Chinese Box

The real Beijing consensus

As I said in my last post, many people with fancy degrees in political science have written about this before, which I am not responding to at this point (The Wikipedia entry touches on a few of these issues for those interested). I'm writing more about the misuse of the term "the Beijing consensus" in the Western press

Here is a definition thrown out in an article from Foreign Affairs just last February:

Many analysts attribute the country's economic success to its unconventional approach to economic policy -- a combination of mixed ownership, basic property rights, and heavy government intervention. Time magazine's former foreign editor, Joshua Cooper Ramo, has even given it a name: the Beijing consensus.

It's easy to see how this definition can be made into something of a straw-man. Heavy government intervention is rarely a good thing for economic development, and a country needs a lot more than basic property rights if its going to go anywhere on a development index. Time can throw this out as a definition, turn China into a socialistic bad guy, and then of course the US is proved right in the end.

 The definition though gets the Chinese economic miracle all wrong. A common difficulty with reporting on China, is that the most obvious things to report on - what large companies and the government are doing - are rarely what's important. The majority of China's employment and sustainable growth are all being done by private enterprises which are poorly regulated - in good and bad ways.

Chinese people have a saying for this usually used in reference to the southern Guangdong province:  "The mountain is high, and the emperor is far away," referring to the curious fact that the areas that are the primary drivers of employment and economic growth in China are also the areas that are far and away the least regulated (Check my Wenzhou article). When you get under the surface of the Chinese economy, one cannot help thinking that the Government mostly provides stability for a capitalistic free-for-all, while occasionally mucking up with the money it skims off the top.

Recently though, I've come to the conclusion that the Chinese government does something else quite well, in which its assisted by its extraordinarily high taxes and central command structure - it builds roads.

Not just roads, but railroads, ports, airports, mobile phone infrastructure, and (to a lesser degree) broadband infrastructure. A repeated theme in the African development literature I was reading prior to going to Egypt, and during my meetings while I was there, was that the major problem that Africa has isn't producing things, but getting those things to market.

I don't think this is an issue with authoritarianism. Central authority helps, as has been repeatedly pointed out in comparisons between infrastructure heavy China and infrastructure free India, but America went through its own Infrastructure boom between 1870 and 1940, without popular consequences. The key to development is rather a strong governmental conviction that infrastructure is their key responsibility.

This would all be academic if it wasn't for the fact that the American government seems to have lost its conviction that this is its responsibility. Lack of government involvement is part of the reason why we are falling behind in broadband rates, and our transport systems are all increasingly inefficient.

China's not a model of development, but they've done one thing completely right, and people should pay attention.

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.

If money is unlimited then why not waste it?

A recent post on the Wall Street Journal's blog points out some of the bizarre things you do if you think you have a "nearly unlimited amount of money"

On March 13, or the second-to-last day of China’s annual legislative session, the ministry gave the go-ahead for the magnetic levitation railway project that promises to cut the current one-hour journey by half when the fancy trains eventually hit the tracks.

the Railway Ministry has already embarked on a competing but much more environmentally-friendly high-speed train project, which upon targeted completion in October will reduce the twin-city journey to 40 minutes, just 10 minutes shy of its ambitious maglev counterpart. The route is also almost identical.

This month we're publishing my interview with Jing Ulrich who happily proclaims that China has a "nearly unlimited amount of money," a very common belief among the analyst community, as it seems to be backed up by published numbers, but there are a number of reasons this belief makes me antsy.

1) Creating two competing high speed train lines the faster of which costs RMB 40 billion (USD 5.86 billion) is stupid.

2) The Beijing to Tianjin high speed train is loss making.

"When constructing the Beijing-Tianjin railway, investment per kilometer reached RMB 180 million," he adds. "Currently the income of the railway can't yet cover the operation cost and interest on loans. Debt risk has become the biggest problem facing the construction of high speed railways in China."

3) The Ministry of Railways is nearing bankruptcy:

The Ministry of Railways has been spending record amounts of money, issuing debt valued at RMB 10 billion in 2009 — the largest single issuance in China that year — and RMB 8 billion in 2008, another record. But RMB 2 trillion is still needed in the next three years. "The total debt will reach RMB 2.5 trillion by 2012, which is a very big number," says Adfaith's Wang. 

If Chinese travelers aren't interested enough to pay the high ticket price, the companies could enter a debt spiral. "If most passengers won't take the high speed railway because of its expensive price, then income won't make up the cost of debt," said Zhao Jian, an economics professor of Beijing Jiaotong University in an interview on CCTV in September 2009. 

So yea, I think there has to at some point be an end to the conviction that the government has unlimited amounts of money. But what do I know, I have no fancy economic degrees.

March Issue of China International Business

Wang Jing and Mo Mo - My Interview with two dancing girls in Wenzhou. I'm really quite happy with this article, and I might be publishing a longer version of it on the blog - they had a fairly in depth knowledge of the bar's finances, which had to be cut because of length.

The Porn Identity - Details about the country's crack down on "online porn" by which is meant "the internet." The entire article is worth reading just for the one paragraph describing all the bureaucratic entities involved.

Clear the Tracks - On China's high speed trains. I've long had the sneaking suspicion that all those analysts who say that China has a nearly unlimited amount of money are being overly optimistic. This is the first place where I've seen concrete evidence that the government doesn't have enough money to pay for its infrastructure drive.