Labor is getting more expensive in China, so manufacturing companies are racing to find ways to reduce costs:

But what it does not reveal is that manufacturing in China is about to get far more expensive. Soaring labor costs caused by worker shortages and unrest, a strengthening Chinese currency that makes exports more expensive, and inflation and rising housing costs are all threatening to sharply increase the cost of making devices like notebook computers, digital cameras and smartphones.

Desperate factory owners are already shifting production away from this country’s dominant electronics manufacturing center in Shenzhen toward lower-cost regions far west of here, even deep in China’s mountainous interior.

That’s precisely what I’ve hoped would happen. China is a nation of contrast—while the east is rich from manufacturing and exports, the landlocked western interior of China is still incredibly poor. China is almost two nations, one developed and one developing.

But development based on unskilled, cheap labor inevitably leads to higher standards of living and increasing wages. Over time, the “cheap” part of it disappears, so manufacturers move elsewhere in search of low costs. As this happens, areas that were dependent on unskilled labor for economic growth must transition toward skilled labor. This is China’s largest challenge—their incredible economic growth is a result of labor that’s laid dormant for decades suddenly coming online all at once, but they must now move from unskilled to skilled labor. In other words, they must move up the supply chain from merely putting things together to manufacturing intricate parts and to even designing them.

As manufacturers move toward other regions and countries with lower wages, the same process plays out. I’m hoping this will have the same effect on China’s interior, but there are natural barriers for it. Using unskilled labor in China’s east is easy: it’s close to the coast, so moving goods to port is cheap. The west doesn’t have this same advantage. Anything manufactured there will have to be moved by truck or rail to the coast.

Brahma Chellaney describes China’s world position:

That approach became more marked with the global financial crisis that began in the fall of 2008. China interpreted that crisis as symbolizing both the decline of the Anglo-American brand of capitalism and the weakening of American economic power. That, in turn, strengthened its two-fold belief – that its brand of state-steered capitalism offers a credible alternative, and that its global ascendance is inevitable.
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The biggest loser from the global financial crisis, in China’s view, is Uncle Sam. That the US remains dependent on China to buy billions of dollars worth of Treasury bonds every week to finance its yawning budget deficit is a sign of shifting global financial power – which China is sure to use for political gain in the years ahead.

The amusing thing about the U.S.’s complaints about China’s currency policy is the vast sums of dollars it results in for China are used to fund our drunken borrowing. Biting the hand and all that.

Chellaney is correct—China views this as the moment where they begin to pull ahead of the west in global power.

Our refusal to recognize the role government power played in the 2008-09 financial crisis only strengthens their position. We continue to try to fix our economy through government control (government spending as stimulus, home buyer tax credit which only delays the inevitable home sales contraction, prolonged low interest rates, and ridiculous amounts of borrowing to support it) under the illusion that the financial crisis was merely a resort of free markets, and thus can be controlled. All the while we are granting the Chinese Communist Party’s basic premise that capitalism must be directed by an authoritarian government hand for the benefit of society, and borrowing our way toward future disaster. We are losing our philosophical and financial edge.

Jonathan Fenby comments on China’s currency policy:

It has to bring the economy back from the runaway 12% growth reported early this year to a sustainable level of around 8% which would create sufficient jobs, keep the population happy and underpin the Communist party’s claim to be the only force that can ensure material progress. It needs to rein-in industries whose excess output adds to the perennial problem of over-capacity, but without creating mass unemployment. It needs to guard against inflation and boost wages.

China’s economy is still heavily dependent on exports. Their incredible economic growth, and thus employment for the population, is driven by it. Allowing the Yuan to appreciate as much as U.S. critics desire would severely harm their export sector, so it isn’t an option.

China does need to become a more self-dependent economy, which entails building a larger and sustained middle class (so consumer goods can be a larger part of the economy) and moving up the supply chain into a product design role.

There still is, though, a huge portion of the population just looking for a steady job of any sort. While the east of China is well developed and in some parts feels very much like a developed country, the west of China is also very much a developing country. The incredible amount of migrant workers in China’s eastern cities bear this out. The CCP knows China’s history well, so it knows that the largest threat to its power is poor economic conditions. They want to continue developing the west and secure the east’s affluence so their power isn’t threatened.

Allowing the Yuan to significantly appreciate against the dollar would threaten this. China’s move away from manufacturing must happen, but the CCP wants to develop the economy in a controlled manner to prevent significant social shocks.

China is allowing its currency, the renminbi, to float, but it is controlling how much it will appreciate:

On the Monday after its statement, the PBOC let the currency appreciate by over 0.4%, generating quite a bit of excitement. At that rate the yuan would double in value in just 174 trading days. The next morning the central bank set its parity to reflect the previous day’s close. But as Tuesday wore on, it decided that “market supply and demand” needed a bit of a nudge. Heavy dollar-buying by the country’s big state banks, presumably at the PBOC’s behest, pushed the yuan down against the dollar, allowing the central bank to set a Wednesday-morning parity of 6.81 (see chart 1).

It’s a smart move on China’s part to try to placate the U.S., but I don’t think it’s going to matter. They aren’t going to let it appreciate as much as critics in the U.S. want (they would like our trade deficit with China wiped out).

Columbia professor Ang Yuen Yuen thinks China’s cheap labor advantage is slipping away:

Apparel production is a prime example of China’s declining competiveness in markets dependent on low-cost labor. According to a study by the US consulting firm Jassin O’Rourke, labor costs in China are higher than in seven other Asian countries. The average cost for a worker is $1.08 per hour in China’s coastal provinces and $0.55-0.80 in the inland provinces. India was in seventh place, at $0.51 per hour. Bangladesh offers the lowest cost, only one-fifth the price of locations like Shanghai and Suzhou.

That’s how developing markets work: an economy based on cheap labor leads to rising standards of living and wages, and that advantage erodes over time. The economy must then shift to different economic advantages, or higher up the supply chain, as Ang says.

Ezra Klein visited China recently and just posted some thoughts on where the country is heading.

Insightful and dead-on.

China has refused to recognize North Korea is responsible for the Cheonan sinking.

The U.S. and South Korea are in an especially difficult spot here. Sinking a warship must have a strong response, but the response must be perfectly designed not to further ratchet up tensions. North and South Korea are one small mistake away from all-out war, and the costs of war are difficult to comprehend. South Korea’s capitol, Seoul, is within artillery distance of the demilitarized zone and would be almost immediately leveled if war breaks out.

China’s position makes this even more difficult. A unified response to North Korea would reduce the potential for increasing tensions. By refusing to recognize North Korea as responsible, though, China is preventing preventing that from happening.

Robert Kaplan wrote a fantastic piece in 2005 on how we would fight China once they have developed a world-class military.

He doesn’t presume that war with China is inevitable, but rather that as China re-emerges as a world power, it’s a possibility with many triggers, and we must be prepared for it.

His writes that we will have to disperse our forces throughout the Pacific, so the Chinese will not be able to eliminate a single U.S. naval base and cripple our Pacific forces, like the Japanese sought to do with Pearl Harbor, and develop new strategies that either defend our central naval advantage, the aircraft carrier, or move more toward submarines as the central means of projecting power (both for their offensive capabilities and because they enable us to drop special forces on land stealthily).

If you have any interest in foreign policy, I absolutely recommend reading it.

The Economist describes China’s financial system:

Big credit decisions in China are not advanced by any one bank, nor any one banker. Credit is infused and withdrawn by central diktat. That process has extraordinary appeal to state planners but is horribly inefficient for individual institutions. In recent weeks, for example, as the screws on lending have tightened, favoured industrial companies have been getting urgent calls from their bankers demanding that they immediately scoop up their credit needs for months to come, or be subject to a freeze of uncertain duration. Firms that manage to load up on credit still suffer because they bear interest costs long before the money is actually needed.

“The Chinese banks are pure utilities,” says one banker. “The State Council [the government’s chief administrative arm] tells them to lend, and they lend.” Overt controls increase in line with the amount of credit. Loans above $500m are said to be directly vetted by the State Council.

China’s economy is by no means a free market. While individual firms are allowed some semblance of freedom, the government manipulates the economy towards its ends. Economic success is had through the government, not through the market.

The U.S. economy is stepping in this direction. Fannie Mae and Freddie Mac are perfect examples of this model: their primary intent is not to make a profit, but to expand credit in the housing market to fulfill the government’s policy goal of increased homeownership. They are given special privileges to do so, and they played a large role in inflating the housing bubble by allowing too much liquidity in the market. Government distortion of the market has consequences.

Rather than recognize this, however, the Obama administration has tried to adopt its own version of China’s government-dictated banking sector:

President Barack Obama challenged top bankers Monday to explore “every responsible way” to increase lending, saying they were obliged to help after being rescued by taxpayers. He asked them to “take a third and fourth look” at their small-business lending.
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Obama, in a statement after more than an hourlong meeting with the executives, said he reminded them that much of the financial crisis that took the U.S. banking system to the brink of collapse had been “of their own making.” He also exhorted the executives — both in private and in public — to drop their opposition to an overhaul of the nation’s financial industry.

Besides being completely un-presidential — attempting to shame private businesses in to supporting government policy — it is wholly antithetical to a free market, and exactly what led to the financial crisis: government policy encouraging dumb loans and investments. Yet here we are, and the administration is now pressuring banks to do precisely that. When they say lend, they lend. Or at least that’s what the administration is seeking.

I wrote last week that the CCP (Chinese Communist Party) will either open the government to multi-party elections, or will eventually be overthrown.

I want to provide more detail on exactly why I believe this, and on a possible route to this reform I think is possible. I wrote a paper in May 2008 that sketches the possibility for a Confucian constitutional democracy in China.

I am publishing it below in its entirety for those of you interested.

China, many say, is rudderless. It is being pushed quickly, but has no direction; it lacks an underlying ideology and base for its continued growth. After the collapse of the Qing dynasty, and with it the imperial system, China’s standing moral and political systems were discredited, and the Chinese were forced to find a new system.

For a while, it seemed that Marxist-Leninist inspired Maoism would be China’s defining philosophy, an all-encompassing political, social and economic model for society. But Maoism, too, was discredited by the horrors of the Great Leap Forward and the destruction of the Cultural Revolution.

These criticisms are not entirely with merit. While the effects of the opium wars, and the imperial system’s collapse, on Chinese identity should not be understated, it is important how these things are conceptualized in their effect. The horrors the Chinese suffered from European imperialism and the decline of the Qing empire were not simply because of the discrediting of their political and social philosophy (empire-based system, and Confucianism, respectively), but because of the discrediting of China itself.

The Chinese today are proud of their nation not because of its superior political and social structure (although the culture is of prime value), but because of its economic success, and international political strength. This points to a fundamental resilience and flexibility in what constitutes being “Chinese,” and it indicates that it is more than belief in particular social norms and form of government.

In the comment section of a Chinese weblog, one Chinese native commented on the identity of nations. He wrote that while many nations, such as the U.S., are founded upon defined principles, and thus its identity is tied directly to them, China is not. He writes:

For me personally, the love for my country lies with the land, the land of ‘middle Kingdom’, it matters not to me, whatever prefix one adds, may it be PR, or RO, my sentiments stay the same. The land has never done anything bad to anyone, what could I possibly cirticise it for? To me and many other chinese, it is the country (the Land, not the government) comes first, then the people. Without China, then there will not be chinese (not in any meaningful way by chinese standards).

For this writer, Chinese identity is not even necessarily defined by their history; being “Chinese” is connected to the land itself. This does not mean that Chinese identity is disconnected from their social structure and norms, political system and history. Instead, it indicates just how flexible Chinese identity is. It shows that what defines being Chinese can evolve over time, with just as strong of a connection for the people to being Chinese.

A historical tradition of language and common beliefs is important. Whether Confucianism as a social doctrine was officially rejected or not by the PRC, it still defines daily Chinese life today, and they should not lose that.

From this point of view, then, this paper will first consider a past example of China’s cultural flexibility, then identify how Confucianism in a modern incarnation can serve as a viable framework for Chinese society, and finally explore how human rights and the rule of law should fit into the “new China.”

Continue reading →

And by that, I don’t mean that Apple’s products aren’t made in China—they just don’t feel like they’re made in China.

Michael Mistretta

I couldn’t help but respond to this. Michael’s comment, I think unintentionally, assumes that “made in China” is a bad thing — that Chinese manufacturing is inferior, that it is “cheap.” That is a common stereotype throughout the U.S., and the phrase “made in China” is itself used to mean poorly constructed.

Let’s remember back to the 1960′s and 1970′s. Japan had begun exporting goods to the world, and in the beginning, they were of lesser quality. Japanese goods were considered poor quality, cheaply-manufactured goods. Yet it didn’t take very long for Japan to become one of the highest-quality manufactures in the world. By the 1980s, and certainly the 1990s, Japanese manufacturing was synonymous with quality. There aren’t many people today who would say that, on the whole, the Japanese produce low quality goods — Japanese cars are some of the finest designed cars in the world.

Design. China, which became recognized as an unskilled-labor nation in the 1980s and 1990s, now produces a large part of the world’s electronics. Perhaps some are not high-quality. My contention here, though, is that the distinguishing factor between a high-quality Chinese good (an Apple product) and a low-quality one (a low-priced PC, perhaps) is not the manufacturer themselves, but the company that designed it. The difference is design. Apple’s emphasis is on great design, so their products tend to be high-quality in their design and manufacturing, both because the initial product design is excellent and because they have high standards for their manufacturers to follow.

Let’s dispel the stereotype that “made in China” means a low-quality product, and replace it with something a little more accurate: “poorly designed” means a low-quality product, wherever it’s manufactured.

China to issue bank notes without Mao Zedong.

China will soon issue 10-Yuan bank notes without Mao Zedong’s image on them, which currently covers all of China’s currency.

What is most telling about this, though, is what is replacing Mao on the currency. In his place will be the bird’s nest stadium in Beijing on the front, the single most well-known symbol of the 2008 Beijing Olympics, and Greek statue of a discus thrower on the back.

The symbolism, I think, is not only clear, but also intentional: this is the new China, connected with the world and a part of it. This is what the Olympics means for the Chinese — a break from two centuries of suffering and chaos, a bright future where anything is possible.

Myths about the Developing World

Video of Hans Rosling, co-founder of Gapminder, presentation at TED.

http://www.newsweek.com/id/135380/page/1

American parochialism is particularly evident in foreign policy. Economically, as other countries grow, for the most part the pie expands and everyone wins. But geopolitics is a struggle for influence: as other nations become more active internationally, they will seek greater freedom of action. This necessarily means that America’s unimpeded influence will decline. But if the world that’s being created has more power centers, nearly all are invested in order, stability and progress. Rather than narrowly obsessing about our own short-term interests and interest groups, our chief priority should be to bring these rising forces into the global system, to integrate them so that they in turn broaden and deepen global economic, political, and cultural ties. If China, India, Russia, Brazil all feel that they have a stake in the existing global order, there will be less danger of war, depression, panics, and breakdowns. There will be lots of problems, crisis, and tensions, but they will occur against a backdrop of systemic stability. This benefits them but also us. It’s the ultimate win-win.

This, I think, is perhaps the most integral change in this new world system. Because international free trade and associated political development benefits countries so strongly, they have an overwhelming interest to remain a part of the international system. It therefore becomes self-sustaining and a driver of peace and stability, rather than precariously-built as older, empire-based systems were. And it is inherently more beneficial to all involved.

China urges ‘rational protests’ of the West

The front-page Sunday editorial in the People’s Daily called on Chinese people to cherish patriotism “while expressing it in a rational way”.

It said: “As citizens, we have the responsibility to express our patriotic enthusiasm calmly and rationally and express patriotic aspiration in an orderly and legal manner.

Protestors in Britain, France, and San Francisco couldn’t have handed the PRC better news fodder than they did by trying to extinguish the torch with sand and water balloons, and even steal it from the runners. In one case the protestors tried to take the torch from a wheelchair-bound woman who fought the protestors, giving the Chinese a picture-perfect PR coup. 

 Protesting China’s human rights violations are fine. But what isn’t is not respecting China’s monumental progress thus far, and addressing the Chinese as a lesser people, like Western powers did in the 19th century. Besides bordering on discrimination, this arrogant attitude not only reinforces Chinese nationalism and drives them to supporting their government, but also severs the tenuous relations between China and the West built piece by piece, small step by small step, since Nixon’s visit to China in 1972. China’s further progress as a country toward respecting human rights, a path that it is on, depends upon these relations. 

 In this way, these shortsighted and disrespectful protests (which seem suspect in their motivation because of their timing — where were all of these “free Tibet” protestors a year ago? Five years ago? I’d bet that two years ago, a significant number of these protestors couldn’t even locate Tibet on a map. This is why these protests seem less because of China’s HR violations, and more so because some in the West still want to keep China in its subordinate role to the West) are very counterproductive. Rather than push China to better respect human rights, it is instead pushing the Chinese people to embrace their government and thus reinforce human rights violations, making it less likely that the PRC will institute better human rights protection. 

 So congratulations, protestors. You’ve managed to give the PRC a PR coup, and bolster their support from the Chinese people. Hope you’re proud.