When the ultra-high speed was opened between Shanghai and Nanjing had its inaugural opening, the Railway Bureau shut down the high speed trains on the same route, so that people had to take the slightly faster (and significantly more expensive) option. Locals indicated that this was a face saving maneuver. Tickets on the newer, faster trains are seen as expensive in general, and its a hot button social issue (particularly since those it affects most – migrants – are in the least capable position to shoulder price increases).

The answer of course is that 8% growth will soak up all of the current costs of infrastructure development (at least until this is finished). While this particular bit of Sinocentric-doctrine is rarely called into question, it would be interesting to examine more information on costs and projected revenues. Given that national GDP is somewhere between USD5-9tr (depending on your preferred methods of measuring exchange), this is a very significant number. HT IS.

On January 1, 2008, China put into effect a new labor law that requires businesses to offer permanent employment to workers with more than 10 years of employment. This new labor law will be very damaging to the economy. Labor market rigidity will reduce the incentives of entrepreneurs to create businesses and will drive away existing businesses to countries such as Vietnam and India. Aggregate employment may drop and thus further exacerbate the weaknesses of domestic demand, even though the intention of the law is to provide relief to China’s long suffering labor…

… There is little recognition that many of the social problems in China today are a result of a malfunctioning economic process, such as the blockage of small-scale entrepreneurship, and that the right recipe to correct these distortions is further liberalization. The 2008 labor law is one of many examples.  (Huang 2008, p. 297)

Throughout the book Huang is very critical of the constraints placed upon local entrepreneurial activity, as well as the pro-government and pro-foreign bias of many of the investment policies promoted in the 1990s and early 2000s.  He acknowledges that Hu Jintao has been a positive force in reversing some of these trends, though using the same set of state-centric tools to support rural development.

The interviews I conducted in Wuhan were primarily concerned with whether the 2008 labor law succeeded in providing basic contract enforcement to workers, regardless of permanent or non-permanent status (personally I’m not sure what the legal distinction is between the two categories; presumably the former are much more difficult to fire.) One of the justifications given for the labor contract law was that, prior to 2008, a large number of migrant workers would not even be given copies of their contract. This obviously meant that they had little recourse in the event of a labor dispute. Still need to write more about that. In general, most of those I interviewed were positive about the impacts from the contract reform, and would use the normal dispute resolution process in the event of a problem. Admittedly I only talked to those who didn’t yet run into any problems, though many indicated they were familiar with someone who had (garnishment of wages being the most common.)

“China is too pro-foreign” and “policy changes risk shipping Chinese jobs overseas.” Both true; not things one hears much as of late.

Recent inflation figures probably gave pro-appreciation groups (Ministry of Finance, PBoC) the cover they needed to push this through. I’m less convinced that the move was blatant a nod to G20 as some other commentators believe, though timing was still an issue. Properly Confucian party apparatchiks absolutely do not want to be seen as heeding foreign demands, and the last several weeks have been the only time period in recent memory where there hasn’t been a high-profile meeting with some barbarian global dignitary calling for a yuan revaluation. After the G20 meeting would have been unthinkable,

There’s obviously a a large amount of concern that short-term inflows will rush into China, so much so that authorities will in all likelihood depreciate in order to send a signal. After that, volatility and an upward (downward?) trend to a stronger Rmb.

LGFVs are conduits, like the Special Investment Vehicles (SIVs) were for western banks, used by local government to borrow and spend on infrastructure and other projects (like real estate).

Local Chinese governments share relatively meagre incomes from the country’s central tax pot, yet they’re charged with some pretty huge infrastructure and stimulus projects. What’s more they’re unable to run deficits, or get bank loans, or issue bonds without special central authority permission.

Enter the LGFV. Using these conduits, local governments are able to finance their projects in a rather roundabout way, borrowing money from banks in exchange for some collateral –often local land.

The scale of local borrowing is unclear; some put it as high as 150-160% of GDP (combined with national debt) which puts China comfortably in developed world debt ranges.

• There are at least 65 million empty apartments in 660 cities throughout China.

• This translates into (assuming 100 square meters per apartment) 6.5bn square meters of unused space.

• That’s enough to essentially add three more Shanghais to the country without batting an eyelash.

• The amount of space, the report notes, is equal to 7.7 times the amount of property sold in 2009, and 11.3 times the amount of new space constructed.

If this is accurate, it would seem that orgies of new construction all over the country are merely a drop in the bucket, when examining aggregate, unused space. There’s a good long term argument that this space will be soaked – 65 million units is enough for, say 190 million people, which is about equal to various estimates of China’s long-term floating population of migrants. The question of whether or not they’ve settled within the cities is extremely relevant, in determining how fast this excess space will be used up. There does appear to be considerable retail demand for decent living space, though price currently deters these people from buying into nicer properties. If incomes continue to rise, however, it’s simply a matter of time until there’s a break even point.

That said, the break even point could be a decade from now, and if structural investment does not shift, the housing boom seen in the last decade may very well have represented a tremendous waste of resources.

赵晓表示，根据国家电网利用智能网络在全国660个城市的调查，发现大约6540万套住宅电表读数连续6个月为零。“以每套住宅平均100平方米计算，65.4亿平方米的空置商品房相当于2009年住宅竣工面积的11.3倍，这相当于2009年住宅销售面积的7.7倍，说明中国当前住房空置率远比想象的严重，也说明一些有钱人正用大量资金在房地产市场上兴风作浪，不断激化社会矛盾，炒房大军明显已经成为加剧我国房地产市场疯狂的毒药。”

These rules were obviously meant to address concerns that many were using real estate purely as an investment tool, buying apartments and having them sit, empty, without even putting them on the rental market. Having written previously about concerns of a housing bubble, the really interesting thing will be to see how much of a recession this move precipitates (caveat: the term “recession” will be tossed around here if year over year growth approaches 8%). The high GDP numbers, and recent real estate price climb certainly motivated this move – it’s not often one sees regulators poking at bubbles, especially when the consequences could be so problematic. In the long run, constantly rising house prices would have been very damaging for social stability, so it’s a positive signal that authorities are trying to be proactive. This may end up illustrating, however, how very difficult it is to pop asset bubbles, assuming they can even be accurately identified. From the outside looking in, it’s fascinating, and how things play out over the next twelve months will shed light on several open questions: the composition of a lot of recent infrastructure investment and actual levels of urbanization/retail demand for housing.

Meanwhile, well-off poor local friends are losing money hand over fist, when all they wanted to do was settle down and marry a nice lady. Boo.

“Private equity is a very good area for princelings because with these sorts of connections you can get into companies ahead of their IPOs and make a lot of money in a short space of time,” says Professor Victor Shih of Northwestern University. “It is an easy way to make money because everyone will be willing to back them because of their connections. Everyone will do it willingly in order to potentially get favours from senior leaders in return.”

… But the constant jockeying for position within the party behind closed doors in Beijing is set to intensify as the next big leadership transition approaches in 2012. Some analysts say the private equity activities of the more aggressive younger princelings could be used by political enemies as a weapon against their parents.

One could argue in defense of this sort of nepotism, since private equity is as relationship driven as anything is here, and these guys, quite reasonably from their perspective, see the most opportunity there. The articles are more interesting as an example of exactly what is blocked. Since the Chinese version isn’t available, even behind a VPN, it means that the FT removed it, potentially after a suggestion from the Ministry of Truth.

Normally, journalism that focuses on economic/financial topics can get away with more in terms of potentially sensitive topics. Magazines like Caijing built their reputations on pushing these boundaries. At times, though, someone hits a soft spot.

A lot of reporting has focused on how the central government is backing out of further stimulus, after last year’s orgiastic fit of new construction. What’s often ignored is that a lot of the money earmarked in 2009 will actually be distributed in 2010, since a lot of the new projects were long-term fixed infrastructure investments. Banks aren’t in the clear yet, and for the next several quarters stimulus driven fixed income investment will continue to be a major component of explicit growth statistics.

The raw materials (people) and tools (legal systems, human capital) already exist, and it’s just a matter of combining them in the proper amounts, while reinforcing systems that allow for coordination. If more people are able to gain access to these tools, the world could very well transform (without the atom reduction of previous absurd scenario). Such a process has certainly happened before:

At present, the world economy doubles approximately every 15 years, the result of what seems to be a globally limited process in terms of the deployment of capital and free trade (per person). The rapid gains in economic growth rates realized after the industrial revolution occurred with only a fraction of global population participating in this process. These were the few in the UK, US and Western Europe who were able to specialize, trade, and add considerable amounts of technology to previously labor intense processes. Even in recent decades in a “highly globalized world,” most individuals in developing countries spent more time watching bootleg Hollywood movies and talking on imported Finnish cell phones without actually contributing anything but the most basic of inputs.

Living in China provides a window to many of these changes, as people move from subsistence living to having the resources to pursue creative endeavors. If they continue (on a large scale), it’s conceivable that the number of people involved in the global economy, in value adding ways, could multiply rapidly in the coming decades. Gains from trade and specialization produce results that are more than the sum of their parts, suggesting that the total product will increase even more rapidly. Simply extending the industrial revolution to the rest of the world, it seems, may very well make it possible to approach a condition where the global economy doubles in an even shorter period of time, without any transformative technologies (furthermore, there are numerous reasons to think that these technologies will be complementary with, rather than substitutable for this broader process of increasing specialization).

Whether there’s a massive property or asset bubble in China at present is inconsequential in the long run if the country is able to continue developing its soft infrastructure and participate in global trade. The same is true of India, and hopefully eventually Africa. Whether the rest of the world catches up with the industrial revolution will be a matter of step-by-step changes in legal systems and cultural taboos. Though much less interesting than hitherto sci-fi technologies, enforceable legal systems promise to be transformative to a significant number of people throughout the world.

This graph (and data) from NYT Economix demonstrates the extent to which India and China, with ~2/5 of the world’s population, have been absent from global economic interactions for the last 100 years. The following version shows percentage of global GDP for various countries/regions from 1820-2001.

These of course aren’t adjusted for population. Simply putting the rest of the world into the mix in productive ways, will be far more transformative than the effects of marginal technological improvements in the coming decades.

This argument rests on a particular definition of urbanization, unique to China:

China’s definition of an urban centre includes, amongst other things, population density of above 1,500 people per square kilometre. By that definition Western cities like Houston (2.2m people with density of 1,375/km2) or Brisbane (1.9 m people with density of 918/km2) could technically not be counted as cities. Back in China, a lot of the so-called “villages” and “townships” are in fact highly industrialised.

Never has so much rested upon demographic methodology and statistical definition.

The report also notes how rapidly interior cities have been developing. Chengdu, Chongqing and Wuhan were among the world’s fastest growing cities throughout the last decade. The image below, from NASA’s Earth Observatory, shows Chengdu’s urbanization in 1990 (yellow) v. 2000 (red). No idea what it means but it’s a nice image.

The US, on the other hand, is in a very good long-term position relative to other developed nations; and stacks up reasonably well against (currently) emerging markets, in terms of demographic trends. Out of curiosity I constructed a dependency ratio projection for several countries (dependency ratio defined as [(Pop0-14+Pop65+)/Pop15-65], and is a general measure of how many resources must be used to take care of useless old people (higher ratio is worse, at least in terms of national economic health. There are probably other spillovers, as old people make great neighbors and Chess partners).

As usual, caveat projector future impossible to predict etc etc.:

This is of course assuming that there’s no world-altering singularity in 2030. It would be nice but I certainly wouldn’t bet on it. Data from US Census Bureau International Database, excel file here.

Rmb appreciation will not materially affect the U.S. trade deficit, and it will have questionable near-term impacts on imbalances. As Chinese gain more purchasing power, they will likely do things like leave the lights on after 5:00pm (and consume more coal and oil as a result), pushing up energy prices. Americans will then (broadly) be forced to pay more to drive their hummers and power their plasma televisions, increasing the United States’ total import bill. Furthermore, there will likely be some level of input-import substitution occurring within China itself, if mainland manufacturers find that they can suddenly purchase other components more cheaply. Threatening sanctions to hasten this process – for dubious gain – is nationalist stupidity at its most pure.

For what’s at stake among various interest groups within China, we turn to the eminent Professor Pettis:

A revaluation shifts wealth from the Chinese government and the manufacturing sectors (and some wealthy Chinese) to Chinese households — which, by the way, is pretty much what is meant by “rebalancing” in the Chinese context. There are many other ways besides revaluation to shift income this way. The PBoC can raise deposit rates, wages can rise faster than productivity, companies can be privatized by giving away shares to the pubic, and so on. They all have the same effect. They shift resources to households and away from producers, infrastructure investment, and real estate developers. This allows household income to grow relative to national income, which ultimately increases the consumption share of GDP.

Domestic Chinese exporters don’t have a leg to stand on for a weak Rmb peg, at present. That doesn’t mean they aren’t lobbying for it, though. To the extent they will be able to sell an us vs. them narrative, anti-China sanctions will only provide more ammunition to make the case for more domestic subsidies, be they explicit (tax breaks) or implicit (currency).

If instead there are 10 men and 9 women, as a result of Momma and Pappa Zhou slavishly adhering to cultural taboos that demand production of a male offspring, the results change dramatically: one man will be unpaired, and if everything is equal and he is rational (and wants p00n), he should be willing to spend all of his surplus to securing the affections of a woman. This quickly reduces men’s payoff to just over zero, and women gain 499,999Y from the exchange. Harmony does not ensue as the unpaired male must resort to a selective combination of World of Warcraft and pillow marriage.

Several ‘long-term-mating’ equilibriums will emerge among different social strata. Yuppie urbanites will find a relatively equal gender balance, since they need marriage and children for status. The ultra-wealthy will enjoy multiple partners as the rewards to being an extremely high status male go up, so also will the effort that goes into acquiring the attention of an extremely high status male. Very poor rural migrants will be left with an even worse gender imbalance, and move into some sort of sharing arrangement with lower status females.

For Chinese men, a house is a very important asset in attracting a woman, and not unreasonably as it represents stability amid a rapidly transitioning economy with no real social safety net. Previously I’ve asserted that the link between getting-some (and having a family, I guess) was not that strong, since the low-status men group wouldn’t be in much of a position to afford houses anyway. This paper presents convincing evidence to the contrary, as household savings rates are higher in provinces with higher gender imbalances. A summary:

“The increased pressure on the marriage market in China might induce men and parents with sons to do things to make themselves more competitive,” Wei says. “Increasing savings is one logical way to do that, to the extent that wealth helps to increase a man’s competitive edge. Parents increase household savings mostly by cutting down their own consumption.”

… “We find not only that households with sons save more than households with daughters in all regions,” Wei says, “but that households with sons tend to raise their savings rate if they also happen to live in a region with a more skewed sex ratio.”

Calling something an ‘inflated asset’ and ‘bubble’ requires an a-priori notion of what a non-distortionary equilibrium would produce. If gender imbalances are affecting competition, and as a result, reservation prices for apartments, there will be considerable skew vis-a-vis models that consider income alone.

While I’m all for laissez-faire utopias,* there’s a certain amount of qualification necessary when discussing Hong Kong’s success. Rapid growth in Singapore, Hong Kong and Taiwan occurred after 1949, when a lot of the formerly mainland bourgeoisie fled throughout the greater Chinese diaspora, taking with them their money,** and much more importantly, their skills. Today, people often hold up Hong Kong and Shanghai as rival cities, since the latter is attempting to become a regional/global financial hub. Many in Shanghai feel this would be the case already were it not for the half-decade of non-participation in the world economy that the mainland experienced after 1949; the fact that people went to Hong Kong was “because they couldn’t go to Shanghai.”

Examining average incomes in both cities, it becomes clear that the largest gaps existed during the height of the mainland’s various socialist experiments. Now that the mainland has stopped the crazy train, some of those who left after the revolution are heading back. Just as significantly, the mainland is able to tap into an (up until 1990) unrealized pool of talent and skill. This isn’t to suggest that all of Hong Kong’s success in the last fifty years has been due to the fact that it benefited from the lucky few who were able to escape the revolution (who were largely those with the wealth/network resources to do so), though it’s certainly a very important source of HK’s success (combined with the fact that, for the same period, it was the only route into China for limited trade).

Institutions alone aren’t the result of Hong Kong’s success, though it’s certain that without them the city would have languished, regardless of circumstance (a la Macau). Institutions are extremely important for wealth creation and, generally, there are several interrelated factors at work that are important for applying them outside of the very limited geographies in which they seem to work:

1. if legal rules are codified without underlying capacity, they will be unenforceable [i.e.: making a law that everyone in the US should have 6 months of holiday every year for mental health reasons.]
2. certain rules are required for social coordination. The best types of these rules seem to be idiosyncratic [decisions or rules that might not make logical sense but produce a positive outcome approaches that are successful and are replicated.] To some extent these can be imposed; though if an authority oversteps the constraints of item 1 they will find their authority quickly undermined
3. people tend to achieve some basic level of coordination with or without a centralized legal structure. The exact nature of this matters, however, as it seems to be a continuum between mafia-anarchy and despotism. Best to have something a bit more benevolent, from the perspective of the participants.

Hong Kong’s history provides an interplay of all of these factors, since the British authorities were able to replicate rules and laws they knew were generally useful and produced positive outcomes. These were adapted for a local context, and the city simultaneously benefited greatly from geography and a windfall of talent after the Communist revolution. Currently, however, simply pointing at Hong Kong’s policies (which are outcomes of a particular process) and declaring that copying them would create prosperity is wishful thinking at best. A much more interesting project would be to determine the process that creates these policy outcomes, which are probably slightly different if one is dealing with a diverse set of national and cultural contexts.

More generally, the inner contrarian wonders whether democracy should be an explicit goal of aid or internal development policy. Singapore did just fine (for a certain class of people) without serious democratic reforms. The more I learn the more it seems that democracy is the result, and not the cause of, prosperity and free social systems. The success of the Chinese diaspora in places like Singapore and HK should fill China watchers with considerable hope for the future of the mainland, barring an asset price implosion. Beijing planners have explicitly used Singaporean and HK technocracies as a deliberate model, and it will be very interesting to see how extensively these systems can be replicated over a much larger and diverse population.

* Mmmm laissez-faire utopia. Hong Kong feels like it has a free banking system, with HSBC, Standard Charter, and the People’s Bank of China all minting notes (though the money supply is controlled by the HK Monetary Authority, so the minting is name only, and for tradition’s sake). Hold an HSBC HKD1,000 note and feel the Smithian glory.

** One of the more amusing arguments advanced by mainlanders to explain Taiwan’s success is that, when the KMT fled China, they took all the bullion and historical treasures. This somehow translated into prosperity, which seems odd since they mostly still have that bullion and historical treasures.

Meanwhile, Chinese regulators are continuing to liberalize financial markets, and will soon introduce rules to allow large institutional investors to trade index futures. In isolation, this may not make much of a difference for the near future (particularly given limits on participation). As part of a broader trend it is very important: the “China collapse imminent” story is, at present, predicated on a property bubble that will collapse and saddle banks with lots of dead loans. At the same time, the mainland is derided as pursuing policies which solidify global imbalances (or, the process by which Chinese savers are shafted with artificially low rates of return, and Westerners get cheap credit that we proceed to do stupid things with).

Currently, a dearth of options for individual investors is only contributing to these distortions. Currency revaluation alone will not fix global imbalances, and a more efficient financial sector (say, anything with >0% return) would allow Chinese investors to save (incrementally) less, which is the only way trade deficits will actually shift in the long run.

Of the short selling rules change by the SEC, Robin Hanson nails it:

Anyone who believes that stocks which have fallen at least 10% in a day are an unappreciated good buy are free to grab that free money they think is lying on the sidewalk.  Clearly most folks don’t do this, and so don’t believe this, implying that short sales that push stock prices down on average give reliable bad news: this stock is worse than you thought.

Taxing short sales is an attempt to ban this bad news, to trick people into thinking those companies are doing better than they are.  After all, we all know that the financial crisis was not caused by banks making bad loans, it was caused by short sellers telling people that banks had made bad loans — if only we’d killed the messenger, we wouldn’t be in this mess, right?