The Once and Future Beijing Blues

China_tmo_2012346

Remember the Beijing Olympics of 2008? A world-renowned stadium. An opening ceremony of unparalleled power and vibrancy. Beautiful blue skies. It was a picture-postcard moment.

At the time visiting reporters regaled the wonderfully clean air, some even claiming the government could make the skies rain on command to wash away the pollution. But to Beijing residents accustomed to temporary prevailing winds, and more importantly subjective policy enforcement, clear skies were a welcome illusion. No one really expected them to last after the games concluded.

And soon after brown became the new blue. Skies darkened. The sun faded behind a familiar beige-orange haze. Factories, forced to shut soon made up for lost time clogging the skies with pollution. The “fog” had returned, though in truth it was an unnatural cousin to moisture trapped by cold fronts against a ring of nearby mountains. (See this China Air Daily/Asia Society slider  of June 2009 bad air vs. blue sky days).

Over the last week or so Beijing has suffered under an extraordinarily bad pollution epidemic with air quality measurements soaring to over 800 according to a U.S. Embassy monitoring station (“safe” levels hover closer around 35-75 depending on U.S or Chinese standards respectively). Even using lower Chinese government readings the numbers were staggering (note: just before the Beijing Olympics official monitoring equipment was moved further outside the city center and to no surprise air quality numbers improved dramatically so doubts remain about “official” statistics.)

Since 2008 two significant changes have occurred. The Chinese government finally decided to report measurements at the far more dangerous PM 2.5 level where particulates small enough to invade lung tissue can cause respiratory disease. The media has also been given extraordinary leeway (at least for the moment) to report on the pollution problem.

What doesn’t seem to have changed is the enforcement of Chinese environmental laws passed years ago meant to protect the public against this very kind of devastating human-made air disaster. Are state-owned enterprises, some of the worst polluters with coal-fired power plants and cement factories, using the scrubbers they supposedly installed? Apparently not, or maybe only when inspectors come to visit.

Have state or national level environmental protection bureaus dramatically increased staffing, equipment and enforcement actions against polluters, despite the billions of dollars spent in pre-Olympic pollution control? Doesn’t seem like it.

Political will remains the major determinant of blue skies over Beijing and elsewhere. In today’s changing China where tens of thousands of people increasingly protest over polluted water and unsafe plant emissions the status quo can’t remain unchanged indefinitely. Absent the power of the vote, physical demonstrations are the only outlet for an increasingly victimized populace. Postcards of 2008 are fading fast. The only key decision left is whether to raise public health above breakneck growth and entrenched economic interests. Slightly less than phenomenal profits in the service of breathable air doesn’t seem like too great a compromise.

Image: NASA satellite imagery 12/11/12 (taken before the latest record pollution levels)

Down but Not Out – Japan’s Economy in Recession

Down but Not Out – Japan’s Economy in Recession

While Europe’s troubles continue making headlines Japan’s economy slipped back into recession in late 2012 with barely a mention. Why the difference? Perhaps the island economy shows no hope of recovery after twenty plus years of stagnation, its quiet fade into economic history a near certainty. That would be a decidedly misguided interpretation.

After the go-go years of the “Japan that could say no” (it never really did) and buying sprees in the U.S. including Rockefeller Center sold at a loss several years later, the land of the rising sun entered a period of relative economic darkness. That didn’t mean there wasn’t a ton of money circulating within and increasingly from Japan. Growth stalled but the country itself remained rich. Japan, still the world’s third largest economy  is expected to keep its strong position with a solid $6 trillion in estimated GDP according to the IMF.

Economic stagnation is hardly news for Japan, but coverage has steadily declined largely eclipsed by China’s seemingly unending rise. Add to that the Kabuki-esque political drama where Prime Ministers enter and exit the stage with alarming speed (roughly every 1-2 years) and government paralysis casts a long dark shadow over growth. The latest major economic debate centered on a consumption tax while government debt has risen to over 200% of GDP.

Demographics don’t help either. Alexandra Harney in the New York Times details Japan’s rapidly aging population and its effect on  future economic trajectory (spoiler alert – it doesn’t look good.) Unless there’s a baby boom, immigration increases dramatically to make up for the worker gap or productivity rises there will be a skills shortage.

An increasingly insular Japan also means robust debate has stagnated. In decades past the number of Japanese studying abroad rose considerably. These days it has been reduced to a trickle. Life, it turns out, isn’t so bad in declining Japan. Crime rates are low. The food is good, and public services abundant. A culture of perfectionism keeps the subways running on time and the streets clean. You’d be hard pressed to find more efficiently running cities anywhere else.

Japan’s middle class though has taken the slowdown exceptionally hard over the last several decades. Life-time employment, at one point an unbreakable social contract, has almost ceased to exist with replacement contract work yielding lower salaries and little to no benefits. Housing costs remain high and most singles, even well into their thirties, live at home with their parents to save on rent.

All this might change if a culture of entrepreneurship and an end to the slavish demands of late night corporate culture spreads.

A glimmer of sunlight  has emerged with Rakuten’s founder Mikitani Hiroshi’s creation of an alternate industry lobbying group made up entirely of new economy companies. The Japanese Association of New Economy (abbreviated in Japanese to Shinkeiren) aims to bring innovative policy solutions focusing on the needs of small fast-growing companies. This is a marked departure from the strategy of Japan’s biggest, and most powerful business lobbying group Keidanren representing the country’s conglomerates.

Time will tell if the new group gains any traction with national level policies. If past is prologue they’ll need deep pockets to influence Diet members mostly concerned about occupying seats rather than planning for a brighter future.

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Photo: Tokyo in spring time. BK.

In-Sourcing the U.S. Middle Class

In-Sourcing the U.S. Middle Class

Welcome back American manufacturing. U.S. in-sourcing (global companies bringing jobs back to the U.S. that were previously sent overseas) hit the mainstream news cycle again this month. An in-depth Atlantic article by Charles Fishman on GE’s plans to manufacture  high-end appliances has drawn exceptional attention. James Fallows, also in The Atlantic, provided the China context.

President Obama gave a January speech on bringing jobs back to the U.S. where he said:

 

“I don’t want the next generation of manufacturing jobs taking root in countries like China or Germany.  I want them taking root in places like Michigan and Ohio and Virginia and North Carolina.”

Among the notable companies announcing in-sourcing plans this past year Apple plans to spend $100 million on new domestic (U.S.) production capabilities and Starbucks’ $172 million investment in a Georgia plant (net 140 jobs, that’s some capital intensive, high-productivity work). White-collar workers appear to be gaining as well. General Motors plans to hire up to 10,000 U.S.-based IT workers, starting with 500 employees at an Austin, Texas innovation center.

The in-sourcing or reshoring “trend” isn’t exactly new. Otis Elevator announced plans to move jobs from Mexico to a new highly-efficient plant in South Carolina more than a year ago. Chesapeake Candle, one of the featured companies at the White House event actually opened its first U.S. factory back in July, 2011.

These jobs mostly aren’t the same ones that went overseas for lower-wage, low-skill workers overseas in the first place either. Garment manufacturing, for example, won’t be making a comeback.

What companies are finding, however is that the total cost for manufacturing abroad to sell back into the U.S. were never fully accounted for (shipping, training, quality control, etc.) When they are, it turns out, semi-skilled to high-skill work closest to where the products will be sold is more profitable than manufacturing overseas and sending them back.

Significant obstacle remain for these anecdotes to turn into a trend.

 

 

 

 

 

 

 

 

 

 

 

 

 

First and foremost worker’s need re-training. Without significant investment in, dare I say it during these tough fiscal times, education, the skilled workforce won’t materialize to make these now isolated cases cascade into a wave of better jobs for America’s workforce.

Beyond education there remains a stultifying restriction on educated immigrants. Vivek Wahda in a July Foreign Policy piece makes the case for focusing on reform as many talented students leave the U.S. after finishing their studies because they can’t get green cards to stay. And if they could stay they’d likely either fill the numerous unfilled tech jobs still floating around in this glum economy, or start businesses of their own.

The Republican-led House passed legislation in November to give 55,000 science and tech grads per year an immediate path to permanent residence. That’s a start but not nearly comprehensive enough. Millions of illegal immigrants on which this country depends need to be turned into tax-paying members of the workforce. The legislation is unlikely to pass both the Senate and the President’s desk without major additions.

Without changes to education and immigration the U.S. risks a serious and long-lasting hollowing out of the middle class. That would prove disastrous for an economy that relies on consumption for 70% of its annual gross domestic product.

 

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Photo: Wikimedia Commons, depression-era soup line.

Mfg Data: http://unstats.un.org/unsd/snaama/dnllist.asp

North Korea Misfires (Again)

North Korea Misfires (Again)

Playing the same song (I was going to say record) over and over again gets old. And quoting oneself is lazy for a writer, but North Korea’s latest missile launch is so similar, in geopolitical terms, to its 2009 foray into the rocket business that I couldn’t help myself.

From a May 27, 2009 NYT op-ed “North Korea Misfires”:

 

Sooner or later the regional pendulum will shift and the Kim regime, or some variant of its successors, will feel confident again through this recent display of relative military might. They will inevitably realize that talks are the best alternative among a rapidly diminishing set of options to achieve the security and recognition they crave.

A wave of international condemnation and UN paper threats followed the missile test in 2009. Since then North Korea has installed a new leader despite projections of regime failure should Kim the father pass away without a well established heir (he did, the regime didn’t). Myanmar, one of it’s few allies has reformed bringing a wave of new investment into that country. Iran remains isolated. China has a new leader. Re-joining the Six Party Talks never materialized despite the perennial famine outside the capital and a wave of more intense international sanctions.

North Korea, in the greater constellation of world affairs remains as isolated as ever, but surviving like always.

Longer-range missile capabilities do little to change the military balance in the region. A war, any war, would be devastating to both North and South Korea (due to short-range missiles that can destroy either country’s capitals within in minutes.)

While China has not taken a hard enough line to influence Pyongyang towards talks rather than demonstrations of military prowess perhaps new leader Xi Jinping will realize that this problem country on his border needs to wake up to progress in the rest of the world. Hope springs eternal, but hope is not a policy (and neither is waiting out the regime hoping it will collapse).

The rest of the world has been unable to curb if not stop altogether North Korea’s ability to test missiles. Visitors to Pyongyang have commented on the seemingly better life, relatively speaking, in the capital. Trade with China continues. While a minor threat to the world-at-large this latest missile test helps the new Kim  demonstrate to his father’s generals that he too can defend the nation (even from fictitious enemies always on the ready to strike).

Perhaps he has finally earned his stripes and can now turn to more important matters like economic reform and opening.

If that were to happen the U.S. should be ready to talk starting with a simple gesture, say an invitation to the North Korean orchestra well after this latest missile test (renewed attention can’t be a reward). That closes the loop on the NY philharmonic visit to Pyongyang in 2008. Throw in a jazz concert at Lincoln Center for good measure.

North Korea returning to its de-nuclearization pledge as a precondition for any talks is a non-starter.  An all-or-nothing approach has failed to achieve results. Start small and move on to the more difficult talks later. But find a reason to talk.

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Photo: North Korean soldier on the NK side of the Yalu River.

Asia Integration Leaves U.S. Behind

Asia Integration Leaves U.S. Behind

You can’t blame them for trying. U.S. trade negotiators have been at it for years but conclusion of the Trans-Pacific Partnership (TPP) keeps receding over the horizon. A June deadline was floated and then passed quietly by. The end of 2012 came next (here and almost gone). Japan and possibly even Korea thought of joining when news broke that Mexico and Canada, already NAFTA members with the U.S., were signing up. Neither has committed.

Meanwhile, Asia is moving ahead with its own far less stringent version of free trade in two proposals: the Regional Comprehensive Economic Partnership (RCEP) launched at the annual ASEAN gathering in late November; and a trilateral China-Japan-South Korea free trade agreement announced in May (negotiations started in November.)

Holding a press conference and successfully completing negotiations are, of course, two very different animals. No doubt recent regional tensions over disputed islands in the East and South China Seas involving mostly China, Japan, Vietnam and the Philippines make any agreement extremely difficult to achieve. Still, all countries involved appear to be forging ahead despite the obstacles in their way.

Asia has taken a decidedly different approach regarding free trade in the region from the U.S. Starting with the lowest common denominators (goods) and through successive agreements working their way up the value-added ladder (limited, then expanded services, broader non-tariff barriers to trade, rules of origin, etc.) This incremental approach, especially when economies at significantly different levels of development are involved, has worked especially well for both China and South Korea in their agreements throughout the region.

The U.S. on the other hand seeks “high standard” agreements encompassing a variety of non-tariff barriers to trade, intellectual property rights protections and labor and environmental standards, all in one comprehensive Free Trade Agreement (FTA).

These are noble goals and of particular interest to U.S. companies who have an enormous number of laws regulating their business at home and abroad. For many with extensive intellectual property to protect the graveyard of international business is littered with the remains of products that have been copied and sold at lower prices. To truly level the playing field they need the additional protections offered in high-standard FTAs.

The problem lies in strategy, not substance. This all-or-nothing approach leaves potential deals on the table while U.S.-based firms continue losing out to their counterparts based in Asia. U.S multi-nationals are increasingly incentivized to locate production overseas where they can source and sell within a tariff-free zone. Even a few percentage points off duties can have a tremendous effect on profitability.

No solution to this problem is in sight. U.S. trade policy has focused almost exclusively on the TPP and purely defensive measures (e.g. WTO cases to remedy unfair trade practices). Asia meanwhile forges ahead. When RCEP comes to fruition India, China, Japan, South Korea, Australia, New Zealand and the ten countries of ASEAN would become one integrated free trade zone. If current strategy doesn’t change soon (or the TPP keeps being delayed) the U.S. won’t even be on the map.

 

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Photo: Yang Shan Deep Water Port, China.

China’s Questionable Market Recovery

Money has to stay fit. It gets soft just lying on the couch, feet up on the coffee table, flipping through reality TV shows.  And this week the money looks like its running back to Asia.

The Shanghai composite index jumped 2.87% on Wednesday prompting a flurry of reporting on the re-awakening of China’s stock market. What a jump. Better days here we come . . .

Chart Source: Yahoo Finance

But before we get ahead of ourselves, take a look at the year-to-date chart.

Chart Source: Yahoo Finance, annotations added.

Yes, it’s that little blip at the bottom edge of the chart. The same uptick that occurred once in October, twice in September, and once in August and June as we climb backwards up the downward facing slope (not a yoga move).

 

For even greater perspective take a look at the last five years while the collective West was supposedly entering inevitable decline, imploding under the weight of its own capitalistic excesses. The mole hill made mountain is just barely visible, way down there in the corner, like the raw unamplified light of a distant galaxy.

Chart Source: Yahoo Finance, annotations added.

Even more illustrative than all the hype surrounding this minor bump is the shape of the longer Shanghai curve. The “V-shaped recovery” ended unceremoniously in July 2009 turning into a long, sustained slump (losing over 40% of its value in the last three and half years.) Compare that to the S&P 500 in the “declining” U.S. over the same period (in orange). The S&P elongated “U”-shaped recovery just keeps going (a rocky road, but climbing), and up 20% from Shanghai’s July 2009 peak.

Chart Source: Yahoo Finance, annotations added.

Fundamentally little has changed in the Chinese economy to warrant sustained optimism about stock market recovery. There has been excessive infrastructure investment which will have questionable returns going forward. Local governments are saddled with rising debt. Land development projects increasingly go unfilled or unfinished.  And accounting scandals continue to rock the boat of listed companies, several of which are leaving U.S. markets because of detailed reporting requirements (read investor protection).

Talk of a Chinese soft landing and bounce-back have been de rigeur for some time. There wasn’t a mortgage market bust or banking crisis like in the U.S. (though there are signs of significantly under-reported bank liabilities, off-balance sheet transactions, “alternative” funding schemes, and real estate inventory backlogs of staggering proportions.) But then again, soft-ish landing doesn’t rule out slower days ahead. The U.S. hard landing actually resulted in a far stronger market recovery it turns out. For a sober analysis of China’s financial predicament see Michael Pettis’s “Three cheers for new data?“.

None of this means you can’t make a mint on short-term trading (full disclosure, I am not a short-term trader), but a small spike in an otherwise downbeat cycle hardly marks a trend. Money keeps running the treadmill in the basement to try and stay fit. Funny thing about home exercise equipment, after a few good runs it rarely gets used again.

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Five Quick Fixes to Grow China’s Economy – Quartz Article

Five Quick Fixes to Grow China’s Economy – Quartz Article

The veil has finally been lifted on China’s leadership mystery. Questions now loom large over what, if any, reforms are likely over the next decade. So far critiques of the new seven-member ruling body point to a more conservative streak (don’t expect a democratic thaw anytime soon.) Those with the strongest reform credentials were either left out of the standing committee selection or reassigned. And no one knows for sure what Xi Jinping has in mind beyond platitudes not unique to the political class.

One certainty still stands out. Without significant reform China’s best days may be behind it as growth slows and opportunity stagnates. Five areas of low-hanging fruit would have a significant near-term impact including: ending the hukou residency permit system; opening the financial sector; building a social safety net; equitable tax collection; and an independent judiciary that can fight corruption.

Read the full article on Quartz.

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Excerpt: © 2012, Brian P. Klein, as first published on Quartz.

100 Minutes of Lip Service – Quartz Commentary

100 Minutes of Lip Service – Quartz Commentary

China’s political transition is in full swing in Beijing, replete with lengthy speeches and obligatory internet crackdowns. Outgoing President Hu Jintao’s lengthy reading of the most pressing issues facing the party—in oratory second only to Castro’s multi-hour monologues (minus the Cuban’s fiery delivery)—went on for a good 100 minutes. He made an ominous warning over corruption spoiling the party and threatening the state.

By western media accounts you’d think China was finally getting serious about graft in the world’s second largest economy. That this was considered news in the US says more about the inability to separate propaganda from policy than it does about any new crackdown in China.

Read the full commentary on Quartz.

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Excerpt: © 2012, Brian P. Klein, as first published on Quartz.

Ten Foreign Policy Priorities for Obama – CNN Commentary

Ten Foreign Policy Priorities for Obama – CNN Commentary

(From CNN GPS – full list here.) Barack Obama has won reelection as America’s president. But while the economy – and avoiding the so-called fiscal cliff – will inevitably take up much of his time, there are numerous foreign policy challenges facing the next administration. GPS asked 10 leading foreign policy analysts to name 10 things that Obama should focus on next. The views expressed are, of course, the authors’ own.

Drop China ambiguity

By Brian Klein

Brian P. Klein is a global strategist and former U.S. diplomat. He blogs at Klein’s Commentary.

China’s economic rise and increasing military assertiveness have pushed U.S. strategic ambiguity to its limits. If a decisive position isn’t taken soon, allies and friendly countries will question whether the U.S. can back up its Asia pivot talk with action. Focusing on realistic trade liberalization, increased military contacts with China and firm engagement rather than the blame and shame tactics of the past must become a priority.

Meanwhile, the once vaunted Arab Spring, so full of promise and democratic zeal, shows signs of entering a long dark winter. Egypt’s President Mohamed Morsy whittles away at reforms in the marginally secular republic, while Syria’s civil war now threatens regional stability, with conflict overflowing into Turkey and Lebanon. Boots on the ground may not be an option, but a focused effort to influence, if not completely resolve these destabilizing trends will be essential to restoring peace.

Half-Time in America is Over, It’s Decision Time

Half-Time in America is Over, It’s Decision Time

They lined-up half a block down the street, forty to fifty people at first, in 35 degree weather well before 8:00am. Parent’s with young children bundled up against the cold, women and men in business suits, in old jeans, in work-out clothes. Hispanic, White, African American, and Asian. No one forced them to show up. No one cut the line. All stood as strangers to each other in a simple, silent procession of cooperation and civic pride.

They came and they waited and then one by one they went inside. All the while the line outside grew longer, the wait half an hour or more. Some held coffee or a paper, but most looked around every time a person who entered came back outside, as if something important had just happened.

On election day everyone who votes is a celebrity, a representative, an agent of change in a social ritual that renews hope, promises a better future and gives an incomparable feeling of freedom.  Something important did happen behind those doors. Volunteers donated their time to help forge a more perfect union between citizens and their government. People voted and they were transformed.

And no matter what their beliefs, their race, their religion, education or profession, or how much money they have in their pockets, on this day, in this line, at this moment, they stand equal among their peers – one person, one vote.

Then it’s over, sticker in hand, back out into the cold to go their separate ways. That’s America and that tens of millions of people will voluntarily go out of their way and spend time in civic ritual at polling stations all across this country renews a hope in the experiment of democracy that grows stronger, every vote, every election.

Half time in America is over. It’s decision time. Choose wisely, but choose.