China Translated

At the climate change talks in Copenhagen, discussions on the future of the global economy in the G20, and the framing of a response to increasing tensions between North and South Korea, observers have discerned a new approach to diplomacy from an increasingly confident China.

One of China’s leading thinkers on international relations is the Director of the Center for Chinese and Global Affairs at Peking University, Prof Pan Wei.  Last night, I attended a presentation he gave organised by a group called Young China Watchers, where he outlined some suggestions for thinking about international relations in the 21st Century.  This is my notes on his remarks:

‘International relations is concerned with 3 main areas:

1. Power - hard military and economic power and soft cultural power

2. Transitions between old and new powers

3. Geo-politics - strategic alliances between powers

In the 21st Century, thinking about these 3 areas  has to answer 6 new questions:

1. Why is global peace sustainable and war between great powers difficult to imagine?  Why is there now no great enemy like the Germany of the first half of the 20th Century or the USSR of the second?

2. Why is there now no grand system of global alliances?

3. Why is the USA, which accounts for 50% of global military spending, considered a power in decline, but China, with a relatively weak military, considered to be in the ascendant?

4. Why is it that in the 20th Century we only saw nations falling from the first world to the second (Argentina, Russia), but in the 21st we are seeing nations rising from the second world to the first?

5. Why is it so difficult to identify the central concern of international politics - with weapons of mass destruction, islamic fundamentalism, financial crisis, climate change, and the rise of China all competing for attention?

6. Why has no one developed a feasible grand strategy for responding to the challenges of the 21st Century?

Finding an answer to these questions demands thinking past the old theories of international relations.

One way to conceptualise the new world order is to think about different sets of issues - economic, religious, political, natural resources and so on.

For any given issue, nation states can be in conflict, cooperation, or competition.  And nation states can be compete, conflict, or cooperate on one issue, whilst at the same time having a different relationship on another issue.

There are three major implications of this analysis:

1. It is a time of peace - since the potential for cooperation or peaceful competition on some issues means conflict on other issues should not be allowed to spill over into militaty conflict

2. No scope for hegemony by a single world power - because of the mulitiplicity of issues and power assymetries in different issues: ‘it is not sustainable to destroy US$100 tents with US$10mln missiles’

3. There is no scope for grand strategies, and instead nation states need to carefully evaluate their position across different issues areas, recognise uncertainties, and be prepared to respond nimbly to changes in the situation.’

In response to questions from the audience:

Prof Pan was sceptical about the conclusions of the official report on the Cheonan incident - noting that the South Korean ship was an advanced anti-submarine ship so it seems unlikely that it could be sunk by a primitive North Korean submarine.  He thought that the decision by President’s Hu and Obama to not address the issue at their meeting on the sidelines of the G20 meeting was sensible, since there was no easy resolution.

He thought that as China’s engagement in the world increased, and its citizens found themselves in more far flung corners, the scope for Chinese engagement to protect their lives and interests increased, but he anticipated that China would attempt to resolve issues through diplomatic rather than military means.

On the outlook for foreign policy under the Xi Jinping and Li Keqiang generation of leaders, Prof Pan noted that the next generation are cautious and do not reveal what their policy stance is.  He thought they see themselves as better educated and more worldly than the generations of leaders that have come before, and keen to surpass their achievements.  The danger in this is that they will be overly bold. 

On Xi Jinping’s famous remarks in Mexico on foreign leaders that have nothing better to do than criticise China, he said that China’s leaders often made extravagent remarks at private events, that Xi Jinping was actually a rather mild mannered individual, and that this comment was not revelatory of a new assertiveness amongst the next generation of leaders.

Communist Party, International Relations

Although China’s exports to the EU and US have held up pretty well this year, all things considered, it’s clear that the fiscal consolidation just getting underway in these two big markets will make things tough going forward. New avenues to pursue export growth will have to be found, and these are likely to come increasingly from the emerging world. You can already see evidence from the trade numbers that exporters are making headway in penetrating new markets - exports to Brazil were up by an eye-popping 98% year on year in the first five months of 2010, and those to ASEAN markets by 46%.

All of which helps to explain why emerging nations like Brazil and India are beginning to join the US and EU in the interminable finger-pointing over the renminbi. India has also begun to use anti-dumping measures against China on a regular basis across a number of sectors. Is this a sign that a new front in China’s trade wars is opening up? I doubt it. India, Brazil and a few others (Mexico and Turkey spring to mind) have the mass market and the strategic global clout to get in China’s face on trade, but any other emerging nations that try throwing their weight around in this way are likely to receive a bruising reminder of Chinese-style trade diplomacy.

Take Argentina, which earlier this year imposed restrictions on imports of Chinese-made shoes, pipes and other products. China was not happy, and responded with quality control measures on soy bean oil imports that hit Argentine exports. Five months on it’s pretty clear who’s winning this argument: according to the China customs administration Chinese exports to Argentina were up by 75% year on year in January-May, while its imports from the country were down 42%. Given that few emerging markets will be willing to risk losing out on the Chinese bonanza like this, I think most will remain wary of trying to curb the Chinese import surge.

Incidentally, given the clarity of the Chinese trade numbers (regarded as some of the stronger data in China’s somewhat rickety statistical base) it is funny to see Xinhua running with the Argentinian data. These portray a far more harmonious picture, with both China’s exports to Argentina and Argentinian exports to China rising, by 39% and 19% respectively. Trade flows are also much higher than shown by the Chinese side’s data. Sadly in this case, given the background of events on the ground and the poor reputation the Argentinian government has for statistical truth-telling, I’d put more faith in the Chinese numbers.

Duncan Innes-Ker is a senior economist with the Economist Intelligence Unit

China - Latin America relations, Guest contributor, International Relations, Statistics, Trade

China’s official statistics tell a story of the rich getting richer and the poor getting, relatively, poorer.  The official data suggests that the richest 10% of the population have earnings 9 times those of the poorest.

But according to Professor Wang Xiaolu, that’s just the half of it.  Professor Wang’s original research in 2005, suggested that the richest 10% of the population had an average disposable income of CNY96,000/year, several times higher than the CNY28,000 suggested by the official statistics.  Professor Wang believes that the reason for the massive gap between official and real income for China’s rich is that the extra earnings are the proceeds of corruption, and are therefore unlikely to be reported.

According to the most recent posting on his blog, Professor Wang has now updated his research, and found much the same thing.  The ratio between the income of the richest and the poorest 10% of the population is not 9, as suggested by the official National Bureau of Statistics numbers, but rather 21.  Professor Wang notes that this massive disparity will likely have serious implications for social stability, and also strip away public support for economic reforms - which are perceived as disproportionately benefiting the rich.

In an intriguing side note, Professor Wang notes that the massive income of the very rich also helps explain the rapid growth in China’s household deposits.  This puts a new spin on the idea of China’s households as frugal savers.  If Prof Wang is correct, China’s very high household savings rate does not reflect poor and middle income households saving carefully for their future, it reflects a few very rich households parking their ill-gotten gains in the banking sector before buying a yacht.

You can see Professor Wang’s blog posting here.

Social Policy, Statistics

I have an opinion piece in the South China Morning Post today on Beijing’s latest moves on the CNY and the implications for this weekend’s G20.

SCMP subscribers can read the piece here.

Everyone else can read it below:

US Might Miss an Open Goal on the Exchange Rate at G20 Summit

China’s hapless soccer team might not have qualified for the World Cup, but when it comes to playing the game of global politics, its leaders have shown considerably more finesse.  So whilst China’s soccer eleven are polishing their boots, China’s economics A-team is on the way to Toronto for the latest summit of the G20.  There has not been this many Chinese faces arriving in Canada since Hong Kong’s reunion with the mainland.

One week ago, it looked like the latest meeting of the world’s self appointed high council on all things financial crisis would be a festival of China bashing, with the exchange rate the main focus of attention. 

Back in April, when the US Treasury delayed publication of a critical report on China’s exchange rate regime, the unspoken trade off was that China would start the yuan appreciation ball rolling ahead of this week’s pow wow.  The attack dogs in the US Congress latched firmly onto that informal deadline, threatening that if there is no movement on the exchange rate by the G20, they will take matters into their own hands.  If China had not acted last weekend, the US would have been compelled to go on the offensive at Toronto. 

The European debt crisis has Brussels gazing at its own bureaucratic navel.  But with emerging markets like Brazil and India adding their voices to the paean of protest, and rumblings of discontent from East Asian neighbors, China looked set to find itself isolated at the international negotiating table.

By signaling the end of the yuan’s 22-month peg to the US dollar, China has done just enough to calm the storm.  In the few days that have followed the announcement, the yuan has been little moved.  A 0.2% appreciation against the dollar will hardly be enough to bring the competitive shine back to manufacturers in the US rust belt. 

But China has won itself the benefit of the doubt.  The same voices that were, last week, raised in protest, are now offering a cautious welcome for Beijing’s promise of increased flexibility.  The US Congress remains on the war path.  But China has given the Obama administration the fig leaf it needs to justify its softly softly approach to dealing with Beijing, and done just enough to ease tensions in relations with other emerging markets. 

Leaders in the US and elsewhere want China to translate its words into actions - they want real change not just a commitment to change.  But for now, Beijing has moved the exchange rate to where it wants to be - off the G20 negotiating table.

A careful examination of the fine print in Beijing’s announcement on exchange rate reform, however, suggests the US would be well advised not to allow the yuan to slide too far from view. 

China’s trade surplus might have come in at a tidy USD198bln in 2009, but that is still way down from almost USD300bln in the 2008.  Beijing has taken this as evidence that the trade account is coming close to balance of its own accord, and the need for further adjustment of the exchange rate is limited.  The announcement also makes clear that what adjustment there is will be gradual, to give the export factories of the Pearl and Yangtze river deltas time to adapt.  When it comes to exchange rate reform ‘limited’ and ‘gradual’ are not the words that Washington DC wants to hear. 

Even more alarming for the US, China has made it clear that in the future, the direction of travel for the yuan against any particular currency could be down as well as up.  The new plan for the yuan might mean continued stability, or even depreciation, against the dollar, at the same time as the currency appreciates against the euro, the Brazilian Real or the Indian Rupee. 

If Brussels, Brasilia, and New Delhi find the yuan’s new flexibility means appreciation against their own currencies, they will see little reason to support the US on the need for appreciation against the dollar.  By conceding to US demands for enhanced flexibility of the exchange rate, China might have succeeded in turning the international consensus on the need for yuan appreciation on its head.  If it is the US that finds itself isolated at the negotiating table at the next G20, scheduled for Korea in November, they might regret missing an open goal in Canada.

Exchange rate, Financial Crisis, International Relations, Trade, US-China Relations

It’s all change on the exchange rate, with the People’s Bank of China (PBOC) signaling the end of the CNY’s 20-month peg to the USD.  Quite what will replace the peg is not yet clear, with the PBOC suggesting that a move to a basket regime - with the value of the CNY determined in relation to a number of currencies of major trade partners - is a possibility.

In keeping with tradition, the PBOC made their policy announcement at the weekend - partly to give the markets time to assimilate the news before trading begins but mainly, I suspect, to deny us economists any leisure time.

Whilst the PBOC was putting the world to rights, I was flying back from Xinjiang to Beijing, and took the opportunity to glance over a copy of everyone’s favourite nationalist rag, the Global Times - provided for free by the good people at China Air.  The front page splash, which was evidently written before the PBOC announcement, was devoted to the latest saber rattling by the US Congress on the exchange rate.  This is my translation of the opening paragraphs:

‘Howls from a multitude of Congressmen yesterday turned what was originally a quiet hearing into a ’struggle session’ direct at China’s exchange rate policy.  The message from Congress was that patience with China’s policy on the CNY is at an end, and that if action does not come from China by the G20 meeting this week, then Congress will take the matter into its own hands.

This kind of ‘final warning’ from the US Congress has been heard so often in the last 20-years that it has started to give many Chinese people callouses on their ears.  Their selfish and self interested, or blindly arrogant resolutions have contributed countless troubles to the US China relationship.

In fact, the Congress does not have the power to make China act.  But at the same time they are not just a paper tiger.  Experts on US China relations believe that finding a way to deal with the US Congress is a long term challenge for the Chinese government.  But the first objective is not to fear Congressional posturing, and to study ways to break up their power.

This kind of Congressional grandstanding will make international observers believe that US China relations have already passed from a balmy spring into a turbulent summer.’

I especially enjoyed the re-imagining of Congressional Ways and Means Committee as a Cultural Revolution style struggle session.

Exchange rate, US-China Relations

Lately China’s sustainable development goals have been in the news again following the announcement of a sudden jump in energy intensity of production. China has been tracking this interesting metric – which is linked not only to energy use and carbon production but also to technological improvement and movement up the industrial value chain – for some time (warning: apparently nobody outside the relevant departments really understands how it is calculated) and it is said to be a particular focus of Premier Wen Jiabao. Energy intensity had steadily declined 14% from 2005 and was almost on target to meet the 2010 goal of a 20% reduction, but took a sudden 3% (annual) jump in the first quarter. Heavy industry, responding to the tremendous infrastructure push of last year’s stimulus package, is seen as the culprit. Following the news Premier Wen got all medieval, promising in widely published reports to take an “iron hand” on the issue.
For deeper analysis, see the excellent Green Leap Forward.

China’s top leadership has been increasingly visible on alternative energy, low carbon development, pollution control, climate change and other sustainability issues, and Wen seems to be making the energy efficiency target a line in the sand. I think we can safely assume that this is not because senior Chinese leaders are lying awake at night worrying about snail darters and burrowing owls, but because they see these issues as serious potential threats to continued economic development and social stability.

Last week, the Chinese Academy of Sciences published a report of a speech given by the Vice Director of the Chinese Institute of Engineering Du Xiangwan called, “After 2050 China Will Enter a Stage of Green, Low-Carbon Energy Development.” The speech was notable to me for its clear description of the importance of changing China’s current energy use – followed by a set of energy goals that can could perhaps be described as realistic: In his description of China’s energy mix in 2050, renewable energy, including hydropower, has taken a position as a major (but unquantified) component, but coal still occupies 35% to 40% of the total, natural gas has 10%, and nuclear has 15%.

Here’s the report’s description of the issue and China’s strategic approach:

Our Nation Must Move Towards Green, Low Carbon Energy Sources
The tasks of China’s sustainable development of an energy development strategy can be summed up as “scientific, green, low carbon energy strategies,” and can be further summarized as speeding up the transition of regulations and controls, strengthening the primacy of energy efficiency, implementing controls on total energy use, guaranteeing appropriate demand, optimizing a diverse structure, carrying out “green and low carbon,” leadership from science and technology, and a high efficiency economic system.

Proposing such a strategy stems from the challenges faced by China’s energy resources. Du Xiangwan said that China very quickly will become the world’s largest energy consumer. “If China’s energy consumption is maintained at an average growth rate of 8.9%, by 2020 China’s energy consumption will reach 7.9 billion standard tons of coal, which is half the world’s current energy consumption.”

He pointed out that this kind of economic development model would obviously run into very severe restrictions. To support society and the economy’s scientific development, it is necessary to put forth total consumption control standards for fossil fuels, and to plan for the overall speed, structure and consumption model of development. Furthermore, China’s current crude energy exploitation and use results in severe environmental problems.

“No matter how much climate change is disputed, China’s energy must move towards green and low carbon,” Du Xiangwan said.

The original speech is here.

Don Johnson is a senior economist with AECOM

Energy, Environment, Guest contributor, Industry, Statistics

Apparently the number of marriages in China shot up last year, despite all the economic turmoil. According to this report on the China Popin website (quoting the Beijing Morning Post), 12.1m people got hitched in 2009, a rise of 10.4% over 2008.

China’s marriage market seems very volatile. In the last ten years the number of marriages being recognised has plunged by as much as 5.1% in a single year (2005), and risen by as much as 14.8% (2006). Average growth over the last 10 years has been about 3.4% annually.

I’m no demographer, and I guess it could all be to do with lucky years, but I’d love to know whether the boom in weddings last year had anything to do with the stimulus. Were people encouraged to do the deed because credit for that expensive ceremony (not to mention the car and house that poor guys need to bring to the table these days) was cheap? Did all those weddings and young couples redecorating new apartments serve as a powerful tool to help get the economy out of its doldrums?

I guess the question now is whether, with people being limited to one housing mortgage per family in most places, we will see couples divorcing to buy that extra flat? Something along those lines seems to have happened before - divorces shot up 25.2% in the housing boom of 2004. (They were up by a more modest 8.8% last year to 2.5m). Let’s keep fingers crossed that the cost of divorcing as the economy slows and credit conditions tighten will help keep all last year’s lovebirds together…

Duncan Innes-Ker is a senior economist with the Economist Intelligence Unit

Guest contributor, Social Policy

Labour unrest looks set to be one of the stories for the summer in China’s economy, and that means a continued focus on the All China Federation of Trade Unions (ACFTU) - China’s only official trade union.

An opinion piece in the latest edition of free thinking broadsheet Southern Weekend (南方周末 Nanfang Zhoumo) argues that if the ACFTU is to have any credibility with workers, then the system for selecting union representatives needs to be changed.  This is my translation of the key points:

‘If the ACFTU is to play its proper role in representing the interests of labour, it needs the trust of those it represents.

Today’s ACFTU leaders are, in large part, distant from the workers they claim to represent.  A large number are drawn from the ranks of the Communist Party or are closely linked to company management.  How could workers ever trust this kind of leaders to fairly represent their interests?

What is required is union leaders chosen through election by the workers.  Only then will the ACFTU be an organisation that pays attention to the needs of workers, and can be trusted to represent their interests.’

Direct election of leaders?  Sounds like a dangerous precedent to me.  You can see the entire article here.

Communist Party, Industry, Labour markets

Honda parts suppliers in Guangdong, Taiwanese rubber producers in Kunshan, computer parts firms in Pudong, sewing machina makers in Xi’an… employee strikes seem to be one of the hottest fads of the summer in China. Although media coverage within China has now been toned down under guidance from above, the press outside of China has been latching onto the story with vigour (see this FT article for example).

The question many are asking is whether all this unrest is going to push up wages and lead to inflation. The answer to both questions is probably yes, but there’s nothing to get too worked up about yet. For starters, strikes are (with the exception of the scale of the Honda disruption) quite normal as I mentioned before. We’re basically back to where we were in 2007-08 when the export sector was thriving and firms were scrabbling around trying to find workers, so workers were doing their best to exploit their strong bargaining position. It’s true some of the pay rises being announced are pretty impressive, but the media figures need to be treated with a pinch of salt.

I find it very difficult to believe, for example, that Foxconn is really going to be doubling the pay of all its workers–it would make them hugely overpaid relative to their skill level, although with somewhere between 300,000 and 600,000 workers being employed by Foxconn’s parent Honhai in China it really would be a bombshell for the market if it happened. The China Labour Bulletin’s Geoff Crothall notes that there seem to be strings attached to the pay deals they’ve announced.

Besides, the pay rises announced this year, as well as the increases in the minimum wage (which seem to be averaging between 15-20% this year), need to be seen in the context of the pay freeze that was in place for most regions last year. Meanwhile many firms are offering much lower increases, especially in services, where competition is still tough for places. KFC’s Shenyang unit recently settled on a 5% annual pay rise deal with a minimum monthly salary level of Rmb900 a month (although one stressed KFC worker complained that they were really short of staff as ”as soon as interviewees hear [the pay level] they run”). With economic growth set to cool in the second half, some of the upward pressure on wages may ease as we head into 2011.

The elephant in the room in all of these pay stories is the All China Federation of Trade Unions. Experts in the labour field say it’s been doing a terrible job managing worker-management relations, and that many in government and the Communist Party have been criticising its failures. It’s hard to generalise across the country, of course, and some branches do much better than others, but it wouldn’t be surprising to see some reshuffling at the ACFTU or policy rethinking if the rash of strikes continues, or escalates.

Duncan Innes-Ker is a senior economist with the Economist Intelligence Unit in Beijing

Communist Party, Guest contributor, Industry, Labour markets

Wen Qiang, the corrupt former police chief from Chongqing, is a bad dude, guilty of accepting millions of yuan in bribes for the protection of criminal gangs that treated the city as their personal fiefdom.

Wen’s trial has recently ended and Liaowang has got hold of the unfortunate former cadre’s statement of repentance (悔过书 huiguo shu).  Taken together with similar statements from other bent bureaucrats, it makes interesting reading.

Wen’s repentance leads in with a litany of complaints about the poor treatment he received in the course of his career.  He spent ten long years as deputy head of department, always feeling that he was the on top of the job and making major contributions.  The sight of colleagues from the level below, or even two levels below, being promoted more quickly than him, was difficult to bear.  Liaowang notes that complaints about being overlooked for promotion, or left to languish in middle management, are fairly common in the reflections of corrupt cadres.

Another regular feature is complaints about the relative penury of life on a government salary.  Mr Yu, another bad egg from Chongqing, complains: ‘I worked diligently for many years, all for the public good, and yet still had to eek out a life in poverty.  When I think about my wife having to mend our clothes, shop for bargains and never buy the latest trends, and the people who get rich quick without ever making the same contribution I did, I feel sick at heart.’

Corrupt cadres also like to list their achievements.  Mr Zhou, who worked in the public utilities company in Chongqing before his prosecution for corruption, says: ‘My writing has been published in national magazines and received favourable comments, I received an award as an outstanding leader.’  Mr Yu notes that ‘I placed 4th in the government entrance exam and departments were fighting amongst themselves to have me join.’

Corrupt cadres blame the degeneration in their moral code for their slide into evil-doing.  Wen Qiang says ‘I relaxed my moral code, forgot who gave me authority, for whom I should wield authority, and who I served.’  But Liaowang wonders whether the frequency with which the repentant sinners play this particular card indicates that it is more a convenient formulation than a heartfelt confession.

The explanation which I think cuts closest to the bone comes from one Luo Kaijing, who says: ‘everyone was on the take, and there was never any negative consequences.  I just went with the flow.’

For those interested in the causes of corruption in today’s China, Liaowang’s review of the repentance books of Chongqing’s mafia politicians makes interesting reading.  A rapidly developing economy in which government posts control access to economic opportunities, but do not themselves offer the same rewards as those available to entrepreneurs，means both motive and opportunity to put a private hand in the public purse.   Cadres‘ high estimate of their own self worth and contribution to the pubic good provides a self serving moral justification for feathering their own nests.

Communist Party