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’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.

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.

Related items

• Entrepreneurship in China: Let a million flowers bloomMar 10th 2011

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• China

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.

Quick Notes from Beijing - James Fallows | The Atlantic

By James Fallows

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

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

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

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

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

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

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

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

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

via theatlantic.com

Finally Official: China Takes the #2 Spot

by Damien Ma

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

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

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

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

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

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

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

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

Damien Ma is a China analyst at Eurasia Group.

via feedproxy.google.com

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

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.

EDITOR’S CHOICE

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Strong data raise Asian inflation fears - Feb-01

“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.

Gas Prices in Hong Kong

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

The puzzle of China’s rising household saving rate | vox - Research-based policy analysis and commentary from leading economists

In an effort to reduce its sizeable current-account surplus, the Chinese government has made it a priority to “rebalance” growth in China by stoking private consumption. This column examines the determinants of the high household saving rate that keeps Chinese consumption so low.

Economists have repeatedly warned policy-makers about imbalances in the global economy, including those caused by the actions of China in running up a colossal current-account surplus. During the global financial crisis and the following global recession, this surplus shrank from 11% of GDP in 2007 to an estimated 5% in 2010, but many analysts view this as a temporary respite related to the contraction in trade and expect China’s current-account surplus to rise again (Baldwin 2009). Chinese government officials, meanwhile, have argued that the current-account surplus is driven by structural factors and that the exchange rate has little role to play in influencing the saving-investment balance. They have also made it a priority to “rebalance” growth in China by stoking private consumption. As part of this debate, we ask what determines the high household savings that have been keeping China’s consumption so low.

The facts

Gross domestic saving in China has surged since 2000, climbing to over 50% of GDP starting in 2007 (Figure 1). In particular, enterprise saving – including that of state-owned enterprises – has risen sharply in recent years. Government saving has also increased. Over this period, the share of household saving in national saving has not changed much, but this is mainly because of a fall in the share of household income in national income rather than a decline in the household saving rate (Prasad 2011).

Figure 1. Gross saving rates by sector

Source: National Bureau of Statistics (Flow of Funds data).

Figure 2. Household saving rates

Source: National Bureau of Statistics, Flow of Funds data and Urban and Rural Household Survey. Saving rate from national accounts is significantly higher than that from the household surveys. This discrepancy is common (it is present in most countries), and can be due to differences in definitions of income and consumption, methodology and sample coverage.

Chinese households save a large share of their disposable incomes and their average saving rate has increased over the last decade and a half (Figure 2). This pattern is particularly pronounced for urban households, which account for about two-thirds of national income. After remaining relatively flat during the early 1990s, the average saving rate of urban households relative to their disposable incomes rose from 18% in 1995 to nearly 29% in 2009.

This increase took place against a background of rapid income growth and a real interest rate on bank deposits that has been low over this period (and even negative in some years, as nominal deposit rates are capped by the government). This pattern of a rising household saving rate at a time of high income growth seems inconsistent with a certainty-equivalent life-cycle hypothesis model, which would imply that future high income growth should cause households to postpone their savings.

New explanations: Evidence from survey data

In our first paper (Chamon and Prasad 2010), we use data from the annual Urban Household Surveys to characterise household saving patterns. These are large annual cross-sectional surveys conducted by the National Bureau of Statistics.

We document that saving rates have risen across the board in urban China, but especially among households with relatively younger and older household heads. That has led to an unusual “U-shaped” age-saving profile (see Figure 3), where the saving rates are higher at the two ends of the age distribution of household heads. Typically, one would expect saving rates to increase with the household head’s age, peaking prior to his or her retirement, and then turning negative in retirement.

Figure 3. Urban household saving rates by age of head

Notes: Based on a 10 province/municipality subsample of the National Bureau of Statistics Urban Household Survey. Saving rates smoothed by a moving average with 4 neighbouring age averages. For details on the data, and how saving rates are defined, please refer to Chamon and Prasad (2010).

We test a number of conventional theories and find little evidence that they can explain these patterns. For instance, the data suggest a limited role for demographic shifts in explaining saving behaviour. The cohorts most affected by the one-child policy are not among the highest savers.

Instead, the declining public provision of education, health, and housing services (the breaking of the “iron rice bowl”) appears to have created new motives for saving. This can contribute to rising savings as younger households accumulate assets to prepare for future education expenditures and older households prepare for uncertain (and lumpy) health expenditures.

The inefficiency of “self-insurance” contributes to higher aggregate savings (as many households save in order to protect against a shock while relatively few may actually be hit by one). We estimate that the motive of saving for health expenditures accounts for an increase of more than 5 percentage points. The extensive privatisation of the housing stock has also contributed to savings. We estimate that saving for house purchases increased average saving rates by 3 percentage points relative to the 1990s, with the effect concentrated among households with younger household heads (that are less likely to own their dwellings).

While cross-sectional household data can help evaluate the importance of competing channels, it is less informative when saving rates have risen across the board, as is the case in urban China. If indeed rising uncertainty and the related increase in precautionary saving is an important driving force behind the trend in saving rates, the availability of panel data on household income could help quantify that uncertainty and gauge its potential impact on savings.

In a second paper (Chamon et al. 2010), we use a panel dataset from the China Health and Nutrition Survey. That survey does not provide information on consumption or savings but does have data on incomes that allows us to quantify the rise in income uncertainty and decompose the variance of income into components attributable to permanent versus temporary income shocks. We find strong trend growth in both the mean and the variance of total household income. Interestingly, the variance of permanent shocks to household income has remained relatively stable, while the variance of transitory shocks trends upwards. This result is in line with a large literature on how technological and sectoral shifts and the associated labour reallocation can generate higher transitory uncertainty even though some of these shifts themselves are permanent in nature.

Based on these results, we calibrate a simple buffer-stock/life-cycle model of savings to evaluate the implications of rising uncertainty on household saving rates. Under plausible parameter values, the rising transitory variance of income can explain about 4 percentage points of the increase in the saving rate among the households with younger heads. Households with older household heads that have already accumulated significant savings can more easily accommodate transitory shocks and this factor does not add much to their savings.

On the other hand, households with older heads are more affected by the pension reforms in 1997, which transferred urban pension obligations from employers (predominantly state-owned enterprises) to provincial governments. We estimate that a decline in the pension replacement rate from 75% to 60% of pre-retirement income (in line with estimates for the transition generation under the reform) can explain a 6-8 percentage point increase in saving rates for households with heads in their 50s. The initial effect is more muted for younger households, who have a longer time to adjust to the pension reforms. Thus, we are able to trace much of the increase in savings, concentrated among households with relatively young and relatively old household heads (the “U-shaped” pattern described above), to higher income uncertainty and pension reforms.

Conclusions

Our analysis based on cross-sectional and panel data sheds light on different motives that drive the saving behaviour of Chinese households. While the combined effect may be smaller than the separate estimates from the two independent approaches, the results are able to account for a substantial portion of the increase in average saving rates of urban households as well as the U-shaped age-saving profile of savings.

• We find that motives of saving for precautionary purposes due to rising income uncertainty and for housing purchases explains the rising saving rates of households with young household heads.
• Pension reforms and rising medical expenditures account for much of the rise in the saving rates of households with older heads.

The views expressed in this column are those of the authors and should not be attributed to the institutions they represent.

References

Baldwin, Richard (2009), The Great Trade Collapse: Causes, Consequences and Prospects, VoxEU.org, 27 November.

Chamon, Marcos, and Eswar Prasad (2010), “Why are Saving Rates of Urban Households in China Rising?”, American Economic Journal: Macroeconomics, 2(1):93-130.

Chamon, Marcos, Kai Liu, and Eswar Prasad (2011), “Income Uncertainty and Household Savings in China”, NBER Working Paper 16565.

Prasad, Eswar (2011), “Rebalancing Growth in Asia”, International Finance, forthcoming. NBER Working Paper 15169.

via voxeu.org

Zhou Xiaochuan breaths fire into US Treasury markets with bold proposal: SDRs and the fall of the Dollar as global reserve...

Cross posted from my blog The World We'll Inherit.

Zhou Xiaochuan, Governor of the Central Bank of China has called for an internationally endorsed shift away from the Dollar as the world's reserve currency "as soon as possible" in advance of the G20 Summit. Zhou urged the International Monetary Fund (IMF) to expand use of Special Drawing Rights (SDRs) and move toward a "super-sovereign reserve currency".

Special Drawing Rights are defined on the IMF website as "The SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries. SDRs are allocated to member countries in proportion to their IMF quotas. The SDR also serves as the unit of account of the IMF and some other international organizations. Its value is based on a basket of key international currencies."

This is a very radical idea and cannot be dismissed because (a) Zhou truly does hold the fate of the Dollar and the US economy in his back pocket; (b) the IMF Board of Governors has advocated expansion of the SDR allocations since 1997, with 131 members (77.7%) officially endorsing the proposal. 85% is needed to implement recommendations from the internal SDR review committee, which convenes every 5 years (next 2010). The US controls 16.75% of the total IMF vote, which granting the Obama administration de facto veto of all IMF resolutions. Zhou's plan called for additional currencies to be added to the basket used to value SDRs; encouraged SDRs to be accepted in international trade and investment so they can become established reserve; SDR denominated securities to be introduced. Obama has indicated he opposes any and all such measures.

It is hard to imagine the Dollar, the underlying grease that makes the world work smoothly for American businesses and politicians, is actually on the verge of becoming merely "part of the basket" as opposed to the peg to which each currency is valued. China is the largest holder of US debt and has tremendous leverage in the debate over the realignment of international currency regimes.

What is to prevent Beijing from coordinating a massive pooling of US debt holders in a Chinese managed international and developing market counter-part to the Federal Reserve? The collective Treasury holdings of the central banks in the 131 dissenting IMF member-states, Ivy Leagueuniversity endowments and personal fortunes of Billionaire philanthropists like Warren Buffettand Bill Gates alone would be enough to leverage a new mint for global reserve notes. It would be like stock-piling gold in Fort Knox to guarantee US debt to its creditors during the Depression (or at least I think it would be).

At what could have been a watershed in American history, Obama and his half-staffed Treasury have gone nearly 100 days in the opposite direction of the hopeful, Reagan-esque vision that candidate Obama was so widely praised for forging during his two-year campaign. The president has been either uncertain or unsatisfied with the qualifications of applicants for many critical bureaucratic appoints under his chief deputy Timothy Geithner. Perhaps Geithner is to blame for the lack of decisiveness within his department, but it matters very little for the freshman president with a HUGE to-do list. Regardless, these posts are critical for managing relations with foreign central banks and finance ministers and needed to be filled last-December.

Beijing ordered Zhou to make his aggressive proposal at a crucial moment for Tim Geithner, who had only begun to unveil their plans to combat the morgaged backed securities ailing the financial markets and clearly failed to fully ascertain the significance of Zhou's comments. Geithner was initially receptive and open to suggestions from Zhou, but his comments spurred a 4.2% decline in the Dollar across all currencies in less than 10 minutes. 15 minutes later he backtracked, and in his second press conference Obama reaffirmed the strength and long-term viability of the Dollar as the global reserve currency. Perhaps Geithner has yet to be briefed by his Under-Secretary for Foreign Affairs on the concerns of Chinese policy-makers.

**I searched for photos of Secretary Geithner with the Zhou, and found none - though I did find dozens of candid snapshots of Geithner's predecessor Hank Paulson enjoying face-time with China's top banker. Perhaps Geithner should call on Paulson to fill the void while he continues to recruit his underlings...