Years of Poems and Spirits

A friend of mine recommended an good article about sourcing issues (c) in China today. In summary:
1. Both buyers (clients) and the suppliers (manufacturers) share the blame for some of the quality issues.
2. A main driver behind the quality problems is the pressure on lowering prices.
3. Chinese are improving their QA at their own pace.
4. Competitive pressure, trade policy shift and now quality concerns may undermine China’s price advantage

It appears that the article was penned by a Chinese. It is well-written but just the POV is naturally defensive and sympathetic. I am surprised Wharton editors would let it out in verbatim.

A discussion during the International Finance class got me thinking: what are China’s options with so much trade surplus?

We all know that at least 70% of China’s trillion dollar foreign reserves are in dollar denominated assets, mainly in treasury securities which yield around 4-5%. Take out the inflation factor, it is more like “deposit” than “investment”.

What is the alternative? Buying higher-yield securities at the expense of higher risk? It is easy to say but rather difficult to execute. For example, it is not a scaleable solution.

What else? How about buying capital goods from the U.S. (goods used for production) and produce more at home? For example, buying heavy equipments, high-end computers, etc. from the U.S. and produce more domestically. Instead, the Chinese choose to buy financial assets from the U.S., some of which will come back as FDI.

It is as if the Chinese are saying, we may have all the production factors–land, natural resources, labor, infrastructure, etc.–but we don’t know how to use them to generate returns higher than 4%. Therefore, we will give you the money and take just 4%.

It is a strange conclusion but seems to be a logical one. I asked the professor about the difference between buying financial assets and capital goods. I wonder whether it is the same as having the U.S. acting as a financial advisor/asset manager plus entreprenuer. I am not sure whether she got my question or not.

This is a title of a NYT article. The author says,

“The answer, say people who have studied the country’s regulatory system, is a cautious yes. ”

Not mine. My prediction is that any “reform” in food/drug safety, if it ever materialize, will likely come at the expense of the rural poor. In other words, the pursue of a “cleaner life” is only to widen the gap between the rich and the poor.

Here is why: first, China today is not Chicago during the Progressive Era. Second, Chinese leadership is held hostage by the quiet barrons.

When Sinclair Lewis witnessed the carcass floating down Charles River, he could write about it and get his articles published. More importantly, when Teddy Roosevelt decided to act, he did not have to get the consent from the mayor of Chicago.

But today, although the world economies have integrated, the world regulatory agencies have not. Therefore, Americans suffering from poor product safety in China can do little to change the situation. Any American Joe can write about food safety in China, but at the end of the day, FDA can’t bypass the Chinese government to enforce even common-sense rules.

Now that Americans have little leverage over the safety issue, how about the Chinese?

The central government, of course, likes nothing more than a pristine image while its representatives strolling down the hallway of United Nations. However, how much control does the central government have?

It is becoming obvious that the central government is losing control over the nation’s economic life. The Premier may shed tears for deceased coal miners, the central government may chop off the heads of some senior officials, yet the weight of an entire state may not be enough to stop a county bank to lend loans to a doomed business.

In fact, I heard that the very author of this article, Joseph Khan, was once detained in ShenZhen while visiting a factory on a product safety assignment. Even the police could not get him freed. Doesn’t this story tell a bigger truth? The central government certainly wouldn’t like to see Mr. Khan got hurt, yet the state appeared powerless in front of strong local business interest.

One last thing, Khan said,
“… big Chinese cities have already demonstrated that they can do a better job monitoring food and drug safety than less developed counties and rural areas. ”
Sure, big citites don’t manufacture those goods. Therefore, they can afford to behave as Americans do by boycutting certain products. Yet the factories still have to run and the laborers have to be employed. While the production happens in rural area but the cities refuse to buy the products, so who are left to consume those tainted goods? That is what I mean “the pursue of a “cleaner life” is only to widen the gap between the rich and the poor.”