Friday, 30 November 2007

Stockmarket off 20% since its peak

The bubble had to burst - whilst I got the final size of the bubble wrong its eventual bursting remained inevitable and whilst large profits were made on the way up those mug punters who bought for the first time at the peak are already nursing loses of up to 20%.

Shares trading on a PE of 46 are still way overvalued. China has specific issues relating to asset allocation and the choices available then may limit the fall but this should not detract from the overvaluation and small investors move in a herd it may be hard to reverse this downward trend in a hurry.

The question is whether a large deflation will have knock on effects across global stock markets.

Chinese stocks face biggest monthly drop since 1995 [China Post]

SHANGHAI -- Chinese stocks are poised for their steepest monthly decline in more than 12 years as the government deflates a bubble that caused prices to quadruple in a year.

The Shanghai Composite Index has fallen 16 percent in November, the most since February 1995, when Bloomberg started keeping records of the benchmark. Shares in the index trade at an average 46 times earnings, according to data compiled by Bloomberg. The MSCI Asia Pacific Index and the Standard & Poor's 500 Index are valued at 18 times.

While this year's rally turned Beijing-based PetroChina Co. into the biggest company by market value and made Industrial & Commercial Bank of China Ltd. the largest bank, five interest rate increases by the People's Bank of China and higher taxes on trading shares sent the index down 18 percent from its Oct. 16 record. The past five times the Shanghai Composite Index dropped 20 percent or more from a high, losses deepened to an average 35 percent before recovering, Bloomberg data show.

"The risk facing the stock market is considerable now, as the government is trying to squeeze an asset bubble," said Zhang Ling, who manages the equivalent of US$1.1 billion with ICBC Credit Suisse Asset Management Co. in Beijing.

U.S. billionaire Warren Buffett said last month investors should be "cautious" about China's stock market. Six months ago, Li Ka-shing, China's richest man, said it "must be a bubble."

The decline in China compares with a 21 percent decrease in Japan's Topix index from its February record to Nov. 22, the first of the world's 10 biggest stock markets to enter a bear market since the summer's U.S. subprime-mortgage collapse. A 20 percent drop within 12 months is considered by traders as the start of a bear market.

The two-year-old CSI 300 Index, which tracks shares on the Shanghai and Shenzhen exchanges, fell 21 percent from its Oct. 16 peak through Wednesday, and rose 4.2 percent Thursday. It's still the world's best-performing national index of the 90 benchmarks followed by Bloomberg.

"It's far too early to talk about a prolonged bear market as domestic demand is still strong," said Leo Gao, who helps manage the equivalent of US$2.3 billion at APS Asset Management Ltd. in Shanghai. "We could see a rebound when banks get their fresh quota of loans in the new year."


Wednesday, 28 November 2007

EU-China Summit

The EU and China have shared interests in a large number of areas - exchange rates, climate change, commodity prices to name just three.

The current US political aggression towards China gives the EU a window of opportunity to take a more conciliatory approach. This will not be easy, but as Sakozy has shown (previous article), China can benefit greatly from closer ties and cooperation with Europe.

Given our interest in education, this is an interesting statistic.

More than 100,000 Chinese students studied at European universities in 2003 and 2004; there were 60,000 at US universities in the same years.

The UK and Europe should build on this strength and increase Europe's lead over the US. This means looking carefully at visa costs and access to higher education.

Stumbling towards mutual understanding [FT]

Whether it is commodity prices or exchange rates, nuclear non-proliferation or climate change, the European Union and China are discovering that there is virtually no economic topic or international security issue these days on which their interests do not intersect – and sometimes collide.

In the 32 years since China and the then European Economic Community established diplomatic ties, the Beijing-Brussels relationship has evolved from a one-dimensional, trade-based affair into a complex partnership that combines growing interdependence with various points of friction and residual misgivings.

From a European perspect­ive, a sense of awe at the rapid expansion of China’s global economic power is matched by uncertainty over how Beijing will cope with the domestic consequences of growth and shoulder its ever greater international responsibilities.

“Even if the EU assumes that China will remain a success story, it is not clear what kind of power it will become,” says Charles Grant, director of the Centre for European Reform, a think-tank.

“Europeans will hope that China takes its place in the multilateral sort of world that they would prefer. But China may not want a rules-based international system with strong multilateral institutions.”

There is no fundamental conflict of interest between the EU and China, and the EU has been China’s biggest foreign trade partner since 2004. Each would like to put the partnership on a solid strategic foundation rather than lurch into rivalry.

But with the EU’s trade deficit with China growing by €2bn ($2.97bn) a week, economic tensions threaten to become serious. Other misunderstandings persist, deriving in the final analysis from the two sides’ different political systems and cultures.

While both embrace economic pluralism, the EU sees itself as a bloc of 27 democracies with a commitment to human rights and the rule of law, quite distinct from China, with its one-party state and communist ideology.

But a more subtle difference is China’s emphasis on the integrity and sovereignty of the nation state, which contrasts with the pride that many EU member states take in having diluted their own sovereignty in favour of European reconciliation and co-operation after the past century’s two world wars.

“China sees sovereignty and non-interference in domestic affairs pretty much as non-negotiable, whereas the EU thinks its success is built on pooling sovereignty and going beyond the principle of the nation state,” one European diplomat says.

This difference of outlook explains why the European leaders who are visiting China this week intend to tread carefully when they talk about the need for a revaluation of the renminbi or more effective Chinese action to protect intellectual property rights.

“What we are aiming for is structured macroeconomic dialogue with China, because we don’t have one yet,” Jean-Claude Juncker, chairman of the eurozone’s finance ministers’ group, said last week. “We will be explaining why the Chinese economic leaders should perhaps change tack. We will make sure we are very explicit this time round.”

Mr Juncker and the eurozone’s two other highest-level officials – Joaquín Almunia, the EU’s monetary affairs commissioner, and Jean-Claude Trichet, the European Central Bank president – will set out the case that it is in China’s own interests to permit a stronger renminbi, boost domestic demand and reduce the huge savings levels in the banking system.

“I don’t think we should be lecturing them on how to grow economically, but surely it is they, not we, who are saying they need a different balance in their growth model. That’s not an idea that we came up with. They came up with this idea,” Mr Almunia told a European parliament hearing last Wednesday.

“China has constantly increased its foreign reserves. That is the backdrop to the dialogue, which we trust will be fruitful, and which we trust will also take place on a regular basis. We are not going to solve all the problems on a one-off trip. That would be unrealistic.”

EU officials acknowledge the eurozone leaders’ visit and the EU-China summit on Wednewsday will be test cases of how much progress Europe is making in speaking to China with a single voice.

Leaders of individual EU member states, especially France, Germany and the UK, have long made a habit of promoting their own political and commercial relationships with the Chinese at the expense of a common position.

Like Russia and the US, China sometimes seems ­frustrated with the internecine squabbles and convoluted decision-making procedures that often constitute EU policymaking. Slowly, however, Europeans and Chinese appear to be learning more about each other. More than 100,000 Chinese students studied at European universities in 2003 and 2004; there were 60,000 at US universities in the same years.

Sarkozy in $30bn trade deal

A rejuvenated French economy under Sarkozy seem keen to expand their sphere of influence. It is good news that France is becoming more active in China as Europe seeks to counter US influence in the region.

The airbus contract is particularly welcome and, given the dollar-Euro exchange rate, a good time to sign as the Airbus finds it harder to compete on price with Boeing.

Sarkozy nets US$30 bil. in trade deals with China [China Post]

BEIJING -- French President Nicolas Sarkozy on Monday oversaw the signing of about US$30 billion in aviation, nuclear and other deals in what he described as an unprecedented day of trade with China.

The two major agreements announced on the second day of Sarkozy's visit to China were contracts for European aerospace giant Airbus to deliver 160 aircraft and French firm Areva to build two nuclear reactors.

Sarkozy said the value of all the deals, signed after he met Chinese President Hu Jintao in the Great Hall of the People, was worth about 20 billion euros (US$29.6 billion).

"The total amount of these contracts has never been matched before," Sarkozy told Hu shortly before the official signing ceremony, according to an AFP journalist there.

"I want to thank President Hu for his personal involvement," he said afterwards.

The most lucrative contract was for Airbus to deliver 110 A320s and 50 A330s in a deal a spokesman for the European firm said was worth US$17.4 billion, based on the list price.

Airbus spokesman Robin Tao said the agreement was its biggest ever in dollar terms with China, which has the world's fastest-growing aviation market.

Areva said its agreements to build two third-generation nuclear reactors for China Guangdong Nuclear Power Corporation (CGNPC) in southern China was worth eight billion euros (US$11.9 billion) and was also historic.

Those deals also included the delivery of uranium from three African mines controlled by Areva and a joint venture to market the third-generation technology in China.

"It's a record. In the history of the civilian nuclear industry, there's never been a deal of this magnitude," Areva chief executive Anne Lauvergeon said.

With China seeking to rapidly build up its nuclear power industry, the deal was important for Areva after losing out in July to U.S.-based Westinghouse Electric in a bid to build four other nuclear reactors.

Other deals announced on Monday included a 750-million-euro telecommunication contract between Alcatel of France and China Mobile, and oneworth 80 million euros for Eurocopter to provide China with 10 helicopters.


Friday, 23 November 2007

The trade deficit that is growing at €15m an hour

It is no longer just the US who are keen to bash China over its growing trade deficits at every opportunity.

Today's FT reports on Peter Mandelson's warning to China that it is prepared to use good old "anti-dumping" measures to "defend" itself against Chinese exports.

The statistic trotted out in the article is that the EU's trade deficit with China is growing at 15million Euros an hour. That is a good statistic and does sound impressively scary.

The hook is that Peter Mandelson is happy with Chinese exports and is spinning this as a demand for freer trade. Leaving the exchange rate issue aside (which we have covered many times before) one of the criticisms is that China is putting limits on market access for foreign countries. This argument does have legs.

However, Mandelson is also keen to explain that he sees the current growth in the trade deficit as "unsustainable". What does that really mean?

The EU also has issues over intellectual property rights, fake goods and cumbersome bureaucratic procedures.

It is a sign of China's coming of age that it is no longer appears to be allowed to play the "still developing" card. It seems the patience of China's trade partners is beginning to wear thin and they are gearing up to play hard.

Make no mistake, China can ill-afford to become embroiled in a trade war with the EU and the US. For all its hard line rhetoric it still has to create millions of jobs in the manufacturing sector a year and it needs markets to sell these products.

Finally, I do not really understand what Peter is talking about in this paragraph.

Mr Mandelson said Chinese leaders needed to act to reduce non-tariff barriers, regulation and discrimination against European companies, saying that "when we pin them to the actions, they respond in terms of trade fairs and investment promotion". He added: "I don't want takeaways or overnight presentational devices. I want real sustained action to remedy the problems."

Is he talking about fast food? What is an overnight presentational device? I am lost.

Mandelson warns China on trade gap[FT]
Peter Mandelson, the European Union trade commissioner, warned China yesterday that the EU could be forced to use anti-dumping measures to defend itself against Chinese exports if Beijing failed to help cut an "unsustainable" trade deficit growing by €15m an hour.


EU frustrations with Chinese limits on market access for foreign companies, and an exchange-rate policy seen as undervaluing the renminbi, have been fuelled by the growth of its trade deficit with China to €86bn ($128bn, £62bn) in the first seven months of the year.

"Europe is becoming more open to China, but I can't sustain that unless China shows the same openness to us," Mr Mandelson told the Financial Times. He pointed out that he would come under increasing pressure to take tougher action if Beijing did not move to clear market barriers.

"During the six days that I spent in China, the trade deficit will grow by over €2bn, or €15m an hour," he said. "That is what I call unsustainable. There are real issues of market access, legal protection, as well as the other issues we are dealing with - like counterfeiting and export of fake goods."

Mr Mandelson's call to China reflects frustration among European companies at what they see as Beijing's failure to act on a host of long-standing complaints.

Mr Mandelson said Chinese leaders needed to act to reduce non-tariff barriers, regulation and discrimination against European companies, saying that "when we pin them to the actions, they respond in terms of trade fairs and investment promotion". He added: "I don't want takeaways or overnight presentational devices. I want real sustained action to remedy the problems."

He made clear that a Chinese failure to deliver change could force Brussels to resort to trade defence measures, such as anti-dumping duties or - in extreme circumstances- complaints to the World Trade Organisation.

China should also "manage its currency better", both for its own economic good and to address the widening trade gap.

A survey of EU companies by the European Chamber in Beijing yesterday highlighted corporate dissatisfaction with China's lack of transparency, its record on intellectual property protection and its cumbersome bureaucratic procedures.

"The investment climate is unfortunately not getting better," said Jörg Wuttke, the chamber's president. Intellectual property rights protection remained a problem for 66 per cent of responding companies, despite Beijing's promises to address the issue, he added.

Despite such complaints, 61 per cent of European companies in China reported being profitable and 73 per cent were optimistic about future growth, the chamber survey found.

The summit comes shortly after Germany's finance minister cancelled a trip to Beijing after his counterpart refused to see him in apparent protest over a meeting between Angela Merkel, the German chancellor, and the Dalai Lama, the exiled Tibetan spiritual leader.


Thursday, 22 November 2007

China Environmental Round-up 21/11/2007

There is no doubt that China has serious environmental problems. It is also true that environmental degradation is limiting Chinese growth with the problem promising to get worse.

In this post I merely emphasise the importance of the environment by providing links from just 1 days PlanetArk news to illustrate the size and importance of the problem. Note again, this is just one days environmental news for China that has managed to make the mainstream news reports.

China's Energy Saving Efforts Gather Pace in Q3
BEIJING - China's efforts to cut the energy it uses to generate each dollar of national income, a key pillar of Beijing's argument that it is tackling carbon emissions, gathered pace in the third quarter, government sources said.

China Takes Pollution Fight to Threatened Villages
BEIJING - Pollution in China's vast countryside is threatening health, water and arable land, the government said on Wednesday, vowing to stop toxic industries shifting pollution to villages.

China Three Gorges Landslide Kills One, Two Missing
BEIJING - A landslide near China's huge Three Gorges Dam trapped four workers, killing one, state media reported, as officials announced efforts to counter environmental fallout from the controversial project.

China Coal Fire Put Out After More Than 50 Years
BEIJING - An underground coal fire in remote northwest China that has raged unchecked for more than 50 years has finally been put out, state media reported on Wednesday.

More than 12.43 million tonnes of coal had been consumed in the fire and an estimated 651 million tonnes saved at the Terak field in Urumqi, capital of Xinjiang autonomous region, the Coalfield Fire Fighting Project Office was quoted as saying.

China to Hold Asia Climate Change Meeting in 2008
SINGAPORE - China will hold a meeting in Beijing next year for Asian countries to discuss climate change, as it faces the risk of more droughts and floods and seeks common ground on a potential successor to the UN Kyoto Protocol.

India, China Sign Deal to Stabilise Greenhouse Gases
SINGAPORE - Leaders of Asian countries, including top polluters India and China, on Wednesday signed an agreement that aims to stabilise greenhouses gas emissions.

Tuesday, 20 November 2007

You have to be a genius to read China Economics Blog

This is amusing.

You enter your blog address and it tells you the reading level of the blog.


Interestingly, Joshua Gans over at CoreEcon gets a "High School" rating.

The implications are as follows:

1. Only clever people read this blog (is that so bad?)
2. I could get more readers if I simplified the language (is that so good?)


Monday, 19 November 2007

The China Fantasy

The "China Fantasy" by james Mann is currently causing a stir in the corridors of power.

The book covers old ground but puts forward a strong argument. The conclusions should also surprise no one and I am surprised that it appears to have caused such a fuss. I doubt the American public really feel victims of a fraud over the handling of US-Chinese relations.

The issue of democracy in China as a result of increased trade and FDI was naive - the question is whether anyone really believed it in the first place.

New book on China raises a storm [International Herald Tribune]

Indeed, a recent book, which argues that on human rights grounds, American policy toward China has been both a failure and a fraud, is making a considerable stir among China policy makers and scholars in the United States.

The book is "The China Fantasy" by James Mann, a former correspondent in Beijing for The Los Angeles Times and now author in residence at the Johns Hopkins School for Advanced International Studies.

Mann's thesis, adamantly rejected by many, though not all, experts on China, is that the American policy of what is called "engagement," pursued with some fits and starts by every administration since Richard Nixon's in the 1970s, has not delivered on its main promise, which was Chinese democratization.

When, for example, the Clinton administration ended linkage between trade benefits for China and progress in human rights, the argument to skeptical members of Congress held that delinkage would lead to more economic growth, more economic growth to the emergence of a middle class and the emergence of a middle class to real political reform.

Andrew Nathan, a China expert at Columbia University who supports the Mann thesis, put it this way in an interview: "The strategy of engagement has been incredibly successful in supporting the stability and prosperity of China and allowing the regime to survive as an authoritarian, repressive regime, but the American people are not being told that that is the strategy."

According to Nathan, everybody involved in the debate would be perfectly delighted if China were to turn into a stable democracy, but in the meantime policy makers are actually pretty happy with the regime in China that they have.

"That's because they know who to call in Beijing and who to talk to about problems like currency, trade, North Korea and Taiwan," he said. "There's somebody in charge and they're basically pretty cooperative with us."

In many respects Mann's book reprises an argument that has been raging among China policy makers and experts since Nixon restored relations with China in 1972.

The questions have always been: How much should the United States publicly criticize China for its numerous, egregious human rights violations and how much does the human rights goal have to be accommodated to China's power and importance?

But because Mann's book accuses China policy makers of a kind of broken promise, it seems to have generated an especially angry response on the Internet and in such specialty journals as The China Quarterly, which published a lengthy exchange between Mann and David Lampton, a leading figure on China who is also at the School for Advanced International Studies.

Mann also touches what may be a sore point in stressing that, with a few exceptions - Nathan one of the most prominent among them - China scholars and policy makers have tended to be rather silent on Chinese human rights abuses, though many of them say that they bring these matters up forcefully with Chinese officials in private.

And this, in turn, has long been part of a complicated debate about how to apportion priorities on China. Administration after administration has come to power in Washington pledged to be tougher on China only to retreat once it needed China's cooperation on other matters.

The China specialists' retort to Mann builds on two elements, one of which is the need for that cooperation. The bilateral relationship faces tough times, some of them say, not least on trade where the ever-growing deficit is bound to lead to calls in the United States for sanctions.

In addition, some China experts are concerned over the trend toward what has come to be called "strategic hedging" on China, building relations with countries on China's periphery as a way of containing what conservatives in the Bush administration regard as a looming military threat from China, a threat that a lot of experts (including Mann) believe to be largely imaginary.

On human rights in particular, some China scholars criticize Mann for concentrating so much on political reform that he has failed to appreciate the enormous beneficial changes that have occurred in China over the past decade, where a middle class of perhaps 200 million to 300 million people has come into existence enjoying a degree of personal autonomy that would have been unthinkable 15 or so years ago.

"Jim's image of China is stuck in the Tiananmen crackdown period," said David Shambaugh, a China scholar at George Washington University. "He thinks China today is the same as China in 1990."

Among Lampton's arguments is that Mann overestimates the centrality of the United States to political developments in China, that if democracy takes hold there it will be because of developments in China itself, not because of pressures from outside.

"The Chinese middle class is not now a wedge pushing for democratization," Lampton said. "In the short run they may be more afraid of the underclass than of the elite, and the middle class is key.

"I think we should be supportive of underlying economic developments that will build a middle class, but there are limits to what U.S. policy can accomplish," Lampton said. "Jim seems to be more implicitly optimistic that if U.S. policy were different, there would be a Chinese reality more to our liking."

Saturday, 17 November 2007

Institutions and Foreign Investment: China Versus the World

Interesting NBER paper looking at the apparent paradox between FDI inflows and the state of China's institution. One would expect a negative correlation. The conclusions of this paper are intuitive and should not be surprising to those with a good knowledge of China.


"Institutions and Foreign Investment: China Versus the World"
NBER Working Paper No. W13435

Contact: JOSEPH P.H. FAN
Chinese University of Hong Kong - School of

University of Alberta - Department of Finance and
Management Science, National Bureau of Economic
Research (NBER)

World Bank - Development Research Group (DECRG),
Peking University - Guang Hua School of Management

New York University - Department of Economics

Full Text:

ABSTRACT: Weak institutions ought to deter foreign direction
investment (FDI), and mass media stories highlight China's
institutional deficiencies, yet China is now one of the world's
largest FDI destinations. This incongruity characterizes China's
paradoxical growth. Cross - country regressions show that China's
FDI inflow is not exceptionally large, given the quality of its
institutions and its economic track record. Institutions clearly
determine a country's allure as an FDI destination, but standard
measures of institutional quality can be problematic for
countries undergoing rapid institutional development, and can
usefully be augmented by economic track record measures. Deng
Xiaoping's 1993 southern tour heralded sweeping reforms, and this
regime shift is insufficiently reflected in commonly used
measures of institutional quality. China's FDI inflow surge after
these reforms resembles similar post-regime shift surges in the
East Bloc, and so is also unexceptional. Recent arguments that
China's FDI inflow is inefficiently large because weak
institutions deter domestic investment while special initiatives
attract FDI are thus either unsupported or not unique to China.

Thursday, 15 November 2007

"China is poorer and smaller than we all think": Discuss

Interesting FT piece today on the Asian Development Bank's announcement that China is in fact a lot smaller and poorer than at first thought.

Hence the justification for the World Bank to continue lending money to China when, at the same time, China invests billions in US paper and and has potentially lost millions on the recent dollar decline.

The limits of a smaller, poorer China [FT]

In a little-noticed mid-summer announcement, the Asian Development Bank presented official survey results indicating China’s economy is smaller and poorer than established estimates say. The announcement cited the first authoritative measure of China’s size using purchasing power parity methods. The results tell us that when the World Bank announces its expected PPP data revisions later this year, China’s economy will turn out to be 40 per cent smaller than previously stated.

This more accurate picture of China clarifies why Beijing concentrates so heavily on domestic priorities such as growth, public investment, pollution control and poverty reduction. The number of people in China living below the World Bank’s dollar-a-day poverty line is 300m – three times larger than currently estimated.

Why such a large revision in the estimates of China’s economic condition? Until recently, China had never participated in the careful price surveys needed to convert accurately its gross domestic product into PPP dollars.

This article is potentially important for US-China relations as well as for the Chinese domestic policy. This article deserves maximum coverage as it sheds light on an important issue. As the article concludes:

Finally, both Congress and the Treasury department should recognise the limitations and opportunities revealed by these more accurate data. For example, risks to its impoverished rural hinterland from a sudden large revaluation of its currency loom larger in Beijing’s eyes than in Washington’s. Acknowledging this could smooth negotiations.


Corruption Watch: Official accused of stealing US$240 million

In an effort to keep readers abreast of corruption trends in China we bring the case of the $240 million dollar official.

This shows that the Chinese sure like a gamble. Perhaps more worrying is the amount spent "speculating of real estate". For now many such gambles have been winners. How many other cases are there out there that will only be revealed once the asset bubbles in shares and land burst.

China official accused of stealing US$240 million [The China Post]

HONG KONG -- A Chinese post office director has been accused of stealing more than US$240 million from customers to help pay off her gambling debts and make personal investments, local media reported on Tuesday. He Liqiong, 43, who managed a post office in the southern Chinese city of Foshan, is accused of amassing 1.79 billion yuan over three years by siphoning cash from hundreds of depositors at her branch.

"He Liqiong is suspected of using 19.8 million yuan to repay gambling debts, more than 73 million yuan for investments, and around 20 million yuan to speculate on land around Foshan," the Sing Tao Daily quoted police investigators as saying.


Condom recycling

The environmental economists over at "Globalisation and the environment" post on the trend in China for used condoms to be recycled as hair bands.

This has to be wind up surely?

Recycling gone too far? Used condoms

In a follow up to our detailed study of the economics of recycling yesterday comes news that China is taking recycling to new heights (or is it depths).

The concept of recycling used condoms to wear as hair bands may not appeal but remember that someone has the job of collecting and processing the said used condom. Whilst we are on the subject, where would a budding used condom entrepreneur source his or her stock? Sounds like a spoof story to me.

China recycling used condoms as cheap hair bands [Yahoo news]

BEIJING (AFP) - Used condoms are being recycled into hair bands in southern China, threatening to spread sexually-transmittable diseases they were originally meant to prevent, state media reported Tuesday.

In the latest example of potentially harmful Chinese-made products, rubber hair bands have been found in local markets and beauty salons in Dongguan and Guangzhou cities in southern Guangdong province, China Daily newspaper said.

"These cheap and colourful rubber bands and hair ties sell well ... threatening the health of local people," it said.

Despite being recycled, the hair bands could still contain bacteria and viruses, it said.

"People could be infected with AIDS, (genital) warts or other diseases if they hold the rubber bands or strings in their mouths while waving their hair into plaits or buns," the paper quoted a local dermatologist who gave only his surname, Dong, as saying.

A bag of ten of the recycled bands sells for just 25 fen (three cents), much cheaper than others on the market, accounting for their popularity, the paper said.

A government official was quoted as saying recycling condoms was illegal.

China's manufacturing industry has been repeatedly tarnished this year by a trying of scandals involving shoddy or dangerous goods made for both domestic and foreign markets.

In response, it launched a public relations blitz this summer aimed at playing up efforts to strengthen monitoring systems


Tuesday, 13 November 2007

Adam Smith in Beijing

A new book by Giovanni Arrighi (a Sociology Professor) examines the role of China and the development of capitalism. The perspective of the left and right is considered.

This is not, as the title may have suggested a business economics text and economists will no doubt find the conclusions of the book full of holes. Holding China up as a leader of a "different way" is a sure fire way of getting shot down.


Internet censorship in China - the role of technology

Today's FT provides a good read about the technology behind China's ability to censor the internet and to stop over a billion Chinese from reading this blog, who would undoubtedly do so if only it were not censored, thus depriving China of access to my meaningless ramblings.

The result of the censorship:

The result is that the vast majority of China's 162m internet users are unlikely to be exposed to anything the state might consider politically dangerous.

Follow the link for the full article and its excellent analysis.

China learns to click carefully [FT]

Ever since the internet arrived in China in the mid-1990s, many have assumed that it poses an unanswerable threat to the sprawling system of political censorship that helps underpin the ruling Communist party's power.


Statistics: FDI up 13%, inflation hits 11 year high

Two news stories catch the eye today. The more worrying concerns inflation. As this quote states:

China has a history of relatively mild price increases spiralling into double-digit inflation.

This should not be taken lightly. For all the governments pledges to "intervene" to ensure price stability the Chinese government should be warned that getting the cat back in the bag after it has been let out is not so easy. The problems with diesel shortages demonstrate this. Without price increases the suppliers of fuel are making a loss. So economics dictates that they will cease to supply fuel - result shortages. Therefore, it China wants the fuel to flow it needs to increase prices - firms need to make a profit or will shut. Capitalism (from which China has done so well recently) works both ways.

Moreover, there is nothing like a bit of food price inflation to really get the government worried about social unrest. A lack of food more than anything is liable to get people onto the streets. These are relatively large values for such staple foods.

Food prices rose 17.9 per cent in October from a year earlier, with pork up 54.9 per cent, fresh vegetables rising 29.9 per cent, and eggs up 14.3 per cent.

China inflation back at 11-year high[FT]

Chinese headline inflation rebounded to its highest level in more than a decade in October driven by soaring food prices, spurring expectations the central bank will continue taking steps to cool the red-hot economy.

The consumer price index rose 6.5 per cent in October from a year earlier, matching August’s 11-year high, after a brief reprieve in September when inflation dropped to 6.2 per cent.


He blamed global oil and food price increases and said the government would ensure price stability. ”We have methods to ensure supply, we will take many different measures to stabilise prices,” a report on the central government Web site quoted Mr Wen as saying.

China has a history of relatively mild price increases spiralling into double-digit inflation.

Food prices rose 17.9 per cent in October from a year earlier, with pork up 54.9 per cent, fresh vegetables rising 29.9 per cent, and eggs up 14.3 per cent.

Non-food inflation was 1.1 per cent, affected by the government’s decision to raise tightly controlled pump prices for petrol, diesel and jet fuel by 10 per cent in late October.

That was the first rise in 17 months and came in response to shortages that have spread across the country as refiners cut production in the face of huge losses resulting from the difference between record high crude prices and government-fixed pump prices.

Some parts of the country are still reporting diesel shortages that some have blamed on outlets hoarding supplies in the expectation of another price rise.

Higher oil prices helped push producer price inflation up to 3.2 per cent in October from a year earlier.

Analysts now expect the central bank to continue raising interest rates and to introduce more forceful measures to rein in bank lending, which expanded by the largest margin ever in October.

The central bank has already lifted interest rates six times this year and raised the proportion of deposits banks must hold in reserve nine times to an all-time high of 13.5 per cent.

On a more encouraging note, FDI inflows are higher again. However, such inflows can cause their own problems not least upward pressure on inflation and increasingly large foreign exchange rate reserves.

China's foreign direct investment up 13.2% in Oct. [The China Post]

BEIJING -- Foreign direct investment into China rose 13.2 percent in October compared with the same month a year ago, the government said Monday.

Foreign enterprises invested US$6.8 billion in China last month, the commerce ministry said in a statement on its website.

The figure was up from US$5.3 billion in September. In the first 10 months of 2007, foreign direct investment rose 11.2 percent from the same period in 2006 to US$54 billion, the commerce ministry said.

Last year actual foreign investment in China was US$69.5 billion, down 4.1 percent from 2005.

Foreign direct investment, along with booming exports, are among the top factors resulting in China's massive build-up in foreign exchange reserves.

The foreign exchange reserves, the largest in the world for more than a year, hit US$1.43 trillion by the end of September, according to the most recent data.


Monday, 12 November 2007

Chinese "A" shares to fall further?

China "A" shares fell again on news of fresh tightening. I have a feeling that this is only the beginning.

There is nothing like fueling a fire but the rumour posted on China Financial Markets is too good not to repeat here. China Financial Markets is an excellent blog with accurate and informed opinion.

Chinese shares down 2.4% on fresh tightening measure [Peoples Daily]

Chinese share prices were sharply lower on Monday as the benchmark Shanghai Composite Index dropped 2.4 percent after Saturday's half percentage point increase in reserve requirement ratio for banks.

The key index, which covers both A and B shares, lost 127.81 points to close at 5,187.73 points.

Here is the Pettis piece. I am providing the "rumour" in full to ensure no misunderstandings. I, for one, buy the analysis spelled out here. The possible problem though is that if funds begin to sell off in expectation of this rumour then the index might not be introduced for fear of causing even greater sell off (even though one could then argue that it is already in the price). Things might get messy, quickly.

Index futures? [China Financial Markets]

One of the advantages of having so many of my students become traders in Hong Kong and the mainland is that I get to hear a lot of the rumors. Two of my former students recently told me about a rumor that seems to be very current in the market, and I called a third who also told me that he had heard it and he thought it was reasonably credible. The rumor is that last week the Social Security Fund was asked to sell off up to 30% of its A-share positions over the next 30 days.

The last time these kinds of rumors surfaced, I am told, was last May, just before the May 30 increase in the stamp tax that trashed the markets. The interpretation that these guys are putting on it is that we may finally see, early next month, the introduction of index futures. Since these instruments are not available to retail investors, who would probably use the futures as a way of taking leveraged long positions, but are likely to be used by institutions, who are expected to use this largely for shorting purposes, most people expect that the introduction of index futures will drive the market down.

Among other things a number of investors told me that they plan to buy H-shares and B-shares, which are at a deep discount to the A-share market, and hedge market risk by shorting the index. There will be lots of tracking error, but given the size of the discount most people are not terribly worried about it.

I have no idea if this true or not and of course make no representation that it is, but this does seem to be a common rumor, and even if it is not true it may affect market behavior in the near future.


Consumerism gone mad - 3 dead in shop stampede.

If we needed any reminder that China is at the front line in the unending march of capitalism comes news that 3 people were killed and another 31 injured in a stampede at a "shop sale".

Not a political demonstration, not an over reaction from the police or the army but killed trying to snap up a bargain in the shops. The following quote shows how much things have changed and yet, how much further China has to go.

What was the bargain - a $1.5 reduction on the price of cooking oil. Not TV sets, not designer clothing but a food staple.

He Yu, one of the shoppers combating for the cooking oil, got bruises in his face and hands in the stampede.

From a purely economic perspective it will be interesting to see what the monetary compensation levels will be. What value does China put on the value of a statistical life (bearing in mind it is in the low millions of dollars in the US).

Three dead, 31 injured in stampede in Carrefour outlet's sales promotion [People's Daily]

Three people have died and 31 others were injured, seven severely, in a stampede triggered by sales promotion in a Carrefour outlet in southwest China Saturday.

The three-day promotion at the outlet in the Shapingba District, Chongqing Municipality, was launched Friday to celebrate the 10th anniversary of Carrefour's entering into the market of the city.

People began queuing at the entrance around 4:00 a.m. Saturday, waiting to buy a kind of cooking oil with a much favorable price, said Gao Chang, spokesman for the government of Shapingba District.

The shop offered a deduction of 11.5 yuan (1.5 U.S. dollars) from the original price of 51.4 yuan (6.9 U.S. dollars) for a five-liter bottle of the edible oil.

Around 8:40 a.m. when the shop started its business, throngs of people burst in and a mass stampede occurred.

He Yu, one of the shoppers combating for the cooking oil, got bruises in his face and hands in the stampede.

"I rushed to the oil shelf with other people and grabbed four bottles. Suddenly I was tripped over on the floor. Luckily I got hold of another person and escaped from being crashed," the young man said.

The injured people are being treated in four hospitals in the city.

By 9:00 p.m., three had been discharged from hospital, but one of the seven seriously injured reported critical condition.

"The outlet has been ordered to suspend operation and the work safety watchdog has started an investigation," said Gao.

The outlet has also been told to prepare money to compensate the victims.

The district government issued an urgent notice late Saturday, saying that all departments and organizations in the district must take effective precautionary measures to prevent such things from happening again while organizing public activities.

French retailer giant Carrefour has opened 103 supermarkets in China since it entered the Chinese market in 1995. The latest outlet was opened on Nov. 1 this year in Changchun, capital of northeast China's Jilin Province.

Carrefour entered the market of Chongqing in 1998 and now operates four outlets in the city.

The Shapingba outlet, covering a business area of 7,000 square meters, was opened in May last year as the fourth supermarket of Carrefour in Chongqing.


Record Trade Surplus (again)

Not a month goes by without China recording yet another record trade surplus. The last month was no exception although the record prices for many commodities meant that the actual value fell below some analysts predictions.

The crucial issue is whether this marks the beginning of a trend reversal or a mere blip. The oil price should begin to fall but the price of other commodities may struggle to come down much as long as supply is restricted.

Goldmans makes a correct observation - if China attempts to curtail domestic inflation, any domestic slowdown is likely to lead to a fall in imports (although commodities for use in teh manufacture of exports should remain unaffected).

China posts record trade surplus [FT]

China’s trade surplus rose to a record in October, but fell short of many analysts’ predictions thanks to a jump in the value of imported raw materials.

Data on Monday showed the trade surplus rose to $27.1bn. Imports in October grew 25.5 per cent from the same month a year earlier to $80.7bn, accelerating from a 16.1 per cent rise in September. That exceeded the growth in exports, which rose 22.3 per cent from a year earlier to $107.7bn in October.

For more than three years export growth has outstripped that of imports as global manufacturers shifted their production to the workshop of the world. However, soaring prices of crude oil and other raw materials appear to have reversed that trend for now.

China’s accumulated trade surplus for the first 10 months of the year reached $212.4bn, an increase of 59 per cent from the same period a year earlier.

China’s trade surplus with the European Union, its top export destination, rose to $13.9bn from September’s $12.5bn while the politically sensitive surplus with the US, its second-largest export market, was $15.40bn, slightly higher than September’s $15.35bn.

China’s trade numbers have provoked fierce debate in Washington over how to deal with perceived trade imbalances and led to calls for Beijing to move faster to liberalise its currency regime.

Trade partners led by the US say the surplus is a direct result of Beijing keeping its tightly managed exchange rate undervalued to give domestic exporters a price advantage.

The surplus is also partly to blame for a rising flood of liquidity in the Chinese financial system that is stoking inflation already at a 10-year high of more than 6 per cent.

The central bank buys the foreign currency earned by Chinese exporters using renminbi which then enters the economy and feeds into price inflation.

In an attempt to drain liquidity and slow bank lending the central bank said at the weekend that it will raise the proportion of deposits banks must hold in reserve for the ninth time this year, to 13.5 per cent, a record high.

”Rising domestic inflation will lead to further tightening of monetary policy in the near term,” Goldman Sachs said in a research report on Monday. ”Without a meaningful adjustment in the [renminbi exchange rate], such tightening will likely lead to a slowdown in domestic demand, and therefore import demand.”

Friday, 9 November 2007

THES top 200 World University Rankings 2007 and Guardian UK top 100 Universities

Two new University rankings have been released this week.

The Guardian and Times Higher Educational Supplement.

When students are looking for a University to study at it is vitally important that league tables are consulted. The reputation of the institution that you undertake your postgraduate study can have a significant impact on your future career prospects.

For Economics and Business this is especially true.

The first ranking is from the Guardian and they rank all UK Universities.

Universities ranked by average ratings [Guardian]

I list here only the top 20 UK Universities. If possible aim to go to one of the top ten. Given the expense of living in London, a non-London university will restrict you to a smaller sample of Universities. In the sidebar we include those Universities that have Economics related MSc programmes. A quick cross-reference will give you a good idea of where to apply.

Imperial College London
Coll London
King's College London
Newcastle University
Queen Mary, London

The second ranking is from THES. This is a ranking of the top 200 Universities across the world.

2007 THES QS World University Rankings [PDF]

The UK has 20 Universities in the top 100 with 16/20 moving UP, 2 staying the same (Oxford and Cambridge at 3 and 2 respectively) and 2 falling (LSE and Glasgow).

The shock is the LSE dropping to 59 from 17. Something has gone wrong here I suspect.

The other UK universities in order of the ranking are:

Cambridge 2
Oxford 3
Imperial College London 5
Edinburgh 23
Kings College London 24
Manchester 30
Bristol 37
Warwick 57
LSE 59
Birmingham 65
Sheffield 68
Nottingham 70
York 74
St Andrews 75
Leeds 80
Southampton 81
Glasgow 83
Cardiff 99
Liverpool 100

It is interesting to compare the two rankings. Many Universities appear in both lists but by no means all. Again, selecting a University that appears in both is likely to be wise move.

Given the costs on an MSc in Economics are fairly similar across Universities especially for economics there is no excuse for attempting, at least at first, to get into one of the top UK Universities.

The following posts may be of interest:

Econphd Ranking of "Economics departments"

Ten Reasons Why You Should Study in Britain

Studying "Economics in the UK": General Links

Which UK University to study in? "Academic Ranking of World Universities"

Studying in the UK: Cost of Accommodation

World University Rankings: Rankings and text

"UK University Ranking": large city effect

Blair earns $300,000 for selling villas in China

Nothing like milking your expertise to make a few dollars. Is the $300,000 dollars fee a lot? Given the decline of the dollar Blair is only really making a little over £100,000.

Here at ChinaEconomicsBlog we would willing talk for twice as long for a fifth of the cost. Is that still a little expensive? Maybe a 15th of the price. China is still a long way to go (think of the carbon footprint) and the speech would have to be carefully crafted.

Did the organisers get a good deal? Publicity like that could be very beneficial and they probably need to start selling real estate quick before that bubble begins to burst as well.

Blair Visits China, Collects $300,000 For Saying “Ni Hao” [The China Game]
Tony Blair passed through South China on a tour that lasted a reported three hours. Stopping at Guangda, a luxury real estate development, he gave a speech to a large group of government officials, bankers and various other bigwigs, and for his efforts the former British Prime Minister was paid a whopping $300,000 speaker’s fee. By comparison, Bill Clinton earned $250,000 for a thirty minute engagement in Shenzhen five years ago, and save-the-planet Al Gore earns $175,000 a pop.

There is little doubt that for years to come that real estate development in South China is going to be remembered as “that place where Blair spoke.” Like owning a Porsche, getting the chance to rub shoulders with former world leaders carries a deal of prestige. For those who paid Blair his fee, the money was not likely wasted. I don’t know how many millions the property project was worth before he turned up, but chances are that villas at the complex will be selling for a great deal more in the morning.


The FT report that the true figure was closer to $500,000 (£237,000) as a result of an extra little $175,000 in tax paid for by the Chinese hosts.

Blair paid $500,000 for 20-minute talk[FT]

Tony Blair has been paid more than $500,000 (£237,000) for a 20-minute speech in China, suggesting he has overtaken Bill Clinton to become the world’s most sought-after public speaker.


Dongguan Guangda, a local property developer, this week paid Mr Blair a post-tax speaking fee of $330,000 and paid another $175,000 in tax on his behalf, according to the Guangdong Provincial Tax Bureau.

Mr Blair’s lucrative speech to a group of about 600 Communist party officials, businessmen and investment bankers confirms he has shot into the super league of after-dinner speakers.


Thursday, 8 November 2007

The student as customer

One of the aims of this blog was to inform students about the best Universities to attend and how to spend your undergraduate and postgraduate money wisely, hence the articles on rankings of economics in Universities at the global and UK level.

One factor that is influencing the behaviour of Universities is the belief that students are increasing being seen as "customers". This is a change in the dynamic between institutions and students. This change is partially being driven by the introduction of student fees and the increasingly reliance of UK Universities on overseas students (especially in recent years, Chinese students).

This academic paper in the Journal of Socio-Economics is therefore of interest. The conclusions fit my experience.


Market overreach: The student as customer

David George

Available online 23 March 2007.


This paper explores the market model's influence in redefining the relationship between teachers and students within the college and university. Viewing the student as a customer rather than as a “worker” or “apprentice” is argued to have created several problems. The case is made that with market forces leading to the substitution of purchased commodities for “production for self,” the role of the student in actively participating in the learning process is threatened. Several trends, including grade inflation, shortened contact hours, and the redefinition of study time are offered as evidence that the non-salable components of higher education are declining in importance.

Keywords: Grade inflation; Household production; Market failure

JEL classification codes: A14; D13; I21; L31


4. Conclusion

Several decades ago, Arthur M. Schlesinger Sr. reported a 30-year ideological cycle that he attributed to the amount of time that, on average, separates a generation's formative years from its leadership years (1986, chapter 2). Thus the 1920s, 1950s, and 1980s were conservative laissez-faire decades, as leaders in each carried with them the dominant worldview of 30 years before, while the 1900s, 1930s, and 1960s reflected activist government for similar reasons. The 1990s threw some doubts on the Schlesinger thesis, since the 1960s leftward orientation never emerged despite intimations that it might with the election of Clinton in 1992. Instead, the revolution begun by Ronald Reagan in 1980 took on new forms, but continued on the same trajectory as governmental activism and governmental popularity declined while respect for the business sector and the free market continued to grow.

There is always some risk in taking on contemporary events in the academic world since the worth of scholarly writings must usually stand the test of time. While reflections on current topics can capture a historical moment they also share a reality faced by contributors to popular culture, namely, a tendency to datedness that causes a certain loss of luster. The changing gestalt of academic administrators has been coincident with the rise of the entrepreneurial sensibility that has been going on for the last two decades. Recent events may well mitigate and even reverse the trend of regarding students as customers. If so, the datedness of this article that will follow notwithstanding, any such reversal can only be welcomed.


Chinese bubble begins to burst

Not a moment too soon the Chinese market is beginning to see the first signs of some reality sinking in.

Chinese share prices fall drastically [People Daily online]
Chinese share prices nose dived on Thursday after a timid rebound on the previous trading day, with the benchmark Shanghai Composite Index closing at 5,330.02 points, down 4.85 percent.

The Shenzhen Component Index on the smaller bourse in Shenzhen ended at 17,465.46 points, down 4.21 percent.

The combined daily transaction volume on the two exchanges stood at 128.2 billion yuan (17.2 billion U.S. dollars), up from the 112.58billion yuan (15.1 billion U.S. dollars) on Wednesday.

So what were the catalysts?

Clearly the recent stock market floatations that went to huge premiums on day one and numerous articles about the first trillion dollar company, PetroChina, ram home the excessive valuations.

PetroChina tops trillion-dollar mark[LA Times]

Secondly, we had the Buffet and Greenspan warnings:

Buffett calls for caution over China stocks[FT 24th October 2007]

Chinese investors reject Greenspan warning[Reuters May 25th 2007]

Greenspan's warning for China [Independent 25th May 2007]

third, we have the recent regulation changes delaying the ability of Chinese residents to buy Hong Kong shares. This may have been the straw that broke the Chinese camels back.

China puts Hong Kong share plan on ice [FT November 4th 2007]

China has in effect frozen a proposal to allow mainland citizens to buy shares in Hong Kong, a decision that threatens to undercut the recent surge in the former colony’s equities market to record highs.

Wen Jiabao, the premier, has attached four conditions to final approval for the scheme, all of which are so open-ended that Beijing could take months, if not longer, to permit it to go ahead.

In reality there could be any number of reasons (the falling dollar, political pressures, oil price rises, inflation in food prices, increases in wages) but what it is important to remember is that the political ramifications from a share price collapse are potentially enormous. With the military and state owned enterprises owning a large amount of stock in addition to the millions of individuals the implications for the stability of China should not be underestimated.

I am sure this topic will get more coverage in the days and weeks to come.

Tuesday, 6 November 2007

Brad DeLong on China and the Alignment problem

This is an interesting article - I do not necessarily agree with the grave concerns about scenario 2 - the Chinese maintaining the close ties between the Yuan and the Dollar and keeping inflation under control - the fear expressed here is that there could be a crash in the dollar in three or four years time. That is a long way off.

Alignment problem shifts to China [Taipeitimes]

Now that the dollar has dropped 43 percent from its high against the euro, the process of global financial rebalancing is seriously under way. The US' trade and current account deficits have begun to shrink relative to US and world GDP. Asian current account surpluses are about to start to shrink as well, especially if growth slows markedly in the US in the aftermath of the end of its housing boom.

At the moment, Europe is feeling most of the pain, as the euro's value has risen furthest and fastest against the dollar. But Latin America and Asia will start to feel distress as well, as the US sheds its decade-long role as the global economy's importer of last resort.

As long as imbalances of world trade and capital flows unwind slowly and smoothly, the magnitude of any global economic distress should be relatively small.

Of course, it will not seem small to exporters and their workers who lose their US markets, or to Americans who lose access to cheap capital provided by foreigners.

Yes, the US might enter a small recession -- the odds are roughly 50-50 of that happening. Yes, a US recession might spill over to the rest of the world and cause a worldwide recession. And yes, global economic growth over the next five years is unlikely to be as rapid as growth in the last five years.

A formal recession, however, is not an overwhelming probability and is likely to be small.

The prospect of a truly hard landing -- one where global investors wake up one morning, suddenly realize the US current accounts cannot be sustained, dump dollars and crash the global economy -- is becoming less likely with each passing day.

Under two scenarios -- both concerning China -- the unwinding of global imbalances could cause regional if not global depression.

In the first scenario, China keeps up its attempt to maintain full employment in Shanghai, Guangzhou, and elsewhere not by stimulating domestic demand but by trying to boost exports further by keeping the yuan stable against the dollar and falling in value against the euro.

The effort to maintain the dollar-yuan exchange rate at a level approved by China's State Council has already led to an enormous increase in the Chinese economy's financial liquidity.

The consequences of this are now manifested in property and stock market inflation, but not yet in rampant and uncontrolled consumer price inflation -- at least for now.

But if China does not accelerate the yuan's revaluation, the world might see a large burst of consumer inflation in China in the next two or three years.

If so, the consequences will be a choice between stagflation on the one hand and the destructive run-away inflation of post-World War II Latin America on the other.

The fall-out from this scenario, however, would be largely confined to Asia.

The second scenario is more dangerous for the entire world. In this scenario, once again China continues to attempt to maintain full employment by keeping the yuan undervalued. But this time, the Chinese government manages to restrain domestic inflation, so the US' trade deficit with Asia stops falling and starts rising again.

Five or six years hence, the world economy faces the danger of a sudden crash in the value of the dollar and the euro against Asian currencies.

Four years ago, I would have said that the principal source of international economic disorder was made in the US.

That has passed as a result of the dollar's decline and the ebbing political strength of right-wing populist factions in the US that seek ever-greater redistribution to the rich fueled by ever-increasing tax cuts and ever-rising long-term deficits.

Today, the principal source of international economic disorder is made in China, owing to factions inside its government that hope to avoid a more rapid appreciation of the yuan's value.

I cannot judge the strength of these factions, or whether they know that the falling US account deficit and dollar may reduce the urgency of adjustment in the rest of the world, but not in China.

Former US president Richard Nixon's treasury secretary, John Connally, once told a group of European leaders that while the dollar was the US currency, its misalignment was Europe's problem. Today, the misalignment of the dollar -- and the euro -- against the yuan and other Asian currencies is increasingly becoming Asia's problem.

J. Bradford DeLong, professor of economics at the University of California at Berkeley, was assistant US Treasury secretary during the administration of former US president Bill Clinton.


Long-Term Effects of the 1959-1961 China Famine

This new NBER working paper demonstrates how economists are not restricted to studying exchange rates and inflation.

I am always in two minds when I see a paper like this. It is an interesting topic with important conclusions. It is also a unique experiment that tells us more about biological processes than merely economics.

Given the sex imbalance in China between males and females the conclusions seem at odds with situation on the ground but that is another blog post entirely.

A paper worth reading. Contact a friendly blogger via email if you are unable to access this paper from the NBER.

"Long-Term Effects of the 1959-1961 China Famine: Mainland China and Hong Kong"
NBER Working Paper No. W13384

Columbia University - Department of Economics,
National Bureau of Economic Research (NBER)

Columbia University - Department of Economics

Chinese University of Hong Kong - Department of

Chinese University of Hong Kong - Department of
Economics, Institute for the Study of Labor (IZA)

Full Text:

ABSTRACT: This paper estimates the effects of maternal malnutrition exploiting the 1959-1961 Chinese famine as a natural experiment. In the 1% sample of the 2000 Chinese Census, we find that fetal exposure to acute maternal malnutrition had compromised a range of socioeconomic outcomes, including: literacy, labor market status, wealth and marriage market outcomes. Women married spouses with less education and later, as did men, if at all. In addition, maternal malnutrition reduced the sex ratio (males to females) in two generations - those prenatally exposed and their children - presumably through heightened male mortality. This tendency toward female offspring is interpretable in light of the Trivers-Willard (1973) hypothesis, according to which parents in poor condition should skew the offspring sex ratio toward daughters. Hong Kong natality micro data from 1984-2004 further confirm this pattern of female offspring among mainland-born residents exposed to malnutrition in utero.

Monday, 5 November 2007

China stockmarket reversal November 2007

Could this be the beginning of the fall in China shares to a more realistic level?

Daily falls of over 2% can be considered serious. There could be further trouble ahead. My doom laden economists prediction is that the major fall out will occur close to the Olympics when the world's attention is on China. Then we we see fireworks of all types.

Chinese share prices go further down

Chinese share prices Monday continued the downward trend on last Friday with the benchmark Shanghai Composite Index closing the daily trading at 5,634.45 points, down 2.48 percent.

The Shenzhen Component Index on the smaller bourse in Shenzhen ended at 18,116.88 points, down 2.41 percent.

However, the combined daily transaction volume on the two exchanges increased sharply to 197.2 billion yuan (26.4 billion U.S. dollars) from the 158.4 billion yuan on the previous trading day.

These falls come on the back of Greenspans comments on the 30th October:

The stock market bubble of Chinese characteristics [China Elections and Governance]

On October 30, Alan Greenspan issued another warning on the risk of a Chinese stock mar­ket bubble. A few months ago, when China's stock index rose by more than 90% over a year, Greenspan expressed concern that the market could experience a "dra­ma­tic shrinkage." At present, the Shanghai and Shenzhen 300 Index has risen 170% this year, allowing China to surpass the US in the number of its companies within the world's ten largest by market value for first time. October 24, investment master Warren Buffett also issued a warning that China shares were rising too fast.

The judgments of "Greenspan" and "Share God" Buffet may not always go unchallenged, but few financial experts would deny that China's stock market prices and risks are on the high side. Interestingly, China's crazy stock market resembles its hypertrophic economy in repeatedly having the last laugh on pessimists' predictions, leaving at least some experts wary of forecasting what the price level of China's stock market will be, or how a major adjustment might take place. It appears that as with "socialism," stock market bubbles in China have some indefinable "Chinese characteristics."

The Chinese characteristics of the bubble are derived from those of the stock market itself. The first of these is that state-owned enterprises occupy a dominant position, whether in the proportion of the assets of listed companies, or equity ratio, state-owned property is absol­u­tely dominant. More importantly, the structure of property rights in the economy on which China's stock market is dependent, is still more unique, in that control of the major­ity of non-financial assets, above all in land, is in the hands of the government, while the im­mov­able property that ordinary people can freely transfer is only a small fraction of the total. The major part of personal assets are deposits and other financial assets that can be depreciated by the government at any time. As I have pointed out before, this abnormal structure of property rights is the inevitable result of the "separation of powers without separation of property" in China's reforms.

Opening up secondary share markets in such a context necessarily results in a large amount of money chasing a small number of stocks, totally detaching stock prices from corporate book profits. This problem in fact existed prior to the share market reforms, but people were so naive as to think that after the share reform this issue had been over­come and share­holders could expect to operate rationally in accordance with classic textbooks, rather than the "irrational exuberance" of price-earnings ratio of up to 80—even several hundred —times. It now seems to have been impossible for the share reforms to resolve the problem of Chinese residents of lots of money but few investment opportunities. measured by their price-earnings ratios, Chinese shares must therefore break through the normal level of states which have private ownership; this is the first of the Chinese characteristics of the stock market bubble.


Friday, 2 November 2007

Rising Fuel Prices in China

A round-up of fuel price related articles. This is an important issue - China is investing heavily in Africa to secure oil stocks in the future. This is a problem that may persist for some time.

This statistic shows how quickly things can turn around with this trade switch indicating how much China has grown since 1993.

China is the second-largest crude oil consumer after the US and although it was a net exporter as recently as 1993 it now relies on imports for nearly 50 per cent of its crude supply.

This quote shows clearly the problems that can occur when strict government controls are in place. Something that Taiwan and many other East Asian countries are also experiencing.

The current shortages, particularly of diesel, result from a combination of high global oil prices and strict government controls, causing huge losses for Chinese refiners that must pay more for oil but cannot raise prices at the pump.

With the Olympic games around the corner there is sure to be a lot more column and blogger inches devoted to this subject.

Beijing raises pump prices as shortages bite [FT]

Faced with worsening fuel shortages across the country Beijing raised petrol, diesel and jet fuel prices at the pump by almost 10 per cent on Wednesday, in an effort to boost domestic supplies and exorcise the spectre of social unrest.

The policy reversal came as shortages spread to the capital, which is usually immune from the country’s periodic supply crunches.

But the government is unwilling to allow prices to rise too much because of a morbid fear of spiralling inflation, which has a history of toppling governments in China and is currently running at a 10-year high, above 6 per cent.


Analysts say the increasingly independent state oil giants are playing a high-stakes bluffing game with the government in which they chase profits by exporting refined products instead of supplying the domestic market.

This has created shortages that force the government to choose between doing nothing and risking incidents like the one in Henan, or raising prices at the risk of triggering a backlash among ordinary citizens that could escalate like the recent protests in Burma, which started as a reaction against a fuel price increase.

“The government will be under enormous pressure to keep fuel prices low at least until after the Olympics next year,” says Gordon Kwan, head of China energy research at CLSA in Hong Kong. “They can’t have sad faces, let alone street riots or fuel shortages, in Beijing with Bush and Putin here to watch the games.”

China hikes fuel prices as long lines form at gas pumps and shortages disrupt trucking [China Post]
BEIJING, China -- China raised gasoline and diesel prices Thursday by about 10 percent to curb demand amid shortages that have caused long lines at filling staions and disrupted trucking in key export areas.

and finally, a China bloggers view of events from 30th and 31st October a good 2 or 3 days before the FT got hold of this story.

Fuel shortage spreads [China Financial Markets]

Hidden inflation? [China Financial Markets]

Certain regions in China are experiencing shortages in diesel fuel. I heard first from my students and then in the press that in parts of coastal China gas stations are rationing the amount of diesel they sell. This often happens when price controls clash with underlying inflation – instead of showing up in higher prices, inflation shows up as shortages.

I believe that the last time gasoline prices were set by the authorities, oil was trading around $60 a barrel. Unless oil prices drop substantially in the near term I would expect that there might be pressure on the government to let gasoline prices rise, thereby showing up in the non-food component of CPI inflation. Perhaps more worrying, to see inflation spread from food to transportation may lead to a rise in inflationary expectations. All eyes will be on October inflation numbers, which I believe should be released in less than two weeks.



Thursday, 1 November 2007

The rise of "Anti-Chinaism" in the US

Apart from the terrible use of the term "Anti-Chinaism" which is just plain ugly and the lack of any meaningful economics this is still an interesting article.

The US does have a habit of going overboard on the perceived economic threat posed by pretty much everything: immigration; off shoring; our sourcing; Japan in the late 80s and early 1990s; and now China in the 2000s.

This article raises some interesting points although this appears a little harsh:

"In essence, the China blame game is a reflection of the United States’ collective self-hatred."

an interesting little Euro centric argument:

To understand why, one just has to examine the relationship between Europe and the United States. A key ingredient of anti-Americanism there — a phenomenon that is almost two centuries old — is rooted in the Europeans’ gnawing and highly unpleasant realization that this upstart nation, due to its own built-in dynamics, was inevitably absorbing a vital share of the global power status once solely accorded to the Europeans themselves.

Good stuff. I have included the entire article as the arguments and true anti-US rhetoric of the article can then be clearly seen.

The United States and the Rise of Anti-Chinaism [The Globalist]

Given China's rising defense budget and the ever-expanding U.S. trade deficit, expressing disgust with China is fast becoming a national sport in the United States. Stephan Richter explores the real reasons behind the increasingly broad-based movement of "anti-Chinaism" — and the very real pitfalls it entails for addressing the nation's larger reform agenda.

Most observers view the recent bout of rising anti-China sentiment in the United States as a direct reflection of worsening U.S. trade statistics. Since the numbers are not turning around, a culprit needs to be found. And this time, it’s not Japan — but China.

Others engage, seemingly more nobly, in an analysis of China’s democracy deficit — and see the country as being on the same path as early-20th century Germany when it pursued militarism instead of true democracy.

The China blame game

So much for the conventional wisdom. What really explains much of the China bashing is that U.S. policymakers and opinion leaders are just plain frustrated — about their own internal inability to get anything done. This is true between the Congress and the Bush Administration, between Democrats and Republicans — and even within their own respective party confines. In essence, the China blame game is a reflection of the United States’ collective self-hatred.

Given this dysfunctional state of affairs, few have the courage to express what really ails the United States of America: the demise of the quintessentially American virtue of pragmatism — and the corresponding inability to simply get things done.

The collective inability to develop a coherent national strategy on key issues of our time — from education to health care to immigration — is indeed stunning.

Victims and perpetrators

The reason why politicians rarely express this sentiment is because they are both the chief perpetrators and victims of this process. Perpetrators — because it is they, in their legislative chambers, who seek to block each other’s every move. And victims — because it is enormously frustrating to work in a profession systematically focused on perpetuating stalemate.

Nothing can be more frustrating to U.S. policymakers than to find themselves resorting to playing games of moral relativism toward China. It wasn’t meant to be that way. But that is where they find themselves at this point.

"Global bad"

In essence, the Bush Administration’s ill-fated unilateralism has created a “global bad” in Iraq that exceeds the “global bad” China is committing in Sudan and elsewhere. Thus, once again, China is off the hook politically as well as morally.

While China engages in some questionable activities, such as supporting rogue regimes in Africa, any U.S. criticism of such moves is implicitly discounted around much of the world due to the loss of the moral power and authority of the United States in world affairs.

What adds insult to injury is that China gains not by investing more in its military, but just by standing idly by and letting the United States diminish its own.

Hypocritical U.S.

Consequently, the entire world wonders, what gives the United States the right to play “holier than thou” and criticize China — before apologizing for the human rights mess it has created in Iraq?

And, even more poignantly, what gives Americans the right to criticize China’s activities in Africa — considering how miserably Americans failed to stop their own leadership from engaging in an ill-advised and unnecessary war in the Middle East?

Psychological effects

Faced with this turn of events, it is no wonder that there is real potential for self-hatred — and a corresponding need to deflect this self-loathing onto another nation, namely China.

If only that would help. In reality, engaging in that blame game is incredibly short-sighted because it seemingly absolves the United States to get its act together, which would be one monumental task.

Instead, U.S. politicians continue to play their mind games. Why does nobody among them talk about what’s really going on? Because doing so would be considered highly unpatriotic — and effective political suicide.

Manning up

One would have to call that ironic — if it weren’t so tragic. After all, the only patriotic thing to do is to rally the country to improve on itself — not to blame others so as to argue that all is well and good in the United States of America.

The process of facing up to this challenge is tough and painful indeed. After all, it would involve acknowledging, on the part of Republicans, that nobody has done more to propel China’s rise than George W. Bush, given the morass created by his ill-advised foreign and domestic policy moves.

Democrats fail too

The fallout from these poor decisions detracts a lot of key decision makers from focusing on the real battle — adjusting critical U.S. policies to position the country for the long term.

Democrats would feel the pain as well. They would have to acknowledge that “getting tough on trade” is not the answer to the nation’s core woes.

The truth of the matter is that Democrats have failed, for a long, long time, to put into place a number of policies that workers in other advanced countries have long called a basic right — such as continuing health care in case of being laid off.

China isn't only problem

The Chinese, to be sure, are far from being above reproach. However, they are not the be-all and end-all of America’s problems — not even those of U.S. manufacturing workers.

And both parties, as well as opinion leaders across U.S. society, will have to come clean with another painful admission: The power dynamics vis-à-vis China are such that the United States will inevitably see its own power slip on a relative basis.

Three choices

Faced with that inescapable reality, the U.S. establishment and the country at large have three choices: They can keep on ignoring this fundamental reality — or they can acknowledge it and seek to act smartly in order to ensure the United States’ continued preeminence.

At a minimum, while Americans are still making up their minds between these two basic choices, they can opt for a third interim solution — doing nothing unilaterally that serves only to accelerate China’s rise.

And that, first and foremost, would entail acting in a more far-sighted, consensual manner in the foreign policy arena. That China has come to be seen as a rather rational and balanced player on the world stage is in part due to the country’s return to long-standing principles of balance-of-power politics — and a rising level of constructive engagement on a variety of issues (such as North Korea).


Ultimately, however, even if the moves advocated here are implemented, the world would still need to reckon with a significant dose of U.S. “anti-Chinaism.”

To understand why, one just has to examine the relationship between Europe and the United States. A key ingredient of anti-Americanism there — a phenomenon that is almost two centuries old — is rooted in the Europeans’ gnawing and highly unpleasant realization that this upstart nation, due to its own built-in dynamics, was inevitably absorbing a vital share of the global power status once solely accorded to the Europeans themselves.

U.S. charades

Few have the courage to express what really ails the United States of America: the demise of the quintessentially American virtue of pragmatism — and the corresponding inability to simply get things done.

That same realization of a relative decline in power is hitting the United States these days. Tragically, the Bush Administration — and even many Democratic leaders — has seen fit to respond to this new reality by emphasizing the unique power status of the United States.

That is humanly comprehensible — because it absolves them of shedding the comfortable, albeit fake, cloak of patriotism.

True patriotism would mean dealing with reality — and preparing the nation for a prosperous future — by focusing on one’s own shortcomings and developing plans to overcome them.


Such a move is long overdue. The United States’ continued failure to act on this most crucial front stands in stark contrast to China, whose leaders are totally focused on the process of constant self-improvement. They are living the "Toyota principle" — of relentlessly engaging in a continuous, daily improvement process.

It is high time that the United States, the modern world’s first society to do just that, reawakens to its own best traditions. After all, before it was called the “Toyota principle,” the process of seeking constant self-improvement was called pragmatism.

"American pragmatism"

Nothing can be more frustrating to U.S. policymakers than to find themselves resorting to playing games of moral relativism toward China. It wasn’t meant to be that way.

Under the label of “American pragmatism” — in politics, industry and elsewhere — it became the great envy of the world.

However, in the last few years, America’s competitiveness, power and prestige have been eroded because it has abandoned its defining virtue.

The United States cannot afford to continue giving short shrift to pragmatism. In the end, that is what the China challenge should really remind every American of.


FDI in China and Credit Constraints

Intersting new take on FDI in China related to the alleviation of credit constraints.

Foreign Direct Investment in China: Reward or Remedy?

* Olena Havrylchyk 11CEPII, Paris and and
* Sandra Poncet 22Université Paris 1 and CEPII

1CEPII, Paris and 2Université Paris 1 and CEPII


This paper tests the significance of FDI as a way to alleviate credit constraints. Incoming foreign investment provides additional sources of capital. Specifically in the Chinese case, enterprises may look for foreign investors, being constrained in their activity due to distortions in the state-dominated system. First, the Chinese financial system allocates resources to the least efficient firms – state-owned enterprises – while denying the same resources to Chinese private enterprises, forcing them to look for a foreign investor. Second, the inefficient system of state investment planning leads to mismanagement of public enterprises, increasing ‘insolvency-induced FDI’. We propose to analyse determinants of FDI in Chinese provinces to test the above hypotheses. We control for traditional determinants of FDI such as market access, labour costs, productivity, infrastructure, reform advances and banking sector size in order to assess the impact of inter-provincial heterogeneity in terms of the access that private enterprises have to credit and the distortive management in state-owned firms.