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."

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.

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• 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

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• 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.

China’s 12th Five-Year-Plan – Will It Help With the Global Trade Imbalance?

Amongst all the political upheaval in the Middle East and North Africa, with people rising against dictatorial regimes in Tunisia, Egypt, Libya, Yemen and elsewhere, this week China embarked on its annual legislative session.  The legislative session of the National People’s Congress, which officially enacts legislation, will rubber-stamp the government’s 12^th Five-Year-Plan (2011-2015), which was decided at the Communist Party meeting in October, 2010.

Details won’t be made public until the conclusion of the legislative session (which usually lasts 10-14 days), but some elements of China’s next five-year economic plan have been made public.  The three elements worth highlighting are a lower growth rate and a more balanced/sustainable economic model, meaningful reductions of pollution through better energy conservation, and a more aggressive fight against inflation.

A New Growth Model:

• Set a GDP growth target of 7% (down from the current actual GDP growth rate of 10%).  To do that, the government will have to divert money away from construction and corporate subsidies, and instead use public funds to increase household incomes.

• Cut import tariffs to reduce input-costs, while boosting consumer demand and reducing China’s reliance for growth on exports which generates trade surpluses and contributes to the global trade imbalance.

• Improve the income of farmers and migrant workers, who have benefited the least from China’s phenomenal economic growth, by increasing minimum wages.  In particular, provinces across China have announced a string of double-digit wage increases this year as part of the government desire to increase incomes among the rural regions and migrant workers in the cities.

• Increase spending on health-care and full nationwide social welfare insurance to reduce the need for “precautionary savings” and encourage more Chinese consumer spending.

• Raise the minimum threshold for personal income tax.  This could exempt hundreds of millions of people from having to pay taxes, and boost household spending.

New Energy Priorities:

• Introduce targets for energy efficiency and consumption that will push China’s energy consumption from non-fossil fuel sources to 12% by 2015.  Key sectors expected to benefit include: hydro and nuclear power, power grid technology.

• In particular, there will be significant growth in nuclear power (from 10 GW to 40 GW), 63 GW of new hydroelectric power, 48 GW of wind capacity and 5 GW of solar power.  Unfortunately, coal generation will continue to provide 260 GW, although its share of China’s energy mix is expected to fall from 72% to 63%.

• Double the share of natural gas in Chinese energy consumption to 8% by 2015, up from 4% that it was last year.  This will make China a natural buyer of large quantities of Russian gas, and an inevitable competitor to Europe, which already relies heavily on gas from Russia.

• Introduce taxes of up to $820 (up from just $100) on vehicles with larger than 2 liters (energy inefficient) engines.

• Introduce a tax linked to carbon emissions, first via pilot programs in special regions and industries.

Fighting Inflation:

• The most important short-term priority for the government is to address increases in food price, which Beijing intends to do through price controls.

• In order to control inflation, the government intends to keep using the tools and methods that it has been employing thus far: manage liquidity, use price controls, curb real-estate speculation, and “adjust and improve” property tax policies.  Furthermore, the budget for this year shows a 35% increase in spending on low-income housing.

• However, no specific lending targets for banks have been outlined by the government yet.  New loans topped a 7.5 trillion RMB ($1.1 trillion) ceiling last year and excessive bank lending is considered by some to be a contributing factor to China’s inflation.

Analyst are already predicting that this Five-Year-Plan will be the most significant in China’s modern history, marking the moment that China finally decided to abandon its fast export-led growth strategy in favor for a more sustainable growth model.  However, this new effort by China to rebalance its economy in not addressing the root cause of its monetary problem (inflation), and will not facilitate the rebalancing of global trade, which has been so critical to the overall world recovery.

The root cause of China’s inflation is its weak-currency policy, which is feeding an artificially large trade surplus.  This policy hurts both China by producing an overheated, inflation-prone economy, and the rest of the world by increasing unemployment in many other countries.

Theoretically, inflation is the market’s way of undoing currency manipulation.  According to Paul Krugman, China has been using a weak currency to keep its wages and prices low in dollar terms; market forces have responded by pushing those wages and prices up, eroding that artificial competitive advantage.

China’s leaders are trying to prevent this outcome, to protect exporters’ interest, and because inflation is even more unpopular in China than it is elsewhere.  Don’t forget that it was inflation that fueled public discontent with the government, bore the 1989 protests in Tiananmen Square.

China is already hurting its citizens through financial controls.  For example, interest rates on bank deposits are limited to just 2.75 percent, which is below the official inflation rate of 4.9%.  Rapidly rising prices, even if matched by wage increases, are making the situation much worse for Chinese consumers.

Unfortunately, Beijing is not willing to deal with the root cause and let the RMB rise.  Instead, they are trying to control inflation by raising interest rates and restricting credit.  This is destructive for China, because credit limits are proving hard to enforce and are being further undermined by inflows of hot money from abroad.  With efforts to cool the economy falling short, China has been trying to limit inflation with price controls, which also rarely work.

Furthermore, this is destructive from a global point of view as well: with much of the world economy still depressed, the last thing the world needs is major players pursuing tight-money policies.  The solution to China’s monetary problem (and to the global recovery) is to let the currency rise!

But, any rebalancing efforts will face serious opposition from special interests domestically, primarily the State Owned Enterprises and regional and local officials.  The SOE’s benefit from lax environmental regulations, cheep energy and government subsidies, and an overall export led growth strategy.  On the other hand, local officials are not always willing to change, have old ideas about growth and tend to favor pet projects that need massive investments.  Couple that with China’s one-party state that refuses to do anything that looks like giving in to U.S. demands, and you have a recipe for certain continuation of the status-quo.

The focus of the new Five-Year-Plan is promising, but its success is questionable.

via chinatrade.foreignpolicyblogs.com

Very interesting...

China's economy: Bamboo capitalism || The Economist

FEW would deny that China has been the economic superstar of recent years. Thanks to its relentless double-digit annual growth, it has become the world’s second-largest economy and in many ways the most dynamic. Less obvious is quite what the secret of this success has been. It is often vaguely attributed to “capitalism with Chinese characteristics”–typically taken to mean that bureaucrats with heavy, visible hands have worked much of the magic. That, naturally, is a view that China’s government is happy to encourage.

But is it true? Of course, the state’s activity has been vast and important. It has been effective in eradicating physical and technological obstacles: physical, through the construction of roads, power plants and bridges; technical, by facilitating (through means fair and foul) the transfer of foreign intellectual property. Yet China’s vigour owes much to what has been happening from the bottom up as well as from the top down. Just as Germany has its mighty Mittelstand, the backbone of its economy, so China has a multitude of vigorous, (very) private entrepreneurs: a fast-growing thicket of bamboo capitalism.

These entrepreneurs often operate outside not only the powerful state-controlled companies, but outside the country’s laws. As a result, their significance cannot be well tracked by the state-generated statistics that serve as a flawed window into China’s economy. But as our briefing shows, they are an astonishing force.

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The Mittel Kingdom

First, there is the scale of their activities. Three decades ago, pretty much all business in China was controlled by one level of the state or another. Now one estimate—and it can only be a stab—puts the share of GDP produced by enterprises that are not majority-owned by the state at 70%. Zheng Yumin, the Communist Party secretary for the commerce department of Zhejiang province, told a conference last year that more than 90% of China’s 43m companies were private. The heartland for entrepreneurial clusters is in regions, like Zhejiang, that have been relatively ignored by Beijing’s bureaucrats, but such businesses have now spread far and wide across the country.

Second, there is their dynamism. Qiao Liu and Alan Siu of the University of Hong Kong calculate that the average return on equity of unlisted private firms is fully ten percentage points higher than the modest 4% achieved by wholly or partly state-owned enterprises. The number of registered private businesses grew at an average of 30% a year in 2000-09. Factories that spring up alongside new roads and railways operate round-the-clock to make whatever nuts and bolts are needed anywhere in the world. The people behind these businesses endlessly adjust what and how they produce in response to extraordinary (often local) competition and fluctuations in demand. Provincial politicians, whose career prospects are tied to growth, often let these outfits operate free not only of direct state management but also from many of the laws tied to land ownership, labour relations, taxation and licensing. Bamboo capitalism lives in a laissez-faire bubble.

But this points to a third, more worrying, characteristic of such businesses: their vulnerability. Chinese regulation of its private sector is often referred to as “one eye open, one eye shut”. It is a wonderfully flexible system, but without a consistent rule of law, companies are prey to the predilections of bureaucrats. A crackdown could come at any time. It is also hard for them to mature into more permanent structures.

Cultivate it, don’t cut it

All this has big implications for China itself and for the wider world. The legal limbo creates ample scope for abuse: limited regard for labour laws, for example, encourages exploitation of workers. Rampant free enterprise also lives uncomfortably alongside the country’s official ideology. So far, China has managed this rather well. But over time, the contradictions between anarchic opportunism and state direction, both vital to China’s rise, will surely result in greater friction. Party conservatives will be tempted to hack away at bamboo capitalism.

It would be much better if they tried instead to provide the entrepreneurs with a proper legal framework. Many entrepreneurs understandably fear such scrutiny: they hate standing out, lest their operations become the focus of an investigation. But without a solid legal basis (including intellectual-property laws), it is very hard to create great enterprises and brands.

The legal uncertainty pushes capital-raising into the shadows, too. The result is a fantastically supple system of financing, but a very costly one. Collateral is suspect and the state-controlled financial system does not reward loan officers for assuming the risks that come with non-state-controlled companies. Instead, money often comes from unofficial sources, at great cost. The so-called Wenzhou rate (after the most famous city for this sort of finance) is said to begin at 18% and can even exceed 200%. A loan rarely extends beyond two years. Outsiders often marvel at the long-term planning tied to China’s economy, but many of its most dynamic manufacturers are limited to sowing and reaping within an agricultural season.

So bamboo capitalism will have to change. But it is changing China. Competition from private companies has driven up wages and benefits more than any new law—helping to create the consumers China (and its firms) need. And behind numerous new businesses created on a shoestring are former factory employees who have seen the rewards that come from running an assembly line rather than merely working on one. In all these respects the private sector plays a vital role in raising living standards—and moving the Chinese economy towards consumption at home rather than just exports abroad.

The West should be grateful for that. And it should also celebrate bamboo capitalism more broadly. Too many people—not just third-world dictators but Western business tycoons—have fallen for the Beijing consensus, the idea that state-directed capitalism and tight political control are the elixir of growth. In fact China has surged forward mainly where the state has stood back. “Capitalism with Chinese characteristics” works because of the capitalism, not the characteristics.

via economist.com

Cleverly written piece by an obviously bright Sinophile - 'Bamboo Capitalism' - finally a much preferred alternative to the often easily misread moniker 'Red Capitalism'! I love the term Mittel Kingdom too!

The Chinese entrepreneur is a misunderstood and underestimated factor in the emerging global economy and they must be engaged aggressively by their western counterparts to create global ventures. America will remain the epicenter of innovation and entrepreneurship for many decades because American culture glorifies the entrepreneur and encourages risk to a degree that may never be possible in a place as communally oriented as China. However, only the entrepreneur can create a sustainable economic growth story in the Mittel Kingdom, because the state by its very nature undermines the true entrepreneurship, this is true even in the US.

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.

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“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.