Confucianism and Trade Imbalances

The enlightened dictatorship of money

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China schooling the US

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I knew it had to happen someday.  The rough consensus among China-watchers is that the best precedent for China’s rise, at least in the realms of economics and business, is Japan.  One peculiar phase of the Japanese-American relationship was when Harley-Davidson ended up redoing its entire production methodology based on what it had learned from its Japanese rivals (who were willing to help, in order to defuse trade tensions.)  The Japanese Production System might have been inspired by an American consultant (Deming), but American companies never became world-class experts in applying it.

I ran into an article the other day, although minor, that marks the first time I’ve ever heard a similar story about China.  Ford’s China social marketing team was sent to the US to train their counterparts there.  Many people know that the Chinese government controls almost every form of communication.  The word 宣传 sort of shares the meanings of “propaganda” and “marketing;” ‘red envelopes’ are an expected practice at press conferences.  And of course Facebook and other American-based social networking services are blocked.  But focusing on the top-down aspects of this phenomenon neglects that it comes equally from the bottom up. Despite all of the censorship, there really is a vibrant Chinese internet. People simply expect their information to come from sources close to them – another aspect of the Chinese attitudes towards geography I’ve mentioned several times before.

A lot of this seems very different from Japan.  Innovative marketing and Kanban production are very different things, implying very different personality types.  It’s important when making the comparison to Japan to note that there are some deep-seated differences that have nothing to do with Capitalism or Communism.  On the other hand, these examples do both come from the auto industry – an important status symbol in either production or consumption.

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Written by Maofucious

December 9, 2012 at 3:26 PM

Mining and weiqi

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I’ve been learning more about the mining industry in China for a project I’m doing at work.  Chinese mining  has created a lot of publicity abroad due to its willingness to overpay for projects around the world with a strategic mineral output.  This publicity has often left out the fact that the industry has been quite stagnant and fragmented domestically, with little investment in technology.  It seems that the government has actually favored overseas acquisition at the expense of domestic development.

Hearing this situation made me think of this paper (pdf) on China’s strategic mindset, as it relates to weiqi, a Chinese version of chess.  (The paper – and Henry Kissinger’s subsequent endorsement in his book – focus on security and warfare, but I’ll be coming back to this argument to show apply it to economics as well).  Weiqi doesn’t end with the capture of a particular piece, but is rather scored at the end by the amount of territory captured, reflecting Sun Zi’s principles of warfare and the importance of geography.

I’ve been learning the game over the last few months, and one of the most difficult parts about it is knowing when to leave something alone.  Players who are much better than me will apparently abandon the most unsupported pieces, while going off to play in some other corner of the board.  The typical progression of the game is therefore to start at the corners, then the sides, and finally move towards the center.  This looks very much like the way China is approaching its natural resources problems.

Written by Maofucious

November 4, 2012 at 5:51 PM

SEZ in the US?

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The US doesn’t really have a problem with consumer spending, when compared to East Asian countries.  It also has a lot of incoming capital as a result of being a reserve currency, in contrast to Europe.  In theory, therefore, it shouldn’t have much of a problem stimulating itself out of a crisis.  The problem is that the capital often gets misappropriated.  Part of the problem is that the money goes too much to short term investments – and the government, who might otherwise be able to mitigate the problem, isn’t really willing to do so.  But a more fundamental problem is this: who is willing to make an investment when they know the proceeds are going to be used to pay down the debt?  And how can the US pay the debt if nobody’s willing to make new investments?

The Chinese model of Special Economic Zones offers an apparent solution.  The beauty of the Chinese system is that no matter how bad it screws up in one location, it is always able start anew someplace else.  This is what it did in Shenzhen, and the Shenzhen local development model sort of formed the basis for economic “models” in the first place, including the Wenzhou model, the Chongqing model, and others.  It has a sort of allure: could the US start a Shenzhen in, say San Diego, where we could forget the debts of the past and just move forward?

Unfortunately, capital in the US is more mobile than it ever has been in China.  If one were to establish a tax-free zone in one region, existing companies would shut down in the regions that were still taxed.  Great care would have to be taken to restrict the favorable tax treatment to companies that weren’t already existing – perhaps by discriminating by sector.  So it wouldn’t be as straightforward as Shenzhen.  But it’s still a model worth considering, particularly the notion that the law doesn’t need to treat every sector equally.

Written by Maofucious

October 31, 2012 at 11:00 PM

Posted in Economic Imbalances

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Ponzi economies

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I’ve been reading news reports a lot recently about Chinese banks lending money to companies in various sectors, just so they can stay alive long enough to pay back their previous loans.

I’ve had various reactions to that.  Throwing good money after bad; the cover-up’s worse than the crime; can we really trust Chinese capitalization data knowing that some of that money is being wasted; and how does anyone think that’s a good idea, given that the reasons these companies are going bankrupt because of powerful long-term trends (like severe oversupply), not some short term blip?

The response that Western readers will identify with the most, I expect, is this one: it’s a Ponzi scheme.  There are many variants (for convenience, I’m lumping in pyramid schemes as well) but the basic essence of a Ponzi scheme is to take capital as income.  These bankrupt companies are consuming bank capital to pay their basic expenses, not to make forward-looking investments.  For some reason, the banks are willingly entering into this arrangement.

This mixing of accounts is something I’ve encountered a lot, in various forms.  I a friend working in a tech startup, who told me, “people in my company don’t work too hard.  It’s not like a tech startup in Silicon Valley.  We just got a capital infusion, and we don’t really have to worry about anything until about two years from now.”  Even in a company that should be innovative sales-driven, it is the boss who is feared, not the customers.

This mixing of accounts can even be seen in legal terms.  I have been learning more about company setup in China, and one of the (many) strange facts I’ve discovered is that wholly foreign-owned enterprises (WFOEs) sometimes pay tax on capital infusions as if they were income.

These are unrelated examples – and I hardly know as much as I really should to be to write this post – but I feel sort of confident in saying that Chinese accounting doesn’t employ the firewall between the current and capital account (in national accounting terms; or expenses and capitalization) as in the US and Europe.  This firewall is the most important reason that accounting exists in the first place.  Ironically, this situation is the opposite when we’re talking about national accounting.  China keeps very close track of current and capital accounts, and some old regulations even required companies to use separate bank accounts for these two accounts.  So, I guess the conclusion to draw here is that Chinese collectivism doesn’t just mean looking out for those less fortunate, but is rather a very literal accounting principle.  Its lack of use for individual company accounting may help explain, if not excuse, its behavior towards various accountants recently.

Now, having gotten this far, I may as well talk about China’s partner in crime, the US. Richard Perry, in his failed presidential bid, controversially called Social Security a “Ponzi scheme.” It is true, but not in the way he meant it: it is true because Social Security savings, represented by government debt, are simply being “spent,” rather than “invested” in infrastructure and other long-term projects.  China also invests in those same government bonds, because it assumes that any country would balance their economy from a top-down perspective.  The US, meanwhile, buys Chinese products under the assumption that their suppliers are geared towards making a profit.  And we end up with a very big culture clash.

Written by Maofucious

October 17, 2012 at 10:23 PM

An update on the short-selling situation

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There have been a number of worrying developments following the accounting standoff, which has already seen Deloitte employees threatened with life inprisonment for doing their job.  The WSJ reported in July on how short sellers are now feeling their safety is being threatened.  The Globe and Mail has an excellent article on how local police in Henan Province allowed themselves to be used as sock-puppets for a company that wanted to investigate a short seller.  The Canadian researcher may end up in prison for two years on charges of “disseminating false facts to impair another person’s commercial reputation.”

The state-run Xinhua service, demonstrating a surprising lack of understanding of Western capital markets for a media organization that has international aspirations, had an editorial last week calling for the SEC to “seriously investigate the short sellers” for unspecified charges.  Well, the SEC can’t just make short-selling illegal retroactively – the writer/editor seems to think that they can just make up charges to fit the political situation.

But I will give them the benefit of the doubt,and assume ignorance, rather than the level of planning implied by a Reuters piece calling this an “official editorial.”  The question is, where does that ignorance come from?  The author clearly had some reason to think the US would do that.  I have two ideas:

  • Defamation laws in Asia are much stronger than in most Western countries, because of the social role of face. In China, it can be a criminal offense.  If you report negatively on somebody, you better have it right. Part of the deal right now is that short sellers have been attacking companies that were apparently better prepared for it.
  • From more of an economics standpoint, Asians don’t have very well-developed attitudes towards risky investments.  The Hong Kong Stock Exchange weeds out risky stocks, which go on to the US. The American attitude is that with risk must come disclosure, but by avoiding risky investments, there is no need to strongly consider alternate viewpoints.

Now, my thought is that these two points are one and the same.  Face, as a social structure, implies a certain attitude towards risk, because if you have face, you don’t want to lose it at the end of the trading day.

Written by Maofucious

September 13, 2012 at 9:41 AM

Chinese company ‘Shanghaied’ in North Korea

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I ran into this little tidbit today (h/t Sinocism), which was so amazing that I had to blog about it.  I can’t find the (long) company press release in English, so I will go ahead and translate it.

I have to say, even though this is clearly expropriation, I don’t really have that much sympathy for Xiyang.  Even in China, some foreign investors in China’s energy sector have ended up in jail for violations of “state secrets” laws . Did they really think North Korea would have a friendlier environment for foreign investment than their home country? Note below that they said a tax on the order of 25% wiped out all of their profits.  Was a profit margin less than 25%, as healthy as that might be in other contexts, really worth the political risks here?

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Written by Maofucious

August 11, 2012 at 6:30 PM

The Chinese view of money

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A few months ago, I was at the National Palace Museum in Taipei with a Chinese travelling companion. We were looking at some cute little drawers for storing doodads. Of course, these were used by royalty, so the deal was that each one was specially made for the objects to fit in it, i.e. if you had a comb, there would be a place to put that comb, and only that comb. She remarked something about how that was a place you could put your money.  Clearly, that was not cash she was referring to. That got me thinking about the traditional Chinese and Asian view of money, and how it differs from the Western view.

My theory is that money in Asia is tied in closely with the social institution of face (a concept that originated in China). China of course independently invented paper money, and their concept of money apparently emphasizes its role as a medium of savings over its role as a unit of account, as we tend to think of in the west as an arbiter of value. Their experiment with money without fundamental value ended with hyperinflation, which might explain why such trinkets are seen as possessing value in themselves. It might also relate to the value Confucianism places on other real investments like infrastructure and education – not to mention the way luxury markets work in Asia.

I ran into something today that might shed more light on the differences. In China, the rich and powerful can hire body doubles to do their prison time for them. Surprisingly, this is not a recent phenomenon.

“Replacement convicts” are not new. For centuries, the use of criminal substitutes was among the first things Westerners would mention when discussing China’s legal system.  … Some imperial Chinese officials who admitted to the use of substitute criminals justified its effectiveness. After all, the real criminal was punished by paying out the market value of his crime, while the stand-in’s punishment intimidated other criminals, keeping the overall crime rate low. In other words, a “cap-and-trade” policy for crime.

So, markets in everything. This reminds me of something else (pdf) I ran across at some point. In Korea, there is apparently an active sex-selection market for children. Parents take a look at the sex ratio in their locality among 20-29 year-olds. Eventually, things come into balance, although the girls end up being born to worse-off families, and the boys to better ones. Less controversially, marriage and other family relations are also seen in the context of money.

It seems that Asian cultures don’t have many of the ethical hangups related to money that Western cultures do. Another association to make here is to the Sun Zi conception of war, ‘economics by other means’ (as opposed to Clausewitz, “politics by other means”), a conception that has been born  out by modern Asian history.  Understanding what money means in Asian cultures might help one better understand economic warfare in the context of current trade disputes.

I leave with one final association. In a system with financial repression, it can be more important to keep the government out of your savings than to understand what it is you’re really investing in. Hence, gambling in Macao is used as an outlet for savings, and it may in some sense be more legitimate than ‘ordinary’ savings through the banking system. This may have something to do with Chinese attitudes towards both gambling and financial markets.

Written by Maofucious

August 5, 2012 at 12:38 AM