Monday 23 June 2008

US assets in Chinese hands

The debate over the large and increasing holdings of US assets by China. Bloomberg investigates.

China Adds to Holdings of U.S. Assets, Buys More Agency Debt [Bloomberg]

June 17 (Bloomberg) -- China is adding to its holdings of U.S. assets, data from the U.S. government showed yesterday, easing concern the Asian nation will sell dollar investments.

Total holdings of U.S. equities, notes and bonds among foreign investors rose by a net $115.1 billion in April from $79.6 billion the previous month, the Treasury Department said yesterday in Washington. China's holdings of Treasuries gained $11.4 billion to $502 billion, holdings of U.S. agency debt rose $11.9 billion and U.S. corporate bond investments increased $6.9 billion, data showed.

``China was a big buyer of U.S. securities,'' wrote Win Thin, a New York-based senior currency strategist at Brown Brothers in a research note today.

China is the second largest holder of U.S. Treasuries after Japan, investing almost one-third of its $1.68 trillion in currency reserves in U.S. government debt. The U.S. dollar's decline has triggered concerns that Beijing would seek other forms of investments for its currency reserves.

``I don't think it's a smart move to invest in U.S. bonds,'' said Cheng Siwei, former vice chairman of the National People's Congress, China's legislature, at a Beijing conference on June 13. Cheng had said on Nov. 7 that China should improve the structure of its foreign reserves by favoring stronger currencies.

`No Sign'

The data showed ``there has been no sign that either China or Japan are decreasing dollar holdings,'' Win wrote in his report. ``Rather the data continued to show diversification by the two within U.S. securities.''

Japan decreased its holdings by $8.5 billion to $592.2 billion in April, the data showed. Its holdings of U.S. agency debt gained $2.6 billion, corporate bonds rose $1.1 billion and U.S. equities increased $1.1 billion.

The drop in Japan's total net holdings of U.S. assets in April ``really isn't worrisome as it comes on the back of three straight months of gains totaling $51.5 billion across all categories,'' Brown Brothers wrote in the note. ``It is important to look at the entire spectrum of investment holdings and not just on the narrow U.S. Treasury holdings,'' it said.

China Financial Markets comments in more detail (excellent reading as always):

Of course Chinese dollar holdings rose, but something changed drastically[China Financial Markets]

It now seems that China’s rate of reserve accumulation, seemingly unsustainable even two years ago, has reached even higher levels, but what is powering it now is not the (relatively) stable trade surplus and FDI accounts but rather highly unstable speculative inflows (for an explanation of how reserve accumulation has been generated see “What? $74.5 billion? Is this a mistake?”). If I am right, it seems to me that there has not just been a quantitative change in China’s and the world’s balance of payments accounts in recent months (i.e. even more rapid growth in an already unsustainable rate of Chinese foreign currency reserve growth), but also a qualitative change – the cause of China’s reserve growth has shifted significantly. The old mechanism, large trade deficits in some countries balanced by rapid reserve accumulation in others, has been converted into something much more complex and maybe even pro-cyclical (hence volatility enhancing): large trade deficits in some countries plus massive speculative inflows in others are being balanced by even more massive reserve accumulation in the latter countries.

I still need to work out in my mind what some possible implications are, but I would be lying if I said I didn’t find this change worrisome. My instinct is that because of the intensely pro-cyclical nature of speculative inflows, this new system is a lot less stable than the old one.

Just How Capitalist is China?

An interesting question and an interesting academic paper that attempts to answer it. The work is taken from the book "Capitalism with Chinese Characteristics" so will be fairly accessible to non academic readers.

I am in general agreement with the findings below:

Just How Capitalist is China? [MIT Sloane Research Paper]

This paper is the first chapter of a forthcoming book, Capitalism with Chinese Characteristics (New York: Cambridge University Press, July 2008). The book is a narrative account of the evolution of capitalism in China in the last three decades. (The year 2008 marks the 30th anniversary of economic reforms in China.) The research is based on detailed archival examinations of policy, bureaucratic and bank documents as well as several waves of household and private-sector firm surveys. As an example, I have examined a 22-volume collection of memoranda, directives, operating manuals, rules of personnel evaluations issued by the presidents of China's central bank, all the major commercial banks, rural credit cooperatives, etc. A detailed synopsis of the book appears after this page.

This paper presents the framework for and the summary findings of the entire book. The highlights are:

- Many economists used output share of private sector as evidence that China's business environment became more liberal over time. Measured by output share, China's private sector has grown enormously since 1978. But output share is not an accurate measure of private sector policy because it is correlated with efficiency differentials between private-sector firms and state-owned enterprises (SOEs). During the 1989-1991 period when China cracked down on private sector, the output share of private firms still increased. Another example is from the former Soviet Union. Private agricultural output was quite high because private farming was so much more efficient than state farming. This is not evidence that the former Soviet Union was pro-private sector.

- A superior measure of policy evolution is capital allocation. By this measure the most liberal policy period, by far, was in the 1980s and in the 1990s the investment share by purely privatesector businesses fell substantially. (The share only began to rise after 2002.)

- The changing investment share by the private sector suggests a development few Western academics have noticed - a substantial policy reversal in the 1990s. Survey and documentary evidence suggests that private access to finance was easier in the 1980s than in the 1990s and this was especially true in rural China.

- Evolution of capitalism in China is a function of a political balance between two Chinas - the entrepreneurial, market-driven rural China vis-à-vis the state-led urban China. In the 1980s, rural China gained the upper hand but in the 1990s, urban China gained the upper hand. Although China made notable progress in the 1990s in terms of FDI liberalization and reforms of SOEs, this book assigns greater weight to the rural developments in determining the overall character and the pace of China's transition to capitalism.

- Many economists rely on GDP data to formulate their view of Chinese economy. The tale of the two decades is not reflected in the GDP data but is reflected in the household income data (obtained through surveys). Rural household income grew substantially faster in the liberal 1980s than in the illiberal 1990s. Also social performance deteriorated in the 1990s as well.


Sunday 22 June 2008

BERGSTEN on China's trade challenge

Foreign Affair have an interesting comprehensive (6 page) China bashing story.

The summary is given as:

Summary: Beijing is shirking its responsibilities to the global economy. To encourage better behavior, Washington should offer to share global economic leadership.

I concentrate here on trade but the whole article is worth reading.

A Partnership of Equals: How Washington Should Respond to China's Economic Challenge[Foreign Affairs]

Some salient paragraphs:

China poses a unique challenge because it is still poor, significantly nonmarketized, and authoritarian. All three characteristics reduce the likelihood that it will easily accept the systemic responsibilities that should ideally accompany superpower status. The integration of China into the existing global economic order will thus be more difficult than was, say, the integration of Japan a generation ago. The United States and the EU would like to co-opt China by integrating it into the regime that they have built and defended over the last several decades. There are increasing signs, however, that China has a different objective. In numerous areas, it is pursuing strategies that conflict with existing norms, rules, and institutional arrangements.


Moreover, Chinese recalcitrance seems to be increasing rather than decreasing over time. At the outset of its economic reform process, in the late 1970s, China was eager to join (and to replace Taiwan in) the International Monetary Fund (IMF) and the World Bank. These institutional ties subsequently played important, and apparently welcome, roles in China's early development success. Later, Beijing not only endured lengthy negotiations and an ever-expanding set of requirements in order to join the World Trade Organization (WTO) but also used the pro-market rules of that institution to overcome resistance to reform among die-hards inside China itself.

On trade - something we are particularly interesting in at China Economics Blog:

On trade, China has been playing at best a passive and at worst a disruptive role. It makes no effort to hide its current preference for low-quality, politically motivated bilateral and regional trade arrangements rather than economically meaningful (and demanding) multilateral trade liberalization through the WTO. Since China is the world's largest surplus country and second-largest exporter, this poses two important challenges to the existing global regime.

First, China's refusal to contribute positively to the Doha Round of international trade negotiations has all but ensured the talks' failure. Beijing has declared that it should have no liberalization obligations whatsoever and has invented a new category of WTO membership ("recently acceded members") to justify its recalcitrance. Such a stance by a major trading power is akin to abstention and has practically guaranteed that the Doha negotiations will go nowhere. And since the global trading system does not stay in place, but is always moving either forward or backward, a collapse of the Doha Round would be quite serious: it would represent the first failure of a major multilateral trade negotiation in the postwar period and place the entire WTO system in jeopardy. China is not the only culprit in the Doha drama, of course. The United States and the EU have been unwilling to abandon their agricultural protectionism, other important emerging economies have been unwilling to meaningfully open their markets, and several poor countries have resisted contributing to a global package of reforms. But China, with its major stake in open trade, exhibits the sharpest contrast of all the major players between its objective interests and its revealed policy.

Second, China's pursuit of bilateral and regional trade agreements with neighboring countries is more about politics than economics. Its "free-trade agreement" with the Association of Southeast Asian Nations (ASEAN), for example, covers only a small share of its commerce with the countries in question; it is simply an effort to calm their fears of being swamped by their huge neighbor. Again, it is true that the United States and other major trading powers also factor foreign policy considerations into their selections of partners for regional and bilateral trade agreements. But they also insist on economic standards that largely conform to the WTO's rules. China is able to escape legal application of those rules by continuing to declare itself a "developing country" and by taking advantage of "special and differential treatment." But for a major global trading power to hide behind such loopholes provokes substantial international strains.

China is also hurting the global trading system by supporting the creation of a loose but potent Asian trading bloc. The network of regional agreements that started with one between China and ASEAN has steadily expanded to include virtually all other possible Asian permutations: parallel Japanese-ASEAN and South Korean-ASEAN deals; various bilateral partnerships, including perhaps a Chinese-Indian one; a "10 + 3" arrangement that brings together the ten ASEAN countries and all three Northeast Asian countries, and possibly even a "10 + 6" agreement that would broaden the group to include Australia, India, and New Zealand. All this activity is likely to produce, within the next decade, an East Asian free-trade area led by China.

Such a regional grouping would almost certainly trigger a sharp backlash from the United States and the EU, as well as from numerous developing countries, because of its new discrimination against them. Even more important, it would create a tripolar global economic regime -- a configuration that could threaten existing global arrangements and multilateral cooperation.

China's challenges to the global trading system are most visible in its opposition to the U.S. proposal, launched at the Asia-Pacific Economic Cooperation forum in 2006, for a free-trade area of the Asia-Pacific. The APEC initiative, immediately endorsed by a number of those smaller member economies that fervently want to prevent trade conflict between the group's two superpowers, seeks to head off the looming confrontation between an Asia-only trading bloc and the United States, which could draw a line down the middle of the Pacific. The initiative would eventually consolidate the many preferential pacts in the Asia-Pacific region and offer an economically meaningful Plan B for widespread trade liberalization if the Doha Round definitively fails. China has led the opposition to the idea, demonstrating its preference for bilateral deals with minimal economic content and its lack of interest in trying to defend the broader trading order.


Tuesday 10 June 2008

Chinese liquidity

The FT's Lex column looks at Chinese liquidity.

Chinese liquidity[FT - subscription required]

China surprised the market at the weekend, lifting the ratio of reserves that banks must hold by 100 basis points. This is the fifth rise of the year, as well as the biggest, and brings the ratio up to 17.5 per cent.

What does Beijing know that nobody else does? Inflation numbers, due out on Thursday, look like a red herring. Food price indices point to a slight deceleration in consumer price inflation; besides, impounding an additional $50bn-$60bn in bank vaults does little to curb spiralling prices when loan growth is steaming along at about 15 per cent year-on-year.

The article goes on to talk about the fear of hot money inflows estimated to be in the region of $75bn in April alone.

Lex concludes that such measures may not be sufficient and that capital controls are a possibility.


Reith Lectures - Chinese vistas

BBC Radio 4 present a series of lectures on China by Professor Jonathan Spence.

Highly recommended listening (pod casts available) for those interested in China.

Reith Lectures - Chinese Vistas

Lecture 1:

Chinese Vistas: In a lecture recorded at the British Library in London, Jonathan Spence reflects on China's most enduring thinker, Confucius. Who was this man, what did he believe in, and what contemporary relevance does his message have, nearly 2,500 years after his death? The Confucian message has survived countless attacks and is being recycled by the Chinese Communist leadership today.

Lecture 2:

Spence examines China's relations with the United Kingdom through three centuries of trade, warfare, unequal treaties and missionary endeavours that shaped their mutual perceptions.

Monday 9 June 2008

Greenfield FDI and innovation

Apologies for the lack of posts recently, exam marking time in academia.

Here is a paper that I need to read. The impact of foreign firms in China is complex. The pursuit of profit has lead many MNEs into China but at what cost? What is the impact on UK/US jobs? On wages in both the west and China, on the growth and innovation in both countries?

Whilst I would have had some concerns if I had refereed this paper and it is more "business school" than "economics" it is a good starting point.

The impact of greenfield FDI and mergers and acquisitions on innovation in Chinese high-tech industries [Journal of World Business]

Xiaohui Liu
Huan Zou1,

Business School, Loughborough University, Leicestershire LE11 3TU, UK

Available online 20 December 2007.


Using panel data analysis, this paper investigates the impact of international technology spillovers on innovation in Chinese high-tech industries through greenfield foreign direct investment, cross-border mergers and acquisitions and trade. We report that foreign greenfield R&D activities by multinational corporations in a host country significantly affect the innovation performance of domestic firms and there exist both intra-industry and inter-industry spillovers from foreign greenfield R&D. There are only inter-industry M&A spillovers. We find that importing foreign technology and investing in domestic R&D have positive impacts on domestic innovation. The findings have important implications for theory, practitioners and policy-makers.

Keywords: Innovation performance; Foreign R&D activities; Cross-border M&As; Chinese high-tech industries