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.

China’s Global Leadership Gap – CNN Commentary

China’s Global Leadership Gap – CNN Commentary

(Also on CNN’s Global Public Square here.)

In a rare and telling diplomatic snub this week China refused to send People’s Bank of China Governor Zhou Xiaochuan to the IMF/World Bank meeting held in Tokyo. The slight, related to the continued stand-off with Japan over a disputed island chain in the East China Sea says more about China’s prospects for greater global leadership than a bilateral territorial disagreement.

For several years running China’s economy has grown along with its ambitions for recognition. Internationalizing the yuan as a reserve currency, more influence over international lending institutions and respect as a leading business and financial center have been chief among them.

The meeting boycott marks the latest in a string of retaliatory acts, including using informal trade measures meant to punish countries acting in ways China dislikes. Imports from the Philippines were suddenly subjected to enhanced inspection and quarantine over a dispute in the South China Sea Rare earth exports critical to Japan’s electronics industry were also suspended in a 2010 island conflict. These steps mark a troubling and regressive tendency in Chinese foreign economic policy.

Since joining the World Trade Organization back in 2001 Beijing has enjoyed many of the benefits of membership while at the same time using protectionist measures to give domestic industries significant advantage. Trade has been used increasingly as a political tool contravening over a decade of engagement to keep these two policy spheres apart.

Refusing to attend the annual international finance meeting will further damage China’s hopes for greater recognition. At a time when the risks of global recession are increasing retrenchment adds doubts about a potential leadership role. While Beijing might think its status as the world’s second largest economy makes it increasingly vital to any discussion, the world continues to turn without it.

Xi Jinping and the rest of China’s new leaders in waiting inherit a country in transition. Rising domestic wage pressure, a slowing economy, and renewed doubts about the security of joint venture intellectual property suggest China’s global economic influence may soon be waning, not continually rising. If slower growth becomes a trend rather than a temporary blip and anti-Japanese business sentiment grows into a broader missive against foreign companies, the lure of China’s growing market would dim significantly.

Embracing the complexities of international discourse rather than shying away from them mark an important maturing stage. Equally important are policies that further opening and reform increasing international participation in China’s domestic economy. This enhances both the perception and reality that China is dedicated to continued global integration. Pulling a no-show at an international gathering in a neighboring country does not.

 

Photo: Tiananmen Square looking north to the Forbidden City. Brian P. Klein.
Slogan by Mao’s portrait reads “May the Communist Party of China Live for Ten Thousand Years” (a former imperial saying re-purposed after the 1949 revolution).

 

If China Televised a Presidential Debate

If China Televised a Presidential Debate

(Sometime in the future . . .)

Moderator, internationally-renowned artist Ai Weiwei: Thank you all for coming to the National Center for the Performing Arts in downtown Beijing for this first ever, internationally televised CCTV – China Presidential Debate. There will be no opening remarks, only questions submitted by Weibo users whose names will be concealed. Our first question comes from a real estate developer.

What do the candidates believe the role of government should be in the economy?

Candidate on the left podium – The government should have more state control, more direction over the economy and more of a focus on the poor. State-owned enterprises stabilize the country. My opponent believes the free market and western economic ideals should be slavishly followed. I believe China should follow its own development path and bring back the ideals of our founding father.

(We hear mild applause. Several in the audience are holding pictures of Mao and waving small Chinese flags.)

Candidate on the right podium – The government should facilitate greater reform and opening. That is how China will take its rightful place as a global economic and political leader in the 21st century. Private enterprise will drive future growth in leading industries. Government can and must enforce the rule of law to create a positive environment for business to flourish. Corruption must be stamped out. Consumers, not elites should drive growth.

(More applause, a little louder and longer than the first.)

Second question comes from a graduate student at the China Foreign Affairs University.

China was invaded many times in the past. Now we are a strong country. Why shouldn’t we take back what is rightfully ours including Taiwan, the South China Sea and the Diaoyu islands?

Candidate (on the left): China is a strong nation and will defend its national interests wherever they may lie.

Candidate (on the right): China is a strong nation and will defend its national interests wherever they may lie. Let me add that we believe in a peaceful rise.

Okay. Our third and final question, well more of a comment and a question, comes from a factory worker in Guangdong.

My husband and I both work 10-12 hours a day, 7 days a week at a Chinese-owned factory. The owner often doesn’t pay the overtime we are promised, even after we’ve paid the manager to get the extra hours. Many of my co-workers have gotten ill from the chemicals we use to clean computer screens. The company said they would pay for medical costs but the local hospital insist on cash. If we want to see the actual doctor we have to pay more. Even with receipts we never get reimbursed. I went to complain to the union. The union boss told the factory manager and now I’ve lost all of my overtime and have to work the overnight shift.

Since I do not have a residency permit my daughter can’t attend school here. She lives 200 kilometers away with my parents. Local officials took their land. Now they live in a small apartment in a new building many miles away that is already falling apart. The money they received wasn’t enough for the apartment so they had to use up all of their savings. While we earn more than we used to both of our salaries barely pay our parent’s doctor bills (they have no insurance), my daughter’s school fees (even though she goes to a public school) and our company housing and food. I do not feel better off than I did ten years ago. What are you going to do about it?

(Large thunderous applause fills the auditorium.)

The microphones are suddenly cut and the candidates whisked off stage. Ai Weiwei pulls out his own bullhorn just as television screens across the country go black. A few seconds later images of fireworks appear from the 2008 Summer Olympic Games.

Asia by the Numbers

Asia by the Numbers

(UPDATE 10/8/12: Both the World Bank and Asian Development Bank have lowered 2012 growth forecasts for China and Asia.)

Remember those halcyon days of unending Asia growth and the re-birth of a Silk Road century? Cherish the memories.

Nothing but negative news keeps flowing out of regional giants these days. Expert debates rage on about China’s hard vs soft landing while recent data just keep disappointing. HSBC China Manufacturing Purchasing Manager’s Index wallowed below the critical 50 threshold again. Political intrigue aside, China’s next generation of leaders are facing significant economic headwinds and challenges unknown to their predecessors.

From the September 29th HSBC Purchasing Manager’s IndexTM:

 

“Data in September signalled a stronger decline in Chinese manufacturing output, as the volume of new orders fell for the eleventh consecutive month. New export orders declined at the sharpest rate in 42 months amid reports of weak international demand…”

 

 

Historical numbers show a long decline since late 2010 (and a wild ride starting with the 2008 U.S.-led financial crisis).

Japan’s Tankan business sentiment survey showed more general weakness (negative views of business for the past 12 months and worsening in the last quarter). Unsurprising considering the weak overseas demand, yen troubles making exports more expensive and now troubles with China over the East China Sea. ANA airlines reported 40,000 cancelled flight reservations for September through November sparked by dueling territorial claims and violence on the mainland targeting Japanese factories, stores and restaurants.

Add to that Australia’s struggles with shrinking exports and a surprise Reserve Bank of Australia rate cut to 3.25% (Philippine’s central bank has cut rates as well), Vietnam’s slowdown, and rising South Korean consumer debt.

With the U.S. caught in a “slow-growth” trap of its own making and greater Europe still flirting with renewed recession, trade is now a back seat driver for most of Asia. The slowdown in China is especially concerning for southeast Asia’s and Australia’s resource-intensive exports since China became their main market over the past several years.

Prospects aren’t all negative of course, though finding bright spots in an increasingly overcast night’s sky is tough. Indonesia keeps generating solid six plus percent growth. High investment and sustained consumer demand (accounting for over 32.9% of GDP last quarter ending in June) are driving economic expansion.

Jakarta has so far managed to avoid the massive over-building in China which will drag down the middle kingdom for some time to come. The infrastructure needs throughout the island nation of over 200 million people, if well managed, might provide sustained growth for a while.

Prognosis: Substantial western growth isn’t coming back anytime soon. For Asia to prosper domestic demand (read: consumers) has to expand and that means further market liberalization and access to capital that has often been denied, mainly for political reasons.

The China model of controlled growth and U.S.-style unchecked market excess both have their discontents, but policies favoring middle class growth and expansion remain key. Balance will be the buzzword going into 2013.

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Foxconn Riots and the Limits of China’s Middle Class

Foxconn Riots and the Limits of China’s Middle Class

Several thousand rioting workers in Foxconn’s Taiyuan factory this week highlighted the inherent limits on China’s emerging middle class. Questions about the causes of the violence continue to circulate, either a dispute sparked by a security guard beating a worker or a fight in one of the privately contracted dormitories that went awry. (Jennifer Preston of the New York Times’ “The Lede” summarizes the blogosphere’s accounts versus official government pronouncements here.) In either case the life of your average manufacturing worker revolves around 10-12 hour days, sleeping in dormitories and eating in massive cafeterias. Room and board are deducted from their pay, when they’re paid on time and accurately.

With some 79,000 workers at this particular plant Foxconn runs the equivalent of a small-sized U.S. town. Workers often self-segregate based on their hometowns or provinces giving rise to rivalries and sometimes conflict. But why hasn’t the sheer size of this workforce spawned a private housing boom, new neighborhoods, and the freedom to congregate and eat where one pleases?

Back in the 1950’s and ’60’s U.S. factory workers fueled a booming middle class. Many were young (in their 20‘s). After several years they got married, bought homes, cars and appliances. Restaurants, hair salons, bowling alleys and movie theaters sprang up nearby. For most of Asia, including Japan, Taiwan, and South Korea which used to assemble similar goods, the story was much the same. Workers salaries rose to the point were they could afford mortgages and banks were eager to lend to workers with stable incomes. Public infrastructure connected new communities to the factory gates. Their children spurred a rise in school construction. Personal and corporate income taxes fueled public infrastructure projects.

The factory model in China, however remains largely stuck in an almost feudalistic past where the company provides, or more accurately controls, what workers can and can’t do, even in their off time. The hukou or residency permit system restricts workers from buying apartments near where they work unless they are already a resident (most are not). Their children can’t attend local schools so many must be left behind in villages with grandparents (see Alexandra Harney’s “The China Price” for the affects of low cost manufacturing on workers.) The state-controlled union can operate, but it mostly supports the interests of the government rather than the workers they’re meant to represent.

The basis for this manufacturing system isn’t strictly a socialist ethos or “manufacturing with Chinese characteristics”. Early industrial U.S. company towns often ran the local store (charging ridiculously high prices) and provided housing (at a cost). When workers tried to organize they brought in local thugs or police to impose force. Those days are long gone primarily because workers could and did organize for better pay, regular hours, and safety. Present day working life in China remains more a matter of control than culture. While the Foxconn riots weren’t directed at management worker’s inability to organize can lead to explosions of pent up anger elsewhere.

Labor advocating for its interests and securing freedom of choice in where to live, eat, and enjoy their spare time forms one of the most basic tenants of middle class growth.  Reasonable hours and significantly higher overtime pay increases personal income and domestic consumption. Company co-sponsored health insurance plans lowers the need to pile away current savings for future medical needs. Rising wages for middle class workers increases social stability. While incomes have been going up some 10% for Chinese workers the income gap is widening and basic healthcare and housing remain out of reach for many.)

Without structural changes China’s economic transition from state and investment-led growth to consumer-driven demand will remain stunted. When tens of thousands of employees stuffed into cramped dormitories and shuffled like cattle through stadium-sized cafeterias finally gain more economic freedom, China’s middle class will flourish. Until then pent up frustrations that erupted in the Foxconn riots suggest more turbulent times ahead.

 

Photo: Youtube video.

Occupy East China Sea – China, Japan Face Off Over Disputed Islands

Occupy East China Sea – China, Japan Face Off Over Disputed Islands

Chinese fishing fleets continue pressing their claims to the resources of a disputed island chain in the East China Sea while Japan considers what it can do with a Coast Guard fleet to protect their administrative control. The Senkaku/Diaoyu or Diaoyu/Senkaku island debate rages on with an occupy movement in full swing.

With the Japanese government’s decision to buy the islands from its private owner, rather than let right–leaning Tokyo governor Ishihara do the same (and escalate tensions further), a wave of anti-Japan protest spread in China. In addition to the anticipated demonstrations against Embassies and consulates, large crowds looted, set fires and attacked civilians (Japanese and Chinese, some in Japanese made cars).

The question over sovereignty of the islands has revolved around two main arguments from China –  historical precedent and geographical rights. Neither holds much sway in the international community of today rather than say several hundred years ago when imperial dynasties ruled.

For the history defense, China claims the islands were never Japanese territory and show up on several ancient maps of the region. History converges around 1895 after the Sino-Japanese war when the Japanese government began to control the islands. Han Yi-Shaw, guest writing in Nicholas Kristof’s New York Times opinion blog dives deep into the historical record and concludes:

“Collectively, these official documents leave no doubt that the Meiji government did not base its occupation of the islands following “on-site surveys time and again,” but instead annexed them as booty of war. This is the inconvenient truth that the Japanese government has conveniently evaded.”

Whatever the reasons espoused by Japan’s rulers at the time, war was (and in some places continues to be) the main arbiter of establishing control over physical territory. If history was the gauge to judge international decisions over territorial disputes Mongolia could claim rights over China, India and vast swathes of the Middle East and Europe. Iran would have overlapping claims from their Persian empire. Mexico re-gains the American Southwest, but perhaps Spain, France and Britain would like to carve out the rest of the U.S.

Historical precedent also shows Japan did administer them, unchallenged, then lost them in World War II to the U.S., and then re-gained them afterwards. If China doesn’t recognize the end of war agreements (to some of which they were not a signatory) then far more lies in question than just a few islands.

Geography also plays a weak role. China is looking to the UN Convention on the Law of the Sea (UNCLOS) to arbitrate a claim that the islands belong to their continental shelf. Since they lie outside of the standard 200 nautical mile limit the government is setting in motion a review to extend the range of the shelf.

While this is certainly better than waging war to win back the islands based on an over one hundred year old conflict UNCLOS doesn’t settle national sovereignty issues, it attempts to resolve conflict over exclusive economic zones.

Neither historical precedent nor length of continental shelf is going to ultimately win favor with the international community or gain the credibility China wants for its claims over these islands. Maintaining the status quo by both sides has been the accepted norm. Increased interest in potential natural resources, rising nationalism on both sides, and China’s rapid military expansion threaten that tentative peace. Japan’s purchase from a private citizen may appear to upend the status quo, but not necessarily. It largely prevented more hawkish factions from attempting to fire up nationalistic sentiments.

For now both sides will need to look strong domestically without crossing a red line into open conflict. As long as neither country builds on the island, begins drilling operations at sea or aggressively restricts access to fishing grounds, a tentative calm can be maintained. The only peaceful way to resolve the dispute is for both sides to negotiate directly. Otherwise we’re back to the days of might makes right in Asia, and that didn’t go well at all.

Photo: Wikimedia Commons

CNN Commentary- Why China Needs a PR Makeover

CNN Commentary- Why China Needs a PR Makeover

The China Central Television building in Beijing towers over everything around it. As a marvel of design, two sloping pillars meeting at an odd angle in mid-air, the construction seems to defy gravity. And yet, for all its external modernity, China’s main mouthpiece to the world – and the censorship regime that it helps underpin – remains lost in a backwater of a propagandist past.

Across the world, headlines in the free press have circulated about the whereabouts of China’s heir apparent, Xi Jinping. Premier Wen Jiabao counseled against speculation after Xi canceled a meeting with U.S. Secretary of State Hillary Clinton several days ago (on possibly her last visit to China as diplomat-in-chief). But how could there not be a raft of largely unsubstantiated stories circulating when Xi disappears from public view in the lead up to the most highly anticipated, internationally watched, single-party transfer of power in the world?

Uncertainty about the Chinese economy and its slow motion slide into lower growth are widely known about both within and outside China. Now the government’s ability to orchestrate political transitions like a stage performance shows signs of weakening as well.

Full CNN blog post.

Re-Thinking China’s Rise – Real Estate

Re-Thinking China’s Rise – Real Estate

For many years now proponents of China’s endless rise, and its ever expanding real estate sector, point to a stream of workers flowing into cities as the world’s largest rural-to-urban migration unfolds. Stephen Roach, former head of Morgan Stanley Asia and now at Yale makes the argument quite succinctly in an August 29th Project Syndicate article:

“Reports of ghost cities, bridges to nowhere, and empty new airports are fueling concern among Western analysts that an unbalanced Chinese economy cannot rebound as it did in the second half of 2009. . . But the pessimists’ hype overlooks one of the most important drivers of China’s modernization: the greatest urbanization story the world has ever seen.”

He goes on to mention a series of statistics highlighting the increasing flow. As of 2011 over half of China’s population now lives in cities. Both the OECD and consulting firm McKinsey predict the trend to continue well into 2025 – 2030. And because tens of millions continue seeking their fortunes in cities they’ll all need somewhere to live.

“Shanghai Pudong is the classic example of how an “empty” urban construction project in the late 1990’s quickly became a fully occupied urban center, with a population today of roughly 5.5 million. . . China cannot afford to wait to build its new cities. Instead, investment and construction must be aligned with the future influx of urban dwellers. The “ghost city” critique misses this point entirely.”

Concerns however can’t be dismissed so easily.

First and foremost, rural-to-urban migration continuing at the same rate while China was growing at double-digits is highly unlikely. China’s economy has been slowing far faster than most expect and may be hovering closer to 7% rather than 9% for 2012.  Peking University’s Michael Pettis predicts slow growth and difficulties in re-balancing over the longer term.

The Pudong example is a bit of a red herring as well. Lying just across the river from Shanghai, one of China’s largest cities and busiest ports, and heavily supported by Beijing’s leaders, Pudong was destined to become heavily populated. Rental rates in Queens, Brooklyn and Jersey City, just across the river from Manhattan were also barely affected by the real estate collapse in the U.S. The exception doesn’t prove the rule.

Does Ordos, or any number of other third and fourth tier urban infrastructure projects hold as much appeal? Probably not. And all of those airports have actual costs associated with their under-use. Banks may be sitting on more debt than they now recognize without landing fees paying back the construction loans taken out by local governments. A heavily state-influenced finance sector may cushion the blow by rolling over or extending those obligations, but these aren’t risk free investments.

Another key assumption: the real estate being built matches the demands of urbanization and not merely investment for choice-deprived wealthy Chinese.

True enough migrants flooding into Chinese cities looking for work need some place to live but the construction and factory workers stay mostly in temporary dorms on site and do not have residency permits to stay in these cities. Others, including newly minted college grads pack into tiny apartments often with 4-6 people per room. They earn barely a living wage and can only dream of someday owning their own place. Far too few affordable housing units were being built prompting the central government to demand an additional 36 million units by 2015.

That goal is proving far harder to implement than decree.

Lucy Hornsby of Reuters reported: “a good portion of what’s being built is already-planned construction re-labeled as affordable housing.” The Peterson Institute’s Nicholas Borst ran a sensitivity analysis estimating how much government funding would be needed to offset a drop in commercial lending. He found that 2011 levels accounted for only 10% of what was needed. The rest was meant to be provided by already cash-strapped local governments.

Local governments apparently aren’t filling the gap.

The China Development Research Foundation (reporting to the State Council, one of China’s highest central government organizations) stated “local governments…neglect the construction of public housing even as they are pushed by the central government to implement public-housing policies,” according to a story by the Wall Street Journal’s Esther Fung.

Corruption degrades officially designated government funding even more. Reuters highlighted China’s National Audit Office report on the misuse of $471 million in 2011 affordable housing funds. And that’s the part they caught.

So who has been buying the new and mostly high-priced apartments that drove the initial real estate boom – those with limited investment choices. And for years real estate had the best returns, which fueled even more development projects and higher prices. The Chinese government then stepped in to cool the market with rules limiting second or third residence ownership and increased minimum down payments.

None of this economic activity was driven by the rural-to-urban migration of mostly poor workers.

The most bullish analyses on China often have more to sell than to explain. As China’s slowdown continues, and hairline fissures begin to widen, expect more uncertainty not less about the perpetual economic growth story.

 

Photo: Map of China’s plan for nation-wide high-speed rail, Shanghai New Railway Station, 2010.