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Unemployment: the missing Link

Thursday, December 4th, 2008

Now that inflation seems under control, unemployment has been identified by most as the real threat to Chinese stability in 2009. The risk of massive layoffs and social unrest is so obvious that you hardly need an economist to identify it. My blue taxi driver was telling me about it only a minute ago.

In the media and the specialized blogosphere we’ve seen many articles lately discussing the problem of closing factories. Mostly wondering how bad the situation really is, or how the government will be able to deal with it. Interestingly, opinions come in waves, one week exaggerating the damage, the week after dismissing it as seasonal closings.

Which just comes to show that, in times of crisis, bloggers and economists are all equally clueless.

The World Bank, Economists and Chinese Characteristics

The other day I commented the latest World Bank Quarterly Report, and I raised the issue that it does not take into account some obvious non-economic factors. Today, after reading the latest post on All Roads I went back to the WB report and performed a search for “unemployment”.

The number of results for this search in the 23 pages report is: 0.

Fair enough, there are 5 instances of “employment” (think positive), but most of them are explaining how the Magic Stimulus Plan is going to solve all the problems. The more I read it, the more I see this Report as loaded with Chinese Characteristics. It has been done in Beijing, by a mostly Chinese team… and like I said, it carries a highly suspicious 7.5% projection.

In spite of this, the WB report is an informative read, and one can hardly be surprised that an international institution tries to avoid conflict with one of its member governments. But what I did find quite surprising is that econoblogger Brad Setser’s analysis of the report doesn’t even mention unemployment either.

This is what made me think that we are going to need something more than economists if we want to see clear in the China 2009 scene.

Recommended Reads for the Fall

So, with all due respect, I have to desagree with Mr. Setser’s advice: If you only read one thing on China this Autumn, do NOT read the World Bank Report.

But then, what to read? Who knows really what’s going on in China?

Let’s analyze the root of the problem: China is not a transparent System. Even worse, unlike other non-transparent countries that we are used to deal with, China is a highly influential country. And it is in a position to not only hide the facts behind a painted veil, but also actively manipulate information and have hundreds of experts around the world scratching their heads.

So the answer to the question “Who knows China?” is:  A bunch of old men that are sitting in Zhongnanhai.

Now, forget your google, you will not find the Politburo Standing Comitee Blog, they will not take your phone calls to arrange an interview or explain their actions.

But what they actually DO every day is leave lots of traces, from the articles on the Chinese press to their announcements in economic policy. And these traces we can track down to the real intentions and the real information that they’re handling.  So it is by reading between the lines of People’s Daily, Xinhua and the likes that you can get a clue of what is going on here.

In conclusion, to understand China, economics is not enough: we also need politics.

Political Economics

So if you are only going to read one thing on China, I suggest you look for a political economist.  For example the blog of Victor Sish, which I discovered recently. He is a professor of political science at Northwestern University specializing in Chinese politics, and he also writes on Nourini’s monitor. He has a keen eye for interpreting the news from a Chinese government perspective. Don’t miss his last post on unemployment. For my part, I’m adding him to my Roll.

In fact, I am opening a new section on my Blogroll for Chinese politics and economy, and I would be grateful if you can recommend some other Crisis Watching sites, in English or Chinese. I am looking for sites that focus on making sense of the Chinese government’s moves.

Any more missing Links? Tips welcome. Thanks.

Picture credit: The shade of Zhongnanhai by Zhongnanhai 10毫克.

Dalai, the French and The Art of War

Wednesday, December 3rd, 2008

Today was a pretty stressful day in the office, but in between meetings I was able to join a lively discussion on the Fool’s Mountain about the latest Dalai incident.

To wit, the French President said he will meet the DL in Poland during a ceremony in honour of Lech Walesa. China immediately threatened EU with cancelling the 11th EU-China Summit this week, and has indeed cancelled it. BBC tells it here. Also see the reaction of Chinese netizens to Pomfret’s article and the account of Xinhua.

Here are my thoughts as posted on the Mountain (minus rants and comebacks):

Is China using France?

Is China using France strategically, as a wedge to divide EU, following the classic “divide and win” from SunTzu’s Art of War?

Could be, but this is nothing new, all the world powers use this old trick when negotiating with EU. The fact is China will listen or not to EU representatives depending on the power it perceives they have, and depending on China’s own interests. For economic aspects such as tariffs, EU does have power and will be listened. In other fields it can be completely ignored. Points to keep in mind:

1- The EU has a problem with unity, and this has nothing to do with China’s policies.

2- China has a problem to deal with DL, and this has nothing to do with the Sarko meeting.

3- Universal Rule in International Relations: If you need to distract attention bash the French.

4- DL is not a terrorist. Comparing him to bin Laden is low and slanderous.

5- China is crying for nothing: In Europe anyone could speak with the equivalent of DL.

For example, the president of the Basque Country (who actively demands independence from Spain) has met up with authorities of many countries and sends representatives regularly to support Basque industry in Shanghai. No whining from Spain, why? because unlike bin Laden, he does NOT support violence.

What are the consequences of this incident? And the real Reasons?

In fact, there shouldn’t be any serious practical consequence of missing this Summit. The real meeting is the one that will happen in April when the G20 + Obama meet to speak of the Crisis.

This little conflict with the French is just a classic IR trick to create some noise. Perhaps Zhongnanhai have decided that it’s time to rally the people in advance of the social shocks of the Crisis. Or perhaps they are preparing the way for a conflictive period in foreign affairs when China tries to implement protectionist/low RMB policies, strongly opposed by the West.

Chinese leaders are well known for thinking one step ahead. Hopefully I am wrong with this one.

Please comment. No swearwords.

Scary Scary News

Thursday, November 27th, 2008

The China blogosphere brought us some disturbing news again today. This time it’s about Foxconn, aka the Hon Hai Precision Industry, based in Taiwan. The rumour has it that it’s planning to lay off 100,000.

You might remember Foxconn from the funny episode of the IphoneGirl that became world famous for a day. It might also ring familiar because this is the company that manufactures the new iPhones and iPods.

What you might not know is that Foxconn is:

    • The largest exporter in China, according to their website.
    • The biggest electronics manufacturer in the World.
    • Employing close to half a million people only in PRC.

Now, I don’t want to come across as a rumourmonger, but I think it is worth to have a closer look at this. Because if it is true the social and economic impact in China will be seriously felt this time.

First, what is the source of this info? Mostly a rumour among the workers in the Shenzen megafactory, reported by local press. To be noted also the Hong Kong stock market sharp fall of Hon Hai shares earlier in November (and those guys in HK know a lot about Shenzen).

Second, how likely is it to be true? Well, I guess we will know soon enough, but there is something in this rumour that sounds very real for anyone that has been following Chinese affairs.

It follows the typical pattern: Local press report, buzz on the internet, Xinhua press ignore and downplay.  It is very suspicious that English Xinhua hasn’t witten a single word about Foxconn (the biggest exporter!) since these good news they reported in July. This is scary, because it’s exactly what the Chinese PR geniuses do when they see trouble coming.

Like I said yesterday, fasten your seatbelts, it looks like we are going to live in interesting times.

Is the Crisis really hitting China?

Thursday, November 20th, 2008

One of the advantages of Crisis Watching in China is that there’s such a large community of observers dedicated to this country that you are never short of ideas. The downside is that with so many voices it is difficult to make sense of the whole thing. To the question in the title, for example, depending where you look you can find today the whole range of answers: yes, no, badly, take it easy!

What is most remarkable is how fast opinion is shifting towards the Yes side, when only 2 months ago most people still believed China’s system was immune to Financial Crises.

Especially interesting is the story of the closing factories on the Pearl River Delta, which has captured the imagination of western media in the past few days. Fortunately we have some sensible China bloggers to shed light on this mess. The guys at All Roads and the Law Blog are the first to question the significance of the events.

Factories are closing sure enough, and this picture I stole from the bbc website is not an evil western media setup. But take a closer look: do you see any difference between this “workshop” and any random car parking? Do you see any traces of heavy fixed equipment, hoisting devices, utilities? anything looking like proper working lights for the operators? It looks exactly like what it is, a precarious facility quickly improvised to catch some coming contract and quick to disappear the minute things start to look bad. It is probably in places like these that they put together the fakes sold at Qipulu.

So it is mostly the fat of the economy that is being lost for the moment. Business which probably would end up closing anyway in a normal economic system that didn’t have as many holes as the Chinese. The bread and meat of the economy are still producing, and doing quite well given the circumstances. The disappearing of these companies will make things easier for the ones remaining, eliminating the pressure of their (sometimes unfair) competition. It’s part of the good effects of a downcycle, really overdue in an economy that’s been racing nonstop for the last 30 years.

So from my point of view the Crisis has still not hit China in any significant way. The international economic slowdown is definitely starting to show, but for the moment we are still riding it better than most of the Western economies.The Wall is holding strong.

Now, what Crisis really means is what by now is in everybody’s mind. The New Republic calls it Crash and Burn. But many observers around the world got excited about the recent protests in the Delta, and failed to realize that those protests are essentially no different from the many other Crack and Burns that happen daily in China. If it is not a taxi strike, it is a drowned kid or citizens unhappy with relocations.  Each of them for their own reason, and usually with no intention to question the role of the central government, but rather trying to call its attention to help against local injustice.

Crack and Burn we have had for years, and it didn’t do much to unstabilize the system, because it was never meant to anyway.

But here is a method to estimate what might happen if some day the Crisis really hits China:

  1. Google “Riots China”
  2. Collect the first different 50 results
  3. Add up the number of people violently protesting in those results
  4. Add the thousands of people that are going to lose (or not find) jobs in the year to come.
  5. To that reactive core you can add hundreds of millions of unhappy peasants, too isolated to organize protests on their own, but happy to ride along if there is any serious movement.
  6. Now all those millions of chinese  put them together at the same time to protest against the same problem. Typically inflation, unemployment, corruption, injustice or inequality.

When there is a critical mass of unemployed and discontent rioting in a particular region, this could spark the chain reaction and spread to the whole country like gunpowder.

Looking at the economy today, I think we are still far from that situation. On the other hand, I also think that, if it ever happens, it will happen so suddenly that none of us will even smell it coming.