Why do the Chinese consume so little?

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

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

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

------------------

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


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

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

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

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

.

From Exports to Domestic Consumption

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

Articles on China's Rebalancing Act

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

.

Inflation in China - a global issue?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Interesting article from Thomas "Flat Earth" Friedman.

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

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

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

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

China in Three Colors [New York Times]

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

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

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

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

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

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

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

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

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

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

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

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

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

.

Corruption crackdown

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

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

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

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

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

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

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

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

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

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

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

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

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

Former bank official sentenced to death for corruption

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

China to Freeze Prices: the start of new period of intervention or a lost cause?

Today the FT reported on China's attempts to curb inflation by imposing price freezes. This is a dangerous route to go down. Market forces are often hard to stop once they get going.

At the moment the freeze is only on prices that the government still controls such as carparking and oil.

Although such policies may have worked in the past, the number of products under direct control is a lot lower. This new stratey may have a limited effect. The question then is "what next"?

Beijing imposes price freeze [FT]

China is to enforce a freeze on all government-controlled prices in a sign of Beijing’s alarm about rising popular anger over inflation, now at its highest rate in more than a decade.

The order freezes a vast array of prices still under the control of government in China, ranging from oil, electricity and water to the cost of parking and park entrance fees.

The order, issued jointly by six ministries on Wednesday, comes after a vaguely worded announcement on the need to prevent price rises by the State Council, or cabinet.

“Any unauthorised price rises are strictly forbidden . . . and in principle there will be no new price-raising measures this year,” the ministries said. Events since the initial State Council announcement that inflation in August hit an 11-year high of 6.5 per cent appear to have galvanised the bureaucracy into a tougher stance.

Qing Wang, of Morgan Stanley, said in Hong Kong: “As inflation has gotten worse, the government may have felt it had to toughen its stand.”

Rising inflation is sensitive in the run-up to the five-yearly meeting of the Communist party, which is due to open on October 15 in Beijing and will choose the senior leadership until 2012. The sharp spike in inflation is largely due to higher food prices due to a shortage of pigs after a disease killed millions and the rising cost of feed – a global phenomenon.

But Chinese leaders and economists are increasingly worried that the impact of inflation and the subsequent government policy response, could cause severe problems for the economy.

Though they were once solely a domestic concern, Chinese prices are now an international issue because of the possibility of the higher cost of consumer goods produced in China fuelling inflation in large export markets such as the US and Europe.

Beijing has raised borrowing costs five times this year, both to cool lending and to prevent negative real interest rates, which provide an extra incentive for people to take money out of banks to buy shares.

China has raised the one-year deposit rate to 3.87 per cent, which is about equal to the eight-month average for inflation but well below August’s 6.5 per cent.

The price freeze is the kind of administrative measure redolent of China’s former planned economy but it may be less effective in China today, economists said.

“They will not be able to control the price of everything,” said Chen Xingdong, of BNP Paribas, in Beijing.

China and the Congo: The battle for resources

China's role in developing countries, specifically Africa, is an important and growing one that I beleive deserves more attention.

The FT covered this issue recently. Whilst this case is specific to Congo the general prenmise behind China investment in Africa is a complex one. With the continued commodity boom and high prices control over resources into the future is crucial.

China's continued interest in Africa should not be underestimated.

Alarm over China’s Congo deal

Mining companies, the International Monetary Fund and other donors were scrambling on Wednesday for clarification of a planned deal between China and the Democratic Republic of Congo.

The deal would tie up mineral resources in exchange for $5bn (€3.6bn, £2.5bn) in infrastructure projects and loans. A preliminary agreement was signed this week just as an IMF mission landed in Kinshasa to review progress towards the resumption of budget support for Congo.

IMF, World Bank and African Development Bank officials seem to have been caught offguard by the scale and timing of China’s plans.

These come at a delicate stage in Congo’s negotiations towards forgiveness of debt accumulated under the dictator Mobutu Sese Seko, who died in 1997, totalling about $8bn, or equal to 800 per cent of current national exports.

Western mining groups, awaiting the results of a government review of about 60 contracts signed during the recent civil war, were also seeking more details from the Kinshasa government.

The Katanga region of Congo has some of the world’s best deposits of copper and cobalt. Other areas host rich sources of minerals including diamonds, gold, iron and uranium.

After years of war, dictatorship and turmoil, however, the country’s infrastructure is either non-existent or in ruins, and extraction operations are producing at a fraction of their potential.

IMF and World Bank officials have acknowledged the scale of Congo’s infrastructure needs. But they are seeking to ascertain whether the Chinese loans are in line with Kinshasa’s commitment under the financial institutions’ heavily indebted poor countries debt reduction initiative not to contract new debt on anything but concessional terms.

In a best-case scenario, the IMF would restart a lending programme – the last one stalled in 2006 because of poor implementation – and Congo would stand to benefit from an 80 per cent write-off of its external debt in mid-2008 at the earliest.

“If the terms of the deal do not meet the concessionality issue, that would be a concern,” said an IMF official.

Most of the mining activity in the country is being carried out by smaller, more entrepreneurial companies. Large western mining groups are keen to gain access to these resources to replace their dwindling deposits but have largely held back from investing in the country – put off by continuing unrest, widespread corruption and the lack of infrastructure.

Alex Gorbansky, managing director of Frontier Strategy Group, a political risk consultancy, said China’s $5bn draft agreement with Kinshasa would put pressure on both the large mining companies looking to get in and the small miners already there.

“It will give China a distinct advantage in the Congolese copper belt,” he pointed out.

He said large western mining groups, such as Anglo American and Rio Tinto, were spending increasing amounts of time and money weighing opportunities in Congo. But China’s move might mean they had left it too late to secure the best assets.

Mr Gorbansky added that there was a risk that some of the mining licences held by smaller companies could be transferred to Chinese investors but Victor Kasongo, the country’s deputy mines minister, insisted this would not be the case.

Research paper: "Construction, Corruption, and Developing Countries"

In China the construction industry is one of teh largest sectors and the from the construction industry for raw materials from Africa and the rest of the world shows no sign of abating.

This new World Bank researh paper may therefore be of interest.

"Construction, Corruption, and Developing Countries"
World Bank Policy Research Working Paper No. 4271


Contact: CHARLES KENNY
World Bank Group - Information and Communications
Technologies Department (ICT)
Email: CKENNY@WORLDBANK.ORG
Auth-Page: http://ssrn.com/author=272817

Full Text: http://ssrn.com/abstract=996954

ABSTRACT: The construction industry accounts for about one-third of gross capital formation. Governments have major roles as clients, regulators, and owners of construction companies. The industry is consistently ranked as one of the most corrupt: large payments to gain or alter contracts and circumvent regulations are common. The impact of corruption goes beyond bribe payments to poor quality construction of infrastructure with low economic returns alongside low funding for maintenance - and this is where the major impact of corruption is felt. Regulation of the sector is necessary, but simplicity, transparency, enforcement, and a focus on the outcomes of poor construction are likely to have a larger impact than voluminous but poorly enforced regulation of the construction process. Where government is the client, attempts to counter corruption need to begin at the level of planning and budgeting. Output-based and community-driven approaches show some promise as tools to reduce corruption. At the same time they will need to be complimented by a range of other interventions including publication of procurement documents, independent and community oversight, physical audit, and public-private anticorruption partnerships.

.

Meaty Problem: Inflation at a record high

We have covered the Pork issue before - prices continue to increase. Non-food prices however retain a very low inflation rate. Things may yet sort themselves out.

Chinese inflation at decade high[BBC news]

Chinese inflation has hit its second 10-year high in two months, led again by a further sharp rise in meat prices.

China's rate of consumer price inflation hit 6.5% in the year to August, up from 5.6% in July, said the National Bureau of Statistics.

Meat price have risen 49% over the past year, caused by a shortage of pork after a series of disease outbreaks.

China's central bank has raised interest rates four times already this year to try to control inflation.

Less pigs

China, the world's biggest consumer of pork, has seen its pig population decline by 10% over the past year due to major outbreaks of blue-ear disease.

The Chinese government has moved quickly to stamp out the problem, but pork imports have surged as domestic supplies try to recover.

Beijing is said to be acutely aware that while the country's growing urbanised middle class can cope with the higher food prices, it is a major problem for the country's rural poor, who make up most of the population.

Non-food prices rose just 0.9% in the year to August.

"The risk is that if the economy continues to grow very rapidly, this inflation, which looks concentrated in food, starts spreading," said Rob Subbaraman, chief Asia economist for Lehman Brothers in Hong Kong.

Other post of interest:

Pork get the chop as prices rise

China, the sex trade and quality assurance: some observations

Intriguing article from China Daily (via China Law Blog) that examines recent Chinese legislation covering bath houses and massage parlors.

We at "China Economics Blog" are of course more interested in the economics of this article rather than the legal angle.

One of the sure fire winners from the new legislation is condom vending machine owners who I expect will see a run on stock as bars and hotels clamber to stock up on the large number of varieties available.

It will be interesting to see whether Chinese machines begin with a simple vanilla offering (metaphorically I might add). Then, as China develops, the theory suggests that they will Chinese develop a wider taste is condoms whether we will see the same move into colours, flavours and textures. Of course luxury brands will demand a premium price. This is one area where you would hope the quality would hold up (given the expensive consequences).

Perhaps more importantly the Chinese "crack down" may have its origins in the recent "quality" issues that have plagued Chinese exporters and the backlash at home from consumers who want a quality product (aside from condoms).

The prostitute market has an element of asymmetric information (market for lemons) as the consumer may be unaware of any diseases that may be present. What is needed therefore is regulation. As always in economics we assume that the higher the price, the higher the quality. Certification may help individual sex workers prove to consumers that their product is of high quality.

The fact that demand for sex trade is growing so rapidly is also a reflection of rising incomes. As people become richer they demand luxury goods. Whereas one may previously have forgone purchased sex in favour of a cheaper (free) alternative, increased levels of disposable income have led to a rise in demand.

An international PPP comparison of prices would make interesting reading, a little like the "big Mac" index that the Economist publishes. I am sure you can fill in your own punchline as to what the new index could be called.

The problem with this index is that one cannot account for regulations/laws and of course, as in the case of the "big Mac", productivity differences.

Tighter rules on bath houses, massage parlors

The Ministry of Commerce has ordered all public bath houses to make their premises more accessible to public inspections in a bid to fight the growing sex trade.

The ministry released draft rules on Thursday that require bath houses with massage rooms to be viewed openly from the outside.

Foot-massage parlors must have their cubicle doors unlocked when attending clients.

The draft rules have been posted on the ministry's website to solicit public opinion before September 10.

Commerce and health authorities are determined to combat the spread of sexually transmitted diseases in public places.

Earlier last month, the commerce and health authorities ordered all hotels, resorts and public bath houses in the country to provide condom-dispensing machines.

Some cities have already taken the lead in cracking down on the sex trade.

Shanghai introduced regulations last year requiring all bath houses and hair dressing saloons to have clear glass windows.

The eastern province of Zhejiang passed a regulation in March requiring all hotels and bars to install condom-dispensing machines.

The new draft rules also stipulate that towels, slippers and teacups, should be sanitized after use.

Water in bathing pools should also be refreshed at least twice a day.

These new rules tighten existing ones, which are now outdated, the ministry of commerce said.

Bath houses and massage parlors will be ranked every two years on their standards, those failing will be ordered to shut down.

One of the comments on China Law blog provides some sobering statistics:

That said, these new rules are hopefully a genuine "part of China's overall safety efforts." From 1990 to 1998, syphilis rates increased 20 times, gonorrhea rates tripled, and genital warts rates quadrupled. Estimates of HIV/AIDS ases in China range from Beijing's sanctioned 640,000 to 1.5 million and above. China's Ministry of Health claims that 43.6% of new HIV cases in 2005 result from sexual transmission, and that 19.6% of the total cases are the result of commercial sex workers and their clients. The bureaucrats in Beijing surely realize the huge detrimental effect that widespread HIV/AIDS can have on a nation's growth, as witnessed in West Africa. Beijing has already taken many steps to reduce HIV/AIDS, and this is probably one of them.

Stockmarket Round-up

As Chinese shares reach NEW HIGHS here are a couple of FT articles of note:

China bubbles as world goes crunch

As the European Central Bank pumps billions of euros into the money markets, and financiers worldwide fret about a messy end to a period of loose credit conditions, it is apposite that the Chinese stock market hit a new high on Thursday. It shows how oblivious to caution or bad news a market in the grip of a liquidity-driven boom can be.

China’s market has doubled since the start of the year, but earnings growth – running at levels of as much as 75 per cent – has almost kept pace. The result is that while valuations, of about 35-40 times prospective earnings, look high, they still do not look insane.

They look pretty insane to me. Why? Because there is just no quality underlying this growth. We are not dealing with established Western companies here. Cut throat competition and many other factors should keep valuations low. This is still a serious bubble although my predictions (see previous stockmarket posts) are looking a little shaky now.

China’s plan on buying foreign shares delayed

China’s plan to allow individual investors to buy overseas securities for the first time has not materialised yet because detailed rules are still being drafted, the country’s main stock regulator said on Thursday.

Finally, a little piece on "Barbie-gate". There is an element of truth to this article. The motivation for overseas companies migrating to China is not to be charitable. They are profit maximising and for some that means environmental short cuts, bribery and paying very low wages.

Foreign-funded companies in China should ensure product quality: NDRC official[People's Daily]

Companies with foreign investment in China should shoulder the responsibility of ensuring and improving product quality, an official with the National Development and Reform Commission (NDRC) said Friday at the Summer Davos meeting in Dalian.

Sixty percent of China's exported products are made in foreign- funded companies, said Zhang Xiaoqiang, vice minister of the NDRC. These companies should have an eye to their product quality in terms of designing, setting up standards and making requirements for raw materials.

"Good product quality is crucial to a company's long-term development," he said.

China has been obsessed with a string of product quality complaints, with its exported toys recalled and food accused of containing toxins.

Rat in the Kitchen? Bring in the eagles and foxes

Never one to miss out on the chance of completing a circle there is news today on how China intends to solve the invasion of China by 2 million rats (mice really but it does not make for such a good strap line).

The original post on this blog was:

There's a rat in the kitchen, what am I going to do?

In a solution that reminds me of the "old lady who swallowed a fly" nursery story we find that China has unleashed the eagles and foxes.

Of course, the natural question to ask is what to unleash on the foxes once they get out of control and start eating other livestock (and children)? Wolves perhaps or will hunger and guns be sufficient?

China battles rat plague with foxes and eagles [Scotsman]

BEIJING (Reuters) - Authorities in far western China have gone into battle against a plague of rodents by using "hot-shot" eagles and foxes, state media reported on Thursday.

For much of this year, grazing land in parts of Xinjiang province have been overwhelmed by growing numbers of rats and other rodents gobbling up grass and forcing out sheep, Xinhua news agency reported.

Now officials there think they have found a green answer -- eagles attracted by nesting stands and foxes unleashed on the armies of rats.

"Using these natural predators to kill the rodents is not only inexpensive, it can sustainably control rodent plagues and there's not environmental pollution," the report said.

Up to now, rat control around the grasslands has depended on scattering poison, and around hard-hit areas this year authorities used airplanes to do the job.

"The results have not been ideal," the report said,

Now across northern Xinjiang over a thousand eagle nests and stands have been erected, and authorities released 200 foxes bred in captivity to chomp through the rats, Xinhua said.

In one county, the number of rodent holes has dropped by 70 percent since the foxes were unleashed, it said.

Around half of restive Xinjiang's population are Uighur, an overwhelmingly Muslim Turkic ethnic group, or belong to other non-Han groups that traditionally lived off herding and trading.

Bumpy road ahead for growth but how big are the bumps?

Today's Independent has an article by Hamish McRae (writing from China) on the prospects for continued economic growth. Although the environment is barely touched on in this article (see previous post) it appears that even without this there are bumps in the road ahead but that they may be smoother than many believe (he should read the Economy article below).

A well balanced and optimistic story that gives us some hope that China will continue to develop without a major catastrophe.

Hamish McRae: When you look at China all you see is growth, but a bumpy road lies ahead

The article concludes:

But, having spent a week now travelling round China, it is hard not to believe that the economy has so much momentum that it will be able to push through the next downturn in reasonable shape. Some way in the future, China will become a normal economy. But, as the leaders of these growth companies gather in Dalian, all they see is growth. You can understand investors, particularly inexperienced ones, thinking pretty much the same way.

.

The Great Leap Backwards

Excellent article and post covering the relationship between Chinese economic growth and continued environmental collapse. Article is by Elizabeth C. Economy.

Essential reading for anyone with an interest in China's environment and how it will impact on future economic growth.

Elizabeth C. Economy on "The great leap backward?" [Globalisation and the Environment]

We have talked at length in this blog about the environmental impact of China both within China and globally and specially the impact of environmental degradation on future growth and political stability. This long post covers this ground and more.

Chinese Military: Hacking and Transparancy

Two stories on the state of the Chinese military. The "Pentagon hacking" story is a good gauge of how quickly China is converging on the technological frontier. What begins with the military will spread, via knowledge spillovers, to industry.

The speed of Chinese technological development should not be underestimated.

China to Report Military Spending to UN

China said Sunday it will provide the United Nations with information on its military spending and arms deals for the first time in more than a decade, taking a step to address international concerns about the secrecy surrounding its defense spending and operations.

../

China says spending for its People's Liberation Army, the world's largest standing army with 2.3 million members, grew 17.8 percent this year to about nearly $45 billion. It was the largest annual increase in more than a decade.

The Pentagon estimates China's actual defense spending may be much higher, because the official budget does not include money for high-priced weapons systems and some other items.

Although China does not currently provide information about its arms deals, several overseas organizations monitor the transactions.

The Stockholm International Peace Research Institute, which tracks the volume of arms transfers but not their financial value, said the three largest importers of Chinese arms in 2006 were Bangladesh, Pakistan and Iran, which accounted for nearly 75 percent of China's arms exports.

China is also a major arms exporter to Sudan, and has faced criticism from human rights activists who say Chinese weapons have been used in attacks in Darfur.

Chinese military hacked into Pentagon[FT]

The Chinese military hacked into a Pentagon computer network in June in the most successful cyber attack on the US defence department, say American ­officials.

The Pentagon acknowledged shutting down part of a computer system serving the office of Robert Gates, defence secretary, but declined to say who it believed was behind the attack.

Current and former officials have told the Financial Times an internal investigation has revealed that the incursion came from the People’s Liberation Army.

../

“The PLA has demonstrated the ability to conduct attacks that disable our system...and the ability in a conflict situation to re-enter and disrupt on a very large scale,” said a former official, who said the PLA had penetrated the networks of US defence companies and think-tanks.

Research Paper: Interprovincial Migration in China: The Effects of Investment and Migrant Networks

Migation within China is an increasingly important topic when one examines the economics of China. Throughout histroy there have been significant waves of internal migration caused by famine, war and economics.

The limits of Chinese internal migration and not as well known as they should be. This new paper sheds some light on this issue.

-------------

"Interprovincial Migration in China: The Effects of Investment and Migrant Networks"
IZA Discussion Paper No. 2924


Author: SHU MING BAO
University of Michigan at Ann Arbor - China Data
Center
Email: SBAO@UMICH.EDU
Auth-Page: http://ssrn.com/author=289828

Contact: ORN B. BODVARSSON
St. Cloud State University, Institute for the Study
of Labor (IZA)
Email: obbodvarsson@stcloudstate.edu
Auth-Page: http://ssrn.com/author=482448

Co-Author: JACK HOU
California State University, Long Beach
Email: jackhou@csulb.edu
Auth-Page: http://ssrn.com/author=348003

Co-Author: YAOHUI ZHAO
Peking University
Email: yhzhao@ccer.pku.edu.cn
Auth-Page: http://ssrn.com/author=336791

Full Text: http://ssrn.com/abstract=1001411

ABSTRACT: Since the 1980s, China's government has eased restrictions on internal migration. This easing, along with rapid growth of the Chinese economy and substantial increases in foreign and domestic investments, has greatly stimulated internal migration. Earlier studies have established that migration patterns were responsive to spatial differences in labor markets in China, especially during the 1990s. However, other important economic and socio-political determinants of interprovincial migration flows have not been considered. These include the size of the migrant community in the destination, foreign direct and domestic fixed asset investments, industry and ethnic mixes and geographic biases in migration patterns. We estimate a modified gravity model of interprovincial migration in China that includes as explanatory variables: migrant networks in the destination province, provincial economic conditions, provincial human capital endowments, domestic and foreign investments made in the province, industry and ethnic mixes in the province, provincial amenities and regional controls, using province-level data obtained from the National Census and China Statistical Press for the 1980s and 1990s. We find strong evidence that migration rates rise with the size of the destination province's migrant community. Foreign and domestic investments influence migration patterns, but sometimes in unexpected ways. We find that as economic reforms in China deepened in the 1990s, the structure of internal migration did not change as much as earlier studies have suggested. Consequently, our results raise new questions about the World's largest-scale test case of internal migration and strongly suggest a need for further research.
__________________________________________________________________

China's Global Influence

This article is a nice little summary of China's spreading influence around the world and gives a good impression of the sheer size of China's demand for raw materials and its increasing use of investment, especially in Africa, to ensure continued supplies of raw materials to satisfy the increases in demand for consumer goods.

None of these trends will be reversing soon. An increasingly ferocious global grab for resources could be on the cards with the EU, US, Russia and China all piling in.

This article has a very dramatic journalistic style but it has some interesting statistics. My bold.

China's Influence Spreads Around World [WIBW News]

KARRATHA, Australia - For nearly three decades, Chinese peasants have left their villages for crowded dormitories and sweaty assembly lines, churning out goods for world markets. Now, China is turning the tables.

../

The reason: China.

For years, China's booming economy touched daily life in the West most visibly through the "made-in-China" label on everything from clothes to computers. But now, economic growth is giving rise to something more that can't be measured just by widgets and gadgets — a shift in China's balance of power with the rest of the world.

China's reach now extends from the Australian desert through the Sahara to the Amazonian jungle — and it's those regions supplying goods for China, not just the other way around. China has stepped up its political and diplomatic presence, most notably in Africa, where it is funneling billions of dollars in aid. And it is increasingly shaping the lifestyle of people around the world, as the United States did before it, right down to the Mandarin-language courses being taught in schools from Argentina to Virginia.

China, like the United States, is also learning that global power cuts both ways. The backlash over tainted toothpaste and toxic pet food has been severe, as has the criticism over China's support for regimes such Sudan's.

To understand why China's influence is increasingly pushing past its borders, just do the math.

When 1.3 billion people want something, the world feels it. And when those people in ever increasing numbers are joining a swelling middle class eager for a richer lifestyle, the world feels it even more.

If China's growth continues, its consumer market will be the world's second largest by 2015. The Chinese already eat 32 percent of the world's rice, build with 47 percent of its cement and smoke one out of every three cigarettes.

China's desire for expensive hardwood to turn into top-quality floorboards for its luxury skyscrapers has penetrated deep into the Amazon jungle. For example, in the isolated community of Novo Progresso, or New Progress in Portuguese, one of the biggest sawmills was started by the mayor with financing from Chinese investors.

China accounts for 30 percent of the wood exported from logging operations in remote towns across Brazil's rain forest, where trucks carry the finished product hundreds of miles along muddy roads to river ports, said Luiz Carlos Tremonte, who heads an influential wood industry association. Many Chinese purchasers now travel to Brazil to clinch deals, and are almost always accompanied at business meetings by friends or relatives of Chinese descent who live there.

"Ten years ago no one knew about China in Brazil; then the demand just exploded and they're buying a lot," Tremonte said. "This wood is great for floors, and they love it there."

The Bovespa stock index in Brazil has climbed more than 300 percent since 2002, riding the China wave.

China is buying coal mining equipment from Poland and drilling for oil and gas in Ethiopia and Nigeria. It has poured hundreds of millions of dollars into Zambia's copper industry. It is the world's biggest market for mobile phones, headed for 520 million handsets this year. The list goes on.

Along with looking to other countries for goods for its people, China is also going far and wide in search of markets for its products.

In war-torn Liberia, where electricity is hard to come by, Chinese-made Tiger generators keep the local economy humming. Costlier Western brands, favored by aid agencies and diplomats, are beyond the reach of small business owners such as Mohammed Kiawu, 30, who runs a phone stall in the capital, Monrovia.

A used Tiger generator costs around $50, he said over the steady beat of his generator. "But even $250 is not enough to buy a used American or European generator. They are not meant for people like myself."

The Chinese generators are more prone to break down, Kiawu said. When the starter cable snapped on one, he replaced it with twine. But by making items for ordinary people, he predicted, China "will take control of the heart of the common people of Africa soon."

China is having to make up for decades of economic stagnation after the communist takeover in 1949.

When Chinese leader Deng Xiaoping began dabbling in economic reforms in 1978, farmers were scraping by. By 2005, income had increased sixfold after adjusting for inflation to $400 a year for those in the countryside and $1,275 for urban Chinese, according to China's National Bureau of Statistics.

"The Chinese don't want war — the Chinese just want to trade their way to power," said David Zweig, a professor at the Hong Kong University of Science and Technology. "In the past, if a state wanted to expand, it had to take territory. You don't need to grab colonies any more. You just need to have competitive goods to trade."

If China stays on the same economic track, it would become the world's largest economy in 2027, surpassing the United States, according to projections by Goldman, Sachs & Co., a Wall Street investment bank. And unlike Japan, which rose in the 1980s only to fade again, China still has a huge pool of workers to tap and an emerging middle class that is just starting to reach critical mass. Many development economists believe China still has 20 years of fairly high growth ahead.

But the transition to a larger presence on the global stage comes with growing pains, for China and the rest of the world.

As Beijing plays an ever bigger role in the developing world, some Western countries fear it could undermine efforts to promote democracy. In its attempt to secure markets and win allies, China is stepping up development aid to Africa and Asia. Chinese President Hu Jintao pledged last year to double Chinese aid to Africa between 2006 and 2009, promising $3 billion in loans, $2 billion in export credits and a $5 billion fund to encourage Chinese investment in Africa. China has also promised Cambodia a $600 million aid package and agreed to loan $500 million to the Philippines for a rail project.

But China also extends aid to states such as Myanmar, Zimbabwe and Sudan whose human rights records have lost them the support of the West. Actress Mia Farrow has labeled next year's Beijing Olympics — a point of pride for China — the "genocide Olympics" because of China's support for Sudan, at a time when the West seeks to punish it for its military actions in Darfur. China buys two-thirds of Sudan's oil output.

"In some ways, it will be integrating us into a new international order in which democracy as we've known it or the right to open organized political activity is no longer considered the norm," said James Mann, author of "The China Fantasy," a book about China and the West.

China is also facing some of the unease that powers before it have encountered. In Africa and Asia, some complain that massive China-funded infrastructure projects involve mostly Chinese workers and companies, rather than create jobs and wealth for the local population. And Moeletsi Mbeki, a political commentator and brother of South African President Thabo Mbeki, likens the trade of African resources for Chinese manufactured goods to former colonial arrangements.

"This equation is not sustainable," Mbeki said at a recent meeting of the African Development Bank in Shanghai. "Africa needs to preserve its natural resources to use in the future for its own industrialization."

The backlash is also coming on the consumer front, with Chinese goods earning a dubious reputation for quality. In the United States, there is a furor over the standard of Chinese imports. In Bolivia, vendors peel off or paint over any indication that their wares were "Hecho en China," Spanish for "Made in China."

A woman selling bicycles in El Alto, a poor city outside the capital, La Paz, insisted they were made in Japan, South Korea, Taiwan or even India. With some prodding, she acknowledged the truth. "They're all Chinese," she said, declining to give her name lest it hurt her business. "But if I say they're Chinese, they don't sell."

Even those who benefit from China's growth express some wariness. Aerospace giant Boeing expects China to be the largest market for commercial air travel outside the United States in the next 20 years, buying more than $100 billion worth of commercial aircraft, U.S. trade envoy Karan Bhatia said in a recent speech.

"Right now, we're hiring every week," noted Connie Kelliher, a union leader. "Things couldn't be better."

Yet Boeing workers remain wary of China's ambitions to build its own planes. next year China plans to test-fly a locally made midsize jet seating 78 to 85 passengers. It also has announced plans to roll out a 150-seat plane by 2020.

"It's kind of a double-edged sword," Kelliher said. "You want the business and we want to get the airplane sales to them, but there's the real concern of giving away so much technology that they start building their own."

That's what happened to Western and Japanese automakers, which made inroads in the Chinese market only to see their designs copied and technologies stolen. Already, China's vehicle manufacturers are venturing overseas, exporting 325,000 units last year — mostly low-priced trucks and buses to Asia, Africa and Latin America.

"We're taking a bigger piece of the pie," said Yamilet Guevara, a sales manager for Cinascar Automotriz, which has opened 20 showrooms in Venezuela in the past 18 months, offering cars from six Chinese makers. "They ask by name now. It's no longer just the Chinese car. It's the Tiggo, the QQ."

China's biggest car company, Chery Automobile Co., just announced a deal with the Chrysler Group to jointly produce and export cars to Western Europe and the United States within 2 1/2 years.

Given the speed of China's ascent, it's perhaps not surprising that China itself is trying to calm some of the fears. Its slogan for the Beijing Olympics: "Peacefully Rising China."

Tax competition in China

There is a growing economic literature that examines the roll of tax competition on the geographic location of firms and specifically, in an international trade context, multinational location choice,

There is no doubt that tax differentials can cause distortions. China is not new to this game with the setting up of special economic zones effectively kick starting China's entry into world markets.

This article shows how government policy can quite quickly effect the location of firms and hence jobs within China. All countries undertake regional economic policy and this is just one example of how China is attempting to get the central and Western regions to "catch up" with the Eastern and coastal regions.

The trade off is always the same. Do Chinese firms relocate to benefit from lower VAT even if the infrastructure and transport networks are worse? Cost-benefit analysis should sort that one out. The same decision is made when MNEs decide whether to stay in the US or the EU or move to China to take advantage of lower costs/ wages/ regulations.

Manufacturers moving inland from Hangzhou as central province VAT reform kicks in [China Briefing]

Textile manufacturers in and around Hangzhou, long one of the region’s pillar industries, are beginning to move their operations inland as China reduces the VAT burden in the central provinces.

Beginning July 1, 2007, the Ministry of Finance and the State Administration of Taxation reduced the VAT burden in 8 sectors within 26 specified industrial cities in the six central provinces of Anhui, Henan, Hubei, Hunan, Jiangxi, and Shanxi.

The new system, which applies to both domestic and foreign invested enterprises in the central provinces, benefits general taxpayers engaged in the equipment manufacturing, petrochemical, metallurgy, automobile manufacturing, agricultural product processing, mining, electrical power, and high/new technology sectors within the 26 specific industrial cities.

The input tax can be deducted upon activities listed below:

* purchase of fixed assets (including fixed assets obtained as donation and capital injection)
* goods purchased or services obtained for self-produced fixed assets
* fixed assets obtained by financial lease and the lessor paid VAT as per the relevant tax regulation (Guoshuihan [2000]514)
* transport costs paid for fixed assets

Younger, Peacebird and Progen, famous textile companies originally from Zhejiang, have already moved their manufacturing bases to the central provinces in a bid to cut costs. “The transfer of the textile industry from the east coast to the central and western regions is already going on, this VAT reform will expedite it,” says Mr. Han Licheng, vice chairman of the Zhejiang Provincial Clothing Association.

Some have complained however, that although production costs are reduced in the central provinces, the environment for manufacturing is still not as good as in Zhejiang province. While companies are looking to move their production facilities inland, many are keeping their operations base and supply chain in place in the eastern provinces.