The China Track 与中国接轨

Happy birthday CUPL

The Chinese University of Political Science and Law (政法大学) celebrated its 60th birthday last week. I was fortunate enough to attend the opening ceremony. Although it was a real hike to get out to the campus, which is around 20 km to the north of the downtown Beijing -- it took over an hour in snarled traffic -- it was worth it. 

It was an amazing performance. I always underestimate how fancy things like this will be. I did wear a suit, which was smart. But while I was in green, everyone else had dark blue suits. I arrived thinking this would be an event for a couple hundred people, but we went into a big theatre, and I guess there were at least 800 people packed in there. And the stage was decked out like the annual meeting of the National People's Congress, with the most important speakers and guests up there looking very important and sipping from their nice tea cups. They were surrounded by lights, a TV crew, a host with a well groomed voice, and dainty young Chinese girls in uniform keeping tea cups full and escorting speakers from their chairs to the microphone.

Down in the audience, I was led to the "foreign guests" section, and I felt like a prop in a play -- the happy foreigners giving greater legitimacy to the accomplishments of the university, but kept apart from everyone else because we were not Chinese. If they really wanted to show they have an international university, we would have been encouraged to mix and mingle amongst everyone else. 

I looked at the program, and there were 13 speeches listed. The current president's took over 20 minutes, and I thought we'd never finish. Luckily, speeches are arranged in order of length, with the longest first and the shorter ones following. Speakers did a great job of staying within their appointed times, all well practiced at turning their thoughts into one hour or one minute. One of the funnest parts of Chinese major public speeches are the cues to let you know they are making a big point and want applause. This happens at the end of sentences such as, "To all our guests, classmates, teachers, let's give them a greAT WARM WELCOOMMEE!!!!!" By the time they say "welcome" (huanying, 欢迎), they are almost yelling. Learning how to speak like this is something foreigners have not mastered, but I plan to find some chances to try out my "speechified" Chinese. 

The electronics were cool. They had 2 large screens on either side of the stage that switched between the audience and the speaker. I was worried when cameras pointed at me because I was in green and a little tired. I didn't want everyone looking at me with my eyes momentarily closed or me taking a deep yawn. The host began by reading letters of congratulations to the university, and I was impressed by one from Zhou Yongkang. Not that Zhou's letter was any better than Li Tieying's, but from what I've read in the foreign media, Zhou seems to have recently taken a vacation from his official duties. To dispell this, Zhou is going to need to show up at a meeting or visit some sick people in a hospital or something. 

One of the nice moments of the program came when about 10 students from CUPL's first class (actually, it wasn't called CUPL until the 1980's), in 1952, came up on stage and each received a plaque. They were, of course, quite old and moved slowly, but they walked with a great deal of pride and smiled widely out at all of us. It was actually moving. 

The speeches mostly made the same points, and everyone got plenty of applause. CUPL has made a huge contribution toward building rule of law in society and government, and there is still much more work to be done. But two speakers got more applause than anyone else: Cheng Siwei, a member of the standing committee of the National People's Congress, and Jiang Ping, CUPL's president during the late 1980's. Both had nice things to say about CUPL, but they took decidedly negative swipes at the overall progress toward rule of law and education. Jiang said China needs to have genuinely indpendent universities with genuine academic freedom, else innovation and rule of law will never materialize. 

I was impressed that they were invited to speak, and that they said things that reflect relatively negatively on China's educational and political systems. And no one stuffed a sock in their mouth. As I said, the crowd gave them the largest applause, and they didn't even raise their voices as well as others. I didn'y see the TV news that evening, and so don't know if their comments made it beyond the room. 

When the festivities ended just after 11:00 am, I made a beeline for the exits and the campus's main gate. CUPL was nice enough to assign a student volunteer to help me the whole way. She escorted me in, and she escorted me out, and then she made a call and a car showed up to take me all the way back into the city to my next appointment. How cool! As I waited a minute for my car, about 100 black Audis with licenses plates of all sorts, including from the miltary, zoomed by me out the campus gates and on to their next destination. 

Yi Gang: Re-balancing a high priority

Trying to determine the trajectory of economic policy in China is never easy, but last week we got some important insights into the financial bureaucracy's views when PBOC deputy governor and SAFE administrator Yi Gang spoke on April 18th at Indiana University's Indianapolis campus. Yi, a former economics professor at the awkwardly named Indiana University Purdue University Indianapolis, or IUPUI, was in town to receive an honorary doctorate of letters for his academic research and application of this knowledge through his contributions to Chinese economic policy during the past 15 years. Yi joined the PBOC in 1997, and has steadily risen up the ranks, becoming deputy governor in 2008 and SAFE administrator in 2009. In a very nice (and brief) ceremony, President Michael McRobbie ticked off Yi's accomplishments and then bestowed the honorary doctoral hood over Yi Gang's shoulders. 

Yi Gang was visibly moved by the ceremony. It was clear he has a special place in his heart for IUPUI and Indianapolis, a city he called a second home to him and his family. He obviously really liked being a scholar, and like most academics, is not extremely comfortable being in the public eye.

It was fitting that Yi Gang then delivered a highly academic 40-minute lecture,  "China's Economy -- Path of RMB Exchange Rate Converging to Equilibrium," followed by 10 minutes of Q&A. I'm not sure that everyone in the audience and the members of the Board of Trustees on the stage sitting behind him could follow the details of his graphs and, conversely, that experts on China's economy would find much new. However, I found his presentation and the discussion quite refreshing and insightful.  

I haven't seen any media reports other than IU's own press release before the event occurred, but this was a public lecture presented to an audience of about 200 people, and so I'm sure it would not be seen as confidential. Hence, I feel comfortable summarizing his main points.

• China has depended heavily on exports for growth, but that era is ending. With substantial RMB appreciation and wages growing faster than productivity growth, China's terms of trade are systematically worsening, which will hamper Chinese competitiveness. Hence, growth must come from other sources.

• China's substantial increase in real estate prices does not represent a bubble waiting to pop. There may be a market correction, but he thinks an underappreciated reason for extended increase in prices is the strenghtening of property rights since housing reform in the late 1990's.

• The official 2012 target for growth is 7.5%, but growth will likely be just over 8%. He expects inflation to come in around 3%.

• China's trade surplus with the US is entirely based on processing trade, which is less sensitive to exchange rate flucutations. For trade in final goods, China actually runs a deficit with the US. He argued that if the US would have reduced barriers to exports of high-tech goods and kept the same market share it had in 2000, US exports would have grown by an additional $250 billion since then. (Of all the things he said, this was the least persuasive, as it assumes a highly unrealistic linear extrapolation. This is just an official talking point that others shouldn't take very seriously.) 

• To help re-balance China's economy, key policy reforms include: 1. Increasing domestic demand; 2. Improving the social safety net; 3. Increasing environmental protection; 4. Reducing price distortions in oil, other energy products, and transportation (this means raising these prices); 5. Expanding Chinese outward direct investment; 6. Making the RMB exchange rate more flexible, which received a boost a few days before when the daily trading band was widened; and 7. Expand imports. 

• Given the Euro sovereign debt crisis and the uncertainty surrounding US deficit reduction plans, it would not make sense for China to accumulate additional foreign exchange reserves. This does not mean, however, that China wants to reduce forex holdings. 

• Interest rate reform is important, but forex reform and achieving capital account covertibility are higher priorities. These 3 reforms need to coordinated and sequenced correctly. Interest rate reform seems less pressing because: 1) Chinese interest rates are much lower than rates abroad, and reforming interest rates would mean raising them, inducing more capital inflows (hot money) into China, which the PBOC would like to avoid; and 2) Since inflation has come down, Chinese real interest rates are no longer negative as they were a few years ago. 

What's this all mean? A couple things. First, this sounds like a roadmap for reform, and is consistent with the report, "China 2030," published in February by the World Bank and the State Council's Development Reform Center. How quickly China will move down this road or whether it will take another path is unclear, but at least we have a pretty good sense of the outlines of what we could potentially expect.  

Second, I'm told by someone who closely follows the comments of China's financial bureaucracy that almost everything Yi Gang said in Indianapolis has already been said by others. The only thing that stood out is his last comment about the appropriate sequencing of reforms -- liberalizing the RMB exchange rate and opening the capital account before engaging in further interest rate liberalization. To be fair, that comment was made during the Q&A period and wasn't part of his prepared remarks. My source says Yi Gang's explanation isn't entirely persuasive. Since the RMB is not likely to appreciate much soon, raising interest rates -- the likely outcome of their liberalization -- isn't likely to spark a hot-money inflow. The more likely reason to not reform interest rates is to keep the cost of borrowing as low as possible for favored borrowers, that is, for state-owned enterprises. The implication is that if Yi Gang presented us with a roadmap for reform, it is a road that won't be traveled in a day, but, in fact, will take much longer.

The censor's marker

Last month I picked up a copy of Newsweek just before boarding a plane in Beijing for the US. The issue focused on women across the globe. Inside was an interesting table placing American women in comparative context. A thick black line was placed through the word "country" at the top of the second column. Given that Taiwan is mentioned in table -- not once but twice -- I can understand how this kind of thing might be insulting to Mainland readers. However, I can't think of a good substitute word to put in that location. "Region," "authority," "island," "location," etc, don't fit there.

There may be another explanation. Not nationalism, but prudishness. Perhaps censors were upset that Taiwanese women apparently have the world's highest ownership rate for vibrators, and discussion of such things shouldn't be so public. Or was it both?

At least Taiwanese women are good in math!

Mega financial reform, drop by drop

Yesterday the National Development and Reform Commission announced that foreign banks would be allowed to bring in $24 billion in borrowed funds into China in 2012. This helps address a potential short-run problem of concerns about capital outflows, but it is part of a much larger trend of substantial financial reforms visible over the past 5 months. In the Fall, the top leadership of the China's securities, banking, and insurance regulators were changed. The most important personnel switch was to replace CSRC commisioner Shang Fulin with Guo Shuqing. Shang was moved over to head the banking regulatory commission, replacing retiring Liu Mingkang. Zhou Xiaochuan, who will likely conclude his tenure as Governor of the People's Bank of China next March, has also continued to sound reformist.

Since last Fall, a long list of financial reforms have been issued; each is individually minor, but together they are pretty substantial.

• Allowing further experiments with issuance of municipal government bonds.
• Liberalizing the issue process for corporate bonds.
• Create a common over-the-counter (OTC) trading platform.
• Expand the quotas for Qualified Foreign Institutional Investors (QFII).
• Permit greater private lending to small- and medium-sized enterprises in Wenzhou, as well as make it easier for Wenzhou businesses to invest overseas.
• Further gradual appreciation of the Renminbi.

Drop by drop, the growing list of individual financial reforms has gotten folks thinking that even bigger and more important reforms are on the horizon, namely a liberalization of interest rates and a more complete opening of the capital account. Authorities are at once discussing these possible measures and tamping down expectations.In the past, announcements of major financial reforms have always been sudden, for example, with the scrapping of Foreign Exchange Certificates in 1994 and unpegging the Renminbi from the dollar in 2005.

Nick Lardy, in his new book, Sustaining China's Economic Growth after the Global Financial Crisis, argues that interest rate liberalization is the cornerstone of any serious economic reform plan going forward. Determining when interest rates will be reformed involves a lot of guess work. Reforms would force the gap between deposit and loan rates to narrow, putting pressure on banks. Also, the country's overall debt levels are still high, and interest rate reform could add to the debt obligations of banks. However, Chinese banks currently are enjoying record profits and perhaps could endure the shift to more liberalized interest-rate environment.

The spate of financial reforms also is pushing people to wonder whether we are on the eve of broader economic and political reforms. Usually, such reforms do not come at the end of a Central Committee's term, particularly when many of the members of the Politburo will be replaced. In the past new leaders have taken 1-2 years to get settled before implementing substantial changes. But there are already signs that a list of reforms is being contemplated, including: greater support for the private sector and reduction of state-owned enterprises' administrative monopolies, greater autonomy for business associations, hukou reform, liberalization of the education system, and government restructuring.

Are we on the precipice of major reforms or will the tinkering of the last few months lead to...more tinkering? At this point, it is still anyone's guess.

China not an anti-status quo power, unfortunately

On March 23-24, 2012, Indiana University's Research Center for Chinese Politics & Business (RCCPB) and the Workshop for Political Theory and Policy Analysis jointly hosted the "Conference on China and Global Governance" in Bloomington, Indiana. Scholars from the US, Canada, China, and Europe presented findings from research projects examining the growing role of the Chinese government and non-state actors in international regimes dealing with foreign investment, exchange rates, intellectual property rights, foreign aid, public health, and climate change.

Some conclusions that emerged out of the papers and discussion are surprising:

• China by and large is a "status quo power." This finding goes against the expectations of those who believe that a rising China that did not create the current rules of the international system would naturally be an opponent of the status quo. That has not been the case. Although there is disagreement about what constitutes "status quo" vs. "anti-status quo," in no area that we examined did we find the Chinese government, industry, NGO's, or experts going strongly against the grain of existing international rules and procedures. For the most part, Chinese are attempting to learn the existing rules of the game and not promote alternate institutions and norms.

Ren Xiao (Fudan University), left, and Cheng Shuaihua (International Centre for Trade & Sustainable Development)

In 2009, Zhou Xiaochuan, the governor of China's central bank, put forward the idea of creating a "super-sovereign currency," but in reality China still favors a dollar-based international monetary system. A substantial part of China's foreign aid is "tied" to economic benefits for Chinese industry, but foreign aid even from many OECD countries has been similarly tied. China's rules for reviewing foreign investment for national security and competition policy concerns are relatively similar to those of other countries. China is a huge violator of IP, but its legal system and the trend of growing patenting amongst Chinese companies places China increasingly within global common practices.

Bruce Reynolds (University of Virginia)

• China's domestic political economy fundamentally shapes how Chinese participate in the international community. Chinese are prone to gravitate making international regimes serve the interest of industry and production, as opposed to the interests of consumers and workers; and they generally prefer state-based institutions, as opposed to private governance mechanisms.

Zhang Lu (Temple University), left, and Xu Jiajun (Oxford University)

• The global status-quo shouldn't be seen as inherently good, and in fact, in many areas is quite troubling, as overall poverty levels and inequality are still on the rise. The global IP regime, to many, has overly shifted its balance toward protecting inventors at the expense of consumers. China and others need to be much stronger advocates of reform; otherwise, poverty, climate change, and other problems will not be solved.

Elinor Ostrom (Indiana University), left, and Ricardo Melendez-Ortiz (ICTSD)

Workshop co-founder Lin Ostrom, winner of the 2009 Nobel Prize in Economic Sciences, gave the conference's keynote address. She discussed how to apply polycentric governance approaches, a key prinicple the Workshop has long advocated, to effectively addressing the problems of global climate change. Her advice: don't just depend on national governments and international negotiations; local initiatives can also be extremely important. She noted a program in Sacramento where when customers were given electric bills that showed how much electricity they used relative to their neighbors ("You're using much more than your neighbors!"), people quickly cut back.

This research on global governance is currently being issued through the center's working paper series. Contributions will soon be revised and published through an edited volume, journal articles, and other formats.

China and the Myth of State Capitalism

In January The Economist had two issues focused heavily on the rise of state capitalism, one on January 21, the other on January 28. China featured prominently in both. Now that the world can't be divided into capitalist and communist anymore, The Economist has re-divided the world into genuinely free market economies and those where governments heavily intervene in the economy, either through direct ownership or industrial policies. Clearly governments take on different roles in different countries, and the Chinese state both has a large stake in the economy and intervenes heavily at the sector and firm levels. And yes, China's market economy is far from free, and I don't think it will fundamentally change from its current form for a long time. The "transition" has essentially ended.

However, it's facile to divide the world into free-market capitalism and state capitalism. Just about every government does more than the Libertarian call to provide basic public goods and then get out of the way. The US government provides a lot of regulation to make markets work and protect private property rights, but it's far from a neutral observer with no desire about who wins and who loses. 

The best retort I've seen so far to the "state capitalism" discussion is provided by Niall Ferguson. In his recent Foreign Policy article, "We're All State Capitalists Now," he provides data showing that countries do not neatly divide into two broad camps, and that on most measures, such as government spending as a % of GDP, China falls largely within the normal range with many others.

An interesting nugget that Ferguson cites shows that in cross-national reputation surveys, China fairs better than the US on two scores: politicians' ethics (China ranked 26th to the US's 50th) and political favoritism (38th to 50th). Given the perception that China is highly corrupt, this is quite odd; but it shows Americans' own estimation of their system differs from that held by others.  

The ongoing debate is an extension of the "varieties of capitalism" discussion carried on by political economy specialists over the last few decades. In that debate, scholars offered a variety of potential labels: liberal capitalism vs. coordinated capitalism, the free-market state vs. the developmental state, etc. None ever stuck. State capitalism seems more appealing and easier to remember, but I for one hope this year's fad soon fades. 

 

 

 

Upcoming IPO's: Facebook vs. People's Daily Online

Facebook may raise $5 billion in its IPO, and the company may reach an estimated value of $75 billion. Today I read that People's Daily Online has recently filed for an IPO in Shanghai. Their IPO looks a little different. They only plan to raise about RMB 560 million (~$87 million), and their IPO will only be available to Chinese domestic investors, save those few qualified foreign institutional investors who have received special permission to play in China's financial sandbox. 

One neat thing Caixin notes in its report, People's Daily Online gets more than 20% of its income through government contracts. Given that this is the flagship publication of the Chinese Communist Party Central Committee, one might expect that Party involvement in the organization goes beyond such contracts.

We've all heard of Mark Zuckerberg. Good looking dude, had a flick made about him, has a huge effect on the planet's social landscape.

Have you heard of Liu Yunshan, Director of the CCP's Propaganda Department? He may be good at overseeing the publicity machine of the Party, but he ain't no Mark Zuckerberg.

How does the publicity machine of the party prosper or even maintain its relevance in this day and age?

In 5 years, which stock do you think will have increased in value more?

Apple's global supply chain

Here is a terrific story from the New York Times on the globalization of Apple. The company has moved jobs around the world to both save on costs and to take advantage of the more flexible and better quality manufacturing facilities and talent that are in Asia.

The reporters present a very balanced story; this is not just about a greedy company willing to exploit powerless workers to get rich. It has been forced to diversify production to become more efficient and produce better products. Some contracted workers in Asia work 12-hour shifts and 6 days per week. When an employee in northern California was asked if he would do the same, he said he wanted his Saturdays free so he could watch his kids play soccer. 

I saw one big thing missing from the piece. Although from an employment perspective Asia and China have benefitted imensely from globalization of the consumer electronics supply chain, China participates at the lowest value-added segments of the production of the iPhone. Most of the value-added comes from the US, and most of the profits go to Apple, not suppliers. China is having an extremely difficult time moving up the value-added chain; the story highlights China's ability to provide a flexible workforce and modify manufacturing on a dime; but Chinese firms contribute little to the design of the iPhone or other popular consumer electronics.  

The difficulty of being more innovative is a central concern across China. Following the death of Jobs, there was a big conversation on blogs here, "Why does China not have a Steve Jobs?" So far, the main solutions have been to crank out a lot of engineers and scientists, throw a lot of money at R&D, ramp up establishing patents and standards, and provide protection for domestic firms against foreign rivals. Still missing is encouraging creativity in the educational system, opening up the media and flow of information, more seriously protecting IPR for innovators, and making capital more accessible to private business. My guess is that there are lots of innovative people in China, they just live in a non-supportive environment. 

Hence, for the time being, China is mainly benefitting on the employment side of hi-tech; if it ever manages to move on reforms that would promote product-level innovation, then China would be in the driver's seat globally. So it seems as if the US and China are mirror opposites. China needs the US's innovative environment, and the US needs a deeper sci-tech workforce and better infrastructure to support manufacturing. Not surprising their economies are so intertwined.

Full disclosure: I'm an iPhone 3Gs owner and just switched from a Dell to MacBook Pro laptop. I love both, but I hope Apple will make Word work better on my Mac; it has been far from a seemless transition, which is the fault of Apple and Microsoft. Also, why on earth can't I easily delete text in front of the cursor (and not just back-up)? I can do so in email and on the web using Ctrl-D, but that does not work in Word; and really, I should just have to hit one key for this, not two. I suppose these are minor complaints, but Apple should be all about the user experience. 

Cartoonists - critical sector gets tax break

I don't know how they did it -- who they lobbied or who they threatened to make fun of -- but China's cartoonists have been awarded a huge tax break. According to a story on IFeng, the income taxes for cartoon animationists have been dropped to just 3%. This seems like better tax treatment than the hi-tech seven "strategic emerging industries" -- environmental protection, info tech, biotech, new energy, new materials, new energy vehicles, and advanced equipment manufacturing. Finally, industrial policy directed where funds are needed most. 

New-energy vehicles: a failing strategic emerging industry

In 2009, China identified new-energy vehicles as one of seven "strategic emerging industries" (战略性新兴产业). At the time, there was a lot of excitement, as BYD was seen as a rising star. The Shenzhen-based private car maker was seen as having an excellent chance to turn its original strength in batteries into a successful electric car manufacturer. Warren Buffet invested a ton of dollars into BYD.

The results so far? The China Association of Automobile Manufacturers just released its 2011 figures. Total auto sales in China in 2011 reached 18.5 million units, up 5% over 2010. That's impressive for a country where a decade ago most people still rode their bicycles to work. But the story isn't pretty for new-energy vehicles. There were only 5,579 cars bought in China last year; hybrids faired even worse, with only 2,580 units driven away by Chinese consumers. That means new-energy vehicles accounted for 0.04% of total auto sales in China in 2011.

I guess that means there is a lot of room for growth in the industry. What will it take for the sector to take off? For one, the cost of new-energy vehicles has to come down a lot, and so far, existing subsidies for consumers aren't sufficient to make these vehicles compeititive. More importantly, there needs to be an infrastructure put in place for charging vehicles, and it needs to extend broadly across cities and regions. Drivers are not going to buy vehicles that they can only charge at home; most Chinese live in apartments, and it's not easy to find a place to plug in on the street.

How likely is either? Not likely soon. A back-of-the-envelope calucation suggests it would take subsidies of RMB 55.5 billion to make new-energy vehicles competitive enough so that they would account for 5% of vehicle sales in a single year. (That assumes a conservative 33% premium for electric or hybrid vehicles.) Building electric charging stations would be even more expensive. Much of the cost of both would have to be borne by the central and local governments, and considering the current economic climate, with slower growth and substantial debt, it's unlikely government budgets will put up these kinds of funds any time soon. 

Lovers of conventional cars can rest easy. The rest of us can continue to enjoy polluted air and growing traffic jams. The better option: ride the subway!