Sunday 30 November 2008

World's Best Universities - US News

It is about time I updated the "good university guide". This is not economics specific but looks at the best Universities in the world and is based on the Times Higher Education-QS World University Rankings that we have discussed before.

Here is a variety of links. For those considering the UK for a MSc postgraduate programme it would be wise to consider only those listed here.


1. Cambridge
2. Oxford
3. Imperial
4. UCL
5. KCL
6. University of Edinburgh
7. ETH Zurich
8. Ecole Normale Supérieure, Paris
9. University of Manchester
10. University of Bristol
11. École Polytechnique
12. University of Copenhagen
13. Trinity College Dublin
14. École Polytechnique Fédérale de Lausanne
15. University of Amsterdam
16. Heidelberg Universität
17. Uppsala University
18. Leiden University
19. LSE
20. Utrecht University
21. University of Geneva
22. University of Warwick
23. Katholieke Universiteit Leuven
24. University of Glasgow
25. University of Birmingham
26. University of Sheffield

Top 200


Why the Financial Crisis will Hurt China Hard

This post is a useful round-up of why China is going to go through some very painful adjustment costs in the next couple of years. This emphasises points previously raised in this blog.

Global financial crisis will hurt China much more than the US [CNreviews]

China’s economic growth is supported by three primary legs:

1. export-led growth
2. real property growth
3. government spending

The first leg is clearly broken. US and European consumers can no longer consume at the debt-supported levels they have at the past. The second leg is also broken, in part because of the first. Rising unemployment, declining Chinese consumer confidence, and significant price declines in real property have slowed sales. So what is left is government spending. Government plays a more significant role in the Chinese economy than Western economies, but can increased government spending make up for the other legs of the stool?

The consensus among economists is “no.” And even more worrying, is the belief that Chinese government policy response could make the global financial crisis worse.

The article then links to a number of other points that back up the "China is in toruble argument".

The Rising Risk of a Hard Landing in China: The Two Engines of Global Growth – U.S. and China – are Now Stalling [RGE monitor]

More worrisome there are now increasing signs that the other main engine of the global economy – China - is also stalling. Let us consider now in detail the evidence that China may be on its way to a hard landing…

Rising unemployment increases the pressure for misguided trade policies [China Financial Markets]

The first is that the unemployment situation here has gotten grim enough that the government is trying to mediate labor and pay disputes and to make it harder for companies to lay off workers. They are especially worried about the implications for social unrest. According to a Bloomberg piece today:

A survey of 84 cities showed demand for workers fell 5.5 percent in the third quarter, the first decline in years, Vice Minister for human resources Zhang Xiaojian said at the press conference today. The ministry should be able to keep the urban unemployment rate within the government’s target of 4.5 percent this year, although the rate will “worsen” next year, Zhang said. That figure does not include an estimated 200 million migrant workers who have left their home town in the countryside to work in cities. Even before the current global crisis, the country faced a huge gap between 24 million new job seekers and the 12 million jobs created annually, according to the ministry.

Most people believe that the official urban employment rate significantly understates real urban unemployment, and although I have hear that real unemployment is as high as 10-11%, I have seen nothing very credible on the issue. I assume unemployment is higher but I don’t really know what it is.

The writer of the original article concludes with 5 points. I agree with all 5 points although I suspect the exchange rate will continue to appreciate slowly against other currencies. The stockmarket will continue to fall and unemployment will rise. Housing prices will also fall and by more than is expected.

Here’s my conclusions:

1 China’s equity markets could fall further. Many listed companies are dependent on real property or export markets.
2 China’s property markets could fall further. Not only are private individuals freezing up, but the government is also making significant investments in public housing. That might have some effect on price levels for private housing. To early to buy.
3 RMB will neither appreciate or depreciate. It will likely hold the dollar peg at the current level, for quite some time.
4 China’s labor markets will get more attractive to employers, but less attractive for employees and job seekers. There will be a large number of unemployed new graduates. There is risk of social unrest.
5 Freedom of speech and media will likely be curtailed further in the future as the risk of social unrest increases.

In summary, the world doesn’t look as wonderful as it once did.


Saturday 29 November 2008

GRE scores by subject

A lot of Chinese postgraduate students take GRE exams to get into graduate school. The following ranking based on a Greg Mankiw post have "economics" at 4th.

This ranking makes a lot of sense to me. Some of the top economists are failed Physics PhDs. Equally, some of the top sociologists and public policy Professors are failed economists.

Larry, Vindicated [Greg Mankiw]

“President Summers asked me, didn’t I agree that, in general, economists are smarter than political scientists, and political scientists are smarter than sociologists?”

Chart of the Day: GRE Scores By Academic Field [CARPE DIEM]


The conclusion - an economics PhD is worth having.


Research Papers: "China and the Manufacturing Exports of Other Developing Countries"

In January 2008 Gordon Hanson and Raymond Robertson published a paper on China's exports and how they impacted on other developing countries exports.

The data is for 2000-2005 and they use a standard gravity approach. COMTRADE data are used and this paper and it is useful as an empirical approach for PhD students and masters students wanting to study empirical trade.

China and the Manufacturing Exports of Other Developing Countries [PDF]

Abstract. In this paper, we examine the impact of China’s growth on developing countries that specialize in manufacturing. Over 2000-2005, manufacturing accounted for 32% of China’s GDP and 89% of its merchandise exports, making it more specialized in the sector than any other large developing economy. Using the gravity model of trade, we decompose bilateral trade into components associated with demand conditions in importing countries, supply conditions in exporting countries, and bilateral trade costs. We identify 10 developing economies for which manufacturing represents more than 75% of merchandise exports (Hungary, Malaysia, Mexico, Pakistan, the Philippines, Poland, Romania, Sri Lanka, Thailand, and Turkey), which are in theory the countries most exposed to the adverse consequences of China’s export growth. Our results suggest that had China’s export supply capacity been constant over the 1995-2005 period, demand for exports would have been 0.8% to 1.6% higher in the 10 countries studied. Thus, even for the developing countries most specialized in export manufacturing, China’s expansion has represented only a modest negative shock.


Friday 28 November 2008

World Bank Quarterly Update: "Trouble ahead"

To read the World Bank's quarterly update for China see this PDF.

Quarterly Update[PDF]

The report contains a great set of figures and tables and is a must read for anyone interested in the economics of China.

The Council of foreign relations does a good overview of the document. I have included the full text as it saves me a lot of time :-) I agree with some of these 7 points but disagree with others.

I happen to think that the World Bank and Brad and underestimating the problem. There are problems not shown in the raw data. This is a story we will return to but it is good to have a World Bank bench mark to make comparisons.

I suggest all read the PDF above and draw their own conclusions.

If you only read one thing on China this fall …[Brad Sester]

David Dollar, Louis Kuijs and their colleagues have outdone themselves – and in the process provided a clear assessment of the sources of China’s current slowdown and the risks that lie ahead. I won’t try to summarize the entire report. Read it. The whole thing. No summary can do it justice.

Here though are seven points that jumped out at me.

1. China was no workers’ paradise during the boom years.

GDP growth has been quite strong. But wages have fallen from around 50% of China’s GDP at the start of the decade to around 40% of GDP. That – not a high rate of household savings – is the main reason why consumption is a very low share of GDP (See Figure 15 of the World Bank Quarterly). If China’s workers had secured a bigger share of China’s output, they could be better off now even if China had grown somewhat less rapidly. There is good reason to think that a world where China subsidies US borrowing (and consumption) isn’t the best of all possible worlds. The fruits of the recent boom weren’t shared broadly in either the capital-exporting countries or the capital-importing countries.

2. China really is a manufacturing and investment driven economy.

Even when compared to Korea in 1990 or Japan in 1980, China stands out. Investment accounts for a large share of GDP than it ever did for the smaller Asian miracles and manufacturing accounts for a higher share of China’s GDP than it ever did in other Asian manufacturing economies (Figure 14). Given China’s size, it is pretty clear that China cannot continue to grow by investing ever more and manufacturing ever more. China ultimately has to produce for Chinese demand not world demand.

3. China’s current slowdown was made in China, not in the world.

Yes, growth in “light manufacturing” (toys, shoes and textiles) has slowed. But electronics and machinery exports are still doing very well – even if they don’t get the press (Figure 3). Or perhaps I should say were still doing well in the third quarter; must has changed recently. China’ problem this year is simple: labor intensive export sectors have slowed more than capital intensive export sectors. Overall though China’s real exports grew at a 10-15% y/y clip in 08 – far faster than the overall growth in world imports. China’s real export growth is forecast to outpace its real import growth in 2008 – which implies that net exports will still contribute positive to China’s GDP growth. True, the net exports won’t provide as much of a positive contribution as in 07, 06 or 05. But they are still adding to growth not subtracting from it.

Why then is China slowing so sharply? Simple, real estate investment has hit a wall. After growing at 20% y/y for a long time, real estate investment stalled – with a y/y growth rate of around 0% (Figure 5). That means that China is in turn producing more steel and cement than it needs, and producers of steel and cement are cutting back. That in turns hurts iron ore exporters …

This though is very much a result of China’s own policy choices. Rather than allowing the real exchange rate to appreciate back when China was truly booming (05-late 07/ early 08), China’s policy makers opted to rely on administrative curbs on credit growth. That left China more exposed to global slump in demand – as it kept exports up by limiting real appreciation even as it credit curbs limited the amount of froth in the real estate market back when China was booming and real interest rates were negative. China invested a lot in real estate, but it is no Dubai. But China’s policy makers still look to have slammed the brakes on a bit too hard. Rather than slowing gradually, real estate investment fell off a cliff (Figure 5).

4. There is more bad news ahead.

While real exports contributed positive to GDP growth in 2008, they won’t contribute in 09. The World Bank forecasts that for the first time in a long time, 2009 real import growth will exceed real export growth. In 2005, real exports grew about 10% faster than real imports (23.6% v 13.4%). Many economists remain – for reasons that to be honest elude me – reluctant to draw the obvious connection: the most likely explanation for China’s strong real export growth is the large depreciation the RMB in 2003 and 2004. That combined with administrative controls – which limited lending, investment and ultimately imports – to create China’s large current account surplus. Real export growth exceeded real import growth by 5 percentage points in 2006 and 2007 – and by 4 percentage points in 2008.

The positive contribution of net exports to GDP is forecast to end in 2009: real import growth will exceed real export growth by 3 percentage points.

That though doesn’t mean that China’s currency isn’t undervalued. China’s exports are forecast to grow faster than the world’s imports, meaning China’s global market share is still increasing (see Figure 2). And if 2008 and 2009 are taken together, China will still be drawing on the world for its growth: the drag from net exports in 09 will be smaller than the contribution from net exports in 08 (see Table 1)

I fully realize that China is appreciating quite significantly now in real terms – just global demand for China’s goods is falling (Figure 11). The tragedy is that this appreciation is coming now – not two or three years ago when domestic Chinese demand was booming and China didn’t need to draw on the rest of the world to sustain strong growth.

5. The fiscal stimulus is real, but modest. China’s fiscal balance is expected to swing from a 0.7% of GDP surplus in 07 to a 2.6% of GDP deficit in 09. That is a 3.3% of GDP swing. In 2009 alone, China’s deficit is forecast to rise by 2.2% of GDP. See Table 1. That shift is important and will help to support China’s growth– but it will likely lag the swing in the US fiscal deficit. Hopes that surplus countries will end doing more than deficit countries seem unlikely to be ratified.

6. The last thing anyone needs to worry about is fall in Chinese demand for US treasuries.

The Treasury market obviously isn’t worried - not it 10 year Treasury yields are under 3%. And there is little reason for the bond market to be worried if current trends continue.

The World Bank forecasts that China’s current account surplus will RISE not fall in 2009, going from an estimated $385 billion to $425 billion. How is that possible if real imports are forecast to grow faster than real exports? Easy – the terms of trade moved in China’s favor. The price of the raw materials China imports will fall faster than the value of China’s exports. China’s oil and iron bill will fall dramatically.

In macroeconomic terms, China’s fiscal stimulus will offset a fall in domestic investment leaving China’s current account (i.e. savings) surplus unchanged. The 2009 surplus is expected to be roughly the same share of China’s GDP (9%) as the 2008 surplus.

In dollar terms, the World Bank forecasts that China will add almost as much to its reserves in 2009 than in 2008. That is a bit misleading: the 2008 reserve growth number leaves out the funds shifted to the CIC (ballpark, $100b in 08) and the rise in the foreign exchange reserve requirement of the state banks (ballpark, another $100b). But it captures a basis truth. Even if a fall in hot money inflows means that China will be adding $500b rather than $700b to its foreign assets, its foreign assets will still be growing incredibly rapidly. China already has – counting its hidden reserves – well over a $2 trillion. It is now rapidly heading for $3 trillion.

In broad terms – if oil stays at its current levels – China will be the only large surplus country in the world, and it will essentially be financing a US deficit of roughly equal magnitude to China’s reserve growth. It makes everything plain to see.

7. The way China manages its reserves matters immensely for the world not just China

China shifted from buying Agencies to buying Treasuries in July. Others did too, but no one has quite the market impact of China. China doesn’t disclose what it is doing with its reserves, but the recent shift in Chinese demand isn’t really in doubt. The market knows it. The TIC data for August showed it. And the latest Fed data strongly suggest large ongoing migration from Agencies to Treasuries.

China now accounts for such a large share of the world’s reserves that it is hard to see how the FRBNY’s custodial data doesn’t reflect, at least in part, a shift in Chinese demand.

A key themes of this blog has been how the internal imbalances of China’s economy are a reflection of its undervalued exchange rate – and that China’s surplus has implications for the world. It has to be balanced by large deficits elsewhere. Another key theme has been that the Fed has been pushed to absorb risks that other central bank reserve managers now shun. Nothing illustrates this more clearly than the Agencies. Foreign central banks are scaling back their Agency holdings. The Fed is gearing up to buy. Big Time.

Thursday 27 November 2008

PANIC: rates cut by 1%

The mainstream press are now giving some attention to the seriousness of the problem in China as is the Chinese government. One can only hope they are reading this blog.

However, using the word "panic" is a low journalistic trick ;-)

The 7.5% threshold that I have repeatedly mentioned is also highlighted. Who are these economists that use this 7-7.5% growth limit? Whoever they are, I agree entirely.

More stories of "riots" are also filtering slowly into the Western press. It is also hard for us to contemplate the term "tens of thousands of factories have shut their gates". These are no individual people but individual factories employing 100's if not thousands.

2 provinces have gone to extraordinary lengths - not allowing companies to fire people without permission. This is shortsighted but shows the lengths China will go to. There is a real and serious problem in China at the moment that may get a lot worse in the months to come.

China slashes interest rates as panic spreads [Daily Telegraph]

The move came just one day after the World Bank predicted that China would grow by 7.5pc next year. The level of growth may appear robust by Western standards, but it would represent the slowest economic expansion in China for the last two decades.

It is also perilously close to the 7pc minimum level of growth that Chinese economists believe is necessary in order to create enough jobs for the 6m university graduates who will enter the jobs market next year.

It is the fourth interest rate cut from the Chinese central bank in the last ten weeks as the government desperately battles an evident economic collapse. "China is out to save itself here," said Patrick Bennett, an analyst with Societe Generale in Hong Kong.

The PBOC reduced its main borrowing rate by 1.08pc points to 5.58pc, the biggest one-off cut since the Asian Financial Crisis in 1997.

In recent weeks, a series of riots across central and southern China have flowered as disgruntled employees aired their grievances at the downturn.

Today, around 500 protesters rioted at the Kai Da toy factory in Dongguan in the Pearl River delta, flipping over a police car and trashing computers in a dispute over payoffs to 80 fired workers. Tens of thousands of factories across the region have already shut their gates.

Yin Weimin, China's Social Security minister, has revealed that employment is the Communist Party's number one concern in the downturn and said the "situation is critical". Unemployment is expected to rise from 4pc to 4.5pc by the end of the year and anecdotal reports have suggested that 3m people have already been fired in the industrial province of Zhejiang alone.

Two major provinces, Shandong and Hubei, have already responded by banning companies from firing staff without permission from the government.

The Chinese government has also announced a £373bn bailout to stimulate domestic growth by investing in infrastructure. However, only a fifth of the money is likely to come from central government coffers, with the rest coming from a mix of private enterprise and local government funds.

"We're seeing a government that steps in, that is trying to do everything it can to keep growth at a decent rate, and has the financial means and the administrative capacity to make that happen," said Louis Kuijs, the head of the World Bank's China economics analysis.

"All my colleagues were shocked by such a big easing. It signals the government may believe the economic situation is really serious for it to call for such a drastic move," said Liu Dongliang, a currency analyst at China Merchants Bank in Shenzhen.

The reserve requirements of Chinese banks were also cut by 1pc point, and 2pc points for smaller banks, freeing up around 360 billion rmb (£34bn) for lending.


Monday 24 November 2008

The threat to China's ability to feed itself

China's rapid growth has lead to environmental degradation of a massive scale. Part of a growing problem is the issue of soil erosion that threatens the ability of China to feed itself.

This problem should not be underestimated. The effects of global warming will only exacerbate the current situation.

China's Crops At Risk From Massive Erosion [PlanetArk]

BEIJING - Over a third of China's land is being scoured by serious erosion that is putting its crops and water supply a risk, a three-year nationwide survey has found.

Soil is being washed and blown away not only in remote rural areas, but near mines, factories and even in cities, the official Xinhua agency cited the country's bio-environment security research team saying.

Each year some 4.5 billion tonnes of soil are lost, threatening the country's ability to feed itself.

If the loss continues at this rate, harvests in China's northeastern breadbasket could fall 40 percent in 50 years, adding to erosion costs estimated at 200 billion yuan ($29 billion) in this decade alone.

"China has a more dire situation than India, Japan, the United States, Australia and many other countries suffering from soil erosion," Xinhua quoted the research team saying.

Beijing has long been worried about the desertification of its northern grasslands, and scaled back logging after rain rushing down denuded mountainsides caused massive flooding along the Yangtze in the late 1990s.

But around 1.6 million square km of land are still being degraded by water erosion, with almost every river basin affected. Another 2.0 million square km are under attack from wind, the report said. The survey was the largest on soil conservation since the Communist Party took control of China in 1949.


Sunday 23 November 2008

Is China's military rise a real concern?

The lead editorial piece in Friday's FT concerned China's desire to have an aircraft carrier or two. At a time when the global economy is collapsing this is remarkable.

So what it the big deal? Inevitably Taiwan gets a mention but China has never had expansionist desires. Simply maintaining its current boarders is ambition enough.

The stakes are high but China has its own domestic worries to think about before other nations need worry to much.

China's rise rattles foreign nerves [FT]

In an intriguing FT interview, a senior member of China's defence ministry spoke openly about Beijing's "dream" of possessing an aircraft carrier - or two. Maj Gen Qian Lihua said: "The navy of any great power . . . has the dream to have one or more aircraft carriers. The question is not whether you have an aircraft carrier, but what you do with your aircraft carrier."

Quite. China's rise - it prefers the term "development" - promises to be perhaps the greatest event of our time. A prosperous China would immeasurably improve the lives of more than a billion people.

But the history of great nations rising is not a happy one. China's experience with Japan, another neighbour with global pretensions, showed that all too clearly. China's recent history suggests it is more interested in maintaining the borders established during the 1644-1911 Qing dynasty than in expanding further. But Beijing's neighbours are, not unreasonably, nervous about the military clout of an ambitious one-party state

China has, after all, threatened to go to war if Taiwan declares independence. In the second half of the 20th century its troops clashed with those of India, the Soviet Union and Vietnam. The secrecy surrounding Beijing's military spending provokes concern. The situation is made more delicate by several unresolved territorial disputes over islands and maritime boundaries. A fragile peace is kept by the US. But if Tokyo doubted for one second Washington's resolve to come to its defence, it would go nuclear, triggering a regional arms race.

The stakes are, therefore, extremely high. In principle, there is nothing wrong with China - a member of almost every important international organisation - developing a modern military. If that includes an aircraft carrier, so be it.

But it is incumbent on Beijing to build up its forces in a manner that does not make others jumpy. That means an honest account of how much it is spending and on what. It also means not pandering to nationalist rhetoric at home, and cementing better relations with neighbours through military exchanges and cool-headed diplomacy. In this respect, the recent thawing of relations with Tokyo is welcome.

The clearest safeguard of all is one Beijing cannot yet meet. Many Americans opposed the invasion of Iraq. Now, belatedly, voters have rejected the party that led them to war and elected a president promising an early withdrawal. China does not yet have that safety valve. Until it does, it is only natural that its military rise should prompt international jitters.


Saturday 22 November 2008

The beginning of the China crisis as unemployment rises?

In this blog I have commented on numerous occasions about the possibility of social unrest in China arising as a result of the export crash and the on going global recession.

To me I felt like I was in the middle of a strange conspiracy. At last the mainstream press and more importantly China's press are beginning to acknowledge what I have been trying to point out for a while:

1. The fall in demand for Chinese goods from the US, Europe and Japan will cause huge unemployment and will not and cannot be absorbed by domestic consumption. This was never even a remote possibility given China's rates of personal saving.

2. Chinese citizens are becoming more vocal and more liable to protest. The Internet and the ability to get information out of the country means that social instability is a real concern.

There is no doubt China's government is still strong enough to quell any trouble and is not afraid to use all the resources at its disposal but at least the issue is quietly sneaking into the real world.

What I like about this article is that China's primary concern is "employment". Forget the global crisis or inflation - employment is all important. Western governments would do well to remember this when asking for favours from China.

The key is that 8% growth is not as great as it seems given China's population structure. If we fall below 7% I would be worried.

Beijing forecasts grim employment outlook [FT]

China's employment outlook is becoming "grim", say officials, as the global financial crisis triggers fresh factory closures in the export sector.

Urban unemployment has begun to rise and will increase next year, Yin Weimin, minister of human resources and social security, said on Thursday.

"Stabilising employment is the top priority for us right now," said Mr Yin, in comments reflecting growing worries about the potential threat to social stability.

"The current situation is grim, and the impact is still unfolding," he said. "Since October, our country's employment situation has been affected along with changes in international economic conditions."

China's official urban unemployment rate is 4 per cent. But this figure includes only registered urban residents. Tens of millions of rural migrants who have moved to cities to work in factories over the past decade are generally not included in unemployment data if they lose their jobs.

The national economy has been slowing gradually since the start of the year. However, the pace at which it is cooling accelerated sharply in September and October, prompting a steep drop in confidence among companies and some consumers.

Even when the economy was growing strongly, China witnessed a stream of localised protests. Recent trouble has included strikes by taxi drivers in three cities and rioting in a city in Gansu province this week.

Statements by Chinese leaders have shown that they were worried about the social impact of a sharp downturn. In an article in a Communist party magazine this month, Wen Jiabao, the premier, said: "We must be crystal clear that without a certain pace of economic growth, there will be difficulties with employment, fiscal revenues and social development . . . factors damaging social stability will grow."

Zhang Xiaojian, vice-minister of human resources and social security, said on Thursday competition for jobs among growing numbers of college graduates would intensify if the economy slumped. The authorities jast week unveiled a huge fiscal stimulus programme aimed at keeping growth at about 8 per cent a year.

The slowdown began in the housing market, spreading to related industries such as steel and cement. With Europe now in recession, and many of its other markets slowing, some economists think that Chinese exporters are about to face an extremely tough patch.

In one indication of the gathering slowdown, Japan saidits exports to the rest of Asia recorded their first decline for seven years last month, with exports to China dropping 0.9 per cent compared with the same period last year. Japanese companies have been large suppliers of components and other products to the array of factories in China that assemble goods for export.

Two provincial governments this week announced measures aimed at deterring businesses from laying off workers. Hubei and Shandong said companies trying to lay off more than 40 staff would need prior approval from the local authorities.


Thursday 20 November 2008

The geographic similarities between China and the US

The FT has an excellent piece in today's paper comparing the geography of the US and China and China's emergence as a world leader.

This is also an astute piece of analysis and should sound some alarm bells in Washington.

How China can be more than 350 Albanias [FT]

It is a truth occasionally acknowledged that if you lay a map of China over one of the US, some striking similarities emerge. Their size is uncannily close, with both occupying almost exactly 6.5 per cent of the world's land mass. Their shapes are broadly similar, if you make allowances for Alaska. (That at least spares us a Chinese version of Sarah Palin.) Both have a rich eastern seaboard - the US has a rich western one too - and swathes of relatively underdeveloped hinterland. History has placed their most important city, Beijing and New York, in the top north-east corner, and their Mecca to Mickey Mouse, Hong Kong and Anaheim, in the south.

If you ask Chinese academics whether China has a role model, a surprising number point to the US. That country is the only one - leaving aside Russia - with the continental scale and oceans of ambition to match China's own. Even culturally, there are superficial similarities. Viewed from Japan, with an etiquette-laced culture that values craft above commerce, China looks like an American-style can-do nation where money is king.

But recent events have knocked China's confidence in - even respect for - its mentor. After years of preaching the virtues of the free market to Beijing, Washington has created a raft of state-owned enterprises (SOEs) from the wreckage of Wall Street. Its once mighty car industry, with brands every Chinese person once aspired to own, has been reduced to knocking on the door of politicians, begging bowl in hand. The next thing you know, Washington will be working on a five-year plan


Of course, politically, the US's reputation has been temporarily salvaged by Barack Obama. His victory is seen in China as evidence of the extraordinary flexibility of US democracy, surprising those who thought Americans would never pick a black president.

But financially, America's glory days appear over. Chinese academics love telling the story (you would think they were all listening in on the call) of how George W. Bush begged Hu Jintao, China's president, to keep buying US bonds. China will keep on helping out, they say, though it knows the US will have to debase the dollar. "Only God can fix it and Obama is not God," says Shi Yinhong, professor of international politics at Renmin University. "If they print too much money, the financial basis of this empire will collapse."

China appears to hold all the cards. It has nearly $2,000bn (€1,570bn, £1,330bn) of reserves and a fashionably basic banking system that the state uses to funnel money to the real economy. (Are you watching Hank Paulson?) The government can spend an extra $586bn to keep growth ticking over at 8 per cent. (Ditto.) Francis Fukuyama, the academic, fresh from declaring the victory of liberal democracy, now suspects US hegemony is fading. He recently told Newsweek: "American power relative to the world is declining because of the growth of other centres of power."

So what has all this got to do with Albania - David Pilling waits until the last paragraph to tell us:

The power and energy on display in emerging Chinese cities can be so impressive it is easy to forget that China's per capita output is less than Albania's. In purchasing power parity terms, at $5,325, China comes in 100th place, four slots behind Albania.

Of course China, with its 1.3bn people, has an economy vastly bigger - roughly 350 times bigger, in fact - than its east European cousin. Scale does matter. But, until China chooses to act like the sum of its parts, it might be more useful to think of it as 350 Albanias than as one America.


Monday 10 November 2008

Stockmarket prediction update November 2008

I return again to my predictions for the Chinese stock market first made in May 2007.

It has been over a year so it is time to assess where we are and where we might be going.

From a 4000 start I predicted a high of around 5000 and a low of 2000. I missed the top and the bottom but generally speaking we are not too far out. I also thought the bottom of 2000 would have been reached before now. The delay in the bubble bursting is why I believe we went over and under based on irrational exuberance (and other reasons) for China's very own stock market bubble.

The balance between fear and greed is always hard to predict but one thing is for sure fear takes effect a lot faster and fortunes are lost quicker than they are made.

The losses from the 120 million trading account holders will have a large knock on effect on the real economy as fear takes over and investment slows. I still worry that we have my no means seen the worst yet. There are companies and banks with truly dreadful balance sheets and massive numbers of none performing loans.

Yesterday's stimulus package has the smell of desperation.

Is the current 1800/1900 figure the bottom? I doubt it. My prediction would be for 1000 to be tested in the next 5 months. That represents close to another 50% fall. The caveat, as always with China, is that I also believe that the government (and other powerful interest groups) will try pretty much everything to prevent a fall of this magnitude. Given this very real possibility and the fact that Chinese firms are still improving in terms of governance and productivity I suspect that we may only get as low as 1400.

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.


China provides details on stimulus package - stockmarket rallies

Whilst the West dithers, China has acted. After a recent visit to China it is clear that a stimulus package is required. There are worries over job losses, house price falls and a drop in consumer spending (increase in saving).

I have warned in this blog on numerous occasions that China has massively underestimated its resilience to a fall in exports and overestimated the domestic economy to take up the slack.

At last the dangers appears to be sinking in. In response the stock market rose 7%. However, questions remain as revealed by the second FT article.

I will review my stock market predictions later this week but I have a feeling that my predictions were pretty close to being spot on.

China authorises ‘massive’ stimulus package [FT]

China announced on Sunday a “massive infrastructure spending programme” as part of a new fiscal stimulus plan aimed at boosting the country’s rapidly slowing economy.

The State Council, China’s cabinet, authorised Rmb4,000bn ($586bn) of investment on infrastructure and social welfare over the next two years, although it did not say how much of the spending would be on new projects not already in the budget.

The government said the spending plan reflected a decision to adopt an “active” fiscal policy to deal with the global financial crisis, while monetary policy would be “moderately active”.

The announcement reflects mounting anxiety in Beijing that China’s economy is cooling much more quickly than was initially expected in the face of weaker international demand and a slowdown in the local property market.

Two recent surveys of manufacturers showed a slump in activity in October, confirming anecdotal evidence that the slowdown has accelerated in recent weeks. Some economists believe that growth, which was nearly 12 per cent last year, could fall to as low as 6 per cent next year without a substantial fiscal stimulus.

Beijing has also been under growing international pressure to take fiscal measures to boost its economy in the hope that continued strong growth can provide some counter-balance to recession in the developed world.

The government has already cut interest rates three times, scrapped quotas for bank lending and unveiled measures to help housebuyers and some exporters. However, economists said those measures had not been enough to overcome growing gloominess among companies and consumers.

According to the official Xinhua news agency, the State Council decided on Friday to “map out more forceful measures to expand domestic demand”, which would include “massive” infrastructure spending.

The investments will focus on low-income housing, water, electricity, disaster relief and transport, with railways expected to see a big increase. Spending in the fourth quarter of this year would be boosted by Rmb120bn beyond what was planned.

The government said it would introduce a long-awaited reform of value added tax which would cut costs for Chinese companies by Rmb120bn, Xinhua said.

In China’s 2006-10 Five Year Plan, the government said it would spend Rmb5,100bn on infrastructure projects.

Article number 2:

Questions raised over fiscal package [FT]

China’s new fiscal stimulus package on Monday animated financial markets desperate for any signs of good economic news around a world confronting a significant slowdown. Yet the package’s announcement has also left many questions unanswered.


"China and the World Economy" - Ningbo, University of Nottingham

Last week at the University of Nottingham, Ningbo China, the Globalisation and Economic Policy (GEP) centre launched in China.

The conference covered a variety of topics from some of the leading international economists in China and academics working on China from the UK, Canada, Germany, Japan, Korea and Singapore. Links to the papers can be found below.

I will look in more detail at some of the more interesting papers later this week.

There is a wider debate on the role of UK Universities in China that is the topic for another post another day but the setting up of a branded campus in China puts Nottingham way ahead of other Universities in the UK and the US in terms of global expansion. The question is why others have not followed. Do they perceive the risk to be too great or is it simply that Nottingham have shown greater vision and fleet of foot to take a strong first mover advantage. The jury is still out although I suspect other Universities will be watching developments carefully.

GEP in China[University of Nottingham]

GEP is delighted to announce the establishment of a branch of its Research Centre at the University of Nottingham, Ningbo, China. The launch of this branch of GEP will coincide with a major international conference to be held in Ningbo on 6th and 7th November, 2008.

Programme available here.[PDF]

Press release available here.[PDF]

GEP - the Globalisation and Economic Policy Centre - will open a world-class new facility in China with a conference examining the international impact of the nation’s growing economy. The two-day conference ‘China and the World Economy’ begins on Thursday 6th November and will be held at the University of Nottingham Ningbo, China, which is home to the new GEP China. Speakers will include Professor Shujie Yao, Co-ordinator and Leader of GEP’s China and the World Economy programme, who will deliver a lecture on understanding the economic psychology of China’s stock market bubble and crash. He will discuss how the dreams of millions of ordinary Chinese investors have been shattered by the crash, which started before the Credit Crunch in the West and had different causes. Professor Yao will examine the economic psychology that drove the bubble, which began in late 2005. In less than two years, the Shanghai Stock Exchange Composite Index rose from just over 1000 to more than 6000. Today the picture looks very different. In the space of ten months to mid-September 2008 the SSE Compose Index fell by more than 70%. Professor Yao says one of the causes of the bubble may have been poor government management of the process of listing giant state-owned companies on the stock exchange. Another was irrational investing by citizens who had little understanding of the markets and the fact they can go down as well as up. “Big interest groups that exploited the boom were the biggest winners; small investors the net losers – fuelling the already serious inequality problem in today’s China,” he said. GEP, which is based at the University of Nottingham, launched its China and the World Economy programme three years ago.

Opening a branch in China will increase opportunities for in-depth study.
Professor Daniel Bernhofen, Director of GEP, said: “The fact that we are now in China, perfectly positioned to further increase our research into one of the most significant factors in the continuing story of globalisation, is a sign not only of China’s growing role in the world economy but of our commitment to studying it as closely as possible.”

Papers available below:-

Yang Yao, Peking University
The Implications of the Chinese Experience for the Developing World

Jiadong Tong, Nankai University
Trade Balance and Government Policy in China

David Greenaway, GEP, University of Nottingham
Has China Displaced Other Asian Countries’ Exports?

Zhihao Yu, Carleton University
Demographic Dynamics and Economic Take-off: the Economic Impact of China's Population-Control Policy

Fuku Kimura, Keio University, Japan (with Ayako Obashi, Keio University)
East Asian Production Networks and the Rise of China: Regional Diversity in Export Performance

Robert Elliott, University of Birmingham
Growth, FDI and Environment - Evidence from Chinese Cities (with Cole and Zhang)

Kui-Wai Li, City University, Hong Kong (with Tung Liu and Lihong Yun)
Decomposition of Economic Growth and Productivity Change in Post-reform China

Innwon Park, Korea University (with Professor Soonchan Park)
Free Trade Agreements versus Customs Unions: An Examination of East Asia

Zhihong Yu, GEP, University of Nottingham (co-authored with Richard Kneller)
Quality Selection, Chinese Exports and Theories of Heterogeneous Firm Trade

Xianguo Yao, Zhejiang University
The Dual Dualism of Labor Markets Segmentation in China: Theory and Evidence

Peter Egger, University of Munich
Mode of Market Participation of Chinese Firms: Theory and Evidence (with Zhihong Yu)

Albert Hu, National University of Singapore
Propensity to Patent, Competition and China's Foreign Patenting Surge

Stephen Morgan, University of Nottingham (with Shujie Yao and Dan Luo)
Impact of the US Credit Crunch and Housing Market Crisis on China

Alessandra Guariglia, GEP, University of Nottingham (with D. Greenaway and Z. Yu)
The more the better? Foreign ownership and corporate performance in China

Jun Zhang, Fudan University
What Can We Learn from China's Economic Transformation?

We are delighted to announce that, as part of the Conference, Professor Shujie Yao will present the inaugural The World Economy Annual China Lecture. This Lecture will be on the topic ' Understanding China's Stock Market Bubble and Crash during 2006-2008: An Economic and Psychological Analysis'.


Managing China's Ascent - James Chace

From the inbox:

World Policy Journal has an interesting reterospective piece by its long standing editor James Chace and considers the accent of China and how the West should react.

This is a free access article which is why I am linking to it here.

End of an Era: The Codas of James Chace [PDF]

Searching for a usable past at the end of the twentieth century seems increasingly likely to bring us back to the nineteenth, when balance of power politics was regnant. Right now it is China, truculent, assertive, insecure, and sometimes bullying that must be balanced. That China is fast becoming a dynamic world power cannot be doubted. Foreign investment and export-led growth have given China growth rates of 9 percent in real terms over the last 15 years. Over the next decade, China expects to grow at 5 to 7 percent annually, and the size of China’s gross domestic product is likely to rival Japan’s (in purchasing power parity) over this same time span. At this point in history, China’s is the ninth largest economy in the world. Ten years from now it could easily be the second.

Militarily, China is also a rising power. Its military budget is the world’s fourth largest, and it has begun to acquire power-projection capabilities with a significant naval buildup. It contests with Vietnam ownership of islands in the South China Sea; this spring, it responded to Taiwan’s presidential election, with its undertone of Taiwanese independence, by starting “missile tests” in the waters off Taiwan....

Nonetheless, China does not seem bent on expansion as the Soviet Union appeared to be after the Second World War. Beijing has indeed asserted a sphere of influence in the north, and it has annexed Tibet in the south. Otherwise, it is most concerned with maintaining internal unity, despite the disparity of income between the coastal provinces and the hinterlands. It has signed agreements with Moscow designed to quell Russian fears about border disputes, set up a “hot line” linking Chinese and Russians leaders for direct communications, and referred to a Sino-Russian “strategic partnership” for the twenty-first century (whatever that means!).

What is the correct policy for the United States toward this rising power?


Monday 3 November 2008

Online money in China - 20% tax?

The ban on Chinese making money from online games was always difficult to enforce. Cash poor, time rich Chinese could build up "characters" and sell them on to cash rich, time short western players who wanted to take a short-cut to the top.

Making it legal but subject to a 20% tax will be equally hard to enforce. However, this is at least a step in the right direction. Online gaming skill could become another good Chinese export.

The idea that these taxes can be collected still demonstrates that the Chinese government has yet to come to terms with the reality of the Internet.

China U-turn on online money-making [FT]

Less than two years after “strictly forbidding” players of online computer games from making money from trade in virtual currencies, China has announced a 20 per cent tax for such income.

The apparently contradictory rulings from different arms of the Chinese state highlight the difficulties faced by governments worldwide as they seek to regulate and tax the growing economic activity centred on “massively multi-player online role-playing games”.

Tax authorities generally take the view that all income from online business should be taxable, even if profits are derived from virtual worlds.

However, the practicalities of collecting those taxes – and valuing virtual assets – continue to be elusive.

Trade in virtual items – ranging from “gold” coins to magic swords and in-game property rights – is estimated to be worth more than Rmb10bn ($1.45bn, €1.15bn, £900m) a year in China alone, according to consultancy iResearch.

The widening trade in the virtual money used within games – and their burgeoning use for other transactions – last year prompted China’s ruling Communist party and the central bank to ban trading in virtual currencies and their use for purchases of “material products”.

However, in what amounts to tacit recognition that last year’s restrictions have had little impact, the State Administration of Taxation has announced that income from the sale of virtual currency with “increased value” is taxable at the same 20 per cent rate applied to real estate and other transactions.

Beijing tax officials declined to explain how they would implement the vaguely worded ruling, with local media saying detailed regulations could be announced in the coming days. However, Chinese analysts and games players suggested that the authorities’ attempt to tax the virtual currency trade would fare no better than the previous effort to ban it.

The contradictions between last year’s order and the tax ruling showed that authorities were “not very clear about online regulation”, said one industry analyst.

“If they can successfully implement this tax in the next two years, then I will jump over Mount Everest,” sneered one contributor to a discussion of the ruling on the popular Netease portal.

Another commentator involved in the growing business of “farming” virtual money and items used in games for sale to cash-rich but time-poor players in the US, Europe and other developed countries asked rhetorically if he or she could expect to benefit from the same tax incentives as other Chinese export businesses.

“I sell virtual currency to foreigners – will I get an export tax rebate?” the commentator said.

Despite last year’s restrictions, trade in virtual currencies used in games such as “World of Warcraft” or issued by online companies such as Hong Kong-listed internet group Tencent is carried out openly on Chinese auction websites.

Tencent’s widely popular “QQ Coins”, for example, were on Sunday being offered at a rate of one to Rmb0.91.


Saturday 1 November 2008

Housing Crisis in China: An overview

One reason why I believe the economy is in a much worse state than many seem to want to admit is the state of the housing and retail market. One problem is that the Chinese are yet to experience falling prices and they will not be prepared for the fallout.

Danwei have a useful summary piece with some interesting links. The interview with the original Forbes writer is interesting.

1. Forbes: Olympian Bust?

Beyond the hoopla, an increasingly bleak property market is spreading around China

The sales hall at the oasis housing development welcomes customers with multicolored streamers, water fountains and marble floors. Sales agents inform visitors that only a few units are available from the first two phases of the project and that 70 of the 130 or more buildings are almost completed. But just a few hundred feet behind the sales hall, some of the "almost completed" buildings look like neglected hulking shells, the concrete aging and exposed, the green scaffolding fabric tattered from neglect. Construction workers idled nearby. Prices have been slashed from $95 per square foot to $55. Industry insiders say that as few as 300 units have been sold out of the first 2,000 put up.

The Economist: What goes up

Numerous other property companies around China are similarly beleaguered. The Chinese press says that in September around 100 homeowners in the eastern city of Hangzhou stormed into the offices of Vanke, a big developer, to demand compensation for falling prices. In March a company in the southern city of Shenzhen (pictured above) caused a stir after it cut prices by 20%, by coughing up the difference to about 25 previous buyers of its property. Others have resisted giving cash, but have tried to calm homeowners by offering discounts on management services.

International Herald Tribune: Chinese banks brace for housing aftershock

As in the United States, Britain and Spain, the real estate bubble in China has turned into a bust in many cities; only one of the two dozen towering cranes at projects near Liu's home was in operation one recent afternoon.

Banking experts and economists expect the bust to produce, by next spring or summer, a sharp increase in loan defaults that could erode the high profits earned by Chinese banks over the past three years.


"Real estate developers are threatening the People's Bank of China, saying, 'If we die, the banks die first,"' said Yu Yongding, a former member of the central bank's monetary policy committee and now an adviser to the cabinet.

According to Yu, developers are exaggerating the dangers that bankruptcies could pose for banks. "If the government bows to this kind of pressure, we lose all the benefits of what we did before" to control inflation, Yu said.

Paradoxically, the relative lack of sophistication of the Chinese mortgage system could keep its real estate bubble from expanding into a credit and financial crisis like the one that has engulfed the West.

Wall Street Journal: China Aids Home Buyers to Curb Impact of Slump

BEIJING -- China's government is racing to make sure one of the world's biggest housing booms doesn't turn into a bust.

How the swoon in housing plays out in coming months may largely determine how severe the nation's economic slowdown during the global financial crisis will be -- and how acute the world-wide repercussions of the slump will be, as China's demand for construction materials declines.

Construction workers demolish old buildings to make way for a new property development in the center of Shanghai.

While housing bubbles around the world have burst, China's market has been seen as different because its surge in home building has been driven less by financial leverage than by real demand from a rapidly urbanizing population. Anywhere from 15 million to 20 million people move to Chinese cities each year.

But sales of new housing in China have plummeted in recent months as buyers have been spooked by a deteriorating economy and weakening prices.

Here is the interview:

China real estate market slump: Q&A with Gady Epstein [Danwei]

Has the Beijing property slump described in your article continued?
Yes. Prices are supposedly holding steady (or even going up), but the key figure to watch for is transactions. No one's buying apartments, no one's signing big leases on office space. The secondary market for apartments looks ugly as well.

Is it going to get worse?
I think it will definitely get worse in the short term. The central government has just announced measures intended to prop up the housing market, including a lower down-payment requirement, but it's obvious that the public has lost confidence in the market and is taking a wait-and-see approach. People no longer assume, as they did for much of the last five years, that buying an apartment is a can't-lose investment.

How will the global financial crisis affect the Beijing property market?
In the short run, it will have both a psychological and real impact, as people and companies delay big purchasing decisions either because they're nervous or because they're short on cash or credit.

In the long run, the world could look to China to lead the recovery, and it's possible that a year from now, people will be talking up real estate in Beijing again. I suspect we're looking at more like 18 months to two years, in part because the financial crisis will continue to play out for some time. But it's impossible to see that far ahead. Many have looked foolish in the past for betting against China, just as quite a few people looked foolish for betting only 12 months ago that the Chinese stock market would keep going up.

Is there any danger in China of slowing economic growth leading to foreclosures on a large scale?
There is a danger of this in the next year, as homeowners begin to see their home values fall below their mortgage balances. But personal savings are high in China and the mortgage market is not as wildly creative as in the U.S, so the danger, while real, is not a systemic threat along the lines of the U.S. sub-prime disaster.

Most economic analysts who watch China agree on one thing: the long run picture — five, 10 years from now — looks good for Chinese real estate. That's because of ongoing urbanization and because there are still few places for Chinese to park their money, besides banks, the stock market (!) and the art market (!!).

I tend to agree with the interviewee's answers although I would tend to be a little more pessimistic. Once burned it will take a while before trust in the housing market returns.