Coincidence or correlation? and a conspiracy theory

Does the graph above demonstrate coincidence or correlation between the 2 indices? do such correlation indicate causal relationship? (Source: Heavy Lifting; See also Kedrosky, and do not miss the discussion (also hat tip) in Big Picture)

A commentator noted in Kedrosky's chart, "Actually, it looks like the prices trail the ratings a little." Here is a conspiracy theory to consider: If your family business sells oil drilling equipment, wouldn't you make sure you pump up the oil price whenever you have some extra political capital?

If such theory holds, the advice to investors is to long oil until Nov 2008
  • ignore all the noise about instability in Iraq or rising demand in China, these are nothing compared with the almighty hegemone, perhaps?
  • all one needs to do is to cut off Iran's supply from the world, how to do this I wonder?
  • before cutting off Iran, perhaps consider other mishaving regimes as well, Sudan, Nigeria?
  • so all these are not about energy security, just about oil price and profit?


Mainlandization of Apple Daily

Via New Century Net, Li Dali speaks up about how low some of Apple Daily's op-ed has become, in particular, that from pseudo-scholar Jiao Guobiao, "It is a pity that this appears on the only newspaper with conscience in HK, Apple Daily, I am concerned about the 'mainlandization' of your paper"

Mr Li, you are not alone. You are being too nice to Jiao. Most of his essays are like that. They all made their way into AD miraculously.

Meanwhile, Jimmy Lai. Please read Stephen Cheung's "Dialectic on Chess Move Undo", also originally from AD. The comments apply to a lot of areas.
  • 记载说,莫札特写乐曲很少修改。莫札特是天才,庄逊、山木、陶杰也近于天才吧。有趣的问题是,这些下笔不改的写手,可能试行修改也改不出什么进境。
  • Mozart is a genius, he seldom needs to revise his work. Johnson is; Lin Shanmu is; and Tao Jie is probably close to a genius(?) The interesting issue is, for that certain "writing hand" who does not bother to edit, perhaps he could not improve even if he tries to revise.
  • 逻辑不错不等于不需要走几着回手棋。事实的真相可能早时没有充分的掌握,局限的理解可能有失误,假设可能要更改一下。这些与逻辑无关:逻辑对,不等于结论也对。
  • 世界太复杂,逻辑频频出错的人是不应该搞科学的。因为科学没有永远不错的理论,从事的人要懂得下回手棋,更要乐意回手。
  • 逻辑这回事,有些人天生下来就没有问题,有些人怎样争取也无可救药。一般来说,天生较弱的两三个月的训练就差不多了。不要节省这生命中的一小撮时间,而以逻辑推理要小心。小心者,多下回手棋是也。
  • About logic, some people are good at it, innately; but it is hopeless for some others. Generally speaking, a few months' training would help. Do not be stingy on such a short period of time within the long span of life, one needs to pay attention to logic.

N.B. mainlandization = behaves like the party organ in mainland China








Yuan-taka Desyo?

(Update: One very important issue missing from these debate is that, the defenders of status quo do not disagree that RMB could appreciate a bit, 3-10%, or even 15%. The key issue here is, should a monetary system be changed arbitrarily? Would this become a precedence of bureacratic intervention? Would you trust the bureaucrats in China?
Yielding to trade pressure to appreciate, e.g. the 2.1% last July, is, IMO, an arbitrary change.
This is why I agree with Cheung, Yam and McKinnon, that a system that provides no leeway to the bureacrats is the best system. A commodity peg is one. The old system from 1994-2005 is another. The new basket peg since 7/2005, I don't know, yet.)

元高でしょう? Stephen Cheung discussed RMB policy and Plaza Accord in AD: The Horrible Lesson of Japan (see original in Chinese cached below).

Cheung first reviewed two essays:
  • Ronald McKinnon's Apr 20 WSJ Op-ed (cached below): "But the higher yen led to no obvious reduction in Japan's trade surplus as a share of its slumping GDP. The fall in domestic imports from the sluggish economy offset the reduced growth in Japan's exports from the higher yen.....So, in an ideal world, on what basis should Presidents Hu and Bush agree to reduce the trade imbalance between the two countries? China needs to increase private consumption in order to reduce its saving glut -- and its new five-year plan, which in its newly marketized economy can only be indicative, points in this direction. But the U.S. needs to drastically rein in the federal budget deficit in order to reduce the national saving deficiency. If China keeps its side of the agreement but the U.S. does not, then China's reduced trade surplus, i.e., less lending to the U.S., will mean higher interest rates here and abroad. But, whether or not such a broad agreement is implemented, Secretary Snow's narrower job of interpreting Section 3004 is straightforward: China is not a currency manipulator and the yuan/dollar rate is best left more or less where it is."
  • Deepak Lal's account of Plaza Syndrome
    • Roubini thought it is unlikely that a RMB Revaluation Cause A Japanese-Style Deflation in China. This is what McKinnon said, "But if it is continually forced to appreciate the renminbi because bad economic theory suggests that a higher renminbi will eventually reduce its trade and saving surplus, the possibility of a Japanese-style deflationary slump cannot be ruled out." No contradiction. There is such possibility, and it is more likely is the insatiable pressure continues
    • Roubini pointed out that Japan's economy expands for "close to 2 decades since 1971", but he forgot that Plaza Accord was signed on 1985, which is almost 2 decades after the period he quoted
Cheung then continues the comparison
  • China's situation today is similar to where Japan was in mid-1970s, in terms of GDP/cap development and its historical trajectory
  • But China still lags Japan-1975 in 3 areas: education/technology; legal/political/economic/financial system; and number of low cost competitors
  • However, China also has its advantages: the momentum and determination to reform
  • There are 2 ways to adjust the exchange rate: (a) active appreciation of the RMB; (b) passively, let USD/others depreciate by themselves. The difference is the relative exchange rate of China vs other developing countries and the risk of deflation in China. i.e. the real difference is about China's competitive advantage with Vietnam/Bangladesh, not China vs USA (27.5% or even 100% change in exchange rate would not shift the US trade deficit)
  • All said, the current "basket peg" is ambiguous and dangerous, which will be further exacerbated if yielding to US pressure. China should seriously consider shifting into a more 'stable' currency regime, which cannot be 'manipulated' by foreign pressure of arbitrary decision by bureacrats. e.g. the "commodity basket".
Do not miss the insights from Morgan Stanley's Stephen Roach:
  • This is not the first time that Washington has tried to browbeat a major US trading partner into submission by using the blunt instrument of currency appreciation as the “remedy” for a trade imbalance. Repeatedly during the 1980s, when the US was in the midst of its first external crisis -- a current account deficit that peaked at a then-unheard of 3.4% share of GDP -- Washington pounded on Japan to let the yen rise. After all, the bilateral deficit with Japan was the biggest piece of the then-gaping US multilateral trade deficit. The theory was if Japan repriced its “unfair” competitive advantage, all would be well for an unbalanced world. Unfortunately, the Japanese heeded this advice, and the yen/dollar cross rate soared from 254 in early 1985 to an intraday peak of 79 in the spring of 1995. Sadly, Japan’s “endaka” (strong yen) was a major factor behind its subsequent undoing -- fueling the mother of all asset bubbles in equities and property that ended with a sickening collapse into a protracted post-bubble deflation. Politics never cease to amaze me, but I am incredulous that a mere 20 years later, America is offering the Chinese the same bad advice that took Japan down a road of unmitigated macro disaster. Fortunately, saner minds have prevailed in Beijing. (Read the rest yourself)
and "Japan’s malaise was made in United States": Deepak Lal (2003)
  • ...Thus, while liberalization of Japan’s capital market in the early 1980s tied Japanese and US interest-rate movements, Japanese interest rates were discounted by the expected rate of currency appreciation. As long as US interest rates were high, Japanese interest rates remained fairly positive, allowing the BOJ to moderate the effects of the yen’s appreciation by easing domestic monetary policy.
    But this ended after 1985, as the so-called “Plaza Accord”...Massive yen appreciation led to a Japanese recession in 1985-86, and the BOJ lowered interest rates to near zero. Even with the tradable sector suffering due to the strong yen, capital-market liberalization meant that the capitalized value of future income streams, particularly from land, soared, as the interest rate at which they were discounted fell.
  • This was the start of the great Japanese asset-price bubble. As the yen’s strength undermined foreign demand for Japanese output, rising asset values turned domestic demand into the engine of the economy, and Japan rapidly grew out of the recession.
  • But all bubbles burst. By the end of the decade, the BOJ was worried by a massive appreciation in land and stock prices. Before long, monetary tightening accompanied renewed trade friction with the US, prompting more yen appreciation and another recession.
Thank you, Prez Hu (Hat tip: New Economist)
Political pressure on the renminbi exchange rate: Joseph Yam (HKMA)


Currency Manipulator?
Ronald I. McKinnon. Wall Street Journal. Apr 20, 2006. pg. A.14

China's president, Hu Jintao, on his first visit to the U.S., may well puzzle over his host's government's sometimes obscure and legalistic approach to international economic issues. Section 3004 of Public Law 100-418 requires that the secretary of the Treasury assess whether countries such as China that have global current account surpluses or large bilateral trade surpluses with the U.S. are manipulating their exchange rates to prevent effective balance of payments adjustment or to gain an unfair competitive advantage in international trade.

The question of whether the beleaguered treasury secretary, John Snow, is willing to classify China as a "currency manipulator," with unspecified economic sanctions to follow if he does, is the current serious flashpoint in China-U.S. relations. Unfortunately, U.S. lawmakers and many, if not most, economists fail to understand that China's motivation for pegging its exchange has been to secure internal monetary stability and not to achieve an undue mercantile advantage in world export markets. The law as written mistakenly presumes that current account surpluses are per se evidence of currency manipulation by the foreign countries in question.

Without a doubt, China's trade surpluses are large and possibly getting larger. From 2000 to 2004, China has had the world's largest bilateral trade surplus with the U.S. But since then, the collective trade surpluses of the oil-exporting countries have become larger than China's surplus. The key difference, however, is that China is a major exporter of manufactured goods that sometimes compete with U.S. manufactures, whereas imports of oil and natural gas are viewed as vital inputs for American industry. This difference explains the current concern in the Congress with possible "unfair" competition from China but not from oil exporters despite their proportionately larger surpluses. Still. China's current bilateral trade surplus with the U.S. is about one-quarter of America's huge and growing trade deficit, which is about 7% of U.S. GDP so far in 2006.

Section 3004 fails to recognize that persistent trade surpluses in China and trade deficits in the U.S. reflect very high saving in China and unusually low saving the U.S., an imbalance that no exchange rate change can correct. China's saving is even higher than its own extraordinarily high domestic investment of 40% of GDP, whereas saving in the U.S. is very low relative to a more normal level of domestic investment of 16% to 17% of GDP. The result is that China (like many other countries in Asia) naturally runs an overall current account surplus while the U.S. runs a current account deficit.

This large current account deficit -- more in goods than in services -- reflects borrowing from the rest of the world to cover its saving deficiency. Without this saving transfer allowing the U.S. to spend more on goods and services than it produces, the U.S. would suffer a credit crunch. Interest rates would increase so that investment -- both industrial and residential -- would fall. If this cessation of net foreign lending to the U.S. happened suddenly causing the current account deficit to fall quickly, and if there was no correction in America's saving deficiency, the U.S. economy would be forced into a sharp cyclical downturn similar to the "credit crunch" of 1991-92. On the other hand, if reduction in net foreign lending was gradual and spread over many years, the cost would be that America's longer term economic growth would slow as domestic investment and the current account deficit fell in tandem as a proportion of GDP.

Two main points must be recognized. First, an exchange rate change cannot correct America's current account and saving-investment imbalance. Second, if the saving rate in the U.S. were to increase gradually through time, then its current account deficit would gradually diminish -- without requiring any substantial change in nominal dollar exchange rates with major trading partners including China.

Increased U.S. saving must come from two sources: the federal government and the household sector. (U.S. corporate saving from retained profits remains robust.) Strenuous efforts must be made reduce the U.S. federal fiscal deficit, which at 3% to 4% of GDP, is a terrific drain on national saving. Tax revenues have fallen to an unduly low level by international standards. Dealing with deficient, perhaps negative, household saving is conceptually a much trickier problem. But some program of "forced" saving, from a national pension plan above and beyond Social Security contributions, should be considered. Singapore's Provident Fund could be a good model.

However, suppose the U.S. current account deficit is misdiagnosed as an exchange rate problem as with Section 3004. More than 20 years ago, when Japan had the largest bilateral trade surplus with the U.S., the U.S. government exerted continual pressure on Japan to appreciate the yen. Indeed, the yen went all the way from 360 to the dollar in 1971 to peak out at just 80 to the dollar in April 1995. This induced a bubble in Japanese stock and land prices in the late 1980s, which collapsed in 1991. A deflationary slump and a zero interest liquidity trap followed resulting in Japan's "lost decade" of the '90s. But the higher yen led to no obvious reduction in Japan's trade surplus as a share of its slumping GDP. The fall in domestic imports from the sluggish economy offset the reduced growth in Japan's exports from the higher yen.

Could the same thing happen to China? From 1994 through to July 21, 2005, China had fixed its exchange rate at 8.28 yuan per dollar by focusing its national monetary policy on maintaining that rate. The idea was to use the dollar exchange rate to anchor China's price level at a time when great financial transformation made domestic monetary indicators difficult to interpret. And this policy was successful in ironing out China's previous "roller coaster ride" in domestic price inflation and growth rates. Its high inflation of the mid 1990s came down and converged to that in the U.S. -- as the principle of relative purchasing power parity would suggest.

Now China has come under great pressure -- mainly from the U.S. -- to appreciate the renminbi. Since July 21, 2005, the renminbi has appreciated slowly -- only about 3.5% so far. But Section 3004 is an important part of continuing American political pressure on China for further appreciation. In 2006, China's year-over-year CPI inflation has fallen to just 1%, whereas America's is over 3%. Clearly, any substantial further appreciation will push China into a situation where its CPI begins to fall. To be sure, China's real economy remains robust. But if it is continually forced to appreciate the renminbi because bad economic theory suggests that a higher renminbi will eventually reduce its trade and saving surplus, the possibility of a Japanese-style deflationary slump cannot be ruled out.

So, in an ideal world, on what basis should Presidents Hu and Bush agree to reduce the trade imbalance between the two countries? China needs to increase private consumption in order to reduce its saving glut -- and its new five-year plan, which in its newly marketized economy can only be indicative, points in this direction. But the U.S. needs to drastically rein in the federal budget deficit in order to reduce the national saving deficiency. If China keeps its side of the agreement but the U.S. does not, then China's reduced trade surplus, i.e., less lending to the U.S., will mean higher interest rates here and abroad. But, whether or not such a broad agreement is implemented, Secretary Snow's narrower job of interpreting Section 3004 is straightforward: China is not a currency manipulator and the yuan/dollar rate is best left more or less where it is.

Mr. McKinnon is professor of economics at Stanford

還 斂 集 : 日 本 的 可 怕 故 事

阿 康 傳 來 兩 篇 文 章 。 一 篇 是 史 坦 福 大 學 經 濟 學 教 授 Ronald McKinnon 四 月 二 十 日 發 表 的 , 內 容 是 中 國 沒 有 「 操 縱 」 人 民 幣 的 國 際 幣 值 。 他 指 出 逼 使 人 民 幣 升 值 不 會 改 進 美 國 的 外 貿 赤 字 , 也 支 持 人 民 幣 兌 換 美 元 的 匯 率 不 變 。 看 來 是 刻 意 地 安 排 在 胡 錦 濤 訪 美 時 發 表 於 《 華 爾 街 日 報 》 , 幫 中 國 一 個 忙 , 炎 黃 子 孫 要 感 謝 這 位 教 授 。
為 中 國 好 , McKinnon 反 對 人 民 幣 升 值 有 一 些 日 子 了 , 這 次 再 澄 清 論 點 。 他 對 日 本 的 經 濟 發 展 有 深 入 的 研 究 , 指 出 日 本 當 年 發 展 得 頭 頭 是 道 , 卻 給 美 國 頻 頻 施 壓 , 把 日 圓 幣 值 趕 上 去 , 害 得 日 本 經 濟 兵 敗 山 倒 。 是 可 怕 的 故 事 , 也 屬 無 聊 : 害 死 了 日 本 , 美 國 卻 沒 有 得 到 好 處 。 此 君 的 分 析 角 度 與 我 的 不 同 : 他 用 四 十 多 年 前 我 讀 過 的 absorption approach , 加 上 變 化 , 令 人 大 開 眼 界 。
另 一 篇 是 洛 杉 磯 加 大 的 Deepak Lal 教 授 寫 的 , 二 ○ ○ 三 年 二 月 發 表 。 Lal 是 印 度 人 , 年 多 前 訪 神 州 , 我 跟 他 暢 論 天 下 大 勢 , 解 釋 中 國 的 發 展 情 況 。 在 比 我 年 輕 一 輩 的 經 濟 學 者 中 , Lal 是 難 得 一 見 地 懂 世 事 , 對 經 濟 理 論 基 礎 的 掌 握 有 分 寸 , 會 面 後 我 在 文 章 中 讚 過 他 。
Lal 的 文 章 , 論 日 本 , 也 評 論 McKinnon 與 Kenici Ohno 合 著 的 一 本 題 為 《 Dollar and Yen 》 的 書 , 讚 。 加 上 自 己 的 , Lal 論 日 本 數 十 年 來 的 經 濟 盛 衰 , 日 圓 被 迫 升 值 而 弄 得 財 政 近 於 破 產 ( virtually insolvent ) 的 故 事 , 比 McKinnon 說 的 更 可 怕 。
記 得 日 圓 被 迫 升 值 不 久 , 我 於 一 九 八 七 發 表 《 日 本 大 勢 已 去 》 , 不 幸 言 中 。 當 時 日 本 還 有 另 一 項 嚴 重 的 政 策 失 誤 , 上 述 兩 位 教 授 沒 有 提 及 的 。 那 是 他 們 禁 止 農 產 品 進 口 , 搞 起 高 地 價 。 一 個 蕃 茄 零 售 五 美 元 , 土 地 種 出 黃 金 , 上 帝 也 保 不 住 。 感 謝 上 帝 , 今 天 中 國 沒 有 那 樣 傻 。

我 曾 經 提 及 , 中 國 目 前 的 經 濟 活 力 彷 彿 七 十 年 代 初 期 的 日 本 , 而 日 本 從 一 九 五 二 至 一 九 七 三 的 增 長 速 度 , 與 中 國 八 、 九 十 年 代 可 以 相 提 並 論 。 日 本 當 時 有 三 個 比 中 國 優 勝 的 地 方 。 其 一 是 以 時 代 衡 量 , 日 本 當 時 的 科 技 基 礎 遠 比 中 國 好 。 其 二 是 在 制 度 上 , 日 本 不 需 要 像 中 國 那 樣 經 過 千 山 萬 水 的 大 改 革 。 其 三 是 日 本 當 年 不 需 要 面 對 數 之 不 盡 的 擁 有 大 量 廉 價 勞 力 的 競 爭 者 。 這 樣 , 中 國 二 十 多 年 來 的 發 展 遠 比 日 本 昔 日 困 難 。 如 果 說 日 本 當 年 是 經 濟 奇 蹟 , 中 國 今 天 是 奇 上 加 奇 。
更 神 奇 的 是 , 撇 開 沙 石 , 我 認 為 中 國 今 天 的 經 濟 體 制 比 日 本 當 年 優 勝 。 這 顯 然 是 因 為 中 國 的 改 革 有 動 力 , 今 天 還 在 改 , 以 後 會 不 會 改 壞 了 是 以 後 的 事 , 但 今 天 看 , 中 國 的 發 展 勢 頭 是 比 日 本 七 十 年 代 初 期 可 取 的 。 很 不 幸 , 在 這 重 要 關 頭 , 中 國 的 貨 幣 制 度 開 始 走 上 歪 路 , 央 行 的 言 論 令 人 擔 心 , 而 外 間 施 壓 人 民 幣 升 值 , 一 方 面 是 強 逼 中 國 走 上 日 本 的 災 難 性 的 路 , 另 一 方 面 會 促 使 央 行 放 棄 我 屢 次 高 舉 的 中 國 貨 幣 制 。
這 裡 有 兩 個 重 點 。 第 一 , 原 則 上 , 如 果 人 民 幣 只 對 所 有 先 進 之 邦 的 貨 幣 升 值 , 中 國 容 易 接 受 。 這 是 說 , 如 果 其 他 地 區 不 存 在 , 人 民 幣 上 升 百 分 之 二 三 十 先 進 之 邦 還 要 買 中 國 貨 , 中 國 的 收 入 會 增 加 。 問 題 是 今 天 的 人 民 幣 早 就 按 廉 價 勞 力 的 競 爭 地 區 調 整 , 這 升 值 會 被 競 爭 地 區 在 背 後 一 刀 斬 過 來 。 第 二 , 說 過 了 , 誰 調 整 幣 值 誰 就 要 付 出 大 代 價 。 人 民 幣 升 值 中 國 會 有 通 縮 , 外 幣 自 己 貶 值 ( 人 民 幣 因 而 升 值 ) 他 們 會 有 通 脹 。 從 北 京 的 立 場 看 , 當 然 讓 外 幣 貶 值 為 上 。
解 決 上 述 兩 個 重 點 的 最 佳 辦 法 , 是 人 民 幣 轉 用 一 籃 子 物 品 為 錨 , 然 後 穩 守 。 這 樣 , 先 進 之 邦 的 貨 幣 大 可 自 由 貶 值 , 廉 價 勞 力 之 區 繼 續 與 中 國 平 手 競 爭 , 而 朱 鎔 基 時 代 的 中 國 貨 幣 制 度 保 持 不 變 。

The billion people market dream comes true: Yum! Brands in China

It is no longer a dream. According to WSJ (see also Businessweek)
  • Yum Brands Inc., parent company of fast-food chains KFC, Taco Bell and Pizza Hut, reported an 11% rise in first-quarter earnings, helped by double-digit growth in its U.S. and China operations. Slightly higher margins and same-store-sales growth in the U.S. helped Yum offset some foreign-currency head winds overseas. The Louisville, Ky., company posted net income of $170 million, or 59 cents a share, for quarter ended March 25, compared with $153 million, or 50 cents a share, a year earlier. Revenue rose 1.5% to $2.09 billion. Same-store sales, or sales at restaurants open at least a year, rose 5% in the U.S. The company said its operating profit totaled $58 million in its China division, up 10%, while operating profit in its U.S. business was up 19% at $188 million.

Yes, that is right. $58M in operating profit (not revenue, profit) from only two brands, KFC and Pizza Hut, in China. This compares with $188M in US.

How significant is this? Considering there is no Taco Bell (unlikely in near future), we are talking about $50M(China, conservatively deducted $8M as "China division" includes Thailand, HK, Taiwan) vs $130M(US, see # stores in table below, Toco Bell/etc contributed more than $58 I deducted here)

Number, location of its stores
Source: USA Today Feb/2005

Pizza Hut
Taco Bell
Long John Silver's
A&W All-American

  • China GDP: $2tn; USA GDP:13tn. So Yum! China profit is 2.5 times that of USA in terms relative to market size
  • per capita profit: China $50/1300 vs USA 130/300. i.e. $0.0385 vs $0.433. Let's factor in the fact that price level in China is lower than US, say 30-50% lower, that still gives at least a 5-7 fold growth potential for China. Scrap 2/3 of rural China, still 2-3 times that of USA.
  • Note the cost in China is also lower, and most importantly, the sales/store is a lot higher in China due to higher urban population density ($1.2M/store China vs $0.9M/store USA, see below -- this explains why McDonald's in HK is among the cheapest while also the most profitable franchise in the world
  • If you think they got lucky on KFC, let me remind you that it was bird flu year and that Chinese are not very fond of pizza
  • Another reason China has a lot of room for growth is that the $50M is mostly from KFC today, i.e. the profitable Pizza Hut has a lot of room to grow (1,378 KFC and 201 Pizza Huts at mid-2005)
In a few years, I am not surprised to see Yum profit in China exceed that of USA, by 2-3 folds.

How did they accomplish this? For an interview with Yum! CEO in February see USA Today a year ago (and older but arguably more insightful story on Times Asia Nov 2003, and of course, the always great Economist coverage).
  • Insana: Do Chinese KFCs outsell U.S. KFCs?
    Novak: Yes. Our China average unit volumes are $1.2 million, vs. around $900,000 or a little higher in the U.S. Our China business is very exciting. This year, we will make $200 million in China. That's 15% of our total profit. In 1998 we made $20 million. We have the two leading brands in China. KFC, according to the Nielsen survey, is the No. 1 consumer brand in all of China. That's ahead of Coca-Cola, Pepsi, Nike, everybody else.

    Insana: Since China's currency is not fully convertible, how do you repatriate profits?
    Novak: We are very successful taking cash out.

    Insana: In paper bags?
    Novak: Well, no. We work it through Treasury. It's a very complicated process, but we basically have no problem at all repatriating our profits. In the last quarter we brought back about $50 million from China. The great thing about China is that we're self-funding all of our growth, plus we have free cash flow that we bring back into the U.S. It's a great business.

    Insana: You're bringing Chinese food to China. How will you do that successfully? I'd be a little skeptical if a Chinese company came here and tried to sell me a hamburger.
    Novak: This is in the embryonic stages. We have a team in China that is self-sufficient and local. We told them, "You know what you love. You know what the Chinese customer loves. You develop the Chinese fast-food concept." So it's not like David Novak and a bunch of U.S. citizens going over there saying, "Here's what you need to eat as Chinese food."

Is Yum! Brands an isolated case? No. Talk to Volkswagon, P&G, Coca Cola. This is no longer an unreachable dream.

There are also miserable failures, Whirlpool, eBay, Yahoo, etc. China is THE most competitive market in the world, as the everyone comes here. However, it is also not difficult to succeed, because the large market also allows for niche opportunities. For strategists, there is no excuse for failure, as it is easy to find out what each of the failed companies has done wrong.

I will end this with a question to the economists. How does the $250M/year profit repatriation of Yum! Brands factor into the US-China trade balance? I believe Paul Krugman had the answer years ago.

Solomon Islands (ii)

As expected, Solomon Islands will be ahead of Vatican. Checkbook diplomacy is stupid. It is more stupid and risky to try to bribe the election of another country.
  • Opposition lawmakers on Wednesday chose former Prime Minister Manasseh Sogavare as their sole candidate for the prime minister's post, making him the likely front-runner.
    If elected, Sogavare said he would consider severing ties with Taiwan, saying it was time for the Solomons to join the majority of the world in giving diplomatic allegiance to Beijing.

  • Some inaccurate reports (in Taiwan and Australia, NZ) tried to confuse the matter, by accusing both PRC and ROC of bribing the MPs. This is ignorant. The accusation only directed at Taiwan. PRC had spent over 50 years creating a brand of non-interference. It would be utterly stupid for them to violate this principle. Checkbook diplomacy, yes. Bribing MP, no.

Expect domino effect in Taiwan's list of 25.

For more insights into Australia's and ROC's role in Solomon Islands tragedy, see China Matters. A must read. (hat tip ESWN)



Ohmae on Taiwan

Kenichi Ohmae, ex-McKinsey partner and business strategist, visited Taiwan recently. His view
  • Many political leaders in Taiwan, lack a world outlook. They should give up their idea of the rule of ideology and pay more attention to Taiwan's economic development...
  • Ohmae said he never believes China would attack Taiwan. "If it did," Ohmae was quoted as saying, "the Chinese economy would die, because its driving force and bursting power are dependent on the management of Taiwan businessmen (in China).
    "President Chen seems unaware of this relationship, and instead believes the Taiwan businessmen are helping the Chinese mainland.
    "As a consequence, he has adopted a policy of confrontation.
    "That is a passe idea."
The cost for a strait war is indeed too huge for the mainland, and for the CCP regime, as economy is where its "legitimacy" is based on. This is not only because of the retreat of "business management and technology" of Taiwan investment in the mainland. It is about the general political uncertainty for everybody who is doing business with mainland China today.

Too bad CSB refuses to see this simple truth. It is appalling how ideology can blind one's common sense.


What is wrong with travelogue journalist turned strategist - Thomas Barnett

Thomas Barnett tells us what is wrong with the travelogue journalist.

WSJ is a great paper. But there are often hidden needles in the haystack. Thomas Barnett picks out the needles for you.

Barnett has said it all. I would just briefly comment on Kaplan's cliche of "thinks and plans in terms of worst-case scenarios" (therefore, spend as much on weapon as possible).
  • Kaplan said "Donald Rumsfeld thought in terms of worst-case scenarios for the invasion of Iraq and got the best possible result; he thought in terms of best-case scenarios for the occupation and got the worst possible result" Well, all this shows is not Murphy's law. It looks to me more like a direct criticism of Rummy, that Rummy is always wrong. If kaplan is always with Rummy, that says enough about Kaplan's judgment as well.
  • Seriously, the fact that "Murphy's law is more observed" is simply the result that unexpected beings are more usually visible
  • The correct approach is not to "take the worse case" in every situation. You would exhaust your stamina and resources if you do this in every circumstance. The correct thing to do is to optimize, based on the probability.
  • To quote Kaplan, "The Pentagon does not have the luxury of" taking the worst case all the time. Use science, use your brain. Don't rely on leap of faith BS.
My sincere personal advice to US (because I am still an admirer or the spirits and ideals in US constitution, and I believe US people will choose the right thing, as they did in the two WWs), do not take the kickboxing strategy. You will lose. Because even if Kaplan is right, China is kickboxing only in East Asia. US has to kickbox also in Middle East, S America, Europe, Russia and Africa. US could then be dragged into exhaustion like the Soviet Empire. This is not good for the world. Focus on your competitive advantage, do not emulate others.

To read the related articles see a temporary cache here.


The secret of Korea's success, nuclear energy?

Of course, there are many secrets for Korea's economic miracle, a few where they did a lot better than Taiwan.

Lee Yuan-tseh, nobel prize winner, cannot compromise ideology and pseudoscience to what he knows, so he finally spoke out in favour of Nuclear Plant #4, albeit a few years late he was.

What are the issues about nuclear energy?
  • It is cleaner, emits less CO2 than fossil fuel
  • It can last millions of years for human being, fossil fuel last for a thousand at most, some said a couple hundred or less
  • It is safe, given proper management practice
  • We still have the opportunity to replace nuclear power with more natural energy sources such as solar, wind, tidal, vegetable oil, ethanol, etc. Though the only candidate that can generate enough energy to replace fossil fuel cleanly are probably solar, and nuclear fusion.
  • For more see here
What has Korea done that is different, see charts below.
Total Fuel Percentage by Nuclear Power

Percentage Electricity Generated by Nuclear Power

Now see where China is at the chart, think about the soaring demand and price recently. China should have built a lot more nuclear power plants in the 1980s and 1990s. I have no idea why such a crucial and strategic issue has been overlooked all these years. Someone need to be held responsible. Perhaps that person is Li Peng, who let his educational background (hydroelectric power) biased a more rational debate and decision making process.

Related: An excellent account of Chernobyl aftermath by Elena Filatova. Equipped with a Geiger counter, she travelled through the ghost towns near Chernobyl, in Ukraine and Bylorussia, giving you lessons on alpha, beta and gamma radiation. Meanwhile, tons of pitctures on the area today, and the 'frozen' pictures inside the Soviet era apartments of 1986. Some said it is an exxaggerated (or frauded) account, but the phtotos are still amazing and I found her narrative (whether she travelled there in tour group or motorbike does not really matter) credible.

Brother Hu are you also broke-sleeve ? (胡哥您也断袖乎)

Caption competition
  • I will begin: 胡哥您也断袖乎? Would you broke-sleeve Brother Hu? (Broke-sleeve - the equivalent of Brokeback in ancient China. The man's sleeve was under his sound asleep lover, not wanting to wake the lover up, the sleeve was cut.)
see also The 88s, Washington Post,

Yes, I reversed the time order of the 2 pictures for humorous effect.

It is hard not to see the Far Long Gong / Secret Service incidence as a conspiracy. It is, more suspicious than the Belgrade Embassy incidence. The best review is by China Matters.
  • "An analogous situation would have been if the Chinese government had granted a credential to Jose Padilla's mother as representative of “The Newspaper of Record for Increasingly Desperate and Infuriated Relatives of Detainees at Abu Ghraib and Guantanamo” and permitted her to participate in President Bush’s visit to Beijing last year.
  • The takeaway, intentional or inadvertent, is that the Bush administration simply doesn’t care enough, either about Hu Jintao’s face--or about relations with his regime--to take care to prevent such a humiliating incident."
China will remember this insult. But it will not act, yet. In fact, as a victim China has gained a lot of sympathy, lot more than what it lost in the humiliation. It should celebrate this as a great PR success, for its restraint, and the restraint of its reporters throughout the incidence.

We will see cooperation and business as usual, not a single word will be said. Until, one day, when the opportunity arises, Mr Bush, you may get your own embarassment. There is a problem for the Chinese, how can you beat this prank -- e.g., reveal US state secret?

(Update) Someone asked what would be the remedy from Bush. This is what I would do if I were Dubya
  • Publicly apologize
  • A public statement from the person in charge of Secret Services, in terms of procedure in place and what will be changed, about why there was no screening and why she was not taken care of within 30 seconds
  • Penalty on Epoch Times, no more press pass for any state function during the next 12 months (this does not really hurt this paper as all it does is copying and fabricating items, but it is still needed to encourage responsible media)
But I am no Dubya and I can bet that this will never happen.

Last but not least, back to business. Via ESWN and Billsdue, all insightful and informative



What has been hurting Taiwan's economy

According to data from this article (By Rong Futian), it is not investment in the mainland, it is investment in foreign (equity) markets
  • 知名政論家黃天麟認為,台灣企業投資大陸每年平均達180億美元(中國國家統計年鑑2004年台灣實際投資金額為31億美元,我國經濟部統計對大陸投資額2004年為69億美元,2005年為60億美元),造成台灣經濟失血,因此應該「積極管理」對中國投資行為才能提振台灣經濟。事實上,台灣失血非僅企業投資大陸一端,根據中央銀行統計,去年我國對外證券投資流出金額達358.07億美元,創下歷史新高。換言之,依據我國統計數據,我國資金投資國外證券為投資大陸的六倍,台灣失血的元兇不是大陸,而是自己。國內證券市場報酬不佳、國內外利差擴大,投資人移情別戀是國外證券投資額六倍於企業投資中國的原因。
  • A famous political commentator Huang tianlin believes, Taiwan's investment in China averaging $18bn/year (PRC Official Stats: $3.1BN, ROC Stats: $6.9bn for 2004, ROC stats $6bn for 2005), is the source of Taiwan's haemorrage, therefore it should be "Actively managed"
  • As a matter of fact, there is a much bigger end of such "haemorrage", according Central Bank stats, our investment in external equity markets totalled $35.807bn last year. i.e. according to our own firgure, such equity investment in markets (other than the mainland) is 6 times more than what we invest in the mainland. The culprit is not mainland China, it is ourselves. Return is unsatisfactory for our own stock market, is the main reason why we invest 6 times as much as money overseas than we invest in mainland China
My friend A, who is a senior investment banker based in HK, but spends 3-4 days per week in Taiwan, told me than it is more than that
  • In every single Asian market, the index has recovered the lost from the peak (i.e. pre-1997). Taiwan is the only exception. Taiwan's peak was close to 10,000. Today it is still under 7,000
  • Why? Taiwanese themselves do not want to invest in Taiwan companies. They are pessemistic of the economic policies
  • There are a lot of restrictions in Taiwan-based companies, such as (re-)investment in their profit centers in the mainland
  • Many are trying to relocate the assets to other markets (HK, Singapore, US), so that the money raised can be invested freely, with no government interferences. This could become a major business opportunity for investment bankers now. i.e. Hollowing out the Taiwan stock market



Light viewing: Trojan Panda?

This runs in parallel with CSB's Trojan Panda incidence.

In the video, the DPP goverment bayoneted the bags, probably hurting the poor pandas, but the real Trojan warriors were let go. Pause when the gate was openned and guess what is Trojan. Hint: what is Trojan is Trojan, what is not Trojan has never really been Trojan.


Lin Cho-shui: Beijing leads Taiwan towards mature party politics

Yes, that is a right. A single party monopoly which "exceled at ideology" is teaching a democracy that politics is more than ideology.

That is basically what the DPP pro-independence hardliner Lin Choshui said today in his Apple Daily Taiwan column.

Lin's observation
  • CCP has been giving out a lot fo goodies to Taiwan after the KMT visits, in fact numerous
  • But it had been very careful to make sure that these are directly at the "people of Taiwan", and tried to prevent KMT from making the impression that they are its monopoly. e.g. Fruit negotiation, CCP talk with non-KMT counterpart. Spring Festial direct traffic, CCP talks with MAC which is controlled by DPP government.
  • CCP's policy is very stable throughout, even when DPP's was like rollercoaster.
Now we see some subtle changes from Taiwan. Su Chenchang finally talked the Deng cat talk, "whatever is beneficial to Taiwan we will take it". So Lin was hopeful the the 2 major parties in Taiwan could begin working together sans ideology. I am not as optimistic, but I certainly wish Lin is right.

Picture: Lee Tenghui's calligraphy "Paternal Love"

See the whole essay below.

p.s. I think ESWN should just dump yahoo and find another host.



中國對台政策不只不因台灣政府1年來各式各樣,包括廢統的強烈反制行動,而採取諸如文攻武嚇的行動;相反的,綿密的對台務實的統戰禮物也從未中止,不久以前,林中斌教授統計這些禮物已有16項,如今在胡連會中又追加了10來項;中國對台的統戰既定的步調甚至也不因藍軍前往示好而刻意加碼,例如日前的連胡會,連帶去的台商排場可說盛況空前,給足中國面子,但中國雖給了15項好處,但台商最期盼的,雙方簽訂MOU(Memorandum of Understanding,備忘錄)以便台灣銀行業布局及三通兩樣,一樣都不肯確切答覆,並不在乎連戰面子掛不住。


The next to go for Taiwan's 25: Solomon Island?

Solomon Islands (an Archipelago east of PNG. Better known for Guadalcanal, if you remember the movie The Thin Red Line).

After the first democratic election since 1998, there were riots. The riots targeted the Chinatown retail businesses. Local Chinese represents 1% of the population, reportedly 80% of the local retail businesses(for this country retail probably is synonymous to secondary industries and void=tertiary industry), and is accused of offering bribes to change the mind of the MPs (together accused was the ROC government), who select the PM. Most of the the Chinese migrated from the Guangdong area, only about 10% or less are from Taiwan.

Solomon Islands is one of the 25 countries that still maintians diplomatic relationship with Taiwan (Republic of China). So that it raised much interests in Taiwan and concern about the Chinese population there. After all, those who emigrated from Taiwan still have some families and friends back home, and even those who are not might have married those who are, or have done business with Taiwanese merchants.

Lu Chinglong, the spokesperson from the ROC Foreign Ministry, while denying rumours that they are the black hand behind bribing the MPs, has this to say
  • "The shops that got burned, the so called Chinese operated shops, are opened by old migrants from mainland China. They are not from Taiwan 被燒毀的商店,所謂的華商商店,這些人是大陸去的老僑所開的,不是台灣去的."
Basically he was saying he couldn't care less about "those so-called Chinese".

Now Solomon Islands is on the process of becoming a democracy, albeit still an immature one or currupted one. The people, especially the rich people, will have strong influence on politics. Given this, I do not think these 5000 people would want the new government to maintain diplomatic relationship with Mr Lu. The local Chinese merchants now will make sure they bribe the new government to dump Taiwan before 2008.

P.S. CCP did a much better jobs in the past, since late 1980s, they have been taking care of people from Taiwan, HK and Macau in crisis in Iraq, Kuwait, Yugoslavia, etc. The bonus: they were great PR opportunities.


Hu's gift to Bush: Art of War

President Hu Jintao's newest gift to President George W Bush and other US official: copies of Art of War by Sun Zi.

Would you teach your enemy strategy? No. Hu must believe in non-zero sum game now. It is not difficult to get this at his position, but not as easy at Bush's. This is the best choice of gift by a Chinese leader. I am not your enemy. I want you to win. I am sure I would be benefited if you choose the best path for yourself and I am not intimidated if you get that right path.

Updated note:
1) there is a good reason why China would benefit from US finding the best path. China is far behind in development, hence much larger room to grow. If everybody focuses on one's own good, China has more to gain as well. This is why it is easier for Hu to see the sum is not zero, but more difficult for Bush, even though it should be quite obvious to both of them.
2) since the book is widely available in West Point and Border's Book Store, this is mainly symbolic, i.e. a statement made. (in more practical sense, a friendly reminder to Mr Bush)

I am not going to discuss in detail what Sun Zi would have approached Iraq (update: Useless Tree said pretty much what I could say), Afghanistan, 9-11 prevention, etc.

Send a few copies to Mr Chen Shui Bian as well.

And Mr Hu, please also read this yourself. I know you are busy, but please do not ask your secretary to do the work this time. You could do better as well.

Dalai wants the HK model (Updated: and he demonstrates his power)

HK Model Autonomy means you yields foreign policy and military but retain the rest. What has not been discussed is the analogy for "Basic Law", and how the local leader is selected.

Dalai realizes that time is not working to his favor and is ready to yield. IMO HK Model is only his asking price. He is ready to yield considerably more. Even though CCP has said it was willing to give more to Taiwan (i.e. Taiwan can keep its own armed force), it is unrealistic for China to grant Tibet the HK status, as the status quo is different.

Preserving "Tibetan culture, Tibetan environment, Tibetan spirituality" are all fine for CCP. In fact, in recent years there was almost total freedom in China. The fact the there are still kinks in Tibet is due to CCP's suspicion of Dalai himself (Dalai also mentioned suspicion in his interview). However, I do not think it is realistic for religious leader to participate in politics, not just in China, in the USA as well. So the most they can get is, still, a few seats in the election clan like HK has today.

Financially, China has paid and is paying a lot to keep Tibet afloat today. But with tourism and better technology to extract wealth from the plateau, though mainly the potential for tourism, it is unlikely that China will yield that today.

One last note, negotiation also means that the domain of Tibet equates that of the boundary of current Tibet Autonomous Region. A strong reason I found the rumous of 50 provinces (map), which upsets the delicate treatment of ethnic composition, laughable.

Here is Dalai's Time Magazine interview
  • China's President Hu Jintao is visiting the U.S. at the same time as you are, and you have urged your supporters here not to demonstrate against him. Why?

    Since we already have some official contact with the Chinese, we believe it is very important to create impressions that we are very sincere, we are fully committed.

    Two weeks ago, the Chinese government said it would allow you to visit your homeland, which you fled in 1959, if you abandoned your pursuit of independence for Tibet. But haven't you long said that you want autonomy, not independence, for Tibet?

    Oh yes. The world knows the Dalai Lama is not seeking independence. The world knows. Still the Chinese do not know. [Laughs]

    Do you have any heaviness of heart about giving up hope for Tibetan independence?

    No. It's not necessary. ......

    As far as the future is concerned, look at the European Union. In the past centuries, those nations talked most about their sovereignty. Now, today, the common interest is more important than each individual nation's sovereignty. Tibet is a landlocked country, a large area, small population, very, very backward. We Tibetans want modernization. Therefore, in order to develop Tibet materially as a modern nation, Tibet must remain within the People's Republic of China. Provided Chinese give us a full guarantee of preservation of Tibetan culture, Tibetan environment, Tibetan spirituality, then it is of mutual benefit. [Besides] foreign affairs [and] defense [are] all the things which Tibetans can manage by themselves. Tibetans should have the full autonomy.

(Update) Meanwhile, there is an urgent letter from Kashag, Dalai's official secretariat appealing to non-protest during the Hu visit in US
  • "If protests are held, this will give the impression that no Tibetan or Tibet Support Group is taking notice of and carrying out His Holiness the Dalai Lama’s instructions issued in the recent 10th March statement."
Dalai is showing to Hu that he can command all the Tibetan activists/separatists (I guess I can use this term now as Dalai clarified his objective) outside, or is taking a challenge from the negotiator. If this is the case, he is bold, brave and confident. This also explains the non-coincidental visit of Dalai himself, who follows Hu's footsteps to the hotspots. Being able to command the majority is something, being able to command every faction, at every instance is really something. He might have to do it a couple more times.

If the "challenge" theory ("Can you guarantee peace and no more trouble if we accept your terms?")is the case, we can hope for Dalai's visiting China within the next 1-2 years. Because only when you have something close to a draft agreement, would you answer to such a challenge. Similarly, for CCP, only when it is ready to yield a few key terms, will it offer a challenge as a pre-condition.

p.s. In September 2005, prior to the Katrina-cancelled vist, a similar urgent appeal has been issued, and explained the rationale (negotiation environment) in a little more details.

GVO has nicely linked to this. I guess the issue is better labelled as Tibet Autonomy or simply Tibet Issue/Problem now, given Dalai's Time interview. Otherwise, we are not helping His Holiness in the negotiation table.

Chen Shui Bian's Figaro interview

(I am sick at home so I am blogging uninteresting topics these days, sorry.)

Chen said in his interview with Le Figaro (Chinese synopsis, French original. I do not read French so I have to rely on the synopsis)

  • Unification can be included as one of the 'options' for Taiwan, with 5 pre-conditions
  • 1) CCP renounce one party dictatorship
  • 2) Implementation of 'true' democracy, freedom and human right systems
  • 3) Do not suppress Taiwan [in international scenes]
  • 4) Publicly renounce the use of force, remove the missiles
  • 5) Abolish Anti-secession Law
All fair points. At first I just wondered if I should have translated (5) as "cease to ...", just kidding.

The problem is. He is not asked how he or his party/supporters would/should vote. He is asked if it could be an option. He could not distinguish the difference between allowing the people an option vs what his people would vote. There may be a procedure of pre-consultation about the options, but the decision is not up to any one single person/party. This is 'democracy 101'.

To be honest, there will be a sizable number of voters who would still reject such option even if the 5 litmus tests are passed, mainly TSU hardliner and DPP fundamentalists. On the other hand, perhaps most of the centrist and even many pan-Blues would vote using these 5 tests or some variations of it. I do not see any problem with the tests and I think CCP should agree to the tests but delay the referendum for 50 years (because it cannot meet all of them today).

The problem is: CSB still did not get what MYJ got a few months ago. "Everything can be an option in the referendum, if there is one, but this is what I will vote or I will recommend my supporters to vote. If we lose, I will have to respect the result."

Reportedly CSB did a lot better than MYJ in Taiwan University Law School. Did Ma' one year in JFK School change him that much?

(Update) David pointed out that the Eastday translation is misleading. He provided a more faithful translation which showed that MYJ and CSB are saying the same thing about option. See comment below. I have to apologize to CSB, as the misguide logic (about option vs choice) is only a bad tactic used by his assistants.



Li Yi: Hu-Bush Meeting and Iran Crisis

Li Yi has made a very insightful obseravtion today. He first laid out the fact that there will be no breakthrough in trade, RMB or Taiwan. The rhetorics are for the respective domestic audience. Then he asked what achievemnet could they accomplish. It became interesting.

Historical event: 1969 (Source: Joseph Alsop)
  • China and USSR on the brink of war, border conflict in Zhenbao Island
  • China vowed it can sustained a nuclear war, even if that means loss of half its population, there would still be 300M left then
  • USSR planned a surgical operation on China's small nuclear power. But it tried to seek opinion from US (Sunbin: it was the beginning of Detente, and both realized the danger of nuke)
  • US expressed strong disagreement
  • Soviet Premier Kosygin subquently made a sudden visit to Beijing, taking a detour on his return trip from Hanoi, to meet Zhou Enlai -- it is quite obviously that Kosygin made the trip after the message from US
  • Soviet army on the border was withdrawn and Chinese were cooled. The Sino-Russian border became quiet afterward
  • Iran nuke crisis. The proud, fearless, nationalistic, and religious Iranians vowed to sacrifice their own lives
  • US considering a surgerical operation to Iran
  • Li noted an insignficant event: Chinese Assistant to Foreign Minister Cui Tiankai just came back from Tehran
  • Hu-Bush meeting in US
Li then proceed to say: Even though China today is no comparison to US in 1969, there is no other candidate as mediator. Will there be a senior level meeting between US and Iran soon? This will be called an achievement.

李 怡 專 欄 : 中 美 更 重 大 的 議 題

胡 錦 濤 主 席 今 天 訪 美 。 表 面 上 , 這 次 高 feng會 , 美 方 強 調 的 是 貿 易 不 平 衡 , 中 方 強 調 的 就 是 台 灣 問 題 。 但 這 兩 個 議 題 基 本 無 解 , 雙 方 其 實 都 是 說 給 自 己 國 內 聽 的 , 會 談 的 結 果 是 兩 件 事 都 維 持 現 狀 。
隱 藏 在 這 些 表 面 議 題 後 面 的 , 實 際 上 有 一 個 更 重 大 的 議 題 , 就 是 伊 朗 的 核 武 器 問 題 。
民 族 主 義 情 緒 ( 或 宗 教 情 緒 ) 高 漲 又 缺 乏 民 主 機 制 的 國 家 , 一 旦 擁 有 大 規 模 殺 傷 性 武 器 , 都 會 引 起 國 際 社 會 尤 其 是 文 明 、 理 性 國 家 的 高 度 警 惕 , 並 會 考 慮 把 這 個 國 際 毒 瘤 切 除 。
筆 者 想 起 三 十 多 年 前 的 一 件 往 事 , 這 件 事 與 中 美 關 係 有 關 , 值 得 在 中 美 高 feng會 舉 行 前 談 談 。
三 十 多 年 前 的 一 九 六 九 年 , 中 國 正 值 文 革 高 潮 , 中 美 雖 沒 有 建 交 , 但 中 蘇 交 惡 更 嚴 重 。 表 面 上 中 蘇 是 所 謂 意 識 形 態 分 歧 、 實 質 上 是 爭 當 共 產 陣 營 老 大 , 兩 國 遂 發 展 到 極 為 緊 張 以 至 兵 戎 相 見 的 階 段 。 這 一 年 三 月 , 中 蘇 發 生 了 東 北 邊 界 的 珍 寶 島 戰 爭 。 中 國 文 革 一 直 叫 嚷 zhe要 把 世 界 革 命 進 行 到 底 , 還 宣 稱 要 打 倒 美 帝 、 打 倒 蘇 修 , 打 倒 一 切 反 動 派 , 叫 嚷 中 國 不 怕 戰 爭 , 中 國 人 民 一 不 怕 苦 二 不 怕 死 , 打 核 戰 中 國 人 頂 多 死 掉 一 半 , 但 還 會 剩 下 三 億 。 蘇 聯 當 時 是 共 產 黨 專 政 的 國 家 , 但 比 較 理 性 與 成 熟 , 而 且 長 期 與 美 國 維 持 zhe核 恐 怖 平 衡 , 對 使 用 核 武 器 懂 得 自 制 。 面 對 中 國 這 種 叫 囂 , 加 上 珍 寶 島 的 戰 爭 , 於 是 蘇 聯 就 計 劃 對 中 國 進 行 一 次 「 外 科 手 術 」 式 的 突 襲 , 就 是 在 中 國 核 子 力 量 壯 大 之 前 把 中 國 的 核 裝 置 「 切 除 」 。

蘇 聯 在 一 些 外 交 活 動 中 悄 悄 地 但 明 白 地 徵 詢 美 國 的 意 見 , 看 美 國 是 否 支 持 蘇 聯 這 一 行 動 。 其 時 當 政 的 美 國 尼 克 遜 總 統 , 作 了 堅 決 的 但 憤 怒 的 反 對 。
一 九 六 九 年 九 月 中 旬 , 蘇 聯 總 理 柯 錫 金 訪 問 河 內 , 在 他 返 回 莫 斯 科 的 航 程 上 突 然 作 了 一 個 轉 向 , 他 一 直 去 到 伊 爾 庫 次 克 , 然 後 在 那 li 直 接 折 往 北 京 與 周 恩 來 會 晤 , 這 次 會 晤 後 , 中 蘇 邊 境 衝 突 緩 和 下 來 , 蘇 軍 也 後 撤 了 。 很 明 顯 , 柯 錫 金 的 轉 向 , 是 接 到 了 美 國 總 統 的 強 烈 反 應 的 訊 息 。 而 美 國 的 反 應 , 在 美 蘇 核 平 衡 中 佔 重 要 位 置 。 美 國 著 名 記 者 艾 爾 索 普 ( Joseph Alsop 1910-1989 ) 一 九 七 三 年 訪 問 中 國 後 , 在 《 紐 約 時 報 》 雜 誌 發 表 一 篇 長 文 , 詳 細 透 露 這 一 段 國 際 秘 辛 , 並 表 示 , 若 中 國 受 到 旨 在 摧 毀 其 核 武 的 突 襲 , 這 不 會 是 故 事 的 結 束 , 而 是 一 個 開 端 。
上 周 , 伊 朗 宣 稱 成 功 提 煉 低 濃 縮 鈾 , 令 核 危 機 升 級 。 伊 朗 的 民 族 主 義 以 及 總 統 艾 哈 邁 迪 內 賈 德 一 再 挑 撥 的 「 美 國 去 死 」 、 「 以 色 列 去 死 」 的 民 眾 情 緒 , 有 點 類 似 文 革 時 期 的 中 國 了 。 美 國 國 務 卿 賴 斯 宣 稱 會 考 慮 包 括 軍 事 行 動 的 方 案 。 美 國 對 伊 朗 進 行 「 外 科 手 術 」 式 的 核 切 除 , 如 箭 在 弦 上 。 這 時 候 , 一 段 不 大 為 人 注 意 的 消 息 , 報 道 中 國 外 交 部 長 助 理 崔 天 凱 抵 達 德 黑 蘭 進 行 外 交 斡 旋 , 接 zhe, 就 是 中 美 的 高 feng 會 。
中 國 的 實 力 , 當 然 不 能 與 冷 戰 時 代 的 美 國 相 比 , 但 中 國 和 伊 朗 的 關 係 , 及 在 美 國 與 伊 朗 之 間 斡 旋 的 能 力 , 恐 怕 現 時 還 未 有 其 他 國 家 可 替 代 。 若 中 國 能 發 揮 三 十 多 年 前 美 國 制 止 一 次 軍 事 行 動 的 影 響 力 , 那 麼 這 次 高 feng會 就 有 舉 世 注 目 的 成 果 了 。


Government officials are genius, especially the omnipotent Chinese

China Minsitry of Informational Industry (MII) said it will 'guide enterprises to develop $30 handphones and $100 computers'
  • 中國信息產業部有關負責人表示,將引導企業開發出三十美元的手機和一百美元的電腦。
I do not know how these genius' (is this the plural for genius? It is rare to see more than one genius' together) are going to "guide" through this. All I know is you can get these gadgets at lower prices on eBay or second hand markets in HK or many Chinese cities. Why not use the money to offer cheap repair and extended warranty services to qualified farmers instead? This would satisfy the order they received from above, to improve the situations for farmers.



Explain the world from a map

You can explain a lot of questions from looking at a map. You can also spot patterns and form hypothesis/theory with a map. Example by examining this physical geography map of Asia
  • Why S Korea is richer than N Korea from the beginning - more low-lying and flat land
  • Why Taiwan was colonized by the Chinese before the Japanese or the Ryukyu - Arable flat low land on the west coast (and population pressure in China of course, but there was also the neutralizing factor of dynasty discouragement)
  • Pattern: ancient civilizations all formed around the 33-37 parallel, Yellow River area, Mesopotamia, Persian Plateau, Indus River area and Greece. Theory/hypothesis: perhaps it is cold enough to have a winter so that people have nothing to do but think and innovate whiel it is not too cold that they cannot survive?
  • Corollary: Is Lee Kuan Yew correct on his praise for true invention of air-conditioner (I tend to make stupid mistakes in maths while at school in summer exams but did well in winters. I used to blame the higher brownian motion activities in summer for disrupting my neurons)?
  • See the area around Shanxi province in China (labeled Yellow Earth Plateau/Huangtu Gaoyuan), the desertification in China. This was the center of Chinese civilization from 500BC to fairly recently, then that of present Iraq (should yellower than as displayed in this map), Indus River Valley (Pakistan). Question: why these areas which nurtured early civilization are all desert today? Is Jared Diamond right on his Easter Island theory?
  • Hot and mountainous areas tend to nurture spicy cuisines (perhaps for better preserving food/killing germ or masking rotten smell?). e.g. Jiangxi, Hunan, Guizhou, SE Asia, India. What about the Sichuan Basin (just look for a 'basin' on the map, you won't miss)? Being surrounded and hence 'conquered' by mountain cuisine culture?
  • Match the map of arable land (low, flat, with water) with that of Han and ethnic minority population in China. Note the spots of Miao and Yao who shared the land with Han 3000 years ago. Corollary: why Han Chinese did not really colonize Xinjiang despite extensive control and migration during Han and Tang period even further west
You are welcome to add your insights.


CATO's Ted Carpenter on strait relationship

Ted Carpenter, the VP of Cato Institute, expressed his view on the strait relationship. He is largely right, except some minor points. e.g. CCP's objective today is not immediate re-unification. They know it is impossible. All they wanted is to avoid formal breaking off of the island.

I wish the leaders in Zhongnanhai would listen to this
  • Until now, Beijing has been able to delude itself that the "Taiwan problem" is all due to President Chen and the DPP. At some point, the Beijing regime will have to realize that its quarrel is really with the bulk of the Taiwanese people.



HK: Taxi discount party, and why I would vote for long hair

The free sheet in HK provides more than what I have expected. e.g. am730 has a pretty good column: Centralblogger. On Apr 10 a vivid case of Happy Discount Taxi Driver was discussed (cannot find the permalink, you have to search by title "快樂的八折的士司機" or date, or at am730 apr/11 pp13)

It dissects how the discount party works
  • A core group called "the centre" takes order (each driver will hand out phone numbers to passengers, to reach the centre), which comprises of about 10 people
  • The second line of the party pays about 30-90 per day to the centre, and the centre will direct order to these drivers. This fee is quite significant, considering the daily revenue of the driver is perhaps a couple thousands. It means the extra revenue the drivers collect must be sizable, if they are willing to give 20% discount and pay the 'centre fee' on top. (For taxi driver economics, where utilization is a key issue, see the Shanghai Case Study, which won the Simon Award)
  • A natural question for the centre is: what is the optimum number of 2nd line members. They need certain guaranteed volume to justify the fees (and incentives for these drivers to direct traffic to the call centre; willing to take call order once committed, and not setting up their own call centres). The 'centre' limited the party size to ensure volume and utilization.
  • After this is taken care of, a second question arised. How to make sure the passengers are happy? Here comes an ingenius solution. Recruit a peripheral 3rd line members, who do not have to pay for the referral. All they need to do is take the business and honor the commitment (to pick up passengers).
Chairman Mao said, "The eyes of the mass are clear as snow". In this case, business solution emerges from the "mass". Such innovations are more frequently found in a free economy (and that intense competition leads to ingeneous solutions), where everyone is empower to innovate. Unfortunately (and fortunately) it was Deng, not Mao, who got the essence of this line. The problems and complains in the local taxi industry originate from the greedy government policy, which tries to apply its de facto tax on real estate to the taxi licenses as well. IMO the problems are not too serious, as HK people still enjoy one of the most affordable taxi fleets in the world.

Digression: there are other ingeneous solution in mainland China.
  • "The Chinese Taxi Model: The innovation is to ask the passenger to switch to a car coming from the opposite direction around the mid-point of the path, so that both vehicles only have to drive half the distance and can return with full load of passenger as well. This way both vehicles can save fuel costs, time, depreciation and even toll by halving the mileage, and part of the savings given back to the passenger via a price discount"

How much is the minimum charge if you catch a taxi on Lantau Island? NT?

This is one of the questions (replicated on the same blog) from a quiz from HK Magazine . It conducted a quiz for a few Legco members on the Apr 7 issue. A Chinese summary can be found here.

Long Hair (Leung Kwok Hung) emerged as the champion, even though a few of the questions are expat-Bourgeois only (Frappaccino, Soho restaurant and Mr. Aaaah-Aaaww). Frankly, I know who Mr Aaahh-aaawww is but cannot make the connect with the way the question was asked. So Leung actually scored 7 out of a total of 9 "relevant" questions. A few of them are actually what has been debated in the Legco, I wonder where these big-shot have gone during the meetings.

Bottom scorers: Emily Lau(3), Cheung Yu Yan (3), Martin Lee (2).

This quiz does not mean much. But it shows how ideology has overshadowed common sense in HK politics as well. This is why I would vote for long hair.

The new paradigm on "special relationship"

Thomas Barnett's analogy of the 'special relationship' between US and UK in 20th century, which is based on ideology, then culture, and probably ethnic heritage as well. He suggests it is now time to use a new set of criteria to find such partner.

You may not agree, so read the comments under his post as well.



Taiwan and Korea: what has gone wrong with Taiwan?

The Legislative Yuan in Taiwan is notorious for meaningless word fight. Now KMT is accusing DPP government for the lackluster economic performance, citing Korea as its benchmark. DPP retorted that Taiwan is only behind by about $1000 per capita.

Here are the data for your reference and judgment.

GDP/capita (Korea)

  • * 2000: 10882
  • * 2001: 10178
  • * 2002: 11468
  • * 2003: 12689
  • * 2004(EIU): 14116
  • * 2005E(EIU): 16897
GDP/capita (Taiwan)
  • * 2000: 13852
  • * 2001: 12508
  • * 2002: 12539
  • * 2003: 12692
  • * 2004(EIU): 13548
  • * 2005E(EIU): 14857
There are some valid points given by the KMT clan this time, although there are many reasons behind the economic development of an area.
  1. Taiwan's GDP is behind Korea's by $2000 per capita in 2005 according to EIU; from $3000 ahead in 2000
  2. Growth between 2000 and 2005: Taiwan 1.4%; Korea 9.2%
  3. Note this comparison is in USD, so exchange rate may affect the results a lot. However, even if one look at the data at local currency, it is hard to say Taiwan has done well
The comparison between Taiwan and S Korea is often made. Because they are both Asian Dragons, of similar size, focus in technology related industries (hence affected by industrial cycles synchronously), both inherited the problem of the cold war (with a communist neighbor up north, though Taiwan fared better as mainland China's economy took off since the 1980s), etc. It is quite irresponsible to dismiss the miserable performance as "only $1000 behind" for these legislators, especially when the net difference is $5000/capita .

One can look at other indicators, such as stock market performance (which are denominated in local currencies) and reach similar conclusion:

Or, look at the GDP growth (Source: ADB forecast) for the rest of CSB's term.

To be fair, it is not just the DPP government that is guilty. KMT (under the Chiang's and Lee) did not leave their successor CSB a star government. But the newly elected democrats in S Korea has similar legacy and perhaps tougher problems to fix.

So what has gone wrong in Taiwan? Here is one of the main reasons: Korea does not hesitate to take the China opportunity and make every penny it could. Taiwanese government tries everything possible to do the opposite. See, for example


China wage rising

10 months ago I discussed about the apparently 'unlimited supply of cheap labor' in China, which is coming to an end. I saw this based on what I saw in inland cities a couple years ago, the country girls are no longer traveling to Guangdong or Yangtze Delta. There are sufficient job opportunities in cities close to home.

Recently Businessweek has an update. It discusses turnover rate and quotes a few observed cases. This shows that market force is at work. What needs to appreciate will appreciate (wages in this case). OTOH, some of the steam building on the pressure for RMB appreciation will be let off. It is time for exporters in China to re-negotiate the price. Wait, isn't it easier for the exporters if China simply allow the Yuan to appreciate more instead?

Update: Stephen Roach of Morgan Stanley said
  • China has come a long way in the 27 years since Deng Xiaoping launched the world’s most populous nation on a path of unprecedented reform. There have been doubters at virtually every point along the way. Yet time and again, China has stayed the course. The latest worry is that the land of surplus labor is rapidly running out of workers — leading to excessive wage inflation and a loss of competitiveness, with profound implications for China and the rest of the world. Such concerns, like those of the past, are vastly overblown, in my view.
  • Moreover, this upsurge of Chinese wage inflation appears to have been accompanied by exceptionally vigorous gains in worker productivity — suggesting that unit labor cost pressures remain under good control. That means China’s competitive advantage remains very much intact.
Jen is probably right that the concern is overblown. But the significance of such observation is that it is happening, as it should have long ago. The NYT (and BW) reports only showed labor shortage in the rich coastal areas, where there is a huge gap between migrant workers in factories and local labor (who works in offices, e.g.). There are still plenty of low paid jobs to be filled in less developed provinces. The implications
  1. The trend observed is for coastal China, which is only 1/4-1/3 of the total of China
  2. The overall wage rise will be a very slow process. What we see in NYT/BW is only one end of a long rope. It takes a lot of time when the whole rope moves. But at least the rope has finally started to move. (from 1984-2004 only part
  3. Coast provinces may have to shift upward in the value added
  4. Inland province will be the Guangdong/Zhejiang of 5-10years ago
  5. It is still too early to talk about Bangladesh/Vietnam. (though Vietnam has very similar labor force as Sichuan and Guangxi)
Related: Economist: RMB does not change US trade deficit

Businessweek MARCH 27, 2006


How Rising Wages Are Changing The Game In China
A labor shortage has pay soaring. That is sure to send ripples around the globe.
(archive here)

Labor Shortage in China May Lead to Trade Shift
Published: April 3, 2006

Archived here
"The people coming here are fewer and fewer," said a woman named Miss Li, who works at the Xingda Employment Agency. "All the labor agencies face the same problem. A lot of young people are now going to the Yangtze River area, where there are higher salaries."

In Guangdong Province late last year, the government said factories were short more than 500,000 workers; and in Fujian Province, there was a shortage of 300,000.

Even north of Shenzhen, Zhejiang Province, known for its brash entrepreneurs, is short about 200,000 to 300,000 workers this year, government officials say. The Wahaha Group, a Chinese beverage maker based in the city of Hangzhou, is one of the region's rising corporate stars. But one of the company's 500-worker factories is short by 50.


"Many companies are already moving to Wuhan, Chongqing and Hunan," Ms. Hong said, ticking off the names of inland Chinese cities. "But Vietnam and Bangladesh are also benefiting. We're bullish on Vietnam."


RMB and USD finally de-coupled

From regressional analysis, it has been shown that USD represents over 99% of the weight inside the 'basket', from July 2005 till March 2006.

However, such regressional analysis cannot be taken as conclusive. For example,
1) USD appreciated against many other currencies during this period;
2) The daily movement is restricted to 0.15%

The mayin group has established a system to monitor the correlation coefficients (i.e. the basket "weight"). In addition, they have tracked an indicator to see if there is structural change in the formula. They found that in the middle of March 2006 there is finally (statistically significant) change in the formula. i.e. it is likely that RMB and USD finally decoupled.
  • From 1 November 2005 onwards, the empirical fluctuation process (black line) was compared against its boundary for rejection of stability (the red line). While the process stayed below the boundary, we could not reject the null that the currency regime was unchanged compared to that prevailing in the history period. But now the process has crossed the boundary, so we know something has changed.

The 'fluctuation process' involves some complicated statistical theories. My understanding is that it means the old formula (with USD=99%+) no long holds. It is still too early to say if RMB has been decoupled from USD, but it would be a new formula, and in this formula USD does not represent 99%+ weight in the basket. It could be 80% or 98%. We need to wait for more data before we know what it is. Or, it will be changed by the time we figured it out. However, this does not neccessarily mean that RMB is "manipulated" arbitrarily, it could mean that there is an objective mechanism and built into which is something to ensure it will move by the time we gather enough data to plot out the weight composition. i.e. a 'moving target' for speculators.

Related: see Stephen Roach on the rate of crawl.


US job loss and RMB, let numbers speak

It is well known among sane minds that RMB appreciation does not help to stop US job loss. But here is some quantification via Asiapundit/HowardFrench/Financial Times
  • China manufacturing myths (Guy de Jonquières - The Financial Times)

    April 04, 2006

    Copyright The Financial Times

    Published: April 3 2006

    Amid all the squeals in Washington at the yawning US trade deficit with China, one strikes a specially resonant political chord: that unfair Chinese competition is annihilating US manufacturing industry and “stealing American jobs”. The assertion is so common it has assumed the status of fact. Yet it is almost entirely false.

    For a start, the bilateral imbalance may be overstated. After ironing out the wide discrepancies between both sides’ data, Oxford Economics, a consultancy, finds China’s share has hovered at about a fifth of the total US merchandise deficit since 1995. That suggests the former is as much a result as a cause of the latter’s growth. Heaping all the blame on China would be off the mark, even if US manufacturing were dying.

    But by most measures, it is in rude health. The US is still the top manufacturing nation, producing almost a quarter of global output, the same as in 1994, while Japan’s share has shrunk. Adjusted to reflect steady falls in the prices of manufactures relative to other goods and services, US output has doubled since 1985 and its share of gross domestic product has changed little in half a century.

    True, more output is from plants owned by non-US companies, some of which have displaced indigenous production. That may fuel popular perceptions of national decline, particularly because greenfield factories usually shun the old rust belt. But corporate nationality is irrelevant to overall economic welfare, except insofar as foreign-owned plants often out-perform locally owned ones.

    What of China as “job thief”? US manufacturing employment is in long-term decline, just as it is in other rich countries. But that is chiefly because of impressive productivity gains. Had none occurred since 1970, almost 40 per cent of all US jobs would – in theory – be in manufacturing, three times today’s level. But the comparison is meaningless because standing still would have consigned US manufacturers to competitive oblivion.

    Of course, Chinese competition has claimed some US manufacturing jobs. But Oxford Economics puts the losses from 2000 to 2010 as low as 500,000 – no more than the US labour force sheds each week. Their disappearance is also partly a statistical illusion. Many manufacturing jobs are actually in services, such as finance and marketing, which yield far higher returns. As companies have disaggregated or outsourced operations, official employment data have re-allocated swaths of workers to the services sector.

    If US manufacturing is stronger than many Americans believe, China poses a weaker challenge than is often supposed. Its output is still less than half that of the US – and many of its industries are suffering a severe profits squeeze. Indeed, to call China a manufacturing economy is something of a misnomer. In reality, it is the world’s biggest final assembly shop, with minimal local value-added.

    As a forthcoming report* by the Institute for International Economics and the Center for Strategic and International Studies points out, on average two-thirds of the value of Chinese products is imported – and much more in some industries. Furthermore, China’s much-ballyhooed “high-tech” exports are a quirk of customs classification: most are low-margin electronics products, such as DVD players. According to Jonathan Woetzel of McKinsey, the management consultancy, China still lags far behind the US in precision engineering industries.

    Many big-ticket Chinese exports are of things no longer made in the US or that have never been made there. A large renminbi revaluation would merely shift Chinese production to even lower-cost locations elsewhere. Increases in China’s still low productivity levels will have a similar effect as higher wages make low-skilled, labour-intensive output increasingly uncompetitive.

    At the same time, more sophisticated activities will spring up to replace it. That has already happened in steel, where China’s capacity has exploded in the past few years. It will soon be repeated in the car industry as investment pours into local production of the lower-cost components China needs to export vehicles profitably in volume.

    That is a prospect to strike fear into Detroit. But the main reason is not because Chinese car companies are likely to develop overnight into super-competitive Toyota clones. It is because decades of mismanagement and failure to produce what the market wants have pushed US carmakers to the edge of the abyss. It will not take much to tip them over.

    Moving steadily up-market is a natural, indeed inevitable, feature of economic development. The biggest worry for the US – and other rich nations – is not that China will follow the same path but that their own economies will stop doing so. There is no intrinsic reason why that should happen and few signs of it as yet. But if it does happen, they will have only themselves to blame.

    *China: The Balance Sheet www.iie.com

I will try to follow up with some quantitative analysis later if I can find the data. But here is what I plan to do
  • Given the estimated 500k job loss in 10 years, or 50k/year, compare this with the case "without China", and that "if RMB appreciates by 10-15%, or even 27.5%". (one can do this by comparing the job loss of a country with higher tariff to Chinese imports, or imports in general, but at a similar income level as US, e.g. Switzerland/Japan and see if the % job loss is less)
  • Compare the job creation meanwhile in US, and see if this is significantly larger that 50k. If it is, then it means a more effectively solution would be to increase the job creation a little. If it is not, then the protectionists may be right.
  • Compare the economic costs of 27.5% tariff to US as a whole. This would effectively shift some of the "made in China" products to elsewhere more expensive that Chinese product (and perhaps an extremely small percentage back into US). That means US will be paying x% more for what they buy in Wal-mart (by turning to alternative sources in Vietnam, Bangladesh). Typically this will also result in a decline in demand of y%. Net effect is US is paying more for less goods (1+x%)(1-y%)>1. This is because for a small change in price, volume usually does not drop as much. i.e. x>y. The difference (roughly $(x%-y%).240bn) will be the change in 'trade deficit', which I expect, will be much higher than how much it costs to feed 50k people (say, $30kx50k=$150m). If x-y>0.06%, then it is more economical to simply create 50k welfare jobs than raising the tariff, while improving quality of living by getting more goods for less price, while having these 50k people serving in, e.g. full service gas stations in NJ
  • We can also try to estimate the impact of x-y of an RMB appreciate and reach a similar conclusion
We already know the answer. But it would be interesting to prove it with numbers.