What?
I thought the reason why China couldn't revalue its currency was its desperate need for jobs — you know, all those migrants from rural China who needed to be absorbed into the modern economy. Apparently not.
Bloomberg reports that "China will curb exports of cheap labor-intensive products to force manufacturers into making higher-quality goods."
Restricting labor-intensive exports rather than say letting the currency appreciate makes very little sense to me. China isn't having any trouble moving upmarket into more capital-intensive exports on its own — look at the migration of electronics components production to China and the development of China's auto sector.
The contradictions in China's development model keep growing.
Communists — even , or perhaps especially, the descendants of immortals — are becoming global capitalists. And the government of a labor-rich economy where wages are falling as a share of GDP is taking a step that on its face seems likely to reduce demand for labor.
One of the ironies of China's current boom, as this new paper by Eswar Prasad notes, is that it simply hasn't created all that many jobs. The low-interest rates associated with holding the RMB down — and the absence of any need for now-profitable SOEs to distribute their earnings as dividends — has instead encouraged the substitution of capital for labor.
The higher value-added jobs are still mainly at the margin. There are still hundreds of millions employed in manufacturing and related services. In addition, a lot of unskilled jobs are in construction that’s financed with revenues earned directly or indirectly from manufacturing. It seems the construction is not necessarily related to the Olympics or the Expo.
China’s govt. is desperately trying to slow things down before their economy becomes one giant bubble, including a bubble of noxious pollution and environmental degradation stemming from cheapo manufacturing. They desperately need a garden-variety recession (to them that means growth of 3%)….
Or, like any other government, at least create the appearances of doing something about it, along with, looking at today’s headlines, appearances of cleaning up intellectual property issues, which might be one part of several changes which may have to accompany any attempt to move up the value chain? “…the FBI links China [which lacks a tradition of protecting intellectual property] to about one-third of all economic espionage cases…” http://www.usatoday.com/money/world/2007-07-23-china-spy-2_N.htm
China has created huge numbers of jobs. It is just that:
1) those jobs were created at the same time that other jobs were destroyed. Streamlining the SOE’s put tens of millions of people out of work.
2) a lot of the jobs are in service areas and in the informal economy, which makes it very difficult to track with official statistics.
Finally, boosting incomes is a much greater priority to the Chinese government than creating jobs. The large rural population has access to land which means that there a safety to soak up the rural unemployed. The substitution of labor for capital is occurring in industry, but there are a lot of mechanisms to keep it from happening in agriculture.
[q]The contradictions in China’s development model keep growing.[/q]
The model? What model? The model for Chinese economic development has been no model. Try a dozen different things, see what works and what doesn’t, and then move forward.
The problem with using any predefined model is that it makes untested assumptions that may not be true. For example, there is no particular reason to think that the Chinese economy will react to the same way to a rise in interest rates the same way that a Western economy would. Also there are a host of complex factors that go into policy that most economists don’t consider. The number one priority for any American or Chinese politician is to keep their job.
The big issues in China right now is not job creation but food/drug quality, lack of health/education spending, and the environment, and government policy is going to react accordingly. Also, one of the prime objectives of the Chinese government is to reduce calls for protectionism in the US, and introducing targeted export limits is going to deal with that a lot more effectively than an across the board currency revaluation.
Thought this part of the story was interesting too – whether it might, to some extent, be a factor in the recent corrections in commodity prices and related industries like shipping: “…China on July 23 said it would raise a levy on companies that import metals, plastic and textiles into China for use in products that will in turn be shipped abroad. A total of 1,853 types of commodities including copper, lead, zinc and cloth will be added to the restricted category, requiring importers to deposit half of their payable levies including duty and value-added tax at the customs office…” http://www.bloomberg.com/apps/news?pid=20601080&sid=a9c64IDUkhpo&refer=asia
The assumption that people get wrong is that there is some grand intention to make the Chinese economy look and work like the United States, when there just isn’t. For example, the issue of macroeconomic control can (and has) been resolved by issuing administrative orders to the large state owned enterprises to control production.
One could argue that these means will become ineffective if China does a wholesale privatization of its state-owned enterprises, but that assumes that China wants to do a wholesale privatization. Personally, I think that China could undertake macroeconomic control by controlling the amount of dividends that the SOE’s pay back to the government.
whether the West takes on more Eastern characteristics, or if the East may (also) be an experimentation ground for reforms to Western policies in the process – another question perhaps being if dividends may gain the stature currently dominated by interest rates, and whether various actions that mitigate commodity and energy price swings, perhaps including the development of Eastern derivatives markets may (have) become more important tools in targeting and ameliorating perceived macroeconomic/currency valuation issues (sorry middle east example was closest at hand but understand work is underway to develop Asian derivatives markets).
“…Other market players are enthusiastic about launching a listed derivatives market. Maaloul says: “The DIFX is the best place to list sophisticated products. Getting a derivatives market here would be great, especially for oil and gas products.”…” http://www.khaleejtimes.com/DisplayArticle.asp?xfile=/data/business/2007/July/business_July599.xml§ion=business
Brad, read the Bloomberg article again closely (ie. see quote below). If manufacturers shift production inland, they are “exempt” from the new export regulations. For labor intensive production, as I previously mentioned, the Pearl River Delta is rapidly becoming too expensive for textile and toy manufacturing. Companies were already leaving Shenzhen and Dong guan.
” Manufacturers can be exempted from the exports limit if they shift their production to inland provinces including Shaanxi, Xinjiang and Gansu further away from the Chinese coast, part of a plan by the government to close the income gap between the wealthy coastal cities and the interior, Wang said today. “
For the record, China absolutely will not do a wholesale privatization. For instance, new PetroChina shares were offered on the Shanghai Stock exchange recently, reducing Chinese government ownership from 88% to 86%. The Chinese government has signalled its intention to retain majority state ownership of strategic industries including energy, transportation, communications, telecom, broadcasting, etc. Foreigners will only be permitted majority ownership in non-strategic industries. For instance, Budweiser purchased 100% ownership in the Wuhan Beer Corporation, and 30% ownership in Tsingtao Beer. Fundamentally at its core, China will remain a market-socialist economy.
“The CPC Central Propaganda Department, together with the state censorship organizations, which include the General Administration of Press and Publication, the State Administration of Radio, Film and Television, and the State Council Information Office, oversee all printing for consistency with official political doctrines under detailed regulations, such as the “Regulations Regarding Strengthening the Administration of Publications Describing Major Party and National Leaders” (1990), which states in part… The description of historical facts must be accurate, and the point of view must conform with the spirit of the Party’s “Decision Regarding Certain Historical Problems,” “Decision Regarding Certain Historical Problems Since the Establishment of the Party” and related Party documents. All responsible agencies and publishing units must strictly guard against violations, and anything that does not conform to the above mentioned requirements may not be published and distributed.” http://en.wikipedia.org/wiki/Propaganda_in_the_People’s_Republic_of_China
I really don’t think that “West” and “East” are useful units of analysis here.
It should be pointed out that press censorship doesn’t apply to most economic topics. On most economic topics, you will find people all over the map.
It’s also not clear that China won’t do a wholesale privatization at some point in the future. What to do with state owned enterprises has been a very hotly debated topic over the last few years. The term “privatization” isn’t used, but there are appropriate code words that people are using in the debate. “Min-ye hua” is the big one.
DC- good catch (re: exempt if you shift inland …)
Under the current Hu Jintao administration, the Chinese leadership seems to be working under the assumption that as long as the SOEs that produce the greatest revenues remain vital, Chinese socialism can be indefinitely sustained. The large state-owned, Monopoly-sector corporations are actually very profitable today, such as petroleum producers PetroChina and CNOOC, China Mobile, Chinese CCTV, China Telecom, China Unicom, Aluminum Corp of China, China Life Insurance, etc.
A couple of points:
1. There is only so much labor-intensive manufacturing possible. Mechanization is the way to go.
2. Whatever you may think of the path, China has made perfectly clear the timetable and direction in which to proceed. For a good starting point, see here.
For a cursory summary of China’s long-term goals, as well as the intermediate timetable, see China now to 2100
There are a number of pressures on China outside of the ones that worry Brad, one of which is the environment; the other of which is energy. To get clean air for the Olympics, China will have to shut down factories a good distance from the playing fields. The “Green Wall” that China is planting to stop and possibly to reverse desertification from the north (until recently, the desert had been advancing at 3 kilometers/year), is China’s acknowledgement that it will have to address global warming–with the added benefits of preserving land, creating a CO2 sink, and increasing the production of biofuels. (As an aside, the real problem will be with the Himalayas: Himalayan glaciers there are in rapid retreat. Those glaciers feed the major rivers of China and India.)
There seems to be little question that China’s move up the manufacturing ladder–without increasing the share of GDP/person–will continue to exert a downward pressure on wages worldwide. Thinking in broad generalities, I would hazard to say that if the middle class continues to erode in the West and does not take hold in China, then the disparity between rich and poor will continue to increase worldwide. For me, this trend raises an interesting question: At what point does the cost of production exceed the buying power of the Western middle class, if middle class wages continue to stagnate and if the cost of energy continues to escalate, and if the credit crunch becomes worse?
Off-topic but on China,
I heard on the radio that that China will not allow any public sing of love in 2008 olynpic games, and they will fine (the amount is still unknown) anybody kissing his girlfrien or her boyfriend in public. And it’s oficial!
I remember that in the World Champions of futbol in Germany, they were checking with hard controls onto all girls coming from West Europe, to avoid excessive prostitution that could hurt german look in the outside world.
In the end the wh*res don’t pay taxes (to government, of course), and don’t help totourist campaings. OK.
D.C.: Does this decision have any sense, apart from a show-off of authority? Or I’m missing the point?
Thanks!
It is my impression that migrant labor supply for lower end jobs is getting tighter. The problem – in terms of influence if not number – is college grads couldn’t find higher paying jobs. Higher education cost has sky rocketed and now families need something to show for their investment.
This is not to say that curbing processing trade esp textile makes any sense. Textile is relatively non polluting and China has mastered the process and technology. I read the decision earlier on cut in VAT rebate for textile as a political nod to other emerging economies that are fearful of China’s competitiveness.
Also I agree with Twofish that the impact is more readily absorbed now that farm products are appreciating in price.
Shifting processing inland is not going to be easy as you need to add two way transportation cost over land which could easily destroy the thin profit margin. And there is little excess transport capacity to deal with increased shipping (okay maybe they will buy more coal from Australia to supply southern China and free up the rail capacity for transportation of other goods).
stormy: thanks for the interesting reference; I wish more bloggers would contribute. I recommend :The John L. Thornton China Center
Changes in China’s Political Landscape: The 17th Party Congress and Beyond
Conference Day One
Thursday, April 12, 2007
9:00 a.m. to 5:00 p.m.
The Brookings Institution
Event Inform
Stormy said:
“At what point does the cost of production exceed the buying power of the Western middle class, if middle class wages continue to stagnate and if the cost of energy continues to escalate, and if the credit crunch becomes worse? ”
Very interesting way to phrase it.
Of course a large part of the Western buying power ultimately comes from China’s less than optimal investment decisions and the requirement to maintain the peg.
The peg strikes me as an interesting concept in flow effects. People are put to work today, but what happens tomorrow to the aggregate wages they earned?
“…Confidence among Chinese bankers fell to a record low in the second quarter as the outlook for economic growth worsened, a survey by the People’s Bank of China found…” http://www.bloomberg.com/apps/news?pid=20601039&sid=aLmDqI8plUkY&refer=home
re: “People are put to work today, but what happens tomorrow…”
“Recently American Anheuser-Busch Inc. and Budweiser Wuhan International Brewing Co. Ltd. instituted a proceeding against five Chinese companies for trademark infringement and unfair competition…” http://www.wptn.com/Mailing/July_2007_3/details/trademarks/china.html
“…Mrs. Paterson’s statement added to Southwestern’s nightmare, which started with her husband’s abrupt resignation from the company last month. The Vancouver-based firm was flying high until June 18, when it announced that a pre-feasibility study on the China-based Boka project was unexpectedly delayed. Mr. Paterson walked out the next day, citing personal reasons. Then last Thursday, the company unveiled a bombshell: some drilling results from Boka were apparently manipulated, and John Zhang, the chief geologist on the project, could not be reached…” http://www.canada.com/nationalpost/financialpost/story.html?id=c074a0de-a5ed-4a45-96fd-621a229edd23&k=91855
koteli:
Does this decision have any sense, apart from a show-off of authority? Or I’m missing the point?
Dave – Reply
In contrast to more individualistic US society, Chinese culture is more group oriented so it is not uncommon that the government would legislate morality.
Surprising News Article from the Neo-con Washington Times
(ie. Usually they China bash on just about everything)
China powering world economy
July 26, 2007
http://www.washingtontimes.com/apps/pbcs.dll/article?AID=/20070726/BUSINESS/107260073/1006
China, this year for the first time, has dislodged the United States from its long reign as the main engine of global economic growth, with its more than 11 percent growth eclipsing sputtering U.S. growth of about 2 percent, according to the International Monetary Fund’s 2007 projections released yesterday.
China’s growth, which has been fueled by booming domestic building and commercial development, as well as soaring exports, has accelerated even as U.S. growth dropped to 0.7 percent in the first quarter under the weight of a profound housing recession. China is expected to drive a hearty 5.2 percent expansion of the global economy this year, the IMF said.
“This year for the very first time — with its very strong growth expected, and with the growth slowdown in the United States — China will be contributing the largest part to the increase in the global growth measured at market exchange rates,” said Charles Collyns, the IMF’s deputy director of research.
China will provide one-quarter of the annual growth rate of the world economy.
“The sex trade is booming in China, having benefited from the country’s effective embrace of capitalism…” http://www.amrc.org.hk/Arch/3303.htm
The idea that Chinese are more group-oriented and less invididualistic than people in the West is a common stereotype, but I think it is very inaccurate and misleading.
IMHO, the cut in textiles is aimed less at emerging markets than at Senators Graham and Schumer. Textiles is the one industry in which China does have a strong competitive advantage and in which reducing exports won’t simply cause production to move to Mexico.
Overland shipping costs depend on infrastructure and China has built tens of thousands of miles of highways in the last fifteen years.
Finally, looking at the statistics, it seems that the real problem for people in the United States isn’t income growth. It’s income volatility.
At the current diesel price long distance trucking is a lot more expensive than rails. Check out US truckers performance relative to railroads.
What is decreed by Peking often is ignored by the provincial folks. Thus it’s been for centuries, and hasn’t changed with this crowd.