Sex Workers Hurt by the Recession Again

As we know, millions of sex workers in China's income have been dropping because of the recession. The high-end sex workers are affected less, although businessmen are tightening their belts, government officials who often benefit from the government's stimulus package have more money to spend for sex. But the low end ones who work on the streets or in the hair salons, whose customers are often lonely migrant workers from the factories, have seen their customers decrease sharply.

But now another blow is coming to them. Because of the recession, the government is getting less tax from companies and individuals, meanwhile, the government needs to expand spending to stimulate the economy, so the public sectors' funding is tight. According to a police friend of mine, his department is suffering from a budget deficit, so they decide to crack down the sex workers to get some fines as a way to generate more income. Of course they don't dare to touch the luxurious brothels owned by high-rank police officials, but they can work on the ones walking the street or in small salons.

My friend Liu Mang Yan, an activist working for the rights of sex workers, advises her sisters: don't panic when the police come, don't do things like jumping off the building, don't hurt yourself, you might only get a fine of 5000 and 5 days in prison.

Neither Left Nor Right

In the US, I always found it interesting that there are people from both the leftist camp and the rightist camp who idealize China.

Some people from the left admire China's big government, and assume it means more regulation of the free market and more welfare and equality for the public. But in reality, the state-owned companies in China enjoy most freedom in exploiting labor or environment, and private companies might enjoy the same freedom if they form the right alliance with government officials. China's spending on welfare, in terms of percentage of government income, is one of the lowest in the world. It's inequality in living standard is one of the highest in the world according to UN surveys. Not to mention its unions are also much weaker than those of most capitalist countries.

Some people from the right admire China's lack of union and loose regulation on labor rights and environment, they think that's good for business. But in reality, if you want to do business and you don't have the right connections with government officials, not only the tax will be high, you will also face many obstacles set by all kinds of government regulatory institutions. No law can fully protect your contract or property rights. There is no free competition, only unlimited previledge for those who have both money and political power.

That unique model of "big government-low welfare-low freedom" is the reason why the Chinese government is much richer than the US government (which is actually in huge debt) although the US's GDP is 4 times bigger than that of China. And it's the reason why Chinese factories have much lower labor cost than countries with high welfare and strong unions. But this model now face its demise because the economic crisis has destroyed the export market of Chinese goods, while most Chinese people cannot afford all those things produced in China. That's why China can only recover from the crisis if the government starts to give the wealth back to the people and reduce the obstacles that prevent people from making a living with their abilities, in other words, smaller government-higher welfare-more freedom. (It needs to be more environment friendly too, that's another complicated issue.)

The Worst Scenario I

1. China's stimulus package, which emphasizes government investment on infrastructure, only leads to even worse over-supply of airports, highway, and industrial goods.

2. China's banks, following the order of the government, keep lending to projects with vague values, which leads to huge toxic assets just like those crippled the western financial system.

3. The real estate bubble might eventually burst. Although banks are lending to developers so that they can maintain the high selling prices without cash flow, although home-ownership is the foundation of family value in China, the current price still cannot hold as fewer and fewer people can afford it.

4. The golden age of Made in China is gone. Protectionism becomes wide-spread as politicians around the world blame international trade for the job loss in their own countries. Factories in China also lose competitiveness because their exploitation of cheap labor has reached a limit, and they don't have the creativity or technology to raise the quality and appeal of their products.

5. Unemployment reaches unprecedented level and people's income drops. Neither peasant workers nor college graduates can find jobs. The only people whose jobs and income are not affected are government officials. Social unrest might follow.

6. All the money injected into the financial system leads to inflation.

7. Environment protection becomes even less a concern for the society as the priority was given to economic development at any cost.

8. Government officials continue to send their kids and money abroad, so they don't need to worry about the future of the country they rule.

To be continued.

Spectacles of State Capitalism:Easy Way Out of the Recession

Here is a quick summary of the unique tools of China's state capitalism to achieve a fast economic recovery:

1. Government investment. Spend the tremendous wealth accumulated from the people on constructions of more airports, railways, freeways, skyscrapers etc. This will generate short-term employment and help the state-owned steel and cement companies get rid of their stocks. But nobody knows whether these infrastures are truly useful.

2. Easy Bank Loan. China's major banks are all owned by the state. So when the state demands them to open their gate of lending, they will do it. Actually, we have seen an explosion of bank loan in the past 3 months, the total number--4580 billon RMB--already exceeds that of the whole 2008. When banks are acting upon state order, they don't care so much about the safety of their loans. They mainly lend to projects of state investment anyway, the only credit they rely on is that of the state. This is in sharp contrast with the finanical system of the US right now, the US government want the banks to start lending, but the banks are reluctant to lend despite the low interest rate, while the consumers and companies are also reluctant to borrow.

3. Boost the income of bureaucrats. Who will consume all those things produced by increasing state investment? Though the government is implementing some programs to improve public welfare, but those programs take time to develop and they will not make people more willing to spend in the short term. People's income are not rising and most private companies are struggling. But there's one group whose spending power will only rise, that's the state employees.

4. Create fear of inflation and another bubble circle of real estate and stocks. The state and banks are instilling more and more money into the economy, and in this weak economy these money cannot actually find promising places to invest, so they are ready to fuel another round of bubbles in real estate and stocks. If the media again talk about the oversupply of money and the potential threat of inflation, common people will again be willing to move their money from the banks to the real estate market or the stock market.

Given the above tools, it's possible that we will soon see a thriving China economy, in which numerous construction projects continue to emerge and consumption rises due to the virtual wealth created in the real esate and stock market. Of course this type of prosperity does not seem very sustainable, but neither the government nor the middle class has the patience for a more difficult path of recovery path. That difficult path involves getting rid of the shackles on people so that they can develop their productivity to the fullest as well as giving government wealth back to the people, which I will discuss in the next post.

What Real Estate Bubble?

While real estate price has been falling all over the world, China's real state price has been stable. Though the amount of transaction faltered in the fourth quarter of 2008, in the first quarter of 2009 you again see long lines in front of real-estate sales offices, and transaction quantity rose again, some apartments' price rose too. All marks of a real-estate bubble are salient in the Chinese market, from the price/earning ratio of (12:1 in shanghai) to the price/rent ratio (100:1 in Shanghai). But there is no sign that the bubble is going to burst.

How can the apartments become unaffordable for most people but still enjoy a stable demand? I was very confused until several friends of mine told me the same thing: one have to get a house to get married. Yes, that's answer, homeownership is the foundation of love in China. Since love is priceless, homes are of course priceless. The economic rules of supply and demand, or cost and benefit, only apply to material things. Spritual things, like love, are beyond those rules. Throughout history, people are willing to give up everything for love, so it's no surprise that now they are willing to pay everything for homeowership. Real state market in China is a bubble only if you think love is a bubble, which might burst at some point of human history.

Spectacles of State Capitalism: Big Government Low Welfare

I just had a revelation: one secret of China's economic miracle is the unique model of "big government and low welfare". Because of the low welfare, people tend to save more for rainy days. So the government can always use the high saving in government-owned banks for investment. Also because of the low welfare, people have to work hard to earn a living. That's how you get high investment and cheap hard-working labor at the same time. Can the high welfare Europe or the over-consuming America beat that?

Spectacles of State Capitalism: Let the Construction Begin

As millions of French people are protesting against the government in Paris for job security and higher wage, millions of Chinese peasant workers are kicking off construction projects all over China. The Local governments in China are in a frantic race to get a bigger slice of the central government's stimulus package, and they are jump-starting projects even before the central government approves them.

If they cannot get the funding from the central government, they can probably get it from government-owned banks. In the first two months of 2009 alone, banks have given out more than 2 trillion yuan loans, which equals to the whole sum of 2008. In Feb., investment in fixed asset in cities increased 25% year on year. Need more evidence of a new Great Leap? Sales of construction machinery, from excavators to bulldozers, has rised more than 30% in Feb. year on year.

Some of these projects are truly long overdue, like the water facilities in Henan which just suffered a long drought. Some are more like fairetales, for example, the city of Tian Jin's plan to build a whole new ecological city on an empty barren land, which will cost billions. But you cannot say such projects are completely illusionary; don't forget Shanghai's Pudong was turned from a farmland to an international financial center. We don't know whether such projects will be of any value at the end, but at least right now they create some jobs and boost the local GDP number.

Can a nation maintain fast long-term growth by just spreading cement and steel? I'm not sure, China is adopting such a unique model of state capitalism that it's hard to draw upon any historical lessons. Yes the western property bubbles bursted, but they don't have the unconditional backing of government credit and nationalized banks.

It seems that business is as usual in the world despite the recession, the French are protesting, the US are creating money out of thin air, and the Chinese are building stuff.

Who are Stimulated

China and the US have one thing in common: obsession with economic growth. So their stimulus packages have turned out to be much more radical than those of EU or Japan. Yesterday The Fed of the US just announced its plan to buy more than 300 billion dollar worth of Treasury bonds, practically creating virtual money to pump more liquidity to the system. Meanwhile, China's local governments have been kicking off massive infrastructure projects one after another. Before, some of these projects cannot get bank loans because of their vague promise of benefits, but now the banks are pushed by the central government to support these projects. Even the environmental regulations that used to hinder some of these projects are being relaxed. But who do these desperate actions really stimulate?

Buyers of gold and oil in the past several months are certainly stimulated. They have speculated that the US would choose inflation over recession, and they turn out to be right. Even those who bought property might be happy that at least the interest rate will be lower. But those who believe in the green papers are again punished.

China's situation is more complicated. Besides the local governments, real-esate developers seem to be very stimulated. Many of them were on the brink of bankrupcy when at the end of 2008 their over-leveraged projects suddenly cannot find customers. At the beginning of 2009, it seemed natural that the real estate bubble in China will finally burst. But after the average price of houses dropped for about 2% in major cities, the local governments suddenly start to hand out various stimulus for people to buy houses, from tax relief to straight government subsidies. After all, the income of local governments depends on high price of land. Then, the banks started to give new loans to the developers, which saves them from selling their projects at lower prices.

Many consumers have been hoping that the developers will be forced to sell their projects low when they have to pay back development loans to the banks. Now these consumers should probably give up; as long as the developers can get their loans extended unconditionally, they can wait longer than the consumers. The sad truth is many of these consumers cannot wait that long, they might have to get an apartment to get married, or they might have to get an apartment to get residence cards in big cities like Shanghai and Beijing. More importantly, they probably cannot endure the shame of not owning a home in today's Chinese culture very long. That's how you stimulate consumer demand.

Spectacles of State Capitalism

These days the western countries are becoming more and more like China, in the sense that governments are playing a central role in the economy. EU believes that more government regulation is the cure for the collapsing financial system, while the US is advocating for more government spending to stimulate the economy. Despite the obvious difference between the two approaches, they both center on expanding the governments' responsibilities. Some Chinese elites are already cheering: look, our banks are already all "nationalized" and government spending has always been a main engine of the economy, our system is superior after all.

China's state capitalism indeed has some merits. Particularly, the current Chinese government has shown impressive efficiency in mobilizing and coordinating a wide range of social resources for the tasks it determines to fulfill. You can see that efficiency in the well-organized Olympics, or the prompt rescue work during the Sichuan Earthquake. How would this efficiency fare with the economic recession?

The Chinese government has already announced its 600 billion dollar stimulus package. How that money should be allocated is still being debated. Grassroot voices are advocating that more money should be spent on health care, education and social safety net. But according to current plan the majority of that money will be spent on infrastructure, from railroad, highway to airports etc. No one will doubt the government's ability to execute these infrastructure projects well. And these projects will indeed boost the GDP, and absorb many unemployed construction workers.

But you can expect the old problem of corruption as long as the power of allocating resources are in the hands of bureucrats without public oversight. What's more, the concentration of resources on government projects might squeeze out resources for the private sector. Particularly, the banks would rather give loans to government projects than to private small business. Infrastructure construction does not generate as many jobs as small business in retail or service. So we might see a growth of GDP without a growth in employment.

My final point, we should really be worried that some government official will decide to waste huge amount money on building MONUMENTS of THEIR OWN ACCHIEVEMENT again! Just look at the skyscrapers to be built in the coming years.

States Strike Back

Not long ago, many economists were talking about the demise of nation-states under the forces of globalization. Now many are calling for the states to play a bigger role in regulating and rescuing the economy. In the US, Obama has announced the plan to increase government spending and raise tax on the rich. China's government also made plans to add trillions of yuan to government spending and requested government-owned banks to expand loans.

Although I have been criticizing unbridled market economy, I'm worried that wrong kinds of government interventions could protract the recovery of the economy now. When you talk about the role of the State in China's context, you have to recognize the gap between the policies made by the central government and the execution of local officials. In the past, a large part of government spending has been wasted on redudant infrastructure, luxurious government buildings and excessive heavy industry. Not to mention the money slipped into the pockets of corrupted local officials. China is already having the problem of over-production, given the dwindling external demand. If more money are invested in infrastructure and products that people cannot really use, the problem of over-production will get worse. So it's better to put those money from the government directly into people's pocket through tax cut and welfare. That way people can spend their money on what they need, and the industries will produce according to the true demand.

In the US's context, I think Obama is doing the right thing. In the past decade, the US government has been leaning towards putting money in the people's pockets, particularly the rich people's. It reached the stage that people start putting easily available money into real estate and financial instruments, rather than engaging in everyday consumption and productive activities. So it's a good idea that the government will now lead the way in renewing infrastructure and developing green technology, which the private sector hasn't showed enough interest in.

But even democratic governments need to consider voter sentiment and narrow national interests. So you often see protectionist policies come with government stimulus packages. Obama has the "Buy America" line, Sarkozy required French car factories not to move to Eastern Europe, and Brown pandered to the "British jobs for British Workers" protests. What's worse, as the states are trying to draw more resources to their own countries, poor countries suffer more.

My skeptism about the effectiveness of government interventions makes me contemplate on what role the civil society can play for this recession...

The Propaganda Might Become True

In China's media these days, confidence is the buzz word. It seems people want to believe that, as the developed world is in decline China will become the new land of opportunities.

I have been warning people around me that the impact of this global recession on China hasn't fully unfolded yet, things can get much worse before they get better. China cannot rely on export or real estate to continue its growth any more. And it will be a long time before China can have a strong domestic market. The social harmony touted in the media may be destablized by massive unemployment and increasing international trade conflicts.

But there is a reason I came back to China at this moment. I, too, am enticed by the opportunities in China in the future. All the flaws here are also opportunities for development. Throughout Chinese history, crisis motivates important social changes more than anything else.

Yes Chinese products today are distrusted by both foreign and domestic consumers. Maybe some milk we are drinking is still unsafe and some houses we are buying leaks on rainy days. But now that almost none of us can stand this anymore, we might finally all try to produce creative and high quality things whatever industry we are in.

Yes Chinese bureucrats are wasting a colossal amount of taxpayer money on luxurious dinner, on vacations disguised as business trips, and even on their mistresses. But that means if we can curb that kind of corruption, the money we save might be enough to cover all the debts in medical care, education and social safety net.

Yes China's environment is polluted and the natural resources are strained. But that means, unlike resource-rich countries like Brazil or Australia, we will have the urgency to develope green technologies and adopt a more environmentally conscious life style.

Yes most Chinese are still very poor, we have 25% of the world's population but only 5% of the world's wealth. But if we can lift more people out of poverty and give each person the freedom and the means to fully realize his/her potential, China will indeed become a land of opportunities and a new engine for the world's economy.

From the World Factory to the World Market

Although the plunge of export are already hitting China hard, my middle-class friends in Shanghai are still surprisingly optimistic. They work for big international corporations, and they are normally negligent of the workers in the manufacturing sector who are affected most by the recession. They firmly believe that China will do much better than the other countries in this crisis, why not, the government promised a 8% growth GDP.

The government is indeed doing a lot to energize the economy. The huge stimulus package will probably indeed provide a growth in GDP. But the GDP growth will mainly come from the constructions of more roads, airports and office towers, which will not provide enough jobs or truly lift people's standard of living. The investment in infrasture will increase China's production capacity even more, with the demand from foreign consumers sharply decreasing, where can all the goods made in China go?

The American consumers' seemingly insatiable appetite was supported by the asset bubble, from financial assets to real-estate, which has finally bursted. Now many Americans will finally learn to live within their means. This change already has a clear impact on China: China's famous trade surplus has decreased 88% in Febuary from January.

The reason my middle-class friends haven't felt the pain yet is they are not part of the world factory. Instead, they mostly work for global corporations that see China not just as a production site but also as a promising market. These global corporations often are reluctant to cut their investment in China because the Chinese market still has a lot of potential to grow while the consumption in the developed world is likely going to shrink for a long time. But the fate of China as the world market depends on whether it can truly raise the people's spending ability.

The domestic consumption in China has been notoriously weak even in China's boom years. Although China became the second largest market in the world for luxury goods, it's only the small amount of bureaucrats and enterpreneurs that gain strong purchasing power. Most people are reluctant to spend because their income grows slower than China's GDP, they are worried about the high cost of health care, medicine, housing and the lack of social safety net. That's why the overall saving rate in China is so much higher than that of America. This will not change easily. My optismistic middle-class friends should realize that their fate depends on whether China can indeed become a strong market, which in turn depends on whether the wealth and privilege they enjoy can be spreaded to their low class fellow citizens. The only way for China to pull it self out of recession is to adjust the wealth distribution and give people more sense of security through better welfare, the people who have been producing everything for the world should be able to consume what they produce too.

The Decline of Made-in-China

A weel ago I went to the city of Yi Wu, the international trade center of small commodities, and the city of Dong Guan, the heart of export-oriented made-in-China manufacturing center. Everyone I talked to, from entrepreneurs to workers, feel afflicted by the recession. But there is something puzzling about it, if the western consumers are tightening their belts, shouldn't the cheap made-in-China goods become more attractive to them? My conversations with many entrepreneurs suggest that the current demise of Made-in-China is caused by domestic factors as much as international factors.

Many entrepreneurs admitted that there are still orders from their customers from the West, but often they can no longer meet the needs or compete with suppliers from other developing countries. In the past, it was easy for them to just take advantage of the cheap labor and the lack of environmental regulation. So they didn't make much effort to improve their technology and design, expand their distribution network or build their own brand. Now that they've reached the limit of squeezing labor and environment, they suddenly cannot retain their competativeness.

Insteading of trying to built upon the success of their manufacturing business, many entrepreneurs went to pursue the high profit of financial investment from real estate, stocks to raw commodities (oil, gold, copper, iron ore etc.) In the past several years, the profit margin of all the shoes or toys they produce is often lower than 5%, but speculative investment on real estate, for example, can often bring 100% profit and make them rich immediately. Now that all those bubbles of assets are bursting, they find themselves short of fund to sustain their manufacturing business.

You cannot put the blame entirely on such entrepreneurs. The bureaucrat class also has made the business environment particular tough for entrepreneurs. Many government officials, usually free of public oversight, takes every opportunity to participate in anything profitable. Since they are the gatekeeper of the market place and controls a lot of public resources, few entrepreneurs can succeed without buying their collaboration. Many entrepreneurs felt so frustrated with this corrupted system, that once they get rich, they try to send their children to countries like the US, Canada and Australia and get green cards for the whole family. Actually, the corrupted officials do the same, they also don't want their children to live in a country that they are damaging.

Now the government has made raising domestic consumption a top priority. If the demand from China's large population can indeed be raised, all things made-in-China will find a market, China and even the world's economy can be lifted out of the recession. But there is a reason Chinese economy became so export oriented. The entrepreneurs I talked with has little confidence selling enough goods to Chinese consumers. They know that their workers cannot afford, given the low way, what themselves produce. They know that the tax they paid was squandered by officials rather than spent on the welfare of people. And they know how much they need to pay to the local officials if they want to distribute their goods in local markets. Foreign distributors, like Wal-Mart squeezed these entrepreneurs pretty hard, giving them only a small percentage of the profit from the goods they produce. But such exploitation seems benign compared to the unreasonable demands of local officials.

So this is the situation. Even if you are an honest and creative entrepreneur who tries to change made-in-China's image of bad quality, you will have to face the declining foreign demand, the weak domestic demand, the exploitation of corrupted officials, the strained environment and the temptation to just escape to a more comfortable foreign country. A recession for China's manufacturing sector seems inevitable. But let's hope this recession at least exposes the problems, and force the Chinese society to create a better economic environment.

Spring in Crisis

The Chinese New Year is coming soon, and it's again the time when tens of million migrant workers--who came from the rural areas to work in the cities--finally gets a chance to reunite their family. Their trip is always tough, tickets are hard to get and the trains are incredibly jammed. But many will go home no matter what it takes, we all remember how millions of them stayed in the freezing train stations unwilling to leave though the unexpect snow disastrously blocked many train routes.

This year they face a new problem: they might not come back as there will no longer be jobs for them. With the external demand for all things "made-in-China" diminishing because of the economic crisis, many factories in China have been closed and those that survive are cuting jobs too. Some optimistic economists think China is in better shape than the West, because its huge domestic market can make up for the strained forgeign markets. But the reality is many industries, from car, real-estate to shoes and clothes, cannot find buyers of their products now.

So why is that the huge population in China cannot absorb a little over-production of the manufacturing sector? I think the main problem is unfair distribution of wealth. The peasant turned migrant workers are the backbone of China's economic rise. Their lack of negotiation power with the capitalists for salary, working condition and any welfare has been the main competative advantage of all things "made-in-China". But their low income also prevents them from consuming the goods they produce! Many bureaucrats, entrepreneurs and white collar workers indeed have gained significant purchasing power, but there are only that many apartments and cars they can buy. Also, given the poor health care, education and social security condition, even the middle class dare not cut deep into their savings.

When these unemployed migrant workers go home, they may face another problem: their land might be polluted or occupied for industrial and commerical use. They cannot be peasants anymore. Although they haven't benefited much from the economic development, they have to bear the cost of such development in terms of environmental damage.

Some economists still believe that it's important to keep such a poor population as a pool for cheap labor. But the central government, recognizing the worsening inequality as a threat to social stability, does pass some policies to subsidize agriculture and increase investment in rural area. But their is no quick fix for China's poverty and inequality problem. Before the rural population get a more fair chance to participate in the economy, our economy will probably still sit on the fragile base of the export industry and the bubbly real-esate industry.