What's good for China is good for globalization

chart here

An FT op-ed by the president of the Chinese Academy of International Trade and Economic Cooperation and the chairman of the Center for America-China Partnership, timed to the recent Strategic and Economic Dialogue in Beijing.

Nice summary of China's thinking regarding our bilateral economic relationship:

America is used to having it all its own way.  In 1972, as the US opened diplomatic relations with China, it abandoned pegging the dollar to gold.  That enabled it--through its monopoly on printing US dollars--to create huge trade and investment advantages.  Its economy grew strongly as it managed the value of its currency at the expense of other nations.

Washington has not always fully acknowledged that from 2000, the year China joined the World Trade Organization, to 2008 the US dollar declined against many currencies, while from 2005 to 2008 Beijing gradually increased the US dollar exchange rate of the renminbi by 21 percent.

The US stimulus plan increased America's debt and deficits and will decrease the value of the dollar. China increased its holding of dollars as America's other trade partners reduced theirs.  As the US financial crisis loomed, China pegged the renminbi to increase stability and exert a positive influence on its economic recovery.  It will keep a relatively stable renminbi exchange rate to ensure its economic growth is steady rather than uncontrollable, which would harm all nations. Currently, China is providing stability as the largest holder of US government debt and US dollar-denominated reserves.

China-US relations changed when the world learnt that America's financial system would collapse unless the government saved insolvent US-based global banks, insurance companies and carmakers.  The bail-out turned the US government into the largest shareholder of formerly privately-owned companies, subsidizing their commercial failure.  Laissez faire theories, which US policymakers still demand that China adopt, were suddenly replaced by massive US government control of market forces.

The US often pursues policies that are "win-win" for itself alone.  Its policymakers would undermine China's vital national security and economic interests while seeking China's help in protecting America's vital interests.  But the reality is that the policies America proposed are implementable and sustainable only if they are beneficial also for China.  The Strategic and Economic Dialogue should focus on new US policies instead of trying to change China's policies, which are essential for global economic recovery.

An excellent and hard-to-refute summary argument.  Our success in encouraging China's rise is such that it can now legitimately claim to be working on behalf of global economic security as much or more than America. In short, it can make the claim that "what's good for China is good for the world," an argument to which only America could lay serious claim in past decades.

This is why we've never going to war with China; the codependency on globalization is profound.

Chart of the day: tracking China's economy

A Chinese business research org, after four years of effort, comes up with a new monthly index of leading indicators designed to give the public--and government--some deeper sense of where things are headed economically.  The government's stats are notoriously patchy, so the Conference Board came up with six:

1. Expectations of consumers
2. Lending by banks
3. Supply of raw materials to industries (central bank survey)
4. New floorspace being constructed
5. Export orders received by firms
6. Supplies delivered to exporting firms.

But because even that leading index is considered a bit crude, the Board simultaneously puts out a monthly current or "coincident" index.  The current index is more volatile than the leading one, because Chinese bureaucrats have a tendency to smooth out reality in their data.

The proof in the pudding?  The Board retroactively applied the indices all the way back to 1986 and showed how it would have predicted the major downturns since.

A nice little step toward managing things better.

Take away:  we have the tendency to assume China's leadership somehow knows more about its economy than our leadership does about ours. The truth is the exact opposite.

Fascinating piece by Matt Armstrong in WPR on next-generation UN peacekeeping

 The starting premise intrigues:

A subtle evolution of United Nations peacekeeping operations is underway. If the first of these missions kept an agreed-upon peace, and later missions sought to make peace, several countries now use these operations to advance their foreign and economic policy agendas, and raise their global profile. This shift, selective as it is to date, may potentially raise the standard of conduct in U.N. peacekeeping operations increasingly fraught with charges of criminal behavior, corruption, lack of accountability, and general ineffectiveness. However, there are significant downsides to this approach. 

China, Brazil and India are thereupon presented for being "well-positioned to leverage this new facet of peacekeeping."

Some cool background precedes the country analyses, to include the factoid that, "Since 2001, more than half of all U.N. peacekeeping forces have come from seven countries: Pakistan, Bangladesh, India, Nigeria, Jordan, Nepal and Ghana."  Body-intensive operations, occurring at heightened frequency, means the UN ends up turning to cheaper militaries--in every sense--that are rich in numbers.

Africa, we are told, is China's primary target for public diplomacy through peacekeeping.  I myself have been surprised, whenever I met with Chinese military officers, how many of them have done time on the continent. It is really viewed as a prime operational experience.  True to form, the Chinese provide purely SysAdmin troops (docs, police, observers, engineers) and no combat-capable personnel.  China explicitly explains its expanding role as filling the vacuum created by the decline of Western military participation in such peacekeeping ops.  

As natural as the day is long to me.  You go with the frontier integrators of the age--not last century's version.

Brazil is presented as seeking more peacekeeping roles as part of its long campaign to win a permanent seat in the UN Security Council, although the geographic purview of its participation remains tight on LATAM.

India, a long-time supplier of peacekeepers, is presented as lacking the tight strategic focus of China--as in, it's not yet sure what it wants to become as a great power.

Conclusion:  mostly upside for the UN with some danger that rising great powers will pick only their preferred missions.

Smart piece.

Underground banking in China

Pic here

Interesting FT piece on the underground banking in China known as minjian jeidai.

Basically it's Chinese companies borrowing short-term money from wealthy households instead of banks via a broker.  Households want better opportunities to use their investment money and banks find it hard to get such loans from banks, so everybody happy!

The problem is that anything that unregulated can have surprising impact, depending on the size of the flow, which nobody really knows.  Some bankers guess it's equal to about 10% of any locality's ongoing finance.

Point of piece by Gillian Tett:  compared to the now vilified West, China's state capitalism isn't exactly lacking in unregulated financing, and it's overall lack of financial transparency suggests that underground banking may be just a fraction of what we don't know.

Bottom line:  lots of bets being placed on future Chinese growth, even though "very few western investors really know that much about what is--or is not--happening at the grass roots in China now."

Not all that different from the US housing market five years ago, she ends.

Sobering thought.

Post-colonial approaches to Africa

FT analysis full-pager by Tom Burgis highlights China's relationship with Niger over uranium mining.

The opening gambit:

Following the same bargain it has struck across the continent – swapping infrastructure and cash for resources to sustain its breakneck growth – China has secured access not only to another source of African oil but also to what is perhaps the single commodity considered more sensitive than crude: uranium. It has also turned Niger into a bellwether for those who fear that the struggle to secure the continent’s resources risks re-creating the ruinous brinkmanship of the cold war.

The loser in this particular thrust?  France's Areva, which enjoyed a 40-year monopoly on Niger uranium. Given the level of development in Niger, I would say that competition wouldn't be a bad step.

Naturally, any such journey is contentious:

From 2004, when he became the first president in Niger’s history to be re-elected, Mr Tandja set about loosening Niamey’s umbilical bond to Paris. From 2007, Niger granted some 150 new permits to prospect for uranium, which accounts for up to half its export earnings. Relations with France reached their nadir when his government accused Areva of funding the Tuareg rebels of the Sahara who kidnapped expatriates and laid landmines in the northern mining region, demanding a greater share of the uranium spoils. Two senior Areva officials were ejected from the country in spite of French denials.

The fruits of Mr. Tandja's boldness became quickly apparent:

The competition has seen work start on Niger’s first refinery and a $700m hydroelectric barrage, not to mention hundreds of millions of dollars in “signature bonuses”, courtesy of Beijing. It helped the country wring tougher terms from France before granting permission for Areva’s vast new mine, which will make the country the world’s second-biggest uranium producer after Kazakhstan.

But apparently Mr. Tandja's closeness to China led to his political downfall:

Yet a February coup d’etat heightened the anxiety of those who see danger in a stand-off. Although ethnic rivalries and opportunism played their part in the putsch, Mamadou Tandja became the first African leader whose downfall could be traced directly to his embrace of Chinese suitors. “It was because Tandja had Chinese money that he felt he could mock the European Union, Ecowas [the regional bloc], the US,” says Mohamed Bazoum, a former minister who now serves on the “consultative council” created by the military junta that seized power.

The US concern?  Naturally, it's all about terrorists getting their hands on WMD --namely, Al-Qaeda's local offshoot.

China's take on things?  The usual:

Perhaps Mr Tandja had not acquainted himself with China’s policy of non-interference in the domestic affairs of African states. When young officers stormed the presidential palace on February 18, Beijing was as silent as it had been while he amassed power. The toppled president remains under lock and key. The junta pledged elections by February and has barred its own members from contesting them – so those overseeing the transition are not themselves participants. The soldiers have signalled they have no plans to break with China, although they intend to audit all Tandja-era mining permits.

They will do business with whomever is in power--not a particularly Chinese trait.

And don't think the Chinese are backing off due to the recent volatility:

Xia Huang, China’s ambassador in Niamey, says Beijing’s bonds to Niger are unshaken and that grander projects are in the offing, including pipelines and coal-fired power stations. China, he says, has offered Africa a “more profitable option” than other partners have. With a little overstatement, he adds: “This country has already seen uranium extraction for nearly 40 years. But when one sees that the direct revenues from uranium are more or less equivalent to those derived from the export of onions each year, there’s a problem.”

Nice point, great piece.

Joseph Nye: No Chinese century just yet

I have a soft spot for Mr. Soft Power for a number of reasons: he sat on my PhD diss advisory board, I taught for him in his famous Core course at Harvard, he gave me a kind WAPO review on "Blueprint," and--quite simply--he's just one of the nicest guys you'll ever meet. 

My wife even calls him the most handsome bald guy on the planet.

Enough love.

Here in this FT op-ed, Joe is his usual sensible self.

The "market Leninist" model, as he calls it, may provide soft power in authoritarian states, but "it has the opposite effect in many democracies."

A China that catches the US economy by 2030 would still be burdened with a huge impoverished countryside--easily equal (I would add) to America's total population).  

Plus, as countries mature economically, growth slows.  Assume 6% for China post-2030 and 2% for the US and China's per capita income doesn't match ours until sometime deep into the second half of the 21st century.

So don't cast China as the equivalent of Kaiser Germany passing Britain at the start of the 20th century.

As for the "advantage" of state capitalism?  

[China] will have difficulty raising its financial leverage by lending overseas in its own currency until it has deep and open financial markets in which interest rates are set by the market, not the government.

If anything, China's single-part state-dumb is a handicap relative to India:

Whether China can develop a formula that can manage an expanding urban middle class, regional inequality and resentment among minorities remains to be seen. The basic point is that no one, including Chinese leaders, knows how the country's political future will evolve and how that will affect its economic growth.

The danger?  Leadership generations change, forgetting the past and what go them there.  Plus, "appetites sometimes grow with eating."

But even if the Chinese leadership (or successive ones) were to grow aggressive, the military balancing function in Asia (a subject Joe knows well from his DoD and NIC stints) would simply kick in. Then there's the reactions of all these state that China depends upon for resources. Polls show most everybody likes China's economic rise but most everybody doesn't like its military rise. The two feeling can coexist quite nicely in terms of resulting policies.

In the end, Joe says, Bill Clinton's bit about the US fearing a weak China more than a strong one still holds.

Clip this one and reread as the China-rules-the-world books pile up.

Another old bit that holds up well via such analysis:  America created a world order that's easy to join and hard to overturn.

That's why our globalization is the end of history in a very real way, and the beginning of something so much better.

The "butcher of Beijing"--redux

graphic here

The Butcher of Beijing is a well-known hacktivist who blogs, tweets and uploads his way into the heart of the Chinese Communist Party.

He is one of the most daring of a growing band of full-time, internet-savvy, Chinese social activists who are beginning to take their calls for justice and transparency from the virtual into the real world.

Got tech and entrepreneurial background--no surprise.  Real name Wu Gan.

Focus:  defending downtrodden citizens who take on the might of the system, with a penchant for women's rights stories.  The 37-year-old radiates impending martyrdom in interviews.

The aha! moment for many of the newest netizen activists?  The 2008 government coverup on the milk scandal.

Very Upton Sinclair.

Chinese men: looking . . . better

FT story.

Chinese men are going soft, shedding traditional notions of masculinity and getting in touch with their inner metrosexual, to L'Oreal's great benefit (27% growth last year and 40% this year).

Some experts point to the sex-ratio imbalance, but the piece argues that:

Chinese men are merely following the lead of their wives and mothers, say cosmetics experts, who note that the Chinese cosmetics market has long been dominated by skincare products, with make-up not widely used and frowned on or even banned for some occupations.

In short, the focus is just as much on getting ahead career-wise as getting a mate.  Nobody wants to look the peasant part anymore, meaning good skin is seen as modern/"with it".

More prosaically, it's the rise in disposable income that makes this even possible.

Growing Chinese investment in US economy takes new turn

WSJ story:  China's Anshan Iron & Steel Groups says it will invest in as many as 5 US production mills owned by a Mississippi company.

It's a small move by a big (#6 in world) player, "but the deal appears to carry political overtones, coming as Beijing puts emphasis on outbound investment as a spark for economic activity elsewhere."

That's the lesson Japan had to learn years ago, and China appears to be moving in this direction with much faster speed.  It's a real credit to them and a good sign overall.

I've told this story on China for a couple years now in the brief: Japanese cars used to be keyed in Indiana parking lots years ago. Why? This is Big 3 production territory. It doesn't happen today. Why? Toyota and Honda have IN plants now.

Read this from the print story:

Last week, a government official in Beijing suggested China's steelmakers could learn from Japanese auto makers, which in the 1980s responded to complaints about their imports by opening U.S. plants.  Jia Yingson, of the Ministry of Industry and Information Technology, said Chinese steel production in the U.S. would help the industry sidestep rising trade barriers . . .

And from the online version:

In the 1980s, Japanese car makers faced the kind of political and popular resentment about imports in the U.S. that much of Chinese industry is up against today. To ease some of the tension, Japan engineered a considerable higher yen exchange rate while companies such asToyota Motor Corp. built U.S. plants so their cars could be labeled "Made in America, by Americans."

Our pushback forced Japanese companies to evolve from national flagships to truly globally integrated enterprises (IBM CEO Sam Palmisano's term).  No doubt the same learning curve happens here.  Bigger question is whether Africa can do the same vis-a-vis China.  But even there, I remain optimistic.

Again, very pleasing to see.  You go around spouting this stuff for years, wondering when it'll happen or if you'll be proven "naive," and then the economics shapes the political decision-making and even deeper economic connectivity and evolution results.

And everything old is new again. 

The Chinese are net buyers of T-bills again, but what choice do they have WRT euro?

WSJ story.

For the first time in six months, China is back to being a net buyer of USG debt, "boosting its position as the top foreign holder."

China soldoff a bunch of T-bills near the end of 2009, spooking a lot of American observers.  For a while, it seemed like Japan was back to being #1 by default, but a revision of the data ended that notion.

Because of Greece and the EU's woes, everybody seems to find US T-bills once again the most attractive option--especially among the Europeans themselves.  While an imprecise measure, this suggest that America's prospects for floating future debt are improved.

The Politics Blog: 5 Ways to Get Help on the North Korean Mess (from China)

Is Kim Jong-Il mad or what? As if this weekend's Eastern diplomatic swing to ease tensions over the sinking of a South Korean warship didn't seem fruitless or frustrating enough, now the world's least-favorite despot is really screaming to respect his authorit-ah by freezing ties with Seoul this morning.

Having long ago reversed its own "sunshine policy" toward its evil twin, South Korea now seems truly fed up. President Lee Myung-bak checked all the usual boxes over the weekend (cut remaining trade, block sea lanes, resume pysops, seek UN Security Council resolution, etc.), then pointedly added a call for regime change, vowing that North Korea "will pay a price." But before you go screaming World War III on today's developments, take heart: The solution, as Secretary of State Hillary Clinton remains in "intensive consultations" with Beijing over both NorKo and Iran's nuclear program, remains in China. And the time for tough choices seems to have arrived, both for Beijing and the Obama administration.

I have long argued — and since persisted, with regard to both Pyongyang and Tehran — that the U.S. should punt on Iran's nukes (there's nothing undeterrable about a Shia bomb) and target North Korea for regime change. I still believe that. Engaging with Iran serves tangible, near-term purpose (e.g., Afghanistan, Iraq, Israel-vs.-Hamas/Hezbollah), while toying with Kim serves none. And I still believe that China is in the driver's seat, whether we're talking Beijing's $80-billion investment in Iran's energy sector or its dreams of lifting $6-trillion worth of NorKo's mineral reserves (at bargain basement prices). Understanding that China must save face as well as sunk costs, here's my plan for making everyone — save Israel and Kim — more, shall we say, respectf-ah in the short run.

Read the full post at Esquire's The Politics Blog

Chart of the day: How loved is China?

From an Economist piece that declares that "the Beijing consensus is to keep quiet."

Yes, publishing houses in both China and the West are coming out with a slew of "China rules the world" books right now, and with the Shanghai Expo in full swing, China seems to be having its equivalent of America's 1893 Columbian Expo self-love-fest.

But the Chinese leadership is having little-to-none of this: they honestly don't want the responsibility of being a global model--yet.

What I got from the chart:  China gets the most love from Gap/Seam states where it's ramping up its investments, moderate love from fellow rising New Core powers (which feel some competition) and far less love from the Old Core West (for all the normal reasons).

Still, some outliers:  maybe the Brits and the Americans do see a younger version of their rising selves, and hence are less suspicious than China's historical regional rivals (India, Korea, Japan).  

China to India telecom market: pretty please, let us in!

Huawei is China's biggest telecom equip manufacturers.  It's working hard to get into India's booming market space, and recently India took a hard line on its imports, blocking orders on the rationalization that the gear might come with spy devices.

Now, Chinese expats are adopting local names (a famous Chinese trick) and dress and going heavy on the charm.

India is worth $1.4B of Huawei's revenue now, or 11%.

I like to see this tussle.  It's part of China's learning process:  the more it penetrates other markets, the more those markets will push back on its lack of democracy and everything that deficiency suggests about its business practices.

More evidence of China's "superiority": the crushing of outspoken artists

Wang Yi was, until recently, celebrated by the official Chinese media as the nation's answer to Mozart.  His "Ode to China" symphony was a staple of state orchestras.

Last year he was arrested for corruption charges (he was also a financial officer of the Party in the way that only happens in China) and now he's universally derided by the official media.  Some wags even claim he can't read music.  Supposedly he took bribes in the millions of yuan to get tickets for businesspeople and officials who either wanted tickets to performances of his works or wanted to curry favor with him.

The truth is hard to ferret out of one piece.  The guy was a longtime and powerful party official who never studied music and then, eight years ago, he starts singing and what comes out is a melody that eventually becomes this super-popular symphony.  China has this thing for its leaders expressing themselves artistically.

But Wang definitely crossed somebody in the party and now he's gone, along with his musical legacy--however it came about.

Point of piece:

The case is one example of the extraordinary influence senior party officials with few or no artistic credentials wield over the Chinese arts.

Critics say these factors are the main reason China, the world's biggest exporter of manufactured goods, has produced relatively few cultural or artistic exports in recent years--despite a multibillion-dollar global campaign and regular exhortations from leaders to develop "the cultural industries" and "soft power" of the nation.

"The officials want China to be seen as a cultured, creative nation, but in this anti-liberal political society everything outside the direct control of the state is seen as a potential threat," says Ai Weiwei, a well-known contemporary artist and a bold critic of Communist Party rule.

"The people who control culture in China have no culture, and in this system art provide a hugely lucrative source of corruption."

So, it would seem that, no matter the truth of Wang's downfall, his career is gloriously emblematic of why the Chinese will continue to feel embarrassed by movies like "Kung Fu Panda."

Another book on China/state capitalism

From former Beijing bureau chief of FT, Richard McGregor comes "The Party."

Emblematic of the control mechanism:  on the desk of the CEOs of the biggest state companies sits a red phone--the ultimate status symbol of political connectivity.  What these phones connect is about 300 men who run the country--we are told.

Interestingly enough, McGregor then lists historical examples of power-wielding elites in the UK, US and Japan. The thing is, once they hit modernity, the old-boy networks in each crumbled and the leadership situation opened up significantly.

But, of course, China will be unique, because, of those power networks, "none can hold a candle to the Chinese Communist Party, which takes ruling-class networking to an entirely new level."

The CCP has 76 million members, or 1-in-12 Chinese, although the vast majority are perfunctory members.

Key point:  nobody, even in the Party, calls their system communist anymore.  The all-powerful ideology has been "airbrushed" from history, says McGregor.

So we have a ruling elite based largely on wealth, and you just know how easy it is to keep the infighting at a minimum when money is involved.  When you depend on a "ruthless private sector" to maintain your power, don't expect the other guy to be looking out for you.

The claim that China's government is very Leninist "under the hood" is a bit rich:  we are told that controlling propaganda, the military and personnel is oh so copycat.  But Lenin was hardly the only genius to come up with that formula in history.  Indeed, I would call it the norm of any single-party state, no matter what BS it is selling.

Good stuff:

The gap between the fiction of the Party's rhetoric ("China is a socialist country") and the reality of everyday life grows larger every year. But the Party must defend the fiction nonetheless, because it represents the political status quo.

The Party's defense of power is also, by extension, a defense of the existing system. In the words of Dai Bingguo, China's most senior foreign policy official, China's "number one core interest is to maintain its fundamental system and state security." State sovereignty, territorial integrity and economic development, the priorities of any state, all are subordinate to the need to keep the Party in power.

Like Bremmer, McGregor notes the fundamental goal of any single-party state is to maintain its grip on power. 

The fundamental contradiction here, of course, is the need to choose between the efficiency and innovation that keeps the economic growth strong (the fundamental element of regime legitimacy in the eyes of the people) and the requirements to crush independent thought.  The only way you can sacrifice the former for the latter is to display the amazing capacity from--on high--to pick winners and losers in the economy.

Now, when picking winners consists merely of tossing in more, more, more of everything, it's fairly easy.  The trick comes when your system, having matured and requiring intensive growth, needs to be ruthless about the losers.  Politicians can't do that well, because the losers in the system get mad and want something in return. In America, the losers of any one moment can express themselves politically by throwing the bums out.  But in China, no go, so their anger must be consistently crushed.  And that ends in one of two ways:  profound social anger that triggers revolution or a sullen disassociation a la the Soviet Union.  Either way, the Party will not survive unless it ultimately submits to the rotation of power.

And that is likely to come after a series of economic crises deepens the rift within the Party between the go-fast coastal crowd and don't-forget-the-caboose interior crowd.

But until such time, we will be consistently treated to analysis that says China is unique in its development, when, in truth, it has plowed no new ground, but merely replicated the same, single-party, extensive-growth catch-up strategy that states have used throughout history--and throughout Asia in recent decades.  The scope is unique, but the outcome will not be.

Looks like a good book.  McGregor writes well.  Find it here at Amazon.

The magnificence and limits of China/Asia's ascent

Residential housing going up in Shanghai.

Three FTs, one WSJ and a Bloomberg BW.

Here's my linking:

The FT op-ed from David Pilling celebrates "unruffled Asia" and its economic ascent, the big danger being overheating.  Still largely export-driven growth, hot money flows in from the West.  Everybody is bullish on Chinese growth.  These flows put pressure on China's central bank, which holds the money because of China's controls on currency exchange (the yuan is not convertible).

As a result, inflation is growing inside China, with housing prices leading the way in the 12-13% range.  The same is happening, to a lesser but still significant extent, on food.  As one Credit Suisse banker puts it, "Virtually everything is on the rise in China."

Meanwhile the Chinese consumer continues to spend more, as do Asian ones in general.  Since the 3Q 2008, total cumulative consumption growth in Asia sits at 7%.  In the West, it's been negative.  And that's with private consumption still under 40% of GDP in China, compared to 71% in the US.

As this "rising" means wages have gone up, resulting in a labor shortage that is "trimming margins for exporters," according to Bloomberg.  As one factory manager notes, "Wal-Mart won't raise what they pay us."

Welcome to globalization, my friend.

Workers are getting uppity allright:

As costs climbed in Taiwan two decades ago, Ben Fan moved his lighting factory to take advantage of China's cheap labor. Now, with Chinese wages on the rise, he's moving again. "It's just like what happened in Taiwan," says Fan, chairman of Neo-Neon Holdings, which sells lamps and lighting fixtures to big retailers including Home Depot (HD), Target (TGT), and Wal-Mart (WMT). "Chinese don't want to work in factories anymore."

Ah, but Chinese state capitalism is so different, yes?  It can ignore these market realities and command where jobs appear and who fills them?

The yin and the yang:

Over the past two years, millions of jobs have moved to China's interior [yang!] or elsewhere in Asia [yin] as factory owners try to cut costs. In Guangdong, the mainland's top exporting province, wages have almost doubled in the past three years, and more than half the factories can't find enough workers. The number of migrants who traveled to coastal provinces for work fell by 9 percent last year, to 91 million. "This lack of labor will only get worse," says Willy Lin, chairman of the Textile Council of Hong Kong, a trade association.

Factory owners complain that the higher wages are devastating profits, especially as their customers continue to squeeze them for lower prices. 

That's the globalization price, as I noted in Great Powers.

You can say this is a problem of success, and it is.  Lotsa growth = labor shortages, and so does success in the one-child policy.

Already, many corporations are talking about keeping certain, more sophisticated production in eastern China while peddling the lower ends of the chain elsewhere.  That means China is ascending all right--up the production chain, and the further it goes, the less it controls--and the less labor advantage it holds.

China will only go deeper into Africa, staying for the very long haul

Pic here

Couple of FTs and a WSJ story on China defending itself from critics.

China does the usual oil-for-infrastructure implied swap in Nigeria:

China has agreed to spend up to $23bn (€19bn, £16bn) to build oil refineries and other petroleum infrastructure in Nigeria, potentially strengthening its hand in the country as it seeks to secure 6bn barrels of crude reserves.

Emmanuel Egbogah, special adviser to the president of Nigeria on petroleum matters, told the Financial Times that China State Construction Engineering Corporation signed a memorandum of understanding on Thursday.

In spite of being Africa’s leading energy producer, Nigeria imports almost all its fuel – and pays a subsidy equivalent to its entire annual capital spending – because existing refineries are in disrepair.

Crude but sweet.

The fund, China Africa Development Fund, is supposed to have a bunch of deals in the pipeline and an initial $5B to spend.

China also announces its largest investment into South Africa, "entrenching its position as the resource-rich continent's most important economic and commercial partner.  China is now South Africa's single biggest trade partner.

No doubt about that, and it is overwhelmingly to the good.

So naturally China bristles at criticism from outside observers, although it will need to grow ever more sensitive to such criticism growing within Africa.

As J.R. Wu notes in the WSJ piece:

... concerns persist that China is preying on the continent's resources to feed China's economy, while contributing little.

Beijing has put in place some mechanism to deal with issues surrounding its investment and trade on the resource-rich continent, and has asserted that its presence in Africa is increasingly being shaped by nongovernment forces.

Meaning more laws and protections must be put into place, says China's vice commerce minister.

China has set up joint government commissions to work these issues in 43 African countries.  Trade now sits around $100B a year, and is expected to skyrocket in coming years.

As a globalization expert and soon-to-be father of both Chinese and African daughters, my fascination with this process knows no bounds.  I have, in the past, vastly underestimated the potential for China to positively alter Africa's development trajectory.

Chart of the day: China's internal immigration rule-set clash

Great piece in The Economist about the hukou registration system that classifies all Chinese are either rural and urban--and only stealthily shall the two meet.

Current purpose is simple:  keep rural folk from migrating to cities too fast.  China is urbanizing at a rate never before seen in history.  In fact, it's the single biggest migration in human history--by sheer size.

What the chart shows:  Officially in Chongqing, roughly 24m people live in the countryside and maybe 9m live in the cities.  But in truth, the cities hold more like 19m, meaning 10m rural folk have migrated there "illegally."

The system is sort of China's internal immigration process: the richer city folk holding off the poorer rural migrants who move in and take all the 3D jobs (dirty, dangerous, difficult). Like the US and its immigration issues, this system is failing to work as intended, hence the many calls for reform.

Classic rule-set clash:  government wants to control the people flow, but the economic development says otherwise.

China's rise must be stopped! In fact, our entire military should be shaped to this end!

Mark Helprin in the WSJ by way of James Riley, plus a couple of NYT pieces on Gates fighting his budget battles with Congress, which, for some reason in this day and age, seems desperate to outspend his wishes.

Here's a projection from the National Intelligence Council's 2020 look-ahead report. If you go with the high-estimate line (always a safe bet with such a secretive government), then you come up with a number in the same range as Helprin's ($115-120B). By 2025, then, we're looking at a PLA that spends about a quarter-trillion dollars a year.

For comparison, check out US spending over the past decade, by way of the Center for Arms Control and Non-Proliferation.

My point here: our baseline spending grew almost as much as China's total budget should be in 2025:  $220B. Our top-line budget grew $373B, but you have to consider the war-spending as more subtractive than additive, even as it means our military now has a long recent combat experience base while the PLA really hasn't fought a conflict of any length since the early 1950s, or almost six decades ago.

What are we likely to spend in 2025? Probably in the range of a trillion a year, or still 4X China's total.

Now, if you follow the great projections on China, you would likely have their defense budget catch ours sometime before 2050, but that stuff gets awfully iffy, because it assumes that China will keep up the build-up despite the stunning aging of their population--to wit, in 2050, we'll have a relatively young total population of 400m and China will have 400m-plus over the age of 60.

That's just the background. Now, on to Helprin's scare-mongering piece.

He says we rationalize our growing weakness relative to China's growing strength, telling ourselves that we'll never fight two major adversaries at the same time (our dream of a WWII-redux). Okay, who else are we going to fight at the same time as China? He doesn't say.

Helprin says we delude ourselves by thinking conventional war is a thing of the past, citing "the growth and modernization of large conventional forces throughout the world." That line is just pure bullshit based on nothing.  

Here's the SIPRI numbers:

Note two things:  1) It took the world 20 years to get back to the peak spending at the end of the Cold War, and that was across a time period in which wars declined dramatically while numerous great powers rose, a trend that historically results in greater defense spending; and 2) the great growth from the trough of the late 90s to now is about $400B. Well, guess who did most of that additional spending? Duh! The United States. No one is modernizing like we are or racking up huge operational experience at the bleeding edge.

Helprin goes on to say that "appeasement and compromise" isn't turning our enemies into friends. Really? Seems like we just went through a rerun of the start of the Great Depression and what kind of cooperation did we get from all our "enemies" around the world? Actually, pretty damn nice.

Then we get the usual decline-of-the-Roman-empire stuff. Impressive.

So we're told that we've ceded the Western Pacific to the Chinese, meaning, at the very least, we're supposed to hold it ad infinitum. Why? Taiwan could be absorbed by China militarily. And if that happens, "America's alliances in the Pacific will collapse."  

Brilliant logic there. China forcibly invades a country it's trying to sign a free trade deal with it and you expect the rest of Asia to suddenly want nothing to do with America. Is this guy high?

From that domination of the Western Pac, China will soon begin to dominate all of Latin America, says Helprin--our China station replaced by China's America station.  

Why will China make this supreme effort? I have no idea. China doesn't seem to have any problem buying whatever it wants from Latin America, but apparently the Chinese people will want this more than environmental cleanups or old age pensions. They will go along with any government push to propel China into constant military standoffs with the US on the other side of the Pacific, because Chinese history is so full of such examples.

Me?  I see China logically building a naval presence and power-projection capability in the direction of its energy supplies--i.e., the Persian Gulf. I don't see them wasting time and money on regions that are stable suppliers. Of course, if China pushes its way into the Gulf military, pretty soon they'll find themselves involved in all the same Leviathan-SysAdmin work we do there now. And frankly, that would make some sense, given that Asia takes out the bulk of the oil the Gulf provides, while the US can get along without it easily (the PG ranks behind Africa, Latin America, Mexico and Canada, and the US itself as our 5th most important supplier of oil). 

And how threatening will a China be that bears this incredible burden? How many costly wars will the Chinese people support in distant lands? Hmm. We shall see.

But this is all silly conjecture on my part. Clearly, the Chinese will do whatever it takes to drive us completely out of the Pacific. Helprin says, we have "perhaps five or ten years" in which we can accomplish a "restoration."

Get used to this logic. Gates is working hard to get the Pentagon and Congress realistic about what we can and cannot afford in the future. We can either pull out of the world and stockpile our brilliant, uber-expensive Leviathan weaponry in anticipation of getting it on with China or we can be more realistic about our Leviathan hedge given our SysAdmin workload. Mr. Helprin believes we can have it all and do it all, and I think that's truly nutty.

But again, the quickest way to bog down the Chinese would be to abandon the Middle East and let them manage it on their own. Any takers on that score?

The Chinese give every indication of wanting to secure their trade networks with the world and no indication of being willing to fight for anything beyond that. Hell, they don't give any indication of wanting even to fight for their trade networks. All they really give as an indication is that they will not tolerate Taiwan declaring independence--their own, whacked-out mania.

We are deep into an age in which our old friends will spend less on their militaries and rising new competitors will spend more on theirs. We can either seek cooperation with these rising powers on mutual economic interests or we can try to hedge against them all, demanding that only America can decide such things.

The fixation with China is convenient for US military hawks, because the Chinese Communist Party will rule in a single-party state, with no serious challengers, for the next two decades or so. Of the other rising great powers, we don't really fear any of them, because they're close enough in their political pluralism--save demographically collapsing Russia--to avoid such suspicions on our part. Now, we can pretend that this crew of rising great powers will prefer a world run predominately by the PLA over one more dominated by the US military, but I think that's a paranoid assumption. I think the alleged Beijing consensus only works so long as China stays out of wars, which is why I'd love to see them sucked into a few.

Mr. Helprin sees a clear and clean route to the top of global military domination for the Chinese. I don't. I see a surfeit of hidden domestic debts and a public with no stomach for military adventure. I also see a single-party state that could not politically survive a single military defeat, and hence it will risk none. China cannot free-ride its way to the top and then dominate with no resulting exposure to draining wars. To believe in such a trajectory is, in my mind, truly ahistoric.

Helprin likewise sees China's defense rise as a pure zero-sum---as in, they gain and we lose. I do not. I see the Chinese arriving just in time.

We will either convince the Chinese to cooperate with us on global security or we will cede the burden to them. Either way, China is going to get dramatically bogged down by all its burgeoning global network connectivity. To believe otherwise is sheer fantasy.

There ain't no such thing as a free lunch. We've never gotten one, and neither will the Chinese.

US accounts for 1/2 global defense spending; China the same in RR

Map found here

FT story on Bank of China investing $1.1B in China railway per government direction, resulting in 15% stake. This just after announcement of $900M investment in high-speed Shanghai-Beijing line, something on which the BoC may actually get its money back.

China is spending $120B on RRs this year.  The most fantastic estimates of Chinese defense spending land in the same range.

The US spends in the range of $600-700B on defense and nowhere near any such number on RRs, which get less maintenance money each year that the interstate system does.

One World Bank expert says China's RR expansion is the biggest thing since the US built its interstate highway system.  China, BTW, is just finishing up its own such system.