Walmart has made significant steps to make themselves, and their operations in China specifically, more environmentally-sustainable:

Acknowledging that Walmart customers “need low prices,” he said he also believed that “more and more, they will be looking at the entire life cycle of a product: How is it made, how is it sold, how is it used, and how is it reused? To meet these customer expectations, we need to ask ourselves: Is a product made in a factory that is a responsible steward of the environment and our natural resources?”

Interesting report by Orville Schell for The Atlantic. His point that Walmart and the Chinese Communist Party are made of similar, if not the same, cloth is a bit vapid, but it’s worth reading for discussion about how Walmart is exerting pressure on its manufacturers in China to become more environmentally-friendly.

In China, children learn smoking’s value early:

In dozens of rural villages in China’s western provinces, one of the first things primary school kids learn is what made their education possible: tobacco.

“On the gates of these schools, you’ll see slogans that say ‘Genius comes from hard work — Tobacco helps you become talented,’” said Xu Guihua, secretary general of the privately funded lobby group Chinese Association on Tobacco Control. The schools are sponsored by local units of China’s government-owned monopoly cigarette maker. “They are pinning their hopes on young people taking up smoking.”

Aren’t state-run businesses lovely?

China decided to create a tobacco monopoly in the 1980s when the industry supplied more than 10 percent of government revenue, said Wang Shiyong, the World Bank’s senior health specialist in Beijing. Today, tobacco contributes 6.7 percent, according to figures from Yang and Hu’s report.

It’s almost like the government has an interest in people smoking.

Bizarre:

Only minutes into Biden’s remarks, Chinese officials had begun to direct reporters toward the exits. Most reporters and the vice president’s staff objected, saying it was important to cover the entirety of Biden’s opening statement, as had been the agreement between officials beforehand.

A Chinese press aide said Biden was going on far too long for their liking. But in fact, including the consecutive translation of his comments from English to Chinese, Biden spoke only two or three minutes longer than Xi had.

Soon the stern shooing turned into forceful shoving. As reporters tried to stand their ground, Chinese officials locked arms and pushed forward in a show of overwhelming force. Soon enough Biden did finish, but reporters had difficulty hearing the entire thing because of the fisticuffs.

Michael Pettis argues China’s miracle growth won’t last much longer:

Can China rebalance away from investment and toward domestic consumption as the main engine of growth? Yes, but with great difficulty. Chinese households consume only about 35% of gross domestic product (GDP), far less than any other country. Such a large domestic imbalance has no historical precedent.

Some in Beijing understand how lopsided their development has been. So over the next 10 years, policy makers have said they will try to raise consumption to 50% of GDP. Even that is a low number; it would put China at the bottom of the group of low-consuming East Asian countries.

But achieving this goal is problematic, since it requires that household consumption grow four percentage points faster than GDP. In the past decade, Chinese household consumption has grown by 7% to 8% annually, while GDP has grown at 10% to 11%. If one expects Chinese GDP to grow by 6% to 7%, Chinese household consumption would have to surge by 10% to 11%.

Basically, China’s growth over the last two decades has been due overwhelmingly to state-directed investment in infrastructure development, and they’re reaching the end of the road for economic growth from investment. China needs to readjust their economy to be a more consumer-based economy to succeed in the coming decades.

The PRC is trying, of course. But as Pettis points out, households only hold 35 percent of GDP. Getting that percentage up to a safer level will require significant adjustment and slower overall economic growth.

China’s path to world economic domination is not an easy one.

China’s high-speed rail—held up by many as an example of how the rest of the world is passing us by—isn’t doing so well:

Liu exploited the communist leadership’s fascination with bigness and national prestige. Among the benefits he promised was a chance to squeeze foreign companies for bullet-train technology so that China could build and export its own. What happened next suggests that he — and others — also saw the potential for graft in such a vast undertaking.

…

Word went forth that state-owned banks and local governments were to give Liu all the money, land and labor he required. When Chinese journalists found that Liu’s ministry was using cheap, low-quality concrete, creating a safety hazard, the Communist Party’s propaganda department quashed the reports, according to a January piece in the South China Morning Post.

Students and other humble citizens greeted the first fast trains with complaints about high ticket prices. They crowded aboard buses instead. According to a recent report in China Daily, the government was forced to deploy 70,000 extra buses during the Chinese New Year celebrations in February.

It is so unfortunate we don’t have China’s autocratic rule and enlightened group of leaders so they can just impose these policies on us, as Thomas Friedman wishes.

iPhone sales are growing fastest in China:

As fast as U.S. sales of iphones keep growing, it is not the fastest growing region. In “Greater China,” iPhone sales were up 250 percent. Sales of all products across Asia Pacific were up 151 percent to $4.7 billion. In contrast, Europe is a $6 billion region for Apple, and the Americas is $9.3 billion. “Greater China” (which presumably includes Hong Kong, Taiwan and other Asian markets, could soon become Apple’s second largest region.

That’s incredible, and there’s a lot of growth left in China. The current “race” between Android and iOS is only a prelude to what’s going to happen in the next decade.

China is considered by many to be the defining example of state-run capitalism, but the Economist reports that not only are most companies majority privately-owned, but they are driving China’s economic growth:

China’s state-controlled entities are not particularly profitable. A study by Qiao Liu, a professor at the University of Hong Kong, concludes that the average return on equity for companies wholly or partly owned by the state is barely 4%, despite the benefit of cheap leverage provided by government-controlled banks. According to a recently published paper by Mr Liu and a colleague, Alan Siu, the returns of unlisted private firms are no less than ten percentage points higher.

That’s rather incredible, because it’s very difficult for private businesses to get loans through official channels. Operating outside the law is a significant risk for them:

Nevertheless, this form of business has inherent limits. To the extent that firms operate outside the law, they are vulnerable to shakedowns from local officials and mood-swings in Beijing. Although success brings praise, too much of it can invite envy and scrutiny. Each new list compiled of China’s greatest tycoons is often accompanied by stories about those on earlier lists who later fell foul of the law. In his remarks last year Mr Zheng, the provincial party official, said that the significance of private business was not understood: businessmen were often criticised (perhaps a veiled reference to being jailed) without good reason and if continually squeezed, would emigrate, sapping China’s vitality. The prospect of expropriation undermines the willingness of these entrepreneurs to make the long-term investment needed to develop brands, novel products and capable middle-management.

Seems telling the PRC is so afraid of thus far puny protests in China:

Near Shanghai’s People’s Square, uniformed police blew whistles nonstop and shouted at people to keep moving, though about 200 people – a combination of onlookers and quiet sympathizers who formed a larger crowd than a week ago – braved the shrill noise. In Beijing, trucks normally used to water the streets drove repeatedly up the busy commercial shopping district spraying water and keeping crowds pressed to the edges.

Foreign journalists met with tighter police controls. In Shanghai, authorities called foreign reporters Sunday indirectly warning them to stay away from the protest sites, while police in Beijing followed some reporters and blocked those with cameras from entering the Wangfujing shopping street where protests were called. Plainclothes police struck a Bloomberg News television reporter, who was then taken away for questioning.

Dictatorships, no matter how successful their means of control and economic policies are, are never completely stable. Something as simple and natural as the people publicly speaking their minds can cut through all the fear and strength they have projected to protect their regime in days.

The Arabs have shown the rest of the world just how much power the people have. If they choose, their repressive governments will fall.

The PRC has inserted a large statue of Confucius in Tiananmen Square:

A mammoth sculpture of the ancient philosopher Confucius was unveiled this week off one side of the vast plaza. It’s a jarring juxtaposition for a square the ruling Communist Party treats as politically hallowed ground: a mausoleum holding revolutionary leader Mao Zedong’s body sits in the middle and his giant portrait hangs at one end.

Placing the statue at China’s political heart is the authoritarian government’s most visible endorsement yet of the 2,500-year-old sage and, selectively, his teachings.

That’s important. Mao attempted to destroy China’s connection to its past and Confucianism was a large target.

Due to China’s adoption of socialism and Maoism, the Cultural Revolution, and finally China’s breakneck economic growth (and requisite social upheaval), China has little historical legacy to inform itself of what it is and to guide its growth. The only idea the PRC has offered for what it means to be Chinese is to grow quickly.

This is an attempt by the CCP to fix that and to secure itself. The CCP is connecting its values to Confucianism’s, and thus to China’s long history. In other words, the CCP is, at least by appearances, trying to model itself not as a break from China’s past, but as merely a continuation of it.

In January 2009, just months after the 2008 financial crisis, I wrote a lengthy (9,000 word) study of the financial crisis—analyzing what happened, what caused it, and what I thought we should do to prevent it from happening again.

Below I am publishing the study in its entirety. If you are interested in what what led to the financial crisis in 2009, and enjoy extensive detail, send it to Instapaper—this is for you.

Homeowners and home buyers were convinced home prices would continue to rise. Indeed, the entire market was convinced. People bought homes with mortgages they could not afford, because their home equity would pay for the loan; lenders made loans without verification of the recipient’s income or credit; financial groups poured money into mortgage-backed securities, and Fannie Mae and Freddie Mac bought and securitized an incredible number of mortgages — roughly half of the U.S.’s $12 trillion mortgage market (Duhigg).

A “bubble” was created in the housing industry, a market condition where one industry receives too much investment and, like a plane flying straight up, must stall and come down quickly. Alan Greenspan called it “irrational exuberance,” and that is an apt description — people disregard logic and invest wildly into one industry. For a time, as everyone is investing in it, this works and everyone makes money; but eventually, the rapid rise must turn into a rapid decline.

Usually, bubbles are contained in one industry. This bubble, however, was different. In this case, the entire United States economy and, indeed, the world economy, was involved. For years, the savings rate for U.S. households declined, as home prices rose. Rather than use their income to save, U.S. households used their home equity as their savings, using income they would normally save for consumption.

Moreover, after the technology bubble collapsed in 2000, investment firms moved their capital into mortgage-backed securities, and foreign central and private banks and firms, too, invested in mortgage-backed securities and related securities. China, using the vast dollar reserves it accumulates from trade with the U.S., was one of the largest state investors in related securities, owning $376 billion of Government Sponsored Enterprise-issued securities. Asia as a whole owned $800 billion in 2007 (Timmons).

Consumer spending (which largely fueled economic growth since 2000) and the finance industry (whose lending is integral for the overall economy to function) were directly tied to housing prices. Moreover, the Chinese economy’s fortune is vitally dependent on U.S. consumer spending, and the world had invested in the U.S. housing boom. Thus, because economic growth in the U.S. and world was so dependent on the housing market, the housing bubble’s collapse in 2006 not only threatened the U.S. economy, but the entire world economy.

The resulting stock market collapse in 2008 has caused severe losses in the U.S. and across the world. World stock markets, overall, declined by 48 percent in 2008; China, whose economy is dependent on exports, saw exports decrease nearly 3 percent in December 2008 (“Economic Crisis Hits Exports”); and Iceland’s government, hit by criticism over the effects of the financial crisis, collapsed January 26.

This paper will consider both the short and long-term causes of the 2008 financial crisis and, based on these causes, note the lessons we can derive from them, both for government and companies.

Continue reading →

WikiLeaks’s State Department cables do provide a few more details on how China pressured Google:

But Chinese officials became alarmed that Google still did less than its Chinese rivals to remove material Chinese officials considered offensive. Such material included information about Chinese dissidents and human rights issues, but also about central and provincial Chinese leaders and their children — considered an especially taboo topic, interviews with people quoted in the cables reveal.

Mr. Li, after apparently searching for information online on himself and his children, was reported to have stepped up pressure on Google. He also took steps to punish Google commercially, according to the May 18 cable.

The propaganda chief ordered three big state-owned Chinese telecommunications companies to stop doing business with Google. Mr. Li also demanded that Google executives remove any link between its sanitized Chinese Web site and its main international one, which he deemed “an illegal site,” the cable said.

When governments have such a large role in the economy, they will inevitably use it to punish anyone who threatens their power. You cannot give the state substantial economic control without also relinquishing political freedom, too.

The Economist on China’s growing military strength:

In sum, China’s abilities to strike have soared far beyond seeking to deter American intervention in any future mainland dispute with Taiwan. Today China can project power out from its coastline well beyond the 12-mile (19km) limit that the Americans once approached without a second thought. Mr Okamoto, the Japanese security expert, believes China’s strategy is to have “complete control” of what planners call the First Island Chain. Ultimately, China seems to want to stop the American fleet from being able to secure its interests in the western Pacific.

David Leonhardt:

To continue growing rapidly, China needs to make the next transition, from sweatshop economy to innovation economy. This transition is the one that has often proved difficult elsewhere. Once a country has turned itself into an export factory, it cannot keep growing by repeating the exercise. It can’t move a worker from an inefficient farm to a modern factory more than once. It cannot even retain its industrial might forever. As a country industrializes, workers will demand their share of the bounty, as has started happening in China, and some factories will start moving to poorer countries. Eventually, a rising economy needs to take two crucial steps: manufacture goods that aren’t just cheaper than the competition, but better; and create a thriving domestic market, so that its own consumers can pick up the slack when exports inevitably slow. These steps go hand in hand. Big consumer markets become laboratories where companies know that innovations will be tested and the successful ones richly rewarded. Those products can then expand into countries with less mature consumer markets. Look at the telephone, the personal computer and the iPhone and iPad, all of which were designed in the United States and are now sold around the world.

Fabulous piece by Leonhardt for the New York Times. Send it to Instapaper and read it all when you have the time.

China’s development, thus far, has been based on an abundance of cheap labor. This has allowed China to become the world’s factory, manufacturing goods for sale in other countries. But as Leonhardt so nicely explains, you can only gain economic efficiency by transferring a worker from farm to factory once.

There’s two pressures working against China’s cost advantage. First is supply—soon, they will run out of new workers in the east, and companies will have to move west. This is already happening, with Foxconn doing just that. On the face of it, this sounds like a good solution; the west is undeveloped and full of people yearning for better paying work, but the problem is that China’s west is landlocked. Manufacturing goods in the west, unlike manufacturing near the east’s ports, requires moving them to port using comparatively expensive rail or truck. The west will never be the panacea China experienced in the past few decades. This will force companies to pay higher wages. Megan McArdle, who just traveled to China, says she’s heard labor costs rising by fifteen to thirty percent in major urban areas.

The second pressure is changing expectations. As more people move into the middle class, or just begin to move toward it, they are expecting higher wages and better treatment. A strike by workers in May at a Honda transmission factory in southern China reflects this.

This means that, at some point in the coming 10-15 years, China must transition from an export-dominated economy to a consumer-based one. This is a difficult shift, but it must happen. Leonhardt explores how the Chinese are trying to do so—by laying the foundation for a better-educated populace and by encouraging creative thinking and developing new ideas.

What should concern China just as much as their lack of innovation is that China is very much two nations. When I visited eastern China in 2008 and 2010, what struck me the most was how much it felt like a developed nation. We often hear how poor China is, but you wouldn’t know it from visiting cities in the east. Beijing’s, and especially Shanghai’s, streets are filled with nice cars and the sidewalks with well-dressed people shopping, lights and billboards everywhere. This isn’t limited to the largest cities, either.

But China is a poor nation. While the east is relatively well-developed, the west is very poor. In this sense, China is, increasingly, two nations, east and west, rich and poor. China’s great challenge, then, is not just to transition from a manufacturing and exports economy into a consumer and innovation economy, but also to bring development to the west as well. China’s west is already the source of most of the country’s instability, so this poses a catch-22 of sorts for their leadership: first, instability makes it even more difficult to bring companies (and thus jobs) westward, but it also means they need more economic growth to quell anger.

Zhao Lianhai was recently convicted in a Beijing court of attempting to use a “popular issue” to incite a mob and disrupt the social order.

What did he do? Zhao’s son was one of 300,000 children that were sickened by chemically-tainted milk powder—his son suffers from kidney stones, other children urinated blood and at least six children died—and so he led a campaign for justice against the company responsible and proper compensation for resulting medical expenses. In China, there is no proper court system to bring civil charges against companies, and so publicly pressuring the central government (read: the Communist Party) is the only means of seeking restitution. And so he did.

Susan Jakes writes:

But, after Zhao and other parents protested that the government’s compensation plan was inadequate to cover the cost of their children’s ongoing medical care, they began to receive threats from local police. Zhao’s Web sites were repeatedly shut down, and the group’s lawyers received phone calls from authorities urging them to drop the case. In late 2009, Zhao was officially arrested; he has been in police custody ever since.

Zhao’s campaign had been based on the widespread belief in China that while local officials or individual businesspeople may engage in venal or criminal activities, the central government, once informed of the truth, will see to it that justice is done.

The company responsible, the Sanlu Dairy Group, was protected by local government and party officials in 2008 from these charges because the company was good for their local economy and they were benefiting from them being based there.

When the state is directing the economy, overlap between the two necessarily happens, to the detriment of individuals.

There’s a fascinating look at a Western freelance journalist’s stint in China as a transcriber for conferences during the 2008 olympics. It’s one, if innocuous by the PRC’s standards, insight into how China’s censorship works:

I remember Ling laughing hysterically during a press conference on the weather. “To some extent,” said an official, “we can control the weather.” When she edited my transcript, she sighed as she tweaked his words to make him sound a little less dumb.