"Open cities", pollution and FDI in China

Matthew Kahn and co-authors have published an interesting paper in Regional Science and Urban Economics. Matt Khan is a fellow blogger and does very good work on the urban-environment nexus (he is also the author of the excellent "Green Cities".

To cover FDI, pollution and house prices in one 10 page paper is impressive.

I am skeptical that migration patterns will be influenced by pollution at this stage of China's development. The paper does point out the impediment caused by the "Hukou" system. I think they underestimate the importance of hukou as a distortion on migration and the speed by which cities can develop.

The "housing bubble" during this period also distorts the market especially in Beijing.

Finally, this paper is related to the standard Kuznet's curve literature (as acknowledged in the paper). This literature suggests that China has yet to reach the turning point for many pollutants. The conclusions of this paper are optimistic although I am not sure I share this optimism. It is unlikely that any Chinese city in the next 10 years will move from a "producer" to a "consumer" city. The authors are right to state in the last line of the paper that any improvement will be part of a "long term trend".

Towards a system of open cities in China: Home prices, FDI flows and air quality in 35 major cities

Siqi Zheng, Matthew E. Kahn and Hongyu Liu

Abstract

Over the last 30 years, China's major cities have experienced significant income and population growth. Much of this growth has been fueled by urban production spurred by world demand. Using a unique cross-city panel data set, we test several hypotheses concerning the relationship between home prices, wages, foreign direct investment and ambient air pollution across major Chinese cities. Home prices are lower in cities with higher ambient pollution levels, and the marginal valuation for green amenities is rising over time. Cities featuring higher per-capita FDI flows have lower pollution levels. These findings may indicate that major Chinese cities are making the transition from “producer cities” to “consumer cities”, which raises the prospects of sustainable economic development in China.

Keywords: China; Urban growth; FDI; Air pollution; Quality of life

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Foreign Direct Investment in China

The latest Review of Development Economics issue has a number of papers on FDI in China.

Some interesting topics - I shall try to get around to reading the Kunal Sen paper.

Review of Development Economics

Special Section: FDI, Employment, and Growth in China and India (p 737-739)
Amelia U. Santos-Paulino, Guanghua Wan
Published Online: Aug 27 2009 3:45AM
DOI: 10.1111/j.1467-9361.2009.00512.x

Abstract | References | Full Text: HTML, PDF (Size: 35K)


FDI Liberalization as a Source of Comparative Advantage in China (p 740-753)
Sebastian Claro
Published Online: Aug 27 2009 3:45AM
DOI: 10.1111/j.1467-9361.2009.00513.x

Abstract | References | Full Text: HTML, PDF (Size: 288K)


Exchange Rates and Outward Foreign Direct Investment: US FDI in Emerging Economies (p 754-764)
Manop Udomkerdmongkol, Oliver Morrissey, Holger Görg
Published Online: Aug 27 2009 3:46AM
DOI: 10.1111/j.1467-9361.2009.00514.x

Abstract | References | Full Text: HTML, PDF (Size: 88K)


International Trade and Manufacturing Employment: Is India following the Footsteps of Asia or Africa? (p 765-777)
Kunal Sen
Published Online: Aug 27 2009 3:46AM
DOI: 10.1111/j.1467-9361.2009.00515.x

Abstract | References | Full Text: HTML, PDF (Size: 112K)


Foreign Direct Investment and Regional Inequality in China (p 778-791)
Kailei Wei, Shujie Yao, Aying Liu
Published Online: Aug 27 2009 3:47AM
DOI: 10.1111/j.1467-9361.2009.00516.x

Abstract | References | Full Text: HTML, PDF (Size: 154K)


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Is China investing abraod to secure natural resouces?

There is considerable anecdotal evidence that China is in a "land grab" race in Africa and elsewhere to secure natural resources for its continuing economic growth.

However a recent paper in Pacific Economic Review casts doubt on this conclusion.

The abstract is somewhat contradictory - is China investing in for natural resources or not. It is a shame the abstract does not make this clearer.

EMPIRICS OF CHINA'S OUTWARD DIRECT INVESTMENT
Yin-Wong Cheung*1 and Xingwang Qian 2

ABSTRACT

Abstract. We investigate the empirical determinants of China's outward direct investment (ODI). It is found that China's investments in developed and developing countries are driven by different sets of factors. Subject to the differences between developed and developing countries, there is evidence that: (i) both market-seeking and resource-seeking motives drive China's ODI; (ii) Chinese exports to developing countries induce China's ODI; (iii) China's international reserves promote its ODI; and (iv) Chinese capital tends to agglomerate among developed economies but diversify among developing economies. Similar results are obtained using alternative ODI data. We do not find substantial evidence that China invests in African and oil-producing countries mainly for their natural resources.

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China blocks Coke on competition grounds

China is really getting into this "western economics" game. There is something that does not quite sit right when we read that China is blocking a Coke acquisition on competition grounds.

It is really hard to see this argument especially given China's overseas acquisition ambitions. Can the Chinese government not see what a damaging move this is after months of "anti-protectionist" speeches around the world. This is a naive move I am afraid.

China blocks Coca-Cola bid for Huiyuan [FT]

China rejected a $2.4bn Coca-Cola deal that would have been the country’s biggest foreign takeover, stoking fears of protectionism and warnings the decision could scupper Beijing’s push to invest in overseas mining companies.

China’s ministry of commerce ruled against Coke’s proposed acquisition of Huiyuan Juice, the country’s leading juice maker, on competition grounds, saying the move would hurt smaller domestic companies and limit consumer choice.

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Bankers and lawyers denounced the move as a protectionist measure that would also have negative implications for Chinese investment abroad, notably Chinalco’s proposed $19.5bn tie-up with Rio Tinto, the Anglo-Australian miner.

Barnaby Joyce, a maverick Australian politician leading a fight to block the Chinalco investment on nationalist grounds, said China’s “welcome” rejection gave him “ammunition to articulate my beliefs”.

It will be interesting to see how this plays out in the courts and in the newspapers.

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China and the Hotel California Effect in Banking

ChinaEconomicsBlog is back after the Christmas break with a topic that has interested me for a while.

This is what I call the "Hotel California Effect" named after a paper by Holger Gorg a few years ago. Respect for sticking with the title even in the face of referees who did not understand what the title even meant.

This was the original paper:

Fancy a Stay at the 'Hotel California'? Foreign Direct Investment, Taxation and Firing Costs

Holger Gorg
University of Nottingham - School of Economics; Institute for the Study of Labor (IZA)

December 2002

IZA Discussion Paper No. 665

Abstract:
This paper looks at the trade off between investment incentives and exit costs for the location of foreign direct investment (FDI). This issue does not appear to have been tackled in much detail in the literature. The analysis considers the effect of profit taxation (as a measure of investment incentives) and an index of hiring and firing costs (proxying exit costs) on the location of US outward FDI in 33 host countries. The results suggest that US FDI, in particular in manufacturing is negatively affected by the level of profit taxation and exit costs. Hence, if countries want to attract FDI it may not suffice that incentives are provided in order to ease the entry of multinationals. Instead, it also appears to be important that exit costs are at a level attractive to multinationals. In other words, multinationals may not check into an attractive looking Hotel California type host country if it is difficult to leave.

Keywords: Foreign Direct Investment, Exit Costs, Firing Costs, Investment Incentives, Taxation

JEL Classifications: F23, H25, J65
Working Paper Series

For those still confused there are lyrics in the Eagles classic song of the same name (the final 3 lines) that read:

We are programmed to receive.
You can checkout any time you like,
But you can never leave!


To me this reminds me of the Chinese FDI policy. China has done very well managing to attract FDI from all over the world. Yet China has not been tested on how easily that FDI is allowed to leave.

The FT cover this issue in today's paper.

As an economist with a good knowledge of China it was clear that the massive investments by UK and US banks in Chinese banks would be high risk to say the least. If these investments were made with a 30-40 year outlook then fine and indeed on paper there have been short term profits from China's stock market boom. The question, as we know from the current crisis, is whether these assets can be sold at the perceived market price.

Routes out of China will be difficult to negotiate [FT]

Last week UBS became the first overseas bank to offload its stake in a Chinese bank in a move expected to trigger a wave of divestments.

Foreign financial institutions including Goldman Sachs, Citigroup, HSBC, TPG, Temasek, Allianz and Royal Bank of Scotland own stakes in leading Chinese lenders worth tens of billions of dollars.

These holdings were mostly acquired in 2005 and 2006 when Beijing was keen to import western capital and expertise to help reform its moribund banking sector.

Many in Beijing and elsewhere are now asking whether the likes of RBS will be tempted to sell out and book handsome profits in order to help repair balance sheets strained by the financial turmoil.

As some of the foreign banks position themselves for possible divestments, many are also wondering what happened to all the talk about “strategic partnerships” and “risk management assistance” that accompanied the original investments.

“The foreign banks promised little and have delivered even less [to their Chinese partners],” according to one person who was deeply involved in negotiations between foreign investors and Chinese banks. “But the Chinese side didn’t really know what to ask for and were more focused on getting deals done as a precursor to very lucrative IPOs.”

At least four other people involved in foreign investments in Chinese banks have said that, although there was interest at one level of the government in introducing western management practices and risk controls, the foreign investors were mainly brought in to provide window dressing for initial public offerings.

With names such as Goldman Sachs, Bank of America and RBS on their share registers, Bank of China, China Construction Bank, Industrial and Commercial Bank of China and Bank of Communications that were technically bankrupt a few years earlier were able to achieve higher valuations when selling shares in Hong Kong and Shanghai.

UBS was considered to be in a slightly different category from the banks that signed up for “strategic partnerships” because its $500m investment in BoC was always considered a financial investment – a “pay to play” commitment that helped it to win a lucrative mandate to advise on the $10bn Hong Kong listing of Bank of China in June 2006.

Last week, UBS decided that the 1.3 per cent stake was no longer core to its strategy and sold it – for $835m – as soon as a three-year lock-in period expired.

UBS stressed that it was “committed” to its relationship with BoC and to its other mainland businesses.

But dealmakers say that any foreign institution mulling a stake sale will have to weigh carefully the potential downside, at a time when Beijing is trying to garner support for its largest banks.

Bank of America last month cancelled a plan to sell more than $3bn worth of its shares in CCB after being told by senior government and banking officials that Beijing was unhappy with the timing of the sale, according to people familiar with the matter.

The cancellation has raised concern among other banks which, like BofA, invested in Chinese banks as “strategic partners” that they will not be able to sell down shares.

“The Chinese stock market is in a terrible situation right now and if all the big foreign investors are running away from the banks then that would hurt confidence even more and the government would not be keen to see that happen,” said Wu Yonggang, an analyst with Guotai Junan, a Chinese brokerage.

Stake sales will also be limited by the need to find buyers for the shares.

“Banks round the world are reviewing non-core holdings and many will no doubt decide to sell their Chinese bank stakes,” says one banker in Hong Kong. “But these share sales can not all come at the same time as they will not be digested by the market.”

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Fuel and Chinese exports

The rapid increase in the price of fuel has obvious knock on effects on transport costs. There are two issues here.

1. There will be an addition fuel cost per shipping container so price goes up

or

2. The ship will go slower to conserve fuel but also resulting in higher transport costs in terms of time.

This has important implications for the study of international trade, offshoring, outsourcing and globalisation in general.

A recent China Economic Review article commenting on a Washington Post piece touches on this development:

China’s getting too expensive. Back to America! [China Economic Review]

We’ve heard plenty in the news this year about rising prices hurting export-oriented businesses in places like Guangdong and, more recently, Zhejiang. Clearly some areas of China that were once “workshops” for the world’s cheap goods are pricing themselves out of the market, with the slashing of export rebates, inflation, currency appreciation (though that appears to be slowing viz. the US dollar) and rising labor, material and fuel costs all playing a part. The next step for these areas, local governments hope, is to climb the greasy pole value chain and start producing higher-value goods.

So who’s going to make our cheap furniture and sleeping bags now? Americans?

Not as strange as it sounds. In some cases, according to this interesting article by the Washington Post’s Ariana Eunjung Cha, some low-cost American manufacturers are headed back home. Transportation costs are a big part of it, according to Cha:

With fuel prices at record highs, the cost of sending a standard 40-foot container of goods has gone from $3,000 in 2000 to about $8,000 today, squeezing profit.

So this summer Kazazian, chief executive of Exxel Outdoors, a Los Angeles-based maker of recreational equipment, did something radical: He moved the manufacturing back to Haleyville, Ala.

Soaring energy costs, the falling dollar and inflation are cutting into what U.S. manufacturers call the “China price”– the 40 to 50 percent cost advantage once offered by Chinese producers.

The export model that has powered China and other Asian countries for three decades will be compromised if fuel prices continue to rise, said Stephen Jen, a managing director for Morgan Stanley.

“Globalization has gone a little bit too far. It has overshot,” Jen said. “We’re not saying Asia is going to crumble, but we are saying Asia enjoyed extraordinary conditions in the past. Now the conditions are changing very quickly because of the energy shock, and Asia is coming under pressure.”

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China's takeover of Africa

Interesting take on China's role in Africa. The sheer number of people moving from China to Africa is interesting.

The author does not mince their words and China gets a grilling. This long article is worth reading in full.

How China's taking over Africa, and why the West should be VERY worried [This is London]

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With little fanfare, a staggering 750,000 Chinese have settled in Africa over the past decade. More are on the way.

The strategy has been carefully devised by officials in Beijing, where one expert has estimated that China will eventually need to send 300 million people to Africa to solve the problems of over-population and pollution.

The plans appear on track. Across Africa, the red flag of China is flying. Lucrative deals are being struck to buy its commodities - oil, platinum, gold and minerals. New embassies and air routes are opening up. The continent's new Chinese elite can be seen everywhere, shopping at their own expensive boutiques, driving Mercedes and BMW limousines, sending their children to exclusive private schools.

The pot-holed roads are cluttered with Chinese buses, taking people to markets filled with cheap Chinese goods. More than a thousand miles of new Chinese railroads are crisscrossing the continent, carrying billions of tons of illegally-logged timber, diamonds and gold.

The trains are linked to ports dotted around the coast, waiting to carry the goods back to Beijing after unloading cargoes of cheap toys made in China.

Confucius Institutes (state-funded Chinese 'cultural centres') have sprung up throughout Africa, as far afield as the tiny land-locked countries of Burundi and Rwanda, teaching baffled local people how to do business in Mandarin and Cantonese.

Massive dams are being built, flooding nature reserves. The land is scarred with giant Chinese mines, with 'slave' labourers paid less than £1 a day to extract ore and minerals.

Pristine forests are being destroyed, with China taking up to 70 per cent of all timber from Africa.

US assets in Chinese hands

The debate over the large and increasing holdings of US assets by China. Bloomberg investigates.

China Adds to Holdings of U.S. Assets, Buys More Agency Debt [Bloomberg]

June 17 (Bloomberg) -- China is adding to its holdings of U.S. assets, data from the U.S. government showed yesterday, easing concern the Asian nation will sell dollar investments.

Total holdings of U.S. equities, notes and bonds among foreign investors rose by a net $115.1 billion in April from $79.6 billion the previous month, the Treasury Department said yesterday in Washington. China's holdings of Treasuries gained $11.4 billion to $502 billion, holdings of U.S. agency debt rose $11.9 billion and U.S. corporate bond investments increased $6.9 billion, data showed.

``China was a big buyer of U.S. securities,'' wrote Win Thin, a New York-based senior currency strategist at Brown Brothers in a research note today.

China is the second largest holder of U.S. Treasuries after Japan, investing almost one-third of its $1.68 trillion in currency reserves in U.S. government debt. The U.S. dollar's decline has triggered concerns that Beijing would seek other forms of investments for its currency reserves.

``I don't think it's a smart move to invest in U.S. bonds,'' said Cheng Siwei, former vice chairman of the National People's Congress, China's legislature, at a Beijing conference on June 13. Cheng had said on Nov. 7 that China should improve the structure of its foreign reserves by favoring stronger currencies.

`No Sign'

The data showed ``there has been no sign that either China or Japan are decreasing dollar holdings,'' Win wrote in his report. ``Rather the data continued to show diversification by the two within U.S. securities.''

Japan decreased its holdings by $8.5 billion to $592.2 billion in April, the data showed. Its holdings of U.S. agency debt gained $2.6 billion, corporate bonds rose $1.1 billion and U.S. equities increased $1.1 billion.

The drop in Japan's total net holdings of U.S. assets in April ``really isn't worrisome as it comes on the back of three straight months of gains totaling $51.5 billion across all categories,'' Brown Brothers wrote in the note. ``It is important to look at the entire spectrum of investment holdings and not just on the narrow U.S. Treasury holdings,'' it said.

China Financial Markets comments in more detail (excellent reading as always):

Of course Chinese dollar holdings rose, but something changed drastically[China Financial Markets]

It now seems that China’s rate of reserve accumulation, seemingly unsustainable even two years ago, has reached even higher levels, but what is powering it now is not the (relatively) stable trade surplus and FDI accounts but rather highly unstable speculative inflows (for an explanation of how reserve accumulation has been generated see “What? $74.5 billion? Is this a mistake?”). If I am right, it seems to me that there has not just been a quantitative change in China’s and the world’s balance of payments accounts in recent months (i.e. even more rapid growth in an already unsustainable rate of Chinese foreign currency reserve growth), but also a qualitative change – the cause of China’s reserve growth has shifted significantly. The old mechanism, large trade deficits in some countries balanced by rapid reserve accumulation in others, has been converted into something much more complex and maybe even pro-cyclical (hence volatility enhancing): large trade deficits in some countries plus massive speculative inflows in others are being balanced by even more massive reserve accumulation in the latter countries.

I still need to work out in my mind what some possible implications are, but I would be lying if I said I didn’t find this change worrisome. My instinct is that because of the intensely pro-cyclical nature of speculative inflows, this new system is a lot less stable than the old one.

Greenfield FDI and innovation

Apologies for the lack of posts recently, exam marking time in academia.

Here is a paper that I need to read. The impact of foreign firms in China is complex. The pursuit of profit has lead many MNEs into China but at what cost? What is the impact on UK/US jobs? On wages in both the west and China, on the growth and innovation in both countries?

Whilst I would have had some concerns if I had refereed this paper and it is more "business school" than "economics" it is a good starting point.

The impact of greenfield FDI and mergers and acquisitions on innovation in Chinese high-tech industries [Journal of World Business]

Xiaohui Liu
Huan Zou1,

Business School, Loughborough University, Leicestershire LE11 3TU, UK

Available online 20 December 2007.

Abstract

Using panel data analysis, this paper investigates the impact of international technology spillovers on innovation in Chinese high-tech industries through greenfield foreign direct investment, cross-border mergers and acquisitions and trade. We report that foreign greenfield R&D activities by multinational corporations in a host country significantly affect the innovation performance of domestic firms and there exist both intra-industry and inter-industry spillovers from foreign greenfield R&D. There are only inter-industry M&A spillovers. We find that importing foreign technology and investing in domestic R&D have positive impacts on domestic innovation. The findings have important implications for theory, practitioners and policy-makers.

Keywords: Innovation performance; Foreign R&D activities; Cross-border M&As; Chinese high-tech industries

Hot money and the calls for a maxi-revaluation

Brad Sester over at RGE monitor has a neat little article (with good figures) outlining the dangers of holding off the revaluation much longer.

For the record I cannot see it yet. The political implications are too great (the perceived job losses associated with a loss of competitiveness).

A good article and worth reading.

What keeps Zhou Xiaochuan up at night [RGE monitor]

Friday’s Lex column highlighted the possibility that China’s real reserve growth may be far higher than the published increase in its reserves – and thus a lot more hot money may be flowing into China than the published increase in China’s reserves implies. Michael Pettis – drawing on the work of Logan Wright of Stone and McCarthy - and I have both published online estimates of the “true” pace of Chinese reserve growth. Wang Tao – formerly of the Bank of America – and Stephen Green of Standard Chartered have done similar work.

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Anecdotal evidence on Chinese firms

I apologise in advance for this post - this excellent article from the always interesting Silk Road International Blog touches on an area of academic research that I am currently up to my neck in.

Economists are always susceptible to the criticism of taking too much of a macroeconomic overview. There are a growing number of papers that examine the determinants of the export decision of firms for developed and developing countries all of which ignore what is really happening on the ground.

This Silk Road article provides some of that information. This post is therefore written so I have a permanent record that I can refer back to, in a sense using this blog as a research diary (which is what I do when posting up abstracts of papers etc.).

This article throws up numerous questions that I may address again at later date.

Three and a Half Kinds of Factories [Silk Road International Blog]

It goes without saying that not all factories are created equal. Not all factories with international experience are equal either. Certainly there is a level that you’d prefer to work with if price was constant. But this isn’t a perfect world so we need to talk about with whom you actually choose to work.

If you’re not here on the ground every day, it’s helpful to know some generals about the differences in factories that are available here. This is certainly a sweeping generalization as there are possibly millions of factories in China. But I’ve worked with, audited and visited hundreds and hundreds of different factories here, in Thailand and Taiwan. And some generalizations are possible, I think, if for nothing other a base-point to start the discussion. So, here is my simplified overview of factory options with in China.

The article then discusses domestic, domestic/international, international and limited international.

Very interesting.

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FDI reversals - high costs leading to fleeing Koreans

After years of spectacular growth in FDI in China the tide might be turning in the face of rapidly increasing costs.

The International Herald Tribune highlight this problem in a recent article. The word of the day is "flee" which gives the impression of a less than orderly exit from the China.

There are two issues here:

1. If China is no longer the cheapest location to produce goods where is? Costs are rising everywhere.

2. The "fleeing" of thousands of factory owners in the face of increased costs merely represents reality kicking in. Rising costs and a US recession mean that easy money can no longer be made and it is merely the least efficient firms going out of business.

What all of this does mean is that prices of consumer goods may well rise in the UK and elsewhere (on top of all the other energy and food related price increases).

Just when the West wants to be cutting interest rates to help with the credit crunch we get inflationary pressures suggesting that the opposite is required.

Interesting times.

Rising costs forcing some South Korean factory owners to flee China [IHT]

Scores of South Korean-owned factories are closing surreptitiously in eastern China as their owners flee rising costs, leaving behind embittered workers like Li Hua.

Li and more than 200 colleagues have been fighting for a year to get the six weeks' wages they were owed when the owner of the toy factory where they worked fled during the 2007 Lunar New Year holidays.

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Her case is not a rarity in Qingdao, a major seaport and industrial city in eastern China that sits across the Yellow Sea from South Korea. A two-hour flight from Seoul and home to about 100,000 South Koreans, the city is a hub for South Korean factories benefiting from cheap labor.

But lately, a growing number of South Korean factories have abruptly closed down and the South Korean owners have disappeared as a slew of policies, including rising labor costs and an end to tax breaks, bite into their profit margins.

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Qingdao mirrors, on a smaller scale, what is happening in the Pearl River Delta near Hong Kong. There, thousands of factories, mostly run by Taiwan and Hong Kong companies, are moving inland or abroad or are simply closing as rising costs undermine the assumption that China is the world's cheapest manufacturing location.

A ravenous dragon in Africa

The increasing presence of China in Africa has been a topic of hot debate in the press, blogs and for academics.

The Economist has now entered the debate with a special issue. Better late than never.

There are a whole series of article most of which are worth a read. The quotes include the standard scare stories. There is some truth in these stories but Western companies also fear being frozen out. Is this a race to the bottom taking place? If so the West will find it very hard to compete.

This issue will become increasingly important in years to come and is something I will be working on.

A ravenous dragon [Economist]

Unwelcome advances

But China's sudden global reach is generating as much anxiety as prosperity. In 2005 America's congressmen, citing nebulous national-security concerns, scuppered the proposed takeover of Unocal, an American oil firm, by CNOOC, a state-owned Chinese one. The opposition candidate in Zambia's presidential election in 2006 made a point of attacking the growing Chinese presence in the country. Residents of Russia's far east fear that China is planning to plunder their oil and timber and perhaps even to colonise their empty spaces.

Some non-governmental organisations worry that Chinese firms will ignore basic legal, environmental and labour standards in their rush to secure resources, leaving a trail of corruption, pollution and exploitation in their wake. Western companies fret that the Chinese state-owned firms with which they suddenly find themselves competing have an agenda beyond commercial gain. The Chinese government, they say, is willing to pay over the odds for mining or drilling rights to secure access to physical resources. It also intervenes unfairly on its companies' behalf, they claim, by offering big aid packages to countries that welcome Chinese investment. All this, it is feared, will dent the profits of big oil and mining firms, stoke inflation and imperil the West's access to resources that it needs just as much as China does.

Diplomats and pundits, for their part, fear that the West is “losing” Africa and other resource-rich regions. China's sudden prominence, according to this view, will reduce the clout of America, Europe and other rich democracies in the developing world. China will befriend ostracised regimes and encourage them to defy international norms. Corruption, economic mismanagement, repression and instability will proliferate. If this baleful influence spreads too widely, say the critics, the “Washington consensus” of economic liberalism and democracy will find itself in competition with a “Beijing consensus” of state-led development and despotism.

Such fears are not entirely groundless if the recent conduct of some of Congo's neighbours is anything to go by. Angola, to the south, has been receiving so much aid and investment from China that in 2006 it decided it had no need of the International Monetary Fund's billions and all the tiresome requirements for transparency and sound economic management that come with them. Sudan, to the north, has shrugged off Western threats and sanctions over the continuing atrocities in Darfur, thanks in large part to China's readiness to invest in Sudanese oilfields and buy their output. Farther afield, China's eagerness to do business in Myanmar, and its consequent reluctance to chide the tyrannical generals that run the place, helped to prevent a forceful international response to the violent repression of peaceful demonstrations there last year.

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Multinationals and CSR in China

There is a considerable interest in the economics literature as well as in the popular press on the behaviour or multinationals in developing countries. I have done some recent work on China.

It is therefore interesting to see the Chinese popular press jumping on this particular bandwagon. From a political economy perspective, corporate social responsibiluty (CSR) is a good stick for China to beat foreign firms with.

The real issue is not how badly foreign firms behave but how badly relative to their plants in thier domestic market and local firms.

Consumer message to foreign firms: Behave [Shanghai Daily]

CHINESE consumers and workers want transnational companies to exercise more social responsibility following a series of scandals, a survey has revealed.

The survey, by the Guangdong Provincial Situation Study and Investigation Center, polled more than 3,000 respondents - including consumers and employees of transnational companies in Shanghai, Beijing, Guangzhou and Shenzhen - on the firms' image in the nation.

About 70 companies were involved, including drinks giant Coca-Cola and telecommunications major Nokia, both of whom have a high-profile presence in China.

Close to 90 percent of those polled agreed that the companies had made significant contributions to the country's economic development.

However, only about 22 percent of those polled said that the companies had fulfilled their social responsibilities in accordance with profits they had made in China.

Almost 80 percent of the respondents also said there was discrimination against Chinese employees within multinational companies.

Feng Shengping, a researcher with the study and investigation center who led the study, said multinational companies should attach more importance to improving their corporate image among consumers, so they can better integrate into the economy and society.

"The public is paying more attention to whether multinationals are performing in accordance with the law, and whether they realize due social responsibility," Feng said.

"Transnational companies, which were once regarded as exemplary businesses for the Chinese economy, have, to some degree, lost their image among consumers, following a series of business scandals in recent years."

More than 570,000 foreign-invested companies have registered in China since 1982, bringing investment of US$665 billion, the researcher said.

On the Rising Sophistication of China's Exports

I am doing some work in this area. This new NBER paper appears to have some excellent data on product level trade between cities. One to add to the "to read" pile.

From the abstract I am not overly convinced by these results. It all depends on how the authors have attempted to measure sophistication.

What Accounts for the Rising Sophistication of China's Exports?

NBER Working Paper No. W13771

ZHI WANG, U.S. International Trade Commission
Email: Zhi.Wang@usitc.gov
SHANG-JIN WEI, Columbia Business School, National Bureau of Economic Research (NBER), Centre for Economic Policy Research (CEPR), International Monetary Fund (IMF)
Email: shangjin.wei@columbia.edu

Chinese exports have become increasingly sophisticated. This has generated anxiety in developed countries as competitive pressure may increasingly be felt outside labor-intensive industries. Using product-level data on exports from different cities within China, this paper investigates the contributing factors to China's rising export sophistication. Somewhat surprisingly, neither processing trade nor foreign invested firms are found to play an important role in generating the increased overlap between China's export structure and that of high-income countries. Instead, improvement in human capital and government policies in the form of tax-favored high-tech zones appear to be the key to the country's evolving export structure. On the other hand, processing trade, foreign invested firms, and government-sponsored high-tech zones all have contributed significantly to raising the unit values of Chinese exports within a given product category.

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Aid from China and Human rights abuses

Excellent article reflecting on a recent academic paper on Chinese aid and human rights abuses.

Instead of going through the arguments again I point you to Chris Blattman's Blog that has the appropriate links. I believe the economists have got it about right here - it is crucial to identify the order of causation.

I believe that this will become an increasingly important topic for empirical researchers and something I will be looking at in the near future data permitting.

Do trade and aid from China increase human rights abuses?

Yesterday, the New York Times lamented the worsening war in Sri Lanka, the rise in human rights abuses, and the emasculation of rights observers. "Gone are the Nordic monitors," it writes, "independent journalists are not allowed anywhere near the front lines."

Today, the blame is apportioned. "Take Aid From China and Take a Pass on Human Rights" proclaims the newspaper. The argument: unconditional aid and trade from China insulates regimes from Western mores and threats of sanctions in a dirty war.

China fear-mongering? Taking the story beyond the evidence? Maybe not.

The Times misses a paper posted last week by economists Erik Meyersson, Nancy Qian, and Gerard Padró-i-Miquel, but it gets the story right. Here newspaper anecdotes get support from some powerful statistics: trade with China predicts human rights abuses. At least in Africa.

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China vrs Thailand

The Silk Road International blog posted an interesting little article where a business man compared doing business in China and Thailand.

I am currently writing academic papers on both countries and this sort of post gives one a flavour of what is happening at ground level. These are therefore posted for my own reference but I think they should of interest to all those interested in the economics of China.

Thailand vs. China [Silk Road International Blog]

1. Were here in Thailand for this client because of the tax and export duty savings over China in their specific product line. The cost differences are substantial and the legal requirements for export are not nearly as burdensome here.

2. Thailand’s infrastructure is at least as good as China’s East Coast’s—ports, airports, toll-ways. Nothing new, I know, but this is one of the major drawbacks of working far inland in China or even close to large cities in Vietnam or Cambodia. The big plus in Thailand is that there are no inter-provincial tariffs or restrictions on the flow of goods like there is in China.

3. Even with the recent wage increases labor is still more expensive in Thailand than in China. I’m seeing cost differences of about $50 to $75 a month between factory workers in China vs. Thailand.

4. The environment is much more “international” in Bangkok than it is in Shenzhen—more so than even Hong Kong, I’d say. Sure there isn’t as much English on signs but the exposure to “the west” is certainly as much or more—To me, Bangkok seems to be becoming more western and Hong Kong more Chinese. There are certainly more foreigners (yes, even in the non touristy sections of town).

5. The advertising is much more sophisticated in Thailand than China where it’s still a relatively immature industry. I was consciously amazed at the higher quality of both radio and out-door media advertising.

6. Nationalism is alive and well in both countries but Thailand’s flavor is much less strident. China seems to be a bit more angry, with something to prove, while Thailand is much more comfortable with it’s unique place in the world.

7. As I work with people in the jewelry industry here I’m constantly being told the same thing when I tell people I live in China, “You know, labor is more expensive here, but you get better quality work too.” Almost to a person, this was the response I heard—more than 10 times in just one day.

8. Thailand has a very well developed export base for automobiles, machinery and electronics, according to the Bangkok Post today. While China does have some of this too, pick-up trucks and hard-drives are especially well developed sub industries in Thailand.

9. Staffing in China is difficult in both retaining top-level local employees as well as low-end factory labor. Thailand has similar tight market in top-level employees. Service levels are much higher in Thailand as is education in general. Professional standards seem, to me, to be higher in Thailand as well.

10. The traffic in both Thailand and China is horrible—but each has it’s own perils. In China you are literally taking your life in your hands when you get into a car—the roads are some of the most deadly in the world. It’s scary, and for good reason. Thailand is completely different—you’re never going fast enough to be in a dangerous situation! The traffic, in Bangkok, is so bad at almost all times of each and every day that estimates are it lowers annual GDP by multiple points!

11. Banking (I can’t believe I’m going to say this); hands down China has better banks—in terms of service and accessibility. In China if you need a bank, you can get one open from 8AM to 5PM 7 days a week. Thailand is 9AM to 3:30PM five days a week and off every holiday known to man.

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World Development Special Issue: Asian Drivers

World Development has a recent special issue looking at the impact of Asian drivers on the developing World. The quality of papers in World Development is usually average to good.

Some interesting papers and some "not so interesting" papers. Special issues can often mean a lower average quality of contribution.

The Impact of Asian Drivers on the Developing World

Introduction: The Impact of Asian Drivers on the Developing World
Pages 197-209
Raphael Kaplinsky and Dirk Messner

Asian Growth and Trade Poles: India, China, and East and Southeast Asia
Pages 210-234
Scott McDonald, Sherman Robinson and Karen Thierfelder

The Impact of China on Latin America and the Caribbean
Pages 235-253
Rhys Jenkins, Enrique Dussel Peters and Mauricio Mesquita Moreira

Do the Asian Drivers Undermine Export-oriented Industrialization in SSA
Pages 254-273
Raphael Kaplinsky and Mike Morris

Global Governance and Developing Countries: The Implications of the Rise of China
Pages 274-292
Jing Gu, John Humphrey and Dirk Messner

Do the Asian Drivers Pull their Diplomatic Weight China, India, and the United Nations
Pages 293-307
Andrew F. Cooper and Thomas Fues

China’s Capacities for Mitigating Climate Change
Pages 308-324
Carmen Richerzhagen and Imme Scholz

Breakthrough China’s and India’s Transition from Production to Innovation
Pages 325-344
Tilman Altenburg, Hubert Schmitz and Andreas Stamm

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Capitalists take control of China - labour left with less

Karl Marx would have a field day. It is clear that capitalism now has China in its icy grip. The workers are, as always, being exploited.

Below is an interesting artcile from the Peterson Institute. I tend to agree with most of the arguments raised. Technological progress has certainly played a part (driven partically by foreign direct investment).

What Is China Doing to Its Workers?

Is the dramatic decline in labor's share of the economic pie ominous?

A silent revolution has been taking place in China. Somehow, without anyone noticing, the capitalists have upended the People's Republic. Over the past few years, they have effected a significant redistribution of income away from workers. This might well be the mother of all redistributions.

Normally, in most countries, the distribution of income between labor and capital changes not at all or very slowly. For example, in the United States, the share of the economic pie going to workers has been, with some small exceptions, roughly stable in the postwar period. In China itself, this share was roughly stable for over 25 years since the Chinese economy took an outward turn in 1978.

But recently there have been tectonic shifts. Between 2002 and 2005, according to Berkeley economists, Chong-En Bai, Chang-Tai Hsieh, and Yingyi Qian, the share of the economic output going to workers decreased by about 8 percentage points, from about 50 percent of GDP to 42 percent of GDP. Which means that China—yes, the People's Republic—now has perhaps the lowest labor share of any major country in the world.

The article concludes:

How might this decline in labor's share—a source of potential social disaffection and unrest—be reversed? To begin with, it is likely that public pressure will force the government to share the large returns to capital with savers, thereby improving household investment income. Most Chinese savers, who have their money in the Chinese banking system, today obtain zero or negative returns. And they have become wise to this large disparity. Thus, the government has been forced to list more firms in the stock market so that households can enjoy some of the high returns that companies are making. Households have also been investing heavily in the real estate market. But this government strategy has limits because stock and real estate prices are exceptionally high, and as they return to earth, households could be left with depreciated assets and poor returns, which might do little to increase their income.

Over a longer period, further economic forces will come into play. New entrants will emerge and bid away the excessive return to capital. But the big question is this: What if these forces are too weak or too slow, and the public becomes impatient? Will the decline in labor's share of the economic pie be reversed through political change? That may be China's big question.

Risk and Sunk Costs

There is a growing literature in economics that examines the behaviour of firms when undertaking FDI and/or exporting. These heterogeneous firm models use "sunk costs" to differentiate between exporters and domestic only producers (which are always a majority of firms) or multinational and domestic firms.

There is still, to my mind, on ongoing debate as to how large these costs actually are.

This comment by China Vortex (H/T: China Law Blog) presents an interesting perspective on how some of these costs can be derived related to "risk" especially concerning the different behaviour of Western and Chinese firms in relation to African investments.

Risk is in the eye of the beholder [China Vortex]

In the west, there is a whole industry called “risk consultancy”. Basically, this industry is built around informing large- and medium-sized corporations about risk. Originally, this was built around business risk and would answer questions like “How safe is it to invest $500M in an industrial diamond mine in the Congo (formerly Zaire)?” The consulting firm would then send practice consultants to the target country, where they would study sunk costs (including bribes which were never written about in the report, regulations, who was related to the president, political opposition, major competing firms, etc.) Most of these questions were positioned as questions which any board would ask the CEOs before they would greenlight an investment.

Underlying all this is the belief, at least in west and among western corporations that “risk” is something which can be quantified and measured objectively.

One of the big topics in the west now is China’s investments in Africa. What is fascinating about China’s investments in Africa is that while the amounts of money and people who go to Africa are huge, China really doesn’t have risk consultancies, and Chinese really have not yet started thinking in terms of quantifying risk in the ways western corporations have.

So how have the Chinese judged risk so far, and will the present method change over time to something more akin to the western way of thinking? When it comes to Chinese investments in Africa, many of the early-stage investments were a part of Chinese foreign policy aimed at securing raw materials for manufacturing, and more importantly, energy sources. The typical model has been to find a country, build a new palace for the president and a new sports stadium to win over the people. This would help state-owned construction firms to gain a footing in the country, which were then quickly followed by Chinese logistics firms and wholesale distribution firms which would sell products to the local African population.

Viewing the local African population as customers were one area where Chinese viewed Africa fundamentally differently from the west. While Beijing, Shanghai and the Chinese tier one and tier two cities are relatively modern, it is very easy to forget that when it comes to pervasive poverty, China is only 10-20 years removed from the levels of African poverty. Basically, Chinese companies know how to sell to poor people because they had lots of practice in China.

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China Law Blog's comment is also illuminating for economists.

The high margins American companies expect and their high labor costs are no doubt factors, but I also wonder if it is not just plain and simple risk aversion based on an unwillingness to risk jeopardizing that which has already been achieved. All I know is that I have worked with an untold number of companies over the years that have come to the brink of going into an emerging market country (including China), but then backed down at the last minute because of some (often very small) risk that would not be present stateside.

In the West it is widely perceived that US firms are greater risk takers than European firms with greater entrepreneurial drive. I suspect CLB's comments only apply to the large US multinationals and not the more nimble small and medium sized companies who may be in less need of their expensive lawyers.


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