High Education Costs, Low Executive Pay

Numerous blog posts have discussed the costs incurred by overseas and Chinese students of studying for a degree in the US or UK. Overseas education is expensive but if I land a high paying job then it is worth the initial investment.

A similar cost-benefit analysis applies to Western Executives paying large sums to take MBAs at the top European and US Universities.

This recent article on C/Net is another reason that Chinese student numbers are falling in the face of continued and rapid growth. On one level, the large increase in the Chinese middle class should result if more students coming to the UK and US. However, the existing large numbers of overseas and local graduates are keeping pay low and making it harder to justify the initial expense.

The fault of the argument below is to assume all executives are the same. Whilst technology can be backward engineered and copied Executive skills are one thing that will take much longer to understand and copy. That is not to say that the Chinese will not learn quickly. Do not expect a fall in US executive pay any time soon.

Moreover, once living costs are taken into account are US executives really on that much more?

My bold highlighting.

China's new weapon: Low executive pay

Excessive executive pay has been a hot-button issue in American politics for years, but worldwide factors could one day make it a liability on the balance sheet.

As companies in countries like China and India move away from performing behind-the-scenes functions, they're selling products and services under their own brand names directly against U.S. and European counterparts.

Since high-level executives and other white collar professionals in Asian companies typically make less than their Western equivalents, these companies potentially will have a cost advantage.

How or even whether the differences in executive salary will impact the market remains unclear: multinational companies are hiring their own executives in these regions, too, after all. Nonetheless, the numbers are tough to ignore: engineers aren't the only "talent" that costs less in developing markets. Executives cost a lot less, too.

Shanghai's SunTech Holdings, for instance, has moved from being a bit player in solar panels to becoming one of the largest manufacturers in the world. Most of the company's panels end up overseas, and it can produce those panels more cheaply than American competitors for various reasons. Among them: the company isn't lavishing huge compensation packages on its executives.

"There aren't 10 executives in the company that make more than $200,000," said Steve Chan, vice president of business development at SunTech Power Holdings.

U.S. execs make far more. In a survey conducted by Forbes last year, the magazine found that the average big company CEO made $3.3 million in salary and bonuses.

It trickles down from there. Chinese engineers make about one-third to one-half the salary of their U.S. counterparts, said one executive who runs Asian operations for a U.S. high tech firm. Marketing execs can make about half as much as their stateside colleagues.

"If you have one (marketing manager) that makes about $100,000 in the U.S, you can hire one here for $50,000," he said.

Professional services firms also pay less than U.S. counterparts, said Ted Dean, managing director of BDA, an analyst firm specializing in Asian markets. New college graduates hired by services firms might make $400 to $500 a month, or $4,800 to $6,000 annually. A well-regarded person with years of experience might make $30,000 to $50,000 annually. In the U.S., the same person can graze around the $100,000 mark.

While executive compensation can be absorbed somewhat in manufacturing companies, it can be pronounced in purely white-collar service operations. Panorama Media Holdings, based in Beijing, sells high-resolution photos to advertising agencies, similar to Getty Images and Corbis.

Panorama, though, can sell its products for an eighth the price, according to Wayne Shiong, a partner in venture firm WI Harper, an investor in Panorama. Wherever Getty charges $50,000 for services, Panorama can charge 50,000 RMB (China Yuan Renminbi), or about $6,600.

Panorama primarily sells its photos to Asian advertising agencies. Shiong, though, said that the multinational photo outfits have not reacted to lower their prices for the local market. Additionally, Panorama is contemplating taking out office space in New York to test out the international opportunities.

The Spartan start-up
The pay discrepancy starts during the start-up phase. Founding CEOs of some Chinese start-ups deliberately take low wages to keep costs down, according to Shiong and others. The CEO at a company that's just finished a Series A round of funding might pay himself 500,000 RMB a year, or about $67,000.

Documents filed by Chinese companies with the Securities and Exchange Commission back this up. Focus Media Holding, which specializes in outdoor advertising kiosks, paid $100,000 to its two executive officers in 2004 combined. In 2005, the year the company went public on Nasdaq, Focus had 13 executives and directors and the total pay for all of them for the year was $512,947.

In 2005, the company's four executives and directors pulled in $100,000 combined. The four executives and directors of Trina Solar Limited pulled in $128,039 in 2005. None had severance packages, the filing states.

Compare that to a pre-public U.S. company. DivX, which makes media software, paid its top five execs about $1 million in 2005, the year before it went public. Shutterfly paid its top five people $1.1 million the year before an IPO--only one made under $210,000.

Chinese executives make their wealth in stock options, which U.S. execs get, too. Suntech founder Shi Zhengrong is considered one of the richest individuals in China, with a net worth exceeding $2 billion, according to various studies. Focus awarded 22.5 million in options to executives and employees in 2005. Salaries also rise after an IPO, but generally not to U.S. levels. One reason, of course, is that the cost of living is lower. Someone making $50,000 in China will likely be able to retain a driver and other household help. That's not enough to rent a decent one-bedroom apartment in many American cities.

Conversely, to expand internationally, Chinese companies have to hire U.S. and European executives, who will command U.S. salaries. Suntech's Chan said that will be an issue for his company. In the first few years of the company's growth, the salespeople came out of China. Expanding internationally will also take quite some time.

Victor Canto, chairman of La Jolla Economics, added that many executives in Asian companies will also leap to U.S. competitors to get salary raises. "That will decrease the disparity," he said.

Still, in the end, multinationals of course have some of their higher-level people in more expensive countries, so a discrepancy should be expected.

"Foreign vendors might be able to achieve comparable manufacturing costs, but they still will have a huge R&D lab in Finland," said BDA's Dean.

Chinese Stock Market Bubble Deflates a Little

There have been numerous posts on the "Chinese Bubble" on this blog such as:
China's Stock market - "how does it work"?
Who is REALLY inflating the "Chinese Stock market Bubble"?
"Bursting Chinese Bubble" - a contagion effect?

The first of these even includes my predictions of what would happen for all to judge.

The last week or so and seen the first signs that investors are beginning to hit the panic button or as we call it in the west the "puke point". This is when markets have fallen to such an extent that fear really takes over.

Remember though, the stock market could fall over 60% and still be around the same level it was a year ago.

The third post above argues why there will be NO or very little contagion effect. So far, so good.

However, we should look at what has happened recently. For one, the introduction of stamp duty (which was tripled last Tuesday) was a wake up call and a trigger.

The stock market fell 8.3% yesterday with the cumulative losses amounting to $40bn since the stamp duty affair.

The first signs of panic selling in China began last Wednesday after the government trebled the stamp duty on share trading. The market has now fallen 15 per cent from its high last Tuesday to close at 3,670 points yesterday.

[FT leader]
So will the current fall lead to a full scale "pop". There are argument both ways. Yesterday many stocks did fall by their full daily limit suggesting further falls to come.

However, we now need to consider the political fallout from a crash.

Many stock market bulls would argue that the Chinese government will not let the market crash and will buy up stock using its vast reserves. This would effectively put in place an artificial floor to the market.

The government has a history of market interference owing to its concerns that share price volatility could lead to social unrest involving angry investors.

The country's three official securities newspapers carried editorials yesterday arguing that the market trend was positive and the tax increase was aimed only at speculative investors.

The government's propaganda officials routinely order the media to run articles and reports that support policy initiatives.

China also has excessive liquidity - the money must go somewhere.

The Chinese economy is still growing strongly and is on a relatively sound footing.

Still, stocks are overvalued and a correction is likely. However, I suspect we will see another upturn before the really big one.

The final point relates to post 2 above - who really owns Chinese stocks - more digging is required here.

Some references:

China correction [LEX FT]

Attempts to reassure investors fail to halt slide in China's shares [FT front page]

Econphd Ranking of "Economics departments"

As part of a series of posts looking at UK and worldwide rankings of Economics departments for those considering postgraduate study (MSc Economics) comes a series of rankings not previously considered on this blog from Econphd.net.


There are 3 categories:

1. Network.
2. Average Productivity.
3. An overall ranking.

Methodology for construction.

Unique among rankings, econphd have also disaggregated by sub-discipline so there are rankings for "trade and development", "econometrics", "macroeconomics" etc.

Given the UK nature of this blog I list just those Universities in the top 200 of the overall ranking.

Note the correlation between ranking and the list of MSc courses in the sidebar. Again, quality of institution matters.

12 London School of Economics (LSE)
31 Oxford U
34 Warwick U
39 U Cambridge
47 University College London
48 U Essex
65 U York
68 U Nottingham
91 Queen Mary & Westfield College
96 U Southampton
105 London Business School
108 Birkbeck College
110 U Bristol
112 U Manchester
113 U Leicester
144 U Edinburgh
149 U Glasgow
153 Royal Holloway College
159 U Wales - Cardiff
164 Imperial College
165 U Exeter
166 U Birmingham
167 U East Anglia

No real surprises here. I would expect UK Universities to do better in the future given the additional spending on education and the fact that UK academic salaries are getting significantly closer to those paid in the US and far better than a lot of Europe.

The following posts may be of interest:
Studying "Economics in the UK": General Links

Which UK University to study in? "Academic Ranking of World Universities"

Studying in the UK: Cost of Accomodation

World University Rankings: Rankings and text

"UK University Ranking": large city effect

China: Coming to Grips with the New Global Player

Lead article in World Economy (an academic economics journal that does tend to publish accessible articles). Requires subscription for full PDF or ask a friendly academic.

China: Coming to Grips with the New Global Player

* Horst Siebert 11Kiel Institute for the World Economy, Germany, and SAIS Bologna Centre, Johns Hopkins University, Italy

Abstract

This paper analyses China's economic performance in the last 25 years and discusses its prospect for growth in the future. Exports and investment have been the two driving forces for the high annual GDP growth rates. FDI plays an important role. However, structural issues such as the loss-making state-owned firms and the fragile banking industry have to be solved. Monetary policy is complicated by the accumulation of reserves which, however, provide an insurance for the fragile banking system. Property rights, a crucial element in transforming a communist society, are far from being clearly developed. Major policy issues in the future include the correction of the distorted growth process and of the institutional deficits, especially with respect to the rule of law and the lack of democracy.

Coal and Corruption

As part of our "corruption watch" we read in today's China government's offical website that:

China punishes over 5,000 officials for illegal coal mine participation

There are a number of interesting numbers that have been thrown into this small article that I must say I was unaware of. In the UK any coal mines that are left are operated on a massive scale. If it difficult to conceive that coal mines can just be set up illegally without anyone knowing but for China to have 100,000 illegal mine cases is astonishing.

The other figure that is of course a cause for concern in the 17 deaths per DAY in Chinese coal mines. This may be less surprising when read with the number of illegal mines in operation.

Linking to the previous article the environmental implications of such activity are also entirely negative.

More than 5,000 Chinese civil servants participating in coal mine operation have received punishment in almost 100,000 illegal mining cases since 2005, according to statistics released by the Ministry of Land and Resources (MLR).

By the end of 2006, China has investigated 89,926 cases of mining with no licenses, 1,907 cases involving illegal trading of prospecting and mining rights, and 5,795 cases of mining beyond boundary lines, said Jia Qihai, a senior official in charge of mining resources development in MLR.

A total of 2,154 people received penal treatment for illegal coal mining, he said.

However, the MLR official specified neither where or what ministries these civil servants come from nor the kinds of punishment they took.

China has been cracking down on illegal mining since the State Council, the country's cabinet, demanded an overall straighten-out campaign in August 2005.

"Generally speaking, the number of cases of illegal mining are declining sharply and mine resources are exploited in a more orderly manner," said Jia, who also called for more related efforts to address this issue.

"Officials in some regions still haven't realized the graveness of the situation and supervision and institutional construction remains weak," he said.

Coal mine accidents killed 4,746 people in China in 2006. On average, 17 miners lose their lives everyday in Chinese coal mines, which are the world's deadliest.

On May 10, the State Administration of Work Safety announced punishment on 133 people held responsible for five serious accidents that claimed 249 lives. Four of the five accidents occurred in coal mines.

The largest single accident was a mine blast in Hebei Province on Dec. 7, 2005, which killed 108 people.

China's First Climate Change Action Plan

China today launched it's first Climate Change Action Plan. It is interesting to note that "economics" take precedent for entirely justafiable reasons.

The West will need to redouble their own efforts to cut emissions to offset Chinese growth in emissions.

The Chinese government is perfectly aware that many of the cost of climate change will fall on China itself. However, as with any developing country, growth, poverty reduction and political stability take priority.

Whilst China should be included in any multilateral discussions of emission reductions the West would be wise to allow China the leyway it requires.

China's First Plan on Climate Change: Poverty first

China puts economy before climate [BBC]

China to enact national action plan on climate change [Official Chinese government website]

China's climate change plan due ahead of G8 summit

China to enact first plan on climate change

EDIT:

Key Facts on China and Climate Change (from PlanetArk).

CLIMATE CHANGE IMPACTS:

- China says global warming poses a serious threat through rising sea levels, worsening droughts in some regions, more unstable rain patterns in others, and melting glaciers.

- By 2020, annual mean temperatures could increase by 1.3 to 2.1 degrees Celsius from 2000, and by 2050 the rise could be 2.3 to 3.3 degrees.

- If adaptive steps are not taken, global warming could cut nationwide crop production by up to 10 percent by 2030. Wheat, rice and corn growing capacity could fall by up to 37 percent in the second half of the century.


TOTAL EMISSIONS ARE HIGH, PER-CAPITA EMISSIONS ARE LOW:

- China's rapid economic growth and huge population of more than 1.3 billion have made it the world's second largest emitter of greenhouse gases after the United States.

- The International Energy Agency has said China could emerge as the top emitter of the main greenhouse gas, carbon dioxide, as early as this year, a claim disputed by Chinese officials.

- China's plan says that between 1994 and 2004, China's greenhouse gas emissions grew by an average 4 percent a year.

- Its average per-capita emissions from burning fossil fuels in 2004 were 3.65 tonnes of carbon dioxide, just 33 percent of the average for member countries of the Organisation for Economic Co-operation and Development.


INTERNATIONAL STEPS:

- In 2002 China ratified the Kyoto Protocol, which governs international climate change and greenhouse gas obligations.

- As a developing country, China is excluded from the current phase of emission cuts in the protocol, but other countries may demand it accept some targets when the next phase of cuts from 2013 are negotiated in coming years.

- China joined the Asia-Pacific Partnership for Clean Development and Climate in 2005. The group, made up of the United States, Australia, India, South Korea, Japan and China, aims to use technology to reduce emissions.


DOMESTIC MEASURES:

- In 2005, China depended on coal, the most carbon-dioxide heavy of the fossil fuels, for 68.9 percent of its primary energy consumption, the plan says, and consumption of oil is climbing as vehicle ownership and industry boom.

- China's plan proposes expanding nuclear power and clean energy sources to weaken dependence on fossil fuels, as well as upgrading to cleaner coal-fired power stations.

- It also aims to expand forests to soak up more carbon dioxide and developing new crop strains to withstand long dry periods.

- China's previously released National Climate Change Assessment proposes by 2020 nearly halving from 2000 levels the amount of greenhouse gases emitted to produce each unit of gross domestic product (GDP), but it states emissions per person are likely to top projected developed-nation levels before starting to fall.

- China has vowed to cut the energy used to generate each unit of GDP by 20 percent of 2005 levels by 2010. (Sources: China National Climate Change Assessment; China's National Climate Change Programme; Reuters)

Paulson Plays the Rude Card Against Chinese

An fascinating post on the state of US-China relations from a US perspective. The linked article comments on a Chris Nelson report (posted below).

Nothing is particularly surprising but what is of interest is whether we believe this to be a deliberate snub or simply misplaced (or not misplaced) US arrogance. Cock-up over conspiracy is my reading of it. My bold.

Perhaps the most telling quote in the article is:

Are we discovering that when China considers itself an equal, does that change the whole "negotiating game"?

I suspect this statement is a true representation of the facts - a little surprising that this is only now being contemplated.
Paulson Plays the Rude Card Against Chinese: No Windfall Expected

The Nelson Report by Chris Nelson, 23 May 2007

It may be that we are cranky because the meds are wearing off from our root canal this morning (just a swell way to start the workday) but it doesn't sound like the US-China cabinet level SED "dialogue" went all that well. In fact, there is some evidence it was a disaster.

So you have to ask if it will end up being the end. Barring some major breakthroughs at the JCCT, it doesn't sound like there will be any point in meeting again, as scheduled, in December.

This morning's session was called early. . .the game was stopped in what would normally have been the 6th inning. As one experienced China-hand asked, rhetorically, "you telling me Wu Yi came over here with 14 of her cabinet members and they couldn't find things to talk with us about?"

"Results", with one or two exceptions, either were minimal, or not what Secretary Paulson seemed to expect. And at the closing press conference, the Chinese didn't even pretend they had had a good time. Madam Wu Yi read her statement, and walked off. No pretence of a friendly hug for the US side.

At yesterday's press briefing, journalists were urged not to see the SED as an negotiating "event", but, rather, as a "discussion". Negotiations and "results", it was argued, are for the JCCT process chaired by Commerce.

Hummmm.

Today, an impertinent ink-stained scribbler asks, privately, "if Treasury chairs the SED, and Paulson isn't allowed to press his case on currency, and to get a Chinese response, what's the point?" In fact, sources indicate there was some "heated dialogue" on currency. But the bottom line is the same...after all the US pressure, all it got was last week's very minimal "float", increasing the maximum daily trading band by 0.2% to 0.5% total. . .exactly half what Bretton Woods defines as a "fixed rate".

So you have to wonder if this time, Paulson's patience has worn out, and the still-delayed Treasury report to Congress on undervalued currencies will. . .finally. . ."cite" China. Since that would formally kick-off mandated "negotiations", you have to wonder how Beijing would react, given its clear public heartburn over the IPR and other WTO cases.

Finally, you have to wonder how long it will take Ways & Means chairman Charlie Rangel to decide that maybe moving some China currency legislation is a small price to pay for Democratic Caucus approval of his Labor and Environment deal.

One normally hesitates to ascribe too much to the theater of body language, but here's something that just bashes you right between the eyes: Paulson, the guy with 72 private trips to China, all that hands-on experience, he who told the White House, State and USTR not to worry, that he would be the China Guy in this Administration...at the closing press conference, Paulson stalked in, well ahead of Wu Yi, and then started reading his statement before she even reached the podium.

Excuse me? An American or European would have cold-cocked the President for such calculated rudeness! In China (Japan, Korea, etc.) you watch older married couples walk into someplace. . .the husband is 10 feet in front, and the subservient wife is dutifully plodding behind. You think for one minute that elderly maiden lady Wu Yi didn't catch the insult here?

Or, are you telling us Paulson didn't mean it, that he was so focused on reading his prepared statement he didn't think? NONSENSE. This was a calculated act of rudeness which told everyone in the room, and anyone watching on TV, that a major failure had taken place.

Further evidence of a Paulson snit. . .he seemed to go out of his way to be rude to an Asian journalist, who had to ask him four times, in very good english, something about the N. Korea/Macao money problems Treasury is having with State (see separate item in tonight's Report). Paulson pretended not to be able to understand what everyone else in the room got the first time.

Is there a less personal problem going on? Perhaps Labor Secretary Elaine Chao, speaking to reporters last night, sensed today's result, when she said that from what she'd seen so far, even though she herself is of Chinese descent, "it's much harder than anyone thinks for the two countries to communicate". "Maybe", she mused, "we just have very different styles. . ."

Even if you discount Paulson's rudeness to his alleged friend as somehow unintentional, witnesses agree that something definitely was "missing" today. Commented one, privately, "it was as cold as ice in there. The Chinese just looked like they wanted to get off the stage quickly. They really didn't bother to put on a show for the cameras back home."

Maybe that was the point? Certainly, Chinese officials had made very clear their displeasure at the Administration's decision to start those three WTO cases at the beginning of April. . .that was a major point of Wu Yi's "frank" opening remarks yesterday.

And perhaps that explains why Paulson got nothing on something which he had already, in a sense, "leaked" to the press. . .China lifting it's 25% foreign ownership cap on domestic bank investment. Nope. . .not this time.

And even with yesterday's OIE announcement of "controlled risk" clearance of US beef exports, no one hinted if the US asked China to at least agree to talk about its continuing ban later on. . .much less did anyone say something specific today, despite the obvious political importance for pro-trade/pro-China trade senators like Finance Chair Max Baucus, and former chair Chuck Grassley.

OK, OK, so Paulson & Co did get a few things. . .the airlines deal is useful; China said it would remove its moratorium on allowing new foreign securities firms into the market. . .something it had hinted about last December; and the Chinese said that US insurance firms can get into the brokerage and property trading business, as US companies had been asking (although an insurance source said, basically, "nice, no big deal").

So. . .step back a few feet. What happened? Is Chao right? Have we run into a clash of negotiating cultures? Are we discovering that when China considers itself an equal, does that change the whole "negotiating game"? Does that mean that when the Administration. . .finally. . .pulled the trigger on some narrowly drawn WTO cases, that when it also asked China for "deliverables" at the SED it was giving self-destructive offense to Beijing?

Somehow you think that by now, Chinese officials and negotiators are a lot more sophisticated than that. So maybe it was the substance, and capacity of the US negotiators?

Who knows? But one thing for sure, dressing up this SED as something which really moved forward the "responsible stakeholder" concept is delusional.

A final, frankly nasty thought: getting nothing on currency was not a surprise, of course, given the Chinese movement last week (Nelson Report, May 18). . .but this then raises a rather embarrassing question for Paulson personally: We noted in our coverage of his performance at a CSIS/PIIE currency conference (Nelson Report) that when unscripted, he has trouble putting two coherent sentences together. A friend in Beijing said he noted the same thing when Paulson was there last December. You have to ask if this guy is rich, tall, tan. . .and. . .and. . .