Chinese Currency Manipulation

I’m amazed at the persistence, with which American policymakers keep blaming China for its economic vows. Meanwhile, we finally received a response to US’s continuing whining about undervalued Renminbi from the China’s Foreign Ministry: “We believe the appreciation of the renminbi cannot bring about balanced trade and cannot help the U.S. solve its own problems of unemployment, overconsumption and a low savings rate”.

I’m inclined to agree with all three factors outlined in this statement, perhaps to a slightly lesser degree with cheap RMB’s impact on US unemployment. There might be indeed some revival if it were not for the Chinese currency. But US exports are not cheap anyway, given Euro’s record lows and weakening purchasing power in Europe. Plus, there is a host of new industrial powerhouses competing with China, such as Vietnam, Indonesia, India etc. flooding the US with shoddy clothes and other low value added goods.

The impact of overconsumption and low savings rate is indisputable. Those were the root causes of the financial crisis and continue to sink the country deeper into debt. Joe the Plumber himself back in good old days would get several cars and a house he could never afford even with his GM salary.

But there is another point the Chinese foreign ministry spokesman did not highlight. The US is a postindustrial nation. As simple as that. It will not be and should not try to revive its blue collar work force. The US’s competitive advantages are high-value added good, financial services, R&D etc. US manufacturing corporations that have put their major stake in developing markets abroad will be get a hedge. Thus, any attempt to appeal to Joe is a pure populism.

China, in fact, is on track to appreciating its currency. It needs to mitigate its excessive trade surplus and resulting overdependence on exports. It just had to boost exports in the wake of the crisis, since it was the only way to stay afloat.

Chinese Business Communication

China has always been more than a country for the Westerners. And today it remains a mind-boggling phenomenon difficult to comprehend. So when Western businesses come to China, they often inadvertently ignore the subtleties of the Chinese business style and mentality of their Chinese counterparts. In this post I would like to draw from my experience living and working in China to outline some of the peculiarities of the local business communication.

Perhaps, the most notable is the “beat around the bush” behavior when the Chinese and Asians in general take their time to ask the negotiating partner about his or her family situation and personal matters. Going straight to the subject matter is considered rude and inconsiderate. After all, personal touch is good in any culture, so it is highly recommended to pay due attention to the informal intro.

During the negotiating phase proper, Chinese still try avoid concrete details, which should not be interpreted as dishonesty. Rather, it is the tactics of “feeling the stones while crossing the river”. In other words, the Chinese are being good listeners and want to hear your point first. You can’t force your Chinese partners to get down to number crunching yet. The word you’ll hear most at this stage is 比较 or “relatively, comparatively”. All you’ll certainly find out is that their price is relatively cheap and supply is relatively abundant!

Finally, it’s time to nail down the deal and voila… nothing happens. You go home empty-handed. Or at least you think so. In reality, your Chinese counterparts just want some time to think it over and the numbers will finally surface when you are on your Hawaii vacation, at which point you would need to interrupt it and finalize the deal.

How do you get what you want relatively soon? Well, try to immerse yourself in the Chinese business communication style. Do not rush things and try to give up the initiative. Ask them to tell you more about their company, what they have accomplished, what experience they have had with foreign partners. Say a toast to successful future cooperation and drink to the bottom with them. Do get personal and be a good listener just like your Chinese partners.

There are a couple of other things that one must keep in mind while dealing with small business. One is regulatory harassment many of them are subject to. Government clerks solicit bribes from entrepreneurs in return for various permits. Your Chinese partners need to be assured they won’t have too much legal hassle dealing with you. It would be great if you could offer some assistance, but be careful not to get harassed yourself. Another thing is stealing trade secrets and dishonesty in general. The priority for a great number of companies is how to make money fast and easy and then disappear so check where the catch is and make sure you are not overcharged.

What is Chinglish?

Dear Reader, I know that you came here to read about Chinese economy, but today I want to write about a seemingly unrelated issue. If you wish to read more about the economy please look through older
posts.

Chinglish. Everybody who has been to China knows what it is, but even those people who have not probably know about it too! In fact, Chinglish, or English in Chinese interpretation, or is not a phenomenon unique to China. It exists in other Asian countries, and non-English speaking countries. It may have other names like Engrish in Japan but the essence is the same. Chinese businesses, however, are especially eager to cater to foreign customers so practically all goods have instructions written in Chinglish.

Here are some graphic samples from my trips to China:

I saw this sign on way too many toilets in China!

All stairs have this sign.

Here are some equally hilarious verbal samples:

“Welcome to choose and buy the socks. It’s beautiful, it’s comfortable and the sizes are completely. Good luck to you!”

Or how about this sales pitch I found on my fake Puma shorts:

“So, you are interested in Puma? Nice move! You’re obviously smart and know what you want in life. You are no slave to the corporate fat-cats. You know the score, you call the shots! So buy this, it suits you!”

Self-assured by this passage, I turn the page and get a bit discouraged by a pie-chart titled “Research”:

“4% of people regularly read this stuff, 96% of people do something more important.”

“Do not touch with your figures or other roughness” warns me a sign on my goggles…

To wrap up, I’ll show you folks a poster with three dudes posing. That’s surely what it takes to come up with manuals like this!

There are endless examples of the wonderful Chinglish on billboards, menus, in supermarkets etc. But on a more serious note, Chinglish sends us an important message. China desperately needs non-Chinese speaking consumers to grow. Especially, given the turmoil in Europe and resulting slower growth worldwide. China still heavily depends on exports and will not depart from it in a short-term perspective.

Being a Chinese speaker myself, although non-native, I perfectly understand the difficulty Chinese people face while studying English and other foreign languages. We have to give them credit, Chinglish is becoming not so overwhelming, although it is probably never going to disappear. Actually, Chinglish is increasingly internationalizing. There are already abundant samples in other languages. My sweater, for instance, “no puede trabajur a maquina colade”. Not even sure, whether they tried to write it in Spanish or Portuguese (or both at once!), but clearly these guys are targeting some new markets.

I could continue on and on since Chinglish is inspiring but will reserve my energy for later. In my turn, I’d appreciate it if somebody could share some new Chinglish laughs!

Chinese Labor Unions

As Jonathan Adams from Newsweek notes, despite its adherence to Communist ideals, China has never been known as a bastion of workers’ rights. However, the situation has begun to change this year with passing of the new Labor Law. In line with its provisions, the ACFTU (All China Federation of Trade Unions) that serves as a government endorsed umbrella for the world’s largest trade union organization, is currently implementing a mass unionization initiative. Thus, the unions’ significance is likely to grow in the coming years, which should be taken into account by any company doing business in China.

As a result, foreign enterprises are pressured by ACFTU to allow their workers’ engagement in grassroots level trade unions. ACFTU’s move is likely to sow discontent among foreign entrepreneurs as the regulations stipulate that companies should set aside a minimum of 2 percent of their payroll for union activities. Still, the unionization process has progressed steadily. Most large foreign corporations, such as Wal-Mart, KFC and McDonalds, despite initial resistance, have eventually cooperated with ACFTU and currently over 80 percent of these companies’ Chinese employees are involved in trade unions established under the auspices of ACFTU. However, small-scale enterprises specializing in low value added commodities may face a severe burden of union activities and worker benefits costs and may even end up shifting their production out of China.
Foreign corporations choose to respond to ACFTU’s initiative for several major reasons. First, despite its vastness, Chinese trade union organization is quite docile. Unlike their counterparts in Western Europe, Chinese trade unions do not encourage workers to strike. Rather, they serve as a regulatory mechanism to control unrest outbreaks and a platform for civilized dialogue on employees’ rights. On the contrary, companies that attempt to resist face strikes and pickets, endless audits, tax examinations and even accusations of the law breach. Second, there are certain positive incentives for employers to cooperate, such as the ability to influence who their union chairman will be, and some negotiating leverage on the 2 percent payroll “tax” to the national union. Finally, the new law does not only stipulate workers’ rights, but also facilitates mass layoffs and caps severance pay for executives. Particularly, bankruptcy and production difficulties are listed as possible rationales for layoffs. In this case, however, American businesses should be aware of possible domestic repercussions that their engagement with ACTFU may entail. For instance, Wal-Mart was very proactive in unionizing its Chinese stores, but now faces criticism from organized labor advocates in the US for depriving its American workers of what it allowed the Chinese employees.

The Chinese side upholds that unionization is in the best interests of both employers and employees. According to ACFTU, the overarching goal is to build a more harmonious society with more equal distribution of wealth. Protests against low wages and poor working conditions have become more frequent in the last decade and the new law is supposed to address these pressing issues. More specifically, ACFTU looks to promote a collective contracts system to provide legal avenues for worker rights protection. Additionally, ACFTU intends to foster communication channels between companies and employees and instill workers’ greater interest in company’s success. At the same time, the underlying objective to further strengthen Chinese Communist Party control of the unions is also quite obvious from the mere fact that ACFTU officials stated that union chairmen should be “politically aware” and that 85 percent of chairmen are also “leading members of the Party organization”.

Given the circumstances mentioned above, most American companies resent coercive methods ACFTU employed to fulfill the unionization task. Yet they choose to cooperate because they realize that obeying authorities is a precondition for the normal business operation. Although foreign corporations do not oppose unions per se, they fear that the Chinese government may use unions to dictate its terms to business. On the other hand, some companies, such as Wal-Mart, seize the opportunity to cooperate with the authorities hoping that it will give them a hedge against competitors.

Russia and China Cooperation

Just fifteen years ago, Heihe was a small Chinese village with a couple of dim lights visible at night. This offered a dramatic contrast with the large Russian port of Blagoveschensk, located on the opposite bank of Amur.

The contrast still persists except that now Heihe’s spectacular city lights blind Russian inhabitants strolling along the embankment. Both cities hoped that the thawing relationship after three decades spent with gun muzzles aimed at each other would bring both countries everlasting prosperity. However, as demonstrated by the Russian and Chinese economic modernizations, the outcome was significantly different.

Those on the Russian side confess that if it were not for China, the region would have been even more severely affected by the economic experiments led by the Moscow government in the 1990s. The price paid for the generous help of neighboring China is the region’s heavy reliance on imports of clothes and food from across the border. In return, Russia offers only raw materials, mainly unprocessed wood, and often pays several times more for the finished products made in China and re-exported back to Russia. Local authorities usually blame Moscow for pumping all the money out of the region, thereby depriving it of the essential resources needed to boost the local economy.

These complaints are understandable, yet other Russian regions sharing a border with China boast of better achievements than Blagoveschensk. Their notably larger quotas allowing Chinese migrant workers into their regions could be a clue. For example, numerous legal immigrants in Khabarovsk, another city in the Russian Far East, are involved in wood processing, textile manufacture, building houses and even growing watermelons in nearly sub-arctic conditions. They pay taxes and invest in the local economy instead of stocking the market with shoddy clothes.

Khabarovsk authorities made an effort to overcome xenophobia, and came to realize that instead of begging for scarce donations from the federal government, located half the world away, it was more advantageous to employ the cheap Chinese labor force. Naturally, fears that the Russian Far East would be transformed into a new Chinese province by influx of migrants are still present. Yet, those who are concerned are often oblivious of how strict current Russian immigration regulations are. They impose effective internal control over foreign immigrants, who have to register with local authorities in every city they visit. In addition, the Sino-Russian border is much better patrolled than frontiers with former Soviet republics. As a result, the vast majority of illegal migrants get intercepted once they reach the opposite bank of Amur.

Further arguments that Chinese will contribute to an increase in delinquency and unemployment rates also lack reason and evidence. In fact, Chinese migrants are more likely to become victims of violent crimes on Russian territory, and Russian citizens are unwilling to assume the jobs of migrant workers for the same low wages.

Clearly, the Russian “wind of change” did not influence the “Soviet” approach to business. On the contrary, fast-paced development of the Chinese border settlements reassures the Chinese citizens and government that the current course should be maintained. The town of Heihe too, enjoys a steadily increasing income from cross-border trade that closely resembles the Opium Wars trade model. The only difference is that now Chinese tawdry goods are playing the role of opium for Russia.
Though Chinese authorities give off the air of being absolutely satisfied with the current situation, they could be looking for more civilized forms of cooperation. Large-scale investments in the Russian Far East, a vast and incredibly resource-rich territory, is the core part of China’s new strategy to develop its North-Eastern provinces that still trail behind the coastal areas. Many small businesses in China produce surplus income and feel squeezed too tightly within the national borders. They are ready to invest in Russia as soon as they are assured that bureaucratic hurdles on the Russian side are removed. Apparently, both Russia and China have similar economic ambitions, but it remains unclear when both parties will finally adopt a cooperation model that would better advance their goals.

Chinese Real Estate Bubble

I will start off my first post by trying to answer the question that concerns the Chinese themselves most these days. Will China’s real estate bubble burst? There are indeed a few precursors to the bubble.

First, in the wake of the global financial crisis China’s largely export-oriented manufacturing sector tumbled and many entrepreneurs turned to real estate speculation for easier money. Second, construction material and machinery producers benefited from hefty government stimulus packages, which in turn contributed to the real estate bubble. Finally, relatively low taxes levied on resold property coupled with low mortgage rates had their fair share as well.

All of that led to a bubble that can burst like the American bubble if it goes untreated. However, China is in a much better position to prevent the burst, first and foremost because all major banks in China are state-owned. This means that lending rates can hike overnight, which happened in the late 1990s when China successfully cracked down on real estate bubbles in Beijing and Shanghai.  Chinese authorities could do exactly the same now and they are already discussing a steep tax increase on speculative operations when housing is resold within 5 years.

Moreover, the current bubble is almost entirely driven by developers as the emerging middle class can hardly afford housing. The ratio of the average annual salary to an average 1,000 sq. ft apartment price in Beijing is 1 to 80.[i] Plus, down payments reach 30 percent, which makes it all but impossible for an average citizen to buy property.  As a result, many newly built apartment buildings stay empty with only a few lights on at night. If developers cannot dictate the rules anymore, the housing market should return to normalcy.

To summarize, China’s real estate bubble is certainly a manageable problem, but China must act fast to regain control over the situation through regulatory methods. In the worst case scenario the government will provide liquidity to the banks, but it certainly prefers not having to do that.

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[i] Dexter Roberts, “Will China’s Real Estate Bubble Be Worse than Ours?”, Bloomberg Businessweek, http://realestate.msn.com/article.aspx?cp-document