Inflation and interest rates - upward move likely

As China's rapid growth continues inflation is now beginning to rear its head. The solution - to increase interest rates.

What is interesting about this article is the statement from the governor of the central bank saying that China needs to slow investment so that China does not have "too many factories, cutting company profits".

This is remarkable. Econ101 economics would tell that competition leads to a zero profit condition - it firms are making supernormal profits then other firms enter the market. Is the governor suggesting protection for those lucky first movers? One problem is that profits do not always = jobs. If China wants to find jobs for its large population then protecting incumbents is not the way to do it. Moreover, preventing the building of factories will not necessarily slow inflation.

Sure, excessive investment in factories can lead to a serious hangover when the party is over. That is why banks need to have stringent lending policies (which was not the case in the run up to the Asian currency crisis in 1997/1998).

What is true is that inflation is becoming a problem with food prices driving the inflation rate up to 4.4% last month. Pork prices grew a whopping 60%.

What is the solution - the one suggested by Bernanke is to allow the currency to appreciate which would help China become "less export reliant". We have discussed this before - such a move has political ramifications.

See below for selected paragraphs from a Bloomberg article.

China Likely to Raise Rates This Quarter, Maybe Today[Bloomberg]

China is likely to raise interest rates this quarter to cool inflation and investment after the economy grew at the fastest pace in more than 12 years, a survey showed. Some economists expect an increase today.

The benchmark one-year lending rate will rise to at least 6.75 percent from 6.57 percent, according to 20 of 21 economists surveyed by Bloomberg News after the release of second-quarter data. One economist expects a 9 basis point increase. The deposit rate will probably climb to 3.33 percent from 3.06 percent.

Central bank Governor Zhou Xiaochuan wants to cool investment that threatens to leave the nation with too many factories, cutting company profits. The world's fourth-largest economy grew 11.9 percent in the second quarter and inflation rose in June to the highest in almost three years.

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Inflation accelerated to 4.4 percent last month as food costs soared. Meat prices climbed 36 percent from a year earlier and the cost of pork jumped 60 percent because of a pig shortage.

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Record trade surpluses are pumping cash into the economy and have pushed the nation's foreign-currency reserves to a record $1.3 trillion. China exported $112.5 billion more than it imported in the first half, up 84 percent from a year earlier.

Federal Reserve Chairman Ben S. Bernanke said yesterday that faster currency appreciation would help China's economy to move away from being ``too oriented towards exports, not enough toward home markets.''

Water Pollution in China

An excellent source of information and data on province and municipality water pollution including mapping capabilities. Data from 2004-2007.

China Water Pollution Map

Link also added to the sidebar.

Update: Today's PlanetArk have an article linked to my initial post. This article highlights how bad things of got - the Kuznet's curve literautre would state that China will eventually reach a per capita income turning point from which point things begin to get better - there are signs of this happening in China but "tipping point" issues need to be considered here. If the underground water sources are polluted they may remain so indefinitely. Equally, desertification and climate change may mean water problems get worse over time.

This is one race I would not like to take part in.

Guangzhou Mayor Leads Mass Swim in Polluted River

GUANGZHOU - Leaders of the southern Chinese city of Guangzhou led thousands in a "swimathon" across the Pearl River on Sunday to trumpet its recent cleanup -- at a time of mounting water pollution crises across the country.

Guangzhou Mayor Zhang Guangning fired a starter's gun before leading more than 3,500 people in a much hyped swim across the river, China's third longest, whose lower reaches had been seriously polluted by rapid industrialisation.

The swim, an annual event, was abandoned in the 1970s because of the chronic pollution and resurrected only last year.

Years of promoting economic growth at almost any cost have taken their toll of China's environment, though growing rural discontent caused by dirty water and other pollution has pushed Beijing to promote cleaner growth.

A state media website quoted Zhang as saying the aim of the mass swim was to "make the local residents become aware of the importance of pollution control."

A government report released in May said pollution at the mouth of the Pearl River delta was "extremely severe," and that 8.3 billion tonnes of sewage, much of it untreated, was flushed into the province's coastal waters last year, a 60 percent jump from 2001.

Sunday's 800-metre swim was meant to hail the success of recent cleanup initiatives including new sewage treatment plants -- but some swimmers weren't convinced.

"The water really stinks over there," said one participant surnamed Zhao, who rinsed his mouth with a freshwater hose at the finish. "You can see. The water's black," he added.

Ma Jun, a leading environmental campaigner and water pollution expert, said water pollution was worse in other parts of China. "In many other cities, the water quality is much worse ... The Pearl River is one of the cleaner rivers," Ma said.

Several large freshwater lakes including Taihu Lake were recently blanketed with toxic green-blue algae, feeding on effluent discharged from nearby farms, homes and factories. Millions in nearby Wuxi city had tap water cut off as a result.

Underground water reserves in 9 out of every 10 Chinese cities are now polluted or over-exploited, according to the State Environmental Protection Administration.

"No flies on me": How much is a dead fly worth at the local flea market?

As an economist, the pricing of odd events and objects is always of interest. This morning's article on China's attempt to create a market in dead flies in a particularly interesting one.

The district of Xigong is paying 1,000 Yuan or £65 for 2000 dead flies. Some have argued that this is an inefficient use of public funds and that this is a relativlty high price to pay.

The question is how much effort does one have to put in to catch and kill 2000 flies? I expect with some strategically placed fly paper and some rotting meat for bait, this could be acheived with relatively little effort. In fact surely it will not be long before fly farms are being set up with the express aim of breeding flies to be sold for cash at the local "flea market" (someone laugh please).

Would there be a knock on environmental effect? What do flies do that is useful just in case there is another potential "Sparrow-Locust" diaster.

Echoes of Cultural Revolution as China becomes a 'no-fly zone'

It's a bad time for cockroaches, flies, rats and other vermin in China. With the 2008 Olympic Games in Beijing nearing, hygiene has forced its way on to the national agenda and improving China's image for cleanliness has become a national obsession.And collecting dead flies can earn you good money.

A suburb in central China's Henan province has set a bounty on dead flies in an attempt to promote public hygiene. The district of Xigong, which is in the city of Luoyang, paid more than 1,000 yuan (£65) for about 2,000 dead flies on 1 July, the day it launched the scheme with the aim of encouraging cleanliness in residential areas.

And in April, a Beijing restaurateur, Guo Zhanqi, said he would buy flies for two yuan, about 13p, each to help clean up the city for the Olympics. Mr Guo is giving cash to anyone who presents him with the dead insects.

"No flies, new Beijing. No flies, great Olympics." This is Mr Guo's slogan, a clever take on the Beijing Games slogan in Chinese.

"There were always a mass of flies around the entrance to my restaurant, and no fewer inside. It was extremely disgusting," Mr Guo, 60, told the China Daily. "Buying flies is not my ultimate purpose. I want everybody to start killing flies."

The Luoyang payment scheme is being given national coverage because it is the first of its kind in a city of 1.55 million people which is striving to earn the title of "state-level hygienic city".

"My colleagues and I believe it is the best way to push residents to do more for their living environment," a local spokesperson, Hu Guisheng, said.

However, some locals feel public funds are being misused and have questioned the wisdom of paying 0.5 yuan (3p) per insect turned in. The campaign in Luoyang has prompted a lively debate on the internet and one blogger said that although the office clearly was acting with good intentions, the action itself had made the district a laughing stock.

"The key point is the government should encourage residents to clean up the environment so that no flies can live there, instead of spending money on dead flies," the blogger said.

The forthcoming Olympics, which start at 8pm on 8 August 2008 (eight is a lucky number in China), have led to all kinds of ground-breaking initiatives in the capital. There are efforts to stop people spitting, littering and queue-jumping and taxi drivers are being told to learn English. Billboards advertising overtly capitalist pursuits are disappearing from the city.

The anti-pest campaigns are very much in the mould of Chairman Mao Zedong's campaign against the "Four Harms" in the 1950s, which targeted rats, sparrows, flies and mosquitoes. Citizens were given strict instructions to kill them and the campaign became famous because the efforts to control the vermin involved banging pots and pans to scare sparrows into flight and have them eventually drop to earth dead from exhaustion.

Sparrows were eventually rehabilitated because without them, locusts and other farm pests thrived and were wiping out thousands of acres of agricultural produce.

Education as an Export: The Benefits of Overseas Students

Now this years students have graduated more and more are looking to extend their education to gain a postgraduate qualification.

Given the increasing popularity of MSc programmes the bar is being raised and other students may also feel that in order to differentiate themselves from the growing body of undergraduates that a further qualification is required.

[For MSc Economics and MSc Finance programmes scroll down the side bar for a whole series of links and information for prospective MSc students]

The UK has always been a top destination. Overseas students inject £3.74Billion into the UK economy each year. Moreover, our economy also benefits from those highly qualified students that decide to stay and pay taxes in this country.

Today's article from the Independent discusses the gains further. My bold. I tend to agree with the sentiment of this article - in the face of increasing competition from Europe for the provision of English taught courses we do need to look at the cost structure.

We all gain from foreign students

Britain is a magnet for overseas students. They flock to our shores because British universities offer high-quality courses in English, a reasonable level of student support and degrees that carry global cachet. Our share of the overseas student market has fallen but is second only to the USA.

The big question is whether we will continue to attract overseas students, given the competition from countries such as Australia (cheaper) and Germany, which doesn't charge overseas students tuition fees. Today's report by Bahram Bekhradnia from the Higher Education Policy Institute, "The Economic Costs and Benefits of International Students", says we need to think very hard about whether to charge lower fees to overseas students.

That is because students from abroad bring more financial benefit than they take. Bekhradnia calculates that overseas students inject £3.74bn into the economy in tuition fees and spending. That makes them a bigger export industry than, for example, alcoholic drinks, textiles, clothing, publishing and even our world-beating cultural and media industries.

Moreover, this injection into the economy has a multiplier effect: money paid in fees goes largely to fund salaries of university staff, and that money is ploughed back into the economy. Also, students often stay on after graduation to work in Britain, providing a further boost.

Such a significant industry needs nurturing, the report suggests. Can the UK maintain its share of overseas students as other countries begin to use English as the language of instruction and market themselves more aggressively? Bekhradnia clearly believes that British universities might begin to struggle. But they can't be expected to subsidise overseas students from money they receive from the Higher Education Funding Council.

So the answer would be an explicit subsidy from taxation. A government that tried to persuade the public that this was in their interests would be brave indeed. But we hope the new Chancellor of the Exchequer will read the report and ponder its message. Who knows: if the public becomes more economically literate with the introduction of lessons in financial management, the British might be persuaded that it is in their interests to charge foreigners lower fees.

The FULL REPORT should be available here in the near future.


The following posts may be of interest:
Econphd Ranking of "Economics departments"

Ten Reasons Why You Should Study in Britain

RateUKcourses.com?

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

"A History of China" by J.A.G. Roberts

A new "book of the week" after 3 months. No paid reviews done on this site (or at least none have ever been offered).

As a partial break from economics I am currently half way through:

A History of China (Palgrave Essential Histories) by J.A.G. Roberts.

Whilst only around 350 pages long it still manages to capture all the important stages of Chinese history in appropriate detail. The beauty of this book is that it is academic in nature and yet highly readable. It could even be considered a page turner. The extensive but unobtrusive use of endnotes is great for the academically minded.

I am just entering the Ming dynasty on page 112 after the fall of the Mongol empire and the Yuan dynasty.

For (sad) economists there is plenty in there - it is perhaps not surprising to learn that in many cases the fall of a dynasty was preceded by economic disaster. Land reform, military expenditure, trade, monopoly rents and taxation are common themes. Now I bet you can't wait to read it....

Even the water is counterfeit

After hearing so much about IP theft and all round piracy in China it was interesting to read that counterfeit water is everywhere. The writer of this article does a good job setting the scene before launching into a full scale rant.

The bottom line is where there is a profit to be made it will be made. Once water begins to be faked you can bet that much everything else is as well.

H/T Time's China blog.

Now it's Fake Water

This morning, I heard the news that half of Beijing’s bottled water is counterfeit. I was horrified. It seems that illegal factories fill the used plastic bottles from the tap or with perfunctorily filtered water. The bottle tops and tape that they use to seal the bottle look identical to the genuine ones. The bottles aren’t sterilized and the number of mold fungi and e. coli bacteria that have been found in such water can easily make drinkers sick. An industry report quoted by Beijing Times calculates that more than 100 million bottles of such water were sold last year. The profit derived from these illegal sales exceeded 1 billion RMB, or about $12 million.

As a Chinese, I am used to reading about dangerous fakes. But this case really enraged me. This is water that many of us drink every day, after all. And the whole reason people pay extra for bottled water is for the quality—and safety. The Beijing Times did a story a couple of days ago that revealed the illegal business has been going on for five years. One unlicensed water bottler told the newspaper: “I filter the tap water before filling the bottle because I am a moral person and I don’t want to get people sick.”

When I read that I myself felt sick --- with anger. I also asked myself where are the government and regulatory authorities who are supposed to be protecting us. The rampancy of fake water comes down to the inability of the government in China to enforce its own laws. In this case, red tape is usually blamed. The local officials with responsibility for preventing counterfeiting have no legal power to search an illegal bottler’s factory, it is said.

How much longer can Beijingers put up with these kind of mealy-mouthed bureaucratic excuses? Maybe, like everything else in this city, we should look to the Olympics for salvation. After all, if this issue isn’t tackled soon, athletes and visitors around the world might show up for Olympics next year carrying their own water and food.

Pollution KILLS 460,000 a year in China: World Bank

Any country that grows at 10% a year for 20 years and has become the manufacturing base for the rest of the world has to expect an increase in pollution. With demand for cars, energy and consumers goods growing even faster as incomes rise the problem of pollution is not going to go away.

The World Bank today released a report (currently off line!) that gives some numbers to the amount of deaths that pollution in China has caused.

This report raises a number of questions.

1. Are these deaths the cost that has to be paid by China for the reduction in poverty and by the West for the cheap consumer goods that we enjoy?

2. Do we agree with the World Bank putting a value of 1 million yuan on the price of a life? This is considerably lower than any developed country VSL figure. An American life is thought to be worth around $6million. Are these numbers compatible? (US$1=7.604 Yuan).

3. Will the announcement of these figures lead to social unrest in China? We know that environmental protests are growing and are being reported. Likewise arrests of environmental protesters have increased.

4. Why is the report at the link below unavailable?

Pollution Kills 460,000 Chinese a Year - World Bank

BEIJING - About 460,000 Chinese die prematurely each year from breathing polluted air and drinking dirty water, according to a World Bank study.

The Financial Times reported on Tuesday that the Chinese government, the bank's partner in the research project, had asked the lender not to publish the estimates for fear they could trigger social unrest.

The conference version of the study, available at the bank's Web site, says some estimates of the physical and economic cost of pollution have been omitted because of uncertainties about calculation methods and their application.

However, the report goes on to estimate the health costs from premature deaths associated with outdoor air pollution at 394 billion yuan (US$51.8 billion). With each life valued at 1 million yuan, that works out at a death toll of 394,000.

The study puts the cost of deaths from diarrhoea and cancer caused by drinking polluted water at 66 billion yuan, pointing to 66,000 premature deaths a year.

China-watchers said it was standard practice in research projects conducted with the government for both sides to have a veto over the conclusions.

The World Bank said the final report would be out soon.

"Consistent with the World Bank's approach to this type of joint research project, the findings of the report are being discussed with the government. The conference version of the report did not include some of the issues that are still under discussion," the bank's Beijing office said in a statement.

An economist in Beijing said the study's estimate of premature deaths from airborne pollution, although shocking, was broadly in line with earlier published World Bank research and with recent findings by Chinese academics.

The World Bank is also concerned by indoor air pollution, principally breathing in fumes from coal-burning stoves and cooking oil. Its experts estimate that as many as 300,000 Chinese a year die prematurely in this way.

China, home to some of the world's 20 most polluted cities, is redoubling its efforts to clean up the environment.

The authorities are closing down dirty industrial plants, raising car fuel-efficiency standards and tweaking taxes to discourage energy-intensive production. China on Sunday also introduced higher drinking water standards.

The conference edition "Cost of Pollution in China" is at:

http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIF ICEXT/EXTEAPREGTOPENVIRONMENT/0,,contentMDK:21252897~pagePK:340 0 4173~piPK:34003707~theSitePK:502886,00.html