[kitchencabinetforum] CHINA WILL NOT SQUANDER ITS MONEY TO PIGS

China's Central Bank Governor Zhou Xiaochuan asserts it's too early to determine how emerging economies can help PIGS avoid bankruptcy. Zhou needs to first see if PIGS can implement their July 21 obligations. Zhou says it's not up to him to increase the size of the EFSF. That needs to be done by Fourth Reich.

China is the world's second largest economy after the United States. It is the world's fastest-growing major economy, with average growth rates of 10% for the past 30 years. China is also the largest exporter and second largest importer of goods in the world. China became the world's top manufacturer in 2011, surpassing the United States. http://venitism.blogspot.com

Chinese Central Bank Deputy Governor Yi Gang asserts the real solution to Europe's woes must come from within the region, while noting that the world's second largest economy can help Europe at the margin. Addressing whether China Investment Corp. will buy euro-area bonds, Vice Chairman Gao Xiqing said in a panel the company can't be a savior of others because it must keep a certain level of profitability.

The private sector hardly dominates the Chinese economy. If anything does, it's the state again. Derek Scissors points out there have been important changes in the state sector. It has shrunk and operates very differently than it did just 15 years ago. During the 1990s, state assets were sold off, sometimes replaced by genuinely private firms.

Scissors notes privatization met serious political opposition. In response, during the 2000s, state-owned enterprises (SOEs) were instead converted into shareholding entities, many of which sold stock in Shanghai, Hong Kong or elsewhere. These shareholding firms took on some characteristics of true commercial businesses.

Those seeing a dominant private sector often mix up such shareholding firms with private firms. Neither specifying shareholders nor selling stock necessarily alters the fact of state control. The large majority of firms listed on domestic stock markets are state-owned.

Zhou declares China has no immediate ways to control inflation because it takes time for monetary policy to affect prices. China's consumer prices rose 6.2 percent from a year earlier in August following a 6.5 percent advance in July that was the biggest since June 2008. Zhou is watching inflation very closely and China will continue to increase the flexibility of the yuan.

Scissors asserts that restructuring was specifically crafted to change SOEs while steering far clear of privatization. This goal was driven home earlier this year by Wu Bangguo, second in the Communist Party hierarchy, who scorned privatization as almost as unacceptable as another party holding office.

Using official Chinese data, the state share of investment in 2010 was 38%, suggesting to some that the private share was 62%. False. What the PRC calls the private sector, plus wholly foreign-owned firms, generated only 24% of investment. The remainder is attributable to mixed ownership.

The vast majority of these mixed firms are designated as limited liability corporations. The term implies privatization, but the subcategories — wholly state-owned and non-wholly state-owned — indicate that the incorporation has not automatically ended state ownership.

Scissors points out SOEs enjoy some amazing advantages over truly private firms. In 2006, China's Cabinet identified sectors where the state must lead, a powerful guarantee. Included were power, telecom and aviation. And in practice, the state dominates many other sectors, including banking, railways and media.

There are other perks as well. SOEs have immediate call on land, while some private firms cannot buy at any price. SOEs receive state bank loans with no borrowing costs and possibly voluntary repayment. Party cadres routinely shuttle between government posts and SOEs, ensuring top-level political access. As it turns out, the largest firms receiving these benefits — e.g., Sinopec and Bank of China — are limited liability corporations. These are far better classified as state-owned than as private.

Profit data reported by SOEs are unreliable, but the money seems to be rolling in. China National Petroleum and China Mobile together claim profits greater than those of the top 500 private firms combined. State entities make 95% of investments in outside bonds. SOEs were pruned back before, and it could happen again. But it wouldn't be easy, because SOEs can now strongly oppose such a move.

Some SOEs have become gigantic. Top banks, telecoms and oil companies rank among the world's largest. They provide the government with much of its revenue, and generate massive employment — the explicit state share of urban employment is well over half. They are also run by high-level party cadres or their children. No wonder the foreign share of investment in China has plummeted. In most sectors, the Chinese market is only what's left after the SOEs take the bulk. Subsidies for SOEs are far larger barriers to American goods than the notorious currency peg.

Scissors points out the policy challenge facing Washington and Brussels is that China's overinvestment and underconsumption help cause bilateral imbalances. The PRC touts rebalancing in the new five-year plan, just as it has done since 2004. But matters have only worsened, and for a reason: rebalancing would undermine SOEs. The PRC overinvests to ensure that SOEs remain dominant, despite their inefficiency. To pay for that overinvestment, consumption is taxed through controlled interest rates and by suppressing competition. To rebalance, Beijing will have to curb SOEs. That would be in the interests of foreign investors. But it would be stridently opposed among China's ruling elite. For now, private-sector dominance of China's economy is a fiction.

China now tries to dominate the Fourth Reich market through Greece. Chinese
officials love Premier Papandreou of Greece, who is also the President of
Socialist International. Greek assets are now sold at bargain prices, because
Greece will go for bankruptcy soon. China can easily buy most Greek assets.
China has already bought the Port of Piraeus, a strategic investment for the
transportation of Chinese goods to Fourth Reich. Chinese can easily manipulate Graecokleptocrats with kickbacks! http://venitism.blogspot.com

China's economy is riddled with vested interests, while free speech is suppressed. No wonder the regime is cracking down on. But it won't be easy to maintain the current political model or to reform it. And failure to do either could knock the economy off its extraordinary trajectory.

Inequality is high and rising. If this inequality were merely a reflection of the market, the fact that some Chinese are more talented and hard-working than others, it could be motivational. But a lot is also a result of economic goodies being grabbed by insiders, sometimes via corruption and in other cases by excluding outsiders from opportunities. Populations can grow restless when they think rulers and their cronies are enriching themselves unfairly.

In China, the class system operates on several levels. At the top of the socio-economic scale are the princelings, children of important party officials, who have become multimillionaires by trading on their contacts. Then there are bureaucrats, who enjoy attractive lifestyles funded by the people's taxes and sometimes bribes. State-owned enterprises, meanwhile, benefit from monopolies or oligopolies and pay minimal dividends. The fruits of their economic activity are therefore largely enjoyed by those who run them.

There is also the hukou system which prevents rural migrants from participating fully in China's economic miracle. The country has at least 150 million people who come from the villages but work in the cities. The snag is that they don't have the right to be resident, so often live in dormitories, and their children don't get the same access to schooling as local residents, so usually stay in the villages with their grandparents. The cities want these workers but don't want to be swamped by the need to house them and pay for the education and health care of their families. The result is a potentially unstable two-class society.

China uses a classic mixture of carrot and stick. The carrot has been growth. Even if the benefits of growth haven't been equally distributed, hundreds of millions of people have still been taken out of poverty. Meanwhile, the stick has been to crack down on anybody who is perceived to be stepping out of line.

The problem is that both the carrot and the stick are becoming harder to wield. Economic growth is going to slow down in the coming decade. It then won't be as easy to buy off potential dissent. Meanwhile, mobile communications and the Internet are mutating in ways that Beijing will find increasingly difficult to control.

What's more, there's a connection between political rights and economic advancement. This was not apparent in the past three decades, when the Chinese model was based on low-value manufacturing. Millions of people could be stuck in factories and told to get on with the job. But it will become apparent as Beijing tries to switch to a new model based on services and high-value manufacturing. If this transition is to be successful, people will have to think for themselves more. They will also have to harness the full power of modern communications. It will then be virtually impossible to keep a lid on free speech.

In China, energy and water issues are inextricably linked. Energy production is a water-intensive activity, and not just in hydropower dams. China is the world's biggest power consumer and has the largest energy system. It is also the largest greenhouse gas emitter. If things don't change, China will become a major energy importer by 2035, having to import fuel to provide 40 percent of its power.

China is facing enormous issues, but the government has developed a strong will to address environmental problems. This comes after decades of ignoring the environment in favor of industrial growth. Those policies allowed polluting practices to continue, ruining air and water, and creating cancer villages where people suffer high rates of the disease.

Conflicts have cropped up over water usage. Agriculture uses 70 percent of the massive nation's water, but contributes just 10 percent to the national GDP. Industrial consumption is growing, and the redistribution of water from agriculture to industry has led to protests by thousands of small farmers.

China is also facing water-distribution problems related to geography, because 47 percent of its population is in northern China, along with 65 percent of its cultivated land, but less than 20 percent of the nation's water supply is there. Water prices have been kept artificially low, which has kept prices down for users. But that has also discouraged conservation practices, such as low-water irrigation and the development of water-saving technology.