Monday 28 April 2008

Hot money and the calls for a maxi-revaluation

Brad Sester over at RGE monitor has a neat little article (with good figures) outlining the dangers of holding off the revaluation much longer.

For the record I cannot see it yet. The political implications are too great (the perceived job losses associated with a loss of competitiveness).

A good article and worth reading.

What keeps Zhou Xiaochuan up at night [RGE monitor]

Friday’s Lex column highlighted the possibility that China’s real reserve growth may be far higher than the published increase in its reserves – and thus a lot more hot money may be flowing into China than the published increase in China’s reserves implies. Michael Pettis – drawing on the work of Logan Wright of Stone and McCarthy - and I have both published online estimates of the “true” pace of Chinese reserve growth. Wang Tao – formerly of the Bank of America – and Stephen Green of Standard Chartered have done similar work.


Saturday 26 April 2008

Does Trade with China benefit the poor in America

The topic of income inequality in the US and who to blame always rears it's head in some form or other whenever the US enters a downturn. This time however, we get to see a little of the other side of the story - do the poor in the US gain from having cheaper goods - you bet.

There is nothing surprising in these results which intuitively fit with my priors. Still, it is good to see high quality research in this area.

This new working paper by Christian Broda (University of Chicago, GSB and NBER) and
John Romalis (University of Chicago, GSB and NBER) is worth a read.

Inequality and Prices: Does China Benefit the Poor in America? [PDF]

Over the past three decades there has been a spectacular rise in income inequality as measured by official statistics. In this paper we revisit the distributional consequences of increased imports from China by looking at the compositional differences in the basket of goods consumed by the poor and the rich in America. Using household data on non-durable consumption between 1994 and 2005 we document that much of the rise of income inequality has been offset by a relative decline in the price index of the poor. By relaxing the standard assumptions underlying the
representative agent framework we find that inflation for households in the lowest tenth percentile of income has been 6 percentage points smaller than inflation for the upper tenth percentile over this period. The lower inflation at low income levels can be explained by three factors: 1) The poor consume a higher share of non-durable goods —whose prices have fallen relative to services over this period; 2) the prices of the set of non-durable goods consumed by the poor has fallen relative to that of the rich; and 3) a higher proportion of the new goods are purchased by the poor. We examine the role played by Chinese exports in explaining the lower inflation of the poor. Since Chinese exports are concentrated in low-quality non-durable products
that are heavily purchased by poorer Americans, we find that about one third of the relative price drops faced by the poor are associated with rising Chinese imports.

Friday 25 April 2008

Robots to replace the "unskilled"

China has expanded on the back of export driven growth with markets won through low cost production. Across the water Japan has a relative abundance of skilled labour but a relative shortage of unskilled workers.

Trade solves this problem. However, Japan wants to solve this problem using its abundant capital - the solution to build 3.5 million robots.

The economic implications are interesting. The low skilled will yet again see their wages under pressure. However, it is hard to see how the capital required can ever be cost effective compared to Chinese wages.

But, crucially, the robot solution means no immigration costs or social unrest associated with immigration of low skilled. The key to the robot solution is Japan's unwillingness to contemplate large scale immigration. I suspect, given Japan's demographics, that this attitude will have to change.

There must be a paper in here somewhere.

Robots seen doing work of 3.5 million in Japan [Reuters]

TOKYO (Reuters) - Robots could fill the jobs of 3.5 million people in graying Japan by 2025, a thinktank says, helping to avert worker shortages as the country's population shrinks.

Japan faces a 16 percent slide in the size of its workforce by 2030 while the number of elderly will mushroom, the government estimates, raising worries about who will do the work in a country unused to, and unwilling to contemplate, large-scale immigration.

The thinktank, the Machine Industry Memorial Foundation, says robots could help fill the gaps, ranging from microsized capsules that detect lesions to high-tech vacuum cleaners.

Rather than each robot replacing one person, the foundation said in a report that robots could make time for people to focus on more important things.

Japan could save 2.1 trillion yen ($21 billion) of elderly insurance payments in 2025 by using robots that monitor the health of older people, so they don't have to rely on human nursing care, the foundation said in its report.

Caregivers would save more than an hour a day if robots helped look after children, older people and did some housework, it added. Robotic duties could include reading books out loud or helping bathe the elderly.

"Seniors are pushing back their retirement until they are 65 years old, day care centers are being built so that more women can work during the day, and there is a move to increase the quota of foreign laborers. But none of these can beat the shrinking workforce," said Takao Kobayashi, who worked on the study.

"Robots are important because they could help in some ways to alleviate such shortage of the labor force."

The current fertility rate is 1.3 babies per woman, far below the level needed to maintain the population, while the government estimates that 40 percent of the population will be over 65 by 2055, raising concerns about who will look after the graying population.

Kobayashi said changes was still needed for robots to make a big impact on the workforce.

"There's the expensive price tag, the functions of the robots still need to improve, and then there are the mindsets of people," he said.

"People need to have the will to use the robots."


Stockmarket bounce and stamp duty

Good coverage of the recent stockmarket bounce of 9% following large recent falls that saw the main index fall below 3000. All predicted here at Chinaeconomicblog of course.

To the West such blunt policy reversals seem to undermine the credibility of the government but given the importance on "stability" we should not be surprised.

Stock market rises 9.3% [China Financial Markets]

Last night the Ministry of Finance and the State Administration of Taxation announced that the stamp tax on the purchase and sale of stocks would be cut from 0.3% to 0.1%. Today, in response, the Shanghai Composite Index surged 9.3%.


The cutting of the stamp tax was a widely-anticipated reversal of the move last year, on May 30, when in order to cool what seemed like a vastly overheated market, the stamp tax was raised from 0.1% to 0.3%. The market fell 6.5% the next day, and lost another 6.5% that week, if I remember correctly, but not for long. It quickly turned around and returned to its dramatic rise, surging another 75% or so to reach 6124 on October 16. Government attempts to manage stock market prices in China do work, for a while at least.

Since its peak in October, however, the market has plummeted to just below 3000 on Tuesday, losing over half its value, and creating a great deal of concern for the government – China’s is the world’s worst performing stock market year to date. The government is afraid both that the continued market slump may anger the newly-emerging urban middle classes and that it may translate into reduced consumption as savings are eroded (although according to Andy Rothman at CLSA at its peak the total market cap of traded shares was only about 36% of GDP, and is much less today).

This fear is a real one. However, I suspect this 9% will be short lived. There will be more pain to come imo.


Wednesday 23 April 2008

“killing the rooster to scare the monkey” over "ratholes"

So many animals in one article made this FT piece a "must blog post".

It will come as no surprise that there exist a large number of loopholes and shady dealing in the Chinese stockmarket.

The financial sector will always be ahead of the giant lumbering government. This is also true for Western countries as the sub prime and Northern Rock fiasco's demonstrate.

At least China is moving in the right direction:

China cracks down on market ‘ratholes’ [FT]

China’s securities regulator has banned one fund manager from the country’s capital markets for life and another for seven years in a warning to the industry to clean up lax internal controls.

The two managers were banned after buying shares in companies their funds invested in and then selling them for a profit – a practice known as “building a rathole” in Chinese.

Tang Jian, a former manager for China International Fund Management, a joint venture between JPMorgan and Shanghai International Trust Co, was banned for life after storing up Rmb1.53m ($220,000) in his rathole, according to the China Securities Regulatory Commission (CSRC).

Wang Limin, formerly a manager at China Southern Fund Management, was banned for seven years after similarly making a profit of Rmb1.5m.

Both managers were also fined Rmb500,000 and had their illicit earnings confiscated.

The transactions occurred in 2006 as the Chinese stock market was heating up and investors began pouring into a market that rose nearly six-fold in the two-and-a-half years to October 2007.

The benchmark Shanghai Composite Index has since dropped by almost half from that peak.

The index rose 1 per cent on Tuesady to 3,148 points, on expectations the government will introduce new measures to support slumping prices.

Such punishment, and the public release of details of such cases, is a common tactic – referred to as “killing the rooster to scare the monkey” – used by the regulator in the face of widespread irregularities and malfeasance in the country’s capital markets.

“The scale in China of corruption, poor disclosure, insider trading and market manipulation basically swamps the regulator’s limited resources,” said Fraser Howie, author of a book on China’s capital markets. “This is just how the market works and these guys were either unlucky or stupid.”

The CSRC issued a warning to fund management firms through state media yesterday that it was prepared to punish companies whose lax internal controls allowed managers to break trading laws and regulations.

It also ordered firms to monitor all communications of investment managers in the workplace.

Assets under management in China’s mutual fund industry total Rmb2,500bn, with funds controlling about 23 per cent of the market capitalisation of all tradeable shares on the Shanghai and Shenzhen exchanges, according to CSRC figures.


Monday 21 April 2008

Krugman on peak oil and commodity bubbles

Paul Krugman in his New York Times blog piece gives some column inches to the oil price, China's insatiable demand for commodities and gives an impressively downbeat view on the future.

Dismal science at its best. I read the original Economist article all those years ago with much interest. The story they presented was plausible but now represents one of the biggest mistakes in publishing history. I have certainly read every Economist piece since then with a high degree of skepticism.

Running Out of Planet to Exploit [New York Times]

Nine years ago The Economist ran a big story on oil, which was then selling for $10 a barrel. The magazine warned that this might not last. Instead, it suggested, oil might well fall to $5 a barrel.

In any case, The Economist asserted, the world faced “the prospect of cheap, plentiful oil for the foreseeable future.”

Last week, oil hit $117.

It’s not just oil that has defied the complacency of a few years back. Food prices have also soared, as have the prices of basic metals. And the global surge in commodity prices is reviving a question we haven’t heard much since the 1970s: Will limited supplies of natural resources pose an obstacle to future world economic growth?

China gets a mention:

For one thing, I don’t expect growth in China to slow sharply anytime soon. That’s a big contrast with what happened in the 1970s, when growth in Japan and Europe, the emerging economies of the time, downshifted — and thereby took a lot of pressure off the world’s resources.

Meanwhile, resources are getting harder to find. Big oil discoveries, in particular, have become few and far between, and in the last few years oil production from new sources has been barely enough to offset declining production from established sources.

And the bad weather hitting agricultural production this time is starting to look more fundamental and permanent than El Niño and La Niña, which disrupted crops 35 years ago. Australia, in particular, is now in the 10th year of a drought that looks more and more like a long-term manifestation of climate change.

The one line conclusion with dismal brilliance:

Don’t look now, but the good times may have just stopped rolling.


Water shortages in China

A snippit on the problems resulting from drought in Liaoning Province. We will see more stories like this in the future. The economic implications are potentially large. Digging wells is a short term solution. Ground water is becoming polluted and in short supply.

Once lack of water leads to crop failures the pressure on food prices in the region could be severe. The Chinese government needs to keep a close eye on the water supply.

China drought leaves 670,000 without drinking water [ABC news]

A drought in China's north-east Liaoning province has left nearly 700,000 people without drinking water after rainfall in the first three months of 2008 tumbled to one-fifth levels last year, the Xinhua agency said.

The area is a top grain producer, and maize and rice farming is due to begin next week, but from January to the end of March it had got less than 2 centimetres of rain.

Some 66 reservoirs have dried up, but the area has raised cash to build 1,700 new wells and expand and upgrade water conservation systems to try and ensure spring planting can go ahead, Xinhua said, citing local sources.

China's weather administration said in early April that drought parching other parts of northern China was the worst in several decades and would continue this month.

Drought and floods are perennial problems in China, which has per capita water resources that are well below the global average. Its meteorologists have said global climate change is exacerbating extreme weather, including droughts.

About 30 million Chinese in the countryside and more than 20 million in urban areas face drinking water shortages every year despite huge government investment to address the problem.

On Chinese Currency Speculation

Once again China Financial Markets are spot on.

This latest post gives a good potted history of currency areas and their ultimate demise.

Where I agree with Pettis is that the Chinese will be more than likely better off holding RMB than buying other currencies. Given the likely revaluation upwards it would appear hard to find a better investment.

Pettis' fears over the demise of the EURO are however overdone. The EURO is certainly here to stay. We do not see US states clambering to exit the $ zone do we and there is no doubt that capital and labour mobility are increasing in Europe (although there is some way to go to meet inter-states levels in the US).

RMB and the EURO [China Financial Markets]

First of all, I don’t think Chinese investors should buy any foreign currency product until the RMB issue has been resolved. With the expected appreciation of the RMB as high as it is, only extremely high-yielding, very risky foreign-currency-denominated assets can be expected to match the returns one can get by simply depositing RMB in a bank account. Why take the risk?

Second, I think the euro is overvalued relative to the dollar, and although we may see more dollar weakness in the short term, my own bet is that the euro will strengthen in the one- or two-year horizon as Europe’s trade deficit continues to swell. Lombard Street Research, a London-based research group and one of my favorites, expects the dollar’s fall to be more of a bungee jump, and they expect the rebound will occur once the markets see the European trade deficit as unsustainable and the euro’s position as precarious. I agree.

Finally, and this is really a much longer-term issue, I am still very skeptical about the survivability of the euro. It seems to me that the strains in the euro zone – especially in countries like Spain, where monetary policy is much too loose, and Italy, where sovereign debt levels are rapidly becoming unsustainable – will put serious pressure on the euro once we end the current liquidity cycle that we have experienced over the past 15-20 year.

Friday 18 April 2008

Dying Chinese towns - economic restructuring in action

The UK has been through the pain of resource based contraction after the closure of UK coal mining and steel making with the loss of hundreds of thousands of jobs and the economic decimation of local villages and towns. The the same experience is beginning to come to China despite the current economic boom.

For the UK is marked the transition from a manufacturing to a service based economy. However, this transition took 100 years - China appears to be on a fast track to .....who knows where?

In China, political unrest is only one crisis away (see previous stockmarket post).

FEATURE - Dying China Oil Town A Warning To Beijing [PlanetArk]

Dying towns are rare in booming China, but the expanses of rubble and abandoned homes that ring the once-wealthy oil centre of Yumen mark it out as one of them.

And though it is home to just a few thousand people, in a nation of over 1.3 billion, Beijing's stability obsessed bureaucrats are fretting about their fate.

They worry because Yumen's poor, disgruntled inhabitants are the thin end of a wedge of discontent that could engulf hundreds of thousands of people within a decade unless the central government can tackle one of the more obscure but troubling legacies of past socialist policies.

The potential troublemakers live in dozens of "resource towns" scattered across China, which were built by Mao-era economic planners to exploit energy or mineral deposits regardless of how remote or inhospitable the location.

Now some seams of oil, coal and ores are starting to run out, pushing up unemployment and migration while leaving behind shells of towns that are impoverished tinderboxes of unrest.

These towns like Yumen should never have existing and are a result of central planning gone mad. However, the human misery tales are all too real.

"I can't eat well, I can't buy clothes, I can't even think of travelling or having fun. All I can do is try to slowly pass my days," said a laid-off worker who gave only his surname, Quan.

"We have all been out to protest."

The article goes to to point out the link with the UK and US:

Resource towns everywhere shrivel up or suffer when their key source of income fades. Texas is dotted with ghost towns and industrial centres of northern England struggled for decades after coal and heavy industry slipped into decline.

Perhaps most damning of all is the lack of progress in the attitudes of officials. In the face of such obvious economic hardship we get the following:

Officials declined repeated requests for statistics on budgets, population, and the economy of the new town, and trailed a journalist who tried to interview residents of new Yumen.

And the provincial government seems equally oblivious to Beijing's concerns about unrest, poverty and marginalisation.

Asked about the impact of the move, Gansu provincial governor Yu Shoucheng said: "Today's Yumen is glowing and in its prime."

The problem is that whilst the government can keep a firm lid on the changes in economic circumstances and the protests it throws up it is simply building up the pressure so that when it blows the result will be all the more catastrophic.


Thursday 17 April 2008

Stockmarket continues to slide - 46.3% down from the October 16th high

The FT report on the pain being suffered by the small Chinese investor. With large shareholding being owned by local officials and even the army a major meltdown is only a few economic and political disasters away.

Click on the stockmarket label to see our previous posts and my historic predictions which are beginning to look rather good :-)

Investors in China brought back down to earth [FT]

Shares in Shanghai have plunged as sharply in the past six months as they surged during the first part of 2007.

The Shanghai composite index closed on Wednesday at 3,291 – down 46.3 per cent from its all-time high of 6,124 on October 16.


Rumours abound that Beijing will do something to boost the market. But prices fell by 5.6 per cent on Monday alone.

“The reason for the repeat this week of ‘Black Monday’ is mainly because people were still expecting a policy change from the government over the weekend,” says Chen Huiqin, analyst at Huatai Securities in Shanghai. “As long as there is nothing new coming out, the pessimistic atmosphere will affect the market.”

So why have share prices fallen so rapidly. Most readers of this blog will already know the answer. The short answer is that shares became insanely overpriced based on standard measures such as PE etc. It was a simple bubble and retail investors felt like they were in a casino where they could never lose. Do not underestimate the share lock up factor - share sales could prove a major drag on prices.

But Mr Evans says there are other reasons for the sharp declines of the last six months.

Beijing does not want the economy to overheat. Inflation has been persistently high – consumer prices are rising at 8.3 per cent a year.

The central bank, the People’s Bank of China, raised policy lending rates by 135 basis points last year and it has lifted the bank reserve requirement 15 times since mid-2006 to a record 15.5 per cent. The PBoC governor this week hinted rates might have to rise further to stamp out inflation at near 11-year highs. “Being in a market where the authorities are tightening is not good for investors,” Mr Evans says.

Steven Sun, HSBC China equity strategist, says there are still billions of non-tradable shares locked up from earlier flotations that will be released on to the market in the second half of this year. That may depress prices further.

Many companies that planned to float in Shanghai have thought again. Figures compiled by Thomson Financial show that the amount of cash raised in initial public offerings so far this year at $7.95bn is 28.7 per cent lower than the same period last year. Thomson says the premium on the first day of trading has fallen from an average of 110 per cent last year to just 30 per cent.

Another worrying trend emerged late last month when shares in China Pacific Insurance dropped below the price at which they were offered to the public in December. Since then, several other recently floated companies have sunk below their offer prices.

The Shanghai market now trades at a more realistic 26 times historic earnings and 20 times estimated profits for the next 12 months.

I still think we could see 3000 short term. Other economists are saying a 50% fall from its highs should be the limit. I disagree. 2500 is not out of the question by any means once investors reach the "puke point". Sheer panic to me and you. Things are bad but no where near bad enough. From someone who rode the bubble never underestimate the power of panic.

Be warned.


The great migration of China

Slate recently published an excellent series of articles from rural China.

The beauty of these stories is that they provide the missing pieces between economic articles that take vast microeconomic datasets and often come up with some counter-intuitive findings and what is actually happening on the ground. There is also a good "China-US" migration history lesson thrown in.

The hard-working US based Chinese and their exported babies is something I was simply unaware of. After the standard journalistic introduction using some specific story telling example to suck us in we get to the meat.

China's Great Migration [Slate]

The overwhelming majority of Chinese who have emigrated to the United States over the past 20 years come from a handful of counties around Fuzhou, the capital of Fujian province, which lies along the banks of the Min River, just across the strait from Taiwan. Seeking better economic opportunities, the Fujianese fled their farms and fishing villages throughout the 1990s and took circuitous—and often illegal—journeys to America. In 1994, then-CIA Director James Woolsey estimated that as many as 100,000 Chinese were entering the country illegally every year. That figure was probably a little high, and the exact numbers are impossible to tabulate. But you get the idea.

The Fujianese are known for their work ethic and entrepreneurial zeal, and the new arrivals fanned across the United States and started businesses. That generic Chinese restaurant in the strip mall near your house? Almost certainly run by Fujianese. Those no-frills "Chinatown buses" that initially linked Eastern seaboard cities and now rival Greyhound, crisscrossing the continent? A Fujianese innovation.

The Fujianese in America work so hard, in fact, that when they have babies—babies who, by virtue of being born on American soil, are U.S. citizens—they don't have time to raise them. So, they send the babies home, back to the very villages the parents left, to be raised by their grandparents. The babies sitting around me—who begin screaming in unison as the plane nears Fuzhou and begins its descent—are packing something that many of their chaperones lack: U.S. passports.

Wednesday 16 April 2008

THE on University Rankings - should rankings be trusted?

This blog has covered University rankings extensively as it is important to pick your University very carefully given the increasing costs of higher education.

University ranking ARE growing in influence. Is this a good thing? On one level it is important for overseas students especially to receive as much information as possible. Moreover, if employers use these rankings to rank applicants then is is increasingly important that students at least play the game whatever the merits or otherwise of haing a ranking of Universities.

Universities also need to understand the importance of rankings and are quickly learning how to play the game:

The report makes it clear why institutions take their results so seriously. Research by one research-intensive institution featured in the study found that 50 to 60 per cent of its intake had been influenced by league tables.

With percentages like that you can expect more creative accounting at the University level.

This excellent article breaks down each ranking to show which indicators are used and the relative weightings.

A measured relationship [THE]

League tables are used to gauge university performance, influence potential students and steer management policy, but should they be trusted? A survey suggests that many fall short of the mark, writes Rebecca Attwood

A nother day, another university league table hits the newspaper headlines. Perhaps you are sceptical about their worth - but nonetheless, a sudden drop in your institution's ranking can be demoralising and can feel like an unfair reflection of the institution and your work.

According to a major study into their impact published this week, university league tables have "serious methodological limitations" and yet are growing in influence.

A study commissioned by the Higher Education Funding Council for England found that institutions shared many concerns about the validity of league tables but were nevertheless strongly influenced by rankings when it came to setting institutional strategy.

Researchers from the Centre for Higher Education Research and Information at The Open University and Hobsons Research dissected five major national and international rankings - The Sunday Times University Guide, The Times Good University Guide, The Guardian University Guide, Shanghai Jiao Tong University's Academic Ranking of World Universities and the Times Higher Education/QS World University Rankings.

[All are covered and linked to it this blog]

Their findings highlight a lack of transparency about the way the league tables are compiled. Some measures, the researchers conclude, are "poor proxies" for the qualities that the tables are attempting to evaluate - many are determined by the data available rather than by clear concepts of excellence, and the methods for calculating scores can be questionable.

In many cases, compilers changed methodologies frequently. "It could be argued that league tables count what can be measured rather than measure what counts," and rankings reflect reputation more than quality or performance, the authors assert.

Monday 14 April 2008

China's obsession with cars

In another example of the West attempting to prevent China and India enjoying the trappings of capitalism and growth, China and India and urged to avoid copying the West's obsession with fast and/or large cars.

As with global warming in general the sentiment is correct - if China and India copy our excessive reliance on the motor vehicle then the planet with hasten its own demise.

The interviewee in this article is right to point the finger at the West's media to blame for fueling the dreams and aspirations of the average Indian or Chinese citizen.

China, India Urged To Avoid Obsession With Cars [PlanetArk]

BOAO - China and other big developing countries such as India need to take steps to avoid being over-reliant on private cars, the head of the Nobel Peace Prize-winning UN climate panel said.

Rajendra Pachauri, head of the Intergovernmental Panel on Climate Change (IPCC), told Reuters that investing in improving railways and urban public transportation was one way countries such as China could balance the need for fighting climate change with that for economic growth.

"This excessive and growing reliance on private vehicular transport is certainly something that doesn't suit large, populous countries like China and India," Pachauri said.

"So we have to find a different model for that -- much more efficient and better railway systems, much better local transport in terms of use of public transport options," he told Reuters on the sidelines of the Boao Forum for Asia held in the southern Chinese island province of Hainan.

China is already the world's second-largest vehicle market, despite only a small fraction of urban residents owning a car.

With incomes rising, car sales are growing by more than a fifth each year, contributing further to serious air pollution in cities, as well as to emissions. China is set to surpass the United States as the world's top emitter of carbon dioxide.

For its part, India will this year see the world's cheapest car, the Nano, hit its roads, bringing car ownership closer to within reach for millions of poorer consumers.


Pachauri acknowledged that investment in better public transport alone would not be enough to curb growth in private car ownership. Lifestyle changes stemming from better awareness of environmental issues would be important as well, he said.

That, in turn, places responsibility on Western countries.

"You won't get lifestyle changes in the developing world unless the developed world also makes some efforts to bring about those changes," he said.

"I mean, everybody over here watches television and they see all the good things in life in the developed world and naturally they're not prepared to give up that distant vision or dream."


Sunday 13 April 2008

China: the NEW Master of the Universe

Standard over the top Daily Mail article but it makes for interesting reading:

Why China is the REAL master of the universe []

Cecil Rhodes, the businessman-imperialist of Africa, the creator of Rhodesia, suffered no flicker of doubt about who were the masters.

"To be born an Englishman," he mused, "Is to win first prize in the lottery of life."

It wasn't idle boasting. In the jingoistic triumphalism of the late 19th century, when waving the Union Jack was a simple pleasure, people sang: "Rule Britannia! Britannia, rule the waves" without any irony. It was a statement of fact.

A quarter of mankind lived under the British flag in the largest empire the world had ever known.

And many of those parts that weren't under Britain's rule - such as the U.S. - had been created by Britain.


Napoleon III compared China to a sleeping giant and warned: "When China awakes, she will shake the world."

After a long hibernation, China, and her 1.3 billion people - twice the population of the U.S. and EU combined - is awaking almost overnight.

And not just China. The world's second most populous country, India, is industrialising at a historically unprecedented pace.

Their economies are growing on a long-term basis about four times the speed of the UK's and that of the United States. Goldman Sachs, the bank, recently predicted that by 2050, China and India would have overtaken the U.S. to be the world's first and second biggest economies.

We have long heard about the benefits this brings, in terms of plentiful cheap goods from toys to TVs, and huge opportunities for Western companies to sell their wares in these booming markets.

But there are also downsides, which are becoming more apparent. Unskilled workers in the West have become unsettled by the threat to their jobs as production moves East.

The most vulnerable Western workers have found their wages stagnate as they struggle to compete in an increasingly global market place.

And competition for raw materials is pitting East against West.

The economic explosion of China, and to a lesser extent India, has given them an almost overpowering hunger for raw materials with which to build their factories, homes and cars.

Wherever you turn, the rise of Asia is making its impact felt on our existence.


China is spending 35 times as much on crude oil as it did eight years ago, and 23 times as much on copper.

As it builds gleaming skyscrapers on its fields, China alone consumes half the world's cement and a third of its steel.

What is happening is so extraordinary that economists have had to invent a new word for it - this is not an economic cycle, but a supercycle, a shift in the world economy of historic proportions.

When demand increases and supply stands still, prices shoot up. Iron, wheat and oil are all at record prices, despite slackening demand in the faltering Western economies.

Typical Daily Mail but entertaining nonetheless.

Friday 4 April 2008

Economics of Transition China Special Issue

The most recent issue of Economics of Transition has a series of 5 interesting papers looking at different aspects of the China economy. Here are three of them.

If anyone knows how I can get a firm level dataset for China please email.

Trade, Technology, and China's Rising Skill Demand

China Europe International Business School
University of Virginia - Darden Graduate School of Business Administration; Centre for Economic Policy Research (CEPR)

Economics of Transition, Vol. 16, Issue 1, pp. 59-84, January 2008

China has experienced rising wage inequality due to rising relative demand for skilled labor. In this paper, we use a sample of 1,500 firms to investigate the impact of trade and technology on China's rising skill demand. We find that export expansion had a negative direct effect (Heckscher-Ohlin type) and a positive indirect effect (export-induced skill-biased technical change) on skill demand; the net effect was found positive and accounted for 5 percent of rising skill demand of the sample firms. We find that technical change in Chinese firms was on average skill-neutral, but majority foreign-owned firms experienced skill-biased technical progress that accounted for 22 percent of the rising skill demand of the sample firms.

Male-Female Wage Discrimination in Chinese Industry - Investigation Using Firm-Level Data

Affiliation Unknown
University of Winnipeg - Department of Economics

Economics of Transition, Vol. 16, Issue 1, pp. 85-112, January 2008

We use firm-level data to analyze male-female wage discrimination in China's industry. We find that there is a significant negative association between wages and the share of female workers in a firm's labor force. However, we also find that the marginal productivity of female workers is significantly lower than that of male workers. Comparing wage gaps and productivity gaps between men and women, we notice an intriguing contrast between state-owned enterprises (SOEs) and private firms. The wage gap is smaller than the productivity gap in SOEs, while the converse is true for private firms. These results suggest that women in the state sector receive wage premiums, whereas women in the private sector face wage discrimination.

Resource Abundance and Regional Development in China

International Food Policy Research Institute
Affiliation Unknown
International Food Policy Research Institute (IFPRI)
Affiliation Unknown

Economics of Transition, Vol. 16, No. 1, pp. 7-29, January 2008

Over the past several decades, China has made tremendous progress in market integration and infrastructure development. Demand for natural resources has increased from the booming coastal economies, causing the terms of trade to favor the resource sector, which is predominantly based in the interior regions of the country. However, the gap in economic development level between the coastal and inland regions has widened significantly. In this paper, using a panel dataset at the provincial level, we show that Chinese provinces with abundant resources perform worse than their resource-poor counterparts in terms of per capita consumption growth. This trend that resource-poor areas are better off than resource-rich areas is particularly prominent in rural areas. Because of the institutional arrangements regarding property rights of natural resources, most gains from the resource boom have been captured either by the government- or state-owned enterprises. Thus, the windfall of natural resources has more to do with government consumption than household consumption. Moreover, in resource-rich areas, greater revenues accrued from natural resources bid up the price of non-tradable goods and hurt the competitiveness of the local economy.

Thursday 3 April 2008

"Reds in the bed": Chinese sleeper spy in the US

I admit that the link to economics is tenuous but this is a great story nonetheless.

After all the spying is related to technology with obvious economic implications.

Such stories should not be that surprising. Why would China not indulge in a little spying along with the rest of the world.

Chinese Spy 'Slept' In U.S. for 2 Decades [Washington Post]

Prosecutors called Chi Mak the "perfect sleeper agent," though he hardly looked the part. For two decades, the bespectacled Chinese-born engineer lived quietly with his wife in a Los Angeles suburb, buying a house and holding a steady job with a U.S. defense contractor, which rewarded him with promotions and a security clearance. Colleagues remembered him as a hard worker who often took paperwork home at night.

Eventually, Mak's job gave him access to sensitive plans for Navy ships, submarines and weapons. These he secretly copied and sent via courier to China -- fulfilling a mission that U.S. officials say he had been planning since the 1970s.

Mak was sentenced last week to 24 1/2 years in prison by a federal judge who described the lengthy term as a warning to China not to "send agents here to steal America's military secrets." But it may already be too late: According to U.S. intelligence and Justice Department officials, the Mak case represents only a small facet of an intelligence-gathering operation that has long been in place and is growing in size and sophistication.


Anecdotal evidence on Chinese firms

I apologise in advance for this post - this excellent article from the always interesting Silk Road International Blog touches on an area of academic research that I am currently up to my neck in.

Economists are always susceptible to the criticism of taking too much of a macroeconomic overview. There are a growing number of papers that examine the determinants of the export decision of firms for developed and developing countries all of which ignore what is really happening on the ground.

This Silk Road article provides some of that information. This post is therefore written so I have a permanent record that I can refer back to, in a sense using this blog as a research diary (which is what I do when posting up abstracts of papers etc.).

This article throws up numerous questions that I may address again at later date.

Three and a Half Kinds of Factories [Silk Road International Blog]

It goes without saying that not all factories are created equal. Not all factories with international experience are equal either. Certainly there is a level that you’d prefer to work with if price was constant. But this isn’t a perfect world so we need to talk about with whom you actually choose to work.

If you’re not here on the ground every day, it’s helpful to know some generals about the differences in factories that are available here. This is certainly a sweeping generalization as there are possibly millions of factories in China. But I’ve worked with, audited and visited hundreds and hundreds of different factories here, in Thailand and Taiwan. And some generalizations are possible, I think, if for nothing other a base-point to start the discussion. So, here is my simplified overview of factory options with in China.

The article then discusses domestic, domestic/international, international and limited international.

Very interesting.


The Onion on Chinese Air Pollution

I found this highly amusing:

China Celebrates Its Status As World's Number One Air Polluter

The facts are still spot on.


FDI reversals - high costs leading to fleeing Koreans

After years of spectacular growth in FDI in China the tide might be turning in the face of rapidly increasing costs.

The International Herald Tribune highlight this problem in a recent article. The word of the day is "flee" which gives the impression of a less than orderly exit from the China.

There are two issues here:

1. If China is no longer the cheapest location to produce goods where is? Costs are rising everywhere.

2. The "fleeing" of thousands of factory owners in the face of increased costs merely represents reality kicking in. Rising costs and a US recession mean that easy money can no longer be made and it is merely the least efficient firms going out of business.

What all of this does mean is that prices of consumer goods may well rise in the UK and elsewhere (on top of all the other energy and food related price increases).

Just when the West wants to be cutting interest rates to help with the credit crunch we get inflationary pressures suggesting that the opposite is required.

Interesting times.

Rising costs forcing some South Korean factory owners to flee China [IHT]

Scores of South Korean-owned factories are closing surreptitiously in eastern China as their owners flee rising costs, leaving behind embittered workers like Li Hua.

Li and more than 200 colleagues have been fighting for a year to get the six weeks' wages they were owed when the owner of the toy factory where they worked fled during the 2007 Lunar New Year holidays.


Her case is not a rarity in Qingdao, a major seaport and industrial city in eastern China that sits across the Yellow Sea from South Korea. A two-hour flight from Seoul and home to about 100,000 South Koreans, the city is a hub for South Korean factories benefiting from cheap labor.

But lately, a growing number of South Korean factories have abruptly closed down and the South Korean owners have disappeared as a slew of policies, including rising labor costs and an end to tax breaks, bite into their profit margins.


Qingdao mirrors, on a smaller scale, what is happening in the Pearl River Delta near Hong Kong. There, thousands of factories, mostly run by Taiwan and Hong Kong companies, are moving inland or abroad or are simply closing as rising costs undermine the assumption that China is the world's cheapest manufacturing location.

Stockmarket crash update

It is time again to revisit my stockmarket predictions on light of the 45% fall off its peak in October last year.

Here are my predictions from back in May 25th 2007. A good forecaster always returns to him original estimates.

When the first article was written the Shanghai Composite Index was around the 4000 level. So far so good then - although I missed the top the fall back so far is bang on with potentially worse to come.

China's Stockmarket - "how does it work"? [China Economics Blog May 25th 2007]

and a later update:

China Stock Market Bubble update [China Economics Blog 30th August 2007]

Before the article here is my prediction - let time be the judge.

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.

The New York Times cover this issue in today's paper. I include some of the more interesting quotes although the whole article makes excellent reading. The real life stories bring home the potentially devasting long term consequences.

To See a Stock Market Bubble Bursting, Look at Shanghai [New York Times]

The Shanghai composite index has plunged 45 percent from its high, reached last October. The first quarter of this year, which ended Monday with a huge sell-off, was the worst ever for the market.

Suddenly, millions of small investors who were crowding into brokerage houses, spending the entire day there playing cards, trading stocks, eating noodles and cheering on the markets with other day traders and retirees, are feeling depressed and angry.


Si Dansu, 68, and a retired engineer, is even more distraught, but she blames the government.

I devoted my whole life to the country. I went to the countryside after graduation, and worked as an engineer in a Shanghai factory until retirement. I invested almost all my savings and retirement fund in the market 10 years ago. But now I’m totally penniless. All my stocks went down.

This next quote shows the scale of the possible problem:

In China, the government fears that angry investors can be a social problem. And so while the state-run media report on the ups and downs of the market, and even warn investors of the risks and pitfalls of investing, the press does not usually report on investors’ anger.

“Actually there are a lot of complaints, but the Chinese media can’t report this,” says Mr. Guan, the former real estate company owner.

Now, in the brokerage house corridors — corridors of pain — one can hear complaints about all the market flaws: the government doesn’t regulate the stock market and it participates in it by allowing mostly big state-owned companies to go public.

There are also complaints about insider trading, stock manipulation, and big investors with government connections, pumping and dumping stocks on small investors.

Finally, it appears that the Chinese are finally working out that fear and greed are not equal and opposite. Greed is a slow burner while fear strikes hard and fast.

“Look,” he said, “it took two years to go from 1,000 to 6,000 but two months to go from 6,000 to 3,500.”


Wednesday 2 April 2008

The Growth in Higher Education in China and the Global Implications

Higher education is a topic we have covered a great deal in this blog.

This new paper by John Whalley and others looks at the growth in higher education in China and comments on the global implications.

Admissions officers everywhere need to read this paper.


The Higher Educational Transformation of China and its Global Implications

University of Western Ontario - Department of Economics
University of Western Ontario - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Centre for International Governance and Innovation (CIGI)
Xiamen University - School of Economics
Xiamen University - Department of Economics March 2008

NBER Working Paper No. W13849

This paper documents the major transformation of higher education that has been underway in China since 1999 and evaluates its potential global impacts. Reflecting China's commitment to continued high growth through quality upgrading and the production of ideas and intellectual property as set out in both the 10th (2001-2005) and 11th (2006-2010) five-year plans, this transformation focuses on major new resource commitments to tertiary education and also embodies significant changes in organizational form. This focus on tertiary education differentiates the Chinese case from other countries who earlier at similar stages of development instead stressed primary and secondary education. The number of undergraduate and graduate students in China has been grown at approximately 30% per year since 1999, and the number of graduates at all levels of higher education in China has approximately quadrupled in the last 6 years. The size of entering classes of new students and total student enrollments have risen even faster, and have approximately quintupled. Prior to 1999 increases in these areas were much smaller. Much of the increased spending is focused on elite universities, and new academic contracts differ sharply from earlier ones with no tenure and annual publication quotas often used. All of these changes have already had large impacts on China's higher educational system and are beginning to be felt by the wider global educational structure. We suggest that even more major impacts will follow in the years to come and there are implications for global trade both directly in ideas, and in idea derived products. These changes, for now, seem relatively poorly documented in literature.


Tuesday 1 April 2008

Virginity loss and academic performance

As this blog has a number of student readers the following paper might be of interest.

It appears that the negative effect of sex on academic performance is not as high as previously expected but is worse for males.

Conclusion: if you want to do well at school girls have to be sacrificed (not literally).

Think about your priors before reading the paper:


Controlling for a wide set of individual- and family-level observables available in the National Longitudinal Study of Adolescent Health, ordinary least squares (OLS) estimates show that sexually active adolescents have grade point averages that are approximately 0.2 points lower than virgins. However, when information on the timing of intercourse decisions is exploited and individual fixed effects are included, the negative effect of sexual intercourse disappears for females, but persists for males. Taken together, the results of this study suggest that while there may be adverse academic spillovers from engaging in intercourse for some adolescents, previous studies’ estimates are overstated due to unmeasured heterogeneity. (JEL I10, I21, I18)


Quality, price and reputation

As an economist who does work on "quality" in China the results of a survey by William Loft into the cost of buying mattresses from China with and without quality inspection is fascinating.

This survey as also been covered by China Law Blog and The China Game.

Here is the original survey which is worth reading.

Williams Loft Evaluates 12 Chinese Down Comforter Manufacturers -- Finds Quality Assurance Only Comes With Testing

Basically, William Loft contacted 12 companies and asked for quotes and then went back later asking for quotes but making it clear that an independent quality inspector would be employed to check the quality of the goods produced.

So what happened to the quotes? In 10 out of 12 cases they increased.

The question is why?

Clearly, it costs more to produce higher quality but given the request was for identical products, quality should have been equal and hence price should not change.

Possible answers include:

1. These companies usually cut corners allowing them to undercut rivals - an example of quality fade. Because the buyer is signalling its serious attitude to quality the firm provides the "real price" for a given level of quality.

2. The firm, by signalling its intention to employ independent inspectors, that it can afford to pay more and thus the price is hiked up on them.

3. The sellers increase their quotes as they see the buyer as "trouble" that will induce additional internal costs of monitoring and the potential for damage to its reputation from any returns or failed inspections. Thus the price rises to compensate for the extra hassle.

On average, Chinese manufacturers increased pricing 20% when told a 3 part inspection process was required. Williams Loft president, Will Robertson, reacts "It's surprising, but not unexpected. We know that very fine products can come from China; we just need to have a system in place to guarantee quality."

An additional WSJ on the quality of suits.

China's Challenge to Italy [WSJ]

Can a Chinese factory make an $800 suit that is just as good as a $1,400 suit made in Italy?

A few years ago, such a question wouldn't have been taken seriously. While production of most clothing has long ago moved to China, expensive men's suits -- those costing $800 and up -- have represented the last frontier in Chinese apparel manufacturing. Such suits, whose jackets are by far the most technically complicated pieces of clothing to make, have typically been made in Italy or North America, or London's Savile Row if the suit is custom-made.