How China views the world?

One has to laugh at the recent Economist front cover:



The people over at Strange Maps discuss the finer details of the map. For example, they write:

In the ocean immediately beyond the city are a few islands of particular interest to China:

* Japan: the old rival, whose rapid modernisation preceded China’s, but now eclipsed and reduced to a few harmless islands.

* Taiwan: similarly superseded by China’s massive economic progress, but still relevant as the rival claimant to be China’s ‘legitimate’ government. Even more repulsive to mainland China is a competing strand of current Taiwanese politics, striving for ‘independence’ and thus eschewing the ‘One China’ policy still officially espoused by both the communist mainland and nationalist Taiwan.

* Hong Kong: the former British crown colony that was handed back to China in 1997 and which has been allowed a degree of autonomy unthinkable elsewhere in China (e.g. Tibet) under an agreement often referred to as ‘One Country, Two Systems’, whereby Hong Kong was allowed to retain its capitalist system and its civil liberties, including inchoate democratic institutions.

* Spratly Islands: a sprawling archipelago of over 600 islets, atols and reefs in the South China Sea, between Vietnam and the Philippines, with barely 5 square kilometers of dry land between them. Because of their strategic location, the Spratlys, or parts of them, are claimed and partly occupied by China, Taiwan, Vietnam, the Philippines and Malaysia - and as such are a flashpoint waiting to happen.

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"Deglobalisation" and world trade flows

I dislike the word "deglobalisation". More importantly I think it is an inappropriate description of what is happening to world trade. Yes, trade levels are falling but this does not mean the world is less "globalised".

Clearly, it depends on one definition of globalisation but unless trade barriers start rising again there is no problem. However, IF we do see increased protectionism then the word could be considered appropriate.

Plots of the extent of globalisation over time are by no means linear. It can be argued that the world was more globalisation over 100 years ago.

The FT discuss world trade levels which, given China's increasingly important role in world trade flows, should be of interest to readers of this blog.

If we are to survive this current slump in a recession and not a depression then it is essential that free trade remains free.

World trade [FT]

Deglobalisation: ugly word, scary concept and now painful reality. The World Trade Organisation estimates global trade will drop by 9 per cent this year, its biggest decline since the second world war. Given that trade was growing at a 6 per cent clip only 15 months ago, the fall is so abrupt that some now worry about the return of Smoot-Hawley, the US tariffs law that made the 1930s depression Great.

That is alarmist. Much of the recent reversal in the global movement of capital, goods and jobs has been directly due to the financial crisis. It has been the collapse in demand, not protectionism, that has savaged trade flows. A lack of trade credit has also hurt, given that 90 per cent of trade involves some kind of credit, insurance or guarantee.

So, yes, since October, China has banned Belgian chocolate, India forbidden Chinese toys and the US energy secretary said he would like to see tariffs on Chinese goods unless Beijing reduces greenhouse emissions – the “green face” of protectionism. There are dozens more such cases. Yet the effects of such incipient protectionism have been small, so far.

Will it stay that way? Reasons to be hopeful include the WTO, and the treaties that bind its members. Companies, even those producing for domestic markets, are more dependent on imported inputs than ever before. Exporters also have more political heft. This changes the politics of protectionism. The “Buy America” programme was watered down. And, in Brazil, private sector outrage that followed an attempt to impose import controls led to their removal. That is encouraging.

Even so, protectionism could rise as the recession worsens, putting governments under pressure to protect jobs at home. Indeed, anti-subsidy duties, anti-dumping rules, imports banned in the name of health, safety or the environment – all these are WTO-legal. Eight decades ago, many sensible people opposed the Smoot-Hawley bill; 1,028 economists petitioned against it, as did Henry Ford. Yet still the “asinine” bill passed. Free traders everywhere cannot drop their guard.

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China blocks Coke on competition grounds

China is really getting into this "western economics" game. There is something that does not quite sit right when we read that China is blocking a Coke acquisition on competition grounds.

It is really hard to see this argument especially given China's overseas acquisition ambitions. Can the Chinese government not see what a damaging move this is after months of "anti-protectionist" speeches around the world. This is a naive move I am afraid.

China blocks Coca-Cola bid for Huiyuan [FT]

China rejected a $2.4bn Coca-Cola deal that would have been the country’s biggest foreign takeover, stoking fears of protectionism and warnings the decision could scupper Beijing’s push to invest in overseas mining companies.

China’s ministry of commerce ruled against Coke’s proposed acquisition of Huiyuan Juice, the country’s leading juice maker, on competition grounds, saying the move would hurt smaller domestic companies and limit consumer choice.

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Bankers and lawyers denounced the move as a protectionist measure that would also have negative implications for Chinese investment abroad, notably Chinalco’s proposed $19.5bn tie-up with Rio Tinto, the Anglo-Australian miner.

Barnaby Joyce, a maverick Australian politician leading a fight to block the Chinalco investment on nationalist grounds, said China’s “welcome” rejection gave him “ammunition to articulate my beliefs”.

It will be interesting to see how this plays out in the courts and in the newspapers.

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UK University fees to rise

This blog was originally created to help Chinese students choose which UK University to study at given the relative lack of good information. The right hand column of this blog if you scroll down lists different "economics" courses on offer and the "good" Universities that provide them.

There are a number of posts on this topic and links to league tables for Economics departments also in the right hand column.

For all this, it appears that studying in the UK is about to get more expensive. As an academic in a leading UK institution this is good news for the faculty but not so good new for the student. However, if the UK is to compete with the US to offer the best education in the world then these increased prices are essential.

Universities push for higher fees [BBC]

Many universities in England and Wales want a sharp increase in tuition fees, a survey by BBC News has concluded.

Two thirds of vice-chancellors, speaking anonymously, said they needed to raise fees, suggesting levels of between £4,000 and £20,000 per year.

More than half of university heads want students to pay at least £5,000 per year or for there to be no upper limit.

England's Higher Education Minister David Lammy said there was an "important debate to be had".

The National Union of Students has warned of debts of £32,000 for students if fees rise to £7,000 per year.

Higher debt

The controversy over tuition fees is set to be re-opened, five years after it sparked one of the biggest backbench rebellions faced by the Labour government.

University fees must be reviewed this year by the government - and there are already arguments about whether the present £3,500 cap on fees should be lifted.

Students considering university are concerned by rising fees

Any changes will affect about a million students on undergraduate courses.

Universities UK has set out the consequences of fee levels of £5,000 and £7,000 - arguing that if fees reached £7,000 a market of differently priced courses would emerge.

This has angered the National Union of Students, which wants to entirely replace the fee system with repayments linked to later earnings.

"In the context of the current recession, it is extremely arrogant for university vice chancellors to be fantasising about charging their students even higher fees and plunging them into over £32,000 of debt," said NUS president Wes Streeting.

Students are now planning a lobby of the House of Commons on Wednesday in a protest against increasing fees.

Sally Hunt, leader of the UCU lecturers' union, accused vice chancellors of "ignoring the views of the general public as they try to secure more cash by any means possible".

Labour backbenchers are also mobilising on the issue - with MP Paul Farrelly, a former fee rebel, putting down a motion in the House of Commons warning against any plans to hike fees.

Mr Farrelly said the government would ignore "at its peril" the risks of pushing through another fee increase.

Recession and resistance

The BBC survey, gathering the views of 53 university vice-chancellors, showed a wide range of expectations of the scale of any increase - from £4,000 to £20,000 per year.

There is an important debate to be had now, which is about how we maintain the world class status of our higher education sector

There were also some expectations of differences between universities and courses - with more than a quarter saying they would not charge the full amount.

About one in 10 wanted the cap scrapped altogether so universities could charge whatever they wanted.

There was widespread support among vice-chancellors for the principle of fees - three out of four believing they had been a successful policy and nine out of 10 saying they should not be scrapped.

Two thirds believed fees had not deterred applications from students from poorer families.

What happened to the Chinese lost billions?

Interesting article discussing the Chinese lost billions. I admit to being in favour of Chinese diversification given the over reliance on US paper which offered historically low returns.

Given the worries over the safety of US owned paper and the poor returns this was probably the correct move but the wrong investments were chosen. I am not sure China can be blamed too much for calling this wrong. Very few called in right after all.

What China should not have been doing was making huge upside bets on global equities. Whoever sanctioned this move was clearly caught up in the belief that markets only go up and has cost China dearly. Heads must have (quite literally) been rolling over at the State Administration of Foreign Exchange.

China lost billions in diversification drive [FT]

China has lost tens of billions of dollars of its foreign exchange reserves through a poorly timed diversification into global equities just before world markets collapsed last year.

The State Administration of Foreign Exchange, the opaque manager of nearly $2,000bn (€1,547bn, £1,429bn) of reserves, started making huge bets on global stocks early in 2007 and continued this strategy at least until the collapse of the US mortgage finance providers Freddie Mac and Fannie Mae in July 2008, according to analysts and people familiar with Safe’s operations.

By that point Safe had moved well over 15 per cent of the country’s $1,800bn reserves into riskier assets, including equities and corporate bonds, according to people familiar with its strategy.

Safe never discloses its holdings except to the top Chinese leadership so it is impossible to know exactly how much it has lost from diversifying before markets crashed.

But judging from the subsequent fall in global stock prices and a conservative estimate that Safe held about $160bn worth of overseas equities, Chinese losses on those investments would exceed $80bn, or more than 50 per cent, according to Brad Setser, an economist at the Council on Foreign Relations in New York.

Total holdings of US equities by all Chinese entities reached $100bn by the end of June last year, more than triple the total of Chinese holdings in June 2007, according to an annual survey published by the US Treasury.

‘It appears Safe began diversifying into equities early in 2007 and, rather than being deterred by the subprime crisis, it continued to buy’
Brad Setser, economist, Council on Foreign Relations

In mid-2006, Chinese holdings of US equities totalled just $4bn. Chinese investors are mostly barred from investing abroad and Safe is the only entity with the resources and the authority to make such large-scale offshore portfolio investments.

“Safe has built up one of the largest US equity portfolios of any foreign government entity investing abroad, including the major sovereign wealth funds,” Mr Setser said.

“It appears Safe began diversifying into equities early in 2007 and, rather than being deterred by the subprime crisis, it continued to buy.”

China’s leadership has not commented on the equity losses but Wen Jiabao, prime minister, expressed concern about the value of China’s large holdings of US assets on Friday and warned the US to take measures to guarantee its “good credit”.

Safe uses a Hong Kong subsidiary when investing in offshore equities in the US and other countries, including the UK, where this subsidiary took small stakes last year in dozens of UK companies including Rio Tinto, Royal Dutch Shell, BP, Barclays, Tesco and RBS.

As part of its diversification in early 2008, Safe also gave some money to private equity firms such as TPG and to hedge funds on a managed account basis.

This gave the Chinese government ultimate approval for how its money was invested, according to people who have worked with Safe.

The large shift into global equities appears to have started at around the time that Beijing approved the establishment of China Investment Corporation, the country’s official sovereign wealth fund, which has been widely criticised in China for incurring paper losses of around $4bn on high-profile investments in Morgan Stanley and Blackstone.

The bulk of Safe’s holdings remain in US Treasury bills and much of the loss on its riskier assets will be offset by gains on long-term bills, according to Mr Setser.

“They are a lot more cautious and risk-averse now and have basically returned to buying government bonds,” said someone who works with Safe.

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Law, Finance and Economic Growth in China

"Law, Finance and Economic Growth in China" is the title of the special issue of World Development. Some potentially interesting papers covering this broad topic although I am more skeptical on the contribution of others.

World Development Special Issue

Law, Finance, and Economic Growth in China: An Introduction
Pages 753-762
Yang Yao, Linda Yueh

The Effectiveness of Law, Financial Development, and Economic Growth in an Economy of Financial Repression: Evidence from China
Pages 763-777
Susan Feng Lu, Yang Yao

China’s Entrepreneurs
Pages 778-786
Linda Yueh

Bank Financing in China’s Private Sector: The Payoffs of Political Capital
Pages 787-799
Wubiao Zhou

Bank Size and Small- and Medium-sized Enterprise (SME) Lending: Evidence from China
Pages 800-811
Yan Shen, Minggao Shen, Zhong Xu, Ying Bai

Which Firms went Public in China? A Study of Financial Market Regulation
Pages 812-824
Julan Du, Chenggang Xu

International Listing as a Means to Mobilize the Benefits of Financial Globalization: Micro-level Evidence from China
Pages 825-838
Damian Tobin, Laixiang Sun

Spillover Effects Among the Greater China Stock Markets
Pages 839-851
Anders C. Johansson, Christer Ljungwall

Institutions and Foreign Direct Investment: China versus the Rest of the World
Pages 852-865
Joseph P.H. Fan, Randall Morck, Lixin Colin Xu, Bernard Yeung

What Determines Innovation Activity in Chinese State-owned Enterprises? The Role of Foreign Direct Investment
Pages 866-873
Sourafel Girma, Yundan Gong, Holger Görg

Can China’s Growth be Sustained? A Productivity Perspective
Pages 874-888
Jinghai Zheng, Arne Bigsten, Angang Hu

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China's assets in the US at risk?

Oh the irony. China is worried about the safety of its assets in the US. The US has given some assurances.

How did it come to this?

This is a very well written article that provides some sobering facts and figures. It is always worth remembering that China has a bigger population than the US and the EU put together.

The conclusion from this article:

1. China's currency will NOT be appreciating against the dollar.
2. China cannot sell its large dollar holdings for 2 reasons (a) there is nothing else to buy (2) selling would drive down the price and cause the problem it is currently trying to avoid.

It is almost as if the US and China have each other in some sort of death grip. One wrong move by either could kill them both. Who will blink first......

Wen puts US honor on the debt line [Asia Times]

HONG KONG - Chinese Premier Wen Jiabao, faced with growing concern that United States efforts to stem the financial crisis will hit the value of China's vast holdings of US debt, used the world's press on Friday to demand that the US honor its promises.

Wen told a press conference after the conclusion of a two-week meeting of the country's legislators that he was "a little bit worried" about the safety of Chinese assets in the US, and called on the US "to maintain its good credit, to honor its promises and to guarantee the safety of China's assets." He also reiterated that other countries had no right to push China into appreciating its currency, the yuan.

Various efforts by the US to resolve the country's financial crisis by selling ever more debt to pump money into the financial system are raising concern that this will drive up inflation and pull down the value of the US dollar, which would cut the value of debt held by China, the largest creditor of the US.

"We are very concerned about the economic developments in the US economy," Wen said. "The US administration of President Barack Obama has taken a series of measures to counter the financial crisis. We look forward to the effectiveness of those measures."

Wen called on the US government to ensure that the value of Chinese assets in the US is maintained amid the crisis.

"We have lent a huge amount of money to the United States and of course we're concerned about the security of our assets and, to be honest, I am a little bit worried," Wen said in Beijing after conclusion of the second session of the 11th National People's Congress (NPC). "That's why here I would like to urge the US to keep its commitment and promise to ensure the safety of Chinese assets."

About US$1 trillion of China's foreign exchange reserves, which increased 27% last year to $1.95 trillion, is invested in US government bonds and other securities. China held $696.2 billion in US government bonds as of December, up from $681.9 billion a month earlier, according to the US Treasury international capital flow report released on February 18.

China has accelerated its purchases of Treasury debt since August 2008, when holdings grew by $23.7 billion month-on-month to US$541.4 billion. By September, it had holdings of Treasury debt worth $585 billion, more than Japan, previously the top holder of US Treasuries. In August 2008, Japan cut its holdings to $573 billion from $586 billion.

As the global financial crisis sends asset values plunging, mainland leaders are under growing pressure at home to diversify the country's foreign exchange reserves.

In December at the fifth Sino-US Strategic Economic Dialogue in Beijing, Vice Premier Wang Qishan urged the US to adopt every measure necessary to stabilize its economy and ensure the safety of China's assets and investments in the United States.

Pauline Loong, senior vice president in charge of China policy and risk research at CIMB-GK Securities (HK) Ltd, said she did not think China would dump its dollar holdings .

"I cannot see Beijing dumping its dollar holdings," she said. "If the market thought there was anything to the talk, there would be a scramble to dump. The result would be exactly what Beijing would not want to see: a massive fall in the value of its dollar holdings. Also, Beijing has few alternatives. What is it going to switch into? There are few markets that are as deep and liquid as the dollar - and to park $2 trillion in exchange reserves, you can't be dabbling about.

"The fact that Premier Wen talks about being worried about the value of the country's dollar holdings is a good sign. If he is going to dump the dollar, he is not going to talk about it," she said.

Even so, a two-day gain in Treasuries juddered to a hold on Friday, with the yield on the benchmark 10-year note rising six basis points to 2.91% as the price of the 2.75% security due in February 2019 fell $4.69 per $1,000 face amount, to 98 19/32 in early London trade, according to Bloomberg.

Wen reiterated China's principle of guaranteeing the "safety, liquidity and good value" of its foreign exchange reserves and diversifying the investment of the reserves.

"On the foreign reserves issue, the first consideration is our national interest ... But we also have to consider the stability of the overall international financial system, as the two factors are interlinked," Wen said. "Currently, our reserves are generally safe."

Wen also ruled out any further strengthening of the Chinese currency in the intermediate future. He said no country had the right to press for either the devaluation or appreciation of the yuan. A stronger yuan would drive up the price of exports to the US while making it cheaper for US goods to be imported to China.

The yuan "has appreciated since the European and Asian currencies have dropped in recent year, in addition to the yuan's 21% appreciation against the dollar since July 2007", he said.

Loong, however, said there was a risk of incorrectly interpreting such comments as indicating policy was set in stone.

Governments everywhere, "not just in China, are devising strategies and coming up with policies on the run. If economic data in the coming months surprise on the upside or downside, then Beijing will need to revise policy," she said.

China, whose currency is not at present fully convertible into other currencies, is moving to make it more fully used in international trade. Wen said that a plan for the settlement of trade in yuan had been formulated and would be carried out as quickly as possible once it was approved by the State Council, or cabinet.

A pilot project involving yuan-denominated settlement of trade deals would start from Hong Kong, Guo Qingping, assistant governor of the People's Bank of China, or the central bank, said on Wednesday in Beijing.

Referring to China's ability to survive in the global downturn, Wen said the country was fully prepared for even worse conditions and had long-term preparations "with plenty of ammunition" to cope.

"We are ready to roll out new stimulus policies at any time," Wen said, without giving details. China last November announced a 4 trillion yuan (US$585 billion) stimulus package to help boost the domestic economy as exports slumped.

Loong said the Chinese government would do whatever it took to support economic growth, but timing remained a question.

"The 4 trillion yuan fiscal spending needs time to kick in and work its way through to the economy. Beijing, we believe, will not fire until it can see the white of the enemy's eyes. Why waste bullets?" she said.

"Any announcement of new stimulus money in the coming weeks as the market awaits news of the first quarter of 2009 gross domestic product [GDP] numbers is both good and bad news - good because it gives the government breathing space to tackle the basic problems of the economy; bad because the government clearly sees a need to prevent a seriously hard landing," Loong said.

Details of the package, including how much is actually new spending, are not yet clear. Wen conceded that some projects in the stimulus package, such as roads and railways, were included in the country's 11th five-year plan. Global stock markets declined sharply at the start of the NPC meeting when Wen, contrary to expectations, declined to announce any new stimulus funding.

China's stimulus package plan was not fully understood by the world, he said. "Rumors and misunderstanding set the world stock market on a roller coaster ride," he said.

Wen emphasized that although China would have difficulty in achieving its goal of 8% economic growth this year, it would be possible with "considerable efforts", given the advantages of a huge domestic market, a large amount of labor and a sound and stable financial sector.

"With a 1.3 billion population ... China has a bigger market than those of the Europe and the United States," Wen said.

Even so, confidence is what China needs most to carry out its all-around economic stimulus package, he said.

"We have proposed a stimulus package only less than half a year after the financial crisis began. To implement the plan, I still believe confidence is still the first and foremost thing," Wen said.