A speech by Premier Wen Jiabao to celebrate the 30th anniversary of the founding of the Shenzhen special economic zone has attracted a lot of attention. 

An editorial in the free-thinking magazine New Century has used the Premier’s remarks as the basis for a call for far reaching political reforms, arguing that political reform is the precondition for further economic growth. 

The editorial itself has triggered some interesting comments by New Century’s readers, including this one on the mixed feelings evoked by the Chinese premier (my translation):

‘Concerning the Premier, my feelings are complex!  At floods, droughts, earthquakes, standing on farm land, his every action suggests deep love of this land.  But his every action points in the other direction.  House prices, everyday prices,  medical insurance, employment, worker strikes, how to make sense of this complex tableaux?  Which premier is real?  Which one is fake?  I think anyone with an average intellect can tell.’

You can see all this and other comments on the New Century editorial here.

Communist Party, Social Policy

In 2009, the National Bureau of Statistics found itself at the center of a storm of controversy over the wage data.  The announcement of an increase in the average wage of 12% for the year was so at odds with the reality of stagnant wages for many and redundancy for many more that it sparked a firestorm of angry commentary. 

Here’s a few of the comments I found online:

‘The NBS appears to have increased my salary again, if only they had told my employer’

‘This is a harmonized statistic’

‘This statistic is only about those who work in state owned enterprises, only those who know how to eat out at the public expense every day.’

The final comment hits the nail on the head.  With the NBS taking a simple average of salaries from mainly state owned firms, the wage data fails to reflect lower and more variable wages for the many workers who labour in the private sector.

To its credit, the NBS took the criticisms to heart.  This year, for the first time as far as I can see, they have published a breakdown of wages by state owned (strictly speaking state owned + public sector, joint venture, listed, and foreign invested companies) and private (which seems to mean small private) operations.

The NBS also explain why the official data for 2009 showed such a large increase in the average wage for the state sector.  Apparently the data was biased upward by a large pay rise for public sector workers - including a 16.1% hike in compensation for teachers.  Manufacturing workers, even those in the state sector, did rather worse, with only an 8.8% increase in wages.

But the real take away from the data is quite how low wages in the private sector are.  For 2009, the average worker in a private sector company was paid just CNY18,200, compared to CNY32,700 for the average state sector employee.  What is more, the growth rate of wages in the private sector is lower, just 6.6% compared to 12% in the state sector.

The new wage data is a step forward in terms of transparency and coverage of the statistical system.  But it also underlines the gap between the insiders who have benefited most from China’s years of rapid growth, and the outsiders who have not.

You can see the data on state sector wages here and private sector wages here.

Labour markets, Social Policy, Statistics

China’s official statistics tell a story of the rich getting richer and the poor getting, relatively, poorer.  The official data suggests that the richest 10% of the population have earnings 9 times those of the poorest.

But according to Professor Wang Xiaolu, that’s just the half of it.  Professor Wang’s original research in 2005, suggested that the richest 10% of the population had an average disposable income of CNY96,000/year, several times higher than the CNY28,000 suggested by the official statistics.  Professor Wang believes that the reason for the massive gap between official and real income for China’s rich is that the extra earnings are the proceeds of corruption, and are therefore unlikely to be reported.

According to the most recent posting on his blog, Professor Wang has now updated his research, and found much the same thing.  The ratio between the income of the richest and the poorest 10% of the population is not 9, as suggested by the official National Bureau of Statistics numbers, but rather 21.  Professor Wang notes that this massive disparity will likely have serious implications for social stability, and also strip away public support for economic reforms - which are perceived as disproportionately benefiting the rich.

In an intriguing side note, Professor Wang notes that the massive income of the very rich also helps explain the rapid growth in China’s household deposits.  This puts a new spin on the idea of China’s households as frugal savers.  If Prof Wang is correct, China’s very high household savings rate does not reflect poor and middle income households saving carefully for their future, it reflects a few very rich households parking their ill-gotten gains in the banking sector before buying a yacht.

You can see Professor Wang’s blog posting here.

Social Policy, Statistics

Apparently the number of marriages in China shot up last year, despite all the economic turmoil. According to this report on the China Popin website (quoting the Beijing Morning Post), 12.1m people got hitched in 2009, a rise of 10.4% over 2008.

China’s marriage market seems very volatile. In the last ten years the number of marriages being recognised has plunged by as much as 5.1% in a single year (2005), and risen by as much as 14.8% (2006). Average growth over the last 10 years has been about 3.4% annually.

I’m no demographer, and I guess it could all be to do with lucky years, but I’d love to know whether the boom in weddings last year had anything to do with the stimulus. Were people encouraged to do the deed because credit for that expensive ceremony (not to mention the car and house that poor guys need to bring to the table these days) was cheap? Did all those weddings and young couples redecorating new apartments serve as a powerful tool to help get the economy out of its doldrums?

I guess the question now is whether, with people being limited to one housing mortgage per family in most places, we will see couples divorcing to buy that extra flat? Something along those lines seems to have happened before - divorces shot up 25.2% in the housing boom of 2004. (They were up by a more modest 8.8% last year to 2.5m). Let’s keep fingers crossed that the cost of divorcing as the economy slows and credit conditions tighten will help keep all last year’s lovebirds together…

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

Guest contributor, Social Policy

One of the greatest challenges China faces as it tries to move up the value chain is the shortage of high quality universities turning out people with the skills needed for the new economy. It’s a subject that clearly bothers a lot of academics and policy makers, but as far as I can see it doesn’t tend to get the sort of press coverage that many of China’s other pressing problems do–perhaps I am just reading the wrong papers. In any case, it was interesting to see it addressed by Caijing in a recent interview (in Chinese - it doesn’t seem to be translated in their English version yet) with Yang Fujia, the current chancellor of the UK’s Nottingham University.

Professor Yang is clearly well placed to talk about the issue. His background is in nuclear physics, but he has previously headed up Shanghai’s prestigious Fudan University, and he holds numerous other mainland academic titles, not least as a fellow of the Chinese Academy of Sciences.

Using his international perspective to compare China’s system with those in the UK and US he draws out a number of criticisms, for example of the enormous spread out campuses that seem to be proliferating in China, which he argues lead to much time being wasted getting between A and B. He also lays into a couple of bugbears that I’ve seen mentioned in other discussions of the university system: the demands on teachers and research students to hit quantitative targets for being published (which distract them from the task of getting on with worthwhile research), and the lack of contact between teachers and students–he is a big fan of the UK’s tutorial system.

However, the bulk of the interview is taken up with a criticism of the current system through which the Party and the government control universities. He notes that in the UK universities run themselves under their own set of rules and regulations, with the only requirement from the government being that these do not breach national laws. By contrast, in China everything is looked after by the Ministry of Education, but this crimps flexibility and few people seem to pay much attention to the rules that the Ministry imposes. Meanwhile, the system encourages university leaders to pay more attention to the Ministry, which appoints them, than to the needs of the professors and students that they are in charge of.

It is refreshing to see weaknesses of the state- and Party-dominated education system discussed so openly in the domestic media, but I fear that Professor Yang’s calls for reform of the system (he wants universities to be overseen by committees representing in equal proportions Party members from the faculty and student bodies, the university leadership and external representatives) may be optimistic. I’m reading David Shambaugh’s China’s Communist Party: Atrophy and Adaption at the moment, which notes that one of the lessons the Party drew from the collapse of the Soviet Union was the need to maintain tight control over universities. I suspect that the government will find it very difficult to manage that while giving the universities the independence that they need to thrive.

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

Guest contributor, Labour markets, Social Policy

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

China’s growth in the last 30 years has been impressive.  But perhaps the last 30 years have been the easy part.  Anyone can build factories to copy goods designed elsewhere in the world.  The difficult part starts when an economy has caught up to the global technology frontier, and has to start thinking for itself.

That is when the education system starts to be really important.  A bad education system is not going to produce good innovators.  I don’t think there is any question that the Chinese education system is good at instilling basic skills, and there has also been a massive increase in those attending university.

But what is less clear is whether the Chinese education system teaches the kind of critical thinking and problem solving skills that underpin an innovative economy.

The author of this recent article, which I have translated from the China Youth Daily, thinks not:

‘There was a story recently about a child taking an exam who said that ‘flat’ was the opposite of ’round’, only to be marked wrong because the standard answer was ’square’.  Leading scholars have remarked that they would not score well in today’s examination system because the important thing is not to know the right answer, but to know the standard answer.

I’d even venture to suggest that if Deng Xiaoping himself took an exam in today’s education system on Deng Xiaoping theory, he’d be hard pressed to get full marks.  Let’s have a look at the reality

A self study guide to exams on Deng Xiaoping theory has the following sample question: use the theory of ‘one country two systems’ to reflect on Hong Kong’s reunification with the motherland.’

It seems like many people could have different responses to that question.  One person might respond that the return of Hong Kong to the motherland was a sign of increasing national strength.  Another might say that the ‘one country two systems’ approach had allowed Hong Kong to continue to flourish after reunification.  A third might add that the ‘one country two systems’ approach could also be used in respect of Taiwan.

From the point of view of common sense, we couldn’t say that any of these answers were wrong.

But according to the the standard answer, there is only one correct response, and none of the reflections on Hong Kong’s flourishing, applications to Taiwan, or anything else that did not fit would have scored full points.

If Comrade Deng was still alive and someone asked him that question, how would he respond?  Comrade Deng was a man of lively mind, he would have modulated his response according to the situation, according to with whom he was speaking, or just to have a different turn of phrase.  In a test on his own theory, Comrade Deng would be hard pressed to score full marks.

These days, lots of people ask why China has not produced any great thinkers.  Do the great problems of today have standard answers?  So will an education system based on repeating standard answers produce great thinkers?’

You can see the original article in Chinese here.

Culture, Social Policy

Hu Yaobang is former Party Secretary of the Communist Party, ousted from power in 1987 for his failure or unwillingness to deal with a wave of student protests.  His death in 1989 is seen as one of the catalysts for the more widespread protests that year, which ended so tragically.

Hu was also the mentor for Premier Wen Jiabao and, 21 years after Hu’s death, Wen has published a reminiscence of a rural inspection tour they made together to a town called Xingyi in Guizhou in 1986.  This is my translation of the central part of the story:

‘Comrade Yaobang beckoned me to join him, and said ‘Jiabao, I have a task for you, wait a while, then take some of the comrades out of the town and check the conditions in one of the nearby villages, but don’t tell our hosts what you are doing.’

I remembered hearing that, on inspection tours, Comrade Yaobang often liked to deviate from the planned route, to meet with the people, and to check conditions at a grass roots level.  He would explain to his hosts, the local party chiefs, ‘I want to see an area you have not prepared for my visit’.  So when Comrade Yaobang gave me this task I knew he wanted me to find out about the real conditions at a local level.

After it was dark, I lead several comrades out of the guest house and into the countryside.  At that time, Xingyi township had only one road, the houses alongside it were low, the street lamps dim, and the street empty.  We walked along the road for 10 minutes before arriving in the outskirts of the town.  Here, everything was farm land, it was pitch black, and we could not tell north from south or east from west. 

In the distance, we could see the lights of a village, we felt our way forward.  Entering the village, we called on a number of houses.  Seeing a group of outsiders arriving in their dimly lit village at night time, the simple country folk were a little perplexed.  But when they knew the purpose of our visit they enthusiastically greeted us.

At around 10pm that night, we finally returned to the guest house.  I entered Comrade Yaobang’s room to find him seated on a bamboo mat waiting for me.  I gave him a detailed report on the conditions in the village we had visited.  Comrade Yaobang listened attentively, and frequently asked questions.  He told me that leadership corps must visit the lowest levels of society to find out the true situation, experience the hardship of the people, listen attentively to their voice, and grasp first hand the real state of affairs.  The greatest danger, is for leaders to separate themselves from reality.  Many years later, those words still echo in my ears.’

Premier Wen is, of course, noted for his media friendly visits to the sites of disasters: the Sichuan earthquake, the fractious crowd at the railway station at Chinese New Year in 2008, the latest trip to drought blighted Guizhou which inspired this reminiscence.  But I wonder whether he still leaves his minders behind to make unplanned stops, check on local conditions that have not been carefully prepared by local party chiefs, and have unscripted conversations with people on the ground.

I wonder also about the significance of this latest move to rehabilitate Hu Yaobang, whose name, along with that of Zhao Ziyang, is closely associated with political reform.

Here’s a link to Wen’s complete essay.

Communist Party, Social Policy

How serious a problem is China’s property bubble?  King of the China bears Andy Xie thinks its pretty serious, and on Friday I had the chance to hear him presenting his views.  The main points from the presentation are:

‘The Chinese response to the financial crisis has followed that of the US.  But where in the US a financial meltdown required near zero interest rates to keep the banking system solvent, in China there was no problem with the stability of the financial system.  Very low interest rates were inappropriate for the Chinese economy.  With the Chinese banks motivated to lend to appease their shareholders in Hong Kong, and the property sector motivated to borrow by very cheap rates, a year and a half of very relaxed monetary policy have made the Chinese property sector bubble bigger.

Property in China is a government business.  Many property sector developers are owned by local government.  For those that are not, the cost of land and taxes are so high that they are effectively just middle men for the government.  Property is the most important source of government revenue

The government is caught in a vicious cycle.  Property prices rise, which means that property developers demand more land to build on.  To meet that demand for land, local government has to clear residents away from more and more areas.  Residents see that to buy a new home, they will need large amounts of money.  They demand huge amounts of compensation - Xie mentioned a household in Shanghai that received CNY1mln compensation for being forced to leave a 10 metre square apartment.  The government is now massively in debt as a result of the high cost of compensation, and so needs to sell the land on at high prices to recoup its costs.  Property developers buy the land at high prices, and so can only turn a profit by selling high end property at high prices, and the cycle continues.

Land is now so expensive that only state owned enterprises, that face no real budget constraint, are willing to buy.  With state owned enterprises the only buyer, the property sector is just a series of transfers between different parts of the government.  State owned banks lend money to state owned enterprises who use it to buy land from the state. 

Local governments are waiting for private sector property developers to buy land.  Their attitude is that private property developers only exist with their approval, so their money is really government money, and can be extracted at will.  Private property developers might look big and powerful, but according to Xie they are being squeezed by the government, with profit margins of 50% a few years ago, 25% today, and non-existent if developers are forced to buy land at today’s high prices.

This state of affairs can’t continue for much longer.  In Hong Kong, property is expensive but other taxes are low.  In China, property is expensive and other taxes are high.  The middle class - grauates of the 1990s who are now earning CNY10-15K/month - are getting squeezed.  This is the most able and vocal of China’s social groups.  Xie pointed out that journalists are also in this group, which is why there is so much negative press attention on the housing issue.

Inflation will be the pin that pricks the bubble.  Xie believes that China is entering an age of high inflation.  Xie pointed out that in the 1950’s, Chaiman Mao encouraged families to have multiple children to boost the Chinese population.  ’Hero mothers’ that had 10 children could even meet Mao.  In the 1970s, the children of the resulting baby boom hit their teenage years.  The result was the cultural revolution.  In the 1990s, they entered the labour market and excess labour supply kept wages (and inflation) low.  Now they are leaving the labour market, wages will start to rise and with them inflation. When inflation returns, the Chinese government will be forced to raise interest rates.  When borrowing becomes more expensive, house prices at today’s high levels will not be sustainable, and there will be a sharp correction.  Xie’s intuition is that this will come in 2012.’

Interesting stuff.  I had not heard the argument about compensation for relocation before, and don’t think it is as important as an explanation for high land prices as local government’s need to close the gap in their finances.  But in general, a compelling account of the drivers and motivations of the key players in the most important sector of the Chinese economy.  Also fascinating argument about the role of demographics and Mao’s ‘hero mothers’ in China’s recent social and economic history.

Banking, Financial Crisis, Fiscal Policy, History, Labour markets, Monetary Policy, Property, Social Policy

I Just finished reading an article in the official magazine Liaowang on the growing wealth of China’s super-rich, the sources of their fortunes, and the social implications of a  widening divide between the haves and the have nots.  This is my translation of the main points:

‘Mr Chen sits in his CNY200,000 chair in his CNY12m house on a fashionable street in Beijing.  This is not Mr Chen’s primary residence, but rather a home he keeps for meetings with business associates and officials.  He points to antique carvings of dragons that line the walls.  ‘I’m not an expert collector’ he says, ‘I just think they are good fun.’

Mr Chen and his type, the company directors, high level managers, and professional investors who form China’s super-rich, have attracted increasing attention in recent years.  In the West, the economic crisis of the last year eroded the wealth of the super rich, but in China this group has seen their wealth increase over the course of the crisis.

According to Forbes, in 2009 the threshold to enter the list of the 400 richest people in China was CNY2.05bn, up from CNY1.22bn in 2008, and 40 people had personal wealth of CNY7bn, up from 24 people in 2008.

China’s super-rich are concentrated on China’s East coast, especially in Beijing, Guangdong, Shanghai, Zhejiang and Jiangsu - where around 60% of China’s richest individuals live.

For China’s super-rich, the road to riches was bright and clear.  The most important route is the real estate market, with the capital market in second place.  In the US, according to Forbes, there are just 50 real estate moghuls amongst the 400 richest names in the country.  In China, that number is 154. Of China’s richest 10 individuals, 5 are involved in real estate.

Hu Run, an expert in China’s rich-list, says that in China the real estate sector surpasses manufacturing, finance, and investment as the way to the top.  Hu notes that China’s special system for controlling land rights, and the rapid pace of urbanisation explain why fortunes can be made in the real estate sector.

Becoming rich in China can also happen more quickly than in the US.  According to Hu, in China the average age of individuals with a net worth of CNY10m is just 39, and of individuals commanding CNY1bn, 43 - much younger than overseas.

In one way, getting rich quick is a sign of the vibrancy of the Chinese economy.  But in another, it points to iniquities in the Chinese economy.  One financial adviser with whom we spoke said that the super-rich clients with whom he worked typically fell into one of three categories: 1) those who relied on power to amass wealth 2) those who had ‘grey’ sources of income and 3) mining magnates and people with monopoly control over a sector of the economy.  He estimated that only about 30% of the super-rich has achieved their wealth through hard work.

The excessive concentration of wealth is an early warning signal of broader problems with the distribution of resources in a society.  Zhejiang Academy of Social Science Professor Yang Jianhua has been researching this question for 10-years.

Prof Yang notes that the experience of other countries is that in the process of development, income distribution gets worse before it gets better.  Specifically, in the income range of USD1000-3000/capita income distribution becomes more unequal, after annual income/capita exceeds USD3000 distribution starts to become more equal.  But the situation in China defies this pattern.

Prof Yang’s research into the distribution of income in Zhejiang shows that even though annual income has now reached USD6000/capita, the gap between rich and poor has not started to narrow, and in fact continues to widen.  Prof Yang notes that the distribution of income in China today does not resemble a pyramid, with a broad base narrowing gradually toward a peak, but rather an inverted ‘T’ with a massive base of people struggling to get by, and a tiny tip of people who control a disproportionate amount of wealth.

One scholar, who was not willing to reveal his name, said that today there were a growing number of cases where government officials, their families or agents controlled access to resources and used them to generate personal wealth.  This conversion of public power into private wealth is a new challenge for the anti-corruption authorities.

China’s new rich do not appear to have strong social or charitable convictions.  One financial advisor with whom we spoke said that many of the super-rich were desparately seeking government offiice, but they did so only as a means to amass more wealth or protect their interests. ‘They don’t believe in duty, only in money’ he said.’

By coincidence, I just finished reading ‘China’s Trapped Transition’ by Minxin Pei.  There is a lot in this article which resonates with Pei’s bleak vision of today’s China:

-The monopoly control of economic rents by those with political power

-An accelerating effort by this privileged group to turn their power into wealth, indicating a lack of faith in the future and an attempt to cash in as quickly as possible

-A collapse in the ideological values which might provide a check on the abuse of power

You can see the original article here.

Communist Party, Financial Crisis, Property, Social Policy