Thursday 26 February 2009

"Is the Chinese growth miracle built to last?"

Eswar Prasad writes on whether the Chinese growth miracle is built to last. I suspect not. What is interesting is the timing of this article.

Note that the paper was received by China Economic Review in December 2007. That is over 13 months ago and the economic landscape is now very different.

I think this paper misses a large part of the story but nonetheless it contains a large number of up to date facts and figures which are useful to the layman.

The recent collapse in exports and the loss of jobs in China is not a result of structural problems in China but more related to the global fall in demand. This issue is not given sufficient attention.

Is the Chinese growth miracle built to last?


Tolani Senior Professor of Trade Policy, Cornell University, United States

Received 13 December 2007;
revised 26 May 2008;
accepted 28 May 2008.
Available online 10 June 2008.


Is the Chinese growth miracle – a remarkably high growth rate sustained for over two decades – likely to persist or are the seeds of its eventual demise contained in the policies that have boosted growth? For all its presumed flaws, the particular approach to macroeconomic and structural policies that has been adopted by the Chinese government has helped to deliver high productivity and output growth, along with a reasonable degree of macroeconomic stability. There comes a point, however, when the policy distortions needed to maintain this approach could generate imbalances, impose potentially large welfare costs, and themselves become a source of instability.

The traditional risks faced by emerging market economies, especially those related to having an open capital account, do not loom large in the case of China. In the process of securing protection against external risks, however, Chinese policymakers may have increased the risks of internal instability. There are a number of factors that could trigger unfavorable economic dynamics that, even if they don't rise to the level of a crisis, could have serious adverse repercussions on growth and welfare. The flexibility and potency of macroeconomic tools to deal with such negative shocks is constrained by the panoply of policies that has supported growth so far.

Keywords: Exchange rate flexibility; Capital account liberalization; Growth model; Macroeconomic policies; Financial sector reforms

JEL classification codes: E2; E5; E6; F3; O1#


Little Korea exits big China

The wave of FDI and skilled workers from overseas and beginning to exit China in their thousands as companies around the world retreat to lick their wounds from the current recession.

This FT article gives a snapshot of how events are playing out.

It is amusing that the Korean press officer could not comment on the exudus of Koreans from China as they had also been sent home.

Downturn drives expat exodus from Shanghai [FT]

Until recently, half the 100,000 Koreans who had made Shanghai their home lived clustered together on the outskirts of the city in “Little Korea”, a neighbourhood where the street signs are in Korean and the shops are full of LG products and kimchi food.

But with the economic crisis hitting the South Korean economy and currency hard, Little Korea is being rapidly vacated.

Korean companies are shipping workers home, cutting off school fees and repatriating wives and children without their menfolk to cut costs. They are the first large wave of expatriates to have begun leaving China’s financial capital as a result of the global economic crisis but their departure raises the prospect of a broader exodus of foreigners who may take investment, skills and job creation opportunities with them.

The press officer of the Korean consulate in Shanghai could not answer questions about the exodus of her countrymen – because her post had just been abolished and she was being sent back to Korea.

Kim Heewon, president of Seoul Plaza, Little Korea’s central shopping complex, estimates that 20 per cent of the Korean population has returned home, many of them in the past few weeks.

“Almost no one comes in any more,” says a clerk in Seoul Plaza’s golf boutique. Throughout Ms Kim’s 4,000-squ-m department store, Korean-speaking staff loiter next to Korean-branded toys, clothing and furniture, with no customers in sight.

Japanese relocation companies, meanwhile, say there has been a marked rise in Japanese families returning home from Shanghai compared with last year and they expect the pace to pick up further during the traditional peak relocation months of March and April.

Each of the Japanese housewives minding toddlers at the vast Mandarin City housing complex, where an estimated 70 per cent of residents are Korean or Japanese, say they know at least one family that has been sent home while the breadwinner remains in China.

The Japanese consulate estimates there were 48,000 nationals in Shanghai 18 months ago, but says it has no figures for the number that might have left since.

The pain has not been limited to Shanghai. A parent with children enrolled in an expensive Beijing international school says most of her daughters’ Korean classmates have left the school almost overnight.

A labour activist in the northern province of Shandong, where Korean investment has totalled $23.4bn (€18.4bn, £16.2bn) since 1988 and has accounted for 40 per cent of total foreign inflows, says the owner of a Korean-invested furniture factory left before the Chinese lunar new year in January and it has yet to reopen.

Local authorities that previously published regular data on absconding factory owners halted such reporting after thousands were left jobless when the entire Korean management of Yantai Shigang Fibre vanished last year.

“I would guess that even more have been closing since then given the worsening macroeconomic environment,” says Yuan Xiaoli, a professor at Qingdao University of Science and Technology.

Back in Little Korea, Ms Kim says the flow of Koreans is not one way. “Workers are going home, but entrepreneurs are coming here from Korea,” she says. “Our Korean people think [since] China is bigger than Korea, there must be more opportunities here than in Korea. There is no dream in Korea, but our Korean people think there is still a dream in China.”

Ms Kim is putting her money where her mouth is. She is planning to open a large golf goods store in Seoul Plaza early next month.


Who killed the economy? "The Gaussian copula function"

Lets get to the bottom of the current financial crisis. Enter the "Gaussian copula function". There are now numerous postgraduate courses in "Mathematical Finance" where you can study such delights and then go off and make lots of money.

So what is the story? Here is it over 4 pages. I provide just the introduction.

Recipe for Disaster: The Formula That Killed Wall Street [Wired]

A year ago, it was hardly unthinkable that a math wizard like David X. Li might someday earn a Nobel Prize. After all, financial economists—even Wall Street quants—have received the Nobel in economics before, and Li's work on measuring risk has had more impact, more quickly, than previous Nobel Prize-winning contributions to the field. Today, though, as dazed bankers, politicians, regulators, and investors survey the wreckage of the biggest financial meltdown since the Great Depression, Li is probably thankful he still has a job in finance at all. Not that his achievement should be dismissed. He took a notoriously tough nut—determining correlation, or how seemingly disparate events are related—and cracked it wide open with a simple and elegant mathematical formula, one that would become ubiquitous in finance worldwide.

For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.

Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.

David X. Li, it's safe to say, won't be getting that Nobel anytime soon. One result of the collapse has been the end of financial economics as something to be celebrated rather than feared. And Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.


Sunday 22 February 2009

US states should do more business with China

Here is a link to an article written by Tom Watkins on "Doing Business with China".

The article talks about Michigan but the same arguments could apply to any US state or EU country. Tom's arguments are correct and if Michigan was the first to act and to show that Michigan is "open for business" the benefits can only be positive.

Article HERE.

Any article that features is sure to get highlighted on this blog whatever the context. It just so happens that I agree entirely with Tom's view on US-China relations on the micro and macro scale.


Thursday 19 February 2009

Is China still a lot poorer than we thought?

China is a country of contradictions. All the press seem to concentrate on is the economic threat from China and the rise of the Chinese middle class.

I believe that while China has travelled a great distance in a very short space of time, millions of Chinese have not enjoyed the same journey. Yes, Chinese growth has probably resulted in the largest and quickest reduction in absolute poverty in history but let us now forget those that have been left behind.

This new World Bank Policy paper sheds some light on this issue.

"China is Poorer Than We Thought, but no Less Successful in the Fight Against Poverty"


World Bank Policy Research Working Paper No. 4621

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

In 2005, China participated for the first time in the International Comparison Program (ICP), which collects primary data across countries on the prices for an internationally comparable list of goods and services. This paper examines the implications of the new Purchasing Power Parity (PPP) rate (derived by the ICP) for China's poverty rate (by international standards) and how it has changed over time. We provide estimates with and without adjustment for a likely sampling bias in the ICP data. Using an international poverty line of USD 1.25 at 2005 PPP, we find a substantially higher poverty rate for China than past estimates, with about 15% of the population living in consumption poverty, implying about 130 million more poor by this standard. The income poverty rate in 2005 is 10%, implying about 65 million more people living in poverty. However, the new ICP data suggest an even larger reduction in the number of poor since 1981.


"New Estimation of China's Exchange Rate Regime"

Frankel is an academic economist who has appeared throughout my research for many years. His writing is accessible and of high quality.

In this blog we often talk about China's exchange rate. Is it undervalued? What are the implications?

China's and indeed and oft cited academic defence is that China is no longer pegged to the dollar and that is has appreciated (it has).

This paper adds a new insight into the RMB-Dollar debate with potentially serious political implications. I suspect non-economists may find this paper tough going.

The same NBER cost problem persists. I am sure a kind academic somewhere would be willing to help if emailed.

"New Estimation of China's Exchange Rate Regime"

NBER Working Paper No. w14700

JEFFREY A. FRANKEL, Harvard University - John F. Kennedy School of Government, National Bureau of Economic Research (NBER)

The paper updates the answer to the question: what precisely is the exchange rate regime that China has put into place since 2005, when it announced a move away from the dollar peg? Is it a basket anchor with the possibility of cumulatable daily appreciations, as was announced at the time? We apply to this question a new approach to estimating countries' de facto exchange rate regimes, a synthesis of two techniques. One is a technique that has been used in the past to estimate implicit de facto currency weights when the hypothesis is a basket peg with little flexibility. The second is a technique used to estimate the de facto degree of exchange rate flexibility when the hypothesis is an anchor to the dollar or some other single major currency. Since the RMB and many other currencies today purportedly follow variants of Band-Basket-Crawl, it is important to have available a technique that can cover both dimensions, inferring weights and inferring flexibility. The synthesis adds a variable representing exchange market pressure to the currency basket equation, whereby the degree of flexibility is estimated at the same time as the currency weights. This approach reveals that by mid-2007, the RMB basket had switched a substantial part of the dollar's weight onto the euro. The implication is that the appreciation of the RMB against the dollar during this period was due to the appreciation of the euro against the dollar, not to any upward trend in the RMB relative to its basket.


"China's Growing Role in World Trade"

A paper that I need to read. Apologies to those who cannot get free access to NBER papers. It is a shame that the NBER feel the need to charge instead of spreading the word.

It would be interesting to know NBER's yearly download revenues.

"Introduction to 'China's Growing Role in World Trade'"

NBER Working Paper No. w14716

ROBERT C. FEENSTRA, University of California, Davis - Department of Economics, National Bureau of Economic Research (NBER)
SHANG-JIN WEI, Columbia Business School, National Bureau of Economic Research (NBER), Centre for Economic Policy Research (CEPR), International Monetary Fund (IMF)

Over the last three decades, the value of Chinese trade has approximately doubled every four years. This rapid growth has transformed the country from a negligible player in world trade to the world's second largest exporter, as well as a substantial importer of raw materials, intermediate inputs, and other goods. This paper provides an overview of the microstructure of Chinese trade, its macroeconomic implications, trade disputes with other WTO member countries, and the role of foreign firms.


Tuesday 17 February 2009

Mankiw says its "It’s No Time for Protectionism"

At least US academics tend to know how economics works. A good piece by Greg Mankiw in the NY Times.

I have included the full article here as it covers a number of key issues and corrects some important misconceptions.

It is a pleasure to read a simple and yet powerful explanation of the economic issues in the relationship between China and the US. If all US politicians were to read this article we might be able to make some progress.

It’s No Time for Protectionism [NY Times]

WHAT approach will the Obama administration and the Democratic majority in Congress take on international economic policy? It is too early to say for sure, but the signs so far are worrying.

Just before his confirmation as Treasury secretary, Timothy F. Geithner turned up the heat on the Chinese regarding the dollar-yuan exchange rate. President Obama, he said, “believes that China is manipulating its currency. Countries like China cannot continue to get a free pass for undermining fair-trade principles.”

Like many economists, I cringe whenever I hear the term “fair trade.” It is not that I am against fairness — who is? — but the word “fair” is so amorphous in this context as to defy definition. Most often, the slogan “fair trade” is little more than a rallying cry for protectionism.

Just days after Mr. Geithner pointed his finger at China, Wen Jiabao, the Chinese prime minister, pointed his own finger right back. Speaking at the World Economic Forum in Davos, Mr. Wen blamed the United States for the economic crisis the world is now experiencing. He talked in particular of “the failure of financial supervision.”

Most likely, Mr. Wen was aware that one of the important players in the United States supervisory system has been Mr. Geithner, who until recently was president of the Federal Reserve Bank of New York. In that role, Mr. Geithner was, for example, the primary federal regulator for Citigroup. Mr. Wen may have been suggesting — quite rightly — that the new Treasury secretary should focus his energy on fixing problems a bit closer to home.

But timing aside, is Mr. Geithner right about the currency question? Are Americans hurt by China’s exchange-rate policy?

Critics of China say it is keeping the yuan undervalued to gain an advantage in the international marketplace. A cheaper yuan makes Chinese goods less expensive in the United States and American goods more expensive in China. As a result, American producers find it harder to compete with Chinese imports in the United States and to sell their own exports in China.

There is, however, another side to the story. The loss to American producers comes with a gain to the many millions of American consumers who prefer to pay less for the goods they buy.

The situation is much the same as when the price of imported oil falls, as it has done in recent months. Domestic oil producers may see lower profits, but American consumers are better off every time they fill up their tanks. Consumers similarly gain when a cheap yuan reduces the prices of T-shirts and televisions imported from China.

Mr. Geithner and other China critics might also want to ponder how the Chinese keep the yuan undervalued. The essence of the policy is supplying yuan and demanding dollars on foreign-exchange markets. The dollars that China accumulates in these transactions are then invested in United States Treasury securities.

So when the Treasury secretary complains about the undervalued yuan, his message to the Chinese boils down to this: Stop lending us money.

Not surprisingly, after Mr. Geithner made his remarks about the Chinese currency, the prices of Treasuries fell and yields rose. If China took him seriously, long-term interest rates would rise even more. As the United States embarks on a path of unusually large budget deficits, the nation’s chief financial officer should pause and think carefully before turning up the heat on one of its biggest creditors.

Perhaps the oddest thing about Mr. Geithner’s move is that his complaint seems out of date. The yuan-dollar exchange rate has moved considerably in recent years. After a long period of completely fixing the exchange rate, China allowed its currency to start moving in July 2005. Since then, it has appreciated by 21 percent.

Mr. Geithner might think that the yuan needs to move more, but why shine a bright light on the issue at this particular moment? Olivier Blanchard, the chief economist of the International Monetary Fund, had it right when he said: “It is probably not the right time to focus on the Chinese exchange rate, given that it is not a central element of the world crisis. There are many other things we should be thinking about.”

DIRECTING attention to the China currency issue amid a worldwide recession and growing fears of depression is more than a distraction. It is downright counterproductive. Senators Charles E. Schumer, Democrat of New York, and Lindsey Graham, Republican of South Carolina, have long proposed dealing with the yuan undervaluation by imposing tariffs on Chinese imports. The Treasury secretary’s comments risk stoking those protectionist embers.

Indeed, protectionist influences seem to be finding their way into the stimulus bill winding its way through Congress. The bill passed by the House included a provision banning the use of foreign iron and steel in infrastructure projects. The Senate has adopted a somewhat more flexible restriction (after voting down an amendment by John McCain to strip the “Buy American” provision from the bill).

Despite having hired many first-rate economists with impeccable free-trade credentials, the president has been only tepid in his public opposition to this creeping protectionism.

This may be a good time to recall the legacy of Senator Reed Smoot of Utah and Representative Willis Hawley of Oregon, both Republicans. The 1930 tariff bill that bears their name did not cause the Great Depression, but it contributed to a plunge in world trade and undoubtedly was a step in the wrong direction.

As we sort through the wreckage of our own financial crisis, a retreat into economic isolationism is one mistake we want to be sure not to repeat.


China open for business as the US closes

Surely I cannot be the only one to see the irony in the different responses of China and the US to the current financial crisis. Respect to China for learning economics both quickly and correctly. Shame on the US for pandering to political lobby groups (again).

China is of course acting in its own self interest. A trade war would be more devastating for China whose reliance on exports is high.

China editorial slams 'Buy American' provision [AP]

BEIJING (AP) — Measures in a $789 billion U.S. stimulus package that favor American goods are a "poison" that will hurt efforts solve the financial crisis, an editorial by China's official news agency said.

Provisions in the U.S. stimulus bill approved Friday favoring American steel, iron and manufactured goods for government projects are protectionist measures that could trigger trade disputes, said the editorial issued late Saturday by the Xinhua News Agency.

"History and economics have told us, facing a global financial crisis, trade protectionism is not a solution, but a poison to the solution," the editorial said.

U.S. labor groups that pushed hard for inclusion of the measures have argued that their main purpose is to ensure that U.S. Treasury dollars are used to the fullest extent to support domestic job creation.

China has promised to avoid "Buy China" protectionist measures in its own multibillion-dollar stimulus effort, and appealed to other governments to support free trade. Deputy Commerce Minister Jiang Zengwei said in early February that China would "treat domestic and foreign goods equally so long as we need them."

Protectionism was a key concern of weekend meetings of the Group of Seven industrialized nations in Rome. U.S. Treasury Secretary Timothy Geithner assured G-7 finance ministers on Saturday that the stimulus package would not violate the United States' commitment to free trade.

Xinhua's editorial said protectionist measures taken during the Great Depression of the 1930s caused trade wars, hurting international trade.

President Barack Obama is expected to sign the economic stimulus package on Tuesday in Denver, Colorado.

The package, aimed at combating the worst economic crisis since the Great Depression, was Obama's first major victory in Congress.

Requirements known as "Buy American" were softened as the bill progressed through Congress and after strong criticism from abroad. Senate and House negotiators agreed to a version that would require the government not to violate trade agreements when implementing the law.


Sunday 15 February 2009

Can China save the world?

The short answer is "no", even if China wanted to.

Michael Pettis over at China Financial Markets posts a good article on why China's consumers are simply in no position to compensate for the fall in US and Europe's consumption. Even if China, as a nation of savers, became consumers, it would hardly dent the global decline in comsumption.

Then we have Chinese job losses and uncertainty which is likely to increase savings.

It is good to see Pettis being pessimistic (realistic). I agree with nearly all of the points made but wonder why these points were not made sooner or more strongly. This is a long article worth reading in full. I highlight only a copy of paragraphs.

Can China adjust to the US adjustment? [China Financial Markets]


If global demand isn’t to collapse, someone else has to increase consumption by that amount. But who? The US government will probably increase its net spending, although it has already significantly increased its gross debt by recapitalizing the banks, and it will almost certainly see tax revenues fall. Corporations are more likely to be cutting spending than increasing it, so the combination of the two is not likely to be significant.

Can the rest of the world step up and replace US consumption? I am not an expert on global economies, but I think it is pretty safe to say that European, Japanese, and Latin American households and businesses are unlikely to be in a hurry to increase spending. In fact they are all likely to reduce consumption, although perhaps not as dramatically as the US. Given high debt levels in all those areas, there are also some constraints on fiscal expansion.

That leaves the net exporters, of which China is the most important. It is the largest saving nation, and the “other” nation along with the US at the center of the global balance-of-payments imbalance, and so much of that adjustment is likely to be forced onto China. As the country that has benefited most from US over-consumption, in other words, it is likely to be the one that will most have to adjust to a drastic cut in consumption.

What are the comparable numbers for China? US GDP ($13.5 trillion) is about 3.4 times the size of China’s ($4.0 trillion). In that case a 5% adjustment in the US is equal to roughly a 17% adjustment in China. That means, all other things being equal, Chinese consumption must go up by 17% of GDP just to compensate globally for the decline in the US, and bear in mind that consumption in China is only around 30-35% of GDP. What is worse, there is reason to believe that Chinese private consumption is likely to slow down in response to rising uncertainties and a slowing economy. Domestic consumption tends to be positively correlated with exports – a very pro-cyclical type of relationship typical for developing countries with large export components.

There are great hopes pinned on fiscal expansion in China, but I have already expressed my doubt about the government’s ability to expand as rapidly as many of us hope (and Stephen Green and Nouriel RoubiniOpen in a new window have anyway argued that there is less here than meets the eye). Even if they are able to expand dramatically without crowding out domestic investment, the sheer magnitude of the numbers make it almost impossible that China can successfully bear the burden of the global adjustment.

Of course it is not China’s job to replace US demand. Chinese policy-makers are only interested, in principle, in protecting growth in the Chinese economy. So why worry about whether China can or cannot replace US demand? Because with the rest of the world unable to step up, and in many cases even reinforcing the decline, if China cannot do so the whole world must see declining growth and a rise in savings, and since China was the main counterbalance to excess US consumption, it will probably bear much of the brunt.


Saturday 14 February 2009

"Eat bitterness and endure hard labor"

Sometimes economists concentrate too heavily on the big picture. As always, macroeconomics is the summation of individual behaviour and experience.

The title of this blog post is a notice for those wanting a job. I suspect a few more Western employees should be as equally truthful when advertising employment opportunities.

The story of one man's search for employment in China is revealing on many levels. Certainly a first for "Buffalo News" on this blog.

The relationship between rural-urban migration is highlighted. Family land is still crucially important - will this continue through generations? Once sold there will be nowhere to return. It is also interesting that this one man blames America for his economic woes. That may be true to an extent although it was US consumer greed that got him a job that would not otherwise have existed.

The irony of course is that average Joe in America is blaming the Chinese (and WallSteet) for his financial and employment woes.

My current prediction for China: DEFLATION. Hints of it are here in this article. The result? Carnage as the Chinese save more, spend less and add to the global crisis. The Chinese stimulus package is unlikely to be enough in my opinion. The next step towards global meltdown is nearly with us.

The other interesting observation is that many workers are "refusing" to work for "insultingly low" pay. Unfortunately for them many others will and this will provide further deflationary pressures. Deflation is around the corner.

One worker's struggle for a factory job in China [Buffalo News]

Xian Yuguo has a tattoo on his left arm with the Chinese character for wealth. But the 20-year-old was growing worried as he competed for a job with tens of millions of laborers in China's increasingly wobbly economy.

He had heard a tip about work at a toy factory in this industrial city. Time was running out.

"I've only got about 400 yuan" - $73 - "in my pocket, just enough to last me a week," he said, being bounced around in a crowded bus speeding down a southern China highway. "If I don't find something by then, I've got to go back home and just hang around my family's tangerine farm."

It was Xian's fourth day on the road during China's peak job-hunting season, when millions of rural workers migrate back to factory towns after the Lunar New Year holiday.

How they fare at finding jobs will be a key barometer of just how badly the global economic crisis is hitting China.

In past years, laborers were snapped up in the industrial zones of Guangdong province, often called the world's factory floor. But the once ravenous appetite for Chinese-made goods is shrinking: China this week said its exports plunged 17.5 percent last month from a year earlier. About 20 million of China's 130 million migrant workers lost their jobs last year, the government said.

"It all started in the U.S.," said Xian, whose short muscular body and blue warm-up suit made him look like a gymnast. "The Americans messed things up, and we just need to cope with it."

Jobs still exist, particularly for the skilled. But Guangdong's labor bureau has warned that of the 9.7 million migrants expected to flow back to the province, 2 million would have a slim chance of finding work.

Many carry only enough money to last about a week, raising fears of a surge in crime by roving groups of jobless migrants lingering in the cities. There also are fears of instability in the countryside if restless unemployed workers return home.

"The social pressures will be enormous in 2009," Pieter Bottelier, an economics professor at Johns Hopkins School of Advanced International Studies, said at a recent conference in Washington, D.C.

And wages are falling from boom-time levels, meaning workers will have to settle for less.

At a job fair in Dongguan, one of Guangdong's biggest manufacturing cities, recruiters sat behind large sign boards plastered with help-wanted notices from factories that make everything from iPods and furniture to Adidas and Reebok sneakers.

Zhang Ni, a willowy 23-year-old migrant, wasn't impressed. Most jobs were paying the minimum wage of 770 yuan ($113) per month. Zhang, from central Hubei province, wasn't ready to go that low, even though she had already been searching for five days and was almost out of cash.

In the past couple years, Zhang found work in a day or two because she has five years of experience in electronics plants.

"I used to work in a factory making flash drives for 1,600 yuan a month," she said. "Now I'd be happy to get 1,200 yuan. Before I came here, I was offered a job for about 700 yuan a month at a shoe factory in another city. I can't accept that. I'd rather go home."

Employment agent Meng Jinping accused her and two friends of being too picky. "I've already told you about several jobs. There's plenty of work. You just don't want to do it," he said.

But after the women shuffled away, Meng acknowledged that many entry-level factory jobs don't really offer a living wage.

Hundreds of thousands of workers arrive daily in Guangdong's capital, Guangzhou, once known as Canton. Most arrive by train from the frigid northern provinces, stepping into the subtropical weather still dressed in parkas and long underwear.

Xian, the worker with the "wealth" tattoo, arrived after a 15-hour bus ride from his village near the Vietnam border.

Xian said his job search began at a cosmetics factory that a friend said was hiring. But the plant was only paying about 800 yuan ($118) a month - a wage he found insultingly low - and he wouldn't get his first paycheck until he worked for three months, he said.

Another friend gave him a tip about a position at a factory making women's handbags, but it only paid 20 yuan ($2.90) a day for eight-hour shifts.

"That's what people got paid in the 1980s. This is a new era. I'd rather go home than accept anything below 1,000 yuan a month," he said. "These factories think they can pay us less because of the financial crisis."

Xian traveled with four of his boyhood friends. The thin young men looked like a touring boy band with their moppy hairdos, tight black jeans and clingy T-shirts. Xian was the leader, and the other guys took turns carrying his small black suitcase.

After two days in Guangzhou, they followed another tip that a toy factory in Dongguan was hiring. They boarded a bus packed with groggy workers.

Once in Dongguan, the men checked into the shabby Golden River Guesthouse, sharing two rooms that each cost 10 yuan ($1.50) per night. The bathroom consisted of a plastic bucket under a faucet and a toilet on a balcony. The building was littered with used plastic takeout food containers. Trash was dumped in the stairwell.

The next morning, Xian walked a few blocks to the toy factory. A tattered white sheet of paper glued to the front gate said the plant was hiring entry-level workers between the ages of 18 and 35 with a junior high education. The notice said applicants had to be able to "eat bitterness and endure hard labor."

After a 15-minute interview, Xian emerged with the news he could move into the factory dormitory in the evening and begin work the next morning.

"I'm getting paid 1,200 yuan ($175) a month. It's OK, just above my bottom line," he said.

His friends were hired by a nearby plant making electronics parts. They celebrated with a breakfast of soybean milk and rice noodles.


Tuesday 10 February 2009

Asia, its dependence on trade and the crisis to follow

This blog has continued to emphasise that Asia is much more dependent on trade with the US and Europe than it or indeed most commentators seem to believe.

Only now is the reality beginning to bite. This was entirely predictable. The savings rates are simply too high in Asia for domestic to consumption to make up for the sheer greed of western consumers.

The Financial Times provides excellent coverage as always.

Asia and the crisis: Unlucky numbers [FT]

Not only Hong Kong, which as a port city and financial centre thrives on its openness to fast-dwindling world trade, but the whole of Asia is in trouble. All over the region, particularly in manufacturing-heavy south-east and north-east Asia, government statisticians have been summoning up evil-eye numbers of their own.

One of the worst came from Japan, whose conservative banks had been slow to buy toxic assets, making the economy seemingly less threatened by recession. That illusion ended when statistics showed that exports had fallen a shocking 35 per cent in December from a year earlier as demand for cars, electronics and precision equipment collapsed around the world.

That was followed by a stream of further bad data including a nearly 10 per cent month-on-month drop in industrial production, a sharp rise in unemployment to 4.4 per cent (see below) and a fall in headline inflation that suggests a return to deflation is just around the corner. So sharp has been the deterioration that the International Monetary Fund has forecast a contraction in gross domestic product of 2.6 per cent this year, suggesting Japan could fare even worse than the US, the origin of the credit crisis.

Singapore, South Korea and Taiwan vie with Japan for the swiftest downturn. Singapore, the canary in the coalmine of global trade because of its open economy, could contract by up to 5 per cent this year in what would be the deepest recession since the city-state’s birth in 1965. The IMF is predicting a 4 per cent contraction in South Korea, though the government in Seoul is sticking much more optimistic.

Nor is China, an economy that is at least expected to grow by a respectable 6-8 per cent this year, immune from heart-stopping statistics. Last week, the government estimated that no fewer than 20m rural migrant workers, 15 per cent of the total, had lost their jobs as export-oriented factories shut their gates. Blue skies in Hong Kong are testimony to the closure of polluting plants across the border in the Pearl River delta.

The speed and ferocity of Asia’s downturn has taken aback even the pessimists. “Whilst Asia was not the epicentre of the crisis it has been hit hard,” said Dominique Strauss-Kahn, IMF managing director, last week. His organisation expects regional growth of just 2.7 per cent, a fraction of the 9 per cent achieved in 2007 and a percentage point lower even than it managed during its own financial crisis a decade ago. That crisis was largely self-inflicted, the product of an overdependence on fickle flows of foreign finance. This time, the region’s balance sheets are in better shape and the crisis began elsewhere. So why does Asia appear set for an even harder fall?

The short answer is trade. As Mr Strauss-Kahn says, Asia is more intimately bound to the global economy than it was a decade ago. The region has grown spectacularly on the back of exports but the “bad side of the coin” is that this makes it more vulnerable now. At the time of the previous crisis, exports accounted for 37 per cent of developing Asia’s output, according to economists at Morgan Stanley. A decade later, that had risen to 47 per cent as governments sought to build large foreign currency reserves to protect themselves against the current-account shocks that had floored them before. The upshot was that Asia swapped dependence on external financing for dependence on external demand.

This matters hugely for a world that, until just a few months ago, had assumed that the financial crisis jolting the west would somehow pass Asia by. A corollary of that flawed assumption was that China – and to a lesser extent Japan and India – could somehow shoulder the global economic burden by substituting for fast-disappearing US and European demand. That hope ignored the fact that, with the exception of Japan, no Asian economy yet possesses anything like the scale to play such a role. But, more important, it missed the point of how entrenched Asia’s export-dependent model is and how difficult it will be to convert its economies into ones powered by domestic demand. As N.K. Singh, a member of India’s parliament, says: “It is not just a matter of hey presto.”

Indeed not. Cem Karacadag of Credit Suisse calculates that exports, net of their import content, account for as much as two-thirds of GDP in Hong Kong and Singapore, almost half of the output of Malaysia and Thailand and one-third for South Korea and Taiwan. He says the initial impact of a 10 per cent fall in exports – without taking into account secondary effects, including inevitable job losses and a fall in consumer sentiment – would cut 2 percentage points off growth in South Korea and Taiwan and leave Hong Kong and Singapore each 7 percentage points worse off.

Jong Wha-Lee of the Asian Development Bank says a sharp rise over recent years in intra-regional trade disguises the fact that 60 per cent of final demand for Asian goods comes from developed countries. As western consumers postpone purchases, a lot of intra-Asian trade – much of it components, inputs and capital equipment – has also evaporated. As if this were not bad enough, economies that rely on tourism are receiving an additional body blow as visitor numbers fall. Tourism makes up 5-7 per cent of GDP in Hong Kong, Malaysia, Singapore and Thailand. Moreover, if employment of foreign workers in the Gulf and elsewhere falls as fast as expected, then remittance-dependent countries from the Philippines to parts of India are also in for a shock.

At the other end of the development scale, Japan is undergoing factory closures as companies slide into the red. Toyota, the leading car manufacturer, has warned amid collapsing US sales that it would make an operating loss of Y450bn ($5bn, €3.8bn, £3.2bn) this year, its first since 1950. Just a few months ago it was predicting a Y600bn profit.

In China, the slowdown contrasts with breakneck 13 per cent growth in 2007. There are tentative signs – including a sharp recovery in bank lending – that growth, which slowed to 6.8 per cent in the fourth quarter, may have hit bottom as a barrage of government stimulus measures begins to take effect. Beijing was fairly quick to recognise the severity of the slowdown, announcing as early as November a Rmb4,000bn ($585bn, €447bn, £390bn) stimulus package. Many other governments are still playing catch-up. Last week, Australia became the latest to formulate a big stimulus package, announcing A$42bn ($29bn, €22bn, £19bn) in extra spending. Japan, whose deadlocked parliament is fighting over stimulus measures, has come up with a string of unorthodox actions, including the central bank’s decision last week to buy up to Y1,000bn of shares owned by banks.

Even if such moves help dull the pain of the external demand shock, the bigger worry is what comes next. Michael Pettis, a finance professor at Peking University, argues that China (and others) will have to engineer a massive rebalancing of their economies towards domestic-led growth if they are to adjust to a world in which US consumers must rebuild depleted savings.

“In the best possible world, Chinese consumption would rise by exactly the same amount as US consumption drops,” he says. But given that the US economy is more than three times the size of China’s, the magnitude of such an adjustment is likely to be beyond it.

“There is no longer any choice for Asia,” concurs Clyde Prestowitz, president of the Economic Strategy Institute who warned for years that global imbalances were unsustainable. “Asia has to start consuming more but I am not sure that the Asian leaders I have been speaking to get it,” he says, adding that this would require changes to credit provision, tax incentives and regulation. “The export-led model has outlived its usefulness.”

If Mr Prestowitz is right, the global crisis means more than a cyclical shock to Asian economies. Rather it signifies the start of a profound – and no doubt painful – transformation as they adjust to a world in which the US consumer is no longer the buyer of last resort. Whether Asian economies are up to that long-term challenge is something on which fortune tellers might usefully comment.


Thursday 5 February 2009

Graduate unemployment in China

Hot on the heels of the previous post the importance of getting the RIGHT education at the RIGHT place in the RIGHT country and at the RIGHT cost has never been more important.

I firmly believe that the mismatch between expectations and reality exists and the consequences could be serious for China and many individual families who spend their life savings on their only child's education.

China's surge of college graduates finds white-collar work elusive [Christian Science Monitor]

Some 6.1 million grads are expected to flood the job market this year – joining the 27 percent of last year's diploma-holders who still haven't found work. Instead, they're finding deserted job fairs, hiring freezes, and salaries that migrant workers might expect. Confronted by global recession and a heavily blue-collar economy, China's educated elite are having to lower their expectations – frustrating families and putting the government on alert ahead of the 20th anniversary of the student-led Tiananmen protests.

There's "a mismatch between expectations and realities, exacerbated by the current economic slowdown," says Thomas Rawski, a China expert at the University of Pittsburgh in Pennsylvania. "It really is a clash of preferences."

The oversupply of students first ballooned in 1999, when China erected a flurry of colleges in an effort to mint more of the scientists and managers it needed for a 21st-century economy. It also sought to absorb a burst of teenagers born in a post-Cultural Revolution baby boom after 1976.

Enrollment rose quickly, from 3 percent of college-age students in the 1980s to 20 percent today.

Despite the rapid expansion, only 6 percent of the population now holds college degrees. Not surprisingly, graduates expect elite jobs, as do the relatives who footed their tuition bill.

Topping the A-list are government jobs, which pay modestly but offer benefits and security. Last year, some 750,000 students took the civil service exam – and only 2 percent could expect slots. Big companies draw students, too: Though less stable than the civil service, business jobs pay well and provide better training.

So you want to study in the UK?

There have been some interesting articles recently looking at the UK University system.

With the weak pound and strength of the Chinese currency more and more students are applying to UK universities.

As a UK based academic I can confirm some of these anecdotes. The fact that different Universities give out different numbers of 1sts and 2.1s is a statement of the obvious.

The following quote was one of the motivations for setting up this blog. To enable Chinese students to pick the right University to go to. For economics they are listed in the right hand column.

Research published last year shows why they would want to know. Three years after leaving university, an arts graduate from one of the older, research-intensive universities - those in the Russell and 1994 groups - is literally twice as likely to be earning £30,000 to £50,000 than a contemporary from a newer university. Some universities have a graduate unemployment rate after six months of 1%, others of more than 8%. In every subject, with the one exception of education, graduates from the older universities earn more than their new university counterparts.

In economics the differences will be greater if anything. Chinese students must be careful to pick the right institution.

Students have been sold a lie [Guardian]

When a friend enrolled as a mature student last year, I was curious to hear what university life was like these days. It was quite a surprise when he reported back that students were taking personal calls on their mobile phones during lectures. Apparently it comes as a shock to the students when lecturers ask them to hang up. In a recent seminar a girl sat with her iPod headphones on, and was astonished when the tutor asked her to remove them. There were no more than a dozen or so other students in the class, and one of them was trying to give a presentation. "But I like listening to music!" the girl objected, genuinely affronted by the intrusion, as though she were on a bus.

People did, my friend said, still hand out leaflets on the student union steps. But when he showed me one, it was a business flyer. "Getting behind with deadlines?" it read. "Snowed under with work? Call this number to order a professionally written essay on the subject of your choice." Prices varied according to the grade required, and even third-class essays were available. After all, there would be no point in paying for one that alerted suspicion by being implausibly good.

University life has changed, evidently, more than I knew. Academics familiar with it are under no illusions, however, and this week vice-chancellors said so to a Commons select committee. "There is a significant difference," one acknowledged, "between universities, and the extent to which they give firsts and 2:1s." It was no more than a statement of the obvious, and this summer 18 universities will issue report cards alongside students' final grades, which must be a good idea. But the wild discrepancies in degree classification are probably the least of the system's problems.

In 1994, in my final year, I visited a boyfriend at a former polytechnic in its first year as a new university. I couldn't believe my eyes. In the library everybody was working away on modules, in busy, practical groups, more like colleagues than my contemporaries back in Manchester. The industry was impressive. But the idea that we were all engaged in the same educational experience at each place was manifestly absurd, and no employer today is deluded by the charade of equivalence.

When the president of Universities UK told MPs, somewhat coyly, "A first in ancient history from the University of Poppleton is not the same as a first in tourism management from Poppleton Met," he knew they could decode his diplomacy. For "Poppleton Met" read, say, London Metropolitan. But the euphemism presumes a degree of inside knowledge - because it's not as simple as "ex-poly = inferior". Manchester Met, for example, outshines many Poppletons. As long as you know which ones to avoid, it doesn't really matter what they're called. But it matters if you don't. And the very people who are being targeted by university access expansion are those with the least chance of knowing what they're getting.

Research published last year shows why they would want to know. Three years after leaving university, an arts graduate from one of the older, research-intensive universities - those in the Russell and 1994 groups - is literally twice as likely to be earning £30,000 to £50,000 than a contemporary from a newer university. Some universities have a graduate unemployment rate after six months of 1%, others of more than 8%. In every subject, with the one exception of education, graduates from the older universities earn more than their new university counterparts.

You could argue that for a student who would never have got into Bristol or Edinburgh, a poorer-quality university was still better than nothing - and that's almost certainly true. But that's a judgment for the student, not an education minister, to make. The Tories are endlessly accused of snobbery on this. But they do, at least, display the virtue of an interest in the truth. "It's great we have diversity in the university system," David Willetts, the shadow secretary for universities, has said, "but there's an official conspiracy that all universities are the same; they are different. Young people are entitled to this information, especially when they are expected to borrow large amounts of money to go to university."

Last year my friends' eldest son enrolled at a former polytechnic in the Midlands to study photography. He is the first in the family ever to go to university, and they're thrilled. No one has told them that in three years, after he's accumulated a debt of about £25,000, his degree will almost certainly not get him a job he wants. He'd do better to get himself a camera and some unpaid shifts at picture agencies, and forget all about university. But how is his family supposed to know that? They think he's won a ticket to the pearly gates of the university-educated elite.

If university was giving him the social and cultural incubation I enjoyed, he still might not be wasting his time. But he has left south London for a campus where serious violence between ethnic student gangs is, he claims, a regular occurrence. If middle-class sons were dealing with fights outside their halls, their parents would be up in arms. But they're not, of course, because they knew the difference between a good university and a Poppleton Met.

There isn't anything more estimable or inspiring than an ambition for everyone to enjoy higher education. But the university drop-out rate is now 22%, and this must have something to do with what is essentially false advertising. Different institutions offering different kinds of education can each have their own merit, but giving them all one name doesn't make them the same, any more than calling a tomato a 747 can turn it into a plane. How can telling a lie possibly be in students' interests? Many won't even know that the lie will fool no one when they graduate, even if it is written on a degree certificate.

Earlier this week the Today programme on Radio 4 interviewed a man who left school functionally illiterate, despite having passed seven GCSEs. It might as well have been 70 GCSEs - or 7,000. It still hadn't meant he could read or write.


Wednesday 4 February 2009

"Made in Europe" - China to start spending

If China starts buying European technologies and increases procurement in the EU will it placate those who still see China as protectionist and a country who is keeping its currency artificially low to boost exports?

I do not think so. However, Wen Jiaboa disagrees. For sure, it will help. The man in the street recently made redundant may not see it so clearly.

Let us be clear - these purchases by China is not charity but will benefit China considerably.

China to go on European spending spree [FT]

China will set up “procurement missions” to buy goods and technologies in Europe in an effort to stem protectionist sentiment in the region against its exports.

Wen Jiabao, the Chinese premier who was talking in London on Monday at the end of a five-day trip to Europe, said the procurement trips would be established as soon as possible.


He said Chinese companies had signed contracts totalling $15bn (€11.7bn, £10.6bn) during his trip to Europe.

The announcement underlines Beijing’s anxiety that the global financial crisis will prompt a new wave of protectionism which would be damaging to a country such as China which is the second largest exporter in the world. Europe is China’s largest trading partner.

China hopes initiatives of this kind will help shift attention away from questions about the level of its currency, which some governments believe to be undervalued.

However, Gordon Brown is correct to point out that a return to protectionism would be disastrous for the global economy. China is to be applauded for its stance that encourages openness and trade as the solution and not the problem to getting out of the current recession. It is also good to see "education" getting a mention. Education is one of the UK's top exports and the number of Chinese students coming to the UK continues to increase.

The sectors of British industry most likely to benefit from China’s enhanced government spending would include aerospace, hi-tech manufacturing, education, pharmaceuticals and low-carbon technologies.

Mr Brown said: “Premier Wen and I agreed that the biggest danger the world faces is the retreat into protectionism, which is the road to ruin. The best attack on protectionism is to demonstrate today the benefits of trade for jobs, for businesses and for eventual prosperity.”


20 million jobs and counting

The long predicted unemployment figures from China are pretty scary. 20m unemployed in a large number.

The China crisis continues to get headlines in the only paper worth reading - the Financial Times.

I suspect that this number is an underestimate. There will be millions underemployed and those staying on in the city to look for new work.

Downturn causes 20m job losses [FT]

More than 20m rural migrant workers in China have lost their jobs and returned to their home villages or towns as a result of the global economic crisis, government figures revealed yesterday.

By the start of the Chinese new year festival on January 25, 15.3 per cent of China's 130m migrant workers had lost their jobs and left coastal manufacturing centres to return home, said officials quoting a survey from the agriculture ministry.

The job losses were a direct result of the global economic crisis and its impact on export-oriented manufacturers, said Chen Xiwen, director of the Office of Central Rural Work Leading Group. He warned that the flood of unemployed migrants would pose challenges to social stability in the countryside.

The figure of 20m unemployed migrants does not include those who have stayed in cities to look for work after being made redundant and is substantially higher than the figure of 12m that Wen Jiabao, premier, gave to the Financial Times in an interview on Sunday.

Speaking on a visit to the UK yesterday, Mr Wen said there had been signs at the end of last year that the Chinese economy might be starting to recover. But in a speech at Cambridge university later, he warned that the global economy could face further problems. "The crisis has not yet hit the bottom, and it is hard to predict what other problems there will be down the path."

Mr Wen's speech was interrupted by a protester who called him a "dictator" and threw a shoe at the stage - an act reminiscent of the Iraqi journalist who threw shoes at George W. Bush, former US president, last year. Police said they had arrested the man.

Production in China's manufacturing sector declined for the sixth successive month in January, according to Hong Kong brokerage CLSA, which said that its purchasing managers' index hit 42.2, up marginally from December but well below the no-change mark of 50.

The CLSA survey showed that manufacturers shed jobs in January at the fastest rate since the survey began in 2004.

In the past decade, 6m-7m rural migrant workers a year have left the countryside to man the factories, construction sites and restaurants of booming cities.

According to a rough official calculation, one percentage point of Chinese gross domestic product growth creates about 1m jobs. In the fourth quarter, growth from a year earlier fell to 6.8 per cent and many economists believe Beijing will struggle to meet its target of 8 per cent growth this year.

Compounding the problems of migrants hoping to return to the land is the expected shock to the agricultural sector resulting from the global crisis.