If The US Economy Goes Down, So Does China’s

September 22nd, 2008

In the past few days, Henry Paulson has come up with his US$700B proposal to save the major lending institutions which made bad decisions re CDOs, with all the bad loans being covered by the US taxpayer. This is happening at a time when the US middle class is under unprecedented pressure already.

Over the next year, all the bad decisions made by China’s economic planners over the past 30 years will show through. These include:

  • The decision to become overly dependent on the US as an export market, and buying US treasuries to effectively buy this single captive market and continue to sell it goods far beyond its capacity to pay for China’s exports.
  • Somewhere along the line, a decision was made to jumpstart China’s economy and put it on the fast-track of economic development. To a large extent, this has happened. But China’s economy is like a body builder whose upper body strength is massive, but has toothpick legs. More incidents like the melamine milk incidents will become common, simply because the government is not equipped to handle incidents of this kind.
  • China, unfortunately, has a reputation for cheap, low-quality products, in spite of the successful Beijing Olympics. For the most part, Chinese companies do not have the talent to work up the value chain creating better products. (There are some, but they are too few to make a significant difference.) This takes time to build.
  • Exports will slow, and the Chinese domestic market will not pick up the slack fast enough to prevent major unemployment problems, especially among university graduates.
  • The wealth gap between the rich and poor will widen dangerously, and real estate prices, which are already falling, will fall even more.

China became addicted to US orders and the US dollar the same way Americans became addicted to Chinese junk products. (This is a generalization; many goods are not junk. But the general image is of, well, junk.) For both sides, it was a dream which was too good to be true.

Now it’s over, and the Beijing Olympics are turning into the final hurrah for that period.

If you would like a well-presented systematic presentation, my friend Corbett Wall has written an interesting piece.

The fat days are over, and we are in for a tough 20-30 years ahead.

Chinese Government’s CSRC To Fund Managers: No Bad News

July 29th, 2008

The Chinese government’s watchdog for equities, the CSRC (China Securities Regulatory Commission) has issued an edict to local fund managers that they are not to issue any pessimistic reports about equities during the Olympics in Beijing.

My question is “Why bother?”

The Shanghai market has been down 50% in the first half of the year, and what started out as a subprime mortgage problem in the US has now morphed into a banking problem with more US banks at risk.

In the meantime, Pony Ma, CEO of Tencent has joined in the chorus with Alibaba’s Jack Ma to talk about hard times ahead. The Chinese government has signaled that the rise of the yuan against the dollar will slow down, with a very public discussion in the People’s Daily. The signs of economic deceleration are everywhere.

When there is so much public discussion about upcoming economic challenges in the Chinese and western media, what good could possibly come from telling local fund managers not to say anything bad which might upset the Chinese equities markets? While many western observers of China see this as a sign of an authoritarian regime, for many Chinese, it looks more like desperation. Instead of allaying fears, it makes those who are still in the market fear the worst, and think that the government is trying to suppress even worse news, which in turn will fuel the rumor mill and make the market even more volatile.

In short, this looks more like a desperation move than a well-thought policy move. Instead of helping the market, it’s likely to make things worse.

This is what happens when politics interfere in the markets.

Chinese Economy: Early Signs of Rapid Deceleration

July 23rd, 2008

Some signs point to a rapid deceleration of the Chinese economy:

The whole idea of an urgent politburo meeting just three weeks before the Beijing Olympics is a strong indicator of how serious the ruling levels of the Chinese government see this situation and would, in my opinion, be an ominous sign.

All of the signs point to an economy which is rapidly deflating, following on the falling performance of the Shanghai stock exchange, which has fallen more than 50% in the first half of the year. A lot of money which people thought they had made, and did not think of converting into cash thinking that it would go higher, is no longer there.

In China, this is always a warning sign of potential social instability. It also explains a lot about why the Chinese government has introduced new licensing regulations for online video and other communications means where people can communicate quickly, spreading views contrary to the official line, and events can quickly spin out of control.

If the Chinese economy deteriorates, as signs suggest, then it would be safe to say the government controls would tighten further. This would especially be the case in areas where foreign investment capital has gone into sensitive media sectors, which is always viewed with some degree of suspicion by the Chinese government.

What’s Wrong with The Economist’s “Angry China” Article?

May 3rd, 2008

I just read The Economist’s lead article this week titled “Angry China”. I came away from it disappointed, and I would like to explain why.

The main gist of the article is that the Chinese government should be worried about the rising tide of Chinese nationalism because a great deal of the anger now directed at western policies and interests are in fact, anger at Chinese government policy. Handled the wrong way, this tide of Chinese nationalism could very well turn against the Chinese government, leading to unpredictable consequences.

Here are the money quotes:

China’s rage is out of all proportion to the alleged offences. It reflects a fear that a resentful, threatened West is determined to thwart China’s rise. The Olympics have become a symbol of China’s right to the respect it is due. Protests, criticism and boycott threats are seen as part of a broader refusal to accept and accommodate China.

There is no doubt genuine fury in China at these offences; yet the impression the response gives of a people united behind the government is an illusion. China, like India, is a land of a million mutinies now. Legions of farmers are angry that their land has been swallowed up for building by greedy local officials. People everywhere are aghast at the poisoning of China’s air, rivers and lakes in the race for growth. Hardworking, honest citizens chafe at corrupt officials who treat them with contempt and get rich quick. And the party still makes an ass of the law and a mockery of justice.

This is a classic “bait-and-switch” argument. The anger directed at the west is in fact domestic Chinese anger at Chinese government policies, according to this thesis. This is a dismissal of any anger at the west as an argument completely without merit, and an attempt to shift all of the blame onto the Chinese government.

It is exactly this kind of argument which Chinese see as western hypocrisy and double standards. Of course there is anger at some Chinese government policies, but these are a separate issue. Please don’t try to change the subject!

Sure, there are some aspects of Chinese government policy which Chinese citizens would like to see change. But the pro-Tibetan independence folk have committed the sin of lumping Chinese citizens together with the Chinese government in their criticisms. To the Chinese, it seems like a classic attempt to hijack the Olympics, something which almost all Chinese are truly proud of, and to turn it into a bully pulpit for their claims of Tibetan independence.

What angers both the Chinese government policymakers and people is that while the country has developed in economic terms and yes, even in human rights terms, that has not been recognized in the west. Instead, there continue to be politicians and media figures who continue to hector China, and play a leading role in shaping western opinions and political policy about China. To the Chinese, it seems like no matter how hard they run to the finish line, there is always someone out there moving the finish line even further away while they are running the race.

Trying to steal the Olympics and letting the Chinese have their day in the sun would be very similiar to insulting an American simply because George W Bush is his president. This is exactly what the pro-Tibetan independence supporters, and the China media critics have done.

Why should these people, who have little deep understanding of China and the Chinese (or Tibetans for that matter) have such an influential role in shaping opinion about such an important relationship as the west’s relationship with China, and be given so much ink and free air time? In light of this, why shouldn’t Chinese get angry about this very unfair and one-sided view which is put forward in much of the western media, and then passed off as the truth? And why doesn’t the western media instead reach out to westerners who have lived in China, and maybe, even speak the language in order to get a deeper understanding of the country?

Is this fair?

The real reason many Chinese are angry is not redirected anger at Chinese government policies, it is a genuine anger at a very biased and one-sided view about China which casts it as irresponsible, selfish, oppressive and wrong, and then throwing all Chinese citizens into the same basket.

The Economist is, generally speaking, a fair and open-minded newspaper, and usually presents well thought-out positions and arguments . It should look deeper than dismiss all of the Chinese anger out of hand.

If this lead article is the best that they can do, then I’m not optimistic about relations between China and the west.

Trouble in the West and Yuan Appreciation

March 24th, 2008

When I talk about the west in the title, I’m referring to the western part of China.

A great deal of thought and ink and pixels have been devoted to how the recent violence in the western part of China has affected the country’s image in the runup to the Beijing 2008 Olympics. I’m not going to talk about that because I have nothing new to add to that conversation.

Instead, I’m going to talk about how those events are likely to affect Chinese government fiscal and monetary policy.

These recent events have shown that the income gap between Han Chinese and Tibetans is growing, and that there are significant numbers of Tibetan youth who do not see a bright future for themselves. They are perfect fodder for unrest. Beijing has tried to mollify things by moving significant numbers of Han Chinese into Tibetan areas to start small businesses but, for the most part, Tibetans are still deeply religious, and many prefer a nomadic lifestyle to living in cities where they cannot find work.

This is the trouble with an urbanization policy: it works fine if people are employed. If they are not employed, there are all kinds of social problems.

The biggest problem is that there is no Tibetan merchant class as there is among Han Chinese.

The central focal point of Chinese social policy is low unemployment at all costs, even if the businesses are not profitable. It is better to have people working in a loss-making enterprise than for them not to have a job at all and wandering the streets.

Part of the rationale for the violence was to scare Han Chinese out of the Tibetan regions. Many Han Chinese families may prefer to move back to their places of origin; the Chinese government may offer economic incentives for them to stay.

Faced with this situation, the Chinese government is unlikely to let the yuan rise significantly more this year. If asked to choose between which is more dangerous, social unrest in China, or increasing pressure from the European Union and the US over letting the yuan appreciate, I’m sure that the residents of Zhongnanhai would say that the former is the threat they fear the most, not the latter.

For them, it’s much more important to keep people working at their jobs in China.