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CHINA: Best of times and worst of times

January 20, 2011


 China’s president Hu Jintao is visiting Washington.  Mr. Jintao’s visit comes at a critical time as China impacts the world’s economy and the US specifically.  Let’s discuss what is happening the world economy and China’s role.  The regulatory landscape is changing in China to address growth, safety, and energy.  But first…

 The currency game.  The European Union, the euro, has been struggling since early last year bailing their members (Spain, Ireland, Portugal, Italy, and Greece) out of a debt crisis.  Germany is going strong so there EU reluctance to take any action which might stifle Germany’s trade strength. Chinese monetary policy is a gradual appreciation.  The Chinese have slowed the yuan strength for a couple of important reasons.  To keep its own currency low to protect small companies in the world trade where increases would open them up to more competition and force some businesses to close and to keep a reign on inflation. Additionally, while the euro is challenged, an undervalued yuan helps China to keep its exchange strength and to have the euro act as a counterweight against the dollar.

Consumer strength.  China specifically and Asia generally are booming.  The World Bank cites 9.3 percent overall growth for developing Asian economies.  Because of this growth, China has implemented credit-tightening measures to combat inflation and surging property prices.  China’s financial success and growth has led created a new market for luxury goods.  The world can tell who has money by who travels and spends.  Americans remember when its cities were filled by Japanese tourists and a few summers ago tourists from the European Union spending on that strong euro currency rate.  Since the US, Europe and Japan can no longer support the previous spending levels for luxury goods, China is stepping into the gap. 

 The “Peking Pound” has accounted for 2.5 million Chinese tourists visiting Western Europe up from 2 million in 2009.  Chinese visitors’ buying power is bolstered by a rise in the yuan against the euro.  Chinese purchasing power is a target for high end manufacturers. Chinese consumers spent $23.4 billion on high-end handbags, suitcases, shoes, watches, jewelry, clothes, cosmetics, and perfumes.  Just this holiday season, wealthy Chinese tourists were expected to spend $1.57 billion on luxury goods in the U.K.

According to the Chinese Academy of Social Sciences, most luxury goods makers have opened outlets in Chinese metropolises and provincial capital cities.  In the U.K., many West End stores have appointed assistants who speak Mandarin to help cash in on the lucrative new market.

 Energy.  How can China and the US partner on a low carbon future and why would they want that future? Both China and the US rely on fossil fuels.  In 2009, the US was the world’s top oil importer with 9.6 million barrels a day, while China was the second largest with 4.3 million barrels a day. Both countries are heavily dependent on coal which is relatively inexpensive but a major pollutant.  Together, the US and China consume about 60 percent of the world’s coal.

China and the US have met in 2009 and last year to discuss clean energy cooperation.  In 2009, in collaboration with the Worlds Resources Institute, joint research, supported by $150 Million in private and public funding from the US and China, began on development of clean energy technology with a focus on advanced coal research.  In 2010, both US and China participated at the United Nations climate conference in Cancun Mexico and the resultant Cancun agreement, a set of decisions that brings emissions among the world’s major economies under the UN’s framework.  A World Resources Institute analysis shows that the US can get close to its 17 percent emission reduction target for 2020 (v. 2005 levels) if the federal government and states move aggressively in this direction.

Finally, China’s urbanization.  China’s population shift to cities will create a demand for capital investment in urban building, raw materials, and energy production.  As more people relocate from villages or shanty towns.  China is providing affordable housing for up 5.9 million homes in 2010.  The government is providing the low income housing to curb soaring property prices.  China is invested 80.2 billion-yuan or $12.2 billion.  To address the housing migration, the National People’s Congress – China’s top legislature reported that provincial governments failed to meet their 2009 affordable housing construction goals.  The primary challenge to the provincial areas is the rising values for property.  Instead of using the land for affordable housing, the provinces could sell the lucrative land where property prices have continued to soar and increase their revenues.  The central government will guarantee land for the construction of 10 million affordable homes this year. Stricter permitting, inspection and quality control is necessary to address the construction quality and living conditions for the affordable housing.  Some new subsidized apartments were built on toxic land polluted by a chemical plant previously on the site.  In other developments, a subsidized housing project in Beijing was ordered demolished due to substandard concrete. 

 The Law –

 China is keeping the yuan undervalued to protect its small companies in world trade so that Chinese exports continue to be cheap.  China’s monetary policy protects its small businesses from competition which might force some businesses to out of the market.  Also China’s actions protect its trade strength around the world particularly with US and Europe.

 What does US current policy do to help its small businesses, to protect jobs?

 Are there any laws that the US can put in place to help small companies be more competitive in the world market?

 Besides encouraging China to accelerate the appreciation of the yuan, what regulatory actions can US take to increase the dollar’s strength? And reduce trade deficits?

 China is beginning to tax only high income earners for property taxes.  Is Chinese purchasing power an opportunity for the government to tax for increased revenue to support urbanization or would increased taxes take stifle the Peking Pound?

 With the Cancun Agreement, China and the US are linking to a global standard and watchdog in the United Nations regarding carbon emissions.  If China and the US are unwilling to police themselves, will the Cancun Agreement have any teeth?  What regulatory policy would support compliance from China and US?

 China needs to provide stricter guidelines for affordable housing projects.  Should regulations be at the local level regarding permits, construction inspections or at the central level?  Which will more effective?

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