"Is the Chinese growth miracle built to last?"

Eswar Prasad writes on whether the Chinese growth miracle is built to last. I suspect not. What is interesting is the timing of this article.

Note that the paper was received by China Economic Review in December 2007. That is over 13 months ago and the economic landscape is now very different.

I think this paper misses a large part of the story but nonetheless it contains a large number of up to date facts and figures which are useful to the layman.

The recent collapse in exports and the loss of jobs in China is not a result of structural problems in China but more related to the global fall in demand. This issue is not given sufficient attention.

Is the Chinese growth miracle built to last?

Eswar S. PRASAD

Tolani Senior Professor of Trade Policy, Cornell University, United States

Received 13 December 2007;
revised 26 May 2008;
accepted 28 May 2008.
Available online 10 June 2008.

Abstract

Is the Chinese growth miracle – a remarkably high growth rate sustained for over two decades – likely to persist or are the seeds of its eventual demise contained in the policies that have boosted growth? For all its presumed flaws, the particular approach to macroeconomic and structural policies that has been adopted by the Chinese government has helped to deliver high productivity and output growth, along with a reasonable degree of macroeconomic stability. There comes a point, however, when the policy distortions needed to maintain this approach could generate imbalances, impose potentially large welfare costs, and themselves become a source of instability.

The traditional risks faced by emerging market economies, especially those related to having an open capital account, do not loom large in the case of China. In the process of securing protection against external risks, however, Chinese policymakers may have increased the risks of internal instability. There are a number of factors that could trigger unfavorable economic dynamics that, even if they don't rise to the level of a crisis, could have serious adverse repercussions on growth and welfare. The flexibility and potency of macroeconomic tools to deal with such negative shocks is constrained by the panoply of policies that has supported growth so far.

Keywords: Exchange rate flexibility; Capital account liberalization; Growth model; Macroeconomic policies; Financial sector reforms

JEL classification codes: E2; E5; E6; F3; O1#


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Little Korea exits big China

The wave of FDI and skilled workers from overseas and beginning to exit China in their thousands as companies around the world retreat to lick their wounds from the current recession.

This FT article gives a snapshot of how events are playing out.

It is amusing that the Korean press officer could not comment on the exudus of Koreans from China as they had also been sent home.

Downturn drives expat exodus from Shanghai [FT]

Until recently, half the 100,000 Koreans who had made Shanghai their home lived clustered together on the outskirts of the city in “Little Korea”, a neighbourhood where the street signs are in Korean and the shops are full of LG products and kimchi food.

But with the economic crisis hitting the South Korean economy and currency hard, Little Korea is being rapidly vacated.

Korean companies are shipping workers home, cutting off school fees and repatriating wives and children without their menfolk to cut costs. They are the first large wave of expatriates to have begun leaving China’s financial capital as a result of the global economic crisis but their departure raises the prospect of a broader exodus of foreigners who may take investment, skills and job creation opportunities with them.

The press officer of the Korean consulate in Shanghai could not answer questions about the exodus of her countrymen – because her post had just been abolished and she was being sent back to Korea.

Kim Heewon, president of Seoul Plaza, Little Korea’s central shopping complex, estimates that 20 per cent of the Korean population has returned home, many of them in the past few weeks.

“Almost no one comes in any more,” says a clerk in Seoul Plaza’s golf boutique. Throughout Ms Kim’s 4,000-squ-m department store, Korean-speaking staff loiter next to Korean-branded toys, clothing and furniture, with no customers in sight.

Japanese relocation companies, meanwhile, say there has been a marked rise in Japanese families returning home from Shanghai compared with last year and they expect the pace to pick up further during the traditional peak relocation months of March and April.

Each of the Japanese housewives minding toddlers at the vast Mandarin City housing complex, where an estimated 70 per cent of residents are Korean or Japanese, say they know at least one family that has been sent home while the breadwinner remains in China.

The Japanese consulate estimates there were 48,000 nationals in Shanghai 18 months ago, but says it has no figures for the number that might have left since.

The pain has not been limited to Shanghai. A parent with children enrolled in an expensive Beijing international school says most of her daughters’ Korean classmates have left the school almost overnight.

A labour activist in the northern province of Shandong, where Korean investment has totalled $23.4bn (€18.4bn, £16.2bn) since 1988 and has accounted for 40 per cent of total foreign inflows, says the owner of a Korean-invested furniture factory left before the Chinese lunar new year in January and it has yet to reopen.

Local authorities that previously published regular data on absconding factory owners halted such reporting after thousands were left jobless when the entire Korean management of Yantai Shigang Fibre vanished last year.

“I would guess that even more have been closing since then given the worsening macroeconomic environment,” says Yuan Xiaoli, a professor at Qingdao University of Science and Technology.

Back in Little Korea, Ms Kim says the flow of Koreans is not one way. “Workers are going home, but entrepreneurs are coming here from Korea,” she says. “Our Korean people think [since] China is bigger than Korea, there must be more opportunities here than in Korea. There is no dream in Korea, but our Korean people think there is still a dream in China.”

Ms Kim is putting her money where her mouth is. She is planning to open a large golf goods store in Seoul Plaza early next month.

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Who killed the economy? "The Gaussian copula function"

Lets get to the bottom of the current financial crisis. Enter the "Gaussian copula function". There are now numerous postgraduate courses in "Mathematical Finance" where you can study such delights and then go off and make lots of money.

So what is the story? Here is it over 4 pages. I provide just the introduction.

Recipe for Disaster: The Formula That Killed Wall Street [Wired]

A year ago, it was hardly unthinkable that a math wizard like David X. Li might someday earn a Nobel Prize. After all, financial economists—even Wall Street quants—have received the Nobel in economics before, and Li's work on measuring risk has had more impact, more quickly, than previous Nobel Prize-winning contributions to the field. Today, though, as dazed bankers, politicians, regulators, and investors survey the wreckage of the biggest financial meltdown since the Great Depression, Li is probably thankful he still has a job in finance at all. Not that his achievement should be dismissed. He took a notoriously tough nut—determining correlation, or how seemingly disparate events are related—and cracked it wide open with a simple and elegant mathematical formula, one that would become ubiquitous in finance worldwide.

For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.

Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.

David X. Li, it's safe to say, won't be getting that Nobel anytime soon. One result of the collapse has been the end of financial economics as something to be celebrated rather than feared. And Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.

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US states should do more business with China

Here is a link to an article written by Tom Watkins on "Doing Business with China".

The article talks about Michigan but the same arguments could apply to any US state or EU country. Tom's arguments are correct and if Michigan was the first to act and to show that Michigan is "open for business" the benefits can only be positive.

Article HERE.

Any article that features Chinaeconomicsblog.com is sure to get highlighted on this blog whatever the context. It just so happens that I agree entirely with Tom's view on US-China relations on the micro and macro scale.

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Is China still a lot poorer than we thought?

China is a country of contradictions. All the press seem to concentrate on is the economic threat from China and the rise of the Chinese middle class.

I believe that while China has travelled a great distance in a very short space of time, millions of Chinese have not enjoyed the same journey. Yes, Chinese growth has probably resulted in the largest and quickest reduction in absolute poverty in history but let us now forget those that have been left behind.

This new World Bank Policy paper sheds some light on this issue.


"China is Poorer Than We Thought, but no Less Successful in the Fight Against Poverty"

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World Bank Policy Research Working Paper No. 4621

SHAOHUA CHEN, World Bank
Email: SCHEN@WORLDBANK.ORG
MARTIN RAVALLION, World Bank - Development Research Group (DECRG)
Email: mravallion@worldbank.org

In 2005, China participated for the first time in the International Comparison Program (ICP), which collects primary data across countries on the prices for an internationally comparable list of goods and services. This paper examines the implications of the new Purchasing Power Parity (PPP) rate (derived by the ICP) for China's poverty rate (by international standards) and how it has changed over time. We provide estimates with and without adjustment for a likely sampling bias in the ICP data. Using an international poverty line of USD 1.25 at 2005 PPP, we find a substantially higher poverty rate for China than past estimates, with about 15% of the population living in consumption poverty, implying about 130 million more poor by this standard. The income poverty rate in 2005 is 10%, implying about 65 million more people living in poverty. However, the new ICP data suggest an even larger reduction in the number of poor since 1981.

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"New Estimation of China's Exchange Rate Regime"

Frankel is an academic economist who has appeared throughout my research for many years. His writing is accessible and of high quality.

In this blog we often talk about China's exchange rate. Is it undervalued? What are the implications?

China's and indeed and oft cited academic defence is that China is no longer pegged to the dollar and that is has appreciated (it has).

This paper adds a new insight into the RMB-Dollar debate with potentially serious political implications. I suspect non-economists may find this paper tough going.

The same NBER cost problem persists. I am sure a kind academic somewhere would be willing to help if emailed.


"New Estimation of China's Exchange Rate Regime"

NBER Working Paper No. w14700

JEFFREY A. FRANKEL, Harvard University - John F. Kennedy School of Government, National Bureau of Economic Research (NBER)
Email: jeffrey_frankel@harvard.edu

The paper updates the answer to the question: what precisely is the exchange rate regime that China has put into place since 2005, when it announced a move away from the dollar peg? Is it a basket anchor with the possibility of cumulatable daily appreciations, as was announced at the time? We apply to this question a new approach to estimating countries' de facto exchange rate regimes, a synthesis of two techniques. One is a technique that has been used in the past to estimate implicit de facto currency weights when the hypothesis is a basket peg with little flexibility. The second is a technique used to estimate the de facto degree of exchange rate flexibility when the hypothesis is an anchor to the dollar or some other single major currency. Since the RMB and many other currencies today purportedly follow variants of Band-Basket-Crawl, it is important to have available a technique that can cover both dimensions, inferring weights and inferring flexibility. The synthesis adds a variable representing exchange market pressure to the currency basket equation, whereby the degree of flexibility is estimated at the same time as the currency weights. This approach reveals that by mid-2007, the RMB basket had switched a substantial part of the dollar's weight onto the euro. The implication is that the appreciation of the RMB against the dollar during this period was due to the appreciation of the euro against the dollar, not to any upward trend in the RMB relative to its basket.

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"China's Growing Role in World Trade"

A paper that I need to read. Apologies to those who cannot get free access to NBER papers. It is a shame that the NBER feel the need to charge instead of spreading the word.

It would be interesting to know NBER's yearly download revenues.

"Introduction to 'China's Growing Role in World Trade'"

NBER Working Paper No. w14716

ROBERT C. FEENSTRA, University of California, Davis - Department of Economics, National Bureau of Economic Research (NBER)
Email: rcfeenstra@ucdavis.edu
SHANG-JIN WEI, Columbia Business School, National Bureau of Economic Research (NBER), Centre for Economic Policy Research (CEPR), International Monetary Fund (IMF)
Email: shangjin.wei@columbia.edu

Over the last three decades, the value of Chinese trade has approximately doubled every four years. This rapid growth has transformed the country from a negligible player in world trade to the world's second largest exporter, as well as a substantial importer of raw materials, intermediate inputs, and other goods. This paper provides an overview of the microstructure of Chinese trade, its macroeconomic implications, trade disputes with other WTO member countries, and the role of foreign firms.

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