Archive for the ‘Economics’ Category

Recently I got a call from a friend offering me an interesting day job. She wasn’t clear on the specifics but it had something to do with businessmen and she assured me I wouldn’t have to do anything seedy. Foreigners in China often get offered these kinds of mystery jobs where you don’t really know what you’re getting into until you’re halfway through it. But they’re usually at least good for some entertainment and writing material, so I agreed.

I was whisked away in a Mercedes to the Diaoyutai Guesthouse – a government compound where foreign dignitaries stay and meet with top leaders like Hu Jintao and Wen Jiabao.

It was for a social networking company to formally announce its plan to go public on Nasdaq. They were pulling out all the stops to impress the investors. As I somewhat suspected, my job was to sit there and be a white guy. Sketchy, yes, but I was just happy they didn’t expect me to pretend I was part of the company or an investor like many of these white-guy-in-a-tie jobs do. I just had to sit and be foreign to enhance the prestige of the event.

But the prestige didn’t stop with me. The Diaoyu guesthouse must cost a small fortune for private companies to rent out. Everyone in China has heard of it. The investors lined up to be photographed next to the podium bearing the compound’s name.

There were cameramen and reporters from several of China’s major media agencies, but I find it hard to believe they had any real interest in covering the event. This was just some two-bit social network that will never compete with the established juggernauts. The ceremony itself was an excruciatingly ordinary chain of executives giving each other face and making flowery speeches.

It’s quite common in China for companies to pay reporters to show up and cover their event…even if there’s no intention of actually airing any of the material they get (that costs extra). Photographers conspicuously snapped away hundreds of pictures of the executives and, during the three minute question & answer period, two journalists were called on to lob softball questions at the panel. But the investors came away with a lot of face and confidence in their investment. The number of people who will actually purchase shares on Nasdaq remains to be seen.

It was reported last week that a Chinese cave somehow managed to get listed on the New York Stock Exchange through a series of backdoor schemes. The lengths and expenses some companies go to in order to bestow prestige and recognition upon themselves in China often goes to a Loony Tunes level of absurdity. I have a little more hope for this company to make a ripple in the stock market than I do the cave, but not a lot.

The money quote of the day came when an Australian investor who was backing the company said, “If you invest in the internet industry, you will achieve great success.”

I can’t say I know anything about this company, but I couldn’t help feeling a bit guilty while wondering how much the crowd, largely rich middle-aged Guangdong housewives, actually knew about “the internet industry.” I wondered how much my presence was contributing to China’s .com bubble (or rather, .cn bubble). And how many companies routinely put on shows like this wooing investors who, like Japanese of the 1980’s, think this rocket ship of economic growth will keep soaring forever.

Perhaps the most distressing thing I thought about while watching was how many Chinese Enrons there might be out there. How many companies are already seeing cracks, yet will keep aggressively pushing for investment until the house of cards comes crashing down?

I don’t know, but I’ve decided to cool it for a while with these mystery jobs.

When haphazard attempts to start a Jasmine Revolution failed comically in Beijing early this year, discussion over whether or not China is ripe for revolution was popular. The conclusion by most was that it’s not. But it seems that in just a few short months the situation has changed somewhat. While an uprising doesn’t look to be imminent, there seems to be many similarities between circumstances unfolding today and those that preceded the Tiananmen Square rebellion of 1989. So I want to look at some key parallels between then and now:

Corruption

Then: There was always corruption in the PRC, but Reform & Opening Up made it much easier and much more visible. In the 80’s, many price controls were lifted, but not all. The shortages of some goods allowed people with the right connections to buy at the artificially low prices and sell at market rates for huge windfalls. So naturally, the already-powerful became even more powerful. The inequality of opportunity and obvious abuse of power were two things immediately visible to those affected and were direct causes the Tiananmen protests.[1]

Now: You can click here to see a visual approximation of China’s Gini Coefficient wealth inequality over time (0 means perfect equality, 1.0 means one person has all the wealth).  In 1989 it was hovering around 0.36. It took a dip that year but has since soared to over 0.47 – well past the 0.40 danger level. China’s crony one-party capitalism and massive economic growth since Tiananmen have only increased the amount of capital involved with corruption and allowed the powerful to get exponentially wealthier.  This is perhaps best felt when local officials make illegal, undercompensated land grabs to raise capital for their city (and often take kickbacks from developers). A recent survey found the number of disputes over these land grabs is at an all-time high. Favoritism, graft and inequality of opportunity are in some ways better than the Tiananmen era, but in many ways much worse.

The Media

Then: The Chinese media of the 1980’s covered issues that had never been touched in the PRC previously; even dabbling in corruption cases. Single essays or TV programs could stir up fiery political discussion on college campuses. A documentary called River Elegy played on CCTV in 1988, which subtly criticized Chinese culture and sparked nationwide debate. When the protests themselves started, the press covered them extensively and even portrayed the student protestors sympathetically. These factors shined a light on many issues intellectuals were concerned about and brought together like-minded activists.

Now: Though the official press was reigned in after 1989 – where it’s more or less stayed ever since – new avenues of disseminating information have sprung up. Mobile phones, blogs and microblogs have put reporting in the hands of those directly affected – shining a light on things never before seen by most common people. Shrewd online political commentary on these issues by bloggers like Han Han may be playing a role similar to programs like River Elegy in the 80’s.

Education Failure

Then: After the Cultural Revolution, universities re-opened and were a sure ticket to a better life. However, with further reform and opening of the markets in the mid-to-late 80’s, many college students graduated to find their education gave them no real advantage in the new business landscape. In 1988, the system that assigned college graduates jobs was also amended to where private companies could reject those top students assigned to them in favor of those who had connections inside the company.[1]

Now: Educational prospects improved after Tiananmen, but now the situation is coming to resemble 1989 again. An overabundance of college graduates has left one-fourth of them unemployed without any better prospects than those who didn’t go to college. Many have also criticized the university system as useless, largely focusing on theory and failing to give students useful practical guidance. With labor wages rising China needs to move up the value chain in order to keep its people employed. Some think the innovation and collaboration needed to achieve this won’t be possible under the current intellectually repressive atmosphere.

Inflation

Then: Inflation was at an astounding 18.5% in 1988 because of panic withdrawling and buying on rumors of what relaxing price controls would mean. [2]

Now: Inflation is sitting at about 5.5%, down from a high of 6.5% in July. Not nearly as bad as pre-Tiananmen, but food is getting less affordable and housing is off the charts. With a roughly 32 million surplus of marrying age men, great pressure is being put on those who need to buy a house (and often a car) to compete for potential wives. And the poorest of the poor are having to cut food from their diet in order to stay on top of their finances.

Competing Party factions

Then: In the lead up to Tiananmen there was an obvious rift in the party between progressives like Zhao Ziyang and Hu Yaobang and hardliners like Li Peng. This rift was absolutely apparent in the days leading up to the crackdown. The protestors saw this split and sniffed weakness; which emboldened them further.

Now: After Tiananmen the party learned to present a united front in public and keep disputes between factions – or even the existence of factions – behind closed doors. That era seems to have ended now though with Bo Xilai’s left wing and Wang Yang’s right wing both making very public criticisms of each other’s models. The bulk of the Chinese public has yet to express an interest  (or knowledge) in this feud, but that could change as factions push harder for influence and citizens begin to take sides.

Banking System Cracks

Then: In the late 80’s Chinese banks flooded the market with loans. As could be expected, a great deal of them went bad and an estimated 1/3 of factories were unprofitable.[1] The government brought this to an abrupt halt in 1988 by cutting the cash flow – a kind of austerity measure many didn’t take too kindly to.

Now: Take that same situation and multiply the figures involved to equal more than seven times China’s entire 1989 GDP. In the wake of the 2008 financial crisis, China pumped $586 billion into the economy as a stimulus. This is part of an overall $2.7 trillion Chinese banks have extended in loans over 2009 and 2010. Up to now that stimulus has looked pretty good in economic recovery terms, as it always does…until the loans start going bad.

The Street recently had a piece that said, “Economic-related news coming from China is a page-turning thriller. Ponzi schemes, zombies, off-balance-sheet reporting, subprime and mafia-style lending; rising inflation, declining asset values, slowing growth — it’s all there. Add in government meddling in market mechanisms and official denials and China sounds like it has the makings of a perfect economic storm.”

Wenzhou has recently had dozens of bosses flee bad debts – something that’s being read as a preview of larger things to come. Tsinghua economist Patrick Chovanec has said he’s not sure if China can make it through next year’s power transition before a major banking crisis hits.

Key differences between Tiananmen era and now

Nationalism and affluence

Since Tiananmen the government has pretty successfully educated nationalism into the youth and trained them to regard any talk of democracy or human rights as a western ploy to make China implode. The relatively well-off youth of today also seem far more interested in video games and pop stars than politics anyways. And the population as a whole is undeniably better off than they were in 1989 (though some studies suggest they’re not any happier). Most have a lot more to lose than they did at that time.

A paranoid and highly technological government

The technological improvements may work to the Party’s advantage more than any would-be revolutionaries. The government has the capability to monitor and immediately clamp down on dissent – a capability that improves by the day. If they were truly threatened by a spontaneous movement, they could temporarily shut down cellphone service, microblogs like Weibo, or even the entire internet – as they did in Xinjiang in 2009. And as the Beijing attempt at a Jasmine Revolution earlier this year demonstrated, the government will come down hard on any threat – real or imagined. And they’re very careful not to allow any large gatherings that they can’t fully control; as the turnout for Hu Yaobang’s funeral in 1989 was the final spark for the Tiananmen Protests.

Conclusion

Given the vast similarities between now and 1989, another go at a revolution seems possible. If history is any indicator, an iron fist can’t succeed by itself if grievances are too great and you have the right catalyst to bring the disenfranchised together quickly.

Probably the only leader popular enough to create this Hu Yaobang-like catalyst in death would be Wen Jiabao. But again, if that happened the party would be overly cautious; and it probably wouldn’t be enough anyways. It would have to be something big that directly affected a huge number of people.

A large scale disaster that could be linked to corruption or official incompetence might do it. The Wenzhou train crash earlier this year and Shanghai fire last year made a lot of people angry and concerned for their safety. They weren’t big enough to spark an uprising, but they were two of many small aggravators that are slowly ebbing away people’s patience with corruption and government cover-ups. If something like a nuclear meltdown, a mass public health incident or a large dam collapse happened, that just might break the camel’s back. In 1975, the Banqiao Dam in Henan collapsed killing 171,000 people. And if you think that’s something relegated to the incompetence of the Mao-era, an average of 68 dams still collapse every year in China, according to one official.

But an even more likely scenario would be a poorly timed financial crisis; one like the aforementioned banking crisis that many are predicating. Life is already getting rough for the post-80’s/post-90’s kids who grew up spoiled taking economic security for granted. The job market is shrinking, their time/money intensive education is often useless and the gender imbalance is leaving many men hopelessly single. To make matters worse, the 2010 ratio of five workers for every elderly person will drop to 3-to-1 by 2020 in what Time Magazine has called “China’s Demographic Time Bomb.” For many only children that means completely supporting two parents financially and physically amid some of the least affordable housing prices in the world.

If a housing bubble burst robs these people of the investments they’ve become slaves to, they might all-of-a-sudden take a very keen interest in politics. And if there’s a banking crisis, it would likely cause a run on banks and panic buying similar to what caused the massive inflation of 1988. Fitch has estimated there’s a 60% chance of such a crisis by mid-2013. If it comes any earlier than that, it would be right during the leadership transition when the party is at its most vulnerable.

I’ll give my standard disclaimer for any internet police or fenqing that might be reading: An uprising isn’t something I’m hoping for. It’s not even something I’d venture to predict. Predications of a CCP collapse have a way of making you look like a fool (See: Gordon Chang).  And even if an uprising did happen, it doesn’t mean the party wouldn’t survive it. But there are many cracks beginning to show – financial, political and social; figurative and literal. The Beijing Consensus of authoritarian led economic growth has delayed the Party’s need to address their legitimacy shortfall for a solid 22 years, but one way or another that growth eventually has to slow and the legitimacy issue has to be addressed. If I were in charge I’d focus a bit less on the iron fist and a bit more on the root problems distressing and disenfranchising those without financial and political influence.

Non-linked sources

[1] Silenced Scream: a Visual History of the 1989 Tiananmen Protests. Donna Rouviere Anderson, Forrest Anderson. p. 1

[2] Dingxin Zhao. ‘’The Power of Tiananmen: State-Society Relations and the 1989 Beijing Student Movement’’. Chicago: University of Chiacgo Press, 2001. ISBN 0-226-982600-2. pp.127.

A new set of maternity laws has been drafted in China, which includes extending maternity leave from 90 days to 98 and requires employers to assist in medical fees; either through insurance or out of their own pockets. While on the surface this seems good for Chinese women, it’s exacerbating a major flaw in China’s maternity system that heavily tips the odds against them when trying to find jobs.

Whenever a woman goes to a job interview in China, she’ll inevitably be asked questions like, “Are you married?” “Have you had your baby?” or “When do you plan on having a baby?”  The employer will usually shy away from any woman with a pregnancy risk. I even had a friend who handed an HR guy her resume at a job fair and got it immediately brushed back. “You’re not a boy,” he said.

Employers’ fear of enduring both the direct costs and lost productivity involved with maternity leave very often prevents them from hiring or promoting women. So while the law is good for those who’ve managed to get a job, it’s detrimental to women’s progress in general.

Ironically, the best thing the government could do for women would be to give men more rights. Giving men an equal amount of paternity leave would take away the incentive to hire them over women. Shenzhen made a move in this direction earlier this year when it bumped the amount of paternity leave from 10 days to 30. With a very high proportion of female workers in the city, it was intended to let men pick up some of the slack of child care. And why shouldn’t they?

I’d argue that this would be better all around, even if they had to decrease the number of maternity leave days for women in order to give men more. Say the country follows Shenzhen; adds the 30 days paternity leave to the 90 days of maternity and divides that total 120 equally between the  mother and father. That gives them each 60 days with the baby – paid.

It would be unfortunate for the women, who undergo the real physical hardship of childbirth, to lose 30 days maternity leave. But that problem would be peanuts next the gross inequality of opportunity for women in China’s workforce that would be alleviated. And when you compare that proposal to the US’s maternity/paternity system, which mandates a total of zero paid days for men and women alike, it looks even better. In addition, there’s a number of social benefits that have been suggested arise from equal paternity/maternity leave.

Of course, this wouldn’t solve gender inequality in China’s workforce, but it would almost certainly help. What do you think? Would it work?

For those who haven’t heard of the horrific incident in Foshan, here’s a link with a video that will absolutely ruin your day and faith in humanity. It shows a two-year old girl getting run over TWICE and ignored by 18 bystanders. She’s not expected to live.

It’s hard to say how much of the bystanders’ ambivalence was universal human psychology and how much can be attributed to distinctly Chinese characteristics, but it’s becoming harder to downplay the latter. This is just the latest in a string of despicable stories to come out of China in recent years.  Consider these, some of which are just one instance of recurring events:

This list, unfortunately, isn’t even close to being exhaustive. It would be very tenuous to connect these all directly to any single factor, as most regard fear of legal liability as the main culprit in the Foshan story, for example, while the one-child policy is oft-cited for the child-trafficking problem. And of course, these things happen in other countries too, but their sheer scale and consistency in China is hard to write off, as many Chinese themselves have noted. There could be one thing at least partially contributing to all of this:

Hell.

Or rather, a lack of it.

I’m a devout atheist and tend to think dogmatic religion plays a largely negative role in society, but I can’t count the number of times in China I’ve shaken my head and wished more people believed in hell.

In any collectivist society, shame among peers tends to have much more influence than internal guilt. So if it’s unlikely that they’ll be caught, punished and shamed, people have less incentive to refrain from despicable actions. There’s even a Chinese proverb alluding to the idea saying “Neng pian jiu pian” (If you’re able to cheat, just cheat). You can couple this with the moral void that’s been left in the wake of socialism’s demise and the tunnel vision focus on money that emerged in the 1990’s.

The idea of hell as a means to keep people honest might be pretty intuitive (if not a bit Machiavellian) but University of British Colombia psychologist Ara Norenzayan published a study entitled Mean Gods Make Good People: Different Views of God Predict Cheating Behavior. He gave subjects a math test they could easily cheat on and those who believed in a vengeful god typically chose not to cheat. “Fear of supernatural punishment may serve as a deterrent to counter-normative behavior, even in anonymous situations free from human social monitoring,” the study said.

Studies by the Federal Reserve Bank of St. Louis and Harvard have also separately found a correlation between belief in hell and lower levels of corruption and higher economic growth.

According to the Boston Globe, “[Harvard researchers Barro and McCleary ] collected data from 59 countries where a majority of the population followed one of the four major religions, Christianity, Islam, Hinduism, or Buddhism.[…] Their results show a strong correlation between economic growth and certain shifts in beliefs, though only in developing countries. Most strikingly, if belief in hell jumps up sharply while actual church attendance stays flat, it correlates with economic growth. Belief in heaven also has a similar effect, though less pronounced. Mere belief in God has no effect one way or the other.”

“The expectation that there is a cultural belief in hell or perpetual and eternal punishment for wrongdoing will act as a disincentive to wrongdoing,” Eileen Lindner, deputy general secretary of the U.S. National Council of Churches, told USA Today.

The Chinese Communist Party has traditionally held a less than hospitable attitude toward religion and regarded the Marxist view that it’s “the opiate of the masses” as a bad thing. But there are signs they’re starting to see the (again, perhaps Machiavellian) advantages to the opiate concept. This seems especially true with Christianity, given its belief in hell and less potential for the political complications associated with Islam in China.

In Nanjing the government has built a 5,000 seat mega church and given other funding to help boost Christianity. In the manufacturing hub of Wenzhou, where it’s estimated as much as 20% of the population is Christian, the government is starting to seriously study the link between Christian enterprises and economic success. One Christian factory owner told BBC, “I’m not saying those people who aren’t Christians are all bad, but from the percentage of the workers who are Christians, they seem to be more responsible. Also when they do things wrong, they feel guilty – that’s the difference.”

During the Mao-era, throwing the doors open to religion would have been unthinkable. Communism was the religion and Mao its god. Any other faith would have been competition. But now, with the death of religious socialism, supernatural religion’s spread is inevitable and SOME in the now strictly utilitarian Party seem to be recognizing that that might be in their best interest.

For many of China’s tens of millions of religious followers, the repression of their faith itself is the biggest grievance with the Party. Standing aside or even assisting religion would likely pay the government far greater dividends than holding the Maoist religion-as-a-threat attitude. It seems it could also have very real economic and socially-stabilizing benefits.

In a 2006 interview with Reuters, Li Junru, deputy head of the Communist Party School  made a very telling statement. When asked why India can handle democracy while China needs an authoritarian government, he explained that India has religion to control the people.

One has to imagine the Communist Party sees the appeal of biblical verses like Hebrews 13:17, which says, “Obey your leaders and submit to their authority. They keep watch over you as men who must give an account. Obey them so that their work will be a joy, not a burden, for that would be of no advantage to you.”

Today, as Libyan rebel forces close in on Tripoli, it seems yet another nation will overthrow their authoritarian rulers in the Jasmine Revolution. Since the movement broke out in December, political forecasters have devoted plenty of ink to speculation over if and when China’s authoritarian government will collapse.

For the record (and anyone at the Ministry of Truth who may stumble upon this), I don’t at all wish for a collapse or overthrow of the Communist Party. Gradual reform leading to real public accountability would be much better than the abrupt dismemberment they’re setting themselves up for with the current iron fist approach.

But in the fairly-likely event that they do dig their own grave, where does that leave a post-Communist Party China?

The Party would have you believe that the country would dissolve into absolute chaos; that they’re the Elmer’s glue holding the whole rickety apparatus together. Without them, people would take to the streets to pillage, rape, torture, kill, etc.  Plenty of foreign observers share that bleak outlook too.

But a few weeks ago I spoke with Uri Dadush, former World Bank director of international trade and author of the book Juggernaut: How Emerging Markets Are Reshaping Globalization. He said China’s GDP is projected to grow at around 5% annually for the next 40 years. “Even if there is a political crisis, that doesn’t mean that China will not grow,” he said.

In economic terms, revolutions aren’t as catastrophic as they appear to be, especially in recent history. This chart maps Egypt’s annual GDP growth for the past 50 years. This measure shows how much the GDP grew in a given year compared to where it was the previous year. It’s good for highlighting economically disruptive events.

Clearly, Egypt has always been a fairly turbulent country capable of enduring crises and quickly bouncing back, never dipping below 0% growth. But the most significant part is if this chart were extended to today. It would show a dip to 2% growth in the fiscal year ending this June, which included the Jasmine Revolution. Before the revolution, it was predicted to grow at around 5%. The government overthrow may have very briefly slowed growth and had some opportunity costs, but it was hardly chaos. Now Egypt’s economy is humming again and will probably hit 5% growth again by year’s end.

Here’s China over the past 50 years:

The two largest dips were during government directed campaigns; the Great Leap Forward being especially catastrophic. Then in 1987-1988 there was massive (over 20%) inflation of the Yuan which partly enabled the Tiananmen Square uprising. The crackdown did scare away some investment. Growth slipped a bit but remained positive and quickly rebounded.

An even better indicator of national well-being is per-capita GDP, because this shows how the wealth of the average person is growing or stagnating. A flat line here is bad; people aren’t getting any wealthier. A downward slope is very bad; people are becoming worse off. If you look at China by this measurement the story is very promising.

There’s a very gentle negative slope during the 60’s and the power struggle of the late 70’s, then it’s all upward. Tiananmen didn’t even leave a mark.

Let’s look at another country’s per capita GDP growth and see if you can spot when the revolution took place:

There’s a sharp decline beginning in 1996 ravaging the average person’s net worth by over 33%, but if you think that’s where the political upheaval was, guess again.

The Asian Financial Crisis devastated Thailand, but when a military coup a decade later overthrew the ruling Prime Minister after a year-long political crisis, there wasn’t even a blip. Per capita income continued to grow to its highest levels ever.

These economic charts don’t tell whole story, but they do tell a lot of things. They tell that, even in the midst of political crisis, people still buy things and people are still working at the store to sell to them. Then there’s a whole network of manufacturing and investment behind those people that continues to expand. So the idea that a political crisis throws the country into violent chaos is greatly exaggerated. And what may have caused a serious disruption even 30 years ago might be hardly noticeable now thanks to globalization.

Mr. Dadush explained, “The drivers of economic growth are very fundamental. They are much deeper than even big political developments. They have to do with technologies and ideas that have already been invented. Once they’ve been invented it’s very difficult to stop their spread. If you have more or less the conditions and you have educated people you can absorb these things and you will have economic growth. Educational openness to the world, the absorption of ideas and technology are very fundamental forces. They can be delayed by political disaster but they cannot be stopped.”

There are plenty of non-political things that can tank the economy, like a housing bubble, demographic decline, foreign financial collapses, protectionism, environmental catastrophe, natural disasters, etc. But contrary to what the Party would like everyone to believe and what all those (totally existent) foreigners who dream of seeing China in chaos believe, political upheaval doesn’t seem to be a serious threat to the economy or the common person’s well-being.

This doesn’t necessarily apply to developed countries as strongly though. Once they’re developed they rarely see more than 5% growth in a given year and become more vulnerable to market and political fluctuations, as you can see in this chart of the US and Japan:

But it will be a long time before China gets to that point as a nation; around 40 years according to Dadush. So China could bounce back much more easily from any political crisis than these nations could.  A prolonged civil war might be different, but that’s very unlikely. Even then, it wouldn’t be as destructive as one would imagine thanks to the fundamental global business presence.

Whatever replaced the CCP would certainly have significant long-term economic impacts, but the simple act of a power switch (non-violent or otherwise) would hardly knock growth and the institutions supporting it out of place. Even in a country that, as we all know, has its own “special circumstances.”

I’m sure economists (which I am not) and others can poke holes in this theory. Tunisia isn’t bounching back quite like Egypt, but it wasn’t growing as much to begin with either. And Libya is still in a drawn out civil war (again, extremely unlikely in China) and its recovery is yet to be seen. But none of these countries come close to having the business apparatus and distribution network in place that China does, which are both hedges against “chaos.”

However, the most important thing these economic charts don’t address is happiness during and after a revolution, which obviously doesn’t equate with economic stability. Economic growth still allows for unchecked corruption, wealth inequality, trampling of human rights, perversion of justice, unfair trade practices, arbitrary violence and wholesale withholding of important information. It would indeed be a shame if the Chinese people were ever subjected to that.

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Chart Sources: World Bank data powered by Google Public Data Service (a great resource for comparing countries’ economic and social aspects)