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| China-Japan-Koreas |
| The China of our imagination bears no resemblance to reality. |
| 2005-05-23 |
| Beginning with Marco Polo's sojourn in China in the late 13th century, there have been two Chinas — the China of the imagination, as interpreted by Westerners, and the real China as experienced by the Chinese. EFL The financial system is hard to measure because the informal lending market is huge, a result of deformities that make it difficult for anyone other than an unprofitable state-owned enterprise to obtain credit. Many Chinese look at the stock market as a kind of casino, where only insiders make money. Nowhere else in world financial history has a stock market shown such poor returns, with an economy growing at an average annual rate of 10%. Chinese middle-class consumers will force democracy to take root in China. The assumption is that along with their Big Macs and lattes, the Chinese are imbibing the precepts of democracy and free elections. The common assumption among Westerners is that economic prosperity will result in a middle class demanding a political structure that would protect their new wealth. There is not much evidence to support this, other than a proliferation of lawsuits. According to Elizabeth Economy of the Council for Foreign Relations, "So far...the middle class has not organized in any meaningful way to push for wholesale political change." Rest at link...it's tonic to those who think of China as an unstoppable juggernaut. They've got problems, big problems. Floating the yuan would make those problems worse. Despite the fact that this was published in the LA Times, it contains a lot of truth. The writer's website, chinaonline.com |
| Posted by:gromky |
| #6 (And yes, I've been meaning to ask you about that for the past month or so...) |
| Posted by: Phil Fraering 2005-05-23 18:28 |
#5
Well, I've heard speculation to the effect that they're heavily subsidizing their steel industry or industries where the main cost determinant is the raw price of steel. Any comments? | |
| Posted by: Phil Fraering 2005-05-23 18:03 |
| #4 lex: it's still rickety due to the very high potential for another Japanese-style bubble caused by de facto defaults on commercial loan portfolios and the resulting bank illiquidity. Always a major danger in opaque Asian economies, and especially so in one characterized by massive corruption and economic dislocation such as China's. The potential for defaults is an issue, but this is less due to corruption than to the state-owned banks being used to prop up state-owned enterprises before they are phased out on a piecemeal basis. If you look at Chinese valuations, they are far from the astronomical numbers recorded during the Japanese bubble. Chinese real estate is cheap compared to say, Indonesian real estate, even though both countries have roughly comparable GDP per capita. Another point is that foreign manufacturers don't benefit from real estate bubbles, since they raise the cost of doing business. If Chinese real estate is so unaffordable, why are they relocating plants in China, where the real estate should, according to this theory, more expensive than in comparable settings in equally low-wage East Asian countries than Indonesia and the Philippines? As to corruption and economic dislocation, take a look at Indonesia and the Philippines, both countries with similar wages to China, and therefore peer competitors in the light manufacturing sector (shoes, clothing, toys, etc). Corruption in China is a real problem, but it is either less of a problem or is offset by other virtues that its competitors lack, because subcontractors (for Tommy Hilfiger, Nike, Ralph Lauren and so on) are not building new physical plant in Indonesia and the Philippines, they are doing it in China. In some cases, they are relocating facilities from those countries to China. |
| Posted by: Zhang Fei 2005-05-23 12:49 |
| #3 Good points, ZF, but the banking sector no less than the capital markets sector suffers from a lack of transparency and oversight. Asian banks are notoriously opaque, and their loan portfolios often carry an extremely large amount of junk that will never be repaid. So even if China's not susceptible to financial crashes caused by panicky outflows of "hot" foreign investment, it's still rickety due to the very high potential for another Japanese-style bubble caused by de facto defaults on commercial loan portfolios and the resulting bank illiquidity. Always a major danger in opaque Asian economies, and especially so in one characterized by massive corruption and economic dislocation such as China's. |
| Posted by: thibaud (aka lex) 2005-05-23 12:33 |
| #2 Bottom line here is that China's problems are not unique to China, and won't prevent China from continuing to grow rapidly, perhaps closing the gap with countries like Malaysia and Thailand. (Malaysia's nominal* (exchange rate) GDP per capita was about $4,000 in 2002, compared to China's number of less than $1,000). There's a Malthusian flavor about some of these doom-and-gloom pronouncements that views large populations as a negative. (Contrary to liberal and Communist assumptions, governments do not feed the populace, it is the populace that feeds the government). The reality is that China's population density is *lower* than Western Europe's, and certainly far lower than most of East and South Asia. * I never use purchasing power parity** (PPP) numbers, which tend to exaggerate a country's productive capacity. Besides, you can't buy steel in the world markets with PPP dollars. ** The PPP methology adjusts for cost-of-living differences between different countries. |
| Posted by: Zhang Fei 2005-05-23 10:37 |
| #1 Article: Many Chinese look at the stock market as a kind of casino, where only insiders make money. Nowhere else in world financial history has a stock market shown such poor returns, with an economy growing at an average annual rate of 10%. The first sentence is true, but not remarkable for East Asia, and much of the world outside the US. This is why equity market participation outside America is so low, as a proportion of total savings. Neither the casino-like nature of the stock market nor the low rate of investment in the stock market (relative to total savings) has prevented other East Asian countries from developing rapidly. The reason? These savings did not get stuffed under the mattress - they got deposited into banks via savings and time deposit accounts, allowing for a very cheap source of funding for banks and consequently, domestic companies that borrowed from the banks. The second statement is demonstrably false. Many of East Asia's stock markets are below where they were over a decade ago, despite growth rates in the high single digits. Stock markets have little correlation to do with the economy, and tend to reflect the liquidity (credit) available in the economy rather than actual economic growth. Why are all these stock markets stuck in a kind of malaise? Because the speculative component is huge - in the Far East, people who put money into the stock markets tend to be like bettors at the races, there isn't the steady flow of money that the US market gets from regular investments in mutual funds, pension funds, 401(k)'s and 403(b)'s.. |
| Posted by: Zhang Fei 2005-05-23 10:16 |