China Translated

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

The first meeting of the US - China Strategic & Economic Dialogue fully lived up to low expectations, with no new agreement or ideas on either the economic or strategic tracks.

Before surrendering to despondency, it’s good to remember that the big picture, at least on the economic track, is not nearly as bad as it could be.  In particular, two of the apocalyptic outcomes which could have followed from the economic crisis  - China’ deciding to stop buying dollar debt or a wholesale retreat into protectionism - have so far failed to materialise.

Of course, there are lots of very good economic reasons why China continues to buy US government debt.  But decisions are not always made on the basis of sound economic reasoning.  To show that the Chinese government is under pressure domestically to stop buying dollar debt, here’s a sample of comments on a recent web-forum discussion of the issue, roughly translated by me:

‘Why using the nation’s wealth to buy depreciating US bonds? Why not using it for education, medical treatment, retirement pensions, and rescuing SMEs?’

‘It’s the negative consequence of the yuan not appreciating enough and exporting cheap goods!’

‘The government will not give up until they sell the whole country!’

‘We should buy land, not bonds!’ 

‘Continuing to increase holdings of US treasuries adds up to betraying the country!’

‘The problem is not China buying US bonds, the problem is the US luring China into the trap they made!’

‘Are we buying US treasury bonds to please the US or because we are threatened by US?’

‘Why are we getting on the kidnapper’s boat when we already know we are going to be abducted?’

‘As long as the US doesn’t go bankrupt, China has hope for economic growth.’

‘Does China have to rely on the US dollar? Can’t China be independent?’

‘It’s no fun to see a poor man lend his money to a rich man!’

‘It’s the government deciding to buy Us bonds, not the people.  As a result, they have spent up all the people’s money!’

A few reasonable remarks, but the tone in general is hostile to continuing purchases of US government debt, for reasons that are easy to understand even if they don’t make economic sense.  This popular sentiment is a constraint on Beijing’s decision making.  It probably won’t force the government into an irrational sale of dollar assets, but it does explain the ongoing rumblings of concern from China’s leaders - designed as much to appease the domestic audience as to keep the US honest.

You can see the original discussion here.

Financial Crisis, Investment, 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

As part of preparations for writing an article on the forthcoming US-China Strategic & Economic Dialogue I spoke to one of the leading US experts on China’s environmental issues, Elizabeth Economy.  She was kind enough to agree that I could reproduce the whole interview here.

Chinatranslated: In your discussion of China’s participation in the framework negotiation on climate change (published in The Making of Chinese Foreign and Security Policy) you characterised the Chinese position in 1998 as reflecting the same set of interests as in the early 1990s: the need for developed countries to take action first; continued technology transfer from developed countries under favourable terms; and no commitments or timetables for emissions reductions. 

More than 10 years on, what has changed?  What would need to happen for China to take a more proactive stance?
 
Elizabeth Economy: There has been virtually no change in the Chinese negotiating stance on climate change in over 25 years: the Chinese will play if the world will pay. That is why the Clean Development Mechanism is such a hit in China.

Beyond that, however, much has changed. On the downside, in the late 1990s, the world thought China would double its coal consumption during 2000-2020; instead it doubled its coal use by 2007 from 2000, making it the largest emitter of CO2 in the world. In the late 1990s, the greatest challenge China posed to climate change in terms of deforestation was within its own borders. Today, China is the largest importer of illegally logged timber in the world, contributing to serious deforestation throughout Southeast Asia and Africa in particular.

On the upside, China has a far more extensive climate change bureaucracy in place to manage both the technical and political aspects of climate change, it is ratcheting up the role of renewables in its energy mix, and it is taking steps to reduce energy intensity in significant sectors of the economy.
 
For China to adopt a more aggressive climate change policy will require someone within China’s leadership to champion the issue. What former Premier Zhu Rongji did for China’s accession to the WTO—in essence saying that there will be serious short term pain for long term gain—someone needs to do in China in the lead- up to Copenhagen. 
 
Chinatranslated: In your recent testimony before the Senate Foreign Relations committee you stressed the importance of building on and working with existing mechanisms, especially the Strategic Economic Dialogue.  What prominence do you expect climate change to have within the new Strategic & Economic Dialogue and is there a danger it will be lost in the middle of discussions of economic and security issues?
Your testimony also suggests various ways in which the US can exert positive pressure on China to step up its climate change strategy, including leading by example, listening to Chinese concerns, and focussing on urbanisation as a key issue.  What other sticks and carrots does the US and the world have to exert positive pressure on China on this issue?
What is the best outcome we can hope for on climate change from the first round of the Strategic and Economic Dialogue?

Elizabeth Economy: With the new U.S. administration, climate change has jumped to the top of the agenda, along with economic and security issues. Climate is, itself, an economic and security issue. I think initially, there was a seriously mistaken impression that working on climate change with China would be easy—somehow there had been a missed opportunity over the past eight years. I think the administration now realizes that climate is every bit as difficult an issue to negotiate as any trade or security issue. I don’t think the issue will get lost. I just don’t anticipate a true breakthrough.
In addition to working with China, the most significant potential leverage the United States could have would be to work with other developing nations to put pressure on China to do more. China considers itself a champion of the developing world. In many respects pressure from the small island states or African nations that will be devastated by climate change will do far more than more lectures from the US or EU.
What I would like to see is a progress report on the energy and climate-related initiatives the two countries began at the last SED. What’s working? What’s not? I am not a big believer in simply launching new initiatives for the sake of having something to announce.
I think the best we can hope for, in addition to announcements of various small scale joint efforts such as the new clean energy research centers, would be for the Chinese to indicate that they are prepared to continue with steep cuts in energy intensity and dramatic moves forward on renewables as far out as 2025. These are the types of initiatives they are excited about because they can be done within the context of continuing to grow their economy and enhancing energy security. Otherwise, I don’t expect much.

You can see more of Elizabeth Economy’s work at the Council for Foreign Relations website here.

China - Africa relations, Energy, Environment, US-China Relations

Next week is the first meeting of the US-China Strategic & Economic Dialogue (S&ED), which takes place in Washington on Monday and Tuesday.  The main topics will be the financial crisis, climate change, and security, presumably with the security focus on North Korea.

I have an opinion piece on the S&ED in the Wall Street Journal China today, you can read it in Chinese here.  The main points are:

The financial crisis and the new administration in Washington has changed the terms of debate between China and the US.

On the economy, the US has in the past used the dialogue with China to apply pressure on the question of the undervalued CNY.  But with the CNY appreciating against the dollar in the first half of 2008, and holding steady against an appreciating dollar in the second half, the substantive case against the CNY has weakened.

In addition, the financial crisis has enabled Beijing to focus attention away from China’s economic policy and the value of the CNY and onto US economic policy and the value of the dollar.  The recent IMF board discussion on the Chinese economy might provide some useful mood music for the US side, with some IMF executive directors arguing that the CNY remains ’substantially undervalued’ (a retreat from stronger language that has been used in the past). 

But a spokesman for the Chinese government, in a press conference on the same day as the statement from the IMF discussion was released, said that China would use the S&ED to seek assurances from the US on the safety of their dollar investments.  The US monetary and fiscal expansion rather than the undervalued CNY looks set to be the focus of the economic track.

On the environment, the Obama administration initially believed that climate change would be an easy win for the bilateral relationship.  Faced with a recalictrant counterpart in Beijing they have come to realise that finding consensus here will be just as difficult as on the exchange rate.  One EU diplomat I spoke with thought that the danger for the rest of the world in the US-China talks on climate change would be that the world’s two largest emitters of carbon dioxide would pre-cook an unambitious deal on emissions reductions in the run up to the post-Kyoto talks at the end of the year.

Finally, on the structure of the talks,  in the old Strategic Economic Dialogue it was Hank Paulson speaking for the US and Wang Qishan for China and the focus was on economic issues (though energy and environment crept in to the later rounds of the talks).  Now it is Geither AND Clinton for the US and Wang Qishan and Dai Bingguo for China discussing economic, environmental AND security issues.  Substantively, it makes sense to bring economic, environment, and security issues together, but procedurally it may mean the talks lack focus.

With considerable distance between the sides on the key issues, and a new and unwieldy structure to work with, my expectations for this first round of the taks are low.

Environment, Financial Crisis, Monetary Policy, US-China Relations

The Financial Times is the paper of choice for most people who work in finance or economics so I’ve been slightly surprised to find two very misleading articles on sensitive China related subjects in recent issues.

In the first, a story on the G8 meeting in Italy, the FT headline ‘China attacks dollar’s dominance’ belied the fact that the Chinese representative at the meeting, Dai Bingguo, had merely repeated the standard line on the subject.

I put this misrepresentation down to the fact that none of the FT’s regular China journalists had contributed to the story and so perhaps the authors had not been familiar with China’s oft repeated concerns about the role of the dollar as international reserve currency, and had taken Dai’s comments as some new strategic move.

Today,  the FT has a story on China’s FX reserves headed ‘China to deploy its foreign exchange reserves’, which states that ‘Beijing will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies, Wen Jiabao, the country’s premier, said in comments published on Tuesday.’

This seemed a bit strange as China would be hard pressed to find the several billion dollars a month in foreign investment deals needed to soak up even a fraction of the flows into its FX reserves.  It has also not had a huge amount of success with its past ventures into foreign investment with its reserves, with disastrous investments in Morgan Stanley and Blackstone.  Current foreign investment attempts haven’t been going much better - with Rio Tinto the example in everyone’s minds.

I hastened to the Ministry of Foreign Affairs website to find the remarks in question and was somewhat surprised to find that they consisted of a single sentence in a much longer speech reiterating China’s more or less standard position on reserve management.

Here’s the FT article on the FX reserves and here’s the record of Wen Jiabao’s remarks on the Ministry of Foreign Affairs website.

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

The Economic Observer has conducted a survey where they asked 283 people for their views on China’s exchange rate.  The results where published in today’s paper:

Do you think the RMB is once again pegged to the $?

Yes: 73%

No: 24%

Don’t know: 3%

If the RMB appreciated against the $ do you think domestic asset prices would go up?

Yes: 72%

No: 23%

Don’t know: 5%

What would be the biggest impact of RMB appreciation?

Bring about reform of the structure of industry: 19%

Help control inflationary pressure: 9%

Import inflationary pressure: 72%

No one thinks that China will allow the RMB to appreciate against the $ until China’s exporters are on a much firmer footing than they are today.  But it’s interesting that the return of specualtive inflows of hot money to the Chinese economy in the last three months has added an additional anti-inflation argument to the case against appreciation.

Banking, Industry, Monetary Policy, Trade, US-China Relations

The arrest of Rio Tinto’s China representative Stern Hu, an Australian citizen, by the Chinese authorities on suspicion of spying, bribery, or some combination of the two, has fired the imagination of China watchers.  The combination of high finance - with the failed Chinalco - Rio Tinto deal, resource nationalism - with the ongoing iron ore price negotiaitons, and the opportunity to pass judgement on China’s opaque judicial system, has everyone interested.

The foreign press is warning darkly of the negative consequences for China of this latest state-ist intervention, suggesting that it will make China a less attractive place to invest and make other countries less wiling to welcome Chinese investment.  The Chinese press is asking who was selling the secrets.  The Economic Observer, one of the better Chinese business publications, has a front page editorial on the subject today.  These are some of the main points, translated by me:

‘China’s large steel factories are almost all state owned and firms like Anshan Steel are controlled directly by the central government.  The China Iron and Steel Association, which is representing China in the annual negotiations on the iron ore price, is representing the interests of the state owned steel companies.

In theory, the interests of the people and the interests of state companies are identical, and so the secrets of state steel companies have the character of national secrets.

But the iron ore price negotiations don’t actually impact the interests of everyone equally.  In particular, the smaller steel steel companies have a different set of interests to the big state owned companies.  Whatever the outcome of the negotiations, they will still have to buy iron ore from the big players at the market price.  even if the result of the negotiation is a lower price, they won’t see any benefit.

So these small companies don’t have so much interest in the outcome of the negotiation, or in protetcing the secrets of the industry.  In fact, at a critical point in the iron ore price negotiations, they showed their self interest by importing a considerable quantity of iron ore, when the national interest was to keep imports low to try and get a better price in the negotiation.

So if China really wants to protect the national interest and get a positive outcome in the iron ore price negotiations, it needs to give small firms an interest in the outcome.  If they don’t have a commercial interest in a positive outcome for China, they can’t be expected to protect the commercial secrets of the steel industry.

In a situation where companies with the monopoly control of iron ore imports have not shared the benefits widely with smaller players, many small steel companies simply do not see the national interest in the iron ore price negotiations.

If we want to overcome this problem we need to reform the iron ore import system, have a little less government control, and a little more commerical initiative.  That way, all the Chinese steel companies will have a commercial interest in the outcome, and they will get a little better at protecting their own commerical interest, and the national interest.’

It’s interesting that the focus of the foreign and the domestic press is so different.  The foreign press sees the Stern Hu story as a lense through which to analyse China’s state controlled industry, the hand of the government in commercial affairs, and the willingness to use the legal system to gain commerical advantage.  The Chiense press, at least this editorial, is oblivious to all of these points.  The starting point is that commerical secrets were revealed and the focus is on how the structure of the steel industry could be changed to ensure that this does not happen again.

Industry, Investment, Law, Trade

There will be a changing of the guard at the State Administration for Foreign Exchange (SAFE) - the organisation that manages China’s more than $2trn in currency reserves.  Hu Xiaolian is to return to the People’s Bank of China (PBOC) to act as deputy governor.  Rumour has it that she will oversee implementation of plans to press ahead with the internationalisation of the RMB.  She will be replaced at the head of SAFE by current deputy governor Yi Gang.

A short Caijing article published in response to the news has a few interesting scraps of detail about Yi Gang’s background.  The main points are:

Yi Gang was an academic economist at Beijing University, he rose to prominence for his early warnings about the threat of deflation in 1998 and was brought into the policy making team to formulate the monetary policy response.  From 2007 onwards he was the secretary of the Monetary Policy Committee.

His book ‘China’s monetary process’ (or perhaps ‘China’s monetisation process’ - the Chinese title is 中国的货币化进程) explains how China can have enjoyed so many years of rapid expansion of the money supply without massive inflation.

An article in China Finance notes that Yi Gang has in the past, said that the objectives for managing China’s FX reserves are first safety, second liquidity, and third return on investment.  He has also said that the starting point for deciding whether to use the reserves to buy US government debt must be China’s national interest.

The article also suggests that Yi’s first task will be getting to grips with the flows of hot money that accounted for a substantial amount of the big increase in China’s reserves in the second quarter of this year.

A couple of thoughts from me:

This is a movement of established existing players within China’s financial bureaucracy.  Hu Xiaolian has risen up through the PBOC and SAFE system, Yi Gang has been a policy insider for more than a decade.  It does not appear to be a radical change in personnel and probably does not signal a radical shift in policy.

Yi Gang’s past statements, as quoted in China Finance, are exactly in line with the existing policy on China’s reserve management.  The China Finance article also says that Yi’s first task is a practical one (dealing with the impact of hot money inflows) and this suggests the immediate focus will not be some strategic reorientation of the reserve policy.

All of this does not mean that Yi Gang’s appointment won’t mean a new approach from SAFE, perhaps a more aggressive approach to diversifying away from the $.  The timing of the move, a week before the first meeting of the Strategic & economic Dialogue with the US might also be significant.  But my assumption at this point is that Yi Gang will not have a substantially new mandate from Hu Xiaolian, and there will be no marked change in China’s reserve management policy.

You can see the China Finance article in Chinese here and the Caijing article also in Chinese here.  Also I had a post a while back on China’s Monetary Policy Committee which has brief biographical details on both Hu and Yi.

Monetary Policy

China and the US are gearing up for the first meeting of the Strategic & Economic Dialogue, which will take place in Washington the week after next.  The dialogue is the heir of the Strategic Economic Dialogue, which was initiated by then Treasury Secretary Hank Paulson, some say as a device to make up for China not being part of the G8.

The two crucial differences between the old SED and the new S&ED are 1) security now joins economic and environmental issues on the agenda with Hilary Clinton speaking for the US and Dai Bingguo for China 2) the SED took place twice a year but the S&ED will take place just once a year.  It remains to be seen if the new structure will prove more or less effective than the predecessor. 

Having more issues on the table makes it easier to cut deals across dossiers (I’ll give you a concession on climate change if you give me a concession on security).  But more issues also means more voices and more procedural complexity, which might be a barrier to effective decision making.

One of the key agenda items will be climate change.  China and the US are the world’s largest emitters of carbon dioxide.  The Obama administration promises a sea change in the approach to this problem taken by the US.  But environmental concerns have certainly not been the focus of the administration as they struggle with the fallout from the economic crisis.

The Chinese negotiating position starts with the point that it is emissions from the industrialised West that have got us to where we are today, and emissions on a per-capita basis in China are still far lower than in the US and EU (all of which is true).  Discussing China’s participation in negotiation in the framework negotiation on climate change at the end of the 1990s, Elizabeth Economy characterised the Chinese position in 1998 as reflecting the same set of interests as in the early 1990s.  In 1990 and in 1998, China argued that developed countries needed to take action first; that there should be continued technology transfer from developed countries under favourable terms; and that no commitments or timetables for emissions reductions should be made. 

More than 10 years on, it is once again difficult to see any change in the Chinese negotiating position.  One European diplomat I spoke with recently said that the danger was that China and the US would pre-cook an unamibitious deal in the run up to Copenhagen, making it diffiuclt for the EU to push for more ambitious targets for emissions reductions.

One final point on a procedural problem on environmental discussions.  Clinton speaks for the US on the environment, but her Chinese counterpart Dai Bingguo is apparently not well versed in, or responsible for, China’s environmental policy.  With no clear allocation of responsibilities for environmental issues within the talks on the Chinese side, the S&ED may be able to make only limited progress on this crucial issue.

Environment, US-China Relations