The ADB on China: This Time Is Different

[Note: below is a guest post from Mark DeWeaver]

The Asian Development Bank has just published its Asian Development Outlook for 2013.  Turning to the “Economic Prospects” section for China (on p. 157 of the report), we find that the ADB is expecting GDP growth of 8.2% for this year, up from 7.8% in 2012.  Next year, however, growth is expected to fall to 8.0% as the new leadership replaces the “previous pursuit of fast-track growth” with a new approach focusing on the “quality, efficiency, and the sustainability of economic growth”

While I agree that faster growth is likely this year, I don’t see a new approach to economic development leading to a slowdown in 2014.  There are two things wrong with this idea:

First, there is nothing new about the “new approach.”   Every five-year plan (FYP) since the Sixth, which ran from 1981-1985, has stressed the importance of transitioning to a more efficient “mode of growth.” Consider the following history of official statements on this issue (all taken from various issues of the Zhongguo Jingji Nianjian [Almanac of the Chinese Economy]):

In 1982, then-Premier Zhao Ziyang told the National People’s Congress that “raising economic efficiency” was to be the “center of all economic work” during the period of the Sixth FYP.

In 1985, describing the Seventh FYP, Zhao told the National Party Congress that “we must not one-sidedly pursue excessively high economic growth rates.”

In 1991, Zhao’s successor Li Peng told the National People’s Congress (NPC) that the Eighth Plan not only had “clear requirements for the speed and quantity of growth,” but “an even greater emphasis on raising the quality of economic growth.”

In a 1996 speech to the NPC on the Ninth Plan, Li called for “actively advancing the economic structure” and “the fundamental transformation of the mode of economic growth.”

Zhu Rongji, Li’s successor as premier, put the case even more emphatically at the March 2001 National People’s Congress. During the period of the Tenth Plan, structural adjustment would be the “main line.” China had, Zhu said, “already reached a point at which further development would be impossible without adjustment.”

In 2007, Hu Jintao told the National Party Congress that during the Eleventh Plan period China would transition to “scientific development,” which he defined as development that is “comprehensive, balanced, and sustainable.”

As it turns out, economic efficiency has been a central government priority since the early 1980s.  Yet progress in this area has been elusive.  The share of investment in GDP continues to grow at the expense of household consumption even as income inequality becomes ever more severe.

The second problem with the ADB’s 2014 forecast is the fact that local officials’ “investment enthusiasm” (as the Chinese call it) is always strongest immediately after Communist Party congresses.  Many officials get new assignments around the time of these meetings, which are held every five years.  Generally they want to start new projects right away, in order to ensure that as much of the resulting GDP growth as possible will occur while they are in office.

The five-year peak-to-peak period of the typical Chinese investment cycle is thus closely linked to the timing of Party congresses.  All six of the investment cycle tops that have occurred since 1977 happened within the first two years following a congress.  And every congress except the 1997 15th Congress has been followed by a top within the following two years.  (See Chapter 4 of my new book, Animal Spirits with Chinese Characteristics, for a detailed history of the Chinese investment cycle.)

Given that a Party congress was held at the end of last year, this suggests that investment growth is unlikely to slow in the second half of this year as the ADB is expecting.

The ADB believes that this time will be different because of the leadership’s “new approach.”  But given that this new approach is already over 30 years old, it’s hard to see why a transition to a new “mode of growth” should now be the basis for anyone’s baseline forecast for the Chinese economy.

Mark DeWeaver manages the emerging markets fund Quantrarian Asia Hedge and is the author of Animal Spirits with Chinese Characteristics: Booms and Busts in the World’s Emerging Economic Giant.

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Working as an educator in China

[Note: below is a guest post from a friend, Glenn Howlett, who is originally from the UK.  As mentioned in Chapter 9, due to the high demand, there are approximately 100,000 foreigner teachers and experts working in China.  For comparison, there are about 600,000 foreign residents currently living in China.  Should you come to China and work in one of these positions?  Unlike the transient backpackers that come and go, Glenn is a focused professional and was awarded a teacher of the year award in Anhui three years ago and thus gives a unique perspective to this labor segment.]

I’ll start by stating that I’ve been in China coming up to 7 years and I’m 29 years old. I’ve worked for 4 years in a small city (but excellent University) in Anhui province and approaching 3 years in a “private University” in Nanjing, the capital of Jiangsu province. In addition to these full time jobs I’ve helped colleagues by teaching someone on their behalf (helping my colleague to build their relationship with someone, this is called guanxi (关系) and is vitally important in China) and also worked in an established training centre during summer vacations.

The term I’m probably labelled by is a “Foreign Expert” which usually means some kind of EFL or English teacher. This has been my role in my two Universities, and also occasionally been handed a “Cross Culture Communication” course. At the training centre I’ve taught both Oral English to students preparing an IELTS examination (International English Language Testing System) and Oral English to children at a summer camp. From what I’ve found teaching “Oral English” is whatever you choose it to be, I consider myself to be a responsible individual so I prepare thoroughly and always try to improve both my teaching and lessons… however I’ve found that you’re never really put under any pressure, never have a curriculum provided and whenever you approach a colleague or liaison to ask then the common response is always “to just do anything.” Therefore it seems that many “Foreign Experts” really do take that to heart and do whatever… or nothing at all. In my experience Universities are quick to show appreciation if you’re exceeding their expectations and in Anhui I received a provincial award for my efforts.

I don’t believe that I’ve faced too many problems here, compared to others. As already stated a lack of direction, curriculum and teaching materials are just the norm. You will probably receive a textbook but really I only find them of use when teaching extremely low level English learners. Possibly two inconveniences that I’ll mention are salary and problems being solved.

  • In my first position, I was to be paid monthly at “around” a certain date. This proved to be extremely inconsistent as if the “boss” was away (which was common) then you didn’t receive the salary on time. I remember one time I wasn’t paid for 7 weeks! Then just a week after I was paid on time for the following month. In my current University no such problems exist.
  • With regards to problems being solved… maybe I’m being specific to living accommodation problems. If there’s a problems you contact the correct person, he/she’ll have a look to clarify the problem, then they’ll contact a guy to come and take a look, again just to clarify. Then after sometime action will be taken, this can be extremely frustrating as many of these problems could seem minor to them but to “us” are huge… like a broken shower, dodgy plumbing, dodgy door lock, broken air-conditioner or shower etc. From my experience you really need to point out the obvious: “OK my shower/air-conditioner/toilet is broken, you expect that it won’t be fixed for 3 days — give me a key to another flat.”

Most immediate opportunities open to foreigners in the education industry are as “Oral English” teachers, occasionally overlapping with other courses. However in big cities there are many teachers employed in Chinese public High/Middle Schools, Kindergartens and International Schools. In my opinion only the large capital cities will see options other than an “Oral Teacher.”

You can probably maintain usual hobbies here, especially in the large cities. I regularly play football (soccer) on a foreign team that I joined and also with students in my University. Traveling must be an important hobby here — China is so large and varied, you really must make the effort to get out and see this country while you’re here, especially since most don’t know if they’re here for 6 months or 10 years.

The overall lifestyle will be completely different for everyone, I started in a small city of a “poorer” province (compared to it’s Eastern neighboring provinces) so everything was a complete culture shock. Luckily there was often a pool of 3-6 foreigners who were in the same boat and all got along. This is an excellent environment to understand the Chinese ways, culture and language, sadly for most they’re always missing “home comforts” or long for the foreign lifestyle again. In the large cities you can probably find many ex-pat areas/bars and circles of friends, sports groups and organisations, even western restaurants and supermarkets. This of course is much more comfortable but at the same time you probably won’t experience the Chinese way of life, and the cost of living a foreign lifestyle here is quite high. In my mind it’s not worth the cost of such meals or drinks. I’m much happier doing my own thing with my wife, playing football (soccer) or going to the gym and travelling.

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A friend discusses alternative wealth management products (WMPs)

In Chapter 5 and 17 I briefly mention that due to the current legal and financial system on the mainland there are very few financial alternatives and investment vehicles to park funds.  As a consequence, wealth management products (WMPs) such as trust companies are a new type of wealth management service that collectively amounts to more than $1 trillion and is considered to be an integral part of a “shadow” banking system (e.g. off-balance sheet transactions).  According to Xiao Gang, chairman of Bank of China, there are 20,000 WMPs in circulation currently.

It should be pointed out that the term “shadow” has been hyped up and distorted by many analysts to mean the equivalent of “shady” and “fraudulent.”  In economic terms, while there may be illicit or fraudulent activity taking place (e.g., money laundering), all the “shadow” activity technically forms part of the larger informal economy.  That is to say, given continued financial reforms, some of these 20,000 WMPs could eventually integrate and become part of the formal economy.  While there may be any number of pyramid and Ponzi schemes in this segment, this is not to say that the entire $1 trillion under management will all collapse into nothingness (it could, but you cannot say it a priori).

How does it work?

I asked a Chinese friend, Kevin C, to briefly explain how he manages his assets in this alternative system.  Here is his response:

I began my first “shadow” investment in the early part of December 2012.  The “shadow” bank system offers different deposit terms ranging from 1 month to 6 months and sometimes up to12 months (which is the longest).  Most companies originally offered interest rates from 17% per year last year, however this has been reduced to 13-14% per year now.  There are more than ten public companies operating this kind of private investment path and promote it via their websites.  In order to open an account, you need to register a user ID and mobile number.  In addition, you need a Chinese National ID Number, plus your personal bank account number which will be used to transfer money back to your account.  In practice, I have placed 80% of my capital in the 1 month term,15% in a 3 month term and 5% for longer terms.

I try to choose the company carefully before make my own investment and of course there is no single website can guarantee 100% safety.  However, if it doesn’t look like a short term business for those companies which I believe, as long as they offer a one month product, I think it will be relatively safe to me.  As far as trying to fund it through debt like credit cards, I looked into taking out a simple loan and found out that the monthly interest rate that I would owe actually outpaces what I would receive in return from one of these private investment plans.  So I am actually using my own money to try this out.  So far so good.  And even though I still worry about the risk, as I said before, the one month term is the most attractive to me for this reason.

Again, I am not endorsing this service.  In fact, it is really hard to see how this particular service can provide these high rate of returns in the long term and may in fact be powered solely through speculation and exuberance.  Perhaps these 10+ firms Kevin mentions do not even reinvest the capital into actual productive projects but merely recycle the money to other customers cashing out each month.  Perhaps other customers do fund a lot of their investments through debt (e.g., borrowing to reinvest it into one of these 10 firms) and have a great deal to lose in the event one of the companies goes bankrupt.  However, this was just an example to give you an idea of what the process is like.

For more see: Examining China’s ‘Shadow Stimulus’ from The Wall Street Journal, In China, Hidden Risk of ‘Shadow Finance’ from The Wall Street Journal, Regulating shadow banking from China Daily, Uncertain foundations from Financial Times, China to tighten shadow banking rules  from Financial Times, China’s brokerages turn shadow banks from Financial Times and Don’t Worry About Wealth-Management Products, Regulator Says from The Wall Street Journal

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Shanghai BarCamp 2013

About a week ago I mentioned a Shanghai geek/tech event called BarCamp.  Unfortunately I was unable to attend, but a good friend of mine, Veli-Antti Ruismäki, was able to.  Here are some of this thoughts he emailed me:

I attended the Shanghai BarCamp on March 23 at the Hult Business School. A day of exhilarating topics ranging from agile project management to decision theory and negotiating tactics to gamification and 3d-printing meant I walked out with a ton of new ideas and refreshed views on things.  The event boasted 40+ topics so there was sure to be something for everyone. A must-go when they organize it again next fall.   Maybe I’ll even present something myself next time.

Have you attended any similar events or expos on the mainland recently?   Send me a message and share it with us.

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