Posted on 09/20/2002 11:47:28 AM PDT by madeinchina
Unlike the four-man U.S. "peace" delegation that just visited Iraq, I'm not into giving helpful advice to Saddam Hussein (other than "Surrender yourself to U.S. Marshalls immediately!"). But if I was, I'd tell him to join the World Trade Organization and use its combination of anti-American politics and unthinking free trade extremism to stay in power and continue his arms buildup.
Saddam would have no trouble getting in - lots of ruthless, dangerous dictatorships belong. And he'd gain virtual immunity from U.S. military and even economic power. The UN sanctions? He could have them declared to be discriminatory trade barriers. U.S. and western controls on exports of militarily useful technology? Contrary to the spirit of unfettered global commerce.
Saddam could also take advantage of America's roll-over-and-play-dead response to adverse WTO decisions. George W. Bush has declared to the world at large that you're either with or against America in the war on global terrorism (and presumably in the related campaign against Iraq). But when it comes to protecting U.S. interests at the WTO, the President and many Congressional Republicans are simply kittens.
Take the WTO's decision that tax breaks for U.S. exporting firms represent illegal trade subsidies and must be eliminated. These tax breaks were created in the pre-WTO mid 1980s, as a counter to the European Union's long-standing value-added taxes, which sought exactly the same results. Without an enforceable body of world trade law to resort to, the Europeans accepted a compromise suggested by Washington to let both tax schemes stand.
But once the WTO was created, the Europeans recognized that they could use their 15-to-one voting advantage over America to break the agreement and un-level the tax playing field again. And they were right. The WTO has ruled that the United States must either eliminate the regulations in question or face $4 billion annually in European trade sanctions on U.S. exports in perpetuity.
George Bush's response to the WTO? "Anything you say." Accordingly, House Ways and Means Committee Chairman Bill Thomas (R.-Cal.), a mastermind of the fast track campaign, has just dutifully completed the second piece of legislation attempting to satisfy the EU and WTO demands. Thomas believes that these fixes will finally do the trick while preserving the competitiveness of U.S. companies. What he doesn't understand is that the Europeans aren't interested in fairness - they want an edge. Caving in to the Europeans on these tax breaks will only encourage future challenges to U.S. competitiveness policies.
But maybe there's a learning curve? Maybe the United States could start using the WTO to play hardball with the world's protectionists itself? Because America is both the most important market for most WTO members and barely one vote out of some 160 in the organization, the odds are long at best. Yet Washington is unlikely even to try.
On September 12, the U.S. Chamber of Commerce, which represents most of the U.S. multinational companies that have exported so many American jobs to China in recent years, discussed its first official findings on China's record of complying with its new WTO obligations.
The Chamber noted numerous problems with China's record, but opposed taking formal WTO actions to solve them. "I see no justification for slapping China in the face at this point," said Richard Holwill, director of international affairs at Chamber member Alticor. Added senior Chamber official Myron Brilliant, filing WTO complaints against China after only one year of membership would amount to "bashing it on its head." Several days later, another senior Chamber official, Chris Murck, bizarrely argued, "WTO dispute resolution is not an effective way to fight the cases of individual companies."
The essence of the Chamber's stance on China is completely unsurprising. The companies it represents most faithfully have always been far more interested in keeping the U.S. market open to the goods they make in China than in opening the China market to products made in the U.S.A. But the Chamber's recent statements now make these outsourcing-not-exporting priorities absolutely unmistakable.
Of course, when they originally lobbied for U.S. entry into the WTO, Big Business-dominated groups like the Chamber insisted that American participation would give American producers powerful tools for promoting exports. Indeed, the United States would benefit most from legalizing the resolution of trade disputes because the U.S. market was already so uniquely open. Now that the multinationals have lured the United States into the WTO, they're characterizing the use of this system as irresponsible protectionism. How hypocritical can you get?
Worse, signs are growing that the Chamber's position is becoming the U.S. government's. An August 25 Wall Street Journal article reported, "U.S. officials are intent on not picking any overt trade spats with China, mainly out of concern that dozens of other countries could follow suit."
The Journal added, "Many trade officials both in the U.S. and Europe fear that an avalanche of trade complaints against Beijing [which also ostensibly would be launched by developing countries under new competitive pressure from China] could overwhelm the WTO's system for resolving international trade disputes."
For good measure, other press reports suggest that Washington is afraid of putting so much pressure on China that its huge banking problems would burst into the open. But as U.S. officials - whose first responsibility should be to American producers - fret about discomforting the Chinese, illegally subsidized and dumped Chinese goods continue to flood U.S. markets and, not so coincidentally, the U.S. manufacturing recession continues. And the Chinese themselves didn't hesitate for a moment to retaliate against the American steel tariffs imposed in March.
Moreover, for all their reported wariness of offending the Chinese and overloading the WTO, the Europeans are maintaining their WTO-aided pressure on the U.S. economy as well - with a new and dangerous twist. In July, the EU warned the United States that a U.S. Customs Service campaign to tighten security at the world's ports in the wake of 9-11 could unfairly discriminate against exporters that do not cooperate - like the many European countries that trade so enthusiastically with rogue states.
The Europeans' unspoken threat: Continue with these security measures and we'll take you to the WTO. Thus the Bush policies of appeasement at the WTO not only threaten America's prosperity, but soon may threaten its national security as well.
The problem is the way economics is taught in colleges and classrooms. Every freaking job that leaves this country gets an FR salutation that it is "whip and buggy" technology. To that analogy I must strongly disagree. Whips and buggies went (practically) out of existance. TV's, underwear, Hersheys chocolates... manufacturing such items are not obsolete. It would be refreshing to be able to "choose" to buy something "made in America" that plugs into the wall.
The trading "system" (WTO etc) is not the only culprit here. Government regulation and taxes will kill any incentive to revamp our manufacturing base. Mining, manufacturing, agriculture and construction are the only way to "create" wealth. Anything else is just a poker game - moving the chips from one end of the table to another.
More than this. We're talking about a unanimous democracy with no enforcement capacity. All they can do is point out that we are in violation of something we previously agreed to.
Maybe Americans should start asking why their fiscal burden of government is some 2x greater than "Communist" China.
Whoa! Can you expand upon this, please? What exactly is the ratio of income kept vs. income taken here and in China? Do you have some hard numbers you can refer me to? Because this is useful info, if it can be substantiated.
Secondarily, the smaller number of American manufacturers must take up a larger and larger burden of a dwindling tax base.
From the 2002 Heritage Foundation's Index of Economic Freedom.
http://www.heritage.org/research/features/index/
China
China's top marginal income tax rate is 45 percent; the average taxpayer faces a 20 percent marginal tax rate. The top corporate tax rate is 30 percent. In 1999, government expenditures equaled 16 percent of GDP, up from 14 percent in 1997; as a result, China's fiscal burden of government score is 0.5 point worse this year.
USA
The top federal income tax rate is 39.6 percent; the average taxpayer faces a 28 percent marginal tax rate. The top marginal corporate tax rate is 35 percent. In 1999, total government expenditures equaled 30 percent of GDP. The government cut taxes this year, but the new tax cuts did not take effect until July 1, 2001, and therefore are not reflected in this year's Index. The top income tax rate is scheduled to be reduced to 38.6 percent in 2001, 37.6 percent in 2004, and 35 percent in 2008.
So 30% over 16% is roughly a factor of two. One thing that I would add is that China's government is investing in infrastructure whereas the majority of American tax dollars go to Social Security, interest on debt, actual debt payments, corporate welfare, etc.
Uh, not quite. Only about 30% of China's economy is "private" (but it results in 70% of the the country's industrial output).
Do I have that right? Because I want to be very sure of these numbers before I go repeating them to everyone I meet. These are the kinds of numbers that can open people's eyes.
It is eye-popping that our fiscal burden of government as a function of GDP is 2X greater than China's.
China is more fascist than communist these days. Eventually the people will ditch Beijing and then watch for a massive deflationary shock to our unskilled labor markets.
They aren't going to have any stinking Social Security.
For a ground level description check out the articles section of Quantum Fund Co-Founder, Jim Rogers.
www.jimrogers.com
The Roaring Dragon
SHANGHAI, China --- Today I did something I?ve contemplated doing for decades: I walked into a Chinese brokerage house in Shanghai and opened a brokerage account so I could buy Chinese equities.
Paige and I entered China on the first of April across the Kazakhstan-Chinese border. We drove eastward across the Gobi Desert, along some excellent roads, stopping along the route---Yining, Urumqi, Hami, Lanzhou, and Xi?an---that I?ve taken twice before on journeys over the past eleven years. Despite the widespread reports in the western press about how poorly China is doing economically, our eyes told us a different story.
Hami, which in 1988 had a way in and out that was more a boulder-strewn path than a road, has turned into a boomtown, packed with trucks, cars, and motorcycles--as well as goats, geese, and cattle. In 1990 there were no dealers for motorcycles; today there are three. In Yining street markets were everywhere, and its streets, too, were filled with vehicular traffic.
Where before there were only a few state shops, now private shops proliferate. In 1990 there were no gas stations; once I was forced to go to a Red Army outpost and beg for gas. On this trip we?ve found an abundance of secular temples to gasoline, elaborate service stations with ten pumps and enough arches to rival McDonald?s. In Xi?an we even found several Mercedes.
In 1990 there was but a budding hotel industry; today there are three times as many hotels, many up to world standards. As for nightlife, in Hami and elsewhere there are many discos, karaoke bars, and nightclubs. Young men are dressed in suits and ties; only the older crowd wear Mao suits.
The western press wants to make much of the lack of human rights in China, but in 8,000 kilometers of travel we were stopped only a couple of times at checkpoints, whereas as we crossed the Stans?our fast allies?we were stopped scores and scores of times by heavy-handed police. Here in China everyone is too busy making money to poke his nose into anyone else?s business.
Today China is all construction, markets, and factories. Looking east from our hotel room in Nanjing, the old southern capital, we counted twelve separate cranes working at skyscraper sites, not that there was any shortage of skyscrapers. Everywhere the Chinese are feverishly building highways, houses, shops, and factories. Many of the roads are as good as the Autobahn ? and much of all this has been built by hand, just as were the Grand Canal and the Great Wall a couple thousand years ago.
Along all the roads in every town and village we found constant activity, bustling markets, Chinese eagerly working, buying and selling at every turn, and an astonishing array of new consumer goods?bicycles, radios, trucks, cars, TVs, clothes?made by both foreign and domestic manufacturers. You name the consumer good, and the Chinese are buying and selling it. China is by far the most dynamic country we?ve encountered, making the boomtimes in Ireland and Turkey pale in comparison.
On my previous visits I stopped at a temple or two, but never had a sense they were too important to the Chinese. No longer: we are constantly running into packed Buddhist, Taoist, and Confucian temples, and the surprise is the extent of the crowds. An additional surprise is the sheer number of thriving mosques and Christian churches. We?ve stumbled onto several churches with vibrant congregations. I never know who is the more startled: Paige and I or the worshippers?some of whose families have been Christian for 200 years. We have yet to find anyone of any faith who is feeling repressed. Some of the oldest members can remember problems under Mao, but the younger ones are bewildered by the question.
All in all I am sure there are some rights? violations; they exist in every country, especially in developing countries. Even Plato wrote about them as long ago as The Republic. My sense after six weeks close to the ground, however, is that the human rights? tempest in the West is a cover for those with some other agenda, such as protecting their own interests from a dynamic new country.
How did China get here? Its recent history is fascinating. Starting in 1978 its leadership has moved the economy from Soviet-style central planning to more of a market-based economy, yet all within Communist Party political control. In place of collectivization in agriculture, national leadership has stressed "household responsibility," allowing households to produce and sell, which has boosted farm production tremendously. In the same way, local officials and plant managers have been allowed far more control over their domains, and Beijing opened up the country to foreign investment. The result has been a quadrupling of gross domestic product over the past 20 years, with both agriculture and industry making enormous strides. The World Bank estimates that China?s GDP might have been as high as $4.25 trillion in 1997.
While successful overall, from this uniquely Chinese stew has sometimes come the worst of both systems. From the constraints of the Communist Party have come corruption and the petty hassles of bureaucracy, while capitalism has brought inflation and the corrupting influence of windfall gains. Between 1992 and 1997 growth reached levels as high as 10% annually, particularly along the prosperous coast.
The government, with some of the best national leadership in China?s history, has had its work cut out for it. Tens of millions of surplus rural workers have floated between the villages, towns, and cities, sustained only with low-paying part-time work. The Chinese leaders have struggled to keep afloat the large state-owned enterprises, few of which have grown with the rest of the country. In addition, it?s been hard for the national government to collect the revenues it felt it needed. On top of these problems, the leadership has not only struggled to reduce corruption and other economic crimes but also to contain the deterioration of the environment?air pollution, soil erosion, and the steady fall of the water table in the north.
Will there be continued tensions between the Communist Party and the decentralized economic system? Absolutely. How will they be resolved? I believe in favor of increasing prosperity, as under Mao the Chinese tried central economic planning for decades and they know it won?t work, just as after seven decades of socialism the peoples of South America came to lose their capacity to believe in economic poppycock.
So now that I?ve seen a country bursting with the capitalist spirit and opened my brokerage account, what stocks might I buy? In China there are two major exchanges, the first here in Shanghai and the other, south of us in Shenzhen, on both of which a total of some 500 Chinese stocks trade. Many of these are not stocks I want to buy; they are the leftovers from the Communist era, poorly-run government companies the authorities are eager to unload on unsuspecting investors.
And of course there are other impediments. The equity shares of Chinese public companies are divided into A and B shares. The A-shares can only be owned by native Chinese. If they are careful how they go about it, these shares can also be owned by the overseas Chinese, who number many tens of millions around the world. Foreign investors who play it straight---that is, who don?t use a Chinese nominee to trade or invest---are only allowed to purchase B-shares.
At this writing the foreigners? B-shares are not convertible into A-shares. Whereas at one time western enthusiasm for China was so large that B-shares sold at a premium to A-shares, today Western pessimism toward China is so great that these B-shares have fallen 85% from their highs. Such a huge discrepancy has whetted my appetite?what a bargain!
Since the Asian economic turmoil began in mid-1997, I?ve been watching and asking when would be the right time to plunge back into Asian equities. I now believe that time is close at hand. My view of the rally over the past few months is that it?s a bear-market rally, that we will have another bottom, a second bottom, that will tell us that the Asian market is truly ready to march upwards. My long observations of major bear markets tells me there is often a second major leg down, one which tests the prior bottom, and shakes out those who have been suckered into the first rally. I?ve thought this second leg down might be marked by the devaluation of the Chinese currency or some other turmoil in China--say, labor unrest and strikes.
Some years ago the Chinese formed International Trust and Investment Corporations (ITICs), government-backed investment companies, usually one to a province. These raised billions of dollars to develop much-needed Chinese infrastructure: airports, toll roads, seaports, and especially power plants. Their bonds typically paid a high rate, 15% to 18%. However, these trusts made the age-old banker?s mistake, lending long and borrowing short. ITICs were usually owned by the local provincial governments, and sometimes appeared to be guaranteed by the government, just as in the U. S. agency bonds appear to be backed by the full faith and credit of the U. S. Treasury but are not. Investors? arguments for trusting in such semi-guarantees are that the governments involved would be too embarrassed to let such bonds default.
One of these ITICs was the Guangdong International Trust and Investment Corporation, GITIC, located in one of the most prosperous Chinese provinces. At a creditors? meeting in January GITIC announced it had $4.3 billion in liabilities and no assets with which to cover these debts, and that it was filing for bankruptcy. The next day the Guangdong authorities announced they weren?t going to meet any obligation they might have had to guarantee the losses. Over the past few months other ITICs have made similar announcements, and the national government has repudiated any responsibility to bail them out. Overseas investment houses, some of whom are insurance companies, have had to reserve massively, sometimes writing off the investment entirely, which will wipe out years of profits earned from China and put a sour taste in their mouths for more Chinese investment.
The way the collapse of GITIC was handled alarmed some of China?s big banks, which have alerted the government that this will damage Chinese credibility abroad and hamper Chinese prospects of raising funds in international markets. They were right enough. Since January international investing in China has backed up.
In fact, much of the early money into China has not been the wisest of money. Iveco, the Italian truck manufacturer, put its first agent in China in 1984. After investing $200 million along the way, it won?t see any profits until 2002, almost 20 years after its agent?s first arrival. Unilever arrived during the 80s, too, and it, too, had to waive its usual investment criteria to justify the millions it spent in China. General Motors and western banks later poured more money into the country, but the gold rush has now come to an end. January and February of this year show a 9.5% decline in foreign direct investment from last year, raising the possibility that in 1999, for the first time in this decade, investment in China from outside may fall. Indeed, Beijing officials are now saying that direct foreign investment may slump to $15 billion from last year?s high of $45 billion.
For a long time there?s been a myth that a global consumer company couldn?t afford not to be in China; but as the losses mount many Western companies? boards are asking if they can afford to be in China at all. Those who rushed to be "first to the honeypot" have not found that establishing a brand has won them the riches that it earlier promised; in China as in other markets brand loyalty is fluid.
Indeed, several western businesses have pulled out of China recently: the Royal Bank of Canada, Southwestern Bell, Marks & Spencer, and Fosters of Australia. Many new projects have been put on hold. The hype about a market with hundreds of millions of eager consumers has encountered the reality that perhaps only millions want certain western products. Many companies have begun to regard China much as they regard any other country opportunity, as one with risks that might well not pay off. They?ve learnt that not all joint ventures work, and that all too many local partners may not be experienced in industries new to the country.
These pioneers didn?t reckon, either, with the intensity of the local competition, nor with the government?s "buy China" policies for many industries. While China has made repeated promises not to devalue its currency, it?s hard to see how the national government can fail to devalue with all the Asian regional pressures on its value, and that prospect, too, has made foreigners cautious.
Without foreign investment, not as many Chinese jobs will be created, which naturally will have an impact on the Gross National Product. In addition, without a positive attitude toward Chinese investment those in our investment and political circles will lean more toward the containment of China rather than engagement with it. It?s a shame Clinton didn?t make the WTO deal with China on Prime Minister Zhu Rongji?s visit to the U. S., as it would have done much to rebuilt the confidence of the foreign investment community toward China.
While many foreigners who have invested in China may have lost money through ill-conceived investments, you?d never believe it by the bustling economic activity we observed on our cross-China journey. For a long, long time I?ve been enthusiastic about China?s prospects. For many years I?ve urged my friends to teach their children Chinese, as I believe the 21st century will be as much China?s as the 19th century was Britain?s and the 20th century was America?s. For all these years I?ve been waiting patiently for the hibernating dragon to awaken.
Well, here at the end of the century and the beginning of a new millennium the huge dragon?slightly smaller in land mass than the United States but with more than four times our population?has awakened. To prepare for the right moment, which could be as early as this fall, I?m compiling a shopping list of those Chinese companies in which I will invest. I?m leaving off the inefficient holdovers from communist days, those giant labor-intensive companies that will never show a profit and whose going public was only a way of getting them off the government?s hands. As examples, I?m looking at a land company with huge holdings in raw land in the new part of Shanghai, a tire and rubber company, an appliance company, and a glass company. Nothing high-tech here, but well-established companies in basic industries that will meet the emerging Chinese middle-class desire for a better life. Tire and rubber may seem hum-drum to those whose portfolios are filled with Amazon.com and AOL, but when you?ve traveled across the breadth of China today and encountered thousands upon thousands of rubber-tired vehicles?cars, motorcycles, and trucks?the Chinese now employ, you come to believe that rubber mountains of tires will be sold.
My visits to the stock exchange and the brokerages taught me several interesting things. Everybody in the stock-market business here is young, including the president of the stock exchange. This is a new business, one that didn?t exist 10 to 15 years ago, and the people in it are like those in software and the internet in America?no one is over 35. They are full of the get-up and go of youth, too, eagerly accepting challenges and long hours.
I?m not actually buying any stocks yet, simply mapping out my strategy. I?m watching and waiting for the Chinese to work out their two major problems. Their currency is not yet convertible, which will keep foreign investors from plunging in again. Once the currency issue is resolved, the artificial division between the A- and the B-shares?which if it were dissolved today would give Chinese citizens a way of sending money out of the country?should also come to be resolved.
However, the most telling piece of information I?ve learned here is that the government is trying to make the ownership of stock shares more attractive to its citizens. Over the decades of my investing life, I?ve seen it over and over: When a government creates incentives?real incentives?for people to buy stocks, they always go up. It?s particularly exciting when, as here, there?s a high savings rate, and the banks are loaded with cash. The banks have grown cautious recently and won?t lend, so that these savings are trapped in the banks. If China?s citizens are genuinely encouraged to take their money out of the banks and buy equities, the market will soar. This could happen as early as this summer, but it might take until the end of the year for all this to occur. Remember, too, that these are only two small exchanges with no more than 500 stocks---and that the local population is 1.2-billion Chinese!
So, I?m waiting for the Chinese to allow its currency to float against other currencies and for stock-market incentives that are rumored to come to become real. One or both should happen this year.
And how might an American investor take advantage of these opportunities?
An approach I?m exploring is investing in companies domiciled in overseas Chinese communities such as Bangkok, Singapore, Vancouver, etc. that do business in China or with the Chinese. The Chinese consider the overseas Chinese almost the same as themselves, giving those outside the country a leg up on other nationalities. Find a few of these companies in which to invest and the alert investor will have found an entry point into the Chinese market.
How else to invest? In addition to various Asian mutual funds, I?m reminded of what John Templeton did in 1942. The stock market in New York was depressed because of the Great Depression and World War II. With a modest amount of money Templeton bought 100 shares of each of the stocks on the New York Stock Exchange that were selling for less than $1.00. He held on to them for a good long while, and although some of these companies didn?t survive, he had bought the vast bulk so cheaply that he made a fortune.
Today many Chinese B-shares sell on the New York Stock Exchange as ADRs for small sums. A similar strategy might be to buy all these stocks and hold them through thick and thin. In five, ten, fifteen years there?s an excellent chance that this will be one of the best investments an investor will ever make.
Quite true. Hadn't thought of that...
You heard right. Should be interesting.
I'm not so sure that investing in Chinese stocks is going to prove to be such a canny move over the long term. I think one could do better looking to cherry pick companies that have stumbled in the American markets.
There are some desirable stocks in the current market. I'm worried about the stability of the housing market, systemic risk in the GSE's & JPM, creeping socialism, endless expansion of government to every facet of life, and so on.
Your civility is appreciated.
Red is dead on about the opportunity cost of over-regulation.
My company has spent a decade and millions of tax dollars developing a novel, life saving technology.
Unfortunately, our attempts to bring the product to market in the US have been met with endless regulation. Most of it has little to do with safety and much to do with the governments desire to control and dominate every aspect of American's lives.
We ended up releasing our technology in Hong Kong. We had more freedom there on day one than we did after years of prostrating ourselves before congress,the fda,irs,faa, etc, etc.....
Disgusting. If Americans had the freedom to let nuclear technology mature in the 1970's we would be independent of the Middle East today.
There simply isn't a safer more environmentally sound way of generating power.
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