China Translated

With the financial crisis drawing attention to some of the problems with free market capitalism and the ‘Washington consensus’ on how economies should be organised, there has been some debate about the emergence or otherwise of a rival ‘Beijing consensus’.

At the same time, there is a certain amount of doubt about what the Washington consensus and the Beijing consensus actually are, and whether they are useful terms or not.  I had always associated the Washington consensus with an approach to resolving balance of payment problems by cutting government spending and raising interest rates (as advocated by the IMF and USA in the 1980s and 1990s).

However, it also seems to point to a broader world view where capitalism and democracy are regarded as good for development and their absence bad.  Conversely, the idea of the Beijing consensus stems from China’s success in developing rapidly despite the obvious absence of both free markets and Western style democracy.

I was in Beijing for the last few days and, amongst other things, met with a Professor of International Politics at Beijing University.  I asked him what he thought of the idea of the Beijing consensus.  His response was:

The Chinese approach to development is different to the approach espoused in Washington but it is not a model as such, it is more an attitude, and so it would not be easy to replicate it in other developing countries.

That said, it is possible to point to key features of the approach.  First, social and political stability provided by the Communist Party, which creates the right environment for economic growth.  He described the Communist party as a ’strong anchor’ for social and political stability.

Second, a government that focuses on the public good rather than appeasing special interests.  (I can think of one or two instances where the government has appeased special interests rather than thinking of the public good but I let it slide)

Third, a government that is willing to act counter-cyclically against prevailing econbomic winds.  He pointed to the current intervention to boost growth in the face of the slowdown, but equally you could point to the intervention in the first half of 2008 to cool the overheating economy.

Financial Crisis, US-China Relations

As I noted in  a previous post, China is making moves to allow the RMB to be more easily used as a settlement currency for international trade.  This continues a trend that started with allowing Hong Kong banks to hold Rmb deposits that, along with policy objectives like the development of Shanghai as an international financial center, raises questions about the opening of the capital account and the convertibility of the currency.  After all, you can’t expect trade partners to hold Rmb for settlement of contracts if they can’t also hedge against currency risk and so on.

Helpful as ever, Caijing have compiled a short list of what various Chinese economists and commentators have to say on the subject.  This is a rough translation:

Everbright Bank’s Tang Shuangning says that the RMB has taken two steps forward.  First, geographically, in its use outside of China.  Second, functionally, as a settlement, investment and reserve currency.

Zhang Bin from the Chinese Academy of Social Science (CASS) says the the use of the RMB as an international settlement currency shows clearly the intention for East Asia to break away from reliance on the US$, but that moves will be step by step.

Li Ruogu of China Import Export Bank thinks that in many respects China has not prepared sufficiently for the transition.  Financial markets are not sufficiently deep and the expertise of financial sector staff is not sufficient.

Caijing’s own Lu Lei notes that the use of the RMB as a regional settlement currency will depend on the acceptance of the idea by multiple autonomous players in other countries in the region.

Finally, Su Ning of the People’s Bank notes that the use of the RMB as a settlement currency and the internationalisation of the RMB are separate ideas.  If the RMB is to be used as a settlement currency that is the free choice of the two parties to a contract.  Policy can improve the system to make it easier for them to implement that choice.

Banking, Monetary Policy, Trade

Sun Lijian is a professor of economics at Shanghai’s Fudan University.  He also has an insightful and regularly updated blog.  This is my translation of some of the key points of a recent posting on China’s first quarter GDP performance.  After noting the various positive signs in the first quarter data Sun goes on:

Amidst the optimism it is important to retain a clear head.

The danger of a government led investment in the supply side, and excessive confidence in the capacity of the economy from government and business, is that in the future the problem of excess capacity will be even more serious.  As a result, the quality of assets held by the financial sector will fall, and the consequences might swallow all the good work done by the government in response to the crisis.

If health care, education, pensions and other people-centered policies are ignored because they do not have the measurable effects on GDP that capital investment does, China will find it difficult to move away from its export focused growth model toward growth driven by domestic demand.

The consequence of failing to develop domestic demand is that China will always be the victim of global circumstance, and never be able to steer its own path through the global economy.  One example of this is that after the current infusion from the government has past through the system, the Chinese economy will continue to be weak, and continue to tremble from every vibration in the EU or US markets.

You can see the complete article in Chinese here.

Financial Crisis

Following on from the post a few days ago here are the details for the remaining members of China’s Monetary Policy Committee (MPC)

Shang Fulin (b. 1951) is the Chair of the China Securities Regulatory Committee (CSRC).  He hails from Shandong’s provincial capital Jinan and studied finance at doctoral level at the Beijing University of Trade and Finance.  He started his career with four years in the armed forces before undertaking his graduate studies in finance and then starting work in the People’s Bank of China (PBOC)  He worked in a Beijing branch before starting work in a central planning role.  He rose within the ranks of the PBOC, ultimately arriving at the position of vice president and, from 1997, serving on the MPC.  From 2000-2002 he headed the agricultural bank of China.  In  2002 he moved to head the CSRC and also represents China in the International Securities Regulatory Commission.

Wu Dingfu (b. 1946) is the head of the China Insurance Regulatory Commission (CIRC).  He has an undergraduate degree in teaching from Hubei University.  Wu spent some time moving up the ranks of Hubei’s county and provincial government before joining the National Audit Office in 1995.  From 1998-2000 he was the deputy head of the CIRC.  In 2003 he got the top job at the CIRC and he also represents China on the International Insurance Regulatory Committee

Dang Chaoliang (b. 1957) is the president of the Chinese Banking Association.  Dang appears to have worked in an arts and crafts factory in Hunan from 1974 -78 before studying finance at Xinan University of Finance.  From 1981-1996 he was with the Agricultural Bank of China where he had responsibility, amongst other things, for managing liquidity and worked in the Qingdao branch.  During this time he also returned to university to conduct research in finance, again at Xinan University.  Joining the PBOC in 1996, he worked in Guangzhou Province.  From 2000-2002 he worked in headquarters as assistant to the PBOC President and on various party committees within the organisation.  In 2002 he became the deputy governor of Hubei province before moving in 2004 to head the Bank of Communication.

Finally, Fan Gang (b. 1953) is the Vice Chair of the China Society of Economic Reform and also a non-executive director of Ping An insurance.  He worked a farmer in Heilongjiang before studying economics at the Chinese Academy of Social Sciences (CASS), at Hebei University, and finally at a doctoral level at Harvard.  From 1994-95 he was the deputy director of the institute of economics at the CASS.  He has also served as an adviser to the World Bank, UNDP and OECD, as well as publishing extensively on China’s economic reforms.  Judging purely by the titles of his books (The Progressive Road: reflections on China’s economic reform; Entering a world of risk; Grey markets) he espouses a gradualist approach to economic reform.

A few summary statistics:

12 of the 13 members are men

The average agefor the 12 whose ages I could find is 57.

12 of the 13 have at least an undergraduate degree, 5 have a PhD, and 8 studied economics or a related field.

4 studied or worked abroad.

4 of the older members worked in factories or agriculture before the reform era.

4 have worked at a senior level in the financial services industry.

5 have risen alsmost exclusively through the ranks of central government economic and financial bureaucracy (PBOC, NDRC, State Council).

4 have served in provincial government, including in some relatively undeveloped areas of the country (Anhui, Hubei).

Finally, according to the PBOC website the MPC has 13 Members but other people I have spoken to have said that the real group is more like 7 people.

A few reflections: average age is not that old by Chinese leadership standards.  Wen Jiabao and Hu Jintao were both born in 1942 making them about 67 years old - ten years older than the average age of the MPC.  Neither does it seem old by comparison with other Central Banks leadership: Jean-Claude Trichet at the ECB was also born in 1942 and Benjamin Bernanke in 1953

International experience and high-level economics training is limited but is certainly not entirely absent.  It would be interesting to know more about the influence that the professional economists as opposed to the career bureaucrats have in the decision making process and to what extent their views are different.

One tension in China’s monetary policy decision making, identified by Victor Shih in his excellent book ‘Factions and Finance in China‘, is between the focussed financial and economic professionals in central government and the provinces and industrial lobby groups.  The first group care more about inflation, the second group care more about growth.

Looking at the breakdown of MPC members it is clear that whilst the central government planners dominate the group, and there is no one with either an industry or a provincial government mandate, there are many who have experience in provincial government and also in industry - and so whose views might reflect the interests of these groups.

Finally, many of the central government planners have spent at least some time in the financial services industry - mainly working in state owned banks.  These banks have a preference for easy credit and so perhaps even the central planners are not unequivocally focused on keeping the macro-economy cool.

I guess the obvious thing to do would now be to compare the composition of the Chinese MPC with the decision making group in the US Federal Reserve, the ECB and perhaps the Bank of England. I may come back to this in a later post.  If any readers have insights into how monetary policy decisions are taken in China I’d be very happy to post them as comments.

Banking, Monetary Policy

In an article in the latest issue of Caijing, Yu Yongding, Head of the Chinese Academy of Social Science International Economics and Politics Research Center, sets out his views on the creation of a new international reserve currency, and on how China should deal with new flows into its reserves, and its stock of existing dollar debt.  Below is my rough translation of his main points.
Zhou Xiaochuan’s proposal for moving toward a super-national international reserve currency based on SDRs is similar to proposals from other international economists and, whilst it is a good idea, it is in all probability not something that we will see in our lifetime.  Yu draws an analogy with the euro – which had a fifty-year journey from initial suggestion to appearance as a real currency.
He notes that China does not and should not wait for the appearance os a new international reserve currency to solve its problems.  Faced with the very real possibility of a depreciation in the value of China’s holdings of dollar denominated debt, he has some practical suggestions of what to do.
First, China should shift decisively toward domestic demand as a drive of growth.  Less dependence on exports would mean a smaller trade surplus (and less need to manage the exchange rate) and therefore less opportunity (and reason) to buy dollar denominated debt.
Second, if domestic consumption and investment cannot soak up all of China’s spare cash and it absolutely has to be invested overseas, Yu suggests diversifying away from US$ denominated debt.  Specifically he suggests money from the future trade surplus that cannot be invested or spent at home should be invested directly in Asia, Latin America and Africa, and help Chinese firms take advantage of opportunities for overseas acquisitions.
Third, for dealing with existing reserves, without reducing its holdings of US$ denominated debt, China can make some sensible changes in the structure of that debt, for example moving from long to short-term debt (to guard against the predicted long-term decline in the value of the dollar) and toward inflation indexed debt (to guard against the predicted increase in inflation eroding the value of the debt).
Yu also believes that China’s reserve holdings are in excess of its needs and are excessively concentrated in US$ debt.  He suggests selling some of the existing reserves and using the proceeds to diversify into other currencies.  Another portion of the existing reserves should be sold and the proceeds used to fund FDI and financial investments.  Yu notes that the biggest objection to this idea is that if China sells its holdings of US$ debt it will take a loss (both on the sale and on the value of remaining US$ assets).  Yu notes that this is not, of course, a perfect solution.  But diversification is a basic principle of investment, and by taking the loss now, China will guard against a larger loss if the US$ should depreciate suddenly in the future.

China - Africa relations, China - Latin America relations, Financial Crisis, IFIs, Trade, US-China Relations

Following on from an earlier post were I looked at the institutional composition of China’s Monetary Policy Committee (MPC), today I take a look at some of the individual members.

First up, Zhou Xiaochuan, （born. 1948） Governor of the People’s Bank of China (PBOC) and Chair of the MPC.  Zhou hails from Jiangsu Province and has studied at a doctoral level.  He started his career with the Economic Reform Commission (which I believe is a predecessor of the NDRC) and also worked on economic affairs for the State Council.  He rose rapidly through the regulatory and banking system, including serving in a senior position at Bank of China, heading the China Securities Regulatory Committee, heading the Construction Bank of China, heading the State Administration of Foreign Exchange and finally arriving at the top job in  the PBOC.

Next up: You Huan (born ?).  You has a Masters degree in economic management from the People’s University of China.  He appears to have a broad administrative and technocractic rather than economic background.  He is the vice secretary general of the State Council, and responsible for its routine work - so something like a chief of staff.  In a previous post, he was responsible for the Communist Party’s oversight of the regulation of the electricity system.

Next up Zhu Zhixin (born 1949), Vice Director of the National Development and Reform Commission.  Zhu started his working life in the pre-reform era in a car factory in Jilin province before moving into a post in local government in Anhui where he rose in the ranks and had responsibility for economic policy.  Later in his career he moved to the National Bureau of Statistics where he rose to be the head.  He is now a vice director of the NDRC.

Moving swiftly along, Li Yong (born 1951) is a Deputy Minister in the Ministry of Finance.  He has an undergraduate degree in accounting and a masters in economics.  Li seems to have risen within the ranks of the central government, starting in the research department at the Ministry of Finance, spending time at the UN and the World Bank in China’s representative offices, and reappearing as Deputy Minister in the Finance department in 2003.

Su Ning (born 1947) is the Deputy Governor of the PBOC and also a graduate of the PBOC’s own university.  In 1997 and 1998 he was doing macro-economic research in the State Council, he then served for a number of years as vice director of the budget oversight committee of the Standing Committee of the National People’s Congress.  In 2003 he joined the party committee in the PBOC and in 2008 simultaneously joined the MPC.

Yi Gang (b. 1958) is also a Deputy Governor of the PBOC.  He started his studies in economics at Beijing University and ended with a PhD from the University of Illinois in the USA.  He then had an academic career, including time as a professor at Beijing University, before joining the PBOC as secretary of the MPC in 1997.  In 2004 he joined the party committee of the PBOC and in 2007 he became deputy governor.

Ma Jiantang (b.1958) is the head of the National Bureau of Statistics.  He has an undergraduate degree from Shandong university, a masters from Nankai university, and a PhD from the Chinese Academy of Social Science.  Ma seems to have had a slightly unusual career in that he started on a professional economist track - with time at the State Economic and Trade Commission, but in 2004 moved to Qinghai to be assistant to the provincial governor, rising rapidly to become deputy governor.  In 2008 he returned to head the NBS.

Hu Xiaolian (b. 1958) is head of the State Administration of Foreign Exchange (SAFE).  Hu is a graduate of the PBOC’s own university and has risen within the ranks of the PBOC and SAFE.  She is also a Deputy Governor of the PBOC.

Li Mingkang (b.1946) is the Chair of the China Banking Regulatory Commission (CBRC).  Li has a Masters in Business Management from London City University.  Li started his career with the Bank of China in Fujian and rose within the ranks there before spending time at the State Development Bank of China, working on issues related to Macao.  He also worked as deputy head of China Everbright Group, returned to the Bank of China as chair of the board of directors, and served as deputy director of something called the International Finance Association, before moving to his current position as head of the CBRC.

Four more members of the MPC still to go.  I will try and add them tomorrow, as well as having a look at what the average age, educational and career backgrounds of the members might say about China’s monetary policy.

Monetary Policy

One slightly puzzling aspect of the ongoing surge in investment spending is that the fall in external demand does not seem to have affected it.

With so much of China’s economy geared toward exports, and external demand falling away and showing no signs of returning, it seems obvious that a large percentage of export focussed corporates would either not have any money to invest (because they had no profit) or would have no incentive to invest (because they already have excess capacity so why build more?)

In fact, export focussed sectors did see a fall in investment in the first 2 months of the year.  Equipment manufacture, electrical machinery and appliances, and the fur and leather industry all saw a marked fall in investment spending.  The average of the fall in investment spending for 9 export focussed sectors, including textiles, was 15% yoy.

One number I saw suggests that 7-10% of total investment spending is in some way dependent on the export sector.

Financial Crisis, Industry, Investment, Trade

Following on from my post a few days ago on China’s falling electricity consumption, one reader has written to point out that whilst falling electricity consumption might indicate GDP contracting, total electricity consumption indicates that China’s total GDP is actually much higher than reported.

According to figures provided by the reader, total annual electricity consumption in China is 3.4trn KWH (in the US it is 3.8trn KWH), whilst total GDP in China is US$4.4trn (US GDP US$14.4trn).  The reader points out that electricity consumption suggests China’s economy is actually much closer in size to that of the US.

That’s certainly an interesting statistic and I agree that China’s total GDP (not GDP growth) is under-reported - I ran through some of the reasons for that in an earlier post.  But before concluding on the basis of electricity consumption that China’s GDP is four times as big as previously thought, two other points to consider:

First, China’s government-controlled low electricity price has encouraged an energy intensive development path, which means that industry has very high electricity demand.  For example there are an awful lot of aluminium smelters in China which are extremely energy intensive and only profitable because of cheap power.

Second, China’s population is four times the size of the US.  I’ve not looked into this but I suspect that the income elasticity of electricity demand (the amount your demand for electicity changes as your income changes) is quite low.  In particular, I suspect that the majority of Chinese households are already consuming much of the electricity they will consume through electric lights and household appliances and that changes in their income will only be reflected in a fractional increase in their electricity consumption.

So whilst very high electricity consumption is another piece of evidence suggesting that China’s total GDP is under-reported, I think it is difficult to estimate - based on electricity consumption - by how much it is under-reported.

Energy, GDP, Industry, Statistics

It’s tough times in the Chinese steel sector as an uptick in prices on the promise of higher demand from infrastructure spending fades away.  One of the places where these problems are most keenly felt is in Hebei, which in 2008 produced 116m tonnes of steel, 23% of China’s total production.

A review of the provincial governments plans suggests they aim to eliminate 10% of older and less efficient blast furnaces in the course of 2009 ,which will presumably reduce some of the environmental damage caused by the sector and ease problems associated with excess capacity.

At the same time they plan to encourage a move of production capacity toward coastal areas - presumably to make it easier to receive shipments of iron ore and to export finished products.

There are also plans to develop the equipment manufacturing sector and the ship building sector - which would extend the steel production value chain into higher added goods and allow the province to capture more of the benefits.

Another priority for the provincial government is reducing the price of imported iron ore.  Brazilian and Australian iron ore giants have gouged huge price increases out of Chinese steel producers in each of the last few years.  2009’s annual price negotiation is ongoing and it will be good news for steel producers in the province if they can extract a significant decrease in the price.  Some analysts where talking about a 40% reduction - though I have not been following this closely in the last few weeks.

A more reasonable price for iron ore, combined with prices for coking coal and oil which are already low, would relieve the steel producers from almost all of the cost pressures they were facing back in summer 2008.  The pick up in prices which will surely come when the new investment spending translates into new orders would then feed through into higher profits.

A few other bits of Hebei steel industry related information:

In December 2008 Hebei Steel Group and Ministry of Railways signed an agreement to co-operate on providing steel for the massive railway extension which is part of the government’s Rmb4trn economic stimulus plan.  Apparently the plans include the building of 40,000km of railway between now and 2020, at a cost of more than Rmb5trn - so quite a lot of steel.

Hebei steel group’s chairman Wang Yifang has announced that they plan to produce 41m tonnes of steel in 2009, up from 33m tonnes in 2008.  That’s a 24% increase compared to the 32% increase in 2008 - so at least for this one company the economic slowdown has slowed the pace of expansion rather than halting it entirely.  The strategic plan for the company also suggests they plan to have the capacity to produce 50m tonnes a year in place by 2010.

Of course, this announcement might also be part of a competitive strategy where they play chicken with other steel producers - seeing who will be first to blink at the lower prices brought on by excess capacity.  By announcing increases in production despite falling prices, Hebei Steel Group might be signalling that they can stand the pain of low prices for their output.

Shougang steel are shifting their production from Beijing to Hebei - reflecting a broader trend as heavy polluting companies move away from the capital (and also Tianjin) into neighbouring Hebei.  Shougang aim to be producing 9.7m tonnes of steel in Hebei in 2009.

Competition, Industry, Infrastructure, Regional

Electricity consumption is somewhat correlated with GDP growth.  The obvious reason is that if factories are producing things then they have lights on an machines whirring and if they are producing more things they have more lights on and more machines whirring.  China’s electricity consumption has been falling for the last 5 months.

Figures obtained by Caijing from the China Electricity Council suggest that in March of this year China’s electricity generation fell by 2.8% and electricity use fell by 2.19% year on year (and fell 4% in the first quarter as a whole).  Unless China has shifted overnight to a new energy efficient growth model, there’s a discrepancy between falling electricity consumption and rising GDP.

Equally, if GDP is rising that should mean more tax revenue for the government, as they collect a percentage of individuals wages and corporate profits.  China’s recent rapid growth has indeed flooded the coffers of the Ministry of Finance - resulting in a budget surplus in the first half of 2008.

Figures obtained by Caijing from the State Administration of Taxation however, suggest that the tax take for the first three months of this year has actually been falling.  Tax revenue for Jan and Feb was down 13% year on year.  Unless China’s tax collectors have become less diligent than the picture on their website suggests they are, there is also a discrepancy between falling tax revenue and a growing economy.

One explanation which springs to mind is that perhaps a substantial percentage of first quarter growth is from investment projects which have been accounted for but which have not yet started - therefore generating neither demand for electricity nor tax revenue.

Energy, Financial Crisis, Fiscal Policy, GDP, Statistics