Month: November 2015

THE CHINESE ECONOMY? NOT ALL IT’S MADE OUT TO BE.

Slowly, even those most bearish about the Chinese economy are reverting to caution or scepticism. There has been economic growth, of course, but there has also been smoke and mirrors.

There are two main reasons why the size and strength of the economy has been overestimated. First, the official statistics have been wrong.

From about 2010, even official growth rates have been edging downwards, from about 10 to about 7 percent. But independent analysts, such as the Conference Board, Capital Economics and Lombard Street, have found that either growth has long been officially overstated and/or that the decline has been steeper than officially stated, down now to about 4 percent or less in annual growth. In a survey of American economists by the Wall Street Journal (11th of September), the overwhelming majority said they do not believe the official estimates accurately reflect the state of the economy.

Second, and more permanently, there are weaknesses in the economy itself that have not been easily visible and not recorded statistically. The government has stimulated economic activity by pouring in cheap credit and directing its enterprises to turn that credit into a stream of investments, some sound and some bad. The GDP statistics record all of the economic activity but do not adjust realistically for the burden of bad debt and investment.

Estimates by researchers at the Chinese National Development and Reform Commission, an official agency, suggest that near to half of the total investment in the Chinese economy in the years 2009 to 2013 (the period of post-2008-recession stimulus) were ‘ineffective.’ Their research also found that investment efficiency has fallen sharply in recent years, which means that the economy gets steadily less additional economic growth for every unit of additional investment, to the effect that annual growth in the relevant period corrected for ineffective investment would be 2 to 3 percentage points lower than in the official statistics.

If you dig holes in the ground and fill them up again, that’s economic activity without anything being produced. If you borrow money to build highways that are never used or apartments that are never lived in, that’s investment but not investment that creates real capital that is converted again into real consumption or further production.

It works like this: If an unnecessary airport it built, that’s economic activity. It creates demand for steel, concrete, glass and the like and jobs are created. This shows up as GDP in the statistics. But once the airport is there with little traffic, it becomes a drain on the economy. It has to be kept up and maintained and kept in service for little or no business, or at worst abandoned.

During the growth period, China has had a steady flow of such ineffective investments. That has notched up the GDP numbers to artificial levels. The numbers have not always been ‘incorrect’ but nor have they reflected real economic strength.

Part of the reason why measured economic growth has been falling recently, is that the burden of debt and ineffective investment has been accumulating and caught up with the real economy, and come to weight more heavily in the balance. The new figures are lower partly because real growth is down but partly also because the previous exaggerated figures are no longer statistically maintained.

Xi Jinping and his team announced early on in their tenure that they intended to restructure the economy to make it less investment-heavy and more consumption driven. However, the consensus among watchers of Chinese economic policy is that this reform programme is, at best, being taken forward hesitantly and at a low pace. In the best years, Chinese economic growth looked too good to be true. Well, we are now coming around to accepting that it wasn’t quite true. The new leadership early on seemed to be true modernisers, but that also looks too good to be true and there has been little of bold reform to be seen.

The Chinese economy is best understood as big and lumbering, rather than strong and nimble. It continues to churn on in its lumbering way as an economy that is impressive on the visible surface but with huge if less visible structural weaknesses under the surface. Of economic activity there is much, of economic strength less.

 

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NGOs IN CHINA

The Chinese party-state has a big problem on its plate. The STATE is dependent on NGOs in public administration. For example, almost all delivery of social services is now outsourced to organisations that are not directly a part of the state apparatus. But the PARTY is determined, as always, to be in control and sees NGOs as potential threats, rightly so from its perspective.

A contributing effort to squaring this circle is a draft law on the regulation of foreign NGOs which is now working its way through to becoming law. That may happen at next year’s People’s Congress, or earlier if the Standing Committee of the PC passes it, as could happen in December. A second draft was released in May for public comment. That elicited unexpectedly strong objections to some elements of the draft from both within China and abroad, including from business communities and from universities and research organisations. Observers are now eager to see what effect, if any, these objections will have in the final wording of the law.

The law will regulate what foreign organisations will be able to operate in China and what they can do. It is expected that the law will block foreign organisations from any operation in China unless they have a permanent presence in the form of an office there. For that purpose, it will need to register and get a permit. One issue of controversy is who will be in charge of registration. In the draft, this will come under the Ministry of Public Security and hence the police. That has been objected to and it seems the NGO community mostly wants the authority under the Ministry of Civil Affairs.

This is in part a matter of internal bureaucratic wrangling. The control faction no doubt favours the Ministry of Public Security over the ‘wets’ in Civil Affairs. And the Ministry of Public Security is no doubt in favour of itself in order to expand its turf and budget.

Another question is what organisations will be effected by the law. The reason business interests got involved is that they saw another potential layer of bureaucracy that businesses would have to deal with. The reason universities and research organisations got involved, is that they saw potential impediments to Chinese-overseas collaboration in teaching and research.

Yet another question is how stringent the rules of operation and the registration and reporting requirements will be, including the ability of Chinese organisation to receive foreign funding and of non-Chinese organisations to support Chinese groups financially. Chinese authorities became increasingly concerned over this after the riots and city occupations in Hong Kong last year, which they persuaded themselves were the work of, or stimulated by, foreign interests and agents.

Related is the question of Party presence in non-governmental organisations. Increasing reliance on NGOs for, say, the delivery of social services, represents a certain retreat of the state. The same can be said of the increasing space for private business following economic opening up. But what may be less noticed is that if the state has retreated in some areas, the Party has been extending its reach. The Party now has a presence of some kind in most businesses of any size, including foreign businesses, and is determined to also have a presence in non-business organisation.

The degree and kind of regulation of foreign NGOs is further complicated by the simultaneous preparation of a Charity Law, which has been in the works for years. This law will regulate the operations of charitable and philanthropic organisations, including foreign ones. It is possible, even likely, that the provisions of these two laws will contradict each other. For example, charity organisation registration may be the remit of Civil Affairs and NGO registration the remit of Public Security, while one and the same organisation may be both and NGO and a charity.

CHINA, DEMOCRACY, DICTATORSHIP

China is a dictatorship. Taiwan is a democracy.
Hence, the New York Times could observe a few days ago: “While Chinese commentary was resoundingly positive about Saturday’s meeting between president Xi Jinping of China and president Ma Ying-jeou of Taiwan, reactions in Taiwan was decidedly mixed.”
In a democracy, when the leader does something it gets debated. Out of debate comes wisdom. That’s a pretty strong case for democracy.

China sometimes looks unified, but it is the unity of open debate that is solid.

CHINA AND TERRORISM

I have been discussing elsewhere China and the response to ISIL-based terrorism. China has committed to international collaboration against terrorism, but with reservations and, says one observer, starting from a low base.

Should China be involved? I think we should expect that, and not only because it is in China’s interest narrowly. China wants to be a big player in the world and claims the right to respect. With rights come duties. Do the leaders see China as in some way a world leader and if so a leader that both claims rights and accepts responsibilities?

At the G20, they said “we sympathise” but they did not say “we sympathise and will help.”

During WWII, Franklin Roosevelt said of lend and lease, before the US had entered the war, that when your neighbour’s house is on fire you let them use your water hose without quibble.

Some have asked what China could do? One obvious answer is to use its formidable cyber capacity against ISIL’s building up its own cyber capacity, as we are being warned of today in London. The world is on fire. If the Chinese leaders wanted to, they have much to contribute to a collaborative effort to put it out.

Xi Jinping and the five-year plan

I was asked by Bloomberg News for a comment on the new Chinese five-year plan:

“It bears Xi Jinping’s fingerprints, as does everything else in the Chinese government now. He is the top man, not first among equals, just first. One-man rule is back in China,” said Stein Ringen, a professor of sociology and social policy at the University of Oxford. “This is Xi saying, ’I am in charge and I will continue to be in charge.’”

China in the South China Sea

The New York Times today publishes a video feature showing the Chinese building of an artificial island in Philippine sea territory and on that island an air and possibly naval base. All in the course of a year. It also shows that China and others, mainly the Philippines and Vietnam, are competing to establish themselves in contested territories in the South China Sea. The article is here.

This is a VERY DANGEROUS situation. The area has been tense for a long time but that tension has increased radically under the leadership of Xi Jinping. Iimmediately on taking up office, they ‘upgraded’ the Chinese position in the East and South China Seas to one of ‘core interest,’ a message that China will do as it wants in these areas and that there will be no settlements by mediation. That position is repeated on every opportunity, such as by the defence minister, Chang Wanquan, in an exchange with the US defence secretary Chuck Hagel in Beijing on the 8th of April 2014, the official policy being ‘no compromise, no concession, no treaty.’

Now China is doing as it wants, by force of ‘might is right,’ and has established itself as an aggressive and expansionist state, at least in its own neighborhood.