Shifting Economic Tectonic Plates

Lots of thought-provoking articles on China today.

From The Asia Times:

Cartoon from Truthdig.com

In the midst of the worst economic crisis since the Great Depression, a new world order is emerging, with its center gravitating towards China. The statistics speak for themselves. The International Monetary Fund (IMF) predicts the world's gross domestic product (GDP) will shrink by an alarming 1.3% this year. Yet, defying this global trend, China expects an annual economic growth rate of 6.5% to 8.5%.

During the first quarter of 2009, the world's leading stock markets combined fell by 4.5%. In contrast, the Shanghai stock exchange index leapt by 38%. In March, car sales in China hit a record 1.1 million, surpassing sales in the US for the third month in a row.

"Despite its severe impact on China's economy, the current financial crisis also creates opportunity for the country," said Chinese President Hu Jintao. It can be argued that the present fiscal tsunami has, in fact, provided China with a chance to discard its pioneering reformer's leading guideline. "Hide your capability and bide your time" was the way former head of the communist party Deng Xiaoping once put it. No longer.

Recognizing that its time has indeed come, Beijing has decided to play an active, interventionist role in the international financial arena. Backed by China's US$2 trillion in foreign exchange reserves, its industrialists have gone on a global buying spree in Africa and Latin America, in neighboring Russia and in Kazakhstan, to lock up future energy supplies for its economy. At home, the government is investing heavily not only in major infrastructure, but also in its much neglected social safety net, its healthcare system, and long overlooked rural development projects - partly to bridge the increasingly wide gap between rural and urban living standards.

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All signs are that Washington will be unable to restore the status quo ante after the present "great recession" has finally given way to recovery. In the coming years, its leaders will have to face reality and concede, however reluctantly, that the economic tectonic plates are shifting - and that it is losing financial power to the thriving regions of the Earth, the foremost of which is China.

Read the Whole Article

This whole lengthy article is worth reading. It goes through the list of reasons why China is prepared to fight the economic crisis: low urban unemployment, high savings rate, state-controlled banking system, energy expansion and security, and the rise of its currency, the yuan.

While some of the arguments the article makes can be debated, it makes compelling arguments for why, on a whole, China is going to be much stronger when the world economy "recovers."

There is another article out today, from the Financial Times, that discusses the eventual rise of China and why it will establish itself at the top of the post-crisis world. This article focuses more on financial matters:

Emerging economies such as China and Russia are calling for alternatives to the dollar as a reserve currency. The trigger is the Federal Reserve’s liberal policy of expanding the money supply to prop up America’s banking system and its over-indebted households. Because the magnitude of the bad assets within the banking system and the excess leverage of its households are potentially huge, the Fed may be forced into printing dollars massively, which would eventually trigger high inflation or even hyper-inflation and cause great damage to countries that hold dollar assets in their foreign exchange reserves.

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Ethnic Chinese, including those in the mainland, Hong Kong, Taiwan and overseas, may account for half of the foreign holdings of dollar assets. You have to check the asset allocations of wealthy ethnic Chinese to understand the dollar’s unique status.

The Chinese love affair with the dollar began in the 1940s when it held its value while the Chinese currency depreciated massively. Memory is long when it comes to currency credibility. The Chinese renminbi remains a closed currency and is not yet a credible vehicle for wealth storage. Also, wealthy ethnic Chinese tend to send their children to the US for education. They treat the dollar as their primary currency.

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America’s policy is pushing China towards developing an alternative financial system. For the past two decades China’s entry into the global economy rested on making cheap labour available to multi-nationals and pegging the renminbi to the dollar. The dollar peg allowed China to leverage the US financial system for its international needs, while domestic finance remained state-controlled to redistribute prosperity from the coast to interior provinces. This dual approach has worked remarkably well. China could have its cake and eat it too. Of course, the global credit bubble was what allowed China’s dual approach to be effective; its inefficiency was masked by bubble-generated global demand.

China is aware that it must become independent from the dollar at some point. Its recent decision to turn Shanghai into a financial centre by 2020 reflects China’s anxiety over relying on the dollar system. The year 2020 seems remote, and the US will not pay attention to something so distant. However, if global stagflation takes hold, as I expect it to, it will force China to accelerate its reforms to float its currency and create a single, independent and market-based financial system. When that happens, the dollar will collapse.

Read On

I found this article's discussion of Chinese peoples' love of the US Dollar to be interesting. I can understand that when the trillions of dollars that are now flooding the US market in the not too-distant future will cause debilitating inflation and, thus, turn off the Chinese, whose massive savings in US dollars will be rendered worthless.

It only makes sense that the Chinese are itching to get the world's financial systems working in the "Chinese way."

I'm going to feature one more article today, an editorial from The Los Angeles Times, that talks about the "Chinese way" and why the Chinese are going to run into a whole different set of problems when it is their turn to be leaders in the twenty-first century:

Which country -- the United States or China -- will make the 21st century its own?

When President Obama recently called for American young people "to be makers of things" and focus on subjects such as science and engineering, it was partly a nod to China's rapid growth. Had he lived, taught and consulted in China for the last 33 months, as I have, he might have urged American students first to follow his example and study the liberal arts. Only technical knowledge complemented by well-honed critical and creative thinking skills can help us regain our innovative edge. China's traditional lack of emphasis on teaching these skills could undermine its efforts to develop its own innovative economy.

I once challenged my Chinese MBA students to brainstorm "two-hour business plans." I divided them into six groups, gave them detailed instructions and an example: a restaurant chain. The more original their idea, the better, I stressed -- and we'd vote for a prize winner. The word "prize" energized the room. Laptops flew open. Fingers pounded. Voices roared. Packs of cookies were ripped open and shared. Not a single person text-messaged. I'd touched a nerve.

In the end, five of the six groups presented plans for, you guessed it, restaurant chains. The sixth proposed a catering service. Why risk a unique solution when the instructor has let it slip he likes the food business?

Though I admitted the time limit had been difficult, I expressed my disappointment and reiterated what I had expected -- originality -- and why. But they'd been so enthusiastic that I couldn't deny them a winner. After a polite discussion of the merits of each idea, the Haagen-Dazs gift certificates were awarded, but not without controversy. Runners-up later complained that an identical concept had been featured on CCTV the night before.

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Ultimately for China, becoming a major world innovator -- and by extension, a robust economic power -- is not just about setting up partnerships with top Western universities or roping off elites and telling them to think creatively. It's about establishing an intellectually rich learning environment for young minds. It's about harnessing the same inventive energy of the street markets and small-time entrepreneurs and putting it in the schools.

The Chinese don't need expensive free-agent scientists. They need a new farm system -- and about 10 million liberal arts professors.

Read On

Just like the world has faced problems because of the way the US has run itself, the world will surely face problems because of the issues China has. As I've discussed a few times recently, China's education system has some very serious problems. The Chinese system just has not figured out how to get its students to think creatively.

From the articles I've referenced today though, the conventional wisdom is saying that the twenty-first century will be China's. At this point in time, it's pretty hard for me to imagine a world going forward that doesn't have China on top.

In terms of people, land size, location, and development, China rising to the top of the world's pecking order seems to be a pretty natural move to me. It's the most populated nation on Earth. It's the heart of Asia. It has tons of natural resources. It's infrastructure is finally reaching the point where it can really take off.

Indeed, it's almost impossible for China to not overtake the US at some point in the coming century in terms of economic prowess, influence, and everything else that goes along with being a superpower.

China is not quite a "super-power" yet. But if one thinks that it's more than a decade or two from being one (or the one), I don't think that that person is looking at the facts. And for the US or any other countries that don't like China's rising, I don't see how the Middle Kingdom can be stopped.

The Male Pill

The Chinese are making great strides in contraception equality.

From The Independent:

Scientists believe they are one step closer to developing an effective male contraceptive jab after successfully carrying out the largest feasibility study to date.

Researchers at the National Research for Family Planning in Beijing injected 1,000 healthy, fertile male patients with a testosterone-based jab over a two-year period and found only 1 per cent went on to father a child. The men were all aged between 20 and 45 and had fathered at least one child in the two years before the testing began. They were also all involved with healthy female partners between the ages of 18 and 38 who had no reproductive problems of their own.

The trial was the largest effectiveness study of a testosterone-based male contraceptive ever undertaken. At the end of the two-year period only one in 100 men had fathered a child. No contraception is 100 per cent effective – 1 to 2 per cent of women still become pregnant while they are on the Pill – but the jab's success rate puts it on a par with the effectiveness of the female Pill or injections.

Dr Yi-Qun Gu, one of the researchers involved in the testing, said: "For couples who cannot or prefer not to use only female-oriented contraception, options have been limited to vasectomy, condom and withdrawal. Our study shows a male hormonal contraceptive regimen may be a potential, novel and workable alternative."

Read On

It's easy to understand why China would be interested in this new area of research: the one child policy. Although there are controversy and drawbacks to the program, the Chinese are committed to it.

I have to imagine that making the "pill" available to men, whether in the form of a pill or an injection, would make the whole endeavor of birth prevention more effective. There can be problems surrounding womens' health and taking the pill. If some women are unwilling or unable to take it, that presents problems in preventing babies. Having the pill only available to half the population certainly limits its overall effectiveness.

And in a way, I suppose a male pill helps balance out the equality in this whole realm. Women are the ones who have the children, so having men be able to bite the bullet on the contraceptive aspect seems reasonable to me.

I'm not sure how long this pill is going to take before it is safe to take. But I'm sure the Chinese will rush it along so that they can begin forcing their men take it.

Sichuan Baby Boom

China is coming up on a painful anniversary in a few days. With that day comes a wave of newly-born babies.

From The Los Angeles Times:

May 3, 2009 Reporting from Mianzhu, China -- Ten months and 25 days after he buried his only child, Luo Gang became a father again at a makeshift hospital cobbled out of aluminum trailers.

For weeks after his 11-year-old daughter was killed in last May's massive earthquake here in Sichuan province, his wife cried so uncontrollably that her family feared she might be having a breakdown.

"If you don't have another baby, my sister will be grieving her whole life," Luo said his brother-in-law advised him.

Luo said he was shocked by the tactlessness of the suggestion.

"We were in a bad way after the earthquake. My wife couldn't stop crying," recalled Luo, a 35-year-old welder, his eyes sunken deep with fatigue after a long night waiting for his wife to give birth to their son. He spoke outside the hospital room where his perfect little baby, born a few hours before, lay wrapped in bunting in a metal bassinet next to his mother, both sleeping contentedly.

"Now, we are better. A new life has been created to take the place of the one that was taken away."

Read On

This article highlights a couple aspects why this tragedy is particularly hard for the Sichuanese:

Sichuan has long been a battleground over the policy, with the government strictly enforcing the one-child limit. (In many other parts of China, farmers can have a second child if the first is a girl, but not in Sichuan.)

Among Sichuan's predominantly rural population, most people have no retirement plans other than the long-ingrained Chinese tradition that children care for their elders.

"The earthquake very much highlights the vulnerability of the one-child policy," said Gu Baochang, a professor of demographics at People's University in Beijing.

"These people are not covered by any social security program. They rely completely on their children for elderly support. And it's not just money. Once they are old, without children they have no place in society."

The parents who now have the opportunity to remake their lives with new children must have such conflicting emotions.

How sad the affected areas of Sichuan must be.

There are so many circumstances about China and Sichuan Province that made last year's earthquake more devastating than it would've been elsewhere. It really is hard to see how many of the people whose lives were destroyed last year will be able to pick up the pieces and move forward.

I'll surely be highlighting and talking about more articles relating to last year's earthquake as May 12th approaches.

Photos of the Week - Xi'an's Westernization

Here are a few pictures I took of Xi'an's development in the Spring of 2007:


Old man collecting bottles and Starbucks. Nice contrast here.


Walmart. Those little stores are, in fact, still there. They haven't been put out of business by big bad Walmart... yet.


A KFC and the Big Wild Goose Pagoda. The Big Wild Goose Pagoda was built in 652AD. The KFC about 2005.

Xi'an is changing really quickly. It's a pretty amazing thing to witness.

An Admissions Officer's Dream

With the development of China's economy, American universities are seeing a massive influx of applications from Chinese students.

From The Washington Post:

It's an admissions officer's dream: ever-growing stacks of applications from students with outstanding test scores, terrific grades and rigorous academic preparation. That's the pleasant prospect faced by the University of Virginia and some other U.S. colleges, which are receiving a surging number of applications from China.

"It's this perfect, beautiful island of people who are immensely motivated, going to great high schools," marveled Parke Muth, director of international admission at U-Va.

A decade ago, 17 Chinese students applied to U-Va. Three years ago, 117 did. This year, the number was more than 800 out of almost 22,000 candidates -- so many that admissions officers had to devise new ways to select from the pool of strong applicants.

Chinese students' growing interest in U-Va. is partly a result of the school's outreach and strong reputation. But even some schools that don't recruit in China have seen a rapid increase in applicants.

Until fall 2007, the number of Chinese undergraduates in the United States had held steady for years, at about 9,000, according to the Institute of International Education, which promotes study abroad. But that year, it jumped to more than 16,000.

Experts say China's increasing wealth, fewer delays in obtaining visas and technology that makes it easier for Chinese students to learn about U.S. schools have helped fuel the boom. It shows no sign of letting up.

Read On

Globalization has made life easier for a lot of Americans. It's opened up doors for American companies abroad and allowed its citizens to buy products at bargain-basement prices. While there have certainly been drawbacks, Americans, on the whole, have had at least a fairly positive view of how globalization has affected their lives.

With globalization and its opportunities are a whole new set of challenges though.

I talk with Chinese students all the time. A huge percentage of them tell me that they want to go to the US to study. Chinese universities have very deep and significant problems. It makes sense that China's best students with the means to go abroad would want to get out of its university system.

A few years ago, going to America to study would've been a pipe dream for nearly everyone in China. But as China rises and more and more of its families have the means to pay for such an endeavor, this dream will certainly become more of a reality for Chinese students.

This increased competition abroad from Chinese students at American universities is one of the things that comes along with a more open and balanced world. It will make things more stressful for American students.

But America, being a largely meritocratic country, should embrace the idea that its universities should be filled with the best students. Even if those students come from China.