China Translated

Outlook Weekly is an official magazine with a focus on political, economic, and international relations issues.  Apparently it is widely read by government officials and party members.  To coincide with the Obama visit, the latest issue has a  lengthy piece explicating Hu Jintao’s 5-principles for the conduct of international relations. 

Here is my translation of the 5-principles:

1. The principle of deep change (深刻变革论) - today’s world is going through a process of unprecedented and historic changes, our world is everywhere a world of opportunities and challenges.

2. The harmonious world principle (和谐世界论) - the need for peace, the urge for development, the importance of cooperation - these are unalterable historical trends.  International society should work hard to construct lasting peace, shared prosperity; and a harmonious world.

3. The shared development principle (共同发展论) - the relationship between countries is one of collective interests, with joys and sorrows borne together.  We must work toward a way of thinking about our collective development that places greater emphasis on communication and cooperation, learning from each other, win-win solutions and shared development.

4. The principle of shared responsibilities (共担责任论) - international society has to establish the idea of shared responsibility.  Considering matters from all sides, we should join hands together to face shared challenges and threats.

5. The principle of active participation (积极参与论) - China’s fate is more and more interwoven with the fate of the world.  We must synthesis the objectives of retaining our independence and participating in the global economy, taking account of domestic and international interests as we play our part in the high task of promoting peace and development.

The other noteworthy point about the article is that there are lots of pictures of Hu in friendly mood with other world leaders, including former US President George W. Bush, the leaders of Brazil, India and Russia, and some African leaders.  But the following article on the meeting with Obama shows Hu looking decidedly less welcoming.

China - Africa relations, China - Latin America relations, EU-China Relations, International Relations, US-China Relations

Brussels and Frankfurt are decamping en masse to Nanjing for the next few days for a series of EU-China summit meetings.  I have an oped on the subject in today’s South China Morning Post.  You can see the SCMP version here or read the text I have pasted below.

“The US get toys, the Chinese get Treasuries, and we get screwed.” That was the succinct summary of the relationship between Brussels, Beijing and Washington expressed by one European official.

But hope springs eternal, and the next few days will see not one but two delegations of European Union leaders head to Nanjing. On Sunday, European Central Bank President Jean-Claude Trichet and other representatives of the euro area will make a push for greater exchange-rate flexibility. On Monday, the EU-China summit will bring Swedish Prime Minister Fredrik Reinfeldt and European Commission President Jose Manuel Barroso face to face with Premier Wen Jiabao, with climate change at the top of the agenda.

For the EU, limping out of recession and with unemployment still rising, the unequal trade relationship is the main focus of concern. European exporters have suffered in the past eight months as the yuan has held steady against a falling dollar but depreciated against the euro. That depreciation makes European goods more expensive and Chinese goods cheaper.

With the cries of anguish from European capitals increasing in volume, the euro area’s top brass will be eager to extract some concessions from their Chinese counterparts to bring greater balance to the trade relationship.

But what hope do the eurocrats have of making any progress? China showed how seriously it took the relationship with the EU last year, when the decision by French President Nicolas Sarkozy to meet the Dalai Lama “hurt the feelings of the Chinese people” and the Chinese side cancelled the summit. To underline the contrast in relations with the EU and those with the US, in October 2007 then-president George W. Bush gave the Dalai Lama a Congressional Gold Medal and caused barely a ripple.

Arrangements for the upcoming wave of meetings do little to inspire confidence in the EU’s negotiating position. Separating the euro-group visit from the rest of the summit might make sense back in Brussels - after all, not all European member states belong to the euro zone. But, if the exchange rate were discussed together with the complete set of bilateral issues, the EU could offer concessions or threaten sanctions in other areas to encourage movement on the Chinese side. By treating the exchange rate separately, Trichet and the other representatives of the euro area will find themselves bereft of both sticks and carrots.

For the Chinese, their target of 8 per cent growth this year is virtually assured, and the outlook is even better. But with the latest data on exports disappointing and foreign demand uncertain, there is little appetite to begin thinking about yuan appreciation. China has showed no signs of altering this stance in the face of US pressure. And where the US failed, the EU has little chance of success.

US President Barack Obama came to Beijing, asked for little, and left with nothing. With the EU unable to get its own house in order and China in no mood to compromise, Trichet, Reinfeldt and Barroso are unlikely to do any better.

EU-China Relations, Exchange rate, Trade

A few weeks ago Caijing’s editor Hu Shuli, and a bunch of the best journalists, left the magazine, apparently because of disputes with the owner over control of the editorial line and revenue from advertising.  As Caijing was the mainland’s best investigative magazine, Hu Shuli’s departure has been taken as a bad sign for the development of a free press in China.

Hu Shuli is reportedly in discussions with investors to start a new publication.  In the mean time, she has become the subject of a heated debate in the Chinese press.  This is my translation of an article in the Economic Observer:

‘A recent article published on the CCTV website follows a very straightforward theme: the attempts of foreigners to interfere in China’s affairs through control of the media, and especially the role of Caijing’s former editor Hu Shuli.

This article is reminiscent of the propoganda posters from the Cultural Revilution in its distortion of the facts.  It even makes an issue of Hu’s oversea’s education.  In fact, short of saying that Hu is working for the CIA, the author has no restraints.

The author suggests that Caijing was responsible for turmoil on China’s stock markets, as if, if it were not for Caijing’s muckracking, the Shanghai Composite Index would have healthily progressed past the 10,000 mark by now. 

The author makes out that having foreign employees in an organisation is a sign of some kind of plot.  But in an era of globalisation, what can be strange about foreigners working in China?

If having foreigners working in the organisation is suspicious, then the China Daily is clearly a very suspicious organisation.

It’s been a long time since we have seen this kind of relic of the Cultural Revolution propoganda, and it can’t but make us a little curious.  The article has subsequently been removed from the CCTV website.

As someone who has worked in media for a number of years, my view is that this ephisode is evidence that someone is trying to blacken the name of Hu Shuli.

The job of the media is a dangerous one, not just in China but everywhere in the world, because our job is not just to sing praises, but to report good and bad news.  Maybe there is media in some places that only wants to recite positive news, but some are not yet resigned to this fate. 

Hu Shuli was a crusading journalist, the journalist who broke the news of the baby milk scandal, someone who would not easily abandon journalistic principles.

Now this essay trys to take advantage of her decision to leave Caijing to blacken her name and silence her.  This is really lower than the lowest low.

And this attack on Hu Shuli is not the only one.  The editor of the Hebei Youth Daily was attacked on his own doorstep by a thug saying: ‘report this! report this!’

So this attack on Hu Shuli is not an isolated incident, but rather represents a dark force at work, and ready to pounce at  any opportunity.’

Here’s the original article.

Culture, Media, Social Policy

This weekend I attended a conference in Shanghai on the road ahead for the Chinese economy.  One of the many interesting presentations was from an academic from the Chinese Academy of Social Sciences (CASS) on the future for small and medium sized exporters.  The main points, which were based on a recent survey of 50 companies in 10 cities, were:

- Small exporters are already facing a challenging environment.  Before the crisis, they faced high costs from changing government policy (appreciating exchange rate, higher labour costs).  After the crisis they face weak external demand.  An increase in the savings rate in the US will mean that foreign demand remains low and there are more difficult times ahead.

-Post-crisis, appreciation of the exchange rate will make life more difficult for SMEs. Increasing labour costs will also be a problem, and there is already evidence of labour shortages in some export areas.  CASS had heard evidence of some companies turning away orders because they would not be able to find the workers to produce them at a reasonable wage.

-Company owners are choosing to invest in the property sector or stock market rather than investing in their business.  Some business owners from Wenzhou in Zhejiang (often regarded as the poster-boy for China’s entrepreneuial economy) had invested in coal mines in Shanxi rather than the future of their own business.

-Adaptability is a key factor in differentiating successful small exporters from unsuccessful.  Small businesses can close production lines down when orders dry up and reopen them when business starts to flow.  Access to capital, even at high interest rates (presumably from the informal financial sector?) is a key part of adapatbility.

-Successful small exporters are also innovative, not just in terms of high-tech innovation, but also in terms of increasing the quality and variety of their product offering.  They can switch their focus between foreign and domestic markets.  They can co-operate with their competitors - the researcher mentioned a cluster of bulb producers who guaranteed each others back-orders - so that collectively they never had to turn business away.

Financial Crisis, Industry, Labour markets, Regional, Trade

One notes that ‘this is maybe the best chance for China to sieze the initiative in negotiations, we should speak out for the Asian interest, after all, if Obama wants to support the US currency, he has to rely on us.’

And many people pointed out that the US was China’s debtor: ‘Obama has a nerve, the US can’t organise its own economy, but he comes here and thinks he can tell us what to do.’

US-China Relations

China’s Deputy Finance Minister Zhu Guangyao was all smiles at a conference on the reform of the international monetary system in Beijing today.  But his words may not have been entirely welcome for the European organisers of the event.

With former IMF Managing Director Michel Camdessus sitting behind him, Zhu laid into the role of the IMF in managing the Asian Financial Crisis (Camdessus headed the IMF at that time and personally led negotiations with Korea).  Zhu said that the IMF conditionality had been too strong, and damaging to the region.  He said that no elements of the Washington consensus considered on their own merits are wrong, but that dogmatic implementation of all the elements together added up to a ‘one size fits all’ approach that had demonstrably failed.

Bringing the discussion up to date, Zhu said that the IMF imposed excessive conditionality on developing countries and had no constructive suggestions for developed countries.  Selection of leaders is non-transparent and favours the EU and US.  The IMF was unable to prevent crisis or to resolve them after they occured.

He said that the objectives for the reform of the IMF should be to develop a financial order that is ‘fair, just, inclusive, and orderly’ and that reform measures toward that end should be ‘comprehensive, balanced, incremental, and result orientated.’

Zhu also had some strong words on the question of global imbalances.  He argued that there were many types of imbalance: the imbalance between rich and poor; between the US as a major current account deficit country, and the several countries (including China - but he didn’t mention China) with a major current account surplus; and the imbalance caused by ‘fluctuations in the value of major reserve currencies’. 

He called on the ‘major international reserve currencies to adopt responsible monetary and economic policies’ - a thinly veiled call on the US to reign in its fiscal deficit and monetary stimulus.

There is really nothing new in what Zhu said on the Asian Finanancial Crisis, the role of the IMF, or the origin of global imbalances. What struck me was the cheerful, almost boisterous confidence, with which he said it.

Financial Crisis, IFIs, US-China Relations

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

The People’s Bank of China’s (PBOC) 3rd quarter monetary policy report, published yesterday, is getting a lot of attention.  In particular, its contents are being minutely examined for signs of a change in the approach to managing the exchange rate.

With signs of a recovery in the world economy, with President Obama about to wing his way to Beijing, and with an ever increasing volume of complaints from the EU about the unfairness of the CNY’s peg to the USD, it’s no surprise that this aspect of the report is getting a lot of attention.

But I’m not sure the slight changes to the PBOC’s boiler-plate language on the exchange rate can sustain the weight of interpretation that has been placed on them.  This is my translation of the relevant passage from the report:

‘The fourth priority… according to our own priorities, and in a gradual manner, taking account of international capital flows, and trends in the movements of major international currencies, is to perfect the exchange rate system.’

The first point to make is that this section appears on page 45 of a 46 page report - hardly the place to announce a major change in policy direction.

The second point is that almost all of the surrounding text is boiler plate language that appears in every monetary policy report and has done for several years.

The final point is that the meaning of the new language - ‘taking account of international capital flows, and the trends in the movements of major exchange rates’ - is ambiguous.  It might mean that as the USD has been depreciating, the CNY should end its peg to the USD.  But it might also mean that the US should end the depreciation of the USD as a precondition for the Chinese to begin to allow the appreciation of the CNY.

With China’s exports still looking very shaky, we are probably a long way from the beginnings of a resumption in CNY appreciation, and in my view the PBOC report doesn’t give cause to believe anything different.

Here’s the link to the PBOC report.

EU-China Relations, Exchange rate, US-China Relations

I have posted before on ‘The Founding of a Republic‘ - the epic tale of the birth of the People’s Republic that was released in cinemas across China to coincide with its 60th anniversary (and available in illegal DVD stores the week after).  My view having seen the film, and based on the publicity surrounding it, was that it was a fairly straightforward, if slightly crass, piece of Communist myth-making.

But one Chinese acquaintance I spoke with recently suggested that some lines in the film might carry a subtle subtext that is less unambiguously positive about the role of the Communist Party.  I did some searching and come across at least 1 Chinese netizen who agrees.  This is my translation of their online comments:

‘I went to see ‘Founding of a Republic’ with my roommate today.  There were a few lines in the film that deeply affected me.  At one point, when the Nationalist run economy is on the brink of ruin, Chiang Kai-Shek says with a sigh: ‘fighting corruption is a difficult task, either reform, and lose the party, or don’t reform, and lose the country.’  Hearing those lines, I couldn’t help but think of the situation of our own Communist party, and whether they might ever have to utter the same words.

‘Rotten to the bone’ is another line given to Chiang to describe the Nationalists.  Corruption results when people accept no restraint on their power.  And what is our Party like?  Does the Party accept constraints on its power?

The basic condition of the country tells us that at this point we can’t walk the Western road.  But we can learn from how Washington, in the early days of the founding of the USA, developed a balance of powers in the government.  If our leaders don’t consider the importance of balance of power, dictatorship will be difficult to avoid.’

You can see the original Chinese comments here.

Communist Party, Culture

I attended a financial sector conference in Beijing last week.  One of the more interesting speeches was from People’s Bank of China assistant governor Guo Qingping.  Aside from the usual reassurances that the government would not move away from its ‘appropriately relaxed’ monetary policy, he also offered some reflections on the monetary policy transmission mechanism.

In Guo’s view, the tendency of the banking sector to lend to large state owned enterprises at the expense of loans to small firms not only damages economic efficiency, it also damages the effectiveness of monetary policy.

The reaons he gave, as far as I understood it, is that if small and private firms are not reliant on banks for credit, they are not affected by changes in monetary policy, or at least are affected only indirectly as it impacts their cost of borrowing from other sources.  That means a large section of the economy is unresponsive to the interest rate as set by the PBOC.

He might have added that as many state owned enterprises are quite profitable and have large amounts of retained earnings, they are not completely reliant on banks for credit either - so monetary policy loses its effectiveness even to control the development of the state sector.

The implication of Guo’s speech is that the banking regulators are going to be pushing for banks to broaden their activities, lending more to private sector and small and medium sized enterprises.

But little of this has been evident in the lending so far this year - which has been heavily biased toward the state owned sector.  And with projects now underway at state owned firms that will require top up funding if the borrower is not to default on its debt, the availability of funds for lending to the private sector may be limited for the forseeable future.

Banking, Monetary Policy