Thursday, June 15, 2006

Is Liquidity the Culprit of China's Alleged Overheating

With the latest investment numbers stronger than expected(read more here), it is expected that another round of macro-policies with the aim of cooling off the red hot Chinese economy is in the works.

Today's edition of SCMP reported that, "Yesterday's strong growth numbers and the excessive liquidity in the economy means the central bank must intensify efforts to drain capital from the financial system. With broad money supply having grown 19.1 per cent year on year in May and new lending having nearly doubled, to 209.4 billion yuan, People's Bank of China governor Zhou Xiaochuan said yesterday that the central bank would "fine-tune liquidity"."

Some commentators blame excessive liquidity as the culprit of the rapid lending growth, implicitly endorsed by Zhou as the above quote shows. Is Liquidity really the source of all evil?

China is still a developing country. That implies, at least at its level of development right now, capital is still a relatively scarce factor of production compared with its vast pool of labor. In other words, all that liquidity can be put to good use if the mechanism that allocates capital works reasonably well. Therefore, liquidity in and of itself should not be viewed as the culprit. By implication then, high investment growth should not worry us too much, again this is important, if the mechanism that allocates capital works reasonably well.

Unfortunately, the mechanism that allocates capital in China does not work reasonably well. The culprit, then, is the mechanism that allocates capital and in China's case, where stock market only plays a secondary role, that pretty much means banks, especially the big 4 state-owned banks.

According to Wen Wei Po (sorry no links, and the story is available in Chinese only anyway), about 50% of new loans made in the first quarter of this year were made by the big 4 state-owned banks. With so much capital allocated through state-owned banks, the quality of those loans are indeed questionable.

Bottom Line: Any measures that do not address the weaknesses inherent in China's capital allocation mechanism would not work in helping to lift the quality of its investments.

Tuesday, June 13, 2006

Why Workers Spend So Much Time in Office

A Russian lady who worked for a local company here in HK told a TV reporter one of the main reasons why she quitted working for somebody and started a business of her own:

She could not stand her colleagues goofing off for most of the day, and starting to work only when the end of the workday looms.

The situation that the Russian lady refers to seems to happen a lot in offices here in HK. And the question is why given that most white collar workers are not paid by the hour?

Part of the answer may be related to the fact that time serves as a proxy for a worker's contribution to the firm, and so by prolonging the workday and given imperfect monitoring, that kind of behavior would help build one's image in the eyes of the supervisor. In any case, I do not have a full answer.

The Most Touching Blogpost I have Read Today

Sorry folks, in Chinese only.

Here it is:

當你心靈破碎,傷心欲絕,坊間各本騙人的、教你如何振作做人十二守則,對人絲毫無效。你應該拿起一本天文物理的普及讀本,例如霍金這本他用眼寫的小書, 發覺在中環以外,並非倫敦紐約,而是木星土星;再望遠一點,是一個黑暗無盡的宇宙。人生匆匆幾十年,只不過是彈指即過。再讀多幾頁,四度空間的space -time,看見那個漏斗型的圖說,頭昏腦脹,更覺得身邊的瑣事,不值一哂。


That is from Fong C Y's blog.

Sunday, June 11, 2006

How much of the rise of Britain to world dominance by 1850 does the Industrial Revolution explain?

Not much, according to professor Greg Clark at UC Davis.

Here is the bottomline:

"Britain's rise to world dominance was a product more of the bedroom labors of British workers than of their factory toil."

Amazing, read the paper here.

Best Line I Have Read Today

"M.B.A. programs train the wrong people in the wrong ways with the wrong consequences."

That is from an interesting story in NYT about the value of having a MBA, read more here.

Wednesday, June 07, 2006

Does Education Teach Us Anything?

Yes, but not what you would expect though.

According to David Friedman:"Considerable parts of it appear designed to teach people to pretend to intellectual tastes and knowledge that they do not possess and that there is no good reason why they should possess."

If what Dave said were true, that might provide us with a novel explanation of the wage premium earned by workers with a college degree over those who don't have one. College graduates are simply better actors. Is there a way to test this implication of David's claim?

David's claim is also consistent with the signalling theory of education. We don't go through school because of what we are expected to learn there. So it does not matter if all those who go to school only learn about how to pretend to learn about intellectual tastes and knowledge that they don't have. The mere fact that we go through school is good enough to show that the school-goers have certain qualities, presumably valuable to employers, that non-school-goers do not possess.

And the quote from David can be found on his post: Ideas: Condi Rice and Walt Whitman

Tuesday, June 06, 2006

Is Democracy Needed for Rule of Law?

I had long believed that rule of law alone is sufficient for the maintenance and preservation of personal liberty. I had a long-held suspicion that democracy is not a prerequisite for rule of law to exist. But I was not 100% sure about my belief though, especially in the face of many arguments which claim that rule of law is a by-product of democracy.

That's until I read this yesterday:

"To regard the rule of law, surely one of the most crucial positive externalities an economy can possibly enjoy, as a by-product of democracy is simply erroneous and is belied by history.

The rule of law has prevailed in England from the end of the 17th century onwards. It dominated some aspects of civil and even public life in France under the absolute monarchy of the Bourbons. It established itself in Prussia in the 18th and in Austria-Hungary in the 19th century. None of these countries waited for democracy before submitting to the rule of law.

Democracy may produce a favourable climate for the rule of law to take root. However, it does not always do so, as witness some Latin American countries that adopted universal suffrage and majority voting as their means of choosing governments in the second half of the 20th century. Saying that they are not really democracies because they do not have the rule of law would be to turn the relation of the two into an empty tautology."

Read the whole thing here.

Saturday, June 03, 2006

The Best Blog Post I have Read Today

1. Teaching Math In 1960

A logger sells a truckload of lumber for $100. His cost of production is 4/5 of the price. What is his profit?

2. Teaching Math in 1970

A logger sells a truckload of lumber for $100. His cost of production is 4/5 of the price, or $80. What is his profit?

3. Teaching Math In 1980

A logger sells a truckload of lumber for $100. His cost of production is $80. Did he make a profit?

4. Teaching Math In 1990

A logger sells a truckload of lumber for $100. His cost of production is $80 and his profit is $20. Your assignment: Underline the number 20.

5. Teaching Math In 2000

A logger cuts down a beautiful forest because he is selfish and inconsiderate and cares nothing for the habitat of animals or the preservation of our woodlands. He does this so he can make a profit of $20. What do you think of this way of making a living?

6. Teaching Math In 2010

Un hachero vende una carretada de maderapara $100. El costo de la produccion es $80. om

That's from Eric Ramusen at Indiana University.

How Businesses Fend Off Regulators

Today's edition of NYT has a fascinating story about how eBay helps curb government regulations, read the story here.

Two points are noteworthy about the story...

1) How Government Regulations are Out-of-tuned with Rapid Pace of Technological Change

In Lousiana, which is the focus of the story, those affiliated with eBay who had got their licenses had to go through a course which supposedly would inform them about their trade. What did they got instead?

"Ninety-nine percent of the course had nothing to do with our business...It was about traditional auctioneering, cattle and land and firearms."

2) How Good Intentions May Backfire

Louisiana Auctioneers Licensing Board, the agency which attempted to get eBay affiliates to be licensed, says its mission is to protect the public from "unqualified, irresponsible or unscrupulous individuals."

While the effectiveness of such license is questionable, given eBay's interests to protect its brandname and thus renders the on-line market a self-regulating one, the regulation does have an undesirable unintended consequence: job losses for those affiliated with eBay.

As the story has it: "[M]any eBay sellers do their trading part time or in addition to another job. "If they are overregulated by licensing fees...they will abandon their eBay business."

Hence the irony is this: the regulators kill the very market that it attempts to regulate.

Cooling China's Property Market, More Difficult than You Think

Over the last few months, Chinese government is increasingly concerned about its red-hot property market, and has launched a series of measures (read more here and here) in order to orchestrate a soft-landing.

Now of course a red hot property market is an outcome, a result of the interactions between and among different individuals and groups participating in an economy.

They are played by a set of rules governing their behaviour. So, before we can evaluate whether the problem in the property market can be properly addressed by the latest government policies, we have to figure out what those rules are.

China has a de facto federal system with substantial power, mostly economic, vested at the local level. Under the current fiscal system, land is the major source of revenue for local governments. Economic perfomance of the areas under their rein is one of the most important criteria for evaluating local officials' performance. Combining the two, then it should not be too difficult to understand why it is the interest of the local officials to see a boom in their local property markets.

The central government thinks differently, of course. For it's concern is mainly the stability of the overall economy. In other words, the rules that are now in place (fiscal rules, and those governing how local officials are evaluated) generate conflicting objectives between the local and the central governments.

Unless those rules are altered, it is hard to see how policies annouced by the central government can effectively deal with the red-hot property market.