The “Crocodile in the Yangtze”

Alibaba Group Headquarters in Yu Hang District, China. April 14, 2012. Thomas Lombard (Wikimedia Commons)

China’s largest e-commerce company, Alibaba, is set to make history in the coming months. Founded in 1999, Alibaba has the potential to set the largest initial public offering (IPO) in the US for a Chinese company and even exceed Facebook’s initial valuation in 2012.

While Alibaba has declined to comment on why it moved its IPO from Hong Kong to New York City, its decision is largely based on a disagreement between company executives and the Hong Kong Securities and Futures Commission. Unlike Hong Kong’s stock exchanges, the NYSE and the NASDAQ do not maintain a one-share per one-vote standard, allowing Alibaba’s key partners to maintain control over its board of directors.

Holding its IPO in the United States could also facilitate future acquisitions of American companies. Its recentinvestments in the Silicon Valley start-ups Tango and AutoNavi indicate that Alibaba is seeking market expansion at the international level. More than just a middleman between sellers and buyers, Alibaba allows its customers to pay bills, buy insurance, and even take out loans. Its wide range of services and competitive pricing structure are enticing to both consumers and venders. Moreover, Alibaba’s capital is substantial. In the past fiscal year, its estimated sales exceed $420 billion, which dwarfs the combined revenue of Amazon and eBay. Further, it boasts 300 million customers across China – a number that will surely grow in accordance with increased Internet penetration.

Flickr - World Economic Forum - Jack Ma Yun - Annual Meeting of the New Champions Tianjin 2008 (1)

Jack Ma Yun, Chairman and Chief Executive Officer, Alibaba Group, speaks during The Future of the Global Economy: The View from China plenary session at the World Economic Forum Annual Meeting of the New Champions in Tianjin. China 28 September 2008. Copyright World Economic Forum (www.weforum.org)/Photo by Natalie Behring (Wikimedia Commons)

The big question that remains is whether Alibaba is capable of competing with established Western brands in the global e-commerce marketplace. Jack Ma, Alibaba’s founder and former CEO, responded to doubts of Alibaba’s competitiveness: “Ebay is a shark in the ocean. We are a crocodile in the Yangtze River. If we fight in the ocean, we will lose. But if we fight in the river, we will win.” Ma’s tempered confidence is justified. Although Alibaba has enjoyed tremendous success in the People’s Republic of China, it may not enjoy viability in the global marketplace. Alibaba’s prospects of successful market penetration are poor, particularly in the United States where the market is already saturated with established firms, such as Amazon and Zappos. Alibaba’s micro-lending, insurance market, and investment services, however, could prove highly successful in several Latin American and African economies where such service industries are severely underdeveloped.

Yet, Alibaba’s main obstacle to success may be the Chinese Communist Party. Consider yuebao, Alibaba’s financial investment service that provides a 5% return on risk-free investments. Yuebao offers a fantastic yield in China where millions of laymen deposit their hard-earned yuan into bank accounts only to see its real value depreciate from an inflationary tax. As Yuebao continues to threaten Chinese banks’ monopoly on savings, its days may be numbered before the Communist Party intervenes. Only time will tell if Alibaba can fend for itself in the vast ocean of e-commerce. Continued expansion within China and throughout the developed and developing world may prove impossible. One thing is for certain: Alibaba’s biggest threat to global development no longer lies in America, but in Beijing’s Politburo.

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Why This May Not be China’s Century

The Shanghai Skyline, by dawvon (Pudong) via Wikimedia Commons.

Over the past few centuries, China has suffered its fair share of embarrassments.  From the Opium Wars to the Great Leap Forward, its hailed position as the middle kingdom has been eroded time and again.  Deeply engrained into the psyche of China’s populous is the belief that China must reclaim its position as a world power.  This stark contrast between China’s idealized status today, and the ruinous state of China a mere half-century ago, resulted in a cognitive dissonance among its populous that has no doubt been a strong catalyst for recent economic reforms.

Gradually implemented reforms such as dual-track pricing, liberalization of socialist policies, and expansion of investment between China and foreign powers has brought about three decades of maintaining nearly 10% growth rates, an extraordinary feat for a nation that was on the verge of collapse fifty years ago.

Its recent ascension as the world’s second largest economy, coupled with potential increases in domestic spending and widespread domestic and foreign investments, have led many to call this century “China’s century.” Yet this optimistic forecast quickly sours when one considers the slew of imminent crises confronting China over the coming decades.

Implemented to curb China’s booming population growth rate, the one-child policy is sowing the seeds of China’s demographic and economic crises.  With the vast majority of families proscribed from having more than one child, China enjoyed an enormous demographic dividend – defined as the economic benefit a country experiences when it has a low ratio of dependent to independent workers – over the past three decades.

This dividend is already starting to expire.  By 2050, 25% of China’s populous will be above the age of 65.  Attempts to solve the demographic crunch by relaxing the one-child policy will prove futile, as any increase in China’s birth rate will only reap modest effects some two decades from now.  Furthermore, as a consequence of this policy, China’s gender distribution has already taken a heavy toll.  A well-established trend in China is the preference of male rather than female children, which has resulted in scores of sex-selective abortions. With an estimated 30-40 million more boys than girls in China, millions of young bachelors will now be unable to find wives.  Add sexual frustration to their already bleak economic prospects, and millions of disgruntled male migrant workers will be even more inclined to take to the streets in the name of political protest.

In addition to economic stagnation and political upheaval is a housing bubble throughout the PRC.  Fueled by greed and overly optimistic homeowners, price to rent ratios across China have skyrocketed past stable levels.  Flawed social expectations have only exacerbated this impending bubble.  Across China owning a home is a prerequisite for finding a wife.  With millions of only children, bachelors are in a position to seek financial assistance from both parents and grandparents, and pay grossly inflated prices for real estate acquisition.  It is unclear how the Politburo plans to address the housing market’s impending crisis.  What is clear is that whether the housing market encounters gradual deflation or a bubble burst, China’s economic prospects will suffer as a result.

Government action to address widespread pollution will bring about similar economic decline.  Two winters ago, China’s AQI (air quality index) broke records when it surpassed 800. Prior to this incident, measures of AQI had never exceeded 500.  Across China, pollution’s wrath has affected the health and economic livelihood of its population.  In Beijing it is now common for parents to select their children’s schools based upon the quality of their air filtration systems.  One particularly noxious chemical, PM 2.5, is found in hazardous doses across Mainland China.  Until China adequately addresses this affront to its citizens’ health and well-being, it will continue to pay increasing social and economic costs.

In spite of China’s woes, there remains a chance at redemption.  This may not be China’s century in terms of economic and geopolitical supremacy, but it may be their century to pave the way for environmental protection, sustainable development, and economic and political reform.  In the words of Churchill, “Failure is never fatal, success is never permanent.  The only thing that really matters is never giving up.”  This of course assumes that China’s population of 150 million migrant workers doesn’t take to the streets, overthrow the Communist Party, and support a military coup.  That could just be the straw that breaks the camels back.

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韦尔蒙历险

小木屋

前年,去年夏天我跟我好朋友在韦尔蒙建造小木屋。前年夏天我们也从他的乡下到加拿大骑自行车。此时我的精神面貌改变了,长大了很多,性格也改变了。我们决定建造小木屋的原因在于David Thoreau著名书的影响。在这本书他讨论社会,经济的问题。我们特别赞美这个有名的作家因为他的想法简单的面对生活的问题。

位于森林旁边,我们建造的小木屋的地址又安静又完美。为了增进我们对哲学的了解,咱们常常参考David Thoreau的书。他再三解释重点生活方面,比如省吃俭用,好好利用机会,欣赏简单的乐事,等等。据一个例子,他说太多人一辈子对工作不满意,然而继续做辛苦的事情为赚钱。一个英国人的理想是在法国写诗,可是为了赚钱在银行工作。这段故事让我们了解非常重要的观念。我们都以为赚钱非常紧急,不然我们没有力气,没有自由。可是,Thoreau非常了解生活太短,每天得做你理想的爱好。

咱们发现了建造小木屋很辛苦,受不了太阳的热度。先,我朋友劈了六十三棵树。我们雇用他拥有马的隔壁把所有的树移到我们要建造的地址。然后,我们开始削树皮。好像很简单,但是非常辛苦。削树皮以后,我们建筑了小木屋的基础。最后我们把原木堆起来,建筑屋顶。在三个句子我能解释我们建筑小木屋的方式,但是好好表达我们的经理不可能的。我们一边工作一边描述故事。

 我们旅游加拿大的时候好玩。每天跟地方的人交了朋友,看风景,观察文化的差别。我们考虑生活的意义,想一想我们毕业后的计划。一次大下雨我们差一点找不到房子。好在找到特别友好,开朗的加拿大人。他们让我们在家里睡觉,劝酒劝菜。我难忘他们的盛意。

这两夏天比较重要的经验。我还没决定我会做什么工作,活什么样的生活,当什么样的人,但是精神面貌改变了。有的时候我紧张找不找工作,未来将怎么样。我一记得这两夏天的历险就放心。在生活上有的时候很重大。工作当然有一点重要,但是历险,朋友们,爱情更有意义。我希望我会再来有历险,找得到爱情,跟不同的人交朋友,建筑别的小木屋。有机会的时候,不会犹豫,就会利用机会因为生活太段。我的理想是一辈子快乐。

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Blessed by Resources, Cursed by Politicians

The Iglesia de la Compania de Jesus, built in 1671 is Argentina’s oldest church; Argentina’s oldest university is on the same block. (Jacob W. Roberts)

President Cristina Kirchner’s health concerns last year are emblematic of the issues that have enshrouded Argentina’s economy and political scene for the past half-century. Over the past few decades Argentina has suffered economic crises, political scandals, and national tragedies. From a failed invasion of the Falkland Islands to the La Guerra Sucia (The Dirty War), in which the Argentinian military killed thousands of its own citizens and kidnapped thousands more infant children, the land of silver has had its share of national embarrassments. More recently in 2001, an attempt to peg the Argentinian peso to the US dollar resulted in default, runs on banks, and an enduring distrust in their financial system.

This distrust continues to manifest itself today. So much as stroll down Florida Street in Buenos Aires and shout, ‘Yo tengo dólares’ and you will be attacked by swarms of porteños (people of Buenos Aires) desperate to buy American currency for many pesos above the government-regulated exchange rate. Even a decade after the economic crash, there remains tremendous distrust in banks. Many Argentinians choose to stash loose cash under their mattresses rather than confront the risk of entrusting it in a financial institution.

Cristina’s leadership has hardly put her citizens’ fears to rest. Over a year ago, she expropriated YPF, a Spanish-owned oil company that her husband sold the rights to decades earlier while governor of Santa Fe. Curiously enough, the money from this deal has never resurfaced. As if encroaching on international law isn’t enough, Cristina has sought to alter the constitution to eliminate the term limits that prohibit her from seeking re-election. While she did not hesitate to dole out welfare benefits to the poor prior during the 2011 election, she was quick to scrap these pay outs following her successful re-election.

In spite of the billions of dollars in agricultural products and commodities being exported to China and other nations in recent years, little of this money has led to domestic development. Driving from San Isidro into the capital, one will pass by thousands of impoverished Argentinians squatting in sevillas, shack-like dwellings constructed out of discarded metal, wood, and concrete. Critics of Cristina are quick to point out that when Cristina entered office there were only one-story shacks in this shantytown, but now it is hard to find a single shack under three-stories high.

These failures as both a nation and as an economy are difficult for many Argentinians to face. Their sense of national pride is nothing to scoff at. In the 1980’s there was a common saying in Europe that one should buy an Argentinian for what he is worth and sell him for what he thinks he’s worth. Even a century after Argentina’s position as the hegemon of the Americas was usurped, many still feel as though their nation is destined to regain its past glory. What few Argentinians will deny is that their country is a land blessed by resources and cursed by politicians. From Peron to Cristina, there have been many crises of leadership. Only time will tell if Cristina’s inevitable downfall will lead to a century of progress and internal development or continued stagnation and corruption. Until then it would be unwise to make any large deposits into El Banco de La Nación.

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What’s Eating Brazil’s Rapid Growth Rates?

A demonstrator tries to stop the riot police during one of many protests around Brazil’s major cities in Rio de Janeiro June 20, 2013. Tens of thousands of demonstrators marched through the streets of Brazil’s biggest cities on Thursday in a growing protest that is tapping into widespread anger at poor public services, police violence and government corruption. REUTERS/Sergio Moraes

Only a few years ago Brazil was on the rise. Both a BRIC country and economic the superstar of Latin America, Brazil enjoyed fantastic growth rates as it rode the wave of a commodity boom. With a young population and many untapped growth opportunities, Brazil seemed poised for continued growth and prosperity.

Unfortunately, even the commodity king of Latin America is not immune to an economic malaise. In contrast to its impressive 7.5% growth rate in 2010, Brazil puttered along at a meager 0.9% in 2012. While growth rates are forecast to rise in 2014, social unrest abounds. Just last year, protesters took to the streets in response to hikes on bus fares and corruption scandals in addition to a general outrage for exuberant government spending on stadiums for the upcoming World Cup and Summer Olympics.

The protestors’ indignation is understandable but would be better directed at failed policies and excessive government spending than at publicized scandals. A whopping 11.3% of Brazil’s GDP is spent on public pension plans, comparable to OECD European nations with much older populations. Its public spending, which amounts to 38.5% of GDP, rivals that of many developed countries.

Opponents of austerity will counter that the anti-poverty policies embraced by former President Luiz Inácio Lula da Silva, or “Lula” for short, lifted nearly 25 million Brazilians out of poverty. Now close to half of Brazil’s population lives in the middle class, and while real income has increased by only 20% for the 10% wealthiest Brazilians, its poorest 10% have seen their real wages double in the last decade. So long as Brazil finds other paths to economic growth, such expensive state intervention can be sustained.

Brazil’s best shot at stimulating growth rates lies in meaningful reform. A disproportionate amount of Brazil’s education spending is lavished upon institutions of higher learning. More of this money should be spent on primary and secondary schooling, and less of it should go to teacher’s pensions, which are unsustainably high.

Reallocation of money from its inflated pension system to investments in infrastructure could pay enormous dividends to Brazil’s economy. While Brazil’s agricultural and commodity production is globally competitive, it is stymied by exorbitant transportation costs that eat up as much as 22% of the costs of production. Improved roads and developed transportation systems could work to alleviate this inefficiency.

Policy makers should also work to streamline its onerous tax code and customs procedures. Doing so would sharply curtail exportation and production costs, in turn bringing Brazilian products to a higher echelon of competitiveness. At the moment, manufacturing costs are continuing to rise while technological advances in production are stagnant. A concerted effort by policy makers to cut manufacturing costs does not need to be a priority, but should be on the backburner as a way of diversifying Brazil’s national income.

These barriers to economic growth are easily remedied. If President Dilma Rousseff or her successors adequately respond with sound economic policies in the coming decade, Brazil will be well on its way to solidifying its place as a world economic power. With a high national birth rate, copious amounts of land and resources, and countless opportunities for reform and infrastructure development, Brazil’s prospects are excellent. In the end, it is not a question of whether Brazil’s economy will continue to grow, but whether its government will allow it to.

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Deciphering The Third Plenum Report

The Key to Addressing Reforms When You Have No Intention of Implementation

The hardest thing about running an authoritarian regime is assuaging the population’s desire for reform without actually doing so. It’s a tricky tightrope act that only the most agile of leaders can master. China’s recent Third Plenum of the 18th Party Congress captured this balancing act in action. Unlike the Third Plenum of the 11th Congress in which Deng Xiaoping clearly articulated a set of free-market, economic reforms, this most recent meeting was a charade. The document released after their three-day meeting, known as the Plenum Communiqué, contained some legitimate calls for change. The only problem was that even in its original language the document is incomprehensible; it lacks coherent solutions and legitimate policy reforms. A drug addict with a monkey stenographer might have been able to pound out a piece of similar – or perhaps greater – substance.

To be fair, identifying necessary reforms in a country plagued by environmental issues, social and economic inequality, and political malfeasance is no easy feat. If Xi Jinping, Li Keqiang and their band of merry men released a statement with too many calls for reform and policy changes, the bar would be set unreasonably high. At the same time, if in the Third Plenum they called for insufficient changes there would be tremendous public outrage that might precipitate political activism.

In this case, being vague is the best approach. If China’s leaders prescribed legitimate reforms for their economy and political systems, just think of the instability it might prompt. The millions of migrant workers who are denied health insurance, educational opportunities, and economic freedom would get overexcited. Calls to curtail environmental pollution would give the millions of Chinese who live in cities with toxic PM 2.5 levels such a sense of relief that they might pass out on the streets during rush hour, dying of asphyxiation from exhaust fumes. Discussing democratization or even more transparency in government might distract Foxconn workers from assembling iPads. It is clear that rushing into reforms without proper thought and consideration is a bad decision for a country still in the early phases of development.

Engaging In Premature Reform is Dangerous

For now the safest way to engage in reform is by avoiding said reform at all costs. They say the longer you wait for policy changes the better they feel. The right time for reform implementation, however, remains unclear. One can’t simply engage in pre-hegemonic reform. At the moment, the party is simply waiting for that special generation to come along. The wait of course will be worth it.
China’s 18th Party Congress can’t be upfront about the fact that reforms may be only attainable in the far-away future. China’s 1.3 billion people are bursting with all kinds of desires to experiment politically, economically and socially. If China was too upfront about its intention to postpone reform, there might be a nasty schism and nationwide protests. And it isn’t that the Communist Party doesn’t want to reform with its people. It just doesn’t feel ready.

How to Lead on Your Population in the Most Effective Way

Sure you can’t engage in it, but you definitely can talk about it. Even just saying the word over and over can excite your countrymen enough without succumbing to their desires. It’s for this reason that in the Plenum Communiqué there was a lot of mention of reform and other words that are sure to excite its disgruntled, frustrated citizens. According to a press release by the Beijing News, no prior Third Plenum report had as many uses of the word ‘reform’.

The Plenum stressed that to comprehensively deepen reform, we must hold high the magnificent banner of Socialism with Chinese characteristics, take Marxism-Leninism, Mao Zedong Thought, Deng Xiaoping Theory, the important ‘Three Represents’ thought and the scientific development view as guidance, persist in beliefs, concentrate a consensus, comprehensively plan matters, move forward in a coordinated manner, persist in the reform orientation of the Socialism market economy, make stimulating social fairness and justice, and enhancing the people’s welfare into starting points and stopover points, further liberate thoughts, liberate and develop social productive forces, liberate and strengthen social vitality, firmly do away with systemic and mechanistic abuses in all areas, and strive to open up an even broader prospect for the undertaking of Socialism with Chinese characteristics.

Chinese readers must have gotten excited just reading this. “Persist…”, “concentrate…”, “stimulate…” This proactive language would leave any reform-deprived person brimming with optimism, if only for a while. One Chinese blogger wrote, “In the end it’s not important whether the document is consistent from beginning to end, because everyone can find what they need in it.” So long as Chinese citizens are satisfied with their government toying with reform, the Communist Party may be able to kick the can down the road and refrain from true policy changes for some time. Sure, citizens’ reform frustrations will continue, but at least everyone can be assured that no one is rushing into any big decisions.

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Don’t Bite the Hand that Feeds Your Economy

People Should Not be Afraid of their Governments, Governments Should be Afraid of their People

Several weeks ago, China’s 18th National Congress held its Third Plenum meeting, a gathering in which the Communist Party usually reveals what reforms it plans to enact in the coming years.

What millions of Chinese citizens sought from this Third Plenum was a decision to repeal the hukou system, a household registration policy that severely controls the migration of citizens outside of their native province. Instead, the party revealed just how adept it is at using vague language to assuage the millions of Chinese seeking reform while at the same time articulating zero clear-cut amendments to legislation.

The hukou system, originally a system designed to maintain social and economic order, is now a blight on China’s socioeconomic distribution that will likely lead to economic stagnation and social instability. The government’s hesitancy to address this outdated policy stems from the anticipated welfare costs that millions of migrant workers could incur upon major cities. However, the party must realize that these costs are minute relative to the immeasurable costs of economic and social instability that will occur should this policy continue to exist.

Dating back to Chairman Mao’s rule, the hukou household registration system actively discriminates against a portion of citizens born to rural provinces. It segregates urban and rural residents, providing urban registered citizens with superior education, health care, and employment opportunities, while providing rural residents with land for agricultural cultivation.

Initially, this system was an attempt to provide ‘separate but equal’ opportunities (better not inform the US Supreme Court about this), and to ensure that Chinese in urban provinces did not flood into its major cities and overwhelm municipal governments.

Unfortunately for rural dwellers, China’s current agricultural tax system makes farming highly unprofitable. With inferior education relative to their urban compatriots and scarce job opportunities, many citizens born to rural domiciles have no choice but to illegally migrate outside of their registered province to work in menial labor, construction, and manufacturing.

Once outside of their native province, these migrant workers are denied health insurance and housing. Since their children are forbidden from attending school outside of their home province, many children of migrant workers either forfeit schooling or attend under-funded, inferior schools in the countryside. For this reason, economic mobility is not viable for the demographic that composes more than 10% of China’s population.

Repeal of this policy is not solely a matter of equality. China’s future interests are best served by abolishing this outdated policy. It is better to reform prematurely in the name of equality and economic viability than later in response to social unrest and economic stagnation.

After decades of enforcing the one-child policy, China is about to confront a demographics crunch. As its enormous labor force begins to downsize, China’s cheap manufacturing industry will wane, and unemployment rates of its floating population will skyrocket. Idle workers are just one political scandal away from taking to the streets.

Declining work opportunities may not be the only determinant of political dissidence. As a result of sex-selective abortions, there are 30 million more men than women in China and that number is only expected to rise in the years to come. With dismal economic prospects and low social status, male migrant workers are having a harder time finding a wife. Add sexual frustration to widespread unemployment, and the result is millions of migrant workers rising up against China’s authoritarian regime. Jasmine Revolution Part II.

Fear of uprising need not be the main motivation for policy changes. It is time Xi Jinping and his band of merry men look to their migrant worker labor force as a source of economic vitality instead of as a means of exploitation.

With China’s hegemony as the world’s manufacturer set to expire in the coming decades, radical transformations of their labor force is a strategic move. Most migrant workers are severely undereducated. Repeal of the hukou system will provide children of migrant workers with superior access to education, improving China’s ability to compete in the global service industry.

Invest in migrant workers’ success and the rewards will be bountiful. Just look back at the effect that the GI Bill had on the US economy. China could very easily create a network of institutes to train its millions of migrant workers in technology, computer programming, and human resources. Why let India have all the fun?

Enabling migrant workers to rise from low-income to middle-income workers can have the additional effect of stimulating China’s domestic demand, which, for a nation with the second largest economy in the world, is appallingly low. Even if such a paradigm shift in income is decades in the making, simply opening up the doors of opportunity can pay untold dividends. Present the possibility of economic mobility and you instill in millions of impoverished Chinese a sense of burgeoning hope.

Deny them a chance at striving for economic advancement, and the Communist Party will pay a heavier price down the road. At 150 million people, China’s migrant worker population is a force to be reckoned with. In 1989, China’s government successfully thwarted protests of college students and dissidents numbering in the hundreds of thousands. Such suppression of an uprising would be unachievable when faced with even just a few million members of China’s floating population. Best to err on the side of caution. Don’t bite the hand that feeds your economy.

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