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Himalayan Crossings: Explaining the Rise of China and India

Selected Insights on US Foreign Policy and on Political Economy, Security, Finance, and Information Technologies in and between South Asia and Greater China


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To boost rural incomes, Beijing could ease micro-finance rules

Wednesday, March 23rd, 2011

Tom Holland. South China Morning Post

China’s leaders talk a lot about lifting incomes for the country’s rural poor.

Their talk is unconvincing. In many cases the ground-level implementation of government policies hinders rather than helps wealth creation among the 54 per cent of the population who still live in the countryside.

Just consider how mainland banking regulations have obstructed the development of China’s micro-finance sector.

Despite recent criticisms comparing some micro-lenders in India to loan sharks, experience around the world shows that institutions which specialise in making miniature loans to very small businesses can play a big role in creating wealth and reducing poverty, especially in areas where small-scale entrepreneurs have little or no access to conventional financial services.

Yet micro-lenders are almost non-existent in China. Although the authorities have approved 1,000 micro-finance licences, the regulatory deck remains stacked against the emergence of the sort of lively small loan markets that have grown up in other developing economies.

For a start, would-be micro-lenders are burdened with onerous capital requirements. They must put up 100 million yuan (HK$118.6 million) of capital before they can open their first branch, with a further 50 million yuan required for every additional branch they open.

Worse, whereas conventional lenders can gear up their capital eight times over, micro-lenders may only gear up 0.5 times. In other words, a micro-finance company with 100 million yuan in capital may make at most only 150 million yuan of loans.

On top of that, micro-lenders in China are extremely constrained in the interest rates they can levy. Under the current regulations, they are not allowed to charge more than four times the benchmark lending rate.

At the moment that means they can charge an interest rate of up to 22.4 per cent on a six month loan. That sounds steep – until you consider it is only around half the interest rate currently imposed by credit card issuers in Hong Kong. As a result, micro-lending in China is barely an economic proposition.

Even so, some are prepared to try. For example, not-for-profit organisation Accion International opened a pilot branch in Chifeng, Inner Mongolia, in December 2009. Just over 15 months later, Accion has around 900 loans outstanding.

Customers are typically small businesses like shops, restaurants, farmers and small-scale hauliers, who borrow an average 30,000 yuan for terms of six to nine months to fund their working capital needs.

With no credit data available, Accion’s 30 staff are forced to gauge borrowers’ ability to service their loans by estimating their likely cash flow.

The assessments are time-consuming and labour-intensive. Credit officers will typically sit in a restaurant all day to count the number of customers coming in. As a result, says Accion’s US-based managing director Roy Jacobowitz, “Breaking even on first loans is almost impossible.”

Still, with a healthy increase in the number of new borrowers and a high enough level of repeat business, he hopes Accion’s Inner Mongolian pilot will be able to break even by the end of its third year in business.

That’s not an attractive enough prospect for most commercial lenders. As a result, says Jacobowitz, most micro-credit licensees in China have restricted themselves to making larger loans of 500,000 yuan or more to bigger, more established companies to finance stock purchases.

And that’s a shame, because there is evidence that the sort of small-scale investments Accion is looking to finance can yield big gains in rural income levels.

According to a new survey by rural development institute Landesa, since new land tenure laws were passed in 1998 some 22 million farm households in China have invested nearly 950 billion yuan – 43,000 yuan each – in diversifying their income, for example by building greenhouses on their land.

Almost all that investment was financed by personal savings together with money borrowed from friends and family. Fewer than 12 per cent of projects involved formal financing, whether from rural credit unions or agricultural banks.

Yet these investments have had a huge impact on earnings. According to the Landesa survey, in 2009 income directly attributable to these investment projects came to 454 billion yuan.

That’s 12 per cent of total rural income for the year and nearly four times the income from the government’s much-vaunted rural subsidies.

Clearly small investments can generate big increases in rural income. So it is surprising, if not perverse, that the authorities continue to obstruct the development of the sort of micro-lending needed to fund more of these small-scale projects.

The most common reason given is that the authorities are anxious to prevent the rural debt boom and bust they fear could follow liberalisation of the micro-lending rules.

Such a boom and bust scenario could well be a danger if the authorities were to embark on wholesale deregulation.

But weighed against the potential increase in rural incomes that could follow, the authorities’ concerns should not be allowed to prevent a partial easing of the current, overly-restrictive regulations.

Helping the poor, after all, is supposed to be a key objective of government policy.

Tom Holland. South China Morning Post

Old Think: Wrapping Amercians' Heads Around the Reality of Their Future Employers – Foreigners

Monday, February 14th, 2011

Kuttner recently argued that American politicians (particularly Democrats) are letting US businesses ignore American workers, and that the USG is coddling the Chinese because American firms make money there.

Its not clear if US firms are not making money selling into China in any real way yet.   They make money from the Chinese assembly platform in a supply chain that delivers final goods to the US consumer. I guess the auto firms, Microsoft and Apple may finally be profiting with sales into China.

Why should Obama go after US business?  If Kuttner wants a German-style model for the US, then he should urge the USG not provide health care to all workers and better education and targeted skills training to make US workers appealing to all business, not just American ones?

Maybe I’m forecasting too firmly on what I alone see as the obvious trend, but is this just not archaic thinking by Kuttner that the major employers of the future for US manufacturing labor will be US firms?  Isn’t the right way to think about this, that the USG should cultivate a workforce that will compete for contracts from TNCs everywhere? Won’t it be Indian, Chinese and Italian and Middle Eastern firms, as well as US ones?

Victor Shih pointed out that “there are still plenty of opportunities for labor repression in China due to weakly enforced labor laws. US companies have come to enjoy that quite a bit.” So Kuttner has a point.  “But”, adds Shih, “with rising wages in China, the equation is starting to chagne.  Of course, the answer is not ‘onshoring’ but moving to India.  Large-scale, national,  job training might be considered too ‘socialist’ in the US, but state-level effort might work.”

India's Response to China's role in global economic governance

Monday, February 14th, 2011

China and global economic governance: History matters | East Asia Forum.

Wendy Dobson over at East Asia Forum has written about China’s positive participation in global and multilateral institutions.  This is something that Ian Johnston has written about with greater rigor elsewhere.

Global climate change will be the key issue area in which to observe and evaluate deep patterns of Chinese policy behaviour and thinking on global multilateral institutions.

Dobson and Drysdale in their anlyses of Chinese participation in mulitlateral institutions have not yet pointed this out.

What has this got to do with India?

As HC has written elsewhere, climate change policy and carbon-control institutions and processes present India with the opportunity to make a positive and lasting impact on global institutions.

It will be interesting to see if Jairam Ramesh who is spearheading India’s efforts in this direction will keep his job in the coming months.

Tempering the Hype: On-the-ground view of Chinese Higher Education

Monday, February 7th, 2011

I received this message from a bright and intrepid former political economy student of mine.  His views of a year studying at one of China’s most well-regarded universities is certainly worth considering in light of the hype that has been causing anxiety in american businesses and policy opinion.  

How this student understands the situation and his ability to reflect on his own position in it says as much about the US system as his reporting about the conditions at his Chinese university does about China’s system.

(I have rendered the quote anonymous to protect the student who continues to study in China.)

As you know, I have been studying in direct matriculation at (one of China’s most prestigious universities) for the past semester. I took three classes including Chinese Economic History and Chinese Public Policies, which were quite interesting….  

What I learned this semester probably had more to do with seeing how things are done than learning anything particularly academic. In all honesty, the Chinese university system is extremely lacking. Even at (XXX) University with the smartest students and best professors, standards are so low. What has struck me the most is how absolutely and completely rampant plagiarism is, which of course reflects the much talked about lack of “critical thinking” in China. And the bureaucratic complications make (YYY University in America) look like the most red-tape free place on earth. Regardless, I think it has been really good for me to be here, and I have met a lot of really interesting and friendly people. I know the exposure I am gaining will prove vital in future academic/professional pursuits.