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Subsidized exporters are parasites.

January 13 2005 at 6:56 PM
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Subsidized exporters are parasites.

China is exporting more and more goods every year at the rate of more than 30% per year in the last several years. The total foreign trade now stands at more than $1 trillion or more than 8 trillion yuans. This is close to some 70% of the entire GDP. Unfortunately, the foreign trade is enabled by an excessively low value of yuan against other foreign currencies especially the dollar. This excessively low value of yuan has turned the goods exported into a virtual free gifts to foreign consumers while forcing the majority of the Chinese people to subsidize the Chinese exporters and the export sector. This makes those engaged in the export trade - from the suppliers of materials to workers working in the factories producing the exported goods to the owners of plants and factories that produce the exported goods to the exporters - parasites that freeload on the rest of the Chinese people and damage the progress of the entire Chinese economy.

Unfortunately, it is very difficult to make the Chinese people understand the seriously harmful effect of subsidized exports because it seems to be providing tens of millions of jobs directly or indirectly to the Chinese workers who are earning higher than average incomes. But the real truth is that all the high incomes of the Chinese workers working for the export trade do not come from foreigners but from China itself. A simple example is enough to illustrate this.

Letís say a Chinese exporter of shirts is exporting 100 million shirts. The shirts cost 60 yuans each to make. Letís say the exchange rate were at 5 yuans to the dollar so each shirt cost $12 for a total of 6 billion yuans or $1.2 billon for the 100 million shirts. Letís say this is too expensive in terms of dollars in America where comparable imported shirts from other developing countries are selling for only $10 each. So in order to compete the Chinese exporter is forced to export his 100 million shirts at $10 each for a total of $1 billion. Given the exchange rate of 5 yuans to the dollar this would only allow him to exchange his $1 billion for 5 billion yuans. Since his cost of production is at 6 billion yuans, he is suffering a loss of 1 billion yuans for the export of the 100 million shirts.

Obviously the Chinese exporter cannot continue to export at the loss of 1 billion yuans for each 100 million shirts exported. Letís say now the Chinese government stepped in and lowered the exchange rate of the yuans to 6 yuans to the dollar. Now the exporter can take his $1 billion to the Chinese banks and exchange it for 6 billion yuans. So immediately the Chinese exporter magically got a billion yuans more and can break even. And if the CCP government continued to lower the exchange rate to 8 yuans to the dollar, the same $1 billion can be exchanged for 8 billion yuans which gives the Chinese exporter a 2 billion yuans profit for the same $1 billion. So what had been a losing business has turned into a hugely profitable business. Overnight the Chinese exporters of all kinds of products are turning into multibillionaires with tens of millions of jobs opening up for unemployed Chinese workers. Unfortunately, most Chinese people, from the lowest unemployed workers at the bottom of the Chinese society to the CCP officials at the highest level of government at the top, never realized what is really happening. Nobody wants to really understand where the extra trillions of yuans are coming from to make the export trade so profitable. They donít realize that there is no free lunch and that the extra trillions of yuans of profits are actually coming from the rest of the Chinese economy in the form of subsidies which is causing great harm to the internal economy of China and impeding the growth of the wealth of the Chinese people in general even while it is making a few Chinese people engaged in the export trade rich.

I give below 5 examples of subsidies and their respective effect on the general economy.

Example 1: schizophrenic patients.

Letís say there is an imaginary island just off the coast of China. On this island letís say there are 1 million schizophrenic patients. Letís say these patients are being catered to by a million other personnel on the island such as doctors, nurses, hospital administrators, and many others. Letís say there are also 5 million workers on the mainland who work to produce food, clothing, medicine, and many other goods and services needed by the people on the island. Since the 1 million schizophrenic patients are not producing anything to give back to the mainland economy they can be said to be parasites on the mainland economy.

Furthermore, since the 1 million hospital personnel on the island and the 5 million workers on the mainland all produce goods and services exclusively for the schizophrenic patients only they too contribute nothing back to the rest of the mainland economy. Since these 6 million workers do not contribute to the mainland economy but consume goods and services produced by the mainland economy, they too can be said to be parasites on the mainland economy. So we have 1 million primary parasites on the island and 6 million more secondary parasites both on the island and the mainland who consume goods and services produced by the mainland economy but contribute nothing back to the mainland economy. And since the rest of the mainland economy provide goods and services to the parasites and get nothing back they can properly be called the host.

Since the schizophrenic patients have no money of their own the goods and services they consume are paid for by money subsidized to them by the government. The government paid the 6 million secondary parasites for rendering their goods and services exclusively to the 1 million schizophrenic patients who are the primary parasites. Some might argue that this created 6 million jobs and stimulates the mainland economy. But this is actually false. The truth is the parasites will only reduce the goods and services available to the host thus reducing the standard of living of the host.

Let me illustrate this by the following example. Letís say there are 100 million people in the host group producing 100 million loaves of bread a day. If there were no parasites then each of the 100 million people will get 1 loaf of bread a day. Letís say there are 100 million yuans of money supply in the mainland economy which makes the price of one loaf of bread 1 yuan. When the government subsidized the parasites it injected 7 million yuans into the economy thus raising the total money supply to 107 million yuans. Since there are now 107 million yuans chasing 100 million loaves of bread, each loaf of bread will cost 1.07 yuans. Since each of the host people will still have only 1 yuan to buy his daily bread it means he will be able to buy less bread each day. Specifically the host will have their standard of living reduced by some 7%.

Some people might argue at this point that the host group will have their money holdings increased by 7 million yuans which will then allow them to buy a whole loaf of bread each the next time. But this is not true because the Chinese government seeing the price of bread has gone up to 1.07 yuans each will simply increase its subsidy to 1.07 yuan. So in the end there will be steady inflation while the standard of living as measured by the amount of bread consumed remains 7% lower than before the subsidy of the parasites began.

At this point some may argue that the extra demand will simply create more employment and increase supply thus expanding the host economy or raise the output of bread in our example. This may not be possible due to various constraints such as resources, capital, technology, etc. For instance there may not be extra electrical supply or flour to bake more bread.

And even if extra electricity and flour could be found to bake more bread it would still mean that the host group could not enjoy the benefit of the increased output of bread. Letís say extra electricity and flour have been found to increase the output of bread to 107 million loaves a day. The host group will still be able to consume only 100 million loaves a day which is no better than before. It might mean they have more money and produce more bread. But their own consumption of bread is still the same as before the subsidy began at best.

Furthermore, people can easily see that if there were no parasites around, the extra electricity and flour could have been used to bake cakes which would be consumed entirely by the host group thus raising the standard of living of the host group significantly. So if it is the governmentís intention to find jobs for the secondary parasites in implementing the subsidy to the parasites, then the money could be more profitably spent to put the secondary parasites to work producing bread for themselves. Or the secondary parasites could be put to work producing cakes so that while taking the bread from the host group they also give back cakes to compensate for the bread they took. In which case they would be contributing to the total amount of goods and services produced by the economy and cease to be parasites. And in the best case, the host group could raise their output of bread to 107 million loaves while the former secondary parasites could bake 7 million cakes so that each could have a whole loaf of bread with some cake for variety. In this case there would be expanded production and significant improvement of the standard of living for all.

A last example to demonstrate why creating more secondary parasites will not help the overall economy is as follows. Suppose 50 million people from the host group were moved to the group of secondary parasites. Now the production of bread is reduced to 50 million loaves a day only. Immediately everybody both in the host group and the parasite group will have less than half a loaf of bread a day. And if the Chinese government stepped up its subsidy to the parasite group then many in the host group will end up with no bread at all. And in the extreme case where all 100 million of the host group joined the parasite group then there is nobody left in the host group to bake any bread and all of the parasites will simply starve no matter how much subsidy the Chinese government gave them.

From the above it should be clear that when a significant group of parasites exists in an economy who consume goods and services without contributing anything back they will inevitably degrade the standard of living of the host group. It should also be clear that the existence of the parasites will never be able to stimulate the economy but will always impede its growth. And the best way to stimulate the economy is to put all of the people to work to give back as much as they take from the economy. In other words to create a symbiotic relationship amongst all the people within the Chinese economy.

I have used the schizophrenic patients as an example to demonstrate the harmful effect of subsidies to economic parasites. In real life it behooves a great civilized nation to take care of those of its citizens who are unable to care for themselves regardless of the economic consequences. So even though caring for schizophrenic patients and others who cannot care for themselves such as the aged and the infirm is a heavy burden on the Chinese economy such burden should be shouldered for moral reasons.

Example 2: Military.

Letís say we now vacate the mythical island of schizophrenic patients and put the 2.5 million personnel of the Chinese military on the island. Letís say there are some 2.5 million civilian workers on the island working for the military. Letís say there are some 20 million workers on the mainland producing food, clothing, medicine, guns, tanks, fighters, and many other goods and services needed by the Chinese military. Since the Chinese military does not produce any goods and services that can be used by the rest of the Chinese economy, it is clear that the 5 million people on the island is like the 2 million schizophrenic patients and hospital personnel in that they are essentially parasites in economic terms. Furthermore, the 20 million workers on the mainland who catered exclusively to the 5 million military and civilian personnel on the island also contribute nothing to the rest of the Chinese economy on the mainland. So they too are parasites on the rest of the Chinese economy. So like the first example, we have 5 million primary parasites on the island and 20 million secondary parasites on the mainland in economic terms praying on the host economy on the mainland.

However, there is a distinct difference between the military and the schizophrenic patients. The schizophrenic patients produce no goods and services to give back to the rest of the Chinese economy. The Chinese military does perform a vital service in the event of foreign aggression. So while the military does not perform any economically beneficial services in the peacetime it does perform a vital economic service in wartime in protecting the life and properties of the people and the nation from pillage and destruction by foreign invaders. So it is obvious that the amount of goods and services consumed by the military can be regarded as insurance premium paid in advance for protection in the event of war. And if China did not have such an insurance in the form of a powerful military it would encourage foreign aggressions and would suffer more economic losses than that paid to maintain the military in the peacetime. Therefore, while the military gives no tangible goods and perceptible services back to the Chinese economy and contribute nothing to the growth and development of the Chinese economy in the peacetime, yet it does provide a vital service in the event of war.

From this example, it should be clear that it behooves a nation in todayís violent world to maintain a powerful military to deter aggression and assure the safe functioning of the overall economy to continue to provide uninterrupted growth and development of the economy for the benefit of the entire people of the nation. On the other hand if the military-industrial complex became too big then it would consume too much goods and services thus reducing the amount of goods and services available to the rest of people to the point of impoverishing them.

One of the biggest reason why the former USSR collapsed is that its military was too big. The Soviet military itself together with the many tens of million workers working to support and supply the military simply took away too much from the rest of the Soviet workers which had less and less. Furthermore, very little capital was used to expand production for the civilian consumption as the Soviet military-industrial complex had the priority to suck away the capital to fund the building of facilities to produce more military goods. In the end the rest of the Soviet workers produced less while more of what they produced got taken away. Inevitably the Soviet people became unbearably impoverished which led to serious malcontent and the final collapse of the USSR.

This is a good lesson that points out the fact that any nationís military is essentially a parasite whose existence is justified only to discourage foreign aggression and protect the national economy in the event of unavoidable war. But since it is parasitic in nature it must be maintained in a degree that does not consume so much goods and services as to impoverish and collapse the national economy in the peacetime.

Example 3: Science and technological R&D.

Letís now remove the Chinese military from the island and put instead 1 million science and engineering doctorates on the island. Letís also put 10 million other workers on the island to assist the doctorates in their work. Letís say some 20 million people on the mainland work exclusively to provide goods and services to these 11 million people on the island. Again since the doctorates donít produce any tangible goods and services for the entire economy they too are parasites on the Chinese economy as a whole. And like the two examples above, those mainland workers who cater exclusively to the island people are also secondary parasites who contribute nothing directly to the entire Chinese economy as a whole. But while the doctorates produce no food or television sets they do produce the technologies that could be used to produce more food and better television sets more cheaply and efficiently. Therefore, unlike the military whose value can only be seen in the event of war, the doctorates do give back vital technologies which though cannot be seen are essential to the continued progress of the Chinese economy in the peacetime by increasing the productivity of the Chinese workers and enhance Chinaís global competitiveness as well as to provide the technology to implement a powerful military to make China unassailable.

While too big a military will immediately lead to a decline in the overall economy, it is almost impossible to have too big a R&D institution in China. This is because the bigger the R&D institution China implemented the more technological advancements will be made in a direct and logical correlation to lead to immediate economic benefits in terms of increased output of the workers and the higher quality of the products produced which lead directly to the bottom line profit. Therefore, while the science and engineering doctorates and the workers who cater to them are parasites in the sense that they give back no immediate perceptible goods and services to the Chinese economy, yet they do give back vital technologies that are critically essential in the growth and development of the Chinese economy during peacetime and in wartime. In this sense the scientists and the engineers and all their supporting people are not parasites and all the goods and services rendered to them can more properly be termed investments.

Many people donít understand why America and Japan are so much stronger than China. The simple reason is that they have more science and engineering doctorates which allow them to produce more advanced technological goods and services thus allowing them to be more productive and have a much bigger economy and a much more lethal military. For this critical reason I have advocated that before China can do anything else it must first educate some 1 million science and engineering doctorates within the next 10 years and then fund them with at least 3% of Chinaís GNP to produce the most advanced technologies in the world thus allowing Chinese workers to be as productive as any nation in the world on the per capita basis thus making the Chinese economy the biggest in terms of total output. And with the largest economy in the world and the most advanced technologies in the world, it is automatic that China will be able to implement the most powerful and lethal military in the world.

Example 4: Urbanized farmers.

Letís say we now relocate the scientists and engineers from the island to some other place on the mainland and put in their place some 10 million farmers who are either unemployed or underemployed in their rural villages. Letís say we put another 20 million people on the mainland to work to supply them with goods and resources to allow them to built a new urban area to produce all the goods and services they need to sustain themselves. When the new urban area on the island is fully developed and become self-sustaining then the island people would not need to be provided with any goods or services from the mainland people anymore. Furthermore, even when the island people do require goods and services from the mainland they could provide goods and services to the mainland in exchange for anything they take from the mainland. So since the mainland gets back from the island as much as it gives to the island there is a symbiotic relationship between the two areas and both benefit from the relationship and grow stronger.

In this case the 20 million people who provided goods and services to the island may be termed secondary parasites for the time when the island is developing. But the time period would be of short duration and ultimately both areas benefit through the expansion of a larger integrated economy. So the goods and services rendered to the island people can properly be termed investment and not subsidy. Therefore the 20 million mainland people who provided goods and services to the island people are not parasites because ultimately their output resulted in the return of commensurate economic benefits to the mainland economy.

Example 5: Foreigners.

Now suppose we remove all the urbanized farmers to the mainland and 1 million foreigners moved in to replace them. Letís say 10 million Chinese people on the mainland then start shipping all kinds of goods to the island to support the foreigners in a luxurious life style. Like the schizophrenic patients the foreigners donít give back anything to the mainland economy. So like all the schizophrenic patients the foreigners are also parasites on the mainland economy. And the 10 million Chinese people on the mainland supporting them are again secondary parasites because they contribute nothing to the mainland economy while taking goods and services from it.

Now unlike the schizophrenic patients the foreigners have no moral claim on the generosity and support of the Chinese people. Unlike the Chinese military or the Chinese science and engineering doctorates the foreigners donít return anything to the Chinese economy either during times of peace or times of war. And unlike the urbanized farmers who quickly become self-supporting and achieve a symbiotic relationship with the mainland economy the foreigners simply keep on taking goods and services without giving anything back ever. It is obvious, therefore, that the foreigners are truly useless parasites that only damage the Chinese economy and degrade the living standard of the entire Chinese people. And the more money the Chinese government gives to the secondary parasites on the mainland the more goods and services they will take away from the host economy and degrade the living standard of the people in the host economy.

Now suppose another million foreigners moved into the island and another 10 million Chinese on the mainland worked exclusively to produce goods and services to support them. It is obvious that even as the number of people on the mainland working exclusively for the island parasites increased, they only take away more goods and services from the rest of the Chinese economy. In other words as more and more Chinese people become secondary parasites the number of people in the host group decreased. This means fewer host people now must work more to support the expanded group of parasites. In other words, the host group will have less and less goods and services to consume as the expanded parasite group consumes more of the goods and services the host group produces.

Now letís think about how the foreigners pay for the goods and services they get from the mainland. Letís say the foreigners have a dinky little printer and a single plate and a limited amount of special paper that allow it to print only 1 million units of currency a day which we will call the island dollar. Letís say the Chinese government peg the exchange rate between the yuan and the island dollar at 1 yuan to the island dollar. This means the foreigners on the island can buy 1 million yuans of goods and services from the mainland each day. But after a while the island foreigners petitioned the Chinese government saying they would like to have more luxury goods such as maotai and silk pajamas. Since the islandersí dinky little printer could not print more than 1 million island dollars the islanders asked the Chinese government to increase the value of their island dollars. And the Chinese government in its infinite generosity granted their petition and raised the value of the island dollar or lowered the value of the yuan to 2 yuans to the island dollar. Immediately the islanders now can double their purchasing power of their 1 million island dollars to buy 2 million yuans of goods and services from the mainland each day.

From this we can see that the islanders can get more goods and services from the mainland simply by having the value of their island dollar increased. At the same time the secondary parasites on the mainland also get more yuans by selling more goods at the same prices as well as selling some goods at higher prices. So both the primary parasites on the island and the secondary parasites on the mainland are getting more benefits and richer out of the decrease in the value of the yuan against the island dollar. But as more materials are used to make goods to be shipped to the island less materials remain for making goods for the consumption of the mainland people. And as the secondary parasites are getting more yuans they consume more of the goods produced by the mainland economy thus depriving the standard of living of the Chinese people in the host group. And finally the increase in the amount of yuans spent by the secondary parasites inevitably pumped more money into the money supply on the mainland thus causing inflation which made many of the poorest people no longer able to afford essentials. In the end the primary parasites on the island and the secondary parasites on the mainland are the only ones who can afford consumer goods produced by the mainland economy. And ironically enough, as the Chinese people in the host group now are too poor to buy consumer goods produced by the mainland economy, in order to keep the workers producing consumer goods employed these consumer goods must be sold to the island people who have become the only people rich enough to buy these goods.

If we now go back to the example I gave at the beginning of this post where the exporter of shirts was able to make a big profit after the value of the yuan was devalued from 5 yuans to the US dollar to 8 yuans to the US dollar, we can see that this is just the same as the case of the example 5 where the Chinese government raised the value of the island dollar from 1 yuan to the island dollar to 2 yuans to the island dollar. We can see easily that the increase in the value of the island dollar was in fact a subsidy to the foreigners on the island which enriched the primary parasites on the island and the secondary parasites on the mainland and led inevitably to the impoverishment of the rest of the Chinese people in the host group. From this we can see the obvious parallel and draw the logical conclusion that the lowering of the value of the yuan against the US dollar is also an effective increase in subsidy to the primary parasites who are the American consumers and the secondary parasites who are the Chinese exporters and everyone Chinese involved in the Chinese export trade. And the biggest losers are the Chinese people as a whole who are impoverished and can no longer afford the products they produce. And the Chinese government now face the Kafkaesque situation of having to subsidize exports to give away more goods as virtual free gifts to foreign parasites in order to keep the Chinese people employed in the export trade which is the only place where jobs can be found but in the process make all the rest of the Chinese people steadily poorer.

When China exports goods overseas it is like our examples above when the secondary parasites on the mainland provide goods and services to the parasites on the mythical island. If China does not import goods equal in value to the amount of goods and services consumed by all the people involved in the export trade and the amount of resources used for the manufacture of the exported goods then the difference in value becomes a free gift or subsidy for the foreign importers. The difference is also how much the export sector is wasting the national economy as a whole. And so the rest of the Chinese people have less and less as more and more energy and sources are used up to make exports. And as more Chinese people move into the export trade they are only swelling the rank of the secondary parasites and take more and more from the rest of the Chinese people without giving anything back to them. Therefore, the argument that the export trade is benefiting the Chinese economy by increasing the employment of the Chinese workers is actually false. The truth is that it only increases the number of secondary parasites who will degrade the standard of living of the rest of the Chinese people.

Of course, the CCP government did not start out with the aim of subsidizing foreign consumers in expanding the Chinese exports through the lowering the value of the Chinese yuan. I believe the original aim was to earn more hard currency in order for China to import critically needed high tech products to accelerate the growth of Chinaís domestic economy. This was obviously a good reason to subsidize exports. Unfortunately, in the last 20 years things have changed a lot. At the beginning the value of the Chinese yuan was fairly valued though somewhat lower than its full PPP value. Even by 1987 the exchange rate was still 1 yuan to $0.225 or 4.44 yuans to the dollar. By 1994 the value of the yuan had dropped to 1 yuan to $0.12 or 8.33 yuans. This is a decline of some 47% in just 7 years. Now the value of the yuan according to the PPP valuation is around 1.5 yuans to the dollar or some 5 times higher than the official nominal rate of exchange. This has practically made the yuan valueless or have made 80% of the value of the dollar a figment of Chinaís imagination. And the value of the dollar is only propped up by Chinaís increasing purchase of American treasury instruments. Take away Chinaís and other Asian countriesí support of the dollar and the value of the dollar would collapse and the entire dollar economy would disintegrate.

Today Chinaís motivation in expanding exports is partly due to its misguided belief that export trade can create jobs. But as pointed out above export jobs under the subsidized regime only creates more secondary parasites to lower the standard of living of the rest of the Chinese people. Another reason for Chinaís willingness to subsidize exports is that many corrupt CCP government officials are stealing hundreds of billions of US dollars through the foreign trade. And they need to maintain the export trade in order both to steal more money and the dollar to get their loot out of China. Unfortunately, the Chinese domestic economy is being ruined while Chinaís people are being impoverished while these corrupt CCP officials are siphoning off hundreds of billions of dollars enabled by subsidized exports.

It should be very clear from the above that the central point is that money given to subsidize a particular group of people is either useless subsidy or investment depends entirely on whether the subsidized group can ultimately return goods and services commensurate with the goods and services subsidized to them in the first place. We saw from the above that subsidy to the schizophrenic patients are truly subsidies because the schizophrenic patients can never return any valuable goods and services to the mainland. But the military and scientists and the urbanized farmers all ultimately return valuable goods and services to the mainland economy and therefore goods and services supplied to them are ultimately investments. By the same token whether money given to the Chinese exporters and all those in the export sector including those who supply the raw material, the electricity, water, transportation, communication, and especially those who work in the factories to make the exported goods is subsidy or investment depends on whether foreign exchange earned can buy back an amount of products that is equal in value to the amount of products exported. Furthermore, the products imported must be of use and affordable to the Chinese people in general.

It should be clear that people involved in the export sector are consuming goods and services produced by the Chinese economy as a whole without returning anything back to it because all their outputs are exported. Letís say the people in the export sector consume some 3 trillion yuans of goods and services produced by the Chinese economy as a whole. And letís say they also used up some 2 trillion yuans of materials and various resources such as electricity, water, transportation and communication facilities in the production of the goods that are eventually exported. If the amount of goods imported with the total amount of foreign exchange earned amounted to only some 1 trillion yuans in PPP terms, then the remaining 4 trillion yuans would be subsidies to those in the export trade. With this understanding Chinese people as a whole is subsidizing those in the export trade to the tune of some 4 trillion yuans a year. The ratio of 4 to 1 is actually quite close to the real situation in Chinese export subsidy because the nominal value of the yuan pegged by the Chinese government is only 20% of the PPP value. This is why the number of the poorest people in China is increasing even as those in the export trade are getting richer because a huge amount of goods and services are taken by those in the export trade to the impoverishment of the Chinese people in general.

For those who still do not understand why goods exported are free gifts to foreign consumers let me explain. The first reason why Chinese exported goods are virtual free gifts is due to the low value of the yuan. The exchange rate of the yuan against the dollar is now some 8.3 yuans to the dollar. The actual purchasing power parity rate of the yuan is some 5 times less at some 1.5 yuans to the dollar. So when China exported 8.3 yuans of good it should have gotten back some 5 dollars but instead it is getting back only 1 dollar. This means 80% of the goods exported are being given away for free.

The second reason why Chinese exported goods are virtual free gifts is due to the fact that much of the foreign exchange received have been used to buy American treasuries or simply deposited to American banks. This means that China literally gets back nothing for all the goods exported.

Let me clarify that I do not mean all exports are free gifts without benefits to the Chinese economy. If goods exported can earn a lot of foreign exchange with the yuan set at the PPP value or above, then the goods exported will be compensated by an amount of imports whose value is equal to or greater than the total amount of goods and services consumed by all the people involved in the export trade plus the value of all the resources used in the manufacture of the exported goods. In this case foreign trade will be of advantage to the Chinese economy as all the Chinese people get to enjoy the imported goods of great value. But in order for foreign trade to be of benefit to the Chinese economy as a whole, several conditions much be met. The first is that the exchange rate must be set at the PPP value or higher. The second is that the Chinese workers must be as productive as the workers in the most advanced countries. The third is that foreign exchange earned must be used to buy goods that all of the Chinese people could use or could benefit from. Otherwise the exports will only benefit a small group of people by making them rich or enabling them to enjoy expensive goods that most of the rest of the Chinese people cannot afford. The fourth is that exported goods must be what the Chinese people can afford and in excess of what the Chinese people need or want. For example, if every Chinese has a television set then the excess number of television sets can be exported. On the other hand if only a few Chinese have cars and most Chinese would like to own a private car, then cars should not be exported. One of the glaring problems of the current regime of the Chinese foreign trade is that goods that Chinese people want but could not afford are exported while things that Chinese people could not afford such as Rolex watches are imported for a few rich people made rich by the subsidized export such as the subsidized exporter of shirts mentioned at the beginning of this post.

From the above I hope I have demonstrated that the low value of yuan is a covert way of subsidizing trillions of yuans to the exporters. Unfortunately, this subsidy has not benefited the Chinese economy in general because due to the subsidized nature of the exports the value of goods imported can never equal to the value of all the goods and services consumed by the people involved in the export sector plus the value of all the resources used in the manufacture of the exported goods. This makes those in the export sector secondary parasites catering to the primary parasites who are the foreign consumers. These Chinese secondary parasites are doing great harm to the Chinese economy and degrading the standard of living of the Chinese people in general because they take away goods and services from the domestic economy without returning anything of comparable value to them. It is a lie to say that subsidized exports is benefiting the Chinese economy because it is creating more higher paying jobs because all it is doing is creating more secondary parasites to take away even more goods and services from the domestic economy without return anything of comparable value to it.

In the final analysis I hope the CCP government could realize that the best way to advance the Chinese economy is by urbanizing the Chinese farmers while at the same time intensifying the R&D of high technologies. As demonstrated from the above examples urbanizing the Chinese farmers will ultimately expand the entire Chinese economy. And intensifying the R&D of high technologies will allow the Chinese workers to be more productive thus allowing them to enjoy more goods and services. And lastly the low value of yuan is allowing huge subsidies to be given to the export sector which make the export sector a secondary parasite. And the more subsidies given to the export sector the less investment money there will be to invest in the urbanization project and the R&D of high technologies not to mention subsidies to the aged and the infirm which deserve help and care from the Chinese nation on moral grounds. While unsubsidized trade with the yuan at the PPP value may be advantageous, subsidized trade enabled by low yuan value will only cripple the Chinese economy unless stopped immediately.

Lastly, I would like to give my 12 points of general guidelines for the rapid development of the Chinese economy:

1. Chinaís store of wealth should be in terms of the knowledge base of its people and in the productive facilities and infrastructures that are owned by the Chinese people;

2. Because of the first statement, China should implement specific programs to rapidly increase the education of its people especially in higher science and engineering education; special programs should be implemented to educate some 1 million science and engineering doctorates within 10 years and ultimately educate some 5 million science and engineering doctorates within 30 years. These special education programs should provide full scholarship to any qualifying student, especially those in the rural areas, who do not have the financial means to participate in the special advanced educational program;

3. Also because of the first statement, China should implement wide-ranging science and engineering R&D to advance Chinaís high tech knowledge so that it may quickly equal and ultimately surpass any foreign countries in terms of high tech products thus minimizing the need for China to import high tech products while at the same time enable Chinese companies to export high tech products of Chinaís own. Since the high tech products will be made with highly skilled and highly paid scientists and engineers and technicians, it will minimize the need to subsidize exports thus making foreign trade beneficial to China as a whole;

4. To raise the overall economic level of China, the rural farmers must be relocated to the urban areas where they can be put to work more productively in manufacturing and service sectors;

5. Urbanization of the farmers should be understood to be not the building of luxury office towers, luxury hotels, or luxury housings that only ďrichĒ foreign investors with their over valued dollars or heavily subsidized ďrichĒ Chinese exporters can afford. Urbanization should be understood to be putting the farmers to work in the urban settings to build their own housings, manufacture their own consumer goods, and provide their own services. Only when urbanization can be done in a bootstrapping operation will it be self-sustaining and long lasting, unaffected by external forces or conditions such as recession or inflation or political turmoil in foreign countries;

6. With the understanding from the above, it is clear that Chinaís creation of wealth does not depend on foreign factors. Therefore, China should concentrate on the internal development and minimize the insidious ďsubsidizedĒ export which is emasculating the Chinese economic development;

7. Specifically China should withdraw immediately from the evil WTO which is nothing more than a dog collar around Chinaís economic neck and provides the control by means of which the foreigners are taking over Chinaís economy and turning it into an economic colony. If China lost control of its economy, it will quickly lose control of its political sovereignty and military security as well;

8. Following the withdrawal from the evil WTO, China should ban all foreign direct investments (FDI) and allow foreign access to Chinaís market through joint ventures (JV) only which are predicated on real transfer of technologies and limited to 10% for the foreign partners. China should make a distinction between FDI which is foreign direct investment made by non-ethnic Chinese of foreign citizenship and OCI which is overseas Chinese investments made by ethnic-Chinese of foreign citizenship. Ethnic Chinese of foreign citizenship are no different from Chinese citizens who have never left China. They will not transfer their capital and accumulated profits overseas but will leave them inside China on a long term basis. Because of this there is no difference between OCI and domestic investments and should be encouraged by the Chinese government;

9. China should trade by negotiating bilateral trade treaties and bilateral investment treaties that will allow China to implement an enlightened protective trade policies that would protect the fledgling high tech and farming industries while they consolidate and open those sectors that are already competitive to foreign competition on genuinely equal competitive rules;

10. China must immediately raise the value of the RMB by some 10% to 20% at a fixed peg, and continue to raise the value of the RMB steadily to full PPP value, while maintaining a fixed peg after each increase, within 7 to 10 years at which time it could allow a wider trading range of some 10%; ultimately when the Chinese economy has reached full development the peg can be removed totally as the Chinese yuan will be the strongest currency in the world backed by an economy that is as big as all the rest of the worldís economy combined;

11. China must immediately implement a fuel cell/hydrogen transportation system to be totally free of oil imports within 10 years. China must also implement a program to build some 1,000 nuclear power plants within 30 years to make China completely energy self-sufficient;

12. While the Chinese government must direct the overall development such as urbanization, education and science and technological R&D, etc., yet it must encourage the development of private enterprises so that eventually all the enterprises in China will be owned by the Chinese people. Only a privately owned economy will be motivated and dynamic to provide the most advanced goods and services.

With the implementation of the above policies, Chinaís economy will grow rapidly with rapid increases in the knowledge base of the Chinese people and the rapid increases in the productivity of the Chinese workers which will increase their incomes thus enabling them to afford the highest standard of living in the world. And with the largest economy with the most advanced technologies, China will be able to deploy the most powerful military to guarantee that the humiliation of the 19th and 20th centuries at the hands of the barbaric foreign aggressors will never be repeatedly again. With the traditional benevolence of the Chinese civilization, China will be able to lead the entire world to an unprecedented era of global peace and prosperity the like of which has never been seen before.

For my post on how China is subsidizing American consumers, please go to the following link:

http://www.network54.com/Hide/Forum/thread?forumid=238054&messageid=1045020295&lp=1045194934
=============================================
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This message has been edited by Liang1ahost on Mar 24, 2005 4:59 PM
This message has been edited by Liang1ahost on Jan 23, 2005 10:47 PM


 
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Re: Subsidized exporters are parasites.

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February 7 2005, 12:43 PM 

Does anybody remember Jiang Zemin's (or was it Deng Xiaoping's?) doctrine of "assymetrical warfare?"  It got me thinking that the reason for the low RMB value was to hollow out the industries of the West in general, and USA in particular.  China has done this with North American clothing industry (even Prima Dona brands like Calvin Klein, Tommy Hilfiger, The North Face, etc. have to make their clothes in other countries to keep their costs down.)  While seemingly innocuous, clothing is one of life's three essentials (the others being housing and food) and China also has a huge influence on the US housing market; the Chinese purchase of US T-Bills has allowed Alan Greenspan to keep US interest rates artificially low.  As for other industries, China has also hollowed out much of the US consumer TV, steel, mining and cement industries, and is moving on mobile phones, automobiles, computer hardware and software. 

I just got back from China last week; I was in Hong Kong, Guangzhou and Kaiping for two weeks total.  The pace of change in China (especially Guangdong province) is astounding; Shenzhen and Guangzhou are completely different now than the last time I saw those places in 1998.  The biggest reason for that is pragmatism.  And from I have seen, China only imports what it needs, the rest comes from local producers; every TV and mobile phone I used was made in China by Chinese firms.  I also saw that once Chinese people work out all the details of a plan, it gets done swiftly.  Illustration: the Guangshen expressway from Shenzhen to Guangzhou was completed only a couple of years ago, while a similar highway near Montrťal (where I currently live, for now,) Autoroute 30, has been "debated" and "studied" for 30 years and only started construction last summer!   

Having seen all of that, I came across this thought: you have two ways you can neutralise an opponent's industries.  One of them is to physically destroy the production centres.  Another is to exploit the prima dona attitudes of American labour unions (i.e. high salaries, aversion to long working hours, selfish individualism, etc) so that American industries die out on their own due to high costs and difficulties dealing with American labourers.  IMHO, it would cost far more to have a total war with the USA than to pursue the current policies to cause a hollowing out of Western industry.  And just like real wars, ecologies and people suffer. 

While I truly share your concern for the well-being of the Chinese people, from those examples, I have faith that the Chinese authorities, once they have mastered all aspects of the associated technologies, will swiftly implement clean hydrogen fuel all across the country.  Westerners think they have the Chinese dragon by the tail, but the reality is that Westerners would suffer more from inflation of both clothing and mortgages should they embargo China, whereas China could simply go high speed ahead on internal development.


 
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Re: Subsidized exporters are parasites.

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March 24 2005, 5:23 PM 

"Does anybody remember Jiang Zemin's (or was it Deng Xiaoping's?) doctrine of "assymetrical warfare?" It got me thinking that the reason for the low RMB value was to hollow out the industries of the West in general, and USA in particular. China has done this with North American clothing industry (even Prima Dona brands like Calvin Klein, Tommy Hilfiger, The North Face, etc. have to make their clothes in other countries to keep their costs down.) While seemingly innocuous, clothing is one of life's three essentials (the others being housing and food) and China also has a huge influence on the US housing market; the Chinese purchase of US T-Bills has allowed Alan Greenspan to keep US interest rates artificially low. As for other industries, China has also hollowed out much of the US consumer TV, steel, mining and cement industries, and is moving on mobile phones, automobiles, computer hardware and software."

Certainly if the Americans embargoed China's exports to America then the cost of living of the American consumers would go up sharply. Similarly if China raised its RMB, the cost of living of Americans consumers will go up accordingly. But this does not mean American corporations will collapse. In fact, most of the exported goods from China to America are made by American corporations who own the factories located in China and using cheap Chinese labor. It really does not enrich the Chinese nation as a whole but actually impoverishes it.


"I just got back from China last week; I was in Hong Kong, Guangzhou and Kaiping for two weeks total. The pace of change in China (especially Guangdong province) is astounding; Shenzhen and Guangzhou are completely different now than the last time I saw those places in 1998. The biggest reason for that is pragmatism. And from I have seen, China only imports what it needs, the rest comes from local producers; every TV and mobile phone I used was made in China by Chinese firms. I also saw that once Chinese people work out all the details of a plan, it gets done swiftly. Illustration: the Guangshen expressway from Shenzhen to Guangzhou was completed only a couple of years ago, while a similar highway near Montrťal (where I currently live, for now,) Autoroute 30, has been "debated" and "studied" for 30 years and only started construction last summer!"

Of course, by spending hundreds of billions of dollars building factories, the Americans have injected a lot of money into China and caused a very rapid construction of big factories and office towers in a few big cities doing export business. But such FDI cannot continue for long. Furthermore, once the factories were build, then the workers who built the factories will be out of jobs. And while some factory workers continued to work for the American factories, their comparatively higher wages are subsidized by the Chinese people as a whole. This is the entire point of my post. Furthermore, the foreign factories also use up a lot of resources such as water and electricity at very cheap prices. Also the foreign factories produce a lot of pollutants that destroy China's rivers and lakes that will ultimately cost the Chinese people a lot of money, labor, and resources to clean up. In the end, foreign factories don't really advance China's overall economy but suppresses it. This is the main point of my post.

"Having seen all of that, I came across this thought: you have two ways you can neutralise an opponent's industries. One of them is to physically destroy the production centres. Another is to exploit the prima dona attitudes of American labour unions (i.e. high salaries, aversion to long working hours, selfish individualism, etc) so that American industries die out on their own due to high costs and difficulties dealing with American labourers. IMHO, it would cost far more to have a total war with the USA than to pursue the current policies to cause a hollowing out of Western industry. And just like real wars, ecologies and people suffer."

As I have said many times, while some American workers have lost their jobs the American corporations still own the factories they have relocated to foreign countries such as China. Furthermore, the American jobless rate is at about the lowest level in decades. Therefore, while the American labor unions are bitching about China "stealing" American jobs, in fact more Americans are working today than ever in the last few decades. American economy is far from being destroyed by China's subsidies to their factories in China.

"While I truly share your concern for the well-being of the Chinese people, from those examples, I have faith that the Chinese authorities, once they have mastered all aspects of the associated technologies, will swiftly implement clean hydrogen fuel all across the country. Westerners think they have the Chinese dragon by the tail, but the reality is that Westerners would suffer more from inflation of both clothing and mortgages should they embargo China, whereas China could simply go high speed ahead on internal development."

The Westerns do have the Chinese dragon by the tail for as long as China cannot shift away from the subsidized exports. And certainly if at all possible, China must begin dumping the foregin factories and concentrate on developing China's internal economy by urbanizing the farmers by putting them to work building urban housings, expanding energy supply, increasing water supply by cleaning up the rivers and lakes, recycling water, and desalinating sea water, building more schools and hospitals, increasing technological R&D, increasing production of goods and services for the increasingly productive Chinese workers. This is the main point of this post that subsidized exports does more harm than good and the best way to improve the standard of living of the Chinese people is through the really constructive tasks of expanding the internal economy as I've outlined in my 12-guidelines.




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Re: Subsidized exporters are parasites.

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March 25 2005, 11:27 AM 

I will rebutt all the points later but for now I would like to post an article from the Guardian that I think is quite interesting:

http://www.guardian.co.uk/china/story/0,7369,1445560,00.html

The future is China's

Although his combative opinions got him the sack from the university of Beijing, Wang Xiaodong remains an outspoken champion of the Chinese nationalist movement. He tells Martin Jacques why his country must not trust the US

Friday March 25, 2005
The Guardian


Our knowledge of China is being transformed with each passing day. Five years ago, virtually the only subject on people's minds was Tiananmen Square. Now nearly everyone knows that the country has undergone a huge economic transformation, and that the future belongs to it in a way that was previously inconceivable. But knowledge about China still remains of the broadest brush. There is little or no perception, for example, of the political and intellectual debates that shape the attitudes of either the Chinese elite or the population at large. Indeed, there is still an underlying assumption that this is an autocracy in which there are no real debates, just fiats handed down from on high.

This is a misconception or, at best, a half-truth. The extraordinary success of China over the past quarter of a century is the product of a sophisticated political leadership, highly attuned to the problems and possibilities that it faces and informed by a plethora of debates and arguments. Those arguments, however, take place within strict parameters, are largely confined to elite circles and are often highly coded. The most important recent such debate has concerned nationalism, and one of its key figures is Wang Xiaodong, a Chinese intellectual in his late 40s. Largely as a result of his book Chinese Nationalism Under the Shadow of Globalisation, which was published in 1999 (just after the Nato bombing of the Chinese embassy in Belgrade, which led to angry demonstrations in Beijing), Wang is now widely seen as a leading thinker of the nationalist movement.

His main target has been what he calls "reverse racism", or the widespread attitude among Chinese intellectuals that denigrates China and looks to the west for the country's future and salvation. In fact, this kind of attitude is far from unusual in the Asian tiger countries: as they have exploded into economic growth, they have invariably looked to the west, at least initially, as their model and their vision.

The venom of Wang's assault on this mentality, during a recent visit to London, says a lot about the Chinese psyche. "In my opinion, this is not very different from Hitler's racism. The only difference between them and Hitler is that they direct this theory against their own race." There is, of course, every difference between self-denigration and the extermination of another race. It is an utterly inappropriate use of the term "racism": indeed, it suggests an ignorance of what racism is, an ignorance that typifies Han Chinese attitudes more generally. China - and the Han Chinese who make up the vast majority of the population - is characterised by a deep Sino-centrism. When I suggest that terms such as self-hatred or self-loathing might be more accurate, Wang counters: "I insist on using the term racism because foreigners don't believe it can happen in China, the idea that the Chinese are an inferior race. We have never had this experience in Chinese history before."

This sense of inferiority is hardly surprising, especially after the Cultural Revolution, during which the country took leave of its collective senses. Wang agrees, arguing that "reverse racism" is strongest among those in their 30s and 40s who lived through the revolution; those in their 20s, whose attitudes have been shaped by a very different set of circumstances, have a very different mentality. "They have a sense of pride in their nation. They care more about national interests. They are not unconditional supporters of the United States." In short, they are products of China's successful economic growth. Wang, now a pollster, has polls to show these generational differences, but alas, these are still only for restricted circulation.

For a century and a half, China has lived in the shadow of the west, and indeed Japan as well. An intensely proud country, which for centuries boasted one of the most advanced civilisations in the world, it felt humiliated by its backwardness and, above all, by its defeats at the hands of the west and Japan. The extraordinary economic transformation of the past two decades has lent the country a new sense of pride and self-confidence. For the first time for two centuries, China is beginning to feel good about itself and, as a consequence, flex its psychological muscles.

Wang came to prominence in the late 90s when he was an editor of Strategy and Management, the most important and interesting literary and intellectual journal in China at the time. The so-called nationalist debate could hardly have been more central - or sensitive - to China's future: it concerned the most important issue facing the country, namely which economic strategy the country should pursue. It was an argument that Wang lost, leading to his sacking from his job as an economics professor at the University of International Business and Economics in Beijing.

According to Wang, there were three main positions: the first, which was ultimately to triumph and become indelibly associated with the leadership of Jiang Zemin and Zhu Rongji, proposed that the country should embrace globalisation, join the World Trade Organisation and open itself to foreign capital, even though it was recognised that this would inevitably cast China, at least initially, in the role of a low-technology manufacturer, in the nether reaches of the global economic food chain. The second position, which was associated with the left, emphasised, in the face of economic growth, the importance of maintaining social equity. The third, Wang's own position, argued that the Chinese state should pursue a more selective and protectionist approach towards globalisation, borrowing from the Japanese and South Korean experiences, in order to prevent China becoming permanently trapped at the lower ends of the global division of labour.

So what does he feel a decade on? Has the gamble of high growth and foreign capital worked? Was he wrong? "I am an optimist," he says. "I do not think we can yet say that China has already won this bet, but the chances of victory are very large because China is already showing signs of moving towards hi-technology under market forces."

In one sense, the argument is far from over. Wang's real target is what he calls the "liberal faction", which he describes as "pro-American, pro-wealth and pro-democracy - providing that it does not harm their wealth". When asked to define what he means by the liberal faction he suggests those members of the elite outside the Communist party who occupy the dominant positions in the universities and the media. As Christopher Hughes, who is writing a book on Chinese nationalism at the London School of Economics, points out, Wang is an astute political operator who knows whom to attack and whom not to - he leaves the party well alone.

At the core of his argument lies the attitude of this group towards the US: "When it comes to the problem of the national interest, China's liberal faction stands unconditionally on the side of other countries, mainly the United States. They submit unceasingly favourable reports about the United States: that we don't need vigilance towards the Americans, nor should we develop our national industries. We should place our full confidence in the United States for recovering Taiwan. This is nonsense." The fact that America "is the pillar of the world situation at present proves that our international order has the structure of a dictatorship. At present ... China is benefiting ... but American foreign policy could change".

Wang believes in globalisation as a way of fulfilling the nationalist ideal of a wealthy country and strong army: "China is a beneficiary of the present international order. We want to preserve the international order." In so saying, he distances himself from much of the developing world and from the anti-globalisation movement. But he constantly warns that American policy may change, that China must depend on its own strength. His clear message: do not trust the United States.

Despite his relative isolation, Wang is a popular figure in China. In Chinese terms, he says what he thinks. He is combative, displaying a toughness that has no doubt helped him to survive defeat. He is also confident of his own position - and probably with very good reason. Although he complains that the nationalist position has been largely suppressed by establishment intellectuals and the state-run media - "my channels for publishing articles have been very few, and often publication has only been possible due to the use of personal relationships" - he points to the internet, and sites such as BBS (Bulletin Board Service), to suggest that there is considerable latent support for his position. As China takes its place on the world stage, it is not difficult to imagine growing support for the kind of arguments presented by Wang.

Until now, the Chinese position has been sotto voce. Given the country's abject poverty and underdevelopment, Deng Xiaoping recognised the need to concentrate all China's efforts and resources on economic development - everything else would depend on its success in this enterprise. With extraordinary self-discipline, this is exactly what China has done for the past 27 years. But it would be wrong to mistake the single-mindedness that China has displayed for its longer-term ambition. China is an extraordinarily old and proud culture, with a very powerful sense of its own identity. Successful economic growth is the pre-condition for the exercise of a wider political, cultural and military influence.

Wang Xiaodong is unusual in that he asserts this broader perspective with unusual candour. But the views he expresses will surely become far more familiar to western ears as China becomes increasingly powerful economically.


 
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I'd like to read about subsidized exporters

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May 23 2005, 9:00 AM 

Hi, please let me log in so I can read and send messages. I import from China.

 
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Re: I'd like to read about subsidized exporters

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May 23 2005, 2:18 PM 

"Bai Mei Huar
(no login) I'd like to read about subsidized exporters
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"Hi, please let me log in so I can read and send messages. I import from China."

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Re: Subsidized exporters are parasites.

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March 30 2006, 1:36 AM 

I am surprised that so few people have commented on the article about Wang Xiaodong which Diunel has posted.

I think what really struck me about this article is where it talks about the fact that msot Chinese people in their 40's and 50's have lived through the Cultural Revolution, Great Leap Foward, and some of the most disastrous period in modern Chinese history. This may possibly explain the inferiority complex which affects even the top echelon of the Chinese leadership nowaday, which is holding China back.

Chinese people who are in their early 20's and 30's however lived in a different time era. Like me, the Chinese of my generation are born at a time when China has embarked on the economic transformation which has given China its rapid growth. We are proud and confident of our country and our culture, and most of all, the speed with which we are catching up to the industrialized world.

If inferiority complex is the root of all problems with China's economic policies, then I think we can look forward to a brighter future for China when my generation of Chinese people begin to make their impacts felt on the Chinese politics, economy, business, science and culture about one and two decades from now . I think this article just made my day

BTW, does anyone know if I can find more writings about Mr. Wang on the internet or anything Mr. Wang had written himself? I am very interested in Mr. Wang's ideas. Any recommendation will be highly appreciated.

 
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