China to America - "Game over"

Surprise, surprise, the Telegraph blog published a China scare story.  Interesting reading.

Will be it be a military or economic attack and which could do the most damage? The military argument seems to be about commenting on the parallels that China has now with Japan in the 1930s.  Look how that turned out.

Economically, if China stops buying US dollar and ditches the dollar things become expensive in the US very quickly killing off the fragile economic recovery.

What should the average American do?  I am not sure there is much they can do.  Buy bitcoins and hope is one possibility.

Is China about to tell the West: 'Game Over'? [Telegraph blog]

My Dad won't like this. As a massive Sinophile, he won't hear a bad word said about the Chinese and their honourable intentions. But here are two pieces I'd like to draw to your attention which offer an interesting counter-perspective.

The links are these:

 What if China attacks?  [David Archibold]

China yearns to be recognised as the most powerful nation on the planet. Driving the United States from the western Pacific would put that beyond doubt, and ongoing territorial disputes represent the perfect excuse

and

  China's planned crude oil futures may be priced in yuan - SHFE [Reuters]

Nov 21 (Reuters) - The Shanghai Futures Exchange (SHFE) may price its crude oil futures contract in yuan and use medium sour crude as its benchmark, its chairman said on Thursday, adding that the bourse is speeding up preparatory work to secure regulatory approvals.
China, which overtook the United States as the world's top oil importer in September, hopes the contract will become a benchmark in Asia and has said it would allow foreign investors to trade in the contract without setting up a local subsidiary.
"China is the only country in the world that is a major crude producer, consumer and a big importer. It has all the necessary conditions to establish a successful crude oil futures contract," Yang Maijun, SHFE chairman, said at an industry conference.
Yang's presentation slides at the conference stated that the draft proposal is for the contract to be denominated in yuan and use the type of medium sour crude that China most commonly imports.

Research Paper: "Enhancing China's Medium-Term Growth Prospects: The Path to a High-Income Economy"

 The shape of China's economy is in the balance.  Academic paper touching on China's vulnerabilities (of which there are many).  Otherwise, a standard Province level study.

"Enhancing China's Medium-Term Growth Prospects: The Path to a High-Income Economy"

IMF Working Paper No. 13/204

MALHAR NABAR, International Monetary Fund (IMF)

PAPA N'DIAYE, International Monetary Fund (IMF) - Asia and Pacific Department


China’s current growth model — which has delivered steady and robust growth for two decades and lifted some 500 million individuals out of poverty — has become too reliant on credit and investment, and has begun to experience diminishing returns. Delays in advancing the government’s reform agenda will mean that vulnerabilities continue to grow and the probability of stalled convergence increases. On the other hand, with reforms to accelerate TFP growth and shift the economy away from its continued reliance on capital accumulation, China can grow at a healthy pace and maintain its convergence toward the level of high income economies. Evidence from China’s provinces indicates that there is room to improve productivity and sustain such a convergence toward the level of more prosperous economies.

“Airpocalypse” in China

"Airpocalypse" is a new word to me and a very fine one at that.  It comes from a good post on ChinaFile.

The continued and increasing use of coal, nitrogen fertilisers and traffic fumes are to blame.  Any solution is a long way off. 

A good read.

Why’s China’s Smog Crisis Still Burning So Hot? [ChinaFile]

 On Sunday, the start of the winter heating season in northern China brought the “airpocalypse” back with a vengeance.

Harbin, the capital of Heilongjiang Province and home to 11 million people, registered fine particulate (PM2.5) pollution levels beyond 500, the top of the scale on the Chinese Air Quality Index, a level which is considered hazardous to human health. Measurements in some parts of the city reached 1,000 micrograms per cubic meter. As a result, authorities forced primary and middle school closures and the shutdown of the airport and local highways.

By contrast, Los Angeles, where I am now based and which typically has some of the worst air quality in the U.S., had U.S. Environmental Protection Agency AQI levels for PM2.5 between 48 and 108.

China’s severe air pollution problems and the high cost to human health, economic productivity, and quality of life by now are well known. The question is whether Chinese leaders are prepared to do what it takes to solve the problem, and, if their stated resolve is genuine, will they have the ability to implement?

Public lecture: Is China too big to fail? An Economic and Environmental Perspective

Speaker: Professor Rob Elliott (me), Date: 23rd October, Location: University of Birmingham, cost: free.

I will be giving a public talk for my inaugural lecture at the University of Birmingham tomorrow afternoon at 4.30.

All welcome.  Just sign up by following the link below.  Apologies for the extremely short notice (only just occurred to me to publicise this event more widely).  The lecture title is self explanatory and although a very large topic it has been crammed into a concise one hour event.

The event is jointly hosted with the University of Birmingham China Institute.

'Is China too big to fail? An economic and environmental perspective' 
 
Speaker: Professor Rob Elliott - Department of Economics

Time: Wednesday 23rd October at 16.30-17.30 followed by a drinks reception

Location: G15, Main Lecture Theatre, Muirhead Tower, University of Birmingham

Places are limited so registration is necessary.

To reserve your place or for further details visit Professor Rob Elliott inaugural lecture
 
Professor Rob Elliott joined the Department of Economics at the University of Birmingham in September 2003. Having obtained a BA (Economics) and MA (Economics) at the Universities of Leicester and Essex, he studied for a PhD with Professor David Greenaway, Dr. Peter Wright and Robert Hine at the University of Nottingham.

Professor Elliott is currently Director of Education and Director of Admissions and Recruitment.  Prof. Elliott’s main research covers empirical international trade, environmental, development and labour economics under the broad umbrella of "the Economics of Globalisation".

Chinese rating agency downgrades the US - big reaction

China's Dagong Global Credit Rating cuts it US credit rating.  Much bigger reaction than expected.

Usually the Dagong ratings are largely a sideshow.  This time people have reacted and whilst this might appear to be part of a larger movement of China sabre rattling there is likely more to it.

The reaction?  A falling dollar.  This will boost certain asset classes which I will talk about in a later post.

Chinese ratings agency downgrades U.S. [Chicago Tribune]

China's Dagong Global Credit Rating cut its credit rating for United States debt by one notch to A-minus from A on Thursday, saying a deal struck by Congress to raise the government's borrowing ceiling failed to solve the cause of its debt problem.

[...]

 Dagong's ratings are barely watched outside of China, and major international credit agencies classify most countries very differently from the Chinese agency. Its views do not necessarily represent the Chinese government's stance, however, its analysis often runs in tandem with remarks from government officials.

China and the shutdown - laughing stock or inspiration

The Diplomat have a nice article looking at how China views the US shutdown.  On the one hand there is bemusement that the US can be shutdown (something that does not even reach being unthinkable in a one party state).

On the other hand there is the strange sight of the US government having been shutdown for a couple of weeks and nothing really changing and people carrying on with their lives and jobs.  Something equally inconceivable in China.

 It is true that to an outsider nothing appears to have really changed - yet.

What is for sure is that China will not be laughing if the US defaults on its foreign debt as China are currently the ones holding the baby.

What will be the subject on a post in the near future are the Chinese plans to replace the dollar as the reserve currency - rumour, myth or reality.

My bold.

What China Thinks of the Shutdown [Diplomat]

 In the midst of a domestic crisis, it is easy to forget that the rest of the world is watching. Now that the U.S. federal government has shut down for the first time since the mid 1990s, the talk of the town is the political problems of the world’s largest economy and sole superpower. In China, most media reports about the shutdown have been merely informative, but every now and then they offer a rare insight into what the Chinese have learned about America’s shortcomings.

“As far as the Chinese populace is concerned, the government shutdown is like the Arabian Nights,” writes Wang Xuejing of Hong Kong Daily News. Evidently, for the citizens of a totalitarian state, the prospect of a government shutdown seems otherworldly. The newspaper Qilu Wanbao complains, “To us, far on the other side of the ocean, the information appears contradictory. Some say Americans are furious [...] Some say [everyday] life remains unchanged. Have or haven’t Americans been affected by the federal shutdown?”

The notion of a government shutdown is strange for the average Chinese person because its consequences in the People’s Republic would go far beyond closed federal agencies and parks. In mainland China, and increasingly Hong Kong, every school and every agency (national and local) answers to a party minder. Banking and internet traffic are also closely monitored by Beijing. Should the party overseers be absent one day, many organizations crucial to China’s social structure would suddenly find themselves without official guidance. The effects of such an abrupt and unfamiliar decentralization are impossible to predict.

Yet other commentators find the federal shutdown inspiring. Dr. Li Xiaohui, Assistant Professor of Law at Xiamen University writes, “The life of the average American has not been greatly affected by it and the economy has continued to grow. This reflects the clear limits between America’s government and the market. Our country should likewise move forward and decouple the government from the economy.” Similarly, the newspaper Nanfang Dushi Bao commended the strength of American society for being able to function without the government. Interestingly, while the American public sees the shutdown as a government failure, some Chinese are seeing it as a sign of efficiency. The common belief that the Chinese words for “opportunity” and “crisis” are the same, though wildly untrue, seems applicable in this case.

[...]

But aside from bewilderment and contentment over the shutdown, there is also concern in China about the possibility of a future U.S. default. At a recent news conference in Beijing, China’s Vice Finance Minster Zhu Guangyao said that the U.S. must protect its creditors, stating, “safeguarding the debt is of vital importance to the economy of the U.S. and the world [...] This is the United States’ responsibility.” Dr. Li echoed the Minister’s message, “The shutdown of the American government is a warning to our compatriots that we should optimize the allocation of our foreign exchange reserves.”
As the largest holder of U.S. debt, China unsurprisingly appears more concerned about American solvency than about the unfamiliar mechanics of a representative democracy. Despite this, China as a whole also appears to be learning a great deal from the shutdown, not only about the American political system, but also about itself and its future. As the shutdown enters its third week, it remains to be seen if America will learn something as well.

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China uses market incentives to reduce air pollution

Bad air pollution?  Will financial incentives get results in China?  $816.91 million should help.  Reuters reports on China's latest attempt to reduce those pesky PM 2.5 particles.

Enforcement is a huge problem but with the right incentives (cold hard cash) I have a sneaky feeling that this will actually get results.  Promotion used to depend on growth and growth alone.  The environment took a hit.

Whether this works will all depend on who gets the money and how it is then "shared".

China offers rewards to six regions to fight air pollution [Reuters]

(Reuters) - China said on Monday it would give rewards amounting to 5 billion yuan ($816.91 million) for curbing air pollution in six regions where the problem is serious, underscoring government concern about a source of public anger.

The Finance Ministry said the regions eligible for the rewards were Beijing and its neighboring city of Tianjin, the provinces of Hebei, Shanxi and Shandong, as well as the Inner Mongolia Autonomous Region.

The awards would be made at the end of the year and would be determined by pollution reduction targets, investment in tackling the problem and falls in PM 2.5 particles, which are especially bad for health, the ministry said on its website.

The provinces of Shanxi and Inner Mongolia are among China's top coal-producing provinces and have been a major source of air pollution.

Smog over northern cities in January generated widespread anger as did the discovery of thousands of dead pigs in March in a river that supplies water to the city of Shanghai.

Protests over pollution in China are becoming common, to the government's alarm. Authorities have invested in various projects to fight pollution and even empowered courts to mete out the death penalty in serious pollution cases.

But the results have been mixed. Enforcement of rules has been patchy at the local level, where district authorities often rely on taxes from polluting industries.

State media said in July the government planned to invest 1.7 trillion yuan ($277 billion) to fight air pollution over the next five years.

China and intra-country environmental outsourcing

Do firms move location to take advantage of lower environmental regulations?  It is a question that many of tried to answer including myself for numerous countries, time periods and regulatory regimes.

A recent guardian newspaper article looks at what is happening within China.  When it comes to the impact of the environment on an economy China is the place to do the research. 

The question the Guardian asks is whether the rich coastal provinces are "outsourcing" their production of greenhouse gases elsewhere in China.

This links to a recent paper of mine called "Environmental Outsourcing" (we look at Japan outsourcing its pollution to China funnily enough).  The paper can be seen HERE.

So what does the Guardian paper report on:

China's rich provinces outsource emissions to less developed areas [Guardian]

Rich coastal provinces of China are outsourcing their greenhouse gas emissions by importing goods from less developed provinces, according to scientists. The practice makes it far less likely that China – the world's biggest emitter – will reach its climate goals, the study published in the Proceedings of the National Academy of Sciences said.

"Recent studies have shown that the high standard of living enjoyed by people in the richest countries often come at the expense of CO2 emissions produced with technologies of low-efficiency in less affluent, developing countries," the study said. "Less apparent is that this relationship between developed and developing can exist within a single country's borders."

It is worth reading the academic paper.  It is interesting that they decided to publish in PNAS.

Abstract

Recent studies have shown that the high standard of living enjoyed by people in the richest countries often comes at the expense of CO₂ emissions produced with technologies of low efficiency in less affluent, developing countries. Less apparent is that this relationship between developed and developing can exist within a single country’s borders, with rich regions consuming and exporting high-value goods and services that depend upon production of low-cost and emission-intensive goods and services from poorer regions in the same country. As the world’s largest emitter of CO₂, China is a prominent and important example, struggling to balance rapid economic growth and environmental sustainability across provinces that are in very different stages of development. In this study, we track CO₂ emissions embodied in products traded among Chinese provinces and internationally. We find that 57% of China’s emissions are related to goods that are consumed outside of the province where they are produced. For instance, up to 80% of the emissions related to goods consumed in the highly developed coastal provinces are imported from less developed provinces in central and western China where many low–value-added but high–carbon-intensive goods are produced. Without policy attention to this sort of interprovincial carbon leakage, the less developed provinces will struggle to meet their emissions intensity targets, whereas the more developed provinces might achieve their own targets by further outsourcing. Consumption-based accounting of emissions can thus inform effective and equitable climate policy within China.

I have many comments on this paper but will not go into detail here.

As an aside, academic economists need to take a close look at how their journals work compared to those in the Physical sciences.  Economists have a lot to learn.

China intervenes in the US shutdown

The current US shutdown has the potential to cause China a serious headache.

China currently holds something like £740 billion in US treasury bonds making it the largest holder of US debt.

The shutdown, if not resolved, could lead to the US defaulting on its debt obligations which would have a serious knock on effect on the global economy.

Zhu Guangyou is quoted as saying "the clock was ticking" for the US.

For BBC coverage see:

China tells US to avoid debt crisis for sake of global economy [outside link]

 A senior Chinese official has warned that the "clock is ticking" to avoid a US default that could hurt China's interests and the global economy.

China, the US's largest creditor, is "naturally concerned about developments in the US fiscal cliff", vice finance minister Zhu Guangyao said.

Washington must agree a deal to raise its borrowing limit by 17 October, or risk being unable to pay its bills.
He asked that "the US earnestly take steps to resolve" the issue.

 

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China Economics Blog Returns

Dear Readers, apologies for my absence over the last 3 years.

It coincided with my elevation to the Head of Department here at the University of Birmingham.

Management and blogging and not particularly compatible unfortunately.

However, I have now completed my term and am looking forward to getting this blog back up and running.

I will instigate a redesign in the near future and bring the blog into the 21st century.

You will also have noticed that this blog is now associated with a real economist.

I have been working on Chinese economic related issues for a number of years and have a deep fascination with China past, present and future.

There is a lot to write about and I hope you will join me on this journey into the middle kingdom.