2008 Sichuan Earthquake - Wikipedia

The following slideshow was sent to my colleague Brian Compton (who forwarded it to me) from his contact at Habitat for Humanity, China. The pictures were all taken in the last 72 hours since the magnitude 7.9 earthquake struck China’s Sichuan province on Monday afternoon this week.

This collection of images tells the story of suffering and despair experienced by the victims of this natural disaster.

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FT.com / Asia-Pacific / China - Economy escapes lasting damage from quake

While hundreds of thousands of Sichuan residents in China’s west await the arrival of relief and death tolls approach 15,000 following Monday’s 7.9 earthquake, analysts have begun to assess the quake’s potential economic impact here in China:

The biggest potential economic risk from the earthquake will be on inflation – 8.5 per cent in April – which has emerged in the past year as the principal threat to the economy. Sichuan is China’s largest pig producer – rising pork prices were the initial reason for the jump in inflation last year – and a big rice producer.

“We expect the earthquake to further fuel inflationary expectations in some parts of China due to possible supply shortages as a result of disruption in transportation,” said Ting Lu, an economist at Merrill Lynch.

However, although the earthquake would probably have a short-term impact on prices in the immediate region, economists said it would do little to disrupt agricultural production in the province.

Moreover, national food prices would be affected only if there was sustained disruption to the transport links between agricultural areas of Sichuan and the rest of the country, which appeared unlikely.

Shanghai’s stock market fell 1.8 per cent on Tuesday, and market regulators suspended trading in 66 companies that have significant operations in the region.

Companies that could be hurt by the earthquake include toll road operator Sichuan Expressway, China Telecom, which has a large fixed-line operation in the region, and those in the insurance sector.

Theory suggests that in times when inflation is already high, as currently in China, then a supply shock of even the slightest severity could trigger the expectation of future rice and pork price increases. This expectation may spurn a speculative bout of of food purchases just as supplies are tightened because of the earthquake. The simultaneous speculative increase in demand and quake-triggered contraction in supply may bring about just the price increases that analysis predict.

I won’t be surprised if inflation numbers for May reveal something greater than the 8.5% (22% rise in food prices) experienced in April. Despite economists’ optimism that the quake will have little effect in the long-run, I would predict that in short-run China’s already unstable price levels will see even sharper rises. Might inflation reach double digits in May?

On a personal note, we here at SAS are praying for the victims of the Sichuan quake. Last October my wife and I led 24 tenth graders on a five day cycling trip through the heart of the region where the quake struck. We started at the panda reserve in Chengdu (where thankfully all pandas survived) and rode 100 km northwest to Dujiangyan, the ancient city in the footills of the Himalayas where, sadly, 900 schoolchildren perished when their building collapsed.

Reports indicate that this beautiful city in the hills, home to the world’s oldest (2300 years!) irrigation project running through the heart of the city has been left in ruins. Below is a picture of me, my wife, and the lucky SAS students who cycled through this beautiful region of Sichuan Province last October. The bridge behind us was in the heart of ancient Dujiangyan, only miles from the earthquake’s epicenter. We hope that the suffering in Sichuan is quickly alleviated and that the victims find shelter and solace in the coming days and weeks.

Dujiangyan, Sichuan Province, China. October 2007. SAS China Alive

China’s inflation climbs to 8.5% - Times Online

Imagine how it feels here in China! Food prices are the main driver of overall inflation here. There appear to be both supply and demand factors at play. While the ever-growing middle class consumes more and more resource intensive meat, input costs are forcing producers to restrict their output and pass higher costs onto consumers:

Overall food prices increased by 22.1 per cent in April from a year earlier, while the price of pork, the most popular meat for most Chinese, was up 68.3 per cent over the same period.

Wen Jiabao, the Chinese Premier, said in March that the government wanted to keep inflation at 4.8 per cent this year.

The bureau said in a statement today: “Growth in consumer prices remains high. At the moment, we must pay close attention to future price trends and prioritise the control of price increases and inflation even higher.”

“It is linked to the fact that the international prices of primary products, and especially grain prices, continue to rise, impacting domestic food prices,” it said.

So rising global commodity prices increase costs to food producers here in China, who pass these higher costs onto consumers. But at the same time, the demand-side has seen ever increasing consumption of pork, beef and chicken, which historically were delicacies enjoyed only by China’s elite. With a middle class of around 300 million, today these meats are staples of the masses, come to be considered a normal part of the urban Chinese diet.

To compound inflationary pressures in China, net exports are expected to remain strong or even grow as China’s trading partners face inflationary problems of their own. Rising prices in the US and Europe make still relatively cheap Chinese imports more attractive to these foreign consumers, putting even more upward pressure on China’s price level as demand for its output remains strong abroad.

Premier Wen Jiabao says the government’s target inflation rate is a moderate 4.8%, but with three consecutive months of greater than 8% inflation, this now seems like an unlikely goal for China. The biggest threat inflation poses to the Chinese Communist Party is the undermining of the gains enjoyed by the average Chinese consumer from the 10% average nominal GDP growth the country has enjoyed for most of the last 30 years.

With inflation approaching double digits, much of the nominal income gains resulting from rapid GDP growth are eroded and the real effect of inflation may feel more like economic stagnation to the average Chinese worker. With its legitimacy hinging on continued improvements in economic well-being, the CCP has much to worry about with 8.4% inflation. Contractionary measures are needed to stabilize prices, perhaps even at the expense of continued growth.

Live from Shanghai - OnPoint with Tom Ashbrook

The 21st century has been called “China’s Century”. With the Olympics in Beijing in a couple of months, the torch relay touring the worlds’ major cities has been met with fierce anti-China protests as angry activists have accused China of countless offenses from human rights violations to oppression of democracy movements to environmental destruction. Although it may be “China’s Century”, it sometimes seems that the rest of the world is not too happy about China’s emergence as a global superpower.

Last week, NPR’s Tom Ashbrook, journalist and host of the OnPoint radio program, visited Shanghai and featured daily stories about China in the world today. Below is an excerpt from the first of these stories, which caught my attention because it shared a minor fact that I had never heard before but which I find extremely interesting. Ashbrook’s guest, David Lampton, is a leading scholar on China’s re-emergence as a global superpower. Listen to what he says here:

 

 China's Challenge - OnPoint with Tom Ashbrook: Play Now | Play in Popup | Download

“Re-claim their share of global GDP?” you might be asking? Here’s the thing… for much of the last 2,000 years, China was THE leading superpower in the world. In fact, up to the 1430’s, China had the largest navy in the world, had established tributary relations with dozens of kingdoms from Southeast Asia to India to Africa, had established and secured trade routes stretching overland to Europe and by sea as far away as East Africa, and some even think Chinese explorers had made it to North America seventy years before Columbus! While Europeans were dying of the plague by the millions and struggling under absolute poverty in a feudal society where the idea of national unity was still a century off, China had grown to be the largest empire the world had ever seen, first under the Yuan Dynasty and then the Ming.

As professor Lambert says, China’s GDP, or its total output of goods and services, accounted for ONE THIRD of the world’s output during much of the common era. This fact shocked me, but made sense once I thought about it. China truly was the greatest example of a global superpower the world had known by the 15th Century. Much of its wealth and power was a result of its efforts to globalize, or to integrate itself with the economies of the foreign nations, empires and kingdoms. Trade with its neighbors, near and far, had helped enrich China, but also built among China’s leaders a rightful sense of superiority over the other peoples of the world.

It was this sense of superiority that would lead to a long period of decline in Chinese dominance of the global economy. In 1432, the Ming emperor ordered the trading vessels of Admiral Zheng He destroyed. 3,000 of the largest ships the world had ever seen were sunk to the bottom of the Yangtze river and the East China Sea. The emperor declared China as “The Middle Kingdom” and ordered that all links with the outside world be severed, as China had no need for trade with others. China, the emperor claimed, was totally “self-sufficient” and could flourish without trade with the “barbarian” outsiders.

What followed was a long period of decline in China’s superpower status. From 1432, through the fall of the Ming in 1644 throughout the subsequent Qing Dynasty, into the 20th Century which saw repeated shifts in power between KMT, the Japanese and finally the CCP, China for the most part resisted attempts by its own and by foreigners to open its doors to the world, welcome trade, and encourage globalization of China’s rapidly dwindling domestic economy. The belief that China was “self-sufficient” endured while China’s share of total economic activity in the world dwindled to nearly nothing.

In the mean time, Europeans “discovered” the New World, philosophized about the gains from trade, integrated their own markets and later the markets of the colonies in Asia, America, and Africa, and grew wealthy as a result of these global exchanges. All the while, China stuck to its path of isolationism and self-sufficiency, as its influence and power slipped ever deeper into obscurity.

This period of isolation essentially lasted until the death of Mao Zedong, who could basically be called China’s last emperor. Since 1978, China has followed a new path, one that has attempted to reverse the mistakes of past dynasties, based on the doctrine of isolation and protection of domestic markets. Since its re-emergence as a global economic superpower, China has rapidly seen its share of global GDP increase from less than 2% in the 1970’s to around 16% today; a rebound achieved only through year after year of rapid economic growth, fueled by exports to the rest of the world. Isolation, it appeared, was not the path to wealth and power. China had discovered a new path, one that has done wonders for it income and standing in today’s circles of global power.

China’s re-emergence was made possible by one simple shift in doctrine and philosophy among its leaders: the belief that trade is good. While today the country still has many obstacles to overcome, such as the environmental challenges posed by growth, achieving a more equal distribution of wealth and income, fostering the growth of a domestic market to lessen its dependence on exports, and the challenges relating to human rights and demands for democratization, it would be wrong to say that China has not benefited from economic globalization in many ways.

A little history lesson is sometimes necessary to better understand where China is coming from and where it is going on its path towards re-emerging as a superpower in the global economy. The West, in the mean time, should pause to consider the rightful place the Chinese people believe is theirs based on their long history of economic power and dominance that for hundreds of years placed China at the pinnacle of power in the world economy.

The $1.4 Trillion Question - James Fallows - the Atlantic

What’s the deal with American consumers? How, exactly, does a nation’s average savings rate fall to 2%, then 1%, and then become negative, like in the US over the last couple of years? What does negative savings actually mean? It means that Americans consumer more than they actually produce.

On the micro level, the only way to consume beyond ones income is to borrow from someone else to pay for the additional consumption. In other words, savings must be negative for one to consume beyond his or her income. The US is a nation of borrowers, but from whom do we borrow? China, in short.

China is a nation of “savers”, where national savings averages 50% of income. What exactly does this mean? Well, just the opposite what negative savings means; rather than consuming more than it produces, the Chinese consume only about half of what it produces. Here’s how James Fallows, a Shanghai-based journalist, explains the China/US dilemma:

Any economist will say that Americans have been living better than they should—which is by definition the case when a nation’s total consumption is greater than its total production, as America’s now is. Economists will also point out that, despite the glitter of China’s big cities and the rise of its billionaire class, China’s people have been living far worse than they could. That’s what it means when a nation consumes only half of what it produces, as China does.

What happens to the rest of China’s output? Naturally, it’s shipped overseas for Americans and others in the West to consume. The irony is that the consumption of China’s products has been kept affordable and cheap thanks to the actions the Chinese government has taken to suppress the value of the RMB, thus keeping its products cheap and attractive to American consumers.

When the dollar is strong, the following (good) things happen: the price of food, fuel, imports, manufactured goods, and just about everything else (vacations in Europe!) goes down. The value of the stock market, real estate, and just about all other American assets goes up. Interest rates go down—for mortgage loans, credit-card debt, and commercial borrowing. Tax rates can be lower, since foreign lenders hold down the cost of financing the national debt. The only problem is that American-made goods become more expensive for foreigners, so the country’s exports are hurt.

When the dollar is weak, the following (bad) things happen: the price of food, fuel, imports, and so on (no more vacations in Europe) goes up. The value of the stock market, real estate, and just about all other American assets goes down. Interest rates are higher. Tax rates can be higher, to cover the increased cost of financing the national debt. The only benefit is that American-made goods become cheaper for foreigners, which helps create new jobs and can raise the value of export-oriented American firms (winemakers in California, producers of medical devices in New England).

Clearly, a strong dollar is good for America in many ways. The dollar’s strength in the last decade can be credited partially to the Chinese, who have been buying dollar denominated assets in record numbers over the last seven years.

By 1996, China amassed its first $100 billion in foreign assets, mainly held in U.S. dollars. (China considers these holdings a state secret, so all numbers come from analyses by outside experts.) By 2001, that sum doubled to about $200 billion… Since then, it has increased more than sixfold, by well over a trillion dollars, and China’s foreign reserves are now the largest in the world.

China’s purchase of American assets keeps demand for dollars on foreign exchange markets strong, thus the value of the dollar high relative to other currencies, allowing American firms and consumers the benefits of a strong dollars described above.

As we learn in AP Economics, a nation’s balance of payments consists of the current account, which measures the difference between a country’s expenditures on imports and its income from exports (China last year had a $232 billion current account surplus with the US, meaning the US bought more Chinese goods than China bought of American goods), and the capital account, which measures the difference between the inflows of foreign money for the purchase of real and financial assets at home and the outflows of currency for the purchase of foreign assets abroad. In the capital account, China maintains a deficit (meaning China holds more American financial and real assets than America does of China’s), to off-set its current account surplus.

The two accounts together, by definition, balance out… usually. Any deficit in the China’s capital account that does not cover the surplus in its current account can be held as foreign exchange reserves by the People’s Bank of China. The PBOC, however, prefers not to hold excess dollars in reserve, as the dollar’s value is continually eroded by inflation and depreciation; therefore it invests the hundreds of billions of excess dollars it receives from Americans’ purchase of Chinese goods back into the American economy, buying up American assets, with the aim of earning interest on these assets that exceed the depreciation and inflation rates.

The “assets” the Chinese are using their large influx of dollars to buy are primarily US government bonds. The government issues these bonds to finance its budget deficits (when government spending is greater than tax revenue; this figure was projected at around $400 billion this year alone!), and the Chinese are happy to buy these bonds for a couple of reasons: They are secure investments, meaning that unless the US government collapses, the interest on US bonds is guaranteed income for China. That’s one reason; but the primary reason is that the purchase of these bonds puts US dollars that were originally spent by American consumers on Chinese imports right back into the hands of American consumers (via government spending or tax rebates), so they can continue buying more Chinese imports.

The Chinese demand for dollar denominated financial assets, including government bonds, corporate stocks and bonds, and real assets like real estate, factories, buildings and so on, has resulted in a long period of a strong dollar. If the Chinese ever decided to stem the flow of dollars into American assets, the dollar’s value would plummet to record lows, leading to high inflation and eventually a balancing of America’s enormous current account deficit with China and the rest of the world.

However, a falling dollar is the last thing China wants to see happen, for two reasons: One, it would make Chinese imports more expensive thus less attractive to American households, thus harming Chinese manufacturers and slowing growth in China. Two, US dollars are an asset to China. Its $1.4 billion of US debt would evaporate if the dollar took a major plunge. To China, this would represent a loss of national wealth; in effect all that “savings” that makes China so unique would disappear as the dollar dived relative to the RMB. For these reasons, it seems likely that China will continue to be a willing buyer of America’s debt, thus the financier of Americans’ insanely high consumptive lifestyle.

When it comes to America’s low personal savings rates, I have a theory here as to why we can’t break the consumptive habit that’s caused us to run up $9.3 trillion of national debt. It relates to something I teach my Asian History students when we study ancient China.

Confucius said something about government that might just explain why Americans have evolved into the negative savers that we are: “If a government desires what is good, the people will be good. The character of a ruler is like wind and that of the people like grass. In whatever direction the wind blows, the grass always bends.”

The Guardian.co.uk - Chinese demand Carrefour boycott…

At lunch today I was sitting across from a local hire, Chinese national employee of Shanghai American School, talking shop, when she perked up and announced to the table that we should all NOT shop at Carrefour on May 1st. If you’re not familiar with Carrefour, it’s a French mega-retailer that operates dozens of shops around China, serving basically the same roll here as Wal-Mart does in the US.

My colleague’s enthusiastic declaration of a nationwide boycott of the French retailer caught me off guard. She explained that it was in response to the French president’s announcement that he might not attend the Olympics opening ceremonies in August in Beijing. I didn’t get it… what did the French president’s decision have to do with a giant retailer serving urban residents in China. How are these two entities related, and how does boycotting a French retail chain send a message to the French president?

My colleague didn’t seem concerned with the details, and simply reiterated the urgency of committing to NOT shopping at Carrefour on May 1st (in fact, I’ve shopped there only twice in the last two years, so I can safely say I will be participating in the boycott, by default).

I decided to see if I could find out more about this story, so after school today I did a Google News search, and sure enough, there is a nationwide boycott being planned by pro-Chinese activists though online chat rooms, text messages, and by patriotic bloggers, aimed at sending a clear message to the French. The boycott’s purpose, it turns out, does not really have to do with anything president Sarkozy said about the opening ceremonies, rather,

Supporters of the boycott call said brands under luxury goods group LVMH had “donated a lot of money to the D**ai L**a”. Carrefour is 10.7 percent-owned by Blue Capital, a holding company owned by property group Colony Capital and French billionaire Bernard Arnault, chairman and chief executive of luxury goods group LVMH .

So it turns out the boycott has less to do with Sarkozy and more to do with some tenuous tie between one of Carrefour’s shareholders and the exiled leader of a politically sensitive region in the western part of China. Interesting. This got me thinking more.

Recently, Westerners have been exposed to lots of anti-Chinese sentiments in the news. From CNN commentator Jack Cafferty calling Chinese “a bunch of goons and thugs”, to Lou Dobbs’ regular reports on the “industrial espionage” and the “cyber-warfare” of the “Communist Chinese” against America, the Western media seems to focus on one side of the story, as the Chinese side seems to go unheard. The Carrefour boycott (as ill-devised as it seems, given the tenuousness of the link between Carrefour and any blatant anti-Chinese activities) is an attempt by patriotic, nationalistic Chinese send a loud signal to the West: “mess with China, and we won’t shop at stores owned by you!“

…”there is truly no reason to give the French money by buying their goods,” the boycott call said, posted on web portal Chinaren (www.chinaren.com).

“Let them see the Chinese people’s power, and the power of the Internet,” the post said.

Boycotts are funny things. Especially one-day boycotts like the one planned here. So let’s say that a few million Chinese agree NOT to shop at Carrefour on May 1st. First of all, my guess is that most people who support this boycott probably weren’t originally planning on shopping at Carrefour on May 1 (a Thursday), so those people won’t make any difference by continuing to NOT shop at Carrefour. Then there’s the people who would have shopped there. What will they do now? Go to a dozen or so local Chinese shops trying to find the things they would have bought at Carrefour? If so, then the boycott may in fact be effective, as local vendors will see an increase in their sales, Carrefour will suffer huge losses as their revenues cannot cover their operating costs, and a clear message will have been sent to France. More likely, however, shoppers who chose to avoid Carrefour on May 1st to show their patriotism will probably be first in line as the doors open on May 2nd… that’s just my guess.

Besides, as I read the passage quoted from a patriotic Chinese website above, “there is truly no reason to give the French money by buying their goods”, it dawned why this boycott is a dumb idea. Remember, Carrefour is like a French version of Wal-Mart. Hundreds of thousands of items from food to flat-screen TVs to lawn furniture to baby clothes: all made in France… wait a minute… hold on… let me check the label… oh, um, eh hem… I mean… yeah… Okay, so you get the point, NOTHING sold at Carrefour is made in France! Whose economy will be harmed if a boycott successfully dents Carrefour’s sales? France’s? There may be a few rich shareholders who feel the pinch, but more likely it’s factories right here in China, employing the very same patriotic Chinese who may support the boycott, who will suffer most if it is successful.

Finally, I followed a link from the Guardian article above to the website where the quote is from. (www.chinaren.com) Of course, everything was in Chinese, but through the magic of Google Translator I was able to read the headlines on this page. I thought I’d share them here. I didn’t read the articles, that would be tedious, but the headlines themselves are quite revealing:

• CNN news stigma of violence come from the gas
• Extremely shameless CNN Beijing Olympic Games does not welcome you
• Japanese look at how the Western media to demonize China
• 1000 source refused to admit to seek political asylum in the United States
• Bai Yansong Carrefour opposition boycott of the United States apologize CNN
• Million Chinese will be launched on the trans-European anti-T***t independence march
• Western China angry disdain brand affected France
• See passage of the Olympic flame safeguard the motherland’s honor dignity

Needless to say, these are headlines that did NOT make it onto CNN or BBC.

FT.com / Asia-Pacific / China - Weak dollar troubles Beijing

Inflation, with its erosive effects on wealth and income, has plagued China at increasing rates since mid-2007. In February it reached an annualized rate of 8.7%, threatening to undermine China’s GDP growth rate, which has been predicted in the 8% range for this year.

As we have discussed in our our AP Econ class here in Shanghai, China’s inflation is caused by a combination of demand and supply-side factors. On the demand-side, a growing middle class has driven consumer spending to record levels recently, surpassing investment as the largest component of China’s GDP in 2007. Of course, as always, high inflation (thus low real interest rates), optimism about rising consumption in the future, and a comparative advantage in labor-intensive manufacturing (albeit a diminishing one as wages continue to rise) all combine to keep investment extremely high. Furthermore, cheap exports have helped keep demand for China’s output from abroad strong. The combination of increasing consumption, strong investment, and its trade surplus have resulted in demand-pull inflation.

On the supply-side, China has encountered additional inflationary pressures of late. Rising energy prices (mostly due to coal and oil shortages) combined with record rises in food prices (24% increase in the last year), have driven costs to firms up, shifting the aggregate supply curve leftward, further fueling inflation.

Knowing the damaging effects inflation has on income and wealth, it might be assumed that Beijing would place the utmost emphasis on taming the country’s rising prices. This, however,is not at the top of the government’s macroeconomic goals, according to premier Wen Jiabao:

On the issue of whether he would sacrifice economic output to bring down inflation, at the risk of increasing unemployment, Mr Wen indicated that growth re­mained the overarching priority. “We must ensure that our economy will grow…in order to ensure employment,” he said. “China is a developing country with 1.3bn people. We have to maintain a certain degree of fast economic growth to provide enough jobs.

”He said China needed to add about 10m jobs a year for the next five years, a lower figure than in the past when the aim was growth of 15m-20m jobs a year.

The tradeoff between inflation and unemployment to which Mr. Wen refers is a text book example of the challenges faced by macroeconomic policymakers everywhere. This trade-off is illustrated in the Phillips Curve model, which shows that in the short-run, there exists an inverse relationship between the price level and the unemployment rate.

In his words above, Mr. Wen demonstrates Beijing’s preference in the trade-off between inflation and unemployment: He’ll take inflation… Here’s why.

In case you haven’t heard, China is not a democracy. Nor is it a, ehem, “free” country. According to Alan Greenspan in his book “The Age of Turbulence”, d