Quotulatiousness

May 18, 2011

China facing recession?

Filed under: China, Economics — Tags: , — Nicholas @ 12:03

At risk of setting my hobby horse to full gallop, reports like this one are starting to sound a few mild alarms about the real state of China’s economy. But accepting official Chinese government statistics like this isn’t going to help:

The Chinese central bank has responded to overheating in its economy by raising interest rates four times since October 2010. Inflation has subsequently cooled, slowing to 5.3 percent in April, but the economy is still roaring with a 9.7 percent increase in gross domestic product for the first quarter.

The rate moves have raised questions about whether the government is going too far to slow things down, and whether the country can accomplish its desired transition from an export-driven economy to growth based more on internal consumption.

As I’ve said several times before, you can’t trust these kinds of numbers because they’re not independently generated from reliable data. They’re numbers that range from kinda-sorta in the same ballpark as reality all the way out to the lower stratosphere. The people providing the numbers are subject to rather more risk than just losing their jobs if they displease the government. Honesty is not a virtue when your life may depend on providing the “right” answer.

As Monty puts it:

I’ll keep hammering this point as long as I’m able: The Chinese “economic miracle” is mostly a sham. The Chinese are awash in cheap Western money, essentially, and when that money dries up (which it is doing right now), the Chinese don’t have much of a domestic market to fall back on. Plus, in case anyone forgot, they’re still run by Communists who don’t really believe in that whole “capitalism” thing.

I’ve ridden this hobby horse many times before. I don’t doubt that I’ll be riding it many times again in the future.

May 13, 2011

Will China’s rise eclipse the United States?

Filed under: China, Economics, History, USA — Tags: , — Nicholas @ 09:49

Jon sent me this link, suggesting that it was good “hobby horse bedding”. It starts with the notion that the pattern (and method) of China’s rise to economic superpower status actually follows that of the United States:

The last time a rising power came bursting onto the international scene and successfully supplanted the existing dominant power was when the United States was a boisterous upstart with a stampeding economy. Back then, America employed its own ruthless political machinations to advantage economic production — slavery and Andrew Jackson’s Indian removal policies made cotton king, while the three-fifths compromise ensured southern political control of Congress.

Meanwhile, we stole designs of British factories for replication here, jump-starting our own industrial revolution. And we forced Britain into a two-front war in the midst of its cataclysmic fight with Napoleon. To outside appearances, America orchestrated political, military, and economic power in ways that shrewdly upended existing rules to our advantage.

Just enough historical parallels to make an interesting story. But the Chinese are not (yet) in a position to actually supplant the Americans, and much of the reason for that isn’t so much economic as it is political:

America is the democracy that those people living under authoritarian regimes choose whenever they get the opportunity. It is a democracy often mistaken in the short run, with the best means of correcting itself, and by its sheer existence, a reminder to others of what they might make for and of themselves. The international order is genuinely different because of the rise of an economically and politically liberal American polity. The Chinese model doesn’t have the kind of advantages that make for success competing against the American one. There’s no reason to believe Chinese citizens aren’t yearning for what Americans get to take for granted. To the contrary, there are many signs that the Chinese are increasingly agitating for it.

American power is robust and enduring because it is built on the strength of ideals that foster our advantage. China is banking on prosperity reducing the desire for political rights, on centralized control by elites that will make “better” choices than individuals would make for themselves, on nationalism and grievance to trump the appeal of values we claim to be universal, on mercantilist foreign policies and the threat of force making them preferred allies. It didn’t work for Palmerston in a much more conducive age and it is unlikely to work for China’s leaders.

A quick search of the blog will come up with lots of posts on China and its economy. This is what Jon refers to as my “hobby horse”.

April 19, 2011

WikiLeaks exposes Chinese espionage unit

Filed under: China, Military, Technology, USA — Tags: , , — Nicholas @ 09:15

Strategy Page points out that it’s not just American and allied secrets that have been exposed by WikiLeaks:

Chinese Cyber War units have been plundering foreign government and military online data for over five years now. But thanks to Wikileaks, and several other sources, the identity and location of the main Chinese Cyber War operation is now known. The Chinese Chengdu Province First Technical Reconnaissance Bureau (1st TRB) is a Chinese Army electronic warfare unit located in central China (Chengdu), and is the most frequent source of hacking attacks traced back to their source. The servers used by the 1st TRB came online over five years ago, and are still used. The Chinese government flatly refuses to even discuss the growing pile of evidence regarding operations like the 1st TRB.

The 1st TRB is part of the Chinese Army’s Third Department, which is responsible for all sorts of electronic eavesdropping. But given the praise showered on the 1st TRB, a lot of valuable data has apparently been brought to Chengdu, and then distributed to the appropriate industrial, diplomatic or military operations. The hacking operation has been so successful, that it has obtained more staff and technical resources. As a result, in the last five years, detected hacking attempts on U.S. government and corporate networks has increased by more than six times. Most of these hacks appear to be coming from China. Not all the hacking is done by 1st TRB personnel. A lot of it appears to be the work of Chinese freelancers, often working for pay, but sometimes just to “serve the motherland.”

Reuters has a special report on “Byzantine Hades”:

According to U.S. investigators, China has stolen terabytes of sensitive data — from usernames and passwords for State Department computers to designs for multi-billion dollar weapons systems. And Chinese hackers show no signs of letting up. “The attacks coming out of China are not only continuing, they are accelerating,” says Alan Paller, director of research at information-security training group SANS Institute in Washington, DC.

Secret U.S. State Department cables, obtained by WikiLeaks and made available to Reuters by a third party, trace systems breaches — colorfully code-named “Byzantine Hades” by U.S. investigators — to the Chinese military. An April 2009 cable even pinpoints the attacks to a specific unit of China’s People’s Liberation Army.

Privately, U.S. officials have long suspected that the Chinese government and in particular the military was behind the cyber-attacks. What was never disclosed publicly, until now, was evidence.

U.S. efforts to halt Byzantine Hades hacks are ongoing, according to four sources familiar with investigations. In the April 2009 cable, officials in the State Department’s Cyber Threat Analysis Division noted that several Chinese-registered Web sites were “involved in Byzantine Hades intrusion activity in 2006.”

April 18, 2011

The real secret weapon of the “China economic miracle”

Filed under: China, Economics, Government — Tags: , , , , — Nicholas @ 10:35

Chriss W. Street thinks the Chinese banks are about to suffer a crisis moment:

It is ironic that China is demanding greater control of the World Bank and International Monetary Fund, just as the nation’s banking system is about to be devastated by the white hot flames of inflation.
From a distance, China’s economy seems to be the poster child of sustainable growth. Recent government reports show the economy expanding by 9.7%, retail sales up a blistering 17.4%, foreign reserves at $3 trillion, and inflation only 5.4%. But these statistics mask a dark side; Chinese communist authorities have been artificially holding down fierce inflationary pressures by subsidizing consumer prices.

[. . .]

The less known and far more important secret-weapon of the “China Economic Miracle” is the absolute control of the banking industry by China’s four largest state-owned banks (“SOB”); Industrial and Commercial Bank, Agricultural Bank, People’s Bank of China and Construction. Since the government does not provide adequate social welfare programs and restricts its citizen’s investment options to bank accounts, about 40% of Chinese household income is deposited in SOBs each month. The SOBs then leverage the deposits by ten times and loan 75% of this massive amount of cash at extremely low interest rates to state-owned-enterprises (“SOE”). The other 25% of lending is allocated to real estate development.

China is no stranger to bankers making risky loans to communist party officials and their crony real estate developers. During the Asian Financial Crisis of the mid-1990s, it is estimated that 40% of all SOB loans were non-performing and most were written off. The Chinese paid for the SOB losses with a 76% devaluation of their currency that crushed the people’s buying-power by 76%. From 1997 to 2004 Chinese frivolous lending was somewhat restrained, but since 2003 the bureaucrats have mandated a massive expansion of lending. In comparison to the U.S. and Europe where bank lending is flat, SOBs have been expanding loans by 25% annually.

H/T to Jon for the link.

Malinvestment the next big problem for China?

Filed under: China, Economics, Government — Tags: , , — Nicholas @ 09:54

Nouriel Roubini thinks that the Chinese central planners are missing the clues about overinvestment in their infrastructure binge:

China’s economy is overheating now, but, over time, its current overinvestment will prove deflationary both domestically and globally. Once increasing fixed investment becomes impossible — most likely after 2013 — China is poised for a sharp slowdown. Instead of focusing on securing a soft landing today, Chinese policymakers should be worrying about the brick wall that economic growth may hit in the second half of the quinquennium.

Despite the rhetoric of the new Five-Year Plan — which, like the previous one, aims to increase the share of consumption in GDP — the path of least resistance is the status quo. The new plan’s details reveal continued reliance on investment, including public housing, to support growth, rather than faster currency appreciation, substantial fiscal transfers to households, taxation and/or privatization of state-owned enterprises (SOEs), liberalization of the household registration (hukou) system, or an easing of financial repression.

China has grown for the last few decades on the back of export-led industrialization and a weak currency, which have resulted in high corporate and household savings rates and reliance on net exports and fixed investment (infrastructure, real estate, and industrial capacity for import-competing and export sectors). When net exports collapsed in 2008-09 from 11 percent of GDP to 5 percent, China’s leader reacted by further increasing the fixed-investment share of GDP from 42 percent to 47 percent.

Thus, China did not suffer a severe recession — as occurred in Japan, Germany, and elsewhere in emerging Asia in 2009 — only because fixed investment exploded. And the fixed-investment share of GDP has increased further in 2010-2011, to almost 50 percent.

The problem, of course, is that no country can be productive enough to reinvest 50 percent of GDP in new capital stock without eventually facing immense overcapacity and a staggering nonperforming loan problem. China is rife with overinvestment in physical capital, infrastructure, and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging.

H/T to Publius for the link.

April 17, 2011

China’s real estate bubble

Filed under: China, Economics, Government — Tags: , , , — Nicholas @ 09:24

April 5, 2011

China’s High Speed Railways: not for the masses

Filed under: China, Government, Technology — Tags: , , , , — Nicholas @ 12:07

Reports of corruption among top officials and soaring costs for China’s HSR network:

. . . question-marks have been raised over these plans after the sacking in February of Liu Zhijun, the minister responsible for building the high-speed network. He was accused of skimming off as much as 1 billion yuan ($152m) in bribes and of keeping as many as 18 mistresses. Zhang Shuguang, another top official in the railways ministry, was later dismissed for corruption. Separately, on March 23rd, state auditors reported that $28m had been embezzled from the 1,300km high-speed line between Beijing and Shanghai, the highest-profile of China’s many rail projects.

Public support for high-speed trains is muted. The trains may reach 350km per hour but fares are proportionately eye-watering. That is all right for well-heeled travellers, happy to have an alternative to flying. But tens of millions of poor migrants who work far afield and flock home for the Chinese new year are being priced out the rail market and have to go by bus (the number of bus journeys is soaring).

The sacking of top officials may be the result merely of one of China’s periodic anti-corruption campaigns. Or it may be the upshot of a high-level factional or personal battle, in which corruption charges are often a favourite weapon. If so, the dismissals would not necessarily affect railway development.

March 24, 2011

China’s “sexy spies” score another intelligence goal

Filed under: China, Japan, Military, Technology — Tags: , — Nicholas @ 09:52

Strategy Page says that the Chinese are “probably the most enthusiastic, and successful, users of this technique these days”:

China is widely known to use sex to obtain secrets from foreigners, inside and outside of China. Four years ago, Japan uncovered a widespread Chinese effort to use sex to steal military technology. Attractive Chinese female intelligence agents in Japan were marrying members of the Japanese armed forces, and then using that access to obtain military secrets. The situation was complicated by the military attempts to keep these “embarrassing incidents” secret. The government was particularly anxious to keep the Americans in the dark about all this, since the Chinese apparently got their hands on Aegis anti-aircraft system technology via their sexy spies.

Actually, most of the Chinese agents don’t have to marry Japanese troops. Just putting out usually does the trick. In Japan, the military doesn’t get much respect, and many of the bases are in backwaters. So the troops are pretty lonely. It’s not unusual for Chinese women to be in the country, as many come, legally or illegally, looking for jobs. The set-up is perfect for using the old “honey pot” (sexual entrapment) routine to extract military secrets.

The military geeks are the most sought after, as these guys have access to the most valuable military secrets. Geeks tend to be least experienced with women, and most vulnerable to a clever, and shapely, Chinese spy. Military commanders are not sure if they have the problem under control, but now that the situation is out in the open, there will be more efforts to tighten up security. As the Japanese expected, the Americans were not amused. And the Chinese honey pot scandal was apparently one reason for refusing to sell F-22s to Japan. To make matters worse, part of the Japanese cover-up involved prosecuting the Chinese spies on immigration, not espionage, charges.

March 23, 2011

Latest outlet for excess Chinese investment money: Bordeaux wineries

Filed under: China, Economics, Europe, France, Wine — Tags: — Nicholas @ 07:53

Running out of interesting investment opportunities? Some Chinese investors are moving into French wineries:

Walking among the ancient vines at Château de Malle, De Bournazel said many families struggled to make ends meet. “Nobody sells for pleasure, but you would struggle to find a chateau that wouldn’t sell for the right price. It’s sad, but I’d rather see families sell to the Chinese than tear themselves apart trying to keep a property.”

Rather than being viewed as conquerors, Chinese wine buyers are seen as saviours of the region — last year China overtook both Germany and the UK to become Bordeaux’s biggest customer, with exports growing by 67%. Bernard Farges, president of the Conseil Interprofessionnel du Vin de Bordeaux (CIVB), the body representing its wine growers and buyers, said Chinese investors buying vineyards would boost exports further.

“These are businessmen who believe in their investment, who are opening doors to a new market and ploughing money into properties to make great wine,” he said.

Others argue that the Chinese are simply the latest in a long line of foreign investors — including the Dutch, the English and the Danes — in Bordeaux.

That last part is certainly true: although you may not realize it, many of the wineries in the Bordeaux region have been foreign-owned for generations. The nationality of the foreign owners may change, but the principal is the same.

Of course, regardless of ownership, if the investors don’t maintain the property, they risk ruining their chances of benefitting from the purchase:

Not everyone is supportive of this new breed of Bordelais. Patrick Etineau recently sold Château de la Salle to a Chinese investor amid a storm of acrimony. “I found them very condescending,” he said. “They have the money and they think we are in penury.”

He says since the chateau was sold in January the vines have been left largely untended. “I was happy to sell, because I couldn’t maintain the property, but now I have the impression that they don’t care at all. We used to make beautiful wine, but this year I fear it will only be fit for the pigs.”

March 17, 2011

Industrial espionage, Chinese style

Filed under: China, Military, Technology, USA — Tags: , , — Nicholas @ 09:38

Another good post at Strategy Page on the recent uptick in detection of Chinese industrial spies in the United States, and how this may not be a result of more successful anti-espionage efforts by the FBI or CIA — it may just be a by-product of stepped up efforts by China’s intelligence services:

For over two decades, China has been attempting to do what the Soviet Union never accomplished; steal Western technology, then use it to move ahead of the West. The Soviets lacked the many essential supporting industries found in the West (most founded and run by entrepreneurs), and was never able to get all the many pieces needed to match Western technical accomplishments. Soviet copies of American computers, for example, were crude, less reliable and less powerful. Same with their jet fighters, tanks and warships.

China gets around this by making it profitable for Western firms to set up factories in China, where Chinese managers and workers can be taught how to make things right. At the same time. China allows thousands of their best students to go to the United States to study. While most of these students will stay in America, where there are better jobs and more opportunities, some will come back to China, and bring American business and technical skills with them. Finally, China energetically uses the “thousand grains of sand” approach to espionage. This involves China trying to get all Chinese going overseas, and those of Chinese ancestry living outside the motherland, to spy for China, if only a tiny bit.

This approach to espionage is nothing new. Other nations have used similar systems for centuries. What is unusual is the scale of the Chinese effort. Backing it all up is a Chinese intelligence bureaucracy back home that is huge, with nearly 100,000 people working just to keep track of the many Chinese overseas, and what they could, or should, be to trying to grab for the motherland. It begins when Chinese intelligence officials examining who is going overseas, and for what purpose. Chinese citizens cannot leave the country, legally, without the state security organizations being notified. The intel people are not being asked to give permission. They are being alerted in case they want to have a talk with students, tourists or business people before they leave the country. Interviews are often held when these people come back as well.

Those who might be coming in contact with useful information are asked to remember what they saw, or bring back souvenirs. Over 100,000 Chinese students go off to foreign universities each year. Even more go abroad as tourists or on business. Most of these people were not asked to actually act as spies, but simply to share, with Chinese government officials (who are not always identified as intelligence personnel) whatever information was obtained. The more ambitious of these people are getting caught and prosecuted. But the majority, who are quite casual, and, individually, bring back relatively little, are almost impossible to catch.

March 15, 2011

Shang-Jin Wei on the Chinese sex imbalance and its economic impact

Filed under: China, Economics, Government — Tags: , , — Nicholas @ 12:19

China’s one-child policy not only intruded into the personal lives of Chinese couples, but it may also have been a key contributor to the economic bubble:

Could a reproductive policy have caused the financial crisis? Could it still be wreaking havoc with the world economy? During a lively discussion at the Council on Foreign Relations yesterday, Columbia professor Shang-Jin Wei said this could be the case. He claimed that the skewed Chinese sex ratio (there are more men than women) can explain much of global trade imbalances. Mr Wei reckons the Chinese sex ratio can explain the high Chinese saving rate, and this is what’s behind China’s current-account surplus.

China adopted the one child law in the early 1980s. It resulted in a skewed sex ratio because many couples preferred a male baby and aborted female fetuses. In 1980, 106 boys were born were born for every 100 girls. By 1997, it was 122 boys for every 100 girls. This means that today one in nine Chinese men will probably never marry and the situation is expected to get worse as time goes on. It’s been suggested that the large pool of single men with no marriage prospects can lead to social unrest. What that will mean for China’s political future is uncertain and potentially troubling. But the world may already be experiencing the economic impact of this policy. Trade imbalances, specifically the Chinese current account surplus and America’s current account deficit, are often cited as a cause of the financial crisis. They provided a glut of cheap, easy capital which fed the housing bubble.

[. . .]

The lack of a social safety net is often blamed for the high Chinese saving rate. Without welfare and government pensions the Chinese must save to self-insure themselves. But Mr Wei pointed out that even as the government has extended more social welfare programmes, the saving rate has continued to rise. He believes the uneven sex ratio can explain half of the increase in private saving between 1990 and 2005. He explained that the marriage market is becoming very competitive with so few girls. Chinese parents want to accumulate as much wealth as possible to ensure that their son can attract a wife. It is also important to provide sons with the best education possible. A competitive marriage market means that members of the disadvantaged gender must raise their game, which in China means greater wealth and education.

Mr Wei also reckons the sex ratio can explain capital accumulation in the corporate sector. The desire to accumulate wealth means that boys and their parents are more likely to become entrepreneurs, work more hours and take more unpleasant jobs. He found higher rates of entrepreneurship in areas with more skewed sex ratios.

This, of course, is the optimistic view of things. The pessimistic view involves those tens of millions of men who can never find wives and projects that into social unrest, civil disorder, and military adventurism. Let’s hope the optimistic view is closer to being correct.

February 19, 2011

When “hacker army” is not an exaggeration

Filed under: Britain, China, Government, Military, Russia, Technology — Tags: , , , , , — Nicholas @ 10:07

Strategy Page counts noses of the various semi-organized hacker armies out in the wild:

Despite spending over a billion dollars a year defending their government networks, Britain recently complained openly of hackers getting into the communications network of the Foreign Office. The government also warned of increasing attacks on British companies. The recent attacks government and corporations were all targeting specific people and data. While China was not mentioned in these official announcements, British officials have often discussed how investigations of recent hacking efforts tended to lead back to China. There is also a strong suspicion, backed up by hacker chatter, that governments are offering large bounties for information from foreign governments. Not information from China, but from everyone else.

China one of many nations taking advantage of the Internet to encourage, or even organize, patriotic Internet users to obtain hacking services. This enables the government to use (often informally) these thousands of hackers to attack targets (foreign or domestic.) These government organizations arrange training and mentoring to improve the skills of group members. Turkey has over 45,000 of hackers organized this way, Saudi Arabia has over 100,000, Iraq has over 40,000, Russia over 100,000 and China, over 400,000. While many of these Cyber Warriors are rank amateurs, even the least skilled can be given simple tasks. And out of their ranks will emerge more skilled hackers, who can do some real damage. These hacker militias have also led to the use of mercenary hacker groups, who will go looking for specific secrets, for a price. Chinese companies are apparently major users of such services, judging from the pattern of recent hacking activity, and the fact that Chinese firms don’t have to fear prosecution for using such methods.

It was China that really pioneered the militia activity. It all began in the late 1990s, when the Chinese Defense Ministry established the “NET Force.” This was initially a research organization, which was to measure China’s vulnerability to attacks via the Internet. Soon this led to examining the vulnerability of other countries, especially the United States, Japan and South Korea (all nations that were heavy Internet users). NET Force has continued to grow. NET Force was soon joined by an irregular civilian militia; the “Red Hackers Union” (RHU). These are nearly half a million patriotic Chinese programmers, Internet engineers and users who wished to assist the motherland, and put the hurt, via the Internet, on those who threaten or insult China. The RHU began spontaneously in 1999 (after the U.S. accidentally bombed the Chinese embassy in Serbia), but the government has assumed some control, without turning the voluntary organization into another bureaucracy. The literal name of the group is “Red Honkers Union,” with Honker meaning “guest” in Chinese. But these were all Internet nerds out to avenge insults to the motherland.

You have to wonder how many script kiddies ever thought they’d end up being government operatives.

February 18, 2011

The internet in China: hidden powers of persuasion

Filed under: China, Government, Technology — Tags: , , , , — Nicholas @ 08:52

A look at how the internet in China has the power to (sometimes) punish corrupt officials and influence the government:

Corruption and viral marketing has provided the Chinese government with a powerful tool for controlling public opinion. It all began when Chinese companies realized that they could hurt competitors by planting damaging rumors on the Internet. This, even in China, is illegal. But the corruption in China being what it is, there was little risk of getting the police to hunt down and punish the perpetrators. This was partly because the marketing firms, hired by companies to burnish their image, or defame competitors, was careful to have other small outfits get on the Internet to actually do the work, and be careful to not be traceable. So the cops, when forced by companies to do something (often because the owner of the offended firm was well-connected politically), were stymied at first. But the police, declaring it a national security issue, eventually discovered how this was done. But this did not stop all these negative campaigns. To defend themselves, companies that were attacked by these Internet disinformation campaigns, fought back.

This use of negative tactics soon fell out of favor, as all those tarnished companies lost sales. So these Internet based opinion manipulation turned to praising your own products. About this time, the government discovered what was going on, and began to use these marketing companies, and their subcontractors, to change opinions towards government policies. There was a pressing need for this, because all this Internet opinion manipulation had started out, over the last decade, as a popular uprising against government corruption, mistreatment and media manipulation. This “online army” was not organized, except by outrage at government, or individual, wrongdoing. For example, many government officials, and their high-spirited offspring, injure or steal from ordinary citizens, and get away with it. These officials have enough political clout to make the police leave them alone. But once the online army gets onto these stories, everyone in the country knows, and is angry. There are over 400 million Internet users in China, a country of 1,400 million. When a lot of people on the Internet get angry enough, the story, and anger, explodes through the Chinese Internet community. China carefully monitors Chinese Internet use, and tries to block unwelcome information or discussions. But when the outrage on a particular item becomes too large, it’s better to just arrest and punish the guy whose misbehavior got the online army going in the first place.

Who knew that sockpuppeting would be such a valuable online tactic in China? It might not just be limited to China, however:

If the Chinese wanted to use this tool in other countries, they would require posters who are familiar with the language and culture of the target population. That’s difficult skill to acquire, especially for at least a few hundred posters required (to hit, regularly, hundreds of message boards, chat rooms and so on). Done right, you can shift opinions among millions of people in a few days. Done wrong, you fail. And if you’re operating in a foreign country, you might get found out. But the opportunity is there.

February 17, 2011

Victor Shih interview on China’s economy

Filed under: China, Economics, Military, Politics — Tags: , , , , — Nicholas @ 07:35

The Browser interviews Victor Shih:

What do people get most wrong when they think of the Chinese economy?

The biggest misperception about China is that it’s a dynamic market economy — it isn’t. It’s a fast-growing, state-dominated economy with some dynamic, private-market aspects. If you look at investment, a main driver of growth, much of it is going to state-owned enterprises (SOEs) or shareholding companies dominated by state entities. Or it’s going directly to government investments carried out at a central or local level. The misperception has abated recently following Richard McGregor’s book on the Chinese Communist Party. People are realising that the party is still behind much of what happens in China.

[. . .]

Your first choice is Yasheng Huang’s Capitalism with Chinese Characteristics. I believe this book successfully demolishes the idea that China is developing a new economic model called ‘market authoritarianism’.

I think Yasheng goes a little too far with some of his claims. But the broad outline is correct. There was a period of healthy organic growth in the 80s, driven by the de facto private sector. Many township and village enterprises were collectives or owned by the local government. But in reality they were private enterprises. This changed in the mid-90s, especially with the adoption of the ‘grasping the large and letting the small go’ policy that circumvented the special interests in the state sector. When Deng Xiaoping was alive, his executive vice premier, Zhu Rongji, wanted to bankrupt or merge many of the smaller state-owned enterprises into larger ones. It was a political tactic to further reform. And it worked.

The problem was that it created these giant, state-owned enterprises. Recent statistics reveal the state sector made a profit of 2 trillion renminbi last year, of which the 122 largest SOEs made 1.35 trillion. They have combined assets of over 10 trillion dollars and have become an enormously resourceful and powerful interest group. Their CEOs have numerous ties with top political leaders and sit on the party’s central committee. Most bank loans, issued bonds and stock-listing proceeds in the system go to these conglomerates. There’s still a private sector but it has been squeezed tremendously, especially in the last two years.

[. . .]

Most investment bankers like to talk things up, but that’s not something we can accuse Carl of doing.

By the late 90s, China’s banks were technically insolvent because the non-performing loans ratio was 40 to 50 per cent. Carl’s still a big fan of Zhu Rongji, the former prime minister. One of Zhu’s greatest achievements was to ‘solve’ the problems in the banking sector by setting up asset-management companies and recapitalising the banks. Today, of course, the banks are still lending very recklessly despite a lot of reform — the formation of credit and risk-management committees, for example. The banks continue to require bailouts and recapitalisation from the Chinese government, which props them up so that they can sell these bank shares to the public in Hong Kong or Shanghai. Carl sees this process as a kind of Ponzi scheme.

February 3, 2011

Urban China: growth market for luxury goods

Filed under: China, Economics — Tags: , — Nicholas @ 07:42

The most liberalized areas of China have become a magnet for the purveyors of ostentatious luxury items:

The Chinese may have an age-old reputation as great savers, but China’s young people are now making up for generations of lost spending time.

Compared with the austere youth of China’s older generations, who went through the turmoil of the Cultural Revolution and strove to build savings in a nation without a social safety net, the young, raised in an unprecedentedly wealthy China, are spending freely.

[. . .]

As the world’s fastest growing luxury market, China’s appetite for high-end Western branded goods is fast becoming insatiable, with predictions by Boston Consulting Group suggesting that within five years, 29 percent of global luxury product consumption will come from China. And while European and US luxury sales are making a slow recovery after the global financial crisis, China—relatively untouched and still optimistic—remains the most important market for luxury retailers. Indeed, this was the theme behind last year’s 5th Annual China Luxury Summit, which was given the grandiose subtitle of ‘China Luxury Market: An Oasis of Hope and Possibility’.

China as the deus ex machina of the luxury world is a concept familiar to European retailers. Last Saturday, for example, the Italian luxury brand Prada staged its first fashion show in Beijing. Like French cosmetics and perfume brand L’Occitane, which listed in Hong Kong last year, Prada is expected to have an initial public offering in Hong Kong.

No need to reiterate that this is only a phenomenon in the urbanized areas of China: the vast majority of Chinese consumers are unable to access the fast growing markets and still live to a large extent under the direct control of the party.

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