BBC in China "China's development gap"

The today programme - a flag ship BBC morning show on Radio 4 has an interesting China series of reports

Humphrys in China[BBC]

This story on the development gap is certainly worth listening to.

Stockmarket gambling grannies and the gapo between those who have and those that have not. Social unrest is crucial for the govenment to key a close eye on.

Development gap [Audio]

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Product Fail: "Superhero fail"

The second in the series of our translation fails.

You have to wonder whether there is anyone checking these very basic facts.

Surely there is quality control at some level at some point.

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Product Fail: "Organ Fail"

Today this blog will start of new series of posts related to the quality of goods coming from China. I must make it clear that not all of these goods will have been made in China but they are indicative of a wider economic problem.

On the plus side I hope these posts will bring a smile to your faces.

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China's energy demand in 21st century

One of my new research interests is China's energy needs. This paper uses computable general equilibrium which is not ideal (the process is to make a large number of assumptions and press a button).

The predictions seem to be sound however. 80% of oil imported is a lot. The West needs to develop alternative energy sources sooner rather than later.

The Sleeping Giant Awakes: Projecting Global Implications of China's Energy Consumption

Jian Zhang
World Bank

Denise Eby Konan
University of Hawaii at Manoa

Review of Development Economics, Vol. 14, No. 4, pp. 750-767, November 2010

Abstract:
China's rapid economic growth has generated a surge in energy demand that is reallocating global fuel balances. We employ a global energy computable general-equilibrium model to analyze alternative scenarios for economic growth, Chinese currency appreciation, and oil price shocks, with a special focus on China energy markets. Imports from the Middle East, Central Asia, Russia, and Sub-Saharan Africa are found to comprise a growing share of China's energy. Imports to China grow from 12% of world energy imports in 2010 to 17% by 2050 when over 80% of China's oil demand will be imported.

Accepted Paper Series

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China's housing market - is the bubble about to go BANG

Good analysis from SERI Quarterly. My belief is that there has been a dangerouslt large bubble for a while. The real danger is who loses from the bubble bursting - state owned enterprises, the army, government officials?

There could be blood on the carpet - literally.

The article with footnotes and more figures can be seen by clicking the link below.

Possibilities of a bubble Collapse in the Chinese Property Market [SERI Quarterly]

Japan and the US present good examples of a property market meltdown and they both exhibited common symptoms before the plunge. First, household debt was extremely high. US household debt amounted to 133 percent of disposable income in 2007 right before the crisis, while debt in Japan was 130 percent in 1990. Second, the increase in real estate prices had been running ahead of growth in disposable income from 1999 to 2006 in the US and from 1986 to 1991 in Japan. Both countries maintained low interest rates before their property bubble burst, spurring a sharp run up in home prices with deeply leveraged purchases; loan growth remained far higher than income growth for at least five years.

China's price to income ratio (PIR) is among the highest in the world, and according to some analysts, the market is frothy because housing prices are very high in terms of income levels. In fact, China's PIR is eight times on average, 19 times in Beijing and 16 times in Shanghai. This is very high compared to other countries: three to six times income in the US, 7.5 times income in Korea and 5.7 times income in Japan.

Despite such high prices, 70 percent of residents in large cities and 80 percent of those in ordinary cities have their own house. This is because many homeowners own homes provided by the government until the housing policy reform of 1998. Most significantly, China's household debt is only 39 percent of disposable income; accordingly Chinese property owners can withstand a decrease in property prices, as they are not suffering from high interest rates.7 In addition, the rate of increase in real estate prices surpassed disposable income growth only in the second half of 2009, meaning that if there is a bubble in the market, it is less than a year old.

Therefore, real estate prices are high in nominal terms, but are not in practice, an actual burden for most people. Considering the household debt ratio, the time the bubble was formed, and the rate of home ownership, if property prices slide, it is more likely to be a temporary adjustment and correction, rather than a warning sign of a coming meltdown.

Low Financial Industry Exposure to the property Market

New loans for property increased 327 percent in a year from 480 billion yuan in 2008 to 2 trillion yuan in 2009, and recorded 47 percent growth in the first half of 2010 compared to the same period of 2009. However, in 2010, the share of loans for property has remained a low 20 percent of the total, compared to 33 percent in Korea (March 2010) and 39.2 percent in the UK in 2006 (immediately before the collapse of its own housing bubble). As of the second quarter of 2010, loans for property (real estate development and mortgages) amounted to 20 percent of the total even after property prices soared from the second half of 2009.

Also, Chinese banks appear financially sound. Loans increased remarkably in 2009 as a result of government stimulus, but the loan-to-deposit ratio stood at 70 percent in April 2010, thanks to the government's 75 percent cap. Compared to bank assets, loans accounted for only a small amount,8 while property-related loans took only 10 percent of assets, enough for banks to cushion themselves from a plunge in real estate prices.9 Therefore, it is highly unlikely that a property market crash in China would trigger a series of bankruptcies among financial institutions, precipitating a financial crisis, as it did in the US and Europe in 2007 and 2008.

Long-Term Challenges of the Chinese Property Market

Chinese property issues are directly linked to government revenue. Real estate sales increasingly account for a greater share of local government revenue. Sales accounted for 23 percent in 2009.10 This has prompted many analysts to predict that the government would not control property prices, as price increases mean higher public revenue. To maintain stable financial income, reasonable growth of real estate prices would be ideal.

Meanwhile, most current homeowners benefited from the government housing policy. Today's new arrivals to cities, self-employed people, and new graduates, however, will find it hard to buy their home. Some non-owners even refer to themselves as "house slaves," working only to save enough to buy a home.

Property issues represent not only economic, but also social, class, generation, and urban-rural disparities. Although a bursting property bubble is improbable, continued price growth may spark severe economic and social problems. To prevent this, the government should maintain balance between housing price control and government revenue.

Currently, China is facing economic and social changes resulting from a transition in its growth commodel. As the property sector takes a large share in the economy, China needs to come up with solutions to prevent property prices from undermining economic and social stability, particularly in this transitional period.

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The great 1959-1961 famine

You have to hope that economists also read history books.

The book below is one of the best books I have ever read. It comes highly recommended for those interested in China and Chinese economics.
















If one was to read this book and then read the paper below you might arrive at a different conclusion as to the cause of the great famine.


The Institutional Causes of China's Great Famine, 1959-61

Xin Meng
Australian National University - Department of Economics; Institute for the Study of Labor (IZA)

Nancy Qian
Yale University - Department of Economics

Pierre Yared
Columbia University - Graduate School of Business


September 2010

NBER Working Paper No. w16361

Abstract:
This paper investigates the institutional causes of China’s Great Famine. It presents two empirical findings: 1) in 1959, when the famine began, food production was almost three times more than population subsistence needs; and 2) regions with higher per capita food production that year suffered higher famine mortality rates, a surprising reversal of a typically negative correlation. A simple model based on historical institutional details shows that these patterns are consistent with the policy outcomes in a centrally planned economy in which the government is unable to easily collect and respond to new information in the presence of an aggregate shock to production.


The following book deals directly with the famine. The title gives it away.

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Why did China industrialise after England?

To an economist this is an interesting question. I have read widely on this subject. This paper provides a possible answer although by no means all of it.

For that we need to look at England colonies, slave labour and massive imports of raw material. China did not have an "empire" that England accumulated during the Victorian era. This enabled capital to accumlate and the shortage of labour required the design of labour saving devices - this was not necessary in China for obvious reasons.

"Why China Industrialized after England"

Economic Inquiry, Vol. 48, Issue 4, pp. 860-863, October 2010
BARRY S. KAHN, affiliation not provided to SSRN

Although industrialization first occurred in England, it is thought that China, not England, may have been the world leader in technology at the time. Yet, China did not industrialize until 150 yr after England and nearly a century after less advanced European countries. This represents a puzzle because two-sector neoclassical growth models, such as Hansen and Prescott (2002), that accurately match industrialization, require that more technologically advanced countries industrialize at an earlier date. I find that a model that accounts for cross-country heterogeneities in population density accurately predicts the timing of industrialization in China.

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Population Wars - India v China

Interesting article on China's population relative to India's.

I have included a number of quotes.

The Battle of the Billionaires: China Vs. India [Globalist]

Together, China and India currently contain nearly two out of every five people in the world — and are equal in size to the world population in 1950.

I like that statistic - together they are equal to the whole world's population in 1950. That puts it in context fantastically. Here is another mind bender:

China’s and India’s demographic size may also be appreciated by noting that each of their populations is larger than those of Africa, Europe or the entire Western hemisphere.

So where do they live:

Also, while most Chinese and Indians still live in rural areas — 55% and 70%, respectively — China will soon become predominately urban, perhaps as early as 2015. In contrast, India is expected to remain mainly rural at least until mid-century.

So what about the future - now we get to fertility. We all know about China's one child policy and its aging population (certainly relative to India). What is remarkable is how high it was in the 1950s at 6 children per woman.

Although fertility levels in the mid-1950s were about the same in the two countries — at six children per woman — fertility rates have declined much faster in China than India, due in part to China’s one-child family policy. Today, China’s fertility is below replacement and one child less than India’s — 1.8 compared to 2.8 children per woman.

So what about the (controversial) gender mix - here China and India share similarities. I detect the raw material for large armies and a future war. Technology means this trend is likely to get worse if anything.

Both China and India have significantly more males than females, in sharp contrast to demographics in most other nations. This atypical gender imbalance is due in part to the use of prenatal ultrasound scanning to abort female fetuses.

So when will the race end?

As a result, India is expected to overtake China as the most populous country in the world in less than two decades, perhaps around 2028.

The question remains whether the world is able to feed the increased number of people given the environmental degradation in both countries. Moreover, China's one child policy may not last the test of time.

The conclusion - will Malthus be proved correct after all of will technology save the day. Climate change, war or a new super virus will probably kick in at some point and reduce populations dramatically.

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Soros speaks: "China must fix the global currency crisis"

Whilst George Soros and the US are happy to hammer the Chinese over the overvalued RMB I am pleased to see that Wen Jiaboa is finally coming out and explaining the true implications of a revaluation policy.

This is important and should not be underestimated.

Wen's argument is that:

..."forcing Beijing to revalue its currency would lead to a "disaster for the world"".

Why? Because of the increased changes of social unrest of course. In this blog this is something I have been writing about for months if not years. This factor has been key to China's exchange rate policy all along. His warning is correct:

"Many of our exporting companies would have to close down, migrant workers would have to return to their villages".

"If China saw social and economic turbulence, then it would be a disaster for the world".

This issue needs close attention.

So let us now look what George has to say:

"China must fix the global currency crisis"[FT]

The prevailing exchange rate system is lopsided. China has essentially pegged its currency to the dollar while most other currencies fluctuate more or less freely. China has a two-tier system in which the capital account is strictly controlled; most other currencies don’t distinguish between current and capital accounts. This makes the Chinese currency chronically undervalued and assures China of a persistent large trade surplus.

Most importantly, this arrangement allows the Chinese government to skim off a significant slice from the value of Chinese exports without interfering with the incentives that make people work so hard and make their labor so productive. It has the same effect as taxation but it works much better.

This has been the secret of China’s success. It gives China the upper hand in its dealings with other countries because the government has discretion over the use of the surplus. And it protected China from the financial crisis, which shook the developed world to its core. For China the crisis was an extraneous event that was experienced mainly as a temporary decline in exports.

It is no exaggeration to say that since the financial crisis, China has been in the driver’s seat. Its currency moves have had a decisive influence on exchange rates. Earlier this year when the euro got into trouble, China adopted a wait-and-see policy. Its absence as a buyer contributed to the euro’s decline. When the euro hit 120 against the dollar China stepped in to preserve the euro as an international currency. Chinese buying reversed the euro’s decline.

I would ask again that readers refer to my previous post on what China can actually do with its surplus. Surplus' are not always good.

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Rural earnings in China and the financial crisis

Apologies once again for a lack of recent posts. This management game takes up a lot of my previous blogging time.

It is very interesting to get some figures on the impact of the financial crisis on employment in China. I will be following this up shortly with a link to the current "currency" debate taking place in the national press.

The bottom line is that China is now coming out to explain it's position - something it should have done a while ago (see next post).

The numbers are large and the recovery impressive. 49 million laid off and over 1/2 rehired within a short space of time.

Interesting reading.

The Impact of the Global Financial Crisis on Off-Farm Employment and Earnings in Rural China

Jikun Huang
Chinese Academy of Sciences (CAS)

Huayong Zhi
affiliation not provided to SSRN

Zhurong Huang
affiliation not provided to SSRN

Scott Rozelle
Stanford University - Freeman Spogli Institute of International Studies

John Giles
World Bank

October 1, 2010

World Bank Policy Research Working Paper No. 5439

Abstract:
This paper examines the effect of the financial crisis on off-farm employment of China's rural labor force. Using a national representative data set collected from across China, the paper finds that there was a substantial impact. By April 2009 off-farm employment reached 6.8 percent of the rural labor force. Monthly earnings also declined. However, while it is estimated that 49 million were laid-off between October 2008 and April 2009, half of them were re-hired in off-farm work by April 2009. By August 2009, less than 2 percent of the rural labor force was unemployed due to the crisis. The robust recovery appears to have helped avoid instability.

Keywords: Labor Markets, Labor Policies, Work & Working Conditions, Tertiary Education, Crops & Crop Management Systems

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THE World University Rankings 2010 - China rising

The long awaited TES World University Rankings 2010 have been released.

The news is good for China and the US but the news is mixed for the UK. Whilst clearly overachieving relative to size and percentage of GDP it is still not good enough.

Overseas students studying in the UK bring is large revenues. It is important that they receive a top quality education and further falls relative to the rest of Europe, Canada and Australia is not acceptable.

Ranking HERE.

The subject specific rankings are not yet out for economics. I will post these at the time but my advice for Chinese students remains - only apply for a UK university that is in the top 100 or 200 in this ranking.

Anything else should be considered a waste of money.

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Remaking the World of Chinese Labour

Labour relations in China over time make for fascinating reading. To the outsider it appears strange that a communist country run by and for the workers appears in many respects to be exploiting workers more than in any capitalist country demonstrated not least by widening income inequality.

This paper in the BJIR looks interesting.

I agree with the conclusions - the new labour laws are good ones but there is a delicate balance of power that the state will have to very carefully.


"Remaking the World of Chinese Labour: A 30-Year Retrospective"

British Journal of Industrial Relations, Vol. 48, Issue 3, pp. 507-533, September 2010

ELI FRIEDMAN, affiliation not provided to SSRN
CHING KWAN LEE, affiliation not provided to SSRN

Over the past 30 years, labour relations, and, indeed, the entirety of working-class politics in China, have been dramatically altered by economic reforms. In this review, we focus on the two key processes of commodification and casualization and their implications for workers. On the one hand, these processes have resulted in the destruction of the old social contract and the emergence of marketized employment relations. This has implied a loss of the job security and generous benefits enjoyed by workers in the planned economy. On the other hand, commodification and casualization have produced significant but localized resistance from the Chinese working class. Up until now, the activities of labour non-governmental organizations and of the official trade unions have contributed to the state's effort of individualizing and institutionalizing labour conflict resolution through labour law and arbitration mechanisms. Finally, we provide a brief discussion of the impact of 2008's Labour Contract Law and the outbreak of the economic crisis on labour relations. We conclude that the continual imbalance of power at the point of production presents a real dilemma for the Chinese state as it attempts to shift away from a model of development dependent on exports.

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The Chinese Housing Bubble - 40% falls possible

I have long been a raging bear on the Chinese housing market. This is a result of a number of China specific factors. (1) lack of assets to invest in (2) the actions of state owned companies including the army that are dangerously addicted to speculation and not doing what they are supposed to do.

This recent CEPR paper looks at this issue in detail. I tend to agree with their headline figures and the results match my own concerns.

40% falls are a real possibility. The fact that the authors pick up on the state owned company problem show that these authors are on the ball.

"Evaluating Conditions in Major Chinese Housing Markets"

NBER Working Paper No. w16189

JING WU, Institute of Real Estate Studies, NUS, Institute of Real Estate Studies, Tsinghua University

JOSEPH GYOURKO, University of Pennsylvania - Real Estate Department, National Bureau of Economic Research (NBER)

YONGHENG DENG, National University of Singapore

High and rising prices in Chinese housing markets have attracted global attention, as well as the interest of the Chinese government and its regulators. Housing markets look very risky based on the stylized facts we document. Price-to-rent ratios in Beijing and seven other large markets across the country have increased from 30% to 70% since the beginning of 2007. Current price-to-rent ratios imply very low user costs of no more than 2%-3% of house value. Very high expected capital gains appear necessary to justify such low user costs of owning. Our calculations suggest that even modest declines in expected appreciation would lead to large price declines of over 40% in markets such as Beijing, absent offsetting rent increases or other countervailing factors. Price-to-income ratios also are at their highest levels ever in Beijing and select other markets. Much of the increase in prices is occurring in land values. Using data from the local land auction market in Beijing, we are able to produce a constant quality land price index for that city. Real, constant quality land values have increased by nearly 800% since the first quarter of 2003, with half that rise occurring over the past two years. State-owned enterprises controlled by the central government have played an important role in this increase, as our analysis shows they paid 27% more than other bidders for an otherwise equivalent land parcel.

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China's Growth to 2030: The Roles of Demographic Change and Financial Reform

This paper is worth a quick glance. What is interesting is the acknowledgement that China's population is not growing so quickly or will even start to contract. I am not convinced that this is true.

China's Growth to 2030: The Roles of Demographic Change and Financial Reform

Rod Tyers
Australian National University (ANU) - School of Economics

Jane Golley
Australian National University (ANU) - Faculty of Economics & Commerce

Review of Development Economics, Vol. 14, Issue 3, pp. 592-610, August 2010

Abstract:
China's economic growth has, hitherto, depended on its relative abundance of production labor and its increasingly secure investment environment. Within the next decade, however, China's labor force will begin to contract. This will set its economy apart from other developing Asian countries where relative labor abundance will increase, as will relative capital returns. Unless there is a substantial change in population policy, the retention of China's large share of global FDI will require further improvements in its investment environment. These linkages are explored using a global economic model that incorporates full demographic behavior. Financial reform is measured by the effect of declining intermediation costs on the wedge between home and foreign borrowing rates, or the “investment premium.” The influence of this wedge on China's projected economic growth performance is investigated under alternative assumptions about fertility decline and labor force growth. China's share of global investment is found to depend sensitively on both its demography and its interest premium, though the results suggest that a feasible continuation of financial reforms will be sufficient to compensate for a slowdown and decline in its labor force.

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Facing the Challenge of the Rising Chinese Economy: ASEAN's Responses

I do a lot of work on Chinese trade and it's relationship with ASEAN. Is China a help or hindrance?

This recent RDE paper makes some progress on this issue.

Facing the Challenge of the Rising Chinese Economy: ASEAN's Responses

Yunhua Liu
Nanyang Technological University (NTU) - School of Humanities & Social Sciences

Beoy Kui Ng
Nanyang Technological University (NTU)

Review of Development Economics, Vol. 14, No. 3, pp. 666-682, August 2010

Abstract:
The emergence of China as one of the largest trading nations in the world provides challenges and opportunities to its neighboring ASEAN countries. In the face of the rise of the Chinese economy, there were concerns that ASEAN economies may be adversely affected with the loss of competitiveness in the international market. One of the concerns is that the world export markets of labor-intensive goods will be threatened if China turns into the world low-cost manufacturing factory. Meanwhile, trade between China and ASEAN countries increased dramatically during the past decades. Not surprisingly, China's accession to the WTO and the future establishment of a free trade area (FTA) between ASEAN and China will further change the trade relations in the region. The paper first analyzes the past trade patterns between China and ASEAN countries and assesses the impact of the rising Chinese economy on ASEAN countries, in particular, the impacts on specific industries in each individual ASEAN country. Second, the paper examines the ever-increasing role of foreign direct investment between the two regions and, finally, it analyzes and assess the policy responses of the ASEAN countries thus far and their possible consequences.

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Water pollution in China - 1/4 gone, 3/4 left (for now)

In China's thirst for growth it is in danger of having the breaks applied very sharply from environmental contraints none more important that a lack of clean water.

China might, just might, be getting on top of air pollution but water pollution remains a serious problem. The sheer scale effect of China's growth will mean the battle against PM10 and air pollution is far from over.

Pollution Makes Quarter Of China Water Unusable: Ministry [PlanetArk]

Almost a quarter of China's surface water remains so polluted that it is unfit even for industrial use, while less than half of total supplies are drinkable, data from the environment watchdog showed on Monday.

Inspectors from China's Ministry of Environmental Protection tested water samples from the country's major rivers and lakes in the first half of the year and declared just 49.3 percent to be safe for drinking, up from 48 percent last year, the ministry said in a notice posted on its website (www.mep.gov.cn).

China classifies its water supplies using six grades, with the first three grades considered safe for drinking and bathing.

Another 26.4 percent was said to be categories IV and V -- fit only for use in industry and agriculture -- leaving a total of 24.3 percent in category VI and unfit for any purpose.

Despite tougher regulations over the last decade, the ministry has struggled to rein in the thousands of small paper mills, cement factories and chemical plants discharging industrial waste directly into the country's waterways, and the overuse of fertilizers has also left large sections of China's lakes and rivers choking with algae.

The ministry said there were noticeable improvements in air quality throughout the country's cities in the first half of 2010, with sulphur dioxide emissions declining 30.2 percent compared to last year.

Airborne particulate matter in China's cities fell 12.1 percent and nitrogen dioxide declined 5 percent, the ministry said.

However, 189 out of 443 cities monitored suffered from acid rain in the first half of the year.

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Climate and war in China

As an academic with an interest in the fascinating history of China the following article on the impact of climate change on war and civil unrest is very interesting.

There is no doubt that droughts will cause future unrest. The government will need to be prepared.

Cooling Caused Wars And Drought In China [PlanetArk]

As Chinese policymakers grapple with an expected increase in extreme weather due to global warming, a study has found that periods of cooling between AD 10 to 1900 also caused a wave of disasters, war and upheaval.

Droughts and locust plagues caused by cooler spells probably triggered internal wars, the authors said.

In a modern day parallel, China, the world's top emitter of greenhouse gases blamed for heating up the planet, has taken steps to curb emissions growth fearing growing social unrest from environmental degradation.

Zhibin Zhang of the Chinese Academy of Sciences and his team used historical records and paleoclimatic reconstructions covering nearly 2,000 years.

They found that the frequency of wars, droughts and floods, price of rice, locust plagues and temperatures in China were positively associated within time bands of around 160 and 320 years.

The study was published in the latest issue of the journal Proceedings of the Royal Society.

"Our study suggests that the food production during the last two millennia has been more unstable during cooler periods," the authors said.

This resulted in more social conflict owing to rebellions within dynasties and/or aggression from northern pastoral nomadic societies in ancient China, they said.

The collapses of the agricultural dynasties of the Han (206 BC-AD 220), Tang (681-906), Song (960-1279) and Ming (1368-1643) were more closely associated with low temperature, they said.

DRIVING FORCE

"It is very probable that cool temperature may be the driving force in causing high frequencies of meteorological, agricultural disasters and then man-made disasters (wars) in ancient China," they said.

In particular, the results suggested that periodic low temperatures could have increased the frequency of internal wars mainly indirectly through increasing drought and locust plague frequencies between AD 950 and the 1900s.

They said external aggression wars mostly occurred between Chinese dynasties and the pastoral nomadic societies to their north, such as the Manchus who overthrew the Ming dynasty.

A cooling of a few degrees Celsius can shorten the northern growing season of grass by 40 days, adversely affecting grasslands and causing huge losses of domestic livestock. This pushed northern tribes south.

The authors found two predominant periodic bands of around 160 and 320 years during past two millennia.

"These periods may be related to cyclic variations of solar activity, or cyclic changes of orbit position of the Earth," they said, pointing to 87 and 210-year cycles of solar activity based on observations of sunspots.

"It is generally believed that global warming is a threat to human societies in many ways. However, some countries or regions might also benefit from increasing temperatures in some ways," the authors said.

The global climate has natural variations in temperature and rainfall but scientists fear the rapid accumulation of greenhouse gases since the Industrial Revolution could lead to catastrophic climate change unless emissions are sharply reduced.

"However, the present on-going global warming may produce different effect on our industrialized societies which own much higher capacity of dealing with natural disasters than pre-industrial societies," they say in a pointer to China's rapid rise to become the world's number 3 economy.

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Chinese firms are getting larger - a threat to the West?

The recession in the West has thrown up a number of opportunities for rapidly growing Chinese and emerging country firms. Whether it is organic expansion or by taking over ailing assets in developed countries.

The FT do a good piece on this.

Business: A change in gear [FT]

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Ubanisation in China

China's rapid growth is putting pressure on the ever growing cities. Shanghai's Expo is providing some of the answers. Today's FT gives a nice little summary of the problems that China faces.

THE BURDEN OF URBANISATION [FT]

China has the world’s biggest urbanisation problem and Expo is promising the world’s best solutions.

By 2030, China will have an urban population of 1bn, having added 350m by then – more than the entire current population of the US, according to a recent McKinsey study, Preparing for China’s urban billion. Even five years before that, China is forecast to have 219 cities of more than 1m each, compared with 35 in Europe today, and 24 cities of more than 5m.

Shanghai, with nearly 20m already, is a living experiment in urbanisation – and one that is mostly failing. The polluted Huangpu river runs between banks crowded with concrete apartment complexes with little or no greenery (but lots of hanging laundry). Parks are few and playgrounds almost unheard of; pedestrianisation is limited and walking is deemed one of the city’s most dangerous sports.

For years, Shanghai has smothered its history in skyscrapers, and Expo has accelerated that process. At the Expo site itself, the Shanghai government did convert one steel plant into a theatre; but outside Expo, numerous traditional buildings have been knocked down.

Wujiang Lu, the city’s famous snack street where stalls served everything from octopus to offal on a stick, is gone. There was nowhere to sit and the rubbish bins were too infrequently emptied – but rather than install benches and schedule extra visits from the trash collectors, the city opted for demolition. Starbucks and Krispy Kreme are there but Little Yang’s famous crispy-bottomed soup dumpling stand is no more.

Part of the point of Expo, whose motto is “Better city, better life”, is to make sure Shanghai thinks twice before demolishing the next Wujiang Lu. “Shanghai could leapfrog the rest of the world [on urbanisation], because the scale of what they want to do and what they need to do is so enormous,” says Anthony Elvey, director of Cisco’s Expo pavilion.

Hoping to sell its integrated city management systems to China’s mayors, the Cisco pavilion is a celebration of the joys of a microchip-enhanced life: right down to wristwatch-sized monitors that simultaneously check the contractions of a pregnant woman, summon the ambulance, inform her husband, rouse the obstetrician from bed and book a delivery room.

Indeed, connected urban living is a main focus of the corporate Expo pavilions: schoolchildren use global positioning devices to find the best bus route home, where they are greeted by a grandmother who has just teleported in from the provinces; cars talk to the traffic grid to find out where best to park themselves.

Some Expos are memorable for inventions that endure; others are mere graveyards for technologies that came before their time. It could take decades before it is known which category Shanghai falls into: a moment that changed urban life forever, or just an urban fantasy.

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US chicken farmers spitting feathers

China has picked on the humble chicken for the next salvo in the escalating trade war between China and the US.

Given the number of chickens in China it is perhaps surprising that China imports chicken at all given the transport costs and perishability of the said white meat.

Still, a 31.4% tariff is not to be sniffed at. Even without a tariff it is hard to believe that US chicken is competitively priced to actually have a market in China. However big that market is it is about to get smaller.

US chicken farmers will be spitting feathers (cheap gag) and US subsidies might have to get larger.

China to impose new tariffs on US {FT]

China announced yesterday it would impose a second round of tariffs on imports of US chicken products of as much as 31.4 per cent.

The commerce ministry said the tariffs were a response to what it called unfair subsidies given to US poultry farmers. The duties come on top of charges of up to 105.4 per cent placed on poultry two months ago because of alleged dumping .

Economic friction between the two countries had appeared to be relaxing after the US Treasury delayed its decision over whether to label China a currency manipulator.

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Human capital, economic growth, and regional inequality in China

Regional inequality in China is an important issue and has been subject to numerous studies including those of many of my MSc dissertation students.

Belton Fleisher and co-authors look at growth and inequality in a recent Journal of Development Economics paper.

The results are fairly standard. The role of FDI and government policy can play their part.

Human capital, economic growth, and regional inequality in China

Belton Fleisher
Haizheng Li
Min Qiang Zhao

Abstract

We show how regional growth patterns in China depend on regional differences in physical, human, and infrastructure capital as well as on differences in foreign direct investment (FDI) flows. We also evaluate the impact of market reforms, especially the reforms that followed Deng Xiaoping's “South Trip” in 1992 those that resulted from serious hardening of budget constraints of state enterprises around 1997. We find that FDI had a much larger effect on TFP growth before 1994 than after, and we attribute this to the encouragement of and increasing success of private and quasi-private enterprises. We find that human capital positively affects output and productivity growth in our cross-provincial study. Moreover, we find both direct and indirect effects of human capital on TFP growth. These impacts of education are more consistent than those found in cross-national studies. The direct effect is hypothesized to come from domestic innovation activities, while the indirect impact is a spillover effect of human capital on TFP growth. We conduct cost-benefit analysis of hypothetical investments in human capital and infrastructure. We find that, while investment in infrastructure generates higher returns in the developed, eastern regions than in the interior, investing in human capital generates slightly higher or comparable returns in the interior regions. We conclude that human capital investment in less-developed areas is justified on efficiency grounds and because it contributes to a reduction in regional inequality.

Keywords: Regional disparity; Human capital; TFP growth; Foreign direct investment

JEL classification codes: O15; O18; O47; O53

Economics of Guanxi

The Guanxi way of doing business in China is important to understand for those hoping to do business in China.

This theoretical paper gives some economic justifcation. This paper will be rather heavy going for non-economists.

The economic problem is that "loyalty takes precent over ability". Is there a rational reason for this? What are the implications for capitalism with Chinese characteristics?


Economics of Guanxi as an Interpersonal Investment Game

Shi Young Lee

Review of Development Economics, Vol. 14, Issue 2, pp. 333-342, May 2010

Abstract:
The purpose of this paper is to provide a simple model of guanxi given stylized facts. I first outline the intrinsic characteristics of guanxi to draw the stylized facts, and then use these facts to model it as an interpersonal investment game. I find that the degrees of the ability and loyalty of the Recipient must be reasonably high enough for the interpersonal investment to take place. After the investment has occurred, the degree of loyalty must be higher than that of the ability to guarantee stable gaunxi relationships. When the interpersonal investment is made, it is a signal of trust in the ability and loyalty of the Recipient. However, if the ability factor dominates, then the Recipient will not always feel loyal enough to return the favor. This indicates that loyalty counts for more than ability. A related result is that a stable guanxi relationship is unlikely to occur for a highly able person given the equal chance of the two characteristics. This paper also presents some interesting implications for corruption and lock-in relationships.

Accepted Paper Series

IMF global stability report

At least the IMF agree with me that there is potentially a lot of left in the finanical crisis. The Global Stability report is a worthwhile read.

IMF Sees Financial Risks Still Elevated [IMF]

Let me begin with our overall assessment of global financial stability. The IMF has just released its new Global Financial Stability Report. We find that risks to stability have eased somewhat. The policy stimulus enacted at the height of the crisis has provided substantial support to financial institutions and markets, and has underpinned the global recovery. This has helped to improve a broad range of risk indicators and financial conditions.

And yet risks remain elevated: global financial stability has not been secured, as the recovery is still fragile, and the repair of consumer and financial balance sheets is still ongoing. Furthermore, there are concerns over rising sovereign risks related to the buildup of public debt that need to be carefully monitored and addressed.

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"Female Employment and Fertility in Rural China"

Interesting new NBER paper. The results have potentially important implications for China's one child policy. Note that female employment which is growing rapidly reduces the probability of having more that one child significantly.

One possible implication is that by encouraging female participation the one child policy could be phased out over time. Korea has no such policy and a birth rate comparable to China's with the policy.

"Female Employment and Fertility in Rural China"

NBER Working Paper No. w15886

HAI FANG, University of Miami
KAREN EGGLESTON, University of California, Los Angeles (UCLA) - International Institute
JOHN A. RIZZO, Stony Brook University - Department of Economics and Department of Preventative Medicine
RICHARD J. ZECKHAUSER, Harvard University - John F. Kennedy School of Government,

Data on 2,288 married women from the 2006 China Health and Nutrition Survey are deployed to study how off-farm female employment affects fertility. Such employment reduces a married woman’s actual number of children by 0.64, her preferred number by 0.48, and her probability of having more than one child by 54.8 percent. Causality flows in both directions; hence, we use well validated instrumental variables to estimate employment status. China has deep concerns with both female employment and population size. Moreover, female employment is growing quickly. Hence, its implications for fertility must be understood. Ramifications for China’s one-child policy are discussed.

China's march continues - Independent

It is always useful to keep on eye on what the popular press are saying about China's economics recovery. How real this recovery really is is still open to question and is something I will cover in this blog.

The article tells us nothing new. Of course the possible US-China trade war gets a good airing as does "unemployment", "inflation" and "housing bubbles".

China's economy marches on [Independent]

The centre of gravity of economic power is tilting rapidly to the east once again. While the rest of the world struggles to emerge from the deepest downturn in three-quarters of a century, China has returned emphatically to double-digit growth, having hardly missed beat.

The country's economy now stands 11.9 per cent higher than it did at this time last year. Most of the western economies, including Britain, will grow by only 1 or 2 per cent in 2011. China has benefited from the largest proportionate fiscal and monetary stimulus in the world, and a pick-up in exports from the revival in global trade and a competitive currency.

Because of the weakness a year ago, the annual rate looks especially strong. On a quarter-on-quarter basis the pace of growth is slowing slightly, at 2.5 per cent now.

The latest figures also mean that China is almost certain to overtake Japan as the world's second-largest economy, behind the US, in the autumn. Growth in China bottomed out at an annual rate of just over 6 per cent in the first three months of 2009, rising to 10.7 per cent in the year to the last quarter.

"We have got off to a good start this year," said an official spokesman, with typical understatement.

But although stock markets were cheered by the news, confirmation of China's robust recovery comes at a time of renewed tensions between Washington and Beijing about the Chinese currency – the yuan – which many in the US say has been kept deliberately low against the dollar to keep Chinese exports cheap and to protect her trade surplus with America. Some fear that a trade war may break out between the two economic giants.

The European Central Bank yesterday criticised China's huge trade surpluses with the West, saying: "At the current juncture, global imbalances continue to pose a key risk to global macro-economic and financial stability. The stakes are high to prevent a disorderly adjustment in the future that would be costly to all economies."

A meeting to discuss the currency issue between President Barack Obama and the Chinese Premier, Hu Jintao, on the margins of the nuclear summit in Washington earlier this week failed to generate much harmony. Mr Obama urged China to put the yuan on a more "market oriented" footing, but Mr Hu said the currency's value would be set primarily for domestic purposes.

Many economists see an upwards revaluation of the yuan as inevitable, but the timing and extent is a hugely sensitive issue for both nations. In the US, the Treasury Secretary, Timothy Geithner, delayed the publication of an official report labelling China a "currency manipulator" until after the talks between Mr Obama and Mr Hu.

Trade sanctions on China have been advocated by many members of Congress, as well as leading economists such as Paul Krugman. Such developments are of concern far beyond the US and China. A return to breakneck growth rates in China is bidding up world commodity prices. Oil is back to about $86 a barrel, with copper close to $8,000 per tonne and its 2008 price peaks. Higher raw materials prices are choking growth in the West and reducing living standards – one of the ways that income and wealth is being transferred progressively eastwards. America's trade gap with China was one of the main "global imbalances", the fundamental economic forces that led to the credit crunch and what the International Monetary Fund (IMF) now calls "The Great Recession".

Despite frequent pledges by the G20 group of large and fast-growing economies to act on these issues, little progress seems to have been made on the largest problem, the US-China deficit. As a result, China continues to add to her foreign currency reserves, which at $2.4 trillion are the largest in the world (although she did run a freakish trade deficit in February).

Just as the Chinese rely on the US and Europe to provide ready export markets, so too do the western nations depend on the Chinese to buy their government bonds. Any hint by the Chinese authorities that they are about to unwind their dollar reserves usually sends shockwaves through the market for US Treasury securities and the greenback itself.

However, economists are hopeful that the very strength of China's recovery may force authorities there to cool an economy that shows signs of overheating, and to allow the yuan to drift higher, making Chinese goods more expensive and taking the pressure off the US trade deficit.

Prices in China's shops are rising at a remarkably low rate of 2.4 per cent per year but "factory gate" inflation, which shows any price increases in the pipeline, is accelerating.

Meanwhile, the Communist government is openly concerned about house price bubbles developing in many of the nation's big cities. Prices were up 12 per cent last month alone and banks have been ordered to curb their lending. Any rise in interest rates might also push the yuan higher, if the Chinese central bank allowed it.

The current growth rate is running some way ahead of Beijing's official target of 8 per cent this year. This is the pace consistent with creating sufficient jobs to prevent unemployment rising. Such is the size of the Chinese population that 27 million jobs need to be generated every year, about the same as the entire British workforce.

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The lost "Ant tribe" of graduates in China

This blog was designed to help potential graduate students in economics and finance. China is very supportive of education and the sector has been expanding rapidly.

The problem, as is often the case in China, is the lack of suitable jobs.

The result has been signifcant unemployment and underemployment of millions of college graduates. This group has now been labeled the "Ant tribe" - for some reason. 12% unemployment is high and it may get worse.

The main problem is when students spend a families life savings and then cannot get a job with a chance to pay back these huge sums.

The Times Higher explains.

From where I sit: Ant music from a lost tribe [TES]

In early March, the day before the annual meeting of the National People's Congress and Chinese People's Political Consultative Committee, three CPPCC representatives paid a visit to Tangjialing, a village in the Beijing suburbs.

There they saw the home of Li Liguo and Bai Wanlong: a 5sq m brick house, rented for 160 yuan (£16) a month. Both musicians, Mr Li and Mr Bai sang a tune they had penned, The Song of the Ant Tribe, and the CPPCC representatives burst into tears.

"Ant Tribe" is a term coined to describe the unemployed and low-income college graduates who live in China's rural-urban fringe. The term became hugely popular last year when Lian Si, a professor at the University of International Business and Economics, published pioneering research focusing on low-income college graduates and social stability.

According to Professor Lian, the Ant Tribe is made up of college graduates aged between 22 and 29. They work in insurance promotion, electronic-appliance sales, advertising and the restaurant business without contracts or social security benefits. Typically, their monthly income is less than 2,000 yuan.

Mr Li was born in 1979. After graduating from a technology institute in Liaoning Province, the software major quit his job in 2000 to try his luck in Beijing as a musician. He has not realised his dream, but still holds on.

After he became acquainted with Mr Bai, born in 1987, through a shared love of music, they formed a band to earn a meagre living by busking in the Beijing subway.

Tangjialing has perhaps the cheapest rent around Beijing, a city where the average property cost more than 20,000 yuan per sq m in 2009.

The village now has more than 60,000 tenants, and more than 70 per cent of them are college graduates. It is a place where they can enjoy low rents and cheap food.

But as the China Youth Daily newspaper points out, traffic at peak hours from Tangjialing to the city is appalling, and since the village has been "overloaded" with temporary housing, disasters such as fires will sooner or later befall the Ant Tribe members who live there.

What the CPPCC representatives saw in Tangjialing became a top story in the media and soon turned into a major national issue.

Chen Guangjin, an expert on employment issues at China's Social Science Academy, said in 2008 that for the 5.59 million college students who graduated that year, the unemployment rate was more than 12 per cent, about three times the official figure. By the end of 2008, more than 1.5 million college graduates were unemployed.

The Beijing municipal government has decided to reconstruct Tangjialing, but Ant Tribes have also appeared in Guangzhou, Shanghai and other cities.

A popular online post among the Ant Tribe internet community is: "All the ants, please come and post. Let the public understand what a huge tribe we are."

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Overvalued or not overvalued that is the question

The exchange rate debate rumbles on - although the pressure for an upward revaluation appears to be growing by the day, a recent FT article questions the level of revaluation required.

My prediction matches that of Goldman and Sachs - I expect something like a 5% appreciation over the next year. Not spectacular but realistic and probably enough to fend off the US attack dogs (for the time being).

Pressure mounting on China’s currency [FT]

Speculation has mounted in recent weeks about a potential revaluation of the Chinese currency. But while many analysts expect some appreciation this year, the case for a significant revaluation seems less sure.

In its March report, the World Bank raised its growth forecast for China in 2010 to 9.5 per cent but warned that tighter monetary policy and a stronger currency were needed to prevent bubbles and to damp rising inflationary expectations.

The report followed the end of the National People’s Congress when Wen Jiabao, Chinese premier, insisted the renminbi was not undervalued and warned other countries that pressing China on currency policy amounted to protectionism.

However, earlier this month, a senior government economist said China could widen the daily trading band for the renminbi and allow it to resume the gradual appreciation it halted on July 2008.

China’s currency has been effectively pegged to the US dollar since mid-2008. This, Beijing has argued, has brought stability to the international economy during the financial crisis. Recently, however, international pressure has been mounting on China to allow its currency to strengthen.

A group of US congressmen last month wrote to Timothy Geithner, treasury secretary, and Gary Locke, commerce secretary, demanding the US administration designate China a manipulator in its regular report on currency manipulation. They believe China’s refusal to let its currency appreciate is damaging the US economic recovery and hurting American competitiveness.

However, publication of the report, due in mid-April, has been postponed. Mr Geithner said there were a number of key meetings in the coming months at the Group of 20 and bilateral talks within the Strategic and Economic Dialogue with China during which he aimed to make “material progress” on China’s exchange rate and bring about a more “sustainable” global economy.

These rising tensions have not led to a radical change in market expectation of an appreciation in the Chinese currency. Indeed, markets are only pricing in a modest appreciation in the next 12 months.

“Commentators view China’s large trade surplus and rapid rate of reserve accumulation as evidence that the yuan is undervalued,” says Paul Bakunowicz, a senior foreign exchange trader at Citi in London.

“The market is predicting that in a year’s time the dollar/China rate will move to 6.6400 from the current 6.8260, which at 2.7 per cent below spot is not much of an appreciation,” says Mr Bakunowicz.

Bhanu Baweja, global head of emerging market fixed income and foreign exchange strategy at UBS, says 2010 is unlikely to be the year when Asian currencies see a material strengthening.

“People have been waiting for a 20 plus per cent appreciation in Asian currencies for a long time. We don’t think they will get lucky in 2010. The reason they have been disappointed is that foreign exchange intervention has not been very costly for central banks.

“The costs of intervention are higher inflation or higher rates. In a world of weak aggregate demand, Asian central banks are unlikely to come up against these constraints.”

A combination of sustained recovery in exports, continuation of strong capital flows and an uptick in domestic demand-induced inflationary pressures, would be the ideal setting for Asian currencies to appreciate, according to Mr Baweja. “We are looking for places in Asia which tick these boxes but there aren’t that many,” he says.

“India is one example, and we have been bullish on the Indian rupee. But consider the Taiwan dollar, which we think lies at the opposite end of that spectrum.

“It is an undervalued currency and can stay that way for a long time because there is little economic pressure on the central bank to dilute its foreign exchange intervention.”

According to UBS, the renminbi has appreciated roughly 13 per cent in nominal trade weighted terms since July 2005, when China loosened the US dollar peg. The country’s trade surplus has also fallen. But while he still believes the currency is undervalued, Mr Baweja does not believe China will feel comfortable to let its currency appreciate meaningfully, given the current economic environment.

Analysts at Goldman Sachs no longer see the currency as undervalued. They expect it will be allowed to appreciate by 5 per cent over the next year and add there is the possibility of a one-off “revaluation”.

In the past, renminbi appreciation has occurred hand-in-hand with a policy of hiking the reserve ratio requirement, says Mr Bakunowicz. The renminbi was allowed to appreciate until July 2008, when the reserve requirement ratio also peaked and the reserve requirement ratio has been rising recently, he notes.

However, despite mounting pressure Mr Bakunowicz expects China will be reluctant to allow the currency to appreciate substantially. “There will probably be gradual appreciation over time, but the likelihood of a dramatic, one-off revaluation is extremely low,” he says.

Simon Derrick, currency strategist at the Bank of New York, says Premier Wen’s annual comments are normally among the most important of the year. “It was in these closing comments five years ago that he first indicated a policy shift was likely in 2005. However, events in recent days suggest there has been a rapprochement of sorts between China and the US on a range of issues, including currency policy.

“As a result there appears to be a growing chance that China could make an initial move on its FX regime within the next few months.”

Whilst there are books on the subject things are moving so quickly that any published book is already our of date. For example, see below.

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Growing out of Poverty

The role that economic growth has had on poverty reduction in China should not be underestimated. It surpasses any effect from government policy.

This recent paper is a useful addition to the literature.

Growing out of Poverty: Trends and Patterns of Urban Poverty in China 1988–2002

Simon Appletona, Lina Songa and Qingjie Xiab

a University of Nottingham, Nottingham, UK

b Peking University, Beijing, China
Accepted 6 November 2009.
Available online 17 December 2009.

Summary

This paper estimates trends in absolute poverty in urban China using the Chinese Household Income Project surveys. Poverty incidence curves are plotted, showing lower poverty in 2002 than in 1988 irrespective of the poverty line chosen. Incomes of the poorest fell during 1988–95, contributing to a rise in inequality. However, inequality has been fairly constant thereafter. Models of the determination of income and poverty reveal widening differentials by education, sex, and Communist Party membership. Income from government anti-poverty programs has little impact on poverty, which has fallen almost entirely due to overall economic growth rather than redistribution.

Key words: poverty; inequality; economic growth; welfare; Asia; China

This DVD provides a real life backdrop to this academic article.

Sacrificing her education to earn money for her family, and suffering drudgery, loneliness and displacement, Li Jieli must leave her rural Chinese home to work in a far-away factory where she is only a number. Li's story gives us a look behind the factory gates. Will her job provide her a basis for growth and personal fulfillment? She has only been back home once in the last three years. In the depressed Iron Range of Minnesota, Wayne Peterson and David Olson are also forced to make difficult choices to survive in a job market impacted by global trade. The local iron mine had shut down due to high labor costs but has recently reopened because of demand for iron from China. Pensions and benefits from the previous owners are gone. Questions of corporate responsibility in both countries come into play as Wayne and David must decide about where their security lies in a shifting global economy.

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China calls in the multinational army to defend against aggressive US

The war of words over China's exchange rate relative to the US is getting hotter.

Following Paul Krugman's recent intervention (see previous post) China is fighting back. Multinationals know which side of the bread is buttered.

Robert Pozen at least speaks some sense.

China asks US groups to back it on currency [FT]

China called on US multinationals on Tuesday to lobby the Obama administration against taking protectionist measures over the Chinese currency, just as attitudes towards China appear to be hardening in the US ­Congress.

Yao Jian, a spokesman at the Chinese commerce ministry, said that some companies had already been lobbying against recent restrictions on Chinese imports to the US and he hoped this would increase.

“We hope that US companies in China will express their demands and point of views in the US, in order to promote the development of global trade and jointly oppose trade protectionism,” he said.

The comments came as the political heat surrounding China’s currency policy intensified in Washington. Led by Chuck Schumer, the New York Democrat, and Lindsey Graham, the South Carolina Republican, a group of senators said China’s refusal to let its currency appreciate was damaging the US economic recovery and hurting American competitiveness.

“China’s currency manipulation would be unacceptable even in good economic times. At a time of 10 per cent unemployment, we will simply not stand for it,” Mr Schumer said.

The senators have proposed a bill that would require the Treasury to identify countries with “fundamentally misaligned currencies” as well as those that need to be tackled with “priority action”.

Those countries would have nearly a year to adjust the value of their currency before the US administration was required to bring a case against them at the World Trade Organisation, according to the proposal. The Treasury would also have to “consult” the Federal Reserve and other central banks about “remedial intervention in currency markets”.

Expecting an appreciation, some measures could be taken earlier, including forbidding Chinese companies from participating in US government contracts, requesting an International Monetary Fund consultation with China, and including currency undervaluation as part of dumping calculations. Mr Schumer and Mr Graham have been leading the charge in Congress against China’s currency policy for several years, and have periodically presented similar proposals.

But their efforts may have gained fresh impetus on the back of a recent flare-up in tensions between Beijing and Washington on issues including currency.

On Sunday, Wen Jiabao, Chinese premier, warned other countries that pressing China on currency policy amounted to protectionism and insisted the renminbi was not undervalued.

“That was the last straw,” said Mr Schumer, who complained that the US had been “lectured”. “We are fed up, and we are not going to take it any more.”

On April 15, the Treasury will release its latest semi-annual currency report, and pressure is building on the administration to describe China formally as a “manipulator” – a move that it has resisted until now even though President Barack Obama was sharply critical of its currency regime during the 2008 election campaign.

Tim Geithner, the Treasury secretary, said in an interview with Fox Business News on Tuesday: “I think ultimately [China] is going to decide over time it’s in their interest to move to a more flexible exchange rate.” He said the Schumer bill was “an illustration of how strong people feel about this, and it’s understandable and it’s true in countries round the world”.

A Treasury official said: “A more market-oriented Chinese exchange rate will make an essential contribution to a stronger, more balanced global economy.”

US multinationals operating in China have long been opposed to Washington taking action over the perceived undervaluation.

“A 10-15 per cent appreciation of the renminbi would have a very modest effect on the margins of the US current account deficit,” Robert Pozen, chairman of MFS Investment Management and a senior lecturer at the Harvard Business School, told the Financial Times. “The US needs to stay quiet. Hopefully, it won’t name China a currency manipulator.”

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Paul Krugman kicks China in the RMBs

Paul Krugman (Nobel prize winner) has weighed into the Chinese currency argument.

The Americans are now getting seriously ****** off with China's exchange rate manipulation. Krugman makes some good points. Of course China is manipulating it's currency. This is not controversial. The issue is how much China's policy really is a drag on the world economies.

It was not China that caused the financial crisis. It was not China who lent millions to people without jobs, homes or prospects....need I go on.

Remember that Krugman is influential and he is not a rabid neo-con - far from it.

The arguments that the Chinese government regularly employ will become harder to make. I have covered the main arguments before.

The bottom line is that there is very little the US can do - at least the US economists acknowledge that a trade war would be far more devastating.

It will be very interesting to watch developments. The question of who has who over a barrel is interesting. I prefer the "two drunks" analogy. One moves and they both fall over.

Most importantly, I recommend that Krugman and anyone concerned by this article to read the previous post on this blog from Michael Pettis on what China's large surplus really means.

US citizens may also not react too kindly to a 20% increase in the price of virtually everything - is that supposed to boost the economy?

Taking On China [New York Times]

Tensions are rising over Chinese economic policy, and rightly so: China’s policy of keeping its currency, the renminbi, undervalued has become a significant drag on global economic recovery. Something must be done.

To give you a sense of the problem: Widespread complaints that China was manipulating its currency — selling renminbi and buying foreign currencies, so as to keep the renminbi weak and China’s exports artificially competitive — began around 2003. At that point China was adding about $10 billion a month to its reserves, and in 2003 it ran an overall surplus on its current account — a broad measure of the trade balance — of $46 billion.

Today, China is adding more than $30 billion a month to its $2.4 trillion hoard of reserves. The International Monetary Fund expects China to have a 2010 current surplus of more than $450 billion — 10 times the 2003 figure. This is the most distortionary exchange rate policy any major nation has ever followed.

And it’s a policy that seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.

So how should we respond? First of all, the U.S. Treasury Department must stop fudging and obfuscating.

Twice a year, by law, Treasury must issue a report identifying nations that “manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.” The law’s intent is clear: the report should be a factual determination, not a policy statement. In practice, however, Treasury has been both unwilling to take action on the renminbi and unwilling to do what the law requires, namely explain to Congress why it isn’t taking action. Instead, it has spent the past six or seven years pretending not to see the obvious.

Will the next report, due April 15, continue this tradition? Stay tuned.

If Treasury does find Chinese currency manipulation, then what? Here, we have to get past a common misunderstanding: the view that the Chinese have us over a barrel, because we don’t dare provoke China into dumping its dollar assets.

What you have to ask is, What would happen if China tried to sell a large share of its U.S. assets? Would interest rates soar? Short-term U.S. interest rates wouldn’t change: they’re being kept near zero by the Fed, which won’t raise rates until the unemployment rate comes down. Long-term rates might rise slightly, but they’re mainly determined by market expectations of future short-term rates. Also, the Fed could offset any interest-rate impact of a Chinese pullback by expanding its own purchases of long-term bonds.

It’s true that if China dumped its U.S. assets the value of the dollar would fall against other major currencies, such as the euro. But that would be a good thing for the United States, since it would make our goods more competitive and reduce our trade deficit. On the other hand, it would be a bad thing for China, which would suffer large losses on its dollar holdings. In short, right now America has China over a barrel, not the other way around.

So we have no reason to fear China. But what should we do?

Some still argue that we must reason gently with China, not confront it. But we’ve been reasoning with China for years, as its surplus ballooned, and gotten nowhere: on Sunday Wen Jiabao, the Chinese prime minister, declared — absurdly — that his nation’s currency is not undervalued. (The Peterson Institute for International Economics estimates that the renminbi is undervalued by between 20 and 40 percent.) And Mr. Wen accused other nations of doing what China actually does, seeking to weaken their currencies “just for the purposes of increasing their own exports.”

But if sweet reason won’t work, what’s the alternative? In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.

I don’t propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand.

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The Chinese manufacturing myth

Helen Wang writes about what is happening on the ground in China regarding the manufacturing sector. She touches on the problem of graduate unemployment which is something I covered in my last post.

The unemployment of graduates has important implications for UK and world Universities. Will the shortage of graduate jobs translate into a fall in the supply of students willing to invest large sums of money for a graduate education? Helen suggests this is the case with more vocational courses coming on stream.

Helen raises some interesting points about the production process and the role of innovation. China lags behind of course but is catching up quickly. Japan and Korea followed a similar development path and are now leading the world in terms on innovation and hightech production. China will catch up quickly and is reinforced by the new 5 year plan.

Myth of China’s Manufacturing Prowess [HelenWang]

In a meeting in Silicon Valley with high-tech and business professionals, I asked how many of them thought China was the world’s largest manufacturer. Almost 90 percent raised their hands.

The latest data shows, however, that the United States is still the largest manufacturer in the world. In 2008, U.S. manufacturing output was $1.8 trillion, compared to $1.4 trillion in China (UN data. China’s data do not separate manufacturing from mining and utilities. So the actual Chinese manufacturing number should be much smaller).

Contrary to the conventional view, manufacturing in the U. S. has been growing in the past two decades despite the decline in manufacturing jobs.

It is true that China’s manufacturing is growing faster than that of the United States. However, there is a key misconception about China’s manufacturing prowess.

In the United States and Europe, the manufacturing industry was created due to technology innovation. In China, the manufacturing industry is being created in response to global demand. Chinese manufacturers take orders from Western companies that have designed products for their home markets. They have no involvement with product development, innovation, market research, and even packaging.

Unlike the manufacturing industry in the West that gave birth to a middle class of both white-collar and blue-collar workers, manufacturers in China mostly absorb surplus labor from rural areas with few skills. Those rural migrant workers live in dormitories, earn about $100 to $200 a month, and hardly fit into the category of the middle class. (To be clear, there is a burgeoning middle class in China. Most of them are in urban private businesses, state-owned enterprises, and multinationals).

James Fallows, national correspondent for the Atlantic, visited many factories in China. He saw people working on the assembly lines and was convinced those tasks would only be performed by machines in the United States.

While people in the West fear China as a global manufacturing powerhouse, the Chinese consider their manufacturers to be the sweatshops for the world and see themselves as being in a disadvantageous position.

Yes, China is making efforts to drive its economy up the value chain. The 11th Five-year Plan (2006 – 2010) called for “scientific development.” A key initiative is an increase in the R&D-to-GDP ratio from about 1.3 percent in 2005 to 2.5 percent by 2020. However, how much of the funding is actually used for research and development and how well the research is being transferred into manufacturing are both highly questionable.

Given the unpredictability of the regulatory environment, many Chinese manufacturers tend to focus on short term gain. They compete on volume and price, and only enjoy wafer-thin profit margins. This has kept Chinese manufacturers from investing in research and development or training employees.

Recently, Chinese manufacturers experienced a shortage of low-waged workers. On the other hand, millions of college graduates have been unable to find jobs. With college tuition sky high, more and more young people are turning to vocational schools, which may offer better prospects of employment at lower cost. This means a majority of Chinese workers may be trapped in low-skilled jobs, making China’s move up the value chain even more challenging.

While the rest of the world fears China’s manufacturing power, China is trying to move away from its “sweatshop” manufacturing and become a service-oriented economy. However, China may find itself locked into place, at least for now, due to the hundreds of millions of rural migrants that need jobs.

In this regard, China is doing the world a service, producing affordable goods for Western consumers, which improves living standards and keeps inflation low in Western economies.

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New York Times: "Educated and Fearing the Future in China"

One reason this blog was started was to give advice to Chinese students on where to study in the UK (for economics and finance). See right hand column and scroll down.

One big issue is the real value of education. Education is seen as very important in China and families will save for 20 years to send their only child to take a postgraduate education for 1 year in the UK.

Does this make sense? Are the returns high enough? The New York Times investigates.

A number of opinions are sought. This article makes a number of important points.

Bottom line - the number of high skilled jobs is not matching supply - result - unemployment of highly educated (and expensively educated) workers.

There is a lot of economics that needs to be considered. (1) too few graduates going into self employment, (2) too much concentration in the coastal cities forcing up wages and house prices, (2), education system and what it really teaches, (4), brain drain.

Educated and Fearing the Future in China [NYT]

As China’s economy recovers, employers are competing to hire low-skilled workers, but many of China’s best and brightest, its college graduates, are facing a long stretch of unemployment.

In 1999, the government began a push to expand college education — once considered a golden ticket — to produce more professionals to meet the demands of globalization. This year, more than 6.3 million graduates will enter the job market, up from one million in 1999. But the number of high-skilled, high-paying jobs has not kept pace.

What might be done to correct the mismatch between expectations and reality? How is this problem altering Chinese attitudes about upward mobility? If college graduates are not reaping economic rewards, how will the next generation view the value of education?

* C. Cindy Fan, associate dean of social sciences, U.C.L.A.
* Yasheng Huang, professor of political economy, M.I.T.
* Daniel A. Bell, professor of political philosophy, Tsinghua University
* Albert Park, economist, University of Oxford
* Loren Brandt, economist, University of Toronto

To read more on each persons perspective you need to visit the website directly.

Materialism and Social Unrest
Cindy Fan

C. Cindy Fan is associate dean of social sciences and professor of geography at the University of California, Los Angeles. She is the author of “China on the Move” and numerous articles.

Like prostitution, stocks, private cars, beauty pageants, and McDonald’s, “unemployment,” thanks to collectivization, was practically absent from Chinese life for the three decades after 1949.

The Chinese economy, no longer centrally planned, has not put enough people back to work.

Deng Xiaoping’s economic reforms paved the way for the collapse of inefficient state-owned enterprises, shattering the “iron rice bowl” of millions of workers and creating the first wave of unemployment in post-Mao China.

Unemployment among college graduates is a hot-button issue in China. A large number of young people have little other than materialism and consumerism to believe in — a general description of Chinese society today since socialist ideology lost its grip. Not having a job is a perfect recipe for social unrest.

Today, China’s official unemployment rate is about 4.3 percent, but it is a gross underestimate because of underemployment among both rural and urban Chinese — they may have a job but their skills are underutilized and they are underpaid.

What explains this situation? No doubt, the global economic crisis has contributed to job loss, but China is considered one of the first economies to recover from the recession.

Another explanation widely cited in the media is the government-directed increase in university enrollment since the late 1990s. But even with that expansion, less than 8 percent of the Chinese population are college-educated compared with more than one in four in the U.S. That suggests there is much room for growth in higher education, especially if the country is to live up to the expectation of “China’s century.”

Instead, three explanations may account for the relatively high unemployment among college graduates. First, geography matters. Young people from smaller places and rural areas, upon obtaining a university degree, are likely eager to go to or stay in big cities. This effect is crowding the labor market in cities like Beijing and Shanghai and hurting the economy of small cities and towns.

Second, globalization matters. By rough estimates, one quarter of the Chinese who have studied overseas have returned. Nicknamed “sea turtles” (haigui), these returnees are highly competitive and can easily push the domestic college graduates down the job hierarchy.

Finally, China’s economy continues to be dominated by the industrial sector, which accounts for about 49 percent of the gross domestic product. While services — the most likely sector for college graduates — account for about 40 percent of the G.D.P., high-skilled, professional jobs are still relatively few compared with low-end service jobs like those in sales.

Creating high-end jobs and increasing the incentives for young people to live in smaller cities are obvious ways to reduce their unemployment. But this is easier said than done. The Chinese economy is no longer centrally planned, and as we have observed on this side of the Pacific, relying on the market alone — even with stimulus packages — has not yet put enough people back to work.

A Terrible Education System
Yasheng Huang

Yasheng Huang is professor of political economy and international management at Sloan School of Management, Massachusetts Institute of Technology. He is the author of “Capitalism with Chinese Characteristics” and will soon begin a large-scale survey of college graduates in China.

In 2007, the job openings for new graduates fell by some 22 percent compared with 2006, according China’s National Development and Reform Commission.

Although Chinese universities have pockets of excellence, they are churning out people with high expectations and low skills.

Some estimate that 30 percent of Chinese engineering students will not find jobs after graduation and that the average pay of the college graduates is now approaching that of rural migrant workers. At the same time, factories in Guangdong province cannot find enough labor. What is going on?

The idea that China is running out of unskilled labor is a myth. The news reports typically concentrate on Guangdong but this does not mean the country as a whole is short of unskilled labor. Development in rural areas in the past six years has meant that rural residents, previously denied economic opportunities close to home, now have a choice between going to Guangdong and staying in their hometowns. Many choose to stay. Any “labor shortage” in Guangdong is mostly evidence that the factories should not be located there in the first place.

But the job market is a problem for college graduates — with the opportunities created in the wrong places. Colleges educate students, but in China they also give a young person a formal right to move to an urban center.

You cannot tell a Chinese college graduate, “you’ve invested years and money in a college education, but your job prospects are in your home village.” So there is now a geographic mismatch between locations of jobs and locations of college graduates.

Secondly, there is a skills mismatch. In my conversations with Chinese managers and entrepreneurs, they constantly complain about a shortage of people with the right set of skills, capabilities and inclinations. China is so short of the right human capital, and books with titles like, “War for Talent,” are best sellers in China.

The Chinese educational system is terrible at producing workers with innovative skills for Chinese economy. It produces people who memorize existing facts rather than discovering new facts; who fish for existing solutions rather than coming up with new ones; who execute orders rather than inventing new ways of doing things. In other words they do not solve problems for their employers.

You multiply this skills mismatch by a sixfold increase in the college enrollments between 1997 and 2008, you get a sense of scale of the problem. Although Chinese universities are not without pockets of excellence, they are churning out people with high expectations and low skills. That combination cannot be good for any country, let alone a country with a low capita income.


Going Back to Mao?
Daniel Bell

Daniel A. Bell is professor of political philosophy at Tsinghua University and author of “China’s New Confucianism: Politics and Everyday Life in a Changing Society.”

“In education, there are no social classes,” Confucius said. The value of equal opportunity for education has deep roots in Chinese culture and may help to explain why most Chinese parents, regardless of social background, put so much pressure on their kids to do well in school.

Even at an elite university, students are lowering their aspirations or settling for government jobs.

It also helps to why explain the university entrance examination system — one of the least corrupt institutions in China — is designed at least partly to provide an equal opportunity for all students. Those who make the cut go on to university, regardless of social connections.

In response to societal demands for more educational opportunities, the government has boosted university enrollment by 30 percent annually over the past decade. Even in the context of a booming economy, the predictable consequence is that there are large numbers of unemployed college students. My own students — graduates of the elite Tsinghua University — are also feeling the pinch, though it usually means lowering their aspirations or changing their plans rather than coping with unemployment.

In the past, it wasn’t too difficult for graduates in the humanities to find highly paid jobs with foreign companies or Chinese financial institutions in Beijing or Shanghai. Many graduates are now considering working in smaller and less developed cities. Others are enrolling in graduate programs that delay the job search. Still others are considering jobs outside of their majors.

One of my graduate students has found a job as a Chinese teacher at a highly regarded secondary school and she says “with this job it will be impossible for me to make a great fortune but I’m quite sure I will be very happy.”

Increasing numbers of graduates are competing to take the civil service exams. Whatever their private misgivings about the government, a government job is increasingly seen as the best option in economically uncertain times.

In response to the job crunch, the government is cutting back on university enrollment growth to 5 percent annually. But the demand for university spots won’t stop growing and the government will find it increasingly difficult to maintain a “harmonious society.”’

The only long-term solution, in my view, is to change parental expectations. Not everyone is destined to be a successful professional or government official, and students will need to be filtered at an earlier age to vocational training, similar to the educational system in Germany.

But parents need to accept that working with hands can be just as socially valuable as working with the mind. A bit of Maoism, in that sense, might need to be reintroduced to China.


Waiting It Out
Albert Park

Albert Park is a reader in the economy of China at the University of Oxford. He has co-directed several surveys on China’s urban workers and is currently leading a World Bank-supported project on the impact of the global economic crisis on employment in China.

China has been confronting the challenge of employing college graduates for some years now. The number of graduates from regular institutions of higher education increased dramatically from 9.5 million in 2000 to 37.8 million in 2006.

The broader trends definitely suggest that the economy will be able to absorb more graduates.

Meanwhile, the urban unemployment rate for college graduates increased from 6.3 percent in 2000 to 11.9 percent in 2005, while declining for those with less education, according to calculations based on census data. It would be surprising if the expectations of college graduates have not begun to adjust to the new reality.

In recent years, many college graduates have been disappointed by the salaries for starting positions. Some may feel they would rather wait for a better first job, since first jobs can strongly influence future career paths. Of course, wages of college graduates tend to rise with experience once employed. Eventually, the costs of waiting will force graduates to accept available job offers.

But are sufficient jobs available? The economic crisis certainly reduced the job market for recent graduates, but evidence suggests that the Chinese economy has bounced back.

The broader trends definitely suggest that the economy will be able to absorb more graduates. First, the economic returns to college education (the percentage difference in wages for college graduates compared with high school graduates) in urban areas have increased tremendously over time, from less than 12 percent in 1988 to nearly 40 percent by the early 2000s, with no signs of declining, and such economic returns are highest for recent graduates. This suggests that increases in the demand for college-educated workers continues to outpace the increase in supply.

Overall, the percentage of the national urban labor force that is college-educated remains less than 10 percent, while global integration and rapid technological change increasingly place a premium on high-skill workers. China’s college graduates have reason to be optimistic about the future.


College Educations, Needed and Desired
Loren Brandt

Loren Brandt is a professor of economics at the University of Toronto. He is a research fellow at the Institute for the Study of Labor in Bonn, Germany. He has published widely on the Chinese economy and has been involved in extensive household and enterprise survey work in China. He is the co-editor of China’s Great Economic Transformation.

China’s urban labor market is fairly sharply divided between workers with urban residency permits (hukou) and migrants from rural areas. In general, the overlap in the job market for these two populations is relatively modest, but it has been increasing over time.

China’s emerging middle class will continue to demand expanded educational opportunities for their children.

Of the total urban workforce of 475-500 million, 60 to 65 percent have urban residency permits (hukou) with the remaining being migrants. A majority of those with residency permits (upwards of three-quarters) work in the “formal” sector in jobs that offer more security, higher wages, as well as the benefits of China’s social safety net. The migrants are more likely to be found in the “informal” urban sector, including manufacturing, construction and services.

For migrants, one huge barrier to jobs in the formal urban sector is their significantly lower levels of education. The most recent arrivals from the countryside have an average educational attainment of middle school (9 years in total), or five years less than their urban counterparts. Migrants are also willing to take the less desirable jobs that urban residents usually avoid.

Estimates suggest that between 2002 and 2008 urban employment grew by nearly 4 percent a year (or 15 million new urban jobs annually), with annual employment growth of migrants outpacing that of urban residents (5.1 percent versus 3.3 percent). Indeed, on the eve of the recent financial crisis, labor markets in many parts of China were fairly tight.

At the end of 2008, total urban employment began to decline and continued to fall through the first half of 2009, but there are indications that urban job growth is now recovering.

The problem facing new college graduates is neither the economy nor the migrants.

Instead, it is the result of a rapid of expansion in higher education and a serious mismatch in the labor market. In 2003, surveys were already pointing to these difficulties. Notably, women, graduates from China’s lower-tier colleges and universities, and those with degrees in education, literature and science were faring more poorly. There were also important regional differences.

Nonetheless, overall there will still be high economic returns for a college degree, and China’s emerging middle class will continue to demand expanded educational opportunities for their children.

China’s educational system needs to do a better job of providing the skills that are valued by the market. On the demand side, other reforms, including those in the financial system, are required to relax constraints facing China’s private sector, which creates jobs. Neither of these changes, however, will happen quickly.

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