I will give a lecture this Friday at Liaoning University, which is in Shenyang, about an hour’s flight north of Beijing. Shenyang is working hard to make the transition from being known as China’s Rust Bowl to the heart of its new industrial base. As such, there are vast opportunities to invest in privatizing companies there.
In addition to lectures and a lunch at Liaoning university, I will visit the Neusoft Group, a successful software company, make a half hour television program for Liaoning TV on China/US economic relations, and spend time with local busines and government leaders.
Thought you would like to see the following brief outline of the points I will cover in the lecture.
JR
The Impact of Integrated Global Capital Markets on China and the U.S.
•China has committed to fully opening capital markets as part of the WTO process. This will have important impacts on both the Chinese and American economies.
•We can best understand the impact of opening capital markets on the economies of China and the U.S. by using the laws of thermodynamic systems from physics.
•China and the U.S. were effectively closed economic systems for most of the past six decades.
•A closed system is one in which temperature, pressure, and other state variables are everywhere driven to uniformity.
•In economics, we refer to closed systems as “markets.” A market is defined as the area in which price tends toward uniformity. This is known as “the law of one price.”
•In closed economic systems, prices, wages, incomes, the price of capital, and the return on capital are determined by local supply and demand conditions, by population, and existing stocks of both human and non-human capital.
•Dramatic changes in China during the past 27 years have bought these formerly closed economic systems into close communication. This has been caused by:
–Changes in laws and regulations,
–China’s WTO membership, and
–The opening of Chinese capital markets.
•When formally-closed economic systems are brought into contact, to form one large closed system, the speed at which prices and wages are driven together depends on the ‘bandwidth’ of the channel connecting the systems.
•Traditionally, these adjustments occur through trade in goods, where bandwidth is limited by shipping capacity. This makes the resulting adjustments slow.
•More recently, changes in communications technology, in the form of information technology (IT) and fiber-optic communications, have broadened and deepened these channels, dramatically increasing channel bandwidth.
•This has speeded convergence of prices, wages, and returns on capital. For the first time, the adjustments are primarily driven by changes in the service sectors, i.e., by changes in wage rates.
•Open capital markets are very important for China. In order to continue to grow at high rates and to develop its energy resources, China must import growing amounts of foreign direct investment and technology.
•Fully open capital markets will reduce risks to foreign investors and make the investor decision about where to locate capital more responsive to return differentials.
•This will accelerate the flow of foreign direct investment (FDI) to China from the U.S., Europe, and Japan, and will allow China’s economy to sustain high growth.
•Result: Two formerly closed systems will become one closed system. Flows of capital and labor services will drive relative prices, wages, incomes, and returns together.
•Issues brought about by economic convergence:
–What will the new set of relative prices and wages look like?
–Will the transition be smooth? Or marred by disruptive stops and starts.
–How will the changes impact domestic politics and policies in both countries?
•Preliminary conclusions:
–The new relative prices will tend toward the mass-weighted average of current prices in both countries.
–Although prices and wages will change substantially in both countries, changes will be larger, and more disruptive, in China.
–The adjustment is unlikely to be smooth.
–Chaotic change frightens people and leads to political pressures on governments for ‘protection’ against change.
–Political pressures in both countries will give rise to unproductive short-term policy reactions—such as tariffs, quotas, or pressure to change exchange rates–that can have permanent effects.
–Policy should attempt to make the adjustment stable and orderly.
•Issues to discuss:
–The link between exchange rate policy and domestic monetary policy.
–Developments in rule of law.
–Corporate governance
–Transparency in financial markets
–Availability of both public and private risk capital.
–The increasing importance of small businesses in China.
–Developing management education programs for Chinese entrepreneurs.
–Need for increased mutual understanding of history, culture, and language.
Dr. R,
You started your lecture outline with a metaphor about thermodynamics then changed the metaphor to electrical signal transmission bandwidth and then never finished the thermo metaphor.
Although I’m sure they understood your meaning and would nod politely, this approach is very disturbing to left brained engineers, scientists, etc.
😉
Brian
Brian,
I am frequently guilty of metaphor abuse. Guilty as charged.
I also like to think of the electron flow in a curcuit as a thermodynamical process, and use the bandwidth thing to get people to think about what sort of connectors there are to bring 2 formerly closed systems into one open system and think about what sets the adjustment speeds and shapes.
Appreciate your comments. Always welcome for more.
JR
I want to teach English in China in February 2006.
New passport Jan 9/06 and immunization required.
Rceived Ed.D. Northern Illinois University 12/05.
years teaching high school business courses in Ontario high schools, 8 years USA, 1 year Zambia
Specialist in Accountancy, Data Processing,
ESL and M.Sc. Reading. M.Ed. Lakehead University.
The Canadian headhunters are working slowly.
Is it because there are no positions or holidays?
Please respond.
Dr. Jane Fraser
Jane,
First, hats off to you. Most prople I know are content to sit at home and complain about the world’s problems; few are willing to rise from their Barcalounger to do anything about it. I think the single most important issue for our childrens’ welfare during their lifetimes is how the US and China learn to get along together over the next 20 years. That will only happen if we get top know each other very well.
I am travelling to China next week and will ask my friends there in the Universities how to connect you, and any others who have the same interest, how best to connect with the people in China who ca make this happen. I will write about this as soon as I have an answer. I already know, however, that there are many opportunities to teach English in China. (One of my daughters is discussing the idea now.) And no, you do not have to be a Chinese speaker to make a contribution.
I will be happy to pass along any names and resumes people send me to the appropriate people in China. And I am also interested in learning about situations in the US where schools are interested in hosting a Chinese student who would like to teach English and learn about America here.
More to come.
John
Do you think that there is a substantial, if any, connection between the unprecedented capital inflows into China and the inflationary worries in Europe?
It seems to me that the dichotomous “US v. China” thinking that dominates most of the dialogue today really degrades the world economy’s international nature and the affect of China’s policies on Europe, the smaller regional economies goes largely ignored.
Dear Dr. Rutledge,
“Fully open capital markets will reduce risks to foreign investors and make the investor decision about where to locate capital more responsive to return differentials.”
and how about the risk to chinese banks? The bank system or finance system in china is still very weakly, wenn the capital markets at once fully opend, will the system probably break down together, then run all the foreign bankers and investors away from china… I think that capital market would sooner or later fully opend, importantly is the opening speed, slowly is more surely, surely for not only chinese but also foreign investors.
Man kann sich natürlich noch über andere Punkten, die Sie genannt haben, stritten, aber eindeutiges Ergebnis gibt es eh nicht, man muss schließlich sehen, wie es sich alles in China entwickeln wird.
I hope you will enjoy your tour in Shenyang, where my heart always will be…
Dear Ying Li,
I think ou are right that a slow and steady opening will be better for stable growth in China. Your comment about the Chinese banks is very important. That is the reason why I think it is very positive that the government holds such a large stock of dollar reserves. The government can use those reserves to increase the capital of the banks, as they have three times in the past year, to allow the banks to write down the bad loans so they can be competitive in world markets. I will hope for the best along with you.
John
Enjoy your trip
Maybe you’ll be able to buy that BIG BMW now ?