China Translated

10 suicides so far this year at Foxconn raises a lot of questions.  For Communist Party official’s favourite magazine, Liaowang, those questions are about the system failures that contributed to the tragedy.

An article in the latest edition of Liaowang leads in with the problems with working conditions, noting that workers were routinely asked to sign away the legal protections which control overtime, that salary without overtime was just CNY900/month - barely enough to subsist, and salary with overtime could be between CNY2000-3000/month.

An 18-year old employee called Zhang Jianhua comments that the factory is run ‘half like a military establishment’ and adds that ‘there’s more than a thousand security personal in the factory, they are very aggressive, beating and cursing employees.’  Another employee, from Jiangxi, confirms that the ‘relationship between the security staff and the other employees is strained.’

Concerns about excessive overtime, a military style regime, and aggressive security staff are familiar from other coverage of the affair.  What’s interesting about this Liaowang article is that it goes on to raise questions about the dogs that didn’t bark on the Foxconn factory environment.

First, the authors ask why the security personnel were not properly registered with the Shenzhen public security bureau.

Next, Liaowang wonders what role the Communist Party’s committee in Foxconn played, whilst worker’s living conditions deteriorated to the point where suicide became a common choice?  Prof Qi Shanhong of Nankai University says: ‘the Communist Party group at Foxconn enjoyed substantial investment but they strayed from their principles and lost the sensitivity to the conditions of workers, in fact their voice in the company was very small.’

Finally, where was the All China Federation of Trade Unions?  The authors note that the union rep for Foxconn was not willing to accept an interview, and that the workers they spoke to did not even know there was a union branch in the factory.  Beijing Teaching University Professor Shen Youjun notes that ‘if union representatives find themselves in conflict with management, they can also find themselves in line for a beating.  This is in stark contrast to the powerful position enjoyed by labour representatives in France or the UK.’

Liaowang concludes that the Foxconn suicides are a wake up call to the Party and the Union to pay more attention to workers’ rights.  I think lots of readers reviewing Liaowang’s own material would draw different conclusions.  The Communist Party committee would be more attentive to workers’ conditions if there were other parties competing for workers attention.  The trade union would show more concern for workers’ plight if they were more than an appendage of the Party.  The problem is not that these institutions did not do their job, but rather that the system within which they operate makes it impossible, or at least very unlikely, that they will be able to do so.

Communist Party, Industry, Labour markets, Uncategorized

The US China Strategic and Economic Dialogue has come and gone with no change to the yuan dollar exchange rate.  The US side appear to believe that the G20 in late June will be the new focus for pressure on China.  But market expectations of a resumption of appreciation have collapsed.

This is the view on the pros and cons (mainly cons) of yuan appreciation from Central University of Finance and Economics Professor Guo Tianyong, which I have translated in summary fashion from a recent posting on his blog:

‘We are going through a period of radical transformation in the structure of the Chinese and the world economy.  China will no longer be able to rely on the luxurious consumption of consumers in the West to drive growth, but will have to look to internal drivers.  In this context, rapid appreciation of the yuan would not provide a stable basis for changing the economic structure.

Second, as everyone knows, Chinese industry benefits from controlled domestic prices for important inputs to production - energy and water prices for example.  These controlled prices have been beneficial but have also introduced distortions into the economy and high levels of pollution.  Removing controls and bringing prices up to market levels is now a priority, but this will mean higher costs which will damage the competitiveness of China’s exporters.  Rapid yuan appreciation on top of higher factor costs would place too great a strain on our businesses.

Third, though some people claim that appreciation of the exchange rate can be used to control inflation, and China is faced with inflationary pressure, in fact the relationship between the exchange rate and inflation is not straightforward.  During the period from 2005 to 2008 faster appreciation appears to have been linked to higher inflation - not the other way around.

Turning to the impact on business, the impact of appreciation would vary from industry to industry and from company to company.  For commodity importers, and companies that want to invest overseas, a stronger yuan would be a positive.  For exporters, it would weaken their competitiveness.

For the export sector, textiles, electronics, light industry, and machinery and power generation make up 70% of exports and employ more than 70m people.  These are low value added industries that compete on price and make profits from high volume.  Our research indicates that these firms use mainly domestic inputs, so they would not benefit from cheaper imported input costs if the yuan appreciates. 

Our research also indicates that the after tax profits of these firms is already very low - close to 5% in the second half of 2007.  An appreciation of the yuan would therefore have a serious impact on them, and so on the wider economy.

For importers, the benefits of yuan appreciation would be limited.  China is a major importer of raw materials and an appreciation of the yuan would certainly reduce the cost.  But as the recent debacle over the pricing of iron ore indicates,  control of the price of commodities lies outside of China’s hands, and this would be the case no matter what the value of the yuan.

Summing up, the evils and maladies of a large yuan appreciation outweigh the benefits, and gradual appreciation is still the best strategy.’

Professor Guo is not adverse to the use of loaded rhetoric (references to the ‘luxurious consumption’ of the USA) or examples (the iron ore price negotiation - which has little to do with the subject at hand but is an emotive point for Chinese nationalists). 

But he is an influential economist within China, and it is interesting to see how points which  in the US and elsewhere would help make the case for rapid appreciation are here used to make the case for a more gradual approach. 

Secretary Geithner might argue that appreciation of the yuan is part of the adjustment of the Chinese economy.  Prof Guo argues that because China is adjusting the structure of its economy it cannot be expected also to rapidly appreciate the value of the yuan.

You can see the original blog posting here.

Exchange rate, Industry, Trade, US-China Relations, Uncategorized

Happy Year of the Tiger to all our readers.  China Translated will return at the beginning of March.

Uncategorized

It was bank lending that funded China’s economic stimulus.  In 2009, China’s banks lent out more than CNY9.5trn.  That’s more than double what they lent in 2008, and only slightly less than a third of GDP.

In the short term, the benefits of that lending are clear in China’s rapid recovery from the impact of the global crisis.  In the longer term, the costs in terms of inflation, bad loans, and a stimulus which tilted the economy further toward a reliance on investment as a driver of growth, could be enormous.

In an article in a recent edition of Business Forum China, I take a look at some of those costs.  You can read the article here.

Uncategorized

China Translated is on vacation, coverage will resume in the first week of January. 

Happy holidays and best wishes for the new year to all our readers!

Uncategorized

Following on from our earlier post on China’s new ‘black collar’ class of avaricious local government officials, this continues my translation of the original essay on the subject:

‘How can a local government official, just started in work in the last two years, afford to buy a house? The salary for someone like that is already CNY8,000 a month, and on top of that they get bonuses of roughly the same amount, and that’s just the amount they are unashamed to tell you about (note: GDP/capita in China is about CNY30,000 a year. Someone earning CNY8,000 a month in salary and another CNY8,000 in bonus would make about CNY192,000/year - or more than 6 times the average). On top of that they get subsidies for absolutely everything, eating, drinking, shitting - it’s all at the public’s expense. These people even want a receipt when they visit prostitutes - so they can claim the money back. The CNY4trn plan to stimulate the economy is all going straight into their pockets

Taking account of local government, state run monopolies, and so on, I reckon there’s about 2m members of this black collar class in the country.

Chinese people’s dream is to have the same living standards, or even higher living standards, than are enjoyed in the EU and USA. By appropriating the country’s resources, the black collar class have already achieved that dream for themselves.

In the past, the people who now form the black collar class adjudicated public disputes and solved local problems. Now they only speak in their own interest and seek not to help but to control.

Getting into the white collar class was on the basis of hard work and ability. In fact, the returns a to a university education have gone down and down as more and more people entered the white collar class. The doors to the black collar class are closed to all but the connected few. Their power is becoming more institutionalized. The outsiders have been reduced to the status of slaves, instruments, domestic animals.

The decline of the white collar class represents the decline of knowledge and diligence as a means to advancement. The rise of the black collar class represents the rise of power, intrigue and blood ties as the means to advancement.’

My main reaction to this is that people’s tolerance for corruption and unfairness is closely linked with how well they are doing themselves. If everyone is getting richer, corrupt local officials are laughingly accepted as part of the rich tapestry of life. If wages start to rise less quickly, legitimate small businesses go bankrupt, and many face the risk of unemployment, but local plutocrats continue to gouge resources from the economy, tolerance is clearly going to be far lower. This ‘black collar class’ essay, and its popularity on the Chinese internet, are a reflection of growing discontent.

Regional, Social Policy, Uncategorized

New lending in the first two months of the year was the highest on record - surging to Rmb2.69trn.  Now Caijing has obtained estimates of new lending from the big four banks for March which suggest that lending for the first quarter could be as high as Rmb4trn.

Based on initial estimates, lending from ICBC, CCB, Bank of China, and Bank of Communications in March amounted to Rmb780bn.  This very rapid growth in lending is in line with the government’s policy to support domestic demand.

For the People’s Bank of China (PBOC), however, it raises two problems.  First, money growth is already racing ahead of their 17% target for the year.  M2 (money in circulation and in savings accounts) grew at an annualised rate of 17.82% in December 2008, 18.79% in January 2009 and 20.48% in February.

According to Caijing’s contact at the PBOC, when the 17% target was set some other institutions thought it was too conservative.  But the PBOC now believes the increase in the money supply is too rapid, and if there are optimistic signs in the real economy they will put the brakes on new lending, whilst ensuring adequate liquidity to the banking system through open market operations.

The second problem is that there is too much long-term lending and not enough short-term lending.  For the first three months of the year, the break down for bank credit notes issued is Rmb1.2trn in long-term and Rmb243bn in short-term financing.

Caijing’s source notes that whilst there is ample funding for state sponsored infrastructure projects in prosperous provinces, for small and medium sized private sector companies, especially in less prosperous areas of the country, funding is hard to come by.

Complete article in Chinese here.

Uncategorized

China’s high savings ratio and the low savings ratio in the US have been fingered as contributing factors in the current financial crisis.  In a paper discussed in a conference in February, but which has just been published, People’s Bank of China Governor Zhou Xiaochuan sets out his thoughts on the main issues at stake.

The main points from his paper are:

The main factors affecting China’s very high savings ratio are 1) cultural - especially the influence of Confucius who warns against conspicuous consumption 2) family structure - especially the responsibility to care for older generations 3) demographic - as the share of the working population in the total population increases the amount of pension and health care saving increases 4) rapid economic growth - at times of very fast economic growth incremental income is saved 5) the Asian Financial Crisis (AFC)

Zhou notes but rejects the suggestion that either a weak social security system or undervalued exchange rate could be contributing to high saving - suggesting that the empirical evidence for either assertion is weak.

On the AFC, Zhou notes that the people of East Asia were ’shocked and disgusted’ by the predatory attacks on their currencies and the failure of the IMF to come to their aid or to impose tighter regulatory controls on cross border financial flows.  For Zhou, the build up of savings and current account surplus is also in large measure a result of the AFC crisis as China self insures against the risk of a similar crisis.

Zhou notes that China’s savings ratio has increased from 37.5% in 1998 to 49.9% in 2007. During the same period, the ratio of corporate sector disposable income to the national disposable income increased from 13% to 22.5%, while the share of government disposable income to the total increased by only 2 percentage points.  The rising share of corporate disposable income in national disposable income is because enterprises no longer provide in-kind benefits like healthcare and housing but wages have not yet fully adjusted to take account of this.  As a result both corporate saving and household saving are very high - corporates because they are swimming in cash - households because they have no social safety net.

On the very low household savings ratio in the US, Zhou notes that there are two stages.  Before 1997 it was around 7-10% of household income.  After 1997 it declined markedly.   Zhou points to US euphoria as the apparently invinsible economy breazed through 9/11 and the bursting of the tech bubble as the psychological underpinnings of the low savings rate.  He argues that as the low US savings rate pre-dates the high Chinese savings rate there cannot be a causal link between the two.

Finally, Zhou has four suggestions for addressing the problem: 1) The US needs to save more - but not till we are out of the current crisis, and East Asian countries need to spend more 2) Strengthened international financial co-operation and tighter regulation of cross border capital flows (presumably this would reduce the need for saving as a defensive buffer against speculative attacks on the currency) 3) For countries where there is still high saving, that saving should be channeled to developing countries and markets (ie not the US) 4) The reform of the international reserve currency system - with the development of an alternative to the dollar - will mean that the US does not automatically benefit from other countries buying US assets - and so is encouraged to save more itself.

So there we are.  I personally share the view that US over-consumption is not the result of Chinese thrift.  Whether or not the weak social state and exchange rate are linked to China’s high savings rate is more open to question and I will try and return to this in future posts.  You can see the full paper in English here.

Financial Crisis, Industry, Labour markets, Social Policy, US-China Relations, Uncategorized

Back in September 2005, Timothy Adams of the US Treasury said that the IMF had been ‘asleep at the wheel‘ on exchange rate surveillance - especially the RMB/US$ exchange rate.  Now, in the midst of the financial crisis, China is relishing the opportunity to turn the tables on the US.

In a press conference on 24th March Hu Xiaolian of SAFE commented on priorities for reform of the IMF.  The priorities she sets out are:

1. Increase the weight of developing countries in decision making (when Chinese officials talk about developing countries they mean China, India, Brazil - not Africa)

2. Equal treatment of all Member countries, and a strengthened focus on the regulation of countries which issue international reserve currencies (ie the USA) and countries with systemically important financial sectors (ie the USA)

3. Increase the ability of the IMF to deal with emerging risks, especially in large developed countries (ie the USA)

4. The IMF’s governance arrangements need to be perfected, in particular the decision making procedures

5. The head of the organisation needs to be picked through a transparent process, on the basis of ability, and be acceptable to all members.

In my view, 2 and 3 are clearly directed at increasing the scope of the IMF to effectively monitor the US.  1 and 5 point in the same direction as the suggestions from the recent G20 Central Banker and Minister of Finance meeting.  But most interesting is 4.  The language here is somewhat opaque, but it might signal that China wants to end the US veto on IMF decision making.

In the same press conference, Hu indicates that resources under the Qing Mai initiative (an East Asian currency swap arrangement which in some ways substitutes for the IMF) have reached US$118bn (the IMF can call on US$250bn).  Hu says: ‘now, the Qing Mai Intiative has changed substantially, as its role as an international reserve fund enters an effective phase.’

The ongoing development of their mutual insurance scheme means that China and other Qing Mai countries have an alternative to the IMF if they do not like the way the organisation operates.  This strengthens China’s hand in negotiations on the future of the IMF.

Taken together, the extension of funding for the Qing Mai initiative and the clear principles on reform of the IMF are further indicators that China means business at the upcoming G20.

You can read Hu’s entire press conference, in Chinese here.

Financial Crisis, Monetary Policy, US-China Relations, Uncategorized