Wednesday 23 December 2009

Is China going off the rails?

The New York Times have an interesting article on China's break neck rail growth. I have an interest in this article as I recently took the 30 minute Beijing - Tianjin train. It was great. Very fast, relatively cheap (this is a moot point) and similar in comfort to a first class air flight. I should add that the train was full when I travelled - see point in the article below.

Pettis is very good. He is also correct about China's level of infrastructure relative to its level of development. He should not underestimate the power of a trophy however.

A five hour train journey from Beijing to Shanghai would also be fantastic. Such links will improve growth and oddly allow more divergence of economic growth instead of the current clustering in the coastal and big city areas.

When you compare train investment with road investment it does make sense. Sure, this is costly and a potentially inefficient use of stimulus funds. It one reads about the growth of railways in the US over a century ago you will see the same story unfolding. The railways opened up the US and lead to huge growth. What happened to the railways companies - they all went bust and shareholders lost everything. This cannot happen in China. So what will happen?

Is China's Economy Speeding Off the Rails? [New York Times]

BEIJING — Train C2019 covers the 120 kilometers between Beijing and Tianjin in 30 minutes, passing peasants in fields burning corn stalks and warrens of shacks occupied by people who are not sharing in China’s economic boom.

The line is part of China’s 2 trillion renminbi, or $292.9 billion, investment in a nationwide high-speed passenger-rail network that may be too much train, too fast.

The time savings that the new system delivers may not justify the cost, creating a potential drag on long-term growth, said Michael Pettis, former head of emerging markets at Bear Stearns. The losers are Chinese consumers, who will have to wait for new health care and old-age benefits while the government focuses on public works spending, he said.

While the expanded service will be a “trophy” for China, the country “already has probably the best infrastructure in the world for its level of development,” said Mr. Pettis, now a finance professor at Peking University.

China accelerated its high-speed-rail development plan last year in the wake of the global financial crisis, saying it would increase the passenger network by a third to 16,000 kilometers, or about 10,000 miles, by 2020.

Bombardier, the Montreal-based company that is the world’s largest maker of passenger locomotives, and Munich-based Siemens are helping to build the system. Bombardier’s Chinese joint venture won a $4 billion contract in September to build 80 high-speed trains. Siemens, the largest European engineering company, and Chinese partners received a €750 million, or $1.08 billion, order in March for 100 trains.

The centerpiece of the service is a 1,318-kilometer line with 16 kilometers of tunnels that will cut the trip between Beijing and Shanghai to five hours from 10.

Set to open by 2012, the 221 billion renminbi project currently employs 127,000 workers and is the most expensive engineering program in Chinese history, eclipsing the Yangtze River’s Three Gorges Dam, the world’s biggest hydroelectric project, which cost 203.9 billion renminbi.

Spending on railroads is growing faster than on any other area of investment, rising 80.7 percent to 464.6 billion renminbi in the first 11 months of the year from the same period in 2008, according to China’s National Bureau of Statistics.

Investment in fixed assets like factories and the rail network accounted for more than 95 percent of China’s 7.7 percent growth in the first three quarters of 2009 and made up 45 percent of gross domestic product, which is higher than any major economy in history, according to Stephen Roach, chairman of Morgan Stanley Asia.

Without a surge in consumer spending and with export growth stalled, investment must rise even further to stoke growth, he said in a Dec. 18 speech in Beijing.

“These are ridiculous, unsustainable numbers for any economy,” Mr. Roach said.

China may be hit with a slowdown next year as the impact of the investment-led expansion wears off and shipments to the United States, the traditional external source of growth, fail to pick up, Mr. Roach said in an October report. He did not specify how much he thought growth might slow.

Some economists say the high-speed network is symbolic of a stimulus program that places too much emphasis on infrastructure spending and not enough on raising living standards. The average urban Chinese worker made 28,898 renminbi last year, a tenth of the $39,653 average wage in the United States, according data from the U.S. and Chinese governments.

Most Chinese rail travelers will not pay the premium to ride on the fast trains, Zhao Jian, a professor of economics at Beijing Jiaotong University, said in a September interview on Chinese television.

A second-class one-way ticket for the half-hour Beijing-Tianjin trip costs 58 renminbi, about three-quarters of the workers’ average daily pay. A so-called hard-seat ticket on a slower train, which covers the distance in two hours, sells for 11 renminbi.

Passenger reluctance means revenue from the high-speed lines will not be enough to service the debt if railway expansion continues at its current pace, Mr. Zhao said in the TV interview. The Ministry of Railways has 383 billion renminbi in bonds outstanding.

“If America had its subprime crisis, in China we have a railroad-debt crisis, or you could call it a government-debt crisis,” Mr. Zhao said in the TV interview.

The Chinese Railway Ministry says that the new system makes economic sense: A two-track bullet train can transport 160 million people a year, compared with 80 million for a four-lane highway, it said in a Dec. 21 faxed statement.

“The safest, fastest, most economical, most environmentally friendly, most reliable mode of transport is high-speed rail,” the ministry said.

The fast trains leave from Beijing South railway station, a new glass and steel structure that looks like a flying saucer. The slower trains depart from the half-century-old Beijing Station, where the clock tower marks the hour by playing “The East is Red,” a tribute to Mao Zedong that was popular during the Cultural Revolution.

Sitting on the stiff green benches in car 13 of train 4401, Yuan Hong, 40, says she does not mind that the old line takes an extra 90 minutes.

“It’s a huge price difference,” says Ms. Yuan, who works as a cleaner in Tianjin. “This is the train the common people take.”


Did China kill hope and the planet at Copenhagen?

Copenhagen was never going to up with a decent environmental agreement. The result is better than nothing but only just. Are China really the bad guys in all this?

The left leaning Guardian puts the boot in. It is a surprise that they think it is a surprise that China would act in this way.

China are flexing their muscles and toughing it out - they can afford to do so without voters and upcoming elections. China's stance has internal and external logic. China will cut emissions and they will probably do a lot better then the West at hitting them but will do so on their own terms.

At least the Guardian accepts Copenhagen was a disaster. It always was. If you read previous posts on this blog such a disaster was inevitable. Can I provide a solution? No.

Did China wreck the deal? Very possibly. I will say again, the West never ceases to amaze me how it underestimates China's leaders and the level of political acumen that the government is happy to employ when the time is right. To get to a position of political leadership in China requires great skill (and some luck) not just a lot of money as in the US (although that also helps).

The West will learn some expensive mistakes in the meantime. Tguis good article is from Mark Lynus. The story they tell of the meeting and China sending a 2nd tier official is standard practice - has Mark Lynus not read his Chinese history? Why would they expect anything less? Why was Mark shocked?

The one point that they do get "China does not need a deal". Once one understands that the rest falls into place.

Mark Lynus was depressed at the result of Copenhagen. My reply is that he should never have been so optimistic in the first place.

Being an economist helps keep things into perspective. Rant over.

How do I know China wrecked the Copenhagen deal? I was in the room [Guardian]

Copenhagen was a disaster. That much is agreed. But the truth about what actually happened is in danger of being lost amid the spin and inevitable mutual recriminations. The truth is this: China wrecked the talks, intentionally humiliated Barack Obama, and insisted on an awful "deal" so western leaders would walk away carrying the blame. How do I know this? Because I was in the room and saw it happen.

China's strategy was simple: block the open negotiations for two weeks, and then ensure that the closed-door deal made it look as if the west had failed the world's poor once again. And sure enough, the aid agencies, civil society movements and environmental groups all took the bait. The failure was "the inevitable result of rich countries refusing adequately and fairly to shoulder their overwhelming responsibility", said Christian Aid. "Rich countries have bullied developing nations," fumed Friends of the Earth International.

All very predictable, but the complete opposite of the truth. Even George Monbiot, writing in yesterday's Guardian, made the mistake of singly blaming Obama. But I saw Obama fighting desperately to salvage a deal, and the Chinese delegate saying "no", over and over again. Monbiot even approvingly quoted the Sudanese delegate Lumumba Di-Aping, who denounced the Copenhagen accord as "a suicide pact, an incineration pact, in order to maintain the economic dominance of a few countries".

Sudan behaves at the talks as a puppet of China; one of a number of countries that relieves the Chinese delegation of having to fight its battles in open sessions. It was a perfect stitch-up. China gutted the deal behind the scenes, and then left its proxies to savage it in public.

Here's what actually went on late last Friday night, as heads of state from two dozen countries met behind closed doors. Obama was at the table for several hours, sitting between Gordon Brown and the Ethiopian prime minister, Meles Zenawi. The Danish prime minister chaired, and on his right sat Ban Ki-moon, secretary-general of the UN. Probably only about 50 or 60 people, including the heads of state, were in the room. I was attached to one of the delegations, whose head of state was also present for most of the time.

What I saw was profoundly shocking. The Chinese premier, Wen Jinbao, did not deign to attend the meetings personally, instead sending a second-tier official in the country's foreign ministry to sit opposite Obama himself. The diplomatic snub was obvious and brutal, as was the practical implication: several times during the session, the world's most powerful heads of state were forced to wait around as the Chinese delegate went off to make telephone calls to his "superiors".

Shifting the blame

To those who would blame Obama and rich countries in general, know this: it was China's representative who insisted that industrialised country targets, previously agreed as an 80% cut by 2050, be taken out of the deal. "Why can't we even mention our own targets?" demanded a furious Angela Merkel. Australia's prime minister, Kevin Rudd, was annoyed enough to bang his microphone. Brazil's representative too pointed out the illogicality of China's position. Why should rich countries not announce even this unilateral cut? The Chinese delegate said no, and I watched, aghast, as Merkel threw up her hands in despair and conceded the point. Now we know why – because China bet, correctly, that Obama would get the blame for the Copenhagen accord's lack of ambition.

China, backed at times by India, then proceeded to take out all the numbers that mattered. A 2020 peaking year in global emissions, essential to restrain temperatures to 2C, was removed and replaced by woolly language suggesting that emissions should peak "as soon as possible". The long-term target, of global 50% cuts by 2050, was also excised. No one else, perhaps with the exceptions of India and Saudi Arabia, wanted this to happen. I am certain that had the Chinese not been in the room, we would have left Copenhagen with a deal that had environmentalists popping champagne corks popping in every corner of the world.

Strong position

So how did China manage to pull off this coup? First, it was in an extremely strong negotiating position. China didn't need a deal. As one developing country foreign minister said to me: "The Athenians had nothing to offer to the Spartans." On the other hand, western leaders in particular – but also presidents Lula of Brazil, Zuma of South Africa, Calderón of Mexico and many others – were desperate for a positive outcome. Obama needed a strong deal perhaps more than anyone. The US had confirmed the offer of $100bn to developing countries for adaptation, put serious cuts on the table for the first time (17% below 2005 levels by 2020), and was obviously prepared to up its offer.

Above all, Obama needed to be able to demonstrate to the Senate that he could deliver China in any global climate regulation framework, so conservative senators could not argue that US carbon cuts would further advantage Chinese industry. With midterm elections looming, Obama and his staff also knew that Copenhagen would be probably their only opportunity to go to climate change talks with a strong mandate. This further strengthened China's negotiating hand, as did the complete lack of civil society political pressure on either China or India. Campaign groups never blame developing countries for failure; this is an iron rule that is never broken. The Indians, in particular, have become past masters at co-opting the language of equity ("equal rights to the atmosphere") in the service of planetary suicide – and leftish campaigners and commentators are hoist with their own petard.

With the deal gutted, the heads of state session concluded with a final battle as the Chinese delegate insisted on removing the 1.5C target so beloved of the small island states and low-lying nations who have most to lose from rising seas. President Nasheed of the Maldives, supported by Brown, fought valiantly to save this crucial number. "How can you ask my country to go extinct?" demanded Nasheed. The Chinese delegate feigned great offence – and the number stayed, but surrounded by language which makes it all but meaningless. The deed was done.

China's game

All this raises the question: what is China's game? Why did China, in the words of a UK-based analyst who also spent hours in heads of state meetings, "not only reject targets for itself, but also refuse to allow any other country to take on binding targets?" The analyst, who has attended climate conferences for more than 15 years, concludes that China wants to weaken the climate regulation regime now "in order to avoid the risk that it might be called on to be more ambitious in a few years' time".

This does not mean China is not serious about global warming. It is strong in both the wind and solar industries. But China's growth, and growing global political and economic dominance, is based largely on cheap coal. China knows it is becoming an uncontested superpower; indeed its newfound muscular confidence was on striking display in Copenhagen. Its coal-based economy doubles every decade, and its power increases commensurately. Its leadership will not alter this magic formula unless they absolutely have to.

Copenhagen was much worse than just another bad deal, because it illustrated a profound shift in global geopolitics. This is fast becoming China's century, yet its leadership has displayed that multilateral environmental governance is not only not a priority, but is viewed as a hindrance to the new superpower's freedom of action. I left Copenhagen more despondent than I have felt in a long time. After all the hope and all the hype, the mobilisation of thousands, a wave of optimism crashed against the rock of global power politics, fell back, and drained away.


Wednesday 16 December 2009

China bank fraud shock - not

When I saw the headline that the Royal Bank of Scotland was investigating fraud at its China operations my initial thoughts are "what took so long".

All banks in China have to accept fraud as an occupational hazard. This is a problem that will not go away quickly.

If UK and US banks expect bank workers to have the same ethos and culture as their UK counterparts then they have a lot to learn.

Each bank should have a specialist fraud team working continuously. The costs will more than compensate. Banks also need to ensure that the anti-fraud team is changed every three years otherwise you can all guess what will happen.

Foreign banks cannot say they have not been warned.

RBS investigates ‘irregularities’ in its China unit [FT]

Royal Bank of Scotland is investigating suspected fraud in its China unit after recently discovering “potential irregularities” in its commercial banking business.

The bank on Wednesday said the probe related to a small number of accounts within the small and medium size banking business at ABN Amro China.

Local media reported last month that the alleged fraud may have resulted in client losses of up to Rmb20m ($3m).

ABN Amro China declined to comment on the scale of the potential losses. The bank has reported the matter to China’s banking regulator, which is also investigating.

People familiar with the matter said that the individual concerned had been suspended pending the outcome of the inquiry.

“Any dishonest behaviour by bank staff is completely unacceptable... and will be taken extremely seriously,” one person close to the bank said. “Safeguarding the interests of our clients is our top priority and, as an international bank, the controls we have in place are in line with the widely accepted industry standards.”


Banks in China have suffered a number of fraud cases in recent years, leading to frustration among regulators.

The AFP news agency this month reported that Yan Qingmin, head of the Shanghai branch of the China Banking Regulatory Commission, had criticised foreign banks during a recent meeting for ignoring risk in their local operations and urged them to carry out better internal checks.


Tuesday 15 December 2009

"Open cities", pollution and FDI in China

Matthew Kahn and co-authors have published an interesting paper in Regional Science and Urban Economics. Matt Khan is a fellow blogger and does very good work on the urban-environment nexus (he is also the author of the excellent "Green Cities".

To cover FDI, pollution and house prices in one 10 page paper is impressive.

I am skeptical that migration patterns will be influenced by pollution at this stage of China's development. The paper does point out the impediment caused by the "Hukou" system. I think they underestimate the importance of hukou as a distortion on migration and the speed by which cities can develop.

The "housing bubble" during this period also distorts the market especially in Beijing.

Finally, this paper is related to the standard Kuznet's curve literature (as acknowledged in the paper). This literature suggests that China has yet to reach the turning point for many pollutants. The conclusions of this paper are optimistic although I am not sure I share this optimism. It is unlikely that any Chinese city in the next 10 years will move from a "producer" to a "consumer" city. The authors are right to state in the last line of the paper that any improvement will be part of a "long term trend".

Towards a system of open cities in China: Home prices, FDI flows and air quality in 35 major cities

Siqi Zheng, Matthew E. Kahn and Hongyu Liu


Over the last 30 years, China's major cities have experienced significant income and population growth. Much of this growth has been fueled by urban production spurred by world demand. Using a unique cross-city panel data set, we test several hypotheses concerning the relationship between home prices, wages, foreign direct investment and ambient air pollution across major Chinese cities. Home prices are lower in cities with higher ambient pollution levels, and the marginal valuation for green amenities is rising over time. Cities featuring higher per-capita FDI flows have lower pollution levels. These findings may indicate that major Chinese cities are making the transition from “producer cities” to “consumer cities”, which raises the prospects of sustainable economic development in China.

Keywords: China; Urban growth; FDI; Air pollution; Quality of life


Copenhagen: "Neither a lender nor a borrower be"

I have kept my Copenhagen coverage to a minimum given that I have covered these issues throughout the year.

However, it is interesting to note the recent spat between the US and China. First, or was it second, we have the US saying that they will not give money to China to combat climate change and then we have China saying that they do not want any money anyway or did they say they didn't want it first.

It could be argued that this is just both countries playing to their domestic audience as part of the negotiations but it marks a significant change in China's stance. China is still very poor in terms of GDP per head but it has grown up fast and is not prepared to flex its muscles on the international stage.

I am impressed by China's position. It shows China makes a major concession and yet appearing more powerful on the international stage. Top marks.

The arguments have been rehearsed in many other articles but the fact remains:

1. Developed nations caused the current high CO2 levels
2. Developing countries will suffer the most from climate change
3. Developing countries have the same right to grow and to develop as the West did
4. Developing country pollution levels are increasing rapidly (due to the scale effect).
5. A proportion of the pollution in developing countries is caused by Western multinational companies producing to export back to the West or domestic firms producing to satify the consumerism of the West.

Any solution will be very difficult to find. The environmental problems in China are severe. China is acting and acting quickly in terms of regulation and enforcement but a lot remains to be done.

The world needs an agreement but I have very low expectations.

China signals climate funds shift [FT]

China signalled on Sunday that it had abandoned its demand for funding from the developed world to combat climate change, the first apparent concession by one of the major players at the Copenhagen climate talks.

However, in the same interview with the Financial Times, the most senior Chinese negotiator accused rich countries of preparing to blame a failure at Copenhagen on Beijing.

As the talks entered their critical final week, He Yafei, Chinese vice-foreign minister, said financing from rich countries should be directed to poorer countries.

“Financial resources for the efforts of developing countries [to combat climate change are] a legal obligation,” he said. “That does not mean China will take a share – probably not.

“We do not expect money will flow from the US, UK [and others] to China.”

China has committed itself to cut emissions per unit of gross domestic product by 40-45 per cent by 2020 but had demanded financing from the developed world to take further steps to tackle climate change.


Wednesday 9 December 2009

Wolf on the China currency problem

The US and the EU continue to moan about the heavily managed exchange rate. So why is it such a problem?

Martin Wolf explains. He correctly points out that China resents the continuous Western pressure. However, the extent of the undervaluation is main clear - this cannot go on.

Is increased protectionism inevitable? I am not so sure. China still imports vast quantities and pays more for these goods as a result of a devalued currency. A managed ER is a subsidy to exporters that is true but I think outright protection is some way off.

Wolf does a good job of highlighting some of the problems that lay ahead. There is no simple solution.

Why China’s exchange rate policy concerns us [FT]

A country’s exchange rate cannot be a concern for it alone, since it must also affect its trading partners. But this is particularly true for big economies. So, whether China likes it or not, its heavily managed exchange rate regime is a legitimate concern of its trading partners. Its exports are now larger than those of any other country. The liberty of insignificance has vanished.

Naturally, the Chinese resent the pressure. At the conclusion of a European Union-China summit in Nanjing last week, Wen Jiabao, the Chinese premier, complained about demands for Beijing to allow its currency to appreciate. He protested that “some countries on the one hand want the renminbi to appreciate, but on the other hand engage in brazen trade protectionism against China. This is unfair. Their measures are a restriction on China’s development.” The premier also repeated the traditional mantra: “We will maintain the stability of the renminbi at a reasonable and balanced level.”

We can make four obvious replies to Mr Wen. First, whatever the Chinese may feel, the degree of protectionism directed at their exports has been astonishingly small, given the depth of the recession. Second, the policy of keeping the exchange rate down is equivalent to an export subsidy and tariff, at a uniform rate – in other words, to protectionism. Third, having accumulated $2,273bn in foreign currency reserves by September, China has kept its exchange rate down, to a degree unmatched in world economic history. Finally, China has, as a result, distorted its own economy and that of the rest of the world. Its real exchange rate is, for example, no higher than in early 1998 and has depreciated by 12 per cent over the past seven months, even though China has the world’s fastest-growing economy and largest current account surplus.

Do these policies matter for China and the world? Yes, is the answer. Mark Carney, governor of the Bank of Canada, notes in a recent speech, that “large and unsustainable current account imbalances across major economic areas were integral to the build-up of vulnerabilities in many asset markets. In recent years, the international monetary system failed to promote timely and orderly economic adjustments.”* He is right.

What we are seeing, as Mr Carney points out, is a failure of adjustment to changes in global competitiveness that has unhappy precedents, notably during the 1920s and 1930s, with the rise of the US, and, again, during the 1960s and 1970s, with the rise of Europe and Japan. As he also notes, “China’s integration into the world economy alone represents a much bigger shock to the system than the emergence of the US at the turn of the last century. China’s share of global gross domestic product has increased faster and its economy is much more open.”

Moreover, today, China’s managed exchange rate regime is quite different from those of other big economies, which was not true of the US when it rose to prominence. Thus, China’s managed exchange rate is shifting adjustment pressure on to other countries. This was disruptive before the crisis, but is now worse than that in this post-crisis period: some advanced countries, notably Canada, Japan, and the eurozone, have already seen big appreciations of their currencies. They are not alone.

Unfortunately, as we have also long known, two classes of countries are immune to external pressure to change policies that affect global “imbalances”: one is the issuer of the world’s key currency; and the other consists of the surplus countries. Thus, the present stalemate might continue for some time. But the dangers this would create are also evident: if, for example, China’s current account surplus were to rise towards 10 per cent of GDP once again, the country’s surplus could be $800bn (€543bn, £491bn), in today’s dollars, by 2018. Who might absorb such sums? US households are broken on the wheel of debt, as are those of most of the other countries that ran large current account deficits. That is why governments are now borrowers of last resort.

Chinese exchange rates

For the external deficit countries, the concern is how to lower fiscal deficits without tipping their economies back into recession. That will be impossible unless they are either able to get their private sectors spending and borrowing as before, or they enjoy rapid expansion in net exports. Of the two, the latter is the safer route to health. But that in turn, will only happen if surplus countries expand demand faster than potential output. China is the most important single player in this game.

Fortunately, these adjustment are in the long-term interests of both sides, including China. As a recent report from the European Chamber points out, China’s external surpluses have been a by-product of misguided policy.** Thus, capital was priced too cheaply in the 2000s, via cheap credit and low taxes on corporate profits, while foreign exchange was deliberately kept too expensive by currency interventions. In the process, income was transferred from households to industry. The result was an extraordinary surge in exports and capital-intensive heavy industry, with little job creation. Household disposable incomes fell to an extremely low share of GDP, while corporate investment, savings and the current account surplus soared. The short-term response to the crisis, with soaring credit and fixed investment, while successful in sustaining demand, reinforced these tendencies, rather than offset them. Another round of huge increases in excess capacity and current account surpluses seems inevitable.

China’s exchange rate regime and structural policies are, indeed, of concern to the world. So, too, are the policies of other significant powers. What would happen if the deficit countries did slash spending relative to incomes while their trading partners were determined to sustain their own excess of output over incomes and export the difference? Answer: a depression. What would happen if deficit countries sustained domestic demand with massive and open-ended fiscal deficits? Answer: a wave of fiscal crises.

Neither answer is acceptable; we need co-operative adjustment. Without it, protectionism in deficit countries is inevitable. We are watching a slow-motion train wreck. We must stop it before it is too late.


Tuesday 8 December 2009

The "Chinaistation" of Africa

Whilst the word "Chinaisation" is objectional as a word in the English dictionary the topic of the Chinaisation of Africa is an interesting one and something I want to work on in the near future. The word "Chinisation" of Africa is even worse.

Which do people prefer?

The World Economy have an excellent special issue.

World Economy

Volume 32 Issue 11 , Pages 1499 - 1655 (November 2009)

The Asian Drivers and Africa: Learning from Case Studies (p 1538-1542)
Andrea Goldstein, Nicolas Pinaud, Helmut Reisen, Dorothy McCormick
Published Online: Dec 3 2009 9:17AM
DOI: 10.1111/j.1467-9701.2009.01248.x

The Chinisation of Africa: The Case of Angola (p 1543-1562)
Renato Aguilar, Andrea Goldstein
Published Online: Dec 3 2009 9:17AM
DOI: 10.1111/j.1467-9701.2009.01249.x

The Developmental Impact of the Asian Drivers on Senegal (p 1563-1585)
Eric Hazard, Lotje De Vries, Mamadou Alimou Barry, Alexis Aka Anouan, Nicolas Pinaud
Published Online: Dec 3 2009 9:17AM
DOI: 10.1111/j.1467-9701.2009.01250.x

The Developmental Impact of Asian Drivers on Kenya with Emphasis on Textiles and Clothing Manufacturing (p 1586-1612)
Paul Kamau, Dorothy McCormick, Nicolas Pinaud
Published Online: Dec 3 2009 9:17AM
DOI: 10.1111/j.1467-9701.2009.01251.x

The Developmental Impact of Asian Drivers on Ethiopia with Emphasis on Small-scale Footwear Producers (p 1613-1637)
Tegegne Gebre-Egziabher
Published Online: Dec 3 2009 9:17AM
DOI: 10.1111/j.1467-9701.2009.01252.x

The Asian Drivers and SSA: Is There a Future for Export-oriented African Industrialisation? (p 1638-1655)
Raphael Kaplinsky, Mike Morris
Published Online: Dec 3 2009 9:17AM
DOI: 10.1111/j.1467-9701.2009.01253.x


Chinadialogue does Copenhagen

Instead of endless Copenhagen coverage I point readers to Chinadialogue who are providing excellent coverage from a "China perspective".


Hello from Copenhagen, Beijing, London and San Francisco and welcome to The Daily Planet chinadialogue’s unique bilingual blog of the Copenhagen climate change summit. Over the next two weeks we will post blogs, video and links to the best articles on the talks in Chinese and English.


Wednesday 2 December 2009

Global warming and the Chinese grain harvest

On the eve of the Copenhagen conference on climate change it is timely to remember that the countries that will suffer the most from climate change and developing countries. Whilst China and India may protest, quite correctly, that they did not emit the greenhouse gases that are now causing the world's temperatures to increase, they will be the ones to suffer the most.

Regular readers of this blog will be aware of this difficult position that China is currently in. They need to make some very tough decisions and are the key player at Copenhagen in my view.

This is while China is making great strides despite taking over as the world's largest emitter of CO2.

China and India need a deal but they also need to be allowed to grow. There will be no agreement at Copenhagen and the poker game will continue.

Planet Ark have an interesting article on the impact of climate volatility on potential grain harvests in China.

Global Warming Threatens China Harvests: Forecaster [Planet Ark]

BEIJING - Droughts and floods stoked by global warming threaten to destabilize China's grain production, the nation's top meteorologist has warned, urging bigger grain reserves and strict protection of farmland and water supplies.

Extreme weather damage can now cause annual grain output in China, the world's biggest grain producer, to fluctuate by about 10 to 20 percent from longer-term averages.

But with global warming intensifying droughts, floods and pests, the band of fluctuation in annual production could widen to between 30 and 50 percent, Zheng Guoguang, head of the China Meteorological Administration, wrote in a new essay. He did not say how long it might be before that could happen.

A stretch of especially bad weather for farming conditions could be disastrous for the world's most populous nation, Zheng wrote in the latest issue of Seeking Truth (Qiushi), the ruling Communist Party's main magazine, which was published on Tuesday and reached subscribers on Wednesday.

"If extreme climatic disasters occur twice or more within five years -- for example, major drought over two or three years -- then the impact on our country's economic and social development would be incalculable," wrote Zheng, who plays a role in developing China's climate change policies.

Zheng's warning appeared days before governments gather in Copenhagen seeking to forge the framework of a new agreement on fighting global warming.

As the world's biggest greenhouse gas emitter, China will be a crucial player in those talks. Last week the government announced emissions goals for the next decade.

Zheng's blunt words underscored the hard choices facing Beijing, as both a big polluter and a vulnerable victim of global warming. He is a member of a "leading small group" charged with developing the government's policies on climate change.


A vast developing country with a farming population of some 750 million, China is also one of the nations most vulnerable to global warming, wrote Zheng. He urged greater attention to adapting to unstoppable shifts in temperatures, rainfall and extreme weather.

China should make a priority of "reducing the impact of global warming on the country's food security, and strengthening the capacity of agriculture to withstand climatic risks," wrote Zheng.

China's grain production has recently reached record levels, despite damage from droughts, floods and frost. In 2008, China enjoyed a fifth straight year of bumper harvests, with grain output at a record 525 million tonnes. U.S. output over the 2007-08 growing year was 412 million tonnes.

Citing previously published research, Zheng wrote that by 2030, China's crop productivity could be 5 to 10 percent lower than it would be without global warming.

While rising temperatures may extend potential growing times and areas for some crops, especially in northeast China, the accompanying rise in evaporation rates is likely to reduce water supplies, undercutting any increases in crop yields, wrote Zheng.

Without adequate adaptive measures, in the second half of the century wheat, rice and corn production could fall by as much as 37 percent of recent averages, he wrote, citing earlier research.

But China "cannot depend on the international marketplace" to make up for these potential shortfalls, because global warming would also erode farming productivity in many parts of the globe, Zheng wrote.

Instead, the government should focus on expanding domestic grain reserves, protecting farmland, developing water-saving technology for farms, and boosting farmers' productivity, he wrote.


Monday 30 November 2009

More on China's excess capacity problem

Articles on China's capacity problem seem to come in waves. In a follow up to yesterday's post we see that the FT has jumped on the problem.

It is about time that the mainstream press woke up to the illusion that China has created through its massive stimulus package. There has to be payback and it may be coming sooner than we think.

This excess capacity will lead to pricing pressures in the US and Europe - touched on my Tyler in a previous blog post - leading to more firm closures in the West becuase you can bet that the Chinese government will and can afford to subsidise their companies longer that in Europe and the US (even if we were allowed to).

The cost of China’s excess capacity [FT]

The world has changed; but China has not. China has responded to the world financial crisis with what seems to be great success. But this is an illusion. China’s solution – a surge in spending on investment – will create greater excess capacity. China’s high-savings, high-investment economy is costly for its people and destabilising for the world. The time for a radical reform is long past.

In a disturbing new report, the European Chamber of Commerce in China lays out the challenge in six sectors: aluminium, where the capacity utilisation rate is forecast to be 67 per cent in 2009; wind power, on 70 per cent; steel, on 72 per cent; cement, on 78 per cent; chemicals, on 80 per cent; and refining, on 85 per cent. Yet vast additional capacity is on the way.

The scale of the excess capacity is breathtaking. At the end of 2008, China’s steel capacity was 660m tons against demand of 470m tons. This difference is much the same as the European Union’s total output. Yet, notes the report, “there are currently 58m tonnes of new capacity under construction in China”. To the extent that gross domestic product is driven by such absurd spending is a measure of waste, not of economic welfare.

Foreign producers fear the impact of China’s growing surplus capacity on their markets. But this is not just a problem for specific industries. It is a broader problem. China has become hooked on an unbalanced pattern of economic development, in which investment cures this year’s excess capacity by increasing next year’s.

In China’s current development model, household income is taxed, to support corporate profits. Corporations now generate more than half of China’s huge savings. Since consumption tends to grow more slowly than GDP, excess capacity can only be used up via yet more investment or exports. This year, economic crisis has made the latter impossible. But China desperately needs to expand its exports once again. The result may well be a crisis in the trading system.

China’s trading partners have to engage with the rising giant. They must explain that they cannot – and will not – absorb the surplus capacity its heavily distorted model of development is creating. But they can point out that this pattern also damages the standards of living of ordinary Chinese. China has to shift income from its corporations to its households and spending from investment to consumption. What is needed for that is a massive structural reform. This must start now. Indeed, it may already be too late.


Sunday 29 November 2009

New York Times on future trouble in big China

Following on from the great petrol mystery comes the great China mystery in aggregate as reported by the New York Times.

Tyler is right to point out the high stakes that the Chinese government is now playing. It cannot afford to fail - the dollar peg aimed at boosting exports and hence growth has worked but the global recession is causing problems.

He is also right to point out the perverse incentives of regional officials. There is widespread "making up of numbers" from what I can gather.

This article is impressively doom-laden but it is about time that these issues were addressed elsewhere. Followers of this blog will know that I have been banging on about these topics for a while.

Civil unrest in China is a distinct possibility is the economy slips up to painfully.

Dangers of an Overheated China [New York Times]

PRESIDENT OBAMA’S recent trip to China reflects a symbiotic relationship at the heart of the global economy: China uses American spending power to enlarge its private sector, while America uses Chinese lending power to expand its public sector. Yet this arrangement may unravel in a dangerous way, and if it does, the most likely culprit will be Chinese economic overcapacity.

Several hundred million Chinese peasants have moved from the countryside to the cities over the last 30 years, in one of the largest, most rapid migrations in history.

To help make this work, the Chinese government has subsidized its exporters by pegging the renminbi at an unnaturally low rate to the dollar. This has supported relatively high-paying export jobs; additional subsidies have included direct credit allocation and preferential treatment for coastal enterprises.

These aren’t the recommended policies you would find in a basic economics text, but it’s hard to argue with success. Most important, it has given many more Chinese a stake in the future of their society.

Those same subsidies, however, have spurred excess capacity and created a dangerous political dynamic in which these investments have to be propped up at all cost.

China has been building factories and production capacity in virtually every sector of its economy, but it’s not clear that the latest round of investments will be profitable anytime soon. Automobiles, steel, semiconductors, cement, aluminum and real estate all show signs of too much capacity. In Shanghai, the central business district appears to have high vacancy rates, yet building continues.

Chinese planners now talk of the need to restrict investment in sectors that are overflowing with unsold products. The global market is no longer strong, and domestic demand was never enough in the first place.

Regional officials have an incentive to prop up local enterprises and production statistics, even if that means supporting projects or accounting practices that are not sustainable. For an individual business, the standard way to get more capital resources is to put forward a plan for growth. Because few sectors are mature, and growth has been so widespread, everyone can promise to be profitable in the future.

Over all, there is a lack of transparency. China’s statistics on its gross domestic product are based more on recorded production activity than on what is actually sold. Chinese fiscal and credit policies are geared toward jobs and political stability, and thus the authorities shy away from revealing which projects are most troubled or should be canceled.

Put all of this together and there is a very real possibility of trouble.

China has had a 30-year run of stellar economic growth. But it’s only human nature for such expansion to breed too much optimism, overextending an entire economy. Americans have found this out the hard way in their own financial crisis.

History has shown that no major economy has grown into maturity without bubbles, crises and possibly even civil strife or civil wars along the way. Is China exempt from this broader pattern?

The notions of excess capacity and malinvestment were common in business-cycle theory of the 19th and early 20th centuries, when growing Western economies had frequent crashes of this kind. Numerous writers, from the Rev. Thomas Malthus to the Austrian economist Friedrich A. von Hayek, warned about the overextension of unprofitable capital deployments and the pain from the inevitable crashes. These writers may well end up being a guide for understanding China today.

What will the consequences be for the United States if and when the Chinese economic miracle encounters a major stumble? A lot of Chinese business ventures will stop being profitable, and layoffs and unrest will most likely rise. The Chinese government may crack down further on dissent. The Chinese public may wonder whether its future lies with capitalism after all, and foreign investors in China will become more nervous.

In economic terms, the prices of Chinese exports will probably fall, as overextended businesses compete to justify their capital investments and recoup their losses. American businesses will find it harder to compete with Chinese companies, and there will be deflationary pressures in both countries. And even if the Chinese are selling more at lower prices, they may be taking in less money over all, so they may have less to lend to the United States government.

In any case, China may end up using more of its reserve funds to address domestic problems or placate domestic interest groups. The United States will face higher borrowing costs, and its fiscal position may very quickly become unsustainable.

That’s not so much a prediction as a very possible contingency, and we should be prepared for it. For now, we should avoid two big mistakes. The first would be to assume that just because borrowing costs are now low, we can postpone fiscal responsibility and keep running up the tab — with the aid of Chinese lending, of course. The history of financial crises shows that turning points can come swiftly and without much warning.

The second mistake would be to demand too many concessions from the Chinese. What we see in the numbers today are a growing China and a somewhat ailing America. Yet there’s a real chance that, soon enough, Chinese economic weakness will be a bigger problem than was Chinese economic strength.


Cars in China and the great missing petrol mystery

In this blog we often ponder the reliability of any data that China provides. The great missing "petrol" mystery has been covered by no less that the Economist.

I have to say that the rumour that China's state owned companies have been buying shed loads of cars and storing them in car parks is just too odd to be made up. It is thus clearly true.

After seeing the clogged up roads in 3 Chinese cities last month it is hard to believe that people are driving less. Slower I agree with but not less.

Never underestimate either the power of state owned enterprises on over estimate the quality of Chinese data.

Exhaust fumes and mirrors [Economist]

IN JANUARY sales of vehicles in China surpassed those in America. Passenger-car sales have grown by around 45% this year. Yet sales of petrol have failed to keep pace (see chart). Attempts to explain this baffling phenomenon come up with widely differing answers, in part because the data present problems at every turn. It is not known for sure, for example, how many cars are being sold by dealers to their final owners; nor how much petrol is being sold at the pump. The car-scrappage rate is also obscure, so the growth of China’s total passenger-car stock is hard to calculate. When it comes to questions of consumer behaviour, such as distances travelled by car owners and how these are affected by petrol prices, tolls or other costs, the guesswork multiplies.

By the end of October sales of passenger cars from factories to dealers this year had reached 8.2m. Arthur Kroeber of Dragonomics, a consultancy, estimates that this could mean an increase in the total number of passenger cars in use of between 20% and 25%. Petrol sales are hard to quantify. But partial data from the first nine months suggest there has been hardly any increase.

One dramatic explanation has been proposed by Gordon Chang, an author and longtime doomsayer on China. Mr Chang wrote in October in Forbes magazine of what he admitted were unconfirmed reports that central-government officials had ordered state-owned enterprises to buy cars, which had then simply been stored in car parks.

Stephen Green of Standard Chartered, a bank, offers a more prosaic explanation. People are buying more fuel-efficient cars, he suggests, and are using their cars less because of high fuel prices. Much of the growth in car sales this year has been encouraged by tax cuts on sales of small cars, which use less fuel. And Mr Green says petrol is 20% dearer than it was two years ago, creating a “powerful reason to drive less”. Mr Kroeber says that uncertainties remain even after taking account of these factors, and the figures were inconsistent even when gas-guzzlers were more common. But he rejects Mr Chang’s theory. “It’s just a reflection that China is a big and chaotic place” rife with incomplete data, he says.


Saturday 28 November 2009

More on China's Dollar problem

China's accumulation of vast quantities of dollars has always interested me - the death grip that the US and China have got into can only end in carnage somewhere down the line. When and what the trigger will be is still beyond me.

Harvard's Ken Rogoff comments. He is absolutely right to bring in the experience of the Europe in the 1970's.

I have a suspicion that the US will inflate its way out of debt. Betting on higher inflation in the US might be a good bet.

He is also right to point out that domestic consumption is not something that will change over night. Rogoff points out there is room to grow but I still think he is overstating the case. Consumption in China will take decades to reach Western levels.

China’s Dollar Problem [Project Syndicate]

CAMBRIDGE – When will China finally realize that it cannot accumulate dollars forever? It already has more than $2 trillion. Do the Chinese really want to be sitting on $4 trillion in another five to 10 years? With the United States government staring at the long-term costs of the financial bailout, as well as inexorably rising entitlement costs, shouldn’t the Chinese worry about a repeat of Europe’s experience from the 1970’s?

During the 1950’s and 1960’s, Europeans amassed a huge stash of US Treasury bills in an effort to maintain fixed exchange-rate pegs, much as China has done today. Unfortunately, the purchasing power of Europe’s dollars shriveled during the 1970’s, when the costs of waging the Vietnam War and a surge in oil prices ultimately contributed to a calamitous rise in inflation.

Perhaps the Chinese should not worry. After all, the world leaders who just gathered at the G20 summit in Pittsburgh said that they would take every measure to prevent such a thing from happening again. A key pillar of their prevention strategy is to scale back “global imbalances,” a euphemism for the huge US trade deficit and the corresponding trade surpluses elsewhere, not least China.

The fact that world leaders recognize that global imbalances are a huge problem is welcome news. Many economists, including myself, believe that America’s thirst for foreign capital to finance its consumption binge played a critical role in the build-up of the crisis. Cheap money from abroad juiced an already fragile financial regulatory and supervisory structure that needed discipline more than cash.

Unfortunately, we have heard leaders – especially from the US – claim before that they recognized the problem. In the run-up to the financial crisis, the US external deficit was soaking up almost 70% of the excess funds saved by China, Japan, Germany, Russia, Saudi Arabia, and all the countries with current-account surpluses combined. But, rather than taking significant action, the US continued to grease the wheels of its financial sector. Europeans, who were called on to improve productivity and raise domestic demand, reformed their economies at a glacial pace, while China maintained its export-led growth strategy.

It took the financial crisis to put the brakes on US borrowing train – America’s current-account deficit has now shrunk to just 3% of its annual income, compared to nearly 7% a few years ago. But will Americans’ newfound moderation last?

With the US government currently tapping financial markets for a whopping 12% of national income (roughly $1.5 trillion), foreign borrowing would be off the scale but for a sudden surge in US consumer and corporate savings. For the time being, America’s private sector is running a surplus that is sufficient to fund roughly 75% of the government’s voracious appetite. But how long will US private sector thrift last?

As the economy normalizes, consumption and investment will resume. When they do – and assuming that the government does not suddenly tighten its belt (it has no credible plan to do so) – there is every likelihood that America’s appetite for foreign cash will surge again.

Of course, the US government claims to want to rein in borrowing. But, assuming the economy must claw its way out of recession for at least another year or two, it is difficult to see how the government can fulfill its Pittsburgh pledge.

Yes, the Federal Reserve could tighten monetary policy. But they will not worry too much about the next financial crisis when the aftermath of the current one still lingers. In our new book This Time is Different: Eight Centuries of Financial Folly , Carmen Reinhart and I find that if financial crises hold one lesson, it is that their aftereffects have a very long tail.

Any real change in the near term must come from China, which increasingly has the most to lose from a dollar debacle. So far, China has looked to external markets so that exporters can achieve the economies of scale needed to improve quality and move up the value chain. But there is no reason in principle that Chinese planners cannot follow the same model in reorienting the economy to a more domestic-demand-led growth strategy.

Yes, China needs to strengthen its social safety net and to deepen domestic capital markets before consumption can take off. But, with consumption accounting for 35% of national income (compared to 70% in the US!), there is vast room to grow.

Chinese leaders clearly realize that their hoard of T-Bills is a problem. Otherwise, they would not be calling so publicly for the International Monetary Fund to advance an alternative to the dollar as a global currency.

They are right to worry. A dollar crisis is not around the corner, but it is certainly a huge risk over the next five to 10 years. China does not want to be left holding a $4 trillion bag when it happens. It is up to China to take the lead on the post-Pittsburgh agenda.


Friday 27 November 2009

EU piles on RMB pressure

It is not only the US who want to see the RMB appreciate. Now the EU want in on the act. This pressure will have a limited impact.

EU leaders step up pressure on renminbi [FT]

China will come under renewed pressure this weekend to begin strengthening its currency when three of Europe’s most senior economic policymakers visit the country.

Ten days after Barack Obama, US president, called for an appreciation of the renminbi during a trip to Beijing, a similar case will be made by Jean-Claude Trichet, European Central Bank president, Joaquin Almunia, the European Union’s economic affairs commissioner, and Jean-Claude Juncker, the Luxembourg prime minister who chairs eurozone finance minister meetings.

The three policymakers will be in Nanjing this weekend, ahead of Monday’s EU-China summit to be held in the eastern city. The meetings with their Chinese counterparts come at a time of increasing international attention on the renminbi which has been effectively pegged to the US dollar since the middle of 2008. Concerns that China is getting a competitive advantage by tracking the weakening dollar have been particularly acute in Europe, given the euro’s strength.

Beijing says China needs a stable exchange rate against the dollar to assist its economic recovery, which it says has benefited the rest of the world.

A meeting of the ruling Politburo on Friday gave no indication that China planned to pull back the aggressive stimulus measures it has adopted this year. A summary of the meeting read on the main national news on Friday night, which made no reference to currency policy, said that the government would maintain “active fiscal policy and appropriately relaxed monetary policy”.

There have been a few hints that policy could change, most notably the announcement from the central bank three weeks ago that the exchange rate would take into account “capital flows and major currency movements”, an acknowledgement of both the large speculative inflows of capital that China is receiving and the weakness in the US dollar.

European policymakers have no illusions that China’s exchange rate policy will change overnight but see their visit this weekend as part of a process of gradual persuasion.

Like the US, the European authorities favour an orderly appreciation of the Chinese currency. They fear a global economic adjustment process in which the euro strengthens further, hitting export prospects. However, Europe’s tactics have been lower key than the public pressure Washington has tried to exert on Beijing.



Thursday 26 November 2009

Economist special report on China-US relations

A recent edition of the Economist published an excellent 16 page special on the China-US relationship. I was in China when it came out so could not blog about it then.

The most interesting article in called "round and round it goes" and touches on the "two drunks propping each other up" argument relating US spending, exchange rates and China's Treasury holdings.

There is some truth in the argument that China has been kidnapped by the US. I suspect the US will try to inflate away its debt and China will be the loser.

Here is the full report.

A wary respect [Economist]

Here is the report on the unsustainable position of US buying Chinese exports and China buying US treasuries. It cannot continue. Most of this article is old news to those who read this blog and I also disagree on a number of points. A new round of protectionism is possible but I believe that China is learning the game very quickly and thus I suspect this is not where the real problem lies.

Round and round it goes [Economist]

AT ONE stage it all seemed to be working, even if it appeared a little surreal. China, a developing country, lent vast amounts of money to wealthy America to feed its spending habit. Americans spent the money on Chinese-made goods, sending the dollars back to China, which lent them to America again. But now many talk of a decoupling of the two economies. Niall Ferguson, a Harvard historian who, only a couple of years ago, popularised the term “Chimerica” for the symbiosis between the two, now says it is a marriage headed for the rocks.


You lose, we lose

As far as the economy is concerned, China heartily agrees. It may grumble about the dollar’s dominance in the global trading system, but it has no desire to pull the rug from under America’s economy. A run on the dollar would be a blow to China itself, slashing the value of its stash of over $800 billion in US Treasuries. Chinese officials also worry openly about a possible resurgence of inflation in America, which would also drive down the value of the dollar. The American budget deficit spooks China, but appears to make little difference to its willingness to lend. China, says Wu Xiaoqiu of Renmin University, has been “kidnapped” by America’s currency. China’s purchases of US Treasuries will naturally slow down along with its export growth. But for now the country is still piling them up.

China may dream of a different world in which the yuan ranks alongside the dollar, euro, sterling and yen as a reserve currency. It is beginning to promote use of the yuan instead of the dollar in transactions with some of its trade partners, but it has set no timetable for making its currency convertible. In September it bought $50 billion in IMF bonds to boost its influence in the institution and strengthen the role of non-dollar currencies (IMF bills are linked to a basket of currencies). But China has not sought to ease the Americans or Europeans out from their dominant roles in the World Bank and the IMF.

When Timothy Geithner, now treasury secretary, said during a Senate confirmation hearing in January that Mr Obama believed China was “manipulating” its currency to gain an unfair trade advantage, the administration was quick to back away from the remark. The yuan’s value has hardly been mentioned in public since. A recent study by the Peterson Institute says that the yuan remains “significantly undervalued”, by 15-25% against a weighted average of the currencies used by China’s trading partners. But American officials know just how prickly China can get when it is accused of mercantilism.

As Americans save more and buy less from China, America’s trade deficit with China—which has been its biggest with any country since 2000—will shrink anyway. But protectionist sentiment in both countries will remain strong. Mr Obama’s decision in September to impose punitive tariffs on imports of Chinese steel pipes and tyres infuriated the Chinese government, although it has so far resisted lashing out (summitry with Mr Obama being too big a party to spoil).


The pungent smell of money

What has been the best investment in China this year? Gold? Copper? No, the humble garlic bulb. Why? Because of swine flu.


What is more sinister is the rumours of "bulb hording" - the Chinese are learning about the dark arts of capitalism very quickly indeed.

I like this story. I am not sure why, but I like it.

Hold Your Nose: Garlic Is Best Investment In China [PlanetArk]

BEIJING - The price of garlic in China has nearly quadrupled since March, propelled by its very pungency to rank ahead of gold and stocks as the country's best-performing asset this year.

The trigger for the bull run may have been the idea that the potent bulb can ward off H1N1 swine flu, Morgan Stanley economists said.

That chimes with some anecdotal evidence. The China Daily reported last week that a high school in Hangzhou, a prosperous city in eastern China, had bought 200 kg of garlic and forced students to eat it every day for lunch to stay healthy.

"I don't know about H1N1, but it can prevent ordinary colds," Zhang Ping, 74, told Reuters at a vegetable market in Beijing. "Take me. I've not had cold for many years and every year I buy several dozen pounds of garlic."

Others have been looking for darker forces behind the surge.

China Business News said coal mine bosses -- who are often depicted as being both extremely rich and nefarious speculators -- had been playing the garlic market, hoarding bulbs and hauling them between storehouses.

Garlic served as a case study of the asset price appreciation that Morgan Stanley thinks China will have to contend with after a flood of lending by banks to help fight off the global financial crisis.

In some parts of Shandong province, the wholesale price of garlic is up as much as 40-fold.

"Too much liquidity in any market can lead to speculation," analyst Jerry Lou said in a research note this week. "The most recent evidence of asset speculation in China's commodity markets has been for garlic."

But a more mundane factor may lie at the root of it all.

Garlic prices were extremely low last year, convincing many farmers that it was not worth planting the crop again, a wholesale trader was quoted as saying in the Nanfang Daily.

Supply could not keep up with a pick-up in demand from home and abroad, sending prices sky-high, the trader said.

Yi Xianrong, a researcher with the Chinese Academy of Social Sciences, a top government think-tank, said there was no need for panic.

"The garlic market is cyclical. Price rises are short-term and they will fall again before long," Yi told Reuters.


Saturday 21 November 2009

"China and the Manufacturing Terms-of-Trade of African Exporters"

China's relationship with Africa is a subject that I am currently interested in. This recent paper in the Journal of African Economics is a decent place to start.

When I indirectly considered this issue for China's Asian neighbour's China's increased exports more than compensated. This may not work for African countries as this paper shows. Interesting results.

China and the Manufacturing Terms-of-Trade of African Exporters"

Journal of African Economies, Vol. 18, Issue 5, pp. 781-823, 2009

NELSON B. VILLORIA, Purdue University

China's export expansion is commonly associated with lower global manufacturing prices. For most countries, lower prices heighten global competition but also allow importing a cheaper and wider set of inputs and consumer goods. This paper investigates the balance of these two forces in Kenya, Mauritius and the Southern Africa Customs Union, the largest exporters of manufactured goods in sub-Saharan Africa. The paper uses the economic geography model of Redding and Venables (in Economic geography and international inequality, Journal of International Economics, 62, 53-22, 2004) to decompose the import growth of a large number of countries into supply and demand capacities. This decomposition allows for analysis of the extent to which China's export growth has altered manufacturing import and export prices for the selected countries. The study finds that China has significantly decreased world prices in major markets for manufactures, especially textiles, wearing apparel and footwear, potentially displacing the clothing exports of the selected African countries. As a consequence of China's export growth, these focus countries have also seen substantial reductions in their import prices across all manufacturing sectors. However, an estimation of their terms-of-trade suggests that the reductions in export prices outweigh the decrease in import prices and the countries are deemed to lose from China's manufactures export expansion.


Thursday 19 November 2009

Property: The bubble that keeps on inflating

In recent weeks I have read articles in the economist arguing that these is no bubble in Chinese property. I am not in that camp and believe that there is a bubble that is getting to dangerous proportions.

At last the FT is taking this issue seriously. I will not repeat the reasons - some are covered below. Just think Japan in the late 1980's and Japan's subsequent growth rate ever since.

The problem is a lack of alternative investments for the cash rich in China and loose lending by out of control banks.

This article represents a useful introduction.

Fears of China property bubble [FT]

A large bubble is forming in China’s property market as a result of Beijing’s credit-driven stimulus programme, one of the country’s most prominent real estate developers warned.

Zhang Xin, chief executive of Soho China, one of the country’s most successful privately owned property developers, told the Financial Times the asset bubble was leading to rampant wasteful investment in the sector, undermining the country’s long-term growth prospects.

“Real estate prices should only go up because people want to actually use the space, but at the moment we can see more and more empty buildings across the whole country and in every real estate segment,” Ms Zhang said. “The rising prices are a direct result of so much money coming from the banks and the Chinese banks should be very worried.”

Ms Zhang’s assessment was echoed by Fan Gang, a member of the central bank’s monetary policy committee, who warned on Wednesday that real estate in cities such as Beijing, Shanghai and Shenzhen was expensive and there was a growing risk of asset price bubbles.

Urban property prices in 70 big and medium-sized Chinese cities rose 3.9 per cent in October from a year earlier, accelerating from September’s 2.8 per cent rise, according to government figures.

Price rises in top-tier markets such as Beijing and Shanghai have been much faster. Analysts say the rebound has largely been driven by an unprecedented government-led expansion of bank lending. It is also being driven by government policies, including tax breaks, low interest rates and smaller down-payment requirements.

Investment in real estate development, a key driver of economic growth, rose 18.9 per cent in the first 10 months of the year on a year earlier, a marked acceleration from 17.7 per cent growth in January-September.

Ms Zhang said the current speculation should be a serious warning for the industry and the general economy.

“In Manhattan, they have vacancy rates of 10-15 per cent and they feel like the sky is falling, but in Pudong [the central business district in Shanghai] vacancy rates are as high as 50 per cent and they are still building new skyscrapers,” she said.

“If you look at GDP growth, then China looks like a new engine driving the global economy, but if you look at how growth is being created here by so much wasteful investment you wouldn’t be so optimistic.”


Wednesday 18 November 2009

50 best blogs about China

Another one of those "50 best something or other lists".

This one is on China and includes China Economics Blog.

Some useful sites that might be worth checking out.

50 Best Blogs to Learn All About China[Onlien Schools]

Over the past few decades China has risen to be one of the world’s biggest economic and political powers. Yet even as it has gained increasing recognition on the world stage, many people know little about Chinese culture, day-to-day life and politics. For those who can’t afford to fly around the world to explore in person, these blogs offer a chance to learn more about this ancient culture, modern country and diverse population without ever having to leave home.

Here is the business and industry section:

Business and Industry

Learn more about China’s national and international economics in these blogs.

15. China Law Blog: Learn more about how Chinese law impacts business on this blog.
16. PanAsianBiz: This blog reports news stories from all over Asia, China included.
17. China Economics Blog: Here you’ll get analysis and stats all about China’s economic development.
18. Black China Blog: Check out this site to learn about China’s aluminum and raw materials market.
19. China Business Services Blog: This blog will help you keep up with business and economic news in China.
20. Experience Not Logic: Visit this site to read interesting posts about business and law.
21. Silk Road International Blog: If you want to know more about doing business with China, this blog is a great place to start finding information.
22. Grape Wall of China: Learn about the Chinese wine industry and how it markets to the world’s largest market here.
23. China Goods News: This site can help you learn more about Chinese goods made for export.
24. The China Observer: With great insights and commentary, this site is an essential read on business in China.


Monday 16 November 2009

Pictures of Pollution in China

The blog post title says it all. These are great pictures that should be seen to be believed.

Some make for very depressing viewing and are very far from the hotel in central Beijing that I recently stayed at.

Amazing Pictures, Pollution in China [China Hush]


Education in China - the long march

THES have a good overview of the Chinese education system. Having recently spent some time in different Chinese Universities I have my own views on this.

China's University system is changing fast and the quality of the best students and best Universities is unrivalled. They are beginning to employ the best staff and paying good salaries.

More Universities are needed but UK Universities need to be aware of how rapidly things are changing.

My impression is the problems of red tape mentioned below are being overcome and that things are not quite as bad as they might first appear.

The long march [THES]

China is hungry for Western-style universities, not least to fuel its economy. Phil Baty reports on the efforts to uproot corruption and bureaucracy and build a dynamic and vibrant world-class system.


But higher education is at something of a crossroads. While grappling with the effects of explosive growth in quality and access, the Government has also prioritised a drive - which some describe as an "obsession" - to ensure that an elite cadre of universities joins the ranks of the world's best.

Analysts in and outside China warn that its exceptional progress to date could be stymied - and its goal to create a truly world-class system thwarted - without deep cultural reform. "One of China's great challenges is to strengthen the academic profession," says Philip Altbach, director of the Centre for International Higher Education at Boston College. "For a start, nationally only 9 per cent of China's university staff hold doctorates. Traditions of academic freedom and meritocratic norms for promotions are slow to develop. Plagiarism and other forms of corruption are frequently reported.

"For China to develop a really world-class higher education system, it will need to ensure that the human and the philosophical 'software' is as well developed as the 'hardware' of buildings and laboratories," Altbach says.

There is no doubt that the "hardware" he refers to is in place. At the creation of the People's Republic of China 60 years ago this month, higher education was "small and weak", Altbach writes in an article in the June 2009 issue of Economic and Political Weekly. In 1949, the sector had just 205 universities, and a total of only 1.16 million students. The new Communist regime looked to the Soviet model of higher education, splitting universities into smaller vocational institutions, separating teaching from research and restricting academic freedom.


According to a March 2009 report on tertiary education in China by the Organisation for Economic Co-operation and Development (OECD), the number of researchers in the country increased by 77 per cent between 1995 and 2004, to a total of 926,000. By the end of 2006, China became the world's biggest investor in research and development after the US, spending some $136 billion (£85 billion). A report published earlier this month by the UK's Department for Business, Innovation and Skills confirmed that China had overtaken the UK to become the world's second-biggest producer of scientific papers (see box page 34).


For Times Higher Education contributor Hong Bing, an associate professor at the School of Journalism at Fudan University in Shanghai, the main problem is bureaucracy.

"It is true that Chinese universities have made much progress," he says. "But I think that increasing bureaucratisation is the number-one obstacle to success. Bureaucracy poses a big threat to creating a campus culture that encourages the independence of academics and the cultivation of students."

The OECD report warns: "Chinese tertiary education remains highly regulated, and this regulation is highly centralised. However, the evidence from elsewhere in the world suggests that world-class institutions enjoy a degree of autonomy that is inadequate in China. World-class universities, in particular, flourish as autonomous - albeit accountable - institutions that encourage creativity, innovation, dynamism and responsiveness to demand. In today's world, all universities that aspire to global levels of excellence need to be agile, flexible and unencumbered by bureaucratic controls in order to succeed."


"Academic corruption ... is seriously damaging China's higher education and could affect China's ambitious bid for world-class status," he says. "China has many good policies to catch up in higher education. However, many of them have been terribly affected by corruption in their implementation, costing China a huge amount of resources and time. The problem is hard to overcome because it is so related to China's way of governance, and corruption has been in China for a long time."

He said that the problem persists because universities are controlled by Government and the Chinese administrative system is based on official authority and rank.


Altbach says: "China has had a policy of insisting that any foreign involvement in higher education in the country be in collaborative arrangements with Chinese partners. This is a wise policy as it ensures that Chinese institutions will have significant participation in decision-making at all levels, and also means that Chinese academic institutions can benefit from the ideas coming into the country - and ensure, as the Chinese say, that foreign imports will have 'Chinese characteristics' and meet local needs."

There are many varieties of such collaboration, he says. One example is the Xi'an Jiaotong University/University of Liverpool collaborative campus in Suzhou, which offers entire degree programmes in English, with degrees awarded jointly from the two partners. Another is the Johns Hopkins/Nanjing University joint degree, which is perhaps the oldest collaborative programme in China. There are also, Altbach adds, many smaller ones.

"Typically, both partners benefit," he says. "The Chinese institution gains experience, ideas, the prestige of a foreign link and added capacity. The overseas institution gets access to the Chinese market, perhaps earning profits from the arrangement, and establishes its 'brand name' in China's huge higher education marketplace."


China's growing prosperity has expanded the country's middle class enormously in recent decades, and this has in turn fuelled the explosion in university enrolments, writes Hannah Fearn.

However, the reservoir of potential students will begin to shrink from 2015 as the impact of the one-child policy starts to be felt.

Research carried out by the Economist Intelligence Unit on behalf of the British Council estimates that the demand for tertiary education in China will grow until 2013, presenting Chinese institutions and international universities with a huge pool of potential students.

The report, What Does the Future Hold?, notes how enrolment has shot up with China's sustained and substantial growth in gross domestic product.

At the time of the report's publication, China was the world's fourth-largest economy (more recent reports indicate that it has now climbed to third). Urban incomes, particularly on the east coast of the country, have increased markedly.

The middle-income band - those with a household income of more than £9,300 - is predicted to treble by the middle of the next decade.

"Higher education has already transitioned from being an advantage available only to the few to one that is available to the masses, with gross enrolment rising by around seven times since 1998," the report says.

Enrolment now stands at 20 per cent of the university-age population, and the Government plans to push the participation rate up to 40 per cent by 2020.


Saturday 14 November 2009

China GDP per capita

China is a remarkable and fast growing country. However, GDP per capita is still low relative to the OECD and many other newly developed countries. The population size is the obvious cause.

This will have continued and profound implications not least regarding the real speed by which China will be able to grow as any capital investment needs to be costed against low wages.

From the inbox:

What is the GDP Per Capita for Every Country?

Click on the drop down menu in the right hand corner to see the groups that China belongs to. Current GCP per capita is $6000.


China Trip

Apologies yet again for some sluggish posting. This time, ironically, the lack of posts is due to the fact that I was actually working in China. Sadly, this blog is still blocked in the middle kingdom.

This is a shame as I have a lot of information that would be useful for students in China specifically regarding education opportunities in the UK.

One issue that is again taxing me is the reliability of data in China. This has always been a bugbear of mine but I am increasingly worried after talking to those at the coal face.

As an economist who has written a number of papers using Chinese data I am beginning to doubt the reliability of any results in empirical papers on China.

Officials in local regions have incentives to massage the figures and I suspect this takes place on a regular basis.

I will post more on my China experience. Having travelled to Beijing, Tianjin and Wuhan the most obvious observation is the sheer size of these cities and the relentless pace of development.

A remarkable, interesting and exciting country.


Sunday 18 October 2009

Foreign direct investment, processing trade, and the sophistication of China's exports

Just how sophisticated are China's exports becoming? This paper is distantly related to the Puga and Treflet paper below but is far more readable.

Another paper on my "must read" list.

Foreign direct investment, processing trade, and the sophistication of China's exports

Bin XU and Jiangyong LU

Received 28 October 2007;
revised 23 January 2009;
accepted 26 January 2009.
Available online 5 February 2009.


China's export structure has shown a rapid shift towards more sophisticated industries. While some believe that this trend is a result of processing trade and foreign direct investment, the evidence is mixed. This paper examines variations in level of export sophistication across China's manufacturing industries. We find that an industry's level of export sophistication is positively related to the share of wholly foreign owned enterprises from OECD countries and the share of processing exports of foreign-invested enterprises, and negatively related to the share of processing exports of indigenous Chinese enterprises. Evidence from the relative export prices of Chinese goods, which measure within-product export sophistication, shows a similar pattern.

Keywords: China; Foreign direct investment; Processing trade; Sophistication of exports

JEL classification codes: F1; O1

"Wake up and smell the ginseng"

A good paper in the recent issue of the Journal of Development Economics - the premier development journal.

The paper attempts to model incremental innovation in low wage economies such as China and India. The model makes sense and this represents a potentially important paper.

Puga and Trefler and premiership academics - this is a quality piece of work.

Wake up and smell the ginseng: International trade and the rise of incremental innovation in low-wage countries

Diego Puga and Daniel Trefler

Received 12 September 2007;
revised 27 January 2009;
accepted 27 January 2009.
Available online 9 February 2009.


Increasingly, a small number of low-wage countries such as China and India are involved in incremental innovation. That is, they are responsible for resolving production-line bugs and suggesting product improvements. We provide evidence of this new phenomenon and develop a model in which there is a transition from old-style product-cycle trade to trade involving incremental innovation in low-wage countries. The model explains why levels of involvement in incremental innovation vary across low-wage countries and across firms within each low-wage country. We draw out implications for sectoral earnings, living standards, the capital account and, foremost, international trade in goods.

Keywords: International trade; Low-wage country innovation

JEL classification codes: F1


The evolution of renminbi yuan and the protracted debate on its undervaluation

A good paper in the Journal of Asian Economics. Summarises the various issues very well.

The evolution of renminbi yuan and the protracted debate on its undervaluation: An integrated review

Dilip K.


For virtually a decade, the undervaluation of RMB yuan has become an issue of impassioned debate in international monetary economics. This issue kept the academic and policy circles engrossed in argumentative deliberations. That RMB yuan is undervalued is widely acknowledged. With China's emergence as an economic superpower of the future, this debate no doubt has considerable merit and ramifications. This article examines sang-froid the RMB yuan undervaluation and provides a review of recent and on-going research on it. The mid-2005 currency revaluation and modification of foreign exchange regime has enormous significance in this regard. It became a defining moment in the RMB yuan debate.

This article attempts to examine whether accusations of currency manipulation made against China can hold, or are merely disingenuous. It encourages the reader to see whether the RMB yuan should be further appreciated. If yes, whether the misalignment is inordinately large or of incidental order which would be corrected with the passage of time. A good number of econometric exercises were undertaken, using differing methodologies. There was a complete lack of consensus on the misalignment of the RMB yuan. It has slowly appreciated since it abandoned its dollar peg in 2005. As the Chinese economy picks up further growth momentum, the currency appreciation is expected to accelerate.

Keywords: China; RMB yuan; Currency misalignments

JEL classification codes: F30; F31; F33

Tuesday 13 October 2009

Foreign Direct Investment in China

The latest Review of Development Economics issue has a number of papers on FDI in China.

Some interesting topics - I shall try to get around to reading the Kunal Sen paper.

Review of Development Economics

Special Section: FDI, Employment, and Growth in China and India (p 737-739)
Amelia U. Santos-Paulino, Guanghua Wan
Published Online: Aug 27 2009 3:45AM
DOI: 10.1111/j.1467-9361.2009.00512.x

Abstract | References | Full Text: HTML, PDF (Size: 35K)

FDI Liberalization as a Source of Comparative Advantage in China (p 740-753)
Sebastian Claro
Published Online: Aug 27 2009 3:45AM
DOI: 10.1111/j.1467-9361.2009.00513.x

Abstract | References | Full Text: HTML, PDF (Size: 288K)

Exchange Rates and Outward Foreign Direct Investment: US FDI in Emerging Economies (p 754-764)
Manop Udomkerdmongkol, Oliver Morrissey, Holger Görg
Published Online: Aug 27 2009 3:46AM
DOI: 10.1111/j.1467-9361.2009.00514.x

Abstract | References | Full Text: HTML, PDF (Size: 88K)

International Trade and Manufacturing Employment: Is India following the Footsteps of Asia or Africa? (p 765-777)
Kunal Sen
Published Online: Aug 27 2009 3:46AM
DOI: 10.1111/j.1467-9361.2009.00515.x

Abstract | References | Full Text: HTML, PDF (Size: 112K)

Foreign Direct Investment and Regional Inequality in China (p 778-791)
Kailei Wei, Shujie Yao, Aying Liu
Published Online: Aug 27 2009 3:47AM
DOI: 10.1111/j.1467-9361.2009.00516.x

Abstract | References | Full Text: HTML, PDF (Size: 154K)


Monday 5 October 2009

China's Exchange Rate Policy, Its Current Account Surplus and the Global Imbalances

A recent paper by Max Corden in the Economics Journal has a good account of the "China surplus" debate.

China's Exchange Rate Policy, Its Current Account Surplus and the Global Imbalances

W. Max Corden 1
University of Melbourne


This article is stimulated by current criticisms of Chinese exchange rate policy. The concern is really about China's current account surplus. The article discusses the factors that determine the surplus, and the reasons why the surplus increased sharply from 2005. The international implications of China's surplus and growth are discussed, and how it has affected the world real interest rate, and through that the US current account deficit. The surplus has had various international relative price effects, which have produced both gainers and losers. Finally, the surplus played only a small part in determining the world credit crisis.


Thursday 1 October 2009

Wednesday 30 September 2009

Overcapacity to be curbed

The China stimulus package has been something to behold. Massive compared to other countries and a massive distortion.

Whilst is may have saved the global economy (in the short term) it is/has stored up a whole lot of trouble. Bubbles in the stock market and property market to name the obvious ones. Actually they are not technical bubbles, simply rises that are not supported by economic fundamentals.

Today the FT reports on the overcapacity of the industrial sector. Basically firms that should have gone bust didn't leading to more inefficient firms than there should be (although a lot more people in jobs that there would have been).

Also of relevance given Copenhagen is that the stimulus package meant the survival of highly polluting firms that would otherwise have gone under leading to higher emissions than would otherwise have been the case. These are the sectors that should be targeted (although they can also be large employers).

These jobs will be lost eventually - how China manages this will be interesting to watch.

China moves to curb industrial capacity [FT]

China on Wednesday announced details of plans to curb severe overcapacity in industrial production that has been made worse by the country’s Rmb4,000bn ($585bn) stimulus package.

The State Council, China’s cabinet, said in a strongly worded statement that highly polluting sectors including steel, coke, cement and plate glass must cut capacity, while silicon and wind power producers should pursue more orderly development.


The details came after the State Council first said in late August that it would ask local authorities to “resolutely [curb] overcapacity and redundant construction”, after the country’s massive stimulus measures and excess bank lending led to unbridled expansions.

It said industrial overcapacity could cause intense competition and derail the country’s economic recovery if no action was taken.