Tuesday 29 January 2008

Globalization, Agriculture and Weevils

This post was written partly so I could include the word "weevil" in the title of a blog post although this article does go to show how China's opening up to the rest of the world brings costs and well as benefits.

Closer integration with the world economy brings the inflow of FDI, expertise, skills, technology and agricultural pests including the infamous weevil.

China Fights Off Invading Moths and Weevils [PlanetArk]

BEIJING - China has drawn up a plan to tackle the growing threat from invasive foreign agricultural pests, whose numbers have risen since the country embarked upon an opening up to the outside world 30 years ago.

Local governments in coastal and border provinces and regions had signed a "document of responsibility" to stop such pests entering China, the Agriculture Ministry said in a statement on its Web site (www.agri.gov.cn).

In the 1970s, China discovered just one foreign pest species, but in the first eight years of this century it had found almost 20, the ministry said.

Some of the most serious pests include rice water weevils, which attack rice crops, and codling moths, originally from Europe and whose larvae feed on apples and pears.


Monday 28 January 2008

Free Online Economics Textbooks

Thanks to 26econ.com here is a directory of FREE online economics textbooks.

Although we are currently blocked in China I am sure China represents a large market for free textbooks given relative incomes and the costs of books.

Links in the 26econ post (too lazy to put them up here as well).

Free online economics books[26econ.com]

Introduction to Economic Analysis, by R. Preston McAfee (2007). ‘Open source’ intermediate undergraduate microeconomics textbook. Website also has slides for teaching.

Introduction to Modern Economic Growth, by Daron Acemoglu (2007, draft). Advanced economic growth theory.

The Econometrics of Macroeconomic Growth, by Steven Durlauf, Paul Johnson and Jonathan Temple (2004, draft). Advanced growth textbook.

Environment Economics, by Ross McKitrick (2007, draft). Intermediate environmental economics textbook.

Against Intellectual Monopoly, by Michele Boldrin and David Levine (2007). A critical analysis of intellectual property.

Invisible Engines, by David Evans, Andrei Hagui and Richard Schmalensee (2007). Non-technical book about two-sided software platforms.

Lecture notes in Microeconomic Theory, by Ariel Rubinstein (2006). Advanced microeconomic theory textbook.

Discrete Choice Methods with Simulation, by Kenneth Train (2003). Advanced textbook on estimating and simulating discrete choice models.

Industrial Organization: A Strategic Approach, by Jeffrey Church and Roger Ware (2000). Intermediate industrial organization textbook.

Short Course on Nonlinear Pricing, by Robert Wilson (1999). Advanced textbook on nonlinear pricing theory and applications.

Law’s Order: An Economic Account, by David Friedman (1999). Economics of the law.

Modelling Bounded Rationality, by Ariel Rubinstein (1998). Game theoretic models of bounded rationality (advanced).

Economics and Language, by Ariel Rubinstein (1996). The economics of language and language of economics.

Price Theory, by David Friedman (1990). Intermediate microeconomics textbook with a slightly unconventional viewpoint.

Bargaining and Markets, by Martin J. Osborne and Ariel Rubinstein (1990). Advanced bargaining theory textbook.

There is also the Library of Economics and Liberty, which has many digital copies of historical economics texts available for download.


Stockmarket crash revisited: 28/1/2007

After another 7% for in Chinese shares it is time to revisit "China Economics Blog" stockmarket predictions.

The benchmark Shanghai Composite Index plunged 342.39 points, or 7.19 percent, to 4,419.29.

Here are my predictions from the 25th May 2007:

Here are those predictions from the 25th May. Another 30 posts on the stockmarket and my doom laden predictions can be found HERE.

China's Stockmarket - "how does it work"?

1. Stockmarket will continue to rise perhaps by another 25-30% over the next 6 months to a year. 5000 could be the psychological barrier that is a digit too far. There will be a series of small hiccups on the way.
2. What will follow will be a trigger than may, by itself, seem quite unimportant that will lead to a widespread sell off of Chinese stocks with perhaps a 10-15% one day fall.
3. Over the next year shares will fall by as much as 40-50% off their all time highs before stabilising.
4. The knock on effect on the world markets will not be as great as some commentators fear but there will be some contagion effect on neighbouring exchanges.
5. Internally, real estate prices will fall and many individuals will be wiped out. Given the large share holdings by the Police, Army and state owned enterprises what happens then is anyone's guess but it could conceivably get quite ugly quite quickly.

If we look at these now, my predictions were looking rather sad as shares sailed up past the 5000 mark before topping out just above 6000 late October 2007.

Since then we have had a steady decline with the Shanghai composite closing at 4419 yesterday, 28th January 2008.

So we had a greater rise than I expected but note that prediction 2 was for stocks to be 40-50% off highs. We are already getting close to that.

We are on target nicely.

Risk and Sunk Costs

There is a growing literature in economics that examines the behaviour of firms when undertaking FDI and/or exporting. These heterogeneous firm models use "sunk costs" to differentiate between exporters and domestic only producers (which are always a majority of firms) or multinational and domestic firms.

There is still, to my mind, on ongoing debate as to how large these costs actually are.

This comment by China Vortex (H/T: China Law Blog) presents an interesting perspective on how some of these costs can be derived related to "risk" especially concerning the different behaviour of Western and Chinese firms in relation to African investments.

Risk is in the eye of the beholder [China Vortex]

In the west, there is a whole industry called “risk consultancy”. Basically, this industry is built around informing large- and medium-sized corporations about risk. Originally, this was built around business risk and would answer questions like “How safe is it to invest $500M in an industrial diamond mine in the Congo (formerly Zaire)?” The consulting firm would then send practice consultants to the target country, where they would study sunk costs (including bribes which were never written about in the report, regulations, who was related to the president, political opposition, major competing firms, etc.) Most of these questions were positioned as questions which any board would ask the CEOs before they would greenlight an investment.

Underlying all this is the belief, at least in west and among western corporations that “risk” is something which can be quantified and measured objectively.

One of the big topics in the west now is China’s investments in Africa. What is fascinating about China’s investments in Africa is that while the amounts of money and people who go to Africa are huge, China really doesn’t have risk consultancies, and Chinese really have not yet started thinking in terms of quantifying risk in the ways western corporations have.

So how have the Chinese judged risk so far, and will the present method change over time to something more akin to the western way of thinking? When it comes to Chinese investments in Africa, many of the early-stage investments were a part of Chinese foreign policy aimed at securing raw materials for manufacturing, and more importantly, energy sources. The typical model has been to find a country, build a new palace for the president and a new sports stadium to win over the people. This would help state-owned construction firms to gain a footing in the country, which were then quickly followed by Chinese logistics firms and wholesale distribution firms which would sell products to the local African population.

Viewing the local African population as customers were one area where Chinese viewed Africa fundamentally differently from the west. While Beijing, Shanghai and the Chinese tier one and tier two cities are relatively modern, it is very easy to forget that when it comes to pervasive poverty, China is only 10-20 years removed from the levels of African poverty. Basically, Chinese companies know how to sell to poor people because they had lots of practice in China.


China Law Blog's comment is also illuminating for economists.

The high margins American companies expect and their high labor costs are no doubt factors, but I also wonder if it is not just plain and simple risk aversion based on an unwillingness to risk jeopardizing that which has already been achieved. All I know is that I have worked with an untold number of companies over the years that have come to the brink of going into an emerging market country (including China), but then backed down at the last minute because of some (often very small) risk that would not be present stateside.

In the West it is widely perceived that US firms are greater risk takers than European firms with greater entrepreneurial drive. I suspect CLB's comments only apply to the large US multinationals and not the more nimble small and medium sized companies who may be in less need of their expensive lawyers.


Risk and Sunk Costs

There is a growing literature in economics that examines the behaviour of firms when undertaking FDI and/or exporting. These heterogenous firm models use "sunk costs" to differentiate between exporters and domestic only producers (which are always a majority of firms) or multinational and domestic firms.

There is still, to my mind, on ongoing debate as to how large these costs actually are.

This comment by China Vortex (H/T: China Law Blog) presents an interesting perspective on how some of these costs can be derived related to "risk" especially concerning the different behaviour of Western and Chinese firms in relation to African investments.

Risk is in the eye of the beholder [China Vortex]

In the west, there is a whole industry called “risk consultancy”. Basically, this industry is built around informing large- and medium-sized corporations about risk. Originally, this was built around business risk and would answer questions like “How safe is it to invest $500M in an industrial diamond mine in the Congo (formerly Zaire)?” The consulting firm would then send practice consultants to the target country, where they would study sunk costs (including bribes which were never written about in the report, regulations, who was related to the president, political opposition, major competing firms, etc.) Most of these questions were positioned as questions which any board would ask the CEOs before they would greenlight an investment.

Underlying all this is the belief, at least in west and among western corporations that “risk” is something which can be quantified and measured objectively.

One of the big topics in the west now is China’s investments in Africa. What is fascinating about China’s investments in Africa is that while the amounts of money and people who go to Africa are huge, China really doesn’t have risk consultancies, and Chinese really have not yet started thinking in terms of quantifying risk in the ways western corporations have.

So how have the Chinese judged risk so far, and will the present method change over time to something more akin to the western way of thinking? When it comes to Chinese investments in Africa, many of the early-stage investments were a part of Chinese foreign policy aimed at securing raw materials for manufacturing, and more importantly, energy sources. The typical model has been to find a country, build a new palace for the president and a new sports stadium to win over the people. This would help state-owned construction firms to gain a footing in the country, which were then quickly followed by Chinese logistics firms and wholesale distribution firms which would sell products to the local African population.

Viewing the local African population as customers were one area where Chinese viewed Africa fundamentally differently from the west. While Beijing, Shanghai and the Chinese tier one and tier two cities are relatively modern, it is very easy to forget that when it comes to pervasive poverty, China is only 10-20 years removed from the levels of African poverty. Basically, Chinese companies know how to sell to poor people because they had lots of practice in China.


Sunday 27 January 2008

Plane Crash and China's "quality fade"

Looks like the issue of China's "Quality Fade", where Chinese manufacturers systematically lower the quality of their products to cut costs and boost short term profits, may have reached the extent where many lives are at stake.

Whilst it might be fine to reduce the metal content of some random manufactured product when you apply quality fade to aviation fuel you are asking for trouble.

Can the crash of BA's 777 really be the fault of Chinese fuel suppliers?

China Game comment.

Boeing 777 Crash: Investigators Looking At Fuel From China [China Game]

“Sources close to the investigation [say] British Airways engineers have been collecting fuel samples from every flight emanating from China. The sample collection, plus comments from the AAIB indicating the aircraft had “adequate” fuel remaining on board at the time of the crash, is believed to point toward suspicions of a heavier-than-fuel contaminant being present. Theories propounded by crew include the possible presence of water in the tanks that, having become frozen during the intense cold-soak period of the flight, partially melted and formed a slush that could have partially blocked the fuel lines.

This is China Games hypothesis. Sounds like a good conspiracy story but we shall see.

Of course I suspect a scheme like quality fade, and the scenario goes something like this: If it costs, let’s say, $200k to fuel an airliner for a long-haul flight, and someone on the ground is in the position to replace just 1% of it with water, that would create an opportunity to “save” $2,000. It doesn’t sound like much, but it might be four months of a manager’s salary. Not only that, but worth keeping in mind that there are thousands of flights operated out of the airport each month.

If there was a small amount of water in the tanks, it would have settled to the bottom (the fuel systems draw from the top is my understanding). So, water would not reach any fuel lines until towards the end of the flight. If the tanks were 10% full and 1% of the volume was water, it might not have ever mattered. The thing is that aircraft do not fill the tanks completely. If fuel is cheaper in London than it is in China, they may have loaded with just enough to get them to Heathrow. Or thereabouts. Right.

Who knows. Maybe it will turn out to be about something else. Or, maybe it turns out to be the fuel, but we never learn about it. China just made fresh some news about a JV with Boeing in Shanghai. Both China and Boeing want to see the cause as having to do with neither the country, nor the manufacturer. I find this latest development interesting and blogworthy.


Thursday 24 January 2008

Chinese Stockmarket Falls - crash coming?

Do the recent large falls in Chinese stocks represent the beginning or the end?

I believe there is a lot further to fall yet once certain positions start to unravel. For now it is holding. I agree that the bubble can burst for a number of reasons and that domestic pressures are far more serious than foreign ones - however, the trigger may still come from worries over the US. The rest of the house of cards will follow.

The FT consider this issue in a comment in today's LEX.

Chinese stocks [FT]

Red polyester lanterns dangle across Shanghai’s store fronts while office lobbies are a riot of scarlet and gold. But one ingredient is missing as China prepares to usher in the lunar new year – the traditional stock market rally. Instead, the Shanghai Composite Index has tracked global volatility, shedding 12 per cent on Monday and Tuesday and recovering 3 per cent on Wednesday.

The falls, however, may be an excuse to exit an overvalued market rather than evidence that China’s domestic currency “A” share market – in which foreigners have only a tiny stake – is turning global. Sure, slower international demand will crimp Chinese earnings, and US subprime exposure is (slightly) denting Chinese banks’ balance sheets. But this is small beer compared with issues at home. On the economic front, tighter monetary policy, alongside the slowdown in external demand, is expected to prune growth to 10 per cent or so. Some sectors will take a bigger hit. Banks go into 2008 with a constrained ability to lend – reserve ratios are higher and lending growth has been curtailed by diktat – and thinner interest rate margins as a result of asymmetric rate rises. Companies with earnings bloated by fat stock market gains will suffer if the market continues to wilt – in aggregate, perhaps one-fifth of net income was accounted for by investment gains last year.

Meanwhile, early indications point to massive equity issuance. A few weeks in, $9bn has been raised on the “A” share market; another $30bn is due in the coming weeks. Issuance this year is expected to trump 2007’s $78bn. On top of that, some $200bn of newly tradeable shares – following reforms designed to scale back state-held stock – could be unleashed this year, representing 17 per cent of free-floated “A” shares, according to HSBC. There are plenty of reasons for China’s stock market bubble to implode, but most are internal.


US rate cuts puts the PBC under increasing pressure

China's slapdash approach to economic management that has so far appeared to work in spite of the PBC often not seeming to know what it is doing will come under increasing pressure as recession in the US and perhaps the EU gets closer.

The dramatic rate cut of 0.75 points in the US also brings with it problems. Massive Chinese trading losses on exchange rage movements will also anger the Chinese people.

The loss the Chinese will realise on US paper has been inevitable for years. This policy of buying US paper to keep exchange rates low to boost exports was never sustainable. These losses are in many respect a travesty.

This excellent article outlines the technicalities. It also illustrates very clearly that macroeconomics can get complicated very quickly.

US action adds to pressure on China [FT]

The sharp cut in US interest rates has increased the conflicting pressures on Beijing's management of its economy and its simult-aneous efforts to stem potential losses of billions of dollarsin its foreign exchange holdings.

To keep the currency stable, the People's Bank of China buys almost all incoming foreign currency, and then attempts to "sterilise" the monetary impact by issuing renminbi bills to take the funds out of circulation.

The US cut means China's central bank will pay almost 200 basis points more on the bills it issues at home to manage its currency than it will get on purchases of US Treasuries.

The PBoC pays about 4 per cent on its so-called "sterilisation" bills, while one-year US Treasuries now carry an interest rate of 2.07 per cent.

Both countries are likely to maintain their policy biases in coming months, the US cutting rates, and China lifting them, a trend that will intensify the pressure on Beijing's currency policies.

"Things just got a lot more complicated for the managers of China's economy," said Stephen Green, of Standard Chartered bank, in Shanghai, yesterday.

China does not release the exact makeup of its foreign exchange holdings, nor how they are invested, making it difficult to get a precise reading on their profitability.

But Hong Liang, Goldman Sachs China economist, calculates the PBoC is losing about $4bn a month on its bills because of the turnround in the interest rate differential over the past 18 months.

"The trend is clearly accelerating as the reserves continue to grow faster than GDP," she said.

China has lifted rates eight times since early 2006, to cool an economy that grew by more than 11 per cent last year and, more recently, to combat inflation, which hit an 11-year high in November.

But further use of interest rates is constrained by Beijing's tight management of the renminbi, a policy aimed at preventing it appreciating too rapidly.

The government fears more rate rises could attract speculative capital inflows, adding to already swollen foreign reserves, which stood at $1,530bn at the end of 2007.

Despite this objection, the government's commitment to fighting inflation means further rate rises are inevitable, China economists say.

The PBoC, in expectation of losses on its sterilisation bills, has used other tools in the past year to drain the funds, mainly by requiring commercial banks to leave more money with it on deposit. Chinese banks are required to place 15 per cent of their deposits with the PBoC, at a much lower interest rate than the 4 per cent offered by the sterilisation bills.

The heavy use of this measure has allowed the PBoC to limit losses on its foreign exchange holdings.

Some economists argue the reserve losses are only on paper, but "at some point, that paper loss may result in a fiscal loss", said Brad Setser, of the Council on Foreign Relations. "It certainly represents a fall in domestic purchasing power of China's external foreign assets. Money held in dollars will end up buying fewer Chinese goods in five years than it does now," he said.


Tuesday 22 January 2008

Chinese Stock Market Crash

We have posted many times on this topic (see Stockmarket label).

The FT weigh in. I tend to agree with this article.

A crash is China’s chance for reforms [FT]

The spectacular run-up in equity prices in China in the past two years has created a classic asset bubble. The likelihood that the stock market will crash in the not-too-distant future has recently increased because of rising inflation at home and a global economic slow-down. The Chinese stock market has already begun to correct – the main stock indexes have fallen 15 per cent from their highs. However, with Chinese equity price levels disturbingly close to those of Japan’s Nikkei in 1989 prior to its meltdown, the Chinese market will have to fall much further to reach reasonable valuations.

Most analysts argue that such a collapse will have minimal impact on the real economy. This might well be the case. But such thinking ignores the fact that, when it comes, a Chinese stock market crash will produce serious political consequences. Official figures show that more than 100m people have invested in equities, mostly during the recent bull market run. A massive sell-off will hit their household net worth. Because the Chinese government has been perceived as an active promoter of the country’s stock market, tens of millions of individual investors, members of the privileged urban middle-class, will direct their ire at the government. To make matters worse, most publicly listed companies are state-owned, so investors assume that the state is liable for the collapse of their share prices.

Because economic performance and, by extension, a booming stock market help legitimise the ruling Communist party, a collapse in equity prices will seriously damage the leadership’s credibility as competent technocrats. Therefore, the Chinese government needs to develop a political strategy that will contain the political fallout from a market collapse while using it as an opportunity to push through financial sector reforms to restore investor confidence.

It is reasonable to expect that angry retail investors will either ask the government for compensation or demand an investigation into corporate foul play after the bursting of the bubble. Large-scale public protest is a possibility: thousands of irate investors demonstrated at the headquarters of the Ministry of Finance the day after it increased trading tax by 0.2 per cent last May, precipitating an instant sell-off.

While Beijing should resist the calls to bail out investors, it must respond to public pressure to punish companies and individuals that have engaged in illegal dealings during the bubble years. The government should seize their ill-gotten gains to set up a fund to compensate investors. The China Securities Regulatory Commission, the chief market watch-dog, should make its investigative proceedings open to the public. Although such measures might strike one as cheap tricks to scapegoat companies and their executives, they are politically necessary and can help calm an agitated public.

To restore confidence and revive the market, Beijing must turn the crisis into an opportunity to enact structural reforms that will improve corporate governance, make the CSRC truly independent, increase competition and raise the level of transparency in the stock market. Many of the specific reform proposals, such as increasing financial products and expanding institutional investing, are well-known. But two deserve special attention. First, the institutional autonomy of the CSRC will be a crucial indicator of Beijing’s commitment to post-crisis reforms. Today, the CSRC is a bureaucracy staffed by political appointees with limited power to enforce regulations. A priority should be to de-link the CSRC from the Communist party’s patronage system and appoint truly respected individuals, including foreigners experienced in financial regulations, to a genuinely independent new CSRC.

Second, the desire to protect China’s growing domestic market in financial securities has seriously limited competition in this sector and led to the domination by state-owned brokerage firms, many of them implicated in previous scandals (only three years ago, the entire brokerage sector, beset by corruption and mismanagement, was on the verge of collapse). The Chinese government must accelerate plans to allow foreign firms to enter the sector. It must abolish its requirement that foreign firms form joint ventures with Chinese partners. This bold move will not only help restore stability in the market, but also create conditions for a future boom in equity investing in China.

Monday 21 January 2008

Research paper: "FDI in China: Reward or Remedy?

The recent issue of World Economy has the following paper on foreign direct investment in China.

The paper examines an interesting new determinant.

"Foreign Direct Investment in China: Reward or Remedy?"

OLENA HAVRYLCHYK, CEPII, Centre d'Etudes Prospectives et d'Info. Internationales, Paris
SANDRA PONCET, Université Paris I Panthéon-Sorbonne - TEAM, Université Paris I Panthéon-Sorbonne, CEPII, Centre d'Etudes Prospectives et d'Info. Internationales, Paris

This paper tests the significance of FDI as a way to alleviate credit constraints. Incoming foreign investment provides additional sources of capital. Specifically in the Chinese case, enterprises may look for foreign investors, being constrained in their activity due to distortions in the state-dominated system. First, the Chinese financial system allocates resources to the least efficient firms - state-owned enterprises - while denying the same resources to Chinese private enterprises, forcing them to look for a foreign investor. Second, the inefficient system of state investment planning leads to mismanagement of public enterprises, increasing 'insolvency-induced FDI'. We propose to analyse determinants of FDI in Chinese provinces to test the above hypotheses. We control for traditional determinants of FDI such as market access, labour costs, productivity, infrastructure, reform advances and banking sector size in order to assess the impact of inter-provincial heterogeneity in terms of the access that private enterprises have to credit and the distortive management in state-owned firms.


Friday 18 January 2008

Investors flee China as sub-prime worries mount

Business Week look at the impending recession in the US and report that investors digesting this news are selling off the Asian stock markets after worries about the performance of exporters.

I tend to agree with the sentiment expressed in this article. The key is what exporters do with unwanted stock. Selling them in the local market at low prices will harm domestic competitors and hammer margins. Although useful as a means of slowing inflation, the employment effects may be serious in the medium term.

Subprime Fears Pelt Asia's Markets [Business Week]

So much for the theory that a U.S. slowdown won't hurt Asia. For months, many Asia watchers have predicted that strong demand in China and India would allow the region to "decouple" from the U.S., Asia's traditional engine of growth. For today at least, investors lost faith in that theory. Stock markets across the region plunged Jan. 16, following scary news from the U.S. about huge losses at Citigroup (C), disappointing numbers from Intel (INTC), and surprisingly weak U.S. retail sales figures for December.


Even mighty China may not be immune. "American consumers have been using their homes like ATMs," Morgan Stanley (MS) Asia Chairman Stephen Roach said at a conference Jan. 13 in the southern Chinese city of Sanya. "That game is over. If the U.S. consumer falters, China is going to feel it."

The worry among investors now is what faltering demand from the U.S. means for Chinese exporters. "Export-related companies are definitely going to have a tough time ahead," says Tony Yam, chief investment officer at SMC China Fund, a hedge fund investing in Chinese shares. One quarter of the country's exports go to the U.S., and another 35% go to European countries, many of them also facing serious downturns.

Chinese exporters, suddenly unable to find as many buyers in the West, might try to sell more of their goods at home. That would put downward pressure on prices in China and threaten some local companies (BusinessWeek.com, 11/15/07). "You could see some corporate distress, which impacts banks, supply chains, and suppliers," says Green, who predicts Chinese gross domestic product growth will fall to 9.5% this year from 11.5% in 2007.


Gordon Brown in China: Is it all about the economics?

The Guardian today report on Gordon Brown's visit to China.

This is a trip that is all about economics and job creation. Human rights will again come to the surface as always but do not be mistaken, GB is in China to promote UK plc and will only play lup service to the human rights issue.

It is remarkable that GB is there to ask for Chinese investment in the UK after a decade of almost total one-way FDI from the UK to China. This shows how far China has come in such a short amount of time.

For more information on this turn around and why such investment may be BAD for the Chinese people you should read the $1.4 Trillion question.

What GB is asking for is for China to yet again put the Chinese people last.

Brown seeks to take China relationship to new level [Guardian]

BEIJING, Jan 18 (Reuters) - Prime Minister Gordon Brown told China on Friday he wanted Britain to be the number one choice for Chinese trade and investment as he sought to take the relationship to a "higher level".

Brown also brought up human rights and democracy in his talks in Beijing with leaders of the world's fastest-growing major economy before heading off to Shanghai on Saturday and India on Sunday.

"Britain will welcome substantial new investment from China in our country in the years to come," Brown told a news conference alongside Premier Wen Jiabao.
"We want Britain to be the number one destination of choice for Chinese business as it invests in the rest of the world."

The two leaders agreed to expand trade to a value of $60 billion by 2010, compared to about $40 billion last year, as they watched the signing of agreements on education cooperation, climate change, sustainable cities and clean-energy development.

"I believe by 2010 we will see 100 new Chinese companies investing in the UK, we will see 100 partnerships between our universities and Chinese universities and we will double the number of firms listed on the London Stock Exchange and thousands of jobs will be created," Brown said.

He added that he welcomed investment from Beijing's huge sovereign wealth fund.
"We are now able to sell to China not just financial and business services and environmental technologies, but also a whole range of British brands that are now becoming very popular among the rising number of Chinese consumers."

"We are moving our partnership with China to a higher level," Brown said.
Among executives travelling with him was entrepreneur Richard Branson, who said he planned "a number of businesses" in China including a clean-energy company.
"China is very interested in developing clean energy. I am seeing a number of potential staff while I am there for running the company," he said on the flight from London.

Wen greeted Brown at the Great Hall of the People, the iconic heart of Communist Party rule. Wen assured reporters China was committed to eventual introduction of democracy.

"China will remain committed to advancing democracy -- that is to say our people will gradually exercise greater democratic elections and participation in political affairs," he said.

Brown said that he had raised the issue of elections in Hong Kong, which Britain handed back to China in 1997.

"I welcomed his assurances that they will move to elections both for the chief executive and for the council in Hong Kong over the next period of time," he said.

While Britain is keen to promote trade, the two countries do not always see eye-to-eye on Iran, Myanmar or the conflict in Sudan's Darfur province. Brown said he would discuss human rights and democracy during his visit.

Human Rights Watch said in an open letter to Brown that he should use his visit to press Beijing on rights in the run-up to the Beijing Olympics.

Western politicians and rights groups have accused China in the past of selling Sudan arms that end up in Darfur and of fending off stronger U.N. Security Council resolutions.

Wen said he and Brown agreed to press for a negotiated settlement on Darfur.
On Iran, Britain has supported its ally, the United States, in pressing for new sanctions against Tehran's nuclear activities, but China wants a negotiated solution.
Brown congratulated China on its successful bid to hold the Olympics and told students at People's University he would definitely come back to Beijing to attend if asked, at which point Wen promptly extended an invitation.


Thursday 17 January 2008

China Analyst Job

China Analyst (New York or DC)

Eurasia Group is seeking an experienced and motivated analyst of Chinese political affairs, to be located in the firm's New York or Washington, DC office.

In this position, you will assess the political risks flowing from political, security and economic developments in China of relevance to Eurasia Group's financial, corporate, and government clients. You will either have, or will develop, the ability to analyze specific sectors of the Chinese economy. You will perform in-depth research and will write both short analyses and longer papers. You will frequently brief both private sector and government clients. You will therefore have excellent analytical and presentation (oral and written) skills. You understand deadlines and you write in a good, succinct style at native English standard.

You will have at least an MA in political science or a relevant field (PhD preferred). Fluent Mandarin Chinese skills are required, and a minimum of three to five years of relevant work experience. One year of relevant in-country experience is preferred. Applications from more senior applicants are also welcomed. All applicants must be eligible to work in the United States.

To apply for a position, please submit cover letter, resume and salary history (plain text, PDF, or MS Word documents only) to careers@eurasiagroup.net with "China Analyst" in the subject line. The resume evaluation process will take place on an ongoing basis until the position has been filled.

H/T: AsiaBizblog

PBoC raise the reserve requirement again

An entirely predictable move by the Chinese central bank, the highest level since 1984.

Chinese central bank to raise reserve requirement ratio by 50 basis points[China View]

BEIJING, Jan. 16 (Xinhua) -- China's central bank announced Wednesday it will raise the required reserve ratio for commercial banks by half a percentage point as of Jan. 25.

The ratio will be raised to 15 percent, the highest since 1984.This increase, the first this year, comes a month after the ratio was raised by a percentage point on Dec. 25.

The People's Bank of China (PBOC) said in a statement that the adjustment, part of its stringent monetary policy, is to draw back excess liquidity at banks and curb the overly fast credit growth.

Excess liquidity is a major challenge for the government as it could result in bubbles and economic overheating. China's benchmark Shanghai Composite Index almost doubled last year and the economy expanded 11.5 percent in the first three quarters.

The problem of excess liquidity becomes more prominent as the record trade surplus pumps more cash into the country.

China Financial Markets comments.[China Financial Markets]


Tuesday 15 January 2008

No Left-Handed Chinese?

Every once in a while you read a post that knocks you for six.

One game that some colleagues and I play when undertaking 3 hour exam invigilations in the UK is to count the number of left handed students. When there are 100 students you usually end up with around 10%. This has been fairly consistent over the years.

Imagine my surprise therefore to hear that there are no left handed people in China.

It is frankly very difficult to believe and must make like hard for natural left handers. I assume that spotting one would be easy as surely they still kick a football with their left foot and throw a ball with their left-hand.

Ben's article is worth a quick read. Surely, left-handedness is now non discouraged to the same extent in China.

No Lefties in China? [Ben's Blog]

This past December, I was invited to a Chinese Christmas party in Chinatown. During the party, I was conversing with a middle-aged gentleman who had lived in the US for ten years. When the conversation turned to culture shock I asked him what he thought was the strangest thing he saw when he first came to the US.

“Left handed people,” he replied without any hesitation.


More on China's trade surplus

As always, an excellent post by Michael Pettis. His well written posts save me a lot of work as he always identifies the points and accurately describes them in a technical but still accessible manner.

His blog is certainly the best blog that covers China economics.

The cause of China’s trade surplus [China Financial Markets]

Prime Minister Manmohan Singh is currently visiting China and yesterday he too complained about China’s trade surplus. There is still a debate about the structure of China’s balance of trade. There are at least three reasons commonly cited to explain China’s massive trade surplus.

Read the post to get the three reasons. Pettis concludes:

It may already be too late to adjust easily, and even if it isn’t if the authorities are too wedded to the ideology of gradualism to make a rapid adjustment, so in this case I expect that the end game will occur either in the form of runaway inflation, which would eventually cause a sharp contraction in the money base, or in the form of sharply rising inventory leading to equally sharp cuts in production, which is how overinvestment cycles classically ended in the 19th Century.

I tend to agree. The adjustment costs will be severe. China is not sufficiently developed to withstand a deep crisis and the implications may be very serious.


Monday 14 January 2008

TheAtlantic.com: The $1.4 Trillion Question

From the inbox:

This is a 5 page US-centric article by James Fallows that asks whether "The Chinese are subsidizing the American way of life. Are we playing them for suckers—or are they playing us?"

The article begins well with a description of the Blackstone saga and the belief among many Chinese that it is them who are subsiding the US with the Chinese government paying $3 billion for a 8% non-voting share of Blackstone. Since it lost $1 billion recently that deal is not looking so clever after all.

Take this quote and think how it sits compared to the usual press stories you ready about the US-China relationship:

Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes.

I would strongly advise reading this accessible article very carefully - it covers all the basics in manner that makes some difficult concepts easy to follow.

The $1.4 Trillion Question [The Atlantic.com]

Can Chinese banks compete after accession to WTO?

I am sorting through some old papers at the moment and keep coming across research that may be of interest.

These are academic papers that may require access to download the full paper. The papers may also be rather technical for non-economists. If you need a copy please email and a friendly academic may be able to find a PDF version of any paper featured on this blog.

The short answer according to this paper is NO. I suspect with continued foreign joint ventures and investment in the share capital of these banks that they will learn very quickly. Howeve, teh bad load provision will remain a serious problem and may get considerably worse if there is a down turn of any magnitude.

Can Chinese banks compete after accession to WTO?

Lei Xua and Chien-Ting Linb,

International Graduate School of Business, University of South Australia and
School of Commerce, University of Adelaide.


Our answer is no, not at least without fundamental changes on the roles of Chinese banks and on the current unfavourable bank regulations towards domestic banks. As a result of China's accession to World Trade Organization (WTO), foreign banks could compete directly with Chinese banks with little barriers from December 2006. We argue that foreign banks’ expertise and experience in modern banking activities coupled with their interests and regulatory advantages in the traditional Renminbi (RMB) business will lead to a loss of RMB deposits and loans from local banks. Given that Chinese banks are currently ridden with large non-performing loans and low capital adequacy, the foreign bank entry will exert further pressure on the banks’ profitability and solvency. It is likely that the health of Chinese banks will deteriorate further in the post-WTO era.


China Slows as Central Bank Policies eventually bite

The Chinese central bank's attempt to slow the economy and put the brakes on inflation appear to be working (finally).

However, China is far from out of the woods yet (and we must also question whether China really wants to get out of the said woods).

China's trade surplus once again hit a new record last week and China's foreign exchange surplus reached another record at $1.53 trillion at the end of 2007.

China Money Supply Growth Slows as Central Bank Measures Bite [Bloomberg]

Jan. 11 (Bloomberg) -- China's money-supply grew at the slowest pace in seven months, evidence that central bank measures to cool inflation and prevent the economy from overheating are beginning to work.

M2, the broadest measure of money supply, rose 16.7 percent to 40.3 trillion yuan ($5.55 trillion) from a year earlier, the central bank said today on its Web site. The pace slowed from November's 18.5 percent and compared with the 18.2 percent median estimate of 20 economists surveyed by Bloomberg News.

The central bank has been trying to stem the flood of money into the economy from a record trade surplus to slow the fastest inflation in 11 years and curb investment. The bank is likely to take more measures to limit credit because money supply growth is still more than the 16 percent target set for last year.

``Money supply and loan growth will continue to slow through the first half of 2008 as the central bank forcefully implements curbing measures,'' said Sun Mingchun, an economist at Lehman Brothers Holdings Inc. in Hong Kong.

China's foreign-exchange reserves, the world's biggest, rose 43 percent to a record $1.53 trillion at the end of 2007 from a year earlier, today's central bank statistics showed.

As well as six interest rate increases last year, the central bank has raised the amount of money banks must set aside as reserves to a 20-year high and directed banks to limit lending.

``The central bank's tightened monetary policies, especially the frequent window-guidance, have started to bite,'' said Sun. ``Banks have got the message that the government will be firm- handed this year from various government meetings over the past two months.''

China's banking regulator last quarter banned seven banks including Agricultural Bank of China from making new loans, according to the official Shanghai Securities News.

Growth, population and industrialization, and urban land expansion of China

A new trend in academic economic research is the use of satallite data to examine different economic questions.

This paper in the Journal of Urban Economics is a good example and is another paper that I have to read.

Growth, population and industrialization, and urban land expansion of China

Xiangzheng Denga,
Jikun Huanga,
Scott Rozelleb,
Emi Uchidac


China is experiencing urbanization at an unprecedented rate over the last two decades. The overall goal of this paper is to understand the extent of and the factors driving urban expansion in China from the late 1980s to 2000. We use a unique three-period panel data set of high-resolution satellite imagery data and socioeconomic data for entire area of coterminous China. Consistent with a number of the key hypotheses generated by the monocentric model, our results demonstrate the powerful role that the growth of income has played in China's urban expansion. In some empirical models, the other key variables in the monocentric model—population, the value of agricultural land and transportation costs—also matter. Adapting the basic empirical model to account for the environment in developing countries, we also find that industrialization and the rise of the service sector appear to have affected the growth of the urban core, but their role was relatively small when compared to the direct effects of economic growth. We also make a methodological contribution, demonstrating the potential importance of accounting for unobserved fixed effects.

Keywords: Urbanization; Spatial scale; Monocentric urban model; Industrialization; Remote sensing; Econometric analyses; Decomposition analyses; China


Big cars in little China

China is falling into the classic development trap of excessive materialism as consumers demand larger and larger cars even in the face of limited space and higher fuel costs. Capitalism has a this way of changing the character of all creeds and colours.

Chinese lose enthusiasm for smaller cars [FT]

The “people’s car” might not find a warm reception in the People’s Republic.

While Tata Motors hopes that its new $2,500 Nano model will bring vehicle ownership to the Indian masses, car-buyers in China, the most dynamic market in the world, have lost some of their enthusiasm for small, cheap vehicles.

Industry figures to be released this week will show that the growth of sales of smaller-engined vehicles fell sharply last year in spite of a continuing boom in the overall car market, which grew by about 24 per cent.

The conventional wisdom in the car industry is that large, developing economies with rapidly expanding middle classes buying their first cars should be fertile territory for small and affordable vehicles. That is what Tata is hoping for in India and that is how carmakers have prospered in emerging markets from Brazil to Thailand.

However, industry analysts say China could be following a different path. Car ownership is growing at a rapid rate – turning China into the second largest market in the world.

But, after flirting with smaller vehicles, Chinese consumers are trading up.

The unique role of "face" in Chinese culture is partically to blame:

“If Chinese can afford a higher-level car, they will go for it, even if it means borrowing money from their family. Image is much more important in China, especially compared with India.”

Research by Volkswagen last year found that average Chinese carbuyers spent twice his or her annual salary on the vehicle. Two years ago Su Tianping, a junior manager at Pudong Development Bank in Shanghai, bought a QQ, the microcar made by Chinese company Chery, which was a sales phenomenon in 2005. However, he sold it a few months ago.

“It was OK to drive around home,” he says, “but driving a QQ to clients or to a party was a loss of face.”

In a related post comes a news piece the like of which we may see more of from China:

Nine killed, 52 injured in central China highway pileup[People's Daily]

Nine people were killed and 52 others were injured in a pile-up involving four motor vehicles on a highway in central China's Hunan Province in the early hours of Monday, said local police.


Saturday 12 January 2008

Returns to Education in Rural China

Studies of the labour market in China are beginning to come on stream.

The issue of rural wages is a crucial aspect of the Chinese economy and this will directly influence rural-urban migration and wage increases may lead to inflationary pressures.

The results of this paper in Review of Development Economics (decent journal but not Journal of Development Economics standard) by Alan de Brauw and Scott Rozelle are not surprising and explains why wage inflation has not been higher even in the wake of double digit growth spanning a number of years.

The key to this paper is what data they used, how trustworthy the data is and what methodology was employed to obtain their results.

Reconciling the Returns to Education in Off-Farm Wage Employment in Rural China

* Alan de Brauw and Scott Rozelle.


Previous studies have found that the returns to education in rural China are far lower than estimates for other developing economies. In this paper, we seek to determine why previous estimates are so low and provide estimates of what we believe are more accurate measures of the returns. Whereas estimates for the early 1990s average 2.3 percent, we find an average return of 6.4 percent. Furthermore, we find even higher returns among younger people, migrants, and for post-primary education. The paper demonstrates that, although part of the difference between our estimate and previous estimates can be attributed to increasing returns during the 1990s, a larger part of the difference is due to the nature of the data and the methodological approaches used by other authors.


Thursday 10 January 2008

How is China viewed in the World?

Interesting article from the Pew Research centre on world wide perceptions of China.

Out of 47 countries surveyed only 5 have an overall negative view (less than for the US).

The China/US comparisons and the time series element to this survey make interesting reading.

How the World Sees China [Pew Research Centre]

Negative views of China are especially strong in Japan, where 67% say they have a generally unfavorable view of China while an even larger majority (80%) disapproves of China's expanding military strength. Several European countries also cast a worried eye on the Middle Kingdom with majorities in Italy (61%), the Czech Republic (58%), Germany (54%), France (51%) as well as Turkey (53%) saying they hold an unfavorable view of China.

(H/T: The China Game)

Economics of reforestation in China

China is one of those countries that is reversing years of deforestation with planting schemes on a massive scale.

Surely this can only be a good thing? It depends. The problem as always is economics - the irony is that the tree planting frenzy is leading to more pollution not less as the wood is processed (an inherently dirty industry).

As always, you need to dig beneath the headline behinds China's forestation miracle to seek the unpalatable truth.

This interesting article from ChinaDialogue discusses the Chinese tree planting trend.

China's "Green Deserts"

China’s tree-planting movement continues down a worrying path. The planting of artificial, single-species forests has not abated in China; in fact, it has worsened. The country’s original distribution of trees: fir trees in the south, poplars in the north, has made way for poplars everywhere – north, south, east and west. There are even attempts to start poplar plantations on the southern tropical island of Hainan.


Why are poplars such a common choice? Put simply, they are profitable. Poplars can be sold in the cities and increasingly in towns; the wood is shaved into two-millimetre thick boards that are used in high-density materials for fitting out buildings and constructing cheap furniture. This huge market has lead to an entire industrial chain planting, felling, shipping, processing and selling poplars. One northern city has several hundred wood processing plants alone. Wood processing is a polluting industry, which releases toxic chemicals due to the glues that are used. These can also harm – or even kill – workers who are regularly exposed to them.


Many will ask why we should not cultivate this fast-growing tree. It has a wide range of uses, after all. However, a quick-growing tree does not mean long-lasting wood. The artificial boards that poplar is used for only last five or six years. They are cheap enough to be thrown away and replaced as China frantically remodels its homes and offices. As a result, we are rapidly exhausting our non-renewable materials, including sand, concrete, bricks, plaster and stone. The short life-span of poplar products mean they do not fix carbon dioxide from the atmosphere for any significant length of time, unlike furniture or building materials made with quality woods, which can last a century or more.


China has the largest area of artificial forests in the world, but ranks last in terms of these forests’ productivity. These single-species require the constant use of fertilisers and other chemicals. They are weak ecosystems that are vulnerable to disease and pests, which can devastate large areas. They are also unattractive; artificial forests in scenic areas and along roads and railways are nothing to look at.


Monday 7 January 2008

Economist: "The Old Chinese Myth"

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

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

An old Chinese myth [The Economist]

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

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

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

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

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

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

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

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

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

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

The article concludes:

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

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


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

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

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

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

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

Adventure Capitalist: The Ultimate Road Trip

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

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

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


Measuring Green Productivity

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

Weak environmental enforcement is, as always, important.

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

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

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

Saturday 5 January 2008

FDI in China: Quality over quantity?

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

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

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

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

Quality over Quantity [China International Business]

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

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

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

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

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

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

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

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

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

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


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

How does FDI affect China? Evidence from industries and provinces

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


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


Plagiarism in Chinese Academia

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

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

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

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

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

Does that rule make economic sense?

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

China's Scientific & Academic Integrity Watch

Some examples of the stories of this blog:

An Academician Who Plagiarized

Yale Professor Criticizes Wide Spread Plagiarism at Peking University

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

H/T to China Law Blog


Wednesday 2 January 2008

Exchange rate update

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

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

For example, in the post below he writes:

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

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

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

Is China sneaking in a revaluation? [CFM]

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


Internal Migration in China

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


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

Chinese Migrant Children Face Educational Hurdles

(H/T: China-Crossroads)