China: Holiday Thoughts on Misunderstanding Data

Here in China we are beginning a holiday week – October 1 is the anniversary of the 1949 revolution – so markets were closed today and will be closed for the rest of the week, and there’s a pretty good chance not a whole lot will happen on the policy front until the end of the holiday schedule.  Much of official public attention has been focused on the successful return of Shenzhou VII, whose flight included China’s first space walk.  Unofficial public attention is still on the milk scandal, whose social repercussions are likely to be fairly deep.

On that note, I thought it might be useful to recount an interesting discussion I had last night with a group of six young Chinese friends.  The foreign media has made a lot of noise in recent months about the ugliness of China’s ultranationalist youth, and I get the impression that a lot of people abroad are worried by the spectacle of China’s being overwhelmed by mobs of goose-stepping youth proclaiming hostility to the rest of the world. 

There is no question, of course, that this country has its fair share of flag-addled nationalists, but in China, like in most other countries, it is too easy to mistake the views of a very loud few for the views of the general population.  The reality here, it seems to me, is not a youth population teeming with aggressive nationalists but rather a great deal of very worried questioning about China and her future.

Last night, my club presented a show by a well-known folk singer in his mid-30s from Shandong province.  After the show I sat down with him to chat, and was joined by five young people in their early to mid-20s who represented a pretty decent cross-section of young Chinese.  One was a software engineer from Hubei, another a college student from Fujian, a third was a bar manager from Dongbei, a fourth was a kid from Xinjiang who had just moved to Beijing a few months earlier to get a job, and the fifth was a Beijing college student majoring in design.  Although half of them were college educated none of them were graduates of elite colleges, and a few of them came from fairly poor circumstances – and so in that sense are perhaps more representative of ordinary youth than some of the nastier types we often see charging through the Beijing streets in their flag-bedecked SUVs.

With the help of plenty of beer we had a wide-ranging discussion, and at one point the young Hubei engineer asked me what I thought of the Beijing Olympics.  I gave him the standard response – a great success for China, wonderful show, etc. etc.  He interrupted me and said that in his opinion it was good for Beijing and terrible for China.

That started off a very long and impassioned discussion in which the people at the table – with the folk singer being the most demure, interestingly enough – launched into a very brutal attack on China and especially on the government.  The milk scandal was presented by everyone as proof of why China was, and was destined to be forever, a failure as a nation.  They gave many other examples and would not hear of anything good I might say.  

When I tried to argue that China would inevitably experience difficult problems in the process of its growth, and that the milk scandal was one of them, they very politely but very firmly explained to me that I could only say this because I was a foreigner and knew nothing about the real China (although I had been to more parts of China than any of them except the folk singer).  They especially pointed out that as a Peking University professor the only students I meet were the ones who would run and benefit from the system, and so my views about Chinese were distorted (they said this very politely, as young Chinese are likely to be with professors, but quite firmly – they had little use for the elite).  They were utterly demoralized about prospects for ordinary Chinese and scathing about their leaders, even Grandpa Wen.  I found myself in the position (and not for the first time) of defending China and its government from very critical young Chinese.

I can’t discuss the whole conversation and of course I don’t want to suggest that these young people represented the totality of young Chinese opinion – after all the fact that they were at a bar to see the performance of a folk singer famous for his social concerns suggests some form of non-random selection – but it was a very striking version of a conversation I have had many times before in the past few years, both with elite college students and with less exalted types.  Often under the outpourings of pride there can still be a real despair among many young people about the prospects for their country, and many are far more skeptical about the official story than one might suppose from reading the press.  In fact, I suspect the nationalistic rage of the feng qing, the so-called angry youth, may be as much a reaction to that skepticism as it is to perceived foreign slights.

What does all of this have to do with China’s financial markets?  I would argue that one thing it suggests, and I have made this comment before, is the brittleness of government credibility.  The idea that Chinese youth mostly follow the dictates of the official media is simply not true, even though you would have to be very naïve not to acknowledge the media influences the debate. 

But the fact that the government regularly directs the media and tries to limit the debate is not lost on most people, and there is a lot more skepticism, distrust, and even hostility than we might think to the China that many of us see in the press.  The government, in other words, can mobilize opinion relatively easily up to a point, but underneath it all this is a population a lot more sophisticated and a lot less malleable than we think, and when anger or frustration breaks, it can break pretty quickly (I remember this happening during the SAS crisis). 

That is probably good for China in the long run (I tried to explain to my very doubtful young friends that the very fact of their skepticism undermined their pessimism, and that China was much worse off when people uncritically accepted of the official line), but suggests more instability in the short run than we might otherwise expect.

Again, I want to stress that these ruminations are not the result of one conversation, but that last night’s conversation was simply a very strong version of many conversations I have often had before, and although my participation in it may have colored it to some extent, it was pretty clear that these were things that these kids had thought about and argued about among themselves often.  It was the beer and feelings of bonhomie that allowed them to be so openly critical of themselves in front of the foreign professor.  

I suppose I shouldn’t take on topics about which I have little expertise, so to move away from my attempts at trenchant social analysis I will return to something about which I can pretend more knowledge.  I was asked today to write an Op-Ed piece about the state of the Chinese financial system, and although I have committed to writing two other pieces this week (so much for the holidays), I agreed to do it.

I think the point of this Op-Ed piece will be to argue that much of the analysis of the banking system in China is a little like the old joke about the drunk who one night loses his car keys in the middle of the road, but spends the night searching for them on the sidewalk because the light there is so much better.  Most discussions of credit and monetary policy focus on the impact of PBoC policies on the banks and the formal sector, mainly because that is where we have data, even though the real action may be going on elsewhere.

So, for example, when the PBoC raises minimum reserve requirements or imposes lending caps so as to slow loan growth, we duly note that RMB lending by commercial banks slows.  But does that mean that total credit in the economy is slowing, or does that simply mean that more rapid loan growth is now occurring in the informal banking sector and off balance sheet?  When the PBoC raises deposit and lending rates, does that mean that the cost of credit has gone up, or is that increase mitigated by a shift in lending from the more expensive informal sector to the cheaper formal sector, as deposits shift to the now-higher-paying commercial banks? 

We don’t know the answer to either of these questions, but we still make assumptions about the efficacy of monetary policy based on what happens in the data we can see – and sure enough there the PBoC regulations do seem to have the desired impact.

However, if you start from the assumption, as I do, that China’s capital controls are too leaky to be effective, then China must face the so-called impossible trinity, which argues that by managing the currency the PBoC cannot have any real control over domestic monetary policy.  In that case rather than assume that specific monetary policies will have the same impact in China as they might in the US, and seeing confirmation of that assumption in the official data, it might be more helpful to look for the types of leakages that automatically undermine the impact of that policy. 

I have been congratulated a lot recently for getting a number of forecasts right – about hot money, about the growth in off-balance sheet lending, about the stress in the banking system and growing NPLs, about the growth of the informal banking sector – but to tell the truth none of those predictions arose from any deeper understanding of China’s financial markets than other analysts have.  In fact I usually turn to much better informed friends to get a sense of what is actually going on.  

All that happened was that when new monetary policy was implemented, and seemed to have the intended effect, I assumed that it could not have had that effect and looked for counterbalancing changes in other parts of the financial system.  In other words I almost begin with the assumption that what drives monetary policy in a system determined by the currency regime is primarily net capital inflows, not domestic central bank policies, and then look for evidence that supports that thesis.  That means taking every bit of data with a lot of skepticism – not because the data are incorrect, but rather because what information is missing is likely systematically to counter the data we have.  

On a completely separate topic, the 3-day Modern Sky Festival begins Tuesday in Haidian Park, just west of Peking University.  Many of Beijing's best indie, underground, folk and experimental musicians will be taking the two stages, including some of who I think are the freshest young bands in the world today (especially on the third day, Thursday).  Those living in the Beijing area should check it out for a very different and pleasant view of China.

Comments

[Urbane Gori...:]

Thanks for the personal perspective. Having spent most of my formative years in various other countries, I often found that we Americans think of foreigners in strict terms.. What I like to call the 'Freedom Fries' mentality. Interesting to hear that students in China have opinions outside the national portrayal... very much as students everywhere seem to. Hope springs eternal... jegan

2008 Sep 29 04:35 PM

[James Lewis:]

The source of the angry ultranationalist youth is actually a reflection of the pain, suffering and discontent felt by the Chinese people towards the CCP. The CCP over the past 59 years has tried to deflect this agression against the establishment and reflect it towards foreign nations/people. This is of course a very common aspect of 'pseudo communism'. I say pseudo because I don't believe there are any modern day versions of 'native american type' communism and village community dynamics alive today. Communism source should be based on Love for all, fairness for all, support for all and justice for all. Not control of the weak/poor by the establishment..

This agression has been deflected away from the establishment by erasing the line between the CCP and the Chinese culture. A lot of the Chinese believe that they are betraying their culture in speaking out against the CCP because in effect they have been taught that they are shunning their culture and inate origin. This is a very effective strategy because of the cultural feature of group psychology the Chinese have so deep inside their being. The Chinese see the red flag and believe it is the connecting symbol of their Culture. The CCP is synominous with this red flag. If you say anything against the red flag/CCP you say something against the Chinese Culture.

Anyone that knows the history of how the CCP got its deep influence in the mainland chinese thinking process understands the deliberate and well thought out strategies and actions that induced the line being erased between the CCP and the Chinese Culture.

The problem is the foreign governments/media don't understand this and flame the hatred by making comments on the Chinese people as a whole rather than the policies of the CCP. This even had an effect this summer during the protests of angering the oversees Chinese. The mis-communicated views punctured a very painful aspect in a lot of Chinese people and as result the outpouring of nationalism was very easy for the CCP to orchestrate. Of course most of the ultranationalist youth in the Olympic stadiums watching the olympics were hand picked by the CCP anyway. Also all the demonstrations were organised centrally by the CCP through the oversees networks.

I think Micheal the people you come in contact with are a 'special calibre' Free-thinking people who have decided they wish to accumulate knowledge. It is only natural that you attract people of this calibre because of your path in life. The earthquake in Sichuan/ Dairy Scandal/Olympic Games have certainly had a very strong effect on how the Chinese see the CCP, themselves and foreign nations/people. And things are heading in the right direction, but we have a very long way to go. And my fear is that we will never get there because of politics.

2008 Sep 30 03:26 AM

[GE collapse...:]

Outstanding, informative, and accurate article. Data, correct or otherwise, can always be interpreted and defined from various angles and positions. What matters most are the percieved realities, as these are what affects market vectors, regardless. Only with hindsight are we able to fully appreciate and reveal accurately data causality. However, what affects tomorrow are the movements now defined by perception, which do not have the luxury of such analysis.

2008 Sep 30 04:37 AM

[A.W.J.:]

Of course not all young people in china are Fen Qing (not Feng Qing). But I think those Fen Qing are exactly those lower class youth. The main reason, in my opinion, is that those lower class guys have nothing to proud about, in other words, they are lack of confidence. Another reason is that they dont have enough information. They dont have the abillity to get information from the rest of the world and, they dont want to. They just want to enjoy their stupid video games (Video games, i think, is more popular among those youth from poorer area. Because they dont have it when they were kids.). So they extremely honor their nation. I dont think there is an connection between the elite colleges and the ultranationalism youth. I'm studying in a so-called 'elite colleges' in Beijing and here are thousands of Fen Qing (Guys here are standing to applause for 'Grandpa P.M.' and presenting their angry about japan). And when you look at those trash colleges nearby, there are also thousands of Fen Qing. Because in every school there always be people from all class. Even PKU students will benefit from the system, now they are outsiders. And I guess guys you met were surely against the system but possibly also against traditional enemies of Fen Qi such as Japan and Korea. I think the central government is far less harmless than those guys against it. At last, the government is running the country in Market economy system, but on the other side those guys who against it want a more 'fair' or even Mao style economy system. That is surely a nightmare.

By the way, the modern sky fest is pretty cool and i gonna be there. but it disappointed me when i found there will be no foreign band. You sucker, Bjork!

2008 Sep 30 09:49 AM

[whidbey:]

It is not clear what your point might be: China is a land of many thoughts, or the government is less than it appears? Both right. I live in Beijing and I too teach at the University, but I have not got the insights of this author who assumes his conversations are informative. My view China and most Chinese are pragmatic and seek only the best in each situation, not maximization of position, but satisfying based on personal energy. In a more Macroeconomic sense China is still seized up in development of its economy and its largest concern is continued export markets. The political process is still very unstable and could go a number of ways. The elites are ready to form up politically, but the party will not allow that so the next best thing is to be well represented to power centers in government. In that regard most of what happens in privately organized and if it works well, it is privately owned. That is power and slowly the center of power is moving to the elites - much like Russia did initially, and probably with the same back lash yet to come. My views are based on little personal contact, but much travel and looking. I think China has a far piece to go to become stable and a mature power in the world.

2008 Sep 30 10:45 AM

[M. Pettis:]

Thanks for all the great comments. The main points I tried to make in the first part of my piece were: 1) As most of the comments implicitly ackowledge it is not very useful to assume that there is such a thing as "Chinese opinion" when in fact this is a very complex country undergoing huge social transformation and, not surprisingly, there is a very wide range of views including some very mixed feelings about the process of change. Chinese attitudes to China are at least as nuanced and conflicted as American attitudes to the US are, and the view of young people as being dominated by the fen qing (sorry for the typo) is no more accurate than to assume all young Austrians are neo-Nazis just because the neo-Nazis are more visible in the headlines. 2) This complexity and distrust has political and economic implications.

And AWJ, I am not disparaging young people from elite colleges (nor are all my young friends from elite colleges -- I actually deal with a pretty wide group of people here). At Beida, Tsinghua, Renda, Zheda, Fudan and several of the other elite schools at which I taught and lectured I have met lots of very impressive students who have a great deal of idealism and are eager to see Chinese advance in a wide variety of areas, but there is no point assuming that elite students have any more objective view than students from what you unfairly call the "trash" schools. In fact Beida students know that, one way or the otjher, their prospects for advancing in China or going abroad (and all six of the people I spoke to Sunday night said they would not hesitate for a second to emigrate if they could, but it was too difficult for them to do so) are fairly good, and this cannot help but affect their feelings and observations.

By the way I agree with your dismay about Bjork's silly and self-interested behavior. If you are Modern Sky come see me at the Maybe Mars booth, where i spend a lot of time.

The second part of my peice was, I guess, a warning about my own perspectives. I am no more objective than anyone else, but my many years experience in other developing countries leaves me very wary of the claim that economic processes are different in China. I think we need to look at data in China and understand that even when the data is right, it can give us a view that is the opposite of reality because the system has so many moving parts and they react in sometimes contradictory ways to each other.

2008 Oct 01 02:48 AM

[A.W.J.:]

Thank you for pointing out my discrimination for those low level school. My opinion is that those fen qing are from every school around this country, no matter how good or bad it is. But there is also something pretty interesting. When you take a look at Xiaonei.com, a chinese version facebook, you can always find: 1. Things most shared are those about ultranationalism 2. This kind of stuff are mostly writen by guys from those unknown schools. Why? Can we take this as a sample?
Also, I guess the major of student matters a lot. A physical student may have far more possibility to be a fen qing than a law student. Because some majors demand Introspection on one's view of his or her home nation.
But all of this are just details, the main question: Will Ultranationalism become main stream? I'm a pessimist and my answer is yes. This is a long trend and its hard to stop it. The reason is what we call 'the wolf's milk', in other words, the education of ultrenationalism. It's just like a monster, which you can only produce it but not terminate it. Example: When leaders try to fix the relationship between china and japan, fen qing fire on leaders. Even the central controlled media system doesnt work well on deal with the anger.
And yes, data here is often without persuasiveness. Just look at what happens nowadays: More than half of beijing people support the traffic control plan, according to the survey. it's just hilarious.
Actually the main reason i went to Modern Sky Fest yesterday is that i want to watch live performance of He Yong, that legendary chinese rock artist. And i think in fact the Modern Sky Fest is not as good as that Midi Fest, for the second one is more pure and hardcore.

2008 Oct 01 03:56 PM

[Xiao Liu:]

I must say you got great insight on Chinese youth and government credibility. It is not surprising me that any government is always making mistakes of over-regulation and under-/deregulation at the same time. Isn't a learning curve issue for both citizens and the government to get closer to the fact and right? I think this applies on America and China.

2008 Oct 03 12:09 PM