Category / China

by Andrew

Coping with industrial decay

Chuin-Wei Yap has an excellent piece in the Wall Street Journal on the shutdown of the Panchenggang steel mill near Chengdu, apparently the largest state-owned steel mill to be closed since the 1950s. The piece is mostly about the human angle, and what happens to “company towns” around China that are centered on declining industries like steel mills or coal mines:

Cities and towns across China are losing some of their biggest employers in a process reminiscent of the factory shutdowns that decades ago hit Rust Belt America, from Detroit to Baltimore.

Paper mills are being forced out of the southern city of Dongguan as it tries to prod manufacturers to move up the value chain. In the northern county of Luquan, made wealthy by cement, scores of polluting producers have shut down as the local government tries to retool the area for tourism; a full-scale replica of the Great Sphinx of Giza—made of cement—stands on the city’s edge.

As communities begin to hollow out, it is straining a social compact that has been a feature of the Communist Party’s rule: that state-owned companies would take care of the industrial workforce, even in difficult times. It is a bargain meant to keep workers from going on strike, or worse, becoming a source of antigovernment unrest, like the dockyard workers who helped bring down Poland’s communist government.

In Qingbaijiang, the industrial district where Panchenggang sits north of Chengdu, thousands of residents have gone elsewhere in search of employment. “For Rent” signs line the streets of once-bustling neighborhoods. Petty crime is edging up.

Read the whole thing, and be sure to check out the spooky video with nice aerial photography of the steel mill and town.

This is a phenomenon we’re only going to hear more about in coming years. It’s not unknown in China currently, but most of the examples I’ve seen of empty “rust belt” towns are in the northeast, and are rare in the rest of the country. As the paragraph above highlights, one of the main ways to deal with local economic decline is for people simply to move. In fact, the northern and inland provinces have been gradually losing population in recent years, at least in relative terms (the national population is still growing, so not that many places have an absolute decline in population).

population-shift-2010-14

Again, this fits the regional pattern of industrial structure and economic distress that I’ve written about several times on this blog: the declining industries are disproportionately located in the inland provinces, particularly north and west. So people have been leaving those places and concentrating in the zones of prosperity with more and better jobs, primarily the Beijing-Tianjin-Hebei area and the southern coastal provinces.

The need to allow people to migrate to help them adjust to the changing economic structure only reinforces the urgency of overhauling China’s household-registration system, which creates lots of disincentives for migration by limiting migrants’ access to social services. There was a lot of discussion about this soon after Premier Li Keqiang took office, but little has been heard of late. I suspect this is because the government is not prepared for the big increase in fiscal spending that would be required to equalize treatment.

by Andrew

Is Singapore the future of language?

Wrapping up a few days of meetings in Singapore, I am reminded of what I enjoy about this place. It’s not just the fantastic street food or the irony-free government pronouncements on the “commuter graciousness index.” No, what I really appreciate is its peculiar linguistic environment. Many Singaporeans are native speakers of both Mandarin Chinese and English–but my Singaporean friends sometimes complain that they feel like they cannot speak either language “properly.”

I think this is partly because the true native linguistic environment for Singaporeans (the ethnic Chinese majority anyway) is neither Chinese nor English but the combination of the two. One aspect of this is the delightful Singaporean dialect Singlish which merges features of both Chinese and English (I had understood Singlish as mainly English vocabulary spoken with mainly Chinese word order, with an overlay of Malay loan words, but the incredible Wikipedia article on Singlish makes clear that was a drastic oversimplification). Another aspect of it is the broad assumption that most people are bilingual, which means that cross-linguistic Chinese-English puns are an unexceptional part of mass culture. One exhibit from this trip: the advertising slogan “Make the 饭 fun” (the Chinese character 饭, pronounced fan, means cooked rice and is a metonym for the whole meal and food in general).

Rather than being pure denizens of one linguistic world, Singaporeans reside, occasionally uncomfortably, in two. As a native English speaker who lives in China and speaks Chinese at home, being uncomfortably poised between two languages is pretty much the story of my life. So that’s why I find Singapore strangely comfortable–because I’m suddenly surrounded by many more people who are in my situation.

And if we think that the world of the future will be largely dominated by the superpowers of America and China, which seems to be the way things have been heading lately, then this kind of English-Chinese bilingualism could become much, much more common. This was one of the fun aspects of the future imagined in the wonderful science-fiction TV show Firefly, in which the characters occasionally tossed snippets of Chinese (without subtitles or explanation) into otherwise normal English dialogue. I enjoyed the show a lot but this part of it could have been better handled: the actors’ Chinese pronunciation was so poor that it was difficult to understand what they were saying. More subtly, the way the characters used Chinese phrases was too arbitrary and not true to the way this happens in real life among bilingual people. For a masterclass in the language of the future, Joss Whedon should have gone to Singapore.

by Andrew

Some good sense on Chinese consumption

I agree with almost everything Yukon Huang says in this piece, “How China’s Consumption Matters,” though he is more optimistic than I am that 7% GDP growth is sustainable for China. The obsession of many economic commentators with “rebalancing” and the consumption share of GDP is largely beside the point.

China’s future growth rate will be largely determined by what the sustainable rate of investment and productivity growth turns out to be. Trying to boost consumption with subsidies or “stimulus” will help only in the short term, if that. This means that the most important reforms are the ones with the potential to increase high-return investments by the private sector–for instance liberalizing service sectors and overhauling state-owned enterprises.

Here’s some excerpts from Yukon’s article:

A country’s gross domestic product grows with increased investment and productivity, and to a lesser extent with growth in the labor force. Consumption doesn’t drive growth. It’s the result of growth.

Household consumption’s share of the Chinese economy, for instance, is around 35%—the lowest of any major economy. Yet over the past decade per-capita consumption in China has increased by about 8% to 9% in real terms after adjusting for inflation—multiples faster than any other developed economy and on average twice that of developing economies. …

What’s important, then, is the maximization of consumption’s growth over time, not its share of GDP in the near term. …

The challenge now is to increase productivity through reforms so that moderately rapid growth and continued increases in personal consumption can be sustained. Whether consumption as a share of GDP rises or falls is incidental. It should not be seen as an objective in its own right.

by Andrew

The Manchurian Recession

Coming back from my own trip out to the provinces, I find that Simon Denyer of the Washington Post has an excellent report on the economic problems of China’s northeast. As is becoming increasingly clear, if you want to find China’s recession, the northeast is the place to look. And you don’t have to look very hard: in the first half of 2015, nominal GDP growth in both Liaoning and Heilongjiang provinces was negative (Jilin managed a meagre 4.4% gain).

The three provinces that comprise most of historic Manchuria are more dependent on heavy industry and more dominated by state-owned enterprises than the rest of the country. So they are extremely vulnerable to the current downturn, whose main feature is stagnant or declining demand for many of the products, like steel, that are made by state-owned heavy industrial companies. The northeast is not the only part of China effectively in recession: coal-mining provinces like Inner Mongolia and Shanxi are suffering, as is Hebei, the nation’s largest steel producer. But these northern and northeastern provinces are at the center of China’s current problems, as is quite clear from the data:

2015Q1-provincial-GDP-tradmap

Simon’s piece has a couple of choice observations that encapsulate some of the problems the northeast is facing. Here is one:

“Everyone knows what the problem is. It is structural,” said an official dealing with economic policy in the Liaoning government who spoke on the condition of anonymity because he was not authorized to talk to the press.

“Everybody knows what to do. You need to change the economic structure. But what concrete steps to take? Nobody knows,” he said. “What can we do? Financial sector? You can’t compete with cities like Shanghai. High-tech industries? Those won’t flourish overnight.”

and another:

Zhou Dewen, who runs a business association in Wenzhou, scouts out investment possibilities throughout China. He has led 20 small-business delegations to the northeast, but he has not been able to work up much enthusiasm for the region.

“The northeast still thinks of itself as the big brother, because they were the first to get rich after the new China was founded,” he said. “They are sitting on their glories and not advancing with time. Their mind-set is still the old planned-economy stuff. They don’t see that small businesses can do big things.”

by Andrew

Still wanted: some frank talk about China’s growth prospects

One of the more depressing pieces of economic news to come into my inbox recently was this piece in the Chinese-language Economic Information Daily. I translate the first paragraph below:

The Fifth Plenum will be held in October this year to research and draft the proposal for the 13th Five-Year Plan, but the Economic Information Daily has learned that as of now it is still undecided whether the economic growth target will be 6.5% or 7%. Economists have different views on China’s potential economic growth rate over the next five years, but most of them think it should be over 7%.

This is depressing because it appears to indicate (with the usual caveats about the reliability of Chinese press reports) that there is hardly any meaningful debate about China’s economic prospects at the highest level of policymaking. If the question is whether the growth target for 2016-2020 should be the same as the previous five years, or half a percentage point slower, then that’s not even asking the right question. It is also disappointing because there had previously been some discussion about whether the next five-year plan should jettison GDP growth targets entirely, and instead target other indicators more directly related to the welfare of its population (maybe China could do something crazy like, I don’t know, target inflation and unemployment instead?). A move away from the fetishization of GDP numbers and toward more realistic policymaking in China is desperately needed, and right now I’m not feeling so optimistic that it is coming.

To get a sense of the problem, sample the rest of the commentary in the article, which features quotes from lots of big names–the type of economists who speak at conferences, write op-eds and get asked to advise the government. Hu Angang, a prominent Chinese economist who has been on the academic advisory commission for a few five-year plans now, is quoted as recommending a growth target of “about” 7% for the next five-year plan period (2016-2020). He says this would imply that anything from 6.6% to 7.4% would be an acceptable growth rate, but that 6.6% would be a “floor” for growth. Peking University economist Liu Wei says potential growth will be 7% or higher until 2023. Fan Gang, another well-known economist from one of the main non-government think tanks, also thinks future growth should be 7% or higher. Wang Yiming of the Development Research Center, a major in-house government think tank, also plumps for 7%. A more cautious view comes from China Banking Association economist Ba Shusong, who warns that because of the exhaustion of the demographic dividend and slower exports, GDP growth is likely to slow to 6.5% over the next five years.

Is it just me, or is it feeling like an echo chamber in here? Of course, it is easy to find Chinese economists who are not wedded to the view that GDP growth will never fall below 7% (I even work with some). But the point is that the public discussion of future growth prospects has been extremely impoverished of late. For all the recent propaganda about a “new normal” that requires some tough adjustments to slower growth, there is little public discussion of scenarios other than continued steady 7% growth. While in the international media you can read about a full range of possibilities, from crash to boom, in the official Chinese press you rarely see numbers other than 6% or 7% growth (or even 8%–I have on this blog previously criticized Justin Lin’s insistence that growth will be 8%). It feels like the topic of future growth rates has become so politicized that, whatever people’s private views, they have little incentive to publicly argue that China should prepare for lower growth. And if that means no one is preparing for lower growth, then we have a problem.

Out in the real world, it is pretty obvious that growth will head below 7% during the next five-year plan period, thanks to extremely high debt levels, the end of a decade-long housing boom and a severe slowdown in private-sector investment. The IMF, hardly a bastion of radical views, is forecasting 6.8% GDP growth for this year, and said in its Article IV review last week that China should look for growth of 6.0-6.5% in 2016. The IMF is urging China to accept this slowdown to what it calls “safer and more sustainable” growth rates, and adapt policy to this trend. I sure hope they succeed.

by Andrew

China goes after occupational licensing

It is rare that the preoccupations of economics bloggers and the priorities of Chinese bureaucrats overlap. But yet it has come to pass, in the form of a July notice from China’s State Council declaring what sounds like an all-out bureaucratic assault on occupational licensing. “All localities and departments should further strengthen their efforts and continue to focus on cancelling occupational licensing and certification requirements,” the document reads. “Professional qualifications that lack a legal basis, whether established by government departments, national industrial associations or academic societies, must all be abolished.” The notice also terminates 62 types of occupational licenses recognized by the central government, for professions like “web advertising broker” (nope, that doesn’t sound like something you really need a license for to me either).

While this admittedly obscure announcement has drawn little public commentary that I’m aware of, it’s interesting that it comes at a time when excessive occupational licensing has become a moderately prominent policy issue in the US. Indeed, in July the White House published a report on occupational licensing that notes that “there is evidence that licensing requirements raise the price of goods and services, restrict employment opportunities, and make it more difficult for workers to take their skills across state lines.” The proliferation of licensing requirements in the US has drawn criticism from commentators and bloggers on both the left and the right, making it an unusually non-partisan issue.

The State Council’s move seems to be less a response to the grassroots and more of a top-down initiative, specifically Premier Li Keqiang’s recent campaign to slash various types of administrative red tape. According to a background paper by the labor ministry, central government agencies had 618 different types of occupational licenses by end-2013, and local governments another 1,875. The recent announcement is actually the third of its kind; in 2012 the State Council canceled 265 types of licenses, and then eliminated another 149 in 2013. With the latest 62 cuts, the central government has reduced by a third the number of occupational licenses under its control. There was no word on what local governments have done.

The trimming back of occupational licensing also seems related to recent government measures to reduce the employment costs created by mandatory social insurance programs (which I wrote about previously). Both are measures that could help increase employment by lowering the barriers and costs that employers face when hiring. It is probably too much to say that these moves portend a radical deregulation of the Chinese labor market, but I for one did expect to be writing two posts about supply-side labor market reforms in China in the space of two months.

Although I doubt that many people in the US are paying attention to the nitty-gritty of Chinese labor market regulation, it is fun to speculate about the potential demonstration effect here. I generally don’t have much truck with most attempts to use the example of China to argue for changes in US public policy–for instance in arguments that US is losing global leadership in renewable energy because China has much bigger subsidies. I don’t think that particular institution of China is something the US should be emulating; it probably led to a lot of renewable energy equipment (particularly wind turbines) being purchased before it could be effectively used by the grid, and it won’t be long before it is rendered obsolete by even newer technologies. But my personal experience of both countries leads me to believe that the problems of excessive occupational licensing are likely to be bigger in the US than in China–mainly because the US actually enforces these kind of rules, whereas in China there is usually a way around them. A nationwide effort by the US to identify and eliminate pointless occupational licensing requirements, which is just what China has been doing for a couple of years now, does not sound at all like a bad idea.

by Andrew

How state ownership came to China

Transitional periods in history are always interesting to me, but they are usually under-researched. It’s easier to find books about how one era or system worked in its heyday then works that discuss the shift from one to another. I’ve always wanted to know more about China’s transition from the chaotic civil war period to the orthodox planned economy of the 1950s, and I’m finding Andrew Walder’s new book China Under Mao: A Revolution Derailed to be a very clearly written analytical history of this period. In line with my interest in all things SOE, the following excerpt is from chapter 4:

From the late 1920s, the Communist Party’s strategy for revolution focused on rural China. Mao’s early doctrine about class struggle was applied in regions that the party controlled, and as the PLA rolled south and west in its military conquest of China after 1947, CCP cadres orchestrated revolution in villages according to a well-practiced script. The cities, however, were another matter entirely. Not until April 1946 did the party take control of a major city, when they took over Harbin from departing Soviet forces. … Initially, their strategy was to implement military control and leave existing ownership of industry and commerce intact, with the exception of state enterprises controlled by the Nationalists. In the cities, the main emphasis was to stabilize the economy and promote industrial development, not to obliterate the economic foundations of the old society.  …

The urban private sector declined immediately after 1949, even before the party leadership announced its decision to move toward socialism in 1953. Government agencies began to take over banks and wholesale suppliers, making it more difficult for businesses to obtain credit and financing, supplies, and customers. These changes deprived the private sector of the means to compete and grow. … Increasingly, private firms depended on state contracts for their business: the output sold by private firms on state contracts rose from 12 to 56 percent during the same period. … Without any explicit attacks on the private sector, it was gradually being squeezed by state policy and made dependent on state agencies.

The gradual squeezing of the private sector turned into a frontal attack in 1952. The party launched the Three-Anti movement to combat “corruption, waste, and bureaucratism,” and the abuse of power by cadres in urban administrations. The campaign struck civil servants who had stayed in their posts and pledged loyalty to the new regime. … The campaign then pivoted to an attack on private businesses. The Three Anti campaign was merged into a Three Anti, Five Anti campaign. The new claim was that corruption among cadres was caused by the business practices of private entrepreneurs. The new Five Anti targeted “tax evasion, bribery, cheating on government contracts, theft of economic intelligence, and stealing state assets.” Work teams moved into private businesses, demanded to see their accounts, and conducted all-night interrogations that pressured business owners to confess to corruption and tax evasion, reveal the source of their “illegal profits,” and divulge hidden assets. Large fines were levied that bankrupted many businesses, which subsequently closed. Many business owners “voluntarily” turned their firms over to the government as payment for their alleged back taxes and criminal fines.

And there’s lots more of interest on other aspects of the creation of the planned economy. Inspired by this reading, I dug up some historical statistics and pulled together the following chart to illustrate the progress of nationalization (the figures in this chart are slightly different from the ones Walder cites in his text, as I’m using a later statistical compilation with revised data). It’s interesting to note that pre-revolutionary China already had a significant amount of state-owned enterprises, as the Nationalists had no aversion to state ownership and made some attempts at planning industrial development (Rana Mitter’s excellent history of the civil war period Forgotten Ally discusses this theme).

abolition of private ownership in 1950s

Further reading: a more detailed account of the early transition to state ownership that Walder cites is Bennis Wai-yip So, “The Policy-Making and Political Economy of the Abolition of Private Ownership in the Early 1950s: Findings from New Material,” a 2002 article in The China Quarterly (JSTOR link).