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May 9, 2011, 10:39 am

China’s Growing Overseas Portfolio

SHANGHAI — A study released last week by the Asia Society in New York forecast that over the coming decade China could invest as much as $2 trillion in overseas companies and projects, with a big share of that money heading to the United States.

But analysts say that just as startling are figures not included in the study, which show the explosive growth of China’s overseas lending and portfolio investments.

According to figures released by CEIC Data, a division of ISI Emerging Markets, China’s overseas lending and trade finance spending reached $102 billion last year, up from $19 billion in 2008.

In addition, the United States Treasury department released figures last week that show that the value of China’s holdings of United States stocks climbed to $127 billion in June 2010, up from about $3 billion in 2004.

With the world’s largest foreign exchange reserves and a growing number of state-owned companies bidding to acquire overseas assets, China is quickly shifting from being a country known for exports to one capable of making huge investment in global financial markets, analysts say.

“What is striking is that China is the first emerging market to become a major player” in the global financial markets, through its outward investments, says Eswar S. Prasad, a professor of trade policy at Cornell University. “This represents China’s increasing use of its financial prowess to strengthen its economic linkages around the world.”
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April 11, 2011, 1:15 pm

The Impact of China’s Consumers

By DAVID BARBOZA

Hill & Wang

In “As China Goes, So Goes the World: How Chinese Consumers Are Transforming Everything,” Karl Gerth outlines China’s growing consumption patterns but then adds an ominous note. He writes, “Nobody fully understands just what they might be sowing, for the Chinese or for the rest of the globe, by continuing to insist that the Chinese consume more and more.”

Mr. Gerth, who teaches modern Chinese history at Oxford University, does not have clear answers to the questions he poses. But his book insists Chinese leaders are rapidly tearing down barriers that have restricted average citizens from consuming more. He explains the trends that have now made China the world’s largest car market, but also how China is still a center of counterfeiting. Professor Gerth agreed to answer questions about his book, which is published by Hill & Wang, a division of Farrar, Straus & Giroux.

Q. Professor Gerth, for the past several years there have been indications that while consumption is growing in China it has not kept pace with the nation’s economic growth. Is China really shifting toward becoming a more consumer-oriented society? What evidence do you see?

Mr. Gerth: Undoubtedly. Take advertising alone, which is a defining feature of living in a consumer-oriented society. The political slogans of the Mao era have been largely replaced over the past few decades with advertisements. Now advertisements are ubiquitous. I’ve even encountered LCDs blasting me with ads in toilet stalls, cabs and elevators.

As with so much in China, the transformation has been both dramatic and rapid. China’s ad market has grown by 40 percent a year over the last two decades; some reports expect China to replace the United States as the world’s largest ad market as soon as 2020. Nearly all Chinese, rich and poor, have access to TVs and the advertising that comes with it. So even the poor are aware of all the new products and services spreading in China.

Brands are a second important piece of evidence of a shift toward consumerism. They are a key way consumers communicate identity to others. Not long ago, China had few national brands and access to international brands, even Coke or McDonald’s, was rare. Now these brands are commonplace and China and MNCs [multinational corporations] are quickly creating nationwide brands across product and service categories, a process of creating not only integrated national markets but also unified consumer consciousness through brands.

So, yes, consumer culture permeates media and brands, and chain stores have begun to standardize consumer experiences and expectations, and for tens of millions of Chinese, especially younger urbanites, brands define their identities.
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April 7, 2011, 12:42 pm

As China Grows, So Does Its Appetite for American-Made Products

By DAVID BARBOZA

U.S.- China Business Council

SHANGHAI — America’s huge trade deficit with China has raised concerns about American competitiveness and jobs moving overseas. But a new study offers a glimmer of hope to Americans: Last year, American exports to China soared 32 percent to a record $91.9 billion.

A study by a trade group called the U.S.- China Business Council says China is now the world’s fastest-growing destination for American exports.

While United States exports to the rest of the world have grown 55 percent over the past decade, American exports to China have jumped 468 percent.

Most of those exports have come from California, Washington and Texas, which have shipped huge quantities of microchips, computer components and aircraft. But states that produce grain, chemicals and transportation equipment have also benefited. Read more…

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March 24, 2011, 9:30 am

The World Economy Shifts Eastward

By CATHERINE RAMPELL

William Easterly points us to a provocative new paper by Danny Quah on how the center of the world economy is shifting eastward.

Professor Quah, an economist at the London School of Economics, has calculated “the average location of economic activity across geographies on Earth” through the last few decades, and found that it has been moving further east:

[I]n 1980 the global economy’s centre of gravity was mid-Atlantic. By 2008, from the continuing rise of China and the rest of East Asia, that centre of gravity had drifted to a location east of Helsinki and Bucharest. Extrapolating growth in almost 700 locations across Earth, this article projects the world’s economic centre of gravity to locate by 2050 literally between India and China. Observed from Earth’s surface, that economic centre of gravity will shift from its 1980 location 9,300 km or 1.5 times the radius of the planet.

Here’s an animated look at this economic migration:

Black dots represent the world’s actual economic center of gravity, shown every three years from 1980 to 2007. Red dots represent projections for every three years thereafter until 2049.

Professor Easterly, an iconoclastic development economist at New York University, argues that Westerners should not “get hysterical” (as he assumes they will) in response to this map.

After all, he says, growth is not a zero-sum game. Rather, the enrichment of our trading partners means that there are more customers to buy American products. China and India may be claiming a larger share of economic activity, but that doesn’t mean the raw amount of economic activity in the United States will fall as a result. The overall pie just gets bigger.

That may be true. But to the extent that economic dominance corresponds to greater political power as well, there may be more for Americans to worry about as the “economic center of gravity” shifts closer to China.

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March 22, 2011, 4:57 pm

Amartya Sen on Growth and Well-Being

By DAVID LEONHARDT

Giorgio Benvenuti/ANSA, via European Pressphoto Agency Amartya Sen, 1998 Nobel laureate for economics.

While reporting my column this week, I exchanged e-mails with the development economists Esther Duflo and Abhijit Banerjee. They pointed out that one of the central arguments in Charles Kenny’s book — the relationship between economic growth and better living standards is complicated — was also at the heart of the work for which Amartya Sen won the Nobel Prize. (And Mr. Kenny’s cites Mr. Sen in the book.)

Here’s a summary of the Sen work, from the economist Pulapre Balakrishnan:

Sen has argued that when studying poor economies in the process of development, income can be a misleading indicator of well being…. He has observed that in 1980 in Sri Lanka the life expectancy at birth was higher than in South Korea, an economy with an income per capita five times higher. The moral of the story is not that growth does not matter, but that it matters only for the associated benefits that are realized in the process of economic growth. Moreover it may be a less efficient means of attaining some of these, which are better attained through what Sen has termed public action….

As Mr. Sen explained, each kind of place — those where well-being lagged and those where economic growth lagged — could stand to learn from the other.

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January 24, 2011, 9:45 am

What Government Can Do

By DAVID LEONHARDT

Two articles in Sunday’s Times contained reminders of the positive role that government can play in a market economy. Steve Lohr, who was a foreign correspondent in Japan back when it was booming, wrote the following, in a piece comparing Japan then with China now:

… for certain industries, the Reagan administration took steps that amounted to a measured approach to industrial policy. Washington negotiated so-called voluntary export restraints with the Japanese in the automobile industry. That forced Japanese automakers to build factories in the United States that now employ many thousands of American workers. And a semiconductor trade agreement helped pry open the Japanese market.

“People often forget that we did a lot of things to address the Japanese challenge,” says Robert D. Atkinson, president of the Information Technology and Innovation Foundation, a nonpartisan research group in Washington…. Read more…

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January 21, 2011, 12:02 pm

A Conversation With Richard McGregor

By DAVID LEONHARDT

Today’s Book Chat is with Richard McGregor, who spent much of the last decade in China as a correspondent for The Financial Times and recently became the newspaper’s Washington bureau chief. His recent book, “The Party,” tries to do what few if any other English-language books have done before: profile China’s ruling body, the Communist Party.

HarperCollins Richard McGregor, author of “The Party.”

Andrew Higgins, reviewing the book in The Washington Post, wrote, “It is a measure of how much China has changed that McGregor has been able to write such a lively and penetrating account of a party that, since its founding in Shanghai as a clandestine organization in 1921, has clung to secrecy as an inviolable principle.”

With China’s president, Hu Jintao, in Washington this week, I thought Mr. McGregor could help shed some light on the government that Mr. Hu leads. Our exchange appears below. He and I also discussed China on “Charlie Rose” this week.

Q. You portray the Communist Party as a deeply flawed organization in some ways. You write that connections are more important in promotion decisions than merit, for instance. Others — like Brent Scowcroft, who says “there’s a remarkable amount of chaos in the system” — have made related points. How should we think about these flaws in the context of the fact that party has had a very successful past 20 years, with tremendous economic growth and no serious threats to its authority?

Mr. McGregor: It is true that China has had a very successful 20 years, and party leaders can take some credit for this on a number of fronts. They have legitimized the private sector and allowed it to flourish. At the same time, the power of the single-party state has both allowed Beijing to mobilize capital and workers on a scale that few if any other countries can match and clear away bureaucratic obstacles for infrastructure and industry. This power to mobilize is diminishing over time but it has served the party well in kick-starting high-speed growth and managing economic cycles.

As with any political machine — and the Communist Party is pre-eminently a political machine — there are a perennial conflicts between cronyism and credentials in doling out jobs. It is an insiders’ game. Personal networks are obviously important but increasingly, performance counts too, a trend that I think I noted in my book has also helped reinforce party rule. China is not one big smoked-filled room, although it may often look that way. Read more…

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January 19, 2011, 1:28 pm

Reader Response: Software Piracy

By DAVID LEONHARDT

Ari in Ithaca asks whether the gap between sales of computer hardware and software in China is really evidence of widespread software piracy:

An alternative explanation is that they are using free software like Linux, FreeBSD, and variants. Without any data on what software they use any accusations of piracy are pure speculation.

Matt Reid of the Business Software Alliance in Washington replies, by e-mail:

Free software does not explain the disparity. Every country is utilizing a mix of free, open and proprietary software, yet nowhere else are we seeing a greater disparity between legal hardware purchases and legal software purchases. BSA and our research partner IDC have examined this question from all angles. Our annual Piracy Rate Study factors in the legal use of free and open source software, and it calculates China’s piracy rate to be 79 percent – with a commercial value of $7.6 billion.

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January 19, 2011, 11:40 am

Software Piracy in China

By DAVID LEONHARDT

Intellectual property is one of the big economic issues between China and the United States. American business executives and government officials believe Chinese companies steal large amounts of intellectual property from foreign companies. China does have laws against such piracy, but they are often not enforced.

How can Americans and others be so sure intellectual property continues to be a problem in China? The most obvious examples are the pirated DVDs for sale in China. But computer software may be the most important example.

Here are the top 10 countries ranked by 2009 sales of computer hardware — mainframes, desktops, laptops and the like — in billions of dollars:

1. United States $158
2. China $64.4
3. Japan $54
4. Germany $24.4
5. Britain $23.5
6. France $19.3
7. Brazil $14.2
8. Italy $13.1
9. Australia $12.8
10. India $11.9

And here are the top 10 ranked by software sales, again for 2009 and in billions of dollars:

1. United States $137.9
2. Japan $23.4
3. Germany $20
4. Britain $16.8
5. France $12.6
6. Canada $7.3
7. Italy $6.3
8. China $5.4
9. Netherlands $5.4
10. Australia $4.8

As Charles Freeman of the Center for Strategic and International Studies says, “it doesn’t make a whole lot of sense” for China to be in such different places on the two lists. It strongly suggests that China is buying its computer hardware and copying much of its computer software.

This chart, comparing hardware sales and software sales for the biggest buyers of computer equipment, makes the point nicely:

Source: Business Software Alliance

Chinese leaders have pledged to crack down on piracy. Expect it to be a topic of conversation during today’s meetings in Washington.

Update: Does free software explain the numbers?

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January 18, 2011, 12:06 pm

One Company’s Struggles in China

By DAVID LEONHARDT

In today’s Washington Post, Howard Schneider has an excellent profile of one American company trying to grow its business in China:

“We went over there to be a global player,” said Manitowoc chief executive Glen Tellock, whose [Wisconsin] company started selling ice makers in China in the early 1990s and diversified as the nation joined the W.T.O. amid hopes for strong and steady growth. But, Tellock said, “they have thumbed their nose at the W.T.O.’s policies and procedures. … They have become bigger than anybody thought, and nobody wants to slap their wrist.” …

Manitowoc’s executives say, as a strategic matter, that the company must do business in China. The nation is the largest market in the world for the tower and crawler cranes that have been Manitowoc’s core business. And until recently, company officials said, the promise of that market was made good. Manitowoc cranes helped build the Three Gorges Dam on the Yangtze River, one of the world’s largest infrastructure projects, and Manitowoc shipped as many as five cranes a month to China in the years after it joined the W.T.O.

But as Chinese competitors became more sophisticated and able to build machines that lifted ever heavier loads, Tellock said, China used a provision in its trade and tariff rules — fully within its W.T.O. promises — to begin taxing imports from Manitowoc and other outside companies. … Those fees top 30 percent, and since the levy was imposed, sales have dried up. It has been two years since Manitowoc shipped a crane to China.

The company has countered with two tactics often adopted by American companies. For one, it entered into a joint venture with a Chinese crane company two years ago. Although that might not mean exports and jobs for the United States, the move could let Manitowoc maintain a foothold in the broader market for cranes in China.

The article has more details.

It’s a good illustration of why the exchange rate is far from the full story of the economic relationship between China and the United States. A stronger renminbi would clearly help Manitowoc, by making all of its exports cheaper. But a stronger renminbi would not get rid of the tariffs that the company faces. And it would not stop intellectual-property theft.

Again, from the story:

Manitowoc has acquired local plants and staff in China, moving into niche markets — for example, restaurant equipment adapted for local dishes. Yet Chinese competitors have also spirited away some of the company’s designs and ideas, leaving it with little recourse.