China Translated

Lately China’s sustainable development goals have been in the news again following the announcement of a sudden jump in energy intensity of production. China has been tracking this interesting metric – which is linked not only to energy use and carbon production but also to technological improvement and movement up the industrial value chain – for some time (warning: apparently nobody outside the relevant departments really understands how it is calculated) and it is said to be a particular focus of Premier Wen Jiabao. Energy intensity had steadily declined 14% from 2005 and was almost on target to meet the 2010 goal of a 20% reduction, but took a sudden 3% (annual) jump in the first quarter. Heavy industry, responding to the tremendous infrastructure push of last year’s stimulus package, is seen as the culprit. Following the news Premier Wen got all medieval, promising in widely published reports to take an “iron hand” on the issue.
For deeper analysis, see the excellent Green Leap Forward.

China’s top leadership has been increasingly visible on alternative energy, low carbon development, pollution control, climate change and other sustainability issues, and Wen seems to be making the energy efficiency target a line in the sand. I think we can safely assume that this is not because senior Chinese leaders are lying awake at night worrying about snail darters and burrowing owls, but because they see these issues as serious potential threats to continued economic development and social stability.

Last week, the Chinese Academy of Sciences published a report of a speech given by the Vice Director of the Chinese Institute of Engineering Du Xiangwan called, “After 2050 China Will Enter a Stage of Green, Low-Carbon Energy Development.” The speech was notable to me for its clear description of the importance of changing China’s current energy use – followed by a set of energy goals that can could perhaps be described as realistic: In his description of China’s energy mix in 2050, renewable energy, including hydropower, has taken a position as a major (but unquantified) component, but coal still occupies 35% to 40% of the total, natural gas has 10%, and nuclear has 15%.

Here’s the report’s description of the issue and China’s strategic approach:

Our Nation Must Move Towards Green, Low Carbon Energy Sources
The tasks of China’s sustainable development of an energy development strategy can be summed up as “scientific, green, low carbon energy strategies,” and can be further summarized as speeding up the transition of regulations and controls, strengthening the primacy of energy efficiency, implementing controls on total energy use, guaranteeing appropriate demand, optimizing a diverse structure, carrying out “green and low carbon,” leadership from science and technology, and a high efficiency economic system.

Proposing such a strategy stems from the challenges faced by China’s energy resources. Du Xiangwan said that China very quickly will become the world’s largest energy consumer. “If China’s energy consumption is maintained at an average growth rate of 8.9%, by 2020 China’s energy consumption will reach 7.9 billion standard tons of coal, which is half the world’s current energy consumption.”

He pointed out that this kind of economic development model would obviously run into very severe restrictions. To support society and the economy’s scientific development, it is necessary to put forth total consumption control standards for fossil fuels, and to plan for the overall speed, structure and consumption model of development. Furthermore, China’s current crude energy exploitation and use results in severe environmental problems.

“No matter how much climate change is disputed, China’s energy must move towards green and low carbon,” Du Xiangwan said.

The original speech is here.

Don Johnson is a senior economist with AECOM

Energy, Environment, Guest contributor, Industry, Statistics

Labour unrest looks set to be one of the stories for the summer in China’s economy, and that means a continued focus on the All China Federation of Trade Unions (ACFTU) - China’s only official trade union.

An opinion piece in the latest edition of free thinking broadsheet Southern Weekend (南方周末 Nanfang Zhoumo) argues that if the ACFTU is to have any credibility with workers, then the system for selecting union representatives needs to be changed.  This is my translation of the key points:

‘If the ACFTU is to play its proper role in representing the interests of labour, it needs the trust of those it represents.

Today’s ACFTU leaders are, in large part, distant from the workers they claim to represent.  A large number are drawn from the ranks of the Communist Party or are closely linked to company management.  How could workers ever trust this kind of leaders to fairly represent their interests?

What is required is union leaders chosen through election by the workers.  Only then will the ACFTU be an organisation that pays attention to the needs of workers, and can be trusted to represent their interests.’

Direct election of leaders?  Sounds like a dangerous precedent to me.  You can see the entire article here.

Communist Party, Industry, Labour markets

Honda parts suppliers in Guangdong, Taiwanese rubber producers in Kunshan, computer parts firms in Pudong, sewing machina makers in Xi’an… employee strikes seem to be one of the hottest fads of the summer in China. Although media coverage within China has now been toned down under guidance from above, the press outside of China has been latching onto the story with vigour (see this FT article for example).

The question many are asking is whether all this unrest is going to push up wages and lead to inflation. The answer to both questions is probably yes, but there’s nothing to get too worked up about yet. For starters, strikes are (with the exception of the scale of the Honda disruption) quite normal as I mentioned before. We’re basically back to where we were in 2007-08 when the export sector was thriving and firms were scrabbling around trying to find workers, so workers were doing their best to exploit their strong bargaining position. It’s true some of the pay rises being announced are pretty impressive, but the media figures need to be treated with a pinch of salt.

I find it very difficult to believe, for example, that Foxconn is really going to be doubling the pay of all its workers–it would make them hugely overpaid relative to their skill level, although with somewhere between 300,000 and 600,000 workers being employed by Foxconn’s parent Honhai in China it really would be a bombshell for the market if it happened. The China Labour Bulletin’s Geoff Crothall notes that there seem to be strings attached to the pay deals they’ve announced.

Besides, the pay rises announced this year, as well as the increases in the minimum wage (which seem to be averaging between 15-20% this year), need to be seen in the context of the pay freeze that was in place for most regions last year. Meanwhile many firms are offering much lower increases, especially in services, where competition is still tough for places. KFC’s Shenyang unit recently settled on a 5% annual pay rise deal with a minimum monthly salary level of Rmb900 a month (although one stressed KFC worker complained that they were really short of staff as ”as soon as interviewees hear [the pay level] they run”). With economic growth set to cool in the second half, some of the upward pressure on wages may ease as we head into 2011.

The elephant in the room in all of these pay stories is the All China Federation of Trade Unions. Experts in the labour field say it’s been doing a terrible job managing worker-management relations, and that many in government and the Communist Party have been criticising its failures. It’s hard to generalise across the country, of course, and some branches do much better than others, but it wouldn’t be surprising to see some reshuffling at the ACFTU or policy rethinking if the rash of strikes continues, or escalates.

Duncan Innes-Ker is a senior economist with the Economist Intelligence Unit in Beijing

Communist Party, Guest contributor, Industry, Labour markets

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

10 suicides so far this year at Foxconn, one of the world’s largest manufacturer of computers, demands an explanation.  Is it living conditions in a factory run along military lines?  Is it low wages, long hours, and distance from family and friends?  Is it just an average number of suicides for a factory with a population the size of a small city?

A recent article in the Beijing Youth Daily suggests that, in fact, the suicides are the result of a lack of self esteem fostered by the total control of all aspects of workers lives at the Foxconn factory.  This is my translation of the main points:

‘The tens of thousands of workers at Foxconn’s factory have a nickname for each other ‘pubic hair’ (屌毛 diaomao).  With a nickname like that in common use amongst the company’s tens of thousands of employees, there’s no need to ask if they have high self esteem.

Foxconn leaders’ latest plan for bringing the spate of suicides to an end, bringing in a monk to improve the atmosphere, hardly inspires confidence that management have the situation under control.

Compared to the other factories on China’s East coast, working and living conditions in Foxconn are actually rather good.  It’s hardly a sweatshop.  There are no glaring violations of the labour law.  Journalists who have visited the factory have not found anything to raise alarm in the conditions there.

But the ‘pubic hair’ nickname in common parlance at the factory gives a clue to the reason for the rash of suicides.  Psychologists tell us that a suicide can only trigger other suicides if those in the circle of the initial victim have already considered ending their lives.  The ‘pubic hair’ nickname suggests that for many at Foxconn, the value of life was limited.

The sources of low self esteem for Foxconn’s tens of thousands of employees is complex, but it is doubtless connected to the Taiwanese company’s approach to management.

Reports on Foxconn show that they have taken modern production efficiency techniques to an extreme degree.  In the factory, time is managed to the second, mistakes are managed down to zero, workers become a part of a massive machine.  Food and shelter are all provided, and are of a reasonable standard, but this too takes away a part of workers’ capacity to make meaningful decisions about their lives.

Workers are required to sign a contract that waives the usual legal controls on overtime.  If they don’t sign, they receive no overtime and the basic wage is barely enough to subsist.  If they do sign they can be required to work overtime anytime management requires - they lose control of their lives.

A second problem for the current generation of workers, is that they have lost their connection with their village home.  For their parent’s generation, work was hard, and the city unwelcoming, but the thought of a return home, using hard won savings to build a home or start a business, was a sustaining thought.  For the current generation, the village is a distant memory, the city remains unwelcoming, and so their only source of self esteem is the factory that strips them of volition.’

You can see the complete Beijing Youth Daily article here.

Industry, Labour markets, Social Policy

The strike at Honda Auto Parts Manufacturing in Foshan, which brought several Honda plants across the country to a standstill last week, is not as unusual as casual observers of China might think. The Chinese government has a reputation for cracking down harshly on workers who dare to organise themselves beyond the confines of the All China Federation of Trade Unions, China’s highly politicised and sole authorised union body. However, in practise there are many strikes across China each year—I witnessed yet another small-scale taxi strike near Guilin this last month, and have heard of a number of other minor incidents of labour unrest involving multinational firms in the last year.

What it does highlight is the ongoing challenge faced by foreign investors in China in dealing with HR issues. As a recent article from China Funds Online highlights, they have to face deep unhappiness at the vastly different pay scales between their expatriate employees, who often appear to have a lock on senior positions, and local staff. It doesn’t help that firms are not really moving up the value chain very quickly, as foreign companies seek to protect their IP by keeping production of more advanced parts offshore — together with the more skilled and highly paid jobs needed to produce them.

Indeed, the pay divide between Chinese car companies’ employees actually seems to be getting worse, as firms avoid investing in their employees’ development and future careers (partly for fear that in the competitive job market they will jump ship), and instead bring in more workers at the lowest end of the pay scale.

The article accurately nails one of the big causes of resentment for workers in the car industry: the flood of new “student apprentices”, who are hired partly to get round minimum wage laws. I have no knowledge of whether this happens at the Honda plant, but it’s certainly very widespread practise in the industry. What the reporters have not clarified so well is how companies use these cheap workers, often employed on temporary contracts, to give them more flexibility, while protecting a “golden core” of privileged workers on longer term contracts. It is interesting to speculate whether the recent surge of hirings to boost production in the wake of the 2009-10 boom in car sales may have upset the delicate balance between these two sets of workers. 

For the government, the Honda strike has got to be ringing alarm bells. Unions have always thrived in the hearts of the world’s automotive manufacturing hubs, and in places like South Korea their feisty members were and are often at the centre of political activism. To date, the government has managed to keep labour unrest pretty much confined to small scale incidents, but imagining the worker response if a sharp downturn in demand for cars hit production and forced massive lay-offs across the sector must keep officials awake at night.

Duncan Innes-Ker is a senior economist with the Economist Intelligence Unit, based in Beijing

Industry, Labour markets

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

The drafting of the 12th 5-year plan will be one of the main policy issues to watch in 2010.  With that in mind, here are some points from another Outlook Weekly article entitled ‘6 major areas for the 12th 5-year plan’:

‘On the one hand, there’s a lot of positives from the 11th 5-year plan.  GDP and trade have both increased significantly.  On the other, it’s difficult to be optimistic about the current economic model.  Investment’s share of GDP has risen from 35.3% in 2000 to 43.5% in 2008.  Consumption as a share of GDP was 51.8% in 2005, in 2008 it had fallen to 48.6%.  Reliance on foreign demand and the consumption of energy and raw materials have both increased.

The current economic model is difficult to sustain.  The imbalance between investment and consumption, between industry and services, and between foreign and domestic demand, are increasingly pronounced.  China is entering a period of weak external demand and rising trade tensions, reliance on foreign demand as a driver of growth is not an option.

For various reasons, the share of consumption in China’s GDP has remained low, including compared to other developing countries like Brazil (75.7%), India (64.9%) and Russia (67.7%).

Increasing consumption requires systemic reform, but with that reform, it is possible we will see the share of domestic consumption in GDP increasing 10-15% in the next 5-years.

Increasing the pace of urbanisation will be an important component of boosting domestic demand.  One government researcher with whom we spoke said ‘in the modernisation of the economy, it is industrialisation that provides the supply, and urbanisation that provides the demand.’

Under normal circumstances, when GDP/capita hits $3000 a country has an urbanisation rate of about 60%.  In China, GDP/capita has hit $3000, but the urbanisation rate lags behind at 45%.  Industrialisation has raced ahead and urbanisation has lagged behind, this is why China has a problem of excess supply and inadequate demand.

One government researcher we spoke to said that if the 12th 5-year plan could break up the separate urban and rural social benefits systems, China could add 10-15% to its urbanisation  rate over the course of the plan.

The 12th 5-year plan will also be a chance to improve the level of public services, with three particular areas for focus.  First, increasing the supply of public services.  Second, employing enhanced public services to address the contradictions in society.  Third, paying special attention to employment services.

Finally, the 12th 5-year plan will have to address the issue of governance.  The existing governance model, which encourages local government to pursue GDP growth and investment at all costs, is one of the reasons why some of the more forward looking objectives in the 11th 5-year plan have not been achieved.  One government researcher with who we spoke said: ‘the biggest challenge facing us in the 12th 5-year plan is not changing the economic model, but rather changing the governance model.’

A few interesting points I took away from this.  First, the suggestion of a somewhat ambitious target on raising the level of domestic consumption in GDP.  A 10-15% increase seems even more ambitious when you consider that domestic consumption’s share in GDP has, remarkably, fallen over the course of the last plan.

Second, the attention to public services and especially breaking down barrier between access to services in the city and countryside - which I take to be a reference to ending the system whereby migrant workers are not entitled to the same level of social services as the local population.  This would be a major step forward for the effective management of an accelerated process of urbanisation.

Finally, the point about governance reform is, as the author suggests, crucial.  Changing the economic system means changing the incentives of the people who govern that system.  As many of those people benefit from the opportunities for graft and corruption that are intimately linked to the current economic model, this will be easier said than done.

Communist Party, Industry, Social Policy

This weekend I attended a conference in Shanghai on the road ahead for the Chinese economy.  One of the many interesting presentations was from an academic from the Chinese Academy of Social Sciences (CASS) on the future for small and medium sized exporters.  The main points, which were based on a recent survey of 50 companies in 10 cities, were:

- Small exporters are already facing a challenging environment.  Before the crisis, they faced high costs from changing government policy (appreciating exchange rate, higher labour costs).  After the crisis they face weak external demand.  An increase in the savings rate in the US will mean that foreign demand remains low and there are more difficult times ahead.

-Post-crisis, appreciation of the exchange rate will make life more difficult for SMEs. Increasing labour costs will also be a problem, and there is already evidence of labour shortages in some export areas.  CASS had heard evidence of some companies turning away orders because they would not be able to find the workers to produce them at a reasonable wage.

-Company owners are choosing to invest in the property sector or stock market rather than investing in their business.  Some business owners from Wenzhou in Zhejiang (often regarded as the poster-boy for China’s entrepreneuial economy) had invested in coal mines in Shanxi rather than the future of their own business.

-Adaptability is a key factor in differentiating successful small exporters from unsuccessful.  Small businesses can close production lines down when orders dry up and reopen them when business starts to flow.  Access to capital, even at high interest rates (presumably from the informal financial sector?) is a key part of adapatbility.

-Successful small exporters are also innovative, not just in terms of high-tech innovation, but also in terms of increasing the quality and variety of their product offering.  They can switch their focus between foreign and domestic markets.  They can co-operate with their competitors - the researcher mentioned a cluster of bulb producers who guaranteed each others back-orders - so that collectively they never had to turn business away.

Financial Crisis, Industry, Labour markets, Regional, Trade

I am reading Yasheng Huang’s ‘Capitalism with Chinese Characteristics’.  His main thesis is that the widespread perception that China’s reform and development has been a continuous process stretching from the late 1970s to today is wrong.

In fact, he argues, there are 4 distinct periods in China’s reform process.  The first period, led by reformers like Zhao Ziyang, was entrepreneurial, private sector lead, and pro poor, characterised by a million flowers blooming in the Chinese countryside as peasants left their farms to start small businesses and improve their quality of life.

The second period, which ran from 1989-92, was characterised by a very repressive atmosphere in which the Party clamped down on anything which looked like a threat to its power - including enterpreneurs and the institutions that supported them.

The third period, which I guess you could say was the Jiang Zemin era, ran from 1992-2002, and was the opposite of the first.  Growth was focused on urban areas and led by state owned enterprises.  The countryside and its entrepreneurs were starved of the resources they needed to start or grow a business.  Growth was anti-poor as the benefits of China’s growth flowed to the cities and, within the cities, mainly to the rich.

The fourth period is the Hu Jintao era and is ongoing.  Huang argues that the early signs from the Hu era are positive, with a renewed emphasis on enabling private sector and pro-poor development.  I’m not sure that thesis would hold up so well given the events of the last year, where the government has pumped massive amounts of resources into the state sector and policies that would support rural entrepreneurs (notably land reform) have been placed on the back burner.

Huang certainly provides a compelling and carefully researched counter-narrative to the standard understanding of China’s upward march.  One significant event he doesn’t seem to find room for in his version of events is China’s entry into the World Trade Organisation, which occured at the end of the Jiang era, and runs contrary to his theory that Jiang was exclusively pro-industrial interests (many industrial interests lost out from, and lobbied hard against, China’s entry into WTO).

One interesting side point from Huang’s analysis is his view on the privatisation of China’s State Owned Enterprises.  China followed a policy of ‘grasping the big and letting go the small’ which basically meant selling small and unprofitable enterprises and keeping hold of big, profitable enterprises, especially if they are in strategic sectors.

Huang argues that from the point of view of maximizing economic efficiency and social welfare they should have done exactly the reverse.  Profitable enterprises are best run by the market, so they should have been privatized.  Non-profitable enterprises, if they have a social welfare function, should be run by the government.  If not, they should be closed down. 

By privatizing big profitable enterprises first, the government would have been able to use the proceeds from the sale to cushion the blow of unemployment from the closure of these moribund smaller state owned enterprises.  Instead of ‘grasping the large and letting go the small’ the government should have ‘grasped the small and let go the large.’

Agriculture, History, Industry, Social Policy