Archive for China

Intolerant US Professors Call Out China for Intolerance

91729433_8b0420c6da_oOne of the least tolerant places around is the US university campus, with its speech codes, disdain for dissenting social and cultural opinions, voluntary self-censorship, and slavish devotion to political correctness. “Diversity” is the mantra, but diversity of opinion on economics, history, and politics is generally unacceptable. So, what are US professors worried about? China, of course. The Association of American University Professors recently issued an official statement of concern about Confucius Institutes, Chinese government-affiliated nonprofits that promote Chinese culture on US university campuses such as Stanford, Chicago, Texas A&M, UCLA, Michigan, and many others. “Confucius Institutes function as an arm of the Chinese state and are allowed to ignore academic freedom,” says the AAUP, most of whose members work for state universities or are paid from government grants and other funds. “North American universities permit Confucius Institutes to advance a state agenda in the recruitment and control of academic staff, in the choice of curriculum, and in the restriction of debate.” Perhaps they learned from the CIA, which has many years of experience advancing US state interests in the guise of educational and cultural programs. In any case, the irony of the largely intolerant US professoriate calling out the Chinese for intolerance has been lost on most observers.

China Plans Railroad to Seattle, and More

125px-Flag_of_the_People's_Republic_of_China.svgThe Chinese government is desperate to keep its bubble economy going, and one way it’s doing that is by spending on massive infrastructure projects. The “China Bubble,” built on huge construction projects such as subways, skyscrapers, highways, and housing, continues to astound with the sheer numbers involved, from the height of the skyscrapers to the miles of track laid.

This sort of spending has become a central part of the Chinese economy:

In the last few years, cities’ efforts have helped government infrastructure and real estate spending surpass foreign trade as the biggest contributor to China’s growth. Subways and skyscrapers, in other words, are replacing exports of furniture and iPhones as the symbols of this nation’s prowess.

This naturally has many political uses, from full employment to rising GDP growth, as noted by Doug French in 2011:

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Why We’re No Longer Number One

800px-thumbnailBy Ron Paul

Last week World Bank economists predicted that China would soon displace the United States as the world’s largest economy. The fact that this one-time economic basket case is now positioned to surpass the US is one more sign of the damage done to American prosperity by welfare, warfare, corporatism, and fiat money.

Some commentators have predicted that China’s reign as the world’s largest economy would not last long. This may be true. While China has made great strides since adopting free-market reforms in the 1970s, China is still run by an authoritarian government whose economic policies distort the market in order to benefit state-favored industries. These state-favored businesses are often controlled by politically-powerful individuals.

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Why the U.S. Has Lost Manufacturing Jobs

Jawaharlal_Nehru_Trust_Portby Michael S. Rozeff

The U.S. has lost manufacturing jobs, and it is not due to increases in productivity in manufacturing or because there is a natural maturation into a services economy. The main reason is the freeing up of labor forces in Asia, particularly China, due to their political reforms. Reforms in China, or movement toward greater free markets, began in 1978. Agricultural productivity went up. Peasant (farm) labor pools then started to move to the cities and manufacturing jobs. Imports into America began to increase. However, they were subject to tariffs that were uncertain. Congress renewed the tariffs annually, and they could be raised or lowered. In 2000, that uncertainty ended, and China entered the WTO. Manufacturing companies could then move production to China in greater volume without worrying that their investments might be harmed by sudden tariff increases by the U.S. The labor market in China became more integrated with the labor market in America through the flow of capital and manufacturing to China. Hence, manufacturing in the U.S. felt this shock and so did the labor forces employed in that manufacturing.

The basic story is that half the world had a labor force that was basically being thwarted by communist and similar repressive governments, and when the dam was burst and free market forces unleashed, giant equilibrating economic forces came into play.

One result has been lower prices for products imported made overseas and imported into America. Another result is that American workers have had to compete with Chinese workers. This has put pressure on pay. American workers have had to retrain and seek employment in other occupations. It has been a very difficult and trying period for large numbers of American workers who once had well-paid manufacturing jobs. A third result is that some localities, cities and regions that had built up government spending that depended on the manufacturing tax base had to adjust to reduced tax bases. A fourth result is that some companies that moved manufacturing overseas have lowered their costs and shown higher profits.

The time when this equilibration is complete is unpredictable. It depends on Chinese and American policies, agricultural productivity in China, the movement of peasants, etc. High profits attract more capital and more demand for labor, raising wages in China. This tends to slow the exit of capital and jobs from America. The creation of new industries and jobs in America is another unpredictable factor. As costs rise in China, the incentive to locate in America goes up.

Naturally, there is some demand in America for the government to do something about this. Government can’t do anything fundamental to help by shifting money around or printing money. The FED’s policy of stimulating housing by buying mortgages won’t help Americans to remain competitive and develop new industries and productivity enhancements that produce better-paying jobs. It won’t help workers who have to migrate and retrain. Raising the minimum wage won’t help. Government make-work won’t help. Government subsidies for favored industries won’t help. Redistributing wealth won’t help. Extending unemployment benefits again and again won’t help. Standard government nostrums cannot deal effectively with the strong economic forces that are at work in the world economy. The most effective incentives are those to be found in free markets. The government can most effectively deal with these forces by removing the impediments in various industries that it has introduced over the last 50 years and counting. It can call a moratorium on new measures of the same ilk. It should not be doing anything to strangle the internet or internet businesses (like sales taxes) or imposing burdens on these businesses, because they are a locus of new jobs that can compete in the world economy.

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China’s Coming Default

800px-Shanghai_-_Nanjing_RoadLast June I pointed to four unfortunate facts in the Chinese economy.

1. Overall credit had increased to $23 trillion dollars, up from $9 trillion as recently as 2008.
2. This amount of credit was over 200 percent of GDP, an increase of 75 percentage points in just five years. (By comparison over the same period the United States’ ratio of debt-to-GDP increased by 40 percentage points.
3. The credit rating agency Fitch had downgraded the Chinese government’s debt to AA-.

Most damning if not ominous, though, was the fourth fact:

4. The cost of short-term borrowing (seven-day) on the Shanghai repo market jumped to nearly 11 percent. This was the highest rate since March 2003. (Zerohedge reported the overnight repo rate was as high as 25 percent at the time.)

In writing Deep Freeze: Iceland’s Economic Collapse, my coauthor Philipp Bagus and I observed a similar set of events with regards to Iceland. Artificially low interest rates, and especially short-term interest rates, created an environment of heavy indebtedness. Entrepreneurs borrowed money on very-short-term loans in continual need of rolling over. By financing projects with, e.g., a one-month loan at a very low interest rate, the borrower could finance a long-term project provided the credit market remained liquid and interest rates remained low. Every month he would just borrow back the amount of money to pay off the existing loan. It is somewhat akin to taking out a new credit card to pay off your old balance, which works as long as you have decent credit and the card issuer keeps interest rates low.

At the time I reported that China was on the precipice of a looming bust, the inevitable result of a credit-fueled boom. Like most things, the bigger they are, the harder they fall.

Chinese state media recently warned that investors may not be repaid by the China Credit Trust Co. when some of its wealth management products mature on January 31, the first day of the Year of the Horse.

You say you’ve never heard of the “China Credit Trust Co.”? It was recently spun off by the world’s largest bank by assets, the Industrial and Commercial Bank of China. ICBC has recently suggested that it will not compensate investors for losses and that it will not assume any responsibility.

Indeed, writing for Forbes, Gordan Chang reports that “it should be no mystery why this investment, known as “2010 China Credit-Credit Equals Gold #1 Collective Trust Product,” is on the verge of default.” China Credit Trust loaned the proceeds from sales of a half billion dollars of product to an unlisted coal mining group. The coal company is, according to Chang, probably paying upwards of 12% for the money as it was desperate for money given that it has already been declared bankrupt.

There has never been a default in a Chinese wealth management product other than some delayed payments. Besides being the first, this one could be a sign of things to come.

Of course, some observers are not worried. As Chang correctly notes: “”To have a market meltdown, you have to have a market” and China does not have one.  Instead, Beijing technocrats dictate outcomes.”

That is indeed correct, but there is the unfortunate fact that private money is on the line. People have invested in China thinking the party would never stop. The Chinese government acting as a surrogate for the market is also the reason why China is heading for the granddaddy financial collapses.

Chinese GDP has not contracted on a year-on-year basis since 1976, the year the great communist leader Mao Zedong died and optimists note that the Chinese government and central bank are flush with cash. This may be, but there are a lot of dodgy wealth funds out there. At the end of 2013 there was as much as 11 trillion yuan ($1.8 trillion) invested in wealth management products, just like the one expected to default at month´s end.

As I said, the bigger they are the larger they fall. After recently dethroning Japan as the world’s second largest economy, China is about as big as they come. Size is not substitute for stability, however, and China´s years of dependence predicated on short-term loans might just prove the point.

(Originally posted at the Ludwig von Mises Institute of Canada.)

Gold Flows to China

ChineseGoldCoinsBloomberg reports that gold is flowing from some Western vaults to China: “The Chinese don’t want US dollars anymore, they want gold.

In 2011, Dan O’Connor wrote on “China’s Hard-Money History: 

So deeply rooted in the culture were gold and silver that the Chinese people upheld a metallic currency longer than all Western nations, even though their currency was consistently destroyed, manipulated and confiscated by governments up until the 1940s, when they ultimately reverted to paper. In fact, a major factor for the runaway inflation that took place at the very end of Cheng Kai Shek’s rule in the 1930s was triggered by the silver coins that had been soaked off the Chinese market. The silver was brought over to the United States under President Franklin Delano Roosevelt’s “Silver Purchase Act.” The ensuing paper currency system was untenable and led to widespread economic instability that undermined Shek’s legitimacy as ruler and caused many of his supporters to shift allegiance to Mao Ze Dong and the Communist Party.

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