China Redux

China’s sizzling stock market and the attendant frenzied investing climate receives the full treatment on Page One of both the NYT and WSJ this morning. James T. Areddy of the Journal reports that “investors are doing everything from mortgaging their homes to borrowing against their credit cards to get in on the action.” Areddy compares China’s market to the late-1990s dot-com boom in the U.S., noting that both drew in a new generation of investors.

Investors have good reason to be excited; the Shanghai Composite Index was up 130% in 2006 and still soaring at the outset of 2007. But there are reasons for skepticism and concern, even in a high-growth economy such as China’s. Today’s two stories offer examples of classic speculative behavior. Here are some strong signs that widepsread speculation is impacting the Chinese markets:

- Mass borrowing on credit to fund investments in the market.

- Mutual funds raising $5 billion in a single day (!).

- Cultural or social hysteria over stock market investing. For example: “When I go to the beauty salon, even the girls who give me a manicure are talking about stocks,” said Shirley Lei, a consultant in Shanghai….”They ask me, ‘What should I invest in?’ They are doing their research.” Trawling for stock tips at the beauty salon is generally not a good sign.

- Trading houses that “seem like carnivals,” with computers installed in stairwells to handle excess traffic.

- Massive funds moving from one asset class (real estate) to another (equity).

- And this inconceivable factoid:

Online trading is spreading rapidly, and in recent weeks individuals have been opening stock-trading accounts at the rate of about 90,000 per day, 35 times the pace of a year earlier.

Many people already feel that the Chinse stock market may be overvalued. But it appears that large numbers of Chinese are entering the market in hopes of striking it rich. This is not a good thing, and it should make the Chinese government very worried. What would happen in China if the market began to slump, or worse, to tumble?

Maureen Fan of the Washington Post Foreign Service wrote a feature Sunday on the growing popularity of wine in China,  a story that doubled as a portrait of the emerging middle and middle-upper classes in China.  Although wine selection is limited and bottles are pricey, wine drinking is surging — imports gained by 91 percent in the first nine months of 2006.

Fan finds a fine phrase to describe the wine phenomenon in China: These days, she writes, “the cost is part of the charm.”

Apparently, China imports its bulk wine in 6,000 gallon bags from Australia, Chile and elsewhere to China, where it is combined with “local ingredients and sold as Chinese bottled wine, often with names such as Dynasty or Great Wall.”

Everyone quoted in the story seems to agree that wine-drinking in China is a reflection of changing social and economic pattern; food and drink as aesthetic evidence for sociological change.  What do you think?

Casino Royale, the newest James Bond movie, is being released in China for the first time (Reuters). The media and everyone else is thrilled that the film is being shown uncensored (”the fact that we got it through without any censor cuts at all seems to me to be some kind of achievement,” said director Martin Campbell).

And with censorship apparently not an issue (at leat not with Casino Royale), Bond star Daniel Craig, in Beijing for the 007 opening, has filled the void with an eloquent little speech on the perils of piracy:

“It hasn’t premiered here yet, but I think it’s been seen here,” Craig lamented. “Someone tried to sell me a copy last night,” he added. “I was wearing a hat and glasses so they didn’t recognize me.”

“I understand the reality of the situation and it saddens me, not just because of the effect it has on the movie industry but because going to the cinema is a great experience,” said Craig, referring to copyright piracy.

“You’re missing out by watching a bad copy of a DVD with no sound and bad picture quality. As far as I’m concerned cinema is a collective experience and you get 50 percent more by going to a cinema.”

I sympathize, but that’s an overstatement and a half. Piracy can be an unfortunate byproduct of globalization, and I understand Hollywood’s efforts to fight back. But really, Daniel Craig need not be made into spokesperson for the cause. It’s tacky and completely contrived.

Robert Carlin and John Lewis published a very interesting op-ed in today’s Washington Post that provides an inside view on North Korea’s strategy to use its nuclear program to become a bigger player in East Asian power politics and ensure its long-term existence (”What North Korea Really Wants“).  Here is a key excerpt:

This is hard for Americans to understand, having read or heard nothing from North Korea except its propaganda, which for years seems to have called for weakening, not maintaining, the U.S. presence on the Korean Peninsula. But in fact an American departure is the last thing the North wants. Because of their pride and fear of appearing weak, however, explicitly requesting that the United States stay is one of the most difficult things for the North Koreans to do.

If the United States has leverage, it is not in its ability to supply fuel oil or grain or paper promises of nonhostility. The leverage rests in Washington’s ability to convince Pyongyang of its commitment to coexist with the Democratic People’s Republic of Korea, accept its system and leadership, and make room for the DPRK in an American vision of the future of Northeast Asia. Quite simply, the North Koreans believe they could be useful to the United States in a longer, larger balance-of-power game against China and Japan. The Chinese know this and say so in private.

More thoughts to come on this intriguing thesis.

The New York Times, blogging from the Davos World Economic Forum Annual Meeting 2007, has an interesting note on what it calls Asia’s “third-mover advantage” in the global arena.

Anne-Marie Slaughter, dean of the Woodrow Wilson School of Public and International Affairs at Princeton University, said Asian countries want the best of both worlds:

“They look to the United States for how to run the economy and to the European Union for how to promote regional integration,” said Ms. Slaughter, a Davos regular who commented by phone because she was unable to make it this year.

Asia’s economic growth, and China’s in particular, is always the first thing remarked upon. But don’t overlook the important of Asia’s success at integrating politically at the regional level.

Leaders of Association of Southeast Asian Nations, known as ASEAN, have quietly endorsed a proposal to replace unanimity with majority voting to streamline decision-making and introduce sanctions for countries that move too slowly to implement joint decisions.

The new framework could be ratified as early as this year, Haruhiko Kuroda, president of the Asian Development Bank, said Friday at the conference in Davos.

“ASEAN is making great strides in integration,” Mr. Kuroda said.

The European Union, by contrast, has been paralyzed by a cumbersome decicion-making process, and the European constitution, which contained major institutional reforms, was rejected by French and Dutch voters last year. Asia, meanwhile, has created new institutions at every turn, resulting in a series of concentric circles of integration, from ASEAN to ASEAN+3 to ASEAN+6.

“Institutional innovation today is definitely in Asia,” Ms. Slaughter said.

What does Asian regional integration mean for the rest of the world? The US has vacillated on the issue, in particular when Asian integration could be seen as leaving the US out of the club.

And what will China’s role be in a new Asian order?

The New York Yankees are sending a “delegation” to Beijing next week that might lead to the establishment of a baseball academy in China, reports the Washington Post.

The team is sending its top brass in what would appear to be an effort to woo Chinese leaders in advance of the 2008 Olympics. Yankees President Randy Levine and General Manager Brian Cashman will head up the party.

“Everybody thinks that that is a great place to grow the sport of baseball,” Levine said. “There’s a real appetite for it. The Chinese want to move forward and expand their talents in the game and really make it a well-known, very active sport.”

Major League Baseball, along with every other major sports league, would love to make its sport the next big thing among China’s 1.3 billion consumers. Just don’t expect China to become a pipeline of talent to the MLB a la the Dominican Republican or even Japan. China got wailed on in last year’s Baseball World Series, going 0-3 in losses to Japan (18-2), South Korea (10-1) and Taiwan (12-3).

On other China sports front news, Houston Rockets All-Star center Yao Ming likely will not begin on-court workouts until after the February 16-18 NBA All-Star game after fracturing his tibia in late December.  Yao, who is averaging 26 points per game in the best season of his career, still managed to lead all NBA players in all-star voting.

Elizabeth Economy, director of Asia studies at the Council on Foreign Relations, published a hawkish op-ed in the Washington Post Thursday morning casting considerable suspicion on China’s foreign policy motivations and arguing for increased vigilance on the part of the US and the world. Economy argues that China’s “peaceful rise” is nothing much more than a protracted PR campaign:

Chinese rhetoric notwithstanding, China’s rise will be as disruptive and difficult as that of any other global power.

To which “other global power” does Economy refer? Germany after World War I? Japan in the sixties and seventies? Both were disruptive.

And more:

Yet the truth is that China, with its rapidly growing economy and large population, already exerts an unsettling and often negative impact on the world.

Economy makes a lot of fine points that stay away from the blather about trade deficits and currency manipulation. She points to China’s growing responsibility for global environmental problems and its backing of unsavory regimes in Sudan, Burma, and Zimbabwe as two reasons for serious concern. But it was last week’s anti-missile test that has Economy throwing down the gauntlet:

If there is a silver lining to this missile strike, it may be that we can finally stop talking about China’s peaceful rise or the Washington Consensus vs. the Beijing Consensus. The only consensus that matters is one rooted in a clear understanding of China’s rise and the urgency it brings to the need for real U.S. leadership.

Was China’s anti-satellite test a sort of tipping point among policy wonks? I think it certainly pushed a lot of centrists into a decidedly more aggressive position on China. Liberal internationalists and even realists who take more of a wait-and-see approach on the issue of the China “threat” were put in an awkward position. But that does not mean that they are wrong.

In point of fact, the world is always looking for “real” U.S. leadership. For Economy, this would seem to mean publicly castigating China in hopes of forcing her into changing various policies deemed harmful by the US. In Economy’s view, “we can and should condemn China for not respecting the international rules governing these issues….”

I believe this is the wrong tactic. The US led in a very subtle, but very effective, manner in the wake of last week’s disruptive test. The Bush administration demonstrated restraint and trust, and it paid off. Now, the US should continue with that style in order to strengthen communication with Beijing, and use the accrued goodwill to push for dividends on space issues and beyond. In the long run, that will prove to be the most productive way to manage China’s ascent.

At the same time, that does not mean that the US should not be implementing policies to counteract the disruptive forces resulting from China’s rise. There is much work to be done at home. We could start with investments in education and infrastructure to strengthen US competitiveness; fixing America’s health care system; restoring America’s global reputation to bolster our ability to lead effectively; and creating a global framework for responsible environmental and energy planning.

Economy is obviously correct in pointing out that China’s ascent will be disruptive. But we should not resort to outrage in the face of another’s growth. Instead, we must pursue the paths that will help sustain our national interest — and that of the world. For now, strategic cooperation is still far more important than demagogy.

The dark side of managing growth is never far behind. Here are President’s Hu comments on the Internet in China (from CNN.com):

Maintain the initiative in opinion on the Internet and raise the level of guidance online. We must promote civilized running and use of the Internet and purify the Internet environment.

“Clean up” would really sound a lot better than “purify.”

Meanwhile, a new study released by the China Internet Network Information Centre (CINIC) said that the number of Internet users in China climbed to 137 million in 2006, up 23.4 percent from the previous year. That number accounts for just 10.5 percent of China’s total population. By way of comparison, the US has 210 million Internet users.

According to the Hindu News, China’s broadband users increased to 104 million, or 75.9 per cent of all Internet users.

This year’s figures are not an aberration; China’s 2006 growth was smaller than in 2002 (75.4 percent) but larger than 2005 (18.2 percent) and 2004 (18.1 percent).

Nobel laureate Michael Spence published a fascinating piece in the WSJ (subscription required) that condenses decades of cutting-edge development economics into roughly 1000 words. Among the 11 cases of sustained high growth (defined as above 7 percent over 25 years or more) since World War II, Spence has has identified three shared characteristics:

1) Functioning markets with price signals, incentives, decentralization, and some degree of private property ownership

2) High levels of savings and investment

3) Resource mobility, which Spence compares to Schumpeter’s “creative destruction” and Romer’s “churn”

China is an examplar of the latter two trends in particular — for example, savings in China ranges between 35% and 45% of GDP.

The piece does a great job of conveying the essence of China’s growth miracle: China is exceptional (for its size, pace) and yet not–it has the same fundamental economic features as the other development wonders.

What I found especially compelling was the way in which Spence celebrates the growth miracle without ignoring the tensions caused by sustained high growth in developing countries. For example, he notes that the 1% annual decline in China’s rural population, instrumental for increasing productivity, represents 13 million people who are moving to cities and need infrastructure, education, and services — not to mention jobs. And it gets stickier. The early movers are rewarded, the latecomers, less so; income inequality rises “for an extended period.”

While this is a natural consequence of the process, it presents a challenge. Excessive inequality of income and wealth is not only a normative problem in most societies; it is also socially and politically disruptive and can threaten support for the policies and public sector investments that in part sustain the growth process.

So, the downside of growth — increased income inequality (albeit distributed in new ways) and social and political tensions — are equally important characteristics of the story. There is a front-end and a back-end to high growth, and China must deal with both; it needs to maintain high growth yet it must mitigate against exacerbating inequalities and social tensions.

China has so far succeeded, by most accounts, in “managing” growth. Spence’s nuanced picture goes a long way towards understanding China’s conduct on certain critical bilateral and international issues (currency devaluation, for example). I would not bank on any significant deviations from those strategies any time soon.

Freedom House, the oft-cited NGO, just released its annual report on the state of freedom around the world in 2007.

China earned the undesired status of “Not Free”– a 7 for political rights (PR) and a 6 for civil liberties (CL) (where 1 represents the most free and 7 the least free). By way of comparison, India received a 2 for PR and 3 for CL; Singapore a 5 and 4; Russia a 6 and 5; and the US a 1 and 1. For more, view charts and graphs and an executive summary.

The Bush Administration has chosen not to push the democracy and human rights issues with China. 2006 was a particularly abysmal year on this front. Here is a prescient Washingon Post editorial in the run-up to President Hu’s April 2006 visit to Washington. The Post piece calls out the administration for its “exquisite sensitivity” to China on these matters and notes more than a little hypocrisy in the president’s special treatment shown to Hu.

From a strategic perspective, one has to ask: why would you risk so much in Egypt but play it safe with China? Well, Dr. Rice has since changed the tune on Egypt. Maybe 2007 will be the year of democracy push in China.