Confucianism and Trade Imbalances

The enlightened dictatorship of money

Posts Tagged ‘rule of law

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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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

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?

Read the rest of this entry »

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

Three ways China will disappoint in 10 – 20 years

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We’ve all heard predictions of China’s collapse, and it doesn’t appear to be happening.  They will make themselves a world economic power in some way or other (as the second-largest economy, they really already are) but they do so by covering up certain problems rather than solving them.  Here are some things that surprisingly are really not necessary for development, even if China doesn’t really win any awards for developing without them.

1) They will never really develop soft power.  Sure they have done some innovative things in their relationships with smaller countries – basically buying them off – but when the money runs dry, there won’t be too much else there.  Whenever they’re not looking, these countries will form their own opinions.  (Note that at the ASEAN conference, which disintegrated over the China territorial issue, there was really only one country, Cambodia, on China’s side.)  At the end of the day, soft power comes from listening, not expanding communications networks to deliver whatever the latest propaganda message is.  And I really doubt that they would address certain concerns like, for instance, the biggest famine in world history, instigated by the Communist government.  …Or other minor details.

2) They won’t become a reserve currency.  Even the preliminary step of internationalization is quite controversial, if you read through the lines.  With this accounting standoff, for instance, there seems to be a strong sentiment that Chinese capital should stay in China.  Well guess what?  Chinese capital is denominated in RMB.  There are really two ideals at stake here, national status and national protectionism, and they are mutually exclusive when it comes to capital movements.  In fact, it is not at all clear if Chinese policy makers even knew what they were signing up for in the first place with this internationalization thing.  They seem to have two sleek sounding propaganda slogans on this issue, with messages that are diametrically opposed.

3) They will have mafias – even state linked ones – running around inside their borders with immunity.  The Bo Xilai thing was just the tip of the iceberg.  All East Asian countries seem to have similar issues, due to underdeveloped legal institutions, but with China, due to the size of its government, I can see the potential for corruption to get much crazier in general.

Written by Maofucious

July 22, 2012 at 12:34 PM

Do either of the US presidential candidates care about the economy?

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If they do, they might want to take a careful look at a situation that’s developing in this part of the world.

Chovanec writes about a standoff that’s developing between US and Chinese stock regulatory authorities.  China is refusing to let Chinese accountants turn over information about Chinese companies listed on the US stock market, on the basis of “state secrets.”  As he writes, the current baseline scenario is for the SEC to simply delist all Chinese companies, within the next year or so.

This is very bad for the US economy – particularly if there are any long-term precedents being set here.  It will hinder efforts to increase American exports, a goal Obama has committed himself to.  Romney also agrees that exports are important to US economic growth, as he has promised a muscular response to currency manipulation.  Guess what?  This is currency manipulation!  Currency manipulation involves restrictions on the capital account.  If US companies can’t invest in China, while Chinese companies and the government can invest in the US, then the difference will be made up in the current account, or the trade balance, for reasons too complicated to explain here.  (It’s an accounting identity, holding a couple of other minor factors constant.)  A few billion dollars of investment money to China a year would translate to an equivalent amount of export sales to the US.  These numbers add up quickly.

So this is a very important issue from an American perspective – particularly thinking about what the American-listed Chinese stock market could become in the future.  But how about from the Chinese perspective?  It is also just as important.  The Chinese stock market has been stagnant for three years, largely because of accounting irregularities.  In response, companies tried to come to the US, using reverse mergers to avoid regulatory scrutiny.  After some scandals last year uncovered by short-sellers Muddy Waters, that tactic also failed, and Chinese companies have been largely unable to raise money on Wall Street either.  One of the main problems with increased transparency is that party officials don’t want their assets to be revealed (i.e. – an example from the last couple of days that apparently got Bloomberg banned from China.)  They are extremely sensitive to accusations of elitism – see the uproar over the fact that US Ambassador to China John Locke actually buys his own coffee at Starbucks.  So US negotiators should be able to push this point; the Chinese have zero bargaining power.

What can be done then (on the US side)?  Chovanec offers the following solution.

I was pondering the irresistible-force-meets-immovable-object dilemma here last night when I happened across a seemingly unrelated passage in Jim Fallows’ new book China Airborne, which offered a glimmer of hope.

In 1997, Jim relates, three Chinese airlines — Air China, China Eastern, and China Southern — had just been awarded or applied for very prestigious and strategically important routes to the United States, and had purchased brand-new state-of-the-art Boeing planes to fly those routes, with many further orders expected.  However, the safety record of Chinese airlines in the 1990s was atrocious.  In order to actually fly those routes, the airlines required approval from the U.S. Department of Transportation (DOT), the parent body of the FAA.  The DOT, at the FAA’s urging, demanded “confirmation that China’s regulatory standards, as applied by the CAAC, conformed to the worldwide guidelines laid out by international agreements.”  Until then, it was no fly.

The Chinese were furious, believing the Americans had double-crossed them by selling the planes and then reneging on the routes.  The whole thing could have concluded in respective chest-beating and a very ugly, damaging stand-off.  Instead, Boeing took the initiative (since its future sales were on the line) through a series of seminars, tours, and training sessions to reconcile the two points of view.  Key to its success was the way it handled Chinese sensitivities…

With due respect to his idea, I’m quoting it because it’s the exact wrong way to conduct the public diplomacy on this issue.  Airplanes convey the idea that something is complex, beyond the reasoning of the average citizen.  If that’s the attitude Americans or Chinese have towards this problem, it will be forgotten, and the status quo solution will prevail.  The message that needs to be conveyed is that Chinese companies are already capable of doing the actions required (no matter if they’re not world class), but that the government has been standing in their way, for no legitimate reason.  American politicians should take a stand here on principle, not let this become some kind of technical negotiation.  The more awareness there is for this issue, the better for the American position.  This issue gives politicians an opportunity to talk about the trade deficit, human rights, and foreign policy leadership all in one sentence – and all during an election year.  There’s no way they could screw this one up, is there?

There is much at stake here.  I’m going to go out on a limb to say that this is the most important economic crossroads for China since it joined the WTO in 2001.  In some ways, accountants are even more powerful than reporters, because nobody accuses them of bias.  It’s always possible that this is being used as a negotiating point for something else, some part of China’s grand scheme, and that things will smooth over naturally in due time.  But it really appears to be a larger culture clash: the Chinese side has been digging their heels in ever since the Muddy Waters incident – which they apparently blame on the investigators rather than the perpetrators. Whatever the case may be, until that part becomes more clear, this should be the American position.

Written by Maofucious

July 1, 2012 at 11:39 PM

What “rule of law” really means

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I promise I will keep the expat-grumbling on this blog to a minimum, but the 100-day crackdown on illegal foreigners in Beijing has received international press.

The China Daily – a Communist Party-linked paper – had this to say in defense of the new campaign:

It is natural to criticize anyone who ignores basic social decencies and to prosecute someone who breaks the law.

And those countries accusing China of xenophobia for tackling illegal immigration should cast the beams out of their own eyes first as their immigration policies are a great deal harsher and stricter than ours.

Foreign nationals in China have nothing to fear as long as they have valid visas and do not break the law.

This passage isn’t that unique, but it is a good example of the way China uses public diplomacy to justify itself.  I myself would tend to glance over that passage without thinking about it too much.

The ironic part about this editorial, reading between the lines, is that even seems to acknowledge a bit of weakness on the government’s part in its ability to enforce its own laws.  Having had run-ins with the immigration department in the past myself, however, I know that their conception of laws is very different from what we have in the West, to the extent that statements like the above are almost deliberately misleading.  The background of Chinese laws is in philosophical legalism – a top-down doctrine (said to have been favored by Mao) in which the concept of “legal protections” is almost an oxymoron.

One thing you will commonly hear from businesspeople and others in China is that it’s better to ask for forgiveness than permission.  Their system of laws is so complex (often poorly understood even by people who are supposed to be in charge) that trying to figure out their system would severely restrict economic activity.  There’s a school that is interested in hiring me, for instance, but in order for me to get a work visa, I would need to commit to a couple of years there.  (They get visas for one year, but apparently it looks bad on the school if too many people come in and stay only one year.)  I don’t think I’m offending a potential future employer to say that this is a ridiculous requirement, and I seriously doubt that anyone will take them up on that offer.  If I go there, it will be illegal.

These sorts of requirements, combined with the “breaking the law” rhetoric above, lead me to the following question: what percentage of Chinese domestic economic activity could be stopped if the government simply decided to enforce every rule that was on its books?  Although I am most familiar with a relatively small segment of the overall Chinese economy, my intuition is that the answer to the question is somewhere (far) north of 50%.  I bring this question up not because I have a solid answer, but just because asking the question helps make a point in its own right.  The Economist has a chart of the day that might give you a hint.

But please leave your thoughts below if you have any insight on the matter.

Written by Maofucious

June 23, 2012 at 6:58 PM

Posted in Confucianism

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