5.3.11

FT.com || FT Magazine - Who will be China’s next leaders?

China's Politburo Standing Committee in 2007
Vice-premier Li Keqiang (second from left) and vice-president Xi Jinping (second from right) on their accession to the Politburo Standing Committee in 2007, a key step in their rise to the top. Other members include current premier Wen Jiabao and current president Hu Jintao (fourth and fifth from left respectively)

The streets at the centre of Beijing are eerily quiet over the week-long Chinese New Year holiday, which fell in early February this year, but outside one old house a few blocks from the Forbidden City, a steady stream of cars pulled up.

The holiday is a time to pay respects to family elders and mentors. I know people in their forties and fifties who still visit their -favourite school teacher over the break and among the upper -echelons of the Chinese Communist party, respected older comrades are given their due. The flurry of activity was outside the family home of Hu Yaobang, the former leader of the Chinese -Communist party who died in 1989. Among the dutiful visitors were Xi Jinping, the man slated to be the next president of China, and Li Keqiang, the likely next premier.

Calling on the widow of a former leader might seem run-of-the-mill, but Hu Yaobang is far from a run-of-the-mill figure in Communist party history. During the 1980s, the party split over whether its economic reforms should be combined with political opening. After pushing a liberal line, Hu was dramatically ousted from office in 1987 by more conservative members of the leadership. It was news of his death in April 1989, by then a broken man, that sparked the Tiananmen Square protests. In official celebrations of the party’s history, his name is never mentioned. Along with Zhao Ziyang, the leader who succeeded him and who was then purged after Tiananmen, Hu was China’s Gorbachev.

Next year, China will start a leadership transition, which will give the country a new president in place of Hu Jintao, who is also the head of the party and the military, and a new premier to replace Wen Jiabao, who runs the day-to-day business of the government. In 2007, a key party meeting in effect chose the next leadership team, when Xi -Jinping (pronounced Shee Jin-ping) and Li Keqiang (pronounced Lee Ke-chiang) were both promoted to the country’s top body, the nine-man Politburo Standing Committee. Xi, now aged 57, became vice--president and 55-year-old Li one of four vice-premiers (the most senior, with responsibility for the economy, climate change, health and the environment), giving both five years to play understudy to their bosses.

Crowds gather at a shrine to Hu Yaobang at Tiananmen Square in 1989
Tiananmen Square, 1989: shrine to reformer Hu Yaobang, whose death sparked the protests

The names of the next leaders may already be pencilled in, but the easiest way for them to sabotage their promotion would be to start ­discussing bold ideas now. Instead, they have to spend five years in a form of political purdah, going out of their way to avoid controversial topics. As a result, little is known of their views about many of the big issues that China faces – how to keep the economic boom going, how to manage ties with the US and, perhaps most important of all, whether the Communist party should maintain its iron grip on the country’s political system. Politics in China is often expressed through coded gestures, rather than bold statements, which makes their visits to the family home of Hu Yaobang so symbolic. Were China’s next leaders behaving as dutiful party members, paying respect to a senior comrade in a system that values displays of loyalty, or are they secret liberal sympathisers who are waiting for the right moment to restart the debate about political reform that died in Tiananmen?

There is always an element of wishful thinking to such discussions. For the past two decades, -western observers and governments have projected these questions on to leadership changes, in the hope of finding the new Chinese Gorbachev figure, one who has yet to appear. Yet this is not just a change in leadership but a shift in generations. The stolid engineers who dominate senior positions in China today will be replaced by a group who -studied law, economics and, in a few cases, journalism, and who came of age during the 1980s, a time when China was assailed by western ideas and influences after the intellectual deep freeze of the Mao years. It will be a new era.

. . .

Xi Jinping
Xi Jinping Age: 57, current position: vice-president

At 6ft 1in and barrel-chested, Xi towers over most of his fellow Chinese. He has an avuncular manner and is good at the sort of glad-handing that is important for political networking, the Communist party version of a good bloke. Among senior party members this makes him more personally popular than Hu Jintao, a dour figure who has cultivated an almost anti-cult of personality. “He is comfortable in his own skin,” as one western politician who has spent a lot of time with him puts it.

A self-confessed fan of American movies with a daughter enrolled at Harvard, Xi is married to a popular folk singer, which will bring a touch of glamour to the post. Peng Liyuan, who also holds the rank of major-general in the army’s song and dance troupe, used to be a regular on the huge television spectacle that airs every year on the eve of the New Year holiday. Her most famous song, “Mount Everest”, has lines such as: “You are warming the Motherland with fresh breezes.”

Ever since he was a young official in the provinces in the mid-1980s, when he created a theme park based on the Chinese fable, Journey to the West, Xi has energetically supported reforms to open up the economy. But it is his family history that brings Xi to the house of Hu Yaobang every year – a -history that raises a lot of questions about his real political beliefs. Xi is one of the nearest things there is to aristocracy in China. His father, Xi Zhongxun, was a communist guerrilla leader in the 1930s and played an important role in the later stages of the Long March, the central event in the civil war. In the 1950s he became a powerful figure in Mao’s China as the youngest vice-premier.

Yet the Xi family soon confronted the worst aspects of Mao’s capriciousness. Xi’s father was purged in the early 1960s, the victim of one of the endless power struggles, and suffered even more during the Cultural Revolution, which started later in the decade, when he was tortured and imprisoned. Xi Jinping was sent at the age of 15 to work as a farmer in a village in the north of the country and remained there for six years, according to his official biography.

When Deng Xiaoping took control after the death of Mao, Xi Zhongxun was rehabilitated, along with tens of thousands of other comrades. (The official who organised the rehabilitation drive was Hu Yaobang, then the head of the party’s organisation department.) From there, Xi became one of the key members of the pro-reform faction during the fierce political debates of the 1980s. As party secretary in Guangdong province in the south, he was one of the fathers of the special economic zone in Shenzhen, the city near Hong Kong that became the symbol of China’s economic take-off. He sided with Hu Yaobang when the leader was forced out in 1987, and after he publicly opposed the military crackdown in Tiananmen Square in 1989, he was pushed into semi-retirement.

“The tantalising thing about Xi Jinping is that here is a guy who really suffered during the Cultural Revolution, much more than most, and whose father actually condemned the killings in Tiananmen,” says a professor at a university in ­Beijing who knows the family. “That, to say the least, is an interesting biography.”

Li Datong, a liberal journalist, says there may have been other indications of possible liberal sympathies. On the death in 2005 of Zhao Ziyang, the pro-reform leader purged after Tiananmen and who spent the rest of his life under house arrest, the Xi family sent a wreath to the funeral. “That could be a hint that Xi has some respect for Zhao,” says Li. “But we cannot be sure. There are no documents connecting him to Hu Yaobang or Zhao Ziyang, no substantial evidence of a political inheritance. In this system, everyone is acting, everyone is fake, so we cannot really tell.”

Xi Zhongxun
China’s likely next president is the son of Xi Zhongxun, a key member of the pro-reform faction of the 1980s

Indeed, there is also another reading of Xi’s climb up the ranks that marks him as a very conservative figure, a careerist who has hugged close to the party’s orthodoxies. In the words of a vividly written US diplomatic cable released by WikiLeaks and based on conversations with a close family friend, Xi decided at an early age to get on by “becoming redder than red”. As the cable points out, Xi actually joined the Communist party while his father was still in prison for falling foul of Mao.

Again, it is his background that holds the key. In the 1950s China of Xi’s birth Mao was trying to forge a classless society, but in the Beijing compounds where the families of senior officials lived, there was a highly stratified sense of status – the schools you went to, the shops you could visit and the car your family drove all depended on your exact -position in the bureaucratic hierarchy.

It is an environment that appears to have inculcated in Xi a sense of being a member of a narrow elite whose duty and right it is to rule the country. After the trauma of the Cultural Revolution when, as the WikiLeaks cable describes, many of his peers found relief in drink, sex and debates about the west, Xi started plotting a path to the top of the political system. Using his father’s contacts, he became the mishu, or personal assistant, to defence minister Geng Biao and wore army uniform to the office every day. Sensing that resentment of his connections might block his career if he stayed in Beijing, he took the unusual step of opting to work in the provinces, starting first as an official in a rural backwater in central China, and ending up as the party boss of the booming east coast province of Zhejiang and then briefly in Shanghai, before being promoted to his current post.

The ambition was evident from an early date. Before he married Peng Liyuan in 1987, Xi was first married to Ke Xiaoming, the daughter of China’s ambassador to the UK in the late 1970s. According to two people who know the family, their often difficult relationship came to a head when she insisted on moving to London to study. Xi is said to have replied that one day he wanted to be a member of the Politburo Standing Committee and that meant there was no way he could live in the west.

One of his university degrees is in Marxist -theories and he is still comfortable spouting the sort of ideological platitudes that remain at the heart of the party’s liturgy, but which are now alien to most Chinese. An article he published last autumn in Qiushi, the party’s main theoretical journal, was entitled: “Study the Theoretical System of Socialism with Chinese Characteristics and Master the Marxist Stand, Viewpoint and Method”.

As his succession approaches, he appears to be trying to consolidate support among the old party families and in the military – elements of the system most attached to the status quo. In the past, talk of a “princeling faction” among the children of revolutionary leaders was often exaggerated because it ignored the intense rivalries within this group. In the early 2000s, Xi’s rise was temporarily stymied by Bo Yibo, another revolutionary hero close to Deng who wanted to push the claims of his own son, Bo Xilai, now the party boss of the central Chinese city of Chongqing. But with his position now stronger, Xi has been laying to rest some of these rivalries and building a base among the princelings. At the end of last year, he visited Chongqing and offered strong support for Bo’s controversial campaign against corruption, which has won him broad popular support but appalled liberals after he had the lawyer of an alleged gangster imprisoned. Bo has also encouraged the public singing of revolutionary songs and has sent out millions of “red” text messages with Maoist slogans – a nostalgic appeal to an era many Chinese see as less corrupt. Xi applauded the propaganda drive, saying that “these activities have gone deeply into the hearts of the people and are worthy of praise”.

During his stints as an official in the provinces, Xi made a point of remaining close to senior officers and over the past few years he has been strengthening his contacts in the military. His wife is also very popular with rank-and-file soldiers, which enhances his prestige. How these close ties will impact on his leadership, however, is harder to judge. Over the past year, there has been an increase in hard-line rhetoric from sections of the military, which appears to have influenced the tougher foreign policy positions China has taken. Some analysts believe this reflects the fact that President Hu, who had little military experience before taking office, is less able than his predecessors to rein in the military. With his good personal contacts, Xi might find it easier to impose his authority on the armed forces, yet the same background could also make him more willing to channel their nationalist instincts. In one of his few unguarded moments since 2007, he ranted at a dinner in Mexico City that “there are a few foreigners, with full bellies, who have nothing better to do than try to point fingers at our country”.

. . .

Li Keqiang
Li Keqiang Age: 55, current position: vice-premier

Beijingers like political gossip as much as residents of the next capital city, yet little is known about the private lives of China’s leaders. They are literally walled off from the rest of society, operating from the large Zhongnanhai compound just west of the Forbidden City, which accommodates both government and party offices. Mao Zedong lived inside the compound in rooms next to the swimming pool and it boasts several modest flats and houses, although these days the leaders are believed to actually live elsewhere in the city, in part because of the security risk of having them all in one place. Although Wen Jiabao has gone out of his way to craft a particular political persona, the family life of the leaders is off-limits – there are no photos of Michelle-and-Barack-style date nights around town. Given the considerable fortunes that the family members of some leaders have amassed, this is more than just a tactic to maintain a little bit of mystery.

The distance that the leaders keep means that there is little concrete information about how Xi Jinping and Li Keqiang get on. But what can be said is that, within the range of the sort of people who prosper in the Communist party, it would be hard to find two men less alike in background or personality. For Li Keqiang, the speculation about his political views is rooted in his university years. The son of a low-level official from the poor, rural province of Anhui, he was also sent to work – for four years – as a farmer during the Cultural Revolution. During that time, China’s universities only admitted those with a suitable proletarian class background, but in 1977, the competitive entrance exam was restored. A total of 11.6 million people applied. Li was one of 401,000 to win a place, making him a member of the famous “Class of 1982”.

When he arrived at the law department at Peking University, the country’s most prestigious and -liberal university, the campus was becoming a hotbed of discussion about long-banned western political ideas, China’s equivalent of -glasnost. Li studied under Gong Xiangrui, a professor who had studied in the UK and who gave a popular class on constitutional democracy. Along with several other students, he helped to translate The Due Process of Law by Lord Denning, the -campaigning British jurist known as “the people’s judge”.

In this heady intellectual atmosphere, he was an active participant in the many debates with fellow classmates, some of whom became leading figures in political dissident circles. They included Wang Juntao, who was jailed for five years for his role as one of the “black hands” in the Tiananmen Square protests and now lives in exile in the US, and Yuan Zhiming, one of the main writers of the 1988 television series River Elegy, a polemical attack on the ills of Chinese civilisation, which was a big influence on the 1989 protests.

Despite strong opposition from conservative elements in the party, the Peking University campus started to experiment with elections for posts in the different student bodies. According to Cheng Li, an expert on Chinese leadership politics at the Brookings Institution, Li was heavily involved in the democracy experiments, winning election as head of the student assembly. In an article written a few years ago, Wang Juntao recalled Li’s support for the student elections and a later meeting with him during the 1989 protests. Li had lost some of his independence, he said, but “was still active and open-minded”. Wang concluded: “He said he still valued the spirit of people from our university, and if he one day became a leader, he would welcome criticisms from all his classmates.”

The perception of liberal sympathies held back Li’s career for a number of years, but he soon began to show a rare talent for moving up the system’s rigid hierarchy. He managed to win a position in the bureaucracy of the Communist Youth League of China, which has also been the power-base of Hu Jintao. As well as becoming one of Hu Jintao’s protégés, he used an interest in tennis to curry favour with other influential party elders.

Yet although he is widely praised for his sharp intellect, even temper and ability to turn potential enemies into allies, Li has not yet managed to inspire widespread confidence, either within or outside the party. Some of this is rooted in a feeling that he suffers from bad luck – a slight that is surprisingly important among superstitious -Chinese. During his time as governor of Henan province, there was a series of huge fires, including one at a shopping mall in Luoyang which killed 309 people. Shortly after moving to be party secretary of Liaoning province in the north-east, 214 miners died following a massive explosion.

He has also not managed to shake off the more substantial charge that he is a passive leader, who reacts to events rather than getting ahead of them. Li moved to Henan just as the first reports began to appear about a major outbreak of HIV/Aids, which was caused by unhygienic blood-collection practices. The government response was hugely inadequate, trying at first to block news about the epidemic and providing minimal support to victims. The result was a series of mass protests and there were even reports from Henan of Aids victims threatening to infect passers-by with needles. According to China’s New Rulers, a 2003 book allegedly drawing on leaked party personnel evaluations, “many senior leaders in Beijing blamed this desperate behaviour on the ineffectiveness of Li Keqiang”.

Indeed, this sense of indecisiveness has been the reason for some of the behind-the-scenes pressure in Beijing for Wang Qishan, the vice-premier in charge of financial issues, to get the premiership in 2013, instead of Li. However, the campaign in favour of Wang seems to have lost support, especially after Li’s successful trip to Europe in January. (If the contest between the two were decided by nicknames alone, Li would lose out. In Henan province, he became known as “Three Fires Li” after the string of disasters, while Wang’s capacity for handling major problems, such as the 2003 Sars outbreak, has led insiders to call him “The Firefighter”.)

The same negative impressions inform the scepticism of many in the reform camp about whether Li and the other new leaders will seek to push bolder ideas about politics. “We are not expecting much from this next generation of leaders,” says Ai Weiwei, the artist and persistent government critic. “Maybe the generation after. After another decade, they will be more open in their ideas.”

Shanghai flyovers and motorways at night
Shanghai, a city transformed in a generation by China’s economic reforms

Even if Xi and Li do have big plans of their own, they will be heavily constrained by the system they are taking over. The orderly leadership succession process that is bringing them to power is part of a drive initiated by Deng Xiaoping to create a more predictable political structure that could never again produce the quixotic, centralised control that Mao exercised. In its place is a collective leadership with the Politburo Standing Committee as the main focus. That means there is much less chance of China suddenly shifting direction, but it has also meant a system less able to take hard decisions, more cautious and interested in defending the status quo.

As it happens, when Hu Jintao and Wen Jiabao were assuming power nearly a decade ago, there was also widespread speculation that they were closet political reformers. Indeed, one of the clues insiders pointed to at the time was their own strong links to Hu Yaobang, who was a mentor to Hu Jintao (no relation), while Wen was one of his senior aides. Both men also visit Hu Yaobang’s widow every year over the New Year holiday.

During the Hu-Wen years, there has been a series of attempts to kickstart a discussion about political reform that has gone nowhere. A 2005 white paper on the Chinese political system concluded that democracy is “the common desire of people all over the world”. Last year, Wen published an article in the People’s Daily extolling Hu Yaobang, which many observers took as a coded appeal for political reform. In the article, Wen recalled a trip he made with Hu in 1986 to a rural area of the poor south-west province of Guizhou. “Every time I think back on this, Comrade Yaobang’s sincere, magnanimous and amiable expression keeps appearing before my eyes. Cherished feelings stored in my heart for all these years swell up like a tide, and it takes a long time for me to calm down,” Wen wrote. He followed this up with a series of speeches and interviews about the importance of “universal values” and on the need for the political system to keep up with the changes in the economy. Yet the initiatives have had little impact. Indeed, some of Wen’s comments about political reform received only cursory coverage in the state media, which is controlled by another official on the Politburo Standing Committee.

Xi and Li will have to navigate the same thicket of vested interests. One western diplomat, who has observed Chinese leaders close-up since Deng Xiaoping in the 1980s, describes how each generation has been better prepared and educated when it took office, but less able to actually exercise real power. Short-term problems are approached with ever-greater professionalism, he argues, but the bigger questions are left for another day. “It is a dictatorship without a dictator,” he says.

Geoff Dyer is the FT’s Beijing bureau chief

To comment on this article, please e-mail magazineletters@ft.com

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A hard act to follow

Wen Jiabao

Within hours of the massive earthquake in Sichuan in May 2008, current premier Wen Jiabao was on a plane to the disaster site. For the next few days, he was constantly filmed tramping around collapsed buildings in an old pair of training shoes. “This is Grandpa Wen here,” he called down to one child trapped in the rubble.

Among political and business circles, Wen has plenty of critics who see him as unwilling to take tough decisions. But among the public he is by far the most popular of the senior leaders, the result of a flair for public relations that many western politicians would envy. The son of rural teachers, he always manages to spend some time over the New Year break in poor, rural areas, cameras on hand. It is a new style of politics for China, which some fear could become a form of rabble-rousing populism. But Wen’s ability to stand out from a pack of leaders, who would all be called grey were it not for their immaculately dyed hair, makes him a hard act to follow.

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WikiLeaks on the leaders-in-waiting

Xi Jinping:

According to a long cable based on extensive conversations with a childhood friend, after the Cultural Revolution Xi “chose to survive by becoming redder than red”. Through his father, he had a sense of entitlement as one of “the legitimate heirs” of the revolution and was a member of a generation of princelings who “deserve to rule China”.

He has a sister who lives in Canada and a brother who at one stage lived in Hong Kong.

In his early career he “was quite taken with Buddhist mysticism” and fascinated with “Buddhist martial arts, qigong and other mystical powers said to aid health”.

Li Keqiang:

When he was party secretary of a north-east province, he confessed to the US ambassador that he did not believe official figures for GDP. They were “for reference only”.

Lee Kuan Yew, Singapore’s founding father, told a US official in 2009 that Li might lose out on the premiership to Wang Qishan, also currently a vice-premier, whom he described as “an exceptional talent”.

via ft.com

Fascinating portrait of China's next generation of party leaders. Xi Jinping appears to be a much more formidable leader than his predecessor Hu Jintao, but Wen Jiabao will be a very tough act to follow and Li Keqiang has an uphill battle to wage to fill "Grandpa Wen's" shoes.

4.3.11

Zheng He's ship compared to Christopher Columbus's - WOW!!

Media_httpuploadwikim_wzbot

I was blown away by this image, comparing the ships of the Chinese Navy under Zheng He to those captained by Christopher Columbus. And to think they were built nearly 100 years before Columbus sailed the Atlantic to the New World -- absolutely amazing!!

Martin Jacques on the rise of China and the civilization state || TED.com

26.2.11

What the renminbi means for US inflation | vox - Research-based policy analysis and commentary from leading economists

What the renminbi means for American inflation

Raphael Auer
21 February 2011

This column says that low US inflation over the last 15 years is partly attributable to cheap Chinese imports. It argues that if the US trade deficit is reduced – via either Chinese inflation or a nominal appreciation of the renminbi – this disinflationary effect will be reduced. It says that the resulting inflationary impulse could be severe.


China’s recent inflation is turning heads (Raede and Volz 2011, Cavallo and Díaz 2011). At first thought, the recent rise of inflation in China seems to be reassuring news for US policymakers concerned with the trade deficit. On the one hand, price increases in China make US firms more competitive, and on the other, high inflation may also goad China into letting the renminbi appreciate at an accelerated pace to lower the cost of imported goods. Thoughts along these lines have lead treasury secretary Timothy Geithner to note that current economic developments “will bring about the necessary adjustment in exchange rates” without any need for further intervention by policymakers.

What has not entered this policy discussion, however, is that the trade deficit with China arose for a reason, namely that Chinese goods are dirt cheap. In fact, the increasing importance of cheap imports was a major contributing factor to the low-inflation environment of the last decade (see on this site Auer and Fischer 2008).

If the US trade deficit is reduced via either Chinese inflation or a nominal appreciation of the renminbi, the disinflationary effect of cheap Chinese imports will be reversed. Given that nearly a sixth of all US consumption of manufactured goods is actually made in China, any real appreciation would have a substantial direct impact on inflation due to the weight of Chinese goods in America's inflation indexes. In a recent study (Auer 2011), I document that such an appreciation might also substantially alter the competitive environment on many US markets and consequently lead to widespread inflationary dynamics.

The study examines the 2005 to 2008 period when the Chinese government let the renminbi appreciate by a combined 17% against the dollar. Matching this appreciation with sectoral US price data, it documents how a higher renminbi translates into higher import prices and, in turn, how this affects the prices that domestic firms charge. Overall, the results suggest that in the covered sectors, a 1% appreciation of the renminbi causes American producer prices to increase by a little over half a percentage point.

Figure 1. A 25% renminbi appreciation and US producer price inflation

Figure 1 uses these findings to simulate the effect of a renminbi appreciation on producer price inflation. In both scenarios the yuan appreciates by 25%, with the appreciation being spread over either 10 or 25 months. For example, these simulations suggests that a 25% appreciation spread over 10 months is equivalent to a temporary 5 percentage points (!) shock on US producer prices.

Inflation in China will have enormous consequences for the course of US inflation. The key question is, of course, what can one do about it? Many argue not much – a real appreciation in China will sooner or later feed into American inflation, in one of two ways:

  • First, it can be achieved via a controlled nominal appreciation of the renminbi.
  • Second, in the absence of such an appreciation it will come via inflation in China, since – as Paul Krugman bluntly puts it – inflation is merely “the market’s way of undoing currency manipulation”.

However, this does not imply that there are no policy options. While the spillover of Chinese inflation into US prices is unavoidable, its timing can be controlled via the timing of the appreciation. US inflation is still low at the current juncture; the core CPI gained a muted 0.8% during 2010 and the ample excess capacity (recently estimated to equal 4%-5% of GDP by Morgan Stanley) suggests that there is no imminent danger of high inflation during 2011.

The inflationary outlook might be very different a year or two down the road. Energy commodities rose by 7.5% in December 2010 alone and across the globe, investors are preparing for a long-lasting commodity rally. These commodity price hikes are likely to affect producer prices and consumer inflation within a couple of years. Although a fully-fledged recovery of the housing market is not foreseeable, it is still highly likely that prices for shelter will increase at a much higher rate in 2013 than the 0.4% increase observed during 2010. What if we add to this upside inflation risk a marked real appreciation of the renminbi, for example taking place during mid 2012?

Given that inflation is still low, but surely on the rise, isn’t now the optimal time for the renminbi to appreciate? A swift appreciation of China's currency on the order of magnitude of 5%-10% followed by a return to the current slow appreciation policy might just be what is needed to contain inflation on both sides of the Pacific. Such a policy would increase short-term inflationary pressure in the US, but not beyond acceptable levels. Since this policy would ease inflationary pressure at home, without disrupting the Chinese export sector, the Chinese government, as well, should be more willing than ever to support such a revaluation.

Author's note: The views expressed in this column are those of the author and do not necessarily reflect those of the Swiss National Bank.

A shorter version of this column was published on 3 February 2011 on the Free Exchange Blog.

References

Auer, RA (2011), “Exchange Rate Pass-Through, Domestic Competition and Inflation: Evidence from the 2005/08 Revaluation of the Renminbi”, Working Paper 68, Globalisation of Monetary Policy Institute, Federal Reserve Bank of Dallas.
Auer, RA and AM Fischer (2008), “The impact of low-income economies on US inflation”, VoxEU.org, 13 June.
Auer, RA (2010a), "The effect of low-wage import competition on US inflationary pressure", Journal of Monetary Economics, 57(4):491-503.
Auer, RA (2010b), “Globalisation and Inflation in Europe”, VoxEU.org, 13 June.
Auer, RA, K Degen, and AM Fischer (2010), “Globalisation and inflation in Europe", CEPR Discussion Paper 6451.
Cavallo, Domingo and Fernando Díaz (2011), “China’s dilemma:Higher inflation or deflation of exportables”, VoxEU.org, 17 February.
Reade, J James and Ulrich Volz (2011), “Chinese inflation, monetary policy and the dollar peg”, VoxEU.org, 17 February.

23.2.11

Quick Notes from Beijing - James Fallows | The Atlantic

By James Fallows

Thanks very much to the latest guest team for their ongoing dispatches. Herewith, on a sanity break from other duties, some quick notes on what I first notice compared with my latest stint here last summer:

1) Pollution in Beijing itself has been as bad as the very worst I remember from the olden era. The view below (11am China time, Feb 23) has been more or less unvarying for the past four days. PM2.5 readings[1] through that period have been steadily[2] in the "hazardous" or "beyond index" category. I don't recall a stretch this bad, this long, before. Offered less as complaint than as reality check.

Thumbnail image for BJFeb23.jpg

2) Prices are higher for everything, especially food. By Western standards they are of course very low. But by Western standards people's incomes are also very low. I see why there is so much talk about the disruptive effects of inflation. (Letting the RMB go up faster would help, but that's a topic for some other time.)

3) Internet blockages and social media interference seem worse than I remember experiencing between 2006 and 2009, except in the tensest Tibet-riot periods. Even VPNs[3] sometimes don't work or are slow -- especially this past weekend when no one knew how serious the "Jasmine" demonstrations would become. To illustrate the difference this can make even if you're willing to shell out (as most Chinese citizens wouldn't be[4]) $60 a year for a VPN to get around Great Firewall restrictions, here is a download screen showing progress on a file I was trying to save, from a server in the US:

TBXDownload.png

If you can't read the small print, it's estimating 1 hour and 31 minutes to finish downloading a 34MB file. As it happened, shortly thereafter the connection improved and the file eventually loaded in "only" about eight minutes. But extrapolate that as an efficiency tax on the system as a whole. As I have mentioned many times, the whole setup here is quite an amazing combination of laissez-faire/chaos and cumbersome over-control. As many other people have mentioned, this is accompanied at the moment by a big media campaign[5] pointing to the Middle East as an example of the kind of disorder China must avoid. The situation makes all the more startling the UN Security Council statement about Libya that China (along with other Permanent Members) approved yesterday:

>>The members of the Security Council underlined the need for the Government of Libya to respect the freedom of peaceful assembly and of expression, including freedom of the press. They called for the immediate lifting of restrictions on all forms of the media.<<

Emphasis mine, to indicate freedoms specifically not respected in China when inconvenient for the government and notably limited right at the moment. Lack of self-awareness on the government's part? Deciding that looking hypocritical was the lesser evil, versus standing alongside Qaddafi? Can't be sure.

4) Smiley curve. As mentioned in the magazine here[6] and on this site here[7], many "made in China" exports are actually mere repackaging of high-value components from Japan, Germany, Korea, the United States, or someplace else. China is a huge export power, but not as huge as it seems. Latest evidence in this McKinsey report[8] (free registration required). It said that if you separate the "real" Chinese content from what is counted as total Chinese exports, exports accounted for only about 1/5th of the recent increase in China's GDP -- rather than 1/3, as most reports would suggest, or nearly 2/3rds, as reported a few years ago. China still has a big trade surplus; it still relies too much on exports for growth; its economy is still out of balance with the rest of the world's. But the picture is a little different from the way it's usually portrayed. Here's the main McKinsey chart showing export-growth as a share of Chinese GDP increase:
McKinseyChinaExports.png

Back to typing, and back to this week's guests.

14.2.11

Finally Official: China Takes the #2 Spot

by Damien Ma

Japan has confirmed it. China indeed emerged from 2010 as the world's second largest economy after the United States, at $5.88 trillion to Japan's $5.47 trillion. (In case you're wondering, that's just above 1/3 of the U.S. economy.) Last time when China overtook Japan in a single quarter in 2010, I asked the question "so now what?" Judging by some of the latest reactions from a small sampling of Chinese, helpfully compiled by the WSJ, they seem to largely reflect my previous sentiment. Anything but celebratory, the new status seems to only highlight the deficiencies, large and small, that have accompanied that stellar GDP performance. 

This kind of self-deprecation is commonplace, and you hear Chinese officials often describe Chinese industry as "big but not strong," like a pliable giant that could stumble and easily hurt itself. And of course, the dearth of international Chinese brands has proven a huge conundrum for policymakers in China. At a hotpot dinner over the Chinese new year, I engaged with others in one of my favorite topics to explore: why China's cultural appeal (or "soft power") is not commensurate with its seeming economic heft. Since Japan is being used here for comparison, it seems to me that Japanese cultural products had much broader appeal and resonance globally at a similar stage of development. Not to mention the eventual "just-in-time" industrial model that found wide favor and spawned imitators. 

It's certainly not for the lack of talent and creative energy in China. Check out, for example, these guys rap battling in Beijing. It looks like a scene straight outta 8 Mile, except replace a pale Eminem with a frizzy-haired Xinjianger Ma Jun (he might even be Uighur -- marginalized minority, liberated in hip hop?) schooling the other guy on stage. 

2010 Iron Mic Freestyle Battle Finals - Yugong Yishan, Beijing, China - 2010/10/27 from Matthew Niederhauser on Vimeo.

Or what about this four-year old Chinese kid flooring an audience on the streets of LA with his Michael Jackson moves (the kid seriously breaks it down around the 2:15 mark).  

One reaction, given the current breathless commentary on "China does it best" might be "Oh no, the Chinese are outmaneuvering us in rap and street dancing! They're training an army of 4-year-olds to erode our comparative advantage in spontaneity and bottom-up creative output! What's next, stealing our Broadway jobs??!!" I think Gary Shteyngart captured this exaggerated view of Chinese omnipotence best in his recent "Super Sad True Love Story", in which the denizens of a spiritless New York live in mortal fear of the Chinese central banker arriving to take his country's money back (which Ben Bernanke apparently revealed to be an eye-popping $2 trillion). 

But in fact, these episodes demonstrate the acute resilience of American soft power and appeal. There's not much "indigenous innovation" in those videos, only talented co-optation of what was pioneered in the American urban cauldron. And those migrant worker DIY rockers I wrote about rode to fame on a cover rather than an original, and now seem to be facing copyright troubles. Nonetheless, these grassroots creative elements are highly encouraging. I hope sooner rather than later, China will be exporting products that are um ... more effective than that ad in Times Square during Hu Jintao's visit.  

Note: the rap battle video is from photographer Matthew Niederhauser, who has done some great work on documenting the underground music scene in China. He has more at his site. 

Damien Ma is a China analyst at Eurasia Group.

Its quite a big deal for China to officially pass Japan as the world's second largest economy in GDP terms. However, while the US may be clearly in the cross-hairs of the rising Chinese economic juggernaut, it will be many generations before China supplants the US as the epicenter of popular culture.

12.2.11

China's reaction: Build a wall | The Economist

Build a wall

The Year of the Rabbit starts badly

China's reaction

Feb 3rd 2011 | BEIJING | from PRINT EDITION

THE Chinese Communist Party’s Publicity Department (or Propaganda Department, a closer rendering of the Chinese) is adept at controlling news from abroad that might inflame sentiment at home. As communism collapsed in Eastern Europe 20 years ago, it kept all but the barest news out of the domestic media, jammed foreign broadcasts and ordered vigilance over fax machines.

In response to the unrest in Egypt, the department has apparently instructed the Chinese media to use only dispatches sent by the official news agency, Xinhua, and either to bury news of events there or play up aspects that show the costs of turmoil. Reporting the travails of stranded Chinese tourists, or the government’s noble attempts to rescue them, is fine, but sympathy with the protesters is taboo. The department’s instructions to the media are, as usual, a secret, but their effect is clear.

The party has also been busy trying to control the internet. Twitter has been blocked in China since 2009, but home-grown versions are hugely popular. Anyone trying to follow postings by users with an interest in Egypt, however, might struggle. Merely searching for the word “Egypt” in Sina Weibo, one of China’s leading Twitter-like services, produces a warning that “according to the relevant laws, regulations and policies, the search results have not been displayed”. On Baidu, a big news portal, a prominent list of “hot search terms” includes “the return of compatriots stranded in Egypt”, but nothing else.

Related topics

Chinese news reports have briefly mentioned the disruption of internet and mobile-phone services in Egypt. They have not, however, discussed China’s pioneering use of such techniques to impede the mobilisation of crowds. Use of the internet and mobile phones for international calls and text-messaging was cut off for months in the far-western region of Xinjiang after ethnic clashes there in 2009.

On February 1st the party’s main mouthpiece, the People’s Daily, relegated Egyptian politics to five terse paragraphs on page three but published a full page of articles under the headline, “The Internet is Warming the Whole of Society”. The internet, one scholar was quoted as saying, is a “great promoter of social change”. The party knows that all too well.

from PRINT EDITION | Briefing

Its always interesting to watch the Chinese media react to events with significant geopolitical implications because of the overt control over the media exerted by Beijing. Revolutions rarely carry the historical significance of these past weeks events in Eygpt, and the moment has clearly not been lost on the leaders of the Chinese Communist Party.

I cannot say that I totally understand why the Chinese political leaders fear such news making it into the hands and minds of the Chinese people. Its not as if the people aren't well aware that they are in control of the status quo in China, of course they understand that if they wanted a new government it would almost certainly be theirs to take. If anything, IMHO, the party is the chosen vehicle of the people as the fast means of achieving prestige and respect as a culture/civilization on the global stage.

8.2.11

FT.com / China in fresh interest rate rise

China in fresh interest rate rise

By Patti Waldmeir in Shanghai and Robert Cookson in Hong Kong

Published: February 8 2011 11:58 | Last updated: February 8 2011 11:58

China has raised benchmark interest rates for the third time since October, as Beijing intensifies its battle against stubbornly high inflation.

The benchmark one-year lending rate would rise to 6.06 per cent from 5.81 per cent, effective from Wednesday, the People’s Bank of China said on its website on Tuesday. The one-year deposit rate will rise to 3 per cent from 2.75 per cent but longer term deposit rates will rise by as much as 45 basis points.

“The goal is to encourage savers to keep their money in bank deposits rather than shifting to equities or property,” said Mark Williams of Capital Economics.

The timing of the increase, which came on the final day of the week-long Chinese new year holiday, appeared to be aimed at avoiding unsettling global and domestic markets. The previous increase came on Christmas day.

“Clearly, Chinese policymakers are increasingly focused on fighting inflation and asset price bubbles,” said Dariusz Kowalczyk, economist at Crédit Agricole. The fact that deposit rates were raised by more than lending rates “shows the determination to bring the real savings rate closer to positive territory”, he said.

The rate rise comes as China seeks to curb rising inflation, particularly in food prices, following a huge expansion in the money supply in the wake of the financial crisis. Goldman Sachs forecasts that year-on-year consumer price inflation in China is likely to have risen to 5.3 per cent in January from 4.6 per cent in December.

In addition to interest rate rises, Beijing has sought to tighten liquidity in the economy by raising the amount of deposits that China’s biggest lenders must hold on reserve with the central bank.

“For China, the year of rabbit is the year of inflation,” said Qu Hongbin, greater China chief economist at HSBC. “Given that growth is still strong, Beijing can now fight against inflation single-mindedly”. Most economists expect a further interest rate rise and a further increase in bank reserve ratios in coming months.

Last month, the PBoC increased the reserve requirement ratio for China’s biggest banks by 0.5 percentage points to 19.5 per cent, its highest level since reserve requirements were introduced in the mid-1980s and the eighth such move since the start of 2010.

Jing Ulrich, head of China equities for JPMorgan, said she expected inflation to remain high in spite of the move. “We expect that inflation will remain elevated in the next several months due to a number of factors, including rising food prices, as well as inflation passed through from increasing wages, commodities prices, and possibly energy costs if they are liberalised.”

via ft.com

Chinese central bankers take action to cool inflation by raising interest rates again (eighth consecutive such move) to 3% from 2.75% for the one-year benchmark lending rate.

7.2.11

China follows British footsteps to African wealth | BBC News

China follows British footsteps to African wealth

Chinese railway worker on Benguela track

By Justin Rowlatt
BBC News, Angola

Chinese investment in Angola is bringing back to life one of the greatest rail routes in Africa, the Benguela Railway. In return, China gets oil - but are accusations of a colonial-style scramble for resources fair?

The passengers squatted beside the railway tracks. It was impossible to tell how many there were.

In the darkness their bodies merged with great shapeless bundles of luggage, but there were certainly hundreds.

Then with the first flush of dawn, and bang on time, the bright beam of headlights appeared in the far distance.

The crowd immediately began to stir and jostle for position, even before the train had eased to a halt.

They threw up their boxes and bags into the open cattle trucks and scruffy passenger carriages, then scrambled after them.

Map of Benguela Railway route
The line stretches from Angola's west coast to the Zambia border

Tony, the railway official who was looking after us, urged us to get moving too.

"It will not wait for you," he warned.

He hurried down to the very last carriage, and gestured at us to board this battered old compartment.

"You can leave your things safely here," he said.

We did as he said and climbed up the steps, and into another world.

Teak-lined stateroom

The contrast with modern Africa could not have been greater.

We were in a teak-lined stateroom, the windows shaded by slatted blinds.

TV SERIES
Justin Rowlatt has embarked on a global journey to explore the effects of China's policy of "going out" into the world to secure the energy and raw materials its rapidly growing economy needs.
A two-part documentary series will air on BBC Two in early 2011.
He will also be reporting regularly for the BBC News website.

There was a table with a crisp white tablecloth surrounded by four heavy chairs and, in the ceiling, a big silver fan.

We had stepped back into Edwardian England.

Tony laughed at my astonishment. He had known we would be impressed.

"You should feel at home," he teased.

"This is one of the original British carriages, where the directors of the railway company would travel."

Our grand accommodation was a remnant of what was once one of the great routes of Africa - the Benguela Railway.

It was an engineering triumph, stretching 1,000 miles up from the Angolan coast, right into the southern Congo.

Some people mutter that it is really just another scramble for oil and other resources

The railway took almost 30 years to build and cost the equivalent of hundreds of millions of pounds - as well as the lives of many of the indentured labourers who worked on it.

But little remains of the glory of the Benguela now. Until very recently all but a tiny stretch of the line was closed.

The railway was one of the many victims of Angola's 27-year-long civil war.

Now it is being rebuilt. Not, needless to say, by the British, but by the Chinese.

Back in Luanda, the Angolan capital, I had heard a lot of anxiety about the Chinese move into Africa.

Some people mutter that it is really just another scramble for oil and other resources.

It is true that Angola has some of the biggest oil reserves in Africa.

But as I looked around at the expensive fittings in our state car on rails, it looked as if motives of the men who built this railway were pretty similar.

The Benguela railway was not a philanthropic project, but a business investment. It was built to ship out the incredible copper wealth of central Africa.

Rolling supermarket

As soon as the train pulled into the first station - a dusty stop in the middle of dry scrubland - it was clear that the recent Chinese work on the railway is providing economic benefits too.

Those huge bundles I had seen by the passengers were thrown open.

Our people have been fighting for so long, they don't know how to build anymore
Angolan woman

Inside were huge mounds of tomatoes, onions, greens, dried fish and great bloody lumps of meat.

The hundreds of people waiting surged forward, yelling and rushing from one carriage to another to barter for the goods on offer.

I realised that this train was, in effect, a rolling supermarket and the passengers were small businessmen and women.

"I couldn't do this before the railway was fixed," one large woman selling plump red tomatoes told me.

"Before, I had to travel by car which was much more expensive."

She giggled shyly and acknowledged that she was making better money now. "I am not rich, but a bit richer," she told me.

So how did these traders feel about the Chinese helping to refurbish the line?

They all agreed that the Chinese were very hard workers and had done a fine job.

But should the work not have gone to Angolans, I wanted to know?

"Our people have been fighting for so long, they don't know how to build any more," the woman with the tomatoes told me with a wry smile.

Fair deal?

Of course the Chinese labourers get paid - and their wages come out of a cheap loan which the Chinese government made to the Angolan government.

And that loan, in turn, is paid for in oil.

So in some sense oil money is still the motive.

BENGUELA RAILWAY
Opened in 1928 to transport copper deposits
It consists of 840 miles (1344 kilometres) of track
Twenty-seven years of civil war destroyed much of the railway

But, as the train grunted and clanked on through the savannah, with its occasional vivid red acacia tree, it seemed to me that what was happening now was very different from what the British had done here.

The Angolan oil which pays off that loan is now sold abroad at the prevailing market rate.

Very different terms from those of the British, who carted hundreds of millions of tons of precious African copper down this line without paying anyone a penny for it.

So, while it may be tempting to see today's China as just another imperial power out to exploit the riches of Africa, it seemed to me that there is a big difference between the Chinese presence and the British one.

Though, sitting back in my state car as the train rattled on up the line, I had to admit those British railway pioneers did know how to travel in style.

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The Chinese have been wisely exporting their culture to the developing world in hopes of spreading their uniquely Chinese model for economic development, much the same way the west was able to export its model of free market capitalism to emerging markets post-WWII up until Reagan and the collapse of the Soviet Union. I have been blogging about this phenomenon for years, but the mainstream press is finally starting to wake up.

6.2.11

Chinese family businesses: Dusk for the patriarchs | The Economist

Chinese family businesses

COMPANIES can survive for hundreds of years. Their founders cannot. Hence the problem that eventually faces all family-owned firms: how to hand over from one generation to the next. In Stanley Ho’s case, the transition is proving stormy.

Mr Ho is the gambling king of Macau: the founder of an empire that includes casinos, ferries, an airline, hotels and commercial property. He is also 89 years old, in poor health and less lucid than he once was. His four families are fighting like harpies over his assets, which are held within an array of complex structures.

It is messy: Mr Ho (pictured, with his third wife and their daughter) had four concurrent “wives” in a territory that does not recognise polygamy. Three are still alive, plus at least 16 children. Mr Ho apparently had a stroke in 2009, prompting his relatives to start struggling for control.

Their feud has become a YouTube sensation. Every few days, a wheelchair-bound Mr Ho issues a statement that contradicts his previous one: either accusing his relatives of robbery or exonerating them. Throngs of Hong Kongers have joined the journalists outside the family’s many opulent residences, straining for the latest whispers. Two photographers have had their feet run over by limousines.

The Ho saga has prompted fresh scrutiny of other firms that will soon face succession tussles. A major investor in two of Mr Ho’s Macau companies (one controlling casinos, the other ferries) is Cheng Yu-tung, 85, who runs his own swelling conglomerate, New World Development, with unresolved succession issues.

At Sun Hung Kai, Hong Kong’s largest property owner, the succession seemed settled in 1990 with the death of the founder and management passing to his three sons. But turmoil erupted in 2008 when the founder’s then 79-year-old widow, Kwong Siu-hing, emerged as the true power, pushing out her eldest son, Walter, who had been chief executive. On Sun Hung Kai’s board sits Lee Shau-kee, 82, who runs another property company, Henderson Land, with its own succession issues.

Any talk in Hong Kong about succession soon touches upon Li Ka-shing, 82, the territory’s richest resident, whose empire encompasses utilities and property. Much of his wealth has been pledged to charity, but no one knows who will run his firms when Mr Li dies. When he was abruptly hospitalised in 2006, shares in his listed companies immediately sank.

Many Hong Kong tycoons are getting old (see table). Typically, their fortunes date back to the early post-war years, when Hong Kong was a desolate rock, Macau was in decline and Singapore was a swamp. They built empires while keeping tight personal control, often using bewildering interlinked corporate structures.

Within a few years, dozens of publicly listed (but family-controlled) Asian companies will change hands. If history is any guide, the process will hurt, says Joseph Fan, a professor at the Chinese University of Hong Kong. A study he jointly conducted of 250 companies in Hong Kong, Taiwan and Singapore controlled by Chinese families found that successions tended to coincide with tremendous destruction of value (see chart).

There are exceptions. Sir Run Run Shaw, a 103-year-old media mogul, appears to be retiring in peace. On January 26th he announced that he would sell his controlling stake in TVB, Hong Kong’s largest television network, for more than $1 billion. It was the last public link to an empire that once included the largest private film studio in the world. Mr Shaw retired from active management on his 100th birthday, in favour of a much younger manager, his then 77-year-old second wife, Mona Fong.

Many patriarchs built their fortunes with risky bets: movies, the first casino, manufacturing. But many have shifted into merely collecting rents from property and related businesses (ports, hotels, retail) or from government concessions (electricity, telecommunications, gas, casino licences).

The simplicity of the underlying businesses may account for the ferocity of the family battles—it is not hard to make money if you own a casino near mainland China these days. However, in areas that are genuinely competitive, such as banking, Hong Kong’s family firms have been largely elbowed aside by multinationals.

Patriarchs add value in two ways that do not appear on balance-sheets, says Mr Fan. Their reputation ensures that banks will lend money to their companies. And their relationships with government are often lucrative. Alas, these strengths are hard to bequeath to one’s children. Which is why some Asian empires will struggle to outlive their founders.

Very interesting article on the tumultuous fall of Hong Kong's great 20th century tycoons, or the inglorious rise of the next generation of Chinese business leaders, depending on your perspective.

29.1.11

Bamboo scaffolding (more images)

Gas Prices in Hong Kong

While there are few gas stations to be found throughout Hong Kong, the prices are quite reasonable by US standards. I found this station while wandering by myself in the middle of the night down a secluded street near the US consulate (Kennedy Road I believe). With the HK$ exchanged at a pegged rate of approximately US$7.75, the cost of regular unleaded is a bit less than $2 and premium is slightly over $2. This at least partially explains the city's very reasonable taxi fares.

Bamboo Scaffolding

I cannot seem to get over my fascination with bamboo scaffolding. Its almost as if the scaffolding is weaved (woven?) together with the excess material sticking out the top, much like an unfinished wicker basket.

China the Mother of All Grey Swans / Japan Past the Point of No Return - October 2010 - By Vitaliy Katsenelson

Is China on the verge of imploding? Is the excess and idle capacity going to drag the entire country under, and with it the rest of the world?

Many very interesting points raised in this presentation from Vitaliy N. Katsenelson of Investment Management Associates.

China Permits Foreign Investment WFOEs in Medical Industry | China Briefing News

China Permits Foreign Investment WFOEs in Medical Industry

Dec. 14 – In a follow up to the piece we wrote last week on China opening up its medical industries to foreign investment, here we offer readers a direct translation of the pertinent text taken from Guobanfa [2010] No. 58 issued on November 26.

Article 5: Allowing overseas capital to establish medical institutions

Opening up shall be further deepened for medical institutions and investments in medical institutions by overseas capital shall be adjusted into permitted foreign-invested projects.

Overseas medical institutions, enterprises and other economic organizations shall be allowed to set up medical institutions through the form of joint ventures or cooperative joint ventures within China with Chinese medical institutions, enterprises and other economic organizations to gradually cancel restrictions over the proportion of equity held by overseas capital.

Eligible overseas capital may establish wholly-owned medical institutions within China on a pilot basis and restrictions shall be removed gradually.

Overseas capital may make investments in both for profit medical institutions and non-profit medical institutions.

Overseas capital shall be encouraged to establish medical institutions in the central and western parts of China.

Capital from Hong Kong SAR, Macau SAR and Taiwan region in establishing medical institutions in the mainland shall enjoy priority support policy in accordance with relevant provisions.

Article 6: Simplifying and standardizing examination and approval procedures for overseas capital making investments in medical institutions

The establishment of Sino-foreign joint venture medical institution and Sino-foreign cooperative joint venture medical institution shall examined and approved by health authorities and commerce authorities at the provincial level, among which the establishment of Chinese medicine hospital, Chinese and western medicine hospital and minority medicine hospital shall seek the opinions of Chinese medicine administration authorities at the provincial level.

The establishment of foreign wholly-owned medical institutions shall be examined and approved by the Ministry of Health and the Ministry of Commerce, among which the establishment of Chinese medicine hospitals, Chinese and western medicine hospitals and traditional Chinese medicine hospitals shall seek the opinions of the State Administration of Traditional Chinese Medicine. Specific measures shall be separately formulated by relevant authorities.

At present, foreign investment is only permitted (with very rare exceptions) in the form of Joint Ventures, however the circular states the equity amount in favor of the Chinese partner may now be reduced. Initial pilot schemes will be permitted for the establishment of WFOEs, while the promulgation of the application procedures is still being worked on.

Also within the circular are the provisions for more “social capital” to be made available for the reform of public hospitals. It dictates the circular is intended to “stably transform some public medical hospitals into non-public medical institutions, appropriately lower the proportion of public hospitals, promote the reasonable distribution of public hospitals and create the situation in which multiple investments are made in medical institutions,” effectively meaning the door has now opened for a class of private hospitals to be both funded from overseas to service the domestic market.

This circular paves the way for far easier access to the large medical care industry in China for foreign investors. Further information concerning this development and the implications for interested parties may be made to Richard Hoffmann, senior legal associate at Dezan Shira & Associates. The firm handles numerous clients in China’s health care and medical industry and can be contact at legal@dezshira.com.

Big news for the opening up of Chinese markets to foreign competition. It still probably makes little sense to try to operate on the mainland without a local partner, but a major step in policy regardless.