Archive for the 'China' Category

China’s Internet obsession

People in the country’s 60 largest cities spend 70 percent of their leisure time online. Seismic changes in the consumer market are likely as a result.

There is a very interesting McKinsey & Co. article out this week. The penetration and growth rate of the Chinese internet is stunning. China is a bigger deal for Google than I realized.

Just how big (or small) a market would Google leave behind were it to pull out of China today? In January, China Internet Network Information Center, the country’s official domain registry and research organization, reported that by the end of 2009, the number of Internet users in China had touched 384 million, more than the entire population of the United States. That’s an increase of around 50 percent over 2008. Moreover, 233 million Chinese—twice as many as in the previous year—accessed the Net on handheld devices, partly because China’s cellular providers started offering 3G services widely last year.
The Chinese are obsessed with the Internet. People in the 60 largest cities in China spend around 70 percent of their leisure time on the Internet, according to a survey we conducted in 2009. In smaller towns, the corresponding number is 50 percent. The PC is fast replacing the TV set as an entertainment hub, and emotions run high over who gets to log on and for how long. In a small city in northwest China, for instance, a man told one of us that domestic squabbles over using the PC got so out of hand that his wife and he discussed spending, for them, a large sum of money to buy another machine—or filing for divorce. They eventually bought a second PC and saved their marriage.
People in China use the Internet more for entertainment—playing online games, messaging, downloading music and movies, and shopping—than for work. The Chinese place great stock in the opinions of online product reviewers. One in five consumers between the ages of 18 and 44 won’t purchase a product or service without first researching it on the Internet. They shop online at auction Web sites such as Taobao, paying for products and services with prepaid Taobao cards that the post offices sell for a small commission. The volume of e-commerce in China more than doubled last year.
Unsurprisingly, both Chinese and foreign consumer-facing companies are pouring money into Internet marketing. Online advertising has been growing at between 20 and 30 percent a year—twice the print media’s growth rate—and the market was around $3 billion (20 billion renminbi) in size last year.

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Deborah Brautigam on Sino-African Development Partnerships

If you have been wondering about China’s expanding role in Africa, read this:

In Africa’s Eastern Promise, a recent article in Foreign Affairs, Deborah Brautigam writes of the two-part development strategy that China pursues with a select number of partner countries in Africa. The strategy consists of loans backed by natural resources and special economic zones—ideas that come directly from China’s development experience at home.

China Eximbank issues market-rate loans that finance infrastructure projects such as roads, railways, hydropower, schools, water systems, and hospitals in Africa. Borrowers repay the loans with natural resources—oil in countries like Angola, Nigeria, and the Republic of the Congo, cocoa beans in Ghana, and copper in the Democratic Republic of the Congo. More often than not, Chinese firms receive the infrastructure contracts, but the agreements typically contain provisions that specify a competitive bid process and a degree of subcontracting to local firms.

China also partnered with Nigeria, Mauritius, Zambia, Ethiopia, and Egypt to build special economic zones (SEZs) oriented toward the type of light-manufacturing that drove Chinese growth in the recent past. In most cases, the Chinese agencies with experience building China’s own SEZs advise the development of the new zones in Africa. The zones will allow African “countries to improve poor infrastructure, inadequate services, and weak institutions by focusing efforts on a limited geographical area.” With the new zones, China appears have learned some lessons from its past development failures in Africa:

“For decades, Chinese teams in Africa constructed agricultural projects or built factories only to turn them over to inexperienced and sometimes uninterested host governments. Once the Chinese left, the benefits of the projects declined, prompting the host governments to ask the Chinese to return. Now, Chinese companies are taking responsibility for both designing and building the zones and then managing them as businesses.”

Though the prospect of China partnering with authoritarian regimes in Africa may seem disconcerting at first, Brautigam calls on Westerners to be open-minded about China’s initiatives in Africa. Indeed, rich Western countries might do well to follow China’s lead. Where traditional aid programs have failed, forging partnerships with African leaders and establishing special zones could be a more effective way for the West to promote development and respect for human rights.

Brautigam’s latest book, The Dragon’s Gift: The Real Story of China in Africa, treats the development relationship between China and Africa in greater detail.

[From Deborah Brautigam on Sino-African Development Partnerships]

Emerging market bonds: bull or bubble?

Buttonwood at The Economist November 28, 2009:

(…) Matt King, a strategist at Citigroup, cites IMF figures showing that the debt-to-GDP ratio of the leading 20 developed nations is already twice that of the top 20 emerging markets. By 2014 it will be three times as high.

Every bubble needs a plausible narrative, whether it is the transformative power of the internet or the growth potential of emerging markets. It usually needs easy money as well—and near-zero short-term interest rates in America, Europe and Japan fit the bill, as they encourage investors to search for yield. Bubbles also normally need a trigger event to give them impetus. In this case the credit crunch gave investors cause to doubt the growth prospects of rich-world markets and to favour developing countries.

The bullish argument for emerging-market bonds is based not just on the state of government finances but on the outlook for foreign-exchange markets. The American government may talk about the desirability of a strong dollar but it seems to have no intention of doing anything about it. Governments in Japan and the euro zone are hardly applauding the resulting strength of the euro and yen. By contrast, argues Mr King, some emerging countries may find their currencies appreciating, no matter what policy they follow.

(…) Buying emerging-market debt is not quite as straightforward as buying equities. The countries to which investors may most desire exposure (China and India, for example) are underweighted in emerging-market-bond indices relative to the likes of Venezuela and Lebanon. There is also the question of whether to buy debt denominated in local currencies, which is less liquid but carries a higher yield. Regardless of the country’s chequered financial history, Brazil’s local-currency debt, yielding 11.8%, must look awfully tempting to income-seeking investors at the moment.

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Google is playing hardball with China

This is from the Google Blog 13 Jan 2010. It is, of course, a negotiation — one where Google threatens to pull out (unless China gives what they want — the public has no information on the position of either side).

Like many other well-known organizations, we face cyber attacks of varying degrees on a regular basis. In mid-December, we detected a highly sophisticated and targeted attack on our corporate infrastructure originating from China that resulted in the theft of intellectual property from Google. However, it soon became clear that what at first appeared to be solely a security incident–albeit a significant one–was something quite different.

First, this attack was not just on Google. As part of our investigation we have discovered that at least twenty other large companies from a wide range of businesses–including the Internet, finance, technology, media and chemical sectors–have been similarly targeted. We are currently in the process of notifying those companies, and we are also working with the relevant U.S. authorities.

Second, we have evidence to suggest that a primary goal of the attackers was accessing the Gmail accounts of Chinese human rights activists. Based on our investigation to date we believe their attack did not achieve that objective. Only two Gmail accounts appear to have been accessed, and that activity was limited to account information (such as the date the account was created) and subject line, rather than the content of emails themselves.

Third, as part of this investigation but independent of the attack on Google, we have discovered that the accounts of dozens of U.S.-, China- and Europe-based Gmail users who are advocates of human rights in China appear to have been routinely accessed by third parties. These accounts have not been accessed through any security breach at Google, but most likely via phishing scams or malware placed on the users’ computers.

We have already used information gained from this attack to make infrastructure and architectural improvements that enhance security for Google and for our users. In terms of individual users, we would advise people to deploy reputable anti-virus and anti-spyware programs on their computers, to install patches for their operating systems and to update their web browsers. Always be cautious when clicking on links appearing in instant messages and emails, or when asked to share personal information like passwords online. You can read more here about our cyber-security recommendations. People wanting to learn more about these kinds of attacks can read this Report to Congress (PDF) by the U.S.-China Economic and Security Review Commission (see p. 163-), as well as a related analysis (PDF) prepared for the Commission, Nart Villeneuve’s blog and this presentation on the GhostNet spying incident.

We have taken the unusual step of sharing information about these attacks with a broad audience not just because of the security and human rights implications of what we have unearthed, but also because this information goes to the heart of a much bigger global debate about freedom of speech. In the last two decades, China’s economic reform programs and its citizens’ entrepreneurial flair have lifted hundreds of millions of Chinese people out of poverty. Indeed, this great nation is at the heart of much economic progress and development in the world today.

We launched Google.cn in January 2006 in the belief that the benefits of increased access to information for people in China and a more open Internet outweighed our discomfort in agreeing to censor some results. At the time we made clear that “we will carefully monitor conditions in China, including new laws and other restrictions on our services. If we determine that we are unable to achieve the objectives outlined we will not hesitate to reconsider our approach to China.”

These attacks and the surveillance they have uncovered–combined with the attempts over the past year to further limit free speech on the web–have led us to conclude that we should review the feasibility of our business operations in China. We have decided we are no longer willing to continue censoring our results on Google.cn, and so over the next few weeks we will be discussing with the Chinese government the basis on which we could operate an unfiltered search engine within the law, if at all. We recognize that this may well mean having to shut down Google.cn, and potentially our offices in China.

The decision to review our business operations in China has been incredibly hard, and we know that it will have potentially far-reaching consequences. We want to make clear that this move was driven by our executives in the United States, without the knowledge or involvement of our employees in China who have worked incredibly hard to make Google.cn the success it is today. We are committed to working responsibly to resolve the very difficult issues raised.

Update: Added a link to another referenced report in paragraph 5.

[From A new approach to China]

China’s Commitment is Significant

Rarely is there any “good news” regarding progress to zero or low carbon economies. In fact the gloomiest outlook is often focused upon the projected GHG burden of China and India. That may still turn out to be true, but there are some indications that China is in fact doing something different — by implementing policies and incentives that would be totally impossible in the developed democracies. China “fell off the wagon” in 2004-2005 and may well do so again as the Chinese provinces are fighting the central government policies. And the data we gave on energy intensity is dependent on Chinese government statistics.

For reference I will excerpt my 29 September comments on China’s on-again, off-again energy intensity policies – from Dispelling China’s Environmental Myths:

There is some unreported good news regarding China’s energy policy. First, the jump in energy intensity in 2002-2004 was related to the abandonment by Bejing of their intensity improvement goals, including a dismantling of the bureaucracy that had been available to advise industry on technology to improve intensity. That policy was reversed in 2005, and now China seems to be back on track to improve intensity while growing rapidly at the same time. That is atypical of developing economies.

For an informed discussion, I highly recommend the Stanford Center for Social Innovation podcast interview with Mark Levine: “Dispelling China’s Environmental Myths“. Dr. Levine is group leader of the China Energy Group at Lawrence Berkeley National Laboratory (LBNL)

Two days ago William Chandler published Memo to Copenhagen: Commentary is Misinformed—China’s Commitment is Significant. Dr. Chandler goes into more detail on the results achieved by Chinese central government policy. I think this confirms Mark Levine’s main conclusions. Here’s an excerpt on the policy switches and the resulting energy intensity changes:

China once before did achieve a high rate of energy (and carbon) intensity reduction over a long period of time. In the 1980s and 1990s, post-Mao China was exceptionally wasteful in energy use, as were all centrally planned economies. Reform, restructuring, energy shortages, and exceptionally strong regulation enabled China to make rapid reductions in energy and, therefore, carbon intensity.

But China’s economy has not performed well over the last decade in reducing energy and carbon intensity. Intensity turned sharply upward in 2001 and got worse each year through 2006.2 Energy and emissions increased much faster than the economy between the years 2000 – 2005. Technically speaking, the energy and carbon GDP elasticity was well above unity.

Changes in Chinese Energy Intensity

Full size PDF of Figure 2…

Only a draconian effort to reduce energy intensity by 20 percent by 2010 reversed that trend. The Chinese central government imposed a five-year policy to reduce year 2010 energy intensity by 20 percent relative to 2005. The policy is decided by the central government, but is implemented by provincial and city governments, who see it as a drag on GDP growth and a weight around the neck of local development plans. That policy is set to expire next year.

(…)

Moreover, many of the provinces are unlikely to meet their current targets, and can be expected to oppose their continuation and strengthening (see Figure 3). The current energy intensity policy (which the author of this paper has supported) can legitimately be described as severe, even draconian. The policy imposes hundreds of detailed industrial efficiency standards to a degree unparalleled in any other country in the world. The policy has forced closure of tens of thousands of factories, power plants, and production lines that failed to meet the standards. It is unimaginable that such a policy could ever be enacted in the United States, much less be continued for another decade. It’s a non-trivial error to call it a “reference case,” as the IEA has done.

William Chandler is a fellow at the Carnegie Endowment for International Peace.

Charter Cities: North vs. South Korea

Paul Romer on the impact of the institutional differences which have been tested for half a century on the Korean peninsula. NOKO is an excellent refutation of the argument that culture dominates rules “it won’t work to reform their government because their culture is so different”.

(…) There are many statistical measures of the large difference in the quality of life between the North and the South. One gripping visual indication comes from a satellite picture of the Korean peninsula at night. Compared to its neighbors, North Korea (outlined for clarity) seems like a black hole. South Korea, which looked like the North within living memory, is now a sea of lights.

Until the end of World War II, the North and South shared a common set of formal and informal rules, first as an independent nation, then under occupation by the Japanese. When the allies disarmed the occupying Japanese forces, Russia set up one system of government above the 38th parallel. The U.S. set up a different one below this arbitrary line on a map.

(…)

In today’s world, charter cities offer the best strategy—perhaps the only feasible strategy—for giving people the option to move to a place with a new system of government. Charter cities can also give the leaders of founding nations the chance to set up new systems of government that can, in the best case, do what better government did for South Korea, unleash the potential of the people who use its rules to connect with each other.

I’m wondering if a charter city on the Chinese border might offer a way forward for the North Korean peasants – if NOKO did not gun them down when attempting to cross over. As it stands China tolerates NOKO criminality in nukes and drugs because they fear a collapse which would lead to millions of starving immigrants.

A Coming Trade War?

I do hope Greg Mankiw is overly concerned. I strongly suspect he is correct.

China: real estate bubble

John Mauldin just republished in his newsletter one of George Friedman’s bulletins (i.e., Stratfor). The PDF is available here. We know that real estate investment has been a large and growing part of Chinese GDP. In some of the hot cities like Shanghai it has been over 50% of GDP and near 18% for the nation. The Stratfor view is that the bubble is mostly in residential, but that commercial may soon be headed into bubble territory.

The summary:

The real estate market in China, particularly the residential side, is a burgeoning bubble that is growing bigger and more breakable by the day. Land and housing prices were already rising steadily when Beijing’s stimulus package hit the sector in early 2009. Now prices are surging, with developers, bureaucrats and investors cashing in while urban Chinese – once encouraged to invest in home ownership by the central government – become less and less able to buy.

Recommended. Note that you can sign up for Stratfor’s free newletter here.

China: The Central Organisation Department

In the FT, fascinating article on how patronage actually works in China. Excerpt:

To glean a sense of the dimensions of the organisation department’s job, conjure up a parallel body in Washington. The imaginary department would oversee the appointments of US state governors and their deputies; the mayors of big cities; heads of federal regulatory agencies; the chief executives of General Electric, ExxonMobil, Walmart and 50-odd of the remaining largest companies; justices on the Supreme Court; the editors of The New York Times, The Wall Street Journal and The Washington Post, the bosses of the television networks and cable stations, the presidents of Yale and Harvard and other big universities and the heads of think-tanks such as the Brookings Institution and the Heritage Foundation.

All equivalent positions in China are filled by people appointed by the party through the organisation department. With a few largely symbolic exceptions, the people who fill these jobs are also party members. Not only that, the vetting process takes place behind closed doors and appointments are announced without any explanation about why they have been made. When the department knocks back candidates for promotion, it does so in secret as well.

Dispelling China's Environmental Myths

China is the “world leader on emissions reductions”? Yes, according to licensed journalists. But it was obvious that the breathless claims of a breakthrough in energy intensity were false. Roger Pileke, Jr. examines the facts:

(…) A few things stand out. One is that China’s energy intensity in 2008 is about the same as it was in 2001. Any claim that China’s energy intensity has improved by 20% over the past five years is incorrect. The second is that energy intensity has improved by only about 7.4% since 2005, meaning that it has a long way to go to reach a 20% target by 2010 (i.e., 0.80 on this graph). Can it happen? Sure. But to say that China is “well on its way” does not square with the data. It would be “ironic” indeed if China has figured out how to grow its economy at 9% per year while increasing energy use by only 3% and decarbonizing its economy at an even lower amount. If this were true, then China would have discovered the holy grail of emissions reductions and we can all forget about the challenges of climate policy.

With all of the talk of China now being the “world leader” on emissions reductions, is this story just another myth of climate policy? It sure looks that way.

[From Is China's Energy Intensity Story A Myth?]

There is some unreported good news regarding China’s energy policy. First, the jump in energy intensity in 2002-2004 was related to the abandonment by Bejing of their intensity improvement goals, including a dismantling of the bureaucracy that had been available to advise industry on technology to improve intensity. That policy was reversed in 2005, and now China seems to be back on track to improve intensity while growing rapidly at the same time. That is atypical of developing economies.

For an informed discussion, I highly recommend the Stanford Center for Social Innovation podcast interview with Mark Levine: “Dispelling China’s Environmental Myths“. Dr. Levine is group leader of the China Energy Group at Lawrence Berkeley National Laboratory (LBNL)

China has long had a reputation for being an extremely energy inefficient country. However, the United States holds certain mistaken views on China’s energy and environmental policies, says Mark Levine in this talk hosted by the Center for Social Innovation at the Stanford Graduate School of Business.

While China is plagued by severe pollution, it is, in fact, trying to get a grip on its energy challenges in ways that would surprise the average American. Levine discusses China’s progressive efforts to establish and enforce new energy policies and emissions standards with a group of MBA students about to leave for a service learning trip to China. He clarifies issues such as the country’s approach to pricing; subsidizing of energy industries, such as electricity; and energy-intensive industries, such as steel production. Levine’s talk is sponsored by the Stanford Center for Social Innovation.




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