New Economist

Are emerging Asia’s reserves really too high?

Aside from China, no, according to a new IMF working paper by Marta Ruiz-Arranz and Milan Zavadjil. This is in large part an attempt to insure against a repeat of the 1997 Asian currency crisis:

The paper has presented evidence that to a large extent explains Asia’s large reserve accumulation since the 1997–98 crisis through the precautionary motive. Current reserve holdings in most of Asia (excluding China) are not seen excessive when compared with levels predicted by a simple model of optimal reserves applied to specific country and regional characteristics. By mitigating the potentially large welfare costs of crises, reserves provide benefits in terms of insurance that more than compensates economies for the
opportunity cost of holding liquid assets.

Large currency reserves have the added benefit of lowering borrowing costs:

Furthermore, the benefits of reserves in terms of reduced spreads on privately held external debt, and thus borrowing costs, further justifies most of the observed growth in reserves. The paper finds that a majority of economies in Asia continue to benefit from reduced spreads, as evidenced by the high estimated threshold levels beyond which no further gains are realized.

Nonethless, the authors consider that current reserves "are close to or have recently reached optimal
reserves levels", and "a slowdown in the pace of accumulation in Asia is now desirable."

China, meanwhile, remains an anomaly. These models "cannot fully explain the large stock of reserves in China" - a subject to be explored in future research.

How rural villages have gained from China's great migration

Inter-county migration in China - mostly rural migrants moving to urban areas - increased four-fold during the 1990s, from just over 20 million in 1990 to 79 million by 2000. With what effect?

Co-authors Alan de Brauw from the International Food Policy Research Institute and Michigan State University's John Giles examine the impacts this great tide of migration has had on China's rural villages. Their paper, Migrant Labor Markets and the Welfare of Rural Households in the Developing World: Evidence from China (PDF), finds that rural out-migration has boosted per capita consumption and reduced inequality:

We find that increased migration from rural villages leads to signicant increases in consumption per capita, and that this effect is stronger for poorer households within villages. Household income per capita and non-durable consumption per capita both increase with out-migration, and increase more for poorer households.

Villages with the fastest growth in out-migration have seen the largest reductions in village poverty headcount and the strongest growth in average consumption levels. Out-migration has also reduced inequality - "expanded migration is associated with decreasing inequality within villages", as poorer households "supply more labor to productive activities and experience more rapid income growth".

There are mixed effects on rural investment - new earnings from urban jobs have largely been spent on better homes and durable goods:

A second important finding relates to the impact of migration on investment in rural areas. Increases in migration from rural China are associated with increased accumulation of housing wealth and consumer durables, but we do not find evidence of a significant relationship between migration and investment in productive assets.

While none of these findings are particularly unexepected, they help unpack China's economic story. And they show that it is not just international migration that brings benefits.

How China thinks

We know a lot about the Chinese economy - but how do the Chinese think? What do they discuss? Are they all Maoist automatons, or is there a lively debate occurring which Western observors are barely aware of? Veteran think tanker Mark Leonard favours the latter view, which he puts forward at some length in his new book, What does China think?

This is also the lead story in the March 2008 issue of Prospect magazine. Leonard makes some inteersting points in his cover piece, China's new intelligentsia. He documents the shift away from Deng's 'growth at any price' approach, as 'new left' views gain ground. Here are some excerpts from the article:

I had imagined that China's intellectual life consisted of a few unbending ideologues in the back rooms of the Communist party or the country's top universities. Instead, I stumbled on a hidden world of intellectuals, think-tankers and activists, all engaged in intense debate about the future of their country. I soon realised that it would take more than a few visits to Beijing and Shanghai to grasp the scale and ambition of China's internal debates. Even on that first trip my mind was made up—I wanted to devote the next few years of my life to understanding the living history that was unfolding before me.

Over a three-year period, I have spoken with dozens of Chinese thinkers, watching their views develop in line with the breathtaking changes in their country. Some were party members; others were outside the party and suffering from a more awkward relationship with the authorities. Yet to some degree, they are all insiders. They have chosen to live and work in mainland China, and thus to cope with the often capricious demands of the one-party state.

We are used to China's growing influence on the world economy—but could it also reshape our ideas about politics and power? This story of China's intellectual awakening is less well documented. We closely follow the twists and turns in America's intellectual life, but how many of us can name a contemporary Chinese writer or thinker? Inside China—in party forums, but also in universities, in semi-independent think tanks, in journals and on the internet—debate rages about the direction of the country: "new left" economists argue with the "new right" about inequality; political theorists argue about the relative importance of elections and the rule of law; and in the foreign policy realm, China's neocons argue with liberal internationalists about grand strategy. Chinese thinkers are trying to reconcile competing goals, exploring how they can enjoy the benefits of global markets while protecting China from the creative destruction they could unleash in its political and economic system. Some others are trying to challenge the flat world of US globalisation with a "walled world" Chinese version.

Can China find an 'eastern' model of development?

Not quite heretical - but certainly controversial - comments on China's economic development:

...from my own layman's point of view, I don't believe China will ever manage to find its own uniquely "eastern" model of development. The past is the past, and there is no room for "what ifs". More than 2,000 years passed between the country first being unified under a central dictator in the Qin dynasty (starting in 221 bce) and the overthrow of the imperial system in 1911. In this period, what did China actually develop on its own? Virtually nothing. In the words of Hegel, China "has no history", but merely the cyclical rise and fall of various monarchs, out of which no progress can emerge.

I might have expected these from a western commentator. But from a Chinese journalist and former editor of a supplement to the China Youth Daily? Now that's a surprise. The piece is by Li Datong and appeared on opendemocracy.net: China’s modernisation: a unique path?,

Hefei: China's Silicon Valley?

The December 2007 issue of Prospect magazine has an article by Rob Gifford about Hefei. Almost unknown outside China, it aspires to be The Silicon Valley of China. Here's the first pargraph:

In the US, there are nine cities with more than 1m inhabitants. In China, there are 49. You can be travelling across China, arrive in a city that is twice the size of Houston, and think: I've never even heard of this place. That is how it is for many foreign visitors to Hefei (population 4.7m). I have been travelling to China as a journalist, or living here, for nearly 20 years and visited Hefei (pronounced Huh-fay) for the first time only last year for the book I have just written about the new China. There had never been any reason to come. But as in so many cities in China, the local government is trying to change that. After centuries of inland poverty, Hefei, like all Chinese cities, is opening up.

Gifford concludes his piece with some interesting comparisons betwen India and China:

In India, the cost of some restraint on the government is a slower growth rate. But at least independent trade unions are allowed in India, and some of them have teeth. India also has a free press, which can act as a watchdog on governmental bad behaviour. In China, the press is more free now on social and economic matters, but it can easily be muzzled by the government on any sensitive issue.

In the end though, there is one crucial difference between China and India, and a perfect example of it is coated in black tarmac and runs east and west through Hefei. China is a brutal place to live if you are on the bottom rung, but there is an exit. And, just as important, there is a real possibility of a job at the other end. India's 1.1bn population is rapidly catching up with China's 1.3bn.

But India has only about 10m manufacturing jobs, compared with about 150m in China. So there are simply more opportunities in China to improve your life. (And I haven't even mentioned India's restrictive caste system.) The growing service sector in India—in software development, in call centres and service centres—is great if you are already middle class and speak English. But what about possibilities for the hundreds of millions of illiterate peasants? It seems to me that India is trying to reach modernism without passing through the industrial revolution.

Now, as the cost of manufacturing rises in China, we are starting to see some manufacturing relocating to India. The country's retail sector is opening up too, and India is in the midst of other major economic changes. So in the near future, more opportunities of escape from rural poverty may be provided, in which case the balance will tip in India's favour.

I'm disappointed that one of the few Indians in central China does not want to have this conversation with me. So in the end, I have the conversation with myself over dinner, and I conclude that I do not want to be a Chinese peasant or an Indian peasant. But if I have to take a side, despite all the massive problems of rural China, I'll go for the sweet and sour pork over the chicken biryani.

Nodding off in Beijing

Channel 4 News' China correspondent Lindsey Hilsum tried not to nod off while attending the 17th Party Congress in Beijing. She was not alone:

Never before have I felt at one with the former Chinese leader Jiang Zemin. But halfway through President Hu Jintao's two-and-a-half-hour speech at the 17th Congress of the Communist Party of China, as the 81-year-old's eyelids drooped and his head flopped on to his chest, I experienced a certain fellow feeling.

The speech had the pithy title "Hold High the Great Banner of Socialism with Chinese Characteristics and Strive for New Victories in Building a Moderately Prosperous Society in All Respects". It was delivered in a monotone. President Hu clapped himself at the best bits, as a cue for his audience of apparatchiks. Two frail and elderly delegates had to be ushered off the stage, presumably for resuscitation.

The speech contained not a single new thought, but rehashed a dozen tired slogans: "Harmonious Society", "Scientific Outlook on Development", "Socialism with Chinese Characteristics". China-watchers - an even more specialised and possibly eccentric bunch than birdwatchers - will now be analysing all 64 pages for clues to what it all means for China's future.

Why so dull?

Chinese leaders don't have to spark excitement among the public, because they are not courting anyone's vote. As I sat in the Great Hall, trying not to nod off like Jiang, I thought of how China's leaders have brought prosperity to hundreds of millions. Universities are graduating well-qualified students; the stock market is soaring; the trade surplus has reached $1.4trn. Yet the party still claims to be following Marxism-Leninism and Mao Zedong Thought. Real achievements are submerged in mind-deadening verbiage. No wonder the Chinese people aren't listening.

And yet, despite the stale Marxist rhetoric and lack of democracy, the economy is booming. Hilsum's piece in the New Statesman contains am apt analogy of the Chinese leadership:

The Chinese economy is like a runaway horse - the government is torn between trying to rein it back, or just clinging on and hoping that it slows down of its own accord. The leaders' main fear is of falling off.

Does another China trade row loom?

First we had bra wars. Then shoe wars. Is yet another China-Europe trade row brewing? The Economist certainly thinks so. The China trade syndrome explains why Europe's next big globalisation row will be over trade with China. It gives this analysis of the reasons:

Three linked China problems are now causing big ructions.

The first is one of sheer scale. Low-key policies that seemed adequate a couple of years ago have struggled to keep pace with the explosive growth of trade. Two-way trade between the EU and China expanded by over 20% last year to a total value of €254 billion ($319 billion), and the trade balance has swung sharply in China's favour. Compared with America, the EU has shunned confrontation, preferring dialogue with China over such concerns as the deficit or intellectual property. But this calm approach may be a harder sell when the bilateral trade deficit with China is running at an average of €15m an hour.

The second problem is that China ignores gentle hints to stick to commitments it made when it joined the World Trade Organisation. The charges are numerous: there are perennial (and hard to prove) accusations about state subsidies and a failure to guard against the theft of intellectual property. A bleak report by the EU Chamber of Commerce in China notes a fresh threat: the unequal treatment of foreign companies by newly muscular Chinese regulators. Chinese officials are even accused of diverting EU energies into “process”—endless argument over when and with whom meetings will take place. It does not help that many commissioners fall for this nonsense, tripping over each other in their eagerness to visit China and meet the right officials. The 27 member countries are worse, eagerly undermining agreed positions in a quest for national advantage.

The third problem is China's currency, the yuan, which has lost about 40% of its value against the euro since 2000, making Chinese exports ever cheaper. President Nicolas Sarkozy of France loudly argues that euro-area governments should join forces with the European Central Bank (ECB) and back American demands for the Chinese to let their currency appreciate (it is still loosely pegged to the dollar). But the sad reality is that any finger-wagging by the Europeans might serve only to expose their impotence. Noting the euro's steady rise against the yuan, several American analysts conclude that the Chinese have taken a deliberate decision to allow Europe to foot the bill for any small concessions they may offer to America on the yuan.

China: poverty down, inequality up

Poverty in China has fallen massively, but other social disparities - particularly income in equality - have grown. David Dollar, the World Bank Country Director for China, writes about Poverty, inequality, and social disparities during China's economic reform

China has been the most rapidly growing economy in the world over the past 25 years. This growth has fueled a remarkable increase in per capita income and a decline in the poverty rate from 64 percent at the beginning of reform to 10 percent in 2004.

At the same time, however, different kinds of disparities have increased. Income inequality has risen, propelled by the rural-urban income gap and by the growing disparity between highly educated urban professionals and the urban working class. There have also been increases in inequality of health and education outcomes.

Some rise in inequality was inevitable as China introduced a market system, but inequality may have been exacerbated rather than mitigated by a number of policy features. Restrictions on rural-urban migration have limited opportunities for the relatively poor rural population. The inability to sell or mortgage rural land has further reduced opportunities.

China has a uniquely decentralized fiscal system that has relied on local government to fund basic health and education. The result has been that poor villages could not afford to provide good services, and poor households could not afford the high private costs of basic public services. Ironically, the large trade surplus that China has built up in recent years is a further problem, in that it stimulates an urban industrial sector that no longer creates many jobs while restricting the government's ability to increase spending to improve services and address disparities.

The government's recent policy shift to encourage migration, fund education and health for poor areas and poor households, and rebalance the economy away from investment and exports toward domestic consumption and public services should help reduce social disparities.

Why China needs its slums

The latest Economist looks at the plight of many China migrant workers whose cheap urban housing is being flattened, No place to call home

To prepare for the Olympic Games next year, Beijing's authorities are removing ..eyesores. Old villages surrounded by the expanding city are being demolished. With them goes cheap housing, vital to the city's huge pool of migrant workers. China does not like to admit it has slums. But it does, and it will find it needs them.

In the past two years or so, cities across China have announced plans to “transform” these “villages within cities”. Because of the Olympics in August 2008, Beijing faces a particularly tight deadline. The aim is to “renovate” (ie, usually, flatten) 171 urban villages by the end of this year. Between 2005, when the campaign was launched, and the end of last year, 114 of them were thus transformed.

Officials have given few details of the number of people affected. A state-controlled newspaper in 2005 said 33,935 households in 231 villages would be moved out. But these are only the “permanent residents”, ie, the villages' original inhabitants. They are heavily outnumbered by rural migrants, most of whom work as traders or in the city's service and construction industries. Their numbers have soared as Beijing has boomed.

In a city of fast-rising house prices, the former villages offer affordable accommodation. Rents are as low as 200 yuan ($25) a month. The villagers of Liguanzhuang, a cluster of shabby single-storey brick houses in the north-east of the city, can afford to sit around moaning. They lost their fields several years ago, but their houses are large by city standards. They have roofed over their courtyards and partitioned their homes into tiny, dark rooms, which they rent out. Conditions in the village are grim. The only lavatories are foul-smelling public ones. But the slumlords are making an easy living.

China's growth: headed for a car crash?

Later this week Wing Thye Woo from UC Davis and the Brookings Institution delivers a paper later this week at a Seoul conference on 'Assessing the Power of China: Political, Economic, and Social Dimensions'. His theme is the major risks or challenges to China's rapid pace of growth: What are the High-Probability Challenges to Continued High Growth in China? Here is a summary:

Analytically, if the Chinese economy is depicted as a speeding car, then are three classes of failures that could result in a car crash: (1) hardware failure, (2) software failure, and (3) power supply failure.

A hardware failure refers the breakdown of an economic mechanism, a development that is analogous to the collapse of the chassis of the car. Probable hardware failures are (1) a banking crisis that dislocates production economy-wide, and (2) a budget crisis that necessitates reductions in important infrastructure and social expenditure.

A software failure refers a flaw in governance that creates frequent widespread social disorders that disrupt production economy-wide and discourage private investment. This situation is similar to a car crash that resulted from a fight among the people inside the speeding car. Probable software failures could come from (1) the present high-growth strategy creating so much inequality, and corruption that severe social unrest results; and (2) the state not being able to meet the rising social expectations about governance issues.

A power supply failure refers to the economy being unable to move forward because it hits either a natural limit or an externally-imposed limit, a situation that is akin to the car running out of gas or having its engine switched off because an outsider reached in and pulled out the ignition key. Examples of power supply failures are (1) an environmental collapse; and (2) a collapse in China's exports because of a trade war.

My assessment is that the highest probability event in hardware failure is the weakening of China's fiscal position; the highest probability event in software failure is social disorder, and the highest probability event in power supply failure is water shortage. And my ranking of the probability of these three specific negative events in descending order is social disorder caused by outmoded governance, water shortage as a result of inept environmental management, and fiscal crisis generated by the repeated recapitalization of the state banks and the rapid aging of the population.

Woo is catiously optimistic - these hazards need not necessarily crash the economy.

Will China succeed in establishing a harmonious society and completing the overhaul of its economic system? My answer is a very cautious "yes". I am optimistic because both Chinese society and government want the economy to continue its convergence to a modern private market economy.

My considerable caution comes from (1) the new major reforms being technically difficult to implement (e.g. setting up social safety nets), and having few, if any, successful precedents in the world to draw upon (e.g. designing market-compatible environmental regulation); and (2) the possibility that the many potential losers from these major reforms could successfully organise to resist meaningful implementation of the reforms.