Wednesday 4 May 2011

The serious consequences of "supply and demand" in China

The natural reaction of a farmer to an increase in the price of a crop is to plant more of it for the following year. Supply and demand.

The difficulty comes in realising that you are not the only one thinking the same thing - the result is price bubbles leading to price crashes.

The role of the "middle man" or "supply chain" is particularly interesting in this story. Is this merely a lack of information on behlaf of the farmer? The introduction of widespread mobile phone technologies should help.

But what about the road tolls? There are some interesting economics to dig into here.

The Diplomat covers the story:

China’s Unhappy, Uneven Growth [The Diplomat]


But one incident stands out for me as representing an issue the government should be particularly ashamed over – the suicide of a farmer in Shandong Province.

When the prices of vegetables surged last year, the farmer in question cultivated large numbers of cabbages, believing that this particular vegetable could fetch a good price this year. However, he discovered that no one would buy his crop because too many people had already grown the vegetable, the wholesale price of which had plunged to a low of 8 Chinese cents per pound.

The despair became too much for the farmer as he watched his cabbages rot, and he committed suicide by drinking pesticide.

His death captured the public’s attention, especially after it was found that although the wholesale price of cabbages was eight cents, they were being sold for a dollar on the market. So, who has been pocketing the difference? The answer is found in the distribution chain.

For a plate of vegetables to be placed on the dining table, it has to go through numerous processes, including testing, approval, loading, wholesale and distribution. The most important significant cost in all this is logistical, namely road toll fees. Some netizens have calculated that the toll fees incurred in sending a batch of vegetables from Sichuan Province to Beijing is about 5,000 renminbi.

All this means that people living in the cities don’t see any fall in the price of vegetables, despite the low price paid to farmers. In fact, inflation just keeps rising – the growth in the consumer price index in March climbed to 5.4 percent year on year.

Back to the farmer who killed himself. In my view, the government needs to ask itself this: Why is the price of vegetables causing farmers AND consumers in the cities such misery?

The government has stressed that it will try to ensure its citizens lead happy lives. However, a recently concluded survey showed that 70 percent of those polled said they didn’t feel they have a good life.

This one high-profile death should therefore serve as yet another warning to the government that the development of China – now the world’s second-largest economy – is leaving many people behind.


Tuesday 3 May 2011

The economics of dams in China - water wars on the horizon?

China is a thirsty country that needs a lot of water. To this end it is using a lot of dams in some very sensitive areas. There are a whole lot of "externalities" involved with dam production for those upstream, downstream and round about.

When those people live in different countries things can get messy quickly especially if two of those countries and China and India.

I like the concluding statement:

"Scarcity in a zero sum situation can lead to conflict but it can also goad countries into more cooperative behavior. It's a bleak picture, but I'm not without hope."

The author of the quote has more hope than I do - I can only guess that he is not an economist.

Water wars? Thirsty, energy-short China stirs fear [Yahoo]

BAHIR JONAI, India – The wall of water raced through narrow Himalayan gorges in northeast India, gathering speed as it raked the banks of towering trees and boulders. When the torrent struck their island in the Brahmaputra river, the villagers remember, it took only moments to obliterate their houses, possessions and livestock.

No one knows exactly how the disaster happened, but everyone knows whom to blame: neighboring China.

"We don't trust the Chinese," says fisherman Akshay Sarkar at the resettlement site where he has lived since the 2000 flood. "They gave us no warning. They may do it again."

About 800 kilometers (500 miles) east, in northern Thailand, Chamlong Saengphet stands in the Mekong river, in water that comes only up to her shins. She is collecting edible river weeds from dwindling beds. A neighbor has hung up his fishing nets, his catches now too meager.

Using words bordering on curses, they point upstream, toward China.

The blame game, voiced in vulnerable river towns and Asian capitals from Pakistan to Vietnam, is rooted in fear that China's accelerating program of damming every major river flowing from the Tibetan plateau will trigger natural disasters, degrade fragile ecologies, divert vital water supplies.

A few analysts and environmental advocates even speak of water as a future trigger for war or diplomatic strong-arming, though others strongly doubt it will come to that. Still, the remapping of the water flow in the world's most heavily populated and thirstiest region is happening on a gigantic scale, with potentially strategic implications.

On the eight great Tibetan rivers alone, almost 20 dams have been built or are under construction while some 40 more are planned or proposed.

China is hardly alone in disrupting the region's water flows. Others are doing it with potentially even worse consequences. But China's vast thirst for power and water, its control over the sources of the rivers and its ever-growing political clout make it a singular target of criticism and suspicion.

"Whether China intends to use water as a political weapon or not, it is acquiring the capability to turn off the tap if it wants to — a leverage it can use to keep any riparian neighbors on good behavior," says Brahma Chellaney, an analyst at New Delhi's Center for Policy Research and author of the forthcoming "Water: Asia's New Battlefield."

Analyst Neil Padukone calls it "the biggest potential point of contention between the two Asian giants," China and India. But the stakes may be even higher since those eight Tibetan rivers serve a vast west-east arc of 1.8 billion people stretching from Pakistan to Vietnam's Mekong river delta.

Suspicions are heightened by Beijing's lack of transparency and refusal to share most hydrological and other data. Only China, along with Turkey, has refused to sign a key 1997 U.N. convention on transnational rivers.

Beijing gave no notice when it began building three dams on the Mekong — the first completed in 1993 — or the $1.2 billion Zangmu dam, the first on the mainstream of the 2,880-kilometer (1,790-mile) Brahmaputra which was started last November and hailed in official media as "a landmark priority project."

The 2000 flood that hit Sarkar's village, is widely believed to have been caused by the burst of an earthen dam wall on a Brahmaputra tributary. But China has kept silent.

"Until today, the Indian government has no clue about what happened," says Ravindranath, who heads the Rural Volunteer Center. He uses only one name.

Tibet's spiritual leader, the Dalai Lama, has also warned of looming dangers stemming from the Tibetan plateau.

"It's something very, very essential. So, since millions of Indians use water coming from the Himalayan glaciers... I think you (India) should express more serious concern. This is nothing to do with politics, just everybody's interests, including Chinese people," he said in New Delhi last month.

Beijing normally counters such censure by pointing out that the bulk of water from the Tibetan rivers springs from downstream tributaries, with only 13-16 percent originating in China.

Officials also say that the dams can benefit their neighbors, easing droughts and floods by regulating flow, and that hydroelectric power reduces China's carbon footprint.

China "will fully consider impacts to downstream countries," Chinese Foreign Ministry spokeswoman Jiang Yu recently told The Associated Press. "We have clarified several times that the dam being built on the Brahmaputra River has a small storage capacity. It will not have large impact on water flow or the ecological environment of downstream."

For some of China's neighbors, the problem is that they too are building controversial dams and may look hypocritical if they criticize China too loudly.

The four-nation Mekong River Commission has expressed concerns not just about the Chinese dams but about a host of others built or planned in downstream countries.

In northeast India, a broad-based movement is fighting central government plans to erect more than 160 dams in the region, and Laos and Cambodia have proposed plans for 11 Mekong dams, sparking environmental protest.

Zangmu dam) was not a project designed to divert water and affect the welfare and availability of water to countries in the lower reaches," India's Foreign Secretary Nirupama Rao said after talks with his Chinese counterpart late last year.

But at the grass roots, and among activists and even some government technocrats, criticism is expressed more readily.

"Everyone knows what China is doing, but won't talk about it. China has real power now. If it says something, everyone follows," says Somkiat Khuengchiangsa, a Thai environmental advocate.

Neither the Indian nor Chinese government responded to specific questions from the AP about the dams, but Beijing is signaling that it will relaunch mega-projects after a break of several years in efforts to meet skyrocketing demands for energy and water, reduce dependence on coal and lift some 300 million people out of poverty.

Official media recently said China was poised to put up dams on the still pristine Nu River, known as the Salween downstream. Seven years ago as many as 13 dams were set to go up until Chinese Premier Wen Jiabao ordered a moratorium.

That ban is regarded as the first and perhaps biggest victory of China's nascent green movement.

"An improper exploitation of water resources by countries on the upper reaches is going to bring about environmental, social and geological risks," Yu Xiaogang, director of the Yunnan Green Watershed, told The Associated Press. "Countries along the rivers have already formed their own way of using water resources. Water shortages could easily ignite extreme nationalist sentiment and escalate into a regional war."

But there is little chance the activists will prevail.

"There is no alternative to dams in sight in China," says Ed Grumbine, an American author on Chinese dams. Grumbine, currently with the Chinese Academy of Sciences in Yunnan province, notes that under its last five-year state plan, China failed to meet its hydroelectric targets and is now playing catch-up in its 2011-2015 plan as it strives to derive 15 percent of energy needs from non-fossil sources, mainly hydroelectric and nuclear.

The arithmetic pointing to more dam-building is clear: China would need 140 megawatts of extra hydroelectric power to meet its goal. Even if all the dams on the Nu go up, they would provide only 21 megawatts.

The demand for water region-wide will also escalate, sparking perhaps that greatest anxieties — that China will divert large quantities from the Tibetan plateau for domestic use.

Noting that Himalayan glaciers which feed the rivers are melting due to global warming, India's Strategic Foresight Group last year estimated that in the coming 20 years India, China, Nepal and Bangladesh will face a depletion of almost 275 billion cubic meters (360 billion cubic yards) of annual renewable water.

Padukone expects China will have to divert water from Tibet to its dry eastern provinces. One plan for rerouting the Brahmaputra was outlined in an officially sanctioned 2005 book by a Chinese former army officer, Li Ling. Its title: "Tibet's Waters Will Save China,"

Analyst Chellaney believes "the issue is not whether China will reroute the Brahmaputra, but when." He cites Chinese researchers and officials as saying that after 2014 work will begin on tapping rivers flowing from the Tibetan plateau to neighboring countries Such a move, he says, would be tantamount to a declaration of war on India.

Others are skeptical. Tashi Tsering, a Tibetan environmentalist at the University of British Columbia who is otherwise critical of China's policies, calls a Brahmaputra diversion "a pipe dream of some Chinese planners."

Grumbine shares the skepticism. "The situation would have to be very dire for China to turn off the taps because the consequences would be huge," he said. "China would alienate every one of its neighbors and historically the Chinese have been very sensitive about maintaining secure borders."

Whatever else may happen, riverside inhabitants along the Mekong and Brahmaputra say the future shock is now.

A fisherman from his youth, Boonrian Chinnarat says the Mekong giant catfish, the world's largest freshwater fish, has all but vanished from the vicinity of Thailand's Had Krai village, other once bountiful species have been depleted, and he and fellow fishermen have sold their nets. He blames the Chinese dams.

Phumee Boontom, headman of nearby Pak Ing village, warns that "If the Chinese keep the water and continue to build more dams, life along the Mekong will change forever." Already, he says, he has seen drastic variations in water levels following dam constructions, "like the tides of the ocean __ low and high in one day."

Jeremy Bird, who heads the Mekong commission, an intergovernmental body of Laos, Cambodia, Thailand and Laos, sees a tendency to blame China for water-related troubles even when they are purely the result of nature. He says diplomacy is needed, and believes "engagement with China is improving."

Grumbine agrees. "Given the enormous demand for water in China, India and Southeast Asia, if you maintain the attitude of sovereign state, we are lost," he says. "Scarcity in a zero sum situation can lead to conflict but it can also goad countries into more cooperative behavior. It's a bleak picture, but I'm not without hope."


Thursday 28 April 2011

Is China’s economy a cause for concern?

The University of Birmingham's Director of the Business School, Professor David Dickinson reports on how he views recent developments in China's economy.

A sensible comment that touches on a number of issues that this blog has talked about in recent posts.

The Birmingham Brief

Is China’s economy a cause for concern?

Questioning China’s remarkable economic performance over the last 30 years seems to fly in the face of wisdom honed by decades of double digit growth. However, it is perfectly possible to explain China in the context of standard models of economic growth. Immigration of low-wage labour into the Eastern seaboard along with transfers of capital from Chinese Diaspora in Hong Kong, Taiwan and further afield, created the conditions for the ‘miracle’.

This does not imply that China has not been an economic success story but puts the emphasis on standard factors rather than some special Chinese characteristics. China’s policy-makers have been generally clever (or perhaps are fortunate to be able) to take a long-term view. They have also been sensible to limit the degree of economic liberalisation to the areas that will promote real economic growth. They have also given rein to the entrepreneurial instincts of the Chinese.

However, times are troubling for the country and its policy-makers. Wages are rising, as are commodity prices, pushing up price inflation. The rich and dynamic regions have suffered unemployment and migration of workers back to their hometowns, although the continued revival of global demand post 2008 has reversed the trend. There has been a stock market bubble and more recently all the evidence of a real estate price bubble. Policy-makers have taken sensible measures to cool the economy but the pressure has yet to subside.

The real problem is that China’s economy is unbalanced for its long-run stability. The real exchange rate is kept artificially low despite recent appreciation. The financial sector is still very limited in scope creating the stampede of wealth into whatever asset is perceived to be the one to deliver high (and self-fulfilling) profits. Wages are continuing to rise and the reliance on low value-added manufacturing industry is not the basis for sustainable growth.

To be sure China’s policy-makers play a clever game. They are securing their long-run access to commodities through diplomacy and aid-giving in Africa (although recent events in the Northern part of the region may have caused them to re-assess the stability of some of the countries with which they do business). They recognise the importance of developing human as well as physical infrastructure in moving the economy to higher value-added industries. They are also aware of the inequalities that are being created as a result of the geographical concentration of growth.

Movement to higher value-added industries requires building human capital which takes time. As people’s human capital becomes greater they typically want the freedom to think for themselves. The export of Chinese students to universities in developed countries is one way of achieving domestic human capital growth and the policy to create world-class universities in China is another (longer-term) mechanism. But increasingly we are living in a world where human capital is mobile and high quality people will choose carefully where to pursue their careers.

So are Chinese policy-makers willing and able to face the next stage of liberalisation of the economy and society for the country to move forward? Increasing the choices open to Chinese consumers through relaxing exchange rate restrictions, further opening of the financial sector, enhancing protection of intellectual property, giving free rein to innovative thinking and allowing more freedom of speech are some of the things required. We should all be considering the way in which Chinese policy-makers will react in the next few years since the success of the global economy is tied inextricably to the success of the China.

Professor David G Dickinson, Birmingham Business School


Martket integration in China

Hot on the heels of my last post signalling the end of market capitalism in China as we know it as part of "socialism 3.0" comes a paper looking at China's market integration from a more academic perspective.

Market Integration in China

Qingqing Chen
Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Chor-ching Goh
World Bank

Bo Sun
Board of Governors of the Federal Reserve System - Division of International Finance - International Banking and Finance Section

Lixin Colin Xu
affiliation not provided to SSRN

April 1, 2011

World Bank Policy Research Working Paper No. 5630

Over the last three decades, China's product, labor, and capital markets have become gradually more integrated within its borders, although integration has been significantly slower for capital markets. There remains a significant urban-rural divide, and Chinese cities tend to be under-sized by international standards. China has also integrated globally, initially through the Special Economic Zones on the coast as launching grounds to connect with world markets, and subsequently through the accession to the World Trade Organization. For future policy considerations, this paper argues that its economic production needs to be spatially concentrated, and its social services need to be spread out to the interior to ensure harmonious development and domestic integration (through inclusive rural-urban transformations and effective territorial development).


Wednesday 27 April 2011

Socialism 3.0 - the beginning of a new China?

China is a country of many contradictions. On the one hand it is a single party communist state and on the other hand it has the most ruthless capitalist ethos I have witnessed.

My reading is that the period of all out capitalism is drawing to an end. China has done what it needed to do to catch up, import technologies and learn learn learn.

The result has been rising inequality and rising discontent.

Enter stage left "Socialism 3.0".

The Diplomat gives a good summary of the rise of the "new left" in China. This development is exactly what I would have expected. Is this development good or bad for world trade and development? Time will tell.

Socialism 3.0 in China [The Diplomat]
But while Bo’s Chongqing has become a capital for China’s New Left, it’s not the only model competing for the attention of China’s top leaders. Liberals and globally oriented modernizers have also drawn inspiration from local governments, especially reformist policies pursued by the governments of Shenzhen and Guangdong Province.


So what exactly do New Left thinkers believe the next wave of Chinese socialism is going to look like?

For a start, they say, it’s going to be a lot less like capitalism. They call for a major re-entry of the state into the economy, and point to Chongqing as proof that a large public sector can co-exist with a dynamic market. Over the past few years, as Chongqing has become a popular destination for factories relocating from the more developed coastal provinces, where wages and costs are rising, its GDP has grown by about 14 percent a year—much faster than the national average–providing fodder for left-wing academics to cast it as a model for growth.

The political scientists of the New Left are using Chongqing, which has encouraged the expansion of state-owned enterprises, to respond to the economic argument shared by many market-oriented Chinese economists that state investment ‘crowds out’ private enterprise (guo jin min tui).

However, Cui Zhiyuan, a Qinghua University professor who has spent much of the last year conducting field research in Chongqing, argues that in Chongqing ‘It’s not the state crowding out private enterprise…In fact, the state and the market develop together (guo jin min ye jin).’

Wang agrees, citing the growth of private activity in the city, which has outpaced state investment. In fact he dismisses the idea of crowding out, writing ‘This kind of idea not only has absolutely no theoretical foundation, but it’s been also been proved absurd by the practical experience of Chongqing…As the state’s absolute role in the Chongqing economy has increased, its proportion of the economy has decreased.’

In the Chongqing model, though, everything links back to the issues of poverty and inequality, and the government of Chongqing has turned the market profits of state-owned enterprises toward traditional socialist projects, using their revenue to fund the construction of affordable housing and transportation infrastructure. It’s perhaps not surprising then that Bo’s biggest policy hit is the affordable housing initiative for the city’s poorest. The massive construction programme aims to provide cheap apartments to a third of the municipality’s 30 million residents, a programme that has received national attention and clearly impressed the central government, which is rolling out a similar plan at a national level as part of the 12th Five-Year Plan.

Bo has tried to cast his programme as a step past the single-minded focus on GDP that has defined Chinese policy since Deng. ‘It’s not about how many tall buildings you have, it’s how happy people are,’ he argued in a 2009 speech to Chongqing Party members.

These are exciting times for China and these developments should be watched carefully.

Thursday 21 April 2011

The Value of Education - $6.1million

Always one to jump on a bandwagon is one is passing I must report the "Beijing Normal University Professor" quote again.

The Diplomat gives a good summary. This is an interesting blog actually.

I have been talking about the real estate bubble for a while. Who are the bubble-deniers?

We must begin to work out what the fallout from a bubble bursting will be. It could get very ugly very quickly. The key is to understand who the large property speculators are over and above the man in the street (trying to find a wife - see previous story).

The question with this story is what is he really trying to say. I can not quite put my finger on it.

The Value of Education [The Diplomat]
I’d like to share a memorable comment from earlier this month by a professor at Beijing Normal University. The remark is about more than just education – it has quickly become a source of entertainment among Chinese netizens, and even something of a social issue.

On 4 April, a professor at one of the university’s research centres wrote a microblog entry that was presumably meant to offer some encouragement for his students.

‘When you’re 40 years-old, don’t come and see me if your net worth isn’t 40 million yuan ($6.1 million). And don’t tell people that you were my student. To a highly-educated person, poverty means shame and failure.’

The media immediately stirred up some debate on the issue, and many members of the public who responded were quick to argue that by emphasizing money, the professor had taken education back a step or two.

The professor responded that the blog entry was a joke, a defence that prompted even more criticism. Some netizens joked that he clearly has a good grasp of how serious China’s inflation problem is, noting that as his students are mainly in their 20s, by the time they are 40 years-old, 40 million yuan would be equivalent to about 10 million yuan now.

I don’t agree with trying to place a numerical value on education – even if a student becomes a teacher or ends up working in a shop they are still making a valuable contribution to society.

But the comments raise another issue. The professor in question is a senior official at Beijing Normal University’s real estate research centre. The university is meant to be a place for nurturing future teachers, so many are likely left wondering how it ended up specializing in real estate. China’s real estate has been dubbed ‘black gold’, and it seems now that even Beijing Normal University has been ‘polluted’ by the real estate boom.

This isn’t the first time this professor has said something unbelievable. About a year ago, he said that there was no bubble in China’s property market because demand is still high. He is also quoted as saying that people who oppose a ‘revival’ in real estate are ‘hurting national interests’. He added that sceptics about an uptick in the real estate market were ‘anti-humanity’.

The Chinese government, though, is clearly worried that there’s a real estate bubble in parts of China, a view echoed by the IMF. With this in mind, it’s difficult not to wonder what place the rosy views of the professor have at a reputable university. Maybe he’s just trying to make a name for himself. And, if that’s the goal, he’s certainly succeeded. The worrying thing is that there are plenty more like him at Chinese universities.


Wednesday 20 April 2011

Pictures of China in the 1800s

Given China's rapid development it is always useful to look back in time to assess where China has come from to know where it is going.

Rare Photographs of China in the 1800s [Environmental Graffiti]


Economics of marriage and real estate in China

Economists have long realised that marriage is just a contract like any other.

Given the relative shortage of females, supply and demand suggests that the price of marriage should go up. The price it seems to to "own" an apartment. Given the cost this is pricing many men out of the market.

This is exactly what is happening.

A large number of young, single restless men is never going to be good for political stability.

The upcoming property crash may also kill off a few marriages.

This story teaches us many things - I just need to work out what they are but I think they are important.

For Many Chinese Men, No Deed Means No Dates [NYT]

BEIJING — In the realm of eligible bachelors, Wang Lin has a lot to recommend him. A 28-year-old college-educated insurance salesman, Mr. Wang has a flawless set of white teeth, a tolerable karaoke voice and a three-year-old Nissan with furry blue seat covers.

What will happen if China's overheated real estate market goes bust?

“My friends tell me I’m quite handsome,” he said in confident English one recent evening, fingering his car keys as if they were a talisman.

But by the exacting standards of single Chinese women, it seems, Mr. Wang lacks that bankable attribute known as real property. Given that even a cramped, two-bedroom apartment on the dusty fringe of the capital sells for about $150,000, Mr. Wang’s $900-a-month salary means he may forever be condemned to the ranks of the renting.

Last year, he said, this deficiency prompted a high-end dating agency to reject his application. In recent months, half a dozen women have turned down a second meeting after learning that he had no means to buy a home.

“Sometimes I wonder if I will ever find a wife,” said Mr. Wang, who lives with his parents, retired factory workers who remind him of his single status with nagging regularity. “I feel like a loser.”

There have been many undesirable repercussions of China’s unrelenting real estate boom, which has driven prices up by 140 percent nationwide since 2007, and by as much as 800 percent in Beijing over the past eight years. Working-class buyers have been frozen out of the market while an estimated 65 million apartments across the country bought as speculative investments sit empty.

The frenzy starts with the local governments that sell off land at steep prices, and is frothed up by overeager developers who force residents out of old neighborhoods, sometimes prompting self-immolations among the dispossessed. But largely overlooked is the collateral damage to urban young professionals, especially men, who increasingly find themselves lovelorn and despairing as a growing number of women hold out for a mate with a deed.

Although there are few concrete ways to measure the scope of involuntary bachelorhood, more than 70 percent of single women in a recent survey said they would tie the knot only with a prospective husband who owned a home.

Among the qualities they seek in a mate, 50 percent said that financial considerations ranked above all else, with good morals and personality falling beneath the top three requirements. (Not surprisingly, 54 percent of single men ranked beauty first, according to the report, which surveyed 32,000 people and was jointly issued by the Chinese Research Association of Marriage and Family and the All-China Women’s Federation.)

The marriage competition is fierce, and statistically, women hold the cards. Given the nation’s gender imbalance, an outgrowth of a cultural preference for boys and China’s stringent family-planning policies, as many as 24 million men could be perpetual bachelors by 2020, according to the report.

Zhang Yanhong, a matchmaking consultant at Baihe, one of the country’s most popular dating sites, said many disheartened men had simply dropped out of the marriage market.

“This fixation on real estate has twisted the popular notion of love and marriage,” she said. “Women are putting economic factors above everything else when looking for a mate, and this is not a good thing for relationships or for society.”

The nation’s real-estate obsession is especially noteworthy given China’s relatively recent embrace of home ownership.

The sale of residential property was not allowed until the late 1980s, and even then under a leasehold system that gives buyers 70 years of ownership. Today, about two-thirds of all Chinese under 40 own their own homes, slightly higher than the average for Americans of the same age group.

With few other outlets for investment (those who park their money in a Chinese bank effectively lose money, given low interest rates and high inflation), many families have been plowing their savings into apartments, spurring what some economists describe as a bubble.

Han Han, one of China’s most widely read bloggers, frequently assails the government policies that he and many economists say have contributed to rapidly rising prices.

In an interview, he said one consequence of the single-minded focus on real estate, or on earning the money to make mortgage payments and repay family loans, is that young people have little time for anything else. “We’ve created a generation of young people whose sole ambition is to have a piece of property under their name,” he said.

Like many anxious bachelors, Yang Xuning, 29, a sportswriter from Beijing, said much of the pressure comes from parents who feel taunted by the wealth around them.

He recalls his first meeting with his girlfriend’s parents in Shanghai last winter, when he was asked about his salary and his nesting plans. “I tried to reason with her mother, explaining that it’s not practical to buy something at this stage in our lives but she wouldn’t hear it,” he said.

What will happen if China's overheated real estate market goes bust?

He stood his ground, she stood hers, and a few months later, on the second anniversary of their relationship, Mr. Yang’s girlfriend called it quits.

“A lot of girls, encouraged by their parents, see marriage as a way of instantly changing their status without the hard work,” he said bitterly.

Many women are unapologetic about their priorities, citing the age-old tradition in which men provided a home for their brides, even if that home came with a mother-in-law.

There are also other concerns, including the instability of starting a family in rented premises and the endless badgering of parents.

Status also plays a role, but so, too, do fears that those who put off buying will be priced out of the market indefinitely.

Gao Yanan, a 27-year-old accountant with a fondness for Ray-Bans and Zara pantsuits, said the matter was not up for debate. “It’s the guy’s responsibility to tell a girl right away whether he owns an apartment,” she said. “It gives her a chance not to fall in love.”

With such women on the prowl, even men who do have their own homes have come up with techniques to weed out the covetous and the inordinately materialistic.

Liu Binbin, 30, an editor at a publishing house in Beijing, said he often arrived at first dates by bus, even though he owned a car. “If they ask me questions like ‘Do you live with your parents?’ I know what they’re after,” he said.

Mr. Liu said he went on 20 unfulfilling blind dates until finding a suitable girlfriend last year. He said he knew she was the one after passing the three-month mark.

“The whole time she thought I didn’t own an apartment and she still wanted me,” he said. “Someone like that is rare.”


Friday 25 March 2011

Who will feed China?

Lester Brown has an interesting article over at Sustainablog.

The ability of China to feed itself has important social and political aspects and recent history puts food production at the top of China's priorities.

China is coming to realise that being self sufficient in food may not be possible.

The article can be clicked on to get the full story. I show only a couple of highlights as a taster.

Can the United States Feed China? [Sustainablog]


As party leaders assessed the situation, they decided to launch an all-out effort to maintain grain self-sufficiency. The government quickly adopted several key production-boosting measures, including a 40 percent rise in the grain support price paid to farmers, an increase in agricultural credit, and heavy investment in developing higher-yielding strains of wheat, rice, and corn, their leading crops.

They offset cropland losses in the fast-industrializing coastal provinces by plowing grasslands in the northwestern provinces, a measure that contributed to the emergence of the country’s massive dust bowl. In addition to overplowing, they expanded irrigation by overpumping aquifers.

Lastly, the Party made a conscious decision to abandon self-sufficiency in soybeans and concentrate their agricultural resources on remaining self-sufficient in grain. The effect of neglecting the soybean in the country where it originated was dramatic. In 1995 China produced and consumed nearly 14 million tons of soybeans. In 2010 it was still producing only 14 million tons—but it consumed nearly 70 million tons, most of it to supplement grain in livestock and poultry rations. China now imports four-fifths of its soybeans.


Despite China’s herculean efforts to expand grain output, several trends are now converging that make it harder to do so. Some, like soil erosion, are longstanding. The pumping capacity to deplete aquifers has emerged only in recent decades. The extraordinary growth in China’s automobile fleet and the associated paving of land have come only in the last several years.

Overplowing and overgrazing are creating a huge dust bowl in northern and western China. The numerous dust storms originating in the region each year in late winter and early spring are now regularly recorded on satellite images. For instance, on March 20, 2010, a suffocating dust storm enveloped Beijing, prompting the city’s weather bureau to warn that air quality was hazardous, urging people to stay inside or to cover their faces when outdoors. Visibility was low, forcing motorists to drive with lights on in daytime.


China is now at war. It is not invading armies that are claiming its territory, but expanding deserts. Old deserts are advancing and new ones are forming like guerrilla forces striking unexpectedly, forcing Beijing to fight on several fronts. And in this war with the deserts, China is losing.


Overpumping, like overplowing, is also taking a toll. As the demand for food in China has soared, millions of Chinese farmers have drilled irrigation wells to expand their harvests. As a result, water tables are falling and wells are starting to go dry under the North China Plain, which produces half of China’s wheat and a third of its corn. The overpumping of aquifers for irrigation temporarily inflates food production, creating a food production bubble that eventually bursts when the aquifer is depleted. Earth Policy Institute estimates that some 130 million Chinese are being fed with grain produced by overpumping—by definition, a short term phenomenon.



Monday 14 March 2011

Are House Prices Rising Too Fast in China?

This is a good question and it is fortunate that a group of respected economists have looked carefully at the question.  My own instinct is to say "yes" they are and that a housing price collapse could have serious implications both economically and more importantly politically.

The authors suggest we do not have to worry just yet.

Ashvin Ahuja
International Monetary Fund (IMF)

Lillian Cheung
Hong Kong Monetary Authority

Gaofeng Han
Hong Kong Monetary Authority; University of California, Santa Cruz - Department of Economics

Nathan Porter
International Monetary Fund (IMF)

Wenlang Zhang
affiliation not provided to SSRN

December 2010

IMF Working Paper No. 10/274

Sharp increase in house prices combined with the extraordinary Chinese lending growth during 2009 has led to concerns of an emerging real estate bubble. We find that, for China as a whole, the current levels of house prices do not seem significantly higher than would be justified by underlying fundamentals. However, there are signs of overvaluation in some cities’ mass-market and luxury segments. Unlike advanced economies before 2007-8, prices have tended to correct frequently in China. Given persistently low real interest rates, lack of alternative investment and mortgage-to-GDP trend, rapid property price growth in China has, and will continue to have, a structural driver. 


WTO sides with China to kicks the US in the antisubsidies

In a surprise ruling the WTO ruled that the US had introduced illegal antidumping and antisubsidy duties on some Chinese exports.

What is interesting is that China has spent vast sums on experts and lobby groups to fight the US and Europe on their terms. If you cannot beat them, hire them. This strategy is already showing signs of working well.

Trade Body Rules in Beijing's Favor [WSJ]

BRUSSELS—The World Trade Organization handed an important victory to China, ruling that the U.S. illegally imposed both antidumping and antisubsidy duties on some Chinese exports in 2007.

The trade body's surprise decision sets a precedent in limiting the ability of China's trading partners to impose punitive duties on its exports.

China, the world's biggest exporter and its second biggest economy, faces its biggest wave of trade disputes at the WTO since it joined the Geneva-based organization in 2001.

Led by the U.S. and the European Union, China's trading partners are fighting what they say is an export machine often lubricated by state subsidies and aggressive dumping of goods below cost on foreign markets. And they complain it's a one-way street: China had $1.6 trillion of exports in 2010, with a trade surplus of $184.5 billion.

China has reacted to the trade legal war by hiring teams of consultants and expert counsel in Geneva, Brussels and Washington. It has become difficult for a reporter covering trade to find a lawyer not retained on some level by China or one of its exporters.

The WTO recently issued two significant rulings against China, finding that it improperly imposes export tariffs on raw materials in order to protect domestic supplies, and ordering China to bust a state-backed monopoly on processing some credit-card payments.

The most recent case dates back to the U.S. imposing punitive tariffs of up to around 20% on Chinese steel pipes, tires, and laminated woven sacks in 2007. A year later, China complained to the WTO that the U.S. had acted illegally. In October, the WTO rejected those claims.

Beijing appealed, arguing the U.S. couldn't legally impose two different classes of punitive duties—antidumping and antisubsidy— on the same goods. Antidumping duties punish dumping, the selling of goods below cost in a foreign country, while the latter compensate for government aid, such as grants and low-interest loans.

Typically, antidumping duties are levied on countries that are not designated as "market economies," because some subsidies are assumed in those countries. Instead, the WTO permits importers to calculate probable cost of the good using another country as a reference. For China, it is often another emerging economy such as Turkey or Mexico. Most countries, the U.S. included, don't consider China a market economy, and therefore usually don't apply antisubsidy duties. The EU has never imposed antisubsidy duties on China. Beijing has been campaigning hard for market-economy status from both the U.S. and EU because it would make it harder for those countries to levy antidumping duties.

In its 232-page report, the WTO's judges said that the U.S. couldn't apply both kinds of duties.

"The Appellate Body's decision on the 'double remedies' issue is likely to cause concern" among U.S. manufacturers and labor unions who lobby the government to impose duties, said Simon Lester, founder of LLC, a Washington consulting firm.

U.S. Trade Representative Ron Kirk reacted angrily to the ruling by the WTO. "I am deeply troubled by this report," he said."It appears to be a clear case of overreaching by the Appellate Body." The U.S., he added, is "reviewing the findings closely in order to understand fully their implications."

The U.S. must now comply with the ruling by removing some of the duties and change its methodology for future cases.

U.S. trade officials pointed out that the WTO panel upheld some parts of the U.S. case, including the finding that certain banks that gave loans to the exporters were "state bodies."

China welcomed the ruling. The panel, a government statement said, "has conclusively established that the United States acts unlawfully in the methods by which it calculates and imposes countervailing duties on imports from China."


China is NOW the world's biggest producer

It was inevitable that China would overtake the US for total production and that great day has now arrived.

What is interesting is that China is merely retaking the position it held in the 19th Century. Think of this as mean reversion. It was always going to happen after what history will see as the blip of communism (a large blip granted).

The UKs once leading position, taking over from China, now seems a long time ago.

It is still astonishing that although China now has the top spot that it takes 9 people to the US's one to manage it. Now we see the gulf between China and the US is still a large one.

China noses ahead as top goods producer [FT]

China has become the world’s top manufacturing country by output, returning the country to the position it occupied in the early 19th century and ending the US’s 110-year run as the largest goods producer.

The change is revealed in a study released on Monday by IHS Global Insight, a US-based economics consultancy, which estimates that China last year accounted for 19.8 per cent of world manufacturing output, fractionally ahead of the US with 19.4 per cent.

China’s reversion to the top position marked the “closing of a 500-year cycle in economic history”, said Robert Allen of Nuffield College, Oxford, a leading economic historian.


The last time China was the world’s biggest goods producer was in about 1850 when the country was close to the end of a long period of population growth and technological ascendancy. Buoyed by the industrial revolution, the UK then became the top maker of factory goods and held this position for almost 50 years, following which the US began a long run as the world’s premier manufacturing nation.

China makes more than the US, but takes nine times as many people to do so
Nicholas Crafts of Warwick university, an expert on long-term economic change, said: “This marks a fundamental shift in the global division of labour [involving goods production] which is unlikely to be reversed in the near future.”



Sunday 13 March 2011

Banking in China continued

China financial markets has a post on the RMBs potential as a reserve currency. Pettis correctly points out that this is unlikely in the near future.

What is more interesting is his comment on the state of the banking sector. In this we yet again share the same view. This is a massive problem waiting to happen.

The dollar, the RMB and the euro?

I will write a lot more about this in the next month or so, but for now it is worth pointing out that the Chinese banking system is one of the least efficient in the world when it comes to assessing risk and allocating capital, and would be bankrupt without repressed interest rates and the implicit (and sometimes explicit) socialization of credit risk. Beijing accepts this because of the tradeoff that gives it banking stability


Friday 11 March 2011

The impending bank crisis in China

I have become increasingly convinced that a bank crisis is just around the corner for China. The planets are lining up.

In my view it is all about property prices. This is a bubble by any name and the reasons for the bubble would take many a blog post but I am convinced that this bubble is there and it is large. The other problem is "bad loans". There are a lot of them, a real lot of them.

This very recent Wall Street Journal article saves me the time of writing up my worries.

It is impressive that Fitch Ratings have shown some balls to make this call.

A 60% chance of a banking crisis by 2013 seems pretty darn high to me actually (and fairly accurate. It is therefore important to understand exactly what the implications would be.

Fitch’s Bold Call on China Banking-System Risk [WSJ]
Fitch Ratings has developed a strong record on China’s banking sector in recent years, thanks largely to the perspicacious analysis of its lead banks analyst in Beijing, Charlene Chu. She was one of the first observers, back in 2009, to flag how Chinese banks were moving loans off their balance sheets to lightly regulated trust companies to avoid government lending caps. This past December, she and her colleagues published a report estimating that China’s banks had used trusts and other tools to blow past the government’s 7.5 trillion yuan ($1.14 trillion) quota for new yuan loans 2010 to the tune of an additional three trillion yuan not recorded on their balance sheets.

Last month, the People’s Bank of China effectively validated Ms. Chu’s analysis, saying that its longstanding measure of new bank lending failed to capture actual credit flows, and that the banks were responsible for creating around 11.5 trillion yuan of new credit last year.

So it turned a few heads Tuesday when an analyst elsewhere at Fitch was quoted saying that China has a 60% probability of experiencing a banking crisis by 2013. Ms. Chu’s analysis had pointed to significant flaws in China’s banking system, but this call put Fitch out there toward the Jim Chanos end of China Cassandra spectrum.

The analyst, Richard Fox, a London-based senior director at Fitch, told Bloomberg News that Fitch sees risks of “holes in bank balance sheets” should a property bubble burst.

The jarring assessment was based on the Macro-Prudential Risk Monitor, a sort of analytical tripwire system that Fitch developed in 2005 to flag potential bank crises. Using a formula based on credit-growth rates and asset-price increases, Fitch places national banking systems in three categories based on their “Macro-Prudential Indicator” scores, with MPI 1 being the least risky and MPI 3 the most.

As noted by Bloomberg, which said it interviewed Mr. Fox by phone on March 4, Fitch actually assigned China to the MPI 3 category back in June. But the move went largely unnoticed.

According to Fitch, an emerging-market economy like China has a 60% chance of experiencing a banking crisis within three years of being designated MPI 3. Thus it would follow there’s a better-than-even chance that D-Day will dawn for Beijing sometime before mid-2013.

Fitch bases that assertion on surveying almost 40 past banking crises. It says that a combination of abnormally fast growth in credit, assets prices, and the real effective exchange rate is a solid predictor of ill fortune for countries’ financial sectors.

Some countries enter MPI 3 and are removed without undergoing banking crises, among them, in the last three years, are Brazil, France, Denmark and New Zealand. On the other hand, according to Bloomberg’s interview MPI 3 correctly sounded the alarm for countries including Ireland and Iceland.

“We look at indicators and conditions which have preceded past crises,” Mr. Fox said in an email exchange with The Wall Street Journal on Tuesday. “MPI 3 shows these are present in China. Past evidence suggests there is therefore a 60% chance of a crisis in three years.”

If China does indeed fall into a banking crisis in the next 28 months, Fitch’s prediction will be lauded for its prescience—though it would also be grim news for the world economy. It’s safe to say that few experts in China who follow the banking system closely think there is a probability of a crisis in such a short period of time—including those who agree that China’s lending binge since 2009 has inevitably created a mountain of new bad loans that will someday have to be reckoned with.

News of the Fitch assessment apparently infuriated Ting Lu, China economist for Bank of America-Merrill Lynch, who blasted the 60% assessment in a note Wednesday. “Being cautious is one thing, exaggerating risks is quite another,” he wrote.

A Fitch spokesman declined to comment on the remark.

Certainly China’s loan growth is worrisome. The volume of outstanding yuan loans in the banking system has jumped by more than half in just the past two years. It’s almost impossible to imagine such a flood of credit being issued without sizeable mistakes. Indeed, regulators are clearly aware of the problems and have already been working to ensure that the banks hold sufficient collateral for loans made to infrastructure investment platforms backed by local governments, a group of borrowers deemed most worrisome.

Still, it could be a stretch to put a numerical probability on something as uncertain as the timing of a financial crisis in China, especially if it’s based on a one-size-fits-all model applied to diverse economies across the globe.

The Fitch model says four conditions have to align before it’s time to sound the alarm. Real private-sector credit growth must exceed 15% a year, sustained over two years. Property prices need to grow more than 5% a year and the real effective exchange rate (that’s a measure of the currency on a trade-weighted basis, adjusted for the effects of inflation) must appreciate by more than 4% a year over the same two-year period. And finally, equity prices need to gain more than 17% a year over the preceding two year period. China has fulfilled the credit and property-price conditions for most of the decade, but a stock market bubble in 2006-2007 and strong yuan appreciation pushed it over in 2008.

China’s government is far from omnipotent, but it does have significant ability to mitigate or delay a crisis—not least because the state is ultimately the owner of both the banks and most of the big borrowers they lend to. And given that the once-a-decade transition in China’s leadership, which begins in the autumn of next year and runs through early 2013, there will be a serious political imperative to paper over problems in the economy. It could be a while yet before the big cracks start showing in the banking system.


Wednesday 23 February 2011

A Global View of Productivity Growth in China

There is a lot written about the "impact of China" on pretty much everything. What about productivity in the rest of the world from China's rise? Gains from trade means productivity spillovers should benefit us all but do they?

A new paper by Chang-Tai Hsieh and Ralph Ossa (NBER) provide some numbers.

They find that the average real income of the rest of the world INCREASED by a cumulative 0.48% from 1992-2007 due to China's productivity growth? This represents 2.2% of total income gains to the world.

What does this really mean?

Where is the bad news?

A Global View of Productivity Growth in China

Chang-Tai Hsieh
University of Chicago - Booth School of Business

Ralph Ossa
affiliation not provided to SSRN

February 2011

NBER Working Paper No. w16778

We revisit a classic question in international economics: how does a country's productivity growth affect worldwide real incomes through international trade? We first identify the channels through which productivity shocks transmit in a model featuring inter-industry trade as in Ricardo (1817), intra-industry trade as in Krugman (1980), and firm heterogeneity as in Melitz (2003). We then estimate China's productivity growth at the industry level and use our model to quantify what would have happened to real incomes throughout the world if nothing but China's productivity had changed. We find that average real income in the rest of the world increased by a cumulative 0.48% from 1992-2007 due to China's productivity growth. This represents 2.2% of the total income gains to the world.


Why are Saving Rates so High in China?

This is an age old question that has been looked at many times before this time in a NBER paper (so it must be of a decent quality).

The simple answer is the lack of a welfare state leading to a lot of "rainy day" saving and also the importance of education where investment in an often single child can cost a relative fortune and needs to be saved for.

The Chinese are rapidly learning how to be good consumers and follow the West in wanting lots of useless trinkets, new clothes and gadgets. The saving rate is sure to fall over time as materialism kicks in.

"Why are Saving Rates so High in China?"
NBER Working Paper No. w16771

JUNSEN ZHANG, Chinese University of Hong Kong (CUHK) - Department of Economics, Institute for the Study of Labor (IZA)

SHAOJIE ZHOU, Tsinghua University

In this paper, we define "The Chinese Saving Puzzle" as the persistently high national saving rate at 34-53 percent of gross domestic product (GDP) in the past three decades and a surge in the saving rate by 11 percentage points from 2000-2008. Using data from the Flow of Funds Accounts (FFA) and Urban Household Surveys (UHS) supplemented by the findings from existing studies, we analyze the sources and causes of China's high and rising saving rates in the government, corporate, and household sectors. Although the causes of China's high saving are complex, we suggest that the evolving economic, demographic, and policy trends in the internal and external environments of the Chinese economy will likely lead to a decline in national saving in the foreseeable future.


Monday 14 February 2011

150 years of foreign trade in China

As an avid reader of Chinese history the relationship between China and the western powers over the last 150 has been interesting to say the least.

It will be interesting to see how the relationship between politics and trade has been handled.

They have some interesting data and arrive at a rather predictable conclusion.

"China's Foreign Trade: Perspectives from the Past 150 Years"

CEPR Discussion Paper No. DP8118
WOLFGANG KELLER, University of Colorado, National Bureau of Economic Research (NBER), Centre for Economic Policy Research (CEPR)
BEN LI, University of Colorado at Boulder - Department of Economics
CAROL HUA SHIUE, affiliation not provided to SSRN

This paper studies the trade of China in the past 150 years, starting from the first opening of China after the Opium War. The main purpose of the paper is to identify what is (and was) China's 'normal' level of foreign trade, and how these levels changed under different trade regimes, from 1840 to the present. We present new evidence on China's foreign trade during the treaty port era (1842-1948), drawn from disaggregated trade data collected by the Chinese Maritime Customs Service, that yields important findings for current research. First, although the volume of foreign trade remained limited initially, there was a notable expansion in the diversity of products, with many new goods being imported into China. Second, the regional diffusion of foreign goods through China was greatly facilitated by the expansions of the port system. Third, the importance of Hong Kong as an intermediary in China's trade has undergone long-term fluctuations suggestive of learning effects. China's recent wave of liberalization has led by the early 1990s to a trade level comparable to the high of the 1920s. While much of China's recent growth in world trade is in line with her income growth, there is no doubt that China's trade openness today, comparable by some measures to Denmark's, is a stunning reversal relative to the pre-1978 and also the pre-1840 period. The paper emphasizes the roles that history and institutional change have played in this.


The value of a degree in China

This week I will post a series of posts on higher education in China. With more and more Chinese nations choosing to study abroad one of the most obvious questions is what the returns to education look like.

This interesting article in the Wallstreet Journal suggests - not a lot.

The key here is the quality of the degree. Here it is suggested that only the top 50 is good enough. This also counts when studying abroad. Those wishing to study in the UK for example must enter one of the top 20 Universities. Some information is provided in the sidebar of this blog for economics/finance.

Value of a Chinese College Degree: $44? [Wallstreet Journal]
American college students facing the misery of an anemic post-graduation job market have company in an unlikely-seeming place: China.

Despite entering a robust economy that seemed to weather the financial crisis as if were it a middling squall, China’s college graduates on average make only 300 yuan, or roughly $44, more per month than the average Chinese migrant worker, according to statistics cited over the weekend by a top Chinese labor researcher and reported today by the Beijing Times (in Chinese).

“It’s the first time China has faced such a situation,” the paper quoted Cai Fang, head of the Chinese Academy of Social Science’s Institute of Population and Labor Economics, as saying Saturday at a conference on Chinese youth. “It’s hard to say how long this situation will last.”

By Mr. Cai’s calculations, college graduates have consistently earned around 1,500 yuan a month since 2003. Migrant workers, meanwhile, have seen their monthly wages rise from an average of 700 yuan to 1,200 yuan over roughly the same time period, MR. Cai said, according to the Beijing Times.

China has faced a surfeit of college graduates in recent years, thanks in large part to an enrollment boom that has seen the university student population swell by as much as 30% year-to-year over the last decade. High levels of unemployment among recent graduates—an estimated one-third of the country’s 5.6 million 2008 graduates failed to find work in their first year out of school—are a major drag on the average wage figures. Meanwhile, labor shortages in manufacturing and construction have enabled migrant workers to demand higher and higher wages.

In a country where a highly competitive pursuit of higher education routinely forces families to spend fortunes, and children to sacrifice their childhoods, such statistics have to have many wondering, why bother?

In the nearly 1,800 comments the report has attracted at the Chinese news portal Sohu, that’s precisely what many are doing. While some readers took the news with a certain post-Communist irony (“Our society has made progress–no longer does a diploma determine social status,” wrote one), the vast majority were cynical about the value of a college education. “If you don’t test into one the top 50 universities, don’t bother doing to school,” one reader advised. “It’s useless.”

Complained another: “Of all universities in China, how many actually cultivate students? It’s all for money. What do college students learn? It doesn’t even compare to a high school education from before.”

Are Chinese degrees really so worthless? Not necessarily, according to Mr. Cai. Like wine, the wages of most college graduates improve significantly over time. But, Mr. Cai said, myopia is already starting to set in, particularly for working-class students for whom the combination of tuition and lost wages can seem too large a sacrifice.

“First it’s ‘Why bother making your kids study?’ or ‘Why bother going to university?’” the report quotes Mr. Cai saying. “Then it’s ‘Why bother going to high school?’”

One possible advantage Chinese degree-holders have over their American counterparts: In China, there’s no shame in living in your parents’ basement after graduation.

CORRECTION: An earlier version of this post misstated the number of 2008 graduates who failed to find work in their first year out of college at nearly 6 million. That is the total number of new graduates in 2008. The number who failed to find work is roughly one-third of the total.

H/T. Best Colleges Online

Saturday 22 January 2011

How We Gain From China's Advances

I have always had a lot of time for Matt Kahn (UCLA) on his environmental blog and his New York Times piece makes a lot of sense.

As someone who works in trade and IO it is good to see Ricardo and spillovers making an appearance. Kahn is absolutely correct in this small piece.

I will be back as a blogger now after a period of laziness (and too much work).

How We Gain From China's Advances

Updated January 18, 2011, 08:14 PM

Matthew E. Kahn is a professor of economics at U.C.L.A.’s Institute of the Environment and Sustainability. He is the author of "Climatopolis: How Our Cities Will Thrive in the Hotter World."

Last September, the Times published an article sketching out the details of how China plays “dirty” in green tech as it offers cheap land and cheap loans to its nascent renewable energy sector. But new ideas are public goods that spread across continents.

Facebook started with the simple idea of connecting individuals, but now businesses use the Facebook platform to spread “buzz” and word of mouth about their products. In a similar spirit, China’s investments offer spillover benefits to the rest of the world.

The United States will gain from the green tech push taking place in China. Because of specialization and learning-by-doing, the cost of producing solar panels and wind turbines will decline. This is very good news for all sorts of firms ranging from Wal-Mart to Google to the defense department. Each of these “non-green” entities will be increasingly likely to be able to “go off the grid” thanks in large part to China’s investments. In this sense, the United States will experience a “greening” of our industries because we are a net importer of China's renewables technology exports.

In 2011, our green tech comparative advantage rests with our leading universities. The nerds at our universities know that if they discover a game-changing breakthrough their idea can be mass produced in China. China knows that U.S universities are likely to continue to come up with great ideas and thus it makes sense to have the nimble factories and workers ready to go.

How does the American middle class gain from this trend, even if the clean energy equipment isn’t manufactured here? One perhaps unsatisfying answer is, air quality will improve and greenhouse gas emissions will decline.

I realize that such long-term benefits do not equal a job right now. But, consider a real world example from U.C.L.A. Just the other day, I was talking to my colleague Michael Jura about the possibility of the university installing solar panels on the graduate housing complexes, but high capital investment costs are blocking this move. When China makes green tech progress, this cost will fall and U.C.L.A. will be able to go forward on this project.

This will create “green jobs” for installation and maintenance workers and the campus’s carbon footprint will fall. David Ricardo would smile as the gains to international trade will be reaffirmed again.