The US ex-undersecretary for international trade of its Commerce Department Aldonas said (what a long ex-title!), "China Needs to Free Capital to Cut Trade Friction".
He may be right, provided that to "cut trade friction" is China's top priority right now, over a healthy GDP growth and ensuring employment stability. But that is not the case.
I was aghast at Mahatir's imposing capital control in 1998. But that, together with "Battle of Stalingrad" in HK, were the turning points of the Asian financial crisis around 1997-1998. I am a firm believer in free market. However, I am also a pragmatist.
I am still not sure if HK did the right thing in the battle with speculator in 1998. Even 10's of billions of USD in spoil may not justify the referee's taking side in a soccer match (as the HK media put it). How do you host games in future? And you don't always win. To convince a pragmatist you need to demonstrate "repeatability".
On the other hand, Malaysia's lesson is what we should study and learn from. Until the Malaysian lesson is fully analyzed by academic and fully understood, do not listen to Mr. Aldonas, China. Stick to your proven strategy of gradualism.
Yes, floating RMB is the eventual objective. But there is no need to change your schedule or sequence of moves just because there is so called "trade friction". Listen to the academics who are neutral and those who put truth and their own credential above personal or national interests. Do not listen to politicians.
As for "trade friction", leave that to WTO which you have joined now.
2005-08-14
Hitchhikers of America - a business concept
A lot of resources are wasted everyday, especially on the American highways. The 6-lane highway is fully packed while the HOV (high-occupancy-vehicle) lane 2/3 empty -> SOV (single-occupancy-vehicle) represents 18/19 or 95% of the traffic volume on the road!
Ride-share or Carpool today is hard to use and requires tedious co-ordination and planning ahead. Total inflexibility. However, now we have the technology to solve the problem. We can take Ride-share to the mobile internet platform, use eBay like software to match riders and drivers, and GPS/mobile phone locational service plus google maps to identify locations. (Share-Ride-on-Mobile-Internet or Sromi - you can't slow me just because I hitchhike :) ) Use your mobile phone, send a request for driver or search for rider any time you are ready to go. When you find your counter-part, one button and you can talk and fix a place to meet.
p.s. Special thanks to Movie Guy for the inspiration and inventing the title.
Ride-share or Carpool today is hard to use and requires tedious co-ordination and planning ahead. Total inflexibility. However, now we have the technology to solve the problem. We can take Ride-share to the mobile internet platform, use eBay like software to match riders and drivers, and GPS/mobile phone locational service plus google maps to identify locations. (Share-Ride-on-Mobile-Internet or Sromi - you can't slow me just because I hitchhike :) ) Use your mobile phone, send a request for driver or search for rider any time you are ready to go. When you find your counter-part, one button and you can talk and fix a place to meet.
- eBay and Google Maps have made the technology totally feasible
- SMS and 3G brings the internet to our mobile phone
- => to implement the taxi-GPS pick up system is cheap and easy on our mobile phone, just a simple software is needed (locational service from mobile operation is a plus)
- with gas price approaching $3/gallon, more people are willing to take mobile-ride-share
- enables ad-hoc driver-hitchhiker match up in real time, saves time to wait
- and...meet new friends who share the same concern for environment :)
- eBay's has taught us a good lesson, use a peer-reviewed rating system
- If one can trust a money transaction, why not one with car license plate, mobile phone number (we can also ask this information to be verified) and peer rating?
- Furthermore, the passenger can choose the age/gender of the driver, so that no young girl will be driven by suspicious male, for example
How do we encourage drivers?
- we can establish a pricing standard, where the hitchhiker will pay the driver the price of gasoline equivalent. e.g., $1 for 0-10 mile, $2 for 10-20 miles, add 50% for each additional hitchhiker who share the same route
- credit/rating for those who drive more than hitchhike, so that one get points and prestige for taking hitchhikers, and will get high priority when they need a ride
- get home faster via the use of HOV (carpool) lanes
- Can charge $0.50 for each match-making
- Market sizing and revenue: easy, a fraction of the MTA revenue + a fraction of the number of commuter drivers. Los Angeles MTA has 330M boarding/year for buses and another 64M in rail, 1% of that gives you 3.9M/yr, 5% is 19.5M. Add Atlanta, Houston, you can easily double, 5x or 10x that if you expend across the US. Good enough to support a fixed cost e-commerce business (see next bullet)
- Costs: mostly fixed costs, maybe partner with eBayand wireless operators via revenue sharing in exchange for the technology support. marketing cost will be low as hype and buzz would be generated through word-of-mouth and environmentalists
- Can also apply to government subsidies for contribution to energy-saving, we should be entitled to whatever subsidy they gave to MTA. Note LA MTA obtained (2006 Budget) $(547+472)M in federal and state grants and $(575+703)M from auto and gas sales tax, their annual revenue of $264M is less than 10% of their annual cost 2.863BN!
- Greener planet, less smog, delay global warming. To quantify this, the amount of the gas saved is at least equal to the revenue of this match-making business.
- Higher productivity due to time saved (less traffic congestion) - we can roughly quantify that as well
Updates (Aug 27)
- See Tim Worstall on the coupon ideas (which can also be applied on the 3G/GPS platform here), and some more discussions on the benefits to our earth, also on sustainablog
- Continued discussion: part II in the series.
p.s. Special thanks to Movie Guy for the inspiration and inventing the title.
Labels:
business
2005-08-13
Lee Kuan Yew's wisdom
I have promised to stick to economic related issues. But I just can't resist telling everyone Lee Kuan Yew has said something.
No comment needed. Lee Kuan Yew is better than Sun Bin. He is Sun Zi. There has nothing Lee Kuan Yew said in the past that I could find fault in. I need to wait for him to get a lot older, maybe he could make a careless mistake and I can find something to say....but I am happy we have such bright mind in our species. With him here we are not afraid of competing with the aliens, or E.T. :))
Original link in Der Spiegel, excerpt below.
------
August 8, 2005
SPIEGEL INTERVIEW WITH SINGAPORE'S LEE KUAN YEW
"It's Stupid to be Afraid"
Singapore's first-ever prime minister, long-time government head and current political mentor Lee Kuan Yew talks about Asia's rise to economic power, China's ambitions and the West's chances of staying competitive.
The elder statesman Lee: "We run a meritocracy."
SPIEGEL: The political and economic center of gravity is moving from the West towards the East. Is Asia becoming the dominant political and economic force in this century?
Mr. Lee: I wouldn't say it's the dominant force. What is gradually happening is the restoration of the world balance to what it was in the early 19th century or late 18th century when China and India together were responsible for more than 40 percent of world GDP. With those two countries becoming part of the globalized trading world, they are going to go back to approximately the level of world GDP that they previously occupied. But that doesn't make them the superpowers of the world.
SPIEGEL: Their leading politicians have publicly discussed the so-called "Asian Century".
Mr. Lee: Yes, economically, there will be a shift to the Pacific from the Atlantic Ocean and you can already see that in the shipping volumes of Chinese ports. Every shipping line is trying to get into association with a Chinese container port. India is slower because their infrastructure is still to be completed. But I think they will join in the race, build roads, bridges, airports, container ports and they'll become a manufacturing hub. Raw materials go in, finished goods go out.
SPIEGEL: You've been the leader of a very successful state for a long time. Returning from your time in China, are you afraid for Singapore's future?
Mr. Lee: I saw it coming from the late 1980s. Deng Xiaoping started this in 1978. He visited Bangkok, Kuala Lumpur and Singapore in November 1978. I think that visit shocked him because he expected three backward cities. Instead he saw three modern cities and he knew that communism -- the politics of the iron rice bowl -- did not work. So, at the end of December, he announced his open door policy. He started free trade zones and from there, they extended it and extended it. Now they have joined the WTO and the whole country is a free trade zone.
SPIEGEL: But has China's success not become dangerous for Singapore?
Mr. Lee: We have watched this transformation and the speed at which it is happening. As many of my people tell me, it's scary. They learn so fast. Our people set up businesses in Shanghai or Suzhou and they employ Chinese at lower wages than Singapore Chinese. After three years, they say: "Look, I can do that work, I want the same pay." So it is a very serious challenge for us to move aside and not collide with them. We have to move to areas where they cannot move.
SPIEGEL: Such as?
Mr. Lee: Such as where the rule of law, intellectual property and security of production systems are required, because for them to establish that, it will take 20 to 30 years. We are concentrating on bio medicine, pharmaceuticals and all products requiring protection of intellectual property rights. No pharmaceutical company is going to go have its precious patents disclosed. So that is why they are here in Singapore and not in China.
SPIEGEL: But the Chinese are moving too. They bought parts of IBM and are trying to take over the American oil company Unocal.
Mr. Lee: They are learning. They have learnt takeovers and mergers from the Americans. They know that if they try to sell their computers with a Chinese brand it will take them decades in America, but if they buy IBM, they can inject their technology and low cost into IBM's brand name, and they will gain access to the market much faster.
SPIEGEL: But how afraid should the West be?
Mr. Lee: It's stupid to be afraid. It's going to happen. I console myself this way. Suppose, China had never gone communist in 1949, suppose the Nationalist government had worked with the Americans -- China would be the great power in Asia -- not Japan, not Korea, not Hong Kong, not Singapore. Because China isolated itself, development took place on the periphery of Asia first.
SPIEGEL: Such a consolation won't be enough for the future.
Mr. Lee: Right. In 50 years I see China, Korea and Japan at the high-tech end of the value chain. Look at the numbers and quality of the engineers and scientists they produce and you know that this is where the R&D will be done. The Chinese have a space programme, they're going to put a man on the Moon and nobody sold them that technology. We have to face that. But you should not be afraid of that. You are leading in many fields which they cannot catch up with for many years, many decades. In pharmaceuticals, I don't see them catching up with the Germans for a long time.
SPIEGEL: That wouldn't feed anybody who works for Opel, would it?
Mr. Lee: A motor car is a commodity -- four wheels, a chassis, a motor. You can have modifications up and down, but it remains a commodity, and the Chinese can do commodities.
SPIEGEL: When you look to Western Europe, do you see a possible collapse of the society because of the overwhelming forces of globalization?
Mr. Lee: No. I see ten bitter years. In the end, the workers, whether they like it or not, will realize, that the cosy European world which they created after the war has come to an end.
SPIEGEL: How so?
Mr. Lee: The social contract that led to workers sitting on the boards of companies and everybody being happy rested on this condition: I work hard, I restore Germany's prosperity, and you, the state, you have to look after me. I'm entitled to go to Baden Baden for spa recuperation one month every year. This old system was gone in the blink of an eye when two to three billion people joined the race -- one billion in China, one billion in India and over half-a-billion in Eastern Europe and the former Soviet Union.
SPIEGEL: The question is: How do you answer that challenge?
Mr. Lee: Chancellor Kohl tried to do it. He did it halfway then he had to pause. Schroeder tried to do it, now he's in a jam and has called an election. Merkel will go in and push, then she will get hammered before she can finish the job, but each time, they will push the restructuring a bit forward.
SPIEGEL: You think it's too slow?
Mr. Lee: It is painful because it is so slow. If your workers were rational they would say, yes, this is going to happen anyway, let's do the necessary things in one go. Instead of one month at the spa, take one week at the spa, work harder and longer for the same pay, compete with the East Europeans, invent in new technology, put more money into your R&D, keep ahead of the Chinese and the Indians.
SPIEGEL: You have seen yourself how hard it is to implement such strategies.
Mr. Lee: I faced this problem myself. Every year, our unions and the Labour Department subsidize trips to China and India. We tell the participants: Don't just look at the Great Wall but go to the factories and ask, "What are you paid?" What hours do you work?" And they come back shell-shocked. The Chinese had perestroika first, then glasnost. That's where the Russians made their mistake.
SPIEGEL: The Chinese Government is promoting the peaceful rise of China. Do you believe them?
Mr. Lee: Yes, I do, with one reservation. I think they have calculated that they need 30 to 40 -- maybe 50 years of peace and quiet to catch up, to build up their system, change it from the communist system to the market system. They must avoid the mistakes made by Germany and Japan. Their competition for power, influence and resources led in the last century to two terrible wars.
SPIEGEL: What should the Chinese do differently?
Mr. Lee: They will trade, they will not demand, "This is my sphere of influence, you keep out". America goes to South America and they also go to South America. Brazil has now put aside an area as big as the state of Massachusetts to grow soya beans for China. They are going to Sudan and Venezuela for oil because the Venezuelan President doesn't like America. They are going to Iran for oil and gas. So, they are not asking for a military contest for power, but for an economic competition.
SPIEGEL: But would anybody take them really seriously without military power?
Mr. Lee: About eight years ago, I met Liu Huaqing, the man who built the Chinese Navy. Mao personally sent him to Leningrad to learn to build ships. I said to him, "The Russians made very rough, crude weapons". He replied, "You are wrong. They made first-class weapons, equal to the Americans." The Russian mistake was that they put so much into military expenditure and so little into civilian technology. So their economy collapsed. I believe the Chinese leadership have learnt: If you compete with America in armaments, you will lose. You will bankrupt yourself. So, avoid it, keep your head down, and smile, for 40 or 50 years.
SPIEGEL: What are your reservations?
Mr. Lee: I don't know whether the next generation will stay on this course. After 15 or 20 years they may feel their muscles are very powerful. We know the mind of the leaders but the mood of the people on the ground is another matter. Because there's no more communist ideology to hold the people together, the ground is now galvanised by Chinese patriotism and nationalism. Look at the anti-Japanese demonstrations.
SPIEGEL: How do you explain that China is spending billions on military modernisation right now?
Mr. Lee: Their modernisation is just a drop in the ocean. Their objective is to raise the level of damage they can deliver to the Americans if they intervene in Taiwan. Their objective is not to defeat the Americans, which they cannot do. They know they will be defeated. They want to weaken the American resolve to intervene. That is their objective, but they do not want to attack Taiwan.
SPIEGEL: Really? They have just passed the aggressive anti-secession law and a general has threatened to use the nuclear bomb.
Mr. Lee: I think they have put themselves into a position internationally that if Taiwan declares independence, they must react and if Beijing's leadership doesn't, they would be finished, they would be a paper tiger and they know that. So, they passed the anti-secession law to tell the Taiwanese and the Americans and the Japanese, "I do not want to fight, but if you allow Taiwan to go for independence, I will have to fight." I think the anti-secession law is a law to preserve the status quo.
SPIEGEL: Another critical point in Asia is the growing rivalry between China and Japan.
Mr. Lee: It's been dormant all this while, right? But I think several things happened that upped the ante. They possibly coincide with the policy of Japanese Prime Minister Junichiro Koizumi. There is this return to "we want to be a normal country." They are sending ships to Afghanistan to support the Americans, they sent a battalion to Iraq, they reclaimed the Senkaku islands, and most recently, they joined the Americans in declaring that Taiwan is a strategic interest of Japan and America. That raises all the historical memories of the Japanese taking away Taiwan in 1895. Then they're applying to be a permanent member of the Security Council. So, I think the Chinese decided that this is too much. So, they have openly said they will object to Japan becoming a member of the Security Council.
SPIEGEL: Well, the United States said the same to Germany.
Mr. Lee: Exactly. So, the whole process is trying to define the position for the next round, maybe in 10 to 15 years, by which time the world will be a different place.SPIEGEL: Can the Chinese convince their North Korean ally Kim Jong-Il to get rid of his nuclear program?Mr. Lee: North Korea is a riddle wrapped up in an enigma. The leaders in North Korea believe that their survival depends upon having a bomb -- at least one nuclear bomb. Otherwise, sooner or later, they will collapse and the leaders will be put on trial like Milosevic for all the crimes that they have committed. And they have no intention of letting that happen.
SPIEGEL: Who can stop them? The Americans?
Mr. Lee: Yes, but at a price, a heavy price.
SPIEGEL: Could the Chinese do it?
Mr. Lee: Possibly. By denying food, denying fuel, so they would implode. But will the Chinese benefit from an imploded North Korea? That brings the South into the North. That brings the Americans to the Yalu River. So, the North Koreans have also done their calculations and know that there are limits.S
PIEGEL: So Kim is in a strong position?
Mr. Lee: If I were Kim I would freeze the programme, tell the Americans you can inspect, but if you attack me, I will use it. That leaves the Americans with the problem of checking and verifying and intercepting ships, aircraft, endless problems.
SPIEGEL: Would that save Kim's regime?
Mr. Lee: In the long run I think they will implode sooner or later because their system cannot survive. They can see China, they can see Russia and Vietnam, all opening up. If they open up, their system of control of the people will break down. So they must go.S
PIEGEL: If the six party talks fail, do you foresee an arms race in Eastern Asia?
Mr. Lee: If the nuclear program is frozen, there won't be an arms race. Eventually, it is not in China's interests to have an erratic Korea nuclear-armed and a Japan nuclear-armed. That reduces China's position.
SPIEGEL: Many Americans fear that China and the US are bound to become strategic rivals. Will this become the great rivalry of the 21st century?
Mr. Lee: Rivals, yes, but not necessarily enemies. The Chinese have spent a lot of energy and time to make sure that their periphery is friendly to them. So, they settled with Russia, they have settled with India. They're going to have a free trade agreement with India -- they're learning from each other. Instead of quarrelling with the Philippines and the Vietnamese over oil in the South China Sea, they have agreed on joint exploration and sharing. They've agreed on a strategic agreement with Indonesia for bilateral trade and technology.
SPIEGEL: But the Americans are trying to encircle China. They have won new bases in Central Asia.
Mr. Lee: The Chinese are very conscious of being encircled by allies of America. But they are very good in countering those moves. South Korea today has the largest number of foreign students in China. They see their future in China. So, the only country that's openly on America's side is Japan. All the others are either neutral or friendly to China.
SPIEGEL: During your career, you have kept your distance from Western style democracy. Are you still convinced that an authoritarian system is the future for Asia?
Mr. Lee: Why should I be against democracy? The British came here, never gave me democracy, except when they were about to leave. But I cannot run my system based on their rules. I have to amend it to fit my people's position. In multiracial societies, you don't vote in accordance with your economic interests and social interests, you vote in accordance with race and religion. Supposing I'd run their system here, Malays would vote for Muslims, Indians would vote for Indians, Chinese would vote for Chinese. I would have a constant clash in my Parliament which cannot be resolved because the Chinese majority would always overrule them. So I found a formula that changes that...
SPIEGEL: ... and that turned Singapore de facto into a one party state. Critics say that Singapore resembles a Lee Family Enterprise. Your son is the Prime Minister, your daughter-in-law heads the powerful Development Agency...
Mr. Lee: ... and my other son is CEO of Singapore Telecoms, my daughter is head of the National Institute for Neurology. This is a very small community of 4 million people. We run a meritocracy. If the Lee Family set an example of nepotism, that system would collapse. If I were not the prime minister, my son could have become Prime Minister several years earlier. It is against my interest to allow any family member who's incompetent to hold an important job because that would be a disaster for Singapore and my legacy. That cannot be allowed.
The interview was conducted by editors Hans Hoyng and Andreas Lorenz.
Translated from the German by Christoper Sultan
No comment needed. Lee Kuan Yew is better than Sun Bin. He is Sun Zi. There has nothing Lee Kuan Yew said in the past that I could find fault in. I need to wait for him to get a lot older, maybe he could make a careless mistake and I can find something to say....but I am happy we have such bright mind in our species. With him here we are not afraid of competing with the aliens, or E.T. :))
Original link in Der Spiegel, excerpt below.
------
August 8, 2005
SPIEGEL INTERVIEW WITH SINGAPORE'S LEE KUAN YEW
"It's Stupid to be Afraid"
Singapore's first-ever prime minister, long-time government head and current political mentor Lee Kuan Yew talks about Asia's rise to economic power, China's ambitions and the West's chances of staying competitive.
The elder statesman Lee: "We run a meritocracy."
SPIEGEL: The political and economic center of gravity is moving from the West towards the East. Is Asia becoming the dominant political and economic force in this century?
Mr. Lee: I wouldn't say it's the dominant force. What is gradually happening is the restoration of the world balance to what it was in the early 19th century or late 18th century when China and India together were responsible for more than 40 percent of world GDP. With those two countries becoming part of the globalized trading world, they are going to go back to approximately the level of world GDP that they previously occupied. But that doesn't make them the superpowers of the world.
SPIEGEL: Their leading politicians have publicly discussed the so-called "Asian Century".
Mr. Lee: Yes, economically, there will be a shift to the Pacific from the Atlantic Ocean and you can already see that in the shipping volumes of Chinese ports. Every shipping line is trying to get into association with a Chinese container port. India is slower because their infrastructure is still to be completed. But I think they will join in the race, build roads, bridges, airports, container ports and they'll become a manufacturing hub. Raw materials go in, finished goods go out.
SPIEGEL: You've been the leader of a very successful state for a long time. Returning from your time in China, are you afraid for Singapore's future?
Mr. Lee: I saw it coming from the late 1980s. Deng Xiaoping started this in 1978. He visited Bangkok, Kuala Lumpur and Singapore in November 1978. I think that visit shocked him because he expected three backward cities. Instead he saw three modern cities and he knew that communism -- the politics of the iron rice bowl -- did not work. So, at the end of December, he announced his open door policy. He started free trade zones and from there, they extended it and extended it. Now they have joined the WTO and the whole country is a free trade zone.
SPIEGEL: But has China's success not become dangerous for Singapore?
Mr. Lee: We have watched this transformation and the speed at which it is happening. As many of my people tell me, it's scary. They learn so fast. Our people set up businesses in Shanghai or Suzhou and they employ Chinese at lower wages than Singapore Chinese. After three years, they say: "Look, I can do that work, I want the same pay." So it is a very serious challenge for us to move aside and not collide with them. We have to move to areas where they cannot move.
SPIEGEL: Such as?
Mr. Lee: Such as where the rule of law, intellectual property and security of production systems are required, because for them to establish that, it will take 20 to 30 years. We are concentrating on bio medicine, pharmaceuticals and all products requiring protection of intellectual property rights. No pharmaceutical company is going to go have its precious patents disclosed. So that is why they are here in Singapore and not in China.
SPIEGEL: But the Chinese are moving too. They bought parts of IBM and are trying to take over the American oil company Unocal.
Mr. Lee: They are learning. They have learnt takeovers and mergers from the Americans. They know that if they try to sell their computers with a Chinese brand it will take them decades in America, but if they buy IBM, they can inject their technology and low cost into IBM's brand name, and they will gain access to the market much faster.
SPIEGEL: But how afraid should the West be?
Mr. Lee: It's stupid to be afraid. It's going to happen. I console myself this way. Suppose, China had never gone communist in 1949, suppose the Nationalist government had worked with the Americans -- China would be the great power in Asia -- not Japan, not Korea, not Hong Kong, not Singapore. Because China isolated itself, development took place on the periphery of Asia first.
SPIEGEL: Such a consolation won't be enough for the future.
Mr. Lee: Right. In 50 years I see China, Korea and Japan at the high-tech end of the value chain. Look at the numbers and quality of the engineers and scientists they produce and you know that this is where the R&D will be done. The Chinese have a space programme, they're going to put a man on the Moon and nobody sold them that technology. We have to face that. But you should not be afraid of that. You are leading in many fields which they cannot catch up with for many years, many decades. In pharmaceuticals, I don't see them catching up with the Germans for a long time.
SPIEGEL: That wouldn't feed anybody who works for Opel, would it?
Mr. Lee: A motor car is a commodity -- four wheels, a chassis, a motor. You can have modifications up and down, but it remains a commodity, and the Chinese can do commodities.
SPIEGEL: When you look to Western Europe, do you see a possible collapse of the society because of the overwhelming forces of globalization?
Mr. Lee: No. I see ten bitter years. In the end, the workers, whether they like it or not, will realize, that the cosy European world which they created after the war has come to an end.
SPIEGEL: How so?
Mr. Lee: The social contract that led to workers sitting on the boards of companies and everybody being happy rested on this condition: I work hard, I restore Germany's prosperity, and you, the state, you have to look after me. I'm entitled to go to Baden Baden for spa recuperation one month every year. This old system was gone in the blink of an eye when two to three billion people joined the race -- one billion in China, one billion in India and over half-a-billion in Eastern Europe and the former Soviet Union.
SPIEGEL: The question is: How do you answer that challenge?
Mr. Lee: Chancellor Kohl tried to do it. He did it halfway then he had to pause. Schroeder tried to do it, now he's in a jam and has called an election. Merkel will go in and push, then she will get hammered before she can finish the job, but each time, they will push the restructuring a bit forward.
SPIEGEL: You think it's too slow?
Mr. Lee: It is painful because it is so slow. If your workers were rational they would say, yes, this is going to happen anyway, let's do the necessary things in one go. Instead of one month at the spa, take one week at the spa, work harder and longer for the same pay, compete with the East Europeans, invent in new technology, put more money into your R&D, keep ahead of the Chinese and the Indians.
SPIEGEL: You have seen yourself how hard it is to implement such strategies.
Mr. Lee: I faced this problem myself. Every year, our unions and the Labour Department subsidize trips to China and India. We tell the participants: Don't just look at the Great Wall but go to the factories and ask, "What are you paid?" What hours do you work?" And they come back shell-shocked. The Chinese had perestroika first, then glasnost. That's where the Russians made their mistake.
SPIEGEL: The Chinese Government is promoting the peaceful rise of China. Do you believe them?
Mr. Lee: Yes, I do, with one reservation. I think they have calculated that they need 30 to 40 -- maybe 50 years of peace and quiet to catch up, to build up their system, change it from the communist system to the market system. They must avoid the mistakes made by Germany and Japan. Their competition for power, influence and resources led in the last century to two terrible wars.
SPIEGEL: What should the Chinese do differently?
Mr. Lee: They will trade, they will not demand, "This is my sphere of influence, you keep out". America goes to South America and they also go to South America. Brazil has now put aside an area as big as the state of Massachusetts to grow soya beans for China. They are going to Sudan and Venezuela for oil because the Venezuelan President doesn't like America. They are going to Iran for oil and gas. So, they are not asking for a military contest for power, but for an economic competition.
SPIEGEL: But would anybody take them really seriously without military power?
Mr. Lee: About eight years ago, I met Liu Huaqing, the man who built the Chinese Navy. Mao personally sent him to Leningrad to learn to build ships. I said to him, "The Russians made very rough, crude weapons". He replied, "You are wrong. They made first-class weapons, equal to the Americans." The Russian mistake was that they put so much into military expenditure and so little into civilian technology. So their economy collapsed. I believe the Chinese leadership have learnt: If you compete with America in armaments, you will lose. You will bankrupt yourself. So, avoid it, keep your head down, and smile, for 40 or 50 years.
SPIEGEL: What are your reservations?
Mr. Lee: I don't know whether the next generation will stay on this course. After 15 or 20 years they may feel their muscles are very powerful. We know the mind of the leaders but the mood of the people on the ground is another matter. Because there's no more communist ideology to hold the people together, the ground is now galvanised by Chinese patriotism and nationalism. Look at the anti-Japanese demonstrations.
SPIEGEL: How do you explain that China is spending billions on military modernisation right now?
Mr. Lee: Their modernisation is just a drop in the ocean. Their objective is to raise the level of damage they can deliver to the Americans if they intervene in Taiwan. Their objective is not to defeat the Americans, which they cannot do. They know they will be defeated. They want to weaken the American resolve to intervene. That is their objective, but they do not want to attack Taiwan.
SPIEGEL: Really? They have just passed the aggressive anti-secession law and a general has threatened to use the nuclear bomb.
Mr. Lee: I think they have put themselves into a position internationally that if Taiwan declares independence, they must react and if Beijing's leadership doesn't, they would be finished, they would be a paper tiger and they know that. So, they passed the anti-secession law to tell the Taiwanese and the Americans and the Japanese, "I do not want to fight, but if you allow Taiwan to go for independence, I will have to fight." I think the anti-secession law is a law to preserve the status quo.
SPIEGEL: Another critical point in Asia is the growing rivalry between China and Japan.
Mr. Lee: It's been dormant all this while, right? But I think several things happened that upped the ante. They possibly coincide with the policy of Japanese Prime Minister Junichiro Koizumi. There is this return to "we want to be a normal country." They are sending ships to Afghanistan to support the Americans, they sent a battalion to Iraq, they reclaimed the Senkaku islands, and most recently, they joined the Americans in declaring that Taiwan is a strategic interest of Japan and America. That raises all the historical memories of the Japanese taking away Taiwan in 1895. Then they're applying to be a permanent member of the Security Council. So, I think the Chinese decided that this is too much. So, they have openly said they will object to Japan becoming a member of the Security Council.
SPIEGEL: Well, the United States said the same to Germany.
Mr. Lee: Exactly. So, the whole process is trying to define the position for the next round, maybe in 10 to 15 years, by which time the world will be a different place.SPIEGEL: Can the Chinese convince their North Korean ally Kim Jong-Il to get rid of his nuclear program?Mr. Lee: North Korea is a riddle wrapped up in an enigma. The leaders in North Korea believe that their survival depends upon having a bomb -- at least one nuclear bomb. Otherwise, sooner or later, they will collapse and the leaders will be put on trial like Milosevic for all the crimes that they have committed. And they have no intention of letting that happen.
SPIEGEL: Who can stop them? The Americans?
Mr. Lee: Yes, but at a price, a heavy price.
SPIEGEL: Could the Chinese do it?
Mr. Lee: Possibly. By denying food, denying fuel, so they would implode. But will the Chinese benefit from an imploded North Korea? That brings the South into the North. That brings the Americans to the Yalu River. So, the North Koreans have also done their calculations and know that there are limits.S
PIEGEL: So Kim is in a strong position?
Mr. Lee: If I were Kim I would freeze the programme, tell the Americans you can inspect, but if you attack me, I will use it. That leaves the Americans with the problem of checking and verifying and intercepting ships, aircraft, endless problems.
SPIEGEL: Would that save Kim's regime?
Mr. Lee: In the long run I think they will implode sooner or later because their system cannot survive. They can see China, they can see Russia and Vietnam, all opening up. If they open up, their system of control of the people will break down. So they must go.S
PIEGEL: If the six party talks fail, do you foresee an arms race in Eastern Asia?
Mr. Lee: If the nuclear program is frozen, there won't be an arms race. Eventually, it is not in China's interests to have an erratic Korea nuclear-armed and a Japan nuclear-armed. That reduces China's position.
SPIEGEL: Many Americans fear that China and the US are bound to become strategic rivals. Will this become the great rivalry of the 21st century?
Mr. Lee: Rivals, yes, but not necessarily enemies. The Chinese have spent a lot of energy and time to make sure that their periphery is friendly to them. So, they settled with Russia, they have settled with India. They're going to have a free trade agreement with India -- they're learning from each other. Instead of quarrelling with the Philippines and the Vietnamese over oil in the South China Sea, they have agreed on joint exploration and sharing. They've agreed on a strategic agreement with Indonesia for bilateral trade and technology.
SPIEGEL: But the Americans are trying to encircle China. They have won new bases in Central Asia.
Mr. Lee: The Chinese are very conscious of being encircled by allies of America. But they are very good in countering those moves. South Korea today has the largest number of foreign students in China. They see their future in China. So, the only country that's openly on America's side is Japan. All the others are either neutral or friendly to China.
SPIEGEL: During your career, you have kept your distance from Western style democracy. Are you still convinced that an authoritarian system is the future for Asia?
Mr. Lee: Why should I be against democracy? The British came here, never gave me democracy, except when they were about to leave. But I cannot run my system based on their rules. I have to amend it to fit my people's position. In multiracial societies, you don't vote in accordance with your economic interests and social interests, you vote in accordance with race and religion. Supposing I'd run their system here, Malays would vote for Muslims, Indians would vote for Indians, Chinese would vote for Chinese. I would have a constant clash in my Parliament which cannot be resolved because the Chinese majority would always overrule them. So I found a formula that changes that...
SPIEGEL: ... and that turned Singapore de facto into a one party state. Critics say that Singapore resembles a Lee Family Enterprise. Your son is the Prime Minister, your daughter-in-law heads the powerful Development Agency...
Mr. Lee: ... and my other son is CEO of Singapore Telecoms, my daughter is head of the National Institute for Neurology. This is a very small community of 4 million people. We run a meritocracy. If the Lee Family set an example of nepotism, that system would collapse. If I were not the prime minister, my son could have become Prime Minister several years earlier. It is against my interest to allow any family member who's incompetent to hold an important job because that would be a disaster for Singapore and my legacy. That cannot be allowed.
The interview was conducted by editors Hans Hoyng and Andreas Lorenz.
Translated from the German by Christoper Sultan
2005-08-12
China vs India (and the Muslim world): equality and meritocracy, Productivity Lost Index
There have been some discussions comparing China and India, e.g., Jayapraka Narayan of India and Businessweek. India has just as many (or more) western educated engineers and scientist. Indian has the advantages of better command of the international language of science and business, English. There are far more successful Indian business managers and executives in US, while Chinese seldom rise to the top management in corporate America. One wonders why China is so much ahead of the game.
Narayan said, "Why such a difference in outcomes between China and India, despite both countries embarking upon market policies? There are three substantial factors slowing IndiaÂ’s growth. First, we have never given adequate importance to education and healthcare...Second, the severe infrastructure bottlenecks...Third, India never acted with consistency even in pursuing economic reform..."
I think Narayan was right on about education and consistency (a clear strategy and adhering to it, despite major political crisis in 1989). However, I think infrastructure is a only secondary reason, as it is part of the consistent policy driven by economic affordability as well. While consistent policy and education are certainly important, I tend to think there are something behind education. They are equality and meritocracy. We might as well apply such comparison to the muslim world as well.
Narayan said, "Why such a difference in outcomes between China and India, despite both countries embarking upon market policies? There are three substantial factors slowing IndiaÂ’s growth. First, we have never given adequate importance to education and healthcare...Second, the severe infrastructure bottlenecks...Third, India never acted with consistency even in pursuing economic reform..."
I think Narayan was right on about education and consistency (a clear strategy and adhering to it, despite major political crisis in 1989). However, I think infrastructure is a only secondary reason, as it is part of the consistent policy driven by economic affordability as well. While consistent policy and education are certainly important, I tend to think there are something behind education. They are equality and meritocracy. We might as well apply such comparison to the muslim world as well.
- Despite the income disparity and inequality between rural and urban residents, China offers relatively reasonable equal opportunities to everyone.
- Although rural students may quit school after 8th grade (and some girls quit earlier), they do receivee the basic education essential for medium/low skilled jobs.
- Although discrimination to rural migrant workers and women are common, the situation is much less serious than the caste discrimination in India, or sex discrimination in many developing countries, and the muslim world.
- If you work hard enough and are lucky enough, even rural resident or women could succeed and win respect in China
- Another important heritage from the communist/Mao era for China is that women hold up half the sky, the rights of women in urban China are probably better than those in many developed world, esp Korea and Japan.
The underprivileged in India or women in the muslim world do not have the same level of opportunity. Estimate of 160-240M of Dalit in India represents 15-25% of the entire population. The productive population is effectively halved at the muslim world and even lower in India, while the population burden remains high. Let's try to quantify the lost of productivity in a population as below.
Updated: (Thanks to WK Lee for the links) There are two excellent discussions about India education and the caste system. Stratification in social caste not only denied talents from lower caste the opportunity to contribute to the society, it also deprived any motivation to work hard and create wealth for oneself and society. High degree of work specialization based sub-castes may help in improving productivity in ancient time when trade is rather localized. Such "planned economy" is a hindrance to development in modern economy, because the Kurumaas and Golaas population may outgrow that of the sheep population they are supposed to raise, and the best shepard may be born in the Kaapy sub-caste family (there is no evidence that such skills are genetic in nature)
Let's try to quatify this. Let's define Productivity Lost Index as the % of the working population who are deprived the right to work as skilled labor (and the right to "proper" education). Discrimination on better job opportunity among skilled labor is not considered as it is hard to quantify. The disparity might be larger if one include such Universal Discrimination Factot (UDF)
Here are the rough estimates - note here we only focus on the opportunity to work, while there is probably an universal discrimination factor (UDF) over what kind of work is given to the under-privileged across all countries in the world. Singapore and some European countries probably perform best in the UDF measure, US good overall but might be slightly impacted negatively by hidden racial inequality
- Japan/Korea 15% : 30% women(x50%)
- China 15%: assume 50% of the rural(x67%) women(x50%), exclude migrant workers who have left the villages (x67% stayed rural), + 20% of urban (x33%) women (x50%)
- Muslim world 30%: 60% of the women(x50%)
- India 36%: 20% Dalit(x80%) + 50% non-dalit (x80%) women (x50%)
- (appreciate if anyone can provide data to improve my estimate)
(One may want to argue that most women stay at home in Japan. But in reality many Japanese women work and they all receive very good education, not different from that for men. Same for Korea, or the European before women are allowed to vote. One can see as far as economic development is concerned, the opportunity to receive education and work is more important than that of voting. In my estimate above the lower job opportunity for women in Japan and Korea compared with urban China is sort of compensated by similar effect in rural China)
(We can also compare literacy rate: India=59.5%, of which male 70.2%, female 48.3%; China=90.9%; male: 95.1% female: 86.5% notice the male/female literacy disparity ratio is 1.4 (India) vs 1.1 (China) )
Therefore, China is an economy of 1.3bn x 85%=1.1bn, India 1.1bn x 65% =0.7bn! (neglecting the negative effect of the super-poor class which contribute to destructive factors in society such as crime and diseases)
China's formula for success is, not co-incidentally, that of Singapore's. And Singapore's formula of meritocracy is, to a large extent, what American value is. Despite not being a democracy, China embraced much of the values adopted by democratic countries and ruled with a rational decision making processes. That is the reason for China's success. If India will follow China's path, the first thing is bring true equality and meritocracy to all its people. If the muslim world is to restore the glory from the 8th to 19th century, the productivity of 50% of its population need to be liberated.
Businessweek interviewed a number of experts. But some of the opinions are, in my view, only tangential on the fundamental issues. e.g.,
- "Indian democracy is viewed as a hindrance vis-a-vis the stability of China's authoritarian regime on its liberalizing market and docile unions." - Japan did not have an authoritarian regime, nor did America, or Singapore in 1965 (or Slovenia, Czech, Estonia). I tend to think democracy is only marginally relevant to economic growth. Liberty is, which India also has, sort of. India's democracy did not enhance or hinder its economic development
- "India also lacks a Hong Kong and a Taiwan, next-door technology, and capital hubs". - There are just as many smart and educated Indian in Europe and USA as there are Chinese (or Taiwanese who went back to Taiwan to build the computer industry)
- "If India were to grow faster than China, it must increase its attractiveness to investing companies in terms of its market size and potential for luxury products...This is evidenced by ubiquitous presence of luxury brands from Starbucks to Louis Vuitton in China vs. India" - FDI is important, but it is only one part of consistent policy and meritocracy (Give equal opportunity to competent foreign companies). To make "luxury products" a strategy is, I am sorry, quite misleading and naive. Perhaps she meant to say value-added and technology content like Boeing, Microsoft and Google, or marketing/brand building expertise like P&G.
The fundamental question is still: How to bring the best out of the resources you have? Ans: give everyone a fair opportunity, and set up a level field for them to play. FDI, anti-corruptions, democracy, policy consistency and coherence...They all point to one sign post, fair play and fair reward. Fair play is the fundamental of capitalism. China is still far from perfect, it is hardly the model for fair play. Singapore is. There are so much more that China needs to do. But China learns about fair play very fast and practices it better than other developing countries. The unfairness in India and those other countries is so enormous that it makes China looks like a saint. Such unfairness is sociological and cultural, rather than political or policy driven.
Update: I am grateful that Asiapundit has quoted this post, but I would like to clarify that the inequality for women is only one of the unfairness in India, the caste discrimination is responsible for lost of productivity among many men as well.
The RMB Basket Composition
The basket content for the new RMB peg is revealed, and the principles and methodology for the choice and weight of the currencies, see PBC's official script for the speech at its website (English version for reference). I believe there are a few reasons for this move.
- To avoid overzealous human error and force adherence to a mechanical peg procedure, and also to convince the mass it is not an arbitrary 'black box'
- To facilitate the forward hedging operators
- To convince businesses to switch contract into non-USD currencies
The estimated currency weights, according to Stephen Jen of Morgan Stanley, are illustrated in the this chart.
- HKD is counted into the USD weight
- It is unclear whether TWD is included, because PBC does not convert TWD into RMB directly and Jen counted it into USD weight as well because most of the transactions are denominated in USD
- FDI and Trade (goods and service) are included in the above estimate
- There are other currencies (e.g. THB), basically all those with trade value above $5bn will be in the basket
The current account is the basis for determining the weights (detailed definition here)
- Tangible goods trade (import, export)
- Service trade (transportation, tourism, communication, construction, insurance, IT, patent license fees, consulting. advertising, entertainment and other business and government services)
- FDI and related dividends (investment and salary incomes and expenses), e.g., P&G China, and also Lenovo/CNOOC's investment overseas)
- Current transfer (e.g. private fund movement, overseas Chinese sending to relatives)
As for how the basket peg is operated daily, not much was said. But it is expected to be consistent with my previous post -- also supported by John Williamson's paper (right click to download).
A particular point worth noting is that each currency has its own gap and it has been observed that the gaps for EUR and JPY are probably set at 1% (0.5% each way)
Ito of REITI in Japan said something in line with my previous posts. I did some calculation testing the basket content and the concluded USD has an effective weight of around 60-80% (note KRW, SGD, etc all has some USD component), or that PBC was intervening on USD while allowing EUR and JPY to drift in a much larger gap, effectively trying to influence the international cross-rates as well. Ito said, "For example, movements in the yuan-dollar rate between July 22 and July 28 can be explained to a certain extent by changes in the yen-dollar and the euro-dollar rate. Even when both the yen and euro moved in the same direction against the dollar during this period, the yuan did not fluctuate as much against the dollar as the other two currencies. Thus it can be inferred that the weights of the yen and the euro in the currency basket are quite modest. "
- "Theoretically... it would be possible for the central rate to gradually rise, though only by a bit each day. With strong buying pressure, the yuan would reach the upper limit each day (a daily appreciation of 0.3%)...6% over one month (around 20 business days)...However, on July 26, the People's Bank of China said it was incorrect to consider this 2% revaluation as the "first step in reform," or to assume that the revaluation range would gradually be expanded. In this case, the above example of a gradual rise in the value of the yuan will not happen...if the yuan-dollar rate is used as the central rate for the following day, reference to a currency basket would be basically meaningless. If the basket were used seriously, officials would probably steer the yuan-dollar rate so that the closing rate would be close to the reference currency basket. This was the most opaque part of the central bank announcement.
- Moving to a basket system, however, does not necessarily mean that all currencies included in the basket must be used for intervention and foreign exchange reserves. Intervention to maintain the yuan's value against the basket can be done with yen, euro, or dollars. If one assumes that the exchange rates between the yen, dollar, and euro are not affected much by Chinese intervention, whichever currency China uses for intervention, the results will be the same due to arbitrage between the three currencies.
- the composition of foreign exchange reserves is determined to ensure liquidity and from an asset management perspective. This means the currencies in which foreign exchange reserves are held are not necessarily the same as the basket currencies. Thus, adoption of a currency basket system need not imply a shift in China's foreign reserve holdings or a sell-off of the U.S. government bonds it holds."
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Here is an excerpt from Economist:
China's new currency basket is broader than most economists had expected
ON AUGUST 10th, three weeks after China abandoned its decade-old peg to the dollar and moved to a managed float of the yuan against a basket of currencies, Zhou Xiaochuan, the governor of the People's Bank of China, revealed which currencies the basket contains. This came as a surprise. Singapore, which has operated a similar system since the 1980s, has never taken such a step. However, China's openness has limits: it is keeping to itself the weights attached to each currency.
Mr Zhou said that the dollar, the yen, the euro and the South Korean won have the biggest weights, but the basket also includes the currencies of Singapore, Britain, Malaysia, Russia, Australia, Thailand and Canada. The Hong Kong and Taiwanese dollars are conspicuously absent. Even so, the basket is much broader than expected. Most analysts had bet on only the dollar, the yen and the euro.
The choice of currencies (and hence presumably the weights), said Mr Zhou, depended not only on the pattern of China's trade but also on the sources of its foreign direct investment (FDI) and the currency composition of its debt. Stephen Jen, an economist at Morgan Stanley, has had a stab at estimating the weights. Using a weighted average of China's trade and FDI, he guesses that the dollar has a weight of 43%, the yen 18% and the euro 14%. This incorporates a higher dollar weight to reflect the importance of Hong Kong and Taiwan. The Hong Kong dollar is pegged to the greenbacks and all transactions between China and Taiwan are in dollars.
It is still unclear how the system will actually operate. In theory, if the dollar falls against the other currencies, the People's Bank of China should let the yuan rise against the dollar in order to hold the overall value of the basket steady. But this is at the discretion of the central bank. However, if this regime had been introduced in January, then as the dollar rose against the other currencies the yuan would have fallen against the dollar—which would hardly have pleased America's Congress.
China also announced this week a further liberalisation of foreign-exchange trading, allowing non-banks to trade in the spot market and more banks to conduct forward trading. Currency swaps will also be introduced into the onshore market.
The reforms are aimed at making the domestic foreign-exchange market more liquid. That would allow banks and firms to hedge risks and so help them to handle uncertainty following the scrapping of the yuan's dollar peg. The central bank claims the measures will give the market a bigger role in setting the exchange rate. However, thanks to strict capital controls, the bank will retain its tight grip on the yuan.
---
"作为人民币汇率调节的一个参考，在篮子货币的选取以及权重的确定时主要遵循的基本原则是：考虑我国国际收支经常项目的主要交易国家、地区及其货币。大家知道，经常项目包括四项内容：商品贸易、服务贸易、收益（利息、分红等）及经常转移（华侨汇款等）。用通俗一点的话来讲，是综合考虑在我国对外贸易、外债（付息）、外商直接投资（分红）等外经贸活动中占较大比重的主要国家、地区的货币，组成一个货币篮子，并分别赋予其在篮子中相应的权重。
——以着重考虑商品和服务贸易的权重作为篮子货币选取及权重确定的基础。
经常项目收支是我国国际收支平衡的基础环节，而商品和服务贸易收支又构成了经常项目收支的绝大部分。从我国现阶段的国情看，商品和服务贸易是经常项目的主体。因此，篮子货币的确定也是以对外贸易权重为主的。美国、欧元区、日本、韩国等目前是我国最主要的贸易伙伴，相应地，美元、欧元、日元、韩元等也自然会成为主要的篮子货币。此外，新加坡、英国、马来西亚、俄罗斯、澳大利亚、泰国、加拿大等国家与我国的贸易比重也较大，这些国家的货币对我国的人民币汇率也是很重要的。一般而言，与我国的年双边贸易额超过100亿美元，在权重中是不可忽略的，50亿美元以上也是不算小的。从支付结算的角度看，尽管目前仍有一些国家或地区在与我国的贸易中较多、较习惯采用美元结算，但这种情况正逐渐发生变化，选用其本币进行结算的会渐渐多起来，我国也要适应和鼓励这一趋势。由于篮子货币的国家和地区占我国对外贸易总量的比重相当高，针对一篮子货币的人民币汇率将比针对美元的人民币汇率能够更好地反映人民币的价值变化和我国面临的总体贸易条件，对实现商品和服务贸易基本平衡有重要的参考意义。
——适当考虑外债来源的币种结构。
随着我国对外开放程度的不断提高，外债金额越来越大，去年末，中国的外债余额折合为2286亿美元，外债来源呈现多样化。由于在多数情况下，外债需用人民币兑换为具体的计价货币进行还本付息，具体的计价货币会在外汇市场上产生明显的需求，成为影响人民币汇率的一个因素。因此，篮子货币权重的确定也要适当考虑我国对外负债的币种结构。
——适当考虑外商直接投资的因素。
近年来外商直接投资增长较快，在我国对外经济关系中的地位日益提高。我国引进外商直接投资已有相当规模，目前，累计使用外商直接投资达5600多亿美元。这些投资中有很多是采用投资来源国自身的货币，而且将来通过分红取得投资收益时也要兑换为相应的外币汇出。因此，在篮子货币中要考虑外商直接投资的影响。
——适当考虑经常项目中一些无偿转移类项目的收支。
虽然这类项目收支所占比重相对小一些，但其币种构成也会对各篮子货币的权重产生一定影响。
总之，这次人民币汇率形成机制改革中所包含的参考一篮子货币进行调节的内容,适应了我国对外经贸关系多元化和国际经济金融体系多元化发展趋势的需要。参考一篮子货币不是盯住一篮子货币。盯住一篮子货币，是机械地按篮子货币汇率指数的变化来调整人民币对美元汇率，以实现名义有效汇率不变。而我国实行的是以市场供求为基础、参考一篮子货币进行调节、有管理的浮动汇率制度，与单一盯住美元的汇率制度相比，可以更全面地反映人民币对主要货币的变化，有利于较好地应对美元不稳定所带来的影响，降低人民币多边汇率的波动，维护我国对外经贸环境总体上的稳定，从而促进国际收支基本平衡和国民经济持续、协调、健康、较快发展。"
2005-08-06
CNOOC winners and losers: US is the loser in this deal
Only one winner emerged from this deal is Chevron. No one else. Everybody else lost, including every US citizen who does not own a Chevron stock.
Losers (in order - and even Chevron may turn out to be a loser):
Losers (in order - and even Chevron may turn out to be a loser):
- Unocal Shareholder: no more explanation needed
- Unocal employees: some jobs are going to be eliminated
- US as a country, its people, and "free market": The Economist said, "By sabotaging a Chinese bid, America has damaged its own interests...The anti-China hysteria in Washington, DC, the cowardly silence of the pro-China business lobby and the blatant disregard for fair play and open markets is deeply disturbing. A second-rank oil firm such as Unocal is not worth such a sacrifice of principles. Blocking CNOOC has not meaningfully increased America's energy security. But it may have damaged American business interests, in China and elsewhere. How could America now credibly complain about, say, French attempts to prevent PepsiCo taking over Danone? Beijing will no doubt use this incident to deflect American pressure to pursue reform in other areas. American politicians, so fond of seizing the moral high ground, have ceded it to, of all people, the Chinese."
- USD as a currency: Brad Sester said "Yesterday, it became 100% clear that the dollar is not freely convertible into [equity of] US companies." US gets what it wants, a devaluation in USD, and it is not just in terms of value. I suppose "The Economist" might call it a "degradation of USD". Without the exchange devaluation it so desperately seeks, it sabotaged its own currency hegemony status.
- You can even argue Chevron may turn out to be the loser, if oil price drops. As it is not a zero sum game between Chevron and Unocal in this case - Chevron is going to get $500M sure money if CNOOC won!
- plus - won international sympathy, can use this to better its trade negotiation position with US
- Plus - wisely maintained a low profile after CNOOC quitted: WSJ Aug 5 said "China Restricts News of CNOOC Bid -- China is heavily restricting domestic news coverage of CNOOC Ltd.'s failed bid to buy American oil company Unocal Corp., a move apparently aimed at muffling criticism of the U.S. before next month's summit meeting between Chinese President Hu Jintao and President Bush..."
- minus - PBC will still be limited in its option to invest with its USD stash
- plus - further diversifying on EUR might not be a bad thing
Other corporations in China (e.g. Haier, Yunnan Tobacco, SAIC, Wanxiang) :
- plus - smoother deal for acquiring "non-strategic" asset, thanks to sympathy CNOOC won for them
- minus - expect opposition from China paranoia (see below) for future deal, if it is marginally 'strategic'
CNOOC
- minus - wasted some time and resource of this deal (but shared 50% of the blame for its inexperience in dealing with non-executive directors, and how to manage a public company -- plus = now learned)
- plus - Unocal was viewed as over-priced by the market, as reflected by its share value gain after its called off the bidding
- plus - gain some experiences, and wide sympathy
- plus - Chevron might yield higher share to CNOOC in the Australian deal
WSJ Editorial Aug/3 pp A10: China Paranoia
- "The Red-scare protectionists on Capitol Hill won a victory of sorts yesterday when the Chinese-owned oil company, CNOOC Ltd., withdrew its offer to purchase Unocal for $18.4 billion. But at whose expense? We suspect the big losers are not so much the Chinese but rather Unocal shareholders, who will have to take a lower price for their shares.
Cnooc's offer was about $1 billion higher than what American-owned Chevron Corp. has put on the table. Had it not been for six weeks of congressional jaw-boning against the Cnooc offer, there's a strong likelihood a bidding war with Chevron might have prompted Cnooc to raise the price further.
This awkward affair follows on the Bush Administration's misguided demands that China revalue the yuan and the tariff measures directed at Chinese imports introduced in both Houses of Congress. So we now have a fissure in U.S.-China relations at a time when $250 billion a year in two-way trade flows are unambiguously enriching both nations.
The mystery is why the Washington celebration over Cnooc's stand- down. To be sure, China is a nation with inexcusably suppressed political freedom and way too much state intrusion in the economy. We too were troubled that Cnooc is quasi-state owned. But it is a good thing for Americans if the Chinese use their increasing economic clout and the dollars they accumulate from trade to bid up the value of U.S. assets.
And since there is one global price for oil, whether Unocal's resources are owned by a Chinese or American firm has no bearing on the price Americans pay for gas. China, like the U.S., is a major importer of oil; Cnooc would have had every incentive to pump oil to keep it on the market.
A zero-sum neurosis has taken hold on Capitol Hill that the Chinese, with their double-digit rates of economic growth, are creating too much wealth and that all this wealth is coming at America's expense. The real lesson of China's economic miracle of the past decade is that capitalism works. The lesson of the failed Cnooc deal with Unocal is that there are still too many mercantilists in Washington."
FEER/IIE: No Reason to Block the Deal
2005-08-05
RMB peg mechanism updated
See this previous thread. It has been revised. See also updates on the basket content in this new post.
A few adjustments
A few adjustments
- Gap different for each currency, as observed in the past week, EUR and JPY has a gap of at least 0.5%
- Central parity is based on the closing price of the previous trading day. Since these are just some numbers within the gap of the previous central parity, depending on how the market interacts with the intervention. This would probably be the reason for a crawl, without adjusting the basket content
- I revised my understanding on the crawl, but the explanation is still incomplete -- I need some more work in analyzing the numbers
- So far PBC has been keeping a tight hand on USD/RMB, while leaving EUR and JPY wandering further away from the central parity. Such maneuver might impact the cross rate in the international markets
PBC announced that the gap (right click to download pdf report in Chinese) will be "adjusted in appropriate time according to changes in market condition". Many previously said points were re-iterated, such as the central parity will remain fixed, but the mechanism will go through a change in "gradualism" (widening gap is one of them). - see English re-cap here.
Please click into the comment field for more recent updates
2005-08-03
CNOOC made the right call
CNOOC finally demonstrated it can act on rational business decision making. It did not fall into Unocal's trap in coercing for a "China premium". Unocal is a good log, but there will not more trees down the road. CNOOC may have lost a battle, but it has learned its lesson for a relatively small price and certainly earned considerable sympathy for future deals from other Chinese corporations.
CNOOC's mistake, as stated in an earlier discussions, was its failure to submit its bid in April. It was consequently caught in the dilemma of compensating Unocal for the $0.5Bn break-up fee and fighting political interference against a deadline - it is an impossible deal if there is still uncertainty over who pays for the break-up fee. (See comment below for impact of this term)
Going forward, we expect to see more M&A activities from Chinese corporations. We also expect opposition from protectionist, xenophobes and neo-conservatives among the US politicians to persist. China has a long way to go to convince the latter two its genuine interest in fair play. Therefore, there will still be a "Chinese premium" to be paid in these games. But future activities would be better planned (e.g. sounding out to the Board earlier regarding such important decisions). The Haier/Bain/Blackstone model may serve as a good model.
The Chinese may still overpaid, as the Japanese did. It is inevitable for a new comer. The over-priced deals will be less severe thanks to better information availability and a more efficient market. But the challenge lies in the post-acquisition management, as demonstrated at many failed PMI (post merger integration), even for companies from the same country. But it may not be in the best interests for the American (or the world) that Chinese acquisition fail, as it would lead to job lost and waste of resources.
Economist has a good coverage, as usual. However, the comments in the last paragraph "multinational...doing business in China is far from easy....and often not very profitable" are not entirely accurate. "Far from easy", true. "Often not profitable", false. There has been a labyrinth of traps for foreign investors in China, but these traps are not insurmountable. Plenty of MNC today are very successful in China, to quote a few:Volkswagens, GM, J&J's Janssen and 90% of the Pharmaco's, Coca-cola, P&G, and even the most recent entrant Dell, etc. Early failures are mostly due to crucial mistakes in strategy (wrongly judged competition, sent obsolete product line managed by incompetent managers, and more often, just mis-management. e.g., Whirlpool, Glaxo's early years. Some others have significantly understated their profit by overstating costs, especially if one could play the transfer price game (Coca-cola and many Pharma JVs, plus the over-pricing of equipment for many manufacturing ventures). Today China already boast one of the most invetment friendly environment among developing countries, as "voted" by FDI.
We should trust the judgments of the businesses, as they would quickly retreat to limit loss if an investment seems to lead to nowhere. In other words, Darwinism wins and you will eventually see more of the profitable ones.
I strongly doubt if China would retaliate by limiting US investment. But when there is competition between US and EU/Japan for business, you know which side the balance will tilt. Expect an uphill battle for US insurance companies in China, and that for a few other sectors, for example. Perhaps an "American premium" in selected "demonstration" areas.
China should resort to WTO to fault US for unfair competition in this particular case, if it can find such pathway in the WTO terms. Otherwise, there is no reason to act irrationally just because US forgo a good price for its citizens. As widely discussed, China (and CNOOC) also has another card to play, to pursue opportunities more aggressively in Iran and other US "enemies" - something the world prefer not to see.
CNOOC's mistake, as stated in an earlier discussions, was its failure to submit its bid in April. It was consequently caught in the dilemma of compensating Unocal for the $0.5Bn break-up fee and fighting political interference against a deadline - it is an impossible deal if there is still uncertainty over who pays for the break-up fee. (See comment below for impact of this term)
Going forward, we expect to see more M&A activities from Chinese corporations. We also expect opposition from protectionist, xenophobes and neo-conservatives among the US politicians to persist. China has a long way to go to convince the latter two its genuine interest in fair play. Therefore, there will still be a "Chinese premium" to be paid in these games. But future activities would be better planned (e.g. sounding out to the Board earlier regarding such important decisions). The Haier/Bain/Blackstone model may serve as a good model.
The Chinese may still overpaid, as the Japanese did. It is inevitable for a new comer. The over-priced deals will be less severe thanks to better information availability and a more efficient market. But the challenge lies in the post-acquisition management, as demonstrated at many failed PMI (post merger integration), even for companies from the same country. But it may not be in the best interests for the American (or the world) that Chinese acquisition fail, as it would lead to job lost and waste of resources.
Economist has a good coverage, as usual. However, the comments in the last paragraph "multinational...doing business in China is far from easy....and often not very profitable" are not entirely accurate. "Far from easy", true. "Often not profitable", false. There has been a labyrinth of traps for foreign investors in China, but these traps are not insurmountable. Plenty of MNC today are very successful in China, to quote a few:Volkswagens, GM, J&J's Janssen and 90% of the Pharmaco's, Coca-cola, P&G, and even the most recent entrant Dell, etc. Early failures are mostly due to crucial mistakes in strategy (wrongly judged competition, sent obsolete product line managed by incompetent managers, and more often, just mis-management. e.g., Whirlpool, Glaxo's early years. Some others have significantly understated their profit by overstating costs, especially if one could play the transfer price game (Coca-cola and many Pharma JVs, plus the over-pricing of equipment for many manufacturing ventures). Today China already boast one of the most invetment friendly environment among developing countries, as "voted" by FDI.
We should trust the judgments of the businesses, as they would quickly retreat to limit loss if an investment seems to lead to nowhere. In other words, Darwinism wins and you will eventually see more of the profitable ones.
I strongly doubt if China would retaliate by limiting US investment. But when there is competition between US and EU/Japan for business, you know which side the balance will tilt. Expect an uphill battle for US insurance companies in China, and that for a few other sectors, for example. Perhaps an "American premium" in selected "demonstration" areas.
China should resort to WTO to fault US for unfair competition in this particular case, if it can find such pathway in the WTO terms. Otherwise, there is no reason to act irrationally just because US forgo a good price for its citizens. As widely discussed, China (and CNOOC) also has another card to play, to pursue opportunities more aggressively in Iran and other US "enemies" - something the world prefer not to see.
Labels:
business
2005-08-02
Price Control for Oil in China
HK Standard has a good coverage on the price control for oil in China. As China is making its transition through gradualism ("stone by stone"), it is about time to stop subsidizing oil users. Same for energy (electricity), water, etc.
Without the force of the market, waste or inappropriate allocation of resources are inevitable consequences. I heard that 30%-70% of the water were not accounted for (stolen or wasted) in many Chinese cities. An inefficient and unstable energy supply (and price mismatch between diesel and electricity) also has led to redundant investment in diesel generators for some factories since mid-1990s.
Gasoline prices in China have been about the same level as in US, but become lower recently as they have not kept up with the international market trend. Here is a snapshot for comparison:
Without the force of the market, waste or inappropriate allocation of resources are inevitable consequences. I heard that 30%-70% of the water were not accounted for (stolen or wasted) in many Chinese cities. An inefficient and unstable energy supply (and price mismatch between diesel and electricity) also has led to redundant investment in diesel generators for some factories since mid-1990s.
Gasoline prices in China have been about the same level as in US, but become lower recently as they have not kept up with the international market trend. Here is a snapshot for comparison:
- The gasoline prices are RMB4.14-4.62/liter in a middle tier city like Chongqing on Jul23 (after the RMB revaluation), for RON 90-97 (Research Octane Number, corresponding to Pump Octane Number PON 87-93 in US); Using conversion factors of 1Gallon=3.785L and 1USD=8.11RMB, the gasoline prices translate into USD1.93-2.16/Gallon
- According to eia.doe.gov, average price in US is US$2.289/Gallon on July 25th
- If we factor in the un-tradable cost in operating a retail gas station, we could say the prices are pretty much the same in these two countries
- The lack of competition should mean higher retail price and less efficient operation, which might have annihilate any cost gap in labor and rent costs
- This means China, being a country of much less access to oil fields domestically and internationally and one that car travel is not a survival essential as in US, is as generous as US in oil tax/etc. It surely has one of the lowest price for oil for a net importer.
China may have its reason to maintain a stable price for energy. But reportedly one of the reason is for fear of hurting the auto industry (see also a previous post on a related topic). The problem of putting too much priority on the auto industry is, e.g., R&D in fuel economy will not received the right proportion of attention, hence China's auto industry may not be as competitive in markets outside US/OPEC, including China itself when local gasoline prices move up eventually.
There are some alternatives in which one can smooth out short term price fluctuation while keeping prices in pace with the market. For instance, one can use the 30-day (or other length of time, the shorter the better) average to set the price, which is possible if China maintains an inventory equivalent to more than 30 day oil consumption. (In fact, that is what China is doing today, without the inventory stock) China's recent effort in building inventory in Zhejiang will pave the way for such reform. However, this is still a distortion of market behaviors.
2005-07-30
The need to adhere to the clear rule for the basket peg - at least internally for PBC
In today's WSJ Op-ed Stanford Professor Ronald McKinnon lamented on China's yielding to unreasonable pressure from US Congress, comparing this to China's yielding to opium import in the 1840s. He listed five "negative comments" on the new basket peg
- With the fixed exchange rate now unhinged, the People's Bank of China (PBC) will have to come up with a new anchor or rule that governs monetary policy. None was announced when the PBC let the exchange rate go. Will the PBC institute an internal inflation target? What will be the financial instruments it uses to achieve this target?
- Because China's inflation rate had converged to the American level (or slightly less), any substantial sustained appreciation of the RMB (the Americans want 20% to 25%) will drive China into deflation -- preceded by a slowdown in exports, domestic investment, and GDP growth more generally.
- If the PBC allows only small appreciations (as with the 2% appreciation announced on July 21) with the threat of more appreciations to follow, then hot money inflows will accelerate. If China attempts further financial liberalization such as interest rate decontrol, open market interest rates in China will be forced toward zero as arbitrageurs bet on a higher future value of the RMB. China is already very close to falling into a zero-interest liquidity trap much like Japan's -- the short-term interbank rate in Shanghai has fallen toward 1%. In a zero-interest liquidity trap, the PBC (like the Bank of Japan before it) would become helpless to combat deflationary pressure.
- Any appreciations, whether large and discrete or small and step-by-step, will have no predictable effect on China's trade surplus. The slowdown in economic growth will reduce China's demand for imports even as exports fall so that the effect on its net trade balance is indeterminate.
- Because the effect of appreciations on China's trade surplus will be ambiguous, American protectionists will come back again and again to complain that any appreciation is not big enough. So abandoning the "traditional" rate of 8.28 yuan per dollar will, at best, result in only a temporary relaxation of foreign pressure on China.
He also said, "Thanks in large part to pressure from our lawmakers in Washington, China is now in a nebulous no man's land regarding its monetary and exchange rate policies. Instead of clear guidelines with a well-defined monetary anchor, its macro economic decision-making will be ad hoc and anybody's guess - as was (and still is) true for Japan."
He is of course correct in that US pressure has been irrational, and China should not yield to it. He is also correct in his deduction, but only if his assumption that the People's Bank of China (PBC) does not have "a new anchor or rule that governs monetary policy" is true. But PBC does have clear policy kept to themselves, in my view, which is confirmed by Zhou's recent speech. As long as China adheres to the "translucent box" rules to eliminate human decision, and restrains from changing the peg anchor (less than 2.5% p.a.), Professor McKinnon's worries (1-4) should be largely addressed. Therefore, PBC needs to pay attention to Professor McKinnon's comments and go through this check-list daily when managing the basket peg.
As for his point (5), let's hope the collective wisdom of the American people (who are also the consumers), and bright minds such as Professor McKinnon's would together win over the irrational protectionists.
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