… When will the Western consumption market return?  This is certainly something that we have little influence over. But in order to take advantage of this challenge, the Chinese economic system must go from “foreign reliance” to “domestic reliance,” and make this transition a priority. It will be impossible to achieve this “transmutation” within the space of one or two years. As a result, the massive 4 trillion RMB investment plan will be able to stimulate the economy, though its exact effects must still be examined. 

西方终端消费市场何时恢复？这并不掌握在我们手里。却使想借机调整中国的经济增长模式，从依靠“外需”为主改为依靠“内需”为主，并不能在一两年内完成这种“蜕变”。因此，一4万亿元为重点的巨额投资拉动经济经济的政策，何时见效，效果如何，仍待观察 。

It is tempting to draw an analogy between China’s reluctance to top up the financial resources of the IMF and the refusal of the United States to join the League of Nations after World War I.  Pushing this further, there is the parallel with Charles Kindleberger’s interpretation of the interwar depression – that it resulted from the inability of the declining power, Great Britain, to exert leadership and the unwillingness of the rising power, the United States, to do so.  In fact this comparison is overdrawn.  China’s economy is still less than a quarter the size of that of the United States at market exchange rates… In contrast, the United States had already surpassed Britain in absolute economic size in the 1870s… But China is not yet in the position to exert the kind of leadership that could be reasonably expected of the United States in 1929…

… But whichever route is taken, not accommodating the rising power by giving it a seat at the table and a voice in key deliberations is a recipe for disaster.

The magnitude of the new protection is modest. However, as the recession spreads and deepens globally, this could change – especially if world leaders lose control of the situation; protectionism and competitive devaluations could trigger a vortex of beggar-thy-neighbour policies.

At the time this warning seemed rather benign. Not so much anymore? The U.S. has just hit China with a WTO suit, alleging that “industrial policies are unfairly promoting Chinese branded products at the expense of American workers…”

Three and a half power plants a week – where are all of these? I’ve not seen any under construction. There is a lot of construction, especially for somewhere that is supposed to have a real estate bubble. 

It will be interesting to see how the numbers continue through this year, given that electricity demand has actually been falling in recent months. Certainly there are expectations of 8-9% growth built into things like capital investment – expect a lot of good deals on apartments / office space in the coming year.

Last month, central bank governor Zhou Xiaochun alluded to the potential likelihood of adjustments to the exchange rate in order to prevent a possible export slowdown. Of course, 500 bps will not fundamentally enhance China’s competitiveness against the backdrop of global economic weakness, which has been exacerbated by an unprecedented financial crisis. This move is meant to be used in addition to the fiscal stimuli China has mainly relied upon to generate domestic demand. It is a sensible policy given that the financial system, like financial systems elsewhere, fails to function when enterprises, firms, and consumers are plagued by extreme risk aversion. In my view, a fiscal stimulus alone will do little to alleviate the pain inflicted on many exporters whose competitiveness is being eroded significantly by the strength of the currency.

In Marxist class yesterday my professor mentioned that ‘growth was slowing – maybe even 7%’ and ‘now is a very difficult time to find jobs for [university] graduates.’ A furious discussion immediately broke out, with students attempting to correct him that ‘growth would be at least 9%! It was in the papers this morning!’

The very same students earlier admitted that ‘most of the newspapers here are just tabloids.’ Still – the process of mutual delusion is important to security. Even more ominously, the very same paper also features a short story (‘Supporting Migrant Workers Job Search after returning Home’) on how the number of reverse-migrants is increasing rapidly in cities like Wuhan, and it’s become a priority to help them find meaningful employment in the countryside. According to the article, 20,000 migrants have already left Wuhan. Here’s a Wall Street Journal article on the same topic (China Fears Restive Migrants as Jobs Disappear in Cities):

Between 80 million and 100 million rural residents are either completely landless or don’t have access to enough land for subsistence, estimates Joshua Muldavin, professor of geography and Asian studies at Sarah Lawrence College. “The increases right now with the large-scale return of peasants could add tens of millions to that,” he says. “Its importance can’t be exaggerated in China and internationally.”

Link from Baseline Scenario, which also features a good roundup of information on general topic of China’s decline.

… most people believe official urban employment rate significantly understates real urban unemployment, and the real level could be as high as 10-11%… The key to social stability is adequate employment growth.  That growth either has to be fueled by maintaining exports, or increasing domestic consumption.  But there are important reasons why domestic consumption won’t increase.  For one, the lack of safety nets in health and elder care cause Chinese households to save in order to self-insure their risks for illness or health care emergencies.

So they’ll have to push more exports in any way possible; subsidies and currency seem the most likely – and might work, that is until hit with protectionist measures from the rest of the world. Real RMB depreciation is great for me – kegs of beer will remain at the appropriate price of $2.67. Of course, factors motivating this phenomena also mean that unemployment will increase; research becomes more complicated. Chinese are generally a jovial people, but poverty can motivate all sorts of undesirable behavior towards a walking white ATM: being mugged may well complicate my project, which consists of me wandering around talking to underemployed guys with power tools. 

This is of course despite ample amounts of rhetoric indicating that Beijing is intent upon ‘replacing foreign demand with domestic consumption. There are over a billion people here…’ with no absolutely discussion of how the process could actually occur – unsurprising, since Communist state media is only slightly more nuanced than cro-magnons like Bill O’Reilly and Lou Dobbs. There is so far little discussion of the ‘painful’ scenario – I become even more pessimistic.

Prof. Roubini argues that China will hit the “hard-landing” 5-6% growth scenario:

… a hard landing in the economy and in investment would lead to a sharp increase in non-performing loans of the – still mostly public – state banks; the implicit liabilities from a serious banking problem would then add to the implicit and explicit budget deficits and public debt. Note that the poor quality of the underwriting by Chinese banks – that financed a huge overinvestment in the economy – has been hidden for the last few years by the high growth of the economy. Once net exports go bust and real investment sharply falls we will see a massive surge in non-performing loans that financed low return and marginal investment projects. The ensuing fiscal costs of cleaning up the banking system could be really high.

And the comments on Roubini’s from the same post (Asia-Pacific Journal):

… the (likely) fall in construction is particularly worrisome. China’s new capital intensive export sectors haven’t been huge job generators. Building buildings by contrast employs lots of people – including a lot of migrants from rural areas.

Which puts even more pressure for China to push their China-bailout out the door as fast as possible. All of this will complicate any pretense about holding variables constant for field research, but also presents an opportunity to witness collapse / resilience first hand.

This is all fun and games until someone flies out of a building: four girls recently died in Shanghai after jumping from a fire in their dorm. Chinasmack provides translation of one of the posts, as well as links to news reports in English. This got me pondering – does provision of safety result only after sufficient societal wealth exists to provide for preventative measures? Put another way, do prematurely legislated safety requirements raise costs resulting in relatively more harmful unseen consequences? Unconvincing: a rope-ladder would have saved these girls’ lives, and surely a rope ladder costs less than the expected lifetime contributions of four university graduates. 

[Disclaimer: my own 4th floor apartment has window cages, making egress in a hurry impossible. These are apparently to prevent acrobatic break in? Being roasted alive in a window cage will make a unique cross cultural obituary.]

So I’m arguing with my friend, devil’s advocating for (surprise) capitalist-hackery: “mandated and effectively enforced safety measures in this case might have meant that fewer people in university (higher building costs = fewer buildings / services, like classes). Who are we as outsiders to compare what we observe, however tragic, against unrealized possibilities? Death is always senseless, but wouldn’t denied opportunity be terrible also? It’s very complex.”

Sure it is – but the reason that friend wins is that she argues in favor of a working litigation process - plaintiffs can always be ruled against. A working legal system should allow the competing costs and risks to be measured more accurately – paradoxically, a higher number of disputes provides more opportunities to find working solutions. This of course can lead to the absurd, but from a social perspective you want idiosyncrasy far more than absolutism, no matter how rational.

Laura recently pointed out the difficulty of formalizing de-facto rules, let alone figuring out what rule structure is appropriate for a given context. So how to help developing countries get there? No idea. If I knew; would be rich and probably have more important things to do than muse on a blog. 

Regardless, a first step might consider differences in historical and institutional circumstances. With regards to the U.S. / China comparison, these seem to boil mostly down to deterministic explanations like the maturity of the legal systems, and relative costs of pursuing legal action… and also some softy nonsense about cultural differences, which I will now relate:

• Stigma: becoming involved in the official legal system carries a much greater stigma than it does in the West, even if you are the victim (has to do with the fixation on saving face?) This particular aspect is improving, but still remains a deterrent (less significant than the expense of hiring a lawyer, but formidable regardless). 
• Social mores as coordinative mechanisms: something like 90% of all disputes in China are resolved by extra-legal mediation. Prior to the Communists, religion and social beliefs had a much tighter relationship with governance than they did in the West, where Church and court have for a long time (at least ostensibly) been separated. 
• Add to the China story the pre-1949 violence and subsequent Maoist “five year everybody dies” plans, and you have are left with hodgepodge of traditional values governing interaction alongside a top heavy bureaucracy that can only selectively enforce its mandates. Complexity ensues.

Generally I feel like it’s easy to blow cultural differences out of proportion when trying to solve problems, but they still matter. At the same time It’s important not to be easily swayed by arguments for tyranny masked by concern for cultural relativism – the way forward certainly does not involve discouraging the existing legal process (by, say, refusing to hear class action suits related to earthquakes or poisoned milk). But there are limits.

Ahh complexity!

So until someone figures all these things out (cc me), this site will be accepting donations for the People’s Rope Ladder Association of Central China, a non-profit distributor of Rope Ladders and assorted gear.

Niall Furgeson has an excellent article in Vanity Fair (who knew there was a reason to subscribe to Vanity Fair other than to impress guests with your acute cultural awareness?) One line that’s been appearing over and over again is the crisis’ intimate connection to rapid growth in Asia in the past decade. Even if not the single most important reason, the narrative still dovetails with a Sino-centric world view:

The benefits for the United States were manifold. Asian imports kept down U.S. inflation. Asian labor kept down U.S. wage costs. Above all, Asian savings kept down U.S. interest rates. But there was a catch. The more Asia was willing to lend to the United States, the more Americans were willing to borrow. The Asian savings glut was thus the underlying cause of the surge in bank lending, bond issuance, and new derivative contracts that Planet Finance witnessed after 2000. It was the underlying cause of the hedge-fund population explosion. It was the underlying reason why private-equity partnerships were able to borrow money left, right, and center to finance leveraged buyouts. And it was the underlying reason why the U.S. mortgage market was so awash with cash by 2006 that you could get a 100 percent mortgage with no income, no job, and no assets. 

… Logically, you might ask how the three primary NRSRO’s have thus far been able to escape and immediate enforcement action for publishing knowingly false, misleading and injurious ratings in the instance of China. The answer is directly related to the fact that, until very recently, the agencies have been exempt from the regulations by the United States Securities and Exchange Commission (SEC) and have operated outside the supervisory jurisdiction of any other regulatory body. The rating agencies claim to be “publishers” whose ratings constitute “editorials,” thus invoking the right to free speech…

Thankfully we haven’t any problems with the ratings agencies yet. None at all… 

He also provides some background on China’s housing bubble; much financed by the national banks (suggesting that even more of these loans could turn sour):

Chinese central bank statistics published at the end of 2005 reported approximately $400 billion in property lending, representing 17% of the country’s GDP. At the same time, however, China’s National Bureau of Statistics warned that unsold residential space across China had risen by nearly 25%.

Further, he lists unfavorable demographics as a key reason to worry about China’s export dependent economy. As labor becomes more scarce, basic production will become more expensive. 

I outlined earlier that I’m not convinced by that opinion; unfortunately there’s no solid empirical way to demonstrate the converse. But the point is sound – stay out of China’s sovereign debt. Yes, obviously that was everyone’s next move after recent events… Thank God I saved you.

Also, if you’re interested, you can check out the Free Market Foundation website at any time, www.freemarketfoundation.com.

There’s definitely more to the story locally, and I plan to investigate. From what I can deduce so far, it’s linked to tax codes such that local governments can apply the highest tax rates to locally owned enterprises – thus the strong incentive to have such enterprises also feature the highest profit margins.

From its rhetoric, the central government strongly opposes these sorts of policies – insofar as they are related to local corruption:

… the local governments rely on local industries for tax revenue. It is thus conjectured that the local governments want to protect industries that have high tax margins… due to the lack of rule of law, even profits of privately owned enterprises are subject to some degree of expropriation, in the form of ad hoc taxes and fees, by the local governments…

That comes from Local Protectionism and Regional Specialization: Evidence from China’s Industries (Bai et al. 2003, SSRN here). 

Data is always a problem; I’ve spent some time Baidu’ing for 地方保护主义 (‘local protection belief’) and come up with very little. This paper ( ”Regional Protectionism in China: Direct Micro Evidence,” SSRN here) utilizes survey results, and finds that regional protectionism has been decreasing over time. They conclude:

… Especially worrisome is that poor provinces such as Yunnan, Guizhou and Shaanxi experienced the highest level of regional protectionism… Third, the past two decades have witnessed a declining trend in regional protectionism, and the decline was gradual over time. This runs counter to some of the recent findings that suggest increasing segregation in domestic markets. Fourth, the gains from removing regional protectionism are significant. For instance, the average increase in revenue for the worst sufferers of regional protectionism would increase revenue by 9.1%, while the mildest sufferer would increase by 3.5%…

Fascinating. Further investigation required. If good data is available, examining regional impacts of protectionism could potentially remove biases inherent in examining cross country differences (where it’s very difficult to find representative variables for ’soft institutions.’) That being said, similar biases certainly  exist within China, but are probably not as pervasive as those found internationally.

The DHS extended from 12 months to 29 months the length of time a graduating student in science and technology fields can stay in the U.S. without a worker visa. Microsoft and other supporters of a higher cap on H-1B immigrant worker visas have complained that the quota fills up before students graduate each year and that the 12-month period didn’t give those students enough time to become part of the next year’s H-1B crop.

To which our enlightened society of rent-seekers responds:

The Bush administration’s recent decision to extend the amount of time foreign nationals can work in the U.S. on student visas is being challenged in a federal lawsuit by H-1B visa opponents.

… The suit, filed in U.S. District Court in Newark, N.J., by the Immigration Reform Law Institute and joined by The Programmers Guild and other groups, charges that the administration’s decision in April to extend the work period for students under the Optional Practical Training provision is little more than an effort to get around the H-1B cap limit.

Get around the H-1B cap limit? Yes. H-1Bs are such low hanging fruit. The US is already a massive exporter of education – why not keep more of it here? According to numerous anecdotes, the scarcity of H-1Bs is responsible for numerous foreign graduates taking low-paying jobs in return for sponsorship by these large corporations – but I don’t see how making it easier to apply for an H-1B helps this argument. It may allow other companies that don’t have as regimented an application support process to seriously look at hiring foreign graduates of U.S. universities. Though small, these types of changes are important steps to fundamentally changing fortress-ammurika immigration policy.

And still people oppose it. Throughout the last decade it’s sickening how much U.S. citizenship has turned into another element of unearned privilege. 

… the reality is that if we toughen our trade relations with China the benefits will be enjoyed by a few, since only a small percentage of Americans now work for companies that compete directly with Chinese manufacturers, while average Americans will feel the pain—in the form of higher prices—far more quickly and more directly than rich Americans will. Obama and Clinton, in their desire to help working Americans—and gain their votes—are pushing for policies that will also hurt them.

… and it’s also helping to lift millions (of Chinese workers) out of abject poverty. I harp on that a lot, but my suspicion is that 150 years from now, our descendants will look on this sort of system (destiny being primarily dependent upon the country one happens to be born in) much the same way we recoil in horror at the suggestion that the slave trade was somehow justifiable. 

Old city Shanghai, picture taken November 2005.