As usual we will start with the popularity of China in the news. This year it is more interesting than ever, because 2010 is a round number, and the early-birds of the China Experts are already chanting the Chinese decade.

As we predicted last time, 2008 was a peak for China related news in the World, and it was going to be difficult to beat that in the short term. Within the general rising trend, 2009 has gone back to reasonable levels of media attention, partly because Xinjiang and the Tiananmen anniversary were no match for Tibet, Sichuan and the Olympics; partly because the US Obamania has stolen the show from the Middle kingdom.

In the first months of the year the crisis did bring some attention to China, but as soon as it became clear that the stimulus package was working and damage was under control, the journalists’ interest waned. Here are the results of my Chinanews-meter, the high precision tracking device I purchased from the Uni of East Anglia:

Occurrences of "China" in LaVanguardia 1881-2009

This year I want to go a bit further, so I add below the statistics from Google Trends for the News references of the term “China”. Note that Google Trends is not more precise than my own original method, because the number of news sources that Google references always grows. To recalibrate the scale we must try neutral words like “when” or “he” and take them as visual zero axis, leaning the whole curve to the right. The result confirms clearly the peak of 08.

Google Trend News for "China" (axis not corrected)

Still, this system is not very accurate, and I would like to find a more reliable way to estimate the impact of China.  I guess the old Chinanews-meter above is as good as I can get for now. As a random mainstream newspaper in Barcelona without any special connection with China, there is no reason why La Vanguardia  shouldn’t replicate roughly the general trend in the West.

Another possible solution (albeit without numbers) is to use the tool “Google Timeline” to compare some occurrences of “China” within particular newspapers. Interestingly, I have seen that the “highbrow” newspapers, such as the NYT or WAPO, tend to have a more stable coverage of China, as they usually have staff dedicated fulltime to this subject:

New York Times occurrences of "China"

Whereas more “lowbrow” papers like USAToday tend to show more the peaks and the valleys, as they follow more closely the trends of popular interest (see the massive peak in 2008 Tibet+Sichuan+Olympics):

USAToday occurrences of "China"

As a temporary conclusion I would say the results from USAToday and similar papers are more significant, because by far that kind of media have the largest number of readers in the World. This confirms again the trend seen in my old Chinanews-meter, and it also confirms the impression of most China bloggers I have spoken to: 2009 was not as hot as 2008.

Your call

I am still not entirely satisfied with these measurements and I am looking to find a better way to estimate “China” and follow it over time. If you have any idea please let me know in comments. Any suggestion welcome.

In the meantime, the bets are open for 2010 predictions, closest guess gets a beer.  Remember there is the Shanghai Expo and the end of the stimulus package, plus the novelty of Obama will be worn out. I go for a safe 4,000 this time (we have to use the Chinanews-meter again as it is the only chart with numbers in it).

In the next part we will see the results of this blog in 09, and I will inflict you with the best of the 2009 collection. While I get that ready, to follow the year end tradition, here’s the green pastures of the Biscay coast:

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UPDATE: This morning I did a “callibrated” Google trend, taking the word “when” as horizontal reference. “The lower curve is the one representing “China”. The results are far from precise, but they do confirm a strong peak in 08 and return to normal in 09:

Occurrences of "when" (up) and "China"(down) in Google Trends News

UPDATE2: I have found out these days one reason why the Chinanews-meter shows such a sharp fall in 2009: in the beginning of the year the popular correspondent of La Vanguardia, Rafael Poch, was demobilised from Beijing. It is very possible that a few hundred of the articles missing in 09  can be explained by his absence.  Of the charts above, probably the general reality of Western media is somewhere between the USAToday and the NYT charts. I am still looking for a way to put numbers to that, any idea would be welcome.

When it comes to Chinese economy I have always been a bit of  a pessimist. This year I am getting to understand better the situation of public finance – I recently read the informative Finance and Factions, by Victor Shih-  and now the outlook looks even bleaker. On the surface China is doing well, but the more you look into the details the more unsustainable it looks. Which is exactly how systems look when they are about to snap.

And yet somehow I will not be surprised if in 10 years time we look back and find that we are still in the same situation.  After all, there were experts writing similar predictions already 10 years ago…

The Time

Economies don’t grow indefinitely.  Low cycles follow high cycles and after 30 years it is about time. China cannot break the laws of economics, so the recession must necessarily come in the next X years. The country hasn’t prepared itself politically and psicologically to face this period. In the end, we are sure to have trouble.

Of course, this argument is of little value without the X, and many proponents of a time limit have failed in the past. This is the field of technical analysts and other mystical thinkers. Mythology also plays a role:  In Chinese history, cataclysms mark the end of a cycle. An earthquake preceded this crisis, and a solar eclipse is coming in July, the dynasty has lost its virtue. These arguments tend to work better with a bit of hindsight.

The Markets

The World’s economies are interdependent today. China’s economy is largely dependent on exports and FDI. The weight of these external factors in China’s growth has been much discussed, but regardless of the exact numbers, few doubt that it is a significant motor of the economy. External motors failing, China turns to internal ones: investment and consumption. Today, strong public investment, mostly in infrastructure and energy, is making up for the loss.

But infrastructure on its own does not move an economy, an empty highway is dead weight. Its value lies in the economic activities that are created or improved by using it, and those activities need markets to get them going in the long term. Optimists have pointed out that the crisis might turn developed economies to cheaper products, but international markets are saturated with cheap Chinese wares, and the latest news are discouraging. This leaves the Chinese consumer.

The People

Since the urban consumer was already developing at full speed, it is to the masses of Chinese peasants that all the eyes turned when a new market was needed to replace the failing exports. The peasants had been left out of the economic miracle, and measures were announced to get them back in.  But few of those social measures have materialized in any significant way, and the government seems to realize that this is a long term effort, not to be mistaken with an emergency financial package.

 Chinese peasants don’t like to spend money. They like to save it.  Some argue this is an immutable principle of a post-confucian society, others attribute it to the lack of “safety nets”, such as  health care plans, and the fact that poverty is still seen as a very real option.  Perhaps Chinese have too much common sense, and in the face of all evidence, they continue to act as if working hard and being thrifty will make you richer.

Meanwhile, the optimists of internal consumption see hope in the low-tier cities, the segments of the population that have already abandoned the peasant lifestyle, but still have a long way to reach East Coast level. 

The Government

China’s authoritarian system has some advantages over Western systems. The executive can take strong, quick measures unhindered by parliament debate and popularity surveys. A good example is the stimulus package. China was the first major country to announce it, and it is has been the biggest  relative to the size of the economy. Government technocrats tend to know more of economics than voters.

But some see in the system the seeds of disaster. The Son of Heaven is human, and bound to the wheel of favours, factions, patrons and clients. The lack of checks and balances makes it easy  for personal interests to take precedence over the common good. Some have a stake in the stock market, others in real estate, there are ways to pump up these markets with the connivance of Beijing. One day they might all decide it is time to cash in, and the rest of the population will be caught by surprise, watcing the CCTV report with the 8% growth spreadsheet. Lack of transparency usually works well to bubble up crises. 

The Package

China has a good package, timely and sizable. Few doubt now that it has delivered the desired stimuli. The thrust in infrastructure and energy investment is spilling its effects over the rest of the economy, and the feared legions of the unemployed are still nowhere to be seen today. 

But the package can only be a temporary patch, as we have seen above, and its function is just to cover the gap until the economy gets back to normal. In the meantime, the investments should be preparing the path for the return of sustainable growth.

Optimists point at the positive parts of the package, such as social measures, education, or development of new sectors of the economy in biotech or renewable energies. Pessimists note that the bulk of the package is actually flowing into very few sectors related to heavy construction, and this will cause unbalances and excess capacities the minute the financial tap is turned off.  In their view, the package is just postponing/aggravating the consequences. Some mention the devastating and unpredictable specter of deflation.

The Chest

China has also a nice chest. It is a war chest, and it is full of foreign-exchange reserves denominated in dollars. Optimists and lovers of logic alike see salvation in these reserves. They like to point out that China has room to go on with its package for a long time, thanks to all the years that the country has spent saving saving money and acting as “Americas banker”.

From a plain logical point of view, this makes sense, but unfortunately financial logic is anything but plain. The specialists in the area are quick to remind us that these reserves are not unencumbered wealth, and not free for the government to use. The central and provincial governments finances are already under stress, and the banking system is channeling all financial resources to the package SOEs, with the consequence of drying up available finance for other sectors of the economy.

The Riots

One of the main subjects in the Crisis discussions has been the possibility of large scale riots caused by unemployment. These riots could have the effect of destabilizing the system, with consequences in politics as well as in the economy. Perhaps because of the political derivations, unemployment has attracted a lot of attention from Western observers. Around the turn of the year, when the Western Christmas season was over and many semi-seasonal workshops were closing, the discussion reached the peak of popularity.

But the package has kicked in, and for the moment unemployment doesn’t show signs of getting out of control. The riots have increased in number, but they remain essentially local in nature, directed to claim arrears from a particular company, or against local authorities. There is a climate of relative optimism among the Chinese, and it looks like the the propaganda package that came with the financial one is having the desired soothing effects.

Inflation/Deflation

Predictably, another high point will come when the investment package is left behind, or when the financial situation makes it unsustainable to continue pushing it. At this point, we might see more passionating discussions, with the added appeal of possible deflation risks. 

Inflation has historically been a major cause of riots and wars, so a logical mind would assume that its opposite -deflation- has opposite effects, forcing everyone to stay in at home reading self-improvement books and drinking green tea. I doubt very much the economists will let us get away with this theory. In the meantime, I will stay tuned to the blogosphere for any interesting development to add to this list.

And in the meantime, we have read so much about her that the debate gets old, the initial guessing game we merrily joined some months ago giving way to a phase of weary expectation.

So, finally, is there going to be trouble in China or not – Will the Wall Fall? I have my own opinions about this, but I’ll keep them clear off this post. Instead, I want to  summarize some ideas appeared in the sinosphere, list the main arguments from each side, and let the reader choose which make sense.  Luckily, this is the kind of discussion where the same arguments are fluently used to support all views, so the list can be made manageable.

But first of all, let’s examine the parties. In this business of Chinese Crisis Watching there are 3 main schools of thought,  which can be roughly classified as follows:

A. The Optimistic Executives:  Old China hands with long memories, bullish consultants with short ones. Optimistic people with or without a stake in the optimism of their clients. Just to list some recent ones.

B. The Academics of Doom:  Everybody knows the highest fulfilment of a dismal scientist is to announce doom and then have doom come. On the other hand, there might be something in what they say…  some examples.

C. The Rosy Men of the Republic: This 3rd group is endemic to China. It consists of a set of highly prepared bureaucrats who resolutely believe in the Feelings of the Motherland, in Santa Claus and in the Theory of Scientific Development. You can see here some of their latest achievements.

The English-speaking sinosphere is a little world, and we rarely see the big names that populate other provinces of the internet. But we do have a great advantage: debate here is relatively free from partisan politics.  There is not much in the way of left-wing China blogs, for instance, and American republicans don’t go about throwing  green tea parties just because grandpa Wen announced a healthcare plan. 

In fact, the left and the right in China are conveniently concealed behind the red walls of Zhongnanhai. There are few leaks, and the real data which analysts use is pretty much available to anyone with an internet connection and some notions of mandarin. This is a level field where you can browse around, draw your own conclusions, and enjoy your tea leave reading with Armstrong’s great cover of  ”La vie en rosy“.

But enough if the rosy chit-chat. Here’s the points.

And I have decided to write this little post to explain to my readers what is a Billion and what is a Trillion. Now, don’t get me wrong, I am not taking you for an idiot, we all know that a T is a thousand B and a B is a thousand M (this is the generally accepted convention in English today, and the one I will use).

But when we hear that the Chinese are going to spend 4 trillion RMB to stimulate their economy, or in general when we discuss such large quantities of money, do we really understand what they mean? Do we have even a notion of what they can do?

I am going to give you first a quite surprising calculation from an Engineer. Based on the empiric observation that a 万 (100notes of 100RMB) stacks up to about 15mm, and supposing that 1RMB notes are about as thick as 100RMBs, I have come to the following results for the 4T RMB stimulus:

• In 100RMB notes it would stack up as high as the Earth’s Radius.
• In 1RMB notes it would stack up to the Moon and back.
  

Considering that a large part of the population spends not much more than 1RMB for a lunch in China, now perhaps you can visualize a bit better the significance of the money we are talking about.

Hospitals and Factories

For those serious business readers who are not impressed by the magic of numbers. As a blogger whose -attention, disclosure!- day job is advisor to direct investments in China,  I can use some figures to reposition our currency. I will not support these estimates here, but if you want you can easily find examples in many corporate websites on the announcements section.

These are my figures:

- One average city hospital, about 400 beds:              250 MRMB
- One average size factory,  2000 workers:                 400 MRMB

This is a fairly average state-of-the-art plant in capital intensive industries, not the toy sweatshops in the Pearl Delta River, nor the monsters like Foxconn Shenzen.

So now we can convert our currency to Hospitals and Factories and look back at some of the quantities that we have been speaking about these last days in the light of this conversion:

• The Stimulus plan is worth 16,000 Hospitals or 10,000 Factories.
• The Shanghai tower is worth 60 Hospitals or 40 Factories.

And speaking of the Shanghai Tower, I have some friends in Shanghai working for Gensler and I wish them the best for this beautiful building. But one can only hope that by 2014 the situation will have changed, because right now it looks like empty offices are flying in the sky.

Note:   Europeans: divide all numbers by 10 for Euro.  Americans: divide all by 7 for Dollar.

Expectations are high on the meeting that will change the World. The trouble is, it will not. Xinhua has just published a first official explanation from NDRC, containing no news. The 40BRMB for “healthcare, education and cultural undertakings”, or the 280BRMB for housing projects were already announced before the meeting. If anything, note that now they have added the “cultural undertakings” for extra flavour.

What about all the rebalancing of the economy that we were supposed to see?

Wishful Thinking

What began as a series of advice by some economists has evolved into a streak of generalized optimism, as  more people started to believe that Chinese leaders will take the chance now to rebalance the economy. I suspect this very optimistic and profusely quoted World Bank report is partly responsible for this state of mind.

But the rebalancing of China’s economy, including a social safety net, health care, and all sorts of measures to bring into the economy the 900 milion rural residents that have been left out is not going to happen now.  Because it doesn’t make sense.

Here is why:

1- Hu Jintao hasn’t been able to implement his rebalancing policies during the first half of the 11 year plan. It is difficult to imagine that the development hawks in the CCP will allow him to implement them precisely now. Especially considering that things like a health care system are costly and someone needs to finance them. How much power do Hu and Wen really have to oppose the immediate interests of business?

2- Chinese like to save money, that is just the way they are, it is a trait of character. No amount of health care or land reform is going to make them spend more in 2009. How would it make sense that the same people who were saving during an economic boom decide to spend more now that there is fear of crisis?

3- All the social rebalancing and Scientific Development of Hu might be great for the long term, but they will not help China weather a difficult 2009. The real worries of the leaders now are: How well will the system resist the social and political tensions that will arise? And how well will Hu Jintao and an already fragile Social Wen resist them in the Party?

An emergency package

But there is a more fundamental objection to the notion that the stimulus package will implement any serious structural change: it is not its role. It is an effort to save an emergency situation and avoid the worst aspects of the crisis (notably unemployment) getting too serious.

And the sad fact is that great restructurings are not done in advance of crises, they are done afterwards. Hard times comes first, then reform. As an example, a quick look back at one of the historical cases that is most fashionable these days: FDR started his famous New Deal only in 1933, well after the crash of 29. In the meantime what was Hoover doing? Investing in infrastructure, like the Chinese now.

“Social” Stimulus

So will the package improve the livelihood of the peasants? Well, if you consider that buying a new color TV at a discount price is going to change their lifes, then yes. But otherwise, not.

The subsidies to buy home appliances that WSJ mentions here are clever measures, and they will probably be effective to boost the consumption of some farmers in the short term. Which makes sense, because the factories producing those TVs have to keep running, unless someone imagines that a legion of jobless manufacturing workers can be set to construct roads and railways overnight.

But nobody should be fooled: these are no social measures. They are measures to help the manufacturing companies to find a substitution market for the failing exports.

Another related “social” measure which might be hidden in the stimulus budget is an emergency fund to cover the possible cases of layoff riots. Victor Shih estimates it in his blog to be around 120BRMB in the worst of cases. I don’t think the government would be announcing this fund publicly, as it is a signal for disaster. But if 120B are missing in the 4Trillion package, now you know were to look.

Conclusions

It is all very healthy to dream, but I am afraid the largest part of China’s money in 2009 will go to help the companies resist the crisis and to mitigate the effects of it. The leaders are nervous, and the time is not for experiments.

But enough of stimulus already. Too much has been said, and I have the feeling that there are more important things to watch right now. Namely: Unemployement and Currency.

I have done enough tea leaf reading in my posts as of late, so I will leave these two subjects for next time. But if you want to know what 2009 is going to bring us in China, make sure keep an eye on them.

Looking at the the reactions from within and without the Summit, it is surprising how peaceful it has been compared to others in the past. No protesters on the streets, no colourful accusations of irresponsibility, nobody even remembered to mention Irak or bash the French. The leaders of the world have understood that the time is not for funny gags. The financial crisis is looming on each of our countries, and we have to stand united. Are we turning the page into a new phase of collaboration in the international community?

For the moment,  these are the main points agreed upon:

• Stabilize banks and boost growth – This includes bailouts and Economic “stimulus”. There is no more than a general statement in this Area, no commitment by any of the States.
• Better Regulation of Financial Markets – Supervision of banks and credit-rating agencies, scrutinize executive pay, tighten controls on complex derivatives, etc. This one was pretty obvious.
• IMF Reform – This is were China and the other developing countries put pressure to have a voice in the exclusive US-EU club. It is likely that they will succeed, and IMF will gain some credibility from that (but gain in efficacity does not not necessarily follow)
• Commitment to an open global economy  – Free market, no barriers to trade or investment. A point that all countries big and small have agreed upon. Hopefully their policies will remain consistent with this statement.

In conclusion, nothing to write home about. What with all the Bretton Woods II measures that where going to change the economy of the XXI Century? Not yet. There will be a follow-up meeting in April 09, and by then some specific plans may be ready for discussion. There hasn’t been time to mature any serious ideas. And anyway, he who shall be in charge of leading the effort could not join the party this weekend.

Indeed, together with the Brie cheese and the lamb, there was a hot potato served for dinner last Friday. And one that nobody is eager to open up, but rather roll on swiftly from plate to plate until it gets to its final destination, president elect Obama. The minute he steps into his office in January it will be there waiting for him, wrapped up in Christmas paper.

In this sport of potato rolling, the Chinese have long been masters. Their words are measured and dictated by wisdom. Thus spake President Hu Jin Tao:

• Reform [of the international financial system] should be conducted in a comprehensive, balanced, incremental and result-oriented manner.
• A comprehensive reform is one that has a general design and includes measures to improve not only the international financial system, monetary system and financial institutions, but also international financial rules and procedures.
• A balanced reform is one that is based on overall consideration and seeks a balance among the interests of all parties
• An incremental reform is one that seeks gradual progress
• A result-oriented reform is one that lays emphasis on practical results.

This sounds very much like Deng’s “Groping stones to cross the river”, an approach which was very effecive to tackle a delicate process of transition like China’s, but not necessarily to avert a crisis. Some famous analysts have long been speaking against this kind of solution.

And then, one wonders how this fits with the aggresive stimulus package that was supposedly launched last week. That was certainly not an incremental announcement. But who knows, it is not for us mortal bloggers to understand the ways of the Popular Repubic.