Thursday, 29 April 2010

Ubanisation in China

China's rapid growth is putting pressure on the ever growing cities. Shanghai's Expo is providing some of the answers. Today's FT gives a nice little summary of the problems that China faces.


China has the world’s biggest urbanisation problem and Expo is promising the world’s best solutions.

By 2030, China will have an urban population of 1bn, having added 350m by then – more than the entire current population of the US, according to a recent McKinsey study, Preparing for China’s urban billion. Even five years before that, China is forecast to have 219 cities of more than 1m each, compared with 35 in Europe today, and 24 cities of more than 5m.

Shanghai, with nearly 20m already, is a living experiment in urbanisation – and one that is mostly failing. The polluted Huangpu river runs between banks crowded with concrete apartment complexes with little or no greenery (but lots of hanging laundry). Parks are few and playgrounds almost unheard of; pedestrianisation is limited and walking is deemed one of the city’s most dangerous sports.

For years, Shanghai has smothered its history in skyscrapers, and Expo has accelerated that process. At the Expo site itself, the Shanghai government did convert one steel plant into a theatre; but outside Expo, numerous traditional buildings have been knocked down.

Wujiang Lu, the city’s famous snack street where stalls served everything from octopus to offal on a stick, is gone. There was nowhere to sit and the rubbish bins were too infrequently emptied – but rather than install benches and schedule extra visits from the trash collectors, the city opted for demolition. Starbucks and Krispy Kreme are there but Little Yang’s famous crispy-bottomed soup dumpling stand is no more.

Part of the point of Expo, whose motto is “Better city, better life”, is to make sure Shanghai thinks twice before demolishing the next Wujiang Lu. “Shanghai could leapfrog the rest of the world [on urbanisation], because the scale of what they want to do and what they need to do is so enormous,” says Anthony Elvey, director of Cisco’s Expo pavilion.

Hoping to sell its integrated city management systems to China’s mayors, the Cisco pavilion is a celebration of the joys of a microchip-enhanced life: right down to wristwatch-sized monitors that simultaneously check the contractions of a pregnant woman, summon the ambulance, inform her husband, rouse the obstetrician from bed and book a delivery room.

Indeed, connected urban living is a main focus of the corporate Expo pavilions: schoolchildren use global positioning devices to find the best bus route home, where they are greeted by a grandmother who has just teleported in from the provinces; cars talk to the traffic grid to find out where best to park themselves.

Some Expos are memorable for inventions that endure; others are mere graveyards for technologies that came before their time. It could take decades before it is known which category Shanghai falls into: a moment that changed urban life forever, or just an urban fantasy.


US chicken farmers spitting feathers

China has picked on the humble chicken for the next salvo in the escalating trade war between China and the US.

Given the number of chickens in China it is perhaps surprising that China imports chicken at all given the transport costs and perishability of the said white meat.

Still, a 31.4% tariff is not to be sniffed at. Even without a tariff it is hard to believe that US chicken is competitively priced to actually have a market in China. However big that market is it is about to get smaller.

US chicken farmers will be spitting feathers (cheap gag) and US subsidies might have to get larger.

China to impose new tariffs on US {FT]
China announced yesterday it would impose a second round of tariffs on imports of US chicken products of as much as 31.4 per cent.

The commerce ministry said the tariffs were a response to what it called unfair subsidies given to US poultry farmers. The duties come on top of charges of up to 105.4 per cent placed on poultry two months ago because of alleged dumping .

Economic friction between the two countries had appeared to be relaxing after the US Treasury delayed its decision over whether to label China a currency manipulator.


Tuesday, 27 April 2010

Human capital, economic growth, and regional inequality in China

Regional inequality in China is an important issue and has been subject to numerous studies including those of many of my MSc dissertation students.

Belton Fleisher and co-authors look at growth and inequality in a recent Journal of Development Economics paper.

The results are fairly standard. The role of FDI and government policy can play their part.

Human capital, economic growth, and regional inequality in China

Belton Fleisher
Haizheng Li
Min Qiang Zhao


We show how regional growth patterns in China depend on regional differences in physical, human, and infrastructure capital as well as on differences in foreign direct investment (FDI) flows. We also evaluate the impact of market reforms, especially the reforms that followed Deng Xiaoping's “South Trip” in 1992 those that resulted from serious hardening of budget constraints of state enterprises around 1997. We find that FDI had a much larger effect on TFP growth before 1994 than after, and we attribute this to the encouragement of and increasing success of private and quasi-private enterprises. We find that human capital positively affects output and productivity growth in our cross-provincial study. Moreover, we find both direct and indirect effects of human capital on TFP growth. These impacts of education are more consistent than those found in cross-national studies. The direct effect is hypothesized to come from domestic innovation activities, while the indirect impact is a spillover effect of human capital on TFP growth. We conduct cost-benefit analysis of hypothetical investments in human capital and infrastructure. We find that, while investment in infrastructure generates higher returns in the developed, eastern regions than in the interior, investing in human capital generates slightly higher or comparable returns in the interior regions. We conclude that human capital investment in less-developed areas is justified on efficiency grounds and because it contributes to a reduction in regional inequality.

Keywords: Regional disparity; Human capital; TFP growth; Foreign direct investment

JEL classification codes: O15; O18; O47; O53

Economics of Guanxi

The Guanxi way of doing business in China is important to understand for those hoping to do business in China.

This theoretical paper gives some economic justifcation. This paper will be rather heavy going for non-economists.

The economic problem is that "loyalty takes precent over ability". Is there a rational reason for this? What are the implications for capitalism with Chinese characteristics?

Economics of Guanxi as an Interpersonal Investment Game

Shi Young Lee

Review of Development Economics, Vol. 14, Issue 2, pp. 333-342, May 2010

The purpose of this paper is to provide a simple model of guanxi given stylized facts. I first outline the intrinsic characteristics of guanxi to draw the stylized facts, and then use these facts to model it as an interpersonal investment game. I find that the degrees of the ability and loyalty of the Recipient must be reasonably high enough for the interpersonal investment to take place. After the investment has occurred, the degree of loyalty must be higher than that of the ability to guarantee stable gaunxi relationships. When the interpersonal investment is made, it is a signal of trust in the ability and loyalty of the Recipient. However, if the ability factor dominates, then the Recipient will not always feel loyal enough to return the favor. This indicates that loyalty counts for more than ability. A related result is that a stable guanxi relationship is unlikely to occur for a highly able person given the equal chance of the two characteristics. This paper also presents some interesting implications for corruption and lock-in relationships.

Accepted Paper Series

Friday, 23 April 2010

IMF global stability report

At least the IMF agree with me that there is potentially a lot of left in the finanical crisis. The Global Stability report is a worthwhile read.

IMF Sees Financial Risks Still Elevated [IMF]

Let me begin with our overall assessment of global financial stability. The IMF has just released its new Global Financial Stability Report. We find that risks to stability have eased somewhat. The policy stimulus enacted at the height of the crisis has provided substantial support to financial institutions and markets, and has underpinned the global recovery. This has helped to improve a broad range of risk indicators and financial conditions.

And yet risks remain elevated: global financial stability has not been secured, as the recovery is still fragile, and the repair of consumer and financial balance sheets is still ongoing. Furthermore, there are concerns over rising sovereign risks related to the buildup of public debt that need to be carefully monitored and addressed.


Tuesday, 20 April 2010

"Female Employment and Fertility in Rural China"

Interesting new NBER paper. The results have potentially important implications for China's one child policy. Note that female employment which is growing rapidly reduces the probability of having more that one child significantly.

One possible implication is that by encouraging female participation the one child policy could be phased out over time. Korea has no such policy and a birth rate comparable to China's with the policy.

"Female Employment and Fertility in Rural China"

NBER Working Paper No. w15886

HAI FANG, University of Miami
KAREN EGGLESTON, University of California, Los Angeles (UCLA) - International Institute
JOHN A. RIZZO, Stony Brook University - Department of Economics and Department of Preventative Medicine
RICHARD J. ZECKHAUSER, Harvard University - John F. Kennedy School of Government,

Data on 2,288 married women from the 2006 China Health and Nutrition Survey are deployed to study how off-farm female employment affects fertility. Such employment reduces a married woman’s actual number of children by 0.64, her preferred number by 0.48, and her probability of having more than one child by 54.8 percent. Causality flows in both directions; hence, we use well validated instrumental variables to estimate employment status. China has deep concerns with both female employment and population size. Moreover, female employment is growing quickly. Hence, its implications for fertility must be understood. Ramifications for China’s one-child policy are discussed.

Friday, 16 April 2010

China's march continues - Independent

It is always useful to keep on eye on what the popular press are saying about China's economics recovery. How real this recovery really is is still open to question and is something I will cover in this blog.

The article tells us nothing new. Of course the possible US-China trade war gets a good airing as does "unemployment", "inflation" and "housing bubbles".

China's economy marches on [Independent]
The centre of gravity of economic power is tilting rapidly to the east once again. While the rest of the world struggles to emerge from the deepest downturn in three-quarters of a century, China has returned emphatically to double-digit growth, having hardly missed beat.

The country's economy now stands 11.9 per cent higher than it did at this time last year. Most of the western economies, including Britain, will grow by only 1 or 2 per cent in 2011. China has benefited from the largest proportionate fiscal and monetary stimulus in the world, and a pick-up in exports from the revival in global trade and a competitive currency.

Because of the weakness a year ago, the annual rate looks especially strong. On a quarter-on-quarter basis the pace of growth is slowing slightly, at 2.5 per cent now.

The latest figures also mean that China is almost certain to overtake Japan as the world's second-largest economy, behind the US, in the autumn. Growth in China bottomed out at an annual rate of just over 6 per cent in the first three months of 2009, rising to 10.7 per cent in the year to the last quarter.

"We have got off to a good start this year," said an official spokesman, with typical understatement.

But although stock markets were cheered by the news, confirmation of China's robust recovery comes at a time of renewed tensions between Washington and Beijing about the Chinese currency – the yuan – which many in the US say has been kept deliberately low against the dollar to keep Chinese exports cheap and to protect her trade surplus with America. Some fear that a trade war may break out between the two economic giants.

The European Central Bank yesterday criticised China's huge trade surpluses with the West, saying: "At the current juncture, global imbalances continue to pose a key risk to global macro-economic and financial stability. The stakes are high to prevent a disorderly adjustment in the future that would be costly to all economies."

A meeting to discuss the currency issue between President Barack Obama and the Chinese Premier, Hu Jintao, on the margins of the nuclear summit in Washington earlier this week failed to generate much harmony. Mr Obama urged China to put the yuan on a more "market oriented" footing, but Mr Hu said the currency's value would be set primarily for domestic purposes.

Many economists see an upwards revaluation of the yuan as inevitable, but the timing and extent is a hugely sensitive issue for both nations. In the US, the Treasury Secretary, Timothy Geithner, delayed the publication of an official report labelling China a "currency manipulator" until after the talks between Mr Obama and Mr Hu.

Trade sanctions on China have been advocated by many members of Congress, as well as leading economists such as Paul Krugman. Such developments are of concern far beyond the US and China. A return to breakneck growth rates in China is bidding up world commodity prices. Oil is back to about $86 a barrel, with copper close to $8,000 per tonne and its 2008 price peaks. Higher raw materials prices are choking growth in the West and reducing living standards – one of the ways that income and wealth is being transferred progressively eastwards. America's trade gap with China was one of the main "global imbalances", the fundamental economic forces that led to the credit crunch and what the International Monetary Fund (IMF) now calls "The Great Recession".

Despite frequent pledges by the G20 group of large and fast-growing economies to act on these issues, little progress seems to have been made on the largest problem, the US-China deficit. As a result, China continues to add to her foreign currency reserves, which at $2.4 trillion are the largest in the world (although she did run a freakish trade deficit in February).

Just as the Chinese rely on the US and Europe to provide ready export markets, so too do the western nations depend on the Chinese to buy their government bonds. Any hint by the Chinese authorities that they are about to unwind their dollar reserves usually sends shockwaves through the market for US Treasury securities and the greenback itself.

However, economists are hopeful that the very strength of China's recovery may force authorities there to cool an economy that shows signs of overheating, and to allow the yuan to drift higher, making Chinese goods more expensive and taking the pressure off the US trade deficit.

Prices in China's shops are rising at a remarkably low rate of 2.4 per cent per year but "factory gate" inflation, which shows any price increases in the pipeline, is accelerating.

Meanwhile, the Communist government is openly concerned about house price bubbles developing in many of the nation's big cities. Prices were up 12 per cent last month alone and banks have been ordered to curb their lending. Any rise in interest rates might also push the yuan higher, if the Chinese central bank allowed it.

The current growth rate is running some way ahead of Beijing's official target of 8 per cent this year. This is the pace consistent with creating sufficient jobs to prevent unemployment rising. Such is the size of the Chinese population that 27 million jobs need to be generated every year, about the same as the entire British workforce.


Monday, 12 April 2010

The lost "Ant tribe" of graduates in China

This blog was designed to help potential graduate students in economics and finance. China is very supportive of education and the sector has been expanding rapidly.

The problem, as is often the case in China, is the lack of suitable jobs.

The result has been signifcant unemployment and underemployment of millions of college graduates. This group has now been labeled the "Ant tribe" - for some reason. 12% unemployment is high and it may get worse.

The main problem is when students spend a families life savings and then cannot get a job with a chance to pay back these huge sums.

The Times Higher explains.

From where I sit: Ant music from a lost tribe [TES]

In early March, the day before the annual meeting of the National People's Congress and Chinese People's Political Consultative Committee, three CPPCC representatives paid a visit to Tangjialing, a village in the Beijing suburbs.

There they saw the home of Li Liguo and Bai Wanlong: a 5sq m brick house, rented for 160 yuan (£16) a month. Both musicians, Mr Li and Mr Bai sang a tune they had penned, The Song of the Ant Tribe, and the CPPCC representatives burst into tears.

"Ant Tribe" is a term coined to describe the unemployed and low-income college graduates who live in China's rural-urban fringe. The term became hugely popular last year when Lian Si, a professor at the University of International Business and Economics, published pioneering research focusing on low-income college graduates and social stability.

According to Professor Lian, the Ant Tribe is made up of college graduates aged between 22 and 29. They work in insurance promotion, electronic-appliance sales, advertising and the restaurant business without contracts or social security benefits. Typically, their monthly income is less than 2,000 yuan.

Mr Li was born in 1979. After graduating from a technology institute in Liaoning Province, the software major quit his job in 2000 to try his luck in Beijing as a musician. He has not realised his dream, but still holds on.

After he became acquainted with Mr Bai, born in 1987, through a shared love of music, they formed a band to earn a meagre living by busking in the Beijing subway.

Tangjialing has perhaps the cheapest rent around Beijing, a city where the average property cost more than 20,000 yuan per sq m in 2009.

The village now has more than 60,000 tenants, and more than 70 per cent of them are college graduates. It is a place where they can enjoy low rents and cheap food.

But as the China Youth Daily newspaper points out, traffic at peak hours from Tangjialing to the city is appalling, and since the village has been "overloaded" with temporary housing, disasters such as fires will sooner or later befall the Ant Tribe members who live there.

What the CPPCC representatives saw in Tangjialing became a top story in the media and soon turned into a major national issue.

Chen Guangjin, an expert on employment issues at China's Social Science Academy, said in 2008 that for the 5.59 million college students who graduated that year, the unemployment rate was more than 12 per cent, about three times the official figure. By the end of 2008, more than 1.5 million college graduates were unemployed.

The Beijing municipal government has decided to reconstruct Tangjialing, but Ant Tribes have also appeared in Guangzhou, Shanghai and other cities.

A popular online post among the Ant Tribe internet community is: "All the ants, please come and post. Let the public understand what a huge tribe we are."


Overvalued or not overvalued that is the question

The exchange rate debate rumbles on - although the pressure for an upward revaluation appears to be growing by the day, a recent FT article questions the level of revaluation required.

My prediction matches that of Goldman and Sachs - I expect something like a 5% appreciation over the next year. Not spectacular but realistic and probably enough to fend off the US attack dogs (for the time being).

Pressure mounting on China’s currency [FT]
Speculation has mounted in recent weeks about a potential revaluation of the Chinese currency. But while many analysts expect some appreciation this year, the case for a significant revaluation seems less sure.

In its March report, the World Bank raised its growth forecast for China in 2010 to 9.5 per cent but warned that tighter monetary policy and a stronger currency were needed to prevent bubbles and to damp rising inflationary expectations.

The report followed the end of the National People’s Congress when Wen Jiabao, Chinese premier, insisted the renminbi was not undervalued and warned other countries that pressing China on currency policy amounted to protectionism.

However, earlier this month, a senior government economist said China could widen the daily trading band for the renminbi and allow it to resume the gradual appreciation it halted on July 2008.

China’s currency has been effectively pegged to the US dollar since mid-2008. This, Beijing has argued, has brought stability to the international economy during the financial crisis. Recently, however, international pressure has been mounting on China to allow its currency to strengthen.

A group of US congressmen last month wrote to Timothy Geithner, treasury secretary, and Gary Locke, commerce secretary, demanding the US administration designate China a manipulator in its regular report on currency manipulation. They believe China’s refusal to let its currency appreciate is damaging the US economic recovery and hurting American competitiveness.

However, publication of the report, due in mid-April, has been postponed. Mr Geithner said there were a number of key meetings in the coming months at the Group of 20 and bilateral talks within the Strategic and Economic Dialogue with China during which he aimed to make “material progress” on China’s exchange rate and bring about a more “sustainable” global economy.

These rising tensions have not led to a radical change in market expectation of an appreciation in the Chinese currency. Indeed, markets are only pricing in a modest appreciation in the next 12 months.

“Commentators view China’s large trade surplus and rapid rate of reserve accumulation as evidence that the yuan is undervalued,” says Paul Bakunowicz, a senior foreign exchange trader at Citi in London.

“The market is predicting that in a year’s time the dollar/China rate will move to 6.6400 from the current 6.8260, which at 2.7 per cent below spot is not much of an appreciation,” says Mr Bakunowicz.

Bhanu Baweja, global head of emerging market fixed income and foreign exchange strategy at UBS, says 2010 is unlikely to be the year when Asian currencies see a material strengthening.

“People have been waiting for a 20 plus per cent appreciation in Asian currencies for a long time. We don’t think they will get lucky in 2010. The reason they have been disappointed is that foreign exchange intervention has not been very costly for central banks.

“The costs of intervention are higher inflation or higher rates. In a world of weak aggregate demand, Asian central banks are unlikely to come up against these constraints.”

A combination of sustained recovery in exports, continuation of strong capital flows and an uptick in domestic demand-induced inflationary pressures, would be the ideal setting for Asian currencies to appreciate, according to Mr Baweja. “We are looking for places in Asia which tick these boxes but there aren’t that many,” he says.

“India is one example, and we have been bullish on the Indian rupee. But consider the Taiwan dollar, which we think lies at the opposite end of that spectrum.

“It is an undervalued currency and can stay that way for a long time because there is little economic pressure on the central bank to dilute its foreign exchange intervention.”

According to UBS, the renminbi has appreciated roughly 13 per cent in nominal trade weighted terms since July 2005, when China loosened the US dollar peg. The country’s trade surplus has also fallen. But while he still believes the currency is undervalued, Mr Baweja does not believe China will feel comfortable to let its currency appreciate meaningfully, given the current economic environment.

Analysts at Goldman Sachs no longer see the currency as undervalued. They expect it will be allowed to appreciate by 5 per cent over the next year and add there is the possibility of a one-off “revaluation”.

In the past, renminbi appreciation has occurred hand-in-hand with a policy of hiking the reserve ratio requirement, says Mr Bakunowicz. The renminbi was allowed to appreciate until July 2008, when the reserve requirement ratio also peaked and the reserve requirement ratio has been rising recently, he notes.

However, despite mounting pressure Mr Bakunowicz expects China will be reluctant to allow the currency to appreciate substantially. “There will probably be gradual appreciation over time, but the likelihood of a dramatic, one-off revaluation is extremely low,” he says.

Simon Derrick, currency strategist at the Bank of New York, says Premier Wen’s annual comments are normally among the most important of the year. “It was in these closing comments five years ago that he first indicated a policy shift was likely in 2005. However, events in recent days suggest there has been a rapprochement of sorts between China and the US on a range of issues, including currency policy.

“As a result there appears to be a growing chance that China could make an initial move on its FX regime within the next few months.”

Whilst there are books on the subject things are moving so quickly that any published book is already our of date. For example, see below.