China Economics Blog

Foreign direct investment, processing trade, and the sophistication of China's exports

2009-10-18T16:02:00.000-07:00

Just how sophisticated are China's exports becoming? This paper is distantly related to the Puga and Treflet paper below but is far more readable.

Another paper on my "must read" list.

Foreign direct investment, processing trade, and the sophistication of China's exports

Bin XU and Jiangyong LU

Received 28 October 2007;
revised 23 January 2009;
accepted 26 January 2009.
Available online 5 February 2009.

Abstract

China's export structure has shown a rapid shift towards more sophisticated industries. While some believe that this trend is a result of processing trade and foreign direct investment, the evidence is mixed. This paper examines variations in level of export sophistication across China's manufacturing industries. We find that an industry's level of export sophistication is positively related to the share of wholly foreign owned enterprises from OECD countries and the share of processing exports of foreign-invested enterprises, and negatively related to the share of processing exports of indigenous Chinese enterprises. Evidence from the relative export prices of Chinese goods, which measure within-product export sophistication, shows a similar pattern.

Keywords: China; Foreign direct investment; Processing trade; Sophistication of exports

JEL classification codes: F1; O1

"Wake up and smell the ginseng"

2009-10-18T15:38:00.001-07:00

A good paper in the recent issue of the Journal of Development Economics - the premier development journal.

The paper attempts to model incremental innovation in low wage economies such as China and India. The model makes sense and this represents a potentially important paper.

Puga and Trefler and premiership academics - this is a quality piece of work.

Wake up and smell the ginseng: International trade and the rise of incremental innovation in low-wage countries

Diego Puga and Daniel Trefler

Received 12 September 2007;
revised 27 January 2009;
accepted 27 January 2009.
Available online 9 February 2009.

Abstract

Increasingly, a small number of low-wage countries such as China and India are involved in incremental innovation. That is, they are responsible for resolving production-line bugs and suggesting product improvements. We provide evidence of this new phenomenon and develop a model in which there is a transition from old-style product-cycle trade to trade involving incremental innovation in low-wage countries. The model explains why levels of involvement in incremental innovation vary across low-wage countries and across firms within each low-wage country. We draw out implications for sectoral earnings, living standards, the capital account and, foremost, international trade in goods.

Keywords: International trade; Low-wage country innovation

JEL classification codes: F1

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The evolution of renminbi yuan and the protracted debate on its undervaluation

2009-10-18T15:31:00.000-07:00

A good paper in the Journal of Asian Economics. Summarises the various issues very well.

The evolution of renminbi yuan and the protracted debate on its undervaluation: An integrated review

Dilip K.

Abstract

For virtually a decade, the undervaluation of RMB yuan has become an issue of impassioned debate in international monetary economics. This issue kept the academic and policy circles engrossed in argumentative deliberations. That RMB yuan is undervalued is widely acknowledged. With China's emergence as an economic superpower of the future, this debate no doubt has considerable merit and ramifications. This article examines sang-froid the RMB yuan undervaluation and provides a review of recent and on-going research on it. The mid-2005 currency revaluation and modification of foreign exchange regime has enormous significance in this regard. It became a defining moment in the RMB yuan debate.

This article attempts to examine whether accusations of currency manipulation made against China can hold, or are merely disingenuous. It encourages the reader to see whether the RMB yuan should be further appreciated. If yes, whether the misalignment is inordinately large or of incidental order which would be corrected with the passage of time. A good number of econometric exercises were undertaken, using differing methodologies. There was a complete lack of consensus on the misalignment of the RMB yuan. It has slowly appreciated since it abandoned its dollar peg in 2005. As the Chinese economy picks up further growth momentum, the currency appreciation is expected to accelerate.

Keywords: China; RMB yuan; Currency misalignments

JEL classification codes: F30; F31; F33

Foreign Direct Investment in China

2009-10-13T02:35:00.000-07:00

The latest Review of Development Economics issue has a number of papers on FDI in China.

Some interesting topics - I shall try to get around to reading the Kunal Sen paper.

Review of Development Economics

Special Section: FDI, Employment, and Growth in China and India (p 737-739)
Amelia U. Santos-Paulino, Guanghua Wan
Published Online: Aug 27 2009 3:45AM
DOI: 10.1111/j.1467-9361.2009.00512.x

Abstract | References | Full Text: HTML, PDF (Size: 35K)

FDI Liberalization as a Source of Comparative Advantage in China (p 740-753)
Sebastian Claro
Published Online: Aug 27 2009 3:45AM
DOI: 10.1111/j.1467-9361.2009.00513.x

Abstract | References | Full Text: HTML, PDF (Size: 288K)

Exchange Rates and Outward Foreign Direct Investment: US FDI in Emerging Economies (p 754-764)
Manop Udomkerdmongkol, Oliver Morrissey, Holger Görg
Published Online: Aug 27 2009 3:46AM
DOI: 10.1111/j.1467-9361.2009.00514.x

Abstract | References | Full Text: HTML, PDF (Size: 88K)

International Trade and Manufacturing Employment: Is India following the Footsteps of Asia or Africa? (p 765-777)
Kunal Sen
Published Online: Aug 27 2009 3:46AM
DOI: 10.1111/j.1467-9361.2009.00515.x

Abstract | References | Full Text: HTML, PDF (Size: 112K)

Foreign Direct Investment and Regional Inequality in China (p 778-791)
Kailei Wei, Shujie Yao, Aying Liu
Published Online: Aug 27 2009 3:47AM
DOI: 10.1111/j.1467-9361.2009.00516.x

Abstract | References | Full Text: HTML, PDF (Size: 154K)

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China's Exchange Rate Policy, Its Current Account Surplus and the Global Imbalances

2009-10-05T02:37:00.000-07:00

A recent paper by Max Corden in the Economics Journal has a good account of the "China surplus" debate.

China's Exchange Rate Policy, Its Current Account Surplus and the Global Imbalances

W. Max Corden 1
University of Melbourne

ABSTRACT

This article is stimulated by current criticisms of Chinese exchange rate policy. The concern is really about China's current account surplus. The article discusses the factors that determine the surplus, and the reasons why the surplus increased sharply from 2005. The international implications of China's surplus and growth are discussed, and how it has affected the world real interest rate, and through that the US current account deficit. The surplus has had various international relative price effects, which have produced both gainers and losers. Finally, the surplus played only a small part in determining the world credit crisis.

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50 Free Ivy-League lectures

2009-10-01T00:30:00.000-07:00

A great post and interesting resource provided by "online-classes".

Good for economics students and academics alike.

Click on the link to get the actual lecture links. I list here only the top 10 and those related to China.

50 Free Ivy-League Lectures on the Economy [Online Classes]

General Economics

These lectures will help you learn the basics of the field of economics and touch on some more specific economic issues as well.

1. Beyond Freakonomics: New Musings on the Economics of Everyday Life: University of Chicago professor and economist Steven Levitt further explains his theory on everyday economics in this lecture. [Princeton]

2. Game Theory: Learn more about how game theory can be applied to economics in this lecture from Yale professor Ben Polak. [Yale]

3. Financial Markets: This lecture series from professor Robert Shiller will teach you about the basics of the economic system and how each part fits together. [Yale]

4. Economic Theory for an Innovative World: Learn why this economist thinks existing models should be changed so that businesses can foster innovation and change. [Columbia]

5. Women and Economic Development: Learn about the role between women, money and power on a global scale at this great lecture event. [Harvard]

6. Higher Education and the Recession: Check out this lecture to find out how higher education is being affected by the recession and how it might trickle down into local communities. [Cornell]

7. The Challenges Retiring Baby-Boomers Face: This lecture will help you better understand how to plan for retirement or advise your parents on how to do so. [UPenn]
8. Why Stock-price Volatility Should Never Be a Surprise, Even in the Long Run: Here you can gain a better understanding of how stocks work, and why you shouldn’t expect them to remain stable all the time. [UPenn]
9. Close-up on Vicki Bogan: Listen to this lecture to get a better understanding of financial decision making. [Cornell]

32 Globalization and Markets: David Dapice addresses how increasing globalization has changed the face of economic markets. [Yale]

33 The Global Financial Crisis: Iwan Azis discusses how the poor markets will affect the way cities are built and planned. [Cornell]

34 Work with Middle East but focus on Asia: This lecture from Francis Fukuyama asks American business people and foreign policy makers to create better relations with regions that are becoming ever more important in the global economy. [Cornell]

35 Conference on Chinese Capitalism: China has become a major player in the world market, and you can learn more about their importance and business practices from this series of lectures. [Cornell]

36 Feeling the Pain: How the Financial Crisis Is Affecting Brazil, Russia, India and China: This lecture from late last year will give you some insights into the real toll the economic crisis is having abroad as well, with input from business leaders in these four countries. [UPenn]

Overcapacity to be curbed

2009-09-30T01:07:00.000-07:00

The China stimulus package has been something to behold. Massive compared to other countries and a massive distortion.

Whilst is may have saved the global economy (in the short term) it is/has stored up a whole lot of trouble. Bubbles in the stock market and property market to name the obvious ones. Actually they are not technical bubbles, simply rises that are not supported by economic fundamentals.

Today the FT reports on the overcapacity of the industrial sector. Basically firms that should have gone bust didn't leading to more inefficient firms than there should be (although a lot more people in jobs that there would have been).

Also of relevance given Copenhagen is that the stimulus package meant the survival of highly polluting firms that would otherwise have gone under leading to higher emissions than would otherwise have been the case. These are the sectors that should be targeted (although they can also be large employers).

These jobs will be lost eventually - how China manages this will be interesting to watch.

China moves to curb industrial capacity [FT]

China on Wednesday announced details of plans to curb severe overcapacity in industrial production that has been made worse by the country’s Rmb4,000bn ($585bn) stimulus package.

The State Council, China’s cabinet, said in a strongly worded statement that highly polluting sectors including steel, coke, cement and plate glass must cut capacity, while silicon and wind power producers should pursue more orderly development.

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The details came after the State Council first said in late August that it would ask local authorities to “resolutely [curb] overcapacity and redundant construction”, after the country’s massive stimulus measures and excess bank lending led to unbridled expansions.

It said industrial overcapacity could cause intense competition and derail the country’s economic recovery if no action was taken.

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Win in China - the movie

2009-09-29T13:02:00.000-07:00

From the inbox:

Robert A. Compton, Two Million Minutes executive producer, and award-winning film maker Ole Schell team up to tell the story of the world's largest and most lucrative business-plan competition. The competition is held...not in the United States or in any western country, but in communist China.

Commentators in the film include Jack Ma, founder of Alibaba Group and Chairman of Yahoo China, James Fallows, correspondent for The Atlantic Monthly and China expert Orville Schell.

Given unprecedented access to the TV shows producers, contestants, judges and audience, Schell discovers in China things are often not as they first appear.

For the first time, westerners see Chinese capitalism in its rawest form. Superficially similar to western business, Chinese business culture is unique. Beneath the game shows surface lies a nuanced, subtle view of Chinese business practices, ambitions, ethical norms and competitive behaviors.

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"Bridge to China" - a US essay

2009-09-29T12:13:00.000-07:00

At least some Americans in middle America are beginning to see the light. If there were more commentators in the US prepared to wake up to the simple realities of the global economy the US would be better prepared for the future. Tom Watkins publishes his essay.

Bridge To China [Dome]

It may be good politics to rhetorically beat up on China to score points with beleaguered Michigan workers, but it does nothing to build jobs-producing relationships with the fastest-growing large economy on the planet.

My current work in China and my more than 20 years of travel there convince me that rather than stirring fear, we need to be devising an aggressive plan to make China’s rise and globalization work for us. China can and must be part of the ingredients necessary to reinvent and revitalize Michigan’s economy.

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As recently as August 25, in a fundraising appeal for her lieutenant governor’s bid to succeed her, she wrote: “Michigan stands at a crossroads: what kind of state do we want to be in the 21st century? Do we want to be a place where the unemployed suffer while we watch our jobs shipped off on a slow boat to China, on the Internet to India, or on a fast track to Mexico?” This type of appeal pops back up at the same time the chairman of the state party can’t wait to reopen the Democrats’ 2006 anti-China playbook; he’s already throwing jobs-exporting charges against an entrant in the earliest stages of the Republican primary contest.

This type of rhetoric not only fails to create a single Michigan job, it makes the task that much harder by perpetuating anti-China and anti-Asian sentiment.

It’s high time the governor and the rest of us in Michigan stopped using China for division and subtraction and started developing a plan to assure that China’s rapid rise results in addition and multiplication of jobs in Michigan.

Some of the comments are worth reading - it appears that at least some people are prepared to listen. Their future might depend on listening to commentators such as Tom Watkins.

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The new housing bubble in China

2009-09-26T13:04:00.000-07:00

I will post a lot more on this topic but I believe that a large percentage of China's stimulus package ended up in the housing market (and the overinflated stockmarket).

Both will fall again in my view but in the meantime the predictable articles are gaining online and offline column inches.

Home rates going through the roof: city dwellers [People's Daily Online]

Shou Zhenwei, a 28-year-old working at a state-owned company in Beijing, said he felt the home prices had gone through the roof and to buy a home in Beijing was like an unrealistic dream for him.

Shou had to increase his budget from 1 million yuan (146,420 U.S. dollars) last year to nearly 1.5 million yuan this year to buy a second-hand two-bedroom apartment in downtown Beijing together with his fiancée.

A recent survey released by the People's Bank of China (PBOC), the central bank, showed that 65.2 percent of Chinese urban residents in 50 cities nationwide thought that home prices were "high and unacceptable" in the third quarter, up 2.8 percentage points from the second quarter.

About 41.5 percent of respondents predicted that home price in Chinese cities would continue to rise, said the PBOC.

Home price in Beijing would continue to rise moderately in next five years, Liu Xiaoguang, president and chief executive officer of Beijing-based Capital Group, a leading property and finance conglomerate, told Xinhua.

Shou is only one of the millions of Chinese rushing to buy an apartment this year, as they thought home prices had hit the bottom at the start of the year.

Chinese home sales volume and prices began to pick up since February, boosted by people's pent-up demands and their heartened confidence of the economy recovery.

Wang Ke, a sales manager at a Beijing-based IT firm, called himself "a housing slave", as he spent more than half of his salary on the housing mortgage every month, reported Saturday's China Daily.

Wang coughed up 1.2 million yuan for a 70-square-meter flat in Beijing within the fourth ring road by borrowing the down payment from his parents and paying the rest of the 20-year loan in equal monthly installments of 4,500 yuan.

Areas within the fifth ring road is considered the central city in Beijing.

Analysts held that home prices should not increase too quickly, otherwise it would add too much pressure to urban dwellers and hurt the long-term healthy development of the property industry.

What should China do about Iran?

2009-09-26T12:54:00.001-07:00

China is big in Iran and will almost certainly get bigger. This week's revelations on nuclear facilities, whilst not surprising in the slightest, do put China in a bit of a spot.

Mu view is that China will reject sanctions and cash in on the inability of the West to actually do anything. If tough sanctions are imposed and China ignores them it will massively undermine the West's efforts. China produces pretty much everything and its oil companies are expanding aggressively.

China has a huge amount to gain - hence the reluctance to play ball at the moment.

The result - I predict Western military involvement before long. Israel will be the catalyst in my opinion.

China signals opposition to Iran sanctions [FT]

China signalled its hostility to new sanctions on Iran over its nuclear programme on Thursday, even as western powers intensified their drive to increase pressure on Tehran.

A day after foreign ministers from the world’s big powers – including China itself – called on Tehran to deliver a “serious response” to their offer of negotiations over the nuclear programme, Beijing highlighted its misgivings on a tougher stance. “China always believes that sanctions and pressure should not be an option and will not be conducive to the current diplomatic efforts over the Iran nuclear issue,” said Jiang Yu, a foreign ministry spokeswoman.

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In recent years, Iran has become one of China’s most important suppliers of crude oil and Chinese companies have announced large investments in Iran’s capital-hungry oil and gas sector. Oil traders said this week that China had begun selling large quantities of refined oil to Iran , despite a strong US push to block such imports.

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In previous years, Russia and China have initially resisted UN sanctions resolutions against Tehran before finally agreeing to measures against Iranian banks and companies linked to missile and nuclear programmes.

At a meeting with Barack Obama, the US president, on Wednesday, however, President Dmitry Medvedev of Russia provided more explicit support, asserting that “in some cases sanctions are inevitable” but adding that “sanctions rarely lead to productive results”.

Will China raise the stakes on US weakness

2009-09-26T12:24:00.000-07:00

First, apologies for not posting recently. I now have a senior academic management role (sigh), have been at an international conference and have been involved in writing a number of research papers with an academic visitor.

But now I should be able to do better - apologies again.

What is interesting me at the moment is the current balance of power between the US and China. The 2007 crisis hit both countries hard but China appears to have bounced back and is on its feet (although still a little unsteady). The US however has just managed to begin clambering back up the ropes.

[I will cover later why I think China could be back on the floor again].

My feeling is that China smells US weakness but what to do about it? Deliver a knock out blow? But how? China is already aggressively expanding with investment in Africa, Latin America and around the world. The 60th celebrations give China a chance to demonstrate its military might. Taiwan is always lurking in the background and US weakness could provide an opportunity for some action.

One issue to investigate further is that a US decline hurts China given the massive amounts of paper that China owns.

It will be interesting to watch. It is noteworthy that the financial times is picking up on this with a long article on the "Stiring Dragon".

My view is that the US suffered major setbacks under Bush. Ombama might just save them. Policies on biotechnology, online gaming and the rather strange practice of teaching creationism in schools will have a long term negative impact.

China can, and in my view will, capitalise. The US empire is in decline. 2 wars, greedy bankers and some very poor policy decisions have left the door wide open for China to step in and take a world leading position. Sure, China has many many problems that I have covered in this blog but we are looking ahead to the next 20 years.

I love the paper title by Wang Yiwei at Fudan University called “How we can prevent the US from declining too quickly”.

This is a a question that might actually need an answer.

The dragon stirs [FT]

Turn on the television news next Thursday and on display will be the sort of images from China that used to capture the imagination in the days of the Soviet Union. Dozens of tanks will roll down Beijing’s main avenue and past Tiananmen Square, followed by immaculate ranks of goose-stepping soldiers. New military hardware will be proudly paraded, from mobile missile launchers that can reach Washington to J-10 fighter jets produced at a Chinese plant.

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Yet the bigger question raised by these celebrations is: what does Beijing really think of the US? Or, more specifically, does it now believe America – embroiled in two wars and with its economy wilting after last year’s financial crisis – is facing inevitable decline? If the answer is yes, it will have big implications for some of the most important global issues in President Barack Obama’s in-tray, from the future role of the dollar to Iran.

The perception that the US is weakened “could imbue Chinese policymakers with the confidence to be more assertive on the international stage”, says Bonnie Glaser at the Center for Strategic and International Studies in Washington.

Chinese leaders rarely make unguarded comments about the US, although Wen Jiabao, prime minister, has articulated fears about a future collapse in the value of the dollar. “Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried. I request the US to maintain its good credit, to honour its promises and to guarantee the safety of China’s assets,” he said at his annual press conference in March.

Yet behind the scenes of the country’s rise in recent years has been a fierce debate about the future direction of foreign policy among the think-tanks and elite universities that advise politicians – pitting academics who argue that Beijing should take a more confrontational attitude to the US against those who believe development is best supported by playing within the existing world order.

Until recently, that discussion was on hold because of a consensus that the US was by far the dominant power and would remain so for at least another two decades. The status quo is described as yi chao duo qiang – one superpower and several great powers. Even many who proposed taking a more assertive stance against America often argued that such a posture was not for now. Better to bide our time and develop our economy, they said, and follow Deng Xiaoping’s advice to “hide the brightness, nourish obscurity”.

Yet there are signs the belief in US invincibility is waning. Even before the financial crisis, some scholars were questioning US dominance on the grounds that the Afghanistan and Iraq wars had damaged it both financially and morally. In 2006, Wang Yiwei at Fudan University in Shanghai sparked a huge response with an article that had the provocative title: “How we can prevent the US from declining too quickly”.

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China has also become much more aggressive in doing energy deals, including in parts of the world that are politically sensitive in the US. Chinese companies used to be cautious about Latin America, in part because it was considered to be the US backyard, but PetroChina is making a large investment in Venezuela and Sinopec is trying to become involved in Brazil’s new oil discovery.

Chinese oil companies are also investing heavily in Iraq and Iran. Indeed Iran, the country which arguably presents the toughest diplomatic challenge facing the Obama White House, is now China’s third-largest supplier of oil and China has started selling refined gasoline to Iran, in a move that could complicate US efforts to limit the supply of fuel to the country.

China Education - 25 facts

2009-09-05T12:14:00.000-07:00

From the inbox.

I like this post. Generally speaking UK Universities provide a high quality postgraduate education and some departments are becomingly increasingly dependent on Chinese students - the 9% growth in local provision may have a long term impact on the UK University sector.

See the right hand column of this blog for recommended UK PG courses in Economics and related subjects.

25 Surprising Facts About China’s Education System [Teaching tips]

General

Learn about China’s education history and its basic laws and regulations here.

1. Before 1949, 80% of the Chinese population was illiterate: Before the People’s Republic of China was founded, nearly 80% of the 500 million people living in China were illiterate. During Mao Zedong’s rule, education became one of the government’s chief priorities and experienced great change during the Cultural Revolution.

2. Chinese citizens must attend school for nine years: The public education system in China, governed by the Ministry of Education, states that all Chinese citizens must attend school for at least nine years.

3. Chinese youth have a 99% literacy rate: UNICEF reports that from 2000-2007, Chinese youth ages 15-24 years old enjoyed a 99% literacy rate.

4. China intends to match developed countries for supplies and school conditions by 2010: Though China’s primary and secondary schools are lacking in supplies and modern structures, they have created a special fund that will allow them to match the standards of well-developed countries by the year 2010.

5. Private schools were not implemented until the 1980s: While private schools have been common in the United States for years, China did not allow private schools to operate until the early 1980s.

6. Local governments and businesses oversee secondary education: High schools and upper middle schools are run by state and local governments as well as local business leaders.

7. Senior-level middle schoolers or high schoolers must pay tuition: After completing the compulsory nine years of education, students who wish to continue in high school, or the senior-level middle school, must pay a small tuition fee.

8. After-School Education: After-school education is an important aspect of the Chinese education system, and it is overseen by joint efforts between the Communist Youth League, Committee for Women’s and Children’s Work, and various departments in charge of education, technology, culture and more.

Layout and Grade-Specific

Discover the intricate layout of preschool, primary school and secondary school in this section.

9. Preschool lasts three years: Chinese students often start preschool as young as three years old and do not enter elementary school until they are six.

10. Preschool curriculum: Preschools and kindergartens put a lot of emphasis on training young children, since the Chinese believe that this time is crucial to personality development. Students are taught to play games, dance, sing, act and uphold the values of Truth, Kindness and Beauty.

11. Middle school is split into two categories: Lower middle school students receive a basic academic education including foreign language, Chinese language and math, but after they graduate, they take a test to determine their vocational/technical path or another basic extension of traditional school in which students learn science and the humanities while preparing for university.

12. High school lasts for three years: Chinese students receive primary or elementary school education for six or seven years, but are typically in middle school and high school for three years each.

13. Vocational schools: Vocational schools train students to become medium-level workers like technical personnel, construction managers and farmers.

14. Schools for Skilled Workers: These schools are set up to train junior middle school graduates in production and operations fields.

15. Students must take a test to go to high school or vocational school: Those who do not pass the test effectively end their formal education.

16. Preschool education in rural areas is still a work in progress: In China’s remote, aging communities, preschools and primary schools use alternative education options like game groups, activity centers and mobile aid centers to reach young children.

17. Vacation: Primary schools have 13 weeks of vacations and holidays, junior secondary schools have 12 weeks, and senior secondary schools have 10-11 weeks of vacation and holidays.

18. Junior Vocational Schools are mostly located in rural areas: Junior vocational schools, which prepare students to enter the labor market, are most often found in rural and disadvantaged communities.

19. Special education: Gifted and special needs students were not addressed until the 1985 National Conference on Education. There are now 1,540 special education schools in China, plus special vocation training schools for special needs students.

Higher Education

College and graduate school enrollment has increased significantly in the last few decades. Learn how and why these changes are occurring below.

20. College students apply through a central enrollment system: China’s Ministry of Education oversees all college applications.

21. Each year, nearly half a million engineering students graduate from college: Wikipedia estimates that each year, 450,000 engineering students graduate from Chinese universities.

22. Adult higher education programs have increased: In 2002, the Ministry of Education of the People’s Republic of China reports, there were 607 higher education institutions (HEIs) for adults and over 2.2 million adults enrolled in unique higher education programs.

23. Tuition changes: China used to cover the costs of college students, but a new system is evolving, in which students compete for scholarships and some students pay part of their tuition.

24. Graduate education is a relatively new concept: As China plans to improve its economic status, more systems are put into place to support graduate education. Between 1990 and 1995, graduate education enrollment increased at an average annual rate of 9.3%.

25. Between 1999 and 2004, college enrollment nearly quadrupled: In 1999, enrollment in higher education stood at 1.6 million, and in 2004, enrollment was up to 4.473 million students.

Will Obama "tyre" of China or the mob?

2009-08-28T11:46:00.000-07:00

Terrible title I know and after such a long posting layoff as well. I must be rusty.

This is a good FT article from Chad Bown looking at US-China trade relations. They are already under strain - this is adding to the pressure.

I am surprised that the FT use the term "mobs". Chad has it spot on though and has read the situation well in my opinion.

China need to take this threat seriously and it might be wise for them to seek a solution so as to to set rolling a ball that may well prove difficult to stop.

Obama must resist the anti-trade mobs [FT]

The Obama administration’s first real test on trade policy has arrived. The US must decide whether to impose new import restrictions on Chinese tyres under what is known as its “China safeguard” law.

This decision is not just a test of President Barack Obama’s support for free trade. History could well record it as the defining moment when the multilateral trading system was able – or not – to withstand the crisis-provoked protectionist forces that currently threaten to bring it down.

The World Bank-sponsored Global Antidumping Database suggests that, since the economic turmoil began, countries have been ganging up to use World Trade Organisation rules in an almost mob-like response to restrict imports from China. The tyres case could make this far, far worse.

The US tyres case began in April when the United Steelworkers union asked the government to investigate tyre imports from China. By June, the US International Trade Commission recommended the president impose a new 55 per cent tariff. President Obama has the discretion under the law to accept this, offer a different package of assistance to the steelworkers or dismiss the case.

There are numerous comparisons between the tyres decision and the first trade policy test President George W. Bush faced over a steel safeguard case in 2001-2002. Each test occurred under safeguard laws subject to presidential discretion, took place early in each president’s first terms, and could lead to import barriers which would benefit a key domestic constituency.

However, for any US administration with multilateralist aspirations, an important historical element is what happened after the Bush administration imposed import restrictions. The 2002 US trade barriers ignited a protectionist fire that quickly spread across the world. Nine other economies, including the European Union and China, followed the US lead by imposing new steel import restrictions. Some governments feared that the steel exports newly shut out of the US market would be deflected into their own markets.

It is doubtful that today’s struggling world economy, still reeling from the financial crisis, could withstand a similar global protectionist backlash. Unfortunately there are three reasons to expect an even stronger international protectionist response if Mr Obama accepts new tariffs.

First, this China safeguard is just one of many anti-China trade policies currently in vogue. Industry demands for new import restrictions against China under this and other policies such as anti-dumping were up 23 per cent in 2008, and are on pace for another increase in 2009. It is not limited to the US and EU; India, Brazil, Argentina, Indonesia, South Africa and Turkey are imposing most of the new import restrictions China faces.

Second, a little-known loophole in the rules governing China’s 2001 WTO accession makes it easy for a global protectionist response to spread faster and further than that which took hold in 2002. Nowadays, once any one country imposes a China safeguard on imports, all other WTO members can immediately follow suit, without investigating whether their own industries have been injured.

Third, much of the world still follows the US lead regarding new import restrictions. The most recent example was the Bush administration’s reversal of a long-standing US policy that made a particular anti-subsidy law off-limits for use against China. After the US charged China under this law, Australia and India initiated their first such cases against China, and others will follow.

Neither China’s exports nor its policies are blameless in these affairs. Some of the US and other WTO member countries’ concerns are based on legitimate problems. It is simply that the mob mentality on new trade barriers does not help the trading system address such problems.

The best option for the US administration in the imminent China-safeguard decision over tyres is to decline to implement new trade barriers, but to offer the adversely affected communities in the US help through adjustment assistance programmes. Doing so will help the US stand up for the trading system and counter the crisis-driven mob mentality that threatens to bring it down.

Where Chinaeconomicsblog leads the FT is sure to follow

2009-08-05T12:54:00.000-07:00

Of course the fact that the FT is covering the "GDP numbers riddle" has nothing to do with Chinaeconomicsblog's coverage but it is good to see the FT picking it up nonetheless.

China’s growth figures fail to add up [FT]

All but seven of the regions reported GDP growth rates above the bureau’s first-half figure of 7.1 per cent. At the start of the year, Beijing set 8 per cent as China’s growth target for the year.

Hmmmm.

However, this is the first time I have seen poetry as the first line of defence.

The criticism has prompted the NBS to launch a campaign last week, entitled “Statistical Feelings: We have walked together – Celebrating the 60th anniversary of the founding of New China,” to boost confidence among statisticians.

The campaign has already produced works such as: “I’m proud to be a brick in the statistical building of the republic.” In another poem, a contributor writes: “I can rearrange the stars in the sky because I have statistics.”

"Chinese riddles" - Chinese numbers questioned yet again

2009-08-04T07:31:00.001-07:00

This time Radio Free Asia take a sceptical view of China's recent GDP numbers.

This scepticism is more than justified. Does the old adage from school "you are only cheating yourself" apply to the most populated country on earth?

Let us imagine that the numbers are wrong. What harm can it do? It might artificially inflate confidence that may in turn cause a virtuous circle of growth and prosperity? Can it be that easy or is it simply storing up a whole lot of trouble for later?

I have posted this article in full as it makes for important reading. This is an issue I have posted about on this blog on numerous occasions.

The "oil use" issue is important as these numbers are harder to fake. Can oil use fall and output rise by so much? previous correlations suggest not.

Can 100,000 statisticans be wrong? This number of statisticans might even help the UK get its numbers right.

China's Numbers Questioned [Radio Free Asia]

BOSTON—China’s economic growth has won praise in the midst of worldwide recession, but controversy continues to swirl around the accuracy of the government’s claims.

In the run-up to last week’s meetings of the U.S.-China Strategic and Economic Dialogue in Washington, China’s National Bureau of Statistics (NBS) released data showing a strong recovery in the second quarter.

“China is leading the world economic recovery based on fresh data from the first half of the year,” the official Xinhua news agency said, citing an interview with C. Fred Bergsten, director of the Petersen Institute for International Economics in Washington.

According to NBS data, China’s GDP expanded by a robust 7.9 percent in the second quarter from a year earlier, boosting growth to 7.1 percent in the first half of 2009.

But the figures have raised doubts on several counts, most notably because the NBS also reported that China’s first-half exports plunged 21.8 percent.

In an economy driven by exports for the last decade, such a steep decline might have been expected to come as a blow to GDP.

Economists have also questioned NBS reports that industrial output rose 7 percent in the first half, while power generation dropped 1.7 percent.

Oil figures

The government doesn’t report oil demand, but Platts Commodity News estimates that it fell less than 1 percent during the period, while Chinese customs data show crude imports up less than 1 percent.

In May, the Paris-based International Energy Agency noted the lag in oil use and challenged the GDP growth data for the first quarter, calling it “another Chinese riddle.”

The NBS dismissed that criticism as “groundless” in a comment on its Web site.

The latest GDP figures have also been met with deep skepticism from some economists, prompting the NBS to take on its critics in similarly strong terms.

In a Web posting on July 16, Derek Scissors, an economist and research fellow at the conservative Heritage Foundation in Washington, blasted the accuracy of the NBS reports.

“It is reasonable to simply dismiss Chinese economic results,” Scissors wrote.

“Despite starkly limited resources and a dynamic, complex economy, the State Statistical Bureau again needed only 15 days to survey the economic progress of 1.3 billion people.”

“Revisions are a farce: No growth figure has ever been revised down, and announcements of upward revisions are incomplete to the point of uselessness,” he said.

“At best, earlier activity is measured. At worst, results are manufactured to suit the Communist Party.”

Thousands of statisticians

The NBS responded in a lengthy interview with an unnamed official on the English-language China Daily Web site, disputing some of Scissors’ conclusions as “wrong.”

The NBS employs “more than 100,000 statisticians” to compile reports quickly, the official said, adding that “we did not see any sense or kindness in Mr. Scissors’ article.”

In an interview, Scissors said that China’s economy clearly strengthened somewhat in the second quarter, but he argued that the NBS growth data is “internally inconsistent” and “can’t be accurate.”

Scissors rejects NBS arguments that China’s gains in energy efficiency can account for such strong GDP growth when power use has declined.

“The spread between the drop in power consumption and the size of production and GDP growth is too big,” he said.

Other explanations of the data have proved difficult, because the NBS has also reported an 8.7 percent rise in coal production, despite the dip in power generated from coal.

The contradictions may reflect adjustments to inaccurate reporting in the past, Scissors said.

“Their data going back 10 or 15 years is flawed, so you can’t really trust what they’re saying at any particular time because they’re building on a bad base,” he said, citing a similar conflict between falling exports and rising GDP.

“Something doesn’t fit here. What exactly it is, it’s hard to determine.”

Energy experts told RFA they hadn't seen previous cases of such strong economic growth without corresponding power demand.

“It would be very unusual to have rather substantial growth in GDP coupled with a substantial decline in electric power consumption,” said Robert Ebel, senior adviser to the energy and national security program at the Center for Strategic and International Studies in Washington.

“They’re trusting people not to raise questions.”

Large disparities

Mikkal Herberg, research director for energy security at the Seattle-based National Bureau of Asian Research, said that such large disparities cannot be explained by exaggerated energy efficiency gains.

“These kinds of improvements in efficiency in a matter of six or 12 months—that’s just not consistent with energy- intensive industries and the slow turnover of capital stock,” said Herberg, who believes the reporting has grown more unreliable with changes in China’s economy.

“The quality of the information becomes very poor when things are very fluid and changing very quickly,” he said.

The analysts all urge caution in relying on NBS statistics in deciding U.S. policy issues, such as negotiating a new climate change treaty or forecasting an end to the global recession.

“I would hope that our embassy in Beijing is doing what they can to provide people in the government with what they believe is the correct assessment of what’s going on,” Ebel said.

Scissors also responded to the NBS charge that his criticisms were not offered in the spirit of “kindness.”

“Economists all over the world love transparency. It’s what we call truth,” he said, adding that his concern is for better economic policy.

“I want China’s economy to thrive and benefit the world economy, so in that sense, there’s plenty of kindness.”

“There’s not a lot of kindness directed toward the National Bureau of Statistics because I’m very frustrated with them and, of course, so are many other people who follow Chinese data,” Scissors said.

New law

Although the NBS has objected to criticism, the government recently enacted a revised statistics law to toughen penalties for falsifying data.

On July 23, Xinhua also reported that China would take part in a U.S. $4 million (27.3 million yuan) U.N. program to help Asian countries improve statistical reporting.

In Washington, the Strategic and Economic Dialogue meetings concluded July 28 with accords for cooperation on environmental and economic issues but without major breakthroughs in either area.

Where I will not be going to cure my blogging addiction

2009-08-04T07:25:00.000-07:00

The Guangxi Qihuang Survival Training Camp sounds like a pretty scary place. There must be an easier way to ween myself off the internet.

Electoshock treatment also sounds a rather drastic method for getting teenagers to stop surfing the net.

The economics link here is the number of internet users in China. The great Chinese firewall is ultimately doomed to fail. China will be a very different place in 10 or 20 years mark my words.

Net addict son 'beaten to death' at camp [SMH]

A teenager was reportedly beaten to death by trainers at a rehabilitation camp in China where his parents had sent him to cure his internet addiction.

The three supervisors who allegedly beat Deng Senshan, 16, were arrested after the boy's death early on Sunday, his father Deng Fei told the Global Times.

"We are investigating a case where a high school student was beaten to death by his camp supervisors. The case is still under investigation," a police officer in Nanning, Guangxi region, was quoted as saying.

Deng Fei said he paid 7000 yuan ($A1190) to give his son a month's training at the Guangxi Qihuang Survival Training Camp to rid him of his addiction to the internet.

But instead, he said, the boy was put in solitary confinement shortly after his arrival and then beaten to death by his trainers who scolded him for running too slowly.

"My son was very healthy and was not a criminal. He just had an internet addiction when I left him at the camp," Deng Fei told the paper.

"We can't believe our only son was beaten to death."

China has the world's largest number of internet users with 338 million -- more than the entire population of the United States.

More than 10 million of the country's 100 million teenage web surfers are internet addicts, the China Daily said, citing a survey by the China Youth internet Association last year.

There is controversy over the treatments for internet addiction and how it is diagnosed. The health ministry last month banned the use of electroshock therapy to treat internet addiction, the China Daily said.

Is china pumping up another asset bubble?

2009-08-04T00:32:00.000-07:00

In fact you could argue that the property bubble in China never really went away but it is inflating again and this spells danger.

Andy Xie at China Digital Times rants. This is a rant and is a rather simple analysis of a complex picture but there is an element of truth in his words. It may take a lot longer that the 4th quarter of 2009 to deflate however.

Andy Xie: “Crazy Again” [China Digital Times] H/T TDWatkins

Chinese stock and property markets have bubbled up again. It was fueled by bank lending and inflation fear. I think that Chinese stocks and properties are 50-100% overvalued. The odds are that both will adjust in the fourth quarter. However, both might flare up again sometime next year. Fluctuating within a long bubble could be the dominant trend for the foreseeable future. The bursting will happen when the US dollar becomes strong again. The catalyst could be serious inflation that forces the Fed to raise interest rate.

Chinese asset markets have become a giant Ponzi scheme. The prices are supported by appreciation expectation. As more people and liquidity are sucked in, the resulting surging prices validate the expectation, which prompts more people to join the party. This sort of bubble ends when there isn’t enough liquidity to feed the beast.

[...] In summary, the market frenzy now won’t last long. The correction may happen in the fourth quarter. There could be another wave of frenzy next year as China can still release more liquidity. When the dollar recovers, possibly in 2012, China’s property and stock market could experience collapses like during the Asian Financial Crisis.

Is China being screwed by the EU?

2009-08-01T07:49:00.000-07:00

I for one did not realise that the EU tariffs on screws was so high. Why?

The FT report (plus this story makes for a good blog title).

Anti-dumping legislation is always interesting (at least to me) and the EU are getting more and more trigger happy when it comes to using anti-dumping as a means of protection. Dumping is always hard to prove.

It will be interesting to see how this plays out.

China in EU trade spat over screw imports [FT]

China has sparked a row with the European Union after complaining to the world’s trade watchdog that EU anti-dumping duties on Chinese screws and bolts are breaking global commerce rules.

The world’s second-largest exporter lodged its first complaint against the EU with the World Trade Organisation on Friday, protesting that EU tariffs of up to 85 per cent were “neither impartial nor transparent” and were damaging business for hundreds of Chinese companies.

The move signals Beijing’s willingness to defend its trade-related interests more aggressively through multilateral institutions, as well as its implicit acceptance of the authority of those western-dominated institutions.

The European Commission said the duties, imposed in January on goods worth some €575m ($812m) a year, complied with WTO rules and served to protect European businesses from unfairly priced Chinese goods.

Under WTO rules, a country imposing anti-dumping duties must prove its domestic industry has been injured by cheap imports from a specific country.

The dispute comes only days after EU trade officials approved pre-emptive penalties on imports of steel pipe from China, viewed by some as a protectionist move intended to mitigate the effects of the economic downturn within the 27-state bloc.

In a statement from its WTO mission in Geneva, China said the commission had failed to comply with the trade watchdog’s rules when it investigated the imports and imposed the measures.

“The determinations made are neither impartial nor transparent, which infringes the legitimate commercial interests of over 1,700 Chinese fastener producers,” it said.

It said the EU had been inconsistent in its application of the rules given that two Chinese subsidiaries of European firms – Italy’s Agrati and Celo of Spain – were exempt from the duties.

However, the European Commission said the measure was fully in line with WTO rules. “Anti-dumping measures are not about protectionism, they are about fighting unfair trade.

“The decision to impose measures was taken on the basis of clear evidence that unfair dumping of Chinese products has taken place with state distortion of raw material prices,” Lutz Guellner, trade spokesman, said.

Between last September and June, other WTO members, particularly the US, India and European countries, brought 77 cases worth a total of $9.8bn against China, more than double the number of cases in the same period a year earlier, Chinese state media reported.

Until recently, China has been reluctant to use the WTO to defend its interests. However, it has now decided to engage more directly to protect its businesses, according to reported comments from Zhou Xiaoyan, deputy director of the China Bureau of Fair Trade for Imports and Exports.

Is China investing abraod to secure natural resouces?

2009-07-28T02:14:00.000-07:00

There is considerable anecdotal evidence that China is in a "land grab" race in Africa and elsewhere to secure natural resources for its continuing economic growth.

However a recent paper in Pacific Economic Review casts doubt on this conclusion.

The abstract is somewhat contradictory - is China investing in for natural resources or not. It is a shame the abstract does not make this clearer.

EMPIRICS OF CHINA'S OUTWARD DIRECT INVESTMENT
Yin-Wong Cheung*1 and Xingwang Qian 2

ABSTRACT

Abstract. We investigate the empirical determinants of China's outward direct investment (ODI). It is found that China's investments in developed and developing countries are driven by different sets of factors. Subject to the differences between developed and developing countries, there is evidence that: (i) both market-seeking and resource-seeking motives drive China's ODI; (ii) Chinese exports to developing countries induce China's ODI; (iii) China's international reserves promote its ODI; and (iv) Chinese capital tends to agglomerate among developed economies but diversify among developing economies. Similar results are obtained using alternative ODI data. We do not find substantial evidence that China invests in African and oil-producing countries mainly for their natural resources.

Corruption in land auctions

2009-07-22T13:37:00.000-07:00

Not so shocking result of the day - that there is corruption is Chinese real estate sales.

This is still excellent work though and a good paper.

China's Land Market Auctions: Evidence of Corruption"

NBER Working Paper No. w15067

HONGBIN CAI, Peking University - Guang Hua School of Management
Email: hbcai@gsm.pku.edu.cn
J. VERNON HENDERSON, Brown University - Department of Economics, National Bureau of Economic Research (NBER)
Email: j_henderson@brown.edu
QINGHUA ZHANG, Peking University - Guang Hua School of Management
Email: zhangq@gsm.pku.edu.cn

This paper studies the urban land market in China in 2003--2007. In China, all urban land is owned by the state. Leasehold use rights for land for (re)development are sold by city governments and are a key source of city revenue. Leasehold sales are viewed as a major venue for corruption, prompting a number of reforms over the years. Reforms now require all leasehold rights be sold at public auction. There are two main types of auction: regular English auction and an unusual type which we call a "two stage auction". The latter type of auction seems more subject to corruption, and to side deals between potential bidders and the auctioneer. Absent corruption, theory suggests that two stage auctions would most likely maximize sales revenue for properties which are likely to have relatively few bidders, or are "cold", which would suggest negative selection on property unobservables into such auctions. However, if such auctions are more corruptible, that could involve positive selection as city officials divert hotter properties to a more corruptible auction form. The paper finds that, overall, sales prices are lower for two stage auctions, and there is strong evidence of positive selection. The price difference is explained primarily by the fact that two stage auctions typically have just one bidder, or no competition despite the vibrant land market in Chinese cities.

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Is China spawning systematic financial risks?

2009-07-13T15:26:00.000-07:00

Yes say local commentators. I agree.

The China recovery is built on sand - where has the money all gone when trade is still falling, profits are falling and output is falling.

Asset bubbles are forming as we speak. Sell China.

Risks Emerge as Bank Loans Hit Overdrive [Caijing.com.cn]

Record bank lending in China is spawning systematic financial risks that may lead to a credit crisis.

New lending in the January-May period totaled 5.84 trillion yuan, 3.72 trillion yuan more than during the same period last year. That's an unprecedented pace for new loans, as lending levels never even reached 5 trillion yuan for an entire year between 2001 and '08.

This huge influx of borrowing, aimed at stimulating China's sluggish economy, is leading to overcapacity.

Most scholars believe China's recovery is solid and strong, but economic statistics suggest otherwise. Industrial enterprise profits and trade volume have fallen remarkably.

Between January and May, industrial enterprises with annual revenues of more than 5 million yuan booked a combined decline in profits of 22.9 percent year-on-year. Profits for big state-owned enterprises declined 41.5 percent year-on-year.

Meanwhile, China's trade volume fell between January and May by 24.7 percent year-on-year, with imports off 21.8 percent and exports down 28 percent.

Those numbers show that the world market for made-in-China products is shrinking. If China's production-driven growth model continues, the country soon may face a predicament that combines "low interest rates, high capacity and finally low growth" – a scenario that's plagued Japan since the early 1990s.

The global economy is now caught in a vicious cycle: The world expects China to lead a recovery, while China is relying on the international market to absorb its products.

And if excessive lending is a power keg, an interest rate hike will be the fuse that sets it off. Indeed, a credit crisis would ensue if China's central bank raises its interest rate.

Interest rate increases were the immediate causes of the 1988 U.S. credit crisis, implosion of Japan's economic bubble in the 1990s, and the 2007 subprime credit crisis.

China's central bank will be reluctant to raise the interest rate, however, so overcapacity in the real economy will continue.

Due to a lack of investment opportunities in the real economy, speculative investment appears to be a reasonable alternative. That leads to high prices on the stock and real estate markets. Meanwhile, low bank interest rates encourage people to transfer cash from savings deposits to asset markets.

In May 2009, total bank deposits increased by a mere 188.6 billion yuan – down 47.8 billion yuan from the same period last year.

If enterprises and individuals use bank loans and deposits to engage in high-risk speculation, assets bubbles can be expected. Commercial banks would then reduce lending to avoid high credit risks, and market interest rates would rise, puncturing asset bubbles and ruining a financial system pillar.

Debt sale flounders

2009-07-13T15:18:00.000-07:00

China's stimulus plan is large. I just don't like the size of it. Nor it appears does the market.

The plan has already caused a bubble in the stockmarket in my opinion.

China Fails to Attract Enough Buyers in Bill Sales [Bloomberg]

July 10 (Bloomberg) -- China failed to attract enough bidders in a government debt sale for a second time this week on speculation record bank lending will spark inflation in the world’s third-largest economy.

The Ministry of Finance sold 25.1 billion yuan ($3.7 billion) in bills of the 35 billion yuan it had sought, according to statements on the Web site of Chinabond, the nation’s biggest debt-clearing house. The government fell short of its target in a bond sale for the first time in almost six years on July 8.

The auction’s failure reflects concern that Premier Wen Jiabao’s 4 trillion yuan stimulus package will cause bubbles in stock and housing markets, forcing the central bank to tighten monetary policy. The People’s Bank of China this week pushed up money-market rates and drained cash from banks, the biggest investors in the nation’s $2.2 trillion debt market.

“The central bank’s open-market operations suggest concerns that the rapid surge in new bank lending in the first half of this year could fuel inflation,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. “Some people speculate the central bank will raise interest rates this year but I don’t think they can as global growth slows.”

Rising Yields

The Ministry sold 12.48 billion yuan of 91-day bills at 1.15 percent, compared with 0.84 percent at the last such auction on June 19. It issued 12.65 billion yuan of 273-day bills at 1.25 percent, up from 0.88 percent at a previous sale on June 5.

The People’s Bank of China yesterday resumed one-year bill sales after an eight-month pause, signaling a shift from an “extremely loose” policy, Goldman Sachs Group Inc. said.

Chinese banks extended 1.53 trillion yuan of new loans in June, more than double the amount in May, the central bank said on July 8. Housing sales surged 45.3 percent in the first five months of this year, the National Development and Reform Commission said today.

The Shanghai Composite Index has jumped more than 80 percent from last year’s Nov. 4 low. Guilin Sanjin Pharmaceutical Co. and Zhejiang Wanma Cable Co., the first two companies allowed to go public in China since September, were suspended in Shenzhen trading after surging on their stock market debut today.

More IPOs

“More initial public offerings will come, which will further tighten liquidity,” said Shi Lei, an analyst in Beijing at Bank of China Ltd., the nation’s third-largest lender. “Investors are quite bearish on short-term bonds.”

The yield on the 2.29 percent treasury note due April 2014 surged five basis points to 2.53 percent, and the price of the security dropped 0.20 per 100 yuan face amount to 98.95, according to the Interbank Bond Market. A basis point is 0.01 percentage point.

“We doubt their aim was to cause distress in the government’s deficit financing effort,” Christian Carrillo, a bond strategist at Deutsche Bank AG in Singapore wrote in a research report today. “It appears the signaling aim of the PBOC has gone wrong especially given our understanding is that top level governors are very uncertain about the economic recovery.”

Rate Outlook

China’s bond market swelled in size by 16 percent in the year-ended March 31, paced by corporate bond sales, according to the Asian Development Bank. Demand has been waning in recent weeks. Before this week’s failed one-year auction, a sale of five-year government securities on July 3 drew bids for 1.42 times the debt on offer, compared with a 1.65 bid-to-cover ratio in a sale of 10-year notes on June 17.

Investments by China will help developing economies regain their growth momentum in the second half of this year, pulling the global economy out of the worst recession in six decades, the International Monetary Fund said on July 8. The IMF forecasts China’s expansion will accelerate to 8.5 percent next year from 7.5 percent in 2009.

Policy makers will probably refrain from raising interest rates as the government aims for 8 percent economic growth this year to create jobs and maintain social stability, according to a Bloomberg survey of economists. China’s consumer prices dropped 1.4 percent in May from a year earlier, after falling 1.5 percent in April, according to the statistics bureau.

The benchmark one-year lending rate will stay at 5.31 percent and the deposit rate at 2.25 percent this year, according to the median estimate of 15 economists surveyed by Bloomberg News.

China’s exports fell for an eighth month, dropping 21.4 percent in June from a year earlier, the state-run Xinhua News Agency reported today, citing customs data.

“Despite the lack of success in selling the intended amount of bills, it is unlikely that the government would switch its tactics to hiking interest rates,” said Sherman Chan, an economist with Moody’s Economy.com in Sydney. “They are trying to mop up excess liquidity without raising rates.”

Unrest in Xinjiang - live discussion

2009-07-09T12:31:00.000-07:00

From the inbox:

The Director of George Washington University’s International Development Studies Program and Cultural Anthropologist Sean Roberts will be available to discuss the growing unrest in Uighur. He has studied the region for 20 years.

The live discussion will take place today (July 8th) at 1 pm ET at the following link:

http://www.washingtonpost.com/wp-dyn/content/discussion/2009/07/07/DI2009070701491.html

Kicking off the discussion, Roberts says:

"The current unrest in Xinjiang is another chapter in a long history of tensions between Han Chinese and Uighurs, but it is mostly the result of the frustrations experienced by Uighurs over the last decade as the rapid pace of Chinese development in the region has brought scores of Han Chinese migrants to Xinjiang and has displaced Uyghurs from their traditional livelihoods and communities. While the violence that has emerged on both sides of the conflict is shocking, the most surprising aspect of the events may be that the tensions had not boiled over into direct confrontations until now.”

Please feel free to submit questions, or share this discussion with your readers. If you have any questions please let me know.

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Chinese lending - a recovery built of sand

2009-07-09T12:19:00.000-07:00

China is new to the capitalism game and I have been concerned for some time about the size of the stimulus plan. One problem is that the spike in lending is resulting in more risk being taken.

The Chinese recovery may well be built on sand and stimulus packages. This leaves me uneasy. The problem (as it was in the previous stockmarket bubble) is the lack of alternative investment homes for all the cash that is still sloshing around.

Risks Emerge as Bank Loans Hit Overdrive [Caijing.com.cn]

(Caijing.com.cn) Record bank lending in China is spawning systematic financial risks that may lead to a credit crisis.

New lending in the January-May period totaled 5.84 trillion yuan, 3.72 trillion yuan more than during the same period last year. That's an unprecedented pace for new loans, as lending levels never even reached 5 trillion yuan for an entire year between 2001 and '08.

This huge influx of borrowing, aimed at stimulating China's sluggish economy, is leading to overcapacity.

Most scholars believe China's recovery is solid and strong, but economic statistics suggest otherwise. Industrial enterprise profits and trade volume have fallen remarkably.

Between January and May, industrial enterprises with annual revenues of more than 5 million yuan booked a combined decline in profits of 22.9 percent year-on-year. Profits for big state-owned enterprises declined 41.5 percent year-on-year.

Meanwhile, China's trade volume fell between January and May by 24.7 percent year-on-year, with imports off 21.8 percent and exports down 28 percent.

Those numbers show that the world market for made-in-China products is shrinking. If China's production-driven growth model continues, the country soon may face a predicament that combines "low interest rates, high capacity and finally low growth" – a scenario that's plagued Japan since the early 1990s.

The global economy is now caught in a vicious cycle: The world expects China to lead a recovery, while China is relying on the international market to absorb its products.

And if excessive lending is a power keg, an interest rate hike will be the fuse that sets it off. Indeed, a credit crisis would ensue if China's central bank raises its interest rate.

Interest rate increases were the immediate causes of the 1988 U.S. credit crisis, implosion of Japan's economic bubble in the 1990s, and the 2007 subprime credit crisis.

China's central bank will be reluctant to raise the interest rate, however, so overcapacity in the real economy will continue.

Due to a lack of investment opportunities in the real economy, speculative investment appears to be a reasonable alternative. That leads to high prices on the stock and real estate markets. Meanwhile, low bank interest rates encourage people to transfer cash from savings deposits to asset markets.

In May 2009, total bank deposits increased by a mere 188.6 billion yuan – down 47.8 billion yuan from the same period last year.

If enterprises and individuals use bank loans and deposits to engage in high-risk speculation, assets bubbles can be expected. Commercial banks would then reduce lending to avoid high credit risks, and market interest rates would rise, puncturing asset bubbles and ruining a financial system pillar.