China Currency

Like the Mississippi River which can changes course as it pleases, despite levees, China and its mercantile policies resist outside influence for the common global good. The Chinese government does not practice free trade and manipulates its currency. Major corporations that attempt to do business must engage in a relationship with a domestic company and transfer technology to benefit China Inc.

China’s new world order demands stronger U.S. Response

By Robert J. Samuelson
Monday, January 24, 2011

By all appearances, Chinese President Hu Jintao’s visit to Washington last week changed little in the lopsided American-Chinese relationship. What we have is a system that methodically transfers American jobs, technology and financial power to China in return for only modest Chinese support for important U.S. geopolitical goals: the suppression of Iran’s and North Korea’s nuclear weapons programs. American officials act as though there’s not much they can do to change this.

American capitalists practice neo-liberalism, whereby, wealth is the highest good, government should step out of the way, and whoever has the most electronic money…wins. Transferring jobs to low-wage countries serves the multi-national corporate interest but some remaining employers cannot compete with China Inc.

Posted Tuesday, Jan. 18, 2010

Heartland hurt has many asking: Is China worth it?


McClatchy Newspapers

SHARON, Pennsylvania — With a heavy heart, President Bill Kerins surveys an empty lot where just a few years ago, a massive steel-pipe plant that employed hundreds of workers stood.

Needing to expand production, Wheatland purchased that plant in 2002. Within a few years, however, cheap imports of standard pipe from China surged from a meager 10 tons to more than 750,000 tons by 2007.

“It came in at prices we couldn’t even consider competing with,” Kerins said. “Finished product was brought in at less than our cost of raw materials.”

Wheatland Tube sought relief through trade laws, but by the time the Bush administration acted, it was too late. The plant closed in 2007, and more than 200 jobs were lost.
The woes where western Pennsylvania meets northeast Ohio are the back story to the growing tension over China’s trade policy and currency manipulation.

will become the new paramount Party leader in 2112. His power within the Party and influence over competing power centers within modern China will define the relationship with US and the global community.

China Grooming Deft Politician as Next Leader

Published: January 23, 2011

BEIJING — President Hu Jintao of China returned home this weekend after a trip intended to repair relations with the United States. But the next time the White House marches out the honor guard and polishes the crystal for a Chinese leader, it is unlikely to be for Mr. Hu.

Following a secretive succession plan sketched out years ago, Mr. Hu has already begun preparing for his departure from power, passing the baton to his presumed successor, a former provincial leader named Xi Jinping, now China’s vice president. While Mr. Xi is expected to formally take the reins next year in China, the world’s second-largest economy and fastest-modernizing military power, he remains a cipher to most people, even in China.

But an extended look at Mr. Xi’s past, taken from wide-ranging interviews and official Chinese publications, shows that his rise has been built on a combination of political acumen, family connections and ideological dexterity. Like the country he will run, he has nimbly maintained the primacy of the Communist Party, while making economic growth the party’s main business.

There is little in his record to suggest that he intends to steer China in a sharply different direction. But some political observers also say that he may have broader support within the party than Mr. Hu, which could give him more leeway to experiment with new ideas. At the same time, there is uncertainty about how he may wield authority in a system where power has grown increasingly diffuse. Mr. Xi also has deeper military ties than his two predecessors, Mr. Hu and Jiang Zemin, had when they took the helm.

For additional perspective on China see:

The communist party’s legitimacy, once based on ideology and the barrel of a gun, now rests upon the social proposition that unprecedented economic performance will continue. Asia’s largest economy grew more than 10 percent in 2010 and educated European youth relocated to China for greater employment prospects. In comparison, America’s economy grew a modest 2.9%, the most since 2005. It was an improvement from 2009, when the economy suffered its worst drop in more than 60 years . This nouveau social contract presumes economic prosperity for entrepreneurs as well as the growing worker class and middle class will be endless and the masses will remain content.

China’s Economy Grew 10.3 Percent in 2010

Published: January 19, 2011

BEIJING — China’s economy continued to accelerate in the fourth quarter, as inflation is easing only slightly, showing that a series of cooling measures by Beijing over the last year have had only a limited effect.

Data released by the National Bureau of Statistics on Thursday put the pace of growth at 10.3 percent for the full year, up from 9.2 percent in 2009.The pace of growth in the last three months of 2010 — 9.8 percent — accelerated from the 9.6 percent recorded for July-September quarter. Both the quarterly and annual figures were significantly above what analysts had expected.

Taken together, the data and a number of other statistics in recent days supported the view of many economists who believe that the government will have to further tighten monetary policy, which could eventually lead the Chinese currency to appreciate against the dollar.

In the 21st century, the global center of gravity, like magnetic north, is shifting, east across the Pacific Ocean. The Red Sox are becoming the Yankees. Instead of Washington and N. Y. C. dominating the global agenda and finance, Beijing and Shanghai will wield greater influence. The dollar’s importance as a reserve currency relaxing controls on capital outflows. China’s foreign exchange reserves amount to $2.8 trillion, an amount that move economies throughout the world and influences the internal and external policy of governments.

The great question concerning the future of China and its interaction without the Middle Kingdom pertains to the goals of the military establishment.

China’s young officers and the 1930s syndrome
By Ambrose Evans-Pritchard Economics Last updated: September 7th, 2010

I try to remain optimistic that the US and China will work out a more or less amicable way to run the world for the next half century, a “Chimerica” of interwoven superpowers.

But it was slightly disturbing to hear the warnings of a distinguished China-watcher at a closed-door session of the annual Ambrosetti conference on Lake Como.

(This gathering of the global policy elites at Villa D’Este is a hardship assignment forTelegraph hacks. It fell to me again this year, but somebody has to do it.)

“China’s military spending is growing so fast that it has overtaken strategy,” said Professor Huang Jing from the Lee Kwan Yew School of Public Policy in Singapore. (He kindly let me quote his remarks.)

“The young officers are taking control of strategy and it is like young officers in Japan in the 1930s. They are thinking what they can do, not what they should do. This is very dangerous.

“They are on a collision course with a US-dominated system”.
Harvard Professor Niall Ferguson rattled me even further with a talk warning that the Chimerica marriage of the last generation is “on the rocks”.

“China gets 10pc growth: the US gets 10pc unemployment. That doesn’t seem the basis for a happy marriage,” said Prof Fergusson, – who used to sit next to me at the Telegraph as a young leader writer almost 20 years ago, before he went on to become one of the 100 most influential people on the planet (Time magazine).

China’s trade surplus is surging back to near record levels, yet the yuan has barely moved against the dollar since the fixed peg ended in June. It has actually fallen against a trade-weighted basket of currencies.

This is not an accident. The exchange rate is controlled. The yuan must rise – ceteribus paribus – unless the central bank prevents it doing so by purchasing foreign assets.

Prof Ferguson said naval rivalry is passé – cyberwarfare is the issue of the future, and he advises the West to be a little more careful about its reliance on Chinese-manufactured microchips.

Be that as it may, the current flash-point is a very old fashioned showdown between gunboats in the Yellow Sea and the South China Sea (the latter now a “core interest” of China along with Tibet and Taiwan), also claimed in part by a ring of other nations who are not pleased.

In late July, the chairman of US chiefs of staff, Admiral Mike Mullen, said he had moved from being “curious” about what the Chinese were doing, “to being concerned about what they’re doing. They seem to be taking a much more aggressive approach.”

“I see a fairly significant investment in high-end equipment – satellites, ships … anti-ship missiles, obviously high-end aircraft and all those kinds of things. They are shifting from a focus on their ground forces to focus on their navy, and their air force.”

Last week this little spat escalated to the point where a Chinese submarine erected a Chinese flag on the seabed of the South China Sea, 4,000 meters below the surface.

China has a perfect right to develop a blue-water navy and to make its presence felt in the region. The question in such matters is judging the purpose and precise circumstances, and I must confess that Prof Huang’s comments were slightly disturbing, always bearing in mind that he has a Singapore (Chinese diaspora) perspective.

Let it be said in China’s defence that it occupies no overseas military bases, and has no modern history of projecting imperial power.

On balance, I remain hopeful that country with a one-child policy, an aging crunch from Hell, and a chronic dearth of young people, will show an enormous reluctance to support military adventurism. Losing an only child is especially cruel.

Let us hope that the Communist hierachy in Beijing can rein in those young officers. But as Dr Huang said, they can no longer control much of anything, least of all the 17m-strong base of the Communist Party.

“The empire has lost control of its officials, which is how Chinese empires have always fallen in history.”

This needs watching, I fear.

Average Chinese swell with pride at the buildup, viewing it as the entitlement of a once-poor country gaining global stature. They see no contradiction between building a brawny military and Beijing’s claim that its “peaceful rise” threatens no one. History largely backs China’s contention that it isn’t an aggressor.

The Chinese have no recent history of sweeping territorial expansion (except Tibet). The one-child policy has left a dearth of young men, and implies a chronic aging crisis within a decade. This is not the demographic profile of a fundamentally bellicose nation.

Unlike Japan, China will not assume the role of an imperialist aggressor, consistent with its “peaceful rise,” but the Party owes the People’s Liberation Army due to its role in suppressing the democracy movement in 1989 at Tiananmen Square. The chief concern for a serious clash between China’s military could be a repeat of the Hainan Island incident in which a Chinese interceptor struck an American reconnaissance aircraft in April 2001, at the beginning of the Bush administration. A worse scenario would entail a deliberate provocation initiated by a rogue junior Chinese commander who wants to flex Sino military muscle.

For information on Japan’s 1930s militarism see:

While President Hu Jintao’s state visit to the United States fell short on deliverables such as a speedier pace of appreciation of the renminbi, both leaderships have bolstered high-level exchange mechanisms that could minimize mishaps due to misperceptions and miscalculations. The Joint Statement issued after the Hu-Obama summit characterized bilateral relations as a “cooperative partnership based on mutual respect and mutual benefit.” Although less grandiose than the “all-weather strategic partnership” that Beijing has formed with some nations, the new term is according to Chinese diplomats a notch up from the “positive, cooperative and comprehensive relationship” that had hitherto described Sino-American ties (Xinhua News Agency, January 20; Wall Street Journal, January 20). Yet both Beijing and Washington need to do more to put bilateral exchanges on an even keel. Not least of the problems is that supremo Hu seems to have trouble reining in the hawkish proclivities of Chinese generals who are having a bigger say in diplomatic and security issues.[tt_news]=37426&tx_ttnews[backPid]=7&cHash=c02dae3dd4

Although still relatively nascent compared to France or the United Kingdom, two countries that regularly send forces abroad, Chinese force projection capabilities are growing and expanding under the broad rubric of President Hu’s “new historic missions.”  The development witnessed in these growing operational capabilities along with an expanded strategic-level focus potentially is a double-edged sword, likely to have profound implications for both the U.S.-Sino relationship and international politics more broadly.

On the one hand, Washington’s call for China to become a “responsible stakeholder” in the international system implies burden sharing in the maintenance of international peace and security.  In this regard, a more active and capable PLA will enable China to better contribute to multilateral efforts seeking to provide global public goods.  The ability to identify and capitalize upon opportunities for military-to-military collaboration will be a crucial task for U.S. policymakers. On the other, even in the defense of the global commons—the policing of sea-lanes, for instance—Chinese force projection capabilities have the potential to erode or displace American leadership.  A more active PLA also increases the possibility of encountering U.S. forces abroad or, even possibly, of the PLA operating at cross-purposes to American interests.  Finally, future expeditionary activities, even of a non-combat nature, will further improve the war-fighting capabilities of the PLA, a point clearly not lost on Chinese strategists.[tt_news]=37295&tx_ttnews[backPid]=381&cHash=48584e4ec5

See also:[tt_news]=37425&tx_ttnews[backPid]=7&cHash=38c2a12667

China’s Currency Isn’t Our Problem

Published: January 17, 2011
Cambridge, Mass.

WHEN President Hu Jintao of China visits Washington this week, many Americans will clamor for Beijing to stop manipulating its currency. We think we are being cheated on a huge scale, but we should reconsider. When it comes to lost jobs, the negative impact of China’s currency, the renminbi, is less than one might think. Adjusting the exchange rate should not take priority over more vexing issues like North Korea, Iran and bilateral trade.

Since China agreed to a more flexible exchange rate last summer, its currency has appreciated a measly 3.6 percent against the dollar. This is because China, just like the United States, is also worried about jobs. In going slowly on appreciation, China is giving its exporters time to adjust, thereby limiting job losses and containing social unrest.

Many Americans believe that the Chinese jobs being preserved by an artificially low currency come at the expense of American jobs. There are three common explanations behind this theory.

First, a stronger currency would increase the purchasing power of Chinese consumers and decrease the relative cost of American goods in China, spurring more Chinese to buy more American products. Second, a stronger currency increases the relative cost of Chinese goods in third markets, like Europe or Latin America. So if the renminbi appreciates, consumers in other countries will shy away from Chinese products in favor of American products. Third, a stronger currency would increase labor costs in China, making it less attractive for American companies to move jobs to China and thus keeping more people employed at home.

These claims, however, are more wishful thinking than actual truths. Consider the first idea, that a strengthened Chinese currency would increase the growth rate of American exports to China. From 2005 to 2008, the renminbi appreciated nearly 20 percent against the dollar. Yet, American exports to China over those three years grew at a slightly slower pace than in the previous three-year period when the renminbi did not appreciate at all (71 percent versus 89 percent).

This is because many of America’s top exports to China are for capital-intensive goods like aerospace and power-generation equipment. Price is but one of several factors for these purchases, along with technology, quality and service. In addition, American companies in those industries are usually competing against European and Japanese firms rather than Chinese manufacturers. Ultimately, the dollar-euro and dollar-yen exchange rates may play more important roles in Chinese demand for American goods than the renminbi rate.

Second, I recently did an analysis of the top American exports to our 20 leading foreign markets, and found little evidence that an undervalued Chinese currency hurts American exports to third countries. This is mostly because there is little head-to-head competition between America and China. In less than 15 percent of top export products — for example, network routers and solar panels — are American and Chinese corporations competing directly against one another. By and large, we are going after entirely different product markets; we market things like airplanes and pharmaceuticals while China sells electronics and textiles.

Finally, it is unlikely that a stronger renminbi would bring many jobs back home. Instead, companies would most likely shift labor-intensive production to Vietnam, Indonesia and other low-wage countries. And in any case many high-skilled jobs will continue to flow overseas, as long as cheaper talent can be found in India and elsewhere. Only in a few industries, like biomedical devices, would a stronger Chinese currency combined with quality issues tempt American companies to keep more manufacturing at home.

Don’t get me wrong: China’s currency policies have led to unhealthy artificial distortions in the Chinese and world economy. They also fuel currency wars that threaten to undermine the cooperation needed to sustain a global recovery. And while the effect on American workers is far less than imagined, workers in the developing world stand much to gain from a faster renminbi appreciation.

We should discuss currency issues with China, but the exchange rate should not be at the top of the bilateral agenda. The issue is best left to the Group of 20, for this is as much the rest of the world’s problem as it is ours. Resolving our economic troubles will depend much more on reinvesting in education, transportation and other government services, basic science and applied research than on forcing China to yield on its currency.

China Goes to Nixon

Published: January 20, 2011

With Hu Jintao, China’s president, currently visiting the United States, stories about growing Chinese economic might are everywhere. And those stories are entirely true: although China is still a poor country, it’s growing fast, and given its sheer size it’s well on the way to matching America as an economic superpower.

What’s also true, however, is that China has stumbled into a monetary muddle that’s getting worse with each passing month. Furthermore, the Chinese government’s response to the problem — with policy seemingly paralyzed by deference to special interests, lack of intellectual clarity and a resort to blame games — belies any notion that China’s leaders can be counted on to act decisively and effectively. In fact, the Chinese come off looking like, well, us.

How bad will it get? Warnings from some analysts that China could trigger a global crisis seem overblown. But the fact that people are saying such things is an indication of how out of control the situation looks right now.

The root cause of China’s muddle is its weak-currency policy, which is feeding an artificially large trade surplus. As I’ve emphasized in the past, this policy hurts the rest of the world, increasing unemployment in many other countries, America included.

But a policy can be bad for us without being good for China. In fact, Chinese currency policy is a lose-lose proposition, simultaneously depressing employment here and producing an overheated, inflation-prone economy in China itself.

One way to think about what’s happening is that inflation is the market’s way of undoing currency manipulation. China has been using a weak currency to keep its wages and prices low in dollar terms; market forces have responded by pushing those wages and prices up, eroding that artificial competitive advantage. Some estimates I’ve heard suggest that at current rates of inflation, Chinese undervaluation could be gone in two or three years — not soon enough, but sooner than many expected.

China’s leaders are, however, trying to prevent this outcome, not just to protect exporters’ interest, but because inflation is even more unpopular in China than it is elsewhere. One big reason is that China already in effect exploits its citizens through financial repression (other kinds, too, but that’s not relevant here). Interest rates on bank deposits are limited to just 2.75 percent, which is below the official inflation rate — and it’s widely believed that China’s true inflation rate is substantially higher than its government admits.

Rapidly rising prices, even if matched by wage increases, will make this exploitation much worse. It’s no wonder that the Chinese public is angry about inflation, and that China’s leaders want to stop it.

But for whatever reason — the power of export interests, refusal to do anything that looks like giving in to U.S. demands or sheer inability to think clearly — they’re not willing to deal with the root cause and let their currency rise. Instead, they are trying to control inflation by raising interest rates and restricting credit.

This is destructive from a global point of view: with much of the world economy still depressed, the last thing we need is major players pursuing tight-money policies. More to the point from China’s perspective, however, is that it’s not working. Credit limits are proving hard to enforce and are being further undermined by inflows of hot money from abroad.

With efforts to cool the economy falling short, China has been trying to limit inflation with price controls — a policy that rarely works. In particular, it’s a policy that failed dismally the last time it was tried here, during the Nixon administration. (And, yes, this means that right now China is going to Nixon.)

So what’s left? Well, China has turned to the blame game, accusing the Federal Reserve (wrongly) of creating the problem by printing too much money. But while blaming the Fed may make Chinese leaders feel better, it won’t change U.S. monetary policy, nor will it do anything to tame China’s inflation monster.

Could all of this really turn into a full-fledged crisis? If I didn’t know my economic history, I’d find the idea implausible. After all, the solution to China’s monetary muddle is both simple and obvious: just let the currency rise, already.

But I do know my economic history, which means that I know how often governments refuse, sometimes for many years, to do the obviously right thing — and especially when currency values are concerned. Usually they try to keep their currencies artificially strong rather than artificially weak; but it can be a big mess either way.

So our newest economic superpower may indeed be on its way to some kind of economic crisis, with collateral damage to the world as a whole. Did we need this?

China’s overheating economy stokes fears for global inflation

By Sean O’Grady, Economics Editor
Friday, 21 January 2011

Fears of overheating and escalating inflation in the Chinese economy sent equity and commodity markets around the world tumbling yesterday, as the country returned to double digit growth rates.

Some £1trillion in loans by local banks helped the Chinese economy to record growth of more than 10 per cent last year, though escalating inflationary trends have raised fears about the sustainability of such expansion in her overheating conomy.

The Chinese National Bureau of Statistics said the economy of the People’s Republic expanded by 10.3 per cent in 2010, compared with about 1.7 per cent in the UK and 2.5 per cent in the US.

It means China has returned to double-digit growth, having fallen back during the world recession to 9.2 per cent in 2009 and 9.6 per cent in 2008. China has averaged growth of around 10 per cent for the past 20 years, leaving it on some measures as the world’s second-largest economy behind the US, having overtaken Japan and Germany this decade. The world’s “two-speed” recovery continues.

Apart from the export-driven boom that has seen China accumulate more than $2trn in reserves, recent attempts by the Beijing government have been targeted at boosting domestic consumption, and it has actively encouraged the many state-controlled banks at a national and regional level to lend extraordinary sums. According to the statistics bureau, Chinese banks loaned 7.95trn yuan (£755bn) last year, with another 3trn or so of yuan loans made “off balance sheet”, according to estimates produced by the credit ratings agency Fitch.

While some of this has fuelled rising consumption among the emerging middle classes – and contributed to the rising price of food globally – much seems to have gone into a real estate bubble that many analysts fear will burst before long, with unknowable consequences for China and the world economy. Other funds may have gone into “prestige” infrastructure projects that yield little or no financial or economic returns.

China’s investment rate of 70 per cent of GDP is high even by developing economy standards, and three or four times the proportions usually encountered in the West. The Government has set a target for borrowing of 7.5trn yuan in 2011, which will trim growth in money supply which is now running at 50 per cent. Retail price inflation eased slightly in December, but the pressure of rising commodity prices – in large part stimulated by China’s breakneck growth – seems certain to push it higher. Inflation stood at 4.6 per cent in December, after cresting a two-year high of 5.1 per cent in November. On average, inflation ran at 3.3 per cent over 2010, but it is expected to rise this year.

Moreover, much inflationary pressure may be disguised in an economy where national and regional officials still have the authority to intervene in markets and distort price signals. The authorities in Beijing may be even more concerned by the real estate bubble that has seen property prices in her sprawling eastern metropolises rise by annual rates of 30, 40 or 50 per cent in recent years. A property crash would not only harm those Chinese who have invested in property but also the banks that lent into that boom, though the residential mortgage market is less developed than in the West. More generalised concerns about the prospects for China saw stock markets around the world take a hit yesterday. Commodity prices also softened.

He Yifeng, an analyst at Hongyuan Securities in Beijing, said: “Overheating signs have already emerged in the Chinese economy. The government may have to take measures to cool off economic activity soon.”

Against a background of “currency wars”, the Chinese press the Chinese press hailed this week’s meeting of presidents Barack Obama and Hu Jintao as “successful”.

Inflation in China May Limit U.S. Trade Deficit

Published: January 30, 2011

HONG KONG — Inflation is starting to slow China’s mighty export machine, as buyers from Western multinational companies balk at higher prices and have cut back their planned spring shipments across the Pacific.

Markups of 20 to 50 percent on products like leather shoes and polo shirts have sent Western buyers scrambling for alternate suppliers. But from Vietnam to India, few low-wage developing countries can match China’s manufacturing might — and no country offers refuge from high global commodity prices.

Already, the slowdown in American orders has forced some container shipping lines to cancel up to a quarter of their trips to the United States this spring from Hong Kong and other Chinese ports.

The trend, if continued, could ease tensions by beginning to limit America’s huge trade deficit with China. Those tensions were an undercurrent during Chinese PresidentHu Jintao’s recent Washington talks with President Obama.

Manufacturers and distributors across a range of industries say the likely result of the export slowdown is higher prices for American shoppers in the coming months, and possibly brief shortages of some products if Western retailers delay purchases too long while haggling over prices.

China exports more than $4 of goods to the United States for each $1 it imports from America, creating a trade surplus of about $275 billion. The higher Chinese prices will tend to show up mainly in products like inexpensive clothing and other commodity goods in which labor and raw materials represent a bigger part of the final value — rather than in sophisticated electronics like Apple iPads, in which Chinese assembly is only a small fraction of the cost.

Of course, the slowdown in the volume of imports could also prove temporary, if American consumers accept higher prices and Western corporate buyers end up renewing contracts at much higher cost. In the meantime, if the average price for each imported product rises faster than the volume of shipments falls, China’s surplus with the United States could continue increasing temporarily.

But whatever the eventual impact on trade, Chinese inflation might also reduce Washington’s pressure on Beijing over its currency, the renminbi. For more than a year, the Obama administration has been pushing China to let the renminbi rise in value against the dollar.

China’s intervention in the currency market has kept its currency artificially low. But that flood of money has also driven inflation, giving Beijing an incentive to let the renminbi move higher. Indeed, the renminbi has increased 3.6 percent against the dollar since last June.

The Obama administration is starting to suggest that the currency problem could gradually solve itself if Chinese prices rise so fast that American goods become more competitive.

The first signs of a potential slowdown in Chinese exports have shown up in shipping. As factories closed on Friday across much of China in preparation for weeklong Chinese New Year celebrations, ports in Hong Kong and elsewhere along the coast were working long hours to meet last-minute shipments.

But the annual pre-New Year rush has been nothing like that of recent years, causing shipping lines to reverse rate increases and cancel sailings they introduced last summer as the American economy improved. This winter, the scurrying started only two weeks before the holidays, instead of the usual four weeks, according to shipping executives. That is because many Chinese factories simply cut back production this month as their Western customers began resisting steep price increases.

China’s inflation is running 5 percent at the consumer level, according to official measures. But Chinese and Western economists describe these measures as based on flawed, outdated techniques and say the real figure may be up to twice as high.

In contrast, the annual inflation rate in the United States is low by historical standards — about 1.5 percent currently.

China imposed price controls on food in mid-November to limit inflation. But Chinese state media began warning the public on Wednesday that those controls might be ineffective, as a drought in northern China has damaged the winter wheat crop and frost has spoiled part of the vegetable harvest in the south.

China’s $6 trillion economy used to be heavily dependent on exports for growth. Exports still account for about one-fifth of the economy, after excluding goods that are merely imported to China for final assembly and then re-exported. But China’s economy has grown powerfully for the last two years mainly on the strength of investment-led domestic demand. That demand, partly fed by low-interest lending by state-owned banks, is another factor in China’s inflation.

Cities and provinces across China have tried to cushion inflation’s effect on consumers by sharply raising minimum wages. Guangdong Province, the export heartland of light industry next to Hong Kong, announced two weeks ago that its cities were raising their minimum wages by an average of 18.6 percent, effective March 1.

That follows a similar increase that took effect in Guangdong around eight months ago. Many other provinces and cities have also sharply raised minimum wages recently.

The wage increases are also driven by a growing scarcity of factory workers. The number of Chinese in their 20s and early 30s, the traditional age bracket for factory labor, is slowly shrinking because of the introduction of the “one child system” a generation ago. And a rapidly expanding university system has produced waves of graduates with no interest in factory work.

Some companies have responded by moving factories deeper into China’s interior, said Stanley Lau, the deputy chairman of the Federation of Hong Kong Industries, which represents exporters employing 10 million mainland Chinese workers. But inland wages are starting to catch up with coastal pay rates, Mr. Lau said, while higher transportation costs frequently offset the wage savings from moving to the interior.

Coach, the American company that is one of the largest marketers of luxury handbags and other accessories, announced on Tuesday that it planned to reduce its reliance on China to less than half of its products, from more than 80 percent now. It will shift output to Vietnam and India, particularly for smaller, more labor-intensive leather goods.

But Mike Devine, the company’s executive vice president and chief financial officer, said that it would take four years to carry out the shift.

Trying to move production elsewhere, some retailers are finding many factories are already fully booked: Vietnam and Thailand each have populations smaller than some Chinese provinces, while Cambodia and Laos have smaller populations than some Chinese cities.

Many manufacturers foresee further labor shortages looming in China that will push wages even higher. They are responding with plans to upgrade their factory equipment and product designs, which could turn them into more direct competitors with high-end manufacturers in Europe and the United States.

Underground world hints at China’s coming crisis

To understand how far ordinary Chinese have been priced out of their country’s property market, you need to look not upwards at the Beijing’s shimmering high-rise skyline, but down, far below the bustling streets where nearly 20m people live and work.

By Peter Foster and Zhang Wei in Beijing 8:00PM GMT 30 Jan 2011

There, in the city’s vast network of unused air defence bunkers, as many as a million people live in small, windowless rooms that rent for £30 to £50 a month, which is as much as many of the city’s army of migrant labourers can afford.

In a Beijing suburb, beneath one of the thousands of faceless residential tower blocks that have carpeted the city’s peripheries in a decade-long building frenzy, one of Beijing’s “bomb shelter hoteliers”, as they are known, agrees to show us his wares.

Passing under a green sign proclaiming “Air Defence Basement”, Mr Zhao leads us down two flights of stairs to the network of corridors and rooms that were designed to offer sanctuary in the event of war or disaster.

“We have two sizes of room,” he says, stepping past heaps of clutter belonging to residents, most of whom work in the nearby cloth wholesale market. “The small ones [6ft by 9ft] are 300 yuan [£30] the big ones [15ft by 6ft] are 500 yuan.”

Beijing is estimated to have 30 square miles of tunnels and basements, some constructed after the Sino-Soviet split of 1969, when Mao’s China feared a Soviet missile strike, and many more constructed since to act as more modern emergency refuges.

The fact Mr Zhao can easily rent out 150 such rooms, with the connivance of the city’s Civil Defence Bureau with whom he has signed a five-year contract and invested nearly £150,000, is testament to China’s massive unfulfilled demand for affordable housing.

“Some 80pc of our tenants are girls working in the wholesale market and the rest are peddlers selling vegetables or running sidewalk snack booths,” he adds. “There are dozens of similar air defence basement projects in residential communities. In this area, they say 100,000 live underground.”

Checking out the price of property above ground it is not difficult to see why. To buy a small flat (860 sq ft) in the tower block above – a typically grim, grey concrete affair – currently costs more than £200,000. In a city where the average monthly salary is 4,000 yuan, the average person would take 50 years to buy such an apartment, assuming they saved every penny they earned.

At the market, Xiao Wang, a sales girl who is one of the basement dwellers, says she lives in a small basement room with a friend. They have no kitchen and only the use of a stinking public toilet upstairs.

“I can earn 4,000 yuan on a good month with commissions,” she says, “but sometimes it is only 2,000. I could maybe afford something a little better, but I need to save money so this is how I have to live.”

Such vast discrepancies between house prices and earnings are creating social and economic difficulties for China’s government – the discontented poor can’t find a decent place to live while the rich look to store their wealth in a speculative, bubble-prone property market. Not for nothing did Li Daokui, an adviser to China’s central bank, tell the World Economic Forum in Davos last week that rising property prices were the “biggest danger” to China’s economy.

With inflation and wage pressures also mounting, a growing number of investors are starting to question the long-term sustainability of China’s investment-heavy growth model. A survey of global investors by Bloomberg last week found that 45pc of them expect a financial crisis in China within the next five years, with another 40pc anticipating a crisis after 2016.

China’s government has given notice that it understands the risks of a property bubble, throwing another bucket of cold water on to the market last week, announcing new restrictions including minimum deposits on second homes of 60pc and a standing property tax in Shanghai and Chongqing.

However, many analysts remain sceptical that the curbs, allied to further interest rate rises expected this quarter, will do much more than stabilise prices which rose by 26pc in Shanghai and 12pc in Beijing last year despite an earlier round of cooling measures.

Goldman Sachs said it felt the impact of the curbs would be “short-lived” while Citigroup said the measures, while “harsh”, would not cause a sharp pullback in property prices, but at best would stop prices going up much further this year.

Those with a bearish outlook, such as Michael Pettis, professor of finance at Beijing’s Peking University, question whether China’s leaders will dare hit the brakes hard enough when so much of China’s economy relies on property investment to hit its politically sacrosanct annual growth targets.

Even last year’s soaring retail figures – sales of furniture rose by 37.2pc, household appliances by 27.7pc – appear to flatter the strength of China’s real economy, he argues in a note, since they are “as much an indication of soaring real estate investment as of rising consumption”.

Others point to the low level of mortgages on Chinese property and the underlying demand for property in a country that will urbanise 200m people in the next 20 years and argue that the bull market has a long way to run yet.

But for Beijing’s bunker residents who will never be able to afford a house, no matter how far prices fall, such considerations are superfluous, so long as China’s government does more to manage their rising discontent. This year, in a sign that it is getting serious about low-cost housing after years of paying lip-service, Beijing’s municipal government announced it was putting 200,000 new low-cost rental homes on the market, compared with 10,000 last year.

“We don’t ask for much,” said a roadside vegetable seller who also lives in a nearby basement shelter, “but the government must give us somewhere to live, because without us labourers what is going to support the Beijing economy?”

Chinese follow same old script (and they get the punch line)

By Steven Pearlstein
Washington Post Staff Writer
Tuesday, January 18, 2011; 10:58 PM

Here we go again.

China’s Supreme Leader visits Washington, and administration officials declare in the run-up to the visit that the United States has had quite enough of Beijing’s currency-manipulating, intellectual- property-stealing, domestic- industry-subsidizing policies.

The Supreme Leader denies his country engages in such practices, then promises it will stop them in its own sweet time, without any more meddling interference from Imperialist Running Dogs.

Meanwhile, with great fanfare, the Supreme Leader announces an order for a few more Boeing passenger jets. There are toasts and smiles all around at the A-list White House dinner. As the Supreme Leader flies off, the Treasury secretary declares his “get tough” policy has been a success.

Then it’s off to the headquarters of Multinational Corp., where the Supreme Leader signs one of those joint venture agreements with a Chinese government-owned company in which Multinational Corp. agrees to share its latest technology to gain access to the World’s Fastest Growing Market – a market that by treaty obligation is supposed to be open to foreign products and foreign investment but in practice is just one giant pay-to-play racket.

By week’s end, Americans finally turn their attentions back to the more pressing issue of whether the Jets can really make it to the Super Bowl.

So far, this week’s visit by President Hu Jintao has pretty much followed the script.

There was last week’s tough speech by Treasury Secretary Timothy F. Geithner that extolled the growth in the U.S.-China trade relationship but threatened to cut off access to U.S investment opportunities and access to U.S. high-tech products if more progress was not made on the usual laundry list of concerns.

Within days, we learned that a company called Evergreen Solar would shutter its solar panel factory in Devens, Mass., opened with great fanfare three years ago with at least $43 million in state subsidies. Evergreen is shifting its production to China. Plunging prices for solar panels had rendered the U.S. plant unprofitable, according to chief executive Michael El-Hillow, but Evergreen can still make money in China because of the lower costs and considerable government subsidies offered by the government there. So much for those 800 “green jobs” in Massachusetts.

Then this week, my colleague Howard Schneider weighed in with an equally telling story from Wisconsin, where Manitowoc Co. has for years exported giant cranes to China for use in giant construction projects such as the Three Gorges Dam. But now that Chinese firms are ready to enter the market, Beijing has slapped a 30 percent tariff on Manitowoc’s exports under a provision of global trade rules that allow “developing” countries to protect “emerging” industries. To stay in the game, Manitowoc has had to enter a joint venture with one of its Chinese competitors, which means much of the work will be done there.

The right response to these challenges would be for the president this week to laud China for the success of its economic policies and announce that the administration will begin forthwith to apply each and every one of them to Chinese exports into the United States. Subsidies and directed credit for local companies, buy-American provisions for government agencies and government contractors, currency manipulation, the rules on “conditional market access” and “indigenous innovation” – surely China could hardly complain if we were to pay them the highest compliment by embracing their economic model.

To start things off, the administration might announce its intention to block the joint venture Hu intends to announce later this week with General Electric. GE already sells lots of engines to China for all those Boeing and Airbus jets it buys. Now GE is hoping to get the contract to provide avionics to the state-owned Commercial Aircraft Corp. of China, which intends to go into direct competition with Boeing. What better way than by forming a 50-50 joint venture with Aviation Industry Corp. of China, another state-owned firm?

In addition to $200 million, GE will be contributing technology to the partnership that will operate as the avionics brain for Boeing’s new 787 Dreamliner. And going forward, the partners will jointly develop new radars, controls and guidance system at a jointly run research and development laboratory that is already under construction. Call me cynical, but this sure sounds as if one of America’s leading technology companies has decided to sell some of this country’s crown jewels to ensure access to China’s rigged market, potentially jeopardizing the competitive advantage enjoyed by this country’s leading export industry.

This is the nub of the problem. With its state-controlled economy, China can force its companies to act collaboratively to achieve the country’s strategic economic objectives. And that gives it a tremendous advantage in negotiating the terms of trade with a country like ours, where China can strike deals that may provide short-term profits to one company and its shareholders but in the long run undermine the competitiveness of the other country’s economy. What’s good for GE or Honeywell or Rockwell is, in this case, almost certainly not good for America and American workers.

Americans are uncomfortable with the idea of industrial policy. But when competing against countries that practice it skillfully and aggressively, we may have no choice but to respond in kind – if for no other reason than as a way to negotiate a more level playing field for American firms and American workers. China has already leveraged this advantage to wipe out large swaths of American industry, build up a $3 trillion dollar war chest and help to put the U.S. economy in a rut characterized by low growth, high unemployment and unsustainable trade deficits.

How much longer must we wait, how much deeper does the rut have to get, before we say, “Enough!”?

Peter Navarro: China’s cold war on our economy

February 01, 2010 |By PETER NAVARRO

China’s recent cyberattacks against Dow Chemical, Google, Juniper Networks, Northrop Grumman, and as many as 30 other U.S. corporations, represent a dangerous escalation in China’s mercantilist war on the U.S. economy. It’s not enough that American businesses have to put up with the competitive disadvantages of a grossly undervalued Chinese currency and the hefty subsidies the Chinese government provides for its exports. Now, the very heart and soul of American business — its intellectual property – is at risk from cyberbandits working for the Chinese government.

Make no mistake about this: The clear target of China’s cyberattacks was any type of corporate intellectual property that might give Chinese enterprises yet another competitive edge over their American counterparts – from new designs and technologies to client lists, marketing strategies, industrial processes and trade secrets. Indeed, some of the most valuable assets of American businesses reside precisely in the intellectual property created by the inspiration, perspiration, and significant research and development expenditures these businesses have made.

Regrettably, Chinese cyberattacks on American institutions are hardly new. However, prior to this recent attack, China has limited its computer hacking to U.S. military and Defense Department networks. In this particular form of cold cyberwarfare, agents regularly probe for weaknesses in our defense umbrella even as they seek sensitive military technologies that are otherwise denied to China by export restrictions.

What’s remarkable about the cyberattacks that China regularly launches against the U.S. military is not that they do it, but rather that the White House and Congress allow China to do this with impunity. This is despite repeated warnings from the U.S.-China Commission that China runs the biggest and most aggressive spy operation in the world against the U.S. Military.

Chinese industrial espionage is hardly new, either. A shadow network of Chinese-American citizens, Chinese nationals on work visas, Chinese students and tourists and visiting executives, diplomats, and dignitaries regularly troll for information and for anything that can be copied or reverse-engineered at venues ranging from trade fairs and university labs to corporate office

Now, however, that China has opened a new industrial espionage front in cyberspace, perhaps American politicians will finally respond with a coherent policy. More broadly, China’s bold cyberattacks should pose this question for the leaders of countries being hacked by the Chinese – from the U.S. and Europe to India and Japan: What should be the policy with respect to cyberattacks on one’s government installations or one’s economy?

In seeking to stave off any new policies or sanctions, Beijing has predictably denied any involvement in the cyberbanditry even as they have sought to portray China likewise as a victim. Of course, this is just so much propaganda. After all, China has the most tightly controlled and monitored Internet in the world. With its Great Firewall technologies and its 50,000-strong army of cybercops, China has every possible tool to stop such attacks. However, as with other forms of counterfeiting, piracy, and industrial espionage that run rampant both in China and from China, Beijing chooses not to crack down because these activities benefit China’s economy.

Given that the Chinese government is unlikely to unilaterally stop its cyberattacks, the U.S. government should take the lead in declaring such attacks to be what they are: acts of war. The obvious official policy response should be to deny any country access to U.S. markets that engages in such warfare.

For a comprehensive review of our China policy see:

See also:

China Currency

About Jerry Frey

Born 1953. Vietnam Veteran. Graduated Ohio State 1980. Have 5 published books. In the Woods Before Dawn; Grandpa's Gone; Longstreet's Assault; Pioneer of Salvation; Three Quarter Cadillac
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