Forecasting Inflation in China

Inflation in China is something of a hot topic to the extent that the blog and newspaper coverage of this topic is seemingly endless. China Financial Markets for example has long detailed posts on inflation and its cures and consequences daily.

This academic paper from the Bank of Finland is either very timely or completely out of date already. I find it hard to believe the forecasts from a month or two ago can be in any way accurate even a few months later.

The methodology may be of more interest.

Judge for yourself.

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Forecasting Inflation in China

AARON N. MEHROTRA
Bank of Finland - Institute for Economies in Transition (BOFIT); European University Institute - Economics Department (ECO)
JOSÉ R. SÁNCHEZ-FUNG
Kingston University January 27, 2008

BOFIT Discussion Paper No. 2/2008

Abstract:
This paper forecasts inflation in China over a 12-month horizon. The analysis runs 15 alternative models and finds that only those considering many predictors via a principal component display a better relative forecasting performance than the univariate benchmark.


Keywords: inflation forecasting, data-rich environment, principal components, China

JEL Classifications: C53, E31

Earthquakes and monetary policy

China Financial Markets looks at the monetary implications of the earthquakes. Economics does not stand still.

The devastating earthquake is also bad for monetary policy [China Financial Markets]

This has been a sad week for China, and it has certainly not been easy to watch on television the heartbreaking scenes of the effect of Monday’s earthquake. Sichuan is a heavily populated province, and many of my students have friends and family in the affected areas, so the disaster has hit us very hard. The fact that so many of the victims were schoolchildren makes it all the more horrifying. Bless China, as my student Gao Ming wrote me earlier today, a phrase many worried and dismayed students around campus have been repeating. Next week my friends and I will organize a concert to raise money for the earthquake victims. It’s not much, but everyone feels helpless and wants to do something to help, however small.

Unfortunately the earthquake and its corresponding devastation are almost certainly going to complicate matters horribly for the PBoC in its attempt to manage monetary policy and fight inflation.

Things are likely to get very tricky indeed.

Clearly the earthquake in Sichuan will not only impact agricultural production and the ability to deliver products to the market, but its reconstruction will fuel a boom in demand for energy, materials, and a wide variety of related goods and services. Recognition of the impact of the earthquake both on loosening monetary policy and on increasing the demand for a variety of goods seems to have powered the stock market today. It closed up 2.73% today, driven by smelters and banks.

The government’s automatic response to this potential surge in demand is to clamp down even tighter on price increases, but this cannot possibly have any but the most adverse effect. After all it is one thing to freeze prices in order to drive out inflationary expectations, but the earthquake has caused a real increase in demand and a real decrease in supply – and the stock market immediately recognized that fact. How can price freezes possibly eliminate the disequilibrium?

In fact yesterday’s China Daily had a very long article on the difficulty of maintaining existing price freezes. The article is called “To raise oil prices or not, that is the question” and starts out very bluntly with: “Diesel sold out. This notice can be seen at many gas stations in the country.” It explores both the difficulty of keeping prices at current levels – shortages and an increasing fiscal subsidy – and the difficulty of letting prices rise – the inflationary impact. People like me of course will point out that price freezes simply convert inflation from one kind, the kind that’s measured in CPI, to another, the kind that shows up as shortages and higher taxes, but the idea that China does not have monetary inflation, simply a temporary food-supply problem, has become so ingrained in policy, even though fewer and fewer people believe it, that its impact will stay with us for a while.

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"Wrong number": On the reliability of Chinese Data

Following on the heals of the last post and thanks to Chinalawblog for the pointer.

As an economist who works with large amounts of Chinese data this issue has arisen many many times without a satisfactory solution. The Economist discusses this issue at length. I tend to use province level data - this raises a set of problems that this article also covers.

An aberrant abacus

AS CHINA'S importance in the global economy increases, investors are paying more attention to its economic numbers. Yet the country's official statistics are notoriously ropy. Some commentators accuse China's government of overstating GDP growth for political reasons, others complain that the official inflation rate is fraudulently low. So which data can you trust?

One reason to be suspicious of GDP figures is that China is always one of the first countries to report them, usually only two weeks after the end of each quarter. Most developed economies take between four and six weeks to produce them.

So which data to trust. From Statistics that Don’t Add Up [China Business Services]

The Economist also provides a guide (developed by Goldman Sachs) to the reliability of official Chinese numbers. It gives a score to different sets of stats, 5 being the most reliable, and 0 the least:

• Foreign Trade: 5
• Money Supply: 5
• Industrial production: 4
• Consumer Prices: 4
• GDP: 3
• Retail Sales: 3
• Fixed Investment: 2
• Employment: 2
• Average Earnings: 1
• Unemployment: 1

On the issue of province versus country level data:

Chinese provinces independently report GDP, and a weighted average of their figures consistently gives higher rates of output and growth than those reported by the central government (see chart). True, local officials have an incentive to inflate growth numbers because promotion depends upon economic performance; however, experience suggests that number crunchers in local government are more accurate than Beijing's. For instance, the figures first published for 2004 showed that the sum of the provincial GDPs was 19% bigger than the reported national figure. Lo and behold, in 2005, after a national economic census picked up more services, the NBS revised its GDP up by 17%; it also lifted the annual growth rate over the previous decade.

Finally, as someone who uses a lot of trade data here is the good news:

Foreign trade is perhaps the most accurate economic indicator. Critics accuse China of fiddling its trade figures, because the value of its exports as measured by the importing country is always much bigger than what the Chinese report. This discrepancy reflects the fact that China's bilateral trade figures exclude goods shipped to Hong Kong before being re-exported. But this should not affect total export figures and detailed Hong Kong data are available to adjust bilateral trade flows.

An interesting topic.

"Huge wealth; huge misery": China by numbers

The Independent on the 10th May had a China special. The numbers at the end of the article are worth posting to have on record.

Whilst the writing style is "sensationalist" it is well written and does paint a good picture.

The dragon awakens: China, how did it happen? [Independent]

What is happening in China is the greatest economic story on the planet. It is the world's biggest boom – and not just the biggest boom right now, but the biggest boom that has ever occurred in history.

As an economist I like numbers. For anyone in the US or Europe these numbers are astonishing. It takes many years to get agreement for just 1 runway in the UK let alone a whole airport (or 97 of them).

The statistics of the boom are astounding. China consumes nearly half the world's cement and produces 40 per cent of its socks. It commissions a new power station about every four days and last year built as much power generating capacity as the entire output of France. It plans to build 97 regional airports in the next decade. And so on.

This comparison with the UK over 100 years ago is a good one.

The other occasion was on the train pulling out of Shanghai. We were passing a wasteland, a site that had been cleared for new building. I glanced out of the window just as we were passing one of the last of the buildings left standing and for an instant saw a group of concerned people carrying out an elderly woman, who was clearly in some distress. I am pretty sure she was being taken from her home prior to its demolition. Then the train picked up speed and we were gone.

Victorian England must have felt like this. Visitors to Manchester were equally appalled and in awe of the stream-driven cotton mills. Huge wealth; huge misery. People ran to the city not because there were good jobs in the mills but because it was a better living than they could have had in the country. At least there was food to eat and there was money to be sent home. And so the workers flock to the cities in China, to what we would call sweat-shops, to produce the toys, clothes and furniture for the shops of the West.

As economists we should not pretend that things in China are any different but as happened in the UK and US these are growing pains that all economies need to go through. China will grow out of these pains a lot quicker than the West ever did (using and adapting Western technologies).

Before China reaches this position these growing pains could get out of hand - can the government negotiate the line between growth and social unrest:

Social tensions and economic inequalities may be even harder to tackle. You can really only catch a feel for that from the Chinese people themselves. A young Shanghai woman told us how she and another friend had spent their last holiday travelling round the deep country: they wanted to see the other China. She described houses where the animals lived on the ground floor, the family in the middle and the fodder was stored in the loft. She realised that these farmers had never seen people like her, the foreign-educated, new middle class of the cities, just as people like her never saw life in the countryside. They could not communicate for there was no common language. The division is even more stark than Disraeli's two nations: at least we could talk to each other.

As someone who writes academic papers on China this final paragraph reveals that there will never be a shortage of research ideas. This is an excellent finish to a very interesting article.

I am not sure we in the West fully grasp the magnitude of what is happening. Intellectually we can see it affecting us but emotionally it is hard to understand that we are moving towards a world where Western ideas, our ideas, will no longer hold sway. China has other ideas. Those will increasingly co-exist alongside ours in shaping global economic and political development. You can see that most obviously in Africa now. If a country seeking inward investment does not want to submit to the guidelines of the World Bank or Western donor agencies it can, if it has something to sell, get China to supply the funds or build the infrastructure instead. This is just an early sign of the shift in power that will go much further.

We will not find this comfortable. What we think will matter less and less. But we cannot do anything about it, and in any case, consider the alternative. Would we really want a China that was failing in economic terms, with all the misery that would cause? That would surely be far more dangerous and disruptive to the world than a continuation of China's thrilling but terrifying success story.

Here are some of the famous numbers:

30,000: The expected number of Chinese MBA graduates in 2008. The number in 1998: 0

5.7 million: Students graduated from Chinese universities in 2007 (compared with 270,000 in 1977)

30: Number of nuclear power plants being built in China

500: The number of coal-fired power plants China plans to build in the next decade

10 million: The estimated number of Chinese people who have no electricity

97: New airports to be built in the next 12 years, bringing the total number to 244 by 2020

540 million: Number of mobile phone users in China, with an increase of 44 million in the past six months

95: The estimated percentage of DVDs sold in China that are fake. Uncensored foreign films are widely available from 50p

160: Cities in China with populations that exceed a million. In the USA there are nine; in the UK just two

80: Percentage of the world's zips produced in factories in the Zhejiang Province city of Qiaotou (amounting to 124,000 miles of zip each year, or enough to stretch half way to the moon). Qiaotou also produces 60 per cent of the world's buttons (15 billion a year), while nearby Datang makes a third of the world's socks. As many as 80 per cent of the world's toys are made in China, which boasts more than 10,000 toy factories

21 million: The number of Chinese-made toys recalled last year by the US toy company Mattel

0: Miles of motorway in 1988

30,000: Miles of motorway today

6.3 million: The number of passenger cars registered in 2007 (compared with 2.3 million in 2004). More than 1,000 new private cars hit the roads every day in Beijing alone

350 million: The number of Chinese people who smoke (a third of the world’s smokers). Around a million people a year are thought to die from smoking-related diseases

240bn yuan: (£17.3bn) The estimated amount earned by the Chinese government in tobacco taxes in 2005

1.3 billion: China’s population. The country accounts for one in five people in the world 400 million

The estimated number of births prevented by China’s one-child policy, introduced in 1979

22: The number of suicides per 100,000 people, about 50 per cent higher than the global average. Suicide is the fifth most common cause of death in China, and the first among people aged between 20 and 35

700,000: The number of people living with HIV or Aids in China. The UN has warned China it could have 10 million cases by 2010 unless action is taken

Tougher stance on inflation

On the back of the steep rise in prices of 8.5% in April China announced further monetary tightening.

What is more worrying is the suspension of the appreciation of the RMB. This may prove to be counter-productive.

The story is covered expertly by the FT (saving me the time).

Beijing takes tougher stance to combat steep rise in prices [FT]

China announced fresh monetary tightening measures yesterday after inflation data showed price rises of 8.5 per cent in April, the second highest monthly figure for 12 years.

The People's Bank of China lifted the share of funds that commercial banks must leave on deposit with the central bank by 50 basis points to 16.5 per cent, the fourth increase this year.

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While Beijing is maintaining an official monetary tightening bias, it appears to have suspended the appreciation of the Chinese currency - regarded by economists as another key instrument for fighting inflation.

The renminbi has stalled in recent weeks against the dollar, after appreciating at an annualised rate of nearly 20 per cent in the first quarter of this year.

Beijing-based economists and government officials, speaking on condition of anonymity, said the PBoC, long known as a supporter of faster currency appreciation, was now being blocked by other ministries.

They said that the slowing rate of the growth of China's exports had prompted some ministries to press for a pause in renminbi appreciation, in order to minimise the impact of the currency on export industries and employment.

China recorded a trade surplus of $16.7bn in Aprilbut the rate of growth of imports outpaced exports.

The PBoC has generally argued that currency appreciation is essential to stemming the growth of the trade surplus and the unchecked flow of speculative funds into China. Rising food prices continue to be the largest contributor to inflation, with year-on-year price increases in this sector hitting 22.1 per cent in April, compared with 21.4 per cent in March.

But economists say the underlying driver of inflation is the excess demand created by the huge flow of funds into China through the trade surplus and other avenues, as well as the velocity at which money circulates in the economy.

Beijing's efforts to talk down inflation by issuing headline-grabbing edicts that threaten price controls and other administrative measures do not seem to have borne fruit so far.

"As underlying inflationary pressures remain undiminished, it is vital for the government to keep its tightening policy stance to anchor inflationary expectations," Goldman Sachs said.

Inflation picking up speed

From Bloomberg.

This article sums up nicely the inherent dangers when inflation begins to rise at rates like this.

China Inflation Quickens; Close to Fastest Since 1996

May 12 (Bloomberg) -- China's inflation accelerated to close to the fastest pace since 1996 as food prices soared and the government slowed gains by the yuan.

Consumer prices rose 8.5 percent in April from a year earlier, the National Bureau of Statistics said today, after gaining 8.3 percent in March. That topped the 8.2 percent median estimate of 22 economists surveyed by Bloomberg News.

Food prices jumped 22 percent, a threat to social stability as the world's most populous nation prepares to host the Olympic Games this summer. Faster currency appreciation, while reducing import costs, also risks attracting more speculative funds into an economy flooded with cash.

Zero Profit in China

An interesting article from Far Eastern Economic Review (thanks to China Game and Paul Midler for the HT and writing the article).

The arguments expounded in this article are fairly sound and provides a number of interesting insights. First, that economics is a long term game, second, that profits are not the only motives of individual firms (at least in the short run). Finally, he points out that many foreign economists (including myself) predicted non-performing loans would cripple the banking sector. Whilst I think this is still a potentially serious problem I think Midler makes a good point in this article.

This discussion on over supply and copyright issues is also interesting.

It is worth reading in full.

Why Profit Zero Works in China [Far Eastern Economic Review]

Profit zero scenarios are a product of Chinese business history. Back when state-owned factories acted in place of a social welfare program, manufacturing’s primary goal was not profitability, but job creation. Throughout the 1980s and into the 1990s, when the planned economy failed to stimulate enough job growth to approach full employment, the Communist Party looked to private industry, and entrepreneurs who could put people to work garnered a degree of political clout with government officials. Profitability was important, but it took a back seat to the achievement of political aims. Manufacturers consequently found themselves motivated to sign cross-border agreements with foreign companies.

While one benefit was the acquisition of new technologies, even more important was the opportunity to learn how business was done in a market-driven economy. It was in this environment that Chinese companies willingly gave up short-term profit opportunities. Some manufacturers viewed their first big contracts the way a college graduate looks at an unpaid internship—a sacrifice made with the understanding that it would pay off later. Labor in China was already cheap, and factories willing to forgo a profit margin made themselves even more attractive. With prices held artificially low, importers rushed into the market.

On the banking sector:

Of course the opportunity for profit zero would not have been made possible without help from the banking sector. Chinese banks loaned money to manufacturers for years without pressuring them to make payment, and, while foreign economists suggested that nonperforming loans would cripple the economy, China ultimately proved the value of a profit-zero strategy. Some of the bad lending that went on was occasionally the result of corruption, but the average loan made to a manufacturer was legitimate. Industry in China has long been in the habit of building production capacity well in advance of any actual need. Importers hesitated to place orders unless they saw a factory that at least on the surface looked capable. Manufacturers and bankers understood that a shining new factory was like a billboard. In most economies, an entrepreneur must prove a need for a capacity expansion before money is lent.

An excellent article.

Being foreign in China

The consistently good "Silk Road International Blog" has an excellent post on what it means to be foreign in China recently.

From a purely economic standpoint China needs to be careful - whilst they may be big enough to go it alone now a mass exodus of foreigners at this potentially pivotal period of development would be unwise.

The full article should be read to get the full story.

Foreigners not Welcome [Silk Road]

So yesterday afternoon I took my two boys, ages 1.5 and 3, to see the relay as it was passing just a few blocks from our home here. We lined up along the main street along with everyone else. As it drew near I was very distinctly told (in Chinese): “Effing foreigner. Go home. This 0lympics is ours.”

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I can honestly say that I have rarely if ever been mistreated in China. I don’t count the arguments over quality or the multiple times I’ve been the target of random theft. I mean, I’ve hardly ever been treated badly by my Chinese hosts in terms of politeness and acceptance.

But that changed this last week. Three separate experiences have really damaged my opinion of the depth of Chinese hospitality. First is the excoriating, racist and downright scary language that is being thrown around in China right now towards foreigners in general and the US and France in particular. From actual riots to virtual (internet) lynchings, from racial comments vocalized without knowing I can speak Chinese to outright bullying and intimidation of foreigners shopping at Carefoure. China is moving farther from its goal of “one world” than it has in more than a couple of decades.

Silk Road give it both barrels in this post:

Secondly, recently, being a foreigner has been, to be honest, at bit scary. Crime against foreigners is high. Anti foreign sentiment is rising fast. Now in China I’m not even a “normal” person (of course not special), now I’m “bad” and I’m “them” and sometimes I even get called “French.” Yuck. Why is this scary? The crime isn’t much worse than a year ago. The race riots are, unfortunately, now becoming almost annual. So why scary now? Because the government may not be able to or willing to control it as the hype for the 0lympics draws near—how do you shut down nationalism in the next 100 days as the 8 year hype of the 0lympics finally crescendos? And instead of shutting it down (and some chats are closed, I realize) they are instead telling Chinese to just not talk with or share “sensitive” information with foreigners—yes, the new official line is to “exclude” anyone that is not Chinese from conversations about real issues. Or just don’t giv them visa’s any more. Welcome (some of you) to China, please shut up, spend your money and then go home as quickly as possible. Nice.

I recommend reading all of this long post.

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Can China feed itself?

Today the FT has a front page article on China's attempt to guarantee food supplies.

This article dovetails nicely with a recent World Bank paper looking at the role of climate changes on China's ability to feed itself.

The economics of this move and quite profound. So profound in fact that I need to think about it a bit more. Capitalism should not object to vast tracts of Africa being farmed by the Chinese or for the Chinese if they pay the market rate. But what happens when the host country needs to feed its own people? I suspect property rights will be worth very little then. The other aspect is the classic tragedy of the commons externality with land being cleared for farm land with the usual environmental consequences.

This "factoid" surprised me initially:

China has about 40 per cent of the world’s farmers but just 9 per cent of the world’s arable land.

It is important to remember that China is not all about exports and skyscrapers. Underneath the new wealth is a large underbelly of the population still living a hand to mouth existence.

China eyes overseas land in food push [FT]

Chinese companies will be encouraged to buy farmland abroad, particularly in Africa and South America, to help guarantee food security under a plan being considered by Beijing.

A proposal drafted by the Ministry of Agriculture would make supporting offshore land acquisition by domestic agricultural companies a central government policy. Beijing already has similar policies to boost offshore investment by state-owned banks, manufacturers and oil companies, but offshore agricultural investment has so far been limited to a few small projects.

If approved, the plan could face intense opposition abroad given surging global food prices and deforestation fears. However an official close to the deliberations said it was likely to be adopted.

“There should be no problem for this policy to be approved. The problem might come from foreign governments who are unwilling to give up large areas of land,” the official said.

The move comes as oil-rich but food-poor countries in the Middle East and north Africa explore similar options. Libya is talking with Ukraine about growing wheat in the former Soviet republic, while Saudi Arabia has said it would invest in agricultural and livestock projects abroad to ensure food security and control commodity prices.

China is losing its ability to be self-sufficient in food as its rising wealth triggers a shift away from diet staples such as rice towards meat, which requires large amounts of imported feed.

China has about 40 per cent of the world’s farmers but just 9 per cent of the world’s arable land.

More FT comment here:

New eating habits force revolution on China's farms [FT]

China, a small net exporter of rice and largely self sufficient in wheat, has been something of a spectator in the global food crisis of recent months, with Beijing's role confined to tightening scrutiny of exports to prevent profiteering.

"There is no grain crisis in China at the moment, and there won't be for some time into the future," says Cui Xiaoli, a researcher at the development research centre, a think-tank under China's cabinet.

The country's inflation hit 11-year highs in recent months, almost entirely because of an increase in food prices, but the government and many economists argue that these rises are a temporary phenomenon.

The above line depends on the classic "supply and demand" diagram. There has been a demand shock or supply should increase right? Prices will then fall. In the long term this should work but as the first article notes, supply, at least in China, is constrained.

Here is the academic article.

Can China Continue Feeding Itself? The Impact of Climate Change on Agriculture

JINXIA WANG
Chinese Academy of Sciences - Center for Chinese Agricultural Policy
ROBERT O. MENDELSOHN
Yale University - Department of Forestry & Environmental Science
ARIEL DINAR
World Bank - Agriculture and Rural Development Department
JIKUN HUANG
Chinese Academy of Sciences (CAS)
SCOTT ROZELLE
University of California, Davis - Department of Agricultural and Resource Economics
LIJUAN ZHANG
Affiliation Unknown January 1, 2008

World Bank Policy Research Working Paper No. 4470

Abstract:
Several studies addressing the supply and demand for food in China suggest that the nation can largely meet its needs in the coming decades. However, these studies do not consider the effects of climate change. This paper examines whether near future expected changes in climate are likely to alter this picture. The authors analyze the effect of temperature and precipitation on net crop revenues using a cross section consisting of both rainfed and irrigated farms. Based on survey data from 8,405 households across 28 provinces, the results of the Ricardian analysis demonstrate that global warming is likely to be harmful to China but the impacts are likely to be very different in each region. The mid latitude region of China may benefit from warming but the southern and northern regions are likely to be damaged by warming. More precipitation is beneficial to Chinese farmers except in the wet southeast. Irrigated and rainfed farmers have similar responses to precipitation but not to temperature. Warmer temperatures may benefit irrigated farms but they are likely to harm rainfed farms. Finally, seasonal effects vary and are offsetting. Although we were able to measure the direct effect of precipitation and temperature, we could not capture the effects of change in water flow which will be very important in China. Can China continue feeding itself if climate changes? Based on the empirical results, the likely gains realized by some farmers will nearly offset the losses that will occur to other farmers in China. If future climate scenarios lead to significant reductions in water, there may be large damages not addressed in this study.


Keywords: Climate Change, Crops &Crop Management Systems, Global Environment Facility, Common Property Resource Development, Rural Development Knowledge &Information Systems

China's Local Comparative Advantage

An interesting new paper for trade economists. This relates to a number of papers I have written in this area.

I always have some concern when unit values are used for China but otherwise this appears to be an interesting paper.

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"China's Local Comparative Advantage"

NBER Working Paper No. W13963

JAMES HARRIGAN, Federal Reserve Bank of New York, National Bureau of Economic Research (NBER)
Email: james.harrigan@ny.frb.org
HAIYAN DENG, The Conference Board
Email: haiyan.deng@conference-board.org

China's trade pattern is influenced not just by its overall comparative advantage in labor intensive goods but also by geography. We use two variants of the Eaton-Kortum (2002) model to study China's local comparative advantage. The theory predicts that China's share of export markets should grow most rapidly where China's share is initially large. A corollary is that exporters that have a big market share where China's share is initially large should see the largest fall in their market shares. These market share change predictions are strongly supported in the data from 1996 to 2006. We also show theoretically that since trade costs are proportional to weight rather than value, relative distance affects local comparative advantage as well as the overall volume of trade. The model predicts that China has a comparative advantage in heavy goods in nearby markets, and lighter goods in more distant markets. This theory motivates a simple empirical prediction: within a product, China's export unit values should be increasing in distance. We find strong support for this effect in our empirical analysis on product-level Chinese exports in 2006.

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Toilet Seat Economics

Sometimes the anecdotal stories of professionals in China tell us more than any text book.

There small post by the undercover lawyer in China has economic lessons all over it (although it has a "cultural" tag). I have posted it in full so you miss nothing.

To any students, what are the economic lessons to be learnt from this story?

Avoid Toilets At Your Chinese Hotel, Or You Will Pay [China Lawyer Blog]

Hotels in China give some insight into how decisions are made here. Except in major cities, hotels across China are mostly still government owned, or run by companies whose main commerce has nothing to do with hotels. But, either because they have extra government subsidies or because they are desperate to find new income, many state owned companies here decide to open hotels.

I’m in the town of Turpan in western China, and most hotels here are state run. In fact, the nicest hotel in town in the Xinjiang Petroleum Hotel, which charges about US$80 a night.

The obvious problem with a government run hotel is that it is run by government employees, and needless to say government employees don’t like to work as hard as employees in the private sector, and it shows. Government hotels are invariably dirtier, have broken fixtures, and have staff that treat customers like, well, the government treats people.

Two days ago, in the nearby city of Kashgar on the ancient silk road, I found a government hotel on the edge of town, the Xinlong Hotel, that seemed decent enough. I paid about US$25 per night and the room included internet access. But, I wasn’t careful, and when I checked out the next day and the receptionist ordered the staff to check my room to see what I owed, she reported that a) I had replaced a clothing hanger with an original hanger, for which I would be charged about US$4, and b) the plastic toilet seat was broken, and I would be charged another US$8 for that.

Needless to say, I didn’t agree. But, I didn’t make progress with these people, and the staff, including two managers, removed the toilet seat to and brought it to the main reception as evidence of the fact it was broken. I couldn’t argue that it was broken, but I didn’t break it, and any hotel that spends just US$8 on plastic toilet seats for its best rooms can expect that they will be broken sometimes.

Virus hits Beijing - cover up underway?

In addition to the obvious intrinsic sadness of this story if there was ever a bearish story to hit the China stock market then this is it. Developments need to be watched carefully although this is unlikely to be another SARS due to the nature of the virus.

China issues virus alert; 24 children dead [LA times]

BEIJING -- The Chinese Health Ministry issued an alert Saturday over a virus that has killed 24 children and sickened more than 4,000, as it scrambled to fend off a potential scandal over a coverup.

The latest victim of enterovirus-71 was an 18-month-old boy who died Friday in southern Guangdong province. A child who died April 25 in Guangdong also tested positive, the official New China News Agency said. The deaths were the first outside the Anhui province city of Fuyang, 700 miles to the north.

The virus also broke out in Hong Kong, Taiwan, Singapore and Vietnam, but no deaths have been reported there.

The virus is a summer perennial in Asia, but the outbreak this year appears to be larger than usual. Because the disease usually peaks in June and July, more deaths are expected.

Kindergartens in Fuyang have been ordered closed until mid-May, and residents described an atmosphere of panic. The Liaoshen Evening News carried a large headline reading, "Death," next to a photo of a health inspection van parked in front of a kindergarten.

"There are noticeably very few children or infants on the street," said a 24-year-old Fuyang student who asked not to be identified. "Even some adults are afraid to step out."

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Informal loans and the credit crunch

The Chinese have found a way around the credit crunch that is enveloping the developed world. The are reverting to the tried and tested route of informal networks to raise funds.

Chinese Firms Tapping Informal Loan Networks [The Economic Observer Online]

With few other options to save his business, Zhang Wei ultimately had to borrow two million yuan from a Wenzhou shoemaker in order to tie over the difficult times.

Squeezed by the Chinese government's tighter macro economic policy since the latter half of 2007, Zhang found difficulty in securing loans while facing rising costs and other market pressures. More troubling is that Zhang's was not an isolated case.

The All-China Federation of Industry and Commerce said there were Chinese private businesses starving for loans in Chongqing, Zhejiang, Jiangsu and Jiangxi Provinces, and recent research revealed that they were increasingly turning to the cash-strong Wenzhou business communities for a lifeline.

"In Zhejing province, Wenzhou is the bank," said Zhang.

This type of lending is storing up a huge amount of trouble ahead due to the exorbitant interest rates being charged.

Research by the Federation estimated that Chinese companies raised some 800 billion yuan through informal channels last year, among which researcher Chen Yongjie said over 20 billion yuan likely came from Wenzhou.

Businesses that raised money in this fashion would likely be charged a 5% monthly interest rate, amounting to around 60% in one year.

When this bubble bursts and either the lender of the borrower learns the folly of their lending or borrowing there is going to be a hell of a hangover. This is a country learning to come to terms with capitalism and it will be a hard lesson indeed.

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China and the Environment: LINKS

The bibliogrpahy for Pollution in China from Geopedia.

Bibliography

Cho, Jung-Myung and Suzanne Giannini-Spohn. Environmental and Health Threats From Cement Production in China.
China Environmental Health Brief (2007).

Ellis, Linden and Jennifer Turner. Surf and Turf: Environmental and Food Safety Concerns of China's Aquaculture and Animal Husbandry. China Environment Series (Issue 9, 2008).

Economy, Elizabeth. The Great Leap Backwards.
Foreign Affairs (September/October 2007).

OECD Environmental Performance Reviews: China. OECD, 2007.

Survey of Rural Pollution to Start Next Year. China Daily, December 14, 2007.

Taylor, Jerome. Air Pollution Forces Star to Pull Out of Olympic Marathon.
Independent, March 11, 2008.

Turner, Jennifer and Juli Kim. China's Filthiest Export. Foreign Policy in Focus (February 2007).

Other Resources
1m [million] People Short of Drinking Water in Guangxi.
Xinhua, December 17, 2007.

Blanchard, David Jorge Perez Izquierdo. "Taming the Dragon." Industry Week (November 2007), 28.

China to Set Resource-Based Cities on Path of Sustainable Development. Xinhua, November 28, 2007.

China's Environmental Chief Reiterates Measures to Combat Water Pollution. Xinhua, November 20, 2007.

Country Profile: China. BBC News Online.

Economy, Elizabeth. Scorched Earth: Will Environmental Risks in China Overwhelm Its Opportunities?
Harvard Business Review (June 2007). (Summary.)

Economy, Elizabeth. The Great Leap Backward?
Foreign Affairs (September/October 2007).

Bolin, He and Wu Jiao. Survey of Rural Pollution to Start Next Year. China Daily, December 14, 2007.

Liu, Jiangou and Jared Diamond. Science and Government: Revolutionizing China's Environmental Protection. Science (January 4, 2008), 37-38.

Xiaohua, Sun. Public Yet to Read the Green of Environment. China Daily, January 8, 2008.

Survey Finds Chinese Concerned With Pollution-Related Food Safety. Xinhua, January 8, 2008.

China's Famous Yellow River Is Fading. BBC.

Gifford, Rob. Yellow River: A Journey Through China. NPR audio slideshow, December 10, 2007.

China's economic development in pictures

This month the National Geographic has a "China Special". The photographs are always of the very highest quality and the story is a good one.

There is a surprising amount of economics in the text and correctly so.

China's Journey [National Geographic]

My students wrote essays on paper so cheap and thin that it felt like the skin of an onion. The brittle pages tore easily; if held to the light, they glowed. The English was flawed, but sometimes that only gave the words more power. "My parents were born in poor farmer's family," wrote a young man who had chosen the English name Hunt. "They told us that they had eaten barks, grass, etc. At that time grandpa and grandma had no open minds and didn't allow my mother to go to school because she is a girl." Another classmate described his mother: "Her hair becomes silver white, and some of her teeth become movable. But she works as hard as ever." Those were common themes—my students valued patience and diligence, and they liked to write about family. National events often left them perplexed. "I'm a Chinese, but I feel it difficult to see my country clearly," wrote a woman named Airane. "I believe there are many young people are as confused as I'm."

Most telling from an economic perspective is the final paragraph in response to a questionnaire sent out to the authors old students:

I asked what worried them the most. Several mentioned relationships; one woman wrote: "The marriage is not safe any more in China, it is more common for people around here to break up." A couple of respondents who now work far from home were concerned about their status as migrants. "I am like a foreigner in China," Willy wrote. But the most common source of worry seemed to be mortgage payments. "Ten years ago, I worried that I could not have a good and warm family," Belinda wrote. "Now I am worried about my loan at the bank." None of her classmates expressed concern about political reform, foreign relations, or any other national issue. Nobody mentioned the environment.

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New book: "Debating China's Exchange Rate Policy"

Given the seemingly endless posts on whether China will revalue or not on other China websites those interested would do well to buy this book.

Debating China's Exchange Rate Policy

edited by Morris Goldstein and Nicholas R. Lardy

China's exchange rate policy has a great impact on the economies of the United States and the rest of the world. This important new book, based on an October 2007 conference looks at this issue in great detail. The book has four sections. The first section assesses progress since China's July 2005 reform of its currency regime, with due attention to China's global current account position, movement of China's real effective exchange rate, the extent of the remaining misalignment of the renminbi (RMB), the roles of market forces and a currency basket in the determination of the RMB exchange rate, and developments in the structure of the foreign exchange market. The second section analyzes how Chinese exchange rate policy reform will affect, and will be affected by, reforms and constraints in other areas of economic policy.The third section delves into the issues raised by China's exchange rate policies for international surveillance of exchange rates and for the timely correction of external payments imbalances.

These issues include the appropriate "rules of the game" for International Monetary Fund (IMF) surveillance over exchange rate policies, the effects of China's exchange rate policies on other Asian emerging economies, and the contribution that US and European policies should make to external adjustment as a counterpart to and inducement for greater exchange rate flexibility in Asia. Finally, the concluding section presents specific proposals for how China's exchange rate and capital account policies might be modified over the medium term.These proposals address how best to eliminate any misalignment of the RMB; how best to reduce pressures emanating from the sterilization of large reserve accumulation; how best to make capital flows the ally - not the enemy - of exchange rate policy; and what institutional arrangements and policy guidelines to put in place to reap the greatest benefits from management of China's large exchange reserves.

Contributors include:

Larry Summers, Jeffrey Frankel, and Ken Rogoff, Harvard University; Simon Johnson and Steve Dunaway, International Monetary Fund; Mohamed El-Erian, Harvard Management Company; William R. Cline, Gary Clyde Hufbauer, Michael Mussa, Edwin M. Truman, and John Williamson, Peterson Institute; Barry Bosworth, Brookings Institution; Takatoshi Ito, University of Tokyo; Stephen Roach, Morgan Stanley; Fan Gang and Jin Zhongxia, People's Bank of China; Eswar Prasad, Cornell University; Shang-Jin Wei, Columbia University; Bert Hofman and Louis Kuijs, World Bank; Yung Chul Park, Seoul University; Jean Pisani-Ferry, Bruegel; Timothy Adams, Lindsey Group; and Brad Setser, Council on Foreign Relations.

A decent selection in anyones book.

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Are There Lessons for Africa from China's Success Against Poverty?

A recent World Bank working paper considers the differences and similarities between China and Africa and how the former managed to take millions out of poverty and the latter did not.

The key line for me from the abstract is in bold and is certainly not rocket science.

I have my doubts about the validity of the results in this paper but should read it first before jumping to conclusions.

Are There Lessons for Africa from China's Success Against Poverty?

MARTIN RAVALLION
World Bank - Development Research Group (DECRG) January 1, 2008

World Bank Policy Research Working Paper No. 4463

Abstract:
At the outset of China's reform period, the country had a far higher poverty rate than for Africa as a whole. Within five years that was no longer true. This paper tries to explain how China escaped from a situation in which extreme poverty persisted due to failed and unpopular policies. While acknowledging that Africa faces constraints that China did not, and that context matters, two lessons stand out. The first is the importance of productivity growth in small holder agriculture, which will require both market-based incentives and public support. The second is the role played by strong leadership and a capable public administration at all levels of government.

Keywords: Rural Poverty Reduction, Population Policies, Achieving Shared Growth, Services & Transfers to Poor

Credit Demand in China

New paper looking at the sensitivity of China to changes in the interest rate. A worthy reseach topic.

I have not read it yet so cannot vouch for its quality.

Has the Chinese Economy Become More Sensitive to Interest Rates? Studying Credit Demand in China

TUULI KOIVU
Bank of Finland February 15, 2008

BOFIT Discussion Paper No. 1/2008

Abstract:
Chinese authorities have traditionally relied mainly on administrative and quantitative measures in conducting monetary policy, with interest rates playing a less prominent role. Additional support for this view resides in a number of earlier studies that have found that the impact of interest rates on the real economy has been miniscule. However, taking into account numerous reforms in the financial sector and more widely in the Chinese economy, interest rates may have gained some influence in the last few years. It is important to study the effectiveness of interest rates also in light of future reforms of the monetary policy tools in China. Whereas administrative policy measures were effective in guiding the behaviour of state-owned enterprises, the authorities may need to increase the use of more market-oriented monetary policy tools as the share of the economy in private and foreign ownership grows. We use a vector error correction model to study, within a credit demand framework, whether the impact of interest rates in China has become stronger over the last decade. Our results suggest that loan demand has indeed become more dependent on interest rates, albeit the channel from interest rate to the real economy is still weak.


Keywords: China, monetary policy

JEL Classifications: E52, P24