China Translated

The Chinese government, or more precisely the Ministry of Information Technology and Industry (MII), has required that all new computers sold on the mainland have some new software installed. To its proponents in government, this software - known as ‘Green Dam’ is intended to stem the flow of immorality that comes with the internet and especially to protect Chinese children from pornography. To its detractors, it is another example of the sinister hand of the Chinese state controlling the Chinese population’s access to information. The new software is particularly annoying for human rights activists and proponents of democracy who had been counting on the internet as their secret weapon to bring about change in China’s way of thinking.

This is a rough translation of the main points of a recent Caijing editorial on the subject:

‘Since the Ministry of Information Industry published its proposals for ‘Green Dam’ the debate has been raging about the possible drawbacks. Some say that the technology is not up to standard and will leave computers vulnerable to attack. Others are concerned that the technology does more than just block access to immoral content and will allow government greater ability to monitor and control our use of the web. Businesses worry about confidentially of client information. No one disagrees that children should be protected from pornography and violence on the web.

But the most constructive framework for thinking about Green Dam is to think about it in terms of public rights and social rights.  Collecting information, filtering it, deciding what is worthwhile and what is not: these are basic rights.  As long as the source and the channel through which information comes is legal, it’s up to society (not government) to decide whether its content is good or bad.

As for pornography and immoral content, that’s a problem which has been with us for a while but which the internet has made more complex.  An additional problem is that Chinese society still has a few steps to take to be mature and grown up, and society’s ability to monitor itself has limits.  In this respect, society needs the help of government, but that help should come at the request of society, not be forced upon it in a heavy handed way.

We suggest that the Ministry of Information Industry put out a tender for software companies to come forward with a new version of Green Dam - something which overcomes the technological problems that plague the current version.  Then we suggest that individuals who buy a computer have the choice to have that software installed or not.  In this way, society can retain its freedom to collect and filter information, and government can play its role in protecting people from pornography, without fears of an overbearing state controlling access to information.’

I hope that’s a reasonable translation, though Caijing’s argument appears to be somewhat subtle and I may be missing something.

For another, considerably less subtle, take on the Green Dam issue, some Chinese netizens have imagined Green Dam as a schoolyard bully with a prurient interest in examining the cleanliness of fellow pupils.  You can see some of the cartoons they have drawn depicting ‘Green Bully Girl’ here.

I also note that the MII has apparently postponed the introduction of Green Dam software, hours before it was intended to be introduced.

Social Policy

An offhand remark by a public official has go the Chinese chat-rooms buzzing. Lu Jun, the spokesman for the local government in Zhengzhou, touched a chord when he asked a reporter looking into a housing scandal if he ’spoke for the party or the people.’

This implicit recognition of a difference in interests between the party and the people strucke a chord in a similar way the ‘black collar class’ essay I reviewed in an earlier post.  Both appeal to a popular feeling of discontent with local officials who abuse their position of power to enrich theselves.

This is from an article in the Asian Times Online describing the events in question:

This month, China National Radio was tipped off that a land lot in a township in the Zhengzhou municipality designated for low-cost housing for low-income people was instead used to build 12 luxury villas. The radio station sent reporters to investigate the report. They sought comments from the Zhengzhou Urban Planning Bureau, which oversees land requisition and housing construction in the provincial city of Henan.

“Why does China National Radio want to cover such small business of others?” the reporters were asked when greeted by Lu Jun, vice director of the bureau. After making sure reporters’ recorders were switched off and the microphone unplugged, he said, “Who will you speak for, the party or the common people?”

He then asked the journalists to put a lid on the scandal in the name of defending the “authority” of the party (local authorities) against the interests of those falling victim to land abuse.

And this is my translation of a Southern Weekend editorial on the subject:

‘Maybe the use of free speech to defend Lu Jun is appropriate after all

Lu Jun, the spokesman for the housing authority of Zhengzhou, who caught attention with his question to reporters ‘do you speak for the party or the people,’ is taking a break from work till the investigation by his department is over.

Now another government spoken has offered an explanation for Lu Jun’s remarks that can only be regarded as ridiculous - suggesting that Lu Jun’s comments are acceptable because he has the right to free speech.  Using this allusion to free speech, a right written  into the constitution, to defend Lu Jun smacks of hypocricy.

In recent times, people’s frustration with cases of government corruption has increased.  The massive number of calls to the corruption reporting hot-line recently set up by the government is evidence of that.

We must admit, though, its quite rare to have someone come out and admit the true situation, as Lu Jun has done.  Perhaps he was so used to holding power over journalists he forgot he was talking to TV not to print media, and would not be able to take back what he said.  In these circumstances, he said what years of training in local government led him to believe - that the interests of the party and the people are separate.

The official who tried to defend Lu Jun on the ground of ‘freedom of speech’ is like the child in the story ‘the emperors new clothes’ - not because he is courageous or moral - but because he has inadvertently drawn attention to the real situation - that freedom of speech (which is a constitutional right) is not really protected.

Effective interaction between  party, government and people requires free speech.  Perhaps the use of the term by the official who used it to defend Lu Jun, however ridiculous in that instance, will put the word back in officials’ mouths and end the taboo on using it - which would be the first step to making it a reality.

What officials say needs to accept the regulation of the people, otherwise how will we know whether the party is speaking on behalf of the people, and of itself.’

Regional, Social Policy

One of the standard narratives about problems with the Chinese (and world) economy goes something like this:

Chinese industry is hugely profitable but responds only clumsily to market signals. The result has been massive overinvestment and a build out of production capacity in excess of the needs of the domestic market. That excess capacity is then exported to the US and EU in the form of cheap consumer goods. The profits are used to build yet more production capacity, exacarbating the trade imbalance which is at the heart of the current crisis.

Exporting overcapacity, the story goes, has saved China from the consequences of its poor investment decisions. But with overseas demand drying up, there is no foreign market for the goods China produces and they are being dumped on the domestic market, causing a fall in prices and a slump in profitability for producers.

All of this means that China should respond to the crisis by boosting domestic consumption - so that Chinese consumers can take up some of the slack left by newly-frugal consumers in the US and EU. The best way to achieve this would be to use stimulus funding to subsidise households - for example through personal income tax cuts, or higher levels of education and health spending. Unfortunately, the government has chosen support for the corporate sector as the main vehicle for stimulus spending. This will mean the building of more production capacity, at a time when external demand looks set to enter a period of prolonged weakness.

That’s the story, and I for one think it makes a lot of sense. But I was speaking to a professor at one of the universities in Hong Kong, an expert in the Chinese economy, and he was very relaxed about the overcapacity problem, at least from a medium term perspective. The point he made is that with growth of 8% a year, the economy doubles in size every 9 years, and so even 100% overcapacity would be gone in a decade, and the much lower levels of overcapacity would be dealt with in a much shorter period of time. That might not be of much comfort in the immediate future, but at least it suggests that a still rapidly growing Chinese economy will be able to accelerate through any poor investment decisions made in response to the crisis.

We also spoke briefly about barriers to trade within China - provinces favouring local producers and barring market access to producers from other provinces. This has been a hot issue in the current crisis, with some provincial governments following a ‘buy local’ policy with their procurement (a more extreme version of ‘buy China’). One province reportedly required all government employees to smoke a certain number of locally produced cigarettes a day.

The professor I spoke with had a story about crossing the line between two counties in Sichuan a few years ago, and being searched for edible mushrooms. Apparently one county had a tax on mushroom producers and the other did not so mushroom smuggling was rife. Notwithstanding this example, the professor thought that provincial protectionism was not in fact a serious problem. The removal of all barriers might boost inter-provincial trade by 10%, but it was difficult to see the political will to make that happen.

Agriculture, Competition, Financial Crisis, Industry, Investment, Regional, Trade

This post continues with the translation of a recent Caijing article on the very high levels of graduate unemployment:

‘The problems with student unemployment are not new, they first came to the public attention in 2003 after the policy of expanding university admissions was introduced. But this year’s gradating class is 6.1m students, almost 3 times the 2.1m that graduated back in 2003.

One of the ways to track employment rates for this years graduating class is to look at how many final year students have signed a contract for their first job. According to 1 study, at the end of the first quarter, 20-30% of this year’s graduating class had already found a job and signed the contract, a lower level than at the same time last year.

A separate study conducted by an employment agency found that 38% of undergraduates in the final year had a job offer, compared to 36% of final year students in professionally focussed schools.

Limited opportunities for employment mean that there is fierce competition for even quite mundane jobs. This year, the government will recruit 13,566 new staff to the civil servce. More than 1m people have registered to take the test. Applications for posts in local government have also increased massively. More than 110,000 people applied to join the Guizhou civil service and in one county there were 910 applicants for a single post. Foreign companies will sometimes receive as many as 10,000 applicants for a single post.

Even taking a bureaucratic post in the countryside has a new popularity. Beijing university’s recruitment office for the ‘country manager’ scheme reports an unprecedentedly high number of applications.’

Financial Crisis, Labour markets, Regional, Social Policy

With the economy on the rocks, employment opportunities are scarce, and it is migrant workers and recent graduates that are experiecing the worst of the problems. In its latest edition, Caijing magazine interviews some recent graduates from universities in Shijiazhuang - one of the larger cities in Hebei province - this is a rough translation of the opening passage:

‘Li Lei is hovering on the edge of Shijiazhuang’s employment market. He graduated a few weeks ago and now he has to leave the Shijiazhaung School of Information Technology, but he has yet to find a job. ‘No one will look at you without experience’ he says. He turns to the opposite stall, where a sign promises ‘golden employment introductions’ and a cluster of students are already eyeing adverts for sales positions.

Li Lei’s university is one of the best in Hebei. Every year it has 12,500 students. Li Lei’s course, accountancy, is the most popular with 1,200 students. But Li Lei says that only 5 or 6 of his graduating class have found a job which fits with the focus of their studies, the rest are looking for temoporary positons in sales and elsewhere.

Compared with the confident Li Lei that entered university three years ago, Li Lei today is completely different. The expectations of he and his fellow students have already shifted down from ‘white collar’ to ‘blue collar.’ They will work in coffee shops, in internet bars, in shops as sales reps. Regarding salary, Li Lei’s hope is: ‘no less than if I had never gone to university.’

At the nearby school of law, one of the professors reveals that apart from a few students who have gone on to graduate study, the others have adoped a flexible approach to employment - working as waiters in cafes, salespeople, even security guards.

This year, 305,000 students will graduate from Hebei’s universities. Add that to the 80,000 unemployed graduates and that means there will be almost 400,000 students trying to find work. Given the 2008 employment rate of 67% for graduates seeking work, that means there will be 100,000 unemployed graduates.

For the country as a whole, in 2009 6.1m students will graduate university, 520 thousand more than the 5.59m that graduated in 2008.

According to a report by the Chinese Academy of Social Science, 1m of last years graduates didn’t find a job. That means there will 7.1m recent graduates searching for work.

The competition for employment will become more intense every day, and the difficulty in finding work is becoming the common experience of every school, every household, and every student. To find dignified work was the dream of many students, at it was by no means an unreasonable one, but these days that dream is taking a serious beating.’

Financial Crisis, Labour markets, Regional, Social Policy

The massive increase in fixed asset investment so far this year has come almost entirely from the government, with the private sector playing a smaller role. Investment in real estate, often taken as a proxy for private sector FAI, increased 6% in the year to end May, against an almost 40% increase in FAI as a whole. One key question is if and when the private sector will return to investment. An uptick in FDI from Hong Kong and Taiwan, much of which is domestic capital round-tripping back into the country, has been taken as a positive sign. But Caijing has two reasons why investment from the private sector might stay at depressed levels:

1. Weak demand: government might invest to support the economy and social stability, but the private sector is only going to invest on the expectation of a return on its investment. With no signs of return to life in major export markets, and a limit to demand in the domestic economy, the private sector sees limited profitable opportunities for investment

2. Massive bank lending to the state sector might actually be squeezing credit available to the private sector. The banks have been keen to lend to state owned firms where there is an implicit government guarantee of payback if the firm defaults. Going forward, these state-backed projects will continue to soak up a disproportionate amount of bank lending, and if some of them start to default, the banks will be even more constrained in their ability to lend to private sector projects.

Caijing also notes that on a provincial basis, the increase in FAI in April in Zhejiang and Fujian, where the private sector is relatively well developed, was less impressive than in more state-sector focussed provinces like Shandong.

Banking, Fiscal Policy, Industry, Infrastructure, Investment, Property, Regional

Taking account of provincial debt, non-performing loans in the banking system, and this year’s high public spending and low tax revenue, China’s public debt might be a lot bigger than the headline figures for central government debt suggest. In an editorial published on the WSJ China webpage today, I try and add the numbers for the various components of public debt together The main points are:

In the budget, published in March, the government projected rising revenue and spending. In fact, revenue is falling and spending is rising faster than expected. The result will be a deficit bigger than the 3% of GDP the government expected.

Provincial debt is, as is well known, substantial. A research institute linked to the Ministry of Finance put it at 16.5% of GDP before the crisis started. With revenue down and spending up it is certainly bigger now.

No-one knows how many NPLs there will be as a result of the current rash of new lending. Certainly not as much as the 40% of GDP they amounted to in 1999-2000, but not nothing either.

Putting it all together, China’s public debt could be 40% of GDP and probably is even more, substantially more than the 19.5% of GDP number for central government debt published in the budget.

Without a clear understanding of how much debt there is, however, there is little incentive to bring it under control, and the government doesn’t have the information it needs to make a judgement on the trade off between the benefits of current spending, and the costs of debt repayments in the future.

You can see the full article in Chinese here: http://chinese.wsj.com/gb/20090617/col160546.asp?source=UpFeature

Fiscal Policy, Regional

There’s a story that John D Rockefeller got out of the stock market before the 1920s crash because a bellboy asked him for a stock tip. He reasoned that when the boys who work the elevators are going into the stock market then it’s time for the smart money to get out.

The Shanghai and Shenzen indexes are up about 50% from the beginning of the year, at the same time as corporate profits are down and the economy is growing at the slowest rate for many years. The widespread belief is that some of the liquidity the government is pumping into the system to get the economy going is being used to play the stock market and this, rather than company performance, is driving stock prices.

Today, I paused at our local illegal DVD shack to see if they had any new films in stock, and found - to my surprise - that the woman who runs it had a computer screen installed and was busy day trading. The stock trading halls - where retail investors can go and trade - are humming with activity and the China Business News TV channel has a phone in section where retail investors can call to get tips on particular stocks. When the DVD vendor is trading stocks, it’s time for the smart money to get out of the market.

Banking, Monetary Policy, Stocks

Tuesday’s meeting of leaders of Brazil, Russia, India and China - collectively known as the BRICs - turned out to be a damp squib. Predictions of the end of US dollar dominance of the world financial system proved grossly exaggerated. The summit could only rather weakly conclude:

“The emerging and developing economies must have a greater voice and representation in international financial institutions…. We also believe that there is a strong need for a stable, predictable and more diversified international monetary system.”

Before the meeting, Chinese commentators were queing up to predict great things. In an article in the 21st Century Business Herald, Fudan University economist Sun Lijian suggested that the use of BRIC currencies to settle BRIC trade would put a dent in the dominant position of the dollar as an international settlement currency, and the use of SDRs as an international reserve currency would bridge the gap till the CNY became convertible and so could itself knock the dollar off its perch.

Another unnamed commentator in the same article suggested that if the BRICs all voted together in the IMF they could wield the same veto power as the USA over IMF decisions.

None of these predictions came true and neither are they likely to come true in the immediate future.

On the use of the CNY to settle BRIC trade, China’s trade with Russia, India, and Brazil taken together is less than 10% of its total trade. Even if all of it was settled in CNY that would still only add up to a fraction of China’s, let alone the world’s, trade settlement. What is more, other BRIC countries also want to see their currencies grow internationally. Most China-Russia trade, for example, is currently settled in rubles. Even within the BRICs, the CNY would be in competition with other currencies for use in trade settlement.

On the replacement of the USD with IMF SDRs as the world’s reserve currency: this suggestion did originally come from China’s central bank governor Zhou Xiaochuan, but whilst the other BRICs have been vocal in support of the idea, China has made clear it is only a suggestion for the long term. The BRICs interests on this issue are, in fact, sharply divided. China’s dollar reserves dwarf those of the other BRICs. A sudden shift away from the dollar would mean massive FX loses for China where the other BRICs would be unscathed.

Finally, on the idea of a BRIC block vote adding up to a veto on IMF decisions, the threshold for a veto in the IMF is 15% of the vote. The BRICs collectively have less than 10% of the vote. Even if that share went up to more than 15% in the next round of quota reforms, speaking with one voice in the IMF is easier said than done - as the EU have found to their cost.

In fact, whilst the BRICs have a shared interest in increasing their say in how the world economy is run, their actual interests on specific issues are divided along national lines. They might all want more voting rights in the IMF, for example, but if the IMF had to decide whether or not to bail out country X, there is no reason to think they would have the same view. Without strong institutions or a shared histroy to help resolve differences between them, it is difficult to see this situation changing in the immediate future.

Financial Crisis, IFIs, Monetary Policy

As any taxi driver in Shanghai will tell you, China is financing the US recovery with its purchases of US government debt. But as Chinese leaders have been hinting darkly of late, China might not stay hungry for dollar debt for ever. And its appetite will certainly be lessened if the dollar starts to decline in value.

One of the best commentators on the Chinese economy is Andy Xie. In a wide ranging essay in the latest Caijing, he addresses the question of US Treasury debt and the future value of the dollar. The main points are:

Foreign central banks have been the main players in the US Treasury market. This is because their countries have large trade surpluses with the US which they have to recycle back into dollars.

For this reason, foreign central banks are insensitive to the yield of Treasuries (the amount of interest they pay). Their purchasing is driven simply by the size of their trade surplus. With massive surpluses in recent years, there has been a healthy appetite for US Treasuries, and so yields have been pushed down from their historical average of 6% (2.5% net of inflation).

But as the US trade deficit narrows, foreign central banks have less money to buy Treasuries with. At the same time, the US fiscal deficit could be $2trn this year, so the amount of Treasuries the US has to issue to cover its spending has gone up. This means the marginal buyer has switched from foreign central banks to US domestic investors, and they will demand a higher yield in order to hold Treasuries.

Andy Xie notes that the Fed may target inflation in the range 5-6%, and suggests that domestic investors will demand a net yield of 7.5%-8.5% - suggesting a nominal yield considerably higher than it is today.

Regarding inflation, he notes that the US is in between a rock and a hard place. Inflation and expectations of inflation will increase the cost of borrowing faced by the government - since investors will demand a higher yield on government debt. The Fed could combat inflationary expectations by signaling that it is willing to raise interest rates, but the US economy is hardly in a state to withstand increased interest rates.

The 10% fall in the dollar index (value of the dollar against a basket of major trade partners’ currencies) since March, even though the trade deficit is shrinking, could have been driven by foreigners buying less dollars, or by investors taking their money out of the dollar because of fears of inflation and a dollar crash. Andy Xie thinks it is the later, and cites the surge in oil prices, even though oil demand has not changed, as evidence that investors are fleeing the dollar in search of safe haven against the coming surge in inflation.

A few thoughts from me:

The US China trade surplus is certainly down, from around $20bn a month in much of 2007/8 to just $13bn this May. That does mean less money for China to recycle into US Treasuries. The data published by the US Treasury does not, however, so far suggest any falling away in China’s purchasing of US government debt, but the latest data only goes up till March - April’s data will be published on 15 June.

If China is indeed buying less US government debt this will doubtless set alarm bells ringing. But if, as Andy Xie suggests, this is a function of a smaller trade surplus rather than a Machiavellian plan for world domination, and if US domestic investors are stepping into the breach, this is no bad thing. China would also doubtless be pleased if the yield on some of its US debt is pushed up.

Of more concern is the possibility of a decline in the dollar and inflation in the US. In the short term, in support of its export sector, the Chinese government will probably manage the value of the Chinese yuan (CNY) down in line with the falling dollar - which will also hide the loss on its FX reserves. In the long term, however, the massive exchange rate loss that has been lurking in the Chinese FX reserves all these years will have to be realised.

If William Cline and John Williamson of the Peterson Institute of International Economics are to be believed, that loss could be bigger than previously thought. According to their analysis of ‘fundamental equilibrium exchange rates’ - (the exchange rates necessary to keep everyone’s trade surplus/deficit within reasonable limits) - the CNY needs to appreciate to CNY4.88 to the dollar. Given that today it is at about CNY6.83 to the dollar, that’s an appreciation of 28%. Given that China has an estimated $1.7trn in reserves, a 28% appreciation would mean it could kiss goodbye to $476bn.

You can see Andy Xie’s essay, in English, here: http://english.caijing.com.cn/2009-06-09/110180019.html

You can see the Cline and Williamson study here: http://www.iie.com/publications/interstitial.cfm?ResearchID=1224

(Apologies for the absence of click-able links in recent posts, there is some technical issue which I hope will be resolved soon, in the mean time you can cut and paste the address into your web browser)

Financial Crisis, IFIs, Monetary Policy, Trade, US-China Relations