Chinese Box

Optimism about China's liberalization.

I was going to make a really long post about the recent spate of businessmen speaking out against China's trade practices, but its just too tempting to just link to Daniel Drezner's piece, which largely mirrors my view of the situation, and get back to paying work.

I wanted to link the story with James Fallows short post on how the (somewhat) positive conclusion of the Google affair would help fight the increasing cynicism of Chinese people with international interests (he's referring mostly to internet users, but I think its true of Chinese businessmen as well). 

I think a lot of people from outside China don't understand the level of demand for liberalization from within the country, or often how its distorted through faulty information systems - most Chinese people I've spoken to think that foreigners are complaining because preferential taxes established to increase FDI are being repealed, which is not at all the case, but has been aggressively argued by the Chinese press. 

I was going to write a somewhat cushy piece on the reasons why I'm optimistic about China, but in the context of the complaints mentioned in Drezner's piece (read it), which I all pretty much agree with, it seems rather cheap. Instead I will just say that the continuing demand for globalization and liberalization from ordinary Chinese people is the one reason why I'm most optimistic about China's future.

Bringing China into the international System

This article was originally published on Roubini's Global Economics Economonitors.

I talk to people from European diplomatic circles fairly often, and one thing you hear pretty regularly is that European politicians hate the fact that the Chinese take Americans more seriously. Particularly in the context of the strategic economic dialogues - Europe may account for more trade with China than the US does, but China pulls out all the stops when American officials are in town, while it largely forgets about officials from the European Union. 

The European Council on Foreign Relations just put together a policy brief, which - while I disagree with the assessment of China's internal situation - is one of the best things I've seen put out recently on "engaging China.

Better than it seems

The core of my disagreement with the piece is its insistance that China is using new found leverage in the wake of the financial crisis to push its own interests over the interests of the international system. While the writer makes an extremely strong argument at times, particularly relating to the dismantlement of Copenhagen (I would throw Doha into the mix), he over states his point.

China has also become more open in rejecting western human rights standards and is, on occasion, now even willing to show disregard for its own law. For example, in January 2010, a Chinese foreign ministry spokesman responded to a question about the whereabouts of a well-known dissident, Gao Zhisheng, who had been missing for almost a year, by saying that “he is where he should be”. (After briefly reappearing under police control after more than a year, Mr.Gao disappeared again.) This disregard represents a significant change and may create splits within China’s political elite and in public opinion.

This is a fairly easy example, because prior to fairly recently no one in their right mind would ask a foreign ministry spokesman the whereabouts of a well-known dissident. The writer in several other cases points out situations where China seems to be obstructionist, but is in fact participating more than it ever had in the past. The situations in Iran and North Korea come to mind. China should be participating more in these cases, but progress is being made.

He is correct though that China's biggest foreign policy platform is "we aren't responsible for that," and China has been able to put considerably more force behind its diplomatic ploys to be irresponsible since it became everyone in the world's largest trading partner. I would however disagree that leverage has been quite as great as Western diplomats are prone to think. China is fairly panicked about its economic situation. The RMB hurts China far more than it hurts the West (though less than it hurts other developing countries). And with growth slowing and inflation rising the countless threats economic analysts made last year of stagflation might be coming true. The North Korean situation is a DISASTER for China, and I'm pretty sure that Chinese foreign policy types are panicking trying to figure out what to do.

A little leverage isn't hard to find

His big point though, that a quid pro quo approach is needed for negotiating with China, I can't possibly argue with, and I think is something that both Europeans and American leaders should pay heed to. His recommendations are all mostly on the grandiose side - he recommends establishing a federal industrial and technological policy to promote Europe as a center for cutting edge technological development... and protect from intellectual property violations in China - but they all seem fairly necessary (can you think of any other solution to rampant law breaking than aggressive legal action?).

He also looks at human rights as an area where Europe should put more muscle into getting China to act more responsibly, or, more accurately speaking, less barbarically. I think this point should be taken very seriously, as improvement in human rights in China I think could easily be contagious. Its sad to say, but America's levels of incarceration is higher than China's, the difference in its attitude towards the death penalty is quantitative, not qualitative, and over the Bush years America's moral compass was slowly syncing with China's instead of Europe's. The horrors of China's human rights policy can help shine a light on areas in the developed world that aren't as different as we like to think.

The other point I would like to emphasize of their policy outline is possible cooperation with other developing states. They mention this as a possible strategy, but I think engagement with India has truly been underwhelming. There have been a number of headline deals and projects, but there are a lot of areas where Europe and the US could be working better in India's long-term interests (tossing out the common agricultural policy jumps to mind) and get India more engaged in strengthening the international system rather than deciding, along with China, that it isn't their responsibility.

Eastern Approaches

The Economist has fulfilled another one of my wishes, starting up a Central-Eastern European blog.

To see exactly why it was one of my wishes, see the third blog post ever on the site, about the conspicuous lack of Chinese migration to Russia.

Harley Balzer of Georgetown writes

I'm now convinced that the really important story of 1985-2000 was not the collapse of Communism, but rather the inversion of economic and geopolitical positions of Russia and China. That's the book I plan to finish by December. This article on migration between the two countries is a small bit of it: most of what we know about migration and economic development would lead us to expect that Chinese will not go to Russia, but Russians will go to China. This is increasingly the case.

Tech deflation: the big story of the next 10 years

April issue is now going to the printers, and so I have some more time to write a longer post about a story, or a chain of stories that I want to write over the next few months. It's about tech deflation, and how China might change the world (for the better).

 The story first came to my attention when I was talking to a cantankerous medical industry analyst from Montana (he lied about not having a business card when he heard I was a journalist, and then searched for one when he found out I was a journalist he read on a regular basis). I asked him what he thought of Mindray Medical, to which he straightforwardly replied "Mindray Medical is going to change the world."

His argument, though new to me at the time, was one that I was later able to identify in a number of sectors: Chinese tech manufacturers are capable of producing 80% solutions at 40% the price, which puts them well in the price range of rural hospitals and developing nations which have thus far been unable to afford the 100% solutions of GE and their ilk.

The deflationary power of Chinese manufacturing is well recorded, and there is a few reasons to expect China to move out of low-investment sectors (tube-socks, lighters, children's toys), and into tech sectors, that could contribute a much larger net benefit to developing economies.

1. Wages are quickly rising in the coastal areas, which is pricing Guangdong, Zhejiang and Jiangsu (China's biggest manufacturing bases) out of the market for low priced goods. - my upcoming Wenzhou article touches on this.

2. Low-tech jobs are being poached by south asia, and the non-coastal provinces of China. - upcoming story on Bangladesh in our magazine (which makes me think I should also look at logistics companies)

3. Its already happening. Cheap Chinese cellphones and cars already flood the markets in Africa, Latin America and the Middle-east. It is only going to grow to other sectors. Not to mention China is used as a manufacturing base for most foreign electronics products which is easing the technology transfer.

4. The Chinese government's push for commodities in developing countries has widely opened up these markets to Chinese merchants, as well as produced new wealth in the areas to be used to buy Chinese goods. - the book China Safari deals with this well

Besides medical devices, electronics and autos, every greentech person I've spoken too has said that China is going to inevitably take a part in bringing down the cost of clean technologies, or "scaling up" said technologies, though such a movement has thus far been held back due to concerns about IP protection. I still hold on to my firm belief in agritech, which in china benefits from the government's concern about food safety, and a general lack of intellectual property enforcement.

The good prediction: Over the next 10 years, medical technology, communication infrastructure, green technology, and bio-engineered foodstuff will drastically reduce in price, bringing large net benefits for developing markets which are building their communication, medical, energy, and food infrastructure.

The bad prediction: Car ownership will skyrocket in developing markets, possibly contributing more problems than green tech contributes solutions (unless something exciting happens with electric cars, which is a possibility). China starts competing more directly with Western core-competencies, creating a tense trade atmosphere. Trampling of intellectual property laws will contribute a lot to this.

I'm betting that's the story of the next decade.

Climate change and the forgotten India

Journalists in China, often facing quixotic battles with censors or ignorant editors, often are slightly too eager to jump on to the China vs. US, G2, bi-polar world narrative, both on the positive and negative side, often because you're given a good share of talking points and its hard to cover more than one country at a time.

So I want to suggest this rather exceptional article about India's place in the China-US standoff during the Copenhagen talks. Basically making the point that while we are all rather clear on China's intentions (keep growth up, and increase its diplomatic clout), and we all know the developed worlds intentions, though some may think them more machiavellian than others, the reason why India by and large sided with China both here and during the Doha negotiations is largely ignored, not to mention the overall way it has been undervalued both by developed nations and China as a source of potential economic and political cooperation.

This was clear in the way India approached a key Copenhagen sticking point – verification. India had been down this road before with the U.S.-India nuclear deal, where Washington's insistence on external verification was seen by some Indian strategists as undermining India's sovereignty and security and a potential excuse to impose costly sanctions.

India, which was also recently hit with restrictions on even the transit of its pharmaceuticals across Europe, is suspicious that the West will use climate as an excuse to put in place fresh trade barriers. New Delhi sees the proposed "binding verification" of emission cuts as a means for finding justifications for "green tariffs" and even for industrial espionage.

As a result, in Copenhagen external, binding emissions verification was a political non-starter for India. However, the United States continued to push for it, even after the conference ended. For example, according to senior White House Advisor David Axelrod's interpretation of the Copenhagen Accord, the United States would not only "review" the implementation of domestic actions by India and China but also "challenge" them if these goals were not met.

Censored: China in the Congo

I am currently working on finding a publishing place for some as of yet unpublished news about the Congo-China deal (though my contact in the Congo says its common knowledge over there). Until then I want to share the article I wrote about the deal that got censored. Its obviously rather positive, and I think the censor just didn't want to admit that Chinese trade for resources, so I probably could have dug a bit more deeply into the critical side of this story. But like the Zimbabwe situation I'm rather optimistic here (and my new piece of information makes me more optimistic that the Congo is getting a good deal, though it puts China's motivation into question).

The world's biggest opportunity or an institutional sinkhole?

Consultants are paid to be more negative than bankers. Which might explain the difference in opinion between Frontier Advisory's [CEO] Martyn Davies and Standard Bank's [China CEO] Craig Bond when talking about the Democractic Republic of Congo (DRC). “Any mining engineer or geologist that's been there says that if they'd known about the place 20 years ago they would have gone in and staked their claim,” says Bond. But Davies takes a different tact, “The DRC is an institutional sinkhole, [The President of the DRC, Joseph] Kabila is more the president of Kinshasa [DRC's capital] than the country as a whole.”

Nevertheless, what both men agree upon is that the DRC is an underdeveloped country with an amazing amount of mineral wealth beneath the surface, and in the words of Bond, “China is the only powerhouse that has the means and the balls to go in there.”

China's first large foray hit a snag right out of the gate though. In exchange for preferential mining rights over 6.8 million tons of copper and 420,000 tons of cobalt, the Chinese government offered the DRC, a USD 9.5 billion low-interest loan along with an agreement to build 8500km of roads and 3200km of rails, 30 hospitals, more than 100 health centers and two universities, as well as “countless” primary and secondary schools. Though the deal at first ran against the ire of the IMF, which had previously arranged debt forgiveness for the Congo, most analysts couldn't imagine a better deal for the country. The debt would be paid off purely through the profits of a newly founded USD 3 billion mining joint venture between the Congolese and Chinese states, and the JV would in turn begin the slow process of rebuilding the mining infrastructure. Legally Congolese citizens must make up 80% of the workforce on all projects.

Since then though, the financial crisis has come, and mineral prices have crashed, making it questionable whether the deal, as structured, can be repaid by the Congolese government. “On the ground, sentiment towards China has definitely soured of late due to China delaying/cancelling projects and some poor business practices by Chinese entrepreneurs,” says Bond. “My sense is that the relationship is still strong, and if China makes the right investments in the years ahead, then any ill will that has been created will be easily resolved.”

Bond openly refers to the area as a “really difficult operating environment,” but is optimistic that things are improving. Standard Bank has two universal banking centers, one in Kinshasa in the west, and one in the southern region where much of the mining is taking place. These two areas are the most peaceful parts of the country, with the northern and eastern borders still seeing occasional guerrilla battles, and central Congo suffering from disease and starvation. Between 2003, when the civil war officially ended, and 2008 the country averaged 45,000 deaths per month, half of which were children younger than five. The Congo is third to last on the human development index, only beaten by its northern neighbors Central African Republic, and Sierra Leone, also recovering from Civil War - though Zimbabwe has not provided information needed by compilers of the index since 2005.

More than anything, the country needs the infrastructure to get food and health supplies to its people. But its annual budget is only USD 1.3 billion, less than one seventh of the amount of money China is giving it to build, what amounts to a rather small amount of infrastructure for a country the size of Western Europe. The Congo is only spending USD 15 a person on health coverage, less than half of what is needed to pay for basics like immunizations and malaria-fighting mosquito nets. It has nowhere near the resources to build over 100 new clinics. “The Chinese banks are prepared to finance our 'Five Works' (water, electricity, education, health, and transport). For the first time in our history, the Congolese will really feel what all that copper, cobalt and nickel is good for,” said Kabila in a recent speech.

But with prices falling, and continuing violence in the east of the country, it is in no way certain that the deal will turn out optimal for the Chinese. Many privately run Chinese firms in the Congo have gone out of business as the commodities boom ended, and there have been reports of Chinese citizens even being murdered. “I think a place like the DRC is pretty high risk, but China has gotten into even more difficult places,” says Bond. “Angola was just an absolute nightmare when the Chinese went in, but they have prospered there.

“But if you look at all the countries with [good governments and good Chinese relations], like Tanzania, Uganda and the DRC, we see all these schools going up, we see new airports, we see new railway lines going to markets so farmers can bring their crops. And these are all being built by Chinese contractors.”

Censored: China dominates the textile markets

One of the things that I definitely could not print in my recent article on China-Africa trade is the dominance of Chinese textiles, and how no one ever in the world can compete with them (my censor told me I had the "wrong theory"). The particular points I discovered:

Mauritius' lost 25,000 textile industry jobs, when they opened the markets to Chinese textiles in 2005.

But Mauritius is getting huge investments in its textile manufacturers from Chinese companies, because the country has tariff free access to the US textile markets and large portions of Africa. (Mauritius is a tax haven, and is used as a portal for trade between Africa and Asia by many Chinese and Indian companies, it also has strong trading ties with Europe, where it sends 95% of its sugar, which is the country's main export)

South Africa has a ridiculous 40% tariff on Chinese textiles, and STILL isn't holding market share (though they are losing it to other people besides the Chinese), its generally assumed that their textile market will collapse if they sign a free trade agreement with China, though the economy would more than make up the difference in other manufacturing industries. According to one economist it would increase the overall value of South Africa’s manufacturing sector by USD 1.42 billion, due to improvements to the chemical, plastics and rubber industries among others.

China has very consciously cornered the market in textiles, which is what a country is supposed to do in a globalized society - pick a particular market which it has a comparative advantage in and specialize, trading for things other countries have a comparative advantage in. This annoys protectionists who bitch about lost low-wage jobs and set high tariffs, but China should be taking the high road here, not telling me I have the "wrong theory."

Why I voted for Hillary

Obama just released a paper detailing his positions on trade in depressing depth. And for those hoping that he'd back away from protectionism when in power it isn't looking like a good sign. From the NYT:

Mr. Obama’s annual trade report to Congress is similarly worrisome. It suggested opening a “discourse with the public” on whether the trade agreements awaiting ratification — with Colombia, South Korea and Panama — are a good idea. It committed the administration to “improving” the North American Free Trade Agreement, without saying how. And it poured cold water on efforts to restart the World Trade Organization’s round of international negotiations.

And Ron Kirk, Obama's trade representative has been quoted saying:

“that not all Americans are winning from it and that our trading partners are not always playing by the rules.”

Oh, and also that he doesn't like the South Korean free trade agreement.

From a China perspective this is all bad, particularly this bit:

Other provisions would reverse changes the Bush administration made to U.S. antidumping and countervailing laws in response to adverse rulings at the World Trade Organization and would bar the Commerce Department from granting "market economy" status to China without congressional approval.

The point is that one of the biggest drivers of world growth, increased efficiency through allocating labor where it is most easily done, i.e. growing globalization, is being taken off the table by politicians. Which is perhaps one of the reasons things like this are being said.