Monday, May 30, 2005

Boobs Banned in Beijing!

Boba [Big Boob] Mouse Pad is Likely Pornography
Banned in Beijing

Banned Mouse Pad 1

May 28, 2005 9:38 am
By Wu Ren

((Translated By Tyler Rooker for on May 30, 2005))

A short time ago pornographic mouse pads appeared in Zhongguancun markets. These mouse pads have images of females from adult video games and cartoons. They are also very out of the ordinary in design and workmanship, surpassing the dimensions of ordinary mouse pads. They have met with condemnation from many quarters. Recently, the Industry & Commerce Department has classified these mouse pads as products of the “three withouts [without capital, without a place of business, and without employees].” The Department also confiscated the mouse pads and made their sales illegal.

Banned Mouse Pad 2 

Some male shoppers didn' think there was anything unusual or overtly bad about these mouse pads! But for females, these mouse pads have had an adverse effect on their esteem. A female salesperson on the 4th floor of Dinghao [Top] Electronics Mall said: “These mouse pads humiliate women. I am opposed to them. People who produce and sell [these mouse pads] are abominations. I don’t know if they have mothers or sisters but I am certain that they don't respect women!”
Certainly these mouse pads do not respect women. Moreover, for minors there may be irrevocable effects. Clamping down is a reasonable action! Here, your correspondent reminds those salespeople secretly selling the mouse pads that you shouldn’t sell yourself out just for a few slivers of profit!

If any consumers come across this type of product, you can report them to the Commerce & Industry Department or the Market Supervision Department.

Banned Mouse Pad 3 

Source: People’s Net, May 28

(May 15, 2005)

Saturday, May 28, 2005

White Paper on Zhongguancun Electronics Markets

Electronics Markets Enter Era of “Modern Marketplace” May 27, 2005 6:15 pm Sina Science & Technology

((Translated from the Chinese by Tyler Rooker on May 28, 2005 for

May 26.

The Zhongguancun Consumer Electronics Trade Chamber of Commerce united with the Zhongguancun Science & Technology Zone Management Council and the Zhongguancun Science & Technology Zone?Haidian Park Management Council to publicize the 2005 Zhongguancun Consumer Electronics Trade Industry Development White Paper at the Jade Palace Hotel.

The Chamber of Commerce started to track the industry development situation in 2004. The 2005 White Paper summarizes the development trends in the consumer electronics trade industry for the Zhongguancun district. It also estimates future development for the industry and analyzes existing development problems.

There are five parts to this year’s White Paper: 1. Summary of the industry in 2004; 2. the development trends of the industry, including product development, brand competition, sales channels, business trends of electronics markets, and product distribution; 3. development trends in the electronics market; 4. main distribution channels for electronics in the China IT retail industry; and 5. crucial problems in the development of the consumer electronics industry. Data for the White Paper comes from the internationally renowned IDC Company and is authoritative and scientific. It is a key reference for the consumer electronics trade and IT industries.

2005 has been a splendid year for development in the Zhongguancun consumer electronics trade industry. Data from the industry has been shocking. As data from the White Paper has shown, total sales of consumer electronics in the Zhongguancun region reached 34.2 billion renminbi [yuan, 8.28 = 1 USD], while total trade hit 87.4 billion renminbi. These amounts increased 22.3% and 21.3% from 2003 respectively. In the same period, sales of IT products in China increased 11.7% so Zhongguancun was 10.6 percentage points higher. Studies have shown that Zhongguancun represents 69% of consumer electronics sales in the city of Beijing and 8% of the entire country. Zhongguancun is an important center for IT products in northern China. According to shipment measurements, 12.8% of the products went outside the province with sales of 4.3 billion yuan.

The White Paper indicated that consumer sales of electronics in IT markets of the Zhongguancun region reached 14.1 billion renminbi, while trade reached 27.7 renminbi. These reflect increased of 21% and 21.2% respectively from 2003. In the nine large markets of Zhongguancun, Hilon Electronics Mall has the highest average sales and trade. Among the nine electronics markets, Hilon has 10% of the area but a 27.5% share [of the market]. Dinghao [Top] Electronics Mall is next on the last after Hilon, occupying second place in total sales and trade.

The White Paper also tracked sales of various key products in Zhongguancun. Among the 20 types of product, sales and trade of desktop computers were the highest. Sales of notebook computers have increased at a rapid rate, replacing electronic parts as the second highest sold and traded product.

The White Paper predicts that from 2004 to 2009, trade in consumer electronics in the Zhongguancun region will increase at 13.8%. The trade of consumer electronics in the IT markets of Zhongguancun will increase at 14.9%. Products such as notebook computers, digital cameras, digital video recorders, memory cards, Mp3/Mp4’s, Pen drives, portable memory devices, multi-functional printers, ink cartridges, ink toner, projectors, and computer software will continue to increase rapidly. Meanwhile, the market for scanners and ribbons will follow a decreasing trend.

The White Paper pointed out: Zhongguancun electronics markets have already entered a fourth era ? the modern market era. Starting from the mid-80s, electronics markets originated in the first era -- the era of spontaneous formation. In 1992, the first specialized market appeared as representing the second era -- the specialized market era. In 1999, the third era of electronics markets appeared -- the electronics mall era. Finally, in 2005 electronics markets have entered the fourth era -- the modern market era. Reviewing development from this perspective, Zhongguancun electronics markets undergo fundamental breakthroughs every 6 to 7 years.

In the “Five Years Ascend the Platform” policy of the Zhongguancun Science & Technology Park, the Chamber of Commerce and various government offices have encouraged others to use Hilon Electronics Mall as representative of a new type of experiment ? mobilize modern technology to remake and upgrade electronics markets. Summing up the general situation, Hilon’s “market upgrade” includes: “two upgrades and three faculties,” namely upgrading the hardware level and upgrading the software level; and strengthening sales faculty, management faculty, and service faculty. Among these, the main indicators that Zhongguancun electronics markets are entering the fourth era are the commercial design of market science, distribution regions for products, management of manufacturers’ brands, full-service IT, and promising “payment in advance” which exhibit the basic characteristics of a “modern market.”

The White Paper pointed out: the market sponsor is the most important guarantor of market upgrades and in promoting “market upgrades.” The most basic promise of the market sponsor is as “the most responsible person.” Electronics markets must innovate their business models so that upgrades of electronics markets will effectively conform to those in the market. Market sponsors must transform from renters of market space to resource and service providers. The key means to do this is mobilizing modern technology to transform and improve traditional attitudes. Whosoever cannot implement this change, in a market as fiercely competitive as this one, will be the loser.

The White Paper pointed out: Zhongguancun is similar to large cities throughout the country in that electronics markets are developing quickly and competition is fierce, while the threshold to entering the industry is rising. Competition will bring the inevitable exit of people from the industry. Currently, Zhongguancun electronics markets take up approximately 200,000 square meters. Next year, once Zhongguancun E-World opens, that amount will increase by 60,000 square meters. The national electronics markets industry has begun to enter a new round of re-shuffling as the days of peaceful competition have passed. Without the technical support and conceptual direction of modern mobilization, gaining a foothold would be excessively difficult. With a marketplace, there would be space to rent but the days of being able to make a lot of money from renting a space are over. Bringing together market choices with government and chambers of commerce is crucial to developing the electronics market industry. In the market economy, every aspect has blind spots so only if the three sides unite can the current situation and future trends be laid out clearly. The necessary planning and steering along with industry consulting and guidance can reduce or eliminate the waste of society’s resources.

The White Paper pointed out that the construction of Hilon Full Service IT Center and Zhongguancun Maintenance Mall represents the specialization, industrialization, and scale effects of maintenance in Zhongguancun’s IT industry. This will allow both consumers and industry users to enjoy more convenient, simpler, and more reliable maintenance services. At the same time, the maintenance industry will be more specialized and centralized to take advantage of the benefits of economies of scale.

The White Paper pointed out: electronics markets have the advantages of location, low-price, and complete stock of products. In the long-term, they will continue to be the main channels for retail sales of IT products in China. The various attitudes of those in the markets will continue coexisting in the long-term, competing, merging, and, as appropriate, retreating to the area of specialization that is most beneficial. These are the basic characteristics of the retail sales industry for China’s IT products.

The White Paper pointed out: the trade industry in Zhongguancun consumer electronics markets should pay attention to the following problems: one is how to strengthen theoretical research; two is how to set up the “11.5 development plan” to change the situation of the past 20 years wherein trade in Zhongguancun consumer electronics has had no development plan; three is how to bring into play the positive value that electronics markets give to Zhongguancun’s development.

This is the year to inspect the results of Zhongguancun Science & Technology Zone five years ascending the platform. Trade in Zhongguancun consumer electronics must cooperate with the work of the government to promote its own development. It must participate in all five years ascending the platform activities, be active in environmental repairs of Zhongguancun, and continue to bring into play the industry’s characteristics. The goal is to form a favorable and beneficial commercial environment for consumer electronics.

The Zhongguancun Consumer Electronics Trade Chamber of Commerce has been established for less than two years but has issued industry white papers for two time periods. These papers have positive guidance uses for industrial, regional, and IT development. This proves that organizing the industry is crucial to the market economy and is a force that cannot be overlooked.

Monday, May 23, 2005

Science and Technology, Land, and Commerce

Is it a Science and Technology Park or a Business Mall?
What Path Will Zhongguancun Follow?

Science and Technology Daily
May 21, 2005

by Li Zhiyong

(or visit the China Blog:

((Translated from the Chinese by Tyler Rooker, May 23, 2005 for

In the past, Zhongguancun had become a pronoun for high-technology. But these days, enterprises engaging in high-tech R&D and production are fewer and fewer, while innovation has slackened. Finance and business has entered Zhongguancun on a large scale. So, we might ask, is Zhongguancun a science and technology park or is it a business mall? What path will Zhongguancun follow?

The “lifecycle” of Zhongguancun’s IT enterprises is very short: 1-5 years, with 20-30% of newly established enterprises facing bankruptcy. Approximately every 9 minutes the life a small- or medium-sized enterprise in Zhongguancun is extinguished. Additionally, the wealthy global 500 arrive one after the other, squeezing small- and medium-sized enterprises, which are technologically innovative but lacking in capital, out of Zhongguancun. In the “village [cun]” there are fewer enterprises engaging in high technology R&D and production, and more engaging in the finance, commerce, and service industries. Zhongguancun’s position as a technology center is being challenged by finance and commerce.

With this background, at May 17 a workshop on Zhongguancun “land and technology” was held. One scholar in attendance ruminated that while “technological innovation” had been the founding root of Zhongguancun, Zhongguancun has already lost its innovative ability. The aura of “Zhongguancun = China’s high technology” is dimming and Zhongguancun’s position as a “high-technology” center is being lost.

“Zhongguancun’s problems have become a bowl of porridge. Before 2000, Zhongguancun was still in an era of science and technology; since 2000, I feel that it is an era of land. Current government departments are weighing the tax benefits and GDP of Zhongguancun as indicators. A mistake in indicators will lead to mistakes in development directions and ultimately interfere with the allocation of resources and industrial patterns in Zhongguancun. Today is it the government that decides who will be most important for large and small companies?” BlogChina president Fang Xingdong pointed out.

Where are Zhongguancun’s problems coming from?

“There is too much attention paid to attracting the global 500 even to the extent that headquarters economics is being undertaken. In the short-term GDP will increase but it will destroy the ‘ecology’ and appearance of Zhongguancun. GDP has concealed Zhongguancun’s false prosperity. No one is paying attention to the amount of science and technology that has been created behind GDP” commented economist Zhang Shuguang, hitting the nail on the head.

“The main indicators for diagnosing enterprise development in Zhongguancun are industrial and commercial figures such as gross income, fees from taxes, and rates of export. Indicators for Silicon Valley in the U.S. are technology innovation and patent indices, while for science and technology enterprises the relevant numbers are venture capital and listed companies. In terms of these indicators, Zhongguancun is still an industrial zone, while Silicon Valley satisfies the requirements of a science and technology zone,” Fang Xingdong said.

It is widely known that there are two considerations in determining the innovative ability of science and technology parks: one is the amount of venture capital and number of listed companies; two is technology innovation and patents. Venture capital directly influences the industrialization of technology, while technological innovation peaks the interests of venture capital. Innovative ability is a crucial factor in determining the life or death of science and technology parks.

“Zhongguancun is actually not short on money but short on mechanisms for evaluating talent and giving incentives. In the late 90s, outstanding people of talent flowed to foreign countries and foreign enterprises. Domestic R&D institutions do not want truly innovative ‘thorns’ but tame, obedient ‘sheep.’ Although over 14,000 enterprises have amassed in Zhongguancun, those with their own intellectual property rights are a rarity; the vast majority engage in circulating, installing, or transferring technology. So Zhongguancun lacks decent enterprises, is short of independently developed technology, and is unwilling to harmonize with the old hats that run the industry,” Zhang Shuguang said.

Lacking intellectual property rights, an independent R&D ability, and the other problems mentioned above are ignored. For Zhongguancun, what does this mean?

“Of the four Chinese companies that listed on the NASDAQ in 2000, one was from Zhongguancun and that was Sina. In 2004, there were 11 new companies and none were from Zhongguancun. Today, the top three internet companies are in Silicon Valley; in Zhongguancun, internet companies have already lost their innovative edge,” Fang Xingdong stated.

“Profits from real estate are huge and some high-technology companies are whimsical. So they take their limited profits from sales and invest them in real estate. In these cases, the funds that end up in R&D are even less. If the heart and soul of business is not invested in R&D, how can the light shine in? Lenovo bought IBM only once IBM had reshuffled its internal structure. Crucial technology cannot be simply purchased: buying technology in the automobile industry is an example of the failure that results. Directly taking other people’s molds and using them will result in the flight of one’s own R&D personnel,” Zhang Shuguang said sincerely.

“The Qinghe area of Guangzhou had a GDP of 66 billion last year with a goal to overtake Zhongguancun. With its integration of capital, people of talent, and technology along with its shipping abilities, in the not to distant future, its gross income could surpass Zhongguancun. They envy the institutes of higher education and research academies we have here. But this is all moveable and will not necessarily stay in Zhongguancun forever.” Professor Ye Jianping from China’s Renmin University issued a wake-up call to Zhongguancun.

Ye Jianping thinks that Zhongguancun has not achieved a brand for many enterprises and the region itself ? this is potentially risky. There needs to be an integration of technology service, R&D, and technology transfer to make science and technology into true productive forces.

“Some people say that land is in the way?that real estate developments have caused housing prices in Zhongguancun to skyrocket, adding to costs for high-technology enterprises. But I think land has accelerated the development of economics in the region. The high-technology industry needs an ecological chain, people of talent, intelligence, and capital; it also needs financial, accounting, and legal service sectors. This will allow the industrial chain to synergize. One of the goals of real estate development is to create a comfortable, convenient environment for high-technology companies, reducing the cost of communication and improving work efficiency.” Beijing Wanjing Real Estate Development Co., Ltd General Manager, Xu Guangyu, said.

As for the many small- and medium-sized technology enterprises that have been “scared” off by high rents, the director of the Haidian District Merchants Service Center, Liu Xiangyang, said: “First we must be clear about innovation and entrepreneurship. I think that Zhongguancun is still positioned as a place of innovation and some of the large enterprises are very innovative. As a merchants' service department, we think about how to efficiently place resources, and how to attract more resources to the central area. We have to use the special advantages of the Haidian District to attract merchant capital.”

The standing director of the China Urban Planning Institute, Professor Lu Bin, said: “Looking at the global picture, when science and technology parks progress into later development, their services will gradually coalesce into city functions, becoming a science city. Compared to Silicon Valley, Zhongguancun has arisen in a spectacular city [Beijing] that has wonderful natural functions. But it is also because the city’s functions are so strong that the price of real estate has risen. Especially with the injection of venture capital, any attempt to make the central region into a pure R&D region is very difficult. Zhongguancun is a vast science and technology mall?we should enrich the service functions of its high-technology.”

As for the current crisis in Zhongguancun, the assistant director of Zhongguancun Administrative Committee, Zhao Mulan, said: “Zhongguancun is developing in the direction of an industrial cluster. Zhongguancun’s problems should be understood with the background of China’s economic transformations. Zhongguancun was constructed by the innumerable decisions of many people?no large intelligence from the government could have formed Zhongguancun. As for development, the Administrative Committee is working with the levels higher up, but the affairs of the “village [cun]” require that enterprises, residents, and related people debate development and positions?and decide on priorities.”

The "cun" in Zhongguancun

Just a quick note -- Zhongguancun is three Chinese characters:

1. "Zhong" is the same as the zhong in Zhongguo ("China")

2. "Guan" is the same guan as guanmen ("Closed" or "Close the door!")

3. "Cun" is a character meaning "village"

The final character is often joked about, since Zhongguancun, as China's Silicon Valley, is the opposite of a "cun" (village).

One of the most successful and famous entrepreneurs, Duan Yongji, is known as the "village head" (cun-zhang) of Zhongguancun.

The people of Zhongguancun are sometimes referred to as "villagers" in jest.

Tuesday, May 17, 2005

Bay to Breakers, San Francisco Posted by Hello

This is a picture of your blogger running the 94th Annual "Bay-to-Breakers". This is a 12km (7.43 mile) race from the San Francisco Bay to the Pacific Ocean, all the way across the city of San Francisco.

Your blogger is wearing a "Niu Bi" t-shirt, with back to the camera and a red 49-ers hat on.

Final statistics: Time was 1 hour 10 minutes 38 seconds, finished between 2,700 and 2,800.

Nothing to do with Zhongguancun, but supporting Niubi ("ass-kickers") in SF.

Next post, I want to discuss Zhongguancun's markets: market places, IT market, market forces, and other things. Post with ideas.

Sunday, May 08, 2005

FIDA is a female FIDO -- Poor Name Choice For UFSoft

Create an International Brand Name: Yongyou Announces New English Name

April 19, China’s largest management software/ERP manufacturer Yongyou Software Stock Company Limited held a news conference to announce that its English name would be changed from UFSoft to UFIDA. It also announced its newest plans for developing the international market.

UFIDA is the new English name Yongyou will use in its plans to develop the international market. In addition, the symbol Yongyou has used in the domestic market during its 17 years of development?a “heart” and the words “Yongyou Software”?will also be replaced with “UFIDA Yongyou.” “UFIDA Yongyou” is derived from the Chinese meaning of Yongyou’s slogan “sincerely cooperate with the user and be the user’s reliable friend.” This is a good expression of Yongyou’s business philosophy. It also has an international flavor that can meet the needs of Yongyou’s both international and domestic development.

Yongyou Company’s chairman of the board and president, Wang Wenjing, thinks that replacing the English sign is appropriate for an international market with multiple languages since it will lead to easier recognition. In the global market of the future, this is the type of sign that will be identified and recognized. In order to advance the internationalization strategy and develop international business, Yongyou Company announced that it will use the new name UFIDA; at the same time, the new English sign is an important landmark for the progress of Yongyou Company’s internationalization.

In introducing this new English name, Mr. Wang Wenjing pointed out that “the new name matches the Chinese meaning of the brand name ‘Yongyou,’ especially ‘sincerely cooperate with the user and be the user’s reliable friend.’ ‘U’ is for ‘User’, meaning user; ‘FID’ expresses fidelity, coming from FIDELITY (faithfulness) while taking the English root; finally, ‘A’ is placed at the end to make ‘UFIDA’ easier to read and remember. At the same time, the new name is a good reflection of the business philosophy of ‘sincerity’ at Yongyou. It is also a feature of internationalization.

It is reported that Yongyou Company made this decision under the influence of a general strategic background of putting all company resources into developing the international market. It shows that the Company is determined to advance into the international market. It also reflects the increasing trend of global users demanding management software. The well-known international research organization IDC points out that the China enterprise management software market his 299 million USD in total value, increasing 20% from last year. Besides this, the global ERP market will grow at a steady to 2007. Using an average increase of 3.3%, the total market will reach 28 billion USD. Wang Wenjing figures that “the global software market has already changed. Products and service must be packaged together to give more value to the customer. Yongyou will develop strategy in this direction. We have already prepared by developing from a domestic software company to a leading company in the international market. We welcome the challenges that the future will bring.”

Wang Wenjing pointed out that “in all aspects of the Company’s strategy, Yongyou is working hard to lead the industry into economies of scale and internationalization.” In order to increase the effort toward internationalization, at the beginning of 2005 Yongyou Company established a international business department. Vice-president Wu Qiang headed up this department which has already established branches in Hong Kong and Japan. In discussing the international business strategy, Mr. Wu expressed that Yongyou Company has used its total business to develop overseas business, including products sold in international markets, software outsourcing, multinational companies use of Yongyou products and service in the China market, and domestic users use of Yongyou products and service in overseas markets. The business strategy has two aspects: one is to sell its own products in overseas markets; the other is to provide product and service outsourcing to overseas customers. In this way, product and service businesses will complement each other and increase the influence and position of the brand name in international markets. In addition, the Company will increase its R&D of multilingual and international versions of its products. Yongyou will continue to attract international talent by employing directors and personnel with international market experience. Overseas outfits and foreigners working at Yongyou headquarters will aid in providing better products and service to local customers.

From the beginning of 2004 when the international strategy began to be implemented, Yongyou Company put into place a strategic goal of “Becoming the Leading Manufacturer of Management Software in Asia by 2006.” The first stop for development was the Asia-Pacific region market, while regions outside the Asia-Pacific Region were also considered. As to the importance of the Asia-Pacific market in terms of Yongyou’s global strategy, Mr. Wu Qiang said: Yongyou Company divides the market into five segments including China and Southeast Asia, Northeast Asia, West Central Asia, South Asia, and Pacific regions. Each of the regions has different needs so according to the different scale of each of market we must adopt different development policies to promote Yongyou products including establishing branches, alliances, collaborations, authorized distributors, joint ventures, or even outright purchase. At the same time, Yongyou currently has a R&D team that is working to develop the next generation of product for the international market. Yongyou Company also uses flexible sales strategies and promotion policies according to the different situations of regions or markets.

To develop business in Hong Kong and Southeast Asia, Yongyou Company has promoted its Hong Kong branch to regional headquarters, controlling Macua, Taiwan, Singapore, Thailand, Malaysia and business from other Southeast Asia countries. Currently, in China, Hong Kong, and Japan the Company has over 50 branches. It has established distributors and joint ventures businesses in Thailand and other countries. At the same time, Yongyou has achieved the trust and favor of a great many international customers and partners, including multinational companies, small- and medium-sized overseas companies, and Chinese customers with overseas business.

Yongyou Company has held the number one ranking in management software for the past three years in China. It has become the indisputable leader among China’s management software manufacturers. According to data from CCID Consulting, Yongyou Company possessed 21.9% of the domestic ERP market. With the high-speed development of Yongyou in the domestic market, other domestic management software leaders are making noise, developing international markets and reaching out to the place where markets are ripe for the taking.

After many years of saving, China’s management software industry is ripe for the picking. With Yongyou at the head, many partners have entered into an ERP alliance. This has created a chain of applications to disseminate ERP. In the domestic market, the ERP chain has gradually become clear as the solution to business problems. Internationalization has gradually become the necessary choice of mainstream manufacturers. The success of China software companies life Yongyou proves that China software manufacturers have experience and expertise to deal with international manufacturers. There exists a complete ability to compete with companies following the WTO market competitive agreements. At the press conference, Wang Wenjing confidently announced that, “17 years ago, we created a Chinese ‘Yongyou.’ It has become one of the most successful brands in China’s market. Today we create an English UFIDA. I believe that, with effort, we can find even more success in the international market!”
April 20, 2005

Monday, May 02, 2005

More Economics: "Dutch Disease"


(Sorry for another general economics post. We are getting to Zhongguancun slowly but surely ;)

What is it about those Netherlandians -- the Dutch? According to the IMF article cited above, in the 1960s natural gas deposits were discovered in the North Sea. The sale of these deposits made the Netherlands very rich. However, a consequence was an increase in the value of Dutch guilder. The final result was a negative impact on various sectors of the Dutch economy, with an emphasis on non-natural gas exports.

This is a general phenomenon in the international economy. It holds for any natural resource (oil, gold, diamonds), and also foreign assistance (aid) and foreign direct investment (FDI).

The explanation, as far as I have grasped it, has three parts. The first part is that increased sales of the new resource (say) make the amount of a country's foreign reserves jump, assuming the entire country is the recipient of the benefits of sales. With increased foreign reserves, there will be consequences for the money supply of domestic currency. One way to avoid these consequences would be to spend the entire amount of profits from the new natural resource on imports (money in equals money out).

The second part of "Dutch disease" is the effect on the domestic money supply (where "domestic" means the country which discovered the new natural resource (or aid or FDI)). There are two possibilities based on whether or not the foreign exchange rate is fixed or flexible. If fixed, the exchange rate does not change but as more foreign exchange is converted into domestic currency, there is more domestic currency (to keep rate fixed, central bank must print more money). With more money available, more goods and services will be purchased causing prices to rise--more demand and constant supply causes rise in prices. Put another way, purchasing power parity has decreased. The second possible effect on the money supply occurs if the exchange rate is flexible--in this case more foreign currency causes the exchange rate to rise. The mechanism is more supply in this case: a greater supply of foreign currency with a constant demand for foreign currency results in less domestic currency required to purchase foreign currency. In both fixed and flexible exchange rate cases, the overall effect is that the country's exports are weakened because of the money supply effects.

The loss is purchasing power parity or the rise in exchange rate of domestic currency both make exports more expensive for other countries. Resources in the country shift towards exploiting the natural resource and away from developing domestic industry, assuming a "zero-sum" allocation of development potential. With less development of other (non-natural resource) industries, and increases in exchange rate (or loss of purchasing parity) both negatively influence a country's economy.

This is Dutch disease and has been observed in Columbia (coffee) and near the Caspian Sea (Kazakhstan, Azerbaijan, etc.) with gas and oil. There are clearly other examples.

Discussion: Is China's FDI permanent? With it ultimately result in a "Dutch disease"? Can zones within the country (for example, Zhongguancun, Shenzhen, or Pudong) come down with "Dutch disease" or is it limited to national economies?

Sunday, May 01, 2005

International Trade and China

Blogpost May 1, 2005 ? International Labor Day

Today I would like to comment on two articles, one directly and one indirectly related to Zhongguancun. They both appeared in the NY Times April 30 and May.

The first article is by Keith Bradsher entitled “A Currency Afloat (for All of 20 Minutes).” This article relates the fact that China’s currency, the Renminbi or yuan, was floated (traded at a level higher than its rate as pegged to the U.S. dollar) for 20 minutes on April 29, 2005. According to Bradsher, “The yuan climbed until it took 8.270 of them to buy a dollar instead of the usual 8.276. That difference, of only six thousandths of a yuan, might not seem like much of a change.”

The significance of this “floating” can be examined from multiple perspectives. The one I want to focus on is the relation of the exchange rate to economy, in particular the relationship of yuan-dollar exchange rates and China-U.S. trade. As is my understanding, allowing the exchange rate for yuan to climb means that it takes fewer yuan to buy a dollar, and consequently a dollar is exchanged for fewer yuan. To make things clearer, I imagine the current rate as 8 yuan = 1 dollar. Suppose the yuan were floated and climbed to a rate of 4 yuan = 1 dollar. For people in China, there should be no immediate change: a hamburger at McDonald’s is still 16 yuan; a yuan is a yuan. The real difference is felt in international trade: a widget (clothing, toy, computer part) that is made in Shenzhen for 80 yuan now costs $20 rather than $10 to produce. If the widget is exported, the cost to other countries (the U.S. for example) will be more, and hence other producers of widgets (in Europe or in U.S.) will be more competitive. Further, imports to China will be cheaper: in the past, a $10 bottle of wine would cost 80 yuan in China; with a new exchange rate, the same bottle of wine would cost 40 yuan, making it more difficult for competitors in China to compete with imports.

This explanation is, of course, exaggerated. In the NY Times article cited, it points out that a 10% rise in the value of the yuan is “larger than most economists expect.” Obviously, a large change in the exchange rate will have a large effect on industries in China that depend on exports or might have to compete with imports.

In the U.S., according to another NY Times article by Elizabeth Becker entitled “China Heads List of Problems for New Trade Official” (April 30), the confirmation of Rob Portman as new U.S. trade representative was “held captive” by democrats, labor unions, and business interests over their objections to China’s illegal trade practices. The administration has not taken China to task over violations that could be brought before the World Trade Organization.

There are two cases of piracy which I have witnessed first-hand that need to be cited in order to understand some of the significance of what is involved. Software is an ubiquitously pirated in Zhongguancun?pirated versions of Chinese Windows are very popular. One reason Windows is pirated is due to price: the selling price of pirated Chinese Windows is 6 yuan, less than 1 U.S. dollar; the price of authentic Chinese Windows is 2,000 yuan, or 250 U.S. dollars. While $250 might not seem like a lot of money for people in the U.S., in China it is a month’s salary for college graduates. The non-pirated version costs 40 times as much.

Microsoft has taken measures to combat piracy, including installing an update that makes the computer crash when it is turned on. For some, then, the only way to avoid computer viruses is to make trips to Zhongguancun every few months to get the software updates to Windows.

An important consequence of this piracy that is often overlooked is the effect it has on computer users in China: everyone uses Windows! If, for example, those who could afford Windows paid for the authentic version while others just went without, a huge portion of China’s population could not use computers or the internet. We can imagine a government-subsidized project or group of companies racing to fill this void: whoever can create an operating system that serves the millions of people in China who cannot avoid 2,000 yuan but CAN afford 200 yuan will make a fortune. Instead, the piracy of Windows has discouraged companies in China from developing their own operating system. Piracy, while taking revenue and sales from Microsoft, has also extended the regime of Windows over another part of the computer world. How can estimates of losses to Microsoft be calculated when something that “steals” from them, also “helps” them?

The other example of piracy is that depicted in the NY Times article by Becker: movies, especially VCDs (video compact disks, prevalent in China) and DVDs. Again, the same argument can be made: the global dominance of Hollywood is enabled by its extension everywhere through piracy. Revenues, profits, and sales are clearly lost when a DVD is reproduced for pennies and then sold for dimes. Yet there is something more that is gained by the movie companies: a global audience. If companies are paying more for product placement in movies then isn’t that a worthwhile expenditure, and can’t movie companies charge more for this given the global reach of its movies?

I believe the lesson to be learned from these examples of piracy is that there are ways to combat piracy that do not involve the government. China is the most populous country in the world, and expecting the already sparse police force in cities to deal with piracy is unrealistic. Instead, U.S. business interests need to follow the example of Microsoft and Hollywood, not in depending on government or bringing cases to the WTO, but in finding ways to deploy piracy in one’s own interests. Microsoft Windows reign over the world of PCs has meant that official and legitimate business in China all use authentic (non-pirated) versions of Windows. That is real revenue for Microsoft. But the millions of pirated versions of Windows maintain Microsoft’s position and discourage other companies in China from developing new, replacement operating systems. Similarly, Hollywood companies need not fear piracy of DVDs as much if they can gain revenue from other companies (Coca-cola, Prada, Nokia, China Mobile) who pay to have their products placed in movies.

These two articles from the NY Times have provided much food for thought. Both are related more to international trade with China than to Zhongguancun. I hope this discussion will reveal some aspects that might not otherwise be obvious. I advocate a more open, free-trade position with China, in line with the current administration of U.S. Protectionist moves, like those being considered in Congress, are not helpful to either the U.S. economy or to U.S. businesses, against what might be popularly thought.