the size of the corporate bond market in selected countries at the end of 2004. The straight line represents the relationship derived from the full, 37-country, 10-year analysis described above. It is clear that countries with larger bond markets also have more, not less, bank lending to the private sector, which is consistent with the findings of Borensztein, Eichengreen, and Panizza (2006).

Where does China stand?

Given China's private sector bank lending (140% of GDP in 2004), the relationship depicted in Figure 2 predicts that China's bond market capitalization in 2004 should have been 16% of GDP, while, in fact, it was only 0.7% of GDP. Indeed, though bank lending in China appears to be on par with Japan and South Korea, its bond market is roughly as small as India's.

In much economic analysis, the ratio of bank lending to GDP is interpreted as a measure of the degree of banking sector development. However, as discussed above, both the quantity of bank lending and the quality of banking institutions matter for the development of the bond market. In China, where more than 50% of bank lending is still conducted by the four state-controlled policy banks, the ratio of bank lending to GDP is likely to overestimate the development of the banking sector. If we adjust this measure by the efficiency of bank lending, China would not appear to be as much of an outlier as it does in Figure 2, suggesting that the banking system needs further improvement for the bond market to develop.

Will the Chinese bond market develop?

Figure 3: Who holds Chinese corporate bondsOn the demand side, China still needs to develop financial institutions willing to hold corporate bonds: insurance companies, pension funds, investment funds, and the like. As Figure 3 shows, over a third of China's commercial bonds are held by banks and only 16% by security corporations and investment funds combined. The state-controlled National Social Security Fund is allowed to invest 10% of its assets in corporate bonds, but currently it does not hold any. As these institutions develop, the demand for corporate bonds will grow.

On the supply side, as the theory discussion illustrates, one should not expect firms to increase bond issuance until the banking system is functioning more competitively. While banking reform in China is well under way, more than half of the loans in China are still made by four state-controlled policy banks, which limits competition in the banking system. In addition, very little credit analysis is conducted by the banks, which makes it difficult for firms to build a reputation for repayment and also makes the interest rates firms pay insensitive to past credit performance. Until firms develop some reputation (either good or bad), they are not likely to find it profitable to raise money in the bond market. Moreover, many private firms do not have access to bank credit and, therefore, have no means of developing a reputation for repayment that is essential for borrowing from the bond market.

The interest rates that banks charge their customers are still relatively inflexible and are unlikely to vary with credit history or to be high enough to recover the information rent. In addition, the secondary market for corporate bonds, which would be needed to disseminate the information on the firms through the pricing of their bonds, is still underdeveloped: currently, over 50% of corporate bonds and 100% of commercial paper are traded in the interbank market, which is not very liquid. Thus, it is unlikely that firms would gain any informational advantage by issuing bonds, because the bond market will not be able to incorporate the information about firms into bond prices.


China's corporate bond market is very small, especially relative to the large amount of bank credit to private firms. This is due to the small number of institutional investors interested in purchasing corporate bonds and to the lack of incentives for firms to issue bonds. While the demand for bonds is expected to rise as nonbank financial institutions develop, the supply of bonds is likely to stagnate until the banking system becomes more competitive and less dependent on the government. Thus, the development of a corporate bond market should not be viewed as a substitute for banking reform. Of course, the Chinese government could require state-owned enterprises to issue bonds rather than borrow from the banks; in that case, however, the important informational role of the bond market would be lost.

Galina Hale


[URLs accessed March 2007.]

Borensztein, Eduardo, Barry Eichengreen, and Ugo Panizza. 2006. "A Tale of Two Markets: Bond Market Development in East Asia and Latin America." Hong Kong Institute for Monetary Research Occasional Paper No. 3.

Diamond, D.W. 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt." Journal of Political Economy 99(4), pp. 689-721.

Dobson, Wendy, and Anil Kashyap. 2006. "The Contradiction in China's Gradualist Banking Reforms." Brookings Papers on Economic Activity (October).

Hale, Galina, and Joao A.C. Santos. 2005. "The Decision to First Enter the Public Bond Market: The Role of Firm Reputation, Funding Choices, and Bank Relationships." Yale ICF Working Paper No. 04-47.

Hale, Galina, and Joao A.C. Santos. 2006. "Evidence on the Costs and Benefits of Bond IPOs." FRB San Francisco Working Paper 2006-42.

Rajan, R.G. 1992. "Insiders and Outsiders: The Choice between Informed and Arm's Length Debt." Journal of Finance 47(4), pp. 1,367-1,400.

Friday 16 March 2007

Research Paper: Can China Promote Electronic Commerce through Law Reform?

This paper may be of interest to the guys over at China Law Blog as well as economists interested in network economics.


"Can China Promote Electronic Commerce through Law Reform? Some Preliminary Case Study Evidence"

Contact: JANE K. WINN
University of Washington - School of Law
Email: jkwinn1@u.washington.edu
Auth-Page: http://ssrn.com/author=334081

Henan University of Technology - School of Law
Email: songyp_haut@sina.com
Auth-Page: http://ssrn.com/author=624756

Full Text: http://ssrn.com/abstract=901849

ABSTRACT: This article analyzes legislation recently enacted in China to promote the use of electronic commerce among Chinese businesses. It reviews the terms of regulations to promote the use of accounting software by Chinese firms, the electronic commerce enabling provisions of the 1999 Contract Law and the
2004 Electronic Signature Law in light of their relationship to China's economic development goals and their impact on Chinese businesses. It contrasts the success of the accounting software regulations with the limited impact of the Contract Law provisions and the dim prospects for the Electronic Signature Law. While law reform generally may be of limited use as a policy instrument to promote the use of electronic commerce technologies by Chinese businesses as long as the transition to a market economy remains incomplete, these case studies suggest that law reform based on an accurate understanding of the conditions Chinese businesses face has a better chance of success than legislation based on foreign models which in turn were based on conditions in developed market economies which differ significantly from those in China's transition economy.

Wednesday 14 March 2007

How to spend China's foreign reserves - more US treasuries?

Following on from the previous posts it appears that China is no longer happy to receive such a poor return on its billions of dollars of foreign exhange.

This is a wise move but the ramifications of a systematic move away form US treasuries and into other currencies and assets may be serious. More than simply the bottom line return needs to be considered, not least the exchange rate between the $ and the RMB. Any appreciation in the RMB against the $ will have a knock on effect on exports to the US and thus employment.

This interview with Jin Renqing is telling.

China's Giant New Investment Agency
On Mar. 9, China's Finance Minister Jin Renqing unveiled a government plan to overhaul the way the country manages its massive $1.07 trillion stockpile of foreign exchange [forex] reserves, the biggest in the world. China's forex holdings are gargantuan for any country, let alone a developing one. They are also growing at clip of about $20 billion per month thanks to the country's massive trade surpluses.

Beijing has typically held about 70% of its reserves in U.S. dollar assets. However, now the plan is create a new state agency to divert more than $200 billion in funds to invest in all sorts of higher-yielding equity assets and perhaps strategic energy assets around the world or even some select social programs at home.

Nobody knows for sure, and details on the new agency remain sketchy. Its name has not yet be chosen, nor has a timetable been disclosed for when the new policy will get underway. However, the amount of money involved is bound to be felt globally. Here are a few of the possible implications.

Will this mean more downward pressure on the U.S. dollar?

No. China will continue to hold the bulk of its reserves in U.S. dollars initially, regardless of how it intends to spend those reserves. While China has eased back on its demand for U.S. Treasury bills, it has been spending more on other types of U.S. agency paper, such as mortgage bonds. Hence its demand for U.S. dollars is relatively unchanged, and the impact on the U.S. exchange rate will be minimal.

Does this mean China will stop buying U.S. Treasuries?

That's unlikely, too. Wu Xiaoling, deputy central bank governor at the People's Bank of China, said the central bank will continue buying U.S. Treasuries with its reserves. However, the policy shift will probably mean that a smaller proportion of China's export earnings will be recycled into the Treasury market.

In fact, even before the announcement of a new investment agency to manage China's FX reserves, Beijing financial authorities have been gradually diversifying into other low-risk investment vehicles denominated in euros and yen. This trend is bound to continue and could put upward pressure on U.S. Treasury bill yields if other foreign investors don't make up the difference.

What will this new entity look like?

It is expected to be modeled after Temasek Holdings, the investment arm of the Singaporean government. Over the years, Temasek has made strategic investments in large Singaporean listed companies as well as foreign companies engaged in telecommunications, property, financial services, and pharmaceuticals. [It is actually a huge investor in mainland Chinese banks.]

China's investment arm will definitely aim to get a rich return on investment, but its decisions will also be guided by political and strategic considerations. China is likely to focus on large equity stakes in oil and gas concerns, minerals such as gold, and possibly shipping assets. But while Temasek has about $85 billion in assets under management, China is expected to have a war chest worth between $200 billion and $220 billion. China has previously injected $70 billion of its reserves to shore up ailing state-controlled banks.

Who will run the new state investment arm?

Lou Jiwei, a former deputy minister of finance who, early in March, was promoted to a cabinet-level position at the all-important State Council, is expected to head up the new investment agency. Lou was instrumental in arguing for diversification of China's foreign exchange earnings. He is likely to hire some foreign professionals with good experience in portfolio risk management.

Will the new agency face opposition to its overseas purchases?

That's probably a given, since Chinese companies have been thwarted by foreign governments in proposed takeover deals viewed as sensitive. China National Offshore Oil Corporation, or CNOOC's, failed takeover run for Unocal in 2005 and Haier's unsuccessful bid for Maytag are two examples that come to mind.

China is likely to focus on acquiring assets in resource-rich emerging economies such as Indonesia, the Philippines, and Africa, where it's less likely to face opposition. So don't expect the Chinese to go on a buying spree similar to the Japanese, who snapped up trophy assets such as Rockefeller Center in the 1980s. The Chinese are keen to fly as far below the radar as they can -- for now.

But does that preclude minority equity investments?

In fact, buying shares of listed resource companies would be a good natural hedge for China. For example, while China may not be able to acquire mining conglomerate BHP (BHP) outright, it can at least benefit as a shareholder. So while China's voracious appetite will drive commodity prices up, the country can benefit from higher prices through dividends on its equity holdings.

What sort of return will the new agency be looking for?

Something well in excess of 6%. The agency will likely raise renminbi by selling bonds and then using proceeds to purchase reserves from the central bank. As things stand now, its internal borrowing costs are about 3%. If you factor in an expected RMB appreciation of 3% per year, then total cost of funds is about 6%.

Will the new agency be transparent about investments and returns?

Don't bet on it, says HSBC China economist Qu Hongbin. "This will easily be one of the largest asset management companies in the global market. The last thing you want to be is transparent as to what you buy and sell."

Record Trade Surplus: What next?

There have been numerous articles highlighting the recent record trade surplus that China recently announced.

The customs authorities said there was a near-record 23.8-billion-dollar trade surplus in February, almost 10 times the year earlier figure and certain to spark more protests that China keeps the yuan deliberately undervalued to gain an export advantage.

China's surplus last year soared 74 percent to hit a record 177.5 billion dollars but some economists are pencilling in 230 billion dollars for 2007.

February exports totalled 82.1 billion dollars, up 51.7 percent from a year earlier, while imports increased 13.1 percent to 58.3 billion dollars, the General Administration of Customs said.

The trade surplus is a major bone of contention with China's trade partners, especially the United States which claims a weak yuan is a major contributor to the problem and the February data could worsen the atmosphere.

So how will the surplus issue be addressed? (can this be called a surplus problem?).

One answer is to revalue the RMB or to at least allow the so-called managed float to be a little less managed. Reading the suggestions below reminded me of ECON101 teaching. It will be interesting to see if or by how much the trading bands are widened to.

I suspect we will see much larger surpluses in the future. What is more interesting is what China plans to do with this surpluses. See next post.
In an apparent bid to address overseas pleas to address the surplus, central bank governor Zhou Xiaochuan said Monday that exchange rate policies could go some way toward tackling the problem.

"As a supplementary policy, exchange rate policy can have a certain function as price leverage and can help adjust the balance between imports and exports," Zhou told reporters at a briefing.

A statement issued alongside Zhou's appearance before the press and dealing with objectives for 2007 suggested slightly more vigorous application of this leverage in the year ahead.

"The managed floating exchange rate regime will be further improved and the flexibility of the exchange rate will be enhanced," the statement said.

"(We will) keep the exchange rate basically stable at an adaptive and equilibrium level," it said, repeating a standard formula.

The managed floating exchange rate regime is China's way of describing a system which still appears to many observers to be tightly controlled by the authorities.

In July 2005, China delinked the yuan from the dollar and since then it has risen by nearly seven percent against the US unit, including a 2.1 percent revaluation at the time of the decision.

The yuan was also set in a daily trading band against the dollar of 0.3 percent either side of a base rate set by the authorities. In practice, daily changes have not come anywhere near that modest amount, sparking protests that Beijing still keeps the yuan on a very tight rein.

Even as the central bank promised a more flexible yuan, Zhou on Monday gave no direct indication of concrete measures, such as whether the trading band might be expanded.

Job shortages in China - beginning of a trend or a minor blip?

After investing large amounts of money in an education overseas many Chinese students expect to be able to return home to a high paid salary.

Even with 10% annual growth it appears that jobs are still hard to find. If we were to get a macro shock (such as a wall street crash) the situation could deteriorate rapidly.

What is interesting from this article is the talk of a skills mismatch between skilled jobs and unskilled workers. However, the sheer number of graduates that are looking for work mean many will be disappointed.

The question is this: Does this increase the risk from taking an MSc overseas or does it make obtaining such a qualification even more important as not only will the student get a top quality education (see sidebar links) but they will also learn to speak and understand English and have a good idea of China's role within the global community. Characteristics that the service sector and foreign multinationals in China will value highly.

From ChinaDaily (my bold emphasis)

Nation faces grim job situation
China faces a major challenge in meeting its goal of creating 9 million jobs this year, a senior official admitted yesterday.

"Based on the current employment situation, the country faces huge job pressure and a grim market in the coming few years," Tian Chengping, minister of labor and social security, said on the sidelines of the ongoing session of the National People's Congress.

The continuing reform of State-owned enterprises will create a huge number of laid-off workers, who will find it difficult to find new jobs, he said.

Moreover, about 5 million college graduates, the largest number in history, will enter the job market this year, in addition to surplus rural laborers swarming into cities for work, Tian said.

Figures from education departments showed that around 30 percent graduates could not find jobs upon graduation, he said.

Tian estimated that there will be 24 million job seekers this year, but only half will find a job.

Despite this, the country hopes to keep the registered urban unemployment rate below 4.6 percent, Premier Wen Jiabao said in his government work report on March 5.

To alleviate the strain, the government will strengthen training and improve public services for job seekers.

Tian brushed aside concerns that some booming coastal regions such as Guangdong and Fujian provinces are facing a labor shortage.

"It mainly reflects a structural problem. As these prosperous regions upgrade their industrial structure, they need more skilled workers," he said. However, migrant workers from rural areas usually don't meet the requirements.

"The market mechanism will come into play; it can be a better job opportunity for workers, and could help them get raises in salary and other perks," he added.

Zheng Chenggong, professor at Renmin University of China, said the central government should formulate policies such as guiding graduates to seek jobs in less developed central and western parts of the country.

Scramble for a .cn domain name - 1RMB each

Perhaps we should get a domain name ending in .cn.

The government seem to want to encourage take up.

China Issues RMB1 cn Domain Name
For less than the cost of a bus ticket, people can register a website name under China's national domain name ‘.cn’.

China Internet Network Information Center (CNNIC), the country's domain name administrator, says the first-year registration fee for domain names ending in ‘.cn’ will be RMB1 (one U.S. dollar equals RMB7.74).

CNNIC is hoping the move will attract registrations from enterprises and netizens. Previously it cost between RMB80 and 100 to register a domain name in China.

People who register a domain name before May 31 will be charged only RMB1 for the first year, while subsequent years will still cost RMB80 to 100 a year, according to the CNNIC.

At the end of 2006, China had 1.8 million websites that ended in ‘.cn’, up 64.4 percent year on year. The 'CN' suffix is Asia's largest and the world's fourth largest, statistics from the CNNIC show.

In all there are 4.2 million registered domain names in China with most using the suffix .com or .net.

Observers said with 137 million netizens and more than 40 million enterprises huge potential remains for the development of domain names ending with ".cn".

Monday 12 March 2007

Chinese Military Spending, the US and the exchange rate

Interesting post by Robert Reich on China's announcement that it is to increase military spending by 18% to $45bn.

Robert Reich makes much of the timing of this announcement that coincided with the visit of Treasury Secretary Hank Paulson. I am not so sure.

What is perhaps more surprising is that whilst China is planning to spend $45bn this pales into insignificance compared to the US military spending of $600bn. China has some way to go to catch up.

The conclusion also proposes a link between this announcement and China's current exchange rate policy. The logic is fine but I think this may be pushing it somewhat.

Why China Announces Military Buildup the Same Week Paulson Visits
China announced this week that it’s planning to increase military spending 18 percent this year this year – its largest military boost in almost a decade – to $45 billion, making it one of the largest defense spenders in the world. That’s not much when compared to America’s military budget of more than $600 billion this year, but it’s large enough – and following so closely on the heels of China’s successful test of an anti-satellite missile – as to spook the Pentagon. What’s going on?

One clue is that China’s announcement of its military buildup comes the same week Treasury Secretary Hank Paulson is scheduled to visit, presumably to continue pressing China to raise the value of its currency in light of the huge and growing trade imbalance with America.

You see, for China, economic security and military security go hand in hand. Both are part of the same strategy to make China a superpower. Maintaining its current 10 percent yearly growth rate necessitates reliable supplies of oil, natural gas, and other raw materials from all over the world; as well as the latest technologies. And China also needs growing export markets to absorb its increasing production, and provide jobs to the tens of millions of its people migrating from the countryside.

All this, in China’s view, necessitates being able to play power politics with both Middle-East and Russian oil producers, when and if tensions arise over energy supplies. And China needs to be able to flex its muscle with Japan, Europe, and America in the competition for energy and other critical raw materials – as well as continue to have access to technologies these nations possess. And it needs to keep its access to these hugely important markets.

Power politics in today’s world doesn’t require the direct exercise of military power so much as the capacity to pressure other major powers indirectly – for example, credibly threatening to use force against Taiwan, or selling advanced weapons systems to oil-rich or raw-materials-rich developing nations, or, in the case of North Korea, becoming the source of food and weapons.

Sound familiar? China is not inventing this strategy of combining economic power with military power. It’s following in the footsteps of the nation that wrote the play book on how it’s done – the United States.

That’s why China’s military announcement was timed to coincide with Hank Paulson’s visit. Some in the U.S. think China has been able to buck American pressure to revalue China's currency because China is becoming our major creditor. Not true. America's indebtedness to China gives the U.S. huge leverage over China -- if we allowed the dollar to fall, China would lose a bundle. No, the real reason China has been able to hold the line against American pressure is China's growing influence around the world. Its military strategy is a part of this, and it's why Paulson’s economic mission will get nowhere.

Research Papers: Collateral Damage: Exchange Controls and International Trade

In development economics the issue of capital controls is always a cause of much argument. The IMF programmes in Latin America (Argentina) and the IMF prescriptions following the Asian crisis have come under much criticism not least from Joesph Stiglitz in his book Globalization and Its Discontents. There are also numerous example where capital controls have been seen to work e.g. in Malaysia after the 1997 Asian Crisis.

This new research paper from SHANG-JIN WEI at the IMF looks at the use of capital controls from a trade perspective. I have not yet read the paper but the results are plausible and provides more ammunition for the supporters of globalisation.

Given China's current position the results of this paper should be considered in light of current and possible future policies.


"Collateral Damage: Exchange Controls and International Trade"
IMF Working Paper No. 07/8

International Monetary Fund (IMF) - Research
Department, Centre for Economic Policy Research
(CEPR), National Bureau of Economic Research
(NBER), The Brookings Institution
Auth-Page: http://ssrn.com/author=54129

Full Text: http://ssrn.com/abstract=959306
ABSTRACT: While new conventional wisdom warns that developing
countries should be aware of the risks of premature capital
account liberalization, the costs of not removing exchange
controls have received much less attention. This paper
investigates the negative effects of exchange controls on trade.
To minimize evasion of controls, countries often intensify
inspections at the border and increase documentation
requirements. Thus, the cost of conducting trade rises. The paper
finds that a one standard-deviation increase in the controls on
trade payment has the same negative effect on trade as an
increase in tariff by about 14 percentage points. A one
standard-deviation increase in the controls on FX transactions
reduces trade by the same amount as a rise in tariff by 11
percentage points. Therefore, the collateral damage in terms of
foregone trade is sizable.

China Shakes The World: The Rise of a Hungry Nation

A recent book by James Kynge has been released charting the rise and rise of the Chinese economy.

There is a good review of this book by Martin Fagan (squaremile bookstore) from where the following quotes are of interest:

On the eve of the British industrial revolution some 230 years ago, China accounted for one third of the global economy. In 1979, after 30 years of Communism, its economy contributed only two per cent to global GDP. Now it is back up to five per cent, and rising. Although China is already a palpable force in the world, its re-emergence is only just starting to be felt.

So, in this book, Kynge charts not only the extraordinary rise of the Chinese economy, but what the future holds as China begins to influence the world. He shows China's weaknesses - its environmental pollution, its crisis in social trust (which is why the Chinese government vets heavily all the websites thrown up by Chinese search engines), its weak financial system and the faltering institutions of its governments - which are poised to have disruptive effects on the world. The fall-out from any failure in China's rush to modernity or simply from a temporary economic crash in the Chinese economy would be felt around the world.

The new China, the nation that in 25 years has changed beyond all recognition is becoming an industrial powerhouse for the world. James Kynge shows not only the extraordinary rise of the Chinese economy, but what the future holds as China begins to influence the world.

The top eight economic concerns of the last decade in China: Basic Overview

The economics in this article from the Globalist are limited but it gives a nice little summary.

The reason for posting the article in full is that the issues covered are of primary interest for this blog - although we will be investigating these topics in more depth in later posts this is a good basic overview for non-economists:

The macro rollercoaster
Rural stagnation
Unlimited cheap labor reserves
“Market share, everywhere”
Enormous trade surpluses
Global fixation with the renminbi
Global fixation with “rebalancing”

The article then goes on to discuss how each of the above may be less of a problem in the future. I tend to be in broad agreement.

China's Very Strange Decade

It’s true that many of the elements of China's mainland growth in the 1990s and the first half of this decade are similar to those of the Asian “tigers” 30 years ago. However, most observers today have only vague memories of those heady Asian growth days of yore, and in any case China’s experience also has a number of unique elements. Consider the following trends:

The macro rollercoaster
No other country in Asia has seen so many sharp boom and bust cycles in rapid-fire succession. Its economic path has moved from massive boom in the mid-1980s to outright recession in 1988-89, back to nearly 15% real GDP growth again in the early 1990s bubble — and then back to hard landing in the latter half of the decade. In short, China has been a chronic macro “rollercoaster” for as long as most analysts have been covering the economy.

Rural stagnation
Another unique factor in China is the sharp contrast between supercharged increases in urban incomes and relative stagnation in the rural sector. From 1995 to 2003, disposable farm incomes barely rose as food prices fell and local governments imposed onerous taxes and agricultural fees. This situation pushed a disproportionate amount of investment into eastern seaboard areas, and left the rural economy behind.

Unlimited cheap labor reserves
Because of weak farm incomes and a large supply of excess young rural workers, Chinese manufacturing enjoyed a decade of virtually unlimited growth at essentially flat wages, which of course meant sharp gains in global market share without undue inflationary pressures.


Normally high-growth economies have high inflation as well — but despite the fact that Chinese GDP expanded at nearly 9% year-on-year in real terms, average consumer prices actually fell in the second half of the 1990s and the beginning of this decade. This reflected a host of factors, including monetary tightening, low rural migrant wages and industrial overcapacity.

“Market share, everywhere”

China has not only taken over global light industrial markets (such as toys and textiles), it is also rapidly establishing itself as the premier electronics manufacturer. What’s more, in the past few years the mainland has also suddenly exploded onto the scene as a net exporter of key heavy industrial materials and equipment. In short, China is currently the low-cost producer in virtually every goods category, a seemingly flagrant violation of the law of comparative advantage.

Enormous trade surpluses
For the past 20 years, China never recorded a significant external imbalance — until two years ago, when the trade surplus suddenly jumped to record-high levels. As we enter into 2007, the mainland current account surplus is running at more than 10% of GDP, an enormous level by international standards and virtually unheard of for a large continental economy. This puts considerable pressure on the currency as well as significant strain on China’s international relations.

Global fixation with the renminbi

With large external imbalances and across-the-board Chinese manufacturing market share gains, global attention has fixed on the renminbi exchange rate as the root cause of all China’s problems. The U.S. Treasury, U.S. Congress, the European Central Bank, the G7 working groups and most other international forums are heavily preoccupied with argument and debate over how to pry loose the renminbi from its current quasi-peg against the dollar.

Global fixation with “rebalancing”

In view of the list above, nearly every observer agrees that the Chinese economy is “out of whack.” The consensus view is that imbalances have reached a point where they are not going away by themselves. As a result, global policy and academic circles are also engulfed in debate on how to rebalance mainland growth.

Back to the real world
The above list describes the situation over the past number of years, but in my view it does not apply to the future. In fact, every one of these trends is coming to a natural end — not tomorrow, of course, but the next two to three years will be a crucial transition period for bringing China back to the “real world”:

No more boom/bust economy
A combination of ongoing privatization, market liberalization and better macro policy capacity have already considerably dampened the volatility of economic cycles in mainland China. With the current round of excess capacity creation winding down, one can expect a more stable growth outlook at 8.5% to 9% through the end of the decade.

Rising rural wages
From easier times over the past ten years, one of the most pressing concerns for Chinese light industrial manufacturers today is now “labor shortage.” This doesn’t mean the economy is running out of workers, but with over 100 million rural migrants already working off the farm and demographic pressures kicking in, the economy is running out of young, single workers. As a result, migrant wages are now rising more aggressively — and mainland exporters have been forced to increase prices accordingly.

The return of China’s farmers
Farm incomes have benefited from increased migrant remittances in recent years – and even more from structurally rising food prices and higher government support levels. In fact, after years of stagnation, rural incomes actually grew faster than their urban counterparts in 2004-06. China’s rural resurgence is one of the most exciting medium-term themes, with strong implications for new development and investment strategy going forward.

Back to inflation
Rising food prices, rising wages and the gradual winding of excess capacity all point to higher inflationary pressures over the next few years, and we are confident that China’s role as a deflationary force in the global economy is coming to an end.

The end of manufacturing domination
The mainland may look hypercompetitive across all industries today, but this situation can’t last very long. With cost pressures cutting into low-end competitiveness and strong demand — and slowing capacity growth pulling heavy industrial products back into the domestic economy — one expects China will begin giving up market share at both ends of the production spectrum.

Back to balanced trade
As this happens, the current massive trade surplus should peak and then subside over the next two years. The biggest drivers here will be renewed imports of industrial materials and equipment, as well as continued strong appetite for natural resources and commodities. Renminbi appreciation should help — but the currency would play a minor role at best.

No more renminbi fixation
If a falling trade surplus, ongoing capital account liberalization and state-led capital outflows relieve the central bank of its current intervention duties over the next two years or so, there would no longer be a “smoking gun” for an undervalued renminbi. This would take pressure off the authorities to further appreciate the exchange rate — and would also stifle cries of currency manipulation from the rest of the world.

The rebalancing of China
The consensus view is that China needs to take urgent steps to boost consumption and reduce household savings in order to rebalance the economy away from overinvestment. These are long-term priorities, but they are not the solution to near-term imbalances. Instead, China needs to reduce corporate savings through consolidating excess capacity industries. This process is already underway through market forces.

Saturday 10 March 2007

World University Rankings: Rankings and text

We have posted on numerous occasions about how students should use University rankings as a starting point when deciding which University to study at (concentrating on economics).

As a help I have included the following in the side bar:

Shanghai Jiao Tong University World University Rankings
The Newsweek Top 100 Universities
The Times UK University Ranking 2007
UK Options University Guide (includes numerous links)

Although I believe that this is enough information for most if you would like more information then check:

Book Description
Based on the Times Higher - QS World University Rankings, this
is the definitive guide to the top universities around the world.

League table ranks the top 200 universities in the world, plus detailed
profiles of the top 100 universities, including student assessments of what
life is like at each university

League tables rank performance of the 100 top universities by principal
subject areas: Arts & Humanities, Engineering & IT, Medical Sciences,
Natural Sciences, Social Sciences.

Directory of over 500 of the best universities in the world along with
their ranking position in each of the principal subject areas.

Reviews of the top ten study destination countries, with a detailed look at
government grants and subsidies for overseas students, types of
institution, entry requirements, cost of living, student life and much

Expert advice on how to choose and apply for the best course at the right
university, and an overview of employment opportunities.

Detailed help and advice on study costs, financing and scholarships

Based on the "Times Higher - QS World University Rankings", this is the definitive guide to the top universities around the world League table ranks the top 200 universities in the world, plus detailed profiles of the top 100 universities, including student assessments of what life is like at each university. League tables rank performance of the 100 top universities by principal subject areas: Arts and Humanities, Engineering and IT, Medical Sciences, Natural Sciences, Social Sciences. This title gives expert advice on how to choose and apply for the best course at the right university, and an overview of employment opportunities. It includes reviews of the top ten study destination countries, with a detailed look at government grants and subsidies for overseas students, types of institution, entry requirements, cost of living, student life and much more. It offers detailed help and advice on study costs, financing and scholarships. It includes a directory of over 500 of the best universities in the world along with their ranking position in each of the principal subject areas.

Thursday 8 March 2007

China's Growth and Integration into the World Economy: Prospects and Challenges

Three new IMF published books have just been released that may be useful for those with an interest in Chinese and Asian-Pacific economic issues. These books rarely have academic value but can provide good empirical overviews for policy makers and can be a good source of data.

IMF Bookstore

China's Growth and Integration into the World Economy: Prospects and Challenges

China's transformation into a dynamic private-sector-led economy and its integration into the world economy have been among the most dramatic global economic developments of recent decades. This study provides an overview of some of the key aspects of recent developments in China's macroeconomy and economic structure.

China and India Learning from Each Other: Reforms and Policies for Sustained Growth

What does the future hold for these giants that are the two fastest-growing emerging markets and among the three largest economies in Asia? Their economic muscle is having increasingly far-reaching effects on the global economy. This must-read new book draws together analysis and insight from high-level policymakers and advisors in both countries, and shows how, for many years, the two countries have cooperated and learned from each other. In addition, the book describes what has (and what has not) worked in each country and offers some concrete suggestions about how each may achieve long-term sustainable development.

Regional Economic Outlook: Asia and Pacific

The September 2006 report analyzes recent developments, examines the impact of the recent market correction, and assesses potential for capital inflows and equity markets, as well as examining private consumption and trends in inequality. Chapters address financial developments in emerging Asia; the main macroeconomic issues facing policymakers; Asia's external surpluses; Asia's investment decline; and rebalancing growth in China.

Wednesday 7 March 2007

China-London Investment Hub: Chinese OUTWARD FDI

In the academic economics world there are 101 different studies looking at the determinants of FDI into China. Is it the low wages, good infrastructure? low environmental regulations? well educated workforce, low tax rates etc.

Now we learn from the FT that foreign direct investment OUTFLOWS from China (including HK) reached $56bn last year and are forcast to rise to $70bn by 2010.

The article in the FT called: Deal Boosts London as investment hub talks about a recent deal between China and London to promote two-way investment between China and a European capital city.

This is good news for both parties and highlights some of the advantages the UK has over its European and even US competitors.
London has bolstered its position as the most popular destination for Chinese capital flows into Europe by signing the first agreement to promote two-way investment between China and a European capital city.

Under the agreement, the Investment Promotion Agency, part of Beijing's Ministry of Commerce, will steer Chinese companies towards London as a profitable centre for investment in sectors such as financial services, creative industries and pharmaceuticals.

The agency will highlight London's favourable business environment, regulations and policies that have already made the capital the gateway to Europe for investors from China.

It will also draw attention to the infrastructure of Chinese schools, restaurants, bookshops, health centres and places of worship created by the 80,000-strong Chinese community.

In return, Think London, the capital's foreign direct investment agency, will help British investors find opportunities in China in manufacturing - both heavy and hi-tech - as well as services and environmental protection industries.

Michael Charlton, its chief executive, said: "There is unprecedented interest from Chinese businesses looking to establish a European base in London as they take the next step in the globalisation of their economy."
The partnership has been set out in a memorandum of understanding between the agencies, signed yesterdaybefore Ma Xiuhong, vice-commerce minister.

Britain is already by far the largest recipient of Chinese foreign investment in Europe; a third of all Chinese investment in the UK goes to London - 15 per cent of the total for Europe.

Foreign direct investment outflows from China (including Hong Kong) reached $56bn (£29bn) last year and are forecast by the Economist Intelligence Unit to rise to more than $70bn by 2010.

Mr Charlton said Chinese companies wanted a platform from which to sell their products throughout Europe and the Middle East. London's excellent air links made it ideal, he added.

However, they are also seeking to move away from mass produced products where competition is eroding margins, and are looking for the design and marketing skills that the UK can offer. Midea, China's second largest domestic appliance manufacturer, has already created a design centre at its European headquarters in Finchley, north London.

The new agreement will promote a two-way flow of investment by exchanges, promotion missions, conferences and seminars. Both agencies will feature the programme on their websites, and hold annual meetings to review the campaign and extend its activities.

London leaders have established strong links with Chinese cities over recent years, including formal relationships between the City and financial centres such as Beijing, Shanghai and Shenzhen. Regular visits by Ken Livingstone, London's mayor, successive Lord Mayors and Think London have created a network of offices in large Chinese centres to promote trade links.

East woos West

China's targets in London

*Financial services

*Information and computer technology

*Creative industries



*Energy industries

*Value-added manufacturing and services

London's targets in China

*Electrical machinery and equipment

*Electronics and telecom manufacturing

*Bio-tech, fine chemicals and hi-tech materials

*Transport and communications equipment

*Financial services

*Logistics services

*Information services

*Environmental protection industries

Environmental Governance in China

China and the Environment update:


China's Environmental Governance
China faces an ecological crisis, but its environmental authorities are too weak to cope, says Xiangcong Ma. Greater enforcement, improved departmental coordination and public supervision are needed.

"The most prominent issue in the enforcement of environmental law is the government itself breaking the law."

Pan Yue, deputy director of China’s State Environmental Protection Adminstration (SEPA), refers to ecological civilisation as a type of society that humans are now moving towards, having developed through the primitive, agricultural and industrial stages of civilisation.

The global environment is now in crisis, but we are only in the initial stages of such a transformation. There is still a long way to go, both in China and in developed countries such as the US. First we need to change the way we think, then put these changes into action – and alter the direction of society’s development.

The Communist Party of China has proposed a scientific, people-centered and sustainable model of growth for the new century. The realisation of a socialist ecological civilisation requires a scientific concept of development, which will mean governance according to rule of law. China has already established basic environmental laws, but weak enforcement has resulted in a worsening environment.

Issues covered in this article:

1. Weak authorities
2. Enforcing the law
3. Environmental oversight

Issues of weak enforcement, a lack of information given to the public, poor knowledge of the health implications of pollution by the general public, weak regulations. All of these issues are covered in this good article.


Environmental Protection in China: the Role of Law

China’s growing rule of law and public environmental awareness show promising initial signs of success. But will it be too little, too late? Alex Wang investigates.

"For China, the challenges of using the law for environmental protection are formidable. Unlike the US with its long history and culture of using law and the courts, China essentially began in 1979 to rebuild anew a legal system that had been entirely dismantled in the previous few decades."

In a rural village, set on the edges of a narrow mountain valley, a group of farmers go to court seeking relief from industrial pollution that has threatened their health and destroyed the crops that are the basis of their livelihoods. The defendants are two local factories that use a primitive industrial process to reduce copper ore. The process generates massive amounts of smoke and stench that decimate much of the surrounding forests and crops and cause local residents chronic headaches and coughing. The farmers ask for compensation and a court order halting the pollution. The court refuses to order a stop to the polluting activities because such an order would “blot out two great mining and manufacturing enterprises, destroy half of the taxable values of a county … and deprive thousands of working people of their homes and livelihood.”

This is a story that is all too familiar in China, reflecting the persistent distance between environmental degradation and a legal system struggling to keep up with a rapidly changing economy. This particular story, however, does not come from China at all. Rather, it is the 1904 US case of Madison v. Ducktown Sulphur from the state of Tennessee. As in China today, the industrial revolution in the United States brought with it increasing harm to the public from pollution and greater environmental conflict. In the early part of the 20th century, the US legal system was not up to the task and the country muddled through decades of inadequate environmental regulation and often unsatisfactory court decisions. It was not until the 1970s that the US passed a series of robust environmental laws and opened the door to a generation of environmental advocates who would use law and the courts to improve the environment.

The article goes on to compare the development of environmental legislation in the US and Japan before looking again at the Chinese context.
The Chinese context

In China, more than three decades of rapid industrialization have created enormous environmental challenges. The problems are, by now, well known. Seventeen of the 25 most polluted cities in the world can be found in China. Three-hundred million people, a population larger than that of the entire United States, do not have access to safe drinking water. China’s carbon dioxide emissions may surpass US levels as early as 2009. An estimated 300,000 people die prematurely each year because of China’s air pollution beyond legal standards. The government’s own estimate puts the initial cost of environmental clean-up at a minimum of US$135 billion.

As a result, environmental disputes are on the rise. In 2005, there were some 51,000 disputes over environmental pollution, according to State Environmental Protection Administration (SEPA) minister Zhou Shengxian. From 2001 to 2005, Chinese environmental authorities received more than 2.53 million letters and 430,000 visits by 597,000 petitionersseeking environmental redress. Officials have expressed concern that China’s environmental problems are a leading threat to social stability.

For China, the challenges of using the law for environmental protection are formidable. Unlike the US with its long history and culture of using law and the courts, China essentially began in 1979 to rebuild anew a legal system that had been entirely dismantled in the previous few decades. China’s court system remains weak, with poorly trained judges and regular intervention in cases by local governments that often have a financial interest in polluting enterprises. Moreover, Chinese environmental laws are often lacking in effective enforcement provisions.

Hat-tip: Absurdist Republic

Monday 5 March 2007

"UK University Ranking": large city effect

In this post we return to the issue of UK University rankings. This time we will look at the correlation between a University's position in the World Ranking, the size of the host city and the size of the Chinese community.

Why is a University ranking important? The blog is primarily concerned with information for overseas students wanting to pick a University to study economics.

However, there are some underlying economics related to the human capital literature. Any student, especially one who wants to study Economics or an MBA, should be looking to maximise their lifetime earnings.

If a student is from China in particular, when the graduate returns to China and has a number of job interviews lined up (after investing a large amount of their own or their parents money in getting a UK education) they want their qualifications and University to have an impact. Both Economics and Business are respectable degrees although Economics is perceived as a "harder" science but may be less use to those wanting to take over the family firm a few years down the line.

One important element will be if the interviewer has heard of the City and University of study. The UK cities that are the most internationally well known include London, Manchester, Birmingham, Sheffield, Glasgow and Liverpool.

These cities are also the most likely to have large Chinese communities and where the student may feel the most comfortable.

So which are the 10 largest cities in the UK?

Town Population

1 London 7,172,091
2 Birmingham 970,892
3 Glasgow 629,501
4 Liverpool 469,017
5 Leeds 443,247
6 Sheffield 439,866
7 Edinburgh 430,082
8 Bristol 420,556
9 Manchester 394,269
10 Leicester 330,574


If we now compare those results with the top UK Universities according to the Shanghai Jiao Tong University top 500 University list and the Newsweek top 100 Global Universities ranking (more below) we see a strong correlation.

World Ranking University

2. University of Cambridge
10. University of Oxford
23. Imperial College London
26. University College London
50. University of Manchester
52. University of Edinburgh
62. University of Bristol
69. University of Sheffield
79. University of Nottingham
83. Kings College London
90. University of Birmingham

Only Nottingham, Bristol and of course Oxford and Cambridge are top 100 Universities but not in the top 10 cities by size.

Which cities have large Chinese populations:

1. Birmingham,
2. Brighton,
3. Cambridge,
4. Edinburgh,
5. Liverpool,
6. London,
7. Manchester,
8. Milton Keynes,
9. Sheffield


Again, there is a high correlation between the Universities with large populations, with large Chinese populations and being a top 10 UK University.

The Universities in all 3 groups are:


All of these Universities are included in our list of MSc Economics courses in the sidebar.

Other posts that may be of interest:

Which UK University to study in? "Academic Ranking of World Universities"

MSc Economics: Google listings and sponsored advertising

Studying "Economics in the UK": General Links

"MSc Economics": How much does it cost?

Nobel Laureate Spence Sees `Chaotic' Economic Growth in China

Bloomberg.com now have a radio station (with downloadable MP3 and ipod interviews) with top economists on a large range of topics.

The interview linked to here is on "Asia's economic growth and the outlook for global investment in technology".
Michael Spence, former dean of the Stanford University Business School and co-winner of the 2001 Nobel Prize in economics, talks with Bloomberg's Tom Keene from Palo Alto about Asia's economic growth and the outlook for global investment in technology.

The interview is dated the 1st March 2007:

Bloomberg ontheeconomy

Michael Spence Profile:
A. Michael Spence is a senior fellow at the Hoover Institution and Philip H. Knight Professor Emeritus of Management in the Graduate School of Business, Stanford University. In 2001, he was awarded the Nobel Memorial Prize in Economic Sciences for his contributions to the analysis of markets with asymmetric information. He received the John Bates Clark Medal of the American Economic Association awarded to economists under 40. He is currently the chairman of an independent Commission on Growth and Development.

How China is ruled: Basic Overview

For the record I am posting a quick overview from the BBC to show the structure of China's political system. This may shed some light on the previous post about Property Rights and Wen's speech from yesterday.

How is China Ruled

On the BBC website each box provides a link for further information.

The Communist Party has ruled China since 1949, tolerating no opposition and often dealing brutally with dissent.

Nowadays the country is actually governed by nine men on top of a pyramid of power which reaches into every village and workplace.

They have never faced competitive election, making it to the top thanks to their patrons, abilities and survival instincts in a political culture where saying the wrong thing can lead to a life under house-arrest, or worse.

Formally, their power stems from their positions on the Party's decision-making Politburo.

But in China, personal relations count much more than job titles. A leader's influence rests on the loyalties he or she builds with superiors and protégés, often over decades.

That was how Deng Xiaoping remained paramount leader long after resigning all official posts, and it explains why Party elders sometimes play a key role in big decisions.

The Politburo controls three other important bodies and ensures the Party line is upheld.

These are the military affairs commission, which controls the armed forces; the National People's Congress, or parliament; and the State Council, the government's administrative arm.