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".

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]

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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.

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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

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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

Abstract:
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).

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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.

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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.

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]

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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.

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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.

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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.

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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.

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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.

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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.”

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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

Abstract:
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.

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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
DENNIS TAO YANG,

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.

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BBC in China "China's development gap"

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

Humphrys in China[BBC]

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

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

Development gap [Audio]

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Population Wars - India v China

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

I have included a number of quotes.

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

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

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

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

So where do they live:

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

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

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

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

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

So when will the race end?

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

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

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

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

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

The FT do a good piece on this.

Business: A change in gear [FT]

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Ubanisation in China

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

THE BURDEN OF URBANISATION [FT]

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

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

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

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

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

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

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

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

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

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China's march continues - Independent

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

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

China's economy marches on [Independent]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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The Chinese manufacturing myth

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

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

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

Myth of China’s Manufacturing Prowess [HelenWang]

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

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

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

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

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

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

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

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

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

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

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

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

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

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China's reserves - what are they good for - not as much as you think

This is the second post paying homage to the Pettis explanation of the role of China's foreign reserves.

The bank of China holds massive foreign reserves. That is agreed. What is far less clear is what these reserves can be spent on. The man in the street might say - "use the money to build hospitals and schools".

Pettis explains how it really works. This is good and well explained economics (certainly better that I could do without spending a lot of time).

It is important that as many people understand the arguments here as possible especially journalists and fellow economists.

What Pettis misses is that whilst the economics is correct he underestimates the importance of the group of losers he labels "exporters" and the associated jobs. Job creation in China is crucial to maintain political stability. These is a cost to maintaining a low RMB value against the dollar but I suspect the Chinese government sees this as a price worth paying (for the time being).

Can PBoC reserves protect China? [China Financial Markets]

So the PBoC cannot give away the reserves without causing an increase in its net indebtedness. This is why I have often said, to the confusion of some of my readers, that Beijing cannot just recapitalize the banks with reserves. A substantial amount of NPLs will one way or another increase government debt. The only way Beijing can recapitalize the banks is by borrowing, or by raising direct (or hidden) taxes. Having the PBoC recapitalize the banks is just another way for the government to borrow, and since almost everyone would agree that losses in the banking system should be paid directly out of fiscal revenues, and not indirectly by the central bank, it would be a very inefficient way of doing so.

So what are reserves good for? As long as China maintains its own currency and denominates all domestic transactions in RMB, the PBoC reserves cannot be used in China. They cannot go to pay doctors’ salaries, to build bridges, to lower taxes or to subsidize consumption. They can only be used to purchase or pay for things from outside China. This means that reserves ensure that China can import foreign commodities and other goods as long as it can pay for them domestically. It also means that the PBoC can ensure the availability of dollars to repay foreign debt and foreign investment.

Here is where a great deal of confusion arises. The US crisis of 2007-08 notwithstanding, we seem implicitly to believe that a financial crisis is always caused by an inability to repay foreign debt and investment, in which case having huge amounts of reserves certainly should protect a country from financial crises.

But this is only partly true. Reserves are useless in preventing domestic debt crises (not totally, because they affect the credibility of the currency, but the RMB today doesn’t seem to suffer from a lack of credibility). As I pointed out two weeks ago, there are many cases of countries with huge amounts of reserves that nonetheless suffered from all kinds of financial crises. It is just that they never suffered from external debt crises.

When it comes to domestic debt crises, large levels of reserves actually can make things worse. Why? Because financial crises are always caused by mismatched and highly inverted balance sheets, and the central bank’s accumulation of reserves is exactly that kind of balance sheet.

Of course when the rest of the country has an equally mismatched balance sheet in the other direction – like when South Korean companies in 1997 had huge amounts of won assets financed by dollar debt – the central bank mismatch enhances financial stability. It acts against the mismatch carried by the rest of the economy, and the net impact is that the economy is less vulnerable to financial crisis. In that sense reserves are a kind of insurance to protect against excessive foreign borrowing. Because South Korea, unlike China today, had too few central bank reserves against the rest of the country’s too-large dollar obligations, its overall balance sheet was mismatched and it was susceptible to a collapse of the won.

But China has very little external debt – certainly very small compared to its reserves – and so this clearly isn’t an issue for China. But then could the huge mismatch on the PBoC’s balance sheet create the opposite risk for China?

Balance sheet mismatches

Yes and no. And this is where another great misperception occurs. Many people in China and abroad have argued that China cannot afford to raise the value of the RMB against the dollar because it would mean that China will take huge losses because of its massive reserves. After all, if the RMB rises by 10% against the dollar, the value of its reserves will have necessarily declined by $250 billion in RMB terms.

This is almost completely wrong – China will not take losses anywhere close to that amount and may probably even take a gain if it revalues the currency. Unfortunately this kind of confused thinking is nonetheless the source of some strange claims. One foreign economist even published a rather loony piece three months ago, which excoriated the Obama administration’s “bogus” trade argument for revaluation as done purely for nefarious and no doubt imperialistic reasons – and to strengthen the conspiratorial air it somehow ignored the fact that nearly every country in Europe and Asia has made the same argument.

Ironically enough, it replaced the very reasonable trade argument with one that is truly bogus, and indicates how foolish and even hysterical the discussion can become. The argument is that the US wants China to revalue the RMB not because of trade rebalancing (wrong, and this makes a common but still annoying mistake about the relationship between the currency and the trade balance) but rather because of a secret American scheme to reduce the amount that the US government has to pay China on its PBoC holdings. Appreciation of the RMB, according to this theory, represents a transfer of wealth from China to the US because it effectively reduces cost to the US of servicing the debt:

If the arguments presented for RMB revaluation by the US administration have no factual basis, why are they being put forward? The real answer lies not in trade but in debt – as other writers, such as Daryl Guppy, have rightly pointed out. In asking for RMB revaluation, President Obama’s advisers were, in effect, asking China to donate $150-$300 billion in RMB to the US via debt reduction.

The arithmetic of this is simple. China’s holdings of US dollar assets, chiefly Treasury Bonds, are around $1.5 trillion, or 10.2 trillion RMB. A 10 percent devaluation of the dollar vis-à-vis the RMB would reduce the value of these holdings to 9.3 trillion RMB, and a 20 percent dollar devaluation would reduce their value to 8.5 trillion RMB. In either case the U.S. is asking for its debt to China to be reduced by 10-20 percent in RMB terms. It may now be seen why President Obama’s advisers have a vested interest in not examining the factual situation of China’s trade. They are seeking a large debt relief package.

Sigh. The arithmetic is apparently not as simple as it seems. When one of my central-bank seminar undergraduates showed me this article in December, he was chortling with glee at its bad economics and suggested I used the article to teach the freshman class – the assumption being that no PKU finance student above the level of freshman could have ever made this kind of conceptual mistake. Perhaps not, but certainly anyone writing about currency policy should have at least done the math first.

Although this article is more confused than most about the impact of an appreciation on central bank reserves, it is worth explaining why it is wrong so as to address the less excitingly conspiratorial mistakes made by the merely confused. First, can an appreciation of the RMB reduce the cost to the US government of its debt obligations? Of course not.

The US government transacts almost exclusively in dollars, raises dollars in the form of taxes and borrowing, and owns dollar assets. Since it will pay exactly the same number of dollars to Chinese investors after the change in the RMB value as it did before the change, simple arithmetic should indicate that there will be no impact at all on the cost to the US of repaying the debt. After all, if a revaluation of the RMB causes the euro to drop against the dollar (a highly plausible outcome), could it possibly be true that the USG would reduce its payments on $100 of obligations owed to Chinese investors while increasing its payments on $100 of obligations owed to European investors? Exactly how would this work?

Are there no winners and losers?

It wouldn’t. The claim is nonsensical and violates simple arithmetic. But if the RMB is revalued are there no losses and gains anywhere? Yes, of course there are, but the distribution of these gains and losses is completely different from what this article claims, and depends wholly on the structure of various balance sheets. In a nutshell, anyone who is net long dollars against RMB loses, and anyone who is net short dollars against RMB gains.

First of all, will China as an economic entity lose? Leaving aside the vigorous discussion about whether an RMB revaluation will increase or reduce China’s long term growth prospects (I think it will), the net balance-sheet impact of a revaluation depends on whether China is net long or net short dollars. There is no precise way of answering this question, because every single economic entity in China implicitly has some complex exposure to the dollar (by which I mean foreign currencies generally) through current and future transactions, but generally speaking China is likely to gain from a revaluation because after the revaluation it will be exchanging the stuff it makes for stuff it buys from abroad at a better ratio. The value of what it sells abroad will rise relative to the value of what it buys from abroad, and if we could correctly capitalize those values on the balance sheet, it would probably show that the Chinese balance sheet would improve with a revaluation of the RMB.

Some people might make a more sophisticated argument that since China is a net creditor – i.e. it is net long dollars – it will lose by a revaluation of the RMB. This argument also turns out to be wrong, but for more complex reasons, and to explain why I have to put on my former-trader’s hat and explain the difference between a real loss and a realized loss.

If you believe that the RMB is undervalued then you must accept that China takes a “real” loss every single time it exchanges a locally produced good or asset for a foreign one. It does not “realize” the loss, however, until it revalues the RMB to its “correct” value.

In other words, the PBoC, as the representative of China’s net creditor status, will immediately realize a loss when the RMB revalues, but this loss did not occur because of the revaluation. It occurred the very day the trade took place. When a Chinese producer sold goods to the US and took payment in US dollars, there was an unrealized economic loss equal to the undervaluation of the RMB. This unrealized loss was passed onto the PBoC when it bought the dollars from the exporter and paid RMB.

This loss, however, will not actually show up until the RMB is revalued, which forces the real loss to be realized (i.e. recognized as an accounting matter). Postponing the revaluation, then, is not the way to avoid the loss – it is too late for that. The only way to avoid future additional loss is to stop making the exchange, which means, ironically, that the longer the PBoC postpones the revaluation of the RMB, the greater the real loss it will take.

So a revaluation of the RMB will not cause any real loss to any Chinese entity today. The loss already occurred but hasn’t been realized.

But wait, if the RMB is revalued by 10%, the value of the PBoC’s assets will immediately decline by $250 billion in RMB terms. Since the Chinese measure their wealth in RMB, isn’t this a real additional loss for China?

No, because remember that the only thing you can do with reserves is pay for foreign imports or repay foreign obligations. And just as the value of the reserves drops 10% in RMB terms, so does the value of all those foreign payments – by definition they must go down by exactly the same amount in RMB terms.

This means that China takes no loss. It can buy and pay for just as much “stuff” after the revaluation, and with less implied PBoC borrowing, as it could before the revaluation – and the real value of money is what you can buy with it. So the real value of the reserves hasn’t changed at all – just the accounting value in RMB, but this simply recognizes losses that were already taken long ago when the trade was first made, and should be a largely irrelevant number (except perhaps for conspiracy theorists).

Wealth is transferred within China

But that doesn’t mean nothing at all happened. Although the Chinese overall balance sheet is probably a little better off with the revaluation, within China there are a whole set of winners and losers. Which is which depends on the structure of individual balance sheets. Basically everyone who is net long dollars against the RMB loses in an appreciation, and everyone who is net short dollars against the RMB wins.

Who loses? Of course the PBoC is a big loser. It has a hugely mismatched balance sheet in which it is long nearly $3 trillion (if everything were correctly counted), funded by an equivalent amount of RMB obligations.

Exporters and their employees, too, are naturally long dollars and so they would lose. They are long dollars because more of the net value of their current and future production less current and future costs is denominated in dollars (they are “sticky” to dollar prices) – for example labor costs, land, and almost all other inputs except imported components are valued in RMB, whereas most revenues are valued in dollars.

Chinese companies with more assets abroad then foreign debt might also lose. Who wins? Nearly everyone else in China, since everyone in the country is short dollars to the extent that there are imported goods in his life. The local tea seller is short dollars if his tea is delivered to him in gas-guzzling trucks, as is the family planning to visit Egypt next year, as is the local provider of French perfumes, as is a teenager who wants to buy Nike shoes, and so pay for the corporate sponsorship of a Brazilian soccer star playing for a Spanish team. Every household and nearly every business in China is, in one way or another, an importer (and this is true in every country), so unless they own a lot of assets abroad they are effectively short dollars and will benefit from an appreciation in the RMB.

Revaluing the RMB, in other words, is important and significant because it represents a shift of wealth largely from the PBoC, exporters, and Chinese residents who have stashed away a lot of wealth in a foreign bank, in favor of the rest of the country. Since much of this shift of wealth benefits households at the expense of the state and manufacturers, one of the automatic consequence of a revaluation will be an increase in household wealth and, with it, household consumption. This is why revaluation is part of the rebalancing strategy – it shifts income to households and so increases household consumption.

So a revaluation has important balance sheet impacts on entities within China, and to a much lesser extent, on some entities outside China. But since it merely represents a distribution of wealth within China should we care about the PBoC losses or can we ignore them? Unfortunately we cannot ignore them and might have to worry about the PBoC losses because, once again, of balance sheet impacts.

The PBoC runs a mismatched balance sheet, and as a consequence every 10% revaluation in the RMB will cause the PBoC’s net indebtedness to rise by about 7-8% of GDP. This ultimately becomes an increase in total government debt, and of course the more dollars the PBoC accumulates, the greater this loss. (Some readers will note that if government debt levels are already too high, an increase in government debt will sharply increase future government claims on household income, thus reducing the future rebalancing impact of a revaluation, and they are right, which indicates how complex and difficult rebalancing might be). In that sense it is not whether or not China as a whole loses or gains from a revaluation that can be measured by looking at the reserves, and I would argue that it gains, but how the losses are distributed and what further balance sheet impacts that might have.

I apologize for such a long post, but I promised several people that I would try to address some of these issues, and it is hard to do so briefly. In short, what the PBoC does to the value of the RMB and how it invests its reserves matter a lot to China and the world, but not always in the way China and the world think. To get it right, we need to keep in mind the functioning of the balance of payments, the PBoC and other balance sheets, and the way the two are interrelated.

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Economic CRASH in China coming soon

As an economist one never likes to dwell on "good news" stories. The previous post on the 56% exporting rebound gave the wrong impression.

There remain a number of issues with the Chinese growth miracle that simply do not add up. The stockmarket and house prices are significantly overvalued.

At least James Chanos has got China's card marked. Good coverage from the New York Times. In this case he may lose his money - he must make sure not to underestimate the Chinese governments ability to plough on regardless.

I am sure China is cooking the books and house prices are out of the range of the vast majority of hard working Chinese. He is right to raise the "crash" possibility.

Contrarian Investor Sees Economic Crash in China [New York Times]

SHANGHAI — James S. Chanos built one of the largest fortunes on Wall Street by foreseeing the collapse of Enron and other highflying companies whose stories were too good to be true.

James Chanos made his hedge fund fortune predicting problems at companies and shorting their stock.

Now Mr. Chanos is betting against China, and is promoting his view that the China miracle has blinded investors to the risks in that economy.

Now Mr. Chanos, a wealthy hedge fund investor, is working to bust the myth of the biggest conglomerate of all: China Inc.

As most of the world bets on China to help lift the global economy out of recession, Mr. Chanos is warning that China’s hyperstimulated economy is headed for a crash, rather than the sustained boom that most economists predict. Its surging real estate sector, buoyed by a flood of speculative capital, looks like “Dubai times 1,000 — or worse,” he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent.

“Bubbles are best identified by credit excesses, not valuation excesses,” he said in a recent appearance on CNBC. “And there’s no bigger credit excess than in China.” He is planning a speech later this month at the University of Oxford to drive home his point.

As America’s pre-eminent short-seller — he bets big money that companies’ strategies will fail — Mr. Chanos’s narrative runs counter to the prevailing wisdom on China. Most economists and governments expect Chinese growth momentum to continue this year, buoyed by what remains of a $586 billion government stimulus program that began last year, meant to lift exports and consumption among Chinese consumers.

Still, betting against China will not be easy. Because foreigners are restricted from investing in stocks listed inside China, Mr. Chanos has said he is searching for other ways to make his bets, including focusing on construction- and infrastructure-related companies that sell cement, coal, steel and iron ore.

Mr. Chanos, 51, whose hedge fund, Kynikos Associates, based in New York, has $6 billion under management, is hardly the only skeptic on China. But he is certainly the most prominent and vocal.

For all his record of prescience — in addition to predicting Enron’s demise, he also spotted the looming problems of Tyco International, the Boston Market restaurant chain and, more recently, home builders and some of the world’s biggest banks — his detractors say that he knows little or nothing about China or its economy and that his bearish calls should be ignored.

“I find it interesting that people who couldn’t spell China 10 years ago are now experts on China,” said Jim Rogers, who co-founded the Quantum Fund with George Soros and now lives in Singapore. “China is not in a bubble.”

Colleagues acknowledge that Mr. Chanos began studying China’s economy in earnest only last summer and sent out e-mail messages seeking expert opinion.

But he is tagging along with the bears, who see mounting evidence that China’s stimulus package and aggressive bank lending are creating artificial demand, raising the risk of a wave of nonperforming loans.

“In China, he seems to see the excesses, to the third and fourth power, that he’s been tilting against all these decades,” said Jim Grant, a longtime friend and the editor of Grant’s Interest Rate Observer, who is also bearish on China. “He homes in on the excesses of the markets and profits from them. That’s been his stock and trade.”

Mr. Chanos declined to be interviewed, citing his continuing research on China. But he has already been spreading the view that the China miracle is blinding investors to the risk that the country is producing far too much.

“The Chinese,” he warned in an interview in November with Politico.com, “are in danger of producing huge quantities of goods and products that they will be unable to sell.”

In December, he appeared on CNBC to discuss how he had already begun taking short positions, hoping to profit from a China collapse.

In recent months, a growing number of analysts, and some Chinese officials, have also warned that asset bubbles might emerge in China.

The nation’s huge stimulus program and record bank lending, estimated to have doubled last year from 2008, pumped billions of dollars into the economy, reigniting growth.

But many analysts now say that money, along with huge foreign inflows of “speculative capital,” has been funneled into the stock and real estate markets.

A result, they say, has been soaring prices and a resumption of the building boom that was under way in early 2008 — one that Mr. Chanos and others have called wasteful and overdone.

“It’s going to be a bust,” said Gordon G. Chang, whose book, “The Coming Collapse of China” (Random House), warned in 2001 of such a crash.

Friends and colleagues say Mr. Chanos is comfortable betting against the crowd — even if that crowd includes the likes of Warren E. Buffett and Wilbur L. Ross Jr., two other towering figures of the investment world.

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China's empty city of Ordos

Where does China's 8% growth really come from?

Having just read the Genghis Khan trilogy I am a big fan of inner Mongolia and the fall of the Chin empire. The unwashed Mongol hordes operated an impressive and ruthless military machines. Although not intellectual these books are an easy read. Took me a week to read all three (see below).

Back to the empty city - Genghis was never a "city man" showing a strong preference for the open plains. Perhaps this explains the empty city of Ordos.

There are some simple supply and demand issues with the "empty city". This is another example of the waste from China's stimulus package. When the money runs out there will be carnage.




Here are the books on the cheap for those who like a boys own story with a body count in the millions.










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"For all we may smile, you can still smell us"

This quote from Shi Yinhong at Renmin University is a good one and represents China's method of diplomacy.

I like this article in the latest Economist. China's role in Africa is interesting - are African countries seeing through China's smile?

The economics behind the smile are also well written. China needs people to like them - they have spent a lot of money convincing us. The more we like China the more we will buy from them and invest in China and the happier the Chinese people will be. Happy Chinese means the Chinese communist party will remain in power. Is the smile beginning to fade and the real China come through?

Copenhagen is the obvious case. China is now getting the bad publicity it deserves and can be seen from my previous Copenhagen post. China is papering over the cracks but the damage has been done.

This article is well worth a read.

From the charm to the offensive [Economist]

IF A single impulse has defined Chinese diplomacy over the past decade, it is its smile: near and far, China has waged a charm offensive. With its land neighbours, India excepted, China has amicably settled nearly all border disputes; it has abjured force in dealing with South-East Asian neighbours over still unsettled maritime boundaries. On the economic front, the free-trade area launched on January 1st between China and the Association of South-East Asian Nations is the world’s biggest, by population. China’s smiling leaders promise it will spread prosperity.

Farther afield, China has scattered roads and football stadiums across Africa. By the hundreds, it has set up Confucius Institutes around the world to spread Chinese language and culture. More than anything, the Beijing Olympics were designed to showcase gentle President Hu Jintao’s notions of a “harmonious world”. In all this, the leaders appear not simply to want to make good a perceived deficit in China’s soft power around the world. A more brutal calculus prevails: without peace, prosperity and prestige abroad, China will have no peace and prosperity at home. And without that, the Chinese Communist Party is dust.

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But the message of harmony will ring hollow abroad if it is secured by muzzling voices at home. Besides, there is now less goodwill to go around. A smile is fresh at first, but loses its charm if held for too long. One problem with China’s smile diplomacy, says the man who coined the phrase, Shi Yinhong of Renmin University in Beijing, is that China’s global impact—its demand for resources, its capacity to pollute—is so much greater than a decade ago. “ For all we may smile, you can still smell us,” he says.

That even applies in places, such as Africa, where enthusiasm for China was once unbounded. China has more than a presentational problem. For instance, it sends Africa both destabilising arms and peacekeepers, the one generating demand for the other. China’s manufactures destroy local industries. Many Africans resent Chinese firms’ deals with their unpleasant leaders and blame them when leaders pocket the proceeds. China’s clout makes a mockery of two guiding tenets of its charm offensive: relations on the basis of equality; and non-interference.

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Fear of the Dragon and the Economist

The economist always does a good job covering China. They are astute enough to know where all the action is.

China is now the world's biggest exporter and this will not change any time soon.

This article goes through all the old "overvalued" currency and "global balancing" stuff. Nothing new but a good summary.

Fear of the dragon [Economist]

MANY people start the new year by resolving to change their old ways. Not China. On December 27th Zhong Shan, the country’s vice-minister of trade, declared that China will continue to increase its share of world exports. Figures due out on January 11th are expected to show that China’s exports in December were higher than a year ago, after 13 months of year-on-year declines. China’s exports fell by around 17% in 2009 as a whole, but other countries’ slumped by even more. As a result China overtook Germany to become the world’s largest exporter and its share of world exports jumped to almost 10%, up from 3% in 1999 (see chart).