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Wednesday, May 26, 2004

A reporter at a major newswire service wrote to ask me about the links between economic factors and the 1989 protest, as well as their role in potential unrests in China today. Since I have some time these days, I decided to give a long-winded answer:

1. What role did economic factors (inflation, unemployment, etc) play into the 1989 protests?

I think economic factors, inflation in particular, played an important role in providing preconditions to the protests. The summer of 1988 saw the most severe round of inflation since reform, with inflation in some cities reaching almost 40%. Although the State Council quickly imposed price control, there were instances of panic buying and severe shortages. Although prices began to stabilize at the beginning of 1989, the economy also stagnated due to the harsh measures used to quell inflation in 1988. Thus, inflation in 1988 saw urban residents' purchasing power drop dramatically. Meanwhile, some of their savings were also wiped out since banks were essentially giving negative interest rate to depositors for some months in 1988. At the same time, the slow-down in 1989 meant that the job market for university graduates was quite grim. At that time, the state still assigned jobs for most university graduates. Because of the economic slow-down and because SOEs were beginning to make serious losses, the prospects for many university students weren't good. University students at that time were just at the cusp of a mental transformation: from a high expectation for state-assigned job to a willingness to seek jobs in the private and JV sectors. The students in 1989 hadn't quite made the transition and thus felt trapped by the seemingly tight state-controlled labor market. Fortunately for the CCP, however, the major cities still more or less had full employment since SOEs were just beginning to see losses. Although they were less willing to hire new workers, they were still capable of using bank loans to finance current wage needs. Thus, although some workers joined the students in 1989, their participation was limited. Certainly, workers' participation would have been much more substantial in the 90s.

2. What is the danger of the current economic pressures (inflation, unemployment again) spilling over into political protest?

There is a lot of economic pressure in China today, but for a variety of reasons, I don't think another large-scale urban protest on the scale of the TAM protests is likely to occur. Certainly, the unemployment problem for SOE workers is extremely severe these days, with effective unemployment rate of over 50% in some Northeastern cities. However, to the extent that there are workers' protests, they are limited in scale or geography. We see small-scale workers' protests all over China, but their scale in central cities like Beijing and Shanghai has been small. The larger protests mainly take place in the Northeast and in some Western cities. Also, despite the unemployment problem, there has not been a visible alliance between workers and students. In many ways, university students in China today have many more economic benefits than their elders in 1989. Instead of confined to the state-controlled labor market, they now have choices to get jobs in foreign multinationals, JVs, and domestic private firms. This year, university graduates are in hot demand, which probably give them wages well above that of the average Chinese. Thus, with the exception of a small handful of idealists, they are unlikely to join the workers to protest against the government. Of course, a severe economic downturn can change this dynamic. Finally, the Chinese government is now much better at preventing a small protest from spreading. Recently, students protested the accidental death of a classmate in Beijing, but the government quickly went in, addressed the students' grievance, but also sent in a bunch of spies and security agents. As the recent Washington Post article reveals, the Chinese security services now employ numerous spies among the students to monitor any potential dissident groups. Thus, I think it will take a major exogenous shock now to prompt a similar scale of protest in major cities in China.

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There was a time when communities would seek counsel from the elders. More experience usually translated into lessons learned. Having picked up a pearl of wisdom here and there over the years, I am now able to share a thought or two. The main lesson is to never stop learning. Seeking other points of view and new ideas like visiting your blog are steps in the right direction. Finding what is ultimately important leads one to appreciate actuality, efficiency and mindfulness. Helping others to see some of the forest through the trees is its own reward. happy thought lifestyles
 
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Monday, May 17, 2004

So, someone in the State Council is trying to stir up the propsect of interest rate hike by sending a Research Center report to the western media. I think people should not be too excited about it. The thing is that raising interest rates carries with it all sorts of costs for the Chinese government. First, given the problem of hot money coming into China, a series of small hikes would encourage even more hot money flowing in China. Moreover, anticipating future increases in interest rates, firms would try even harder to borrow from banks, which might exacerbate the money supply issue. Furthermore, increase in the general interest rates means that SOE borrowing costs will increase, which decreases SOE profit margin. Officials at SAMC might not be too happy about that. Finally, the MOF would also have to increase bond rates to match increases in bank interest rates in order to attract buyers. Thus, the MOF is probably resistant to interest rates increases. The fact that DRC is leaking the proposal to the western media shows a certain degree of desperation on the part of neo-liberal scholars in the government.


Here are the articles:

China's consumer prices rise more than expected
By Financial Times reporters
Published: May 14 2004 3:50 | Last Updated: May 14 2004 3:50


China's consumer price index continues to rise at a fast rate, fueling fears that Beijing is under increasing pressure to raise the country's interest rates soon to quell the threat of inflation.

According to data released by the National Bureau of Statistics of China on Friday, the CPI rose 3.8 per cent compared with April last year, and was 0.5 per cent higher than the level in March. A Reuters poll had predicted a 3.2-3.3 per cent rise in the year to April.

The CPI, which covers basic consumer goods and services, showed that the cost of food rose by the largest extent, with prices 10.2 per cent higher than in last April. The average price of grains, in particular, surged a phenomenal 33.9 per cent in past twelve months.

Beijing has rolled out a series of measures over past months to curb over-investment but has stopped short of raising the country's interest rates. The central bank earlier dismissed calls for such a move, saying policies aimed at reducing loan growth had produced some impact and that further observation of the economy was needed.

But recent data called into question the effectiveness of existing controls. Figures released on Thursday showed industrial output rose 19.1 per cent in the year to April while total lending rose 20.4 per cent year-on-year at the end of April.

In a report dated April 30, but obtained by the Financial Times this week, the Development Research Centre of the State Council, China's cabinet, recommended small rate increases to cool the economy.

"To keep inflation from being too high or real interest rates from being too low [we should] several times by small increments raise deposit rates and raise lending rates by a higher margin," it said. While the government think-tank did not suggest a time frame for putting up rates, its recommendation showed that such a move remains an option actively explored in Beijing.

The Bureau also announced on Friday that retail sales rose 13.2 percent in the year through April. The increase mainly reflected the sector's recovery from Sars, which the region last spring.



Small rate increases urged to cool China's economy
By James Kynge in Beijing
Published: May 13 2004 21:58 | Last Updated: May 13 2004 21:58


China's interest rates should be raised by small increments "several times" to curb excessive investment and cool credit growth, but authorities should guard against precipitating an economic slump, recommends the cabinet think-tank.


In a report dated April 30, but obtained by the Financial Times this week, the Development Research Centre of the State Council, China's cabinet, makes seven recommendations including reducing government spending, raising interest rates and approving the outflow of funds to capital markets overseas.

The recommendations were made before official figures released on Thursday showing M2 money supply growth at the end of April continued to rise at a vigorous 19.2 per cent year on year. Other key economic indicators, however, showed a slightly slowing trend.

The DRC said Beijing should aim to keep growth in M2, the broadest measure of money supply, at 17-19 per cent this year and renminbi credit growth below 21 per cent in order to keep inflation below 5 per cent for the year. By the official measure of consumer prices, inflation rose 2.8 per cent in the first quarter.

"To keep inflation from being too high or real interest rates from being too low [we should] several times by small increments raise deposit rates and raise lending rates by a higher margin," the report said.

The report did not suggest a time period for raising rates but said that to counter the upward pressure such a rise might exert on the renminbi's exchange rate, some domestic institutions should be allowed to invest in overseas markets under a proposed scheme called Qualified Domestic Institutional Investors.

The DRC also recommends slowing down excessive investment by "strictly controlling" the actions of local governments, a policy Beijing has already begun.

Its other recommendations were also in line with existing government policy. In all actions, the DRC stressed, authorities should adopt a light touch, neither slamming on the brakes nor using "one knife to cut all".

Figures released on Thursday showed industrial output rose 19.1 per cent in the year to April, from 19.4 per cent the previous month. Imports surged 42.9 per cent in the year to April compared to 42.8 per cent in the year to March. The April trade deficit widened to $2.26bn, up from $540m in March. Total lending rose 20.4 per cent year on year at the end of April, a 0.3 percentage-point decline from March. Actual foreign direct investment hit $5.55bn in April, down from about $5.8bn in March.


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Monday, May 10, 2004

Hey All, you can now comment at the end of every blog entry. Feel free to comment on past entries as well.

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So, the Planning Commission decided to reimpose price control. My friend Bill Hurst at Berkeley was quite alarmed by the recent development, but I didn't think it was that bad. Here are his comments, my response, and the SCMP article below:

Bill: In another very interesting development, the SPC has just introduced what look to be pretty comprehensive price controls. SCMP calls it a "move reminiscent of the days of central planning". I think it may be just not very wise - do they really have to worry so much about inflation? Isn't overcapacity and tons and tons of slack the real problem? Wouldn't reigning in investment and capping supply be a better strategy than forcibly restraining prices? Most interesting to me though is the fact that the controls would really be implemented at the provincial level and largely at the discretion - apparently - of provincial officials...So much for combatting local protectionism and forging a national market.....

Me: This is very interesting news from China. However, I think the extent of price control is not as broad as the article suggests. The way that I read the SDRC announcement is that SDRC will only control the prices of those commodities still on the state-price list. According to the latest list I found on the SDRC website, only fuel, energy, fertilizer, medicine, tobacco and a few other items are still controlled by the state. I would be surprised if they start to reimpose price control on things they liberalized already. If inflation was over 20%, they might do it, but certain not now. I think they are saying that local governments which had plans to raise prices or administrative fees should put a stop to it for a few months. Of course, monitoring local behavior is another issue.

The SCMP article:

Monday, May 10, 2004

Mainland acts to keep price increases in check
If decreed limits are breached, localised control measures will be triggered


KELVIN WONG and TOM MITCHELL

Next Story



--------------------------------------------------------------------------------

The mainland's top economic planning body has issued limits on future price rises. If breached this will trigger localised price control measures in a dramatic move reminiscent of the days of central planning.
A statement posted on the State Development and Reform Commission website yesterday said the ceilings set included a 1 percentage-point increase in the monthly rate of consumer price inflation - or a 4 percentage-point rise in the annual rate.


In either instance, new projects that would worsen inflation are to be frozen by regional authorities for three months.

The mainland's consumer price index rose 2.8 per cent in the first quarter over the same period last year.

Although that is mild and even desirable after years of deflation, Beijing is concerned that with fixed-asset investment touching more than 40 per cent, inflation could soon gallop out of control.

That last happened in 1988, stoking popular discontent made manifest in the 1989 Tiananmen Square protests, and again in 1994, forcing the implementation of stringent credit control measures whose deflationary effects were felt for years. The directive comes after repeated pledges by Premier Wen Jiabao, who is touring Europe, to put a brake on the nation's economic growth and orchestrate a so-called soft landing for the economy.

Mr Wen and President Hu Jintao have toned down the return to go-for-broke economic growth that characterised the last years in power of former premier Zhu Rongji and former president Jiang Zemin.

The new emphasis on balanced growth is aimed at ironing out large and growing wealth gaps between coastal and interior provinces - and between city and countryside - that have stoked social tensions.

The commission's surprise directive also highlights just how concerned Beijing is about the economy - and how crude the control levers it has at its disposal are.

For most of the past 25 years, the mainland has steadily shed the price-control mechanisms that characterised decades of central planning. The prospect of their reinstatement - even on a local and temporary basis - marks a startling step backwards.

Such measures are consistent, however, with the government's recent precision-guided approach to macroeconomic management. Cooling measures have so far sought to restrict lending to specific sectors of the economy, with particular emphasis on industrial commodities such as steel and luxury residential property developments.

State leaders must contend with a continental-sized economy that is racing ahead at double-digit rates in some areas while others are mired in unemployment and poverty.

The commission hopes sweeping measures that would affect all provinces and industries can be avoided by empowering provincial price-control officials to take appropriate and feasible measures when inflation ceilings are breached.

The most drastic of these would be an increase in interest rates, which have not been raised in more than nine years.

Reflecting the government's delicate balancing act, the commission cautioned that local officials must carefully weigh the consequences of any price-control measures.

"Compensatory measures must be put in place to ensure that the living standards of low-income people will not be hurt," it said.


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After my previous posting on what is happening in Jiangsu, my friend Kunchin wrote to disagree with my assessment. I post his criticism and my response.

Kunchin:

Forgive me, the following questions are going to sound
out of touch with elite politics, which I've been
since leaving Dittmer's sphere of influence.

1) Why do Hu and Wen want to force Jiang out of CMC? I
just don't see the immediate impetus, or a clear
cost-benefit calculus. Jiang has been a thorn on their
side, but are Hu and Wen so confident that they could
maintain political stability without Jiang's nominal
presence?

Me: You raise some really good points indeed. I think Hu and Wen do want to get Jiang out of the CMC. As long as he remains chair of CMC, the sword of Damocles will always dangle on their head. They cannot govern the way that they want to govern because Jiang still has control over the CMC. Remember, Deng, as the chair of CMC, forced Hua, Hu, and Zhao out of power. It seems ridiculous to think of Chinese politics in this way these days, but I am not convinced that these concerns don't play an important role in Hu and Wen's thinking.

It is also a good time to do this. With overheating, the center can take the opportunity to investigate in a series of irregular case. You have to admit that the special focus on Jiangnan region is a bit odd. Similarly, Jiang Zemin focused much of his policing efforts on Beijing and Guangdong.

2) I thought the major media were under Jiang/Zeng's
control - People's Daily and other presses were not
exactly pro-Hu/Wen during the SARS campaign, so why
would they be speaking on their behalf in this very
beginning of what you see as an end-game power
struggle for Jiang? Has Hu/Wen managed to capture the
media in the past year? Or are individual
reporters/editors responding to Wen's order in an
overactive (jiji) way? As for cryptic messages, aren't
most Chinese reports littered with them? It's like
reading the Book of Revelation!

Me: As for the Chinese media, it is run by Liu Yunshan, who is a Jiang loyalist. The RMRB, however, is run by two people who are long-time veterans of the propaganda system. They don't seem to be "plants" of Jiang. I think you might be right that the RMRB received orders from the Central Committee to publish these editorials. It is all speculation, and I guess we will see what, if anything, happens.

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Sunday, May 09, 2004

Hey All, recent events have compelled me to write a blog entry just for the blog. On April 29th, Wen Jiabao issued an order to harshly deal with local officials in Yangzhong for allowing land seizure, over-quota investment, and lax lending for a steel company named Tieben Steel. There are a couple of things that are curious about this case. First, Yangzhong is only a few miles away from Jiang Zemin's birthplace, Yangzhou. It is commonly assumed that officials in the surrounding area, including Yangzhou, Yangzhong, and Changzhou (my own ancestral home) are all Jiang loyalists. They have had plenty of opportunities to cultivate good ties, since Jiang often toured the area as party secretary general. Since Wen's order, the People's Daily have issued a series of editorials condemning the Yangzhong government for allowing such blatant violation of State Council rulings to occurr. At the same time, Hu Jintao made a trip to Jiangsu on April 30th, immediately after Wen's order. This trip perhaps signifies that the center has no problem with the Jiangsu government, which is controlled by a Hu loyalist (Li Yuanchao). The center's problem is, instead, with city level governments around Jiang's hometown.

Moreover, mysterious phrases appeared in these editorials. One of these RMRB editorials questions why irregular activities lasted for so long in Yangzhong and believes that "a deeper reason will reveal itself to the readers soon." What does that mean?! Meanwhile, we have the audit on China Netcomm at the same time, which, as you know, is Jiang's son's company. I believe that Wen and Hu are engineering a coup to force Jiang to give up his chair in the CMC. Wen of course supports this since it also fits his interest of increasing the power of the SC vis a vis local officials. Other editorials say that the national economy will be rectified by "the central committee led by the party secretary general Hu Jintao." Clearly, the editorial warns local officials in the Jiangnan region that Hu, not Jiang is in charge, so start following state policies.

But will Jiang sit "idly by?" the public press shows both Jiang and Zeng relatively subdued over the holiday. However, today, the Central Military Commission issued a new set of regulations for strengthening party leadership in the military. In the PLA Daily editorial on the new regulations, Jiang's name and his ideology, the Three Represent, appeared with very high frequency. Although the regulations have no doubt been in the works for some time, Jiang might have rushed the appearance of these regulations to show the world who is still in charge of the military. I guess we will see how things "reveal themselves" in the coming days.

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Tuesday, May 04, 2004

Mark my words, there will be trouble with this round of audit. One of the targets of the latest NAO audit is China Netcom, which is run by Jiang's son Jiang Mianheng. It could be an attempt to finally blackmail Jiang into giving up the CMC position. But, as they say, Jiang will not stand "idly by." We will see what happens:
BBC
China to audit key state firms


China is planning its strictest audit yet of key state firms
China's state auditor is to investigate the accounts of nine key Chinese companies owned by the government.
It would be the most stringent ever study made by the National Audit Office, the Xinhua news agency said.

So far, 22 state-owned firms have been checked by the auditor, which plans to look into businesses in technology, manufacturing and petro-chemicals.

One target will be the China National Offshore Oil Corporation (CNOOC), China's biggest offshore oil firm.


The CNOOC has already been investigated by the Hong Kong stock exchange after making deposits to a finance firm controlled by its parent.

Also on the list to have their books checked are China Electronics Science and Technology Corporation, China Netcom Corporation and the State Tobacco Monopoly.

Catalyst

The trigger for the decision to investigate on such a wide scale was the discovery, in February, of 5.4bn yuan ($652m) worth of accounting irregularities at the state-owned predecessor to China Life.

China Life went public in the world's biggest initial public offering (IPO) last year, raising $3.5bn.

The investigation into the irregularities has attracted attention from a number of international organisations.

The Securities and Exchange Commission (SEC) is conducting an informal investigation and the firm also faces a lawsuit from US investors.




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