Confucianism and Trade Imbalances

The enlightened dictatorship of money

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

Tagged with ,

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

Tech wars and value rigidity

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The Washington Post this week had an interesting article about Japanese manufacturing.  I don’t inherently trust Western declinist views of Japan, and clearly the Washington Post is aware of the political context of its piece.  (It had another piece a few months ago on Japanese fondness for the fax machine, which while cute, clearly had a political subtext.)  But in the manufacturing article, this section stood out to me as being plausible:

Those who study the consumer electronics industry describe a decade of missteps and miscalculations. Japan’s giants concentrated on stand-alone devices like televisions and phones and computers, but devoted little thought to software and the ways their devices synced with one another. As a result, their products don’t always work in harmony, in the way an iPhone connects naturally with a laptop and a digital music store.

In the heyday of Japanese manufacturing, quality was the typical selling point of an electronics product, whereas today that’s changed.  Now, I can’t help think about this comment in light of the current rivalry between Google and Apple over maps.

Apple has just released its iPhone 5, which has been heavily criticized for its premature mapping technology. For some background, Apple has been making huge profits in China.  Its products are must-have items, which I would put in the category of luxury “face” goods.  These small, integrated electronics goods are quite suitable for Asian consumer preferences, of which I’m reminded every time I try to take my laptop on the bus to do reading, and can’t fit it on my lap.  These are the sorts of things that are more expensive in China than abroad, because of occasional supply shortages.

Google, with its mission to “organize the world’s information and make it universally accessible and useful,” has had a tougher time in China.  One might point to specific disputes it has had with the government regarding censorship, but I wonder if there’s a deeper cultural undercurrent here.  Its most innovative projects now involve geographical information, and it is pushing its maps to new frontiers (South Pole?  underwater?).  This sort of work has also been banned in China, where geographic information is extremely sensitive.  (Curiously CCTV anchor Yang Rui, in an unrelated and totally unprofessional rant against foreigners, accused us of compiling GPS data, among other things – giving us more of an insight into his mind than reality.)  Satellite maps are required to have a certain amount of inaccuracy, so that anyone bombing China will be forced to use map view.  In some ways, this mirrors Google’s prior larger controversy over censorship, but it is also different.  There are no blatant political  motives here, but I think there are more in the way of cultural biases.

So I wonder if China, in its clamor for handheld devices popular in its heyday (which I would say ended around 2009, when the stock market started its quiet death plunge) is going to miss out on the next wave of geographical technology, just as Japan also did when high technology ceased to be about things simply not breaking down?

Written by Maofucious

October 2, 2012 at 5:47 PM

Posted in Confucianism

Tagged with , ,

IQ, language, and political economy

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There hasn’t yet been enough controversy on this blog, so I will now talk about race and intelligence.

The American Conservative (who I don’t normally read) has an article on how Asian IQs seem to be invariant to economic development.  Asians in general (now I’m talking about Asian immigrants to the US) aren’t rewarded for their above-average IQs.  This guy (apparently an academic who wants to remain anonymous) thinks it’s because their verbal-analytic skills lag other races, compared with visuospatial skills. This shortcoming makes it more difficult for them develop lawyer-type skill sets, and it ultimately impacts economic growth.  I won’t comment on his theory of an IQ cutoff for economic development, and gaussian vs. linear regression, but I did notice that the way he treats his data to subtract 6.5 points from Asian IQ statistics.

All of this fits into my preconceived notions of how the Chinese language fits in with the culture.  (The Chinese language is a cultural foundation for all Confucian societies.)  Chinese has no grammar, using classifications and complex rules of the type lawyers would be expected to understand.  At best, all of its rules are situational, applying to groups of a few words.  (In policy terms, I would relate this to industrial growth policies.)  The language is also hierarchical (with an obvious political analogy) as certain themes reappear in related contexts.  I think the best way to illustrate this might be in reference to my point in the last post about little kingdoms and geography.  Place names typically have two characters.  One of those characters is likely to be some kind of moniker for the area as a whole, and so you are likely to see that character in the names of smaller districts (down to danwei) within the district, or around the  district.  One example off the top of my head is Guangdong province, which borders Guangxi and has Guangzhou as its capital.  (Dong is east; Xi is west; and zhou might be translated as -ville; although these transformations don’t always follow these sorts of formulas.)  This process is replicated in the the highly transparent evolution of the characters themselves.

This sort of setup makes it natural to base economic growth on evolutionary trial and error, arbitrated by face. This entire process creates a strong sense of conservatism that helps mediate between the highs and lows of economic development – what the American Conservative article was getting at.  Also, I suspect this relation to characters and geography has something to do with why Asians’ visuospatial skills are so well developed.

None of this, by the way, says anything about the direction of the causality.

Written by Maofucious

September 22, 2012 at 9:38 PM

China’s failed apprentice system – part 3

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This the last part in a series on why wages are so low.  I will collect a few thoughts here, and see if it turns out into a coherent whole.

I realized that an important part of this situation, which I shouldn’t leave out, is really simple: Chinese discrimination against Chinese.  I had a Chinese client a couple of weeks ago who wanted to speak to me, and only me.  He only spoke Chinese, and I explained to him that I would have to refer him to my colleague for any meaningful communication to take place. He still wanted me to be his point man, even though I really didn’t have much to say to him. This seems to be an issue particularly in the Southeast, where I lived for two years.  (The client was from Ningbo.)  (See also this story from Nanjing, for instance.)

Anyway, earlier in this series I retold this story that a friend told me about aviation because it highlighted two things I had heard about healthcare:

  • People who go half of their careers without being able to do any real hands-on work, because of their bosses’ delicate egos.
  • Employers owning their employees’ work licenses and refusing to let them leave for other work.

The second factor is due in part to what might be the single most unappreciated fact about China: how local everything is.  During the Maoist era, localities were told to make their own arrangements for health, and these sorts of bureaucracies tend to end up as bottom-up patchworks just as often as top-down structures.

This system goes all the way back to China’s feudal past.  Land is extremely important in China.  For this reason, Google Maps isn’t allowed to match satellite images up exactly with its maps.  North and South are not universal attributes – highways in Beijing will direct you towards Guangdong, rather than the South Pole (which is a practically equivalent distance from there) since one is in China and the other is not.  Even public spaces become like little kingdoms, as there are walls put all around the place restricting walking routes.  (I will someday get a picture of the South Railway MRT station in Beijing, which has a series of metal railings fencing off areas of absolutely nothing.)  I could spend an entire post or more talking about Chinese spatial orientations.  This also has to do with feng shui, and, at its core, land might be linked with the concept of face.  That’s how fundamental territorial divisions are to the Chinese psyche.

So China is full of these little kingdoms, relics in the more recent (Communist) past of the danwei work-unit system.  This leads to a surplus of little kings, who don’t like to see their status challenged.  We can see these leaders acting like little kings now with the accounting standoff: they are not used to being questioned, even when it comes to increasing efficiency.  These relationships are born from tradition, not from any notion of maximizing shareholder value.  As a final example of the importance of physicality in Chinese law, any company document must be notarized by a company stamp, which functions as the official company signature.  A great deal of power is placed on the owner of the stamp – typically the management of a company, not the shareholders.

Wages are often set so low that they even fail to maximize profitability.  Healthcare is a very good example of the result: there are lines outside of clinics, sometimes for days, for top doctors.  Meanwhile, for everyone else, healthcare is getting more violent – yes, violent.  Attacks on hospital workers are becoming frequent enough (in the context of a generally low-crime society) that police are being stationed inside the hospitals.  For the workers, healthcare is unprofitable enough (despite this demand) that it’s not really a particularly sought-after profession.  The whole system is geared not towards maximizing value, but towards preserving these little fiefdoms.

Written by Maofucious

September 21, 2012 at 11:12 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

China’s failed apprentice system – part 2

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This is a series of posts on why wages are lower than productivity in China.  The first part is here. The following is a rant delivered to me by a flight instructor in Beijing:

So, suppose somebody decides you’d be a good pilot – this happens when you’re about twelve.  You then moved to special pilots’ school, so it will be difficult or impossible to have a career doing anything else.  You will need to sign a contract with the airline that selected you, and you will have to pay back the cost of your education.

Now, once you graduate, you will go work for the airline.  For the first ten years or so, you will be in the copilot seat.  Your boss, the pilot, will sit to the left of you with a rolled up newspaper in hand.  Anytime you make a mistake, it is expected that he will bat you with the newspaper. That’s obviously not the best learning environment.

You’ve graduated to pilot status.  The airlines will fine you, personally, for even the smallest of mistakes, with the result that nobody touches the controls. (Many of the rules themselves are quite ridiculous – par for the course in China.) Pilots put the plane on autopilot as soon as they can after takeoff, so nobody ever really learns how to fly the thing.

So then, suppose you have put your time in, made it to the top of the hierarchy.  Maybe at that point, you want to move to another airline with higher pay, better conditions, or you simply don’t want to work for an airline anymore.  Guess what? The airline owns your pilot license.  You’re stuck!

What is it called when you are forced to work for someone else, with no opportunity to improve your own life?

Written by Maofucious

August 31, 2012 at 9:53 PM