China Challenges

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Only 36% of Recent Chinese Grads Have Jobs

The China Perspective notes:

Only 35.6% of recent graduates who finished university in mid 2008 have found a job, a survey of 1,000 in major cities by the Social Survey Institute of China has shown. This was way too far from the 70% employment for fresh graduates target set by China's human resource and social security authority. Of the employed, 27% were satisfied with their jobs. Most cited compensation and personal network as reasons they thought their jobs were not good. 71% of all respondents pictured a bleak outlook for the labor market and 56% were very anxious about their careers. Around 6.1 million university students are to graduate this year.

Source: http://money.msn.hexun.com/2009-02-24/114920561.html

Understanding the US Trade Deficit

Don Boudreaux explains the US trade deficit: 

Earlier today I heard Washington Post columnist Robert Samuelson interviewed on WTOP radio (a local all-news/sports/weather channel in DC).  Samuelson is usually pretty good, but he -- like so many others -- fails to understand the trade deficit.  He said in this interview (as he says sometimes in his columns) that the trade deficit "must be financed."

That's simply not so.

If Mr. Toyota sells $1 million worth of cars to Americans in 2009, spends $600,000 buying ("current") goods and services -- exports -- from Americans, and stuffs the remaining $400,000 into his mattress, the U.S. trade deficit rises by $400,000 but there's no more "financing" of this amount going on than if Americans had spent that $1 million buying, not Mr. Toyota's product, but Mr. Chrysler's and Mr. Chrysler had used the proceeds exactly as Mr. Toyota did.  The only difference between these two scenarios is that, in the first, the U.S. trade deficit rises while in the second it does not rise.

Ditto if, say, Mr. Toyota used the $400,000 to buy shares of General Electric and 3M -- or if he used the $400,000 to buy real-estate in Ohio.

Only if Mr. Toyota lends the $400,000 to Americans is there any financing going on, but even here there isn't necessarily a problem.  Is it worse for Entrepreneur Jones in Jacksonville to launch his firm with money borrowed from Mr. Toyota than with money borrowed from, say, Bill Gates?  In both cases there's debt.  But economically it matters not one whit which government issues the creditor's passport.  If the borrowed funds are used wisely, they serve a useful purpose.  Period.  End of story.

Taiwan, China Moving Toward a Free Trade Deal

Washington Post reports:

Taiwan and China are negotiating a wide-ranging free-trade agreement that represents an important step toward the possibility of unification of the longtime adversaries.

The Comprehensive Economic Cooperation Agreement would allow the free flow of goods, services and capital across the Taiwan Strait at a time when the economies of the mainland and the democratic self-ruled island are increasingly interdependent. While Taiwanese groups have tried to play down the political implications of the economic pact, those on the mainland are already talking about the eventual union of the two.

Students Believe "Trying" Should Result in "Passing"

As a business teacher in Asia for the past ten years, I really like this post from the WSJ Best of the Web blog:

The New York Times has an amusing piece about the frustrations of college professors:

Prof. Marshall Grossman has come to expect complaints whenever he returns graded papers in his English classes at the University of Maryland.

"Many students come in with the conviction that they've worked hard and deserve a higher mark," Professor Grossman said. "Some assert that they have never gotten a grade as low as this before."

He attributes those complaints to his students' sense of entitlement.

Another prof, Ellen Greenberger of the University of California at Irvine, has published a study called "Self-Entitled College Students":

Nearly two-thirds of the students surveyed said that if they explained to a professor that they were trying hard, that should be taken into account in their grade.

Jason Greenwood, a senior kinesiology major at the University of Maryland echoed that view.

"I think putting in a lot of effort should merit a high grade," Mr. Greenwood said. "What else is there really than the effort that you put in?"

"If you put in all the effort you have and get a C, what is the point?" he added. "If someone goes to every class and reads every chapter in the book and does everything the teacher asks of them and more, then they should be getting an A like their effort deserves. If your maximum effort can only be average in a teacher's mind, then something is wrong."

Anyone who works for a living is immediately struck by the contrast between this attitude and the real world. When you hire someone to do a job, you look for results, not "effort." Someone who works effectively and effortlessly is much more valued than someone who tries really hard and produces mediocre results. Why should schoolwork be any different?

AmCham: China remained a bright spot for U.S. companies in 2008

At Businessweek, Harold Sirkin writes:

Despite the tough times we're experiencing, the U.S. business community's enthusiasm for the world's most populous nation remains unshaken. For example, a survey released in mid-December 2008 by the 4,000-member American Chamber of Commerce in Shanghai indicated that "China remained a bright spot for U.S. companies in 2008," with 78% of respondents expecting increased revenues over 2007. More than 70% of respondents reported achieving profitable operations, 77% of those realizing increased profits, and 60% said that "accessing China's domestic market" was the top priority for their company. In our frequent conversations with Chinese and American CEOs, we hear these sentiments over and over.

What is most significant about the China-U.S. relationship isn't the amount of trade between the two countries. It's that countless American companies are now doing business in China, and dozens of Chinese companies are making plans to do business here in the U.S. The U.S. firms are not just manufacturing in China or sourcing from China but have long-term business plans that recognize a significant portion of their future business will come from China's burgeoning middle class.

China bans fake medical experts from TV

The China Economic Review says:

China has banned actors and "non-accredited personnel" from playing medical experts in television advertisements after online outrage over the practice, Reuters reported, citing state media. The new rules follow a campaign by one Chinese internet user that exposed 12 bogus medical experts selling medicine under various names on television stations in eastern Shandong province. Any further breaches of this ruling would lead to the revocation of the offending companies' advertising licenses and a temporary suspension of sales for their medicinal products. The State Administration of Radio Film and Television has attempted to clean up China's advertising industry by imposing advertising bans on companies whose drugs and health products do not meet safety standards.

Beijing criticizes 'Buy American' provisions

CER notes:

The state-run Xinhua news agency sharply criticized measures in the US government's stimulus package requiring the purchase of US-made materials and products, Reuters reported. "History and economic theory show that in facing a financial crisis, trade protectionism is not a way out, but rather could become just the poison that worsens global economic hardships," said the Xinhua editorial. The "Buy American" provisions of the US government's US$787 billion stimulus plan require public works projects funded by the stimulus to use only US-made goods, including commodities like iron and steel. "Trade protectionism will also cause catastrophic effects to some poor countries, making the current financial crisis one of a humanitarian crisis as well," Xinhua said.

Ad - Earn an MBA Certificate from Shanghai's Jiao Tong University in 2009!

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Classes are held in Puxi on Kaixuan Road, near Panyu Road. See English map here.

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In Defense of a Stable Yuan

WSJ:

Contrary to widely held beliefs in both China and the U.S., a discrete appreciation of the yuan against the dollar would not reduce China's trade surplus or America's trade deficit. A discrete appreciation of the yuan could have the perverse effect of causing investment in China to slump, as firms see China becoming a higher-cost area. This could drive up China's already high net savings rate, thus increasing its trade surplus with the U.S.

Mr. Geithner's accusations notwithstanding, China has other reasons for wanting to keep the yuan-dollar rate stable. First, as long as the fixed rate is credible -- as it was between 1995 and 2004 at 8.28 yuan per dollar -- it serves as an effective monetary anchor for China's internal price level. After inflation had exploded to over 20% per year in 1993-95, the fixed-rate anchor helped China regain price-level stability. Second, Beijing's four trillion yuan ($586 billion) fiscal stimulus package, launched in November and likely to grow even larger, would be most effective if China's exchange rate is kept stable -- as it has been since last July.

So what should Beijing be doing now? In order to buoy China's and the world economy while further correcting the festering trade imbalance between China and the U.S., fiscal expansion in surplus-saving countries like China is desperately needed. Because massive U.S. fiscal expansion (as it appears we will soon have) would enlarge the U.S. trade deficit, better to convince the Chinese that they should do most of the fiscal stimulating.

Losing Faith in Obama

WSJ:

President Obama and Democrats like to speak about "restoring" America's reputation abroad. In one key respect -- trade policy -- they're already veering off track. This might be good short-term domestic politics in Washington. But it will come at a price.

Meanwhile, pundits on Wall Street say:

Obviously the Geithner plan disappointed the Street.

It seems that some investors are losing faith in Obama. There's now conjecture as to whether the stimulus will be helpful or harmful, muses Karen Finerman. The idea that the stimulus could be harmful is a fairly new sentiment in this market.

The Offshoring of Services to China During a Downturn

Thomas Meyer writes:

A lot of attention has focused on China recently. China is already a leading offshore destination with regard to high-tech manufacturing products, such as consumer electronics, but it is not yet prominent for IT or business services. This is about to change, if the Chinese government has its way.

In the current economic climate, IT offshoring faces several challenges. Financial services institutions emerged as main clients. For instance, more than 40 percent of Indian IT and business services exports are delivered to banks and other financial companies. This exposes a key vulnerability. Financial institutions in Europe and the US have reduced their outsourcing activities sharply in the wake of the financial crisis. By one account, they have cut the volume of newly awarded IT outsourcing contracts by nearly 30 percent in 2008 compared to the previous year.

Rising unemployment compounds the problem of weakening demand because it plays to protectionist instincts. Creating jobs overseas during a deep recession does not go down well with the public. This matters all the more because so many banks are being propped up with public money. Any new major offshoring contract could create a public backlash that would undermine the government’s ability to defend further assistance to the financial sector. Already the US stimulus package contains a provision that software required for medical-services modernization be produced in the US. Many companies, not only in the financial sector, sense this and may put new offshoring activities on hold for a while.

Moreover, the challenge to India’s IT services has deepened with an accounting swindle at one of India’s large IT providers. Since data processing and back-office work relies on trustworthiness of the partner more than any other service the scandal has raised broader concerns over the general reliability of offshore providers working on crucial applications and handling sensitive data.

'Buy American' provision worries Caterpillar

Max Showalter writes:

LAFYAETTE, Ind. -- The "Buy American" provision contained in the federal economic stimulus package has become a political football that Caterpillar Inc. would like to see kicked completely out of the legislation.

Without a change, the world's largest mining and construction equipment manufacturer fears its operations -- including the Large Engine Center in Lafayette -- could be severely and negatively impacted.

"Our position is that, while 'Buy American' may sound good, in fact we're very concerned that if this stimulus legislation contains the 'Buy American' provision, other nations and regions of the world would follow our lead and pass similar provisions," said spokesman Jim Dugan.

"Suddenly, we could find ourselves with an old-fashioned trade dispute similar to the 1930s, and soon global trade could grind to a halt. We are very, very concerned that this 'Buy American' provision could end up leading to a similar set of circumstances that would be detrimental to Caterpillar, and more importantly, to the U.S. economy and the global economy."

Today, ABC News reports:

EAST PEORIA, ILL. -- President Obama today repeated the claim we asked about yesterday at the press briefing that Jim Owens, the CEO of Caterpillar, Inc., "said that if Congress passes our plan, this company will be able to rehire some of the folks who were just laid off."

Caterpillar announced 22,000 layoffs last month.

But after the president left the event, Owens said the exact opposite.

Asked if the stimulus package would be able to stop the 22,000 layoffs or not, Owens said, "I think realistically no. The truth is we're going to have more layoffs before we start hiring again"

Credit Boom Led Greater Global Trade

Micheal Mandel writes in Businessweek:

But there's a good chance that the trade boom and the credit boom helped feed each other in all sorts of perverse ways. One example: Huge trade surpluses in China, Germany, Japan, and elsewhere created a pool of mobile capital, which flowed into subprime mortgages and all sorts of exotic securities. That is to say, the rest of the world lent the U.S. an enormous amount of money at low rates, which helped fuel the American housing boom. (It's interesting to note that the growth of housing prices over the past 20 years roughly parallels the rise in trade.)

Another example: Cheap credit made it a lot easier for freight companies to finance new ships and trucks and for airlines to finance new planes. This, in turn, increased the supply of transportation and reduced the cost of shipping goods across long distances. In addition, supply chains that stretch across the ocean mean that more goods are in transit at any time. All of these goods in transit, which have been produced at a cost, but not yet bought by the final user, must be financed by someone. Until recently, such financing was cheap and easy to obtain.

And finally, there's the link between the trade deficit and the financial crisis. As long as the U.S. is still running a trade deficit, we are still borrowing from overseas. And as long as we are still borrowing from overseas, we are piling up debt, and the financial crisis is getting worse, not better.

In the end, it may turn out that it really doesn't make sense to buy so many goods from overseas, and ship them such long distances, once the drug of cheap credit has disappeared. The trade bubble may be popping right now; even after the crisis is over, imports and exports may take years to recover to their peak levels.

Weaker Chinese Labor Market Makes Recruiting Easier

In the FT, Jayashankar M. Swaminathan writes:

For multinationals who have captive operations in China and India, the downturn presents an opportunity for improving the quality of the workforce. During the past decade, many multinationals who initiated operations in these countries quickly realised that productive employees were difficult to attract and retain. This is a good time to take advantage of the weaker labour market to recruit and retain top-notch managerial talent. After all, an important benefit of running an operation in these countries is the opportunity to tap into their large pool of brainpower.

China's Outlook for Jobs: "The Worst is Yet to Come"

The FT reports:

The collapse of China’s export engine appears to have hit the most vulnerable first, with the state estimating that 20m of the 130m rural migrant workers have lost their jobs and returned to home towns and villages.

The implied 15.3 per cent unemployment rate among migrants is not captured in official jobless numbers, which measure only urban workers who register as unemployed. That official number rose to 8.86m people, or 4.2 per cent of the urban workforce, in December, but economists say it vastly underestimates the true scale of the problem. For one thing it does not count anyone made redundant who still receives some sort of ­stipend.

“It is virtually impossible to get a handle on the true numbers, but we are clearly nowhere near the peak of unemployment,” Stephen Green, a Shanghai-based economist with Standard Chartered bank, said. “The worst is yet to come.”

Several senior officials have voiced concerns that rising unemployment might lead to serious social unrest that could even threaten the Communist party’s tight grip on power.

China By the Numbers

The China Economic Review reports:

Some China-related numbers that you may have missed:

US$628,000 – Bribes paid by the finance director of a US valve company to get business from state-owned firms in China, South Korea, Romania and Saudi Arabia

27% - Percentage of 2008 university graduates who are still unemployed. Approximately 6.1 million students are expected to start job hunting this year.

130 million – Number of foreign tourists that visited China in 2008, down 1.4% from the year before. The drop has been attributed to the global economic slowdown.

8% - Drop in electricity use in Guangdong province. Analysts said the drop is due to the large number of factories that have closed in the province.

China's Problem is Allocating Capital, Not Savings Rate

Jack Perkowski at the Managing the Dragon Blog writes:

Like Premier Wen, I have a great deal of trouble with the suggestion that China should reduce its savings rate. I was always taught in my economics courses that savings were a good thing for an economy because savings represent a country’s pool of investment capital. Since investment, just like consumption, drives an economy, and perhaps more effectively so, a higher level of savings should be better, not worse, for an economy. The more savings, the more capital is available for the investment necessary to build long term viability and sustainability.

The issue in China is not that Chinese consumers are saving too much and not buying enough television sets and refrigerators. It’s that China does not have an effective system for distributing investment capital to its private sector. In fact, the government controls the allocation of investment capital in a way that discriminates against private investment. This is precisely the point that Yijiang Wang, professor of economics and human resource management at the Cheung Kong Graduate School of Business, has made.

Clive Crook - The reckless stupidity of "Buy America"

Crook writes:

The Buy America provisions in the House stimulus bill were bad enough. The Senate version threatens to make them even worse, extending them from government purchases of steel to government purchases of all manufactures. These measures are possibly illegal in international law, flatly contradict a commitment that the US made at the G20 summit in November, and (most important) are likely to hurt the economy more than help it. Is this the new spirit of US multilateralism? Smoot Hawley, anyone?

Read the analysis by Gary Hufbauer and Jeff Schott of the Peterson Institute.

Based on economic and legal analysis, the authors conclude that the Buy American provisions would violate US trade obligations and damage the United States' reputation, with very little impact on US jobs. They estimate that the additional US steel production fostered by the Buy American provisions will amount to around 0.5 million metric tons. This in turn translates into a gain in steel industry employment equal to roughly 1,000 jobs. The job impact is small because steel is very capital intensive. In the giant US economy, with a labor force of roughly 140 million people, 1,000 jobs more or less is a rounding error. On balance the Buy American provisions could well cost jobs if other countries emulate US policies or retaliate against them. Most importantly, the Buy American provisions contradict the G-20 commitment not to implement new protectionist measures--a commitment that was designed to forestall a rush of "beggar-thy-neighbor" policies.

Intel to Close Shanghai Plant

Shanghai Daily reports:

INTEL Corp plans to close its assembly and test plant in Shanghai and move those operations to a lower-cost region - a move that will affect 2,000 employees.

Even as it reins in operations in the city, the world's biggest chip maker also said yesterday that it will increase its registered capital in China by US$100 million for future expansion. Details on how the investment might be used were not revealed.

Built in 1994 with an investment of US$500 million, the Shanghai assembly facility was the company's earliest plant in China. The chip maker said it will close the local factory over the next year and move its operations to existing facilities in southwest China's Chengdu City.

The Santa Clara, California-based company said the move was made to accommodate "recent economic conditions."

As consumers scale back spending in the wake of the global financial turmoil, sales of computers, phone handsets and flat-panel TVs - all powered by semiconductors - have plummeted.

Last year, revenue for China's integrated-circuit market grew only 5 percent to 130 billion yuan (US$19 billion), compared with 25 percent expansion in 2007, according to CCID Consulting, a Beijing-based research firm.

Trade Protectionism is Popping Up All Over China

The ChinaBizGov blog notes some local protectionism in China:

An excellent article in the 21st Century Business Herald outlines an increasing number of local protectionist policies that are beginning to pop up all over China.

Local protectionism, or policies that encourage purchasing locally-made products (or discourage buying products from elsewhere) used to be a problem in China that received a lot of attention in the 1980s and '90s, but it hasn't received much press over the past decade or so. Perhaps that was because the long bull market brought enough of a rising tide to lift all boats.

.....

Some examples:

The City of Hangzhou is adding 5 percent on top of the already announced 13 percent "home appliances to the countryside" rebates -- but only for purchasing local brands.

The City of Changchun is waiving new car inspection fees, but only for cars made by First Auto Works which just happens to be headquartered in Changchun. They are also requiring that no less than 50 percent of equipment purchases for large projects be of locally-made equipment. And they are adding a further 10 percent subsidy to the Central Government's subsidy for tractors and farm equipment made locally.

 

Imagining Geithner's Dialogue with China

At Seeking Alpha, Howard Richman writes:

I can already hear the constructive dialogue he will have when he arrives in China...

Geithner: Thank you President Hu and Premier Wen for inviting me to dialogue with you about matters of the utmost importance to the future of your economy.

Hu: Welcome esteemed Treasury Secretary. We are looking forward to your kind consideration in our affairs.

Geithner: I understand that you now have $1.7 trillion dollars in your currency reserves. That's more than enough to protect the yuan should it fall in the currency markets. For your own benefit, you should stop buying so many dollars and use your country's savings to help your own people, instead of us.

Wen: Thank you for your kind consideration. But we are always concerned with the welfare of the American people and want to provide them with the financing that they need to buy our products.

Geithner: You realize of course, that the dollar will eventually fall in value by 50% while your yuan will rise in value by 40%. You will lose money if you keep changing your yuan for dollars in order to keep the dollar high and the yuan low.

Hu: You are most considerate. Your president has chosen a treasury secretary of rare intelligence. But we do want to help your people so much, we are willing to sacrifice our own interests. We will indeed continue to finance your stimulus package so that your people can buy more Chinese imports.

More -

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FT: Downturn causes 20m job losses in China

The FT reports:

More than 20m rural migrant workers in China have lost their jobs and returned to their home villages or towns as a result of the global economic crisis, government figures revealed on Monday.

By the start of the Chinese new year festival on January 25, 15.3 per cent of China’s 130m migrant workers had lost their jobs and left coastal manufacturing centres to return home, said officials quoting a survey from the agriculture ministry.

The job losses were a direct result of the global economic crisis and its impact on export-oriented manufacturers, said Chen Xiwen, director of the Office of Central Rural Work Leading Group. He warned that the flood of unemployed migrants would pose challenges to social stability in the countryside.

The figure of 20m unemployed migrants does not include those who have stayed in cities to look for work after being made redundant and is substantially higher than the figure of 12m that Wen Jiabao, premier, gave to the Financial Times in an interview on Sunday. Speaking on a visit to the UK on Monday, Mr Wen said there had been signs at the end of last year the Chinese economy might be starting to recover.

Why Single Out China For Currency Manipulation?

At Slate, Charles P. Wallace writes: Is China manipulating its exchange rate unfairly, and is the United States being damaged by Beijing's currency policies?

China does not allow its currency, the yuan, to be freely traded in foreign exchange markets, so technically Geithner is right that Beijing artificially sets its value. China used to set the yuan at a fixed rate against the dollar but ended the dollar peg—after pressure from Washington—in July 2005 and now allows the yuan to fluctuate by up to 0.5 percent per day against the dollar. That's still not free trade in the most technical sense, but look at the result: The yuan has gained 21 percent against the dollar since the dollar peg ended in 2005, so it's hard to argue the Beijing has acted in only its own interests.

Besides, the world currency markets have been in turmoil for the last six months, leading to a flight to the dollar worldwide. And plenty of other countries manipulate their currencies when it suits their needs. Just last week, the Swiss National Bank said it was preparing to intervene in the currency markets to stop the rise in the value of the Swiss franc against the euro. And Eisuke Sakakibara, a former top official of the Japanese finance ministry known to currency traders everywhere as Mr. Yen, predicted that Tokyo would intervene soon to reverse the rise of the yen, which touched 87.10 yen to the dollar last week, up sharply from 120 yen less than six months ago. A possible reason: Sony predicted $3 billion in annual losses because of the yen's strength. South Korea also said it was considering a depreciation of the Korean won after foreign trade slumped in the fourth quarter. Aren't those all currency manipulations by Geithner's standards?

So why single out China? What undoubtedly put Geithner's bull's-eye on China's back is the huge trade surplus that China earns from Western nations, especially the United States. Chinese customs officials reported that the country had a whopping trade surplus of $290 billion in 2008, up 18 percent from 2007. But look a little more closely at the numbers, and the explanation for that huge trade surplus is not growing exports but plummeting imports due to the impact of the world economic slowdown on China's domestic market. Shipments to the United States actually declined 4.1 percent in December and exports to the European Union, China's biggest export market, fell by 3.5 percent.

And besides, does the exchange rate really matter? Mark J. Perry, an economics professor at the University of Michigan, has written that it's China's abundance of low-cost labor, not the yuan exchange rate, that is responsible for driving trade flows. A worker in a Chinese shoe factory earns only $1.95 a day, far less than an American or European worker. As Daniella Markheim, a policy analyst at the conservative Heritage Foundation points out, imposing trade sanctions because of Chinese currency manipulation would not provide a boost to U.S. manufacturing exports or create more American jobs. Sorry, those jobs making cheap sneakers and toys aren't ever coming back to America. Even former Treasury Secretary Henry Paulson noted there was little the United States could do with currency measures against the Chinese "that would make a difference."

Obama Tests a Shaky Bilateral Relationship with China

By Brian Schwarz

Barack Obama is on a risky path toward further confrontation with America’s banker, the Chinese. As his economic stimulus package makes its way though Congress, Uncle Sam’s biggest trading partners are warning we face a spiral of protectionist policies. The House-approved version includes a "Buy American" provision that generally prohibits the purchase of foreign iron and steel for any infrastructure project in the bill.

While it may not hit the Chinese economy directly, this provision has the potential to stir up a nationalistic backlash among government officials in Beijing. Running big trade and budget deficits indefinitely is not possible for America, either economically or politically. The Chinese indirectly control Washington' s purse strings. China has become the biggest foreign holder of U.S. debt, second only to the U.S. government itself in overall holdings.

Obama is testing an already shaky bilateral relationship. The new president committed a gaffe last week by allowing his nominee for Treasury Secretary Timothy Geithnerto say the administration "believes that China is manipulating its currency."

To read more. . .