China roundup

A must-read post by economist Brad Setser, entitled Has a slowing Chinese economy eliminated domestic pressure for a renminbi revaluation? Brad makes the point that a slowdown in the Chinese economy makes it much easier to sterilize dollar inflows:

China is not currently finding it difficult to sell domestic central bank bonds to prevent rising reserves from leading to an increase in the money supply. Sterilization has been pretty easy so far this year -- contrary to what Nouriel and I expected. On one hand, rising rates in the US mean that China is earning more on its shorter-term investments in US dollar assets. China, of course, doesn't just invest in short-term Treasuries though, so it is not obvious that rising short-term rates are having a huge impact on the overall return on China's portfolio. On the other hand, restrictions on lending growth have left China's banks with lots of spare cash -- cash that they are investing in the sterilization bills sold by the central bank. The interest rate on those bills remains well below the interest rate China earns on its reserves. On a cash flow basis, China is not losing money selling sterilization bonds to offset rising reserves. While the central banks currency risk keeps on growing, at the margin, it is not losing money selling sterilization bonds.

Some of the comments on this post are quite insightful:

"I don't think that China's card is particularly strong. They just assemble and make some stuff. Almost any nation's people can do that. "

Until you have actually seen the vast industrial complex that is China you can't imagine how out of touch with reality that statement is Movie Guy. When I describe China to people I wonder if admiral Yamamoto had the same feelings when he made the following statement (I will attempt to roughly paraphrase the original quote) "Until you have seen the oil fields Texas, the cornfields of Kansas or the factories of Detroit you cannot imagine how vast and powerful the United States is."

This is the best way for me to describe China to most Americans.

The first thing any traveler will notice about Ningbo, is that the roads around the city have no visible pot holes. In addition the roads are often vast in size and capable of accommdating massive amounts of traffic. When you drive into areas adjacent to downtown Ningbo its absolutely to see the number of truly huge factories that surround you. I don't live very far from Irvine and Costa Mesa(at least where there isn't traffic) which would be considered highly "developed" areas by American standards. Costa Mesa and Irvine are at the heart of Orange County which in turn is the heart of Southern California's high tech and manufacturing industries.

The big buildings in Orange County are dwarfed by the huge numbers of large multi story factories around Ningbo. They're everywhere new supermodern factories created with the latest and most gawdy modern architecture. Unlike crowded Orange County the Chinese made provisions for huge and smooth roads that run throughout Ningbo and its adjacent areas. The factory industrial parks present through the the Ningbo area are huge multi story buildings that put our little commercial parks to shame.

In China everything seems to be built in two sizes: huge and outrageous. So what's the implication of this: that the Chinese have an economy of scale that is unmatched anywhere. This in turn allows a huge number of highly specialized industries to thrive because the industrial ecosystem is so large that it can justify their existence.

DongGuan and Shanghai are even crazier with even high concentrations of development. More importantly however areas the outlying the key urban centers in China are cheap enough to provide low setup and land acquisition costs and close enough to easily reach key containers ports.

Jiasan for example is fairly close to Ningbo (about two hours with traffic) and illustrates this point perfectly. The road system in Jiasan is absurdedly huge, its could easily be adequate for a city like Ningbo or perhaps even LA. There are some very large factories that often occupy much more land that the factories in Ningbo. Of course like any other business city Jiasan has a downtown with a few upscale resturaunts.

...This is just one example but to me that Chinese are not just prepared for today but they are prepared to expand well into the future. Its difficult to imagine urban planning ty aking place on this level in a country other than China with its massive population. More importantly that expansion is occuring in a very controlled and systematic way.

...Unfortunately I haven't been to countryside... so I can't say how things are going there. But the urban economic machine in the cities is going full blast on a scale that would be absolutely unimaginable anywhere else in the world.

Of course more importantly China is also doing an outstanding job of producing high tech workers. China produces some 800,000 engineering graduates a year!
http://us.tom.com/english/3297.htm

THe US also produces far less engineering graduates than China: only 59,445 (as of 2000). To put this in perspective 50,000 engineers joined the IT sector alone in China!
http://www.usatoday.com/educate/college/education/articles/20040502.htm

To me this would imply that the place to hire engineers probably wouldn't be the United States. More importantly however it shows that China has a huge edge in producing high quality human capital that is unmatched by any other country in the world.

And finally:

Alex made some very good comments about China’s growth. As one who has traveled extensively in rural areas in both the US and China, I can tell you that the changes in village life is not quite as dramatic... [but] Twenty years ago, any village I saw was just a few decades better off than 1,500 years ago. Now, they are on a par with villages in remote parts of developed economies (say, Sardinia in Italy or Krabi Town in Thailand). Now that’s rapid development!