Economic crises and opportunities

The United States has been careful to never formally contend that China is manipulating its currency to make its exports artificially cheaper, so when the new Treasury Secretary Timothy Geithner made such a statement during his confirmation process, it caused a bit of tension.

The People’s Bank of China “manages” the value of the yuan on the foreign exchange market by forcing domestic banks and companies to “surrender” much of the foreign currency that they take in through exports. They are given yuan in return and the People’s Bank of China accumulates about $1 billion a day through this process. The result is that there’s a larger supply of yuan, thus an artificially lower value compared to foreign currencies. Normally a high demand for exports causes the value of a country’s currency to go up as foreigners buy the currency to buy goods. A lower exchange rate means exports are cheaper, which is the rationale behind the managed exchange rate (though it makes imported goods more expensive). For a more detailed explanation, see James Fallows’s The $1.4 Trillion Dollar Question.

The yuan was pegged at about 8.3 per US dollar until it was allowed to gradually appreciate beginning in the second half of 2005. It now stands at 6.84 yuan to the dollar, after its value depreciated relative to the dollar for the first time briefly last fall, when the Lehman Brothers, AIG, and Fannie Mae troubles caused the dollar to rise and most currencies of developing economies to fall. Economists say that the value of the yuan, if allowed to float freely, would be around 5.5 yuan to the dollar.


(from FT.com)

While there may be disagreement on floating versus managed exchange rates, what effect the undervalued yuan has, and how much China should influence the dollar-yuan exchange, there are a few common points between the two countries. Both governments are implementing huge economic stimulus spending, including funds to expand infrastructure and to alleviate unemployment and falling demand.

And both are pursuing more wide reaching stimulus programs and health care reform. Some are even calling the U.S. bailout “socialism with American characteristics.”

Prime Minister Wen Jiabao is in Europe for the World Economic forum and visits with leaders in several countries. The article sites the dour mood during this year’s Lunar New Year holiday. Government estimates show that of the roughly “130 million Chinese migrants who crossed provincial lines for work, 20 percent to 30 percent will find themselves jobless after the holiday.”

Layoffs are up and salary raises and bonuses are vanishing. Recent and soon-to-be college graduates are having a difficult time finding jobs.

This may be exacerbating a recent trend of a growing divide between rural and urban incomes.

“City dwellers earned an average annual income of 15,800 yuan ($2,300) a year in 2008... The average rural income was 4,700 yuan (about $690),” which is a ratio of 3.36 to 1. I’d imagine it’s much lower than that in the United States.

And that is a drastic change in the last several decades. Only 30 years ago, China had one of the most equal income distributions of any country, and now it’s one of the most unequal countries in the world. I happened to read a 2002 speech by Nicholas Lardy, an American economist and an expert on China, and it had some relevant points on the potential crisis posed by high levels of inequality during an economic downturn.

“[since the 1980s] China has grown very rapidly and done all of these other things which are fairly positive, inequality has increased at an unprecedented rate. In fact I do not think one can find a society, perhaps with the exception of wars or natural disasters, which has had such a rapid deterioration in income distribution in a twenty-year period.”
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One of the reasons inequality has been manageable to date is that even the poorest members of Chinese society have much higher incomes today than they did twenty years ago. Relatively speaking they have fallen further behind. But in absolute terms they have done, with very few exceptions, extremely well. Their absolute living standard has gone up enormously… But if economic growth were to slow down, that whole equation would change dramatically. Then you might have a situation in which as inequality gets worse, the people at the bottom of the income distribution might be experiencing an actual decline in their real living standards, rather than an increase. And I think that would be much, much more difficult for the regime to manage. So I think maintaining a robust economic growth and delivering rising living standards is a precondition for maintaining political stability.”

How the economic crisis affects political stability in China and what domestic policy changes come out of it will all be interesting developments to watch. The government has already promised to provide nearly universal health care coverage within three years, not to mention large investments in transportation and education. The health care program was conceived, in part, to induce more consumer spending. Savings rates are really high, around 40%, because of the lack of pensions and private health care insurance. Another way to look at it – in China, 35% of the economy is consumer spending, compared to 70% in the United States, so the high savings rate is limiting domestic demand and the consumer driven growth that is needed to replace the slowing demand for the country’s exports and maintain the high levels of growth of recent years.

The economic crisis in the United States also presents a unique opportunity to transform domestic policy in areas such as health care, education, financial regulation, and levels of saving and investment. For an excellent overview of opportunities for fundamental reforms in our country, see David Leonhardt’s essay in the New York Times Magazine.

Finally, the country that invented tea now has more than 350 Starbucks stores and is growing a new coffee for the chain, the first Chinese coffee to be sold by Starbucks. Green tea frappuccinos, by the way, are one of the more popular Starbucks drinks in China. Otherwise, the stores and their menus seem to be the same as those in the States.

The Lunar New Year

Monday, January 26th was the first day of the Chinese New Year. It’s the year of the ox, and given that the Chinese lunar calendar is a twelve year cycle of twelve animals, anyone who turns 12, 24 (like me), 36, 48... years old this year was born in the year of the ox. I also happen to be a Taurus, so I’m more or less the same animal according to the monthly zodiac calendar and the yearly Chinese lunar calendar.

I was invited out for lunch by a parent I know through school and ate at a nice Sichuan restaurant with two families. Sichuan cuisine is one of my favorites so the food was really good. They bought two bottles of alcohol; the grandfather sipped on one and the other was a bottle of brandy that the two fathers drank, only they were both driving, so they kept refilling my glass and I ended up drinking most of the brandy. It hit me later that afternoon and I had to take a long nap.

I went to a friend’s house for dinner and had a lot more excellent food. Everyone does the same thing on New Year’s Eve – hang out at home with the whole family, cook, eat, watch holiday specials on TV, and set off fireworks. One food that is commonly eaten is fish, because the word for fish – “yu” 鱼 – is the same pronunciation as another word – 余 – that means surplus or extra. Eating fish means you’ll have a surplus of wealth and prosperity in the new year (the most common superstition derived from a homonym is the number four 四, which is pronounced the same as the word “to die” 死, so it’s considered a very unluckly number).

So I ate fish and a lot of other good food, drank, and watched the holiday specials, which I missed last year. We watched some on TV and then retreated to a warm bedroom and watched more online, mostly comedy skits and music performances. We later set of fireworks and then the city erupted at around 11:50 pm as seemingly every house set off fireworks outside. The amateur pyrotechnics continued for nearly an hour and then started up again soon after sunrise the following morning.

I posted some pictures on flickr.

Where I live

I made two brief videos to give you a tour of my house.

First floor.

Second floor.

Inauguration reactions

An editorial in China’s Xinhua newswire raised fears about a reversal in Chinese-American relations that were strengthened under the Bush White House. The Strategic Economic Dialogues, one of the positive developments mentioned in the editorial, in addition to providing a forum high level discussions twice a year, has facilitated some pretty cool joint projects on green energy and sustainable development called EcoPartnerships.

President Obama ruffled some feathers in his inauguration speech by placing “non-believers” alongside Americans of various faiths, and for drawing a clear line on the lack of freedoms and the corruption that is endemic in many countries around the world. But some of those comments irked the media censors here.

In his inauguration address, President Obama said: "Recall that earlier generations faced down fascism and communism not just with missiles and tanks, but with sturdy alliances and enduring convictions."

That entire passage was retained for an English-language version of the speech that appeared on the website of state-run Xinhua news agency.

But in the Chinese-language version, the word "communism" was taken out.
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"To those who cling to power through corruption and deceit and the silencing of dissent, know that you are on the wrong side of history," the president said.

Once again, Xinhua included the passage in full in its English version, but the sentence was taken out of the Chinese translation.
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China Central Television, the country's main broadcaster, aired the speech live with a simultaneous Chinese translation.

But when the translator got to the part where President Obama talked about facing down communism, her voice suddenly faded away.

The programme suddenly cut back to the studio, where an off-guard presenter had to quickly ask a guest a question.

Censoring sensitive news reports is nothing new in China, where officials go to great lengths to cut critical material.

From the BBC News in Beijing.

The first step in tackling controversial issues is simply raising the topic and normalizing it so that it is more widely discussed in public and in the media. Of anyone, hearing those words come out of the President’s mouth is the best way to promote those issues. With time, there will be no prejudices towards different faiths, towards atheism, or towards gay, lesbian, and transgender people, so it’s good to hear those statements in Obama’s first speech as president.

The limits on free speech in China might be harder to crack, but slowly more and more controversial ideas are being openly discussed here as well.

English as a global language

I often overlook the opportunities I’ve been given as a native English speaker. I don’t have any teaching qualifications and don’t plan to make a career as an English teacher, but it has been a good way to live here and support myself. There’s never been another language that has reached the scope and influence of English. Latin was the lingua franca of Europe for centuries, but it never reached a global scale (I guess it has in scientific nomenclature, but it’s not used much in any other context).

At the earliest stages of globalization, languages and cultures and economic systems mixed as people traveled and traded around the world, and what happens with any clash between standards (not unlike VHS versus Beta or BluRay versus HDVD), the most popular one – not always the best one – wins out entirely and becomes the standard. In this case, the Anglo-American culture and economic system was the most powerful, so it became the world standard. There’s never been language teachers travelling the globe as there are today with English teachers, so I should consider myself lucky having been born at the time and place where I was. On a related note, last week I went to a gathering for a Changzhou expat group and the language everyone used to converse was English, even though less than a quarter of the attendees were from English speaking countries. It was mostly Europeans, particularly from France, Germany and Austria, and a few from Turkey. In general, among the foreign companies in Changzhou, if they aren’t Japanese, Taiwanese, or Korean, then they are most likely French or German.

The Chinese script had a similar role in East Asia as Latin did in western Europe. The system of Chinese characters is one part of the written Japanese language and was formerly used in the Vietnamese and Korean languages. Chinese will become more important as a world language (see an excellent article on the spread of Mandarin) but, to make a snap judgment, it’s unlikely to become the global language when English is already so widely in use around the world in business and academia. And Chinese has some disadvantages that limit it’s appeal beyond East Asia, such as the difficult writing system. Another related note: one of the eminent American scholars of the Chinese language, John DeFrancis, died this month. He was a persistent critic of the Chinese writing system and advocated reforms that went far beyond the simplification of a number of common characters in the mid-20th century.

One of the reasons English has been widely adopted and extremely successful as a world language is because it adopts foreign words and phrases so easily (but that does make spelling difficult; I’m often explaining to students “this is a French word, that’s why the vowels are strange” or “this word comes from Greek, that’s why the ‘ph’ is used in place of ‘f’). Chinese has no easy method of importing foreign words; acronyms are left unchanged but foreign words and names are translated into characters that sound similar (or close enough). I like learning the names of foreign people, cities, and companies, because some are hilarious ( “Mi er wo ji” for Milwaukee, “Pu li se tong ne” for Bridgestone, “A nuo Shi wa xin ge” for Arnold Schwarzenegger – the last two sound pretty close if you say them fast). Interestingly, Japanese has a separate alphabet, in addition to using traditional Chinese characters, that is used for transcribing foreign words.

One consequence of the large number of speakers using English as a second language and the flexibility of the English lexicon and grammar is that it is rapidly evolving outside of the countries where it is officially spoken. When there are many more students learning English in China than are people in the United States, it will be altered a great deal by those second language speakers, and we should realize that we now have far less influence over how it evolves.

Finally, here’s a discussion of the few English words that come from Chinese (from the obvious – ginseng – to the unexpected – ketchup).

The Inauguration

I’ll be watching the inauguration, which starts at midnight here, over the internet. Even though I’d rather be watching it with others in the States, or better yet, in the multimillion-person crowd on the Mall, it’s novel to be one of the viewers participating in the first presidential inauguration widely broadcast over the internet. And I’ll no longer take the event for granted after living in a country where the transition of power is an opaque process conducted amongst a small group of unelected leaders.

Such a symbolic historical precedent – the inauguration of the first black president – couldn’t have come at a more crucial moment. A day after celebrating Martin Luther King Jr.’s birthday, Americans are given another chance to come together to commemorate a milestone that many people, benefiting from the opportunities found in a diverse and free society, have struggled to achieve. Americans fought for desegregation and voting rights to ensure equal opportunity for every citizen and the swearing in of our 44th president strongly validates the system we created.

I’m afraid we can’t rejoice for long because we’re facing a lot of urgent problems. I’ve read a few books on modern American history (on the presidency in the 21st century, on the Cold War, and on the CIA) in recent weeks and they’ve tempered my expectations. Nothing can prepare one for the unexpected challenges the country and the president will face. I think being more removed from the events of the past year in the States has shaped my perspective so while I’m immensely proud of President Obama’s inauguration, I also expect a lot of stumbles and letdowns from his new administration. So, best of luck, but on the 21st let’s put our heads down and get to work.

Turning points in history

Jimmy Carter and Henry Kissinger traveled to Beijing to speak with Chinese government leaders and commemorate the first visits that Carter and Deng Xiaoping made to each others countries in 1979.

“There is no more important diplomatic relationship in the world than the one that has grown between the People’s Republic of China and the United States of America,” said Jimmy Carter

The two countries are undoubtedly closely linked. Two and a half million Chinese people live in the United States, Wal-Mart buys over $22 billion worth of goods from China each year, and China holds nearly $600 billion of our debt (over a fifth of our foreign debt holdings).

Chinese is becoming a popular foreign language for students at many private colleges in the U.S. The article cites that 10 percent of undergraduates at Yale University study Chinese (though it's probably true that 100% of students at Beijing University have studied English since grade school). And from my anecdotal evidence, a good number of Harvard and Princeton students are also studying the language. Harvard has a summer language program at Beijing Language and Culture University and they were an impressive group as they took a pledge to speak only Chinese so they stood out being a close group of foreign students who were always talking in Chinese. Same for Princeton, I ran into their group in the Longqing Gorge – they were bungee jumping the same time when I went – and only spoke English when a European tourist asked them where they were from.

The history of China in the last 30 years and how it got to where it is today is a fascinating story and a sharp contrast to the decades of civil war, famine and repression from the 1930s through the middle of the 1970s. I knew little about China’s path of development until reading a few books recently. In “China Shakes the World,” James Kynge describes a common misperception about the way economic reforms were implemented, “In the popular imagination, the launch of China’s economic reforms in 1978 was a planned, top-down affair managed by a man who is often called the ‘architect’ of the country’s emergence, Deng Xiaoping.” But, planned economy or not, history tends to run its own course. As Kynge explains, “the reality has not been so neat. Many of the key events and occurrences that propelled progress towards capitalism were, in fact, either unplanned, unintended or completely accidental.”

The initial reforms–ending collective agriculture and allowing free enterprise–led to a period of the fastest growth and greatest reduction in poverty the country has ever seen. According to the World Bank,

“China’s poverty reduction in the past 25 years is unprecedented. Poverty fell from 53 percent in 1981 to eight percent in 2001, pulling about 500 million people out of poverty. Rural poverty fell from 76 percent in 1980 to 12 percent in 2001. The sharpest reduction was in the early 1980s, spurred by agricultural reforms that started in 1978. The household responsibility system, which assigned strong user rights for individual plots of land to rural households, the increase in government procurement prices, and a partial farm price liberalization all had strong positive effects on incentives for individual farmers. In the first years of the reforms, agricultural production and productivity increased dramatically, in part through farmers’ adoption of high-yielding hybrid rice varieties. Rural incomes rose by 15 percent a year between 1978 and 1984."

Not only were much of the reforms unplanned, much of the initiative was taken on my local officials and individual entrepreneurs (for better or worse–Beijing now has stricter environmental policies but often there is little compliance at the local level).

Another example of consequential changes that subverted the central party are the events that kicked off the second burst of reform and growth in the 1990s. Tim Clissold wrote the book “Mr. China” about his two years as a language student in Beijing in the early nineties, followed by several years working for an American firm investing in the Chinese auto industry. The Chinese economy stumbled after Tiananmen Square and the Communist Party reached a nadir as their hold on power seemed untenable unless they could counter the swell of social unrest with economic prosperity. As Clissold describes,

“While Deng was no liberal, he was a pragmatist and realized years before his Russian counterparts that if the Chinese Communist Party was to survive, it had to deliver the economic goods. Tiananmen Square has shown that he would not shrink from using force, but he knew that in the longer term power grew from rising living standards rather than from the barrel of a gun… Even though he had won the battle for the top place in the Chinese hierarchy, Deng could not just set policy as he pleased, and when he tried to recharge the economy he faced serious opposition from the conservatives.”

To get around the political stalemate, Deng, who was 88 years old at the time, went on a holiday trip to southern China with his family during the Chinese New Year in 1992. He planted a tree in Shenzhen and proclaimed, “To get rich is glorious,”, followed by a tour of cities and factories up the coast and a visit to the Pudong Special Economic Zone in Shanghai.

“He talked directly to local officials about the need to ‘guard against the left,’ and pushed his agenda for greater reform…[party conservatives] knew that Deng had deliberately bypassed all the normal party structures and had reached out directly to local officials. They also quickly realized that they were fighting a losing battle; the rank and file liked what Deng had to say and the tide was against them.”

The most substantial changes start with ordinary people. China’s (and America’s) most successful leaders were those who were able to sway public opinion and convince people that they had a stake in improving the country. The expansion of civil society, the internet and media, and the growing numbers of university graduates and foreign students and workers in China bode well for further reforms and prosperity.

A look back at 2008

2008 was the first time I’ve spent a full calendar year outside of the United States. I spent the entire year within greater China, including several short stays in the Special Administrative Regions of Hong Kong and Macau.

My Chinese level accelerated considerably, once I got over the steep learning curve due to a handful of extremely difficult sounds in Chinese (the ‘e’ and ‘u’ vowels and the ‘zh,’ ‘q,’ and ‘x’ consonants are unlike any sound in English) and the intimidating characters (there’s thousands of them!). Joining the beginner classes high school in the spring and taking classes during the summer helped a great deal.

I had one of the worst travelling experiences of my life during the winter storm in late January and early February. Unprepared for so much snow and cold weather, I spent a week in several cities frozen and miserable. Then the train that was to get me deep in southern China was delayed over 20 hours, and the trip took 28 hours instead of the scheduled 13 hours. And it was cold and rainy in the first southern city I reached, in addition there were frequent power outages. Then I got the flu and then took a sleeper bus that broke down in the middle of the night and arrived about 14 hours late. So during this winter break I’m staying put and not going anywhere.

A lot happened in the United States during 2008 and several events will have a long-lasting impact. The American model of capitalism – aggressive lending and subprime mortgages, banks taking huge risks and awarding huge bonuses, immense personal debt from credit cards and home equity loans, over-consuming and under-saving – was challenged by the credit crisis that it helped bring about. Trillions of dollars of wealth in equities and real estate disappeared. The fundamentals of our economic system were threatened and some things will likely never be the same.

A 47 year-old man with a white mother from Kansas and black father from Kenya was elected the 44th president of the United States. And I voted for him.

The Olympic Games were held in the world’s most populous country for the first time. And I was there.

I learned roughly one thousand Chinese characters, spent countless hours in class, with tutors, and on my own reading, writing, speaking, and listening to Chinese. I traveled to several Chinese provinces and dozens of cities.

My resolutions for the new year are not so different from last year. One was to study Chinese for at least one hour each day. I missed a few days but simply by living in China I’m learning a little every day. I’ll keep that resolution for 2009 and add a few more topics to study: history, cooking, calligraphy, and brushing up on math and statistics (for graduate school and simply for general knowledge).

My second resolution for 2008 was to run a marathon. Done. In 2009 I want to run another. And this time at least 30 minutes faster.

I guess a new resolution or two for 2009 would be to find some volunteer work here, meet more people, and eat healthier.

Best wishes in 2009 to everyone.

An update on recent news in the new year

An eco-city is going to be built from scratch on an island in the mouth of the Yangtze River, just north of Shanghai.

It’s a promising sign that China’s development (tens of millions more people will move into the cities so urban areas are rapidly expanding) will – at least in some cases – take smart design and environmental impact into consideration.

Who knew that Peking duck is made by filling the duck’s body cavity with water and putting a bamboo plug up its butt to keep it from leaking? The water keeps the meat moist as it slowly roasts (includes pictures from the Dong duck restaurant in Beijing, where I ate Peking duck once this summer).

Chinese, followed by Japanese and Korean spend more of their leisure time on the Internet than anyone else. A lot of that is done on their cell phones now. People are very mobile and cities have lots of wi-fi access. And my students are certainly addicted to their phones and PSPs, which are often used to go online, take videos and pictures (and edit them on the phone), and play games.

One of the first people to fly on a direct commercial flight from China to Taiwan (direct flights and postal services started about three weeks ago) wrote about the brief and uneventful but symbolic flight.

China is spending a lot of money on its military and building up capacity in the Pacific and Indian Oceans, partly because of the modern day pirates on the high seas and the threats they pose to ships bringing oil and other valuable natural resources into China and sending exports out to markets around the world.

BYD, a Chinese car company, recently released China’s first hybrid car. This one can also plug into an electric power source to recharge the battery.

There was a good summary of the economic interdependence of China and the U.S.in the New York Times. People here are closely watching all of the bad news in the financial industry that comes out of New York City and every detail of the government’s reaction in Washington. So much of the world economy – and China’s export led growth – is driven by American consumers that its strange to think about how much our holiday shopping, vacation trips, home remodeling, and car buying decisions affect the lives of workers and savers in countries halfway around the world.

This day in history

While riding a stationary bike at the gym I watched a long news piece on Chinese television about the economic opening and reforms 30 years ago. There was an event at the city’s sports stadium marking the event, also. Since Deng Xiaoping led China on the path market capitalism and free trade, the country’s economy has expanded 69-fold, propelling it from one of the most underdeveloped and poorest economies in the world to one that is the third largest, and lifting hundreds of millions of people out of poverty.

This photo series documents the changes of the past three decades.

Also, exactly 30 years ago (1/1/1979), the United States switched diplomatic recognition of China from The Republic of China (Taiwan) to the People’s Republic of China (Mainland China).