U.S. vs. China: Nurturing America's Homegrown Advantages | TIME Ideas

PETER PARKS / AFP / GETTY IMAGES

A person passes a photomontage of the Shanghai skyline in a subway station in Pudong, the financial district of Shanghai, on Feb. 3, 2012

Liu's latest book is The Gardens of Democracy: A New American Story of Citizenship, the Economy, and the Role of Government

Two years ago, China launched an ambitious campaign to lure expatriate Chinese-born scientists, engineers and entrepreneurs, particularly those in the U.S., to go home to China. This “talent development” initiative, reported the New York Times, promises free housing, tax breaks and signing bonuses of up to $158,000, and reinforces a narrative loop in the threatened American psyche: First they got our jobs, then our dollars and debt and now our talent.

But in his new book, China Airborne, James Fallows tells a story that’s more nuanced and, in some ways, actually harder to bear. A longtime correspondent for the Atlantic who’s lived in Beijing and Shanghai, Fallows chronicles China’s efforts to create a world-class commercial-aviation sector from scratch. Assembling iPhones by hand requires only abundant unskilled labor. Making passenger jets that stay aloft requires an economy of such sophistication and interlocking complexity that it can truly be called first world. And, indeed, China’s aviation boom — with catalysts ranging from well-connected tycoons to ambitious American advisers to provincial boosters — is a microcosm of China’s epic rise. Where that country’s core assets can be brought to bear — scale, mass, will, central planning — breathtaking progress ensues. China, for instance, is building 100 new airports today; the U.S., one or two. China has created a giant aeronautical complex in Xi’an for 250,000 engineers.

(MORE: Why China’s Rise Is Great for America)

Yet the Chinese have liabilities too. Those engineers have been trained more to follow routines than to adapt creatively to the unexpected. The state’s control of the Internet stifles innovation. The reluctance of the People’s Liberation Army to relax its grip on airspace deters aerospace entrepreneurs. The culture of self-dealing state capitalism makes foreign investment risky. The absence of transparent governance and public trust dampens citizen initiative.

These liabilities often go unnoticed by Americans because it’s harder to see the soft stuff (like culture) than the hard (like infrastructure). For the same reason, Americans are often blind to their own strengths. I write this from Seattle, which remains the aviation capital of the world — and likely will for the rest of our lives. Here America’s assets are hidden in plain sight: its research universities, its venture-capital ecosystems, its Boeings and Microsofts, its immigrants of all races and classes, its relatively open government, its web of voluntary associations.

(MORE: China’s Going to the Moon — and That’s Good for Everyone)

But then, in the other Washington and on Wall Street, America’s liabilities lie also in plain sight. The body politic is crippled by severe, asymmetrical party polarization. CEOs and shareholders are obsessed with quarterly results instead of long-term economic health. Bankers still believe that financial engineering is engineering and that making a casino killing is the same as creating social value.

It turns out that a much earlier work by Fallows may bear the more apt message for our times. Back in the late 1980s, when Japan was rising and predictions of American decline were rampant, he wrote that instead of wringing our hands and trying to be more like the Japanese, what we needed was to be — in the title of his book — More Like Us. We had to remember that America’s advantage, when activated, was its openness to talent from outside, its social mobility, its institutional support for equal opportunity, its amalgam of individual moxie and mutual responsibility, its tolerance for change and risk, its essential pragmatism.

We know how that story ended: America rebounded, and Japan, because of its own underappreciated weaknesses, fell into a “lost decade.” How today’s story will end is still in question. What’s certain is that Americans should be less alarmed by reports of China’s methods than by reports of America’s underfunded universities, its money-drenched ideological politics, its concentration of wealth and the meanness and myopia of its immigration policies. These things — not China’s 12th Five-Year Plan or $158,000 signing bonuses — are what threaten American prosperity.

(MORE: Will Events in China Have a Lasting Impact on Obama?)

It’s worth remembering too that the transformation China must now make to create an economy with topflight jobs is much more wrenching than the transformation America must make to keep such an economy. The difference is civic: a society’s talent is developed much more readily when institutions and incentives tip toward openness and freedom. And it’s much harder to create such institutions than to renew them.

As Fallows observes, leaders in China aren’t preoccupied with the U.S.; they are busy trying to hold their own centrifugal, contradictory society together. But they surely note even today the rich evidence of insistent American innovation: from SpaceX’s rocket launch to James Cameron’s deep-ocean dive to the Nobel laureates who still populate America’s research institutions and are exploring the frontiers of nanorobotics and brain science and the mysteries of the genome.

So let China take flight and let them do it their way. We can’t out-China China. But we can be more like us — and we’d better, in a hurry.

MORE: Murder, Lies, Abuse of Power and Other Crimes of the Chinese Century

Liu is the author of several books, including The Gardens of Democracy and The Accidental Asian. He was a speechwriter and policy adviser to President Clinton.

via ideas.time.com

This is a great piece on the under-appreciated differences between the US economy and our rising Chinese counterpart. Great stuff. Here is my favorite excerpt;

"...Americans are often blind to their own strengths. I write this from Seattle, which remains the aviation capital of the world — and likely will for the rest of our lives. Here America’s assets are hidden in plain sight: its research universities, its venture-capital ecosystems, its Boeings and Microsofts, its immigrants of all races and classes, its relatively open government, its web of voluntary associations."

U.S. vs. China: Nurturing America's Homegrown Advantages | TIME Ideas

PETER PARKS / AFP / GETTY IMAGES

A person passes a photomontage of the Shanghai skyline in a subway station in Pudong, the financial district of Shanghai, on Feb. 3, 2012

Liu's latest book is The Gardens of Democracy: A New American Story of Citizenship, the Economy, and the Role of Government

Two years ago, China launched an ambitious campaign to lure expatriate Chinese-born scientists, engineers and entrepreneurs, particularly those in the U.S., to go home to China. This “talent development” initiative, reported the New York Times, promises free housing, tax breaks and signing bonuses of up to $158,000, and reinforces a narrative loop in the threatened American psyche: First they got our jobs, then our dollars and debt and now our talent.

But in his new book, China Airborne, James Fallows tells a story that’s more nuanced and, in some ways, actually harder to bear. A longtime correspondent for the Atlantic who’s lived in Beijing and Shanghai, Fallows chronicles China’s efforts to create a world-class commercial-aviation sector from scratch. Assembling iPhones by hand requires only abundant unskilled labor. Making passenger jets that stay aloft requires an economy of such sophistication and interlocking complexity that it can truly be called first world. And, indeed, China’s aviation boom — with catalysts ranging from well-connected tycoons to ambitious American advisers to provincial boosters — is a microcosm of China’s epic rise. Where that country’s core assets can be brought to bear — scale, mass, will, central planning — breathtaking progress ensues. China, for instance, is building 100 new airports today; the U.S., one or two. China has created a giant aeronautical complex in Xi’an for 250,000 engineers.

(MORE: Why China’s Rise Is Great for America)

Yet the Chinese have liabilities too. Those engineers have been trained more to follow routines than to adapt creatively to the unexpected. The state’s control of the Internet stifles innovation. The reluctance of the People’s Liberation Army to relax its grip on airspace deters aerospace entrepreneurs. The culture of self-dealing state capitalism makes foreign investment risky. The absence of transparent governance and public trust dampens citizen initiative.

These liabilities often go unnoticed by Americans because it’s harder to see the soft stuff (like culture) than the hard (like infrastructure). For the same reason, Americans are often blind to their own strengths. I write this from Seattle, which remains the aviation capital of the world — and likely will for the rest of our lives. Here America’s assets are hidden in plain sight: its research universities, its venture-capital ecosystems, its Boeings and Microsofts, its immigrants of all races and classes, its relatively open government, its web of voluntary associations.

(MORE: China’s Going to the Moon — and That’s Good for Everyone)

But then, in the other Washington and on Wall Street, America’s liabilities lie also in plain sight. The body politic is crippled by severe, asymmetrical party polarization. CEOs and shareholders are obsessed with quarterly results instead of long-term economic health. Bankers still believe that financial engineering is engineering and that making a casino killing is the same as creating social value.

It turns out that a much earlier work by Fallows may bear the more apt message for our times. Back in the late 1980s, when Japan was rising and predictions of American decline were rampant, he wrote that instead of wringing our hands and trying to be more like the Japanese, what we needed was to be — in the title of his book — More Like Us. We had to remember that America’s advantage, when activated, was its openness to talent from outside, its social mobility, its institutional support for equal opportunity, its amalgam of individual moxie and mutual responsibility, its tolerance for change and risk, its essential pragmatism.

We know how that story ended: America rebounded, and Japan, because of its own underappreciated weaknesses, fell into a “lost decade.” How today’s story will end is still in question. What’s certain is that Americans should be less alarmed by reports of China’s methods than by reports of America’s underfunded universities, its money-drenched ideological politics, its concentration of wealth and the meanness and myopia of its immigration policies. These things — not China’s 12th Five-Year Plan or $158,000 signing bonuses — are what threaten American prosperity.

(MORE: Will Events in China Have a Lasting Impact on Obama?)

It’s worth remembering too that the transformation China must now make to create an economy with topflight jobs is much more wrenching than the transformation America must make to keep such an economy. The difference is civic: a society’s talent is developed much more readily when institutions and incentives tip toward openness and freedom. And it’s much harder to create such institutions than to renew them.

As Fallows observes, leaders in China aren’t preoccupied with the U.S.; they are busy trying to hold their own centrifugal, contradictory society together. But they surely note even today the rich evidence of insistent American innovation: from SpaceX’s rocket launch to James Cameron’s deep-ocean dive to the Nobel laureates who still populate America’s research institutions and are exploring the frontiers of nanorobotics and brain science and the mysteries of the genome.

So let China take flight and let them do it their way. We can’t out-China China. But we can be more like us — and we’d better, in a hurry.

MORE: Murder, Lies, Abuse of Power and Other Crimes of the Chinese Century

Liu is the author of several books, including The Gardens of Democracy and The Accidental Asian. He was a speechwriter and policy adviser to President Clinton.

via ideas.time.com

This is a great piece on the under-appreciated differences between the US economy and our rising Chinese counterpart. Great stuff. Here is my favorite excerpt;

"...Americans are often blind to their own strengths. I write this from Seattle, which remains the aviation capital of the world — and likely will for the rest of our lives. Here America’s assets are hidden in plain sight: its research universities, its venture-capital ecosystems, its Boeings and Microsofts, its immigrants of all races and classes, its relatively open government, its web of voluntary associations."

The sky's the limit | James Fallows new book on the Chinese aerospace ambitions

2012-06-01 07:56:19.0Kelly Chung DawsonThe sky's the limit1811066442People2@usa/enpproperty-->

Author explores potential of Chinese aviation

Beyond standard economic indicators of prosperity, certain industries can be seen as a microcosm of a country's maturity. James Fallows' new book, China Airborne, argues that Chinese aviation is such an industry, worthy of closer examination for what its successes and shortcomings reflect about China's technological and social progress.

"There are a number of industries that have significance beyond themselves," Fallows says.

"If a country succeeds in those industries, it indicates a larger range of accomplishment and networks of sophisticated production, and aerospace is one of these high-end industries.

"Countries that have successful aerospace industries are capable of building sophisticated operation systems, maintaining safety standards, and can pull off the integration of military, civilian and weather systems on an international level," he says.

James Fallows sees the aviation industry as a microcosm of China's maturity in his new book. Provided to China Daily

"It's a microcosm of the larger Chinese effort to become a higher-value modern economy, and it seemed to me to deserve attention as a test case for China's emergence."

China Airborne traces the history of the nation's commercial airline industry and its more recent attempts to compete as an aircraft manufacturer. Once rated among the most dangerous to fly, Chinese airlines now boast some of the lowest crash rates in the world. But Chinese airplane manufacturers lag behind international competitors in innovation and design - a telling sign, Fallows says.

"There are major catch-up efforts to build regional jets and larger jetliners, and the test is whether these Chinese factories will be able to take the next step up. It has not happened yet, but Boeing and Airbus are very attentive to what will happen in China over the next few years."

In 2011, the Chinese government unveiled its 12th Five-Year Plan (2011-2015), in which it pledged 1.5 trillion yuan ($237 billion, 189 billion euros) to develop the national aerospace industry in the form of new airports, navigation systems and planes. As of 2010, the country counted 2,600 commercial planes, about half as many as in the US, with a target of 4,500 by 2016.

Construction of 150 new airports is already under way in China, although Fallows seems to argue that growth can sometimes surpass actual need. Much of China's airspace is highly regulated and in some cases off-limits due to military reasons, severely curtailing the potential of the private small-aircraft industry.

But as Fallows notes, Boeing executives have declared China the sole source of hope "that the world aviation industry is beginning to recover".

China Airborne also outlines the history of Chinese involvement in aviation and aerospace. A Chinese engineer, Wong Tsu, played a significant role in the development of the US industry in the early 1900s, Fallows writes. Born in Beijing in 1893 and sent to England for naval cadet training, Wong eventually became a student at MIT, in the country's first aeronautical engineering program. In 1916 he joined Bill Boeing in Seattle as the Boeing Co's first chief engineer. In fact he designed the Model C plane, the first aircraft Boeing sold to the US military.

China had its first flight in 1909, only six years after the Wright brothers' fixed-wing gas-powered plane made history on a North Carolina beach. But the gap between Chinese and US technologies only widened over time.

For a period, China used only Soviet-made planes. When the then US President Richard Nixon flew to China in 1972 aboard the Boeing 707 that was Air Force One, the simple question of how he would disembark to the runway 20 feet below created a small crisis, Fallows writes. Soviet aircraft were built at a different height and the airport was unprepared for Nixon's visit. Ultimately, Chinese builders rushed production of a set of stairs built from published 707 specs and photographs of similar portable stairways.

During that trip, Premier Zhou Enlai approved the purchase of 10 Boeing 707s as a goodwill gesture, Fallows writes. "This purchase - like all major airline sales in the modern age - was as much a diplomatic gesture as a commercial transaction, constituting a big and noticeable US export to China."

Decades later, when President Hu Jintao visited the US in 2006, his very first stop was a Boeing factory outside Seattle. While touring the assembly line, he spoke to about 5,000 Boeing workers. "Boeing is a household name in my country," Hu said. "When Chinese people fly, it is mostly in a Boeing plane. I am happy to tell you that I came to the United States on a Boeing plane."

Fallows makes the important point that because their products enable travel between nations, airline companies and their executives are de facto diplomats in geopolitics.

"One of the reasons I wanted to tell the story of Boeing's role in China was that while living in China, I was really impressed at the thousands of less-publicized levels of interaction that occur between the two countries," Fallows says.

"For Boeing, they recognized that in many parts of the world, sales are not only commercial decisions but also political decisions. On the Chinese side, Boeing was viewed as a branch of the US government. And in Boeing's role as this quasi-governmental body, it was able to get involved in air-safety ventures and air-traffic issues. Much of the miracle of making Chinese airline travel so much safer has involved intense work between Boeing and the Chinese side."

The American company brought in Western experts to train Chinese airline officials and regulators, and worked to bring China's air industry up to international standards.

"Boeing had a direct stake in improving the safety record of Chinese airlines and felt it had a responsibility to do what it could," writes Fallows.

"If commercial airliners kept crashing - as five of them did within a four-month span in 1992, including an accident in southern China in which more than 140 people aboard a Boeing 737 died - neither Chinese nor foreign passengers would ride on them, and Boeing's prospects would be limited. Thus, making Chinese airlines safer became Boeing's job."

While China's contributions to airline manufacturing remain unremarkable, the government took a huge step in moving toward innovation in 2011 when the State-owned Aviation Industry Corporation of China bought US manufacturer Cirrus Industries, known for its state-of-the-art small-propeller airplanes, and Teledyne Industries' piston engine business, which equips small aircraft including Cirrus planes.

"That is a very significant sign of Chinese sophistication," Fallows says. "It's a sign of their potential. It is an interesting choice, and I expect more purchases like that. I think that the people on the Chinese investment side are sophisticated in their purchases - they know if they do too much, there would be an adverse reaction in the US. They are being cautious, but there will be more of this, knowing the kind of ambition that's present in the Chinese industry."

Fallows, who was a speechwriter for former US President Jimmy Carter before his longtime journalism career with the Atlantic, published the 2001 book Free Flight about the US airline industry. He called the experience of reporting and writing China Airborne inspiring.

"I had a lot of fun working on this book and going out to these remote areas, where people were cooking up new airports and had big dreams," he says. "It was very stimulating. If you are interested in life and things changing, China is a very interesting place. The air industry is a field that I have pre-existing interest in, so it was a rewarding way for me to learn more about China.

"I ended up thinking about how much more varied China is than most Americans know, and if you look closely at the particular case of an industry or region or technology, you can see reflections of the country on a larger scale. This is a field in which China is trying to rise to the top, and its success or difficulties in fulfilling that dream will broadly indicate the success or limit of its technological ambition in general. If these Chinese can succeed in aerospace, there's nothing they can't succeed in."

kdawson@chinadailyusa.com

(China Daily 06/01/2012 page21)

via usa.chinadaily.com.cn

Great review of James Fallows' new book, China Airborne, about the ambitious Chinese aviation industry. Fallows is one of my favorite China watchers and this book is officially on my summer reading list. What I want to know about the Chinese aviation industry is when will there be a Chinese competitor to Airbus and Boeing?

Doing bioscience business deals in China? Why ‘guanxi’ matters to you | MedCity News

China presents life sciences opportunities, but to Western pharmaceutical and medical device companies seeking business deals, the Chinese business world can be a mystery.

To understand the Chinese way of thinking about business relationships, it might help to consider the experience of an American. Michael Batalia, director of technology asset management at the Wake Forest University School of Medicine, grew up in rural Illinois. Batalia recalls farmers who relied on each other based on relationships going back decades. Beyond the farm work, families knew each other well. It was a blending of work life and family life.

In the West, this way of life is mostly a relic, Batalia said. But in China, it is the centuries old practice of “guanxi.” The word refers to the network of relationships that is the backdrop of Chinese business. Batalia, who has traveled to China in his work with the Association of University Technology Managers, said that Chinese business relationships go beyond strict business deals. Without a more personal connection, deals don’t come easily.

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“It’s hard to distill relationships down to a contract when you barely know each other,” said Batalia, one of the speakers on a panel at China Bioscience Connect, a conference held last week in Winston-Salem, North Carolina on developing Chinese business relationships.

While many Americans prefer to keep a clear line between work life and personal life, in China that boundary is not well defined. Americans define themselves by their work, typically asking new acquaintances what they do for a living. In China, the first questions are never about business, said Shiqin Xu, director of the Global Training Initiative China Program at North Carolina State University. A Chinese person will ask about family, even hobbies. These questions might be considered too personal in the context of American business, but they are standard in Chinese relationships. Such details are important, Xu explained, because the Chinese view this personal information as the building blocks of a relationship. That relationship is what leads to business deals. But it takes time.

Creating one of these relationships is best done through an introduction, perhaps from a mutual friend, said Yin Chen, vice president of business development for the U.S. region for Shangai Medicilon, a preclinical contract research organization. As you build these relationships, expect to share many meals.

“In the Chinese tradition, we always prepare more than you can eat,” Chen said. “You don’t have to eat it all.”

Relationships are built on reciprocity, Batalia said. A favor done from someone creates the expectation that a favor will be returned. Business deals are negotiated to benefit both parties, rather than to put one party at a disadvantage. It’s a different approach than Western business practices, where Americans relish bargaining for advantage, said Dr. Joseph Molnar, a professor of plastic and reconstructive surgery and associate director of the burn center at the Wake Forest University School of Medicine. The Chinese view negotiating from a position of power as arrogance, Molnar said. The Chinese approach is negotiate with humility, which in the West is viewed as weakness.

“It’s one of the culture clashes that’s misunderstood on both sides,” said Molnar, who along with several Wake Forest colleagues is part of a faculty and physician exchange with Shanghai Changhai Hospital in Shanghai, China.

But well before the point of executing a business deal, much simpler exchanges take place as the relationship builds over time. Chen stressed that gift giving is considered an important part of guanxi. While the sentiment of the gift matters most, Chen offers one sage piece of advice: “You better not bring gifts made in China.”

[Photo from stock.xchng user yum]

via medcitynews.com

Interesting post on the importance of 'guanxi', or personal relationships, when doing business in China. To be successful in the Middle Kingdom, US health tech companies will need to operate under a different, more conciliatory mentality than they do in Western markets.

First US-China tech incubator launches | chinadaily.com.cn

2012-04-13 11:28:58.0Zhang Qidong in Santa Clara, CaliforniaFirst US-China tech incubator launches1811040061Home2@usa/enpproperty-->

Ken Wilcox, chairman of Silicon Valley Bank, speaks at InnoSpring's opening ceremony on April 11. Chang Jun / China Daily

InnoSpring, Silicon Valley's first US-China technology startup incubator, officially opened its doors on April 11 to Chinese returnees starting their own companies and American entrepreneurs seeking to enter the Chinese market.

InnoSpring, created from a joint partnership of a consortium of Chinese and American financial institutions - Tsinghua University Science Park, Shui On Group, Northern Light Venture and Silicon Valley Bank - is expected to compete with leading local incubators by providing a full range of services to its beneficiaries.

"Newly inducted incubatees joining InnoSpring's ecosystem can leverage our US-China focus as well as receive customized incubator services," said Eugene Zhang, president of InnoSpring. "Today, we crossed our first milestone and eagerly look forward to building InnoSpring for the long haul."

Twelve technology startup companies have already been selected and will settle into InnoSpring's 1,350-square-meter facility. InnoSpring plans to select 15 companies every six months for its "Seed Program". These companies will receive an initial $25,000 investment at the outset of the program.

The Seed Program is akin to a 6-month boot camp for entrepreneurs who aim to complete a prototype, assemble a core team and conduct initial customer feedback.

Select startups will also have the opportunity to receive additional funds of up to $250,000 in capital from TEEC Angel Fund, bringing the maximum initial investment amount to $275,000.

Ken Wilcox, chairman of Silicon Valley Bank, said the establishment of InnoSpring is a sign of true innovation between China and the US.

"Chinese engineers and high tech professionals have made major contribution to technology innovation in Silicon Valley. The creation of InnoSpring tells us again that innovation has no borders, and most progress can be made where there is collaboration between different parties," he said.

Xia Shuguang with the San Francisco Consul of Economic & Commercial Office described the incubation center as a "nest where future golden eggs are being hatched".

"We will help set up the best incubation platform to help technology startup companies to go through the initial stage of business innovation," said Lei Yang, managing director of Northern Light Venture Capital.

"The life cycle of business starts with innovation. Our goal is to eliminate the globalization barrier and make the Silicon Valley's technology innovation a global innovation," Yang said.

The VC managing director also said InnoSpring can accommodate up to 40 startups in its office space. The company also give access to venture capitalists and angel investors, mentor executives and entrepreneurs, give business and funding advice, provide entrepreneurial workshops and assist in assembling core teams recruiting.

"We also offer cross-border development for US and Chinese startups, and access to Chinese public agencies to facilitate China expansion for US startups, which basically cut all the barriers out for both side to achieve their goals better and faster," Yang said.

kellyzhang@chinadailyusa.com

via usa.chinadaily.com.cn

Doors open at the first US-China technology incubator in Silicon Valley.

U.S.-based Chinese entrepreneur finds working with China difficult | MedCity News

When Kevin Liu, a Minnesota-based Chinese entrepreneur, decided that he wanted to test his disposable medical device, he thought that going to China was a no-brainer.

Experience proved otherwise. Liu had intended to file a 510(k) application by the end of last year with a launch in May. Instead, he had to contend with repeated delays and finally submitted an application in March.

“What happened is that like many companies, to cut costs I thought to test products in China because it’s a fraction of what it costs to test here,” Liu said. “But I had a tough time. We picked a reputable testing center in China, but still we had communication issues back and forth, wording corrections, things that were wrong that we had to fix over and over. That made everything so much slower.”

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Then Liu ran into the Chinese New Year, the big annual celebration in which the nation of more than 1.3 billion shuts down for the better part of a month.

Finally, in March, Liu through his company United Medical Innovations submitted 510(k) applications for its syringe and manifold kit system. He now expects a launch in the fall.

“I am from China, so I always thought it would be easier because of my cultural background and my language — to communicate with them directly — but experience tells me that it is not as easy,” he said. “There are difference business styles and there is a real trust issue with business men in China. You are thinking of how are you going to protect your intellectual property. There are so many things to think about. That is something I learned from this experience.”

[Photo Credit: Ohmega1982]

via medcitynews.com

A Chinese entrepreneur explains why he finds entering the Chinese market much more difficult than he could have ever anticipated, and he already speaks the language.

Ai Weiwei: "The Internet is uncontrollable, freedom will win" | TheNextWeb

It’s easy to forget that Ai Weiwei is an artist, at times. The man who is so often (and rightly) described as ‘outspoken’ and a ‘dissident’ is one of the most vocal critics of the Chinese regime, particularly on the subject of Internet censorship, to the point that it tends to overshadow his work.

Ai, who famously designed the Beijing ‘Birds Nest’ Olympic stadium, something he now regrets, discusses the Chinese government and its attitude to technology and the Web in a new op-ed published by The Guardian.

In the article, that is also available in Chinese, Ai looks at the affect that the Great Firewall censorship has had on China. An avid user of Twitter — @awiwi – he pens an argument that, in the long term, China’s can’t keep the power of the Internet at bay forever.

The government is certainly doing its best to provide that theory wrong. Its heightened efforts to quash ‘harmful information online’ have seen it implement a identification verification policy for microblogs (albeit loosely so far) and make arrests, close websites and restrict Twitter-like services following excessive political speculation last month.

“[China] blocks major internet platforms – such as Twitter and Facebook – because it is afraid of free discussion,” Ai says. “And it deletes information. The government computer has one button: delete.”

Ai compares China’s Web effort to the construction of a dam:

China may seem quite successful in its controls, but it has only raised the water level. It’s like building a dam: it thinks there is more water so it will build it higher. But every drop of water is still in there. It doesn’t understand how to let the pressure out. It builds up a way to maintain control and push the problem to the next generation.

Ultimately, he believes, this approach will see the Internet and freedom “win” in the communist country:

It still hasn’t come to the moment that [the regime] will collapse. That makes a lot of other states admire its technology and methods. But in the long run, its leaders must understand it’s not possible for them to control the internet unless they shut it off – and they can’t live with the consequences of that. The internet is uncontrollable. And if the internet is uncontrollable, freedom will win. It’s as simple as that.

The over-arching effect of China’s Internet freedom, Ai says, impacts on more than just civil liberties, it also blocks creativity, leaving China “far behind” other nations, he says.

For example, while those in the US discuss the (unlikely) possibility that Apple might bring its operation and manufacturing plants to the US, China’s dream is for the design of the device, and others like it, to come from within the Asian country.

Ai believes that the flagship Apple smartphone is  ”an understanding of human nature” and therefore it cannot be conceived from within China, he argues:

If a person has never had the right to choose their information, freely associate with any kind of ideology, and develop an individual character with some passion and imagination – how can they become creative?

Ai is unique in not being afraid to criticise, and be seen criticising, China. Consequently, his vocal comments have seen him handed a series of stiff punishments from authorities.

At its worst, he was detained for 81 days last year after a series of comments, released after apparently confessing his crimes. Though initially forbidden to return to social media, Ai quickly returned to his regular diet of Twitter and its Chinese equivalent Sina Weibo.

Last year he was hit by a massive $2 million tax bill but his supports used social media to rally round and collect donations to help pay it.

His latest scuffle with authorities saw the state order him to switch off a series of surveillance cameras that the artist had set up across his home. Ai had made the feed freely available online from April 2 to mark a year since his detention.

It remains to be seen how his latest article will be received by authorities in China and whether there will be further punishment dealt out to Ai Weiwei for his criticisms.

The full opinion article is most definitely worth reading, you can find it here.

via thenextweb.com

Very interesting perspective on the current state and future of Internet freedom in China.

China: the next must-have, private jets | beyondbrics | News and views on emerging markets from the Financial Times – FT.com

It will come as no surprise that rich Chinese have developed a taste these days for private jets. It is a short step, in China, from Gucci to Gulfstream: according to a survey of China’s richest people, released by the Hurun report at the Asian Business Aviation Conference Asian Business Aviation Conference in Shanghai, 13 per cent of Chinese with personal assets over Rmb100m plan to buy a corporate jet.

China had only 32 business jets registered in 2008, but that number rose to 132 by last year, according to state-owned China Daily. Beijing’s latest five year plan calls for developing the industry, and Cessna, one of the world’s biggest makers of business jets, recently signed agreements with Chinese partners to build business jets in Chengdu. The aviation industry is salivating at the opportunities presented by the notion of rich Chinese looking for the convenience – not to mention that sheer bragging value – of owning one’s own personal airplane.

But VistaJet, the ultra-luxurious Swiss business aviation company, is confident that there will be plenty of rich Chinese who think owning a jet is just too much trouble. VistaJet promises on-demand access to the company’s 31 near-new Bombardier aircraft, under a subscription model which VistaJet says makes much better financial sense than owning a jet for anyone who flies less than 500 hours per year. VistaJet today announced a memorandum of understanding with Beijing Airlines (the private jet subsidiary of Air China) that will allow it to base some of those aircraft in China, and eventually fly between domestic Chinese destinations.

Thomas Flohr, VistaJet chairman and founder, knows that deciding to buy a jet, especially in China, is not always a purely rational decision. Reason not the need: ultra high net worth Chinese have given “need” an all new meaning. But he is sure there will still be plenty of value-conscious business people around – even in China – who want access to a jet without having to pay for pilots, mechanics and downtime.

Flohr said his company is already doing good business flying the Chinese to Africa and Africans to China – often to remote locations that could not conveniently be reached by commercial airlines. “As an entrepreneur, you cannot afford to spend up to three days flying commercially between Harbin and Khartoum,” he said, adding “nor are you going to want to fly on some of the airlines that will get you there”. And even if some Chinese entrepreneurs are tempted to buy a jet rather than a block of hours on VistaJet, there will still be plenty of wives and kids, grandmas and grandpas of entrepreneurs who need moving from place to place – and as Flohr put it, first class on Air China will no longer cut it once they have tasted private aviation.

Related reading:
Chinese airlines hit by dispute over hedging, FT
China creates turbulence over EU aviation levies, FT
Luxury brand makes links with China’s past, FT

via blogs.ft.com

Not surprised the Chinese have taken to private planes.

Wen Jiabao attacks party conservatives on the way out the door | via @FinancialTimes

(Source: FT.com)

©Getty

Chinese premier Wen Jiabao fired a parting shot at conservative officials in the ruling Communist party, warning them that China could face another Cultural Revolution unless it undertakes urgent political reforms.

 

“Without successful political structural reform, it is impossible for us to fully institute economic structural reform and the gains we have made in this area may be lost,” Mr Wen said at his farewell briefing at the National People’s Congress, China’s rubber stamp parliament which meets for just 10 days every year.

 

More

ON THIS STORY

• Splits surface in China leadership fight
• Comment Talking about a cultural revolution
• Wealth gap on display at China’s parliament
• China ditches double-digit growth
• Wen Jiabao to visit Gulf energy powers

ON THIS TOPIC

• Factional fights continue despite dismissal
• Downfall ends Bo’s ambition to rule China
• Global Insight China needs to match words with actions
• China offers other Brics renminbi loans

IN CHINA

• Bo purged by Chinese leadership
• China’s rare earth stranglehold in spotlight
• China’s Bo dismisses downfall rumours
• China tycoon may yet gain Iceland foothold

“New problems that have cropped up in Chinese society will not be fundamentally resolved and such a historical tragedy as the Cultural Revolution may happen again,” the premier added, in remarks that were broadcast live on national television. “The mistake of the Cultural Revolution and impact of feudalism are yet to be fully eliminated.”

 

Mr Wen, who will step down from the party’s powerful politburo standing committee later this year, directed his aim at rivals including Bo Xilai.

Mr Bo is the ruling party official in Chongqing, a large city in southwest China, and a candidate for promotion to the top ranks of the party in the upcoming leadership transition. His propects, however, have been damaged by a recent scandal involving Chongqing’s former police chief.

 

Mr Wen’s references to the anarchy of the 1966-76 Cultural Revolution, during which millions of people were persecuted and perished, appeared to be a swipe at the “Cultural Revolution-style” campaigns organised by Mr Bo in Chongqing. The campaigns evoke revolutionary, or “red”, propaganda and ostensibly target organised crime.

 

In another rare example of open criticism among senior Communist party officials, Mr Wen also addressed the scandal that brought down Mr Bo’s former police chief and political ally, Wang Lijun, who tried to defect to the US last month. Mr Wang is in custody and his case is under investigation.

“The current [Chongqing] party committee and government of Chongqing must seriously reflect on the Wang Lijun incident and learn lessons from this incident,” Mr Wen said.

 

As Mr Wen and President Hu Jintao prepare to make way for a new generation of leaders in a once-in-a-decade reshuffle, the country’s political elite are engaged in internecine strugglesthat will determine the national agenda for years to come. Mr Bo has been angling for a place on the nine-person Politburo standing committee, the Communist party’s most powerful body.

 

“There are obviously some conflicts [among China’s political elite], with the most important conflicts related to the distribution of power within the party,” said He Weifang, a law professor at Beijing University. “There are also different views over how to solve China’s social problems, including the wealth distribution problem, corruption and China’s relations with the outside world.”

 

During a three-hour press conference, Mr Wen outlined a liberal reform agenda, including gradual steps towards direct elections. While Mr Wen has commented about the need for such reform before, he has rarely done so in such forceful language.

 

Asked whether China would hold general elections to choose its leaders, Mr Wen said he believed lower-level village elections should be expanded to towns and counties: “The democratic system of China will continue to move forward in keeping with China’s national conditions and no force will be able to hold this process back.”

 

Referring to the wave of uprisings sweeping across the Middle East, Mr Wen was more emphatic in his support for free elections. “The demand for democracy by the Arab people must be respected and truly responded to,” he said. “I believe this trend towards democracy cannot be held back by any force.”

 

Mr Wen has often been criticised for failing to match his rhetoric with action. He alluded to this criticism on Wednesday, blaming “institutional and other factors” for his inability to push through some policies and reforms. He also referred to unspecified “slander” directed at him personally and said these attacks made him “worried about society”.

 

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A Political Shocker in China Has Implications for the Economy | via @bloomberg

[[posterous-content:pid___0]]In a terse announcement, China’s official Xinhua News Agency announced March 15 that the charismatic Chongqing party leader and princeling, Bo Xilai, has been replaced. It is the biggest setback for a senior Chinese Communist Party leader since at least the sacking of former Shanghai party secretary Chen Liangyu in a corruption scandal in 2006. “Bo will no longer serve as
secretary, standing committee member, or member of the CPC Chongqing municipal committee,” according to the Xinhua announcement.

While Bo is still listed on a government website as one of the 25 members of China’s ruling Politburo, it is unclear whether he will also have to step down from that body. Even if he doesn’t, Bo’s political future seems finished, and his once-likely appointment to the nine-member Standing Committee of the Politburo—with seven positions up for grabs this fall in a major leadership transition—is finished.

While some see the fall of Bo as a setback for princelings, or the children of early revolutionary leaders, others see his downfall stemming from a more generalized resistance in the ruling party to Bo’s swashbuckling, nontraditional campaign style—in essence, his use of populism and personality to try to win promotion to the top echelons of Chinese leadership. “Some leaders have been very nervous about Bo Xilai’s self-promotional campaign. They see it as a possible effort to establish a political kingdom to challenge Beijing,” says Cheng Li, a senior fellow at the Brookings Institution in Washington.

The 62-year-old party leader’s demise also suggests significant resistance to what some had started calling the Chongqing model. That’s usually seen as an approach to running the political economy that advocates conservative values, including the singing of “red songs” from China’s Maoist past, as well as an aggressive crackdown on crime. Bo’s assault on crime, a campaign called “dahei”—literally, “hit black”—put 2,000 people in jail in the southwestern municipality of 30 million people. These moves raised the ire of some Chinese intellectuals and party members, who saw them as a regressive step back to a less open, and more dogma-ruled China.

The Chongqing model also includes a focus on state-led control of the economy, a return to government-owned companies that dominate the business world, as well as policies aimed at combatting China’s growing inequality, including by building subsidized housing for the poor. On March 9, on the sidelines of the National People’s Congress, Bo said that China’s gini coefficient, an index of income inequality, had exceeded 0.46, well above the level that most economists say leads to social unrest. “As Chairman Mao said as he was building the nation, the goal of our building a socialist society is to make sure that everyone has a job to do and food to eat, that everybody is wealthy together,” Bo said. “If only a few people are rich, then we’ll slide into capitalism. We’ve failed. If a new capitalist class is created, then we’ll really have turned onto a wrong road.”

In pointed comments during a press conference the day before Bo’s dismissal, outgoing premier Wen Jiabao took aim at the soon-to-be deposed princeling and his policies (Wen very likely already knew of Bo’s fate; the decision to replace Bo would almost certainly require lengthy discussions by China’s Standing Committee in the days proceeding the move). “The current party committee and government in Chongqing must seriously reflect on the Wang Lijun incident,” he said, referring to Bo’s former chief of police, who, after taking temporary refuge in the American consulate in Chengdu, Sichuan, last month, is now under investigation and has been relieved of his previous positions.

“I want to say a few words at this point,” Wen continued, before launching into a spirited defense of the need for continued economic reform. “Our country’s modernization drive has made great achievements. Yet at the same  time, we’ve also taken detours and have learned hard lessons,” the 69-year-old Wen said. “In particular, we’ve taken the major decision of conducting reform and opening up in China, a decision that’s crucial for China’s future and destiny. What has happened shows that any practice that we take must be based on the experience and lessons we’ve gained from history, and it must serve the people’s interests.”

Wen also made an appeal for political reform, saying that without it, China could once again experience a “tragedy” like the Cultural Revolution. His reference to the decade-long era of Mao excesses seemed also to be criticism directed at Bo’s recent campaigns. “Reform can only go forward and must not stand still or go backward, because that offers no way out,” he said. “Without successful political reform, it’s impossible for China to fully institute economic reform, and the gains we have made in these areas may be lost.”

“It was a very, very powerful statement. It was the clearest, most comprehensive statement talking about the necessity of political reform in China,” says the Brookings Institution’s Li. To Bo’s Chongqing model, “there is a linkage absolutely. Chongqing’s approach is ultimately anti-democratic, and it is very dangerous. Wen was saying that political institutionalization or Chinese-style democracy, not red terror, should be the way forward for China,” says Li.

Bo was replaced as party secretary by 65-year-old Vice Premier Zhang Dejiang, a less well-known senior Politburo member. The native of China’s northeastern Liaoning province has a decidedly mixed background: He earned a degree in economics from North Korea’s Kim Il Sung University, hardly a place where one is likely to acquire a reformist bent. But Zhang also served from 1998 to 2007 as party secretary of Zhejiang and Guangdong, respectively, two of China’s most open provinces, albeit doing little there to distinguish his tenure. The Brookings Institution says this promotion increases Zhang’s chance of winning an eventual appointment to the Standing Committee.

More tantalizing is what the sacking might mean for the future of presumed Bo rival and, at 57, relatively youthful Guangdong party secretary Wang Yang. Bo’s dismissal could open up a slot for Wang in the top leadership body but also could hamper his prospects if the elite or princeling faction lashes out at Wang in retaliation, says Li.

In recent years, Wang has earned a reformist reputation running China’s export-oriented southern province. In particular, his handling of labor strikes that have swept the Pearl River Delta, including the spring 2010 Honda strike in which he personally intervened (he is believed to support reforms to China’s usually toothless official union, including allowing workers to elect their own representatives), as well as his dealing with the Wukan Village movement last year, has encouraged those hoping for a more politically open younger generation of leaders taking over in China.

Still, the sentiments driving much of what has been identified with the Chongqing model are unlikely to go away with Bo’s departure, says Patrick Chovanec, a business professor at Tsinghua University in Beijing. “Bo was hopping onto some broader trends that exist in the Chinese economy and society, especially in the wake of the global financial crisis. Those include greater skepticism about the market, embracing the role of the state in the economy, and concerns about income inequality,” he says. “The things that made [the Chongqing model] so attractive to so many people are still very real for many in China today.”

By Dexter Roberts on March 15, 2012

(Source: Bloomberg BusinessWeek)

Related articles

• China's Corruption Scandal: Bo Xilai Sacked as Chongqing Communist Party Chief (the2012scenario.com)
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• Why Chinese succession matters (globalpublicsquare.blogs.cnn.com)
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China set to become top smartphone market in 2012, critical for Apple & Others | via @TechCrunch

(Source: TechCrunch)

China is already a significant market for companies like Apple, with CEO Tim Cook describing “staggering” and “off the charts” sales of the iPhone in China last quarter. But according to IDC the opportunity is just beginning for Apple and others working in the smartphone world: China is set to become the world’s largest smartphone market this year, overtaking the U.S., which has led in years past.

IDC says this is part of a larger trend of emerging countries getting up to speed with developed nations: by 2016, China will be joined by Brazil and India in the top-five countries in terms of smartphone shipments. Countries like the U.S., U.K. and Japan will continue to see growth, but not at the rate of these other, more populated countries.

The growth of China is something that IDC had already started to track in 2011: China had already overtaken the U.S. in terms of shipments in the last two quarters of that year, it said today.

The shift raises questions about pricing and what we might expect in these devices as they roll out to bigger markets.

IDC notes that so far, in China, it has been the rush of sub-$200 Android devices that have benefited most from the surge in smartphone demand. But it believes that the trend will be for smartphones to cost less than $50.

The big names so far have been domestic handset makers like Huawei, ZTE, and Lenovo, but Samsung and Nokia (which had once led the smartphone market in China before the Android onslaught) are also playing a part with the launch of cheap devices. Nokia’s first Windows Phone handset China — one of its less expensive Lumia devices — is expected to launch by the end of this month.

That drive for domestic handset makers is not only being played out in China. In India, names like Micromax, Spice, Karbonn and Lava — also developing low-cost devices — are trying to set the agenda for what consumers demand and expect out of their smartphones. However, up to now more global brands like HTC and Samsung have been leading the pack.

Brazil, meanwhile, seems to be facing a still-high cost for devices, and it is only this year that average prices have come down to below $300 for a smartphone. Whether Apple chooses to try to create devices to better target users in markets like this one, rather than continue to aim for the high-end consumer, still remains to be seen.

IDC notes that it will not just be about cheap devices, however: it says that carriers will have to step up with innovative data plans, and probable handset subsidies, to get people using smartphones to their full effect.

Some good headway seems to already have been made in that area in some emerging markets:

Some statistics out yesterday from OnDevice Research found that in China, some 38 percent of consumers are only accessing the Internet from their mobile devices. In comparison, countries like the UK registered at 25 percent; while countries with less fixed infrastructure registered with even higher percentages: Nigeria’s figure was 56 percent, and Kenya’s was 51 percent. In effect, that means the opportunity is there not just for device makers, but for carriers and the many companies developing content as well.

Related articles

• Apple falls to 54.7 percent tablet marketshare in Q4 2011 following Kindle Fire launch, says IDC (theverge.com)
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• Living In A Smartphone World: Apple Number-Three Among ALL Mobile Players (paidcontent.org)

China’s holy grail: a leading indicator | beyondbrics FT.com

For anyone foolhardy enough to make Chinese economic forecasts, a constant problem is the lack of crystal balls at hand.

The usual arsenal of predictive tools in other countries – yield curves, stock prices, purchasing manager surveys, Conference Board and OECD indices – all exist in China. But all are market-based measures, making them deeply flawed in an economy which is so heavily managed by the government. So what to believe?

Three leading analysts who cover China have in recent weeks revealed their frustrations at the paucity of leading indicators, but also made a few novel suggestions.

Stephen Green and colleagues at Standard Chartered looked at a series of unconventional data points: wheel-loader and excavator sales, steel and cement production, and projects under construction. Their conclusion was that cement output and construction were indeed useful, but didn’t function as leading indicators. That is, they closely track investment activity in real time, but “there is very limited leading information here”.

Jonathan Anderson, who left UBS this month, used one of his last research notes at the bank to savage the idea that purchasing manger indices (PMIs) are even remotely useful in China. Not only did PMI numbers fail to predict the country’s downturn in late 2008 and recovery in early 2009, they were actually late in detecting the economic changes and thus misleading as coincident indicators.

He writes: “Did this show up in the PMI? Hardly. In fact, if you were watching the index you essentially had no idea that any of this was going on.”

What, then, can we rely on if we want to get a feel for where the economy is headed?

Green reaches for an old stand-by: “After following one tantalising clue after another, we are still left with credit growth as the only leading indicator of investment.”

The beauty of looking at credit growth in China is two-fold. The financial system is dominated by bank lending, making credit issuance far and away the most important factor in liquidity conditions and hence also the best predictor of investment activity. What’s more, credit growth is closely managed by the government through a loan quota system, so it does a good job of reflecting Beijing’s policy preferences, not just market sentiment.

Du Jinsong, a property analyst with Credit Suisse, makes a more unusual proposal for a leading indicator: the production of bricks and pre-stressed concrete piling. To be clear, he is only thinking of these as predictors for property construction – they seem to lead new housing starts by about eight months.

But property is the dominant component of Chinese investment activity and the broader economy is led by investment, so getting the real estate market right would be a very good start.

There is only one problem. The leading indicators proposed by Green and Du point in slightly different directions.

Looking at credit growth, Green forecasts a moderate pick-up in investment growth in the second quarter. Looking at brick and piling production, Du says property construction will probably remain flat for the next six months.

Now, it is of course possible that both are right. Investment growth may accelerate, just not in property. But given China’s frustrating track record for would-be oracles, it is also possible that at least one of the two may be more of a red herring than a leading indicator.

via blogs.ft.com

Very interesting post about the tools available to economists for predicting economic growth in China.

Meet The Chinese Guy Who Ripped Off Conan O'Brien

This is Da Peng. He is a Chinese variety show host, and he recently made his American television debut—for ripping off Conan O'Brien.

On a recent episode, Conan O'Brien showed how Da Peng's program, Da Pang Debade, totally copied Conan's opening animation. O'Brien then copied some of the silly antics of the Chinese show in revenge.

Da Peng's program, however, isn't televised. It's an online talk show, which isn't exactly a household name in China. However, it does have its loyal fans, and it does appear on a major Chinese web network. After Conan took the webshow to task, that could change—being called out by a famous American celebrity does mean Da Peng suddenly has more name recognition as this story makes its way through Chinese cyberspace via microblogs and webforums.

In the most recent show, Da Peng removed the intro animation—the one that ripped off Conan. Then he apologized. "At this point I want to the time to say sorry to Mr. Conan on behalf of myself, my show, and our staff," said Da Peng, who then started doing a "sorry dance". He even refers to his own show as "shanzai" or a Chinese imitation.

He's apparently a comedian, so he's trying to be funny. "I hope English majors, translators and American show lovers will help me translate this," Da Peng added. "We will immediately stop using the opening sequence—and will officially apologize again. We'll have to apologize again after apologizing."

Da Peng then went off on tangent (again, he's trying to be funny), saying that the show's name is too hard to pronounce as well as mentioning Jeremy Lin and the U.S. debt.

Online in China, many seem embarrassed by the show's opening and how it copied Conan. "China invented the four great Inventions (gunpowder, paper, paper Printing and the compass)," wrote one individual online. "But that is in the past, and now all we're doing is plagiarizing and copying... Such a tragedy."

Chinese people might feel embarrassed. Though, if anyone "won" in this brouhaha, it's webshow Da Peng. "The guy downstairs selling fruit even recognizes me," he said about his newfound celebrity. "I guess everyone knows about this now.

"My ex-girlfriend sent me a text saying how she regrets dumping me and how she saw me on American television. Now, I'm international." That you are, Da Peng, that you are.

View Da Peng's apology in the link below.

Da Peng Debade [TV Sohu]

via kotaku.com

Its always interesting to see what elements of western culture go viral in the Middle Kingdom, just usually with their own Chinese flavor.

China is right to open up slowly - FT.com

The next big global financial crisis will emanate from China. That is not a firm prediction. But few countries have avoided crises after financial liberalisation and global integration. Think of the US in the 1930s, Japan and Sweden in the early 1990s, Mexico and South Korea in the later 1990s and the US, UK and much of the eurozone now. Financial crises afflict every kind of country. As Carmen Reinhart of the Peterson Institute for International Economics and Kenneth Rogoff of Harvard have remarked, they are “an equal opportunity menace”. Would China be different? Only if Chinese policymakers retain their caution.

Such caution permeated last week’s report that the People’s Bank of China has recommended accelerated opening up of the Chinese financial system. Given what is at stake, in both China and the world, it is essential to consider the implications. Maybe the world will then do a better job of managing this process than it has done in the past.

More

On this story

• Blueprint for China to open up markets
• Lex China’s capital account
• beyondbrics No vote for the renminbi
• China outlines plan to loosen capital controls
• Inside Business China should open up markets to investors

On this topic

• Rahul Jacob Wine spills on Beijing’s favoured candidate
• China wants say in World Bank choice
• Chinese princeling Bo Xilai comes under pressure
• Chinese defence budget set to double by 2015

Martin Wolf

• Prepare for a golden age of gas
• Britain needs to whittle down corporate cash piles
• Much too much ado about Greece
• Crisis must not change India’s course

Click to enlarge

This plan was published by Xinhua, the state news agency, not on the PBoC’s web site. Moreover, it was published under the name of Sheng Songcheng, head of the statistics department, not that of the governor or a deputy governor. This must mean that it is more an exercise in kite-flying than a policy. Nevertheless, this was published with the PBoC’s approval and, quite possibly, with that of people much higher up still.

The article lays out three stages for reform. The first, to occur over the next three years, would clear the path for more Chinese investment abroad as “the shrinkage of western banks and companies has vacated space for Chinese investments” and so presented a “strategic opportunity”. The second phase, in between three and five years, would accelerate foreign lending of the renminbi. In the longer term, over five to 10 years, foreigners could invest in Chinese stocks, bonds and property. Free convertibility of the renminbi would be the “last step”, to be taken at an unspecified time. It would also be combined with restrictions on “speculative” capital flows and short-term foreign borrowing. In sum, full integration would be indefinitely delayed.

What are the implications of this plan? The answer is that it seems sensible. In reaching that view, one has to take into account the benefits and risks of financial “reform and opening” for China and the world.

The arguments for such opening up to the world are closely connected to those for domestic reform. Indeed, the former cannot be undertaken prior to the latter: opening up today’s highly regulated financial system to the world is a recipe for disaster, as Chinese policymakers know. It is for this reason that full convertibility would come in the distant future, as this plan suggests.

Happily, arguments for domestic reform are powerful. Dynamic financial markets are an essential element in any economy that wishes both to sustain growth and to begin rivalling rich countries in productivity, as China surely aspires to do. More immediately, as Nicholas Lardy of the Peterson Institute for International Economics notes in a recent study: “Negative real deposit rates impose a high implicit tax on households, which are large net depositors in the banking system, and lead to excessive investment in residential housing. Negative real lending rates subsidise investment in capital-intensive industries, thus undermining the goal of restructuring the economy in favour of light industries and services.”*

Yet, as Mr Lardy also knows, this distorted financial regime is part of a wider system for taxing savings, promoting investment and repressing consumption, which has led to huge interventions in foreign currency markets and vast accumulations of foreign currency reserves. The deeper case for reform is that this system no longer contributes to a desirable pattern of development. But it has become so deeply entrenched in the economy that reform is politically fraught and economically disruptive. The question is even whether such reform is politically feasible. It is surely likely to be a slow process.

How would the PBoC’s proposed moves towards opening up then fit with such a cautious reform? Presumably, the greater freedom for capital outflows envisaged for the next five years would partly substitute for accumulations of foreign currency reserves. Yet if this went with suggested moves towards higher real interest rates, China’s savings and current account surpluses might explode, worsening the external imbalances.

This point underlines just how big a stake the rest of the world has in the nature of China’s reform and opening up of the financial sector.

China’s gross savings are running at an annual rate of well over $3tn, which is more than 50 per cent larger than the gross savings of the US. Full integration of these vast flows is sure to have huge global effects. China’s financial institutions, already enormous, are also almost certain to become the biggest in the world over the next decade. One need only think back to Japan’s integration in the 1980s and subsequent financial implosion to recognise the possible dangers. We should be pleased, therefore, that China is taking a cautious approach.

The world has a huge interest in a shift of China’s economy towards more balanced growth. It has a parallel interest in the way China manages its domestic reform and opening up of the financial system. A whole range of policies need to be co-ordinated, particularly over financial regulation, monetary policy and exchange rate regimes. If this is done well, today’s high-income countries’ crisis will not be promptly followed by the “China crisis” of the 2020s or 2030s. If it is done badly, even the Chinese might lose control, with devastating results.

The PBoC suggests a timetable of reforms that would fit with China’s and the world’s needs. But if this is to happen, thorough discussion of all the implications must now occur. China’s policies do not matter for the Chinese alone. That is what it means to be a superpower – as the US should note.

* Sustaining China’s Economic Growth After the Global Financial Crisis, Peterson Institute for International Economics, 2012.

via ft.com

Good commentary from Martin Wolf at the Financial Times.