China going backwards? Economist discusses

The Economist considers whether China is becoming more or less "capitalist". There is a certainly irony about this article written on October 2nd. You can bet that the US and Europe have become less capitalist very quickly as banks become nationalised at an increasing speed.

It is interesting that the reliability of the data is considered such an important element of the story. I have published a number of papers on China are always have this nagging doubt about the quality of the official data I am using.

This is therefore a potentially important book to come out of MIT.

The long march backwards [The Economist]

MOST people, particularly those living outside China, assume that the country’s phenomenal growth and increasing global heft are based on a steady, if not always smooth, transition to capitalism. Thirty years of reforms have freed the economy and it can be only a matter of time until the politics follows.

This gradualist view is wrong, according to an important new book by Yasheng Huang, a professor at Massachusetts Institute of Technology. Original research on China is rare, largely because statistics, though plentiful, are notoriously unreliable. Mr Huang has gone far beyond the superficial data on gross domestic product (GDP) and foreign direct investment that satisfy most researchers. Instead, he has unearthed thousands of long-forgotten pages of memoranda and policy documents issued by bank chairmen, businessmen and state officials. In the process he has discovered two Chinas: one, from not so long ago, vibrant, entrepreneurial and rural; the other, today’s China, urban and controlled by the state.

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True, China’s cities sprouted gleaming skyscrapers, foreign investment exploded and GDP continued to grow. But it was at a huge cost. As the state reversed course, taxing the countryside to finance urban development, growth in average household income and poverty eradication slowed while income differences and social tensions widened. Rural schools and hospitals were closed, with the result that between 2000 and 2005 the number of illiterate adults increased by 30m. According to Mr Huang, the worst weaknesses of China’s state-led capitalism—a reliance on creaking state companies rather than more efficient private ones, a weak financial sector, pollution and rampant corruption—are increasingly distorting the economy.

The role played by Hong-Kong and Tawain should not be underestimated. The official data also show this. Here is the book's view on this:

But what about the growing cohort of Chinese companies starting to strut the world stage? Surely that is evidence of a healthy and expanding private economy. Mr Huang’s evidence shows that, on closer inspection, these firms are either not really Chinese or not really private. Lenovo, a computer group, has succeeded because it was controlled, financed and run not from mainland China but from Hong Kong (a happy legacy of the founder’s family connections there—not something enjoyed by most Chinese businessmen). The subsidiaries of Haier, a white-goods maker, were also put out of reach of mainland bureaucrats early on. Wahaha, a food producer, Galanz, a maker of microwave ovens, and many others all depended on foreign protection and capital to grow and escape state strictures.

Indeed one of the main, and underappreciated, functions of foreign investment in China has been to play venture capitalist to domestic entrepreneurs. As for Huawei, a telecoms group and one of China’s much vaunted “global” companies, its structure and links to the state are so convoluted that the most diligent China-watchers have little idea if it is a private or state firm. They do, however, agree that Huawei’s opacity is a microcosm of China’s distorted economy.

A book worth reading.

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Inefficient operation: the real "China" problem

I have always wondered why China appears to have such poor energy efficiency numbers. The basic thinking was that China's power plants were using old technologies and no environmental regulation so what do you expect.

I never liked this answer. There had to be something else. This following article tells us that it is not technology but the operation of this technology.

This article provides a far better answer.

MIT report debunks China energy myth [MIT news]

A detailed analysis of powerplants in China by MIT researchers debunks the widespread notion that outmoded energy technology or the utter absence of government regulation is to blame for that country's notorious air-pollution problems. The real issue, the study found, involves complicated interactions between new market forces, new commercial pressures and new types of governmental regulation.

China's power sector has been expanding at a rate roughly equivalent to three to four new coal-fired, 500 megawatt plants coming on line every week, said Edward S. Steinfeld, associate professor of political science at MIT.

After detailed survey and field research involving dozens of managers at 85 power plants across 14 Chinese provinces, Steinfeld and his co-authors, Richard Lester (professor, nuclear science and engineering and director of the MIT Industrial Performance Center) and Edward Cunningham (doctoral candidate, political science) found that in fact most of the new plants have been built to very high technical standards, using some of the most modern technologies available. The problem has to do with the way that energy infrastructure is being operated and the types of coals being burned.

New market pressures encourage plant managers to buy the cheapest, lowest quality and most-polluting coal available, while at the same time idle expensive-to-operate smokestack scrubbers or other cleanup technologies. The physical infrastructure is advanced, but the emissions performance ends up decidedly retrograde.

Understanding the realities of China's energy infrastructure and management is crucial, Steinfeld said, for gaining leverage over the whole gamut of global energy-related challenges. China's electric power sector is vast -- second only to America's in size -- and globally unparalleled in terms of the speed of its growth. "To a significant degree, our planet's energy and environmental future is now being written in China," he and his two co-authors wrote in a recent MIT Industrial Performance Center working paper (PDF available). Findings from the research have also recently been published in The China Economic Quarterly and an additional paper is currently under review at Energy Policy.

Steinfeld, who has been working in China since the late 1980s and has been carrying out this research project there since 2005, said that at present the Chinese government lacks reliable data on how the nation's powerplants are built and operated. Officially available data tend to be collected haphazardly and often by local authorities who have a vested interest in the outcomes. The survey work conducted by Steinfeld and his colleagues represents a first-of-its-kind effort by outsiders to collect unbiased, objective data of this sort at a national level.

One of the most surprising findings was that "the kinds of technology currently being adopted in China are not cheap. They're not buying junk, and in some cases the plants are employing state-of-the-art technology."

The findings suggest that emissions levels from Chinese powerplants, he said, "depend almost entirely on the quality of the coal they use. When they're hit by price spikes, they buy low-grade coal." Lower-grade coal, which produces high levels of sulfur emissions, can be obtained locally, whereas the highest-grade anthracite comes mostly from China's northwest and must travel long distances to the plants, adding greatly to its cost. Contrary to what many outsiders believe, the Chinese state has substantially improved its ability to implement and enforce rules on technology standards. It has been slower, however, to develop such abilities for monitoring the day-to-day operations of energy producers.

In some respects, the situation is more amenable to change than many people had assumed, Steinfeld said. With expanding regulatory capacity and increasingly sophisticated efforts to regulate through market-friendly pricing mechanisms, reformers could achieve change relatively quickly, he said. "At least the technology -- the physical infrastructure of China's energy system -- is not an impediment," he said. Indeed, it can ultimately prove a key asset for achieving better environmental outcomes.

Since coal quality is one important leverage point, "some new regulatory efforts probably need to be focused on the mines and coal markets," Steinfeld suggested. "That's the kind of question that this research begins to allow you to address."

The three co-authors of the study are members of the Industrial Performance Center's China Energy Group. The research was supported by Shell, the MIT Energy Initiative, and the MIT Sloan School of Management China Program.

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Sophie's Choice in Mao's Mass Send Down Movement

A fascinating new paper from Yale economist MARK R. ROSENZWEIG and co-authors. One for the "papers to read" pile. History and economics in one paper.

Altruism, Favoritism, and Guilt in the Allocation of Family Resources: Sophie's Choice in Mao's Mass Send Down Movement

Li Hongbin
Tsinghua University

Mark R. Rosenzweig
Yale University - Economic Growth Center

Junsen Zhang
Chinese University of Hong Kong - Department of Economics; Institute for the Study of Labor (IZA)


September 23, 2008

Yale Economics Department Working Paper No. 54

Yale University Economic Growth Center Discussion Paper No. 965

Abstract:
In this paper, we use new survey data on twins born in urban China, among whom many experienced the consequences of the forced mass rustication movement of the Chinese "cultural revolution," to identify the distinct roles of altruism and guilt in affecting behavior within families. Based on a model depicting the choices of the allocation of parental time and transfers to multiple children incorporating favoritism, altruism and guilt, we show the conditions under which guilt and altruism can be separately identified by experimental variation in parental time with children. Based on within-twins estimates of affected cohorts, we find that parents selected children with lower endowments to be sent down; that parents behaved altruistically, providing more gifts to the sibling with lower earnings and schooling; but also exhibited guilt - given the current state variables of the two children, the child experiencing more years of rustication received significantly higher transfers.

Keywords: Guilt, Altruism, China

JEL Classifications: J12, J13, O12
Working Paper Series

China's love of cars - crisis or not?

We all know that as countries get richer then eat more meat and drive more cars. China is no different. In the expectation of the latter production has been ramped up to very high levels. And then came the financial crisis and the beginning of a global recession that could last for years.

As an economist who is pessimistic even by economist standards I suspect things will be bad. Very bad and China will also see its fair share of pain. It has, you could argue, grown too quickly and needs significant growth just to stand still now.

Social unrest is always lurking in the background as the inequalities caused by capitalism begin to play out. China's gradual acceptance of capitalism is what may save it as the state remains all powerful. They may well need to this power over the next couple of years.

But I digress. One manifestation of the possible fallout comes from looking at the automobile industry.

Two recent Bloomberg stories sum this up:

China's First-Half Vehicle Sales Growth Slows to 19% [Bloomberg 10th July]

China's vehicle sales rose 19 percent in the first half, slower than a year earlier, as inflation and natural disasters tempered demand in the world's fastest-growing major vehicle market.

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Still, vehicles are becoming affordable to more people in China because of the country's 10 percent economic growth rate and price cuts triggered by rising competition. The proportion of people owning vehicles in China is also only equal to that seen in the U.S. in 1925 and in the U.K. in 1950.

``Vehicle prices have been falling while prices for everything else in the country have been rising,'' said Yu, who expects full-year vehicle sales to hit 10 million.

Sales of cars and light trucks fell 10 percent in the U.S., the world's largest auto market, in the first half. Japanese vehicle sales, excluding minicars, dropped 0.9 percent.

Then we get:

China's New Vehicle Stockpile Reaches Four-Year High [Bloomberg 18th July]

China's stockpile of unsold new vehicles rose about 50 percent in the six months ended June, hitting a four-year high, as automakers expanded production and sales growth slowed.

The backlog reached 170,000 vehicles from about 110,000 at the end of last year, Cheng Xiaodong, head of vehicle-price monitoring at the National Development and Reform Commission, said by phone today. First-half sales totaled 5.18 million.

How did they not see this coming?

``Automakers were too optimistic when planning their capacity expansion and didn't expect the slowdown,'' said Tang Jun, an analyst at Guangfa Securities Co. in Guangzhou. ``Dealers are hit the most by rising inventory and may have to slash prices further to help with liquidity.''

Yet the investment continues - is this good long term planning or throwing good money after bad? There is no doubt that Chinese demand will continue and capacity expansion now is in a sense a loss leader. The company that becomes the "car of choice" could take all as dealerships and sparepart firms flourish.

GM, the world's largest automaker, plans to invest as much as $5 billion in China over five years through 2012, Kevin Wale, president of its China unit said in December.

Toyota is spending 3.6 billion yuan ($524 million) to more than double the capacity of a factory in Chengdu to 30,000 vehicles, it said on July 5. The work, which also includes moving the plant, will be completed by the first half of 2010.

Volkswagen, the largest overseas carmaker in China, plans to boost its capacity in the country from 1.08 million vehicles a year through efficiency improvements, it said earlier this month. The company took over a former Fiat SpA plant in Nanjing in April.

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Fuel and Chinese exports

The rapid increase in the price of fuel has obvious knock on effects on transport costs. There are two issues here.

1. There will be an addition fuel cost per shipping container so price goes up

or

2. The ship will go slower to conserve fuel but also resulting in higher transport costs in terms of time.

This has important implications for the study of international trade, offshoring, outsourcing and globalisation in general.

A recent China Economic Review article commenting on a Washington Post piece touches on this development:

China’s getting too expensive. Back to America! [China Economic Review]

We’ve heard plenty in the news this year about rising prices hurting export-oriented businesses in places like Guangdong and, more recently, Zhejiang. Clearly some areas of China that were once “workshops” for the world’s cheap goods are pricing themselves out of the market, with the slashing of export rebates, inflation, currency appreciation (though that appears to be slowing viz. the US dollar) and rising labor, material and fuel costs all playing a part. The next step for these areas, local governments hope, is to climb the greasy pole value chain and start producing higher-value goods.

So who’s going to make our cheap furniture and sleeping bags now? Americans?

Not as strange as it sounds. In some cases, according to this interesting article by the Washington Post’s Ariana Eunjung Cha, some low-cost American manufacturers are headed back home. Transportation costs are a big part of it, according to Cha:

With fuel prices at record highs, the cost of sending a standard 40-foot container of goods has gone from $3,000 in 2000 to about $8,000 today, squeezing profit.

So this summer Kazazian, chief executive of Exxel Outdoors, a Los Angeles-based maker of recreational equipment, did something radical: He moved the manufacturing back to Haleyville, Ala.

Soaring energy costs, the falling dollar and inflation are cutting into what U.S. manufacturers call the “China price”– the 40 to 50 percent cost advantage once offered by Chinese producers.

The export model that has powered China and other Asian countries for three decades will be compromised if fuel prices continue to rise, said Stephen Jen, a managing director for Morgan Stanley.

“Globalization has gone a little bit too far. It has overshot,” Jen said. “We’re not saying Asia is going to crumble, but we are saying Asia enjoyed extraordinary conditions in the past. Now the conditions are changing very quickly because of the energy shock, and Asia is coming under pressure.”

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Tony Blair on China

Tony Blair writes an interesting opinion piece in the Washington Post. We now have to hope that America reads it.

We Can Help China Embrace the Future [Washington Post]

On talking to young Chinese Internet entrepreneurs:

These people, men and women, were smart, sharp, forthright, unafraid to express their views about China and its future. Above all, there was a confidence, an optimism, a lack of the cynical, and a presence of the spirit of get up and go, that reminded me greatly of the U.S. at its best and any country on its way forward.

On some economic basics:

The Chinese leadership is understandably preoccupied with internal development. Beijing and Shanghai no more paint for you the complete picture of China than New York and Washington do of the U.S. Understanding the internal challenge is fundamental to understanding China, its politics and its psyche. We in Europe have roughly 5% of our population employed in agriculture. China has almost 60%. Over the coming years it will seek to move hundreds of millions of its people from a rural to an urban economy. Of course India will seek to do the same, and the scale of this transformation will create huge challenges and opportunities in the economy, the environment and politically.

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Globalist: A month on China

The recent issue of "The Globalist" has a number of interesting China articles continuing a month of China related articles.

Also on The Globalist this week:

Coming on Friday
Australia: The Power Behind the Scenes at the Beijing Olympics
How has Australia been involved in the 2008 Olympics?
By Tim Harcourt

Thursday
Chinese Lessons
As compared to the China of a quarter century ago, what has since changed — and what remains the same?
By John Pomfret

Wednesday
China Reinvents the City
What are the long-term effects of hasty urban planning and questionable construction standards in China?
By Thomas Campanella

Tuesday
China Goes Green
How can China’s characteristic speed and innovation be applied to finding sustainable energy solutions?
By Thomas Campanella

Monday
The Chinese Brand of Democracy
Can China produce its own model of democracy separate from Western ideals?
By Mark Leonard