Thursday 26 March 2009

How China views the world?

One has to laugh at the recent Economist front cover:

The people over at Strange Maps discuss the finer details of the map. For example, they write:

In the ocean immediately beyond the city are a few islands of particular interest to China:

* Japan: the old rival, whose rapid modernisation preceded China’s, but now eclipsed and reduced to a few harmless islands.

* Taiwan: similarly superseded by China’s massive economic progress, but still relevant as the rival claimant to be China’s ‘legitimate’ government. Even more repulsive to mainland China is a competing strand of current Taiwanese politics, striving for ‘independence’ and thus eschewing the ‘One China’ policy still officially espoused by both the communist mainland and nationalist Taiwan.

* Hong Kong: the former British crown colony that was handed back to China in 1997 and which has been allowed a degree of autonomy unthinkable elsewhere in China (e.g. Tibet) under an agreement often referred to as ‘One Country, Two Systems’, whereby Hong Kong was allowed to retain its capitalist system and its civil liberties, including inchoate democratic institutions.

* Spratly Islands: a sprawling archipelago of over 600 islets, atols and reefs in the South China Sea, between Vietnam and the Philippines, with barely 5 square kilometers of dry land between them. Because of their strategic location, the Spratlys, or parts of them, are claimed and partly occupied by China, Taiwan, Vietnam, the Philippines and Malaysia - and as such are a flashpoint waiting to happen.


Wednesday 25 March 2009

"Deglobalisation" and world trade flows

I dislike the word "deglobalisation". More importantly I think it is an inappropriate description of what is happening to world trade. Yes, trade levels are falling but this does not mean the world is less "globalised".

Clearly, it depends on one definition of globalisation but unless trade barriers start rising again there is no problem. However, IF we do see increased protectionism then the word could be considered appropriate.

Plots of the extent of globalisation over time are by no means linear. It can be argued that the world was more globalisation over 100 years ago.

The FT discuss world trade levels which, given China's increasingly important role in world trade flows, should be of interest to readers of this blog.

If we are to survive this current slump in a recession and not a depression then it is essential that free trade remains free.

World trade [FT]

Deglobalisation: ugly word, scary concept and now painful reality. The World Trade Organisation estimates global trade will drop by 9 per cent this year, its biggest decline since the second world war. Given that trade was growing at a 6 per cent clip only 15 months ago, the fall is so abrupt that some now worry about the return of Smoot-Hawley, the US tariffs law that made the 1930s depression Great.

That is alarmist. Much of the recent reversal in the global movement of capital, goods and jobs has been directly due to the financial crisis. It has been the collapse in demand, not protectionism, that has savaged trade flows. A lack of trade credit has also hurt, given that 90 per cent of trade involves some kind of credit, insurance or guarantee.

So, yes, since October, China has banned Belgian chocolate, India forbidden Chinese toys and the US energy secretary said he would like to see tariffs on Chinese goods unless Beijing reduces greenhouse emissions – the “green face” of protectionism. There are dozens more such cases. Yet the effects of such incipient protectionism have been small, so far.

Will it stay that way? Reasons to be hopeful include the WTO, and the treaties that bind its members. Companies, even those producing for domestic markets, are more dependent on imported inputs than ever before. Exporters also have more political heft. This changes the politics of protectionism. The “Buy America” programme was watered down. And, in Brazil, private sector outrage that followed an attempt to impose import controls led to their removal. That is encouraging.

Even so, protectionism could rise as the recession worsens, putting governments under pressure to protect jobs at home. Indeed, anti-subsidy duties, anti-dumping rules, imports banned in the name of health, safety or the environment – all these are WTO-legal. Eight decades ago, many sensible people opposed the Smoot-Hawley bill; 1,028 economists petitioned against it, as did Henry Ford. Yet still the “asinine” bill passed. Free traders everywhere cannot drop their guard.


Thursday 19 March 2009

China blocks Coke on competition grounds

China is really getting into this "western economics" game. There is something that does not quite sit right when we read that China is blocking a Coke acquisition on competition grounds.

It is really hard to see this argument especially given China's overseas acquisition ambitions. Can the Chinese government not see what a damaging move this is after months of "anti-protectionist" speeches around the world. This is a naive move I am afraid.

China blocks Coca-Cola bid for Huiyuan [FT]

China rejected a $2.4bn Coca-Cola deal that would have been the country’s biggest foreign takeover, stoking fears of protectionism and warnings the decision could scupper Beijing’s push to invest in overseas mining companies.

China’s ministry of commerce ruled against Coke’s proposed acquisition of Huiyuan Juice, the country’s leading juice maker, on competition grounds, saying the move would hurt smaller domestic companies and limit consumer choice.


Bankers and lawyers denounced the move as a protectionist measure that would also have negative implications for Chinese investment abroad, notably Chinalco’s proposed $19.5bn tie-up with Rio Tinto, the Anglo-Australian miner.

Barnaby Joyce, a maverick Australian politician leading a fight to block the Chinalco investment on nationalist grounds, said China’s “welcome” rejection gave him “ammunition to articulate my beliefs”.

It will be interesting to see how this plays out in the courts and in the newspapers.


Tuesday 17 March 2009

UK University fees to rise

This blog was originally created to help Chinese students choose which UK University to study at given the relative lack of good information. The right hand column of this blog if you scroll down lists different "economics" courses on offer and the "good" Universities that provide them.

There are a number of posts on this topic and links to league tables for Economics departments also in the right hand column.

For all this, it appears that studying in the UK is about to get more expensive. As an academic in a leading UK institution this is good news for the faculty but not so good new for the student. However, if the UK is to compete with the US to offer the best education in the world then these increased prices are essential.

Universities push for higher fees [BBC]

Many universities in England and Wales want a sharp increase in tuition fees, a survey by BBC News has concluded.

Two thirds of vice-chancellors, speaking anonymously, said they needed to raise fees, suggesting levels of between £4,000 and £20,000 per year.

More than half of university heads want students to pay at least £5,000 per year or for there to be no upper limit.

England's Higher Education Minister David Lammy said there was an "important debate to be had".

The National Union of Students has warned of debts of £32,000 for students if fees rise to £7,000 per year.

Higher debt

The controversy over tuition fees is set to be re-opened, five years after it sparked one of the biggest backbench rebellions faced by the Labour government.

University fees must be reviewed this year by the government - and there are already arguments about whether the present £3,500 cap on fees should be lifted.

Students considering university are concerned by rising fees

Any changes will affect about a million students on undergraduate courses.

Universities UK has set out the consequences of fee levels of £5,000 and £7,000 - arguing that if fees reached £7,000 a market of differently priced courses would emerge.

This has angered the National Union of Students, which wants to entirely replace the fee system with repayments linked to later earnings.

"In the context of the current recession, it is extremely arrogant for university vice chancellors to be fantasising about charging their students even higher fees and plunging them into over £32,000 of debt," said NUS president Wes Streeting.

Students are now planning a lobby of the House of Commons on Wednesday in a protest against increasing fees.

Sally Hunt, leader of the UCU lecturers' union, accused vice chancellors of "ignoring the views of the general public as they try to secure more cash by any means possible".

Labour backbenchers are also mobilising on the issue - with MP Paul Farrelly, a former fee rebel, putting down a motion in the House of Commons warning against any plans to hike fees.

Mr Farrelly said the government would ignore "at its peril" the risks of pushing through another fee increase.

Recession and resistance

The BBC survey, gathering the views of 53 university vice-chancellors, showed a wide range of expectations of the scale of any increase - from £4,000 to £20,000 per year.

There is an important debate to be had now, which is about how we maintain the world class status of our higher education sector

There were also some expectations of differences between universities and courses - with more than a quarter saying they would not charge the full amount.

About one in 10 wanted the cap scrapped altogether so universities could charge whatever they wanted.

There was widespread support among vice-chancellors for the principle of fees - three out of four believing they had been a successful policy and nine out of 10 saying they should not be scrapped.

Two thirds believed fees had not deterred applications from students from poorer families.

What happened to the Chinese lost billions?

Interesting article discussing the Chinese lost billions. I admit to being in favour of Chinese diversification given the over reliance on US paper which offered historically low returns.

Given the worries over the safety of US owned paper and the poor returns this was probably the correct move but the wrong investments were chosen. I am not sure China can be blamed too much for calling this wrong. Very few called in right after all.

What China should not have been doing was making huge upside bets on global equities. Whoever sanctioned this move was clearly caught up in the belief that markets only go up and has cost China dearly. Heads must have (quite literally) been rolling over at the State Administration of Foreign Exchange.

China lost billions in diversification drive [FT]

China has lost tens of billions of dollars of its foreign exchange reserves through a poorly timed diversification into global equities just before world markets collapsed last year.

The State Administration of Foreign Exchange, the opaque manager of nearly $2,000bn (€1,547bn, £1,429bn) of reserves, started making huge bets on global stocks early in 2007 and continued this strategy at least until the collapse of the US mortgage finance providers Freddie Mac and Fannie Mae in July 2008, according to analysts and people familiar with Safe’s operations.

By that point Safe had moved well over 15 per cent of the country’s $1,800bn reserves into riskier assets, including equities and corporate bonds, according to people familiar with its strategy.

Safe never discloses its holdings except to the top Chinese leadership so it is impossible to know exactly how much it has lost from diversifying before markets crashed.

But judging from the subsequent fall in global stock prices and a conservative estimate that Safe held about $160bn worth of overseas equities, Chinese losses on those investments would exceed $80bn, or more than 50 per cent, according to Brad Setser, an economist at the Council on Foreign Relations in New York.

Total holdings of US equities by all Chinese entities reached $100bn by the end of June last year, more than triple the total of Chinese holdings in June 2007, according to an annual survey published by the US Treasury.

‘It appears Safe began diversifying into equities early in 2007 and, rather than being deterred by the subprime crisis, it continued to buy’
Brad Setser, economist, Council on Foreign Relations

In mid-2006, Chinese holdings of US equities totalled just $4bn. Chinese investors are mostly barred from investing abroad and Safe is the only entity with the resources and the authority to make such large-scale offshore portfolio investments.

“Safe has built up one of the largest US equity portfolios of any foreign government entity investing abroad, including the major sovereign wealth funds,” Mr Setser said.

“It appears Safe began diversifying into equities early in 2007 and, rather than being deterred by the subprime crisis, it continued to buy.”

China’s leadership has not commented on the equity losses but Wen Jiabao, prime minister, expressed concern about the value of China’s large holdings of US assets on Friday and warned the US to take measures to guarantee its “good credit”.

Safe uses a Hong Kong subsidiary when investing in offshore equities in the US and other countries, including the UK, where this subsidiary took small stakes last year in dozens of UK companies including Rio Tinto, Royal Dutch Shell, BP, Barclays, Tesco and RBS.

As part of its diversification in early 2008, Safe also gave some money to private equity firms such as TPG and to hedge funds on a managed account basis.

This gave the Chinese government ultimate approval for how its money was invested, according to people who have worked with Safe.

The large shift into global equities appears to have started at around the time that Beijing approved the establishment of China Investment Corporation, the country’s official sovereign wealth fund, which has been widely criticised in China for incurring paper losses of around $4bn on high-profile investments in Morgan Stanley and Blackstone.

The bulk of Safe’s holdings remain in US Treasury bills and much of the loss on its riskier assets will be offset by gains on long-term bills, according to Mr Setser.

“They are a lot more cautious and risk-averse now and have basically returned to buying government bonds,” said someone who works with Safe.


Sunday 15 March 2009

Law, Finance and Economic Growth in China

"Law, Finance and Economic Growth in China" is the title of the special issue of World Development. Some potentially interesting papers covering this broad topic although I am more skeptical on the contribution of others.

World Development Special Issue

Law, Finance, and Economic Growth in China: An Introduction
Pages 753-762
Yang Yao, Linda Yueh

The Effectiveness of Law, Financial Development, and Economic Growth in an Economy of Financial Repression: Evidence from China
Pages 763-777
Susan Feng Lu, Yang Yao

China’s Entrepreneurs
Pages 778-786
Linda Yueh

Bank Financing in China’s Private Sector: The Payoffs of Political Capital
Pages 787-799
Wubiao Zhou

Bank Size and Small- and Medium-sized Enterprise (SME) Lending: Evidence from China
Pages 800-811
Yan Shen, Minggao Shen, Zhong Xu, Ying Bai

Which Firms went Public in China? A Study of Financial Market Regulation
Pages 812-824
Julan Du, Chenggang Xu

International Listing as a Means to Mobilize the Benefits of Financial Globalization: Micro-level Evidence from China
Pages 825-838
Damian Tobin, Laixiang Sun

Spillover Effects Among the Greater China Stock Markets
Pages 839-851
Anders C. Johansson, Christer Ljungwall

Institutions and Foreign Direct Investment: China versus the Rest of the World
Pages 852-865
Joseph P.H. Fan, Randall Morck, Lixin Colin Xu, Bernard Yeung

What Determines Innovation Activity in Chinese State-owned Enterprises? The Role of Foreign Direct Investment
Pages 866-873
Sourafel Girma, Yundan Gong, Holger Görg

Can China’s Growth be Sustained? A Productivity Perspective
Pages 874-888
Jinghai Zheng, Arne Bigsten, Angang Hu


Friday 13 March 2009

China's assets in the US at risk?

Oh the irony. China is worried about the safety of its assets in the US. The US has given some assurances.

How did it come to this?

This is a very well written article that provides some sobering facts and figures. It is always worth remembering that China has a bigger population than the US and the EU put together.

The conclusion from this article:

1. China's currency will NOT be appreciating against the dollar.
2. China cannot sell its large dollar holdings for 2 reasons (a) there is nothing else to buy (2) selling would drive down the price and cause the problem it is currently trying to avoid.

It is almost as if the US and China have each other in some sort of death grip. One wrong move by either could kill them both. Who will blink first......

Wen puts US honor on the debt line [Asia Times]

HONG KONG - Chinese Premier Wen Jiabao, faced with growing concern that United States efforts to stem the financial crisis will hit the value of China's vast holdings of US debt, used the world's press on Friday to demand that the US honor its promises.

Wen told a press conference after the conclusion of a two-week meeting of the country's legislators that he was "a little bit worried" about the safety of Chinese assets in the US, and called on the US "to maintain its good credit, to honor its promises and to guarantee the safety of China's assets." He also reiterated that other countries had no right to push China into appreciating its currency, the yuan.

Various efforts by the US to resolve the country's financial crisis by selling ever more debt to pump money into the financial system are raising concern that this will drive up inflation and pull down the value of the US dollar, which would cut the value of debt held by China, the largest creditor of the US.

"We are very concerned about the economic developments in the US economy," Wen said. "The US administration of President Barack Obama has taken a series of measures to counter the financial crisis. We look forward to the effectiveness of those measures."

Wen called on the US government to ensure that the value of Chinese assets in the US is maintained amid the crisis.

"We have lent a huge amount of money to the United States and of course we're concerned about the security of our assets and, to be honest, I am a little bit worried," Wen said in Beijing after conclusion of the second session of the 11th National People's Congress (NPC). "That's why here I would like to urge the US to keep its commitment and promise to ensure the safety of Chinese assets."

About US$1 trillion of China's foreign exchange reserves, which increased 27% last year to $1.95 trillion, is invested in US government bonds and other securities. China held $696.2 billion in US government bonds as of December, up from $681.9 billion a month earlier, according to the US Treasury international capital flow report released on February 18.

China has accelerated its purchases of Treasury debt since August 2008, when holdings grew by $23.7 billion month-on-month to US$541.4 billion. By September, it had holdings of Treasury debt worth $585 billion, more than Japan, previously the top holder of US Treasuries. In August 2008, Japan cut its holdings to $573 billion from $586 billion.

As the global financial crisis sends asset values plunging, mainland leaders are under growing pressure at home to diversify the country's foreign exchange reserves.

In December at the fifth Sino-US Strategic Economic Dialogue in Beijing, Vice Premier Wang Qishan urged the US to adopt every measure necessary to stabilize its economy and ensure the safety of China's assets and investments in the United States.

Pauline Loong, senior vice president in charge of China policy and risk research at CIMB-GK Securities (HK) Ltd, said she did not think China would dump its dollar holdings .

"I cannot see Beijing dumping its dollar holdings," she said. "If the market thought there was anything to the talk, there would be a scramble to dump. The result would be exactly what Beijing would not want to see: a massive fall in the value of its dollar holdings. Also, Beijing has few alternatives. What is it going to switch into? There are few markets that are as deep and liquid as the dollar - and to park $2 trillion in exchange reserves, you can't be dabbling about.

"The fact that Premier Wen talks about being worried about the value of the country's dollar holdings is a good sign. If he is going to dump the dollar, he is not going to talk about it," she said.

Even so, a two-day gain in Treasuries juddered to a hold on Friday, with the yield on the benchmark 10-year note rising six basis points to 2.91% as the price of the 2.75% security due in February 2019 fell $4.69 per $1,000 face amount, to 98 19/32 in early London trade, according to Bloomberg.

Wen reiterated China's principle of guaranteeing the "safety, liquidity and good value" of its foreign exchange reserves and diversifying the investment of the reserves.

"On the foreign reserves issue, the first consideration is our national interest ... But we also have to consider the stability of the overall international financial system, as the two factors are interlinked," Wen said. "Currently, our reserves are generally safe."

Wen also ruled out any further strengthening of the Chinese currency in the intermediate future. He said no country had the right to press for either the devaluation or appreciation of the yuan. A stronger yuan would drive up the price of exports to the US while making it cheaper for US goods to be imported to China.

The yuan "has appreciated since the European and Asian currencies have dropped in recent year, in addition to the yuan's 21% appreciation against the dollar since July 2007", he said.

Loong, however, said there was a risk of incorrectly interpreting such comments as indicating policy was set in stone.

Governments everywhere, "not just in China, are devising strategies and coming up with policies on the run. If economic data in the coming months surprise on the upside or downside, then Beijing will need to revise policy," she said.

China, whose currency is not at present fully convertible into other currencies, is moving to make it more fully used in international trade. Wen said that a plan for the settlement of trade in yuan had been formulated and would be carried out as quickly as possible once it was approved by the State Council, or cabinet.

A pilot project involving yuan-denominated settlement of trade deals would start from Hong Kong, Guo Qingping, assistant governor of the People's Bank of China, or the central bank, said on Wednesday in Beijing.

Referring to China's ability to survive in the global downturn, Wen said the country was fully prepared for even worse conditions and had long-term preparations "with plenty of ammunition" to cope.

"We are ready to roll out new stimulus policies at any time," Wen said, without giving details. China last November announced a 4 trillion yuan (US$585 billion) stimulus package to help boost the domestic economy as exports slumped.

Loong said the Chinese government would do whatever it took to support economic growth, but timing remained a question.

"The 4 trillion yuan fiscal spending needs time to kick in and work its way through to the economy. Beijing, we believe, will not fire until it can see the white of the enemy's eyes. Why waste bullets?" she said.

"Any announcement of new stimulus money in the coming weeks as the market awaits news of the first quarter of 2009 gross domestic product [GDP] numbers is both good and bad news - good because it gives the government breathing space to tackle the basic problems of the economy; bad because the government clearly sees a need to prevent a seriously hard landing," Loong said.

Details of the package, including how much is actually new spending, are not yet clear. Wen conceded that some projects in the stimulus package, such as roads and railways, were included in the country's 11th five-year plan. Global stock markets declined sharply at the start of the NPC meeting when Wen, contrary to expectations, declined to announce any new stimulus funding.

China's stimulus package plan was not fully understood by the world, he said. "Rumors and misunderstanding set the world stock market on a roller coaster ride," he said.

Wen emphasized that although China would have difficulty in achieving its goal of 8% economic growth this year, it would be possible with "considerable efforts", given the advantages of a huge domestic market, a large amount of labor and a sound and stable financial sector.

"With a 1.3 billion population ... China has a bigger market than those of the Europe and the United States," Wen said.

Even so, confidence is what China needs most to carry out its all-around economic stimulus package, he said.

"We have proposed a stimulus package only less than half a year after the financial crisis began. To implement the plan, I still believe confidence is still the first and foremost thing," Wen said.

Harry Shutt: "Prophet of doom"

I place myself firmly on the dismal side of the dismal science that is economics. It is therefore refreshing to be able to write a blog post on someone who's prognosis on the global economy is as bleak as mine.

Why is this article relevant to China? Apart from the obvious links as a result of a globalised world and the flows of capital and people is that this doom laden article is couched in the theory of Marx. The issue of the "hegemonic conquest of China" is also worth thinking about a little more carefully.

China is therefore a very interesting country to have in the back of your mind as you read this article.

This article contains some great quotes.

Prophet of doom [RedPepper]

Dissident economist Harry Shutt was arguing that capitalism was heading for a fall long before the current crisis. Interview by Mat Little

Harry Shutt is shocked that the Financial Times has published one of his letters. This doesn’t normally happen, despite his firing off regular missives. He thinks it might be a sign of the times. For if the house organ of the global financial establishment is prepared to give space to the views of someone like him, something must be seriously amiss. ‘I’m sure that this would never have been published a year ago. Now perhaps people see that the writing is on the wall,’ he says.

Talking about the decline of capitalism Shutt states:

Barely a decade after its victory over communism, and just at the point of its hegemonic conquest of China and India, capitalism, he argued, was far less healthy than it appeared to be. In fact, it was heading for a fall.

The intutition behind the following paragraphs is sound.

In order to understand Shutt’s explanation for the crisis, it is necessary to take a brief detour through Marx. According to Marx, capitalism is a system of accumulation. Profits are made but can’t all be consumed by owners. Extra profits need to be recycled through the market. ‘The only way you can successfully recycle them is to either expand your existing business or diversify into another business,’ says Shutt. ‘It all depends on the ultimate consumer, consuming more and more. It has to grow, growth is built in.’ The problem is that as profits are invested into the market, generating more profits that in turn have to be reinvested, production expands until it reaches a level that can no longer be absorbed by consumers. The market is glutted, and recession results. But the destruction of capital and jobs creates pent up demand for the whole process to begin again in time.

That, in brief, is the business cycle. But Shutt’s argument is that western political leaders have, for years, based their economic strategy on avoiding or limiting the downside of the cycle, a doctrine encapsulated in Gordon Brown’s famous boast of an ‘end to boom and bust’. Credit expansion has been fuelled, household debt recklessly encouraged, state services privatised, financial institutions subsidised and regulations banished all in order to find profitable outlets for a burgeoning ‘wall of money’ generated by the system. A high rate of growth is needed to maintain this process, but can’t be sustained because of the weakness of demand in the economy.

The consequence is that money, frustrated in its search for productive activities to invest in, has turned to speculation. ‘When you get to the point that you can’t actually make profits by producing more stuff – organic growth – profits get recycled into speculation,’ says Shutt. ‘In other words, you start placing bets that certain assets will increase in value.’ And once speculation takes hold, it becomes advantageous to bring even more money into the market, because that pushes up the value of assets. Hence, the ‘leveraging’ by speculators – the borrowing of more and more money to speculate on financial assets.

Again, one can rejoice in the bleakness of Harry Shutt. I find myself agreeing yet again with his prognosis.

It’s not a cheering prognosis – a protracted downturn of several years with the likely side effects of military conflict and scapegoating of minorities. But Shutt hasn’t finished yet. There is no light at the end of the tunnel, or if there is, it’s very dim. He believes that that this slump will be much more difficult to emerge from than in previous downturns because traditional engines of growth are no longer available to drag us out. Remove debt-fuelled consumption and property speculation from the equation, and you are left with anaemic substitutes such as the internet, the service sector and green technology. The arguments of centre-left Keynesian commentators that the answer lies in re-regulating the financial sector and encouraging consumer spending, ignore the fact, says Shutt, that the demand for capital – the availability of new profitable productive activities to invest in – is in long-term decline, and consumer spending power has been exhausted.

Shutt is wise enough to realise that there is no solution to the problem. This shows that is he is not some deluded Marxist but a simple realist.


Thursday 12 March 2009

China's exports fall off a bigger cliff than expected

It was always going to be tough for China's exporters. I have forgotten the number of times this blog has warned that things will be far worse for China than current pundits predict.

The news that exports fell 25% is no surprise. This will not be the end. The sheer volume of exports from China to the West (the EU and UK specifically) means that any buyers strike will hit China very heavily. The rest of Asia will also suffer as China reduces its inputs from the wider Asia trade network.

It is hard to believe any "analysts" really thought there would be a modest uptick. Who are these people? At least the excellent Pettis is on the ball as usual. That is a man worth listening to although I have previously disagreed with his overly optimistic stock market predictions.

China's policy of sending delegates to Europe and the US to diffuse the "protectionist" fears is a wise move. Having spoken to a well placed economist in China it is clear that they have a good understanding of the political-economy issues currently in play.

The fact that Chinese exporters are lobbying for a currency depreciation is a further worry on the horizon but I just cannot see it. The Chinese government would not risk such an aggressive move just yet.

China hit by huge drop in exports [FT]

China’s exporters succumbed on Wednesday to the full force of the global economic turmoil. Even after the horror show of economic statistics published around the globe in recent months, China’s exports numbers in February painted a grim picture.

Some analysts had been expecting a modest uptick, given that there were fewer working days in February last year because of new-year holidays. Instead, exports slumped by 25.7 per cent as the collapse in global demand caught up with the country’s exporters and overshadowed a sharp rise in domestic investment..

China’s exports have decreased since November, but until last month the rate of decline had been much slower than in other Asian countries with large export sectors.

Economists said the headline figure for last month, which was already much worse than expected, probably masked an even steeper decline given that there was a shorter number of working days in February 2008 due to new-year holidays.

“It was really just a question of time,” said Michael Pettis, finance professor at Beijing University. “Given the figures coming out of other Asian countries, China’s recent export numbers were not sustainable.” Chinese exports have fallen every month since November but until Wednesday they had dropped at a slower pace than elsewhere in Asia.

For Chinese diplomats preparing for the Group of 20 summit, the trade numbers might come as something of a relief. In particular, the trade surplus, which had been hovering around a record $40bn (€31bn, £29bn) a month since October, declined sharply to $4.84bn in February.

With the global recession deepening, China has been afraid that its large trade surpluses will encourage protectionist pressures and that other governments at the G20 will press China to appreciate its currency.

China this week launched its second buying mission to Europe in the past month in an effort to defuse protectionist sentiment. The government has also faced rising trade tensions with some neighbouring countries after China has begun running a trade surplus with the rest of Asia in recent months. India has already placed restrictions on Chinese imports of toys and officials fear further such measures across the region.

The figures released on Wednesday will allow the Chinese government to argue that it is starting to rebalance its economy, with exports slowing sharply and imports falling less rapidly as the government’s fiscal stimulus plan starts to kick into action. The 26 per cent rise in fixed asset investment over January and February, announced on Wednesday, lends some credibility to this story, as do huge recent increases in bank lending.

“This gives us a glimpse of what China could start to look like if fiscal policy really gets going,” said Paul Cavey, an economist at Macquarie Securities.

However, it was not clear if the trend was sustainable given signs of weak underlying demand in much of the economy. “You could find that imports fall again in a few months time and the trade surplus rises,” he said.

A smaller trade surplus would have other international implications, including fewer Chinese purchases of US financial assets. With foreign direct investment into China also slowing and some signs of capital outflows, most economists are predicting that China’s foreign currency reserves will not increase at the same rate as they did last year.

“Private buyers [of US Treasury bonds] will have to take up more of the slack to prevent the expanded supply from pushing up auction rates,” said Stephen Green at Standard Chartered in a research note.

However, while the trade numbers might help to ease some of the international criticism of China, they will also magnify the already huge pressures that the government is facing at home from the export sector. Such a large decline in exports will probably mean more factories on the verge of bankruptcy and a further increase in unemployment, on top of the 20m migrant workers who have already lost their jobs from the export sector.

Chinese exporters are likely to step up calls for a depreciation of the currency. However, the government has rejected such an option. In his speech to the National People’s Congress last week, Wen Jiabao, the premier, said that the exchange rate would remain “basically stable”. Economists point out that a modest weakening of the Chinese currency would do little to help exports in the current market but could prompt a large and potentially destabilising capital outflow, as well as anger trading partners.

Instead, the government has been looking at other measures to try to assist exporters. Chen Deming, the commerce minister, said at the weekend that China would reduce taxes on exports to zero and provide additional financial assistance to exporters. The China Iron and Steel Association has proposed lifting a tax rebate on exports of cold-rolled steel from five per cent to 17 per cent, state media reported on Wednesday.

Xie Rongfang, head of the Wenzhou Shoe Industry Association, said a further increase in tax rebates was being negotiated with the government. “The pressure on us at the moment is huge, both at home and abroad, so any financial support the government can give us will be very welcome,” she said.

However, these policies bring their own dangers, because if the government appears to be doing too much for exporters it could encourage retaliatory measures from trading partners.

“If the European market starts to be flooded again with cheap Chinese steel, then there will be a big fight,” said a European diplomat in Beijing this week.

After dropping 43 per cent in January, imports fell by 24 per cent last month, which some analysts said was a sign that the government’s fiscal stimulus measures were beginning to have an impact.

Figures for fixed asset investment for the first two months of the year were also much higher than expected, rising 26.5 per cent against the same period the year before, compared to 21.9 per cent in December.

Within those figures, transport investment – one of the priorities of the fiscal stimulus plan – rose 210 per cent over the same period the year before, while property investment was up only 1 per cent, a sign of the continued weakness in the housing market.


Research Paper: "Rising Income Inequality in China: A Race to the Top"

How much of a problem could China's increasing income inequality be? The following paper suggests there is room for optimism.

"Rising Income Inequality in China: A Race to the Top"

World Bank Policy Research Working Paper No. 4700

XUBEI LUO, World Bank
NONG ZHU, University of Quebec at Montreal (INRS-UCS)

Income inequality in China has risen rapidly in the past decades across regions, between rural and urban sectors, and within provinces. The dynamics of divergence across these sub-national areas have taken the form of a race to the top - meaning that all segments of the population, including the poor with low education in lagging inland rural areas, have experienced gains in average income. The largest gains have been registered by those with higher income and education in leading coastal urban areas. Using the China Economic, Population, Nutrition and Health Survey data of 1989 and 2004, we show that the most important factors explaining overall inequality are differential returns to schooling and sector of employment. A decomposition analysis based on household income determination shows that the increase in returns to education explains two-thirds of income changes in urban areas and one-sixth in rural areas. The widening income gaps are the consequence of higher growth in leading urban and coastal areas and that the skilled population has benefited more from the economic reforms carried out during the last 25 years. The authors argue that rising income inequality can be part of a normal process of development at a certain stage, and that the dynamics of spatial income divergence in the form of "a race to the top" can be desirable to some extent as it unleashes competitive pressure and creates incentives for investment in skills. Continuing to improve market efficiency and investing in people, in particular improving education service in lagging areas to poor people, are important for sustainable growth and equitable distribution in the long run.


Friday 6 March 2009

Research Paper: "How vertically specialized is Chinese trade?"

This is an area where I have done considerable work. Judith Dean is a well respected researcher in this area. This is a paper I need to read.

It is odd to see so many China related papers being published in the Bank of Finland working paper series. I cannot see the link myself.

The methodology employed in this paper appear to be appropriate and make a useful contribution to the literature.

How vertically specialized is Chinese trade? [PDF]

Judith Dean*, K.C. Fung** and Zhi Wang***

How vertically specialized is Chinese trade?

Two recent phenomena have transformed the nature of world trade: the explosive growth of Chinese trade, and the growth of vertically specialized trade due to international produc-tion fragmentation. While vertical specialization may explain much of the growth and unique features of Chinese trade, few papers have quantitatively assessed these two phe-nomena together. In part, this is because it is difficult to measure just how vertically spe-cialized Chinese trade is. The unique features of China's extensive processing trade cause both the identification of imported intermediate goods, and their allocation across sectors, to depend upon the Chinese trade regime. In this paper, we estimate the vertical speciali-zation of Chinese exports, addressing these two challenges. Using two Chinese benchmark input-output tables, and a detailed Chinese trade dataset which distinguishes processing trade from other forms of trade, we develop a new method of identifying intermediate goods imported into China. Vertical specialization is then estimated using two methods. The first method uses the Hummels, Ishii and Yi (2001) measure, the official benchmark IO tables, and incorporates our identification correction. The second method follows the first, but also incorporates the Koopman, Wang and Wei (2008) method of splitting the benchmark IO tables into separate tables for processing and normal exports, in order to ad-dress the allocation problem. Results show strong evidence of an Asian network of inter-mediate suppliers to China, and the two methods provide a range of estimates for the for-eign content of Chinese exports. In 2002 aggregate exports ranges between 25% and 46%, with some individual sectors are as high as 52%-95%. Across destinations, under both me-thods, the vertical specialization of Chinese exports declines with the level of development of the trading partner.

JEL Codes: F10, F14

Key Words: China, fragmentation, vertical specialization, trade growth


Research Paper: China's New Labour Contract Law: No Harm to Employment?

The current recession has meant that many academic papers are "born" out of date. Once a paper is submitted to a journal it can take up to 2 years for it to come out in print. This is a major failing in academic economics although some improvements have been made in recent years.

The problem remains the uncooperative nature of overworked and under rewarded referees.

For example, this paper looks very interesting and I suppose China can still be considered "fast growing", just not quite as fast as before.

The labour market is another issue entirely with rapidly rising unemployment more on which later. The guys over at "China Law Blog" may well be perplexed at economists throwing a load of equations on the issue of employment law.

"China's New Labour Contract Law: No Harm to Employment?"

BOFIT Discussion Paper No. 29/2008

MICHAEL FUNKE, University of Hamburg - Department of Economics and Business Administration, CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
YU-FU CHEN, University of Dundee - Department of Economic Studies

In January 2008, China adopted a new labour contract law. This new law represents the most significant reform to the legislation on employment relations in mainland China in more than a decade. The paper provides a theoretical framework on the inter-linkages between labour market regulation, option value and the choice and timing of employment. All in all, the paper demonstrates that the Labour Contract Law in its own right will have only small impacts upon employment in the fast-growing Chinese economy. Rather, induced increasing unit labour costs represent the real issue and may reduce employment.


China News Wrap

A relatively new China News site is now live. It is called China News Wrap and I have added it to the blog roll.

China News Wrap provides regular summaries in English of major headlines and new stories in the mainland Chinese media. All translations and summaries on the website are the original works of the site owner.

The main use of this site is to get access to stories from a Chinese media perspective that might not make the Western press.

A potentially useful resource.


Thursday 5 March 2009

FTChinaConfidential - free trial

The Financial Time's coverage of China is generally excellent.

On March 5th the FT launched FT China Confidential.

The content appears excellent and at the moment individuals and companies can sign-up for a free 2 week trail although I recommend reading the small print first.

FT China Confidential


Sunday 1 March 2009

Asia also reliant on the West - no surprise

As readers of this blog may be sick of reading about - China's continued reliance on the West has been greatly underestimated. By definition the same applies to the rest of Asia.

Why? Because a large proportion of China's import of intermediates is from the rest of Asia. The FINAL goods are then exported to the West.

If China's exports fall then so do Asia's exports to China (and any exports that go directly to the West). There will be some very large GDP falls coming up in Asia.

The FT get round to reporting this news. Of course it "smells a lot of just supply-chain dynamics”. That is because it is and has been for years.

Once over priced property prices start falling the real meltdown will start. Asian banks are looking mightily unattractive at the moment. Any rebound will be further away than is suggested here in my opinion.

Asia trade suffers as Chinese imports fall [FT]

Asia, whose economic resilience was in part meant to be guaranteed by booming regional trade, is confronting growing signs that such trade remains much more dependent on western demand than previously hoped.

Michael Buchanan, Asia chief economist at Goldman Sachs, says the dramatic fall in Chinese imports from other Asian countries in January shows that Chinese consumers have not replaced their US and European counterparts. Instead, he says a lot of intra-Asian trade still “smells a lot of just supply-chain dynamics” feeding exports to other regions.

In January, exports from Taiwan and South Korea to China fell by 50 per cent and 33 per cent year-on-year respectively. South Korea said on Sunday its overall exports fell less rapidly in February than in January. But it will release only on Monday a breakdown of shipments to China and elsewhere.

More bad news is expected to follow, at least until the second quarter, as most export-focused Asian companies cut jobs and manufacturing capacity because of anaemic western consumer demand. Government stimulus packages, heavily geared towards infrastructure spending, will only gradually help Asia recover, rather than act as an overnight cure.

Asia’s most open economies – Japan, South Korea, Taiwan, Hong Kong and Singapore – are suffering the most. Each of them is set to see their economies contract this year. In Hong Kong and Singapore, the problems are compounded by a furious race to expand a financial sector that is now bleeding jobs and triggering a tumble in high-end property prices.

Among Asian nations, only the Philippines and Indonesia have a lower ratio of exports to gross domestic product now than in 2001. Some economists are warning that other Asian nations should stop counting on intervention from Beijing to lift the region out of its economic quagmire.

“There is a sense in Asia that as long as China continues to grow relatively quickly, then the rest of Asia will benefit . . . China is now the most important market for many Asian export-oriented economies, but it appears to us that China’s economic stimulus plan will support domestic investment, which is not necessarily import-intensive,” says James McCormack, Fitch’s head of Asian sovereign ratings.

Nevertheless, many economists are still expecting a regional rebound in the second half. Some of the optimism stems from a belief that the recent slowdown was in part self-induced.

A year ago, authorities were facing surging oil and food prices, which convinced them to review their traditional bias towards growth and worry more about inflation. But having raised interest rates aggressively, they were confronted with a worldwide credit meltdown, so that “at a time when they should have been infusing liquidity to strengthen financial sector fragility, they actually constrained it,” says Subir Gokarn, Asia chief economist at Standard & Poor’s.

The good news, Mr Gokarn and others note, is that central banks, other than Japan’s, have room to cut rates further and feed into an Asian banking system that still has plenty of liquidity and has not suffered anything like the subprime-induced losses of western banks.

Furthermore, Asia will reap great long-term benefits from additional infrastructure spending, because of years of under-spending and a booming urban population.

Despite some concerns about how efficiently the money will now be spent, “Asia is one of the very few regions of the world where there is a really valid case for expanding infrastructure,” says Glenn Maguire, Asia chief economist at Société Générale.