07 December 2011

China through the eyes of a Czar

Original article
There are many people who write about China and it can be a challenge to sort the drek from the gems of wisdom that are contained in their writings. Most, however, are undoubtedly sincere in in their purposes. China is afterall an important topic of academic, business, and social inquiry. There are, on another hand, those who write about China for unclear reasons and with personal motives. There was something about a recent opinion piece that caught my eye and got me to think about its author and his intentions. Steve Rattner is a man of many talents and with many career turns, whose connections with the New York Times staff entitled him to submit an essay about China. His observations bear close scrutiny and his conclusions deserve mockery.

Rattner has held many positions in his storied life, but cheerleader for the Chinese economic model seems to be the latest stint on his carreerpath. Or he might be a parttime shill for G.M. international. Ever since Thomas Friedmann perfected airport journalism, it has become trendy to become an instant expert on any region of the globe while earning frequent flier miles. Rattner begins his contribution to Sinology by vaguely referring to much of the recent bad press about China.
"Hardly a day goes by without news of yet another economic problem facing China. A frothy real estate market. Quickly rising wages. A weakening manufacturing sector. Tightening lending standards."
First of all, what exactly is a 'frothy real estate market' and why is it a problem? There are very clear structural, and simmering problems with the Chinese real estate market. Why does he choose to compare it to a tasty cappuccino? Is frothy perhaps a bit of venture capitalist jargon? Next, he has: 'quickly rising wages' as a problem. For whom is a rising wage ever a problem? Clearly for the people Rattner is writing this essay for, I can surmise. And then, 'a weakening manufacturing sector'. For China to continue its development into an advanced economy, it will shift more of its wealth creation to the service sector, just has happened in every other postindustrial society. So how is this anticipated development a problem and for whom? Lastly, he ends his list with 'tightening lending standards'. This last one is the most bizarre feature to highlight as a problem. If only the USA had such a clearly defined problem during the last decade while loose lending standards helped to create the housing bubble of 2008.

I like reading about China. I don't read Chinese so I have to rely on the many bridge 'blogs that provide translation of many media highlights and postings from the Chinese language intranet. Most of these are managed by volunteer translators, some Chinese and some nonHan. The quality varies. The best ones have been blocked on the mainland; another relatively good one has been subjected to denial of service attacks from hypernationalists. A new 'blog from inside China appears from time to time with both meaningful content and analyses.

But the editors of the New York Times evidently believe that one visit by one of their own is more valuable than whatever those who specialize in China can ever hope to enlighten. Of course, having been the able car czar under Obama who saw to the restructuring of General Motors and Chrysler affords him a special perspective. It's a pity that he only found time to visit GM assembly plants and to sing their praises in the NYT piece. 
"... G.M. achieves American levels of productivity, quality and worker safety — with pay that is a small fraction of levels in the United States." 
So at least we can understand a bit better for whom the quickly rising wages are a problem. And so he further assuages the investor class to not worry with the most tonedeaf and heartless bit of his writing:
"This illustrates China’s great strength: its ability to relentlessly grind down costs by combining high labor efficiency with wages that remain extraordinarily low." 
To illustrate his point, he cites Foxconn as a positive example. I doubt Rattner met any of the workers who have their wages ground down in order to make China strong.
The rest of the piece is where he sings the praises of the Chinese model for development. On the one hand, he does mention: "China’s economic success is colored by its opaque political system, repressive and riddled with corruption." And yet according to Rattner's priorities, the political system is not even a problem worthy of mention at the outset of the piece. Yet all is well as he concludes, on the other hand: "...a populace that appears more interested in economic advancement than in democracy." Because in Rattner's mind, the same people who are having their wages ground down by a political system are willing to forego better governance because that same system is advancing them economically. But does Rattner hate the working class so much? He recently clarified his position:
"Perhaps I misspoke. Perhaps my remarks were misinterpreted. So let me be clear, I have no desire to see auto workers (or anyone else) take a pay cut,". 
Cutting, in a strictly tool and die sense, is, in fact, quite different from grinding down.
To be fair to Rattner, he is truly concerned about one minority group, the investors in China who might be worried about how so much corruption might affect their bottom lines. He dismisses this all with a comparison with the USA.
"Not unlike the United States in the 19th century, China’s early stage of industrialization has brought with it an unsavory wild West flavor, from cronyism to fraudulent accounting, ..." 
It's really odd for him to claim that China is still in its early stage of industrialization unless he is focussing on the level of labor rights and trade unionsim, which clearly he is not. China's leaders want it to move into a more balanced economy, which means de-emphasizing manufacturing and a greater development of the service sector. Rattner's claim that China is both at the same level of US productivity and at its early stage of industrialization is both awkward and selfserving. In Rattner's mind it's all good because China's debt, which might or not be larger than the USA's (possibly due to fraudulent accounting?) is being spent on infrastructure.
"Notwithstanding accounts of 'roads to nowhere,' China has vastly improved its core infrastructure. Its government arguably does better than ours at allocating capital." 
Is there anything that China can ever do wrong? Or the USA do right for that matter? Is he possibly hinting at the misallocation of the TARP funds or of the $82 billion of public funds to bail out the US auto industry, which he supervised. One might even hope that he is referring to the indefinite military ventures, but I doubt that is much of Rattner's concern.
Rattner then proceeds to list even more reasons to invest foreign capital in China, finalizing his pitch with the most assuring of assurances for the investor class: "...China is likely to continue to get away with reforming only slowly." 30 years of 8% annual growth and, as as as Rattner can foresee, it will continue on indefinitely.
Steve Rattner is an interesting man by many accounts. While he is not even the only billionaire on the NYT staff, he has worked his way up to that level from beat reporter. His most recent title is that of chairman of Willett Advisors, LLC, which for all intents and purposes is just a rebranded version of Quadrangle Asset Managment with most of the same staff and likely a good deal of the same investment funds. Before QAM, he was with Lazard Frères & Co. to which he matriculated from Morgan Stanley after getting his start in the investment banking world at at the now defunct Lehman Brothers.
One theory is that Rattner is just doing what he can to stroke the egos of high level Chinese officials. The NYT is considered the only newspaper that the Chinese politburo pays attention to. Fallows at the Atlantic often mentions this. Rattner is indeed well positioned; being in the middle allows him more easily to play both sides against each other. And isn't that what a hedge fund manager's real job all about? There is something jarring to read an editorial shift to the second person. Starting in the title, "Will China Stumble? Don’t Bet on It", he then plays a tourguide, "Visit the General Motors plant on the outskirts of Shanghai and watch Buicks..." By the end, the piece comes across as a salespitch for China composed by a very wordy bookmaker.  A hedgefundmanager is a very well compensated and privileged bookie. I have no doubt that Rattner has been making bets on China, but while he encourages others from one side of his mouth to make long bets on China's upward growth, I strongly suspect that he has a good deal of smart money on short trades.

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