It's Not the Economy, Stupid

Again I know it's being indulgent, but I can't resist it. Fons Tuinstra in Shanghai, with an advance posting of his WTO ChinaBiz column, being his very own ironic self. I agree, ridicule is effective. (incidentally, one argument no-one seems to be making, does occur to me. When Argentina pegged to the dollar, no-one complained, at least no-one on Wall Street. It may have been a good or a bad decision - I think it was a bad decision - but no-one cried 'foul'. Why was it thought a good thing for Argentina to peg: to create an infrastructure with financial stability. And why do some think it is convenient that China continue, for the time being, with the peg.........

Shanghai – China seems to be a convenient subject during the campaigns for American presidential elections, and at least two days afterwards. Especially in the upcoming campaign, since there are so many real issues politicians want to avoid – Iraq, taxation - China has become an issue very early in the struggle.

Unfortunately this time a real non-issue has the honor of becoming the epicenter of public attention in the US: the question whether China treats the world unfairly by pegging its renminbi to the US dollar. Even a Wall Street Journal commentator – not really a medium for China fellow travelers – sighted yesterday that since it is politics, arguments do not make a difference anymore. China has already sent US Treasury Secretary John Snow home, polite but empty-handed. Snow will have another go at this weekend’s G7 meeting, but that will not make much of a difference.
It is comparable to the Japan discussion the US in the 1980s when US manufacturers campaigned against Japanese cars. Now half of the Americans drive a Japanese car.


The US manufacturers, followed by lawmakers and the US administration accuse China of stealing American jobs in an unfair way. Other countries like Mexico and Italy lose many more jobs to China, but they have been less vocal on this issue. On the contrary, it is remarkable how many experts, countries and institutions agree with China when it says it first has to make its banking system healthy before it can give the renminbi in the hands of the free market.
Almost everybody agrees with China. The European Bank. The IMF. Nobel-prize winner Stiglitz. The Japanese Prime Minister. Mister Forbes. Almost nobody with a basic knowledge of economics thinks it is a good idea for China to float its currency, it might even hurt the world economy.

It is obvious that only a good alternative subject is going to take the heat off China. What advice can we give the American politicians? I think first they should turn away from the economy. It is very hard to blame anybody else for the fact you are unable to compete on a global market. Better forget about the economy as an issue unless you would really have a very smart idea to save it.

Just pick a little country with loads of nasty anti-American habits, and bomb the hell out of them – verbally please, not like in Iraq. If you promise not to send your marines, I can give you some really good arguments why you should take on Holland, my home country. We despise the US policy toward Iraq. We let homosexuals marry! You need more arguments? We condone soft drugs and legalized prostitution (although we liked it more when it was still illegal). We attract loads of American tourists who do not spend their money doing things that are banned at home. We facilitate abortion. We support safe sex. Economy is anyway such a boring subject is you have no really smart solutions. How can you keep up momentum for the next 14 months, especially if you still need a lot of favors from China? Go for the small countries and juicy subjects: that is much more convenient.
Source: The China Trade

Big Trouble Over Little China

With US elections looming next year, the volume in the war of words over the 'china trade' is definitely going up. Let's hope that's all it is, a war of words. I, of course, do not mean to imply that all China's trade practices are 'fair', nor would I suggest that such a thing could be said whilst keeping a straight face of the US record. What is more significant is the evident deterioration in the atmosphere. As I noted yesterday in connection with another topic , shouting normally is not the best way to make progress on an agenda. If this continues it is less, rather than more likely that the Renminbi will float any time soon. And following so close on the heals of Cancun, it has to raise a question mark over the continuing future of the globalisation process. No bad thing, some might say, but this would not be my view.

Chinese trade officials and experts reacted yesterday with a mixture of defiance and foreboding to several criticisms of Beijing by Donald Evans, US commerce secretary, that signalled a sharp increase in trade tensions across the Pacific.

Sun Huaibin, director of the China National Textile Industry Council, a powerful government-linked body, dismissed Mr Evans's complaint that China was pursuing "unfair" trade policies in some areas. "The US is always bragging about being a free-market economy," Mr Sun said in an interview. "Our competitive edge [in textiles] is the result of 10 years of reform and restructuring. The US textile industry should learn from our experience rather than seeking the help of their government."

The textiles sector is particularly sensitive in a bilateral trade relationship that has become a key issue for the next US presidential election. Mr Evans said the US administration was creating an "unfair trade practices team" to combat illegal product-dumping, intellectual property theft and other abuses by trading partners - mainly China - that contributed to a loss in US jobs.

US business groups also stepped up pressure yesterday, saying that China's compliance with its obligations under the World Trade Organisation had been "uneven and incomplete" and warning there could be "political consequences" if US companies did not see tangible new opportunities.

The toughly worded report from the US Chamber of Commerce, the largest business federation in the country, says China's entry into the WTO has raised the expectations of US companies, who want to see sales in China grow markedly.

"Without tangible improvements, there will be political consequences as well as a possible souring of business views about the market," it says.

The complaints that US companies are not winning sufficient business in China echo many of the charges made against Japan two decades ago when that country was running record trade surpluses with the US. But while the US in the 1980s negotiated a series of agreements to limit Japan's exports to the US, such mechanisms are no longer allowed under WTO rules.

China's trade surplus overtook that of Japan for the first time last year to total $103bn (€92bn, £65bn), raising widespread concern in the US that China is keeping its currency pegged at an artificially competitive rate. US calls for a revaluation have been rejected by China, although Beijing is considering moving to a more flexible exchange rate.

US Chamber officials said yesterday that they did not want concerns over China's WTO compliance to become an excuse for protecting the US market. They sought to distance themselves from the campaign launched by some US manufacturers and sympathetic members of Congress to press China into revaluing its currency.

"We do support engagement," said Joe Damond, a lobbyist for the pharmaceutical industry and member of the Chamber's China task force. "What we want to see is that engagement turn into concrete results for our companies."
LINK

China Watching and China Bashing

I'm trying to put together some thoughts on why I don't agree with the 'China is Going to Crash' school of thought. So reading around I came across this interview with the Ford Foundation Representative in China, Andrew Watson in China Development Brief (thanks to T-Salon for the link). The points Andrew makes sum up many of my feelings. China is a complex society, and China is changing. In the same way you can't take GWB and his 'republican guard' as the last word on the US today, it would be a mistake to say China is run by the CCP, period. The devil, as always, is in the detail.

...........in any society each individual performs a variety of social functions regardless of where their work assignment is and some of the most creative researchers and thinkers who've had the greatest impact on, shall we say, economic reform and development, have been in government institutions and quite often their role there enables them to have quite a big impact.

There's clearly a growing diversity of perspectives in China on the whole range of social issues and that reflects the increasing diversity and complexity of Chinese society. Even in areas which were not broadly worked on in society at large — say, international relations — there's a growing difference of perspectives on what is China's strategic interest, what kind of policy China should have towards particular current issues, and this is reflected in the growth of different kinds of institutions that now work on international affairs and foreign policy. In the 1970s that was essentially the preserve of the Ministry of Foreign Affairs but now you have — I don't know if you'd call them NGOS, but consultancy groups or independent groups working on international relations issues and producing research reports for provincial governments or companies related to issues that are going to impact on those particular groups. In economic affairs there's a lot of that as well, you have groups like Unirule and Horizon who are no longer part of a formal government structure and can act like independent consulting think-tank groups, and some of those have quite reasonable research capacity.

Many of the emerging types of social organisations are not yet institutionally mature enough or well established enough to be able to run solid research programmes in the area in which they work.................I tend to be relatively optimistic about the prospect for growth and change here. I'm not one of the 'China crashes tomorrow' school. I think there are clearly very significant issues to be sorted out. I'd like to see first of all a reduction in disparities in income, particularly between town and countryside and different regions; secondly, a greater provision of public goods and public welfare more broadly across China - urban areas still get a lion's share of these things and it seems to me increasingly important for the Chinese state to provide educational and health and other opportunities for rural citizens, and I think that's a really important challenge facing the society.............


To date, the reform and growth process in China has been basically driven from above. It's changes in government policy and experiments and innovation from within the system that has opened up the space for reform and change. The whole thing started off with rural reforms. Essentially the leadership took the decision that there could be contracting of land to the household, that the household could then use its labour appropriately, that there could be markets for goods that were not part of the Plan. And in fact those three changes opened up space in which peasant farmers and households were able to move their resources in all kinds of different directions, which helped change the structure of the economy, opened out all kinds of new types of rural activities, transformed the structure of agricultural production and so on. So policy change from above has a very important impact on what happens.
LINK

China: At Last the Voice of Reason

Phew, what a relief. I've spent half the week arguing with people who believe the China growth phenomenon is 'pure hype' (I will post on this tomorrow). Suddenly comes the voice of reality. Thank god for Andy Xie, giving us some facts about China:

Several US congressmen are reportedly proposing legislation that would impose punitive tariffs on Chinese imports.

In the media reports, one reads “unfair”, “illegal”, “manipulation”, “deception”, and “out-of-control” in quotes from politicians on Capitol Hill describing China. Indeed, it appears that those whipping up negative sentiment know how easy the old prejudices against China could be rekindled. But, strangely, the indignant congressmen are not smashing Chinese products on the Hill for TV cameras. I can still recollect the vivid images of the US congressmen smashing made-in-Japan tape recorders in the mid-1980s. This is the clue why I believe the furore on the Hill will not lead to any substantive measures.

China’s development model shares its upside with everyone who can contribute. More than US$500 billion in foreign direct investment has flowed into China. The supply chain from an industrial park in Suzhou to a hypermart in Chicago, for example, is full of different participants from all over the world. A Singapore company may own the real estate. A Hong Kong company may own and manage the factories. A Japanese company may supply the equipment. A US brand owner may design, brand, and import the products from China. A Korean shipping company may take the goods to the US. A US chain store may arrange the logistics and retail to the consumers in Chicago. “Made in China” is fundamentally different from “Made in Japan”. Japan’s keiretsu system kept the value chain for export production among Japanese businesses. The value chain for China’s export production is spread across the globe. Most of value added in China trade actually goes to Americans and other countries.

For each dollar of China’s exports to the US, American businesses add on about four dollars in value before the goods reach the US consumers. My estimate is based on the disclosed information from export companies listed in Hong Kong or Taiwan. China’s exports to the US, according to US government statistics, reached US$125 billion last year and grew by 25% in 1H03. If the trend continues, US imports from China would reach US$156 billion this year. US businesses would then add US$625 billion in value before the Chinese goods reach US consumers. This amount of value would be the equivalent to 5.8% of the US GDP. Moreover, this portion of the US GDP is probably more labor intensive than the US economy as a whole. I estimate it would imply that more than 8 million American jobs are tied up with the Chinese imports.

Could the US quickly switch to other sources? Who else has the scale and low-cost base to replace China? Since 1997, American consumers have already saved US$100 billion a year in the import bills just on the decline in the price of goods from East Asian relative to those from other regions. These savings have come as other countries in East Asia relocated their production to China. Would American consumers be willing to pay so much again to switch to another supply source? Now you can see why I believe congressmen are not smashing made-in-China products on Capitol Hill. If they were to do so, they would be smashing American jobs, American businesses, and American prosperity.

Let’s take the US statistics on China trade and see how much damage any disruption would hurt China. The value of the materials China imports to produce its exports to the US represents about 30% of the final value of the exports. The Hong Kong, Taiwan, American, or Japanese businesses that own the factories take away about another 15% of the gross sales as profits. This leaves 55% to represent the value added that benefits China, or about US$86 billion this year. China’s GDP should reach US$1.4 trillion this year. These exports to the US would be about 6.1% of China’s GDP. If the trade between the two countries were seriously disrupted, the extent of damage would be similar for China as it would be for the US. Furthermore, I believe US financial markets are much more vulnerable to any disruption in US-China trade. Profits for companies in the US retail and IT sectors depend on keeping supplies from China cheap. The market values of these companies would be severely affected if trade were disrupted. This is why I do not believe that the US Congress will bludgeon China into doing something harmful to the interests of the US. And, why I say it would hurt the US more than China.

The irony is that East Asia, including China, is losing market share in the US. The region’s share of US imports peaked at 40% in 1994, falling to 32.5% for 1H03. China’s exports to the US are rapidly rising, mainly because Japan, Taiwan, and other East Asia economies are shifting their production of goods destined for the US market to China. The relocation is generating cost savings that are being passed onto US consumers. The political rhetoric, however, could be ominous for the global economy in the long run. It could mean that the US commitment to free trade is not as solid as it was. It also reminds me of what the US did after the crash of 1929, when the bursting of the financial bubble led to high unemployment. The US Congress eventually legislated to restrict trade to protect jobs at home. As other nations also resorted to protectionism for the same purpose, it became a negative-sum game for the global economy that caused the Great Depression.
Source: Morgan Stanley Global Economic Forum
LINK

I'm not convinced that Andy is right about the last point. I don't think the Hawley-Smoot tarrif caused the Great Depression, which was anyway primarily a US phenomenon - I don't mean there wasn't depresion elsewhere, but that what Lionel Robbins called the Depression has very specific characteristics in the US. On the other hand, I think it is impossible to foresee whether there could be a US withdrawal from globalisation. I do, however, agree, that the consequences would be quite important, especially since it would probably lead to a less US centric global economy, and the US itself would probably have difficulty financing its debts. Something like shooting yourself in the foot, perhaps. But with the ideological climate in the US these days, virtually anything is possible. We may yet even get to see Bush and co joining forces with José Bose.

Wages and Deflation in China

In the mailbox, Stephen makes some comments on this . Some very interesting points, and he should know, since his job is researching this area.

Your 2 Sept 03 piece on China's 'reserve army' is interesting, but you may want to talk to factory owners in China before you start generalising about internal wage deflation. I take your points regarding xiagang, SOEs, etc, but minimum wages in China have shown pretty steady growth over the last decade (with Guangzhou - for instance - raising min wages five or so times in the last five years). Whether workers get paid those rates is another question, but given that we're now witnessing the migration south of garment factories (from Guangdong to Vietnam) might tell us something about Chinese wages. HK businessmen moving to Vietnam will tell you that high wages in China's south have had at least some influence on their decision to move, though of course there are many other reasons why someone shuts down a factory in Dongguan and moves to rural Vietnam. Shenzhen and other manufacturing centres in Guangdong have the highest minimum wages in the country (574 yuan per month for Shenzhen - off the top of my head...).


The interesting story, and one not often told, is about the competition between counties, townships and other administrative units over investment. Minimum wage competition is ongoing, with adjacent counties attempting to use lower wages to attract investment. People often quote stories about Malaysia losing contracts to China and so on, but wages competition is a much greater issue internally.

Second: everyone is talking about China sucking investment out of Southeast Asia, but far fewer are talking about China's outward FDI. It's growing rapidly and is making waves in Southeast Asia in particular. With large investments in Cambodia, Burma and Laos, the Chinese state is now in a position to influence ASEAN, much to the consternation of the Singaporeans and others. That China is probably (it's hard to know for sure) the largest investor in Cambodia is not widely understood, but the ramifications of this are pretty interesting.

Japan: Older Workers Moving to China?

Eddie writes from Spore:

I’ve attached an article that I thought was pretty interesting. A reverse labour flow - older workers to younger countries. If we had an even flow in either direction, it would really breakdown ethnic barriers. Imagine Shanghai having as many Japanese as Tokyo had Chinese. That would balance out the demographics in the 2 cities. There was a story a month back about a Singaporean private collage looking to employ ‘retired’ teachers and civil servants to teach in China. But right now, the balance of flow is of course one-sided. Growth attracts more growth. And the stagnant economies just see a hollowing out.

Japanese job-seekers heading to China

Older Japanese workers with skills and experience but who have lost their jobs at home are turning to work in China
By Kwan Weng Kin
JAPAN CORRESPONDENT

TOKYO - Shanghai-based human resources executive Sun Liping, 40, has a dream. He wants to boost the competitiveness of Chinese manufacturing companies in his native Shanghai, and hopes to do so by matching them with veteran Japanese workers who have the skills to share. Mr Sun, president of human resources firm Shanghai Chuangjia Consulting, knows the situation in Japan well, having studied here in the early 1990s. 'Shanghai's economic development has been very rapid. Some companies in our manufacturing sector are now very good but many are still far behind the Japanese,' Mr Sun told The Straits Times in a telephone interview. 'On the other hand, many Japanese middle managers, product development experts and so on are losing their jobs due to corporate restructuring. So there are Chinese companies which can benefit from their expertise. 'My company can help bring the two sides together.'


Fortunately for Mr Sun, there has been a steady number of Japanese in their 40s and 50s seeking second careers in China. As the percentage of jobless in Japan continues to hover around 5 per cent, China presents bright prospects for older Japanese workers forsaken by their employers. By last April, Mr Sun had received the details of some 1,400 Japanese job seekers, 70 per cent of whom have experience in the manufacturing sector, his main target. PaHuma Asia, a Japanese job placement firm headquartered in Hong Kong, has also seen a leap in applications from Japanese for jobs on the Chinese mainland. According to PaHuma's Tokyo office, 42 per cent of Japanese registered with it want to work in China. PaHuma also attests to the growing number of job opportunities in China for Japanese workers, not only in China-based Japanese companies but also in Chinese firms.


Ms Tomoko Hata, manager of PaHuma's Tokyo office, said: 'In the year ended August 2003, 35 per cent of our available positions were for jobs in China.' Most were in sales or technical fields. A survey released in May last year by the Japan External Trade Organisation (Jetro) noted that while Japanese companies were trimming expatriate staff throughout East Asia, they were hiring more Japanese personnel on local terms, particularly in China and Asean.
And while job placement agencies saw less demand for Japanese workers in Singapore and Hong Kong, they were dispatching more veteran Japanese workers to China and Thailand, said Jetro. Statistics compiled by the Japanese Foreign Ministry show that the number of Japanese residents in China has been rising in recent years, totalling nearly 38,000 as of October last year. Although technology industry workers draw higher salaries in Japan, the lower cost of living in China means they can live comfortably on their Chinese pay packets and still have ample savings. But as Mr Sun pointed out, problems in hiring Japanese go beyond monthly salaries. 'There are often language problems, issues with food and housing, even pensions. But we hope to be able to solve them,' he said. The Sars crisis earlier this year was also a major setback. 'We were unable to arrange interviews in China,' said Mr Sun. With Sars on the wane, he is looking to go full speed ahead to bring to Shanghai companies the Japanese talent they need to compete.


A report last year by chinanews.com said there was a shortage of personnel in the Shanghai area among the 20-to-40 age group who were familiar with leading technology.To plug the gap, Chinese companies are said to be willing to pay monthly salaries ranging from 20,000 yuan (S$4,200) to 50,000 yuan for a Japanese expert.This is several times what they would pay Chinese workers.Many companies have been able to attract workers previously at Japanese blue-chip firms, particularly in the electronics sector, which has shed thousands of jobs over the past few years through early-retirement schemes.Although such workers draw far higher salaries in Japan, the lower cost of living in China means they can live comfortably on their Chinese pay packets and still have ample savings.

Funnily enough this is something I often discuss with my wife. Spain in ten years time will be one of the oldest countries on the planet. In a society where everyone is old, the premium will be on young people, older people will, almost inevitably be less respected. That, in part explains why so many companies want to recycle their over 50 workforce. In contrast, those societies where there are still a disproportionately large number of young people (just sufficient, not tooooo many) will need the experience of older people, older people will be more valued and respected. Apart from relieving the burden on the welfare system (ironically, in a slightly poorer, but younger society, hospitals may be fewer in number, but access may be easier) it may be a good practical proposition for those over 55 who find themselves prematurely 'released' from their obligations in the west to recycle themsleves, and start a new life in one of the younger 'developing' economies. Apart from anything else, with the internet to accompany you, it might feel just like home.

Why This is not a Good Time to Revalue Renminbi

Following up on the China financial reform topic, here's Andy Xie from last Friday:

I believe China must reform its financial system before it can open its capital account and change its currency policy. The reforms are not just about solving the stock of non-performing loans in the banking system, but more importantly, they are also about stopping the banking system from accumulating more bad loans.

The non-bank financial sector also presents a serious risk to China’s stability, in my view. In particular, our strategist believes the stock market is overvalued; I believe it is not a level playing field.

Further, the inefficient financial system reflects the contradiction between the need to narrow the gaps in regional incomes within China and the inability of the government to collect taxes. If China does not streamline its tax system to raise national tax revenue to more than 25% of GDP, the central government will likely have to continue to rely on banks to support investment programs in poor provinces to narrow the gaps in regional incomes.

There is a race between GDP and bad debt in China. If the latter grows faster, as it has been in the past, China may need to devalue the currency when its exports slow down because inflation is needed to reduce the burden from bad debt. Although productivity gains may support a renminbi appreciation at some point, the financial system is distinctly pointing at the other direction. If you are betting on the renminbi today, I say good luck.
Source: Morgan Stanley Global Economic Forum
LINK

And don't miss this part:

For each US$1 in value for a product that China exports to the US, a product sells for US$4–5 at the retail level in the US. Therefore, American brand owners and distributors benefit far more from China’s output than the Chinese themselves. Moreover, for each US$1 in value for a product that China exports to the US, businesses in Hong Kong or Taiwan take 20 cents.

and remember, a lot of Chinese exports to the US are of products which originate in Hong Kong or Taiwan, and which have simply been 'processed' (assembled etc) in China. A revaluation of the Chinese currency would have no impact on the underlying value of the core components. So it is not clear that anything other than a sharp correction would have more than a negligible impact on the US trade deficit with China, and a sharp revaluation would surely be deflationary and destabilising (which would also amount to the same thing) inside China.