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

China bank fraud shock - not

When I saw the headline that the Royal Bank of Scotland was investigating fraud at its China operations my initial thoughts are "what took so long".

All banks in China have to accept fraud as an occupational hazard. This is a problem that will not go away quickly.

If UK and US banks expect bank workers to have the same ethos and culture as their UK counterparts then they have a lot to learn.

Each bank should have a specialist fraud team working continuously. The costs will more than compensate. Banks also need to ensure that the anti-fraud team is changed every three years otherwise you can all guess what will happen.

Foreign banks cannot say they have not been warned.

RBS investigates ‘irregularities’ in its China unit [FT]

Royal Bank of Scotland is investigating suspected fraud in its China unit after recently discovering “potential irregularities” in its commercial banking business.

The bank on Wednesday said the probe related to a small number of accounts within the small and medium size banking business at ABN Amro China.

Local media reported last month that the alleged fraud may have resulted in client losses of up to Rmb20m ($3m).

ABN Amro China declined to comment on the scale of the potential losses. The bank has reported the matter to China’s banking regulator, which is also investigating.

People familiar with the matter said that the individual concerned had been suspended pending the outcome of the inquiry.

“Any dishonest behaviour by bank staff is completely unacceptable... and will be taken extremely seriously,” one person close to the bank said. “Safeguarding the interests of our clients is our top priority and, as an international bank, the controls we have in place are in line with the widely accepted industry standards.”

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Banks in China have suffered a number of fraud cases in recent years, leading to frustration among regulators.

The AFP news agency this month reported that Yan Qingmin, head of the Shanghai branch of the China Banking Regulatory Commission, had criticised foreign banks during a recent meeting for ignoring risk in their local operations and urged them to carry out better internal checks.

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Cars in China and the great missing petrol mystery

In this blog we often ponder the reliability of any data that China provides. The great missing "petrol" mystery has been covered by no less that the Economist.

I have to say that the rumour that China's state owned companies have been buying shed loads of cars and storing them in car parks is just too odd to be made up. It is thus clearly true.

After seeing the clogged up roads in 3 Chinese cities last month it is hard to believe that people are driving less. Slower I agree with but not less.

Never underestimate either the power of state owned enterprises on over estimate the quality of Chinese data.

Exhaust fumes and mirrors [Economist]

IN JANUARY sales of vehicles in China surpassed those in America. Passenger-car sales have grown by around 45% this year. Yet sales of petrol have failed to keep pace (see chart). Attempts to explain this baffling phenomenon come up with widely differing answers, in part because the data present problems at every turn. It is not known for sure, for example, how many cars are being sold by dealers to their final owners; nor how much petrol is being sold at the pump. The car-scrappage rate is also obscure, so the growth of China’s total passenger-car stock is hard to calculate. When it comes to questions of consumer behaviour, such as distances travelled by car owners and how these are affected by petrol prices, tolls or other costs, the guesswork multiplies.

By the end of October sales of passenger cars from factories to dealers this year had reached 8.2m. Arthur Kroeber of Dragonomics, a consultancy, estimates that this could mean an increase in the total number of passenger cars in use of between 20% and 25%. Petrol sales are hard to quantify. But partial data from the first nine months suggest there has been hardly any increase.

One dramatic explanation has been proposed by Gordon Chang, an author and longtime doomsayer on China. Mr Chang wrote in October in Forbes magazine of what he admitted were unconfirmed reports that central-government officials had ordered state-owned enterprises to buy cars, which had then simply been stored in car parks.

Stephen Green of Standard Chartered, a bank, offers a more prosaic explanation. People are buying more fuel-efficient cars, he suggests, and are using their cars less because of high fuel prices. Much of the growth in car sales this year has been encouraged by tax cuts on sales of small cars, which use less fuel. And Mr Green says petrol is 20% dearer than it was two years ago, creating a “powerful reason to drive less”. Mr Kroeber says that uncertainties remain even after taking account of these factors, and the figures were inconsistent even when gas-guzzlers were more common. But he rejects Mr Chang’s theory. “It’s just a reflection that China is a big and chaotic place” rife with incomplete data, he says.

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Where Chinaeconomicsblog leads the FT is sure to follow

Of course the fact that the FT is covering the "GDP numbers riddle" has nothing to do with Chinaeconomicsblog's coverage but it is good to see the FT picking it up nonetheless.

China’s growth figures fail to add up [FT]

All but seven of the regions reported GDP growth rates above the bureau’s first-half figure of 7.1 per cent. At the start of the year, Beijing set 8 per cent as China’s growth target for the year.

Hmmmm.

However, this is the first time I have seen poetry as the first line of defence.

The criticism has prompted the NBS to launch a campaign last week, entitled “Statistical Feelings: We have walked together – Celebrating the 60th anniversary of the founding of New China,” to boost confidence among statisticians.

The campaign has already produced works such as: “I’m proud to be a brick in the statistical building of the republic.” In another poem, a contributor writes: “I can rearrange the stars in the sky because I have statistics.”

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Corruption in land auctions

Not so shocking result of the day - that there is corruption is Chinese real estate sales.

This is still excellent work though and a good paper.

China's Land Market Auctions: Evidence of Corruption"

NBER Working Paper No. w15067

HONGBIN CAI, Peking University - Guang Hua School of Management
Email: hbcai@gsm.pku.edu.cn
J. VERNON HENDERSON, Brown University - Department of Economics, National Bureau of Economic Research (NBER)
Email: j_henderson@brown.edu
QINGHUA ZHANG, Peking University - Guang Hua School of Management
Email: zhangq@gsm.pku.edu.cn

This paper studies the urban land market in China in 2003--2007. In China, all urban land is owned by the state. Leasehold use rights for land for (re)development are sold by city governments and are a key source of city revenue. Leasehold sales are viewed as a major venue for corruption, prompting a number of reforms over the years. Reforms now require all leasehold rights be sold at public auction. There are two main types of auction: regular English auction and an unusual type which we call a "two stage auction". The latter type of auction seems more subject to corruption, and to side deals between potential bidders and the auctioneer. Absent corruption, theory suggests that two stage auctions would most likely maximize sales revenue for properties which are likely to have relatively few bidders, or are "cold", which would suggest negative selection on property unobservables into such auctions. However, if such auctions are more corruptible, that could involve positive selection as city officials divert hotter properties to a more corruptible auction form. The paper finds that, overall, sales prices are lower for two stage auctions, and there is strong evidence of positive selection. The price difference is explained primarily by the fact that two stage auctions typically have just one bidder, or no competition despite the vibrant land market in Chinese cities.

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China statistics - to believe or not to believe?

I have stated on numerous occasions that I do not trust the statistics coming out of China and for good reason.

It appears other economists share my skepticism. So is China in recession or not? To get 2 quarters of NEGATIVE growth would be required. This would be pushing it but I suspect we are not far off.

Economists treat statistics from Beijing with caution [FT]

Beijing boasted bright blue skies yesterday, but for the nation's economists the outlook is not quite so clear.

When the Chinese economy was growing at more than 10 per cent a year, few people stopped to question the official numbers. The soaring tower blocks and acres of new factories made the story real. Yet now that analysts are scrambling to work out just how quickly the economy is slowing, the holes in the official statistics are looming larger.

China said yesterday the economy expanded 6.8 per cent in the fourth quarter of 2008 compared with the same period the year before, the lowest rate in seven years. However, the raft of figures out yesterday did little to clarify just how long the slowdown would last and left some economists complaining the official numbers were flawed.

"China is now the third largest economy in the world but we have no reliable data on consumption or housing," says Ben Simpfendorfer, RBS economist. "It is difficult to get an accurate view of two of the main growth drivers over the last decade."

The government, which has set a target of 8 per cent growth this year, admitted the economy had cooled rapidly but said there were already tentative signs the worst might be over.

Industrial production rose by 5.7 per cent in December, a modest improvement on November, and retail sales growth remained high at 19 per cent. The surge in new bank lending at the end of last year has been interpreted by some as a sign the government's fiscal and monetary stimulus plans are beginning to work.

Ma Jiantang, head of the National Bureau of Statistics, aimed for a poetic touch to describe the positive signs. It was not yet clear if they were sustainable, he said, but they could be "like sunshine in a cold winter, light at the break of a dark dawn and sparks that can turn into a roaring fire".

Yet there are plenty of indications of a more prolonged slowdown. Imports dropped sharply in November and December, including of machinery which suggests weak investment in manufacturing. And although there have been signs that housing transactions are increasing, the large volume of unsold new properties in many cities could hold back new investment this year.

"Developers will be very cautious about getting new construction going again," says Joan Wang, head of research at the Beijing office of Savills, the property services group.

Economists also caution against reading too much into some of the data. China releases gross domestic product figures on a year-on-year basis, but does not provide data from one quarter to another. After stripping out seasonal adjustments, some economists tentatively estimated the economy barely grew at all from the third to the fourth quarters and could even have declined.

The official figures for house prices are believed by some to understate both past increases and current decreases in prices. Moreover, the retail sales figures, which appear to indicate buoyant consumer demand, are treated with caution, because they include some government purchases and wholesale buying.

"Retail sales number should not be trusted," says Arthur Kroeber, editor of China Economic Quarterly. The headline numbers last year grew much faster than urban incomes, which he says is "implausible", especially given the apparent slowdown in consumer spending on items such as car.

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Internet content crackdown continues

Google continues to get a pounding in China as do many other content providers as China renews its attacks.

If the sole aim is to remove porn then there can be few complaints (except from the billion or so that would undoubtedly access said material).

ChinaEconomicsblog will remain "vulgar" free although I believe we might still be blocked by the great firewall of China.

China cracks down on internet content [FT]

China’s government has accused the country’s leading internet search engines and web portals, including Google, of threatening public morals by carrying pornographic and vulgar content.

While Beijing regularly launches web censorship campaigns, the new crackdown is the first in which the government has targeted heavyweight companies such as Google and Baidu, the local rival that leads the Chinese search market. During the last campaign about a year ago, the authorities listed only small and little-known websites as responsible for spreading unhealthy content.

The 19 internet sites cited by the government on Monday included Sina, Sohu, Tencent and NetEase, among the country’s biggest web portals and each run by overseas listed companies, and blog hosting websites and discussion forums such as Tianya.

The move comes as the political leadership faces a raft of challenges, many of them organised through the internet.

Government censors are currently busy blocking reporting and debate about Charter 08, an appeal for democratic reform which has attracted signatures from hundreds of prominent intellectuals. Other forms of dissent, such as the voicing of demands for compensation in China’s poisoned milk scandal, have also been organised through the internet.

The government on Monday directed its criticism strictly at content that could be damaging to children or young people.

Search results on the pages of Google and Baidu had “large amounts of pornographic links [and] after notification from the complaint centre, the site did not take effective countermeasures”, the State Council Information Office said in a joint statement with other agencies distributed through official media.

People familiar with the internet industry in China said the move would serve as a powerful reminder of the self-censorship the authorities expect from internet portals.

Cai Mingzhao, a senior official at the SCIO, said that some websites had exploited legal loopholes and warned of stern punishment.

Late last year, state media attacked Baidu and later also other search engines for carrying links to unlicensed pharmaceutical websites. “Looking back, that was the first signal of a tougher tone in dealing with internet companies,” said one internet executive.

Nevertheless, the websites pilloried by the government censors were caught by surprise on Monday. A manager at Sohu said, ”We find this extremely strange and are still figuring out what exactly happened.”

Chen Tong, editor-in-chief at Sina, China’s leading news portal, said there was no point in being surprised about the crackdown. “Ensuring that your content is OK is a content provider’s responsibility in the first place,” he said.

Neither Baidu nor Google responded to requests for comment.

On Chinese blogging sites, pictures of scantily clad girls can often be seen along one side of the screen or in pop up windows. These were still appearing on Sina and other blog hosting pages on Monday.

China has the world’s largest number of internet users, some 390m according to the government’s last count.

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Are poor transport networks a brake on China's growth?

Another artice from the recent "Doing Business in China" series in the FT.

In my research where I control of transportation networks odd results are thrown up due to the geography of China and the differences in quality of network across provinces especially for rail.

Whilst certainly true that poor transport networks can act as a brake on growth, I would imagine that China is in a much better position that the perceived competition from India or more recently Vietnam where transport is certainly in a worse state than China. The investment in transport in China in recent years has been enormous and whilst a lot remains to be done China is well on the way.

It is interesting to note how the way the road network operates leads to an increase in bribes and theft. Regulations clearly make this worse than it needs to be.

Missing links [FT]

Distribution and the moving of goods remains one of the biggest headaches for almost every company looking to sell products across China.

The principal reason is the uneven development of the country’s transport sectors, with extremely high spending in some regions and sectors – above all, on the country’s expressway network – but poor overall co-ordination.

The outcome has been not just a hugely fragmented transport industry, with barely any logistics companies offering nationwide services, but also one of the world’s most expensive logistics sectors, with transport and related costs accounting for more than twice the share of gross domestic product as in the US, and about four times as much as in Europe.

On the plus side, provinces across China have spent enormously on developing an expressway network – from having less than 10,000km a decade ago, the country’s total length has grown to 78,000km, second only in total length to the US.

This roll-out is set to continue under a master plan that during the next three decades should see every city with 200,000 or more inhabitants linked into the network.

Ports have also seen heavy spending, especially around China’s main export manufacturing locations: at Shenzhen in Guangdong province, around the Lower Yangtze Delta region centred on Shanghai and at Tianjin, Qingdao and Dalian in the north and north-east.

And the country has some of the world’s biggest and most modern airports, notably at Beijing, Pudong in Shanghai and Guangzhou.

With these three elements in place, China has an excellent infrastructure for importing inputs and materials and exporting finished products – by air, if necessary, as well as by ship.

The country also has some excellent regional networks but its transport shortcomings are exposed when a company tries to move goods from one part of the country to another – links between provinces and major cities remain surprisingly poor.

The most obvious weakness is the country’s rail network, whose total length has barely grown in the past five years.

China’s transport shortcomings can be attributed to a lack of central co-ordination and the large number of competing bodies involved in overseeing the transport and logistics sectors.

Railways, aviation and road each fall under separate ministries or central government commissions: the Ministry of Commerce is responsible for licensing various logistics and other transport services; the National Development and Reform Commission, the state’s main planning body, aims at co-ordinating transport policy but has to fight turf wars with the other local and state entities; and China’s customs and State Administration for Industry and Commerce (the latter with both central and local arms) are also involved in regulating the movement of goods.

Throw in a decentralisation of administrative power that has taken place in the past two decades, and it is unsurprising that while China’s richest regions have successfully been able to fund their own infrastructure programmes, central officials have struggled to impose their will in getting different parts of the country to work together.

Making things worse are a series of additional factors that seriously hinder the movement of goods, and make the whole process a lot more expensive.

First, is that road haulage is an intrinsically more expensive and inefficient way of moving large volumes of goods long distances than railways.

Second, are road charges. China now has 70 per cent of the world’s mileage of toll roads, according to the China Supply Chain Council, which local governments have to levy in order to fund their road-building projects.

And then there is local protectionism, with provinces or cities discriminating against transport and logistics firms from other parts of the country.

The consequence of these factors are multiple changes of goods from one trucking company to another, multiple payment of fees at provincial and city borders, and lots of trucks making empty return journeys.

Such practices, of course, all encourage the demanding of bribes, create opportunities for petty theft, make the tracking of goods all but impossible and – arguably most important of all – build in long delays.

The good news is that improvements are coming. Expenditure on railways has been lifted. This summer saw the opening of a high-speed rail link between Beijing and Tianjin, and at the start of the year work began on a 1,300km high-speed route from Beijing to Shanghai, scheduled for completion in 2013.

Plans have also been announced to increase the total railway length to 120,000 km by 2015 (advanced from an original target of 2020) – a credible figure given that expenditure has been raised to more than £23bn a year, up from an average of less than £9bn a year in the first five years of this decade.

And there are also signs that the central government is looking to exercise tighter control over both planning and funding, and an opening of the logistics sector to greater foreign participation, which between them should both lower barriers between provinces, raise managerial standards and see increased investment in the soft side of the transport industry.

Nonetheless, given the time that it will take for the planned new rail lines to come into operation, a continuing shortage of experienced logistics managers, and the almost certain continued prevalence of local protectionism, distribution is going to remain one of the main obstacles to companies doing business in China – whether Chinese or foreign – for at least a decade.

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Corruption in Asia

I have done some work looking at the impact of corruption in China. It was therefore interesting to read a recent ChinaLawBlog post on corruption rankings in Asia.

Corruption In Asia: China Is Ten Out Of Thirteen [ChinaLawBlog]

The Political and Economic Risk Consultancy (PERC) recently asked "over 1,400 expatriates" to rank 13 Asian economies on corruption and the results of that survey, from least corrupt to most corrupt, are as follows:

1. Singapore
2. Hong Kong
3. Japan
4. Macau
5. South Korea
6. Malaysia
7. Taiwan
8. India
9. Vietnam
10. China
11. Indonesia
12. Thailand
13. Philippines

China is a creditable 10th but is pretty much where I would have placed it in this list of countries.

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Government Efficiency in China

The New York Times looks at China's atempt to improve government efficiency. This is an interesting area of research and there have been other cross-country studies looking at, for example, the effect of government on FDI. Studies have also been written looking specifically at province level efficiency in China.

China Retools Its Government in Efficiency Push [New York Times]

BEIJING — China announced Tuesday that it would reorganize the central government by creating five so-called superministries, including one responsible for improving environmental protection. But the plan stopped short of creating a single agency to oversee the contentious issue of energy policy.

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The plan, submitted Tuesday during the annual session of the National People’s Congress, the legislature run by the Communist Party, is intended to streamline an overlapping array of government agencies, commissions and ministries around core issues: environmental protection; social services; housing and construction; transportation; and industry and information.

China’s complex bureaucracy is widely regarded as inefficient and often ineffective at carrying out policies that flow from Beijing, in part because agencies become enmeshed in turf battles or are focused on protecting their own entrenched interests.

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Chinese state media quickly framed the plan, expected to be endorsed this week by the legislature, as a major bureaucratic reform that would improve the way national policies were carried out. But the practical impact is far from certain as China’s bureaucracy struggles to manage soaring energy demand, rampant pollution, rising inflation and an economy that some analysts say is perilously close to overheating.

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Despite three decades of market reforms, China’s economy is still heavily shaped by the government’s central planning agency, the National Development and Reform Commission. Some analysts had contended that the government could become more efficient by stripping away some of the commission’s responsibilities, including energy policy. Speculation had centered on whether an independent energy ministry would be established.

The new plan divides authority over energy. A new “high level” energy commission would develop national energy strategies. But an energy bureau under the central planning agency would control administration and oversight of the energy sector.

Yang Fuqiang, director of the Beijing office of the nonprofit Energy Foundation, said the creation of the two energy agencies represented a political compromise. He predicted that they would eventually be merged into a full ministry, but not for a few more years. “This is a first step,” Mr. Yang said.

The plan also puts the country’s food and drug regulatory agency under the control of the Ministry of Health. China’s regulatory system has come under heavy international criticism because of scandals involving contaminated or counterfeit ingredients in food and drugs. The Chinese state news media said the new arrangement “would make for better food and drug safety.”

Mr. Kroeber said one significant change in the restructuring plan was that the central planning agency would no longer have final approval on major construction projects. But he said that calling the new entities “superministries” overstated their power and that they seemed to represent a “half step.” He said the expanded ministry over transportation would oversee civil aviation and urban road transportation, but would not include the current Ministry of Railways, which lobbied strenuously to remain autonomous.

“They haven’t gotten all the way to a coordinated transportation ministry,” Mr. Kroeber said.

The new environmental ministry would seem further proof of the emphasis placed on fighting pollution by President Hu Jintao and Prime Minister Wen Jiabao. Environmentalists have complained that the State Environmental Protection Administration was easily steamrolled in bureaucratic turf battles because it did not rank as a full government ministry. The new plan elevates the agency to ministry status, presumably with greater clout inside the bureaucracy.

Yet it is unclear if that new status will also include an expanded budget for a larger staff to carry out regulatory policies. Currently, the agency has only a few hundred employees to coordinate and regulate environmental protection.

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Xie Zhenhua, a vice chairman of the National Development and Reform Commission, said the country was steadily decreasing its energy use, but still not meeting the target of annual 4 percent reductions.

Aid from China and Human rights abuses

Excellent article reflecting on a recent academic paper on Chinese aid and human rights abuses.

Instead of going through the arguments again I point you to Chris Blattman's Blog that has the appropriate links. I believe the economists have got it about right here - it is crucial to identify the order of causation.

I believe that this will become an increasingly important topic for empirical researchers and something I will be looking at in the near future data permitting.

Do trade and aid from China increase human rights abuses?

Yesterday, the New York Times lamented the worsening war in Sri Lanka, the rise in human rights abuses, and the emasculation of rights observers. "Gone are the Nordic monitors," it writes, "independent journalists are not allowed anywhere near the front lines."

Today, the blame is apportioned. "Take Aid From China and Take a Pass on Human Rights" proclaims the newspaper. The argument: unconditional aid and trade from China insulates regimes from Western mores and threats of sanctions in a dirty war.

China fear-mongering? Taking the story beyond the evidence? Maybe not.

The Times misses a paper posted last week by economists Erik Meyersson, Nancy Qian, and Gerard Padró-i-Miquel, but it gets the story right. Here newspaper anecdotes get support from some powerful statistics: trade with China predicts human rights abuses. At least in Africa.

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Gordon Brown in China: Is it all about the economics?

The Guardian today report on Gordon Brown's visit to China.

This is a trip that is all about economics and job creation. Human rights will again come to the surface as always but do not be mistaken, GB is in China to promote UK plc and will only play lup service to the human rights issue.

It is remarkable that GB is there to ask for Chinese investment in the UK after a decade of almost total one-way FDI from the UK to China. This shows how far China has come in such a short amount of time.

For more information on this turn around and why such investment may be BAD for the Chinese people you should read the $1.4 Trillion question.

What GB is asking for is for China to yet again put the Chinese people last.

Brown seeks to take China relationship to new level [Guardian]

BEIJING, Jan 18 (Reuters) - Prime Minister Gordon Brown told China on Friday he wanted Britain to be the number one choice for Chinese trade and investment as he sought to take the relationship to a "higher level".

Brown also brought up human rights and democracy in his talks in Beijing with leaders of the world's fastest-growing major economy before heading off to Shanghai on Saturday and India on Sunday.

"Britain will welcome substantial new investment from China in our country in the years to come," Brown told a news conference alongside Premier Wen Jiabao.
"We want Britain to be the number one destination of choice for Chinese business as it invests in the rest of the world."

The two leaders agreed to expand trade to a value of $60 billion by 2010, compared to about $40 billion last year, as they watched the signing of agreements on education cooperation, climate change, sustainable cities and clean-energy development.

"I believe by 2010 we will see 100 new Chinese companies investing in the UK, we will see 100 partnerships between our universities and Chinese universities and we will double the number of firms listed on the London Stock Exchange and thousands of jobs will be created," Brown said.

He added that he welcomed investment from Beijing's huge sovereign wealth fund.
"We are now able to sell to China not just financial and business services and environmental technologies, but also a whole range of British brands that are now becoming very popular among the rising number of Chinese consumers."

"We are moving our partnership with China to a higher level," Brown said.
Among executives travelling with him was entrepreneur Richard Branson, who said he planned "a number of businesses" in China including a clean-energy company.
"China is very interested in developing clean energy. I am seeing a number of potential staff while I am there for running the company," he said on the flight from London.

Wen greeted Brown at the Great Hall of the People, the iconic heart of Communist Party rule. Wen assured reporters China was committed to eventual introduction of democracy.

"China will remain committed to advancing democracy -- that is to say our people will gradually exercise greater democratic elections and participation in political affairs," he said.

Brown said that he had raised the issue of elections in Hong Kong, which Britain handed back to China in 1997.

"I welcomed his assurances that they will move to elections both for the chief executive and for the council in Hong Kong over the next period of time," he said.

HUMAN RIGHTS
While Britain is keen to promote trade, the two countries do not always see eye-to-eye on Iran, Myanmar or the conflict in Sudan's Darfur province. Brown said he would discuss human rights and democracy during his visit.

Human Rights Watch said in an open letter to Brown that he should use his visit to press Beijing on rights in the run-up to the Beijing Olympics.

Western politicians and rights groups have accused China in the past of selling Sudan arms that end up in Darfur and of fending off stronger U.N. Security Council resolutions.

Wen said he and Brown agreed to press for a negotiated settlement on Darfur.
On Iran, Britain has supported its ally, the United States, in pressing for new sanctions against Tehran's nuclear activities, but China wants a negotiated solution.
Brown congratulated China on its successful bid to hold the Olympics and told students at People's University he would definitely come back to Beijing to attend if asked, at which point Wen promptly extended an invitation.

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Plagiarism in Chinese Academia

Although not specifically related to economics, plagiarism by students is a major concern in UK academia.

It appears in China the problem is not only with the students but also some of the academics.

There is an interesting blog run by friends of Fang Shimin aka Fang Zhouzi, who

...has been fighting a lonely crusade exposing the many frauds in China's scientific and academic communities. His efforts has gained as many enemies as friends.

I must say I have had some doubts and always ask my students and colleagues about academic life in China. When discussing publishing in journals one colleague quipped that allegedly some journals pay you to publish in them (the good ones) and the others you have to pay the journal to publish in them (the bad ones). I am sure this is not strictly true.

Does that rule make economic sense?

The only papers that can really be trusted are those in peer reviewed international journals. I suspect that other academics in China already know this.

China's Scientific & Academic Integrity Watch

Some examples of the stories of this blog:

An Academician Who Plagiarized

Yale Professor Criticizes Wide Spread Plagiarism at Peking University

This is an excellent post and contains a letter from the Professor complaining about student plagiarism. It appears to be institutionalised which may explain some of the problems we face in the UK. If a student has done an undergraduate degree in China and comes to the UK to undertake a postgraduate degree it might be argued that certain bad habits travel with them.

H/T to China Law Blog

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Chinese paradise unmasked

Over at "The Life as a US Lawyer in a Chinese Law Firm" our resident hero Jeff decides to lift the lid on life in China.

Jeff pulls no punches and gives it to us straight. This is car-crash blogging at its very best. If this blog is not in your reader then you are missing real life drama where the boundaries between the good guys and the bad guys are becoming increasingly blurred.

He describes the "good" about living in China and then lists the "bad". I repost all seven "bads". There are economic implications to be gleaned from all 7 points. See if you can spot them. Comments most welcome.

Please don't shoot the messenger (figuratively or literally).

Only Mentally Ill People See Flaws In The Chinese Paradise

Now, the bad. Where to start?

1. Scientific progress. Though nearly everyone here in this country with 1/5 of the human population is pushed to study science, no Nobel Prize has ever been awarded to someone raised here, and they don’t create much that’s new or innovative.

2. Broken toilets. The flushing arm on the damn western toilet has been broken in my office bathroom for 8 months. Jesus. After someone uses the toilet each morning, the cleaning lady manually flushes it, but nobody demands that management fix it. Good thing the squat one next to it works.

3. New products. Every factory I visit makes rip-offs of foreign products, but never develops anything new of their own. The reason? Why pay a scientist to develop something that might not make money, when you can spend money paying people to produce more products that do make money, albeit rip-offs that are less profitable than innovative, new products.

4. Dangerous intersections. Every hundred yards in China is another extremely dangerous intersection, where I see people getting hit, daily, by passing cars. Simple functioning pedestrian walkways are needed everywhere, or lights, but nobody ever says anything, or demands a review of the planning.

5. Environmental disasters. Have you read today’s news about the three gorges dam? Seems like the Beijing thugocracy messed up the design, budget and everything else, because nobody was allowed to question the moronic first plan for this environmental disaster. The government told everyone about ten years ago that the design and budget were accurate, and nobody second guessed them–wrong again! Compare that with the law making process in the USA–political parties argue, senators and congressman argue, Capitol Hill argues with the President, and this is how we make laws by consensus.

6. Can’t walk freely. The Chinese put up gates, with guards, everywhere, that temporary block traffic at random street and neighborhoods, but people soon find ways to avoid these barriers, so again and again China has developed cities of gates that are everywhere, rusting, and serious eyesores that just add to life’s frustrations.

7. Social pressure. When my firm’s partner Wang Lihua told me that Zhong Lun didn’t owe me money when they did, she reinforced what I had known: you are supposed to shut up even when you are right. If you challenge that, Chinese are accustomed to being told they have mental problems.

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Insider Trading and Chinese cultural differences: real or imaginary?

One aspect of working in academia is the claim of "cultural differences" in student approaches to higher education.

Although this excuse has previously be used as a defence for plagiarism this is the first time I have seen such a defence used for "insider trading".

The judge said she was ``mystified'' why the couple, both ``classic overachievers'' raised in China, would trade on inside information. Wang's lawyer, Catherine Redlich, said there may have been a ``cultural'' basis for the crime.

The defence lawyer then stated:

``In the People's Republic of China, insider trading is only rarely, and not until very recently, prosecuted as an offense,'' Redlich said.

This story gives us an insight into the behaviour of the Chinese stockmarket and to me is another bear signal. The Chinese stockmarket is a sell at current levels in my opinion. With corruption clearly rife, current share prices resemble of classic ponzi scheme.

Ex-Morgan Stanley, ING Couple Sentenced to Prison [Bloomberg]

Dec. 4 (Bloomberg) -- An Ex-Morgan Stanley vice president and her husband, a former ING Investment Management analyst, were sentenced to 18 months in prison as a judge assailed the ``pure greed'' that drove them to trade on secret stock tips.

U.S. District Judge Colleen McMahon in New York today turned aside a request by Jennifer Wang, of Englishtown, New Jersey, that she get probation so that she may care for her infant son. Wang and her husband, Ruben Chen, faced as long as 37 months in prison after admitting in September that they made $611,000 through three trades based on inside information.

``A clear message does need to be sent to everyone who works in this industry,'' McMahon said. ``You are both culpable. You are both going to do prison time.''

U.S. prosecutors this year have stepped up efforts to combat insider trading. A former Bear Stearns Cos. broker last week became the ninth person to plead guilty in a wide-ranging insider case that also involved UBS AG and Morgan Stanley employees. In August, a former Goldman Sachs Group Inc. associate pleaded guilty to making more than $6.7 million through illegal trades.

McMahon ordered the couple to pay $611,000 in restitution. She staggered the couple's prison terms, ordering Wang to prison after Chen completed his sentence.

The judge said she was ``mystified'' why the couple, both ``classic overachievers'' raised in China, would trade on inside information. Wang's lawyer, Catherine Redlich, said there may have been a ``cultural'' basis for the crime.

Rarely Prosecuted

``In the People's Republic of China, insider trading is only rarely, and not until very recently, prosecuted as an offense,'' Redlich said.

``Pure greed,'' McMahon replied. ``That's all I'm left with.''

Wang and Chen were arrested in May for trading in the securities of Town and Country Trust, Glenborough Realty Trust and Genesis Health Care based on information Wang learned from New York-based Morgan Stanley. They made their illegal trades from December 2005 to March 2007.

According to the government, Morgan Stanley was advising its Morgan Stanley Real Estate unit on the acquisition of both Town and Country and Glenborough. Wang learned about the firm's failure to acquire Town and Country and the successful purchase of Glenborough before the transactions became public and tipped her husband to the news.

``The people who committed this crime, like most criminals, didn't believe they'd get caught,'' Assistant U.S. Attorney Reed Brosky told McMahon at the sentencing hearing. ``That's a sad reflection on our society and Wall Street.''

`Take the Fall'

Wang and Chen each pleaded guilty to one count of conspiracy and three counts of insider trading. Chen, a former hedge fund analyst, had asked to be sentenced to 30 months in prison.

McMahon said she wouldn't permit Chen ``to take the fall'' for his wife, who was ``more culpable.''

``You are a thief,'' McMahon told Wang.

The couple was arrested on the same day that Randi Collotta, a former Morgan Stanley compliance officer, pleaded guilty to insider-trading charges. Collotta was sentenced to probation and 60 days in custody on nights and weekends. Her husband, who also pleaded guilty in the case, was sentenced to six months of home-confinement.

Redlich cited ``the other Morgan Stanley couple case'' when she sought probation for Wang.

Neither defendant spoke during the sentencing.

Representatives of ING Groep NV, the largest Dutch financial-services company, and Morgan Stanley have said their firms cooperated with federal investigators.

The case is U.S. v. Wang, 07-cr-730, U.S. District Court, Southern District of New York (Manhattan).

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Institutions and Foreign Investment: China Versus the World

Interesting NBER paper looking at the apparent paradox between FDI inflows and the state of China's institution. One would expect a negative correlation. The conclusions of this paper are intuitive and should not be surprising to those with a good knowledge of China.

----------------------------------------------

"Institutions and Foreign Investment: China Versus the World"
NBER Working Paper No. W13435


Contact: JOSEPH P.H. FAN
Chinese University of Hong Kong - School of
Accountancy
Email: pjfan@cuhk.edu.hk
Auth-Page: http://ssrn.com/author=28125

Co-Author: RANDALL MORCK
University of Alberta - Department of Finance and
Management Science, National Bureau of Economic
Research (NBER)
Email: randall.morck@ualberta.ca
Auth-Page: http://ssrn.com/author=71368

Co-Author: LIXIN COLIN XU
World Bank - Development Research Group (DECRG),
Peking University - Guang Hua School of Management
Email: LXU1@worldbank.org
Auth-Page: http://ssrn.com/author=122631

Co-Author: BERNARD YIN YEUNG
New York University - Department of Economics
Email: byeung@stern.nyu.edu
Auth-Page: http://ssrn.com/author=71371

Full Text: http://ssrn.com/abstract=1016346

ABSTRACT: Weak institutions ought to deter foreign direction
investment (FDI), and mass media stories highlight China's
institutional deficiencies, yet China is now one of the world's
largest FDI destinations. This incongruity characterizes China's
paradoxical growth. Cross - country regressions show that China's
FDI inflow is not exceptionally large, given the quality of its
institutions and its economic track record. Institutions clearly
determine a country's allure as an FDI destination, but standard
measures of institutional quality can be problematic for
countries undergoing rapid institutional development, and can
usefully be augmented by economic track record measures. Deng
Xiaoping's 1993 southern tour heralded sweeping reforms, and this
regime shift is insufficiently reflected in commonly used
measures of institutional quality. China's FDI inflow surge after
these reforms resembles similar post-regime shift surges in the
East Bloc, and so is also unexceptional. Recent arguments that
China's FDI inflow is inefficiently large because weak
institutions deter domestic investment while special initiatives
attract FDI are thus either unsupported or not unique to China.

Corruption Watch: Official accused of stealing US$240 million

In an effort to keep readers abreast of corruption trends in China we bring the case of the $240 million dollar official.

This shows that the Chinese sure like a gamble. Perhaps more worrying is the amount spent "speculating of real estate". For now many such gambles have been winners. How many other cases are there out there that will only be revealed once the asset bubbles in shares and land burst.

China official accused of stealing US$240 million [The China Post]

HONG KONG -- A Chinese post office director has been accused of stealing more than US$240 million from customers to help pay off her gambling debts and make personal investments, local media reported on Tuesday. He Liqiong, 43, who managed a post office in the southern Chinese city of Foshan, is accused of amassing 1.79 billion yuan over three years by siphoning cash from hundreds of depositors at her branch.

"He Liqiong is suspected of using 19.8 million yuan to repay gambling debts, more than 73 million yuan for investments, and around 20 million yuan to speculate on land around Foshan," the Sing Tao Daily quoted police investigators as saying.

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Lethal corruption?

Today's FT looks at the corruption issue in China.

The important issue to consider is that the risk-reward ratio and got out of synch.

With low level officers being able to illicitly conceal millions of yuan and the chances of being caught so slim the temptation is often too great. However, what is China to do? They already have the death penalty for corruption - that is pretty much as large a deterrent as you are every likely to get.

Whenever a country goes through such an abrupt change corruption is simply inevitable. Look at the rise of the oligarchs in Russia. Corruption is part of the growing pains. The danger is that the pains get so large as to overwhelm the country.

The question is "will good money drive out bad money" in China or will it be the other way around (with the associated high costs).

Corruption poses ‘lethal threat’ to China [FT]

Corruption costs China as much as 3 per cent of its economic output, or $86bn in 2003, and poses a “lethal threat” to the country’s economic development, according to a report by the Carnegie Endowment for International Peace.

The report by Minxin Pei, the director of the China programme at the Washington-based policy study group, says the sums of money expropriated by corrupt officials have risen “exponentially” since the 1980s and cost more than last year’s entire education budget.

Mr Pei said: “Even after adjusting for inflation, the sums of money looted by government officials today are astonishing – a relatively low-level official can amass an illicit fortune in tens of millions of yuan.”

Mr Pei calculated the cost to GDP using a “conservative assumption” that 10 per cent of land revenues, investment and government spending are “stolen or misappropriated”.

This benchmark is difficult to confirm but it meshes with anecdotal evidence from a number of officials, who privately say that about 10 per cent of the value of all contracts is set aside for illicit payments.

Despite a stream of high-profile corruption cases, including the arrest last year of Shanghai’s party boss and the execution this year of the former head of the national food and drug regulation body, the report says that in reality only a “small proportion” of officials tainted by corruption are punished.

“The odds of an average corrupt official going to jail are at most three out of 100, making corruption a high-return, low-risk activity,” the report says.

Speaking to foreign journalists in late September, Chi Yaoyun, deputy director-general of the Central Commission for Discipline Inspection, the party’s anti-corruption body, admitted that graft was a serious problem, especially in the finance sector and land transfers.

“We do not deny that to some extent in certain areas there is corruption,” Mr Chi said, during a rare tour of the committee’s offices.

But he blamed the practice on the fact that “the economy is undergoing profound structural change”.

Mr Pei, however, sees corruption not just as a stage of development but as a failure of political reform.

“The Chinese government has consistently resisted steps to further reduce the role of the state in the economy, increase judicial independence and mobilise the power of the media and civil society, even though international experience shows that only such full-fledged efforts can root out systemic corruption,” he said.

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Sex and Corruption

Regular readers will of course be familiar with the ChinaEconomicsBlog interest in the economics of corruption.

It is therefore legitimate to post the following headline from the perhaps not world renowned paper the "Malaysian Sun".

Sex a major factor in Chinese corruption cases

China’s state media has broadcast statistics for some of China’s recent high profile corruption cases.

Out of the 16 recent cases where high-ranking officials were sacked for corruption, fourteen of the offenders had illicit lovers.

Some of the most notorious recent scandals have involved sexual misconduct, like the former mayor of Shanghai who stole from pension funds partly to finance a string of mistresses.

The top prosecutor's office has opened its files, it says, to draw attention to the fight against corruption.

Some observers see the new moral mood as a sign that more official misdeeds will be exposed and punished, others believe it may be a political manoeuvre to manipulate certain officials out of office.

As one can clearly observe, there is not a lot of fact presented in this article and little evidence of in depth research. However, the title alone justifies a link from this blog.

We should perhaps provide some comment. The bottom line is that this headline is not really so surprising. Sex in all its guises is undoubtedly the motivation for a wide range of misdemeanors, corrupt practices included.

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CPC membership up by 6.4 million

In most developed countries union membership is falling as economies undergo the transition from manaufacturing to services where labour is harder to organise.

When it comes to political party membership things are not a lot better with election turn outs often being woeful.

It is interesting to note therefore that in China membership of the CPC has been increasing.

The questions of interest are:

1. Do we believe / can we trust these figures?

2. Assuming the figures are correct it is an interesting economic exercise to ponder exactly why membership is increasing. Note the large increase from college graduates. Now assuming that individuals are attempting to mazimise their incomes it is not surprise that more and more college graduates are joining. The saying "it is not what you know but who you know" rings true in the developed world and it is clear that being a CPC memeber can only HELP you job prospects. To not join given the competetion for jobs would therefore be sub-optimal.

Moreover, an examiniation of the backgrounds of the top Chinese entrepheneurs would indicate that a large percentage are the children of top party officials.

In blunt terms, being a party member pays. Hence the incease in membership. It is simply a rational economic decision.

Number of CPC members increases by 6.4 million over 2002

The number of Communist Party of China (CPC) members has reached 73.36 million, an increase of 6.42 million over 2002, according to the Organization Department of the CPC Central Committee.

On average, about 2.4 million new CPC members enrol each year, department statistics show. From 2002, when the 16th CPC national congress was held, to June 2007, the CPC has welcomed 13.16 million new members.

Twelve percent of the new members over the last five years had previously been recognized as model workers and 32.5 percent were college graduates.

By June this year, there were about 3.6 million grass-roots CPC organizations, up 142,000 over 2002, the department said.

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