Damien Ma : The Atlantic

China's (Probably Doomed) Plan to Partner With Hollywood

2012-02-17T15:40:09-05:00

Beijing wants to team up with American filmmakers to produce more Chinese films, but politics can sometimes supersede art.

Chinese director Zhang Yimou poses with his cast members before a screening "The Flowers of War" at the 62nd Berlinale International Film Festival / Reuters

Just as Chinese Vice President Xi Jinping and his entourage descend on Hollywood, Zhang Yimou, China's celebrated film director, is enjoying a warm reception at the Berlinale with his latest historical opus The Flowers of War. According to Der Spiegel:

"The Flowers of War" is the most expensive Chinese film ever made, with production costs of $94 million (€72 million) and a Hollywood star in the leading role: British Oscar winner Christian Bale, famous for his portrayal of Batman. Bale, too, is expected in Berlin this week.
In "The Flowers of War," Bale plays a fictional American who becomes entangled in a real life tragedy -- the 1937 Nanjing Massacre, also known as the "Rape of Nanking," one of the worst war crimes of the 20th century, in which Japanese troops murdered or raped hundreds of thousands of Chinese citizens when they occupied the city, then the capital of the Republic of China. That period strains relations between China and Japan to this day.
"China's younger generation doesn't know much about the events in Nanjing," Zhang says, something he noticed while working on the film. "But almost everyone here knows 'Schindler's List.' Hollywood movies have a big influence on us in China. What we need to do now is further develop our own film industry. We need to produce films that Chinese people want to see -- and, of course, foreign audiences as well."

Yes, Hollywood has an obvious and outsized influence in China, one reason why Beijing caps foreign movie imports to just 20 a year under the World Trade Organization. (This import substitution policy has also spawned a vast piracy market, as Chinese demand for western films and TV shows far outstrips supply through formal, legalized channels.) Yet just as Zhang bemoans the Hollywoodification of the Chinese film industry, his vice president is poised to officially announce a major deal between DreamWorks Animation and Shanghai Media Group in, where else, Hollywood. What's more, Zhang's own Flowers was the product of a "Chollywood" joint effort starring Christian Bale. Best known as Batman in Christopher Nolan's revived franchise, Bale made recent headlines when he attempted to visit blind Chinese activist Chen Guangcheng under house arrest, only to be shoved and punched by a rotund Chinese security guard.

That this encounter between Batman and China went poorly isn't meant to serve as an allegory of the sometimes uneasy relationship between Hollywood and Beijing (exhibit A: Richard Gere and Red Corner). In fact, despite the contention over piracy and constraints on free expression, the relationship seems to be on the mend. Chollywood coproductions, for example, are on the rise, including the latest remake of the Karate Kid with Jaden Smith and Jackie Chan. And money talks. In addition to the possible DreamWorks deal, Bruno Wu, a Chinese media mogul, has created an $800 million fund to invest in Hollywood-Chinese projects. Some serious financing will be flowing toward these ventures.

Can money alone build a legitimate and appealing culture industry? The Chinese are certainly going to try. Indeed, Xi's Hollywood jaunt is directly linked to developments on the home front. Since Hu Jintao's politically charged culture essay early this year that decried foreign influence, the government has released yet another five-year plan on the culture industry (here in Chinese). The dense plan proscribes a significant role for the state in directing the industry's development. It also calls for creating a culture market and allocates special funds and other sorts of policy support to realize it. And, of course, China would like to have films and culture products that contain domestic intellectual property. In its most Orwellian moment, the plan's language calls for strengthening official broadcasting media (read: propaganda) to proactively shape public opinion.

In short, China's strategy here seems to suffer from a sort of ideological schizophrenia. The only certainty is that its unveiling is an implicit recognition of China's enormous cultural deficit and an attempt to solve it. Indeed, China cannot even match its smaller Asian neighbors, such as Japan and South Korea, in cultural output, let alone the United States. Given its economic power, China punches far below its weight on generating creative output that also has mass appeal.

Such is the contradiction that Beijing is trying to untangle, hoping that a few deals with Hollywood can raise China's global profile as a center of the creative industry. It's unclear whether it's likely to work. Just ask Zhang, whose Flowers was largely panned by critics and mocked by Chinese themselves as playing to the Communist Party's sentiments. Perhaps that's why Beijing is insistent on trumpeting him as director extraordinaire, a "safe" choice.

But playing it safe doesn't always make for good art, and can sometimes seem to lead audiences to seek other outlets that offer more emotional and psychological resonance. The central government lacks the ability to live comfortably with the unpredictability of art, and that's exactly the problem. The current political intrigue in Chongqing could be adapted into a gripping series on China's failing institutions like HBO series The Wire, for example; the betrayal between Bo Xilai and Wang Lijun is not unlike the famous unraveling of Stringer Bell and Avon Barksdale. Imagine a split-screen scene with Bo, sitting serenely and Godfather-like at the Chinese opera on the left, and Wang fleeing a trail of police and flooring his Jeep toward the U.S. embassy on the right. The screenplay writes itself. Or at least it would, if the central government were capable of allowing such a thing.

Perhaps it is unrealistic to expect a show as profound and gritty as The Wire to emerge from the Chinese market any time soon. Even American TV has many more Bachelors than Wires. But if China hopes to cultivate a culture industry that is globally renowned and respected, it is not a bad aspiration to accept that sometimes one of the favorite TV characters may just be a gay Robin Hood gangster terminating drug dealers on the broken streets of a decaying coastal city. And if Chinese leaders are okay with that, then China has made it.

How Do You Say 'Badonkadonk' in Chinese?

2012-02-08T15:09:03-05:00

The story of OMG! Meiyu, Jessica Beinecke's wildly popular web video series for Chinese who want to learn American slang.

Jessica Beinecke's "OMG! 美语 (American slang)" / YouTube

That language shapes culture and vice versa seems intuitive and axiomatic. Language and educational exchanges have always been a defining feature of the U.S.-China relationship. Regular people-to-people exchanges, including the State Department's "100,000 Strong" initiative started under President Obama, have been important to the bilateral relationship because of persistent and often serious mutual distrust. The experience of teaching English in China was perhaps most memorably captured in Peter Hessler's book Rivertown. Like Hessler and many Americans since, I too was once an English teacher in China, attempting to dissect the ingenuity of Jay-Z and explicating Hamlet's neurosis to my students. Though I can't say they fully understood the significance of H.O.V.A and To Be or Not to Be (I'm still not sure I do either), I hope they at least learned something about the diversity of America.

Given that experience, I was delighted to discover that, in the age of YouTube and social media, American English lessons have been taken to another level. Meet Jessica Beinecke, a Voice of America journalist who decided that she could leverage all the web 2.0 tools at her disposal to create a show that taught Chinese youth American slang. It's shot with only a webcam and was exclusively on Chinese Youku until recently migrating to YouTube. A profile in the Washington Post describes the show:

Beinecke's two- to three-minute shows appear online only. She posts on Weibo, a Chinese social media site, where she has more than 100,000 followers. For each episode, she sifts through American lingo, introducing expressions and explaining their meanings in Chinese in her signature peppy, comical style.
"You can look up the word 'cow' in the dictionary, but knowing what that means, knowing that you can call someone that? In a dictionary, it's really hard to find," Beinecke said. The same may be said for "rocking a dress," "sweating bullets" or having a "muffin top," expressions familiar to "OMG!" watchers.
Beinecke's fans, particularly teens and 20-somethings, post adoring messages on Beinecke's page and eagerly await each installment from the woman they know as Bai Jie, the Chinese name given to her by a friend when she began learning Mandarin in 2006. Only later did she learn there is also a Chinese porn novel called "Bai Jie," which means white and pure; she kept her name, regardless.

Beinecke went viral in China much earlier than in the U.S., having somehow struck a chord with a video about boogers that garnered 1.5 million hits:

She now has posted hundreds of shows -- covering everything from "badakadonk" to "chillax". The solo effort has paid off, winning hundreds of thousands of adoring Chinese fans on Weibo and accumulating nearly 8 million total hits on the shows.

I caught up with Beinecke recently to chat about her show and her Chinese language training:

How did you come up with the idea of doing the web show?

OMG! Meiyu started as a monthly travel TV show produced for the China branch of VOA. The first travel show we produced focused on U.S. and UK English differences in April 2009, which we shot in London and New York. I hadn't been on television before that, having studied public relations and Chinese at Ohio University. Television was not my goal at all until I found the VOA job on Monster.com.

OMG is an acronym very popular among Chinese and American youth culture. Young Chinese people take it to the next level and say "Oh My Lady Gaga!" So we settled on a name that represents a slang term that both American and Chinese cultures use, and I think we reach a lot more people on a daily basis.

We posted the "Yucky Gunk" episode last August and it went viral. You certainly can't find a lesson on "sleepies" and "boogers" in a textbook, which I think is why it resonated with our viewers. Although we discussed some gross terms in that episode, like snot, those words are useful in American English. Calling someone a "snot" is sort of like calling someone a snob, but you first need to know what snot means.

Was VOA immediately supportive of the idea?

Last spring I actually gave a presentation about turning the TV show into a daily online show. I don't think anyone could have imagined the overwhelmingly positive response we've received. We now have more than 200,000 followers and 7.8 million hits in 6 months. I am so excited to wake up everyday and interact with the cross-cultural community we've developed, and VOA has been extremely supportive.

How much does the video personality resemble your off-screen personality? Did you intentionally adopt this "bubbly" personality because you were trying to reach a young Chinese audience?

First of all, I took an entire year of acting classes at the Studio Theater in D.C. last year because, after shooting the D.C. travel show for VOA, I realized I didn't know how to act! Those classes really helped me open up my emotions and develop confidence in front of the camera.

But I am also a naturally bubbly person. I guess I take after my father, who's the funniest and most encouraging person in my life. Being an eternal optimist, he would always say "Jessi, if you love what you do, you'll never work a day in your life." He was the one who initially supported me when I started studying Chinese, and said it was the best investment he's ever made.

I'd say my default disposition is lively. But subconsciously, my Chinese was very influenced by living with female Chinese roommates in China. We spent so much time talking and giggling together, and I think their lighthearted silliness sort of comes out in my Chinese on the show. Also, I think it's very important to be authentic. I would never put any slang terms or idioms in the show that I wouldn't say to my friends. I think it's important to be as genuine as possible because our young Chinese viewers are coming to me everyday to learn authentic American slang.

I think social media presents a unique opportunity to let followers create the content. Every week I ask our followers on Weibo which words they want to learn, and I get hundreds of responses. So each episode is based on user-generated content, which is the core of this cross-cultural learning platform.

Have your videos received a lot of attention in China?

Yes, we have a very active fan club in Beijing. They threw an OMG! Meiyu party in December when I was in Beijing, and I got to meet hundreds of fans.

How much Chinese language training have you had?

I have the equivalent of about the fourth year Chinese language level. I reached fluency in 1.5 years, thanks to Middlebury College's Chinese language programs. I admit I wasn't the best student in class. I've always wanted to learn just enough to connect with people, make friends and learn more about the culture. I don't know every "chengyu" [Chinese idiom] and I can't recite ancient Chinese poetry. But I am really proud of the way we're connecting two cultures and starting conversations about language learning every day.

Being based in DC, how do you keep up your Chinese, other than doing the videos?

Shooting and posting the daily videos is only the first step in interacting with our followers. I "re-Tweet" their comments 24/7 to keep the daily conversations flowing, and that is always conducted in Chinese and English. Also, 95% of my coworkers are from Mainland China or Taiwan. My interaction with them keeps me fresh.

What advice would you give to US high school and college students who are studying, and perhaps struggling with, Chinese?

1) Watch OMG! Meiyu.

2) Learn the characters. Write them individually and in sentence form over and over. Muscle memory sticks!

3) You don't need to go to Middlebury or study abroad. You can start very cheap on your own by finding a language partner. I think an informal language exchange is so much more fun to have with peers. It takes a lot of motivation and drive to commit to a weekly meeting, but it's worth it.

4) Listen to as much Chinese-language music as possible. I love singing and dancing, so it barely feels like studying when you're having a great time.

What has been the hardest American slang to translate into Chinese?

Translating slang can be difficult because sometimes a direct translation doesn't exist. I mean, what's the Chinese equivalent of "badonkadonk" or "jiggly!?" Our followers love those fun words, and I provide a Chinese explanation for the American slang terms.

I also share my daily routine on a regular basis, which includes an ice-cold fruit smoothie every morning. Our followers were quick to comment and warn me of the impending health risks one faces when drinking cold beverages in the morning [this reaction is familiar to anyone who has spent enough time in China]. I love starting discussions about these US-China cultural differences because we have so much fun comparing and contrasting our day-to-day lives.

This is how soft power is done, by individuals trying and doing, unencumbered. These efforts add up and they are powerful.

The Chinese Faces Behind Your Apple Gadgets

2012-01-28T08:00:00-05:00

A promising new documentary on individual Chinese workers at Foxconn

Protesters depicting Steve Jobs and Foxconn workers act in a street drama in Hong Kong / Reuters

The New York Times over the last week or so ran several stellar pieces on the Apple supply chain and the potential human cost associated with the personal technology device revolution over the last decade (see here and here). Much ink has already been spilled in the commentariat on these stories, which frankly, are less "news" than highlighting revelations about an existing dynamic that has faded into the distant background in the last several years. I have little substance to add beyond what I wrote immediately after Steve Jobs' passing, when ubiquitous praise obscured the thornier issues of Chinese factory workers and what most of us have come to accept as today's global supply chain.

Instead, I want to point to what appears to be a promising new documentary on individual Chinese workers at Foxconn. From an Italian trio of Ivan Franceschini, Tommaso Facchin, Tommaso Bonaventura, Dreamwork China is meant to document the "dreams and rights of a new generation in the world's factory". Based on the clip, I think this is a film that needs to be viewed widely. Without additional commentary, judge for yourself:

Dreamwork China from Cineresie on Vimeo.

This is what the filmmakers had to say to the NYT about their intent:

Q.
What drew you to the subject?
A.
2010 was a very important year for Chinese labor. Chinese workers, especially young migrants, started gaining a lot of attention from the Chinese and international media. At the time, I was living between Beijing and Shenzhen, and I had already been researching the topic of Chinese labor for some years, so I was struck by the change in the public discourse about Chinese labor.
Until spring 2010, Chinese and international media were eager to describe Chinese workers as victims, but then the focus shifted to their activism on the workplace and their (supposed) rising legal consciousness. In particular, at the end of 2010 there were two considerations which pushed me and Tommaso Facchin to undertake the project "Dreamwork China."
The first one was the willingness to experiment with a new medium and a new language for my research. The second one was the idea of describing these workers beyond their being just workers, but as young people with dreams, ideals and goals -- not just as screws or robots on the production lines. We also wanted to investigate these young migrant workers' "awakening," an idea which after the Honda strike has been strongly promoted by the media and part of the academic communities, but is still highly debated.
Q.
What does the story of these workers tell us?
A.
The stories and the dreams that we collected tell us a lot about this new generation of workers, which is taking the scene in the world factory. In particular, as I wrote before, their testimonies remind us of the humanity of these young people, their being something more than "workers." Another thing that we realized while we were touring Italian universities for some screenings was that many Italian students were struck by what they perceived as the "optimism" of these young workers. It didn't matter how hard their life was, they still had a dream to cling on and a strong faith that this dream could be realized, which is something very different from their Western counterparts nowadays.
Q.
Are there any plans to distribute the film?
A.
At the moment, we're still searching for a distributor. We're screening the documentary in universities across Italy and abroad.

I hope the film makes its way to Washington.

After 20 Years of 'Peaceful Evolution,' China Faces Another Historic Moment

2012-01-23T13:05:55-05:00

China's central challenge now is remedying the social consequences and cleavages that its growth has wrought.

A man looks out from a window next to a portrait of late Chinese leader Deng in a gallery at Dafen Oil Painting Village, in Shenzhen / Reuters

Twenty years ago this month, the octogenarian Deng Xiaoping embarked on his "southern tour," a journey that would turn out to be one of the most significant acts of modern Chinese history. Although Deng would die five years later at 92, his organs donated to medical research, the elder leader's bold maneuvering in the winter of 1992 made the China of today possible. Deliberately ambiguous in intention, the trip was in fact a political campaign of sorts aimed at achieving two crucial objectives: First, to sustain the political conditions that would facilitate continuous reform and economic liberalization; and, second, to rescue the Communist Party -- via a reform agenda - -from reducing itself into a speck in the dustbin of history.

Indeed, Deng was thrusting himself into a political climate that was entirely anathema to his "reform and opening up" policy. The conservatives in the party seemingly emerged victorious after the Tiananmen crackdown three years earlier, only to have the collapse of the Soviet Union hand them another convenient justification to block economic and political reforms. A considerable conservative faction vehemently discredited further reform, claiming that it would bring the party to its knees. To them, the Tiananmen tragedy of 1989 and the Soviet disintegration were all products of "peaceful evolution," which they viewed as the clear and present danger. Peaceful evolution was the most serious and threatening in the economic sphere, they claimed, and any economic reforms must be first and foremost subject to the question, "is your surname socialism or capitalism"?

Deng had attempted to shred this ideological straitjacket in 1991, in which he ordered a series of pro-reform essays to be penned under the pseudonym Huangfu Ping (皇甫平). But given the conservative zeitgeist, he could only publish the pieces in the Shanghai-based Liberation Daily, not the more authoritative central mouthpiece People's Daily. His messages were simple but sharp, directly taking the conservatives to task. Deng believed that without reforms and economic development to improve peoples' livelihoods, the CCP was writing its own death sentence. He had little patience for the ideological battles that paralyzed the political system from pursuing a rational course of development. Instead of managing the economy, the political elites were ensconced in petty "left" vs. "right" battles that obscured the larger prerogative of nation-building. One of Deng's most poignant comments to rewire China's ideological mindset was, to paraphrase, "going 'right' can bury socialism, and going 'left' can also bury socialism. China should remain vigilant against moving too far right [toward capitalism], but must primarily prevent returning to the left [toward Mao-style revolutions]."

Needless to say, the commentaries immediately ignited a furor within the party. The conservatives countered forcefully, and Deng did not get the effect he had intended with the public ideological fisticuffs. Having risen from the ashes of political purges three times, Deng was anything but a quitter. When he realized that he needed a closing act to solicit political allies, he orchestrated his month-long trip through central and southern China to win "hearts and minds." Win he did. The southern tour proved highly successful, sending reverberations through Beijing and knocking conservatives off balance. Those who remained on the fence, such as future Chinese president Jiang Zemin, understood the ground had shifted and swiftly coalesced behind Deng's agenda. When the 14th Party Congress opened in October 1992, it was unambiguously clear that Deng had, with persistence and political acumen, once again set China on a course that would dictate its development for the next two decades.

What a course it has been, as the record speaks for itself. Since 1978, China's economy has grown more than 100-fold, while per capita GDP has risen roughly 80 times (not adjusted for inflation or exchange rate differences). It has far exceeded Deng's expectation of reaching a per capita GDP of $4,000 by mid-21st century--a milestone that was achieved forty years ahead of schedule. China's steel output is now north of 600 million tons, an incredible feat considering that the Great Leap Forward in the late 1950s mobilized nearly 100 million Chinese only to end up with 11 million tons of steel.

I recount this snapshot of history on the anniversary of the southern tour not for its own sake, but because I believe it is instructive for observing China today. As China proceeds through a political transition, culminating in the new 18th Party Congress this fall, there are echoes of 1992. The Jasmine Revolution, Arab Spring, Wukan violence, increasing civil disobedience, and pluralism on social media, are new manifestations of peaceful evolution, as Hu Jintao's culture essay elliptically warned against. The unusually public campaigns for political office--primarily construed as a two-way contest between Bo Xilai and Wang Yang--appear to be fundamentally about a referendum on the direction of reforms.

Indeed, the entire edifice of the reform agenda appears to be called into question. Except that the conservatives in 1992 have been replaced by vested interests, having deduced that "reform" is but another name for transferring wealth away from themselves. Therefore, many state-owned enterprises, which indirectly means the central government, are the special interests that would prefer to stall reform rather than facilitate it. Adding to this perception of the increasing role of the state is the fact that Beijing is flush with cash, with fiscal revenue increasing from 15.7% of GDP to nearly 23% in 2011. In fact, the central coffer broke the 10 trillion yuan mark (or about $1.6 trillion = the size of the Canadian economy) last year, reinforcing the notion that the accumulation of state wealth is coming at the expense of the individual citizen and private sector.

Yet the core of it is fundamentally about distributional justice and social fairness. Deng's spirited defense of reform may have created an economic engine that leaped to the world's #2 in record time, the central challenge now is remedying the social consequences and cleavages that this growth has wrought. In other words, "reform" will increasingly be sapped of momentum if the public no longer has a buy-in because they are on the losing end of what passes as reform. A recent essay by a Tsinghua University sociologist captures the phenomenon thusly:

What is the most common feeling in China today? I think many people would say disappointment. This feeling comes from the insufficient improvement in their lives that people are achieving amid rapid economic growth. It also comes from the contrast between the degree to which individual social status is rising and the idea of the "rise of a great and powerful nation."...

...Imbalances in social rights, the reduction of social mobility and the hardening of the social structure will inevitably lead to the rich getting richer and the poor poorer, the strong permanently strong and the weak permanently weak.
The stagnation of social mobility will inevitably bring about a series of consequences. The biggest harm may not be in the gap between rich and poor itself, but the deterioration of the overall societal ecosystem and the fall of civilization. The social ecosystem is similar to the natural ecosystem. "Running water doesn't stink" is an old Chinese saying that indicates that a pool of standing water will become putrid. The deterioration of the social ecosystem resulting from stagnating opportunity is evident, and the picture is not pretty...

China is caught amid a peculiar situation of acute social inequality as a developing country with immature markets. Because the market is not always capable of efficiently delivering public and social goods, the government usually assumes that role to provide a sense of social fairness and welfare. But ironically, the Chinese public seems to perceive the government as a self-interested entity that is primarily concerned about protecting its own wealth rather than investing in public welfare, despite the official rhetoric.

Herein lies the rub. China's impressive global economic might seems to have little resonance to many of its own citizens, who fear that the potential formation of a intractable crony capitalist society is stacked against them. It is no wonder gallows humor that went viral on the Chinese internet included phrases such as "rather fight to the end for the right father than a PhD" (拼搏不如拼爹) or "why kill yourself over physics and chemistry when you can have a 'good' daddy" (学好数理化，不如有个好爸爸).

The political status quo in 2012, unlike the early 1990s, isn't resigned to narrow ideological trench warfare. Rather, it is about monied elites who are largely concerned with enriching themselves and those in their circles, exacerbating inequality in a country that has yet to create a broad-based middle class. But just as China requires the equivalent of an LBJ-like "great society" transformation, forces are arrayed against it, leading to wayward and dispirited reforms.

What's more, the great helmsman Deng Xiaoping is no longer around to right the course. A new political consensus will have to be forged by a new cohort of leaders. Whether they can coalesce around a social agenda as ambitious and transformative as Deng's and inject energy into flagging reforms are ever more pertinent questions. They will get an opportunity come this fall--to complete Deng's unfinished business of heralding sociopolitical change for the sake of nation building.

China's Latest Reforms: Green Energy, Land Grabs, and Housing Booms

2012-01-11T23:03:46-05:00

Beijing is making some much-needed changes, but will they work?

A protester argues with a police officer in Wukan, where demonstrators upset over government land seizures had forced out police / Reuters

The Financial Times ran a piece on China reforming its so-called "resource taxes" that are levied on carbon-intensive commodities such as oil/gas and coal:

Broadly speaking the tax reforms will shift from volume-based taxes, set years ago and generally very low, to value-based taxes that will fluctuate alongside commodity prices. The new system was implemented for oil and gas late last year, and is expected to be extended to coal and other commodities...

...On November 1 the resources tax for oil and gas moved from volume-based (between Rmb8 ($1.30) and Rmb30 a tonne for crude oil) to a value-based tax set at 5 per cent of the value of the oil and gas produced. At today's prices that equates to a tax increase of 10-20 times for crude oil.

But the net impact on China's oil companies will be minimal because the government offset this increase with separate changes to the windfall profits tax - backdated to November 1 to match the day the resources tax was changed - that will largely balance that out...

This move has been anticipated for more than a year now, as China initiated a pilot resource tax in the resource-rich province of Xinjiang as far back as May 2010. Beijing always intended to nationalize the tax if and when the trial period proved successful. Although only levied on oil and gas so far, it seems fairly likely a similar ad valorem tax will be imposed on coal further down the road. In fact, the Chinese energy bureau is reportedly ironing out a plan now. But raising the price of coal, which is already expensive in China, is highly politically sensitive. For instance, the current resource tax on coal by volume is estimated at anywhere between $0.50 and $0.80 per ton. But if moved to 5% ad valorem, based on Qinhuangdao spot prices of roughly $152, the tax burden would rise to $7.50, or as much as a 15-fold jump. This explains the government's hesitancy in imposing such a tax on the lifeline fuel of the Chinese economy.

The logic behind the tax is two-fold, with both goals aimed at restructuring the Chinese political economy. First, to facilitate energy efficiency by pricing carbon-intensive commodities higher and, second, to boost local governments' revenue, with the intent that those local governments then re-invest into cleaner energy and other useful projects. While the energy efficiency motive is obvious enough, as it comports with China's overall energy strategy, it is the second objective that I think deserves some elaboration because of a non-obvious linkage to the housing sector.

Ever since China's major tax overhaul in 1994, which reformed the tax structure to better boost the coffers of the central government, provinces have struggled to sustain revenues. Not only were local authorities required to repatriate more taxes to Beijing, they were also responsible for funding expensive public projects on infrastructure, social welfare, etc. This seemingly contradictory dynamic has been blamed for local authorities turning to converting rural land for housing developments to cover revenue shortfalls. And for the last decade or so, it is no secret that much of the land was sold to property developers. For instance in 2009:

Local governments generated 1.59 trillion yuan ($233 billion) from the sale of 209,000 hectares of land in 2009. Of that, 103,000 hectares was sold to real estate developers, up 36.7 percent year on year.
Land sale revenues for property development hit 1.34 trillion yuan, accounting for 84 percent of the total.

The $233 billion figure is probably under-reported, as it is exceptionally difficult to account precisely for extra-budgetary revenue. But it is clear that money raised from expropriating land (mostly from farmers) went into the pockets of developers, rather than "virtuous" investment or social welfare spending, playing a major role in catalyzing the now infamous housing boom that has persisted since the late 1990s. And of course, it is also responsible for generating the negative social externality of numerous protests and even self-immolations over illegal land grabs, including the well-documented Wukan violence in late 2011.

And so, the resource tax, as well as planned future energy and environmental taxes, are in part intended to sever this self-reinforcing dynamic at the local level. In other words, the resource and energy taxes are something of a "nicotine patch" to gradually wean local governments off of their addiction to land sales to generate revenue. The nationalization of the tax couldn't have come at a more opportune time, as a slow down in the property sector has meant less fiscal revenue. For example, the Ministry of Finance reported that from January to September 2011, the housing sales tax, while still growing, has slowed in terms of year-on-year growth by a remarkable 23 percentage points. Meanwhile, resource taxes collected in 2010 perhaps constituted 10% of total local revenue, which is a whopping increase from a meager 1.3% based on the old volume-based system.

Just how effective these new taxes will be in helping to de-carbonize the Chinese economy and sufficiently incentivize local governments to exit housing developments remain to be seen. But at the very least, Beijing is doing it for the right reasons.

Beijing's 'Culture War' Isn't About the U.S.—It's About China's Future

2012-01-05T10:53:31-05:00

A controversial essay by Chinese President Hu Jintao may be more about the leadership's concerns about their own rule than about clashing with the West

Hu meets with U.S. business leaders in Honolulu / AP

On the first day of 2012, Chinese President Hu Jintao published an essay on culture in a Communist Party journal, Seeking Truth. The language, lifted from Hu's speech at a party plenum on "promoting culture" in October last year, has been interpreted as largely hostile toward the "west" and its machinations to divide China. Here's Ed Wong of the New York Times on this:

The essay, which was signed by Mr. Hu and based on a speech he gave in October, drew a sharp line between the cultures of the West and China and effectively said the two sides were engaged in an escalating war. It was published in Seeking Truth, a magazine that evolved from a publication founded by Mao Zedong as a platform for establishing Communist Party principles.
"We must clearly see that international hostile forces are intensifying the strategic plot of Westernizing and dividing China, and ideological and cultural fields are the focal areas of their long-term infiltration," Mr. Hu said, according to a translation by The Associated Press.

And the Wall Street Journal seems to accuse Hu of launching a "new cultural revolution":

No, it won't be as destructive as the original, in which Mao Zedong brought China to its knees in the late 1960s and early '70s. But his successor Hu Jintao has launched another culture-rectification campaign with goals that Mao would recognize: step up ideological struggle and fight back against Western encroachments.

Hu's words were largely construed as a call for a "culture war" against the amorphous West (see a sensible take from China Geeks on just how Beijing would wage this coming battle) or as an indication that the leadership will tighten domestic censorship and speech. That the Chinese president's opening salvo made western audiences recoil did not go unnoticed in China. The Culture Minister responded on Wednesday by stating that 2012's "culture work" is not a "great leap forward," clearly attempting to defuse any fears of a repeat of the Cultural Revolution, which saw millions killed from 1966 to 1976. It's all about promoting soft power, stupid, says the Culture Minister -- an eerie and Orwellian label.

I have a bit of a different take on Hu's politically charged essay. I am of the view that the "politics" of it are predominantly aimed at the Communist Party itself rather than an abstract "external enemy," in this case the West or specifically the United States. It serves as a warning to both current party members and incoming leaders to remain vigilant, not simply because it is a political transition year but because of the existential fear that peaceful evolution (和平演变) may just be around the corner. Indeed, one of the longstanding fears for the party-state is not that it will go out with a bang but that it will fold quietly in a whimper of irrelevance.

First propounded by then-Secretary of State John Foster Dulles during the Cold War, the concept of "peaceful evolution", which essentially meant promoting policies that would induce a peaceful transition to liberal democracies within the Communist bloc, preoccupied Mao Zedong dearly. The chairman became suspicious of the Soviet Union falling prey to Dulles' cunning ploy and eventually grew so concerned that one of the justifications for launching the decade-long Cultural Revolution in 1966 was to counter the threat of peaceful evolution. Bo Yibo, one of the "eight immortals" who fought with Mao and whose son is turning Chongqing "red" with revolutionary zeal and Maoist campaigns, explained in his memoir Mao's thinking (courtesy of China Heritage Quarterly):

History suggests that although the armed aggression, intervention, and economic blockade launched by Western imperialists against socialist countries can create enormous problems for socialist countries, they have great difficulty in realizing their goal of overthrowing socialist states. Therefore, imperialist countries are inclined to adopt a 'soft' method in addition to employing 'hard' policies. In January 1953, U.S. Secretary of States Dulles emphasized the strategy of 'peaceful evolution'. He pointed out that 'the enslaved people' of socialist countries should be 'liberated', and become 'free people', and that 'liberation can be achieved through means other than war', and 'the means ought to be and can be peaceful'. He displayed satisfaction with the 'liberalization-demanding forces' which had emerged in some socialist countries and placed his hope on the third and fourth generations within socialist countries, contending that if the leader of a socialist regime 'continues wanting to have children and these children will produce their children, then the leader's offspring will obtain freedom.' He also claimed that 'Chinese communism is in fatal danger', and 'represents a fading phenomena', and that the obligation of the United States and its allies was 'to make every effort to facilitate the disappearance of that phenomena', and 'to bring about freedom in all of China by all peaceful means.'

Chairman Mao paid full attention to these statements by Dulles and watched carefully the changes in strategies and tactics used by imperialists against socialist countries. That was the time when the War to Aid Korea and Resist America had just achieved victory, when the United States was continuing its blockade of the Taiwan Straits and its embargo, and when our domestic situation was stable, 'the First Five-Year Plan' was fully under way, economic construction was developing rapidly, and everywhere was the picture of prosperity and vitality. At that moment, Chairman Mao did not immediately bring up the issue of preventing a 'peaceful evolution'. The reason for his later raising the question has to do with developments in international and domestic situations...

...Considering the situation in both the Soviet Union and at home, Chairman Mao took very seriously Dulles's remarks. In a speech to the directors of the cooperation regions[6] on November 30, 1958, Chairman Mao noted that Dulles was a man of schemes and that he controlled the helm in the United States...

Among these passages, this remark stood out for me the most: "He [Dulles]...placed his hope on the third and fourth generations within socialist countries..." (for those interested in the Chinese, Mao supposedly said "帝国主义的预言家门把和平演变的希望寄托在中国党的第三代或第四代身上", which roughly translates into "imperialism's prophesiers have pinned their hopes for 'peaceful evolution' on the shoulders of the party's third or fourth generations.") Well, depending on how leadership generations are counted, China is in that third or fourth generation, preoccupied by a leadership change that is breeding considerable caution regarding any potential destabilizing factors. Mao's warning (or prescience?) may have added resonance, given the year that China just had, which began with the Arab Spring and ended with Wukan. In some quarters in China, these developments are likely viewed as manifestations of western-inspired peaceful evolution. It is a process made much more efficient with the penetration of social media, which are of course western-invented weapons of mass dissemination as potentially powerful as nuclear bombs.

Indeed, the Hu administration has seen a personal communication technology boom like none any previous Chinese leadership has dealt with, unintentionally creating a public that is exerting vigorous bottom-up pressure. Perhaps in an indirect admission of the challenges of a new era of information pluralism, the propaganda chief recently bemoaned the immense challenge in propaganda work and "maintaining reform stability."

Mao's disastrous Cultural Revolution may have "saved" China from peaceful evolution, but the chairman lived to see neither the disintegration of the Soviet Union nor the "color revolutions," which spooked the Communist Party. Hu's essay, then, is perhaps signaling that the party is facing head-on the unprecedented challenges in dealing with a Chinese society that has increasingly moved away from the party's rule. Successor president Xi Jinping and the new cohort will inherit these complex dynamics, not exactly an envious position to be in.

The "culture war" is not truly meant to be waged against nefarious U.S. cultural encroachments. It is instead part of a battle to sustain the confidence of its own people -- via nationalism, Confucian tenets, wealth, cultural renaissance, or whatever substitute that can be dreamed up -- or risk the consequences. The war is, and has always been, about defining the soul of the modern Chinese nation.

The Most Important Political Risks to Keep Track of in 2012

2012-01-04T12:10:00-05:00

With the fate of the Eurozone, North Korea, and other governments in question, will the new year prove as politically momentous as 2011?

Reuters

Now an annual tradition, Eurasia Group unveiled its top ten political risks for 2012, a year that is already anticipated to be highly political. Like last year, in which the top risk was both a shift of, and challenge to, global institutions embodied in the concept of the "G-Zero," this year also identifies the #1 risk as global in nature. To wit:

As we begin 2012, political risks dominate global headlines in a way we've not experienced in decades. Everywhere you look in today's global economy, concerns over insular, gridlocked, or fractured politics affecting markets stare back at you. Continuation of the politically driven crisis in the eurozone appears virtually guaranteed. There is profound instability across the Middle East. Grassroots opposition to entrenched governments is spreading to countries such as Russia and Kazakhstan that were thought more insulated. Nuclear powers North Korea and Pakistan (and soon Iran?) face unprecedented internal political pressure.
Paradoxically, political risk has become so fashionable that its effects are now frequently overstated. Those 2012 political handovers in countries totaling some 50% of the world's GDP? They're not such a big deal this year, whether the democratic elections in the United States and France or managed authoritarian transitions in China and Russia. Moreover, serious challenges to national decision-makers doesn't mean that governments are all poised to buckle under pressure. The eurozone isn't heading toward fragmentation (one of the most consistently over-exagerated risks out there). The American economy is more resilient than many believe. And a Chinese hard landing? Not if Beijing can help it--and it can--in 2012.
So the big challenge, for risk analysts and for corporate decision-makers and investors, is in carefully weighing the risks in a world of ever-increasing information, data, and commentary (much of it noise). Our top risks of 2012 are meant to provide you with tools, signposts, and our best judgments on where all these stories are heading--and on how some stories that you're not reading about elsewhere might prove more important than people think.
The most important macro theme for 2012: The world's key political decision-makers will be focused heavily on questions of domestic economic stability at the expense of international security concerns at a moment when politics is having unprecedented impact on the global economy. This conflation of global politics and markets defines the formal end of the 9/11 era, a moment when decision-makers sought to isolate globalization from international security concerns. The end of the 9/11 era is our top risk for 2012.

While the Eurozone and North Korea make the top five, less discussed issues like Venezuelan election volatility and rising populism in South Africa also make the list. Though these concerns are not incessantly splashed across headlines, the possibility of these scenarios materializing could shake investor confidence. And interestingly, this year's "red herrings" eschew the conventional wisdom on the inherent uncertainty that accompanies a year filled with political transitions from Paris to Beijing:

2012 political transitions
In addition to elections this year in Mexico, Venezuela, Kenya, Taiwan and (maybe) Egypt, 2012 will see political transitions in the US, China, Russia, and France, countries that together represent about nearly half of global GDP and four-fifths of the UN security council. Yet there is surprising little at stake here for geopolitics and the global economy. Whatever risks come with these outcomes will arrive in 2013 or beyond.
The two biggest transitions--in America and China--will go smoothly. Governance in the United States is constrained mainly by structural factors--an entrenched and powerful private-sector lobby and a system that forces two parties to jostle for majority hold of a Congress that neither can fully control. Despite the rhetoric and the punditry, the presidential candidates still veer toward the center in two-party, executive-led America (that's somewhat less true in Congress). And, of course, there's no actual impact until 2013. In addition, for the rest of the world, there is less to the foreign policy differences in this race than the rhetoric might lead you to believe, at least when it comes to Republican candidates (Romney) with a genuine chance to win.
In China, the regime's greatest political success has been the institutionalization of what is essentially a term-limits system for its entire senior leadership, making transitions, the Achilles heel of authoritarian regimes, much less challenging. In 2012, China will have a new slate of next generation leaders, and without a single strong, charismatic force capable of dominating the policymaking process.
It's rule by consensus. We're long past the days of Deng Xiaoping or Zhu Rongji, and it will take a year minimum for that new group to come together and start implementing a new strategic plan, which itself will represent only an incremental change from what we've seen for the past five years. It's big headlines, not much impact.
In Russia, despite unprecedented popular protests in recent months, there's not going to be a lot of suspense on election night as Vladimir Putin retakes the presidential reins. Despite the impressive crowds of recent days, there is no Arab Spring on the horizon in Moscow. Kremlin-sponsored opposition parties will take considerable wind from the sails of Russia's demonstrators. President Dmitry Medvedev may well be left by the wayside, but that's not going to affect Russian governance. For 2012, Putin will spend money and co-opt elites to ensure that everything goes as close to Kremlin plan as possible. There's room for a little embarrassment, a rogue uncle turning up at the party, getting drunk, and embarrassing his family. But the holidays go on, and so does Russia. Not much to see here.
In France, Sarkozy looks weak, no question. At this point, it's tempting to call the election for François Hollande. That could very well change, but the candidates' positions on the issue that matters most for markets--the fate of the eurozone--are quite similar.

As many are surely preoccupied with Mitt, Ron, and Rick in Iowa over the next few days, each one of them will have to deal with Jinping, Nicolas, Vladimir, and Jong-Un between now and November.

The full report can be read here.

Is China Ready for 2012?

2011-12-29T11:45:00-05:00

The Chinese leadership will face daunting challenges in the coming year

Reuters

It is appropriate that the year began with the Tiger Mom and closed with an official indictment of the management of the Chinese high-speed rail program. The book ends of this year's China narrative capture the zeitgeist in 2011: the ever fiercer duels between the China bulls and bears. Yes, Amy Chua is American, but her story became instantly linked to the general competitive fears that Americans had about what appeared to be an unstoppable juggernaut -- perhaps one of the most overused nouns in describing China. From raising future Ivy Leaguers to clocking the fastest bullet trains, the Chinese can do it all and with exacting efficiency. It was a year in which many latched onto the China story, many more traveled to China for days or weeks and commented on it, and many used the country as a reflection of America's own debilitating dysfunctions. A "juggernaut" it may be, but China's size is also its curse. The country is no longer under the proprietary province of China specialists -- it is now subject to Saturday Night Live parodies and Gary Shteyngart's literary satire. For better or worse, 2011 saw the democratization of the China narrative.

This debate is due in large part a consequence of this democratization, leading to a proliferation of "takes" on China that make it difficult to separate the good from the bad. Each camp can marshal enough evidence to support their respective cases. To be sure, the China bulls had plenty of ammunition entering into 2011. China was the indisputable growth engine in the wake of the financial crisis, just as the Eurozone was lurching from fiscal to political crises and the U.S. faced abysmal employment figures. Formally assuming the #2 spot in the global economy, China took on some swagger. President Hu Jintao's January state visit in Washington was popularly viewed as a debt-collection exercise (call that the "SNL effect"). I recall watching Hu's motorcade, regaled in Chinese flags, descending Connecticut Avenue as a random passerby quipped, "you know what that means, he's gonna want his money back."

Of course, Hu wasn't asking for his money back and in fact continued to pile China's foreign exchange reserves into U.S. Treasuries as the export sector boomed amid a global downturn. Yet support for an export-led strategy had already waned and was clearly de-prioritized as Beijing finally unveiled its long-awaited 12th Five-Year Plan in March, as I have previously discussed. (Also see here, here, and here.) The rebalancing agenda incorporates a major effort to restructure China's energy landscape, including a commitment to nuclear energy. And so, despite initial concerns over the prospects of China's nuclear program in the immediate aftermath of the tragic Fukushima disaster, China never intended to ditch its ambitious program. The Chinese position lent some cheers for those hoping for a nuclear renaissance.

Things appeared rather swell, even as the perception on China began to shift. For the next several months, China was walloped by investor bears, who overwhelmed the bulls. Few were as colorful as investor guru Jim Chanos in describing China as running on a "treadmill to hell". But the compounded effect of stubbornly high inflation, a clampdown on the property sector, cleaning up the stimulus hangover, a deadly bullet train crash, and embarrassing discoveries of fraudulent Chinese IPOs all made China appear much more wobbly than many had thought. And all of this took place as the Arab Spring reached a crescendo, prompting the arrest of activist Ai Weiwei -- the Liu Xiaobo of 2011 -- and as the mood over Eurozone prospects grew darker than ever. "Pork prices," "ghost cities," "hard landing," "political repression," and "debt-laden local governments" became the watch words for the rest of the year.

So did the Beijing mandarins over-tighten as it was heading into a double dip because of Europe? In other words, was China repeating the mistakes of the 2007-08 period? For markets, China was the remaining leg in the tripod of global growth -- the other two being the U.S. and EU -- and any sputtering of its economic engine could prove disastrous. Beijing responded by signaling a looser fiscal and monetary policy to put a floor on growth, even as it is determined to keep the screws tight on the housing market to prevent another bout of irrational exuberance. Why? Because despite the preference for full-throttle growth by some, the Chinese public still ranked inflation and housing prices as top issues in 2011, according to a recent survey by an influential state think tank (h/t China Smack):

Indeed, nearly 60 percent of respondents believe that inflation was the #1 issue, while housing costs ranked #6. Healthcare and education costs, employment, social security, wealth gap, and corruption all made the top ten. These are largely bread-and-butter issues that have little to do with demanding Western-style political liberalization, though corruption and the income gap would require political solutions. What transpired in "Occupy Wukan" over the last month or so was not an urgent demand for democracy, but is emblematic of the worsening rural-urban divide and local government malfeasance. Wukan alone won't bring down the Chinese government, but the two structural maladies, if left untreated, could, not least because they have before.

That is precisely what the rebalancing agenda seeks to solve. It is meant to rescue the party-state from defeating itself by allowing these problems to fester. I think what I wrote in last year's wrap-up remains valid as we head into 2012:

...But the outstanding question remains whether China's leaders will pursue the right policies with the kind of urgency necessary. Major economic adjustments are usually never pleasant, and most leaders would prefer to minimize the pain on the largest swath of the population possible during that process. The Chinese are no different in this regard, but how much heavy-lifting can they tolerate?

Yu and a similarly reform-minded lot are advocating temerity over timidity, likely in a bid to influence the direction of debate as there are forces inevitably arrayed against them. Plenty of interests in China eschew these changes that will involve taking away some of their wealth, likely prompting a vigorous defense of the status quo...

To me, one of the biggest questions next year is whether China can create the necessary political conditions, amid one of the most important transitions in a decade, to forge ahead with its restructuring. With the anticipated slow down in growth and a shrinking export surplus, there appears to be an opportunity to steer the ship of state in a different direction. Yet with a political leadership still unsettled, I find it hard to be optimistic over the extent of progress next year. But I am fully open to being surprised.

Kim Jong Il Might Be Gone, But the Satire Will Live Forever

2011-12-19T14:45:00-05:00

Is Kim Jong-il's son crazy enough to succeed his father?

Reuters

"Kim Jong Il? You mean Kim Jong Dead," my fiancee quipped last night when news of the North Korean dictator's death first broke.

There is something about insular, totalitarian regimes that makes them dependable fodder for mockery and humor. the Kim dynasty is arguably one of the most peculiar and anachronistic, spawning reams of satire and curiosity. Given that every major power in the region -- China, the U.S., South Korea, and Japan -- is basically stuck in "wait and see" mode, it might be a good moment for some levity amid the vast uncertainty. Here are three items on the new, and perhaps the illest, Kim on the block.

Remember "Kim Jong Il looking at thing"? His son and presumed "Most Endearing Leader" Kim Jong-Un enjoys the same:

Looking at industrial equipment:

Looking at a gift from the Chinese minister of public security:

Looking at his mountains:

And of course, where would satire be without the Onion weighing in:

Kim Jong-Un Privately Doubting He's Crazy Enough To Run North Korea

PYONGYANG, NORTH KOREA--In surprisingly candid remarks today following his father's death, Kim Jong-un, heir apparent to North Korea's highest government post, expressed doubt that he was sufficiently out of his mind to succeed longtime dictator Kim Jong-il

While emphasizing that he was definitely completely insane and would likely become even more so as leader of North Korea, the younger Kim nevertheless wondered if he could ever be enough of a lunatic to truly replace the most unhinged dictator on the planet.

"Obviously, I know I was handpicked because I'm super crazy," said Kim, the youngest of the late 69-year-old dictator's four known children. "But my father was just so great at what he did. Did you know the people of North Korea heard his voice exactly once, for like five seconds? How nuts is that? Honestly, I look at stuff like that and I think, 'Wow, there's just no way I can ever top Dad.'"...

Finally, the always redoubtable NMA has another of their animated "news" clips, with the now familiar crassness:

2011: When Chinese Social Media Found Its Legs

2011-12-18T21:27:06-05:00

A charm offensive from the U.S. ambassador and a few fumbles from the Chinese government were amplified this year through the growing power of microblogging

U.S. Ambassador to China Gary Locke, second left, shakes hands with bystanders outside Shuibu kindergarten in Taishan, Guangdong province, southern China. (AP Photo/Kin Cheung)

Authoritarian regimes' days were supposed to be numbered in a web 2.0 world. Indeed, it has long been hypothesized that the proliferation of communication technology would lead to the demise of illiberal and strong-handed autocrats. It seemed impossible for any cabal of powerbrokers to remain immune to a public fitted with new tools of protest and collective action. The instantaneity and velocity of truths, pictures, and videos speeding across vast transnational networks made life very difficult for governments not accustomed to responding to the demands of the people. This year, it seemed that the cyber and technology utopians were proved prescient.

In the fertile crescent, a war concluded just as a revolution spread, toppling regimes more effectively in several months than the bloody and misplaced military adventure that lasted nearly a decade. From London to Athens, discontent sprung from unnecessary brutality and necessary austerity. From DC to San Francisco, occupiers and 99 percenters became disillusioned by how all men may be created equal, but grow into inequality. In Moscow, a popular indictment on crony capitalism proved that Putin's seeming invincibility is a canard. A unifying force is present in these uprisings and protests: the penetration of social media. Yet in China, apart from the current "contained" protests in Wukan, the state appears to be the exception to the political paroxysms afflicting numerous corners of the globe.

But it would be a mistake to believe that the Chinese government is not shaken by the unpredictable anti-incumbent contagion that has infected regions as diverse as Tunisia and the United States. Although the Chinese political establishment remains intact, it is facing popular pressures unprecedented in the regime's recent history, precisely because of the rapid adoption of new media that undermine its traditional information monopoly. In fact, 2011 was arguably the year in which the Chinese Twitterati found a voice and flashed its teeth, not to overtly challenge the state's legitimacy, but to hold it more accountable than it prefers. In the absence of a robust legal system, the government is now being forced to answer itself in the court of public opinion.

Several issues stand out for me in the past year:

1. The high-speed rail crash: It became a sensation in the Chinese microblog universe, triggering a tsunami of criticism at government handling of the incident and the larger issue of crony capitalism that is all too common in today's China. The episode prompted the government to undertake a comprehensive safety evaluation, sack the rail minister, and pledge more transparency.

2. The controversy over air quality measurements: The horrendous pollution in Beijing in recent months lit up on Sina Weibo, the Chinese microblog, where many inveighed against a government withholding crucial air-quality information from its citizens. The story even contained a minor wrinkle in U.S.-China relations. As the U.S. embassy's own twitter feed tracked the PM2.5 pollution particle, it earned the trust of the Chinese public, embarrassing a Chinese government that tried, but failed, to convince the public that it is yet another American ploy to destabilize China. Under intense pressure, officials had to concede that it must make more information public.

3. Gary Locke's unintended charm offensive: A rock star before he even boarded a plane for Beijing, Ambassador Locke became an overnight celebrity among the Chinese Twitterati. Photos of him purchasing Starbucks coffee with a coupon and carrying his own luggage drew wide approval among the Chinese public. As I have noted, trumpeting an US official's "average-ness" is a reflection of the Chinese public's own displeasure at the braggadocio, elitist attitude, and unchecked authority of its own officials.

Just as it is apparently en vogue these days to use "China" as a mirror for our own considerable dysfunctions (I'm looking at you Tom Friedman), we often forget that the Chinese public, too, deploys "America" as an instrument to reflect on their own shortcomings. And in each of the above cases, the unspoken but obvious deficiency is that the Chinese regime is facing a growing credibility gap in governance, in large part because it can no longer construct a singular reality, for it is being coopted by individuals weibo-ing, blogging, and YouKu-ing. At its most elemental, it is evolving into a contestation of truth between the state and society.

So far, the power of social media in China primarily resides in its seeming capacity to hold the government accountable, incrementally influencing its behavior. It has not been a regime-wide destabilizing force, not least because the state has overwhelming capacity to control the system. At the same time, however, social media has a disproportionate impact in the Chinese context because it is perceived as one of the only unfiltered channels of information. Its exponential growth clearly unnerves the Chinese government, which is already taking action by requiring real name registration on weibo. Yet weibo is almost "too big to fail"—shutting it down would exact too high of a cost. To give a sense of the size of the internet and social media penetration, I found this series from "We are Social" mind-boggling (h/t to China Hush):

Scale matters. These numbers are dizzyingly large, and they certainly look frightening to the Chinese government. To be sure, the regime has been particularly adept at preventing sparks from setting the prairie on fire. The Great Firewall was supposed to be the all-enveloping fire-proof net, though it was never without leaks. And can it contain 350 million+ sparks, or how about half a billion? The key question, then, is whether the Communist Party, wading into the uncharted waters of controlling social media, double down on its current approach of ham-fisted repression or adapt to the inevitable reality by becoming more open and publicly accountable.

To that question we anxiously await the answers. And so are the villagers in Wukan.

New Documentary Explores China's Growing Presence in Africa

2011-12-02T12:37:29-05:00

China's expanding footprint in Africa has become almost synonymous with a paradigmatic shift in global power. Yet too often, discussions of this phenomenon is sifted through abstract concepts like geopolitics, nefarious neocolonialist intentions, and resource mercantilism. While important in their own right, these ponderous concepts and terms tend to skirt over the simpler motivations and tangible developments on the ground. There is also a tendency to treat "Africa" as an indistinguishable and amalgamated mass that is having things done to it by "China," another featureless geopolitical entity armed with cash. But what are the things being done by the Chinese? And how are individual Africans responding? Few mediums are as capable as film in capturing microcosms of reality that reflect broader narratives--it is an unparalleled story-telling device. And the story that is told in When China Met Africa, the latest documentary by Marc and Nick Francis, is one of the most fascinating and unique I've seen on this subject.

In many ways, the film is minimalist in scope but ambitious in conveying the humanity in this complex and nuanced Asian-African courtship. That is precisely its strength. Instead of offering sweeping generalizations about "China's impact on Africa," the filmmakers deliberately focus on a single country: Zambia. Instead of attempting to construct a grand narrative, the film unfolds in layers and revolves around three simple and interwoven stories: Mr. Liu, a Chinese farmer/entrepreneur, Mr. Li, a Chinese project manager for a Henan-based (central Chinese province) state company, and the Zambian Trade Minister Felix Mutati.

Nothing obvious -- like a common plot or cliched coincidence -- binds these very different men. What connects them is that none seems to have fully digested the larger significance of their efforts. It is merely routine -- Mr. Liu just wants to run his farm, Mr. Li wants to shepherd his road project to fruition, and Minister Mutati wants more Chinese investment. But that is how development is done and how relations between two states are sustained. In their small and quotidian ways, the characters are of something much bigger.

Brash, chain-smoking, and attitude-laden, Liu the entrepreneur has got all the instantly recognizable characteristics of the "every street vendor" who hawks his wares in Beijing. But he is a risk-taker. Having uprooted his family and purchased several plots of farmland, he has tied his family's fate to Zambia. Clearly relishing the freedom that comes with being his own boss, he waxes about capitalist enterprise and free competition -- with an indiscernable Chinese dialect -- at the local chicken market in a monologue that would make Milton Friedman giddy with pride.

An unapologetically capitalist Chinese farmer planting his roots in Zambia is not the western press' usual image of Chinese machinery constructing stadiums and roads in a nameless African country. That's where Mr. Li the project manager comes in, a man who puts the call of duty above virtually all else. His family in Zambia consists of two cats and his Chinese work crew. He deflects loneliness by consuming himself in the road project. The road, literally and metaphorically, is the path toward development, according to Mr. Li, who seems to earnestly believe it. Infrastructure will integrate markets and bring prosperity to impoverished towns -- that's how China did it, and so can Zambia. The local Zambian official seems to agree with that assessment and invites the "light-skinned brother" to meet President Sata.

When China Met Africa is one of the few documentaries without voiceover commentary. The directors explained, "It was important that the film had no commentary because we wanted the audience to have the opportunity to interpret this story for themselves. This would be the first time western audiences would see grassroots interaction of China and Africa in this way." Indeed, the characters' own voices effectively and effortlessly carry the film. And the emphasis on individuals and individual agency is a hallmark of the filmmakers, whose other credits include Black Gold and Kurdish Blogger.

The Francis brothers, whose own educational pedigrees are well suited for this film, also manage to send a political message without politicizing -- no easy feat. Other than the opening scene of President Hu Jintao hosting China's largest Africa summit in 2006, the politics of this sometimes uneasy relationship hardly surface in the film. The exceptions are when Minister Mutati speaks, for example when he compares western companies to the Chinese:

When I sit with investors from the Western world they do a PowerPoint presentation about projections, cash-flows, profit and loss accounts, income statements, balance sheets, risk assessments and all these flamboyant graphs. I've never seen those with the Chinese. They probably do them on their own, but when they come here, they just ask me what are the incentives? Where is a piece of land where we should go and begin to work?

Mutati's fondness for the "Chinese way" is perhaps a result of Zambia being the first African country to establish formal relations with China and the site of Africa's first Chinese special economic zone. But it is also an elliptical political jab at the "West" for a lot of thunder and little rain -- that is, the Westerners show and tell, the Chinese do.

Beneath the "win-win" slogans, however, lies an unarticulated uneasiness. The Chinese way is not universally adored in Zambia, and the country has become publicly skeptical of China's role. Yet even as President Sata's anti-Chinese rhetoric made headlines, he heaped on praise for Mr. Li and his road. But as funding dries up, the road remains unfinished, much like the China-Africa story. It chugs along, driven by the accumulated efforts of the Lis and Lius building, investing, learning and punctuated by unavoidable politics. Will the conclusion to the Chinese story in Africa repeat that of the West's retreat? Will the rising global power commit long enough to a neglected continent to transform it? Mr. Liu the entrepreneur would say yes; he is a Zambian lifer.

Meet the Red Princesses and Princes: The Chinese Elite's Globe-Trotting Kids

2011-11-28T07:22:42-05:00

All of them spent their formative years in American education institutions (not to mention Parisian debutante balls) and seem to have entered high-power private sector professions

Over Thanksgiving, the Wall Street Journal's Jeremy Page wrote an excellent piece on Chinese royalty 3.0, replete with a neat interactive graphic. It immediately became a buzz on Twitter and Weibo. The article featured Bo Guagua prominently, the son of standing committee aspirant and former Minister of Commerce Bo Xilai, and led with a vignette of Guagua pulling up to the U.S. Embassy in Beijing in a red Ferrari. To me, that was the least surprising part of it. I would be surprised if he wasn't behind the wheels of a Ferrari or some ultra luxury brand equivalent. Who do we think he is, U.S. Ambassador to China Gary Locke?

I won't dwell on what this phenomenon of "princelings with money" means for the Chinese political economy, since the WSJ page explains it in more detail. While it is understandable that Guagua commands most of the attention because he has not exactly been shy, in this Web 2.0 world, it is difficult for any of the notable progeny of Chinese politicians to escape notice. In fact, many of these "red princes and princesses" are on Facebook or Renren, the Chinese equivalent. A quick search turned up Bo Guagua's page:

Apparently, Guagua considers himself a "public figure" and displays a photo of what is presumably his NGO work. But I didn't notice any way in which you can "friend" him. His status updates, which I doubt he manages himself, offer an interesting selection, including a Global Times piece titled "Why Bo Guagua is so popular in China", in which he is described as a "good-looking and outstanding young man" who studied at Oxford. There is also another linked Chinese piece titled "Bo Guagua: Hoping for understanding, but relishing misunderstanding," perhaps a snide riposte at the kind of coverage that has been lavished upon him. Exhibit A below are two photos from the China Digital Times:

Yes, he has had a tough time shaking the image of a partier frat boy who hangs with celebrities like Jackie Chan. But it's not so uncommon for a western-educated Chinese elite to engage in typical college revelry such as hook ups and booze. He does drive a red Ferrari. But he may have already given up the bachelor lifestyle if the speculation of his engagement to Chen Xiaodan -- the daughter of second-generation princeling Chen Yuan, the head of China Development Bank -- turns out to be true. Rumor of their engagement first broke in the British press, which treat it somewhat like another royal wedding. Since then, more photos have emerged that seem to confirm that Bo and Chen are a pair:

They could be called the "William and Kate of China" -- an Oxford man tying the knot with a Harvard Business School grad who now works at Morgan Stanley, according to Chen's Facebook and Linkedin pages (she goes by Sabrina Chen). It's little surprise they're making it into the tabloids -- their seeming transparency contrasts greatly with their politically connected fathers' relative opacity.

It's not just them, even though they attract a disproportionate amount of intrigue. There's also Jasmine Li, the granddaughter of Jia Qinglin, who heads the Chinese People's Political Consultative Committee and is currently number four on the nine-man standing committee. Li attends Stanford and debutante balls in Paris -- an honor she shares with Sabrina Chen. Apparently, becoming a red princess requires an appearance at the Paris debutante ball. Perhaps the least high profile red princess is Alice Yang, the daughter of Chinese Foreign Minister Yang Jiechi and a Yale grad. And last but not least, there is of course future Chinese president Xi Jinping's daughter Xi Mingze, who is attending Harvard as an undergrad.

Their pedigrees are not so different from those of elite children anywhere else, and are all products of prestigious prep and boarding schools in the U.S. (Sabrina Chen, Tabor Academy; Jasmine Li, Hotchkiss School; Alice Yang, Sidwell Friends, which makes sense given that her father previously served as Chinese ambassador in D.C.). All of them spent their formative years in American education institutions and seem to have entered high-power private sector professions. It is far from clear whether any of them will have political aspirations in the future, and if they do, whether their experiences will decisively shape their world views. The average Chinese -- actually, average anybody -- would struggle to identify with what they represent or to determine whether they will be forces for change or stasis in China over the next decades.

(On a personal note, there was a remote possibility that I could've tasted the "sweetness" of the exclusive princelings club, as I recently learned that my grandfather survived the infamous "Long March" with Mao Zedong during the civil war. Alas, I went to public schools, dislike cars in general, and have nary a clue what a debutante ball is, all disqualifying me from entry. In any event, to paraphrase Groucho Marx, I, too, wouldn't want to be part of a club that would have me as a member.)

China's Decade of Free Trade

2011-11-15T07:20:47-05:00

The Obama administration's trade agenda has Beijing upset. What will happen to unfinished Chinese reforms in a post-WTO world?

A truck drives into a shipping container area at Qingdao port in Qingdao / Reuters

A decade since China joined the World Trade Organization, trade negotiation in the Doha Round looks to be going nowhere. Meanwhile, in a move that has unnerved Beijing, the Obama administration is pushing its biggest trade agenda to date with the Trans-Pacific Partnership agreement, which would not include China.

What have China's leaders thought about global trade? That's the subject of part three in my series translating excerpts from speeches and statements by former Premiere Zhu Rongji, which were recently published. Here's part one, on China's growth, and part two, in which he appears to have warned the U.S. about its coming financial crisis. In this speech, given at an important State Council research session on the WTO in February 2002, he makes a spirited defense of China's WTO entry.

It is easy to forget how contentious this issue was in China at the time. Zhu had to spend considerable political capital to complete the historic deal, likely making a few enemies in the process. What struck me in particular was Zhu's persistent argument that the WTO is a vehicle by which to proceed with necessary development and reform objectives in China. I highlight this because a rising concern in certain quarters, which is putting it mildly, is what will happen to unfinished Chinese reforms in a post-WTO world? Indeed, a growing chorus of dimmer views on China's WTO record seems to be emerging.

On justifying Beijing's decision to enter the WTO

Over the last few days, a number of cadres have expressed their concern on how we will protect ourselves in the WTO. And because some of you wanted to emphasize the gravity of the issue, there seems to be some exaggeration as well. Of course, taking the issue seriously is necessary. On the other hand, there has been far less concrete discussion on how WTO entry will benefit us. In other words, the discussion has primarily revolved around "defense", with little attention paid to "offense"--much more talk on how to adapt to the challenge rather than how to leverage it as an opportunity. This is why you are likely to conclude that with so much unanticipated trouble, was it worth it to join the WTO? If that was indeed the case, then we wouldn't have negotiated over this for 15 years.

We began in 1986, when we restored our status as party to GATT...In 1993, President Jiang Zemin launched official direct talks with President Clinton in Seattle, based on three principles. Last year (2001), we finally acceded to the WTO. This move is directly linked to our reform and opening up process and the growing strength of our economy. During the 1980s, our economy was still relatively weak and lacked a solid regulatory framework. Under those conditions, we would have incurred losses if we joined GATT...Over the next 15 years, we increasingly recognized the importance and necessity of entering the WTO. This is because opening up to foreign investment and trade and cooperation are more and more important to our economic development. Right now, export performance has a huge impact on the national economy. If exporters were to decline by 10% in a year, it would lead to a reduction in GDP growth of 2 percentage points. Moreover, if we don't join the WTO, we would have no recourse against other countries' trade sanctions or discrimination. After we've joined, China must be given "most favored nation" status. Once we have MFN status, it gives us equal treatment as other countries. At the same time, we can use WTO mechanisms to resolve trade disputes and sue other countries. We may not win every time, but at least we have a place to bring cases.

Something that left a deep impression on me was last year's trade battles over agricultural exports to Japan. At the time, we weren't in the WTO yet. Japan first dramatically raised import tariffs on Chinese onion and mushroom exports. That made it impossible for our exporters, and Shandong farmers were watching their onions rot in their fields. We felt the Japanese action violated WTO rules, and so we reciprocated by slapping tariffs on imports of Japanese cars, mobile phones, and air conditioners. Our onions weren't worth a lot of money, but their cars were much more valuable. We negotiated over this issue 19 times, and we would not back down. Ultimately, Japan finally abolished their tariffs. Once they cancelled, we slashed ours too. If they didn't, we wouldn't have removed ours either. And so, after entering the WTO, we're no longer easy to bully around. Not only have we always been tough to manipulate on the political front, now no one can bully us on the economic front...So what we should be saying is that WTO entry has put us in a position of proactive "offense" rather than the usual reactive "defense" posture...If it's merely all sorts of trouble after WTO entry, then why bother with it in the first place? Why not just seal ourselves off just like before, to protect us. This way we can certainly protect ourselves, but it also means we cannot develop. If much of our system does not undergo appropriate reforms, then we cannot adapt to the globalization wave; our industry will forever be "iron rice bowls" that are protected by the state and cannot compete globally...

On bilateral maneuvering with Russia under WTO

...We have to take advantage of the WTO opportunity to advance our "go out" strategy and expand our exports. I saw a recent report from the Ministry of Foreign Trade that argued that because Russia's economy was drastically weakened by the Asian Financial Crisis, it had a negative attitude on acceding to the WTO. And thirty-two countries have already proposed to engage in bilateral discussion with the Russians on WTO accession. Russia is a large potential market for us, so the relevant agencies must be prepared to begin bilateral talks with Moscow to secure provisions in our interests. We have to research the Russian market and market entry strategies. When I visited Moscow, I spoke at the embassy and used the slogan "March toward Russia". Because Russia's market is not liberalized, our exports are very attractive to them. Normal China-Russian trade is about $10 billion, not insubstantial. But outside of "normal" trade, there is a lot of border trade and nebulous trade activities that are probably worth another $10 billion, totaling $20 billion. This kind of profiteering trade along borders can be beneficial for those Russian residents who live along the border. But a number of products are shoddy, ruining our reputation...

...Trade with Russia is very much in our interest, and there should be no worry that it can't pay for the exports. Although it doesn't have large volumes of forex reserves--perhaps about $38 billion--Russia has oil, timber, all the commodities we lack. Our West-East pipeline has a distance issue, our northeast oil resources will gradually be depleted, and importing Middle East oil requires a long and arduous sea journey. We need to consider our long-term oil reserves and supplies, perhaps from Russia and Kazakhstan. Our policy to conserve domestic forestry is predicated on receiving reliable supplies from Russia and Southeast Asia. Or else how can we possibly meet domestic timber demand?...

On spreading the risks of an export model

From a long-term perspective, we must not put all our eggs in one basket, tying our fate to the US and EU markets. Right now the US, EU, and Japan represent a disproportionate amount of our exports, a serious problem down the line. Last year our bilateral deficit with the US was $83 billion according to the Americans, but only $28 billion according to our own calculations. If you include processing trade, the figure may rise to $50 billion. With Japan, we only have a $2 billion deficit and a $5-$8 billion deficit with the EU. We have a trade surplus of $22 billion with Taiwan and another several billions in surplus with Southeast Asia. Last year we had $11 billion trade surplus with South Korea, as we imported large volumes of their cars, steel products, machinery, and chemical products. We also have deficits with Latin America and Africa, since they don't sell much to us. If we do not open new markets, and only rely on the US and EU, it will prove to be very dangerous...

On tapping the Indian market and protectionism

I visited India this year as well and sent another message of "marching toward the Indian market". India is clearly a huge market with 1 billion people, but really is quite poor. They don't seem to understand China and were under the impression that we are as poor as them. During an enterprise conference in Mumbai, one of the businessman said "I find it very strange that when I visited China just a few years ago, your mobile phone and fixed line phone subscribers didn't even hit 100 million. I can't believe you are developing so rapidly right now." I replied that China already has 350 million subscribers, surpassing the United States! Our consumer white goods and textiles should find much appeal in the Indian market.

However, there's a strong sense of protectionism in India. For instance, the vehicle that picked me up at the airport was an Indian-made "Beatle", which was incredibly cramped for two people. I didn't think India was that poor! That's just the way they are, only use domestically made cars in India, high degree of protectionism...On the latest trip to India, I had my colleagues conduct an informal market survey. They found that consumer appliances like TVs, air conditioners, and refrigerators are about 3-5 times more expensive than our exports of the same products. So we certainly have a cost advantage. They can protect themselves, but we can also find a way to break into their market. Bangalore is known as the "Indian Silicon Valley," so when I went there I told the official, we will provide you with all the necessary parts for consumer appliances and you just need to assemble it in a factory here. We will set up a 50-50 JV, and the products you assemble with our parts will sell for 50%-66% cheaper. That way, Indian consumers can afford to buy the products, it will improve their lives and increase job creation. The Indian official replied that it was a great solution.

On systemic reforms to take advantage of new markets

To enter markets like Russia, India, and others, we must usher in systemic and regulatory change and encourage private sector participation. A number of private enterprises are extremely nimble and risk tolerant. Huawei is one of those companies. It has advance technologies, decent scale, and already has operations in both India and Russia. A group of risk takers is exactly what we need to dive deeply into those markets. Recently, our ambassador in Afghanistan reported that he's receiving numerous calls and inquiries about whether it's possible to do business in the country. Whether the country is stable and safe. The relevant agencies should be facilitating this "go out" process to encourage these companies. Last year, we decided to build a trade center in Moscow to showcase China. In the trade center, there are distributors, retailers, product displays, and all sorts of consulting services, making Chinese businesses operate more efficiently in Russia. In terms of India, we need to strive for a solution to break down their protectionism and sell in that market.

A perplexing problem now is that many of our companies lack strategic foresight. They are myopic and are content with making a quick buck, which only taints China's reputation. The relevant departments should not only continue to ensure the quality of products, but also persuade these entrepreneurs to settle on a long-term vision. Without a brand and after-sale services, it is impossible to become dominant in a market. So after joining the WTO, we should use our position to compete in the global market and expand market share, this is the fundamental purpose of acceding to the WTO...

...I hope after this session is over, everyone should not merely examine how to protect ourselves, but more importantly, should research how to "go out", quickly familiarize with the "rules of the game", study other countries' laws, and take various actions to "go out". The "go out" strategy should first and foremost rely on product quality and cannot depend solely on cost...The thing that worries me the most isn't our ability to compete or volatility in our economy but rather our product quality. Many of our companies have not made "quality" their lifeline, but continue to rely on price and volume to compete. If this mentality is perpetuated, then our country has no future.

Who Killed China's Electric Car?

2011-11-07T12:11:09-05:00

Three years ago, China was set for a green auto revolution. But the country's electricity-powered car industry is in stasis.

WIKIPEDIA

When Warren Buffett in 2008 bought 10% of Chinese car and battery maker BYD (acronym stands for Build Your Dreams), many thought it was the dawning of the Chinese electric vehicles (EVs) age. That "golden era" may yet arrive. Eventually. But in the interim, that dream has mutated into something of a nightmare ensnared in interest group politics and lack of clear strategies.

Take BYD, whose current fate--because it is considered a private sector leader in the EV game--reflects conditions of the embryonic industry at large. A string of negative press has not helped its prospects. For example, Bloomberg reported in September that the Shenzhen-based company is planning to issue nearly $1 billion of bonds as it comes under pressure to pay back debt and as sales of its sedans dwindle. Then in late October, BusinessWeek followed with a piece that said BYD America has not only delayed opening its operations, it has also under-delivered in the number of jobs it claimed it will create in Los Angeles. (The subtext here: "see, Chinese investment in the US does not create 'green-collar' jobs!") Of course, BYD's troubles in the U.S. are linked to its sub-optimal performance in the domestic Chinese market.

Indeed, BYD has likely sold more of its fully electric and hybrid vehicles to government entities than to actual Chinese consumers. Even with limited consumer subsidies, the E6 all-electric model will still cost around 250,000 yuan, or nearly $40,000--sticker shock for the average Chinese consumer in the market for a car that gets you from point A to B. And that's all on top of percolating questions over the soundness of its battery technology.

Beyond BYD, the rest of the industry appears to remain more or less in stasis, with more talk than action. In the department of exaggerated/misleading headlines, this China Daily piece trumpets "Electric taxis to triple in Beijing next year". But what does that actually mean?

Beijing will increase the number of its fleet of electric taxis from 50 to 150 by May 2012, said an official from Yanqing, a county in northwestern Beijing where an electric car pilot operation is underway.

The program in Yanqing is the biggest of its kind in North China, said Wu Shijiang, vice director of the transportation bureau of the county. The 50 electric taxis in operation were developed by Beiqi Foton Motor Co Ltd, the biggest commercial vehicle manufacturer in China in terms of production and sales.

So that's 150 taxis among how many tens of thousands in Beijing? And reading between the lines, this "county official" is clearly promoting local business interests to garner the attention of higher-level officials. In the absence of an official nod from the Beijing government, it is not entirely clear whether these taxis will even be used at all.

The state of EV development in China is hardly solely the fault of industry or technology. The central government shares a large part of the blame, as it has sent confusing and vacillating signals that confound industry and confuse the market. Despite what initially appeared to be fervent support for EVs, the top leadership has poured some cold water on the sector with recent comments. Premier Wen Jiabao, speaking at a national science and technology association conference in May, all but admitted that the leadership itself is unsure about the future direction of the EV industry and that issues ranging from strategy to core technology still need to be resolved.

Wen's comments explain why the ten-year plan on alternative energy vehicles development, which was intended to be released this year, has remained under wraps. That plan was supposed to be one major pillar of China's 21st century industrial policy through 2020 and considered a "strategic emerging industry". It appears that major disagreements at the top are driven by a generous helping of bureaucratic interest conflicts. According to the Economic Observer, the Ministry of Industry and Information Technology is pushing for the simultaneous development of fuel efficient cars and EVs; the Ministry of Science and Technology is obsessed with promoting EVs from a narrow technological standpoint; and the National Development and Reform Commission seems to support hybrids as a transitional phase toward singular focus on EVs.

Industry is complicit in complicating an already complex situation. Given Beijing's incessant touting of the trillions of investment that will flow to new strategic sectors over the next five years, including EVs, automakers and even major state-owned enterprises (SOEs) do not want to be denied a piece of the money pie. The auto industry already formed its own EV association, only to be followed by the formation of an SOE-dominated EV group that includes the likes of State Grid and the national oil companies. Why the oil companies? Because the "big two"--CNPC and Sinopec--control the vast majority of downstream gas stations, they believe there is profit to be made in retrofitting gas stations to EV charging stations. No one wants to cede ground in case the money spigot starts flowing RMBs.

The government, in essence, is stuck. Walking back on the entire EV program is impossible. But full-throttle ahead at this point seems unrealistic given that no one can decide on a clear path forward. Moreover, the government is most likely correct in assessing that blind pursuit of this program with little foresight can lead to irrational exuberance like what happened with the wind industry.

I have not been particularly bullish on the Chinese EV sector's near-term prospects, and it's unclear to me whether developing an auto industry on par with Japan, Germany, or the US even makes sense from China's macro development standpoint. (In this respect, I agree with Zhu Rongji's harsh assessment of creating a domestic auto industry.) Introducing EVs into the Beijing taxi fleet may help mitigate horrendous and unpredictable air pollution, but they won't alleviate the worsening traffic bottlenecks that now regularly choke the city. Even if EVs reduce air pollution, charging them could mean more coal usage--since China is primarily a coal-powered economy--that offset whatever carbon reduction benefits derived from less gasoline consumption in the transport sector. But wait, there's also "indigenous innovation", and wouldn't leading battery technology go a long way toward that goal? Paradoxical objectives, pulled along by powerful interests in different directions, explain much of China's story these days.

Whatever the outcome of this uncertainty, one thing is clear: what was once hailed as a potential EV revolution in China is turning out to be more akin to an incremental evolution.

Why Many in China Sympathize With Occupy Wall Street

2011-10-28T07:01:52-04:00

Income inequality, a feeling of disenfranchisement, and a sense of injustice are fueling popular curiosity about the movement, in which a number of Chinese see parallels with their own complaints against their government

A man watches the skyline of Shanghai from the Shanghai Financial Center building / Reuters

Back in the land of Internet freedom. One thing that struck me on this last trip to China was the repeated questions I received about how to interpret the "Occupy Wall Street" movement in the U.S. The Chinese interlocutors weren't asking out of a sense of schadenfreude. Well, only the Chinese version of the Global Times gleefully emblazoned its front page with the predictable headline "Anti-Capitalism Shakes the World". No, they seemed to be inquiring out of a sense of concern for their own lot.

"The terrifying thing isn't that justice is relative. The terrifying thing is to witness injustice and to act as if one sees nothing."

That's because unlike the "Arab Spring," the "We are the 99 percent" movement isn't about revolution or regime change, but about contesting a system that seems less fair than imagined and less equal than ought to be. It doesn't take much for many Chinese to see parallels in their own socioeconomic conditions, where vast and unsustainable inequality is probably the leading potential destabilizing factor facing the country. Everyone from those in the middle-class to cab drivers feel viscerally this sense of inequality or unfairness. I had a highly educated government think tanker ask me if I thought it was fair that someone like herself, who would be considered an "elite" in any society, can't foresee how she can afford an apartment -- a common question these days. And it's not simply the existing gap in wealth and equality, it's that large swathes of the population -- migrant workers for example -- literally cannot see a path by which they can plausibly join the ranks of elite urban society. This will be the crux of the challenge in absorbing another 300 million or so people -- equivalent to the entire United States -- into Chinese cities over the coming decades.

An illustration of the plight of the rural Chinese bumpkin/semi-migrant is captured in this essay that is apparently circulating the Chinese blogosphere (h/t to China Hush; Chinese version here). It is from someone who has "made it" into the elite world to which she/he aspired. The account is highly effective, and resembles the personalized stories that proliferate the "we are the 99 percent" website -- it is titled "I fought for 18 years to have a cup of coffee with you":

Here's a question I pose for my white collar friends: what if I never graduated from middle school, and had become a migrant worker? Would you sit down for a cup of coffee with me at Starbucks? The answer, unequivocally, is that you wouldn't. That is simply not a possibility. If we compared our experiences growing up, you will find that for the things that you take for granted, I have sacrificed and exerted huge amounts of efforts to acquire.

From the moment I was born, our life's path swerved away from each other. I was given a rural resident card while you got a city one. If I grew up keeping my rural residence, I wouldn't be able to work in the city today. I would also be denied social security, and proper medical care. You might ask: "Why must you come to the city? Isn't the country good enough? The air is fresh, and it's never crowded." But the country has no proper healthcare system. During the SARs scare our country seemed to "suddenly" realize that its rural healthcare was completely defunct. Plus, we have a very small consumer market. Because farmers make very little money and can't afford much, companies refuse to distribute products in our areas. During the New Year only a tiny percent of families can afford the color T.V to watch the New Year's broadcast. The majority of families are still fighting for their basic survival. This is why I want to be in the city. For the object you were simply born with, this city resident card, I have had to fight and struggle.

College was the only way out of rural China. I needed to work very hard to graduate from elementary school, to be accepted into a middle and high school. I was a lone traveler on a narrow and precarious bridge above a deep valley, and while I was on it, I watched my friends and classmates fall one by one. Meanwhile, the road ahead of me became increasingly narrow. Should I have been happy or worried? Because of fierce competition, I was terrified that any misstep might drag me off course. Apart from studying, I was never able to have a hobby or partake in extra-curriculars, not that the school ever offered any opportunities. On the first day in high school, our principal told us that we had only one goal during those three years- Gao Kao.(college entrance exam) So, during that time, I woke up at 5:30 every morning, and went to bed at 11:00 PM. During holidays, I was memorizing test questions.

For you, there is no question that you'll graduate elementary school and go onward to middle and high school. The competition isn't that fierce, and your homework load isn't that heavy. You can take the time to develop a hobby, to read the books you want, to play basketball, to take excursions to the countryside to enjoy its blue skies. If you don't want to work so hard for Gao Kao, and your grades aren't atrocious, you can opt for a school who's willing to recruit you without test scores. And even if your scores are indeed atrocious, a third tier university will still accept you. Meanwhile, I have to earn exceptionally high marks to get into that same third tier university, since universities demand more from out-of-state students.

We take the same test. The minimum score requirements for you and me are not the same. But once we're accepted, our tuition fees are again the same. Every person pays 6000RMB per year - that's for tuition only, which comes out as 24,000 RMB for all four years. Housing (1500RMB), and books (1000RMB) add up to around 4000RMB - and I'm only talking about eating cafeteria food the entire time. Four years of college comes down to 50,000 RMB. In 2003, a university in Shanghai announced that it was raising its annual tuition to 10,000 RMB due to the "campus renovation" That means 40,000 RMB for four years of tuition alone. Count in living and text book costs and a university education adds up to 66,000 RMB. For families who live in the city, 66,000 RMB isn't much. For a rural family, 66,000 RMB is a life time's worth of savings. I come from a coastal province that has been getting steady foreign investment. We were better off compared to some inner provinces, but still, after a year of hard labor, we were hard pressed to save much. A family of four who consume only the very basics can save 3000 RMB each year. That means to send one child to a four year college at 66,000 RMB a family needs to save for 22 years. That's assuming that no one gets sick. It also means that no matter how talented the second child is the family must still deprive him or her from attending college since they can only afford to send one.

I was lucky compared to others. By throwing together all the funds we had, and by taking out student loans, I was finally able to pay my first year of tuition. Meanwhile, I watched those students who'd been accepted and the heartbreak their families experienced for being unable to send them to school. I felt a pervasive sense of wrongness. Our education industry nowadays don't only recruit the best students, they recruit the students with the richest parents.

But, finally I found myself on a University campus! I worked hard and earned a scholarship. During the holidays, I worked to save spending money. I couldn't bear asking my parents for money. Every cent they made was an exchange of their sweat. That money was sweat money, blood money.

Upon coming to Shanghai, I realized that compared to my classmates, I was green beyond belief. I couldn't draw, couldn't play an instrument, didn't know who the hottest pop stars were, had never read a best selling novel, didn't know what an MP3 was, didn't even know what a Walkman was. To understand what our management professor was lecturing about during his class on "Warehouse style supermarkets" like Wal-Mart and Sam's Club, I spent a day at "McDonalds" watching with astonishment. I'd never seen so much stuff.

I'd never touched a computer, so I spent half a year sitting in a computer lab learning the skills you'd learned in high school. My English is the English spoken by a deaf or a mute person. Neither westerners nor Chinese people can understand what I'm saying. But that wasn't my fault. There were never any foreign teachers in my village. When teachers don't even know the language, how can they possibly teach students to speak? With a poor foundation, I spent an entire year correcting my pronunciation. I admired city students for how talented they were, how much they knew. I only knew how to study. I'd only known studying, test taking, graduating, because only by getting into college could I study amongst you and become a part of you. Everything had to be geared and pointed towards this goal.

I could bear the mockery of my classmates, could go weeks without eating any meat, could spend my entire weekend cooped up in a library, could come back from studying on the weekend to see boys and girls dancing, could go running at the deep of the night out of loneliness and boredom. I dreamt that one day I would graduate, and find a job in the city. I wanted to work with the city-dwellers of my generation, and like them, to become a city resident. I wanted my parents to be proud because they had a son working in Shanghai!

Finally, I graduated. Finding a job in Shanghai was hard, but going back to the village was not an option. The average salary for our class was 2000RMB per month. Perhaps you think that 2000RMB is an adequate salary, but I still needed to pay for rent, to pay for utilities, to pay back my student loans, and to send money home to put my brother and sister through school. What was left, I used for food. After all of this, I still couldn't join you for a coffee at Starbucks!

Since that time I've earned a master's degree, and currently live in Shanghai where my annual salary is 80,000 RMB. I fought for eighteen years, and can finally sit down with you for a cup of coffee. I'm now a resident in this big, international city, and I'm no different from the white collar workers here. However, I can never forget the struggles my family and I went through. I can never forget my classmates who will never see their dreams come true. For this reason, I've written this in the first person. What I've written is nothing special. It's the typical tale of those who come from rural China. Every time I see a student who's been dealt same hand I got, I feel a heavy sense of responsibility.

I didn't write this to complain. The terrifying thing isn't that justice is relative. The terrifying thing is to witness injustice and to act as if one sees nothing. While I was getting my masters, I once had a conversation with a girl who at the time had 3 years of work experience under her belt. She is now the HR director of a joint stock company. We were talking about a marketing strategy for Weida's paper industry. Her idea was to carve out a new market by advertising Weida's high quality dinner napkins to China's nine hundred million farmers. Surprised by her cocksureness, I asked her if she knew how farmers wipe their mouths after each meal. She returned my question with a misgiving look. I raised my hand and wiped my mouth on my sleeve. She looked at my graceless action with contempt.

During a macro-economics class, a classmate attacked blue collar workers who'd been laid off, and unemployed high school dropouts: "80% of them are where they are because they don't work hard. They chose not to specialize in something when they were young, so they can't get jobs now! Those kids are perfectly capable of studying and working. I've heard that a lot of students use their holidays to make thousands to pay their tuition." You can't find a person who knows less about the struggles of rural China than this classmate of mine.

I was born during the 70s. People my age are starting to become leaders and our actions affect the social and economic development. I wrote this essay for the young people who grew up in well-heeled communities, and for those who grew up struggling but have since forgotten. Pay attention to the classes beneath you. For this world to be fairer, we need to do what we can for others, to be aware that social responsibility warrants a permanent place in our thoughts and actions.

This is a reality that Chinese from all walks of life recognize and live with. The government has taken due notice as well. And so it comes as no surprise that the major theme in their economic plan de-emphasizes economic growth (growing the pie) and trumpets income (redistributing the existing pie). However, the jury is still out on just how extensively they will be able to address the clear and present dangers of inequality.

Did China Try to Warn the U.S. About the Coming Financial Crisis in 1999?

2011-10-27T08:19:04-04:00

In conversation that year with U.S. Fed Chairman Alan Greenspan, Premiere Zhu Rongji predicted that U.S. policy would lead to a massive bubble and financial collapse

Then-Premier Zhu Rongji (right) speaks to Hu Jintao, who has since become President, in Beijing / AP

Due to popular interest, I thought another excerpt from former Premier Zhu Rongji's published speeches and letters would be in order. Zhu held the office from 1998 to 2003; thousands of pages of his speeches and writings have just been published. It helps that I was able to purchase two volumes of a four volume set of Zhu's speeches that spanned a decade. The two volumes alone contain over 1,000 pages of material. As a result, I will consider doing a series of excerpts that I find interesting and worth sharing.

This particular excerpt below is from a meeting that took place in January 1999 between former Fed chair Alan Greenspan and the Chinese premier. Note that this is about a decade before the latest financial crisis, and I think some of what was said between the two men is fascinating in light of developments over that decade. (Please excuse potential mistranslations or deviations from precise verbatim rendering of the conversation.)

Zhu: Mr. Greenspan, your influence in managing the U.S. economy is growing by the day, you've transformed yourself from human to economic sage. Last December, the Financial Times published a piece that argued that you, Mr. Greenspan, are setting a course to further inflate the U.S. stock market bubble, and that current success could well lead to a collapse of the U.S. financial market in the future. I wonder what you think of that assessment?

Greenspan: China's economic performance is very much owed to Premier Zhu's tireless efforts. The economy is very successful and growing at a relatively fast clip. U.S. growth prospects are quite positive as well. China has already grown into an important global economy. If China can maintain its current growth trajectory, then not only will China become a major cultural and political power but also an economic power in the 21st century.

The past two years have been rather difficult ones for many countries. Several of China's neighbors have been significantly affected by the financial crisis and face anemic growth, which is having an indirect impact on China's growth. And China's economic performance is having an impact on the U.S. economy too. This situation is forcing us to start reforming the international financial system. Yesterday, Central Bank Governor Dai Xianglong and I, as well as other central bankers, met in Hong Kong for a International Bank of Settlements special conference. We discussed many issues in detail, including what kind of actions to take to stabilize global financial markets and how to create a stable, 21st century global financial architecture.

Technological progress has not only closely linked different economic segments, it has also revolutionized the global financial system. In the United States, computers and telecom technology's rapid development has led the financial system's revolution, raised productivity, improved the efficiency of capital, and lifted people's quality of life. Technology's continuous progress has outpaced our expectations just a few years ago. At the same time, factors that have affected US technological progress have also influenced other countries. Financial systems and products are developing rapidly, and capital can help consumers shift from products they don't want to the ones they want in the most efficient fashion. A complex financial system has brought people benefits, but also brings potential risks.

It is very important for the United States to clearly understand this problem. That is, why is it that given Southeast Asian nations have experienced 20-30 years of robust growth, the region couldn't fend off the financial crisis and saw their economies collapse. We believe that this is related to the current structure of the global financial system. Currently, there are too many countries in the world that over-rely on the banking system, and only use the banks as financing vehicle. So banks have become those countries' only source of financing. This is an inflexible system and cannot adequately deal with crises, just like the Russian situation now. The United States is in a different position from those countries. When facing a crisis, we have financial channels outside of the banking system and can easily mitigate a financial crisis.

The US economy is currently in great shape, it is better than any given day over the last 50 years. But we also need to be sober because we cannot know how long these good conditions will be sustained. The US Fed will closely monitor changes brought by technology and whether we can leverage it to develop novel financial products. High tech will bring important changes to the financial system, manufacturing, and services. We need to deeply understand the force of technology and its impact on global economic stability.

Zhu: The entire world is focused on the US economy, it is the engine of global growth. Right now the US economy is the best it has ever been, almost impossible to be any better than this. There are people who believe that US stock prices are way over valued--just this year the Dow Jones may breach 10,000, but could quickly fall down to earth. You've expressed your views on the US economy on numerous occasions, but I'd like you to discuss your views face to face with me.

Greenspan: Whether the current stock market performance--with skyrocketing prices--reflects underlying economic conditions or a bubble is difficult to determine. Japan in 1996 saw its stock market peak and then the bubble deflated. Some seem to be overly optimistic in their assessment of potential benefits from technological development. They believe that computers and internet will significantly increase labor and capital productivity, lifting corporate profits and their underlying value. The extremely optimistic believe that because of technological developments, the US economy has already reached a new level, and so the stock market reflects reality. I personally am skeptical of this view. I still believe in being sober. Based on historical experience, the current stock market performance is abnormal and does not reflect the underlying realities of the US economy. Under normal circumstances, stock prices and company valuations should be considered relatively high. Nonetheless, I personally believe that even if stocks are currently over valued, there will be a natural correction later on. But even under a scenario of stock market correction, it doesn't mean that the US economy will go into recession; it only means that US economic growth will be modestly slower.

Zhu: Last year Hong Kong felt the impact of global hedge fund volatility, and the HK government first raised interest rates to mitigate the impact, but took huge losses. It could then only use foreign exchange to support the market. At the time you criticized Hong Kong's actions, and Ren Zhigang (then HK financial management bureau head) said he wanted to explain it to you in person. I don't know what kind of explanation he will provide when you two meet this time? What's your view? In terms of the large volume of speculative capital flows that damage the financial market, does the US plan to better regulate it, what kind of regulatory measures are you preparing? I also just met with the Australian ambassador to China, he brought me a personal letter from Prime Minister Howard, who suggested that we should create a "G20" institution to discuss and coordinate how to manage and supervise the global financial system. What's your view on this idea?

Greenspan: Mr. Ren Zhigang and I had a great exchange. We both agreed that short-term capital flows are a double-edged sword, both positive and negative. But, Mr. Ren is more concerned about the short-term downsides brought by speculative capital flows. I was against Hong Kong government's use of foreign exchange funds to support stock prices. I believe that such actions may have a near-term positive impact, but will create distortions in the long term, and will impede capital markets' rational operations. A listed company's value does not derive from who owns it or what investors are paying for the stock; the value of the company is derived from its productivity and productive capacity. Intervention by the Hong Kong financial authority resulted in the government holding a lot of company stocks, this is not beneficial for the efficient allocation of capital. Mr. Ren believes that a healthy economy should not face these kinds of speculative capital inflows.

Hong Kong's challenge with speculative capital inflows associated with many problems that exist in the financial system. The current financial system is drastically different from that of 10-15 years ago. It is now much more complex, broad, and sensitive, with information traveling much more rapidly, both accurate and false information. The issue is how to leverage the advantages of current financial system while minimize the impact from complex factors. There are two main problems: 1) Many countries and regions are borrowing money in the international market, but have not taken measures to prevent exchange rate risks.

So that's why they're seeing losses during market volatility. 2) we should identify clearly which financial institution's lending behavior/pattern is actually counterproductive to market stability--and we should regulate those. The major issue being debated now is that the financial crisis has made people more cautious, and what measures should be taken to better regulate financial markets. I anticipate that in one or two years, we will carefully reflect and analyze the upsides and downside risks of the current financial system and implement some reforms. I personally believe that if we can weather this crisis--and in fact, we've basically survived it at this point--the next couple years aren't likely to see another major crisis. If we don't take the necessary precautions now, then if another crisis happens in four or five years it will be more severe, with much greater impact and breadth. I think all central banks should move toward that goal. I hope that when China further regulates the financial system that it should be prudent and now inhibit the development of the financial market.

Zhu: China is paying close attention to the experiences of US banking reform. We have already made changes to our central bank, dividing it into nine regional branches instead of the original model of individual branches in every province. We are strengthening central bank supervision and eliminating local authorities administrative interference. We are currently developing commercial credit market's principles and pushing forward with commercial bank reforms. The problem for China is the high ratio of nonperforming loans, which is a legacy issue that started in the 1992-93 period of economic overheating. At the time, the property sector was overheating, provincial governments were setting up too many special development zones; they were borrowing to fund these projects but couldn't pay back the loans. And this is why China hopes to borrow from the US experience of setting up asset management companies. We want to first shift the bad assets out of the banks, and then proceed with banking reform to improve the operation of commercial banks. Do you think in this regard the US experience can meaningfully help China? What's your view?

Greenspan: When commercial banks take on too many nonperforming loans, banks' normal functions in facilitating economic growth will be greatly constrained. The problem in Japan is large volumes of NPLs have caused its banking system to contract, and it has even affected the rest of the world. Having NPLs will make it harder for banks to get private financing, and even if they get the financing, it will be at a higher cost. Only once you've resolved this problem can the banking system operate effectively and revive the economy. The People's Bank of China's structural changes and commercial bank reforms are crucial. Right now Chinese commercial banks do not need direct capital injections from the market, it only really performs simple functions of holding saving and releasing credit. But when the banking sector develops to a certain stage, and needs capital, the NPL problem will be a serious one. Before reaching that point, China's setting up of asset management companies to solve the NPL problem is a sound solution in my view. We now recognize that NPL's impact in limiting banks' normal functions is greater than what we thought a decade ago.

Zhu: Today the American ambassador couldn't make it, so his representative is here. Now I will talk about an issue that is not for Mr. Greenspan, but for the ambassador's representative. Recently there has been anti-China rhetoric and opinion coming out of the US; some are attacking China's human rights record and some even falsely claim that China is stealing US military secrets. I don't want to dwell on each of these subjects, but I do want to talk about the bilateral trade deficit issue. Published US data show that in 1997, the bilateral trade deficit was $50 billion, increasing to $60 billion in 1998. These published figures show that the US has very little understanding of China's current situation. Last year, China's total exports stood at $180 billion, of which 60% was processing trade exports. In other words, about $110 billion of those exports are from foreign invested enterprises based in China, including US-China joint ventures. But generating this $110 billion of exports requires $90 billion of imports of raw material and other goods from various countries including the United States. Put another way, China actually only has about $20 billion of deficit. But this $20 billion in not in China's hands but in the hands of FIEs based in China, including those US-invested FIEs.

So if you take out processing trade, then Chinese exports are only $70 billion, impossible to have more exports. If you claim that in 1998 the US-China trade deficit is $60 billion, then that means China only exported $10 billion to the rest of the world, that's impossible. In my view, problems in the US-China trade relationship must be viewed rationally. In reality, the bilateral trade is only $20 billion. My purpose for highlighting this is to preserve good relations between the two countries. Any public opinion that damages the bilateral relationship is good for neither country. The US data on bilateral deficit has no basis and is untethered from reality.

I have accepted President Clinton's invitation to visit the US in April. I hope that during my visit we can seal the deal on China's entry into the World Trade Organization. I've already dispatched minister of foreign trade Shi Guangsheng to continue negotiations with US Trade Representative Barshefsky. If Barshefsky's terms are reasonable, we will accept them. But it must have a timetable. I'm demanding a timetable not because I want to have a protracted process--the timetable may be for 1 year, 3 years, but no longer than 5 years. The toughest problems will take five years, for example opening the financial market. The lesson for us from the Asian Financial Crisis is that too rapid opening of financial markets is not beneficial. Financial market opening must undergo a process, the conditions must be ripe and the regulatory standards must be met. (Now turns to Greenspan) I apologize for speaking on subject matters that don't necessarily concern you.

Greenspan: On the contrary, Premier Zhu's comments do concern me a great deal. I look forward to Premier Zhu's visit. You are a great public speaker, and speaking in front of a US audience you will be able to explain the intricacies of Chinese policy. Because China is not only an important global political player, it is also a key member of the global economic family. From the US government's view, it is very important for China to enter the WTO, myself included. I agree with the premier's view that Southeast Asian nations did not adequately lay the groundworks before opening its financial system, and did not prepare to accommodate the challenges of an increasingly complex global financial system. If the premier's grasp of the financial system is as deep as your understanding of the US-China trade relationship, you will enlighten us with your views.

Zhu: I am delighted to see you again. I always benefit from our conversations. I hope you will visit China often.

So the idea of a G20 was floated as early as 1999, if not earlier. It only took another decade and another major crisis for it to be realized. You wonder that as we continue to face down another crisis brewing in Europe, how many ideas that are dead now will be revived amid a future crisis. Institutions are sticky--it usually takes massive shocks and crises to supplant the existing.

The Great Stagnation or the Great Relocation?

2011-10-16T11:06:53-04:00

Noah Smith offers a counter take on Tyler Cowen's "Great Stagnation" hypothesis

Being behind the Great Firewall (yes, I'm in China again) has disincentivized me from doing much blogging, mostly due to the practical inconveniences caused by unpredictable disruptions to websites. I haven't yet installed a VPN on my new laptop so the internet is annoyingly slow. Google has been such a pain to load that I've resorted to using Baidu -- that's what the Chinese government wants anyway. It's a clever strategy really, "allowing but disrupting". It makes doing normal work with Google inefficient enough that you are compelled to use the Chinese equivalent.

And so, what better time for a guest post that requires zero to minimal use of Google. This one comes from Noah Smith, an economics PhD candidate at the University of Michigan who also maintains an econ blog at Noahpinion. It offers a counter take on Tyler Cowen's "Great Stagnation" hypothesis. And in many ways, it provides a framework for the Apple and China dynamics I wrote about last week. Smith's hypothesis is also interesting amid the Occupy Wall Street movement that seems to have just spread to other countries.

What the Great Relocation means for America (and China)

Are we better off than our parents were at our age? More and more economists are saying "not much." Except for a brief boom in the 1990s, median income for male workers has flat-lined since the early 70s. And the last decade has been an unmitigated disaster; real income for working-age households is no higher now than it was in 1994.

Opinions are divided over the cause of this "Great Stagnation"--coined by Tyler Cowen, the prolific blogger and economist--which argues that technological progress has slowed down (especially in the energy sector) while we've also exhausted the gains from universal education. But casual observers have noticed that something else big has been happening since 1973: globalization. And it's in the last decade that the shift in the world's economic center of gravity has gathered momentum, as China has boomed and the mature economies of Europe, Japan, and America have stalled. It's becoming harder to dodge the uncomfortable question: Is there a cause and effect here? Is this Great Stagnation actually better explained by the "Great Relocation"?Most economists would reply that growth is not a zero-sum game. China's rise, they say, will cause America to decline in relative terms, but our absolute standard of living will rise as more Chinese consumers buy our products and sell us their wares. Perhaps. But there exist more complicated theories of how the global economy grows and evolves, and some of these are far less optimistic that catch-up growth is exclusively win-win. As a case in point, take Paul Krugman's celebrated "New Economic Geography" theory (and lately an ardent critic of Chinese currency policy), which helped win him a Nobel Prize. One implication of his model is that when poor countries catch up very quickly with rich countries, the latter's standard of living may actually decline for a while. When the catch-up finishes, the upward march of progress resumes, but in the meantime, their gain can be our pain.

How does this work? Well, it's complicated, but the basic idea is that economic activity wants to clump together. Producers want to be near their customers and suppliers, and workers want to be near employers. This is why we have cities. If you look at New York State, it's one giant megacity surrounded by a bunch of mostly empty farmland. But when the rich core gets too built-up, costs get too high, and economic activity suddenly spills over into a nearby poor region, which then rapidly builds up until it too becomes a forest of smokestacks and skyscrapers.

This is the story of the Great Relocation. In the 1980s, Europe, America and Japan had high labor costs and lots of purchasing power. It made sense to start shifting factories to China. But that shift might have occurred so fast and furious that it has repressed growth here in the rich world. And if that's true, it means that our slowly declining standard of living is not due to skills shortages or government policy mistakes, but instead is a consequence of natural and inevitable forces.

So what does this mean for America? Here we enter into even more speculative territory. China may be "taking our jobs," but it's not clear how much of that is inevitable and how much is due to deliberate Chinese policy. If it's the latter, we may be able to slow the Great Relocation to a more stately and manageable pace by resisting China's modern-day mercantilism. That could mean trying to force China to float its exchange rate or to better protect US intellectual property. But if China's growth is primarily a result of natural economic inertia, then doing these things would be irrelevant at best, and dangerous at worst. It's a tricky problem.

But that doesn't mean the US should stand idle. Regardless of our trade policy, there is something we can do to win in a world where geography rules. The lesson of Krugman's theory is that density can be a plus: It's better to be a city than a farm. Despite our wealth, our technology, and our industrial history, America is not a very densely populated place. That means that if you had to pick America or China to be either the world's factory or the world's farm ... well, China would be Manhattan and America would be upstate New York. It's not that stark, of course, but look at countries that have plenty of land and resources and few people--Russia or Argentina comes to mind--they don't seem to be doing a lot of high value-added manufacturing or services.

If we want to be the world's factory fifty years from now, one important thing we can do is to welcome large numbers of immigrants (especially high-skilled immigrants) into our country. We should also focus on policies to promote greater urbanization within our country: walkable neighborhoods, high-rise housing, and light rail would accommodate those new immigrants much easier than sprawling exurbs and traffic-choked commuter freeways. These are things we should and could be doing independently of trade policy, innovation, etc.

And what does the Great Relocation mean for China? It means China's spectacular growth is no mirage. The country has a large, dense, literate population, and a fairly open trade policy. According to Krugman's theory, that's really all you need to get rich.

Now that China has partially industrialized, its growth has taken on a momentum all its own. Notice that you hear less and less these days about multinationals moving to China for the cheap labor and more and more about wanting to be close to the enormous domestic market. Although China's growth will inevitably slow, there is unlikely to be a "middle-income trap."

The message of the Great Relocation story, then, is that the China genie is out of the bottle. Regardless of trade policy, our best shot at long-run prosperity is to prepare for a world in which the United States is just one major industrial economy among many.

Whether you agree with Smith's hypothesis, issues of globalization and trade in these times stir passions. It is clear that riding the globalization wave has had uneven effects across different demographics in different countries. The first reckoning was arguably what transpired but quickly fizzled in Seattle in 1999. That was two years before China even officially joined the WTO. Ten years since, both China and the rest of world are struggling to make sense of the new global economic reality in which they live.

The outcomes of this renewed reckoning are far from clear.

Image: Reuters

Apple's Rise Is China's Rise

2011-10-10T08:48:00-04:00

Steve Jobs's vision of a world full of iPhones, iPads, and iPods would be impossible without cheap foreign labor

"Designed by Apple in California Assembled in China" is etched into the glossy black of every iPhone. The designer is mourned and deified the world over, but the assemblers are huddled in anonymity. Indeed, the story of Apple's rise over the last decade is as much America's story as it is China's. If Steve Jobs, donned in his uniform of jeans and black pullover, was the general who led the battle for global digital technology supremacy, then it took hundreds of thousands of his troops in factory overalls and static-free scrubs to realize his vision with precision and consistency.

That the foot soldiers of Apple's meteoric ascendancy are Chinese has received nary a mention in the flood of hagiographies on the late industry titan. That's understandable: Jobs was an iconic iconoclast who thrived as a businessman and as the envy of his field. The revolution he ushered in transforming consumer behavior and the portable device frontier deserves to be praised. His was a quintessentially American story of risk-tolerant entrepreneurs who sought the ideal and succeeded to an inimitable degree. Product of an immigrant father and college drop-out, Jobs personified the unique cultural and social milieu of Silicon Valley, one that has spawned endless, though mostly unsuccessful, imitators. He embodied one of the defining narratives of what's best about America writ large, that it is an inventor of the future, time and again. That is how progress is done.

But kneading innovation in the abstract in Cupertino was realized as tangible devices in city-sized factory in Shenzhen, China (Foxconn reportedly has more workers on its payroll than twice the entire population of Washington, D.C.). Commercialization of the sophisticated products, while successively lowering prices, would've been impossible without China's essential role. Few, if any, Americans seem to care that the iPhone registers in the "trade deficit" column of U.S. trade with China, even though the guts of that phone contain parts from Japan, Korea, and the U.S. Who disputes that Apple is thoroughly American? Are the Occupy Wall Street participants--tweeting their progress and slogans on iPhones--rallying against how Apple indirectly hires vastly more Chinese workers than in their California headquarters? The trade deficit is with China--just look at the COSCO shipping containers arriving at U.S. shores loaded with i-somethings that are cheaper than those sold in China.

And as Apple keeps almost all the value of its products, China is left wondering whether it too can produce an Apple. In the meantime, Foxconn spits out millions of iPhones to support its workforce and sustain profit margins. Some of its workers have even plunged off buildings to their deaths, capturing enormous international attention last year. Despite the well noted "college campus-like" atmosphere of Foxconn, that image belied a messy cauldron of worker discontent. And more recently, Apple has drawn criticism from Chinese environmental groups for neglecting to hold its suppliers in China to strict environmental standards. The extent to which Apple is in fact responsible for these issues, directly or indirectly, seems to have had little impact on its brand and sales in China.

The Chinese factory worker's role in the Apple story should not obscure Steve Jobs monumental achievements as an innovator. Nor should those workers' roles be marginalized in the breathless paeans to Jobs's almost-mythical legend. This is the funny thing about the current state of trade and globalized network of supply chains in which we find ourselves--many of the stories that germinate in Cupertino/Silicon Valley usually find their denouement in Shenzhen or nearby factory towns. Yet when recriminations are flung back and forth between the U.S. and China--recently over Chinese currency again--there are always clear-cut villains and heroes. Sure, China is exploiting the trade regime where it can to its own advantage. Why wouldn't it game the system if possible? It is simply following its own interests and the well-trod path of many countries before it that also tried to bend the system to its own liking. Not all were successful, but the successful ones usually get blamed for breaking the rules of the game.

But let's just cast all these complexities aside momentarily and focus on what's truly important: Apple brought down the iPhone 4S to a base price of just $200! A swankier and more powerful phone that is cheaper than the lesser version? American consumers: meet the China price. Thank you China. And thank you Steve Jobs.

What's Behind Congress Taking on China's Currency Policy

2011-10-06T08:46:34-04:00

China's currency may or may not still be under valued, but looming political obstacles will likely keep U.S.-Chinese policy from being determined at a national level

Reuters

There are two divergent, and competitive, strains of thought on the U.S.-China economic relationship. They can be essentially summarized as "carrot" or "stick" approaches to managing Chinese competition during a time of high unemployment in the U.S. One is the China currency legislation, revived this week with notable support in the Senate -- the stick. The other is attracting Chinese money to create new jobs and investment, especially in cash-strapped states -- the carrot.

It is understandable that long-time observers of congressional politics might roll their eyes at the thought of another China bill during election season, with the same cast of characters (yes, Chuck Schumer, Democrat of New York). And some may even wonder how you sell a currency bill when the Chinese yuan has been appreciating since last year, as shown in the screen shot below:

The pace of appreciation has been uneven, of course, with noticeable spikes but also a slow down in September. But the trajectory is unambiguous. So the argument, then, is that the Chinese currency is still undervalued (most economists agree) and so it must appreciate more and faster (there's less agreement about how much). If one recalls Senators Schumer and Lindsey Graham's first attempt at a China currency bill in 2005, it was stipulated that the Chinese yuan was undervalued by 27.5 percent. Until recently, Fred Bergsten of the Peterson Institute proclaimed that the Chinese currency remained another 30 percent below its actual market value, but now seems to have changed his mind. Since 2005 when China formally de-pegged its currency from the U.S. dollar -- discounting the pause during the financial crisis -- the yuan has had nominal appreciation of nearly 30 percent, exceeding what Schumer and Graham deigned in their original legislation.

So why the revival now? One obvious answer is the fleecing of American manufacturing jobs, which the supporters of the bill seem to agree is largely caused by China engaging in unfair trade practices -- such as currency manipulation -- at the expense of U.S. workers' livelihoods. In an environment of 10 percent unemployment, it is a compelling political argument that aligns with President Obama's reelection platform of jobs, jobs, and some more jobs. Or it may just be a principled stance to hold China accountable, as Paul Krugman, the political pundit, argues, even as the economist in him readily concedes the this action won't come close to ameliorating our economic woes. There is likely another motive this time, however, that involves a bargain on trade, as the WSJ reports:

Adding to the pressure, free-trade deals with Panama, South Korea and Colombia are coming before the Senate soon. Critics of the pacts say they will hurt American workers, and lawmakers who support the China currency bill may find it easier to vote for the trade deals.

Free trade deals in exchange for smacking China for its maligned currency policy -- does this mean it is yet again political theater? Not necessarily, since the margin of vote in the Senate could help support the bill and as the House caves to pressure, sending the bill to President Obama's desk. Sean West, U.S. politics analyst at Eurasia Group, explains in a note:

...however, the bill could pick up momentum if the bill receives 70 votes or more in the senate. That momentum could be reinforced by a 15 October decision by the Treasury Department to either decline to label China a currency manipulator or to delay its decision (there is little chance Treasury will actually label China a manipulator). While GOP leadership prefers not to proceed with the China bill, it is far from clear whether it wants to spend much political capital to kill it. Indeed, strong pressure from rank-and-file members could convince the House leadership that it is better to let the bill-or an alternative -come to the floor, where it is likely to pass.

Ultimately, however, I would be very surprised if the White House went along with this bill. Indeed, the administration has ostensibly tried to keep the bilateral relationship on an even keel, preventing major volatility as each country undergoes important political transitions. Moreover, the U.S. Treasury has been loathe to label China a "currency manipulator" in its semi-annual reports to congress. The Taiwan arms sale has been another recent example, with the island's looming elections next year adding uncertainty to the U.S.-China relationship.

The relatively restrained pro forma response from Beijing on the currency bill seem to reflect an understanding of the current situation, with Beijing doing its part to not worsen the tension. In predictable official repudiation mode, news agency Xinhua collated official statements from the various Chinese ministries and enlisted foreigners ("allies") who agree with the Chinese view. The firebrand Ma Zhaoxu at the foreign ministry is "unwaveringly against U.S. congress' action"; then the commerce ministry, more modestly, inveighs that the "action violates the WTO and arouses deep concerns from China"; and finally, the eminently rational People's Bank of China makes the economic case that "...the value of Chinese currency is not the main contributor to bilateral trade imbalances, which are caused by various structural factors...". Yes, each bureaucracy stuck faithfully to its talking points.

Yet as this issue plays out in the immediate term, an entirely different meme is shaping the relationship in the long run: follow the Chinese money. It is well-known that an outcome of China's currency policy has meant the endless accumulation of foreign exchange reserves, which stands at about $3.2 trillion, or half of China's GDP, most of which are denominated in U.S. dollars. That growing figure has become emblematic of bilateral trade imbalances and it is turning into a liability for the Chinese government.

Beijing's policy has never been about "dumping Treasuries" but about diversifying out of them. This logic is all the most salient given a depreciating dollar and dysfunctional politics in Washington that brought the debt-ceiling issue to the brink. These massive piles of U.S. T bills can get better returns if re-invested into U.S. assets with solid long-term returns. And, for our part, why wouldn't we want our money back?

Debate over Chinese investment in the U.S. is fierce, even as various state governors/city mayors have trekked to Beijing to pitch to investors--for instance, this Maryland story. At last week's Washington Post Live China conference (videos here), I sat in on a panel that was devoted entirely to the subject of getting Chinese money. David Rubenstein, head of private equity behemoth Carlyle Group, was an ardent advocate of making it easier for China to deploy its capital to create American jobs (operative words here). Others are expressing similar ideas -- see this Asia Society report, for example.

Yet it is undeniable that Chinese investments face considerable political obstacles in Washington for a host of reasons: national security concerns, perception of Chinese intentions, the state's role in Chinese companies, and so on. But a different story may be unfolding at the state level, which could affect national politics and attitudes. How do you reconcile Schumer haranguing China on its currency policy with the Illinois governor getting Chinese Goldwind to build wind farms in the state?

The heightened political season makes it difficult to discern which direction the politics will eventually break. But it seems to me that states' receptivity to Chinese investment will have the potential to alter the national political landscape in the longer term.

Pictures From China's 62nd National Day

2011-10-01T12:32:07-04:00

Instead of wasting words on this year's annual Communist Party celebration that leads into the "Golden Week" of unbridled consumerism, I must share some photos that will say everything and more.

From this year's celebration (click to enlarge):

And they say Chinese people look the same...come on, Politburo Standing Committee members, couldn't one of you have put on a different colored tie? I appreciate the style coordination and exacting uniformity, but seriously, forget soft power -- start with softer colors.

Now, for contrast, sixty years earlier:

Nope, this is not DC Gay Pride 2011, but apparently the CCP National Day parade in...wait for it...1950! (grateful h/t to the good folks at Shanghaiist). So were these PLA soldiers? Where's the progress sixty years later?

And finally, back to the present again:

You really can't have enough "sea of humanity" pictures from China (h/t to Bill Bishop at Sinocism). This was apparently a shot of the Bund in Shanghai on the eve of the National Day, where people gather to marvel at the dazzling lights and fireworks.

Did you just get a bit frightened looking at that photo? Because I did.

Happy National Day, now go out and spur Chinese consumption!

A Former Premier of China Speaks

2011-09-15T16:38:17-04:00

Translated excerpts from the just-released book of speeches by Zhu Rongji

Zhu Rongji as he gave his final report in 2003 / Reuters

When top leaders in Chinese politics enter retirement, they seem to be sequestered in a nether region where no sounds are emitted. Indeed, they reappear fleetingly during important Communist Party events and celebrations, solemn and silent. Memoir-writing and speech-giving are entirely alien concepts to former Chinese leaders. They may well work behind the scenes in some capacity, but public life essentially ends when they step out of the Zhongnanhai leadership compound.

And so on the rare occasions that published works of former leaders arrive, China nerds like me salivate. This time it's a compilation of speeches by former Premier Zhu Rongji -- the unyielding and effective economic czar credited with steering China out of the Asian financial crisis, securing China's accession into the World Trade Organization, and reforming an inefficient state sector at the cost of massive layoffs. Zhu was known to have an intimidating and no-nonsense style, for which he earned praise and engendered hostilities. Many of these speeches are being published for the first time, and I think they offer glimpses into a man many in China miss today. Because the published texts are in Chinese, I thought I would translate some excerpts.

Classic Zhu quotes:

"You (referring to cadres) are neither diligent nor independent. You go out drinking and eating at banquets, then arbitrarily approve projects.You put cronyism first, cultivating guanxi (networks) everywhere, not giving a damn about the state's money and assets. When you're sitting here reporting to the chairman, how can you expect people below you not be disgusted?"
--speaking at financial work conference in 1993

"To fight corruption one must go after the tiger first, then the wolf. There will be absolutely no tolerance for the tiger. Prepare 100 caskets and leave one for me. I'm ready to perish together in this fight if it brings the nation long-term economic stability and the public's trust in our government."
--speaking after major corruption case that ousted Beijing Mayor Chen Xitong

"I've slammed my hand on tables, given intimidating stare-downs, and people say I do it to scare the public. Well I don't think anyone believes that is the case. I don't intimidate the public, I only intimidate those corrupt officials."
--speaking at a press conference at a national legislature session in 2002

"My only hope is that after I leave public service, the Chinese people will think of me in one way: that he was a clean official, not a corrupt one. I will be immensely satisfied with that judgment alone. But if they are feeling particularly generous and say that Zhu Rongji got some real things done while in office, then I'll thank heaven and earth."
--speaking to press at a national legislature session in 2000

The rest is taken from a speech at a full cabinet meeting in January 2003, Zhu's last full session at the helm. As the sun set on his career, Zhu understandably touted his government's achievements at some length. But more interestingly, it was his warnings and assessment of China's economic ailments nearly a decade ago that seem prescient and instructive today.

On government accomplishments:
The past five years were a particularly unique time in the development of modern China. One, we were facing head on global economic uncertainty, with the Asian Financial Crisis having a disastrous effect on many Asian countries. Two, we also faced enormous domestic challenges, including the 1998 flooding natural disaster, compounded by major economic restructuring and production declines that led to 10 million laid off workers in 1997. Having survived these five years was truly extraordinary. In fact, not only did we conquer these challenges, we managed to use the opportunity to expand our economy. Although I can't claim that this was the fastest growth period in history...it really was one of the best periods of economic performance in history...Let me use some statistics to prove my point. For example, investment in infrastructure in the last five years was double or triple that of the last decade or more. This huge scale not only transformed the natural environment and the social fabric, it also changed the quality of people's lives...

...We originally projected that post-Asian Financial Crisis, our exports would see negative growth for 2 or 3 years. But because we took a series of judicious policies, it turned out that exports didn't contract, they actually grew quite well...Frankly, we never thought that foreign direct investment would grow so tremendously--just last year FDI reached $52.8 billion, first in the world. Foreign investment has spurred reforms in the state sector, improved enterprise and sales management systems, all of which are beyond our imagination...

...And one more point. If we do not improve and refine our social welfare system, with social stability as a precondition, we would not have today's optimistic environment. Since 1997 we have been building a social welfare and unemployment system. We've done a lot of detailed work, issued numerous policies, and allocated significant spending from central coffers to that end...

On problems:

...I want to remind those cadres who are staying on the job beyond me: my biggest worry right now is an overheating economy, I've already worried about this for a year now. I wouldn't say this publicly, but only bring it up to the top leadership, that overheating is the one thing that preoccupies my mind. Many signs seem to have emerged, and if we're not vigilant, the economic situation will be difficult to rein in. I've had 50 years of macroeconomic work experience and I can sense deeply this creeping "national syndrome". Every time things improve just a little bit, people start to adopt an exaggerated swagger, become blindly self indulgent, randomly complicate things, and ignorantly devise policies. I've already commented that I think the property market is overheating, but I notice that the majority of my colleagues have not internalized the gravity of this issue. They always tell me "the overall conditions are quite good" as their bottom line and only spend little time discussing the problems. That's a bunch of malarkey! This is serious overheating, it was precisely overheating in the housing sector in 1993 that crippled Hainan. I've been reading some foreign media and they all say China is already a bubble, property is overheating, and risk is growing...

Our banking and financial sector colleagues must grasp this dynamic, because at the end of the day, all the money will come from banks. I must reiterate to our bank colleagues: perhaps you think you are being promoted to higher office in two years and that you will no longer manage financial portfolios, so why not just leave current problems for the next administration to fix...You cannot just leave these problems to your successors and blindly pursue development. I'm particularly concerned about this trend toward "urbanization". Urbanization now has been interpreted as simply constructing more housing at low cost, seizing farmers' land, and allowing foreign investors or domestic developers to move in without appropriately dealing with the farmers--this is a dangerous development. This does not align with the central government's intentions at all. We've discussed this internally on numerous occasions because we were precisely afraid of these kinds of trends. Our own think tank has published a report called The Cost of Urbanization to Rural Residents and Farmers that I suggest you all read. The study details a case in Luoyang, Henan, where it began massive township developments in 2001. It proceeded for two years without any comprehensive plans nor obvious sources of funding. So what do you do when you don't have the money? Well, what was originally a single floor house, they just built another taller wall along the street to make it look like it's a two or three-story house. They didn't invent this method, it has been used before, it's all fake! I don't know where they got their money, how could the village and county governments put up that kind of money? Either they got it through some kind of bank loans or they tapped local funds that were meant to be spent on education. I think this report is more poignant than a comparable one from the State Council. In 1993 it was all these urbanization projects in major cities, Hainan and elsewhere. If everyone starts to "urbanize" going forward, how can that be sustained! Our bank colleagues must remain alert. You always say that macro conditions are good, nonperforming loans are declining, but I just don't believe it...

...Moreover, setting up theme parks seems to be all the rage these days. But even in foreign countries they aren't this gun-ho about it. Take Disney for example, the US has two, France has one, and Japan has one. Yet now theme parks in China are popping up everywhere. The foreigners aren't taking money out of their pockets, but you sell the land at a discount, destroying the country's natural resources, and using your own money. Why the hell are you doing that??!! We've got millions of farmers to feed and all you want to do is build theme parks, who's gonna go there? Shanghai failed in its effort to build a Disney World, but still wants to do a theme park. Tianjin wants to do one and so does Beijing, so close to each other. The two Disneys in America are far apart, one in LA and the other in Florida, why are we building two next to each other? We must continue to clamp down on this...all these projects must be approved by the State Council first before proceeding. I assume many haven't even heard of the "Jurassic Park" in Sichuan. It was set up by the forestry bureau there, taking up 9 square km--it's a joint venture with an Australian bank and only because the local guys wanted to build a five-star hotel...

...Now the auto sector is getting hot too. Last year auto prices were slashed, we had massive auto imports, and banks were willing to lend to the sector. I don't believe that building compact cars should be our development trajectory, there's no need for this irrational exuberance, where young people adopt this mindset that owning a car is a badge of prestige. We've said this long ago, China is not that kind of a country, and I still haven't changed my mind. We should instead make public transport a central pillar of our development. Right now, Beijing's traffic is horrendous, how are we going to handle the 2008 Olympics? All sorts of basic infrastructure, transport infrastructure, and management infrastructure aren't up to standards. Shanghai has half as many cars as Beijing, but it still faces huge traffic jams, how are we going to accommodate the 2010 World Expo?...

...We cannot waver on our resolve in expanding public transport systems. There just isn't that much oil in the world! Cadres, last year crude imports stood at 70 million tons, and this doesn't account for smuggled products, so who knows how much we've actually imported. We can only produce 160 million tons domestically, but consumption is 260 million tons, how can this be sustained? When we run out of oil, how can we grow an auto sector? Public transport has been our persistent weakness, and we've never gotten it right...

Plenty more in there to read over, but I think that's enough of to give a sense of how Zhu once operated. His warnings on the economy, made at the beginning of the last decade, are similar to the warnings we hear as this decade opens. And it is clear that his sharp language often did not go over well with others, but it was this same uncompromising stance that enabled major changes to the Chinese economy.

The timing of the speeches' publication coincides with the current political transition in China. It would be impossible to divine precisely what impact Zhu's words will have on the Chinese "campaign season" under way, if they have any at all. Yet the simple fact that the voice of a respected former premier is now mixed into the larger political intrigue should not be dismissed outright -- especially during a time when vigorous debates are taking place among Chinese elites over the country's development trajectory, ideology, and identity. With some now questioning the ability of sitting Premier Wen Jiabao -- derided as the "greatest actor" in some quarters -- will Zhu's perceived effectiveness be used against Wen just as the latter is forging his own legacy? Is he like an Al Gore who never quite stepped out of the shadows of Bill Clinton?

Will Zhu's words cause the public to recall the reforms of yesteryear and ask questions of why many reforms have seemingly stalled? So far, the liberal Guangdong paper Southern Weekend has scored a coup in publishing excerpts of Zhu's speeches. But will official media pick it up or remain completely silent? Indeed, suppression of the speeches may be a good barometer to gauge the extent to which current leaders feel threatened by the return of Zhu.

These are interesting times in China.

Can China Manage Its Energy Consumption?

2011-09-13T07:00:00-04:00

Beijing plans to put a ceiling on energy usage in an apparent attempt to control GDP growth

Smoke billows from chimneys of a coal-burning power plant in Wuhan / Reuters

Having strayed from energy lately, I thought it a good time to return to it. Just when you thought the whole 12th Five-Year Plan (FYP) matter was wrapping up, it turns out to have only begun. An energy-specific 12th FYP is expected to be released later this year, barring delays. The plan should offer plenty of details on how China will execute the policies to reach the energy targets it has set.

Why the delay? It has to do with the controversial measure of capping total energy consumption. That is, based on preliminary details, Beijing intends to put a ceiling on energy consumption at 4.1 to 4.2 billion tons of standard coal equivalent (STCE) by 2015. This implies that they plan for, roughly, a 10 percentage points drop in energy consumption growth from the 11th FYP period that ended in 2010. And because energy consumption is highly correlated with economic growth in China, the attempt to curb energy demand could signal an attempt to tame GDP growth. It could also be intended to force industry to dramatically improve efficiency -- a requisite if Beijing is serious about controlling energy consumption.

It is little wonder that this policy would generate controversy -- it is essentially telling the provinces that they can't grow as much as they'd like, particularly those provinces dominated by heavy industry. But China's addiction to GDP growth is a tough habit to break, and provincial officials have reportedly proposed plans that would amount to a total of over 5 billion tons STCE in energy consumption, a full 1 billion tons over what the central government is setting. The province of Jiangsu, for instance, has set its energy consumption level one-third more than in 2010. Moreover, numerous provinces have submitted their own plans that still include double-digit growth.

This mismatch between Beijing's wishes and local-level intransigence will require negotiation -- and intensify central-local politics, which is likely the reason behind the delay in promulgating the energy plan. Resistance from localities will be severe, and it is up to Beijing to overpower the provinces. Even if the central government does not give in, a national energy cap will have little impact if local governments aren't held accountable for reaching their respective targets. Those outsider observers who are perennially dazzled by Beijing's capacity for top-down execution tend to underestimate the extent to which China is a decentralized body politic. Sure, the central government has considerable resources and leverage, but the provinces aren't obsequious vassals either.

I suspect that when all's said and done, the cap won't be "politically binding" like China's other energy and carbon intensity targets. As a result, its effect in meaningfully taming energy consumption will be limited -- and in all likelihood, that 4.1 to 4.2 billion tons cap could well be surpassed. I think it's probably best to interpret the cap as an effort to push policy in the right direction rather than an iron-clad directive to constrain energy consumption.

Nonetheless, Beijing remains committed to its energy efficiency goals and, if anything, aims to rationalize its approach so that a cap will best help achieve national-level energy targets. With the cap, policymakers seem to be sending a signal that it is about time to balance overwhelming emphasis on supply-side energy security with demand-side management.

Such a rethink on energy policy, no matter how nascent, is a welcome development indeed.

As Global Markets Rattle, Is China Shifting Economic Policy?

2011-08-31T07:01:22-04:00

After the S & P downgrade of U.S. debt, China's concerns over the safety of its reserve assets in the States may prompt some changes

Reuters

Normally an uneventful month, August proved to be restless. Earthquakes and hurricanes aside, the markets swung wildly as a slow global recovery reduced consumer confidence. It didn't help matters that the month opened with a paralyzed Washington that eventually delivered, at the final hour, a meek and unsatisfying interim solution to US fiscal woes -- only to be followed by the S&P downgrade. Meanwhile, across the Atlantic, the Eurozone is facing one of the toughest political and policy coordination challenges since the Europeans cast aside wartime animosities and conceived an embryonic economic unit in 1958. Judging by the events of last month, it is little wonder that perception of risk in western developed countries (except maybe in Sweden) has heightened considerably. Who wants a political system that can't get its act together when necessary?

Not China, a point that Beijing has hammered home ad nauseum. But has August made China reassess its own economic policies and heavy dependence on the US economy? Here I direct you to an interesting but slightly dated Reuters piece that would suggest it did:

Chinese editorials flaying Washington for fiscal recklessness over its debt dramatics and downgrade mask a growing unease in Beijing: a fear that China's own economic policies are shifting too slowly.

Interviews with a dozen high-ranking Chinese officials and government economists revealed frustration with China's self-imposed fetters to the U.S. dollar and louder calls for a change, but no clear short-term plan to break free.

The obvious answer -- allowing the yuan to rise more rapidly -- carries economic and political costs that China is probably not yet prepared to pay...

China's public response to the U.S. debt troubles, expressed in a series of scathing commentaries in the state-controlled media, has been to censure Washington for neglecting its responsibility as issuer of the world's primary reserve currency and trying to "borrow its way out of messes of its own making".

But in interviews with Reuters, some officials quietly acknowledged Beijing's own policies have put China in an uncomfortable position, and argued they would have to change.

China has already laid out a five-year plan that envisages promoting domestic consumption, something the United States has urged for years as a way to reduce a gaping trade imbalance and shrink the vast heap of dollars Beijing invests in Treasuries.

This is where Yu Yongding's op-eds come in. Yu was a former adviser to the Chinese central bank and has been arguing for a floating Chinese currency for years now. Here he is in the Financial Times:

Chinese officials are understandably angry about the irresponsible brinkmanship demonstrated by their American counterparts in recent weeks. Unfortunately, anger counts for little in international finance. The danger facing the US is that after Tuesday's debt deal any sense of urgency over a dire fiscal situation will dissipate. The danger for China is that it does not learn the right lesson - namely, that now is the time to end its dependency on the US dollar...

China has run a current account surplus and a capital account surplus almost without interruption for more than two decades. Inevitably this has led to an accumulation of foreign reserves. It is clear, however, that running these surpluses persistently is not in China's best interests. A developing country, with per capita income ranking below the 100th in the world, lending to the world's richest country for decades is not reasonable. Even worse is the fact that, as one of the largest foreign direct investment-absorbing countries in the world, China essentially lends money it borrowed at a high cost back to its creditors, by buying US Treasuries, rather than importing goods and services...

If there is any lesson China can draw from the US debt ceiling crisis, it is that it must stop policies that result in further accumulation of foreign exchange reserves. Given that many large developed countries are simply printing money (and the recent rumors are that the US might return to quantitative easing), China must realise that it can no longer invest in the paper assets of the developed world. The People's Bank of China must stop buying US dollars and allow the renminbi exchange rate to be decided by market forces as soon as possible. China should have done so a long time ago. There should be no more hesitating and dithering. To float the renminbi is not costless. However, its benefits for the Chinese economy will vastly offset those costs, while being favorable to the global economy as well....

It's not just Yu. Current central bank advisers like Xia Bin have also jumped on the bandwagon.

"The Chinese government is certainly worried about (the safety) of its foreign exchange reserves," Xia told a forum.

"China should reduce the portion of financial assets in its reserves and increase the portion of non-financial assets," he said.

Xia said China should use its reserves to buy overseas energy, resources and equity instead of buying more euro debt.

China has long advocated diversifying its war chest of $3.2 trillion reserves away from the dollar, but as much as 70 percent of the holdings are still invested in U.S. dollar assets, including U.S. Treasuries, according to analysts.

Chinese officials and the public have expressed growing concerns over the safety of its reserve assets in the United States after the Standard & Poor's downgrade of U.S. debt.

Xia said China must improve the way it manages the rapidly accumulating foreign exchange reserves by allowing more government agencies to manage the assets to better serve China's "strategic interests."

Neither of these economists is a "decision-maker," and it is difficult to assess the extent of their influence. But the strategic timing of their arguments suggests that they could be the public mouthpieces for a concerted internal push to rethink some of the most politically sensitive policies like currency appreciation and economic adjustment. I say "strategic" because these arguments for reform coincide with the knee-jerk nationalist critiques that often dot headlines in the Western press. (Yes, Global Times will always harangue the "western imperialists" -- honestly, do you expect anything less from the Fox News of China?)

But what's politically interesting here is that as the "nationalists" are calling for dumping U.S. debt and wondering why China holds so many "worthless U.S. assets," the liberal economists are agreeing with them, albeit with very different motives. This marriage of convenience, regardless of how ephemeral, may produce some interesting outcomes. People like Yu and Xia are arguing that if you want to limit China's exposure to U.S. assets, then Beijing has to look itself in the mirror and tackle longstanding export-oriented policies that have only exacerbated this reliance.

Will Beijing then simply decide to float its currency and whittle down its current account surplus? Unlikely and certainly not rapidly. But is this apparently concerted push by economists, who have shrouded the necessary reforms in nationalist clothing, having an impact? Probably and modestly. In the annals of imperfect analogies, think of it as if "green-minded" liberals adopted a national security platform to argue that the U.S. needs a comprehensive clean energy policy to wean off Saudi oil that funds terrorist cells and therefore compromises U.S. security. It's like if Rachel Maddow and Michele Bachmann both agreed that raising taxes on the wealthy is sound economic policy.

Indeed, there is already plenty of speculation over whether changes in China's currency policy are afoot.

In the past three weeks, China has come tantalizingly close to signaling some sort of a policy shift. The PBOC has fixed the yuan mid-point at a series of record highs, and did so yet again on Monday.

A flurry of articles and editorials in government-controlled newspapers have argued that the time is right for faster appreciation.

But just when investors and economists smelled a change, the PBOC stepped back and let the yuan drift sideways for a week. Reuters spoke with several analysts at Chinese government think-tanks, who said expectations of a big move were misplaced.

Liang Youcai, senior economist at the State Information Center, said a sharp yuan rise could backfire by attracting more investment money into China, worsening the inflation pressures that the PBOC wants to counter.

Still, the yuan has risen about 0.8 percent against the dollar so far this month. That may sound modest, but considering it rose just 2.3 percent over the first seven months of the year combined, it shows Beijing has stepped up the pace even though growth concerns have intensified.

Not only is the RMB appreciating against the U.S. dollar on nominal terms, it is apparently also rising on a trade-weighted basis against other currencies, something Beijing has been reluctant to do in the past (and politically, the dollar-yuan exchange rate has been the consistent focus). This is an interesting change from the global financial crisis, when China immediately re-pegged its currency to the U.S. dollar.

The unintended political alignment of the two interests in China is probably not going to endure, in large part because Chinese politics have become so pluralistic and interest-driven. It seems to be a constantly negotiated game where a temporary upper hand assures nothing in the long term. And it bears repeating for the umpteenth time that regardless of the modest steps that Beijing seems to be taking in the right direction, its policies are still restrained by accumulating an obscene amount of U.S. debt. There is no magic solution and the ultimate re-balancing process will take substantial coordination and years or decades to realize. In the meantime, slow and steady management to minimize volatile impact seems to be the Chinese way these days.

Is Chinese Growth Sustainable?

2011-08-18T13:15:00-04:00

Confronted with diminished growth, China's newest five-year plan focuses on rebalancing an export-driven economy

Reuters

I will reserve comments on Biden's China visit until his trip is complete, though I suspect there isn't going to be a whole lot to comment on. At this point, it has been about that Georgetown basketball game the vice president attended as soon as he left the Beijing tarmac.

For now, I wanted to draw attention to a comprehensive report on China's 12th Five-Year Plan (FYP) from Eurasia Group -- that economic rebalancing blueprint I've written about in various snippets in this space (for example here, here, and here). Consider this something of a "magnum opus" of the 12th FYP then. (Yes, I contributed extensively to said report in my day job.)

It is more than merely a summation of what's in the plan, however. The "plan" is used as a window to explore China's political economy -- both its maladies and prospects -- writ large. As I've argued before, it would be a mistake to view this rebalancing as a five-year endeavor. It is more apt to think of it as a decade or longer process of adjustment that, if even three-quarters successful, will have substantial implications for both the Chinese and global economies.

Introduction
For decades, China's blistering growth has depended on exports and investment. The country has become the world's workshop and lifted millions out of dire poverty. And for the first time in nearly two centuries, China has returned to a position of global power and influence. But this growth model is no longer sustainable and China's savvy leaders know it. They are committed to rebalancing the country's economy because their capital-intensive, export-oriented approach is delivering diminishing returns and threatens to become a major political vulnerability for the government.
Why is China's growth model delivering diminishing returns? The global economic crisis provided clear evidence that China's export-driven economy is vulnerable to dips in demand in the rest of the world. Meanwhile, its dependence on investment has introduced distortions and imbalances into the Chinese economy. China's monstrous $586 billion stimulus package in 2009 staved off severe hardship and effectively reinvigorated the economy. But most Chinese policymakers agree that rapid growth now looks less desirable and, more to the point, cannot be sustained under the current approach. Some policy advisers and economists have also warned that China could become trapped in a "lost decade" similar to Japan's if it does not change course.
The 12^th Five-Year Plan (FYP), which runs from 2011-2015, is their strategic blueprint for doing so. Such plans are a legacy of the 1950s, when China's socialist economy was built around detailed plans that touched every aspect of economic life. But the 12^th FYP aims to alter China's macroeconomic landscape in far-reaching ways, with effects that are likely to be felt for a decade to come. Eurasia Group does believe that Beijing will achieve some of its goals. But ultimately, the country's leaders lack the political stomach and sense of the moment to implement a comprehensive and ambitious rebalancing agenda. They have correctly diagnosed many of China's underlying economic challenges and have, at least on paper, prescribed many of the needed remedies. Yet, as innately conservative technocrats, their inclination to put off the toughest decisions about China's political economy means that Beijing will confront even starker choices down the road.
Failure to implement key portions of the rebalancing agenda will jeopardize China's economic trajectory. And over the longer term, such failures could also threaten China's political stability.

The next decade for China is arguable just as important, if not more so, than the last three combined. The curtains on the era of easy "catch-up" growth is being closed, and a transition to a prosperous and equal society is the fundamental issue facing Beijing. It's not that the Chinese leaders don't get what's at stake -- they know such a reckoning must be had. But recognizing what must be done is quite different from summoning the political chutzpah to achieve it. And so, the next ten years will prove to be fascinating ones for China and indeed for the global realignment that is slowly taking shape.

On Chinese Clampdown with Fallows and One More on High-Speed Rail

2011-08-11T21:00:00-04:00

Couple items to draw your attention to, on the Atlantic's site and elsewhere. First is the recent video I did with Jim Fallows -- who has a new piece out on Chinese reaction to the "Arab Spring"-- part of the "China's Rise" series (more videos will be up soon so check back!):

The second item is a piece I did for China Dialogue, which by the way does very good work publishing both English and Chinese-language writing to facilitate better exchange of ideas/views. It's probably going to be my final commentary on the bullet train disaster for a while, unless of course there's another major development. I reassert the point that despite the obvious failings in overseeing the rail network project, I continue to believe that there are sound justifications for pursuing HSR in China as a rational economic choice. Whatever may come out of this crisis, I'm not sure that "throwing the baby out with the bathwater" is the optimal solution. (For Chinese readers, the piece also got picked in the FT Chinese edition.)

Keeping high-speed rail on track
Damien Ma August 11, 2011
Beijing must respond to public anger over mismanagement of its railways, but not by ditching plans for faster trains, writes Damien Ma.

An uncomfortable lesson for Beijing that rose from the mangled debris of the high-speed rail (HSR) accident is that a crash inside China is heard instantly around the world. For all the stifling checks on unfettered information, the microblog Sina Weibo (the "Chinese Twitter") shined as a vehicle that beamed the ferocity of public opinion rapidly across the globe.

As I have written elsewhere, that opinion overwhelmingly reflected collective ire toward a government that remained more opaque than necessary and less accountable than demanded. Unlike the aftermath of the Fukushima nuclear fallout - when officials defended imported nuclear technology as more sophisticated and blamed Japan's disaster on a once-in-a-century freakish natural calamity - deflecting responsibility over an entirely self-created problem rings hollow.

The public and unofficial media continue to have none of it and have mounted calls for full disclosure of what went wrong. As policymakers' hands are increasingly bound by the tide of public opinion, it appears that some changes will have to be made in China's approach to rail development. It would be a mistake for the central government to respond to the disaster with inaction. Yet it would equally be a mistake if the ultimate course of action was to abandon HSR altogether. I have argued and continue to believe that HSR is in and of itself a rational idea to accommodate China's economic development and urbanisation ambitions.

Still in crisis management mode, neither the rail ministry nor the State Council - China's highest administrative organ - has indicated what long-term steps are being debated. In the interim, however, the State Council has announced a blanket suspension of new high-speed rail projects, while Wen Jiabao has pledged to get to the bottom of the accident's true cause. In the absence of further information, it's probably reasonable to entertain a range of scenarios for the future of China's HSR programme. Here are five:

No change; China goes full throttle forward with existing plan and timeframe.
Temporary respite to reassess, but ultimately the programme forges ahead.
Pace of development slows in order to address serious issues with rail ministry and governance.
Scale of project is significantly curtailed and funding cut.
China throws the baby out with the bath water and scraps entire programme.
Scenarios at either end of this spectrum seem rather unlikely at this point. Since voices like Caixin, a boundary-pushing media company, continue to pressure the top leadership to hold the rail ministry's feet to the fire, at a minimum a legitimate - and potentially independent - probe into whether toreform the stodgy ministry is a real possibility. Indeed, the chances seem to be strengthening daily: yesterday, the railway ministry announced a small step of reducing top speeds of the trains across the board and chopping ticket prices; today came the State Council's announcement on the suspension of approving new rail projects.

If that reform then went ahead, it would amount to one of the most significant political restructurings that Beijing has undertaken in at least a decade. Just as China lacks an overarching energy ministry akin to the United States' Department of Energy, a comprehensive transport ministry is nonexistent. This creates a "too many cooks in the kitchen" situation, where governance is fragmented among various bureaucratic interests with little horizontal coordination.

In fact, the rail ministry only cared about its own interests. And under the leadership of the fallen former minister Liu Zhijun, it was particularly adept at pushing for those interests and for the businesses associated with it, as I have noted. Yet meaningful restructuring of the entity will come at a cost, especially as the agency is saddled with debt that could easily grow as public fear reduces ridership on the bullet trains and crimps revenue. Already, there are signs thatpassenger volume on the new Beijing-Shanghai service has plummeted.

With the litany of issues that have surfaced, a failure on the part of central government to take any action would likely exacerbate the public crisis of confidence in handling this political hot potato. But this action should not extend to complete abandonment of HSR: the basic arguments for building an advanced rail network in China remain strong.

Proponents of HSR have argued that increasing passenger rail transport can free up freight transport for needed commodities like coal. Having been stuck behind a line of coal trucks in Inner Mongolia for miles, I can't seriously dispute the practical aspect of expanding rail capacity. What's more, there's sound justification for an HSR network to link a continent-sized nation with high urban density. The latest census, from 2010, showed that 50% of China's population - close to 700 million people - already live in cities, pointing to a faster rate of urbanisation than expected. But this ratio is still considerably below that of developed countries with urbanisation levels in the 70% to 80% range.

With huge volumes of population waiting to be absorbed into cities - including the integration of younger migrants who want to become full-fledged urban citizens - Beijing is planning mega urban clusters while simultaneously dispersing urbanisation into the interior, according to research firm Dragonomics. The megacities are meant to contain more than 10 million people, with the next category of "large cities" accommodating five to 10 million residents.

It is no coincidence that the four main arteries of the HSR connect the currently planned mega urban regions. They basically stretch north to south, from the Beijing/Bohai region to the Yangtze River Delta and from Changsha-Wuhan in central China down to the Pearl River Delta. On the horizontal axis, the HSR lines are intended to eventually connect Shanghai and Chongqing - now the hub and model of development in China's western regions. So, the planned HSR services are meant to facilitate regional integration and development and provide an appealing mode of public transport. The existence of HSR can also force a consumer choice between driving, flying, or riding a bullet train, which, for the "green-minded", is less carbon-intensive.

But despite reasonable arguments in favor of HSR, it is clear that the execution of the project got away from what were likely good intentions. I suspect that when the concluding chapter of this human tragedy is written, the fault will lie less with technical deficiencies than mismanagement, politics and wholly avoidable human errors. Indeed, it is the seeming addiction to speed (both in terms of running the trains and the pace of track expansion), the chabuduo ("good enough") mentality, a culture of secrecy and a ministry seduced by solidifying a powerful fiefdom that threaten to derail the realisation of the country's technological aspirations.