31 May, 2011

China's perceived military threat a Sinophobic invention (EJ Insight)

May 30, 2011 08:26

The 'surreal' China threat
By L K Shiu

Chinese People's Liberation Army General Chen Bingde was more than correct to be surprised by the sophistication of U.S. military might. The PLA's chief of staff said very honestly after his last week's tour of US military facilities that "China does not have the capability to challenge the United States".

His comment may help to cool down the nationalistic fervor of his countrymen and the unfounded "China threat" peddled by some Americans – let's hope so. This "China threat" is a tale partly invented by China-skeptics or Sinophobes. But it is also unwisely fuelled by the populist nationalistic behavior of some Chinese, including both the young "netizens" and regrettably some elites. It is a natural offspring of the dazzling economic success achieved by China over the past few decades. It is the geopolitical twin of the economic hypothesis that there is such a thing called the "Chinese model" that would rival western capitalism.

It is not difficult to see through the folly of this "China threat". The latest call on the port of Hong Kong by the USS Carl Vinson, a nuclear-powered aircraft carrier, is a vivid reminder of the power disparity between the two countries. While most local media of the city focuses on the role of the warship in the burial of bin Laden, I am more reminded of the many like visits by such mammoth warships in the past.

One of them was the USS Abraham Lincoln, another nuclear-powered carrier, which was in the city shortly after President Clinton's China tour back in the summer of 1998. I took part in a guided tour of the carrier. What impressed me most was not the advanced weaponry, though no doubt impressive in itself, nor the breathtaking take-off in an attack jet plane from the deck. It was the control room that they showed us.

The control room coordinated all information coming from outside and the necessary strategic or tactical responses to be made by the carrier battle group. It convinced me that this was not merely a fighting machine, but also a thinking one. Its operation involved a sophisticated command system, much of which had to do with the human side, besides the modern computers and fancy gadgets.

What's more, the Americans are never too shy to let you know their superiority. During such port calls, they usually invite the press on board. This requires a sense of confidence not possessed by many countries. Confidence is built on concrete capability, not talk. The Americans are probably the last ones having to worry about being spied. Their control room houses a radar screen whose range covers more than half of southern China.

No doubt that throughout these years, their navy kept making regular port visits to Hong Kong, interrupted only by occasional diplomatic cool-off between Beijing and Washington. The most notable and recent of such interruptions was the failed application by the USS Kitty Hawk in 2007, following the Dalai Lama's visit to the White House. Under the "One Country, Two Systems" principle, foreign warships intending to enter Hong Kong waters must obtain prior approval of the Chinese Foreign Ministry.

At the moment, the Chinese have no serving aircraft carrier and we are not aware of any concrete plan of constructing one, at least not openly. Deprived of such vital long-range power projection capability, China is on no equal footing with the United States as far as military strength is concerned.

For the past 30 years or so, the Chinese economy counted its success mainly on the prosperous south-eastern coastal provinces, heavily dependent on imports of strategic resources as well as exports of finished goods. Such unbalanced development model is being called into question. That may have far-reaching implications for various industries especially the energy sector, a topic to which I shall return later.

L K Shiu is a part-time lecturer at Chinese University and a public affairs consultant. He worked as an administrative officer in the Hong Kong Government.

-- Contact the writer at utopia1848@gmail.com


21 May, 2011

Revisiting the East Asian Miracle (EJ Insight)

May 19, 2011 08:28

Revisiting the East Asian Miracle
By L K Shiu

When I reflect on all the hype about the peculiarities of the Chinese growth model, I am tempted to revisit Prof. Paul Krugman’s celebrated essay “The Myths of Asia’s Miracle”. Published in 1994 in Foreign Affairs, the essay rightly predicted the coming bust of the then very popular – almost mystical – East Asian growth model.

Krugman points out in the essay that there is nothing mysterious about the economic achievement of the economic “tigers” of the Pacific Rim. The growth in output or national income is fully explained by the rapid growth of inputs: higher labor employment and massive investment in fixed assets or capital. There is no noticeable growth in efficiency, by which he means the improvement in management, advancement in technology and knowledge. Such economic growth is unsustainable in the long run; the mere increase of inputs cannot indefinitely raise output at the same pace. Without efficiency gains, sooner or later the marginal return of added inputs would be diminishing.

There is nothing too complicated about this economic reasoning. I bet the same logic is applicable to many businesses or even at personal level. We either work harder or smarter; but there is a natural limit to the hours on our calendar. The same applies to capital. Buy a computer for an employee and you surely raise his or her productivity. But the same person's output will not be doubled by having two computers to work with; and adding a third one will merely take up more space.

The lesson of the 1997 Asian financial crisis is too painful to recall in detail here. The socio-political turmoil and accompanying loss of lives in many countries in the aftermath of that crisis will conjure up bitter memories for many. So let us be on guard with respect to China. Because anything repeated even mildly there will be played out on atomic scale.

For sure, the two are not identical. The East Asian economies of the 1990s were mostly running current account deficits and borrowing heavily overseas to finance their domestic investment projects. Excessive borrowing inevitably widens the loopholes for bad loans and often is characterized by low returns. It makes things worse when loans are in foreign currencies; a foreign reserve crisis is appended to a liquidity crisis.

Admittedly, China has no problem with foreign reserves. As mentioned in this column last time, China is indeed a big international creditor right now. But let’s not forget that Hong Kong prior to 1997 was also running a huge foreign reserve (and it still does). That, however, provided little comfort when an asset price bubble burst. Excessive borrowing, domestic or foreign, is a worrying sign.

The Chinese fixed-asset investment, some 48 percent of national income according to the official Statistical Yearbook (2009), is at a historic high and cannot be much higher without going to the point of being ridiculous.

There is nothing too boastful about such high fixed investment. Simply put, huge capital accumulation, be it more machinery or factories or bridges, represents a choice for deferred gratification. People are opting for more production capacity by sacrificing current consumption. Many developing countries are doing the same, and for good reason. In fact, the league table of the top ten countries of fixed investment consists of those developing nations of the Third World, ranging from Congo to Madagascar. For reader’s reference, the world average of fixed investment is about 23 percent.

The problem is this. Overcapacity as a result of over-investment will lead to excess supply and eventually put a deflationary brake on the economy. Many economists such as Nouriel Roubini, the prophet of the 2008 financial tsunami, have observed the many vacant residential districts in Beijing’s suburbs, at a time when the property market is taking a feverish ride. As a Hongkonger, I need no reminder of the catastrophic consequences of such excessive investment in property market when it gets a hard landing.

The same may be said of labor, the other factor of production. The unemployment rate is below the 5 percent threshold, which is the envy of many western nations. Yet it also implies there is little room for increase in labor inputs. Longer hours will be objectionable under more humane labor law and at any rate incompatible with the mentality of a new generation of workers. Anecdotal evidence abounds to show the difficulty of adding labor inputs without sustaining rising costs.

All this brings us back to the central proposition of Krugman’s original article: that long-term persistent economic growth can only be achieved through raising the output per unit of input, i.e. by efficiency gains. And that is the greatest challenge to which the Chinese way of growth has yet to convince the world that it has its own magical solution.

L K Shiu is a part-time lecturer at Chinese University and a public affairs consultant. He worked as an administrative officer in the Hong Kong Government.

-- Contact the writer at utopia1848@gmail.com


17 May, 2011

The New Global Creditor (from EJ Insight)

May 9, 2011 11:10

The new global creditor
By L K Shiu

If China is to maintain its success of the past two decades as a mercantilist export-driven economy, it has to manage the concomitant accumulation of foreign capital from international trade by exporting it. Fundamentals of macroeconomics tell us that current account surplus and capital account deficit are two sides to the same coin. Recent comments by the governor of the People’s Bank of China over the unreasonable level of China’s foreign reserves further highlights a problem known for years.

By heaping US$2.6 trillion worth of foreign currency-denominated financial assets (chiefly IOU from the U.S. government), the Chinese have effectively become the new global creditor. The amount far outstrips the need for servicing external debt, currently about US$400 billion.

Historically, two countries had played similar roles before as the major supplier of capital or credit to the rest of the world. Like China, they accumulated huge capital and credit by hard work and foreign trade. They were the British Empire of the 19th century and the American republic for most part of the 20th century. The British exported nearly half of its merchandise to North America in 1800 and invested the proceeds from trade in all sorts of projects in the New World (the expensive U.S. railroad system, for example). This shows how macroeconomic principle worked in practice.

But can China do the same? We see the Chinese eager to divest their foreign reserves by buying up things through the sovereign wealth fund. The latest news is that China Investment Corporation, the sovereign fund, might get an additional injection of US$200 billion. In this context, three particular points are worth noting.

The first is the fact that throughout history, international exporters of capital or suppliers of credit seemed to be those with an internationally convertible and accepted currency (i.e. hard currency). The Chinese renminbi is not. True, there is much clamor that the RMB should be much stronger than what it is. In fact, the World Factbook of the U.S. Central Intelligence Agency states that China’s GDP, valued at purchasing power parity, should be something near US$10 trillion instead of US$5.7 billion as at official exchange rate. That suggests that the RMB is undervalued by about 40 percent.

However, without the crucible of open market discipline, under which currency can be just as readily dumped as sought after, no one knows for sure how the RMB would fare in an extended period of time. More importantly, we do not know for sure how steadfast or how vulnerable is the financial system built on such a “green” currency in global capital market.

Perhaps the very accumulation of reserves hints at the insecurity of Chinese leadership. Take a glance over the top foreign reserve holders around the world. With the exception of Japan, they are either very small open economies like Hong Kong, or those with less than freely convertible currencies and some degrees of exchange control.

The second obstacle is the surging economic nationalism of the west. The Anglo-Saxons are famed for their down-to-earth utilitarianism that can sell anything. But selling off strategic resources with long-term economic value is not quite the same as letting the Japanese own the Rockefeller building, or making Russian tycoons the bosses of football teams. CNOOC’s failed bid for Unocal some years ago or Hutchison’s controversial port interests in Panama come to my mind. These kinds of investment overseas would continue to attract political opposition as the west grows increasingly wary of a rising China.

It is therefore unsurprising to see Chinese enterprises going more for untapped resources in developing or undeveloped regions and continents, such as South America and Africa. But that strategy is not without its own difficulty. For one thing, the west has long-established interests in these areas considered to be their backyards. For another, the west has both the political will and the military prowess to protect its vital interests if challenged, as recent events in Libya show. Nearly all of the traditional great trading nations of the past had been strong maritime powers. This was no coincidence since trade routes required the protection of fleet. China unfortunately was and is not one of these.

Of course in present times, long-range projection of power is not limited to naval power. But judging from the many sporadic assaults on Chinese citizens in remote lands, China cannot overestimate its cultural or economic appeal. Her power abroad, both hard and soft, is wanting.

If, because of these possible obstructions, the Chinese cannot manage their foreign reserves well to produce economic value, years of toil by Chinese workers will be wasted in idle T-bills of dwindling value. China’s direct investment abroad, less than US$300 billion according to the U.S. government, is disproportionately small compared to its vast pool of foreign reserves. But FDI is what really generates economic value over the long run, much as individual investment in growth stocks. Mounting foreign reserves is not a sign of national strength or glory, as some nationalists believe, but another indication that the export-oriented model cannot be sustained to China’s long-term economic advantage.

L K Shiu is a part-time lecturer at Chinese University and a public affairs consultant. He worked as an administrative officer in the Hong Kong Government.

-- Contact the writer at utopia1848@gmail.com


08 May, 2011

Sustainability of the Chinese Model in dispute

May 5, 2011 08:29 (originally published on EJ Insight, retrievable from http:\\www.ejinsight.com)

Sustainability of Chinese model in dispute
By L K Shiu

The phenomenal success of the Chinese model of development has emboldened many to offer it as a competing model for developing countries against the Western model. Economists point out that it has taken China only decades what Great Britain took centuries to achieve. The hotly debated question is whether this model is sustainable.

A key feature of this model, in contrast to the Western model, is the one-party authoritarian government. But since politics is said to be more difficult than physics (Einstein) by its haphazard nature, let us leave this aside and focus on its export-oriented nature.

How dependent is China on its exports? According to the World Bank, the export of goods and services as a percentage of China's gross domestic product dropped from its peak of 39 percent in 2006 to 27 percent in 2009. This says something about the effectiveness of the central government’s pledge to boost domestic consumption in place of current account surplus as a driver of GDP growth. But it may also be ascribed, at least in part, to shrinking Western demand after the financial tsunami of 2008.

Nonetheless, much has been said by commentators about the difficulty of boosting domestic consumption. Let’s turn the question around and assume for a while that China could maintain its exports at roughly one-third of its national income level, which has been the average of the past 10 years. We would like to paint a picture of the world in such scenario. One-third is not a big deal in the context of, say, Germany, until recently the world’s largest exporter, whose exports are about 45 percent of its national income. But the number is more than outstanding when compared with that of the United States, whose figure has lingered somewhere between 8 and 13 percent in the past decade.

Now the question is: would China be more like the U.S. or Germany? The answer depends on trade policy, economic structure, technological level, history and culture and a whole range of factors. But essentially, we must remember that China is much closer to the U.S. in terms of the size of territory, population (considerably larger indeed) and economy. The arithmetic difficulty for a large economy to have a very high dependency on exports is that soon it will not be able to find a sizeable global market to absorb its goods and services.

Economic historians have ascertained that China, for a long time in human history, made up more than a quarter of global output (about the present size of the U.S.). Many people rely on this to justify that China would naturally resume its past status. But let’s not forget that we did not have the same kind of globalization in those days. For a very long time, the Chinese economy was like an autarky, made possible by the vast internal market and the relatively simple division of labor in an agrarian economy. Regimes in pre-modern Chinese history had successively imposed an isolationist “sea ban” policy, the latest only broken by the Opium War.

Now we must question why the Chinese economy could unquestionably maintain such an export-dependency ratio when its absolute size is poised to grow to a par with the U.S., as many analysts and economists forecast would happen in 20 years’ time.

The arithmetic is only the surface and more interesting will be the implications of such a scenario. We would expect to see, first and foremost, some internationally competitive Chinese corporations that can excel either by the quality or quantity of what they make. As mentioned in my last article, China does have a few dozen mega-sized “central” state-owned enterprises (SOEs) on the Forbes 500 league. However, they are distinct from their Western counterparts in one singular but critical aspect: they have never really been exposed to any serious domestic competition before.

This is true of the situation prior to China’s accession to the World Trade Organization and the Chinese leadership understood this. To guard against foreign encroachment after opening up its market, the Chinese government allowed these SOEs to float parts of the state assets on capital markets and assume more and more features of capitalist enterprises. Monopolies in strategic industries were broken into a few oligopolies to incubate a few industry leaders capable of competition.

Yet, policies and regulations still favor those SOEs vis-à-vis domestic private enterprises. The shuffle of top executives among SOEs in the same field makes one wonder whether they are more collaborative than competitive. One must be cautious as to whether these corporations can stand up to battle-hardened Western enterprises when the market is fully open, let alone invade the turf markets of the latter.

In fact, until now, the Chinese seem most successful in making what is no longer profitable to produce in the West (that does not mean it is technically not possible but merely economically unprofitable). Chinese goods are taking up the deserted territory of those Western enterprises. If China is to make what Germany is making nowadays in 20 years’ time, we must first see very fundamental change in the goods and services we consume these days.

L K Shiu is a part-time lecturer at the Chinese University and a public affairs consultant. He has worked as an administrative officer in the Hong Kong government.

-- Contact the writer at utopia1848@gmail.com


04 May, 2011

Chinese University Book Club: Talk on "the Federalist Papers"