Tuesday, March 13, 2012

496 World Bank head Robert Zoellick tells China to Privatize/Deregulate

World Bank head Robert Zoellick tells China to Privatize/Deregulate

(1) World Bank tells China to abandon "state-led capitalism dominated by
giant state-owned corporations"
(2) World Bank head Robert Zoellick tells China to Privatize/Deregulate
(3) China should Privatize state-owned firms - economist Michael Pettis
(4) China's state sector is reason its stimulus package more successful
than the West's - economist John Ross
(5) China's post-Mao economic transformation "the greatest economic
achievement in world history" - John Ross
(6) China tightens grip on hot money
(7) China to continue crackdown on hot money
(8) Japan's Trade Figures: Some Perspective - Eamonn Fingleton

(1) World Bank tells China to abandon "state-led capitalism dominated by
giant state-owned corporations"


February 22, 2012

China Needs Deep Reform, Says Upcoming Report

China could face an economic crisis unless it implements deep reforms,
according to a report by the World Bank and a Chinese government think
tank, which urges Beijing to operate its vast state-owned enterprises
more like commercial firms.

By Bob Davis

BEIJING—China could face an economic crisis unless it implements deep
reforms, according to a report by the World Bank and a Chinese
government think tank, which urges Beijing to scale back its vast
state-owned enterprises and make them operate more like commercial firms.

The recommendation is contained in "China 2030," a report set to be
released Monday, according to a half-dozen individuals involved in
preparing and reviewing it.

The report, which addresses some of China's most politically sensitive
economic issues, is designed to influence the next generation of Chinese
leaders who take office starting this year, these people said. It
challenges the way China's economic model has developed during the past
decade under President Hu Jintao, when the role of the state in the
world's second-largest economy has steadily expanded.
Reuters A customer pays for her vegetables at a local market in Shanghai
February 9, 2012.

"China 2030" cautions that China's growth is in danger of decelerating
rapidly and without much warning, as has occurred with many high-flying
developing countries once they reach a certain income level, a
phenomenon that development economists call the "middle-income trap." A
sharp slowdown could deepen problems in the banking sector and
elsewhere, the report warns, and could prompt a crisis, according to
those involved with the project.

It recommends that state-owned firms should be overseen by
asset-management firms, say those involved in the report. It also urges
China to overhaul local government finances and promote competition and

"China's state-owned sector is at a crossroads," said Fred Hu, chief
executive of Primavera Capital Group, a Beijing investment firm. The
Chinese government must decide "whether it wants state-led capitalism
dominated by giant state-owned corporations or free-market

Even ahead of its release, the report has generated fierce resistance
from bureaucrats who manage state enterprises, according to several
individuals involved in the discussions.

China's political heir apparent, Xi Jinping, now vice president, has
given few clues about his economic policies. Analysts expect the
high-profile report will help to shape discussions among Mr. Xi and his
allies about whether to make changes to a state-led economic model that
has alarmed Chinese private entrepreneurs and is becoming a source of
growing tension between China and its main trading partners, including
the U.S.

The report's authors argue that having the imprimatur of the World Bank
and the Development Research Center, or DRC—which reports to China's top
executive body, the State Council—will add political heft to the
proposals. The World Bank is widely admired in Chinese government
circles, particularly for its advice in helping China design early
market reforms. ...

(2) World Bank head Robert Zoellick tells China to Privatize/Deregulate


China to Be Largest Economy Before 2030: World Bank

Published: Monday, 27 Feb 2012 | 3:43 AM ET

By: Reuters

China must relax its grip on industry and move towards a free-market
economy, the World Bank said on Monday in a report that forecast the
country would become the world's largest economy before 2030.


Judging China to be near an inflection point in its economic growth, the
World Bank called on Beijing and its incoming leaders to overhaul the
structure of the world's No. 2 economy to keep income and productivity
rising in years ahead.

"As China's leaders know, the country's current growth model is
unsustainable," World Bank President Robert Zoellick said in Beijing at
the launch of the "China 2030 Report".

"This is not the time just for muddling through. It's time to get ahead
of events and to adapt to major changes in the world and national

An executive summary of the 400-plus page report, made public by
Zoellick, had six broad recommendations for Beijing: strengthen a
market-based economy, foster innovation, go "green", provide social
security for all, improve the fiscal system and seek mutually beneficial
relations with the world.

Among other specific recommendations, it urged Beijing to commercialize
banks and allow interest rates to be set by the financial market,
develop its private sector, protect farmers' rights and cut local
governments' dependence on land revenues.

The outcome of these changes would produce a China that is more socially
stable and equal in wealth distribution, relies less on exports and
investment for economic growth, and more on domestic consumption that
can be sustained, the Bank said.

"The reforms that launched China on its current growth trajectory were
inspired by Deng Xiaoping who played an important role in building
consensus for a fundamental shift in the country's strategy," the report

"China has reached another turning point in its development path when a
second strategic, and no less fundamental, shift is called for."

President Hu Jintao and Premier Wen Jiabao are scheduled to hand over
power to a new leadership in the late autumn, by which time China should
be well on course for its slowest full year of growth since they took
office a decade ago.

Zoellick acknowledged that the World Bank and Beijing had disagreed over
the contents of the report, which is prepared by the Bank and the
Development Research Center, a top Chinese think-tank that advises
China's cabinet, the State Council.

But Zoellick said the report "stops short of being overly prescriptive",
as requested by Chinese authorities, and recognizes that any
recommendation needs further discussion within Beijing before they can
be implemented.

"The report is realistic. Reforms are not easy. They often generate
pushback," he said. "We have tried to recognize obstacles to reforms,
suggest sequencing and quick wins, steps that can make reforms easier to

The thrust of the World's Bank latest report is similar to one released
by the International Monetary Fund in November that urged Beijing to
free up its financial markets to give investors, commercial banks and
the central bank more autonomy.

The IMF's recommendations drew rebukes from Beijing, which said some of
the ideas were not comprehensive and objective enough.

Dong Tao, an economist at Credit Suisse in Hong Kong, said while the
World Bank's recommendations were sensible, it was unlikely that they
would all be implemented due to political sensitivities around any form
of privatization.

"As an economist, I'm a big fan of market-based economies. But Beijing
needs to balance what is economically good with what is politically and
socially practical," he said.

(3) China should Privatize state-owned firms - economist Michael Pettis


MICHAEL PETTIS: No One Is Considering The One Option That Could Save China

Gus Lubin | Feb. 29, 2012, 5:33 AM | 610 | 1

Michael Pettis says the World Bank's report on China out this week
doesn't go far enough.

Where the World Bank calls for moderate reforms to increase state
revenue like increasing dividends paid by SOEs, Pettis says China needs
a radical solution—or it faces severe slowdown.

He writes in a newsletter:

What we really need are much more dramatic transfers, for example
wholesale selling of assets, with the money used either to clean up bad
loans or delivered directly to households. According to the article,
however, “neither the World Bank nor the DRC proposed privatizing the
state-owned firms, figuring that was politically unacceptable.”

This is the problem. The best solution for China, economically, seems to
be off limits because it will be politically difficult. In that case the
second best solution, a gradual build-up of government debt as growth
slows for many years, is the most likely outcome.

And how much will growth slow? The World Bank report apparently doesn't
say, but the consensus has been slowly moving down towards 5-6% annual
growth over the next few years. That's better than the crazy numbers of
8-9% most analysts were predicting even two years ago (and some still
are), but it is still too high. GDP growth rates will slow a lot more
than that. I still maintain that average growth in this decade will
barely break 3%. It will take, however, at least another two or three
years before a number this low falls within the consensus range.

(4) China's state sector is reason its stimulus package more successful
than the West's - economist John Ross


05 February 2012

Deng Xiaoping and John Maynard Keynes

John Ross

[...] In the US and Europe budget deficits have been utilised – although
they are under increasing attack. Low central bank interest rates have
been pursued and some forms of quantitative easing, driving down long
term interest rates through central bank purchases of debt, have been
used. But no serious programmes of state investment have been launched –
let alone Keynes's 'somewhat comprehensive socialisation of investment'.

In China, in contrast, relatively limited budget deficits have been
combined with low interest rates, a state owned banking system
('euthanasia of the rentier') and a huge state investment programme.
While the West's economic recovery programme has been timid, China has
pursued full blooded policies of the type recognisable from Keynes
General Theory as well as its own 'socialism with Chinese
characteristics.' Why this contrast and why has China's stimulus package
been so much more successful than the West's?

Because in the US and Europe, of course, it is held that the colour of
the cat matters very much. Only the private sector coloured cat is good,
the state sector coloured cat is bad. Therefore even if the private
sector cat is catching insufficient mice, that is the economy is in
severe recession, the state sector cat must not be used to catch them.
In China both cats have been let lose – and therefore far more mice are

The recession in the Western economies, as foreseen by Keynes, is driven
by decline in investment – in most countries decline in fixed investment
accounted for two thirds to more than ninety per cent of the GDP fall
(Ross, Li, & Xu, 2010). Keynes's calls for not only budget deficits and
low interest rates but also for the state to set about 'organising
investment' are evidently required. But this is blocked because the
state coloured cat is not allowed to catch mice.

To put it another way, the US and Europe insist on participating in a
race while hopping on only one leg – the private sector. China is using
two legs, so little wonder it is running faster.

To turn from metaphors to economic measures, a large scale state
financed house building programme, or large scale expansion of
transport, of the type China is following as part of anti-crisis
measures not only delivers goods that are valuable in themselves but
boosts the economy through macro-economic effects in raising investment.
But in the West such state investment is blocked as it creates
competition for the private sector. As the top aim in the US and Europe
is not to revive the economy, but to protect the private sector,
therefore such large-scale investment must not be undertaken.

It is an irony. Keynes explicitly put forward his theories to save
capitalism. But the structure of the US and European economies has made
it impossible to implement Keynes's policies even when confronted with
the most severe recession since the Great Depression. The anti-crisis
measures of China's 'socialist market economy' are far closer to those
Keynes foresaw that any capitalist economy. Whereas in the US, for
example, fixed investment fell by over twenty five per cent during the
financial crisis in China urban fixed investment rose by over thirty per
cent. Consequently, there is no mystery why China's economy has grown by
41.4 per cent in the four years since the peak of the last US business
cycle, in the 4th quarter of 2007, while the US economy has grown by 0.7
per cent. ...

(5) China's post-Mao economic transformation "the greatest economic
achievement in world history" - John Ross


John Ross

19 February 2012

China's achievement is literally the greatest in world economic history

Economic development's purpose is to improve the conditions of human
beings. Robert Lucas put it eloquently, in frequently quoted words,
examining the consequences of different rates of economic growth: 'I do
not see how one can look at these figures without seeing them as
possibilities. Is there some action a government of India could take
that would lead the Indian economy to grow… If so, what, exactly?… The
consequences for human welfare involved in questions like these are
simply staggering: Once one starts to think about them, it is hard to
think about anything else.'

In this framework it should be stated, soberly and with due
consideration, that China's economy since 1978 is the greatest economic
achievement in world history. This article shows this in the prosaic
language of statistics. But of course that is not the real issue. What
really counts is the consequences of this for human beings – escape from
poverty, improvement in life expectancy, improved health, expanded
potential for education, improvement in the position of women, and many
other dimensions. Economic statistics, such as GDP per capita, simply
underpin this improvement in human conditions.

The scale of China's economic achievement

A problem in assessing the true scale of China's economic achievement is
that partial statistics are frequently used to state it. Some of these,
for example that China has become the world's second largest economy, or
that it has raised 620 million people out of internationally defined
poverty, are extremely striking (Quah, 2010). But nevertheless, because
they are partial, they do not capture the full scope of what has
occurred. Only when systematic data is used does the full magnitude of
China's achievement become clear.

Again, even when systematic comparisons are attempted, the scale of
China's economic achievement is frequently underestimated because
inappropriate measures are used. For example when comparing rates of
economic growth, in calculating contributions to economic welfare, it is
misleading to take individual countries as the unit of comparison,
rather than the proportion of world population affected – rapid economic
growth in a small country evidently contributes less to human well being
than rapid growth in a large country.

In order to give an initial systematic comparison, therefore, Table 1
shows the percentage of world population affected at the point when
sustained rapid growth commenced in major economies. For example the
first country to experience sustained rapid economic growth was the UK
in the industrial revolution - which was in a country with 2.0 per cent
of the world's population. The sustained rapid US economic growth after
the Civil War was in a country with 3.3 per cent of the world's
population. ...

No other economy starting sustained rapid economic growth even
approaches the 22.3 per cent of the world's population in China in 1978
at the beginning of its new economic policies. For comparison Japan's
rapid post-World War II growth was in a country with 3.3 per cent of the
world's population, and the growth of the four Asian 'Tigers' (Hong
Kong, Singapore, South Korea, and Taiwan) was in economies with only 1.4
per cent of the world's population.

Only India's sustained economic growth after the late 1980s, in a
country with 16 per cent of the world's population, even begins to
approach China's achievement in scale, but the percentage of the world
population affected is still lower than China's, as is India's growth
rate. ...

(6) China tightens grip on hot money


By Luo Lan (People's Daily Overseas Edition)

12:39, November 23, 2011

Edited and translated by People's Daily Online

Since the beginning of 2011, the State Administration of Foreign
Exchange has used heavy-handed measures to crack down on hot money.
Recently, Deng Xinhong, vice director-general of the administration, was
interviewed regarding the issue of coping with and cracking down on
illegal capital flows, including hot money.

The administration confiscated 260 million yuan of hot money in the
first half of 2011.

Question: What achievements has the administration made in 2011 in
cracking down on illegal capital flows, including hot money?

Deng: Since the beginning of 2011, the State Administration of Foreign
Exchange has been using heavy-handed measures to crack down on hot money
and has made remarkable achievements.

In the first half of 2011, the administration investigated and treated
nearly 1,900 illegal foreign exchange cases and the money involved
totaled more than 16 billion U.S. dollar, up 26 percent and 27 percent,
respectively, compared to figures for the same period of 2010.

The administration confiscated 260 million yuan in total administrative
penalties in the first half of 2011, and the number for the full year of
2010 was 243 million yuan.

Maximum award to informants: 100,000 yuan

Question: The total amount of illegal capital confiscated by the
administration has increased dramatically. What is the main reason for that?

Deng: Generally, the administration has three channels to get clues
about illegal capital flows: first, the investigations or on-site
inspections carried out by the foreign exchange administration sectors;
second, tip-offs from the masses; and third, clues offered by other
sectors, such as the public security, auditing, customs, taxation and
others. We give awards to informants who feed back, report or expose
illegal foreign exchange activities according to their contributions,
and the maximum award to an informant is as high as 100,000 yuan. For an
informant who has made an especially large contribution, the maximum
award could also be raised beyond that with proper authorization.

Imposing heavy fines on illegal practices

Question: If illegal cross-border flows of capital, such as hot money,
are discovered, what administrative fines will the related parties face?

Deng: Following the investigations and verifications into irregular or
illegal foreign exchange flows, the foreign exchange authorities will
either levy administrative fines on related parties or transfer them to
the judicial organs for criminal charges.

For institutions and the individuals that have involved illegal
cross-border flows of capital, such as hot money, the authorities will
not only regulate them and confiscate their illegal income but they will
also fine them for less than 30 percent of the amount of money involved;
for particularly serious practices, the fines can be above 30 percent of
the amount of money involved.

For financial institutions with irregularities or illegal activities
concerning foreign exchanges, the foreign exchange management organs
will terminate their operations as well as warn and fine directly liable

Question: What is the outlook for dealing with and cracking down on hot
money in the future?

Deng: Given complicated domestic and foreign economic situation, the
State Administration of Foreign Exchange will continue to combat illegal
cross-border capital flows, particularly imposing strong pressure on the
inflows of hot money. It will also improve investigation means and step
up the crackdown on major cases.

(7) China to continue crackdown on hot money


China to continue crackdown on hot money: SAFE


10:09, November 22, 2011

BEIJING - China's top foreign exchange regulator said on Monday that
China will continue to crack down on the influx of hot money as a result
of complicated economic conditions at home and abroad.

"Outstanding achievements have been made in the country's campaign
against hot money inflows," Deng Xianhong, deputy director of the State
Administration of Foreign Exchange (SAFE), said in a statement on SAFE's

SAFE investigated 1,865 cases of foreign exchange irregularities in the
first half of this year, involving more than $16 billion in illegal
funds, up 26.2 percent and 26.9 percent year-on-year, respectively.

Deng attributed the "outstanding achievements" to the country's
investigations into illegal foreign fund inflows, as well as an
investigation and supervision system that covers all foreign exchange
transactions under both current account and capital account.

He noted that SAFE will continue improving the system while enhancing
its monitoring of abnormal foreign capital outflows, adding that SAFE
has the ability, means and confidence to win in the battle against
illegal foreign fund inflows.

(8) Japan's Trade Figures: Some Perspective - Eamonn Fingleton


Japan's Trade Figures: Some Perspective

Posted on January 26, 2012 by Eamonn Fingleton

As usual the American press missed the real story.

The American press has made much of news that Japan last year recorded a
deficit of $32 billion on its visible trade. Supposedly this is the
beginning of the end for the Japanese trade engine. Some of us have been
around a while and have seen that same story written dozens of times
over the years — yet always said trade engine has not only recovered but
has gone on to ever greater achievements.

The first thing to note is that the figures are incomplete in a way that
crucially distorts the real news — of an extraordinarily strong
performance in the face of unprecedented challenges.

The proper way to measure a nation's performance is not by the visible
trade balance alone but by the current account, which is the widest and
most meaningful measure of a nation's trade. The current account
includes financial flows such as interest payments, dividends, insurance
premiums, and patent royalties. The balance in such items has been
positive for Japan since the 1960s and the net invisible surplus has
grown astoundingly in the last two decades. This reflects not only the
fact that the underlying economic performance in true invisibles has
been strong but because of so-called transfer pricing, which is now
rampant in Japanese industry and results in massive understatement of
exports. (In a typical maneuver, goods might be shipped to China via
Hong Kong. The goods are exported from Japan at heavily discounted
prices and a Hong Kong subsidiary takes a huge profit in selling to
China. Such profits constitute hidden export revenues that are not
caught in the visible trade numbers. The maneuver makes sense because
Japan's corporate tax rate is one of the world's highest.)

As for the numbers as officially presented, the effect of temporary
factors is hard to exaggerate: the earthquake, tsunami, power shutdowns,
and then late in the year the Thai floods all contributed to severe
supply chain disruption that curtailed exports. Meanwhile oil imports
have temporarily soared as almost the entire nuclear power industry has
been closed for maintenance.

Then there is the “minor” matter of a 1930s-style recession across much
of the world, which has drastically cut demand for Japanese exports,
particularly capital goods.

For me the Wall Street Journal's coverage was particularly notable as an
exercise in spin and double-think. Not only did the Journal not make any
mention of transfer pricing but it did not refer to the fact that the
current account figures, due in a few days, will show a strong surplus —
a truly remarkable performance given the circumstances of 2011.

The Journal only covers Japanese trade figures when they are bad. (The
$196 billion current account surplus of 2010, announced this time last
year, did not merit a single sentence in the Journal.) By the same token
when it comes to reporting America's trade performance, the Journal
thinks the numbers count only when they are good.

Another inconsistency is that while huge U.S. trade deficits are
dismissed as not important or are even presented as evidence of the
“strength of the American economy,” bad Japanese numbers — however
obviously fleeting — are given big play as a “historic” turn towards
economic decline.

I have a modest request for the Journal: when the current account
figures come out, please give them at least as much attention as you
have given the visible figures.

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