Brad Setser

Brad Setser: Follow the Money

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Old habits die hard …

by Brad Setser
August 5, 2008

At the first hint of a slowdown, the US tends to take steps — like a fiscal stimulus package — to support domestic demand.

Though to be fair, the US has also loosened monetary policy, and one of the ways monetary policy helps support the economy is through a weaker dollar and stronger exports. Some of the smartest advocates of fiscal stimulus advocated it in part because they worried that cutting policy rates would might fail to generate the intended stimulus because of financial weakness while risking a true dollar crisis.

And at the first hint of a cyclical slowdown, China tends to take steps — slowing RMB appreciation, increasing export rebates — to support its export sector.

Keith Bradsher of the New York Times has joined the chorus writing about signs that China’s economy is slowing, and that Southern Chinese manufacturers who produce for export have been particularly hard hit. There certainly is no shortage of supporting anecdotal evidence. And with growing signs of weakness in Europe — and now signs that US export growth may be poised to slow – it isn’t difficult to believe that Chinese exports are poised to slow.

But as of now, I don’t see any solid evidence of a slowdown in the actual export data.

On average monthly exports in 2006 were about $17.3b higher than monthly exports in 2005. On average monthly exports in 2007 were about $21.7b higher than monthly exports in 2006. I plotted 2008 exports against the a forecast that assumed that 2008 monthly exports would be on average, $19b higher than 2007 exports. $19b is the average of the y/y increase in 2006 and 2007. Guess what? So far, exports have been above the resulting forecast.

chinese-08-exports-what-slowdown.JPG

Yes, June was weak relative to May — but May was unusually strong, as the usual holiday related dip didn’t occur this year. June is still right on trend.

I wouldn’t be surprised if exports do dip below this trend over the remainder of the year. China is too big an exporter not to be influenced by the global cycle — and the global economy certainly looks to be slowing.

But to me the big surprise is that China hasn’t felt more of an impact of the US credit crunch to date. US domestic demand isn’t growing. Chinese exports to the US are flat. And there still isn’t — at least in the data through June — any real sign of an overall slowdown in Chinese exports.

Sure the increase in exports so far this year is a bit weaker than in 2007 — and with prices up, the pace of increase in real exports certainly has slowed. But the y/y dollar increase is still stronger than the y/y dollar increase in 2006. By any standard other than the huge 2007 increase, that is superb performance.

65 Comments

  • Posted by Asuk

    Dear Brad, this remembers me:

    Tom Waits » Innocent When You Dream Lyrics
    The bats are in the belfry
    the dew is on the moor
    where are the arms that held me
    and pledged her love before
    and pledged her love before

    Chorus

    It’s such a sad old feeling
    the fields are soft and green
    it’s memories that I’m stelaing
    but you’re innocent when you dream
    when you dream
    you’re innocent when you dream

    running through the graveyard
    we laughed my friends and I
    we swore we’d be together
    until the day we died
    until the day we died

    Repeat Chorus

    I made a golden promise
    that we would never part
    I gave my love a locket
    and then I broke her heart
    and then I broke her heart

    Repeat Chorus

    You are asking the questions you answered before, but let’s we go.

    —Wouldn’t be the right question: why do they go on buying treasuries? with money earned in places you told us after leaving the US of A?

    Maybe, they dream higher than religious and pious US of A citicens…

    Or you are using a very US-navel-centered version of Global Economics.

    “Sure the increase in exports so far this year is a bit weaker than in 2007″ although they are making iPhones like if there was no hell!

    Does the Globe finish in Kansas? Or US of A?

    Good enterteinment, Mr. Setser.

    Asuk

  • Posted by Asuk

    Even dear Calculated Risk is making graphs about China.

    I thought that your sneezes was causing troubles in the whole world.

    Was it a faith question?

    Let’s see the limits of this faith/science of US of A.

    Good evening!

    Asuk

  • Posted by Asuk

    What about Oil habits die hard…?

    Asuk

  • Posted by euro
  • Posted by aim

    This is a very chilling comment for me from the NY times article:

    Chris Woodward, the managing director for China at Ryder, the big logistics company particularly active in shipping auto parts, said American companies were still expanding in China and were becoming more focused on the market here even as Chinese exports slow.

    “People have made huge investments in the infrastructure, and it’s not just the physical infrastructure,” he said. “It’s all the training and people development.”

    This is why the US is in recession. Lack of buisness investment in US labor in favor of overseas labor. US companies must play these pegs to stay competetive.

  • Posted by bsetser

    euro — i guess you could argue that my tag “old habits die hard” applies to some of Dr. Greenspan’s arguments as well.

  • Posted by don

    There will be a big price to pay for distortions from unnatural trade – factory relocations, displaced workers. A second question is how tolerant the world will be for unnatural trade surpluses when everyone is starving for demand.

  • Posted by Rien Huizer

    Brad,

    -Some of this may be caused by slow steaming (containerships have very high cruising when oil is cheap but going from say 24 knots to 21 (still fairly fast) cuts fuel consumption a lot and still get t goods to market firly quickly. More ships make that possible too. But the effect would be visible especially visible during the second quarter of this year when the practice became widespread.

    -From the way investment in the export sector in China has taken place (especially in what I would call the Greater Taiwan and Greater Japan investment area, rather than the “Li & Fung” area ) it can b expected that output supply would be fairly price inelastic in the short term and the product range often price inelastic as well, in the exportmarkets. It is the balance between more or les oligopolistic supply and more or less discretionary spending that determines where import dollars (or euros). are spent. The fluffy toys are clearly in the highly elstic/discretionary catergory (but they re so cheap). Many brand name items and intermediate goods are the exact opposite. It was part of the 1970s Japanese approach to shift to products in the inelastic/ non-discretionary sector, which basically allowed spending on their products to displace other products/producers. I am sure that strategy (good business strategy) is also being executed wrt their plants in China, same goes for the top end of Taiwanese controlled production. Another isssue is that in the “fluffy toys” category (the “old” exporting China) the contribution of the export is only a tiny fraction of the retail price.

    Nevertheless China could have big problems even if the exports hold up much better than expected (mainly) because of a mix shift to strong, price-setting products (often controlled by foreign firms), away from unsphisticated, cheap products where production can be shifted to cheaper locations in a matter of months (I know of one Taiwanese shoe maker that maintains factories in China, Vietnam and Indonesia (i.a,) with precisely that capacity). So the combination of a strong CNY (and possibly weaker Dong, INR etc) and higher shipping costs could have a profound effect on products made by real Chinese firms, that employ the bulk of the workforce in SE China and the interior. Not only the textiles, flufy toys but also heavy/bulky stuff such as construction materials, furniture etc. I would guess that the Politbureau is far more concerned about the mix i.e. exports in terms of man-hour equivalent than in macro monetary terms (and those labor intensive manufacturers represent a strong political force and a large potential banking problem).

  • Posted by Rien Huizer

    euro,

    What has this adolescent piece to do with the subject? OK if ethnically aware Chinese abuse this blog but why someone calling itself “euro”. Nobless obilge, Monsieur!

  • Posted by Twofish

    aim: “People have made huge investments in the infrastructure, and it’s not just the physical infrastructure,” he said. “It’s all the training and people development.”

    aim: This is why the US is in recession. Lack of buisness investment in US labor in favor of overseas labor. US companies must play these pegs to stay competetive.

    The US is in recession, because recessions are an inherent part of the market business cycle. China will be in recession (relatively speaking) at some point in the next few years.

    Having said that, I took that statement to mean government investment in infrastructure. The Chinese government has made some rather large investments in education, roads, ports, railroads, etc. etc.

  • Posted by fatbrick

    Brad,

    I thought you should have known by now that macroeconomic data always come in late. For example, only a few weeks ago we knew that 2007 4q US GDP had a negative growth. It had been positive for the past 8 months. There were plenty of evidences that US was in bad shape at the end of 2007. However, when you actually saw the data and comfirmed, it passed the point long time ago.

    And you think we should make policy change when we see the change in aggregate data? By the time you see it, the horse is dead already. So when you hear the noise, shoot immediately and question later.

  • Posted by Dave Chiang

    The northern region of China that retains most of the nation’s heavy industrial manufacturers is relatively well insulated from US consumer-led recession. For instance, the heavy locomotive and railcar manufacturing are benefitting from a massive expansion of China’s railways for high-speed bullet trains. Heavy Diesel-Electric locomotives and railcars from China are also in heavy demand from the developing world. Even Australia BHP has under order from China, dozens of locomotives and hundreds of iron ore rail cars. Changchun Car company received its largest order in history from Iran for 600 passenger railcars. The heavy industries across northern China are relatively high capital intensity and higher technology.

    The brunt of the global recession is impacting the Light export industries across southern China’s Pearl River Delta. Generally, the light industries across southern China are low capital intensity and low technology. But the Chinese government needs to support both high-technology and low-technology industries. The labor intensive textile and toy industries employ millions of low skilled workers. As a declared socialist state, the Chinese government has an obligation to ensure “full employment” of the lower skilled and less educated workers. What Western Neo-liberal Economists fail to understand is that even textile manufacturing jobs represent a huge advancement from subsistance farming for migrant Chinese workers. Including some distant relatives of mine, most migrant workers will save their earnings for a better life including obtaining a better education for their children, and/or starting small service businesses.

  • Posted by bsetser

    fatbrick — good points. China has reason to be worried on a forward looking basis that growth will slow. My point was that they have opted to respond by supporting exports rather a big domestic stimulus –i.e. they are following the existing playbook rather than trying to rebalance. the us to a degree is doing the same.

    DC — i do understand that manufacturing offers an improvement over subsistence farming. My paternal grandfather started life as a farmhand, and was eventually able to buy some land, which, while not the greatest land (maybe he woudl have been better off in factory?), was still a step up, and it allowed him and my grandfather to pay for my father’s education. This isn’t just a Chinese thing.

    My argument all along has been that the byproduct of the exchange rate policy has been very low itnerest rates and a very low cost of capital that has encouraged too much substitution of capital for labor, and that China could, through a fiscal stimulus that supported domestic demand — generate a lot more jobs per unit of GDP growth that it does now.

  • Posted by Dave Chiang

    “a very low cost of capital that has encouraged too much substitution of capital for labor”

    I’m not sure that is true for the textile and toy industries which tend to be very labor intensive. Textile sewing and toy manufacturing still needs the manual dexterity of the human hand. It is simply not technologically possible today to automate sewing of shirts and leather boots.

    In other industries, automation is required less for saving labor costs, and more for quality control. For instance, body panels on automotive assembly lines are laser aligned to one-hundredth of an centimeter. It is also not possible for any human manual labor to accurately assemble to that precision. Honda builds the Fit subcompact vehicle in China for export to Europe. Should Honda sacrifice quality control at its Guangzhou factory in order to save labor costs?

  • Posted by tyaresun

    One can clearly see seasonality in that chart. Looking at the chart, the M5 to M6 number has always increased except for 2008. Using the numbers in the chart, my forecasted trend growth would look very different than what is shown in the chart. Perhaps the forecast line was created without the 2008 M6 actual.

  • Posted by Twofish

    bsetser: My argument all along has been that the byproduct of the exchange rate policy has been very low itnerest rates and a very low cost of capital that has encouraged too much substitution of capital for labor,

    Except that interest rates aren’t particularly low. The rate that banks pay to depositors at is very low, but the rate at which the banks lend at isn’t particularly low, and those rates are aimed at large corporations. Small/mid sized enterprises have to rely on informal or semi-formal financial systems and the interest rates for those tend to be quite high.

    Also, I don’t think that there has been too much capital substitution. By massively increasing labor productivity through capital substitution, China generates a large number of service jobs, and that is where the major employment growth has been at.

  • Posted by Twofish

    Also, the spread between borrow and lending rates let the banks 1) pay off the loans that were used for social welfare benefits cushion that was used to move China away from central planning and 2) develop a capital cushion that will come in handy when the credit cycle shifts.

  • Posted by Twofish

    Chinese borrowing rates are 3-4%, lending rates to large corporations tend to be 7-8%, lending rates to small companies through the informal market tends to be in 10-12%.

    One consequence of this is that if you are a Chinese company and you end up with cash, you tend to keep it since it is much cheaper to capital expenses through savings than through borrowing. Also, if you can figure out a way of getting cash reserves and then lending things out on the informal market….

    By contrast, it makes no sense for a US company to have large cash reserves. You can get funding very easily, and if you are just holding cash, your shareholders get annoyed and you are opening the door to corporate raiders.

  • Posted by bsetser

    yes, there is seasonality. and yes, the forecast line was created without any data for 08 –the forecast is super simple; $19b + exports in the same month last year.

    m5 v m6 seasonality changed with year b/c the may day holiday was shortened pushing up may exports.

    2fish — lending rates are low relative to inflation and nominal GDP growth; real rates are negative I think. The data on substitution of capital for labor and the low rate of job growth v gdp growth and fall in labor income v GDP all are documented in an IMF paper. there simply hasn’t been a big expansion of service jobs over the full course of the boom that have absorbed a ton of labor and put sustained pressure on wages.

    p.s. i think where we disagree most is on how the “Spread” between lending v deposits has been used. to me there is has been a slowdown not an acceleration in market reforms — see the use of administrative curbs on credit, the tightening of administrative capital controls, the large number of administered prices. the spread has been used: a) to help recap the banks after the losses from the 90s and b) (increasingly) to hide the costs of the pboc’s intervention to hold the rMB down (sterilization bills that the banks are encouraged to buy, high required reserves, the fx reserve requirement) …

  • Posted by bsetser

    p.s. i would expect exports to drop below the forecast created by adding $19b to last year’s monthly export total in the next few months — my point was that there hasn’t been a slowdown todate. the trend line isn’t my forecast per se (in the sense of my expectation). it a more of baseline that helps me understand the data as it comes in.

  • Posted by Twofish

    One thing that the Gulf States and China have in common is that their high savings rates is partly a consequence of the fact that their economies are both dependent on resources that will disappear in about 10-20 years time. Cheap oil in the case of the Middle East. Cheap labor in the case of China.

    Trying not build an economic infrastructure that depends on cheap labor makes no sense to me in China’s case, since all of the cheap labor will be gone in 10-20 years as the population all ages.

  • Posted by s

    Note the Bloomberg article indicating the Asian sovs called Paulson and imporessed upon him the need to support the Agencies. US monetary policy has been checkmated by the pegs. With RoW slowing, the US export driver will be reduced offset by lower oil somewhat, but hard to see the Net Exports contributing more meaningfully sequentially. At some point, the US will have to write down the debt and the only question is who is going to be the first to pull the trigger. If the Chinese were smart, they would use the $ rally to sell down their position. Instead they will try to provide life support to BWII. The US strategy of a controlled burn is simply untenable. Too mu7ch kindling. As for demand for China exports, look over at the banks and the fall is coming. Every bank in the states and Europe is reigning in lending across consumer, housing, and auto. The US Gov’t has stepped in with consent form the sovereigns (vis treasury buying) to assume the role that equity lines played over the past 5 years (and equity before that). The bond market looks increasingly like the next super super bubble is the bond market, which doesn’t paint a rosy scenario for the dollar. I am with Rogers, any dollar rally will be sold. When will the rest opf the world get dollar fatigue?

  • Posted by Dave Chiang

    Japan’s Elpida to invest $5 billion for Advanced Semiconductor factory in China’s Suzhou. It is quite similar to Intel’s $2.5 billion investment in Dalian China or NEC’s $1 billion investment in Shanghai for advanced technology semiconductors. It is not just lower engineering salaries, but the rapid “industrial clustering” of the global electronics industry to China that is drawing massive capital investment.

    Elpida Memory says to make huge $5 billion investment in China
    http://www.sinodaily.com/2006/080806111932.d6ic06qt.html

    TOKYO, Aug 6 (AFP) Aug 06, 2008
    Japanese computer chip maker Elpida Memory Inc. said Wednesday it would build a huge new plant in China along with its joint venture partner there with an investment of up to five billion dollars.

    Elpida will buy 100 percent of the memory chips produced by the plant in eastern Suzhou City which will be jointly owned with China’s Suzhou Venture Group Co., the Japanese firm said in a statement.

    The move comes amid growing demand for computer chips for use in electronic products such as mobile telephones, computers and cameras. The semiconductors are expected to go into goods mainly for the Chinese market.

    Elpida chief executive Yukio Sakamoto said it was “critical” to invest in the rapidly growing Chinese market.

  • Posted by Twofish

    bsetser: The data on substitution of capital for labor and the low rate of job growth v gdp growth and fall in labor income v GDP all are documented in an IMF paper.

    The statistics I’ve seen have shown a massive shift in jobs from agriculture to services with manufacturing staying flat.

    The fall in labor income v. GDP has been due to a massive growth in corporate earnings, and in part because labor incomes in the early 1990′s were economically unsustainable. To keep incomes high during the early 1990′s, China had to rely on massive bank loans which created the NPL problem.

    bsetser: There simply hasn’t been a big expansion of service jobs over the full course of the boom that have absorbed a ton of labor and put sustained pressure on wages.

    At this point we just need to look at the statistics, but the fraction of service jobs has increased markedly since 2000.

    Also, statistics tend to understate employment and wages in service jobs since most of the people in services get paid under the table. They also tend to overstate manufacturing employment in the early/mid-1990′s since lots of people were getting paid to do nothing

    bsetser: there is has been a slowdown not an acceleration in market reforms — see the use of administrative curbs on credit, the tightening of administrative capital controls, the large number of administered prices

    That puts everything on the axis of “pro-market” (good) and “anti-market” (bad) which isn’t a good lens to look at things. As far as creating securities market and corporate governance, there has been a trend toward less state intervention. In 2002-2003, the state tried to cool the economy by directly issuing production orders whereas today the state tends to use more indirect tools (interest rates and price settings) to manage the economy.

    Also all of the administrative controls that are being used were there in 2001. I haven’t seen any new administrative controls in place that weren’t there in 2001.

    One must never forget that the goal of Chinese economic reform is to increase Chinese standards of living and not to move toward a market economy for the sake of moving toward a market economy. If putting in market mechanisms work, use them. If administrative mechanisms work, use them. I tend to be suspicious of administrative mechanisms, but I’m not a zealot about this.

    bsetser: a) to help recap the banks after the losses from the 90s and b) (increasingly) to hide the costs of the pboc’s intervention to hold the rMB down (sterilization bills that the banks are encouraged to buy, high required reserves, the fx reserve requirement) …

    “Hide the costs” implies that they are intentionally trying to do this in secret, whereas I think that using the borrow/lending spread to absorb the costs of currency intervention is something I don’t think anyone would deny doing it if you ask them whether or not they are doing it.

    The borrow-lending spread is very convenient to fund things like this since it is this huge tax that no one (except the banks) gets particularly mad about since no one sees the money leaving their pocket.

  • Posted by Stefan, Tallinn

    Now the oil-price is falling.

    I have earlier claimed that the graphs of the oil-price and of the Chinese central banks reserves are inter-related.

    Thus I propose that Chinese reserves have now started falling. I think Brad will write about that, but it will take another 1-2 months.

  • Posted by bsetser

    Stefan — wow, what do you know that I don’t ….

    china’s trade surplus is around $20b a month
    FDI inflows are in the $5-10b range
    interest income isn’t small any more. 4% on $2 trillion is $80b a year, or over $5b a month

    sum it up and reserves should be going up by around $30b a month even without any hot money inflows …

    2fish — raising the reserve requirement is a way of cutting the pboc’s “funding costs” and thus hiding the net loss on fx position. it ain’t transparent — basically, you use the guaranteed spread in the state banking system to cross subsidize a losing position on loans to the central bank, and by keeping the pboc’s funding costs down, you minimize its loss by shifting some of the loss to the state banking system. i stand by my argument.

    s — interesting points, but it is kind of hard for china to sell massively into a $ rally. it might be able to slow the pace at which it is adding to its position, but that is it … remember, the CNY has depreciated v the $ over the past few days … as china seems intent on signaling a policy shift.

  • Posted by Dave Chiang

    Any comments Brad about the US government’s “No Wall Street Investment Bank left behind program” with taxpayer bailouts?

    New York University Professor Nouriel Roubini told Barron’s in Sunday’s edition

    http://uk.reuters.com/article/privateEquity/idUKN0344130720080803

    Taxpayers will pay a big price for helping bail out the rest of the financial services industry as well, Roubini said — at least $1 trillion and more likely $2 trillion.

    U.S. consumers, meanwhile, are “shopped out” and saving less, while the Federal Reserve’s performance in handling the crisis has been poor, Roubini said, because it failed to see that the problem extended beyond subprime mortgage debt.

    Now, Roubini told Barron’s, the government is overregulating, bailing out troubled participants and intervening in every market.

    “The regulators should investigate themselves for bailing out Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research), the creditors of Bear Stearns and the financial system with new lending facilities. They have swapped U.S. Treasury bonds for toxic securities,” he told Barron’s. “It is privatizing the gains and profits, and socializing the losses as usual. This is socialism for Wall Street and the rich.”

  • Posted by Dave Chiang

    “basically, you use the guaranteed spread in the state banking system to cross subsidize a losing position on loans to the central bank, and by keeping the pboc’s funding costs”

    The large Chinese banks are all majority state-owned, and the China PBoC Central bank is also state-owned. Basically, you are merely swapping funds from one state bank account to another state bank account. In the US, the US Treasury dept may swap funds with the state-owned US Import-Export bank, or the US Treasury swaps the funds from the federal employees 401K account when there is a deficit shortfall, so what’s the difference.

  • Posted by bsetser

    dc — i have some concerns with the way fannie and freddie were bailed out. i agree with dr. summers — the taxpayers took the downside but didn’t get any equity and thus didn’t get the upside.

    tis true that that state banks and the pboc are all part of the same government. so is the cic. so are SOEs. I assume you would agree that there is no real different between the CIC supporting sOEs as they expand abroad and the various state banks doing the same thing? tis all in the family …

    the real subsidy here is that artificially low rate on rmb deposits, with a cap across the system enforced by regulation. that helps the state at the expense of china’s savers.

  • Posted by Gregor Neumann

    Brad,

    I am not sure, if China will be able to decouple from its main trading partners. From China Daily:

    “China’s dependence on foreign trade tops 60%
    (Xinhua)
    Updated: 2008-08-05 16:17

    China’s reliance on foreign trade had exceeded 60 percent, which made the country more sensitive to price changes on international markets and caused the ensuing external-driven inflation in the nation, sources with the National Bureau of Statistics (NBS) said on Tuesday.”
    http://www.chinadaily.com.cn/bizchina/2008-08/05/content_6905773.htm

    The second indicator is the shipping industry. International trade is soft right now and is getting weaker by the minute. According to the Baltic Dry Index rates are falling and traders are very pessimistic for the christmas season.

    As for your charts on hot money inflow, I would recommend to look at the data from the Chinese perspective. Don’t use Dollar but Yuan as the base currency. Compare the projection in 2007 exchange rate with todays results. Chinas is getting less CNY that anticipated, even if the amount of USD looks the same.

  • Posted by Dave Chiang

    “I assume you would agree that there is no real different between the CIC supporting SOEs as they expand abroad and the various state banks doing the same thing? tis all in the family”

    Actually in China, the Communist Party still reigns supreme over everything including the China PBoC, China PLA military, CIC, SOE’s, etc. On CCTV last night I had to laugh when the Beijing Communist party chairman was given the higher honor of lighting the olympic torch first before the Beijing Mayor. But even Walmart-China has an official Communist party labor union. Its really not as bad as it sounds. The Communist party stays in power by giving the people a higher standard of living. Most things, like even complaining about a government policy, isn’t illegal anymore.

  • Posted by Stefan, Tallinn

    Brad
    USD/CNY has bevahed strangely for a month.

    Falling stock and property markets.

    Falling oil/commodities stimulates reallocation from financial assets into these.

    Deteriorating trade-balance.

    Soaring domestic consumption at the expense of savings – starting from an extraordinarily high savings level.

    strengthening USD (ok reserves should be looked at in real terms)

    Thus: look out for a fall in reserves!

  • Posted by Twofish

    bsetser: tis true that that state banks and the pboc are all part of the same government. so is the cic. so are SOEs. I assume you would agree that there is no real different between the CIC supporting sOEs as they expand abroad and the various state banks doing the same thing?

    No I don’t, The US Air Force, a crossing guard at an elementary school, the highway patrol, a kindergarten teacher, and the person that fixes potholes for the state government are all part of the same government, but they have radically different functions. A fighter pilot and a kindergarten teacher are both “state employees” but they aren’t interchangeable, and neither are PBC, CIC, SOE’s and the big four commercial banks.

  • Posted by Twofish

    DC: The large Chinese banks are all majority state-owned, and the China PBoC Central bank is also state-owned.

    This is incorrect. The large banks are majority state-owned but the PBC isn’t “state owned” it’s an agent of the state. Big difference (at least in Chinese law). Also the large banks are *not* sole state-owned enterprises, they are listed companies with both public and private owners. Also at least for the big banks, there are shareholder agreements that give the private minority owners a seat on the board of directors.

    I’m sure that the big banks don’t like the PBC having them hold reserves. It’s just that the PBC has legal authority to have them do that. There are also limits as to what the PBC can do. The PBC can order banks to hold reserves, however the PBC doesn’t have the legal authority to have banks actually transfer funds to the state.

  • Posted by Twofish

    DC: Actually in China, the Communist Party still reigns supreme over everything including the China PBoC, China PLA military, CIC, SOE’s, etc.

    Yes and no. With so many different groups within the tent of the Communist Party it means that there are a lot of differences between different parts of the party. PBC, PLA, CIC, and the SOE’s all have different interests, so there is a lot of conflict between them.

    I’m not sure it makes that much sense to say that the Communist Party reigns supreme, since it gives this incorrect idea that there is some group of people who can order everyone else around, which isn’t the case at all. Since there are so many groups within the CCP, trying to figure out “what the Party wants to do” isn’t always clear.

  • Posted by Twofish

    DC: This is socialism for Wall Street and the rich.

    Bashing the rich and people in finance is a fun game. Why don’t we just shoot the rich and the evil speculators and have it be done with….

    Oh wait…. They tried that in China in the 1950′s and 1960′s…. Didn’t work too well….

    The trouble is that (as Mao, Robert Mugabe, and lot’s and lot’s of people have found out) is that if you shoot the rich, then the economy just falls apart. People get rich basically by being the in the middle of political and economic networks, and if you destroy those networks, then things just go to pieces in a big, big way.

  • Posted by Twofish

    One thing that makes China Construction Bank different from CIC is that Bank of America has a seat on the CCB Board. The CEO of CCB is going to be someone acceptable to the Organization Department of the Chinese Communist Party but at the same time Bank of America has also got an effective veto on the CCB CEO, and so it is going to be someone acceptable to BoA. So basically you are looking for a Communist with lots of finance and management experience. The fact that there is no lack of such people, tells you that things are very different from the late Soviet Union.

    If the State Council tries to ram someone through over BoA’s objections, then BoA can threaten to dump its shares and embarrass CCB in a really big way.

    There are some pretty strange alliances in the world of Chinese finance. For example, the Politburo generally wants Bank of America to have some major say in who the CEO of CCB is going to be, because if you just have people within the system heading up the banks, then they tend to create their own fiefdoms.

  • Posted by Rien Huizer

    Twofish, your # 35. There is little bit more to it.

    Deng and Zhao did not inherit a completely implemented stalinist economy and intact “marxist leninist” bureaucratic/political structure from their predecessors. There was essentially the standard organisation of the state, centre, provinces etc plus the state’s industry ministries and their factories etc, a centralized foreign trade function and a single “bank”, essentially the treasury function of the state, delivering funds based on the quota allocated by each planning unit according to the plan. Then, separately, there was the PLA and a uniquely Chinese rural sector.All of this was overlapped by the party organization, typically by having a “party” #2 next to the “state” ceo of a particular unit. The plan never got to Russian levels of comprehensiveness and the anti-bureaucratic, intuitive Mao of the 1960s, basically ruined the chances of China becoming a thoroughly predictable environment for buraucratic predators, as happened in the USSR

    Zhu’s reforms built upon and consolidated changes prototyped under Zhao. I do not think that the Tienanmen incident had much impact on the reform process, but Deng’s Nan Xun a very large positive. Zhu initiated a sequence of reforms within a seemingly anarchic fiscal-financial environment. The main effect of these reforms was to do what had failed in Eastern Europe in the final stages of “socialism” there, an economic transition (to some form of market economy, not necessarily a highly efficient one in welfare terms) without disenfranchising the existing elite and its political culture and patterns, as symbolized by the entity CCP.
    The sequence consisted of (1) making SOEs more economically aware and in particular responsive to price and risk signals (2) completely changing the role of the banking system and adding a market for profit/loss sharing investments (the current type of stockmarket) -but not for corporate control (3) gradually dismantling the nexus of urban residence, benefits and SOE worker status (the Iron Rice Bowl) (4) clearly acknowledging “problems” (bad “loans”) in the banking system and cutting the links between provincial governments and bank lending, further hardening budget constraints (5) by spliting the PBoC up into four commercial banks (operationlly independent from the government chain of command, except at the very top) plus a central bank function (Twofish, full marks for your observation that the PoBC is not a separate “legal person”), and allowing some private and foreign competition for financial services, (6) creating an asset management function for SOEs without a future (thus controlling (not eliminating though, great rewards for the deserving) the famous “tunneling” and “looting” characteristic of East European transitions), (7) listing the surviving SOEs and SCBs in order to have create a market conforming incentive structure, a proper market for managerial labor and privately placed foreign stakes in order to introduce permanent links with foreign friends with something to offer (technology, practice, markets, etc) plus a second pair of “eyes”. Finally, the civil code was completed by adopting the property law section of the current German Civil Code (the contract, torts etc section had already been adopted in the 1980s). One item for decent set of institutions still in progress is the bankruptcy law. After that will have been done, budget constraints in China should be as hard as in an OECD country, with some slack perhaps due to guangxi, although that could well be on the way to much more control also.

    The big question in all this is where does that leave the professional CCP bureaucrat. No more “income” or status from the local factories (possibly some bribes, but that is riskier), possibility that whole generations of smart and ambitious people are locked in a sector (pure government) that is very different from what they expected (a mix of government and business). The Singaporeans, arriving at a somwhat (it would take long time to explain this) similar situation of having a mixed state-business bureaucracy via a totally different route (decolonisation and inheritance of Crown assets) seem to have found some balance, but that is on a very small scale and cn probably not be replicated. The current generation of top officials is probably financially very OK and their relatives seem to flourish, but there must be hundreds of thousands who have started climbing the ladder in the nineties and are now finding that they are in dead end street. I think that that i one of the biggest risks the CCP faces.

    Meanwhile, the system is more or less in limbo, combining strong anarchic elements (not democracy) with some very well protected remnants of real power, and that real power (i.e. life and death of individuals, survival of large enterprises) is more and more in the hands of the centre.

    I think that this continuously evolving structure is extremely confusing for people who do not understand the background. My apologies to all of you who are completely familiar. Perhaps you know the next twist of this tale?

  • Posted by Twofish

    Huizer: The big question in all this is where does that leave the professional CCP bureaucrat.

    Pretty much the same as before. Only know the professional CCP bureaucrat is reading Warren Buffett and Bill Gates rather than Karl Marx, and advancement within the Party is determined by how much profit they can get rather than by production quotas. The CCP changed everything to be market-oriented, yes. But the people running the corporations are still members of the Communist Party. A lot of the problem is that people have this stereotypical notion of what a member of the Chinese Communist Party looks like. The Communist Party survived by turning socialist bureaucrats into capitalist bureaucrats.

    Also, industrial corporations are huge massive bureaucracies. There is far more demand for people in economic bureaucracies than political bureaucracies.

    Huizer: There must be hundreds of thousands who have started climbing the ladder in the nineties and are now finding that they are in dead end street. I think that that i one of the biggest risks the CCP faces.

    I really don’t think so, since I don’t think that anyone who joined the party in the 1990′s is on dead end street. CCP membership is still pretty much required once you reach a certain level of management in state-owned enterprises, and a lot of the people that go into the CCP today are pretty much the same type of people that get MBA’s and law degrees in the United States.

  • Posted by Dave Chiang

    “Bashing the rich and people in finance is a fun game. Why don’t we just shoot the rich and the evil speculators and have it be done with….” Twofish

    Oh wait, the typical American Joe6pack can’t pay the fuel oil bill this coming winter, but the Wall Street banks deserve a federal taxpayer bailout for their financial losses. Under Hank Paulson’s “No Wall Street Investment Bank left behind program”, a multi-trillion dollar taxpayer bailout is necessary “to save the system”, but mostly the bonuses of fellow Goldman Sachs executives. Not to mention that marketing subprime garbage as AAA-rated securities was fraudulent criminal behavior, isn’t that really just the same as “Corporate Welfare Pork”.

    The Fannie Mae and Freddie Mac taxpayer bailouts will cost 1 to 2 trillion dollars, or $10,000 per US family, as per Nouriel Roubini. Now General Motors and Ford are demanding a $40 billion taxpayer bailout. Soon the Airlines will be demanding “crony capitalist” taxpayer bailouts. When will this nonsense end. No taxpayer bailouts for private corporations, shareholders, and corporate executives. Period.

  • Posted by Dave Chiang

    “I’m not sure it makes that much sense to say that the Communist Party reigns supreme, since it gives this incorrect idea that there is some group of people who can order everyone else around, which isn’t the case at all.”

    When push really comes to shove, the CCP can order everyone around. Notice Wen Jiabao during the Sichuan earthquake barking out orders to China PLA military personnel to deploy troops here and fly helicopters there. Wen Jiabao never has had any formal official position in the China PLA, but it is a fact that the China PLA miltary was operating under his direct orders during the crisis. As Chairman of the Central Military Commission, President Hu Jintao must have also approved.

  • Posted by Dave Chiang

    Oh one more issue, the China PLA military still retains Communist party political officers that operate in a separate command structure. This is similar to the former Soviet Union Red Army. The CCP reigns supreme over the China PLA military.

  • Posted by Twofish

    DC: Oh wait, the typical American Joe6pack can’t pay the fuel oil bill this coming winter, but the Wall Street banks deserve a federal taxpayer bailout for their financial losses.

    Where do you suppose Joe6Pack keeps his money? Directly or indirectly, his money is in some Wall Street bank somewhere, and if you don’t bailout a bank then he is going to get hit. The whole point of a bank bailout is to keep depositors from losing money.

    DC: A multi-trillion dollar taxpayer bailout is necessary “to save the system”, but mostly the bonuses of fellow Goldman Sachs executives.

    Bonuses are going to be very lean this year, and executives really aren’t the target of the bailouts.

    DC: When will this nonsense end. No taxpayer bailouts for private corporations, shareholders, and corporate executives. Period.

    This is just politically unsustainable. People are usually very much against bailouts until they find out that they are the people that are going to be bailed out, and a “no bailout” policy is one reason that the “Washington consensus” was just a stupid policy.

    One reason China survived the 1990′s, was that China went against the “Washington consensus” and made a huge US$300-500 billion bailout of state owned enterprises and banks that is much, much larger than anything that the US has been talking about.

    DC: When push really comes to shove, the CCP can order everyone around.

    Not really. The CCP *didn’t* go to a tent factory or farmers and directly order them to produce food and tents. They signed contracts with farmers and tent makers to buy food and tents and then deliver them to Sichuan.

    Also in the case of Sichuan, the CCP had economic authority (i.e. it could pay people) and moral authority (i.e. disaster relief is a good thing). In other cases, this might not be the case.

    DC: Wen Jiabao never has had any formal official position in the China PLA, but it is a fact that the China PLA miltary was operating under his direct orders during the crisis.

    But the Wen Jiabao was acting under his authority as Prime Minister and not his party position. Wen Jiabao doesn’t have any specific official position in the party. Also the authority that Wen Jiabao used to order the PLA was delegated to him by Hu Jintao in the latter’s capacity as President and CMC Chairman.

    The Party really had nothing to do with this since all of the orders went through the state and military chains of command, and not the Party ones.

  • Posted by Rien Huizer

    Twofish,

    I think I made it clear that the ones with the MBAs and the SOE managerial jobs were not the ones I would worry about. And yes of course they would try to become party members. No, I meant the ones who will be in PURE public adminsitration (like civil servants in the US??). Those guys will not get rich or famous, or important anymore. The losers in this process. Those are the ones authoritarian politicians worry about. Not the guys in the Audis. No one worries about these people anywhere.

    You see, I really believe that China is on track to become a country that is institutionally very close to say, modern Europe, unlike Japan, which is more like an archeology site for Prussian practices. An that means keeping a little of the populist/communautarian past plus a lot of strict professional management and adminsitration. Hard work, mostly low pay. Glad to change my view given evidence of course.

  • Posted by Twofish

    One thing where the “Washington Consensus” fails is that policies designed to punish high level executives and corporate cronies, usually don’t.

    People with power tend to do well no matter what you do to them since they have social networks that tend to survive. You look at who ended up charge in Russia and Eastern Europe, Indonesia, the Philiphines, Latin America, etc. etc. and it’s usually the same group of people that were in charge before the revolution. They might get rid of a few scapegoats and sacrificial lambs, but it’s the same group of people in charge.

    Similarly if you let the Wall Street financial system fall apart, you’ll probably find that the people running whatever the new system is, are pretty much the same as the old people. Now in the process, you’ve wrecked the economy and made life total hell for people without social networks.

    Most of the them when someone is bashing the power elite and standing up for the “middle class”, you shouldn’t take them too seriously since they are merely one member of the power elite trying to bash another member of the power elite.

  • Posted by bsetser

    rien — my operating hypothesis is that China will look nothing like Europe or the US or Japan …

    and that the CIC/ Chinese state banks won’t be like either the gulf SWFs or US private banks but rather will be uniquely Chinese and reflect chinese practices and institutional pressure.

    2fish — I doubt BoA really has a veto over CCB’s CEO/ Chairman, or Goldman has a veto over ICBC. Certainly it is something that they would be reluctant to use and risk annoynig the government/ losing its business (Goldman wants a CIC mandate, remember, and no dobut BoA wants something too ) … My sense from talking to a BoA economist in Beijing was that there was actually very little interaction between the two …

  • Posted by Dave Chiang

    Twofish,

    Remember that Wall Street doesn’t produce “real economic wealth” that industrial manufacturing or even agricultural production produces. The pending two-trillion dollar taxpayer bailout of Wall Street represents precious capital that has been misallocated, stolen, and wasted. Redistributing real economic wealth into the pockets of financial parasites, Wall Street no longer serves any social redeeming purpose. The US is no longer a democracy but a kleptocracy led by crony capitalists. The federal taxpayer bailout of the Wall Street private sector is an absolute total disgrace! Period.

  • Posted by Twofish

    bsetser: 2fish — I doubt BoA really has a veto over CCB’s CEO/ Chairman, or Goldman has a veto over ICBC.

    I think they do. Boards of directors tend to work by consensus, and once you have a seat on the board, the need to maintain a unified view to the outside world means that there is a discussion if someone on the board finds the candidate totally unacceptable.

    bsetser: Certainly it is something that they would be reluctant to use and risk annoynig the government/ losing its business (Goldman wants a CIC mandate, remember, and no dobut BoA wants something too )

    True, but BoA and Goldman could also make life very difficult for the Chinese government if they wanted to. What generally happens in these situations is that people settle these issues in the board room.

    bsetser: My sense from talking to a BoA economist in Beijing was that there was actually very little interaction between the two …

    It’s hard for someone at the ground floor to figure out what is happening at the board level/senior management level.

    Also, I can’t imagine a situation in which the Communist Party would suggest a candidate that BoA would feel compelled to veto in the first place.

    DC: Remember that Wall Street doesn’t produce “real economic wealth” that industrial manufacturing or even agricultural production produces.

    It seems to be a popular economic theory that finance doesn’t produce any “real economic wealth” and that traders and speculators don’t do anything “real.” Generally when people act on this economy theory and get rid of the “social parasites”, you end up with a disaster.

    Capital doesn’t allocate itself.

  • Posted by flow5

    “US has also loosened monetary policy, and one of the ways monetary policy helps support the economy is through a weaker dollar and stronger exports”

    The FED has reverted to a more restrictive monetary policy. That’s why oil dropped. Friedman said it “inflation is always and everywhere a monetary phenomenon”. Wouldn’t that imply slower Chinese exports?

  • Posted by Sam

    DC – you are criticizing the US (as usual) for corporate welfare, but as TwoFish pointed out, Chinese banks were the beneficiaries of hundreds of $ billions in bailouts from the government earlier this decade. And don’t forget the fact that deposit rates and even longer term interest rates have been held artificially low for years below inflation. This is a direct subsidy to the banks and is no different from the Fed steepening out the curve to recapitalize financial institutions’ balance sheets at the expense of taxpayers and savers. The Chinese government has long been subsidizing banks at the expense of the saver/depositor and the manufacturers with a manipulated Yuan and undervalued CNY relative to the USD at the expense of consumers’ purchasing power. The difference is that the US government is doing this under extreme duress and crisis mode, while this arrangement has been in place for a decade with growth 10% per year and is structural in China. Does anyone really think Chinese manufacturers could compete with Caterpillar, United Tech, or GE without a currency subsidy? Could the banks and funds (who were the first to take the capital-raising bait of US and EUR banks and bought the high of the private equity bubble) really be profitable without the yield curve subsidy? Time will tell. I don’t like to make predictions, but I do believe there is a risk of China’s capacity/manufacturing bubble popping in 2009. Debt deflation as zombie companies default on loans may ensue, and Chinese banks will make US banks now look like paragons of prudence. There is only so much the bureaucrats in Beijing can do to keep the economy growing until all the excess, bubbles, and misallocation of captial and resources push the country over the edge. China is run by exacting engineers and career bureaucrats, not savvy businessmean and objective academics.

    Also, if you don’t think Wall Street creates real economic wealth, why has it been around for so long? What about the City of London being around for centuries? The job of financial centres is to facilitate, raise, and guide capital between those who need it and those who provide it. Panics like we are having now are nothing new and occur in free markets from time to time. Panics flush out the excesses and misallocation, something the Chinese authorities refuse to let happen but whose refusal will ultimately exacerbate the downturn WHEN it happens.

    One last thing, all you ever do here is bait people with inflammatory remarks that stray from the subject Brad wants to discuss. You are always denouncing the US and its leadership and praising China and its leaders. In all seriousness, if it’s so bad here, why not leave and move to China?

  • Posted by Twofish

    Also a lot of my guesses as to what is going on in Chinese boardrooms involves reading the current Chinese management literature on best practices.

    The most recent regulations require that listed companies have 1/3 independent directors, and that the independent directors chair the audit, compensation, and nominations committees. It also encourages cumulative voting. Chinese corporate law is much, much more shareholder friendly than US corporate law, since the Chinese government tends to be the largest shareholder.

    One thing about BoA and foreign investment, is that the Communist Party obviously wanted BoA and GS to take active roles in corporate governance. They didn’t need to give BoA, Temasek, and GS seats on the boards of the big banks, but they did. Much of the reason is that the foreign banks and the Communist Party have basically the same interests in corporate governance (maintain control and make lots of money).

    The big danger in corporations is that senior management will turn it into a fiefdom that completely ignores the shareholders. Keeping control of a company in the hands of shareholders is a huge problem in any system.

  • Posted by Twofish

    sam: Chinese banks were the beneficiaries of hundreds of $ billions in bailouts from the government earlier this decade

    To be fair, one very strong argument for a government bailout in China is that the government was bailing out banks for making loans that the government were forcing them to make.

    sam: Does anyone really think Chinese manufacturers could compete with Caterpillar, United Tech, or GE without a currency subsidy?

    Depends on what area. Also, sometimes the best way of competing is not to compete. If you want to have a Chinese tractor manufacturer be world class, then give Caterpillar a stake in the company so that Caterpillar is working *with* the Chinese company rather than against them. That’s part of the theory behind foreign investment in the banks.

    sam: The Chinese government has long been subsidizing banks at the expense of the saver/depositor.

    Actually they haven’t. The current system only started around 2000 when lending limits were removed but borrowing limits were kept. Official policy in the early/mid-1990′s was actually hostile to the banks as the government forced the banks to make loans to SOE’s to keep employment up, so in the 1990′s, there was actually an anti-subsidy, which is why the banks ended up so much in debt.

    sam: Could the banks and funds (who were the first to take the capital-raising bait of US and EUR banks and bought the high of the private equity bubble) really be profitable without the yield curve subsidy.

    Heck yes. The yield curve subsidy is not the difference between profit and loss. It’s the difference between profit and totally obscene profits. The Chinese banks are making huge amounts of money. At some point the subsidy is going to disappear, but the banks are going to fight like heck to keep it.

    sam: Debt deflation as zombie companies default on loans may ensue, and Chinese banks will make US banks now look like paragons of prudence.

    I really don’t think so. People are people, and both Chinese and US banks will take the money and run if they are allowed to. The difference is that the Chinese government has been keeping a much tighter grip on the banks than the US government. The nightmare scenario for the Communist Party is a repeat of what happened in 1998 in Indonesia so they have been doing a lot of work to make sure that Chinese banks are well run.

    People have this idea that Chinese banks must be necessarily be more badly run than American banks, but there is no reason to believe that. US banks are well run only because there is a sophisticated regulatory system in place, but if that breaks down (and it did break down quite badly) then Americans banks can be as badly run as Chinese ones.

  • Posted by Dr.Bubb

    When will …the world get dollar fatigue?

    TIMING QUESTION:

    If you were China, and you wanted to strengthen your currency
    - by switching some reserves OUT OF DOLLARS and INTO GOLD.

    When would you do it?:

    + Before the Beijing Olympics?
    + After the Beijing Olympics?

    No prizes for the right answer

    Benefit: you can lower commodity price inflation
    Cost: less exports to the US- but they are fading anyway

  • Posted by Dr.Bubb

    Also, if you don’t think Wall Street creates real economic wealth, why has it been around for so long?
    +++++

    So of it does “add value”- like the primary fundraisings, at times.

    The rest extracts value, like a tax on America’s wealth, until the toxins it pumps out implode, like a disease reaching its peak and fading, ala subprime securities.

    But now America’s wealth is so impaired by decades of wasteful mal-investment (in an outmoded suburban living arrangement), it can no longer afford a Wall Street of its present size. Wall Street will have to shrink to survive.

  • Posted by Dave Chiang

    Twofish,

    Answer the question honestly, as presently regulated, has Wall Street done a good job of properly allocating capital throughout the US Economy? There are literally tens of thousands of abandoned McMansions littered across the states of Florida, California, Nevada, and Arizona. If you choose to answer disingenuously, why should there even be any economic consideration for a federal taxpayer bailout of Wall Street’s wrecked balance sheets. There has been little if any consideration for the “moral hazards” and the economic implications to the US government’s own balance sheet from repeated taxpayer bailouts of private Wall Street firms. Even S&P was forced to admit that the Federal Debt would have to be downgraded to perhaps below China’s AA-rating if Fannie Mae’s debt was assumed by the US Treasury. As noted investor Jim Rogers has commented, “Investment Banks have failed throughout US history without the United States economy collapsing, why is it that now that Hank Paulson will bailout every Wall Street bank that gets into trouble”.

  • Posted by Twofish

    DC: Answer the question honestly, as presently regulated, has Wall Street done a good job of properly allocating capital throughout the US Economy? T

    Compared to what? Compared to the magical, fairy dust economic systems that people come up with. No. Compared to any real system that has ever existed, it does quite well.

    DC: “Investment Banks have failed throughout US history without the United States economy collapsing, why is it that now that Hank Paulson will bailout every Wall Street bank that gets into trouble”.

    Jim Rogers needs to read about the panics of 1797, 1819, 1825, 1837, 1847, 1857, 1866, 1873, 1884, 1890, 1893, 1896, 1901, 1907, and 1910. Since 1914, when there has been a central bank, there has only been one massive disaster and that was in 1929.

  • Posted by Glen

    Dr. Bubb mentions some of the usual fear suspects, where we can all disagree as to whether China would or could take such routes.

    One thing I find extremely interesting/important in that context is a matter Twofish has often touched upon here.
    The ‘consensus’ on what to do in Beijing…. or the liberty of the CPC leaders to do as they please.. it really isn’t there as much as most Western observers think. It never was probably, but seemingly less than ever.

    Maybe you can argue that it is there at the top levels in terms of foreign policy, power projection and long terms strategic goals (it seems so), but in terms of China’s internal developmental strategies and economic policy…and thus the “who benefits” question, nah!

    I do rather a lot of interviews with Chinese economics/political science scholars in or on the periphery of the advisory groups to Government, and the answers to questions about China’s post-Olympic policy changes ranges from New Left to New Right chartered courses, but most frequently “right now we really have no idea either”.

    More and more, when asking top International bankers, when the microphone is off and answers are less or not political at all, I get the same sense. People are guessing, and when people don’t know – then you get more fear. When you don’t know – suddenly the “finance internal drive and growth policies by decreasing the dollar propping” scenario seems more plausible to many. Nevermind the difficulty or potential backlash from this.

    Everyone sees that Hu Jintao currently feels it necessary to give in to factions in the party/SouthEast and inland exporters needing stimulus, but for China the impact here is minor in the greater scheme of things so far.

    Everyone can also envision that the growing frustrations (more and more outright anger) among both urban (migrant) and rural poor plus the elderly being largely deprived of security must be addressed in some way. That leads to majority assumptions that there’ll be a marked increase in Chinese fixed asset invesment that targets especially such concerns as well as further education, further improvements for farmers/rural communities. The disagreement goes to whether this increase will be big enough to signal an actual policy change. These constituents obviously are weak in everything but numbers.

    At the same time you have Hu’s pledge to political reforms after the Olympics. What will that mean – if anything? The slightest changes here can cause major behind the scenes fighting.
    You have new high profile voices coming out of Beijing in seemingly open support for Shenzhen’s (seemingly) quite dramatic accountability and multi-choice election plans which clearly corresponds well with previously articulated goals from Hu and Wen Jiabao. And of course you have local governments and many in the top brass who will fight this development tooth and nail to keep their priviledges.

    Seriously, post-Olympic decisionmaking will be very, very interesting.

  • Posted by Rien Huizer

    Glen,

    Well put.

    Brad,

    Of course, whatever the outcomes of changes in the institutional framework may be, they will be very Chinese. My reference to Europe (see also Glen’s piece with attention for unmet demands of groups that will never “get rich”) was in reference to an often used (by by economists too) and (too) simplistic dichotomy; Europe (of course the continent) vs the anglo-saxon model. Now there is a fair bit of variety in both categories but it involves clusters like common law vs civil code/statute law (plus different role of the state in law creation and juridical function ans structure) two party systems/ plurality vs proportional representation/typically coalition government high degree of individual risk mnagement (health care, unemployment) vs high degree of state risk assumption (but: several Anglosaxon countries, UK, Australia, Canada, NZ have health systems that are more government-driven than continentals like Holland.

    Anyway, it is anyone’s guess but political reform (not necessarily democratization) is necessary to arrive at a functioning public adminsitration system. for the whole of the country. That should involve greater separation of party and state (very difficult to do and very risky not to do) and administrative (not entirely separate but high priority) reform of the rural sector. I did not mention some form of political pluralism outside the party (there is a fair bit of real politics (not only career-making) going on at the moment but it is hardly official and the more there is that seeps out, the harder it would be for the leadership to do a public conversion to pluralism and its attributes (fredom of political organization, press, metings etc (some of these things re still imperfect in a modern place like Singapore) But again h point is not the high profile “democrcy” thing, but a better alignment between public administration and the emerging market economy.

  • Posted by TR

    David Chinag says: “What Western Neo-liberal Economists fail to understand is that even textile manufacturing jobs represent a huge advancement from subsistance farming for migrant Chinese workers.”

    Really? Not the ones I have read. You must get most of your economic knowledge from real klutzes.

  • Posted by Judy Yeo

    Frankly, I partly agree with the post-olympic political and economic adjustments trend; not that the present economic stats are really all that reassuring. When everyone comes down from the irrational highs of the olympic adrenalin rush, the what next question might just bring some dusty bugs out of the woodwork. Chinese banks have their own worries even if they have individually dodged the subprime slime . Mr Pettis has lots on that on his site .

    Rien

    sure the seperation of party and state makes for good government but sometimes that has merely been the effect of factionalism . In some more remote areas of china that has led to a situation that updates the old saying that the “mountains are high and the emperor is far away”, just think of those cases of modern day slavery in brickwork “factories”.

    Glen

    not sure if you’re still reading this thread but just a thought; could the growing wealth gap and the resentment that stirs transform rhetoric to policy?

  • Posted by Twofish

    Glen: I do rather a lot of interviews with Chinese economics/political science scholars in or on the periphery of the advisory groups to Government, and the answers to questions about China’s post-Olympic policy changes ranges from New Left to New Right chartered courses, but most frequently “right now we really have no idea either.”

    And I think this is a good thing that people have no idea what to do. If you don’t have any idea what to do, you think and think and think and then you end up figuring something out. The “New Right” and the “New Left” argue with each other and eventually something sensible comes out.

    It’s when you know exactly what to do that you end up with huge messes. Mao knew exactly what to do, and wasn’t about to listen to anyone with a different opinion.

    Glen: Seriously, post-Olympic decisionmaking will be very, very interesting.

    Chinese decision making is always very, very interesting. One thing to point out is that the arguments that people are having now aren’t any more bitter than the one’s that people have had in China for the last thirty years. So watch out for the “Chinese leaders disagree with each other so the Party is going to collapse” meme that happens in the Western media. The institutions are far stronger and the real disagreements are far, far *less* bitter and fundamental then they have been over the last thirty years. Person A wants to spend 20% GDP on investment. Person B wants to spend 50%, so after they argue for a month, then end up spending 35%. (That’s one of the nice things about arguing about money rather than ideology, arguments about money can be resolved by splitting the difference.)

    Huizer: That should involve greater separation of party and state (very difficult to do and very risky not to do)

    Separation of party and state was tried in the 1980′s. It worked very, very badly, and really I don’t see any reason to try it now. One thing that is interesting is to try to get someone that supports it to explain exactly why they think it is a good idea.

    The system as it now exists has the actual orders going down the state hierarchy, but with the party being something of a “human resources” department in charge of figuring out who gets what state position. I don’t see any reason to have any quick, radical changes in the system, since it seems to work.

    I do support strengthening the state and legal system so that if there are ever any bitter fights or power struggles within the party, that the whole thing doesn’t collapse (i.e. what happened in Russia), but I can’t think of any reasons to split the party and state. (And that includes human rights reasons, since I don’t think a split party/state will be more friendly to dissidents, and if it means less control over local officials, it may be even worse for political dissidents.)

    Huizer: administrative (not entirely separate but high priority) reform of the rural sector

    I’m really starting to really hate the word “reform” since it has become a feel-good word that really is starting to lose any meaning. In 1980, the term “reform” actually had some meaning in China since it meant the group of people that didn’t believe in revolutionary Maoism or Stalinist economic policies. Since no one in the Chinese government is a Maoist or a Stalinist today, it means that everyone is a “reformer” and when everyone is a reformer then the term doesn’t have any meaning any more.

    Let’s step back a bit. What *exactly* do you think ought to be changed in rural China? I think that if you ask a dozen people what exactly “rural administrative reform” means, you will get a dozen answers, and arguing over specific policies is the conversation that needs to happen.

  • Posted by unokai

    Excellent post, Brad, as usual! Will you please name the source of your graph? Can I cite your opinions in one russian financial magazine? Thanx in advance!

  • Posted by bsetser

    Unokai — feel free to cite my opinions. the source is the underlying data is the government of China (Ministry of commerce I suppose). i use the export and import data on a customs basis. I did the graph myself based on their numbers.

  • Posted by unokai

    thank you very much, Brad, your blog is an excellent and thought provoking source of information and analysis.

  • Posted by CCTV Training

    In Europe and the UK there will be interesting changes for both private security and national security – data protection is important.