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Entries in China (495)

12:09AM

China's car market: The global race to the middle

Beijing Auto Show photo found here

WSJ story on how, up to now, the foreign car companies operating inside China have focused on the upscale end of the market while the domestic firms have focused on the lower-end market.  As China's middle class emerges, a new middle-ground battlespace opens up, with both sides--foreign and domestic--increasingly bumping into one another, chasing the same customers.

This is intense competition.  Just like in politics, where the first vote in college tends to stamp the voter for life in terms of Dem versus GOP, when it comes to car buying, the first choice usually leads to a lifetime of brand devotion.  Good example:  I've bought 9 Hondas over the last two decades.  Started with a VW Fox and hated it, and then went to a Honda Civic and loved it.  One Audi GT Coupe in there, provided by my mother-in-law, but once I settled on Honda, it's been Hondas ever since in terms of purchases.

Well, imagine all those first-time buyers in China.

So look for the foreign companies to move aggressively downmarket and the domestics to move aggressively upmarket, which is why a Geely buys Volvo--for example.

12:03AM

Economic isolation is no choice, says Taiwan's Ma

NYT and WAPO, plus the Japan Times via WPR's Media Roundup.

Taiwan's President Ma is pushing hard for the FTA framework agreement with China, his culminating dream of deep economic integration with China.  

Per the NYT story:

“We can handle diplomatic isolation,” Mr. Ma said last month, “but economic isolation is fatal.”

The Economic Cooperation Framework Agreement, the Ma administration says, would be a prelude to similar deals with Malaysia, Singapore and, eventually, Japan or the United States. “Once E.C.F.A. is signed, we want to sign other free trade agreements and try to use mainland China to link with international markets,” a trade official involved in the negotiations, Hsu Chun-fang, said.

In recent years, Taiwan has watched as rivals like South Korea have signed free-trade deals throughout Asia, becoming more competitive in industries like machinery making and pushing their per capita gross domestic product ahead of the island’s.

Taiwan has been hampered in negotiating similar agreements because Beijing views the island as a part of China and objects to other countries’ signing formal treaties that could strengthen Taiwan’s claims to independence. The island has trade deals only with five Latin American countries, which buy a tiny slice of its exports.

The economies of Taiwan and China are already connected. Taiwan has invested $150 billion in China since the early 1990s, according to a Taiwan government estimate. About 40 percent of Taiwan’s exports already go to China, where they face average tariffs of 9 percent. Half of those exports are semifinished goods that are shipped to factories for assembly and other value-added services and then re-exported, according to Mr. Ma.

Yet many of the details remain vague, and that has fueled economic as well as political worries.

For example, Taiwanese business leaders fear a lot of small manufacturing industries, like the show industry, will get wiped out by Chinese competition.

Given his low approval ratings (20s-30s), Ma has felt the need to engage in televised political debate with his primary opponent, as if he were still running for president, according to the Japan Times story.  A lot of experts predict he may be a one-term president whose primary achievement is all his economic accords with China (12 in total) , with the framework agreement hanging in the balance.

My sense:  Ma's fears are well-grounded.  The Asian economic integration process is well underway and only gaining steam. Taiwan can either get in early or be left behind.

12:09AM

The NIEO is a' coming!

Samuelson in WAPO by way of David Emery.

NIEO refers to the notion, championed by the South in the early 1970s, of a more equitable global economy (New International Economic Order).

Well, guess who made it happen?  Not the Sovs, and not the South, but the New Deal for the World-cum-post WWII order-cum-the West-cum- the global economy-cum-globalization, dreamt up by the United States (TR), launched by the US (FDR), defended and expanded by a series of presidents (Nixon getting the most credit, in my mind, because he opens up China and caps the Sov threat), and finally now rebalanced by our own success--and excess--in that quest.

The two biggest players in triggering this latest rapid expansion of globalization:  China and India, with Brazil, Turkey, South Africa moving up fast.

According to Subramanian (often in FT) by way of Samuelson, another take on the journey from the Gap to the Core: 

This is classic economic catch-up, as poor countries adopt the products and technologies of rich countries. It's a two-step process, says economist Arvind Subramanian of the Peterson Institute. "First, countries have to cross the Hobbesian threshold" -- that's after philosopher Thomas Hobbes (1588-1679), who declared that life without strong government is "nasty, brutish, and short." Governments must provide basic security and sanitation, create some rule of law and establish protections for property, says Subramanian. Otherwise, the stability doesn't exist to pursue Step Two: allowing markets to work; practicing standard economic virtues (taming inflation, disciplining government budgets).

Parts of Africa and Latin America still haven't crossed the Hobbesian threshold, says Subramanian. But elsewhere, many countries have reaped the rewards of moving to Step Two. China and India are the most spectacular cases. Only in recent decades have they relaxed pervasive state regulation and ownership and trade restrictions for more market-based policies.

Now Samuelson's judgment on what must come next: 

So is rebalancing going according to script? Well, not necessarily. It's true that the massive trade imbalances have dropped sharply. The U.S. trade deficit fell from $760 billion in 2006 to $379 billion in 2009; China's trade surplus also dropped. But these changes mostly reflect the Great Recession. The worsening slump caused people and companies to stop spending. Global trade contracted sharply -- and with it the size of imbalances. But as the recovery has strengthened, trade and imbalances are growing again. American imports are increasing faster than exports; this surge could be temporary, suggests economist Richard Berner of Morgan Stanley, as companies replenish depleted inventories.

Still, what's missing is a sizable revaluation of China's currency, the renminbi. Fred Bergsten of the Peterson Institute thinks the renminbi may be 40 percent undervalued against the dollar. This gives China's exports a huge advantage and underpins its trade surpluses. Other Asian countries fear altering their currencies if China doesn't change first. "They'll lose ground to China," notes Hensley. The European Union, Brazil and India all feel threatened by the renminbi. President Obama wants U.S. exports to double in five years. That's probably unrealistic, but it's impossible if the renminbi isn't revalued.

The next best problem to have, no doubt, and I agree with those that say "paid in renminbi" will be the slow route by which China converts its currency (letting more and more of its importers use the yuan, swapped out by China via currency trades).  But as this process matures, it will represent a brave new world for the Chinese as much--or more--than for the US and its dollar.

In short, the catch-up strategy stuff ends and the competition gets a whole lot more real.

12:04AM

Mining OPEC for Africa?

Inevitable development and proper channeling of what will be substantial blowback inside Africa (maybe not on top but definitely from below) regarding Asia's (and particularly China's) ramping up of demand for the continent's mineral resources.  

It's misleading and premature to cast China's "penetration" as a colonial-style grab for power.  What is happening is the development of a huge co-dependency relationship that lack counterparty capacity (it takes two to tango fairly on any deal) on the part of African nations.  In short, China's got its state capitalism shtick in line but African nations lack a cohesive counter, creating uneven transactions (i.e., Africa can always do better) that so far generate a lot of investment and activity and jobs (all great); it's just not clear how evenly that new wealth is being distributed locally in a sustainable fashion.

Gist of piece:  time to call the companies' bluff about being able to go elsewhere if they're not treated right by the Africans.  With China's heavy entry, that bluff starts looking a lot weaker because finding such volume elsewhere is a whole lot less feasible with each passing year of "sticky" investment.

12:03AM

Obama: any grand vision for Asian security architecture? None yet detected.

Former Indian ambassador to Pakistan writing in WSJ (via WPR's Media Roundup).
Gist:  Obama seems eager to make any sort of relationship happen with China.  I could add:  Ditto on Pakistan.
The loser in these foci?  India, of course.

India has tried to prod the Obama administration into a more active role. New Delhi has recently had a detailed exchange of views on the Asia-Pacific region with the State Department's highest-ranking Asia official, Kurt Campbell, but much more needs to be done. While New Delhi welcomes cooperative and constructive relations between the U.S. and China, concerns in India are inevitable when the Sino-U.S. relationship is marked either by confrontation or collusion which undermines Indian interests.

Many Indians wonder if the Obama administration has any grand vision at all in shaping the emerging architecture for security and cooperation in the Asia-Pacific region. No one doubts that relations with the U.S. will remain a key feature of Indian foreign policy. But in the absence of mutual trust which characterized the relationship in the recent past, existing misgivings will not be put to rest merely by grand state banquets or glib talk about democracies being "natural partners."

I have advocated prioritizing China over India, but likewise India over Pakistan.  From India's perspective, Obama's performance to date must seem entirely opportunistic and reactive--the unwinding of crises with little sense of the structure to emerge.

I would not contest that characterization.

12:04AM

A fundamental difference between Chinese and US education

Lovely bit:

Zheng Yue, a young woman from China who is teaching her native language to students in this town on the Oklahoma grasslands, was explaining a vocabulary quiz on a recent morning. Then a student interrupted.

“Sorry, I was zoning out,” said the girl, a junior wearing black eye makeup. “What are we supposed to be doing?”

Ms. Zheng seemed taken aback but patiently repeated the instructions.

“In China,” she said after class, “if you teach the students and they don’t get it, that’s their problem. Here if they don’t get it, you teach it again.”

China, we are told, wants to teach the world Mandarin, so it's sending several hundred teachers here to teach in US schools, subsidized by the Chinese government.  US school administrators visit Chinese schools in reply.

I think this is inevitable and good, strengthening bold sides and increasing understanding.  It is hard to imagine a global culture a generation hence that isn't as infiltrated by Chinese and today's is by Japanese--the exporters of cool.  Nothing quite makes a culture feel secure in its own accomplishments than to have their ways incorporated by other cultures.

12:10AM

The problem is when the ants start marching

When all the little ants are marching / Red and black antennas waving / They all do it the same / They all do it the same way ...

So says Dave Matthews.

The reference here (WSJ story) involves Chinese college graduates who call themselves the "ant tribe" because they can't find post-grad jobs but nonetheless stick around Beijing's outskirts, squeaking out a cheap life while hoping for something to come along.

Term comes from a recent popular book that surveyed such students, one that inspired "both admiration for the young people's striving and indignation at their living conditions."

Sort of sounds like a Chinese "Rent."

This year's class of 2010 hits the job market at 6.3m strong, and more than 100k are expected to take up an ant-like residency on Beijing's margins.  Imagine five guys sharing 130 square feet, or getting by encapsulated in a "capsule" apartment that measures 8 feet by 28 (!) inches.

The popular "song of the ants" is neither Jonathan Larson- or Dave Matthews-like, and yet the punch line resonates well enough:

Though we have nothing, we are tough in spirit

Though we have nothing, we are still dreaming

Though we have nothing, we still have power

I think Bill Clinton created something like 8m jobs across two terms.  The Chinese need to create a noticeably higher figure every year.  The country's total labor supply grows about 25m per year.

12:07AM

What history predicts regarding a revalued yuan

"Economics focus" column from The Economist.

Story is an old one:  US in the 1920s, West Germany in the late 1960s, Japan in the early 1970s, Asian tigers in late 1990s, and China today.

The description:

A big export-oriented economy is booming but its trading partners are livid. Year after year, they point out, it runs large current-account surpluses. The country regards itself as an export powerhouse whose goods are prized abroad. Others castigate it for mercantilism. Some argue that it subsidises its exports unfairly by giving exporters credit at cheap rates and by keeping its currency artificially undervalued. Pressure builds on the country to revalue its currency and boost domestic consumption, which makes up an unusually small share of its GDP.

Nor is the size of China's surplus unprecedented:  both Germany and Japan owned one-fifth of the world's export surplus in their day, just like China now.

All ended up revaluing their currencies, and as the charts show, China has little to fear by doing so:

 

The contribution of net exports to GDP will fall slightly, but growth not impacted much at all--in either direction.  The slack was picked up by private consumption and investment.
The fly in the ointment:  better to have pursued a monetary stimulus than just revaluing the currency.  If you only do the latter, then every 10% in appreciation takes a GDP growth point off.  When Taiwan and South Korea did the same, they proceeded to liberalize their financial markets--meaning China should continue to do the same now.
Classic example of connectivity driving code: you connect to globalization to enrich yourself, and you end up having to conform your internal rules to those of the global economy--or you get burned.

 

12:06AM

The best sort of rebalancing

Japan Times story (by way of WPR Media Roundup) on recent global polling re: attitudes toward great powers:

Despite widespread talk of a rising China and an America in decline, the latest BBC World Service poll shows not just strong residual American soft power but actually an increase. At the same time, the data depict a China whose influence is viewed as more negative than positive in an increasing number of countries.

Old truth: when your popularity is high, it's got nowhere to go but down, and vice versa.

More tactical reality:  every day China gets perceived by more of the world as globalization's great purveyor/integrator/action-force.

And with that burgeoning reputation will come a lot of negative feeling--especially so long as China remains a single-party state.  Eventually, the CCP will have to kill the dictatorship to save itself.  Why?  It'll need the capacity to swap out leadership in response to dramatic failure.

And yeah, those failures will come, as will the global blame.

More polling details:

In 2005, 49 percent of people thought that China's influence was mostly positive, 11 points higher than that of the U.S. However, China's numbers have fallen, reaching 34 percent this year, trailing the U.S. by 6 points.

As China's political, economic and military power have grown, global attention has focused on its influence and activities in Asia.

Public sentiment in the region is shifting dramatically. Japan has for many years had a strained relationship with China. While 59 percent of Japanese had a negative view of China in 2009, this number has now fallen dramatically to 38 percent . . . 

But Indians are moving in the other direction. In 2009, Indians leaned toward a positive view of China, 30 percent versus 24 percent, with many declining to state a view. Now, there are more Indians who view China negatively, 38 percent versus 30 percent who have a positive view.

South Koreans are going even further than Indians, with 61 percent viewing China negatively, compared to 50 percent in 2008.

Elsewhere in Asia, Indonesians view China less negatively than before, with 43 percent holding a positive view and 29 percent negative, compared to 37 percent negative previously. And in the Philippines, sentiment has shifted sharply, from 52 percent negative in 2009 to 55 percent positive today.

Why a souring of perceptions in South Korea and India while none in the others?  SK and India see themselves as similarly rising powers, something that Indonesia and the Philippines don't yet do and something Japan has passed on.

12:03AM

North Korea as a Chinese colony? Only so long as the minerals hold out.

Found here

NYT story noting that, in their respective hours of fear (North Korea over looming famine, South Korea of recent naval ship sinking by North Korea), both sides sent their top leader to China recently for reassurance.

On Friday [30 April], President Lee Myung-bak will travel to China under growing pressure at home to make the case for crucial Chinese support for tough international sanctions against North Korea if, as is widely expected, the North is found responsible for the sinking of a South Korean ship. But he is unlikely to win that support, experts say, a reflection of China’s growing role in the Korean Peninsula.

Since taking office in 2008, Mr. Lee has wound down his predecessors’ “sunshine policy” of aid and engagement with the North, heightening Chinese fears of instability and driving the North into China’s economic embrace. Ultimately, that could give Beijing greater leverage in determining the fate of the northern half of the Korean Peninsula, a situation that many South Koreans would consider to be a nightmare.

“China’s influence has become so important that we can almost say that it can now claim the first and last piece of the apple on the Korean Peninsula,” said Lee Byong-chul, a senior fellow at the Institute for Peace and Cooperation in Seoul, using a Korean saying to suggest that China can have whatever it wants.

Even conservatives, who have usually opposed aid to the North, warn of North Korea’s becoming a “Chinese colony” whenever reports circulate of Chinese companies taking over North Korean ports and mines at bargain prices.

All the experts quoted call the "colony" fear overblown, but they're talking about it in a political sense.

In an economic sense, NorKo already is China's colony.  China controls 70% of its trade and is locking in the nation's natural resources in a manner that can only be described a colonial in scope and control.

I do agree with the experts on one thing:  China will do nothing to destabilize the situation--nothing so long as they get their minerals ($6T worth) in return for their meager aid ($3B a year).

12:01AM

Chart of the day: China's per $ GDP of electricity usage

Now, we know from history that advanced economies are able to generate one percent of growth in GDP while increasing their energy usage less than one percent (an energy elasticity below 1.0).  Undeveloped economies tend to do it the other way around (taking more than an additional one percent of energy consumption to generate that one percent growth in GDP).  Rising economies are somewhere in between.

This chart measures something similar:  how many kilowatt hours are expended in the generation of a dollar of GDP.

No surprise:  Old Core economies (UK, Japan, US) use the least and New Core ones (Indonesia, Brazil, India) use substantially more.  Presumably, if the chart showed underdeveloped Gap economies, they'd all be clustered at the top, and yet, you'd have to wonder if some of them wouldn't beat China's jump-out-at-you number that's more than double India's (which is almost double America's number).

The giveaway?  Notice how low the taxes are on electricity in China and India, meaning the governments keep it cheap and--thus--consumers treat it as an inexpensive resource.

Two takeaways for me:  1) China is paying too high a price (as is the world WRT CO2 emissions) for its growth; and 2) America could do a lot better too, possibly through higher taxation or other incentives.

12:04AM

Big Pharma goes upstream--to China

WSJ piece on how Charles River Laboratories International is buying one of China's largest drug research firms, WuXi AppTec Company for $1.6B.

Charles River is a big US research firm (i.e., drug developer) that works with the Big Pharma producers.  Buying WuXi allows Charles River to access a lot of cheaper PhDs in China.  

Research costs continue to go up.  Meanwhile, one-third of all drug patents in the world will expire during the next few years, so Big Pharma and its partners have little choice but to access China's growing pharmaceutical industry.

I think this is a wave that will benefit the US:  exposure to, and integration with, a large but cheaper medical market.   We need the infusion of cost discipline and a rethinking of our very expensive methodologies, plus, quite simply, access to cheaper drugs and devices and--as is shown by "medical tourism"--procedures, which China will be pioneering or just redesigning as it seeks to extend more and better care to all its people.

12:01AM

Chart of the day: visualizing U.S.-world trade

 

Found here at Visual Economics.

12:07AM

China considers US-style property taxes

WSJ story (Fung) on China thinking through what it will eventually take to control the housing market, which is booming along the coast (see chart below) and presumably increasing the coastal-interior divide.

China has real estate taxes now, and is considering jacking them up, says Fung.  But the real rule-set reset would be to shift to US-style annual taxes, which "would mark a significant escalation of its struggle to cool down a booming property market now widely being described as a bubble."

My guess:  it'll take the bubble bursting for China to make this bold move. Developers vehemently oppose the move, and nobody wants to piss them off as construction is a bright spot right now.  Sticking in the new type of taxes now might just prick the bubble.

Still, expect the government to do this eventually (Chongqing's city gov has proposed it to Beijing), with the first targets, according to the piece, being second homes (luxury tax really designed to tamp down on flipping or speculation).  The leadership fears the rising sense of coastal-interior/have-have-not divide, but is adamant about encouraging individual home ownership--a very middle-class-empowering status.

12:04AM

A society under stress, with mental health patients who go untreated

Two Sky Canaves stories in the WSJ.

Makes you realize that American who got killed at the Olympics by a mentally-ill knife-wielding Chinese was just at the wrong place at the wrong time.

Two knife attacks in two days at Chinese schools (44 kids and 4 adults wounded!), following an equally bizarre attack in late March that left 8 kids dead.  Second story says a total of five attacks have unfolded in the past six weeks for a grand total of 11 dead and 70 injured.  Police fear the usual copy-catting effect.

But the attacks highlight a sense of growing social unease and the undeniable reality that most mentally-ill people in China are on their own.  Estimates run to almost 175 million, "and the vast majority of them have never received treatment," according to a Columbia U study.

Why go after kids?  In this upwardly mobile society, they are the ultimate status symbols.

You know how much American parents would freak out if similar events were happening here, and the Chinese are no different.  I know a lot of Chinese with the classic one kid to worry over, and the amount of attention that kid gets is stunning--even by obsessive US standards.  And if you cross them on the subject, they will get very mad--very fast, as we saw with the recent earthquakes.

So China orders police patrols, etc., but that alone won't calm parents when three-year-olds are being knifed in their school.

Again, the unease is larger than just these crimes.  It's a sense of accumulated ills amidst all this tumultuous development:

China's remarkable economic growth over the past three decades, while bringing hundreds of millions of people out of poverty, has been accompanied by the emergence of complex problems that tend to undermine the ideals of a "harmonious society," which Beijing sees as necessary to maintaining the legitimacy of the ruling Communist Party. Official corruption, rising income inequality and a frayed social-security system are among the most pressing issues, and now violent crime may be added to the mix.

"These attackers basically belong to the category of suicide attackers," says Ma Ai, a professor of criminal psychology at the China University of Political Science and Law in Beijing. "They can't expect that they can get away from police after they commit the crimes." To prevent future outbreaks of violence, Mr. Ma says it is necessary "to gradually eliminate the breeding grounds for their hatred toward society."

The motives for the attacks are confused. But the sense of rage toward society, and the way it is targeting children, has thrown a spotlight on the changes that have swept through China. Much has been made of the widening gap between the urban rich and the rural poor and the resentments engendered by corrupt and high-handed officials who hold sway over the lives of ordinary Chinese.

Beyond that, China's dash toward prosperity has placed huge psychological strains on those striving to stay ahead and on those unable to keep up. The mentally ill are among the most vulnerable members of a society that struggles to provide basic health care for large sections of the rural population.

China hasn't seen the kind of random street violence that blights urban life in some Western countries, but the school attacks point to a growing problem among individuals who nurse deep grievances against society and are ready to blow at any moment.

You have to go back to America's 1890s to find similar stress:  the previous 25 years following the Civil War were so stunning in their growth and discombobulation, and government services--corrupt as their were until civil service reform kicked in--simply failed to keep up with the growing needs.  Dealing with crime in major cities?  Hell, NYC didn't get the NYPD really going until the mid 1840s and it's not until the mid-1890s, when Teddy Roosevelt becomes a police commissioner, that you start to see the serious reforms begin.

My sense of the cops in China whenever I see them out and about is that they deal with numbers we can't begin to imagine.  They always look stressed and overworked and a bit behind events.  Far from impressing me as a police state, I find myself usually thinking that they should be more cops around--given the constant crowds everywhere you go.

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