China

Book review: How China Became Capitalist, by Ronald Coase and Ning Wang.

This is my favorite book about China so far, due to a combination of insights and readability.

They emphasize that growth happened rather differently from how China’s leaders planned, and that their encouragement of trial and error was more important than their ability to recognize good plans.

The most surprising features of China’s government after 1978 were a lack of powerful special interests and freedom from ideological rigidity. Mancur Olson’s book The Rise and Decline of Nations suggests how a revolution such as Mao’s might free a nation from special interest power for a good while.

I’m still somewhat puzzled by the rapid and nearly complete switch from a country blinded by ideology to a country pragmatically searching for a good economy. Coase and Wang attribute it to awareness of the harm Maoism caused, but I can easily imagine that such awareness could mainly cause a switch to a new ideology.

It ends with a cautiously optimistic outlook on China’s future, with some doubts about freedom of expression, and some hope that China will contribute to diversity of capitalist cultures.

Book review: Awakening Giants, Feet of Clay: Assessing the Economic Rise of China and India by Pranab Bardhan.

This short book has a few interesting ideas.

The most surprising ones involve favorable claims about China’s collectivist period (but without any claim that that period was better overall).

China under Mao apparently had a fairly decentralized economic system, with reasonable performance-based incentives for local officials, which meant that switching to functioning capitalism required less change than in Russia.

Chinese health apparently improved under Mao (in spite of famine), possibly more than it has since, at least by important measures such as life expectancy. This is reportedly due to more organized and widespread measures against ordinary communicable diseases under collectivism.

Book review: Capitalism with Chinese Characteristics: Entrepreneurship and the State by Yasheng Huang.

This is the most insightful book I’ve read so far on the Chinese economy. Most commentators only look at the most readily available data, but Huang dug through many obscure detailed records that were less likely to be manipulated.

The most important point of the book is to show that the widely held view of China as having gradual, steady improvement since 1978 is wrong. There was a dramatic political change in 1978 that allowed the rural parts of China (which still account for a large part of the economy, and where entrepreneurial culture had not been stamped out by communism) to prosper. Then starting in 1989 urban-focused leaders stifled rural businesses, causing stagnation there until 2002, when leaders more friendly to rural business gained power and allowed fairly healthy growth to resume.

Meanwhile urban areas have been dominated by crony capitalism which produced a good deal of gdp growth through massive state-directed investment in large companies, especially in the 1990s. This growth has produced fewer benefits to the average person than gdp numbers would lead us to expect.

Most of China’s success has been due to private enterprise. Beliefs that state-run businesses have produced growth are partly due to confusing reports about which companies are private.

I’m fairly impressed by the documentation of the changes in the rural political climate, but since the author seems to be the only one reading his sources of data and since it would be very time consuming to check them, it would be easy for errors to go unnoticed. For urban issues, he appears to be overstating the importance of problems that are not unique to China.

He partly clears up the puzzle of China doing better than should be expected for a country whose legal system doesn’t provide much rule of law. He provides evidence that some of the most important successes depend on British law imported via Hong Kong. But he doesn’t provide enough evidence to tell us how important this effect has been.

He leaves unanswered many questions I’d like answered. Why did government policies undergo these changes? Is the surprisingly reported steady gdp growth mostly the result of manipulated statistics? How much of the growth has been an investment bubble, and how much is sustainable? How did entrepreneurial culture survive communism in rural China so much better than in other countries?

There are lots of small Chinese companies trading on U.S. stock exchanges that look at first glance to be ridiculously underpriced. One reason for the low prices are that it’s harder than you might expect to enforce U.S. law on Chinese companies that have few or no assets in the U.S.

The most blatant example I’ve seen is Eternal Technologies Group Inc, which has ignored a judgment in a lawsuit that seems minor compared to the cash the company reports having, with the result that a receiver has been appointed who is likely to collect some money in ways that badly hurt stockholders who bought before the lawsuit.
Another hint at how little the company cares about stockholders (at least those in the U.S.) is the careless way their press releases are written: “5. Radification of the elecrion of the auditors” (they managed to spell election correctly on the prior line, so it’s not simple ignorance).

I’ve noticed problems with other U.S. traded Chinese companies that leave me uncertain which of them can be trusted. I’ve been trading stocks listed on the Hong Kong Stock Exchange a fair amount, and haven’t noticed any similar problems there. I presume the stronger cultural and/or legal ties are more effective than anything that can be accomplished by U.S. law.

Up to two months ago, I was not too excited by the claims of a bubble in the Chinese stock market. Maybe the stocks that trade only in China were at bubble levels, but the ones that trade in the U.S. or Hong Kong still looked like mostly good investments.
Much has changed since then. On October 17, PetroChina rose 14.5%, more than doubling in about two months. That was a one day gain in market capitalization of almost $60 billion, and a two month gain of $247 billion (doubling the market capitalization). I’ve seen similar but less dramatic rises in smaller Chinese stocks that trade in the U.S., but less on the Hong Kong stock exchange.
By comparison, the largest rises in market capitalization that I’ve been able to find in the technology stock bubble of 1999-2000 were a $50 billion one day rise in Microsoft on December 15, 1999, and a $250 billion rise (doubling) in Cisco which took four months.
I’m not saying that Chinese stocks are clearly overvalued yet, and I’m still holding some stocks in smaller Chinese companies that I don’t feel much urgency about selling. But the unusually strong and long lasting Chinese economic expansion, combined with the unusually frothy action in the stock market, are what I’d expect to be causes and symptoms of a bubble.
Bubbles in the U.S. have peaked when real interest rates rise to higher than normal levels. The Chinese government is keeping real interest rates near zero, and seems to think it can keep nominal interest rates stable and reduce inflation. That would be an unusual accomplishment under most circumstances. When combined with a stock market bubble, I suspect it could only be accomplished with drastic restrictions on economic activity, which would involve instabilities that the Chinese government has been trying to avoid by stabilizing things such as interest rates.
Without a rise in interest rates or drastic restrictions of some sort, it’s hard to see what will stop the rise in Chinese stocks. So I’m guessing we’ll see a bigger bubble than the U.S. has experienced. It’s effects will likely extend well beyond China.

Book Review: Operation Yao Ming: The Chinese Sports Empire, American Big Business, and the Making of an NBA Superstar by Brook Larmer
This book is a very readable biography of Yao Ming.
But I had been led to hope that it would inform me about China’s future. I’m disappointed at how little it tells me about that subject. It provides some moderately interesting tidbits of information about China’s recent history, but the book doesn’t attempt to provide the kind of understanding of China that would tell us whether those tidbits are a glimpse of a past that is being abandoned or whether they contain useful indications of China’s future.

China’s Politburo

In the past few months I’ve heard from both Eric Drexler and from Thomas Friedman’s The World is Flat that the Chinese government is run by engineers. This sounds important enough that I checked for confirmation on the web.
this page says “Every member of the Politburo in China is an engineer.”
An article titled Made in China: The Revenge of the Nerds reinforces the point.
This must imply some interesting things about the policies of the Chinese government. I wish I could predict whether this is the result of forces that will persist for a significant time or whether (as this page hints) it was a one-time result of Deng Xiaoping’s personality.

Buy the Yuan?

I’m curious how U.S. politicians are rationalizing their support for tariffs to punish China for keeping the yuan high (i.e. propping up the dollar). There’s an obvious alternative if it’s as clear as most people claim that the yuan is undervalued: have the U.S. government buy as many yuan as it can. That would make it more expensive for China to keep the yuan down at a probable profit to the U.S.
There may be some Chinese rules which pose obstacles to doing this, but I doubt the U.S. politicians are able to know that they couldn’t get around such rules.
Note that I didn’t ask what their real motives are (tariffs benefit special interests more than buying the yuan would, which provides a strong hint). I’m interested in what excuses they would give.