"China is a kleptocracy of a scale never seen before in human history "

Hedge fund manager and top financial blogger John Hempton looks at the Chinese economy - basically describing how Chinese workers, forced by demography (one child policy) to save for their old age, and limited by the state in their investment options (to bank accounts with a below-inflation return), are robbed by inflation - the money going at low interest rates (negative real rates) to State Owned Enterprises - which are then looted by the elite.

The Chinese banks are the finest deposit franchises in human history. They can borrow huge amounts at ex-ante negative real returns.

And those deposits are mostly lent to State Owned enterprises.

The SOEs are the center of the Chinese kleptocracy. If you manage your way up the Communist Party of China and you play your politics really well may wind up senior in some State Owned Enterprise. This is your opportunity to loot on a scale unprecedented in human history.

Us Westerners see the skimming arrangements. If you want to sell kit (say high-end railway control equipment) to the Chinese SOE you don't sell it to them. You sell it to an intermediate company who on-sell it in China. From the Western perspective you pay a few percent for access. From the Chinese perspective – this is just a gentle form of looting.

And it is not the only one. The SOEs are looted every way until Tuesday...

A normal business – especially a State Owned dinosaur run by bureaucrats – would collapse under this scale of looting. But here is the key: the Chinese SOEs are financed at negative real rates.

A business – even a badly run business – can stand a lot of looting if it is (a) large and (b) funded at negative real rates.Those negative real rates are only possible because there are copious bank deposits available at negative real rates to State controlled banks.

People saving for their old age, then being robbed by high inflation to enrich a financial elite who benefit from negative real rates of interest? Thank God it couldn't happen here!




UPDATE - NYT.

"... a broad consensus of Chinese economists says the country is overdue for another big push to encourage private enterprise and to foster a shift toward a more consumer-driven economy. The challenge, they say, is turning back China’s domineering state sector. But that seems increasingly unlikely. Publicly controlled enterprises have become increasingly lucrative, generating wealth and privileges for hundreds of thousands of Communist Party members and their families. And in a clear sign of its position, the government has moved to limit public debate on economic policy, shutting out voices for change. "

Mass Immigration And The Lewis Turning Point

Ambrose Evans-Pritchard ponders the wealth of nations :

For China, the cheap labour era is over. It faces the "Lewis Point" where the limitless supply of migrants from the countryside dries up and urban wages surge.

Pay has already been rising at 16pc to 18pc annually in the Eastern cities for several years, and this is now happening in Chengdu and Chongqing in the heartland.

I'd heard vaguely before of the economist Arthur Lewis, the first black person to win an academic Nobel, and his famous model :

In his story a "capitalist" sector develops by taking labour from a non-capitalist backward "subsistence" sector.

At an early stage of development, there would be available an "unlimited" supply of labour from the subsistence economy which means that the capitalist sector can expand without the need to raise wages. This results in higher returns to capital which are then reinvested in further capital accumulation. In turn, the increase in the capital stock leads the "capitalists" to expand employment by drawing further labor from the subsistence sector. Given the assumptions of the model (for example, that the profits are reinvested and that capital accumulation does not substitute for skilled labor in production), the process becomes self-sustaining and leads to modernization and economic development.

The point at which the excess labor in the subsistence sector is fully absorbed into the modern sector, and where further capital accumulation begins to increase wages, is sometimes called the "Lewisian turning point" (or "Lewis turning point") and has recently gained wide circulation in the context of economic development in China.

So as long as there's a plentiful supply of new labour, our capitalist doesn't need to raise wages. In its original development context, we're talking early-to-mid nineteenth century - the stuff that people like Dickens and later Zola railed against (in Zola's case after it was well on the way out).

By the latter half of the nineteenth century the country had moved to town, working class living standards were rising - and they didn't stop until the 1970s.

Lewis was writing in a 1950s Britain where "Globalisation In One Country" was undreamt of. It didn't occur to him that a wealthy country might start to put in train the reverse process, bringing in millions of poor from all over the world (a process which a change of government shows no sign or intention of stopping) and stopping wage growth in its tracks, before reversing it. Inflation's been over 5% for three years now, wage rises around 1% a year. That's a hefty cut. Asset price inflation - especially housing - has been high for 25 years.

And, as Adam Posen will tell you, it's a lot easier to let inflation lower real wages than "crush" nominal ones.

But unlike China, where the Communist capitalists, having a concept of a nation and a national interest, won't start importing millions of foreigners the moment wages go up, Britain seems likely to see this "un-development model" continue indefinitely. There are only a finite number of peasants in China, and it's a big country. Eventually, if the Communist Party continue their impressive capitalist stewardship, the average Chinese may be comfortably off.

The UK is a very small country, and there are a lot more poor people in the rest of the world. It could be a very long time before the "limitless supply of migrants" dries up and the UK becomes the first world economy to experience a second Lewis point.

Maybe when I mooted the prospect of UK real wages reaching Chinese levels I was being over-optimistic.

China - Genius Genes, Gentlemen and State Power

As I said a while back, if China can set up a eugenic policy for a few Olympic basketball medals, what might they not do for a few more Nobel-winning scientists ?

Some of the world's fastest supercomputers are being set up in Hong Kong to address the age-old mystery of human intelligence.

The study of intelligence quotient (IQ) is being conducted by BGI Hong Kong, [formerly] known as the Beijing Genomics Institute. It will survey DNA samples from 1,000 child prodigies from China's best high schools, comparing them with samples from 1,000 children of average intelligence, searching for genetic variations.

The study will examine protein coding genes of the extremely smart children, many of whom are expected to enroll at Harvard, Yale or Cambridge. The results will be correlated with each youngster's school test scores, in hopes of learning how specific genetic variations affect intelligence.

The study, which started in 2009 in Shenzhen, is moving to a new facility in Tai Po. By the end of this month, 115 of the world's fastest sequencers - the HiSeq 2000 - will have relocated to the city. They will be able to sequence the equivalent of 1,000 human genomes a day, and soon surpass the entire sequencing output of the United States to become the world's largest sequencing centre.

The study by BGI, which receives strong financial backing from the Shenzhen and mainland governments, will be the largest-scale examination of its kind. Ethical and privacy concerns have hindered such work in America and Europe.

You can say that again. When a decent and humane sort like Charles Murray gets called a Nazi and a racist for writing about IQ, the likelihood of a Western government sponsoring a massive IQ/genetics research program ain't terribly high.

BTW, I'm no expert, but mightn't it be more productive to compare exceptional children with their less brilliant siblings ? I'm sure Professor Hsu knows what he's doing.

Ever since Nazi Germany misused science to support its murderous racist and anti-Semitic theories, Western societies have been extremely sensitive about linking genetics to IQ.

Yup. Even though we ain't German and we ain't Nazis, no one wants to be branded by association - which is what UK lefties will do the moment the subject's raised. But China doesn't seem to have a great deal of liberal guilt about such things - they're more into 'what works'.

Be interesting (as in the apocryphal Chinese curse) to see what comes out of this. East Asians are already among the cleverest people in the world as measured by IQ. If they could find some way of turbocharging that ... on the other hand the simplest thing would be to drop the one-child policy for clever girls.

(In the UK the cleverest girls have the fewest children - dysgenics rather than eugenics).



UPDATE - a vision of the future ? via Professor Hsu, Mark Lilla at New Republic on the two Westerners influencing bright young Chinese - Leo Strauss and Carl Schmitt.

I had heard that Strauss was popular there, as was, to my surprise, Carl Schmitt, the Weimar anti-liberal (and Nazi - LT) legal theorist... Strauss and Schmitt are at the center of intellectual debate, but they are being read by everyone, whatever their partisan leanings; as a liberal journalist in Shanghai told me as we took a stroll one day, “no one will take you seriously if you have nothing to say about these two men and their ideas.” And the interest has little to do with nationalism in the nineteenth-century sense of the term. It is a response to crisis—a widely shared belief that the millennia-long continuity of Chinese history has been broken and that everything, politically and intellectually, is now up for grabs.

... Liberal thought, the young ones now feel, just doesn’t help them understand the dynamics of Chinese life today or offer a model for the future. For example, everyone I spoke with, across the political spectrum, agrees that China needs a stronger state, not a weaker one—a state that follows the rule of law, is less capricious, can control local corruption, and can perform and carry out long-term planning. Their disagreements all seem to be about how a strong state should exercise its power over the economy and how its newfound power should be exercised in international affairs. Similarly, there was complete consensus about China’s right to defend its national interests, just differences over what those interests are. When my turn to talk about American politics came, and I tried to explain the Tea Party movement’s goal of “getting government off our backs,” I was met with blank stares and ironic smiles.

That makes sense to me. Chinese national interest demands better governance, not less government. The national interest is expressed by Schmitt :

Classical liberalism sees society as having multiple, semi-autonomous spheres; Schmitt asserted the priority of the social whole (his ideal was the medieval Catholic Church) and considered the autonomy of the economy, say, or culture or religion, as a dangerous fiction. Classical liberalism treats sovereignty as a kind of coin that individuals are given by nature and which they cash in as they build legitimate political institutions for themselves; Schmitt saw sovereignty as the result of an arbitrary self-founding act by a leader, a party, a class, or a nation that simply declares “thus it shall be.”

... The Chinese tradition of political thought that begins with Confucius, though in a way statist, is altogether different: Its aim is to build a just social hierarchy where every person has a station and is bound to others by clear obligations, including the ruler, who is there to serve. Central to the functioning of such a state are the “gentlemen” (or “gentry” in some Confucius translations), men of character and conscience trained to serve the ruler by making him a better one—more rational and concerned with the people’s good. Though the Chinese students I met clearly wanted to épater their teachers and me by constantly referring to Schmitt, the truth is that they want a good society, not just a strong one.

And the better governance comes from Strauss's gentlemen :

Taking a cue from Aristotle, Strauss distinguished between philosophers, on the one hand, and practical men who embody civic virtue and are devoted to the public good, on the other: While knowing what constitutes the good society requires philosophy, he taught, bringing it about and maintaining it requires gentlemen. Aristocracies recognize this need, democracies don’t ... But for the young Chinese I met, the distinction between sages and statesmen and the idea of an elite class educated to serve the public good make perfect sense because they are already rooted in the Chinese political tradition. What makes Strauss additionally appealing to them, apart from the grand tapestry of Western political theory he lays before them, is that he makes this ideal philosophically respectable without reference to Confucius or religion or Chinese history. He provides a bridge between their ancient tradition and our own. No one I met talked about a post-Communist China, for obvious reasons. But students did speak openly about the need for a new gentry class to direct China’s affairs, to strengthen the state by making it wiser and more just.

Now this is all fascinating stuff, implying a future China a little like Victorian Britain, with an elite class of gentlemen born (or bred) to rule in the national interest. But the British were always sceptical of ideology, let alone an ideology like Schmitt's, with its theory of 'the enemy' or 'the other', not to mention a love of dictatorship and 'decisive action'. Schmitt considered the Night of the Long Knives to be "the highest form of administrative law" - not a guy you'd want to be up in front of in court.

When I see people like Andy Newman worshipping at the People's Shrine, I do wonder - is he just making his obeisances to whatever rising power isn't British (hedging his bets by also backing Islam), or is he genuinely confusing some idealised Socialist Republic in his skull with the reality of the PRC ? What I see in these young Chinese patriots is a desire for something more like the "ancient virtues of courage, patriotism and devotion to duty" which Glubb Pasha describes in a rising empire.

“Chinese tradition has many good things, but we’ve ditched them,” Wan told me. “I feel there have to be people to carry them on.” She came from a middle-class home, and Tang’s humble roots and old-fashioned values impressed her. “Most of my generation has a smooth, happy life, including me,” she said. “I feel like our character lacks something. For example, love for the country or the perseverance you get from conquering hardships. Those virtues, I don’t see them in myself and many people my age.”

Those who came into conflict with Victorian Britannia usually came off worse - she was pretty robust about defending her interests. How robust will a 'Schmitt-powered' Chinese elite be?

Chinese Eugenics

Well strike a light :

In other sports, size is more important - and the government appears to be discreetly trying to influence this too. Top basketball coach Wang Libin says the government encouraged the exceptionally tall mother and father of Yao Ming, the 7ft 6in superstar of the American basketball league, to marry. They did the same for his own parents, and for him and his wife - both basketball players. Their daughter is only 15, but she is 6ft 4in tall and dreams of playing in the 2012 London Olympics. Now, he says, tall people are exempted from the one-child policy so that they can breed more tall offspring.

Hmm. If they'll do that for a few gold medals, what might they not do for a few Nobel-winning scientists ?

UPDATE - apparently a Chinese law of 1994 provides for the compulsory sterilisation of those who carry serious genetic disorders and wish to marry. "Wish to marry", eh - how quaint and old-fashioned that sounds to a Brit. I have to assume there aren't many Ed Milibands in China. In fact :

"it is illegal in almost every province for single women to have a child and that people who have children out of wedlock must pay "social compensation fees" (29 Feb. 2009, Sec.1.f). The US Congressional-Executive Commission on China (CECC) reports that those who give birth to a child outside of marriage can face fines six to eight times the amount of their income from the previous year (US 31 Oct. 2008, 97). According to a 2005 article in Reproductive Health, very few children are born out of wedlock in China (11 Aug. 2005, 3)."

I'm not surprised. But has anyone told Andy Newman ?

The Fate of Empires - Part 1

An excerpt from The Fate of Empires, by Sir John Glubb ('Glubb Pasha'), soldier, historian and Arabist, who died in 1986. I found it here thanks to a link here, and OCR'd it into text. Published by Blackwell in 1978 (in total opposition to the then zeitgeist), it appears to be unobtainable - can't even find a copy on ABE Books.

While I'm not at all sure that the one-third of call centre employees who have degrees were motivated by the desire for academic honours (I think they probably believed the innovative market theory that you could quintuple the number of graduates with no impact on graduate salaries, and thought they'd get well-paid jobs), and I don't get a hint of Paul Kennedy's later thesis that 'while the point of becoming a great power is to be able to fight major wars, the way to remain one is not to fight them', the pattern Glubb lays out seems a fairly good fit with what we see.

Let us now, however, return to the life-story of our typical empire. We have already considered the age of outburst, when a little-regarded people suddenly bursts on to the world stage with a wild courage and energy. Let us call it the Age of the Pioneers.

Then we saw that these new conquerors acquired the sophisticated weapons of the old empires, and adopted their regular systems of military organisation and training. A great period of military expansion ensued, which we may call the Age of Conquests. The conquests resulted in the acquisition of vast territories under one government, thereby automatically giving rise to commercial prosperity. We may call this the Age of Commerce.

The Age of Conquests, of course, overlaps the Age of Commerce. The proud military traditions still hold sway and the great armies guard the frontiers, but gradually the desire to make money seems to gain hold of the public. During the military period, glory and honour were the principal objects of ambition. To the merchant, such ideas are but empty words, which add nothing to the bank balance.

The wealth which seems, almost without effort, to pour into the country, enables the commercial classes to grow immensely rich. How to spend all this money becomes a problem to the wealthy business community. Art, architecture and luxury find rich patrons. Splendid municipal buildings and wide streets lend dignity and beauty to the wealthy areas of great cities. The rich merchants build themselves palaces, and money is invested in communications, highways, bridges, railways or hotels, according to the varied patterns of the ages.

The first half of the Age of Commerce appears to be peculiarly splendid. The ancient virtues of courage, patriotism and devotion to duty are still in evidence. The nation is proud, united and full of self-confidence. Boys are still required, first of all, to be manly — to ride, to shoot straight and to tell the truth. (It is remarkable what emphasis is placed, at this stage, on the manly virtue of truthfulness, for lying is cowardice — the fear of facing up to the situation.)
Boys' schools are intentionally rough. Frugal eating, hard living, breaking the ice to have a bath and similar customs are aimed at producing a strong, hardy and fearless breed of men. Duty is the word constantly drummed into the heads of young people.

The Age of Commerce is also marked by great enterprise in the exploration for new forms of wealth. Daring initiative is shown in the search for profitable enterprises in far comers of the earth, perpetuating to some degree the adventurous courage of the Age of Conquests.

The Age of Affluence

There does not appear to be any doubt that money is the agent which causes the decline of this strong, brave and self-confident people. The decline in courage, enterprise and a sense of duty is, however, gradual.
The first direction in which wealth injures the nation is a moral one. Money replaces honour and adventure as the objective of the best young men. Moreover, men do not normally seek to make money for their country or their community, but for themselves. Gradually, and almost imperceptibly, the Age of Affluence silences the voice of duty. The object of the young and the ambitious is no longer fame, honour or service, but cash.
Education undergoes the same gradual transformation. No longer do schools aim at producing brave patriots ready to serve their country. Parents and students alike seek the educational qualifications which will command the highest salaries. The Arab moralist, Ghazali (1058-1111), complains in these very same words of the lowering of objectives in the declining Arab world of his time. Students, he says, no longer attend college to acquire learning and virtue, but to obtain those qualifications which will enable them to grow rich. The same situation is everywhere evident among us in the West today.

High Noon

That which we may call the High Noon of the nation covers the period of transition from the Age of Conquests to the Age of Affluence: the age of Augustus in Rome, that of Harun al-Rashid in Baghdad, of Sulaiman the Magnificent in the Ottoman Empire, or of Queen Victoria in Britain. Perhaps we might add the age of Woodrow Wilson in the United States. All these periods reveal the same characteristics. The immense wealth accumulated in the nation dazzles the onlookers. Enough of the ancient virtues of courage, energy and patriotism survive to enable the state successfully to defend its frontiers. But, beneath the surface, greed for money is gradually replacing duty and public service. Indeed the change might be summarised as being from service to selfishness.

Defensiveness

Another outward change which invariably marks the transition from the Age of Conquests to the Age of Affluence is the spread of defensiveness. The nation, immensely rich, is no longer interested in glory or duty, but is only anxious to retain its wealth and its luxury. It is a period of defensiveness, from the Great Wall of China, to Hadrian's Wall on the Scottish Border, to the Maginot Line in France in 1939. Money being in better supply than courage, subsidies instead of weapons are employed to buy off enemies. To justify this departure the mind easily devises its own justification. Military readiness, or aggressiveness, is denounced as primitive and immoral. Civilised peoples are too proud to fight. The conquest of one nation by another is declared to be immoral. Empires are wicked. This intellectual device enables us to suppress our feeling of inferiority, when we read of the heroism of our ancestors, and then ruefully contemplate our position today. 'It is not that we are afraid to fight,' we say, ' but we should consider it immoral.' This even enables us to assume an attitude of moral superiority.

The weakness of pacifism is that there are still many peoples in the world who are aggressive. Nations who proclaim themselves unwilling to fight are liable to be conquered by peoples in the stage of militarism—perhaps even to see themselves incorporated into some new empire, with the status of mere provinces or colonies.
When to be prepared to use force and when to give way is a perpetual human problem, which can only be solved, as best we can, in each successive situation as it arises. In fact, however, history seems to indicate that great nations do not normally disarm from motives of conscience, but owing to the weakening of a sense of duty in the citizens, and the increase in selfishness and the desire for wealth and case.

The Age of Intellect

We have now, perhaps arbitrarily, divided the life-story of our great nation into four ages. The Age of the Pioneers (or the Outburst), the Age of Conquests, the Age of Commerce, and the Age of Affluence. The great wealth of the nation is no longer needed to supply the mere necessities, or even the luxuries of life. Ample funds are available also for the pursuit of knowledge.

The merchant princes of the Age of Commerce seek fame and praise, not only by endowing works of art or patronising music and literature. They also found and endow colleges and universities. It is remarkable with what regularity this phase follows on that of wealth, in empire after empire, divided by many centuries. In the eleventh century, the former Arab Empire, then in complete political decline, was ruled by the Seljuk sultan, Malik Shah. The Arabs, no longer soldiers, were still the intellectual leaders of the world. During the reign of Malik Shah, the building of universities and colleges became a passion. Whereas a small number of universities in the great cities had sufficed the years of Arab glory, now a university sprang up in every town. In our own lifetime, we have witnessed the same phenomenon in the U.S.A. and Britain. When these nations were at the height of their glory, Harvard, Yale, Oxford and Cambridge seemed to meet their needs. Now almost every city has its university. The ambition of the young, once engaged in the pursuit of adventure and military glory, and then in the desire for the accumulation of wealth, now turns to the acquisition of academic honours.

It is useful here to take note that almost all the pursuits followed with such passion throughout the ages were in themselves good. The manly cult of hardihood, frankness and truthfulness, which characterised the Age of Conquests, produced many really splendid heroes. The opening up of natural resources, and the peaceful accumulation of wealth, which marked the age of commercialism, appeared to introduce new triumphs in civilisation, in culture and in the arts. In the same way, the vast expansion of the field of knowledge achieved by the Age of Intellect seemed to mark a new high-water mark of human progress. We cannot say that any of these changes were 'good 'or' bad '. The striking features in the pageant of empire are:

(a) the extraordinary exactitude with which these stages have followed one another, in empire after empire, over centuries or even millennia; and

(b) the fact that the successive changes seem to represent mere changes in popular fashion—new fads and fancies which sweep away public opinion without logical reason. At first, popular enthusiasm is devoted to military glory, then to the accumulation of wealth and later to the acquisition of academic fame.

Why could not all these legitimate, and indeed beneficent, activities be carried on simultaneously, each of them in due moderation? Yet this never seemed to happen.

There you have the UK round about now. What happens next in the story of Empire? Does it go on to greater heights? I think probably not ....

He, for one, welcomes our new overlords

In the last year or so born-again Labour man Andy Newman's Socialist Unity blog has started to constantly beat the drum for soi-disant Communist China. I whacked a comment on his latest breathless report, but the spam filter nailed it, so here it is.

Andy - why the constant worship of our new Chinese overlords? The socialism of China has a highly nationalistic and patriotic flavour - one that you would hate and fear were a UK party to be offering it.

As a born-again cultural conservative I can appreciate what China's doing - looking after #1 while useful idiots all over the world embrace globalisation. As the new manufacturing powerhouse, they'll naturally be in favour of free trade and open markets - for others. The US firms which rushed into China, swooning over the size of the market ('if we only had 3% that could be x million customers'), are discovering that the Chinese have no intention of allowing roundeyes major influence.

Meanwhile military spending increases and the sabres are rattling in the South China Sea, while China is buying up as many resources in Asia and Africa (ores, coal, oil) as it can and developing strongly in future green technologies, especially solar generation.

They're driven by Chinese national interest, something I can completely understand. But Andy - and, to be fair, pretty much all the UK left - openly hate the concept of British national interest. What have they got that we haven't, Andy?