Sunday 29 April 2007

China's reserve ratio rises again - interest rates next?

China appears to be set on controlling a potentially overheating economy by restricting the ability of China's commercial banks to lend money. This will have the affect of absorbing liquidity and lowering bank lending (especially for smaller banks).

However, such liquidity tightening methods are rarely used by Western governments as banks have endless methods of getting around such restrictions.

Moreover, such a small increase (even if it is the seventh in a row could be seen as minor tinkering given China's rapid growth (over 11%) and inflation creeping up to 3.3%.

Interest rates will have to rise and the currency appreciate. As we have said before on this blog however, is that domestic consumption needs to increase and savings need to fall - for this to happen requires huge structural and cultural changes with precautionary savings only falling as the social security net widens (which all costs money and requires investment).

The China Daily article gives a decent if badly written overview. Some quotes are included in this post.

China hikes bank reserve ratio to cool investment
The deposit reserve ratio for depository financial institutions will be raised by 0.5 percentage point to 11 percent starting on May 15, the People's Bank of China said in a statement on its website.

That marked the seventh hike in less than a year in addition to three interest rate increases as regulators try to prevent the economy from overheating.

China's economy surged 11.1 percent in the first quarter of this year after growing 10.7 percent in 2006, as shown in official statistics.

Meanwhile, fixed-asset investment countrywide grew a robust 23.7 percent during March, while the consumer price index (CPI), a key indicator of inflation, rose 3.3 percent last month, above the government's three percent target.

In the first quarter, China's commercial banks posted a 16.25 percent growth in loans, up 1.52 percent from the same period last year.

Meanwhile, Zhu noted the reserve ratio hike is a mild control mechanism, compared with an interest rate increase, especially during the current sensitive period leading to the May Day holiday. There has been speculation in the market that the central bank may raise the interest rate before, during or soon after the holiday.

This final quote is telling - expect a rate rise AFTER the May day holiday but not before.

The asset bubbles in China are growing....

Saturday 28 April 2007

Environmental Summary: Trouble ahead

Chinadialogue have an excellent summary article by Orville Schell. The article should be read in its entirety but here are a few quotes:

Cleaning the air with China

This year, China broke a 161-year-old temperature record. The environmental consequences of the country’s breakneck growth are evident, says Orville Schell, and coal is at the heart of the crisis.

In 2000, the U.N. Development Program reported that air pollution was already causing about 400,000 premature deaths a year. It is hardly surprising, as China is home to 16 of the 30 cities with the worst air pollution in the world.

China's State Environmental Protection Administration (SEPA) estimates that sulphur-dioxide (SO2) emissions alone are causing China's GNP an annual loss of 12%, which is about equal to its impressive growth rate.

Last November, China did commit itself to deriving 15% of its energy from renewable sources by 2020 and to cutting the energy consumed per unit of GDP by 20% over five years. But during the first half of last year, Beijing not only failed to meet these targets but had an increase of 8% in energy consumption per unit of GDP. Initial reports from China's massive hydropower facility at the Three Gorges are also underwhelming; it appears that the Yangtze River isn't yet flowing fast enough to keep the turbines turning.

Wednesday 25 April 2007

Joseph Stiglitz on China's "new economic model"

An interesting article from Stiglitz on China's new economic model.

Professor Stiglitz is someone who should be listened to and has written excellent books on globalisation.

Globalization and Its Discontents
Making Globalization Work: The Next Steps to Global Justice

In this article Stiglitz covers export driven growth, rural-urban migration, social services, environmental problems and US-China relations. This is a well balanced article that makes some interesting points and provides clues as to some likely future scenarios.

China’s New Economic Model
China’s success since it began its transition to a market economy has been based on adaptable strategies and policies: as each set of problems are solved, new problems arise, for which new policies and strategies must be devised. This process includes social innovation . China recognized that it could not simply transfer economic institutions that had worked in other countries; at the least, what succeeded elsewhere had to be adapted to the unique problems confronting China.

Today, China is discussing a “new economic model.” Of course, the old economic model has been a resounding success, producing almost 10% annual growth for 30 years and lifting hundreds of millions of Chinese out of poverty. The changes are apparent not only in the statistics, but even more so in the faces of the people that one sees around the country.

I recently visited a remote Dong village in the mountains of Quizho, one of China’s poorest provinces, miles away from the nearest paved road; yet it had electricity, and with electricity had come not just television, but the internet. While some rising incomes came from remittances from family members who had migrated to coastal cities, the farmers, too, were better off, with new crops and better seeds: the government was selling, on credit, high-grade seeds with a guaranteed rate of germination.

China knows that it must change if it is to have sustainable growth. At every level, there is a consciousness of environmental limits and the realization that the resource-intensive consumption patterns now accepted in the United States would be a disaster for China – and for the world. As an increasing share of China’s population moves to cities, those cities will have to be made livable, which will require careful planning, including public transportation systems and parks.

Equally interesting, China is attempting to move away from the export-led growth strategy that it and other East Asian countries have pursued. That strategy supported technology transfer, helping to close the knowledge gap and rapidly improving the quality of manufactured goods. Export-led growth meant that China could produce without worrying about developing the domestic market.

But a global backlash has already developed. Even countries seemingly committed to competitive markets don’t like being beaten at their own game, and often trump up charges of “unfair competition.” More importantly, even if markets are not fully saturated in many areas, it will be hard to maintain double-digit growth rates for exports.

So something has to change. China has been engaged in what might be called “vendor finance,” providing the money that helps finance the huge US fiscal and trade deficits, allowing Americans to buy more goods than they sell. But this is a peculiar arrangement: a relatively poor country is helping to finance America’s War on Iraq, as well as a massive tax cut for the richest people in the world’s richest country, while huge needs at home imply ample room for expansion of both consumption and investment.

In fact, to meet the challenge of restructuring China’s economy away from exports and resource-intensive goods, China must stimulate consumption. While the rest of the world struggles to raise savings, China, with a savings rate in excess of 40%, struggles to get its people to consume more.

Providing better social services (public health care, education, and nation-wide retirement programs) would reduce the need for “precautionary” savings. More access to finance for small and medium sized businesses would help, too. And “green taxes” – such as on carbon emissions – would shift consumption patterns while discouraging energy-intensive exports.

As China moves away from export-led growth, it will have to look for new sources of dynamism in its growing entrepreneurial ranks, which requires a commitment to creating an independent innovation system. China has long invested heavily in higher education and technology; now it is striving to create world-class institutions.

But if China wants a dynamic innovation system, it should resist pressure by Western governments to adopt the kind of unbalanced intellectual property laws that are being demanded. Instead, it should pursue a “balanced” intellectual property regime: because knowledge itself is the most important input in the production of knowledge, a badly designed intellectual property regime can stifle innovation – as has been the case in America in some areas.

Western technological innovation has focused too little on reducing the adverse environmental impact of growth, and too much on saving labor – something that China has in abundance. So it makes sense for China to focus its scientific prowess on new technologies that use fewer resources. But it is important to have an innovation system (including an intellectual property regime) that ensures that advances in knowledge are widely used. That may require innovative approaches, quite different from intellectual property regimes based on privatization and monopolization of knowledge, with the high prices and restricted benefits that follow.

Too many people think of economics as a zero-sum game, and that China’s success is coming at the expense of the rest of the world. Yes, China’s rapid growth poses challenges to the West. Competition will force some to work harder, to become more efficient, or to accept lower profits.

But economics is really a positive-sum game. An increasingly prosperous China has not only expanded imports from other countries, but is also providing goods that have kept prices lower in the West, despite sharply higher oil prices in recent years. This downward pressure on prices has allowed Western central banks to follow expansionary monetary policies, underpinning higher employment and growth.

We should all hope that China’s new economic model succeeds. If it does, all of us will have much to gain.

Chinese Partners, Western Firms and the "Hotel California" effect.

In a series of posts charting the extent of corruption in China and how this affects Western companies comes an excellent summary article from the always consistent China Law Blog.

In recent economic papers by myself and others it has been shown that corruption has a negative affect on FDI (at the country and regional level) as well as damaging reputation effects (and why of course China likes to keep all publicity about corruption levels to a minimum). This is not, of course, much of a surprise although there is the "speed money" theory where high corruption levels act to attract FDI if the investor believes that well placed bribes can speed up certain processes (and may then even result in increases in economic growth).

It is interesting therefore to get a new perspective - that of the advice given by foreign partners to Western investors/partners.

What is particularly interesting is that the "advice" from the local Chinese firms gives us an excellent glimpse into what is really happening on the ground and the pereived levels of corruption from locals.

This is in no way is meant to encourage Western firms to break the law but what is does show is that Western firms who DO stick closely to their perception of what the law is, are at a competitive disadvantage compared to local Chinese firms who may be taking so-called "short-cuts". Local firms are therefore exploiting local knowledge for economic gain and thus making business harder in China that it would be in a corruption free economy.

The other interesting aspect is what could be called the "Hotel California" effect. This is where foreign investment is allowed in with few restrictions, but once there it is made very difficult to leave.

"'Relax,' said the night man,
'We are programmed to receive.
You can check-out any time you like,
But you can never leave!'"

The encouraging bit of this post is that it is clear that lawyers such as those at China Law Blog take Chinese law very seriously AND give the impression that things have been tightened up considerably. This bodes well for China being able to throw off its reputation as a "wild west (or should that be wild east) town"

I have posted this article in full so as not to disrupt the flow of the argument.

Foreign Partners In China Crime Do The Time

Yet another great post by Andrew Hupert over at the Chinese Negotiation/Negotiating in China Blog, entitled, Negotiating in China: Partners in Crime. Post is on how foreign companies must avoid engaging in illegal acts just because asked to do so by their Chinese partner.

Now I know many of you are saying/thinking, "Well, Duh," (which is what I always get from my daughters whenever I say something they deem particularly obvious), but I can assure you foreign business constantly engage in illegal activities in China on the advice of their Chinese partners.

Hupert's post starts out by noting how if an American company with were to ask you to issue a fake receipt, forge a contract or commit fraud, you would almost certainly say "no" and terminate your relationship. But when "many newly arrived westerners are asked to do the same type of things in China . . . a surprisingly large number actually do it."

The post correctly notes how China now has a functioning legal system, at least when it comes to foreigners against whom it does not hesitate to use it:

The days of back-room deals, special favors for connections and outright bribery are largely over for run-of-the-mill transactions. (Ok, there may still be a lot of corruption and back-channel deals at higher levels, but if you are reading this for business entry information then you shouldn’t be dealing with that sort of thing yet.) China has a new legal system that it is very proud of. So proud, in fact, that they are excited about showing it off to their new foreign friends. Trust me, you don’t want to see it close up.

Your Chinese parter will entice you to engage in illegalities by telling you "everyone breaks the rules," "the government expects you to cut corners," "no one does the paperwork," and, "you'll never be caught." Hupert's response to this is eminently sensible:

Well, they don’t, it doesn’t, they do, and you will.

Plenty of Americans evade taxes and break laws in the US, but that doesn’t make it a good idea. You certainly wouldn’t recommend that a newcomer to your town start his new venture by committing fraud and forgery. Well, don’t be that guy in China.

The post then points out THE relevant difference between you and your Chinese partner: he or she is Chinese and you are NOT:

Yes, your local lawyer, accountant and partners have had a ripping success evading the authorities and living by their wits. But that doesn’t mean it will work for you. The Chinese government is very sensitive about foreigners it perceives to be exploiting China or taking advantage of Chinese people – and breaking business laws will put you in that category.

Nearly every month, one of my firm's clients comes to us planning to do something blatantly illegal in China, solely on the instructions of and with assurances from one of its Chinese partners. This happens so often that I have a stock response, which is, "what makes you think Mr. so and so is an expert in Chinese law as it applies to foreigners?" I then ask whether it would make sense for their assistant plant manager here in the United States to be the one giving legal advice to foreign companies doing business in the United States.

The post then goes on to point out that making the money in China and keeping the money you made are two very different things:

Another issue in China is the exit strategy. You may be able to buy the property, you may be able to sell the product – but collecting the money, selling the business and getting the money out are all much different things. You will see the same bureaucrats on the way out that you saw on the way in – so you’d better have all your paperwork.

I found this part of the post particularly interesting because just last week I spoke with a U.S. company owner who kept insisting his million dollar China investment had to have been "completely legal" because the local government knew about it and had done nothing to stop it. My explanation that the governments in China (particularly the local ones) tend to be very liberal in allowing money to come into China but very strict (particularly Beijing) when it comes time for that money to leave China seemed to stun him. This had simply never occurred to him.

I have said it before and I will say it again. In practice, there are essentially two legal systems in China, one for foreign companies and one for domestic companies.

In many ways, figuring out what is legal and what is illegal is easier for foreign companies because those companies need to know only one thing: they must follow the law as it is written. Do this no matter what anyone may say.

Tuesday 24 April 2007

China and Production Networks

I am particularly interested in my academic work on the relationship between China and its near neighbours - Malaysia, Thailand, Indonesia, Singapore, Vietnam etc.

From an adjustment perspective, the rise of China provides both an opportunity and a threat. China's growing consumer lead society will demand more products but the intense competition from Chinese firms may lead to import as well as increased competition in their home markets.

This World Bank working paper looks at a related topic - that of production networks across East Asia and the integration of China. The issue above is touched on in the abstract - although Chinese growth has been beneficial it has resulted in some vulnerabilities.

This is not a technically demanding paper and has lots of pictures and simple to understand tables.

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

World Bank - EASPR March 1, 2007

World Bank Policy Research Working Paper No. 4160

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

Keywords: Economic Theory & Research, Free Trade, Trade Policy, Trade Law, Technology Industry

Monday 23 April 2007

Research Paper: Projections of Chinese Energy Demand in 2020

The news that China is about to takeover the US in terms of its total CO2 emissions (although a mile away from any per capita comparison) it a staple of many a newspaper article.

In the following paper Adams and Shachmurove use an econometric model to predict Chinese energy demand in 2020. The reason for posting this article is that I tend to agree with its conclusions. For all the talk of "increased energy efficiency" this will be drowned by the sheer size of the increase in demand for energy particularly from the increased demand for transport (car ownership).

In economics we tend to talk about scale, composition and technique effects when talking about the environmental impact of growth. Whilst new technology will affect the "technique" so that all cars are cleaner, the size of the scale effect means the sheer number of extra cars will outweigh the technique effect by a considerable margin.

"Projections of Chinese Energy Demands in 2020" PIER Working Paper No. 07-012

Northeastern University - College of Business

City University of New York - Department of
Economics, University of Pennsylvania - Department
of Economics

Full Text:

ABSTRACT: As current trends of Chinese economic growth and motorization continue, its demand for higher efficiency fuels (oil, gas, and electric power) will increase. This, coupled with China's limited domestic production, can translate into a massive demand for energy imports. To predict China's energy demand into 2020, an econometric model of the Chinese energy economy is constructed based on its energy balance. This paper suggests that China's increase demand for energy imports will be most sensitive to increases in motorization rather than economic growth. It can be partially offset by increasing domestic energy production or energy efficiency.

Environmental Roundup: Farm Land Polluted, Water Shortages and Global Warming

Today PlantArk ran 3 stories on China - all with worrying implications for the Chinese economy.

China has not been growing sustainably and today sees the first official response that clearly states that future economic growth is threatened by the affects of global warming.

China Says Ten Percent of Farming Land Contaminated
Over 10 percent of China's farm land is contaminated, threatening the ability of the world's most populous nation to feed itself, the official Xinhua news agency said on Sunday.

Excessive fertilizer use, dirty water and solid waste were among the main pollutants, with heavy metals alone poisoning around 12 million tonnes of grain a year, the report said, quoting the Ministry of Land and Resources.

That pollution caused 20 billion yuan (US$2.59 billion) of annual losses.

In total, around 12.3 million hectares have been damaged, and the country is also losing large amounts of arable land to development as its cities expand, posing a "severe threat" to national food security, Xinhua quoted an unnamed ministry official saying.

China had already announced that agricultural land had shrunk by 306,800 hectares in the first 10 months of last year alone, to a total 121.8 million hectares.

Beijing is trying to halt the outward sprawl of its cities, with a series of restrictions on luxury developments and the use of farmland for housing or industrial zones.

China's Hebei Province Hit by Drinking Water Shortage
Some 500,000 people in China's northern province of Hebei are suffering from a shortage of drinking water following a drought that began late last year, the official Xinhua news agency said on Saturday.

Quoting local water conservation authorities, the agency said more than 200 small reservoirs had dried up in Hebei.

Sources at the provincial bureau of agriculture said the water shortage was affecting farmland in Hebei, one of China's major wheat and corn growing provinces.

It was also affecting hydro-power generation, the news agency said.

Last month it was reported that a drought in southwestern China could continue well into April, affecting nearly 10 million people and 9 million livestock.

China Says Global Warming Threatens Development
Global warming could devastate China's development, the nation's first official survey of climate change warns, while insisting economic growth must come before greenhouse gas cuts.

Hotter average global temperatures fueled by greenhouse gases mean that different regions of China are likely to suffer spreading deserts, worsening droughts and floods, shrinking glaciers and rising seas, the National Climate Change Assessment states.

This environmental upheaval could derail the ruling Communist Party's plans for sustainable development, a copy of the report obtained by Reuters says.

"Climatic warming may have serious consequences for our environment of survival as China's economic sectors, such as agriculture and coastal regions, suffer grave negative effects," the report states.

There is a lot more in this last article. Talking about the report:
The 400-page report was written over several years by experts and officials from dozens of ministries and agencies, representing China's first official response to global warming.

With its mixture of dire warnings and caveats, it bears the markings of bureaucratic bargaining.

On the potential disasters ahead for China:
By the end of the century, glaciers on the Qinghai-Tibet highlands that feed the Yangtze river could shrink by two thirds. Further downstream, increasingly intense rainfall could "spark mud and landslides and other geological disasters" around the massive Three Gorges Dam.

Coastal cities will need to build or strengthen barriers to ward off rising sea levels.

Unless steps are taken, water scarcity and increasingly extreme weather could reduce nationwide crop production by up to 10 percent by 2030. Wheat, rice and corn growing capacity could fall by up to 37 percent in the second half of the century.

"If we do not take any actions, climate change will seriously damage China's long-term grain security," the report states.

So what of the future? It is clear that the Chinese government is increasingly prepared to face up to the impact of China's rapid growth on the environment and is now showing some willingness to act now to prevent far worse (and more costly) disasters in the future.

They key to China's environmental future is for China and the Party to have a clear understanding of the economics - that is to say, the costs of doing nothing now may be severe costs in the future. However, it must be remembered that the cause of global warming today was not China but the West's rapid industrialisation. So whilst China is certainly contributing to future problems, they also have to adapt to the man-made global warming from the developed world.

Monday 16 April 2007

Chinese students and local labour laws

In this blog we occasionally post on how, why and where Chinese students should study, making comparisons across country and University. See the sidebar for a series of links.

One of the concerns I have and I am sure Chinese students have when thinking of studying in the UK is cost. We have covered this HERE.

One issue we have not discussed is that once in the UK, students can offset the approximate £10,000 fees and £7,000 living costs (and travel) by taking temporary employment in the UK. With a minimum wage of over £5 an hour and higher rates available it is at least possible to offset some of the costs. Again, for Chinese students it is wise to head for the large cities that have a larger Chinese community and ample job opportunities in the formal and informal sector.

In contrast this post from China Economic Review editors highlights the difficulties faced by students in China.

Students not protected

Students in Guangdong province that have to work to support themselves are not protected by labor laws.

New legislation that kicked in earlier this year sets minimum wages for part-time workers at a less-than-princely US$0.95 or RMB7.5 per hour but, as it turns out, these rules can be really more like guidelines or suggestions as far as students as concerned. Reporters from a local newspaper in Guangzhou, the Kuai Xin Bao, reported in March that McDonald’s and Yum! Brands (owner of Pizza Hut and KFC) pay their part-time student employees about US$0.52 or RMB4 per hour.

The scoop prompted much discussion and comments of abuse while the companies maintained they had done nothing legally wrong.

As it turns out, they were right. The labor protection bureau in Guangdong cleared them last week, Forbes reported. Provincial officials declared that the relationship between employer and student worker is not a formal working relationship.

Let’s see. One imagines that said student must have to show up on time. He or she is probably expected to work while at the restaurant that employs him. He or she supposedly receives a salary for his or her work. Yup, can’t see how that is an official working relationship. The students in question are probably flipping burgers in between long study sessions because it’s fun, a distraction from physics, engineering or arts.

At the end of the day, most of these guys don’t need the work, not really. They put on those stylish red KFC caps because they look cool. They could just as easily finance their silly hobbies like the (very) occasional night on the town, eating and sleeping under a roof through myriad other activities like… well… hang on… something will come to me.

Research Paper: Health Shocks, Village Elections, and Long-Term Income: Evidence from Rural China

This paper is interesting as it highlights a potentially rich data source. Being an NBER working paper a certain quality level is assured.

"Health Shocks, Village Elections, and Long-Term Income: Evidence from Rural China"
NBER Working Paper No. W12686

Contact: LI GAN
Texas A&M University - Department of Economics,
National Bureau of Economic Research (NBER)

World Bank - Development Research Group (DECRG),
Peking University - Guang Hua School of Management

Co-Author: YANG YAO
Beijing University - China Center for Economic

Full Text:
ABSTRACT: Using a sample of households in 48 Chinese villages for the period 1986-2002, this paper studies the dynamic effects of major health shocks on household income and the role played by village elections in mitigating these effects. Our results show that in the first 15 years after a shock, a shock-hit household on average falls short of its normal income trajectory by 11.8% and its recovery would take 19 years. Based on the premise that shock-hit families impose negative externalities on richer families by borrowing from them, our political economy model predicts that the outcome of village elections would differ from that of a standard median voter model in that the elected village leaders tend to adopt pro-poor policies. Our empirical study finds that villages are more likely to establish a healthcare plan after the election is introduced. In addition, village elections reduce the probability of a household to borrow by 16.7% when one of its working adults is seriously sick. As a result, they reduce more than half of the negative effect of a health shock on household income.

Saturday 14 April 2007

Exporting and Firm Performance: Chinese exporters and the Asian Financial Crisis

This is a paper from February 2007 that I must read carefully by Albert Park, Dean Yang, Xinzheng Shi (University of Michigan) and Yuan Jiang (National Bureau of Statistics, China). The paper looks at the affect of the Asian financial crisis on the export behaviour of Chinese exporters looking specifically at how the exchange rate and destination of exports impacts on firm level productivity.

An interesting paper. Data issues will be crucial here and it will be interesting to see how they deal with data quality issues although having a co-author from the NBSChina should help). This paper was also a working paper in 2005 so I expect some updating has been done possibly in light of referee comments.

Exporting and Firm Performance: Chinese exporters and the Asian Financial Crisis
This paper analyzes firm panel data to examine how export demand shocks associated with the 1997 Asian financial crisis affected Chinese exporters. We construct firm-specific exchange rate shocks based on the pre-crisis destinations of firms’ exports. Because the shocks were unanticipated and large in magnitude, they are an ideal instrument for identifying the impact of exporting on firm productivity and other aspects of firm performance. We find that firms whose export destinations experience greater currency depreciation have slower growth in exports and that export growth increases firm productivity as well as other measures of firm performance. Consistent with the “learning-by-exporting” hypothesis, the productivity impact of export growth is greater when firms export to more developed countries.

Friday 13 April 2007

Academia and the Party in China

A fascinating article. A must read for all social scientists working on and in China.
I have re posted this article in full because of the importance of the message contained within it.

Economics specific issues highlighted in bold.

The questions raised here deserve close attention.

H/T: Absudist Republic.

Have China Scholars All Been Bought?

Mr. Holz is an economist and professor in the social science division of the Hong Kong University of Science and Technology.
Academics who study China, which includes the author, habitually please the Chinese Communist Party, sometimes consciously, and often unconsciously. Our incentives are to conform, and we do so in numerous ways: through the research questions we ask or don’t ask, through the facts we report or ignore, through our use of language, and through what and how we teach.

Foreign academics must cooperate with academics in China to collect data and co-author research. Surveys are conducted in a manner that is acceptable to the Party, and their content is limited to politically acceptable questions. For academics in China, such choices come naturally. The Western side plays along.

China researchers are equally constrained in their solo research. Some Western China scholars have relatives in China. Others own apartments there. Those China scholars whose mother tongue is not Chinese have studied the language for years and have built their careers on this large and nontransferable investment. We benefit from our connections in China to obtain information and insights, and we protect these connections. Everybody is happy, Western readers for the up-to-date view from academia, we ourselves for prospering in our jobs, and the Party for getting us to do its advertising. China is fairly unique in that the incentives for academics all go one way: One does not upset the Party.

What happens when we don’t play along is all too obvious. We can’t attract Chinese collaborators. When we poke around in China to do research we run into trouble. Li Shaomin, associate professor in the marketing department of City University in Hong Kong and a U.S. citizen, spent five months in a Chinese jail on charges of “endangering state security.” In his own words, his crimes were his critical views of China’s political system, his visits to Taiwan, his use of Taiwanese funds to conduct research on politically sensitive issues, and his collecting research data in China. City University offered no support, and once he was released he went to teach at Old Dominion University in Virginia. One may wonder what five months in the hands of Chinese secret police does to one’s psyche, and what means the Party used to silence Mr. Li. To academics in Hong Kong, the signal was not lost.

China researchers across different disciplines may not all be equally affected. Economists and political scientists are likely to come up against the Party constraint frequently, and perhaps severely. But even sociologists or ethnographers can reach the forbidden zone when doing network studies or examining ethnic minority cultures.

Our self-censorship takes many forms. We ask Western instead of China-relevant questions. We try to explain the profitability of state-owned enterprises (SOEs) by basic economic factors, when it may make more sense to explain it by the quality of enterprise management (hand-picked by the Party’s “Organization Department”), or by the political constraints an enterprise faces, or by the political and bureaucratic channels through which an enterprise interacts with its owners, employees, suppliers and buyers. But how to collect systematic information about the influence of the Party on the operation of a state-owned or state-controlled enterprise, when these are typically matters that nobody in the enterprise will speak about?

We talk about economic institutions and their development over time as if they were institutions in the West. “Price administration” regulations, central and local, abound, giving officials far-reaching powers to interfere in the price-setting process. Yet we accept official statistics that show 90% of all prices, by trading value, to be market-determined. We do not question the meaning of the Chinese word shichang, translated as “market,” but presume it to be the same as in the West.

Similarly, we take at face value China’s Company Law, which makes no mention of the Party, even though the Party is likely to still call the shots in the companies organized under the Company Law. Only if one digs deeper will one find unambiguous evidence: The Shaanxi Provincial Party Committee and the Shaanxi government in a joint circular of 2006 explicitly require the Party cell in state-owned enterprises (including “companies”) to participate in all major enterprise decisions; the circular also requests that in all provincial state-owned enterprises the chairman of the board of directors and the Party secretary, in principle, are one and the same person. At the national level, the leadership of the 50 largest central state-owned enterprises—enterprises that invest around the world—is directly appointed by the Politburo. Economists do not ask what it means if the Party center increasingly runs enterprises in the U.S. and Europe.

The governor and Party secretary of China’s central bank, Zhou Xiaochuan, writes extensively in Chinese about “comprehensively accelerating central bank work” based on the “three represents” (the Party represents the “advanced productive forces, the advanced Chinese culture and the basic interests of the Chinese people”). He describes the three represents as “guiding macroeconomic policy” in ways that defy any Western concept of logic. And yet we take this person as seriously as if we were dealing with the governor of a Western central bank, as if China’s central bank were truly setting monetary policy, and as if the channels through which monetary policy operates in China and the impact monetary policy has on the economy are the same as in the West.

Are we na├»ve? Or are we justified in ignoring the central bank governor’s second—or rather, first—life as Party secretary? Are we subconsciously shutting out something that we do not comprehend, or something we do not want to see because it doesn’t fit into our neat, Western economic concepts?

Article after article pores over the potential economic reasons for the increase in income inequality in China. We ignore the fact that of the 3,220 Chinese citizens with a personal wealth of 100 million yuan ($13 million) or more, 2, 932 are children of high-level cadres. Of the key positions in the five industrial sectors—finance, foreign trade, land development, large-scale engineering and securities—85% to 90% are held by children of high-level cadres.

With the introduction of each new element of reform and transition, cadres enrich themselves: the dual track price system, the nonperforming loans, the asset-stripping of SOEs, the misuse of funds in investment companies and in private pension accounts. The overwhelmingly irregular transformation of rural into urban land may well qualify as “systematic looting” by local “leaders.” Local cadres are heavily invested in the small, unsafe coal mines they are supposed to close, and nobody knows how they obtained their stakes in these operations.

A general dearth of economic information shapes our research. Statistics on specific current issues are collected by the National Bureau of Statistics on special request of the Party Central Committee and the State Council. None of this information is likely to be available to the public. The quality of the statistics that are published comes with a large question mark. Outside the realm of official statistics, government departments at all levels collect and control internal information. What is published tends to be propaganda—pieces of information released with an ulterior objective in mind. One solution for China economists then is to resign themselves to conducting sterilized surveys and to building abstract models on the basis of convenient assumptions—of perfect competition, profit maximization given a production technology, household utility maximization with respect to consumption and subject to financial constraints, etc. How much this can tell us about China is unclear.

Other China economists openly accept favors from the Party. We can use our connections to link up with government cadres. We may be hosted in field research by local governments and local Party committees. A local Party committee, at one point, helped me out by providing a car, a Party cadre and a local government official. They directed me to enterprise managers who, presumably, gave all the right answers. The hosts were invariably highly supportive, but I ended up working in exactly the box in which they were thinking and operating. (This seems to be the only research project that I never completed.) Furthermore, those who go to the field and interview cadres may not only unwillingly become a tool of the Party, but also a tool in departmental infighting.

Our use of language to conform to the image the Party wishes to project is pervasive. Would the description “a secret society characterized by an attitude of popular hostility to law and government” not properly describe the secrecy of the Party’s operations, its supremacy above the law and its total control of government? In Webster’s New World College Dictionary, this is the definition of “mafia.”

We speak of the Chinese “government” without further qualification when more than 95% of the “leadership cadres” are Party members, key decisions are reached by leadership cadres in their function as members of Party work committees, the staff of the government Personnel Ministry is virtually identical to the staff of the Party Organization Department, the staff of the Supervision Ministry is virtually identical to the staff of the Party Disciplinary Commission, and the staff of the PRC Central Military Commission is usually 100% identical to the staff of the Chinese Communist Party’s Central Military Commission. Does China’s government actually govern China, or is it merely an organ that implements Party decisions? By using the word “government,” is it correct to grant the Chinese “government” this association with other, in particular Western, governments, or would it not be more accurate to call it the “government with Chinese characteristics” or the “mafia’s front man”? Who questions the legitimacy of the Party leadership to rule China, and to rule it the way it does?

The Party’s—or, the mafia’s—terminology pervades our writing and teaching. We do not ask if the Chinese Communist Party is communist, the People’s Congresses are congresses of the people, the People’s Liberation Army is liberating or suppressing the people, or if the judges are not all appointed by the Party and answer to the Party. We say “Tiananmen incident,” in conformance with Party terminology, but called it “Tiananmen massacre” right after the 1989 Tiananmen massacre, when “incident” would have made us look too submissive to the Party.

Which Western textbook on China’s political system elaborates on the Party’s selection and de facto appointment of government officials and parliamentary delegates, and, furthermore, points out these procedures as different from how we view political parties, government and parliament in the West? By following the Party’s lead in giving the names of Western institutions to fake Chinese imitations, we sanctify the Party’s pretenses. We are not even willing to call China what its own constitution calls it: a dictatorship (a “people’s democratic dictatorship led by the working class and based on the alliance of workers and peasants, which is in essence the dictatorship of the proletariat”).

Who lays out the systematic sale of leadership positions across Chinese governments and Party committees? The Heilongjiang scandal provides the going price list from the province down to the county level, a list not to be found in any textbook. The publicly known scope of the sale of positions does not leave much room for interpretation. For these salesmen and saleswomen of government positions to have nothing to fear, the rule of the mafia and its code of silence must be powerful beyond imagination.

What is not normal is accepted as normal for China. Hackers were collecting the incoming emails of a faculty member of the University of Hong Kong from the university’s server until they were found out in June 2005, when they accidentally deleted emails. The hackers came from three mainland Internet provider addresses, and all three IP addresses are state telecommunications firms. Within China, the staff of the foreign students’ dormitories includes public security officials who keep tabs on foreign students and compile each student’s file. In a Shanghai institution of tertiary education, typing “Jiang Zemin” into a search engine from a computer located on campus, three times in a row, leads to the automatic shutdown of access to that search engine for the whole campus. The Party is rumored to employ tens of thousands of Internet “police.” Phone calls are listened to, if not systematically recorded. Emails are filtered and sometimes not delivered. Who will not learn to instinctively avoid what the Party does not want them to think or do?

Party propaganda has found its way deeply into our thinking. The importance of “social stability” and nowadays a “harmonious society” are accepted unconditionally as important for China. But is a country with more than 200 incidents of social unrest every day really socially stable, and its society harmonious? Or does “socially stable” mean no more than acceptance of the rule of the mafia?

“Local government bad, central government good” is another propaganda truism that is accepted unquestioningly in the foreign research community, informing and shaping research questions. Yet, viewing the Party as a mafia, there is no room for such niceties, and reporting outside academia indeed suggests that the center hides a rather hideous second face, and inevitably does so for a purpose.

We see the “ends”—successful reform—and don’t question the “means.” The Party’s growth mantra is faithfully accepted as the overarching objective for the country and the one measure of successful reform. Nobody lingers on the political mechanisms through which growth is achieved. The mafia runs China rather efficiently, so why worry about how it is done, and what the “side effects” are? We obviously know of the labor camps into which people disappear without judiciary review, of torture inflicted by the personnel of state “security” organs, and of the treatment of Falun Gong, but choose to move on with our sterilized research and teaching. We ignore that China’s political system is responsible for 30 million dead from starvation in the Great Leap Forward, and 750,000 to 1.5 million murders during the Cultural Revolution. What can make Western academics stop and think twice about who they have bedded down with?

If academics don’t, who will? The World Bank and other international organizations won’t because they profit from dealing with China. Their banking relationship depends on amicable cooperation with the Party, and a de facto requirement of their research collaboration is that the final report and the public statements are acceptable to Party censors. The research departments of Western investment banks won’t because the banks’ other arms likely depend on business with China.

Does this all matter? Does it matter if China researchers ignore the political context in which they operate and the political constraints that shape their work? Does it matter if we present China to the West the way the Party leadership must like us to present China, providing narrow answers to our self-censored research questions and offering a sanitized picture of China’s political system?

The size of China’s economy will exceed that of the U.S., in purchasing power terms, by 2008 or 2009. China is a country with which Western economies are increasingly intertwined: A quarter of Chinese industry is foreign-owned and we depend on Chinese industry for cheap consumer goods. Ultimately, our pensions, invested in multinationals that increasingly produce in China, depend on the continued economic rise of China. But does the West understand that country and its rulers? At what point, and through what channels, will the Party leadership with its different views of human rights and the citizens’ rights affect our choices of political organization and political freedoms in the West (as it has affected academic research and teaching)? And to what extent are China researchers guilty of putting their own rice bowl before honest thinking and teaching?

Wednesday 11 April 2007

Valuing the health impacts from particulate air pollution in Tianjin

Apologies for the lack of posts - I have been travelling around East Asia (Singapore and Malaysia) doing some academic research (instead of writing blog posts). The internet, whilst decent over there is still not really quick enough to facilitate blogging at the speed I require to make it worthwhile).

The first post back is Environmental related and relates to a paper written by Richard Tol (a most prolific writer of global warming related papers) and Zhou Yuan.

Valuing the health impacts from particulate air pollution in Tianjin
Date: 2005-09
By: Zhou Yuan
Richard S.J. Tol (Economic and Social Research Institute, Dublin)


Although China has made dramatic economic progress in recent years, air pollution continues to be the most visible environmental problem and imposes significant health and economic costs on society. Using data on pollutant concentration and population for 2003, this paper estimates the economic costs of health related effects due to particulate air pollution in urban areas of Tianjin, China. Exposure-response functions are used to quantify the impact on human health. Value of a statistical life and benefit transfer are used to obtain the unit value of some health effects. Our results show significant health costs associated with air pollution in Tianjin. The total economic cost is estimated to be US$1.1 billion, about 3.7% of Tianjin’s GDP in 2003. The findings underscore the importance of urban air pollution control. Finally, the policy implications for alternative energy options and climate policies are given.

Keywords: particulate air pollution, PM10, economic valuation, Tianjin
JEL: Q51 Q53