Oz and China go head to head

China’s relationships with all sorts of countries are, to say the least, fraying. Much of the coverage in this respect focuses on Sino-US relations. But more interesting from a fight-lover’s perspective is a confrontation such as Australia versus China. A nation of 25 million, heavily dependent on trade with the Middle Kingdom, squares up against a nation of 1.3 billion.

Without going into the background of why the Aussies are ready to deck Beijing, this article about personal experience highlights how ugly the fight is getting. A journalist describes a threat to put his 14-year-old daughter in prison and his family’s flight from China.

To my understanding, although the minimum age of legal responsibility in China is 14, it would not be easy under Chinese law to put a 14-year-old in prison for a non-violent crime (probably easier to lock up the parents and put the child in an orphanage — a favourite tactic in Tibet and spectacularly unpleasant). But the fact that Foreign Ministry and police employees threatened prison in this case tells you something about what is going on.

It is also a reminder of how un-Chinese the Chinese Communist Party is becoming. Respect for kids is one of the more reliable and charming aspects of Chinese culture. Just not in this case.

快要控制全球？

No, China isn’t going to take over the world.

If you thought it was, take a look at the dull but important new paper on the country’s history of productivity growth at the link below.

The paper sets out China’s extraordinary record on productivity growth over the past 40 years. At its root was the move out of agriculture and into — in particular — manufacturing, as described in How Asia Works.

In the 1990s, Zhu Rongji kept the game going by laying off state workers and greatly increasing competition among state-owned firms. Contrary to what many economists (such as those who advised Russia) expected, state firms began to quickly close the productivity gap on private firms. It turned out that competition was much more important than ownership.

Productivity gains remained strong in the early 2000s as China’s economic boom came to the world’s attention.

In the past decade, however, the data show that China’s model hit the buffers. After the global financial crisis, more and more investment went into infrastructure and real estate with low productivity gains. State enterprises sucked up easy credit and stopped catching up the private sector in terms of efficiency. And rates of bankruptcy remained low, preventing the exit of less efficient firms, which is an important longer term driver of productivity gains in any highly productive economy.

I have mentioned before that Xi Jinping reminds me of South Korea’s last autocrat, Chun Doo Hwan. As a corollary of the collapse in productivity growth, the credit picture in China is also beginning to resemble Korea in the mid-1980s as smaller, weaker banks and non-bank financial institutions take a much bigger share of financial system assets and make riskier loans to less productive activities. As the paper notes, the Big Four Chinese banks’ share of bank system assets has fallen from more than half before the global financial crisis to well under two-fifths today.

China’s total factor productivity is still less than half that of the United States. There is no reason why China could not catch up, but to do so it would have to change policies on competition and economic openness that just aren’t going to be changed by the Communist Party of China. And that is why China isn’t going to take over the world, or indeed anything close.

Chinas-Productivity-Slowdown-2020 clean

Joined-up economics

Here is a rare thing. A dynamic theory from an economist — whereby the solution to today’s problem may not be the solution to tomorrow’s problem. It’s David Dollar, former World Bank country chief for China talking about the role of institutions in development…

 

What institutions do Asian countries need to keep growing?

31 May 2015

Author: David Dollar, Brookings Institution

The notion of a ‘middle-income trap’ has entered the lexicon of policymakers in emerging markets in Asia and elsewhere. Many leaders of countries that have experienced fast growth — such as Chinese Premier Li Keqiang — worry that economic growth will come off the boil as their countries reach middle-income status.

Growth for virtually all advanced economies was slower in the 2000s than in the 1990s; meanwhile growth rates in poor and middle-income countries accelerated. But there is a lot of variation in these broad trends, especially for the middle-income countries. Some of the latter have seen very impressive growth spurts, while others have stagnated.

What explains why some countries grow fast and others languish? There is a strong empirical relationship between the quality of institutions (as measured by the World Governance Indicators’ Rule of Law index) and economic growth. But institutional quality does not change very much from year to year or sometimes even from decade to decade, which makes it hard to explain why countries have periods of high growth followed by low growth (or vice versa).

Institutions which are well-suited to one phase of economic development may be ill-suited to another. One way to resolve the paradox of persistence of institutions and non-persistence of growth rates is to focus on the quality of institutions relative to the level of development. It turns out this can help explain why China and Vietnam, for instance, have seen such high growth in recent times: they have relatively low institutional quality in an absolute sense, but they have above-average quality institutions given their stage of development, which might, for instance, help to attract foreign investment to China or Vietnam rather than other Asian countries with similarly low wage levels but weaker institutions.

Another question is whether authoritarian institutions are better for economic growth than democratic ones. It may depend on the stage of a country’s development. When we look at the historical experience, in countries that have a per capita income below US$8,000, authoritarian institutions seem more conducive to growth. But at higher levels of income, democratic countries are likely to see higher growth than authoritarian ones. Why might this be so?

One explanation might be that at low levels of income, the economic priority of government should be to establish basic law and order and an environment in which private investment, including foreign investment, can operate. This is a catch-up stage, in which innovation is not yet particularly relevant. But the usual economic strategy for authoritarian governments relies on capital accumulation, which becomes less effective as countries get richer. When an economy reaches the point where acquiring more and more capital is no longer sufficient for rapid growth, the need for political and economic institutions that promote competition, innovation and productivity growth becomes paramount.

Interestingly, it is about at the US$8,000 per capita GDP mark that two of East Asia’s great developmental success stories, Taiwan and South Korea, were also becoming free and open polities. By the early 1980s for Taiwan and the mid-1980s for South Korea, a move had been made away from authoritarian institutions, which continued until both reached fully democratic status as measured by Freedom House’s civil liberties metric.

Of the countries that have witnessed rapid growth in Asia recently, Vietnam has shown some steps towards political liberalisation, with its civil liberties score moving to five, which is slightly better than either South Korea or Taiwan at the same stage of development. But Vietnam is entering the stage of development where the line of thinking presented above implies a need for further political reform. Greater freedom will be necessary to strengthen property rights and the rule of law in order to bring about an environment for innovation and productivity growth.

China, on the other hand, has largely eschewed political reform. Although he has placed a lot of emphasis on the idea of implementing the ‘rule of law’ in China, President Xi Jinping has made it abundantly clear that he wants to pursue economic reform without political liberalisation; some observers even point to backsliding in recent years on the question of freedom of ideas and debate. The historical evidence would suggest that this will weigh on the growth of the Chinese economy in the future. At the stage of development at which China now finds itself, South Korea and Taiwan were on the way to becoming more or less free societies.

Of course, just because no authoritarian country (apart from oil producers and, depending on how you classify it, Singapore) has reached more than 35 per cent of US GDP per capita does not mean that it will be impossible for China to do so. But the historical evidence should caution Chinese policymakers against thinking that the kind of political institutions that have facilitated China’s astonishing growth up to now will be sufficient or optimal for the next stage of its development.

David Dollar is Senior Fellow, John L. Thornton China Center, Brookings Institution. He was the former World Bank Country Director for China and Mongolia in the East Asia and Pacific Region.

This article summarises a paper prepared for the Pacific Trade and Development Conference in Singapore this week.

Latest thoughts on the Chinese economy / the ‘new normal’

China held its Central Economic Work Conference last week, chaired by president Xi Jinping, so here are a few thoughts on the current state of the Chinese economy and a few links to an article I have written, and talks I have given, recently about the Chinese economy.

First up, the slogan du jour is definitely ‘new normal’ (新常态). Xi Jinping has been using this for about six months, but now he is really using it. Xinhua’s short, official report on the conference has ‘new normal’ in the headline and ‘new normal’ six times in the text. See here for the English version.

What does it mean? It means that local politicians, state firms, and everybody else should dial back their expectations about credit and growth. The increase in both is slowing and that is the way it is going to be as China undertakes a deleveraging process in the banking and corporate sectors. There is not going to be the kind of collapse in growth that many have predicted. The government has plenty of room to fine tune the slow-down, Chinese exports remain competitive, and the global economic environment, while not great, is not a disaster from the perspective of China’s needs. Look out for reported GDP growth in 2015 between 6-7 percent.

Against this background reforms will continue to increase the extent to which the market prices credit in China’s economy. There has already been a big shift in favour of lending to the private sector since the global financial crisis (see my review of Nicholas Lardy’s new book, below), and this is one aspect of an ongoing financial liberalisation process. To my mind, this explains the recent strong performance of the Chinese stock market much better than claims it is down to an interest rate cut (which wasn’t really a cut at all given falling inflation). Previous run-ups in the Chinese market have coincided with periods of financial sector deregulation. The difference this time I suspect is that the bull market will last longer.

All in all the outlook is a not unattractive one: slower growth, better credit rationing hence higher quality growth, and a rising share for consumption in the economy at the expense of slowing investment. The main risk — as was the case during Zhu Rongji’s long period of ‘structural adjustment’ in the 1990s — is that the central government listens to local politicians who say they cannot maintain ‘social stability’ without more credit and growth. Zhu didn’t listen to such imprecations, and we have to hope Xi won’t either. As the slogan says, China needs and is getting a new normal. Otherwise the books really cannot be balanced and financial system risk will become unmanageable.

Later re. the new normal: Damian Ma has written an excellent piece for the new issue of Foreign Policy around the theme of the ‘new normal’. Well worth a read, with a lot more detail than I can offer here.

 

Links:

Below is a link to download the review of Nick Lardy’s latest book, Markets Over Mao, that I wrote for the latest China Economic Quarterly. The book makes an important contribution to the optimists’ case that China will overcome its current slough of non-performing loans in the banking system.

2014 CEQ Q4 final Markets Over Mao review

 

This next link is to a download of a synopsis of a talk I gave at the Madariaga College of Europe in Brussels (an EU think-tank) a couple of weeks ago. It is about how China’s development model is similar and dissimilar to those of Japan, Korea and Taiwan. The theme will be familiar to anyone who has read How Asia Works, but there are some additional, up-to-date thoughts about China as well as responses to questions raised by the Brussels nomenklatura. The precise topic I was asked to speak on is ‘What can east Asian countries learn from China’s economic policies?’

2014-Dec-01 – Madariaga – CN lessons to East Asia_final

 

The Youtube video below is a speech I gave at the National University of Singapore in October (blog entry about that trip here) on the subject of ‘When will governance matter to China’s growth?’ (governance here meaning institutions like a free and fair and prompt judiciary). Roger Cohen of the New York Times speaks first about the role of the US in east Asia. Then I speak at roughly the 25-minute mark. Then there is a joint Q&A.

 

 

And here is another Youtube video where I spoke separately about How Asia Works at the National University of Singapore. There is quite a long Q&A in which lots of questions about development from a more Singaporean perspective are addressed.

 

 

5,000 years…

 

After three weeks here, I stand by the assertion that Taipei is the world’s most interesting and liveable Chinese city. However it would be wrong to suggest that Taipei’s free society, strong sense of community, respect for other people, good manners and superb food are not undergirded by the fundamental and immutable laws of a deeper Chinese culture, the one with 5,000 years of continuous history.

The quotidian evidence of this is surely the piety shown for small dogs, as demanded by the Analects of Confucius  (‘Exemplary persons would feel shame if their small dogs were not well-dressed, or their perambulators not in working order.’) The mainland has begun to rediscover its ancient respect for small pooches in recent years, but Taipei reveals how far there is still to go. Here, pooches are properly dressed in dresses, vests and nappies, and wheeled around in high-end canine perambulators purchased from designer doggy shops that can be found on almost every street.

 

 

 

I have been told that the real reason why the tomb of Qinshihuangdi at Xi’an — close by the terracotta warriors — has never been opened is that this would disturb the souls of 8888 Celestial Poodles who were buried with the first emperor. All the stuff about mercury poisoning is a red herring.

 

 

 

Tribute in the bag

Thailand’s latest junta, the National Council for Peace and Order (aka National Council for Underdevelopment as Usual), has confirmed it is committing to a US$23 billion high-speed rail investment. Beyond this I can find very few concrete details. But the expectation is that much of the construction work, as well as the rolling stock, signalling equipment, and even quite basic industrial inputs will be supplied by China. Late last year, before the junta got rid of Thaksin’s little sister, Chinese premier  Li Keqiang was down in Bangkok doing the hard sell. When the junta boys grabbed the reins of power they made a show of putting the deal that was then shaping up on hold. But a few months later it is back in play, albeit possibly with some cuts to the project specification suggested by this Bangkok Post article (see the references to lower speed services).

Although we know nothing of the Chinese financing terms, it looks like the Celestial Empire has done an effective number on its traditional south-east Asian tribute states. First they leaned on the Laotians, the poorest and most biddable group, to agree to the first leg from Kunming through their territory. Now they have the Thais in the bag. Officially, the Malaysians say high speed rail is too expensive for them. But my guess is that the Malaysian government will fold once construction starts on the Kunming to Bangkok legs and sign a deal. The Chinese an easily twist their arms by threatening to buy their palm oil and gas somewhere else. (When I saw Mahathir late last year in KL he told me that he personally he is already in favour of a Chinese high-speed deal, so Beijing has one still-loud voice singing its song already.)

Who is all this investment good news for? It is good news for China’s rail equipment and rail construction firms, into which Beijing has sunk vast sums in order to master high-speed rail technology. And it is good news for bourgeois types like myself, who want fast, clean travel between their preferred Nanyang beaches and mountain retreats and the panda lairs of south-west China.

But we shouldn’t pretend it is good news for south-east Asian economic development. By the time there is a high-speed link all the way from Kunming to Singapore — which could now easily be completed within 10 years — the projects will have cost at least US$60 billion in today’s money. That expenditure will have done almost nothing to increase south-east Asia’s grasp of manufacturing technology, or even its project management capacity, because all the value-added goes to China. At a time when south-east Asia desperately needs to increase manufacturing employment to provide jobs for countries’ young populations, the China high-speed rail deals instead reveal the developmental bankruptcy of regional politicians. Their only strategy in addition to being a proto-colonial resource base for China, is to become a tourist destination for a new Chinese middle class.

 

More

This from Geoff Wade at the Australian Strategic Policy Institute, though I am not convinced all the numbers quoted are accurate.

What is not to like?

Summer in Taiwan. I came out two weeks ago with two kids and flew on to Penghu — the ‘Pescadore’ islands between Taiwan and China. Fortunately not on the flight that crashed that week. Clean air, clean beaches, and a diet of oysters and the odd beer.

Then we moved back to Taipei. Fantastic public transport, reasonably priced Chinese language summer camp, sitting in the hot springs at Beitou with a bunch of old boys and girls with flannels on their heads, wandering through night markets and shooting balloons with air pistols, chewing the fat with thoughtful, relaxed, helpful people. Chinese people at ease with themselves. Imagine that!

They tell me they lost the development race with Korea. Not really, I say. You lost the economic development race. But you won the overall development race. In Seoul they are all pissed out of their heads from Monday till Sunday, working 50 hours a week. Here, people are drinking fresh fruit juice and iced tea, eating the best food in east Asia, going to the temple or church, planning a holiday in Laos or Myanmar (it is striking how many people are wholly uninterested in visiting the mainland), reading a good book.

To be sure, I exaggerate for effect. But I honestly suspect that Taiwan is presently the most liveable place in east Asia. The parks, the public pools, the transport system, the schools all work in the general interest. Taipei retains the architectural charm of Tokyo because there are narrow streets but little high-rise construction, but it is more interesting because the Chinese are always up to something. It’s individuality with social responsibility. The losers are males of working age who are compelled to go to the mainland for work. But everyone else is here having a nice time. And there are pleasantly few gweilos of the irritating sort, because they have moved to China, or else stayed in Hong Kong or Singapore in order to better pool their wisdom and thereby earn their clients less money than the market index pays.

Thinking back to Indonesia and Jokowi, if he wants to see what a manufacturing-plus-infrastructure strategy could do for his country, he should pop up here before he assumes the presidency. This is south-east Asia with dignity, built by small-time manufacturers like Jokowi. The Vietnamese, who are the only south-east Asian state on track to replicate this model, might also come over to remind themselves of the future. It ain’t too shabby.

Sounds like my book

A long trip through Malaysia, Indonesia and China leaves me more convinced than ever that east Asia has two distinct destinies in economic development terms, and that the south-east Asian states are on the wrong side of the tracks.

I start off in Malaysia, where the United Malays National Organisation (UMNO) holds power despite winning a slightly smaller vote share than the opposition in May’s elections. The effect has been a skittish, neurotic administration confronted with deep-seated developmental problems it has no desire or capacity to address. The government commissions reports from the likes of McKinsey as if believing foreign management consultants are likely to come up with some brilliant idea to solve the nation’s problems. In reality, locals know all too well what the issues are — a coddled plantation sector and ignored smallholders in agriculture, low levels of indigenous industrial competitiveness, an untamed army of oligarchs that does almost nothing to promote national economic development and recycles its cash flows offshore, a financial system that pushes out consumer debt rather than supporting industrial development, and resurgent speculation in high-end real estate. Despite oil and gas revenues that cover around two-fifths of the national budget, the government still runs a budget deficit of 5 percent of GDP as it strives to buy off discontent.

In Malaysia today, there is a general sense of malaise, compounded by a recently much increased crime rate — particularly theft, burglary and violent crime. This was never a country that you associated with crime (other than expropriation by godfathers), but that seems to have changed.

On 9 October, a nearly 90-year-old Mahathir was kind enough to grant me a meeting. After corresponding with him during the writing of How Asia Works, I was looking forward to sitting down with him. However the experience did nothing to change the conclusions I had already reached.

Here are the highlights: On agriculture, Mahathir insisted that plantations always produce better yields than smallholders. On Malaysia’s tycoons staying out of manufacturing and not contributing to industrialisation, he commented: ‘They do what they think they can do best. We don’t direct them.’ On the future of economic development, he said he never did, and does not now, see ASEAN as a vehicle for economic policy cooperation and joint development. ‘Economic cooperation is secondary in ASEAN,’ he said. Instead Mahathir talked of the tourism potential of millions of Chinese visitors and of China as a source of cheap manufactured products for Malaysia; he favours buying a Chinese high-speed rail line to run the length of the country.

For me, the takeaway was that Mahathir doesn’t think a country like Malaysia ‘ought’ to be able to compete with a country like China. His parting shot was to say that it was unfair of me to compare the manufacturing development of Malaysia and Korea in How Asia Works: ‘We are not a single ethnic country. We are a multi-ethnic country. That makes it more difficult. They [Malaysia’s ethnic groups] are not at the same level.’ It was the race-based outlook that I describe in How Asia Works as having been so devisive and detrimental to effective policy in every south-east Asian country.

Would Indonesia be any different? I spoke at an event generously hosted by Trade Minister Gita Wirjawan, who read How Asia Works soon after it was published and announced himself ‘a fan’. However, while he might agree with the analysis of south-east Asia’s problems, at the event he offered no clear statements as to policy changes he believes are required if Indonesia is to improve its development prospects. All I picked up in Jakarta was the same, general sense of discontent after 15 post-Asian crisis years of partial economic recovery based on commodity trade (principally with China) and zero industrial progress.

On this topic, I spent the day before the Trade Ministry event at what used to be called IPTN in Bandung, now known as Indonesian Aerospace. People I asked in Jakarta assumed that the aircraft-building industrial policy adventure sponsored by BJ Habibie — which the IMF insisted be cut off from further state funding as a condition of providing credit to Indonesia in 1998 — is long dead.

But not so. IPTN/IAe lends a little support to my assertion in the book that even failed industrial policy will produce some tangible benefits (just very expensive ones compared with well organised industrial policy). Up in Bandung, IPTN had 15,600 employees, including 3,500 engineers, before the Asian crisis hit. The firm was receiving monthly government remittances to cover development costs for Indonesia’s indigenous N-250, 50-seat turbo-prop aircraft. With almost no cash reserves, when the cash was cut off the firm went into freefall. Management did not stabilise the business until the headcount had been cut by more than 12,000, to just 3,000. They did so by turning what had been an aircraft building business into a low-cost parts supplier, particularly to Airbus.

Today, the two N-250 prototypes sit disconsolate in a parking area of the 80 hectare site (the one at the bottom is three metres longer and can seat 70, so was really the N-270, as in two engines, 70 seats). Suharto himself launched the first prototype in 1995, naming it Gatotkoco after a character in Hindu-Javanese legend. Something of the order of US$1 billion had been pumped into the N-250 programme by 1998. The renamed Indonesian Aerospace kept flying its prototypes — racking up 1,200 test hours — until 2007 in the vain hope of finding cash to finish the project. The outside technical reviews were generally positive, but the will and capacity of the government to back the project were gone.

After the state cash flow was cut, Indonesian Aerospace first obtained work making wing ribs for the Airbus A380. Then it obtained contracts for the A320, and for Boeing and other aircraft. There was no way for the firm itself to invest in development projects because residual government debt made it unbankable. Only in 2011 did the government agree to a debt write-off (technically a debt-equity swap). This was followed in 2012 by a Rupiah1.2 trillion (circa US$100m) ‘goodbye’ capital injection from the state.

Indonesian Aerospace continued to assemble small aircraft after the crisis that it had assembled before 1998 in a joint venture with a Spanish firm — now owned by Airbus Military. Gradually it has managed improve the terms of its cooperation with Airbus, moving, for instance, to profit sharing on the most popular model it builds. Critically, the post-crisis era focused Indonesian Aerospace on selling aircraft as well as making them. It currently exports around one-fifth of the small aircraft it assembles — to Thailand for rain-seeding, to South Korea for coastal surveillance, to Malaysia, Pakistan and Turkey. Exports, however, are still nowhere near as strong as they were in Embraer’s formative stages in Brazil, before that firm went on to be truly globally competitive. Indonesian non-weaponized defence procurement is the current backbone of Indonesian Aerospace’s order backlog, which stands at US$1 billion.

Perhaps most interesting is that the firm, after conducting five years of market studies (what would have been an unthinkably long period of analysis in the pre-crisis era when it was rushing straight from the N250 to the N2130, a 130-seat jet aircraft), has committed to develop a new civilian aircraft of its own. Indonesian Aerospace managers say they have 150 non-binding commitments for a very small, 19-seat passenger aircraft designed for low-cost travel between second-tier cities in the provinces. Indonesia, like the rest of south-east Asia, already has a booming low-cost sector between key cities based on Boeing and Airbus aircraft. This is an attempt to grab a bit of market share below the radar of the big boys. The aircraft will work off short landing strips, be able to carry substantial amounts of freight relative to passengers, and is designed for use with minimal air traffic control; a prototype will fly in 2015.

Indonesia’s industrial policy was badly conceived, with too little competition, no involvement of leading entrepreneurs, and almost zero export orientation. Even today Indonesian Aerospace has failed to build a supplier cluster around Bandung. But it looks like the firm may in the end produce a marketable aircraft worthy of the name of indigenous technological capacity.

The big point of contemporary comparison, of course, is China. Earlier in 2013 there was a mild panic among foreign observers that that country’s accumulation of bad debt — largely a result of the aggressive industrial policy orientation of its financial sector — could lead to imminent financial melt-down. But not so. Unlike Indonesia, which had no capital controls in 1997, China is protected from changes of sentiment about its banks by capital controls that trap money in the country and keep the system liquid. China’s capacity to grow away from debt is declining as its growth rate gradually falls, but the basic fact of capital controls still meant that this year’s panic was a storm in a teacup. There is always a lot of waste involved in industrial policy, but control of the domestic financial system allows a government to socialise the cost.

Riding the high-speed rail system (HSR) from Shanghai to Suzhou to Xuzhou to Beijing, visiting firms, I also reflected how massively greater is China’s technological capacity today than was Indonesia’s when that country hit the skids in 1997-8. The entire Chinese economy makes stuff that the world economy is willing to pay for. Manufacturing activity is not confined to one or two bellwether projects like IPTN or Malaysia’s Proton. If crisis struck China today, the country would be way more competitive, in more value-added activities, once the crisis abated than was Indonesia after 1998. And China doesn’t face a crisis today because it has not been dumb enough to abandon capital controls. I suspect the country only has one more economic cycle to go before its control over capital is insufficient to escape crisis — the irony of its present stage of development is that China must begin to deregulate finance in order to waste less capital in an era of slowing growth. But by the time crisis does strike, China’s technological competitiveness and its roster of globally competitive large firms will be substantially higher again that it is today.

So what I came back to England thinking is that there is just a lack of political will and political self-belief in south-east Asia to do things differently. I am not sure it was ever really any different. Even Mahathir, who talked the best game in the region in terms of promising a shift to a Japanese-Korean model when he was premier, says that Malaysians cannot really follow the model because they are not racially up to it. On that view, you have lost before you start.

Visibility on Xi / Heineken government

There has been a lot of good quality think-tank and media stuff in the past few weeks about what the new Chinese president Xi Jinping may be thinking and planning. Since what his government implements in the next two to three years will largely decide how far China can go with its developmental project, I am posting some highlights here.

The big lacuna, for me, is that there is no similar debate about what premier Li Keqiang may be thinking and planning and what his capacity to act (semi-) independently of Xi may be. Premiers are also important in the Chinese system and, from time to time, you get ones like Zhao Ziyang or Zhu Rongji who define an era more than the president. Anyhow, the Li side of things is not much addressed here.

 

The background

Recall that Obama did two days of unscripted discussions with Xi in California in June in an effort to find out what is happening in Xi’s head. My sense is that Obama didn’t get a very clear view.

 

1. Francois Godemont’s essay Xi Jingping’s China, published by the European Council on Foreign Relations. Godement has Xi as the new Chinese Big Man, streamlining the bureaucracy and limiting corruption but doing almost zero at the institutional development level. I found this sort of interesting but not compelling in the sense of really giving visibility.

The blurb says Godement argues that:

• Xi has accumulated more power and more personal authority than any leader since Mao Zedong. His top-down approach will probably leave little room for major political reform or economic liberalisation; his “hardline modernisation” approach seeks instead to combat behaviour such as corruption and loose credit.
• The economy is the one area where Xi doesn’t seem fully in control. The price he has paid for broad support from party elders and conservatives is also an endorsement of major vested interests, which will constrain those arguing for major economic reform.
• Xi is ignoring his predecessors’ “low profile” approach to foreign policy, and claims a role for China as a global power. Xi seeks strategic parity with the US while its regional approach is based upon China’s superior strength.

“Xi Jinping is pursuing a neighbourhood policy based on strength in which China subjugates small countries while building a “big power” relationship with the US. Xi seems to want to combine 19th century geopolitics with 20th century Leninist politics, in order to gain the upper hand in the globalised 21st century world.” François Godement

….

2. Here is a resume of what Tim Summers at Chatham House in London thinks we know so far. Again, the expectation seems to be that we are not going to get significant institutional reform or indeed incremental moves in the direction of political pluralism. However the author sees moves in social policy areas like environmental degradation as some sort of half-way house between pure economic reform and more politically sensitive reform. This would have some echoes in 1970s Japan or 1980s Korea. (There is a reference to me at the end. I don’t know Mr Summers.)

China’s Current Reform Agenda

by Dr Tim Summers, Senior Consulting Fellow, Chatham House

There is an ongoing debate about reform in China which centres around questions of how far and how fast reform – political and economic – might go.Political reform – at least in most western discussions – encapsulates the possibility of changes to China’s political system. Under the country’s new leaders there is little sign of fundamental shifts so far, though there are campaigns to clean up the bureaucracy and make the Party-state more responsive.Economic reform is often reduced to greater marketization and a reduction in the state’s role in the economy. This has been prompted partly by a sense that state-owned enterprises have become too powerful, that the private sector has insufficient space to develop, and that factor markets are still too much in the hands of government officials.

Reform in motion

The coming months will see further debate, inside and outside China, about what sort of reforms China’s new leadership might consider. President Xi Jinping confirmed to Barack Obama in California in June that the Party machine was working on a medium and long-term policy plan for comprehensive economic reforms, and precedent suggests that this will be unveiled at this autumn’s Party Plenum.In fact, the new leadership has already set in train some elements of a reform programme. At the National People’s Congress (NPC) in March it was agreed that the railways ministry would be reduced to a policy administration and its operations would be fully corporatized. Other changes to government structure included the establishment of a new, stronger agency for food safety, symbolic of the desire to respond to growing popular concerns.After a meeting of the State Council (cabinet) in May, a subsequent policy document set out the most comprehensive statement of government priorities for economic reform this year since the NPC. Some of these are economic: reforms to the fiscal system, financial sector reform such as further marketization of interest rates and internationalization of the currency, encouraging more private and flexible investment, and freeing up the pricing of resources. There do not appear to be plans to shake up state-owned enterprises. Other points address livelihood issues, such as low income protection, ensuring food and medicine safety, and dealing with the environment.The highlight so far is administrative reform, in particular reducing government approvals needed in certain areas and devolving other responsibilities from the centre to the provinces. These reforms amount to making the government more responsive and efficient, but without changing the fundamental political structures. Part of the motivation is to help stimulate innovation and economic efficiency, but there is also a social element in the suggestion that these reforms could improve the delivery of public services.Social element

Less noticed is the extent to which social and livelihood issues feature. Even when it comes to resource pricing, for example, there are aims to differentiate pricing in electricity, water and gas (planned for some time) to support livelihoods.

Indeed, the ‘economic reform’ document for 2013 has as its guiding principle dealing with the state’s relationship not just with the market, but also with society. A reference to ‘reform dividends’ benefiting people ‘more justly’ highlights the social element. This is not a manifesto for economic efficiency alone.

Social issues have also been prominent on the agenda of the State Council, under new Premier Li Keqiang. According to official accounts of its meetings, major issues discussed over recent months include air pollution, developing the solar panel industry, safety in (industrial) production, providing safe and high quality milk powder, managing the agricultural sector to ensure supply and stable prices, and dealing with the earthquake which hit Sichuan in April.

A social policy emphasis makes a lot of sense. While economists and investors have stressed their desire for market-oriented economic reforms to improve efficiency, from a political perspective the most pressing issues the leadership faces are social and popular concerns.

There were hints of this as soon as Xi Jinping took over from Hu Jintao as head of the Chinese Communist Party back in November. Xi’s first public comments highlighted people’s desire for ‘better education, stable jobs, more income, greater social security, better medical and health care, improved housing conditions and a better environment’.

All of this suggests we should rethink the way we understand ‘reform’ in the Chinese context. Social, or livelihood, issues are at the forefront of Chinese policy making. And economic reform does not just mean the economics of efficiency (to borrow a phrase from Joe Studwell’s How Asia Works), but also addressing social and livelihood issues through the economics of equity.

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3. Kerry Brown, once of Chatham House, now based in Australia, has some nice bullets on what we may know about Xi. The final bullet is one I think I would have gone for. What interests me most is to understand the mechanics of the political tendency to increasing consensus and conservatism in fast-developing states. Is it just the effect having more money that encourages politicians to buy off constituencies and avoid confrontation for as long as possible?

The New Leadership in Beijing: Political and Economic Implications

Evidence to Parliament
Kerry Brown, July 2013

This is a submission to the Foreign Affairs Committee, House of Commons, on 2 July 2013.

• China’s new leadership is one of political scientists, historians, economists, lawyers and social scientists. The era of the technocrats has come to an end.
• This is a leadership set up for a domestic agenda and that will resist attempts to pull it more deeply into international affairs, which are seen as lying beyond what the elite define as in China’s national interests (preservation of stability, building up economic strength, safeguarding sovereignty), despite the very real pressures that will be put on it to that effect.
• They view international relations in a more emboldened way than their predecessors, and show their awareness of their country’s new economic status and how this needs to be reflected in how the world talks to and engages with China.
• Underneath the bolder presentation of reformist intention towards corruption, economic policy and use of political language, the Chinese Communist Party in the 21st century lives with the paradox that a movement founded in revolution has become, in its seventh decade in power, self-preserving, highly cautious, led by people with remarkably little diversity, and extremely conservative.

…

4. Michael Komesaroff is a thoughtful commodities specialists who writes the Metal Man column in the China Economic Quarterly. I am not posting his presentation because you should register at his Urandaline site in order to get it. However it, and other useful things he posts, are free. Who said that Australians are tighter than Scots? Here is his blurb.

After Hu: More of the same, is the title of a presentation I made in April to the Sydney based clients of UBS. The presentation develops a theme I have been articulating for sometime, namely that Western observers of China are likely to be disappointed in the reforms they seem to be expecting from China’s new leadership.The presentation includes a positive forecast on China’s need to import greater quantities of iron ore, but this is offset by changes in market power so thermal coal is less attractive. After Hu: More of the same can be found here.

You are receiving this e-mail because some time back you registered at my websitewww.urandaline.com.au to receive notification when additions were made to the site.  At the time of registration these are the log in parameters you chose:

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5. A macro-economic aside. In terms of the raw economic problem that the new government faces, this graph from Gavekal Dragonomics is useful. It shows how much nominal growth banking lending produces — in other words a proxy for a pure Incremental Capital Output Ratio. The point is that chucking money around is producing diminishing returns, as one would expect at this stage of development, and so structural adjustment and institutional change are suddenly very important as means to improve Chinese bang-for-buck.

The question is whether Xi and Li do only economic structural adjustment — such as interest rate reform, a revision to the centre-provincial fiscal arrangements in place since 1994, more action on welfare transfers and inequality — or whether they add any institutional medicine from education system to legal system to media to political pluralism modernisation.

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6. More media-type stuff now. This is an op-ed from Russell Leigh Moses, Dean of Academics and Faculty at The Beijing Center for Chinese Studies, who is writing a book on the Chinese political system.

Xi Jinping’s Rare Scolding of Top Party Leaders (Wall Street Journal)

By Russell Leigh Moses

After telling the lower ranks of the Communist Party to shape up and make a clean break from past practice, Chinese leader Xi Jinping has taken aim at a new target:  the Party leadership itself.

And he’s done so with authority and openness from the highest pulpit of politics in China–the Politburo, the very place where the senior leaders sit and make policy.

In a speech at the conclusion of a three-day special meeting that was covered across Party media and took up nearly half of the evening newscast on Tuesday evening, Xi proclaimed that senior members of the Party needed “to play an exemplary role,” and that they had to be “broad-minded enough to reject any selfishness…to adhere to self-respect, self-examination and self-admonition” in their work (in Chinese).

It’s extremely rare for Politburo proceedings to be spoken of in such detail and openness.  And it’s unprecedented in modern times for the Party boss to start taking swings at his colleagues at the top by so directly reminding them of their responsibilities—a move that suggests he might be planning something even stronger soon.

Having just admonished lower-level cadres in a salvo last week, some observers might think that Xi is simply putting on a show here. After all, it’s difficult to demand improvement in the work-styles of the rank and file without at least paying lip-service to the idea that those at the top could stand to do a little better themselves.

But the tone of Xi’s comments and the play they’ve received in the state media suggest this is far more than just rhetorical window dressing.  It wasn’t enough for high officials to “strictly abide by party discipline and act in strict accordance with policies and procedures,” Xi said. Those at the top must also “strictly manage their relatives and their staff and refrain from abuse of power.”

“The sole pursuit” of senior members of the Party, Xi insisted, should be tied to “the Party’s cause and interests” – in other words, “to seek benefits for the Chinese people as a whole.”

Whether it’s misuse of official license plates or the high-end looting of state assets (in Chinese), Xi knows that corruption is not always confined to lower-level cadres.

Xi was careful to concede that there have been some positive developments in the ways by which the Politburo and other Party bodies operate, such as “improvements in research and reporting.”  Meetings have been shortened and presentations streamlined, “enhancing the majority of party members’ and cadres’ sense of purpose, as well as the view of the masses” towards the Party leadership, he noted.

But it’s clearly morality at the top — not the way that decisions are made — that concerns Xi and his allies the most.   As Xi’s speech noted, “as long as Politburo comrades always and everywhere set an example, they can continue to call the shots, for that will have a strong demonstration effect, and the Party will be very powerful.”

But Party leaders “must follow their own strict requirements first.”

Xi’s reprimand seems to imply that some of them are not.  His predecessors talked about the general threat to Party rule from the evils of corruption; but in nearly every case they chose to scold officials in the abstract, instead of smacking them around.  As with so many other efforts, Xi’s being different.

Indeed, such comments raise the very real possibility that Xi has someone specific in mind – that he could be about to strike against one or more of the conservatives who populate the Politburo and who might be standing in the way of further reforms.

Whatever form the next round of fighting takes, Xi and his reformist colleagues are clearly interested in creating a fresh sort of politics, even at the very top of the system.  This is risk-taking and resolution of a high order–and it brings a real political showdown with opponents of Xi’s brand of reform all the closer.

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7. And this is an op-ed from Ching Cheong, the venerable Straits Times journalist who was locked up in China for three years accused (among other things) of spying for Taiwan. It talks about Xi’s encounter with Hu Dehua, which was referenced above.

海峡时报 (新加坡)

Opinion  |   Others  |   By Ching Cheong, Senior Writer  2013-06-28

Outspoken China princeling takes on President Xi 

 CHINESE President Xi Jinping’s conservative stance on political reform has led to a major split within the princeling community, whose members share a common interest in preserving the ruling status of the Chinese Communist Party (CCP).

Mr Hu Dehua, the third son of the late party chief Hu Yaobang, openly criticised Mr Xi at a seminar held by the liberal magazine Yan Huang Chunqiu in mid-April. It was by far the most severe criticism lodged against Mr Xi since the latter became CCP general secretary last November.

Mr Hu Yaobang was the CCP general secretary from 1982 to 1987. He was known for “liberating” thousands of senior CCP officials purged by CCP founder Mao Zedong. For this reason, he wielded considerable moral strength within the party. Mr Hu Yaobang’s death in 1989 triggered a massive democracy movement in Tiananmen Square that was put down bloodily.

Thanks to his legacy, his two sons, Deping and Dehua, stood out as symbols of political reform amongst the princelings.

Before Mr Xi became CCP chief last November, he let it be known that he paid a visit to Mr Hu Deping and had a long chat with him. Many considered this an attempt by Mr Xi to build an image as an enlightened leader.

Now, however, Mr Xi has been taken to task by Mr Hu Dehua.

He started with Mr Xi’s speech to party colleagues during his southern tour early this year. In it, the President stated that the Soviet Union collapsed because the party had disarmed itself by allowing the army to be loyal to the country rather than the party. “One lesson to draw is that we should forever grasp firmly the gun and not to disarm ourselves,” the President said.

Mr Xi also lamented that when the country faced disintegration, given the size of the Communist Party of the Soviet Union (CPSU), there was no one “man enough” to come to its defence.

To refute him, Mr Hu Dehua cited Russian Communist Party leader Gennady Zyuganov’s view that the Soviet Union collapsed because the CPSU had monopolised resources, political power and truth. “If this was the case, then there was nothing to regret if the Soviet Union or the CPSU collapsed,” he said.

Mr Hu Dehua then hinted that Mr Xi had misread the reason for the collapse of the CPSU. Mr Hu cited a CCP document of July 14, 1964, entitled On Khrushchov’s Phoney Communism And Its Historical Lessons for the World, saying that there emerged in the Soviet Union a privileged class represented by the CPSU.

“The members of this pivileged stratum have converted the function of serving the masses into the privilege of dominating them. They are abusing their powers over the means of production and of livelihood for the private benefit of their small clique,” the document said.

“The members of this privileged stratum appropriate the fruits of the Soviet people’s labour and pocket incomes that are dozens or even a hundred times those of the average Soviet worker and peasant. They not only secure high incomes in the form of high salaries, high awards, high royalties and a great variety of personal subsidies, but also use their privileged position to appropriate public property by graft and bribery. Completely divorced from the working people of the Soviet Union, they live the parasitical and decadent life of the bourgeoisie,” said the document.

Mr Hu Dehua pointed out that this was the real reason for the collapse of the Soviet Union. Turning to present-day China, which was plagued with problems similar to the Soviet Union’s, he said pointedly: “We blame everyone else, but never try to find problems from within. Is this a correct attitude?

“Why can’t we learn from the Kuomintang (in Taiwan), reform ourselves and get elected, basing our legitimacy on people’s authorisation and not on guns and cannon?” Mr Hu Dehua asked.

He then queried Mr Xi’s remark that no one was “man enough” to save the CPSU. “What does it mean by ‘man enough’?” he asked.

“Driving third-generation battlefield tanks against your own people is ‘man enough’? Or resisting orders to kill your own people and opt to face martial court instead?” he asked.

“When the ruling party faces a crisis, there are two options: to suppress the opposition or to reach reconciliation with the people,” Mr Hu Dehua said.

“We should learn from the experience of Chiang Ching-kuo (the late Taiwanese President who scrapped martial law). Be bold enough to reflect on the Feb 28, 1947 incident (where demonstrators were bloodily suppressed) so that historical pains could be redressed without bloodshed, revenge or purges.”

Clearly, Mr Hu Dehua was referring to the Tiananmen incident.

He then turned to Mr Xi’s latest assertion that one should not use post-reform history to negate the pre-reform years.

Mr Hu argued that without turning its back on the traumatic Cultural Revolution (1966 to 1976), the CCP could not embrace reform and open the door to usher in a period of prosperity.

“If one should not negate the first 30 years, does it mean that we still have to uphold the Cultural Revolution, uphold Mao Zedong’s purges of senior cadres, including his remark that Mr Xi’s father, Xi Zhongxun, was a counter-revolutionary who used novels as a weapon to conduct anti-CCP activities?”

This last question put the Chinese President in an extremely awkward position.

Mr Hu decided recently to release the transcript of his speech on the Web.

Mr Chen Ziming, a dissident branded as the black hand behind the 1989 Tiananmen incident, speculated that the recent salvos of propaganda attacking constitutionalism might have prompted Mr Hu to take Mr Xi to task.

Mr Hu’s open criticism of Mr Xi also suggests that the princeling community is sharply divided over how to preserve the ruling status of the CCP, especially over whether rampant corruption and widespread unrest can be dealt with without political reform.

…

Do you feel enlightened? I feel very slightly less in the dark. Rather like thousands and thousands of Chinese cadres, not to mention the general population, who are waiting to find out what Xi4Li3 (a homonym of Heineken’s Chinese name Xi3Li4 – you heard it here first) are actually going to do. I don’t mind a bottle of Heineken. But is that all this nation of 1.3 billion can offer us?

On the road

The longest trip I ever made away from the family. Three-and-a-half weeks including Astana.

From there I arrived in Beijing. Domingo Cavallo sitting in the seat next door except I didn’t recognise him. We shared a cab into town and had a nice chat.

Various talks in Beijing, but also desperately trying not to stop to smell the rose(s) and get on with my research. The revelation of this trip was Line 6, newly opened, of the Beijing Underground. What a line. It connects, on a straight, east-west route, the greedy gweilos of Chaoyang district and the paranoid, pipe-hitting, nationalistic politicians and bureaucrats in the Beihai North and Chegongzhuang areas. Plus it ends up in IT-land Haidian. It’s the golden line of money and power, with the fastest trains to match. Well built.

Tianjin was easy on the 300kmh train. Back in the day I was pulled over on the expressway doing 160kmh. You are the fastest today, said the policeman. 谢谢, I replied. He popped the fine in a briefcase, heaving with cash. Still took 2 hours door to door. The train is 30 mins. Then an interesting factory manager. Minimum wage in Tianjin this year is Rmb1,800. Ouch.

Then 5 hours on the high-speed to Shanghai. I never liked the place, but this time, for the first time, they charmed me. The urban planning is just better than Beijing. The people are calmer, less bullshitty than they were. Beautiful dinner with friends. Small dogs. I am still obsessed with where all the dog shit goes. They say no owner cleans up after the pooches. It’s the waidi ren, the peasant slave labour, that just picks up the shit early in the morning while Shanghai is dozing.

No high-speed to Guangdong yet, so took the sleeper. Beers in the dining carriage with a businessman who told a story you just could not make up. It’s like they just want to write the next book for you, take the weight… We trade numbers. A Burmese-Chinese returnee who can’t speak Chinese and a Shanghainese too.

In Guangdong I have to go to Zhongshan, near Zhuhai, to see a rather smart company. Seems to me a lovely place, not visited in 15 years. Taxi driver says street crime is on the rise. But I think the people are great, open, smiling at the gweilo.

Then across the border for a weekend on Coloane, at Pousada de Coloane. Sunday lunch at Fernando’s, my favourite anywhere. You never could book. However they have introduced a piece of paper on which you write your name after 12.30, when restaurant already full, and they use this to determine who at the bar is next. Even Portugal is making progress. I lament the changed shape of the Vinho Verde bottle.

Hong Kong is a whirr of money pigs and talks. In the midst I am drinking 温水in the FCC when a svelte young colonial strides in. It is Hemlock. I hardly know him. Convex chest, unhunched shoulders, a smile… He tells me, apologetically, that he has ‘a girlfriend, almost half my age…’ Wonders will never frickin’ cease. Of course he still shoves a plate of noodles in his face at 11am. But Thus Spake Zarathustra just came to a movie theatre near you.

All in all, a lovely trip. Problem is that in the whole month only Bowring tries to really nail me, with a question at the FCC. God bless. It is one of the points that Charlie Munger lists in his guide to gentle informational murder. They just don’t challenge you. And yet without the struggle, we cannot progress.

Finally, I get home. And the wife tells me to stop swearing so much. Gravity, at last.

 

Some media stuff:

Pilling on Indian IT after a chat

Marginal Revolution likes the book. And is probably right that neither beach reader nor academic reader will be happy.

Tom Holland on the book.

Jake Van der Kamp responds to Tom Holland in the SCMP, except without reading the book. This is staggeringly lazy. File under Howard Davies. And I have often quite liked Van der Kamp’s stuff. But this thin, indolent drivel is a pretty good guide to why so many millions remain poor. How can anyone serious pass judgement on something they have not read? It is a book about stages, that takes in your view, Mr Van der Kamp, and the other one. Separately, and somewhat pedantically, ‘fulsome’ does not mean ‘full of’. It means ‘insincere’.

And now Holland responds. His main point is valid. I said at the beginning (and end) of How Asia Works that this is a book about economic development. Real development is also about social and political development. But I was not willing or capable to try to put the other parts of the equation in the same book. It would be too complex. And people would not absorb the basic message about economics. The next book will deal with the institutional stuff.

RTHK on the book. I had to download a plug-in to run this, but assume the average reader is more tech savvy than I. Trick is to do all this and then hit the play button to start the show. But first go to ‘Select segr’ and choose the 11.05 slot. With Phil Whelan. That is where the interview is. Very clunky stuff. But listenable if you get there. ACTUALLY… just did this again a slightly different way. Went here. Then just scrolled down the page and hit the button next to ‘Joe Studwell — How Asia Works’. Took a couple of secs to load up, but then fine.

Podcast interview by the Economist Intelligence Unit in Hong Kong. It was the end of the day. I am more tired than at RTHK, but still a decent chat.

Amcham in Beijing. The podcast should be here.

More to come when I remember what it was.