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 am currently ploughing through Brothers, Yu Hua’s tragi-comic epic of Chinese life from the cultural revolution to the reform era.  A translation of Brother’s into English has already been published.  But for those who might not have picked up a copy, here is my translation of the first couple of pages:

‘Our town’s richest man, Liu Guangtou, prone to wild flights of fancy, planned to spend $20m to travel to Russia and take a tour into space.  Sitting on his famous gold plated toilet seat, Li Guangtou’s mind had already drifted into orbit, from where he looked down on the world.  Then, unbidden, tears started to well up in his eyes, as he realised for the first time that he had no friends or family in the world.

One upon a time he had a brother, Song Gang.  Older than him by one year and taller by him than a head, kind, honest and stubborn, Song Gang had left this world three years ago, and his ashes now resided in a little wooden box.  Thinking of how few the ashes of his brother were, Li Guangtou was deeply moved, reflecting on how the ashes of a tree were greater in number than the ashes of his brother.

When Li Guangtou’s mother had still been alive, she was fond of saying to her son: ‘different fathers produce different sons.’  With these words, she referred to Song Gang, honest, sincere, and kind, from the same mould as his father, like two melon’s from the same vine.  When she was talking about Li Guangtou, she didn’t use these words, but would just shake her head and say that he and his father had walked different roads.  At least that was what she said till a fourteen year old Li Guangtou was caught peeping at women’s bottoms in the public lavatory.  At that point, his mother finally knew that Li Guangtou and his father were also melons from the same vine.  Li Guangtou clearly remembered his mother averting her eyes in horror, wiping the tears from her eyes, saying: ‘with that kind of father, you are bound to have that kind of son.’

Li Guangtou had never seen his flesh and blood father.  On the day of Li Guangtou’s birth, his father had made his stinking and notorious exit from the world.  His mother had said that his father had died from drowning.  Li Guangtou had asked how he had downed, in a lake, or a pond, or a well?  Later on, after he had been caught peeping in the public toilet, the scandal had spread round the town, and his notoriety was widespread, only then did he discover the real reason for the death of his papa: drowned in shit after himself attempting to sneak a peek at women’s bottoms in the public lavatory.’

For anyone confused about the mechanics of peeping in pre-reform era toilets, I believe the public toilet was essentially a plank with holes in suspended over a sewage pit, with men’s and women’s sections separated by a divide.  Instead of sticking their posterior into the holes too make use of the facilities, Li Guangtou and his less fortunate father appear to have stuck their heads through to peer at the women’s bottoms protuding through the plank on the other side of the divide.  Li Guangtou’s father evidently lowered himself down too far into the hole, lost his grip, and fell into the sewage pit below.

The opening paragraphs capture the bawdy physical humour with which Yu Hua deals with the extremely sensitive, and occassionally horrific, subject matter of life during the cultural revolution.

Culture, History

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

Han Han is a celebrity racing driver, novelist, and budding public intellectual - an outspoken and flamboyant critic of many aspects of Chinese society.  On his blog, which is extremely popular amongst young Chinese people, he has spoken out against the CCTV fire, the vitriolic campaign against Sharon Stone for her ill-advised ‘karma’ comments on the Sichuan earthquake, and the Green Dam web filtering software pushed by the government.

Now he has turned his ire on ‘The Founding of a Republic’ - the epic of the founding of Communist China that is taking the box offices by storm as the People’s Republic prepares to celebrate its sixtieth anniversary.  Here is my translation of his review:

‘As I was watching this film, I wondered if the director and the actors where being satirical?  It made me think there was a great film waiting to be made, this film stops in 1949 - the great film would end in 1976.

In 1949, a sincere people placed their hopes in Mao Zedong and a new China.  60 years on, the people still don’t have one square foot of earth to call their own, everyone lives as a parasite.  Back then, society was composed of lots of classes, now there are only 4 - the poor, the house slaves, the wealthy and the billionaires.

In another way, the film is like a love story, a penniless little boy in love with a rich woman.  The communist party is the little boy, China is the woman, and the non-communist parties and the girl’s friends stand in the path of the union.  The little boy succeeds by talking about ideals, making promises, writing worthless cheques, and of course the odd scuffle.  At last he succeeds in marrying the new China.

The only thing we learn from the film which is completely accurate is when the Communist Party occupy Shanghai and seize all the most desirable property.  If you want to get the girl you have to have a nice house.’

Hard hitting stuff.  You can see more about the film here and Han Han’s blog is here.

Culture, History

Who are the heroes Chinese people look up to?  One website has taken votes from the public on who they most revere and the results make interesting reading.

Many voters found Dong Cunrui’s story to be inspirational.  Dong, born in 1929 and died in 1948, was an unlikely hero.  Short and with unfortunate features, he died a martyr in the war against the nationalists, storming a heavily fortified enemy post with a hand grenade.  His heroism inspired the rhyme: ‘Dong Cunrui ge bu gao, guanjian ke ju guanjian bao’ which translates as ‘Dong wasn’t tall but he packed an explosive punch.’

One of the most popular of all the Chinese heroes, with more than 4000 votes, is Lei Feng.  Lei Feng was born in 1940 and died in 1962.  His short life was marked by selfless dedication to the ideal of building a socialist China.  He died in a tragic accident and Mao Zedong himself began the campaign to position him as a national hero with a speech exhorting young people to ‘learn from the example of Lei Feng.’  His story has been immortalized in the lessons taught to generations of school children.  The 5th March every year is ‘Lei Feng study day’ when the nation is meant to reflect on and learn from Lei Feng’s selflessness.

The Legend of the Red Lantern  is one of the Eight model plays, the only operas and ballets permitted during the Cultural Revolution in China. In the play, Li Tiemei’s grandmother tells her the story of her father’s revolutionary exploits against the Japanese.  Li Tiemei is motivated to live up to her parents example and realise the vision of the revolutionary generation.  311 online voters found her story to be inspirational.

Marshal arts movie star Jet Li started his career as a professional marshal artist, dominating the sport and representing China around the world, before finding even greater fame as a film star - most recently co-staring with Jackie Chan in The Forbidden Kingdom.  Jet Li garners 3600 votes.

Another example of self-sacrifice comes from Lai Ning, a 13-year old boy in 1980s Sichuan who gained a place in the history books but lost his own life saving other children from a fire.  More than 6000 voters said he was their idol.  Funnily enough, Sichuan has recently generated another selfless child-hero.  9-year old Lin Hao ran back into his collapsing school in the Sichuan earthquake and saved several of his classmates.  You can see an interview with him here.

Zhou Xingchi (Stephen Chow) is one of the most prolific and successful Chinese directors and actors of the 1980, 90s and 00’s.  Starting his career with some rather puerile comedies in his native Hong Kong, he graduated to a series of very funny historical dramas, a brilliant re-imagining of the great Chinese novel Journey to the West - where he played the central Monkey King character, and most recently a series of comedies that have found an audience outside China - including Shaolin Soccer and Kungfu Hustle.  His most recent film, CJ7 was not only hugely popular and very funny but also a sensitive treatment of the experience of migrant workers and their children.  He gets 3600 votes.

Xu Sanduo is a fictional character in a popular TV show about life in the People’s Liberation Army.  Ever smiling, ever cheerful, reliable in his deeds and careful in his words, he is in many ways a modern fictional reworking of the Lei Feng myth.  He gets 3430 votes.

The authors of the website note that as the times have changed, China’s idols have changed with them.  In the 1950’s, it was still heroes of the war against the Japanese and the nationalists that dominated the pantheon.  In the 1960s, it was those who worked selflessly to build a socialist economy that the people were encouraged to venerate.  In the 1970s, a combination of a romantic longing for the past and an official policy of idolising the peasants meant the emergence of heroes from the agricultural world.

In the 1980s, heroes started to emerge spontaneously, from amongst the people, rather than being carefully crafted by the Communist Party’s propaganda department.  In the 1990s, the fame cycle was shortened.  Idols whose appeal was based on sex appeal or outspoken views caught the attention of rebellious youth, but their time in the sun was shortened by a media hungry for new faces.  This decade, according to the website, there is a dearth of real heroes, and instead China has the unreflecting, meritless and ephemeral heroes of a consumer culture.

The number of voters participating in the websites pole is rather limited, but it’s interesting that military heroes continue to enjoy such a strong popular following, and that the heroes crafted by the Communist Party’s propganda machine continue to exercise a powerful hold on the popular imagination.  The authors of the website bemoan the froth of modern celebrity.  There is certainly a shockingly vapid strain to much of China’s pop culture.  But in my view people like Stephen Chow are rather more substantial and provide a compelling narrative of the nation - which is what idols are meant to do.

Culture, History

China’s accession to the World Trade Organisation (WTO) in 2001 was a landmark in its development and the culmination  of a negotiating process which stretched back to its attempt to accede to the General Agreement on  Tariffs and Trade in 1986.  I just read an interesting essay on the subject by Margaret M. Pearson entitled ‘The Case of China’s Accession to GATT/WTO’.

One popular theory of international relations is that bureaucratic links, business ties, and cultural exchanges are good because they open a country to a process of learning which will ultimately catalyse positive change.  So getting China to participate in scientific exchanges will help them learn about climate change, student exchanges will teach the benefits of free speech, business to business ties will create a constituency opposed to government control of the economy, and in the end, through a process of social osmosis, China will have transformed into an environmentally friendly, capitalist, democracy.

Pearson’s essay suggests that the process might not be that straightforward.  She argues that it is initially a very small elite who decide that joining the GATT then the WTO is a good idea, and who drive the process forwards.  When China engages seriously with the international community in the negotiation process this brings more players into the debate - notably industry groups and the ministries that represent them.  These groups, through the process of learning about the WTO and the benefits of free trade, decide that actually they don’t like the idea at all. For the industry groups, free trade would represent the end of easy profits in closed national markets.  For the ministries, it would mean surrender of many of their regulatory powers and some revenue from tariffs on imports and exports.

According to Pearson, the elite then decided it would be a good idea to outflank these narrow sectional interests by educating the people about the national benefits of membership.  There was a concerted educational and outreach effort.  One Ministry of Foreign Trade and Economic Co-operation official reports traveling the country for a year speaking to audiences twice a week on the subject.  But the people too were hostile to the idea.  According to Pearson ‘views of the WTO became linked in the public mind to other ‘evidence’ that the United States was trying to keep China weak, including Beijing’s failed effort to the win the bid to host the 2000 Olympics.’

Ultimately, opposition by interest groups and either indifference or hostility from the public meant that Jiang Zemin and them Premier Zhu Rongji had to step in to make the decisions to bring China into line with the requirements for accession.

All of this has a few interesting implications for some of today’s big debates about China and the international economy.

First, more international engagement won’t necessarily mean China is more likely to move in the ‘right’ direction.  More international engagement will sometimes mean that powerful interest groups within China learn more about the costs to them of membership of international organisitons or adherence to international regimes.  For example, learning about the costs of climate changes has also meant Chinese industry learning about the cost of emissions reductions.  International learning is a double edged sword.

Second, even if a change would be overall welfare maximizing for China doesn’t necessarily mean that China is going to make that change.  Free trade is welfare maximizing but for China, and other countries, it is welfare reducing for large and powerful interest groups.  Sometimes these interest groups are sufficiently powerful to prevent change from happening.  The politics of concentrated costs and diffuse benefits works as powerfully in China as it does anywhere else and continues to impact decisions on climate change, exchange rates, liberalisation of financial markets, and so on.

EU-China Relations, Environment, History, IFIs, Industry, Social Policy, Trade, US-China Relations

China has a tradition of political satire which, in some of the modern versions, pokes fun at the national appetite for glory and the sanctification of all-too-human leaders.  One piece about a fictional leader called Comrade Wei Guangzheng has given rise to a name for this thread of satirical thought - Weiguangzheng Syndrome.

This is my rough translation of a piece about Comrade Wei.  It reads to me like a parody of the official versions of the lives of the first generation of Chinese leaders.

‘Comrade Wei Guangzheng is the outstanding product of the process of natural selection.  His hereditary characteristics have given him an outstanding capacity to survive and reproduce, meaning he represents the most advanced path of the species.

Comrade Wei is the founder of an ideology that has brought untold benefits to multitudes of people.  Comrade Wei’s deep love of his country, his bringing together of its people, and testing in numerous battles has given his thoughts the character of a historical theory and given birth to two overarching theoretical principles.

The first is the principle of the spear: to build a beautiful and new world order, the common people must rise up with their weapons, and through revolution and struggle seize the power of the government.

The second is the principle of the shield: to conserve the distinctive characteristics of the nation that has been built by struggle, the leadership of Wei Guangzheng must never be overthrown.

Following these two principles, Comrade Wei succeeded in unifying the country, leading to the saying ‘without Comrade Wei there would be no country’.  Choosing to follow Comrade Wei is the natural choice for our country, and the inevitable trend of history.

Comrade Wei endured severe struggles for survival.  He climbed snowy mountains and waded through dense jungle, the story of his iron will has become a legend which has moved the hearts of later generations.  At the same time, he fought an ongoing struggle with the government and ultimately succeeded.  Simultaneously, he contended with and overcame evil forces within his own revolutionary organisation.  This combination of personal fortitude, and ability to deal with enemies internal and external is what makes Comrade Wei the final triumph of natural selection.

In this country of harmony created by the hands of Comrade Wei, where there are no enemies under heaven, and where there are ample sexual partners for all, Comrade Wei reproduced rapidly.  Today, there are many descendants of Comrade Wei, all blazing new trails.  For example, many of the descendants of Comrade Wei are using their unique powers to amass more money for themselves.  Of course, there are also variations in evolutionary inheritance.  For example, even though Comrade Wei led a people’s uprising, many of his descendants actually hate the common people.

Perhaps this trait of loathing the common people is a mutation of the ’shield’ principle?  Whatever the reason, it is said that these small variations in evolution are what lead to progress, but they can also lead to a cancer which kills the species.’

Understanding satire requires a deep knowledge of a culture and a language and I am sure there is a lot going on in the original piece which I don’t understand.  But the main points of the humour seem to focused on: 1) the official versions  of the lives of the early leaders of the communist party, the stories of heroic military struggles carried about by men who were not only great warriors but also great philosophers 2) the abuse of power for self-enrichment by later generations of leaders.

One point that is certainly lost in translation is in the names given to Comrade Wei’s 2 theoretical principles.  In Chinese the word for spear is ‘mao’ (矛) and the word for shield is ‘dun’ (盾).  If you put them together you get ‘maodun’ (矛盾) which in Chinese means ‘contradiction’.  So the author is making the joke that the two tenets of Comrade Wei’s theory - that power should be seized by struggle but that Comrade Wei’s power should never be overthrown - are contradictory.

Culture, History, Social Policy

This year the People’s Republic of China celebrates the 60th Anniversary of its foundation.  Today, I attended a lecture by Harvard Professor William Kirby, an expert on Chinese history and former student of John Fairbank - who literally wrote the book on the subject.

A few interesting points from the lecture:

Prof Kirby argued that there was no inevitability about the Communist Party’s rise to power.  it was not the logical consequence of the uprising of the peasants against their class enemies but rather the result of a series of battles which the Communists won and in which chance played a part.  He joked that Chiang Kai Shek was possibly the worst general in history, having lost all of China one and a half times, half to the Japanese then all of it to the Communists.

Prof Kirby also suggested that there are many elements of continuity between China pre-1949 and post-1979.  Systems of administration and education in place pre-1949 where revived in the reform era.  He paid particular attention to higher education, noting that Beijing University and Jiaotong University (in Shanghai) were leading institutions before 1949 and are again now.  He noted that in many ways the post reform leaders has realised Sun Yatsen’s vision of a ‘dictatorship of engineers’ (in fact they have realised it literally as the entire top ranks of the Communist Party is filled with engineers).

On the role of education, he noted that the first generation of leaders (Mao, Zhou Enlai, Deng Xiaopeng) had come out of the military and leadership of the revolution. The second had the technical training of engineers.  But for future generations of leaders, a liberal education would be an important foundation for their thinking.  He mentioned that many Chinese universities were interested in learning from Harvard College’s ‘core curriculum’ - which i believe has elements of literature, history, and philosophy and ensures that even those with a science major have some exposure to the arts.

Finally, as a comic aside, he noted that in 1908 US textile mills were selling clothing to China and US investors were using China railroad bond certificates to wallpaper their apartments after the investments turned bad.  100 years on, the textile industry has certainly switched places, and Chinese investors are hoping there is another use for the US government bonds than papering over the cracks in their hastily fabricated apartments.

History, Social Policy