Data Visualization -- China Plotting

I spent a good deal of time over the course of the past semester working on topics about Chinese development. A lot of it started from my work at MKM Partners over the summer in which I worked on topics of regional Chinese growth. This eventually turned into a sequence of Quartz articles: one on the growth potential of the inland provinces, another on the overall success of the high speed rail program (which was actually backed up by a later NYT article), and a third on boosting Chinese consumption through a social service led urbanization (which ended up being an important part of the 3rd plenum). I found it an engaging topic to research, and I will have an article in the next edition of the Milken Institute Review on these topics. If you have any thoughts about those articles, please share in the comments below and I'll try to get back to you.

In this process of working with Chinese data, I was faced with the task of analyzing a lot of spatial data about Chinese provinces, and in this process I had to write a lot of R code. After a while, I got annoyed by how long the process would take, and as a result I took the liberty of designing an R Shiny application to help do some of the heavy lifting. Fortunately, these applications are all hosted on the cloud, and you can find the China Mapping Application here:

To give you an idea of how it works, after you upload the csv file you will see a screen like this showing you the data:

You can go directly from there to see the map. This was done using the GADM databases for the shapefiles and then the spplot package to render the drawing. Spatial rendering is expensive, so this should take around 60 seconds to do:

And finally, you can go to the interactive bar chart and observe the distribution of your data. This was done using the rCharts package, which creates javascript visualizations using just R code.

If you want some data to play around with, you can take a look at the two dropbox links on China on my data page.

Anyways, I hope my fellow China researchers can enjoy the tool, and if anybody has any suggestions feel free to tweet me at @yichuanw or leave a comment below.

Edit: For those of you interested, the source code can be found here.

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Why is Liu Xiaobo China's first Nobel prize winner?

Last week, Chinese dissident Liu Xiaobo won the Nobel Peace Prize for his work on Charter 08, a document that calls for democratic reforms and greater political freedoms in the People's Republic of China. He is currently in jail for writing that document. When the prize was announced, China's state-controlled media and security apparatus began an all-out campaign to censor the story, blocking Web access to information about the award, arresting people who gathered to celebrate, and promptly imprisoning Liu's wife.

I should mention at this point that Liu Xiaobo is the first resident of China to win any Nobel Prize. Ever.

I cannot help but think that this is no coincidence.

Name a well-known piece of technology invented in China since the year 1400. Or name an important scientific discovery made in China since that year. If you can, you're a better Google hound than I, because I find absolutely nada. Nothing. In 600 years. China's technological and scientific underachievement is not a figment of Swedish/Norwegian bias.

What could cause a country with 20% of the world's population - twice as many as all of Europe! - to be the world's most spectacular scientific and technological dunce for six centuries?

Racist and Eurocentric theories that East Asians are less creative than Caucasians are patently false, as both historical and modern facts demonstrate. Japan, for example, has plenty of Nobel prizes and great scientific discoveries to its name, and is the birthplace of inventions such as (deep breath) the digital camera, the hand calculator, the floppy disk, flash memory, pluripotent stem cells, B-vitamins, the camcorder/VCR/VHS, and the compact disc (not to mention MSG, high-fructose corn syrup, methamphetamine, and karaoke). People of Chinese descent have made huge numbers of landmark contributions to science and technology...outside China. And, as everyone knows, pre-1400 China was the birthplace of paper, gunpowder, the compass, movable type, the horse collar, the astrolabe, compartmentalized ship hulls, and a long list of other awesome things that rivaled (and, during the Middle Ages, far exceeded) anything in Europe. It is clear that China's underachievement has been due to collective deficiencies, not individual ones.

Similarly, China's turbulent history in the 19th and 20th centuries, though undoubtedly a contributing factor, is hardly an excuse. Russia, which lost a far larger percentage of its population to wars and famines than did China during the same time period, and suffered under an equally blinkered communist regime, managed to put the first man in space and clean up plenty of Nobels. And the upheavals of the modern age cannot explain the so-called "Great Divergence" of 1400-1870, in which Europe took over from China as the locus of global innovation long before British warships showed up pushing opium.

Nor is this simply a case of China's inevitable catch-up. The U.S. was the birthplace of inventions like the steamboat and the airplane long before it caught up to European levels of per capita GDP. Even if China now starts to produce some innovations, it will still have 600 years of stasis to explain.

So what is China's problem? As I said before, I believe that the fact that China's first Nobel winner is an imprisoned dissident is telling. Liu Xiaobo is not the first Chinese citizen to be imprisoned by the state for calling for intellectual freedom; he joins a long and hallowed line of such persecuted thought-criminals, stretching back at least to Li Zhi of the Ming Dynasty.

Glib theories cannot easily explain the broad sweep of history, but my guess as to the cause of China's technological underachievement goes something like this: the act of trying to keep together a nation as large and diverse as China has come at the cost of intellectual, scientific, and technological progress. After 1400, as Mongol domination of China ended, the rulers of the Ming Dynasty soon found themselves in charge of an empire vastly more populous (thanks to new rice-farming techniques) than the earlier Han and T'ang dominions. Controlling and stabilizing this mega-nation required more government intervention in daily economic life than in most countries. China stayed together where European and Indian empires of comparable population crumbled, but the cost was constant suppression of potentially disruptive technologies.

The Ming began this unfortunate tradition by banning private shipping (just as European explorers were gearing up for world conquest), by purging science from the civil service examinations, and by sending a bunch of (basically) lawyers called the "Confucian Scholar-Gentry" into the countryside to regulate economic activity. Mechanical inventions comparable to, and centuries ahead of, the textile machinery that kicked off Europe's Industrial Revolution languished in obscurity and were forgotten.

European countries, of course, would have loved to do the same thing, but they couldn't. Although European nations were arguably more despotic than China during the Early Modern period, they were forced to fight each other in a series of endless wars; this not only spurred them to allow their scientists and inventors to do their thing (in order to gain a military edge over the neighbors), but it allowed visionaries like Columbus to shop around for patrons among the cornucopia of European rulers. China, with one Emperor - even a benign one - could afford to sacrifice progress in favor of stability. This is basically Jared Diamond's theory of "optimal fragmentation."

Even in the modern day, the absolute priority that China places on internal stability ("harmony," in their favored terminology) has contributed to the aforementioned bloody and chaotic history that delayed China's industrial revolution until 1979. The Chinese Civil War (really, wars), the Great Leap Forward, the Cultural Revolution, Tiananmen Square - all of these were overkill on the part of Chinese rulers desperate to keep the far-flung empire as a single, unified, homogeneous nation-state. Excessive government control of academia has led to a culture of fraud and fear that continues to hamstring Chinese science. Meanwhile, Chinese splinter nations Hong Kong and Taiwan, and smaller East Asian neighbors like Japan, Korea, and Singapore, sped ahead while massive, monolithic Mainland China languished.

Far from being the champion of the Chinese race, as it has always claimed, the Chinese Empire - and its successor, the People's Republic of China - has been the greatest force preventing 80% of East Asians from finding new and better ways to live.

If my theory is right, it is no surprise that China's first Nobel laureate is not a scientist, but a would-be reformer. China's high-speed economic growth primarily relies on foreign technology and on brute accumulation of physical capital; the people who are doing the most new and revolutionary things in that country are those who are trying to reform a society hobbled by 600 years of excessive government enforcement of "harmony."

I think there is great hope for China to change. Modern communications and transportation technology has made it more possible than ever to hold together a large, diverse nation without sacrificing intellectual dynamism - the U.S. and India are cases in point. But cultural change is no sure thing. It seems to me that until and unless China Liu Xiaobo's succeed in their attempts at societal innovation, China's scientists will continue to lag behind those of Japan, Korea, Taiwan, Hong Kong, Singapore, and the West.

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Why no one in the U.S. really wants to get tough on China

The House has just passed a bill that would allow the President to impose tariffs on China in retaliation for China's currency manipulation. Although the traditional defenders of the currency status quo have been predictably shrill in their reaction to this "protectionism," cooler heads realize that the bill means nothing. The Senate is not going to pass the bill soon (and most likely never), and even if it passed, the bill only gives Obama permission to impose tariffs; remember, Obama has passed up the opportunity even to label China a currency manipulator. Chinese officials, for their part, are not overly concerned. Nor should they be: America is not going to get tough with China anytime soon.

The reason America is not going to get tough with China anytime soon is actually pretty interesting, since it involves a unique confluence of factors. Both of the two main political blocs in America want to avoid doing anything about China's currency manipulation, but for very different reasons.

For Republicans, it is because China is making them rich. In addition to a massive supply of cheap labor, China offers American business owners low costs via lax protection of property rights and the environment. Here's how it works: When a businessman in China wants to build a factory, he gives a kickback to a local official, who allows him to dump toxic waste in the river and kick as many peasants off their land as he wants. That allows the Chinese businessman to provide goods to U.S. multinationals at extremely low cost, boosting U.S. profits and forcing down the wages of U.S. workers. Naturally, these effects are exaggerated hugely by the undervalued yuan.

In other words, China has given America's capitalist class what they have long dreamed of: in the words of Hyman Roth from The Godfather Part II, "a real partnership with [a] government." This gravy train is probably the main reason why capital's share of income in the U.S. has reached record highs (and labor's share record lows). Note that the same has happened in China.

But there's more. China's currency manipulation requires that China's government buy lots and lots of U.S. debt. That lowers interest rates in the U.S., which in turn allows U.S. finance companies to borrow lots of money very cheaply, thus boosting their profits (which reached 45% of all U.S. profits in the early '00s). Although many contend that these artificially low rates were a big cause of the recent bubble and financial crisis, finance companies - who, despite what the Tea Partiers would have you believe, are big supporters of the Republicans - continue to depend indirectly on Chinese financing for their yearly bonuses.

But what about liberals? You'd think that soaring inequality and collapsing middle-class wages would have Democrats thundering for retaliatory tariffs, but no; for reasons all their own, liberals don't want to get tough on China either. Many, such as Brad DeLong and Matt Yglesias, fear that trying to force China to change its ways will start a new Cold War. That is something they really don't want. The first Cold War was a (temporary) disaster for liberalism - it boosted the power and importance of the U.S. military, encouraged red-baiting, and led to wars. A decades-long standoff with China might well tip U.S. culture back toward militarism. As a result, though Democrats have been perfectly willing to scuttle trade deals with small, weak countries like South Korea or the countries of Central America, China's great-power muscle has proven overwhelmingly intimidating.

Thus, although a few prominent figures (Paul Krugman among them) have urged the U.S. to take a harder line toward China, the bipartisan consensus is still overwhelmingly against taking any sort of action that would anger the Chinese. And the People's Republic, for its part, is prevented by its own domestic politics from correcting a currency policy that might soon cause dangerous imbalances. So the world's two superpowers will remain locked in an unhealthy, co-dependent embrace, until things get so bad that they force one or the other country to act. By then, of course, the cost of action will be much higher.

Update: Paul Krugman suggests that irrational fear of "protectionism," indoctrinated into Americans since the disastrous Smoot-Hawley tariffs, is a big factor in scaring Americans into not doing anything about Chinese mercantilism. A friend suggested this to me. I'm not sure how big a role ingrained fear of "protectionism" plays in all this, but my point is that irrational fear isn't necessary to explain why America refuses to resist Chinese mercantilism. Most people are simply too leery of the consequences (higher production costs, higher interest rates, and worsened U.S.-China relations) that resistance would entail. The mercantilism problem, big as it is, isn't yet big enough to spur people to action.

Update: More from Krugman, who is pretty angry about the situation:

So, why did Tim Geithner feel the need to declare,

We’re not going to have a trade war; we’re not going to have currency wars. I don’t know what that means, but people are saying that.

I suspect that he was trying to reassure the markets — but if we’ve learned anything lately, I hope it is that actions, not talk, matter.

And look, if China continues on its present course, eventually we will have some serious currency and trade conflict. Furthermore, we should.

All Geithner did here was signal to the Chinese not to worry, U.S. officials will keep making excuses for China’s behavior and doing nothing, regardless of provocation. Remember, this statement comes after China blatantly reneged on earlier promises about the exchange rate. They must take us for fools — because we (or at least some of us) are.

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China: it's tariffs or nothing

In the news today, I see another instance of Tim Geithner pretending to get tough on Chinese currency manipulation:

In his testimony, Mr. Geithner is not expected to rule out declaring China a currency manipulator, a finding that could lead to retaliatory trade measures. The administration has so far refused to take such a step, relying instead on persuasion, though with little success.

What? Geithner "won't rule out" a step that "could lead to" retaliatory trade measures? Hu Jintao must be quaking in his boots!

I mean...come on...Tim Geithner?! This is the guy who, during his time in office, has met with the CEO of Goldman Sachs more often than the Speaker of the House or the Senate Majority Leader. The guy is a creature of the shadow banking system, which depends on cheap Chinese financing (a.k.a. Chinese currency manipulation) for its super-profitable shenanigans. He is not getting tough on China now, and he never will. Instead, what he will continue to do is what he has always done: make vague rumblings in China's direction, in the hope that it will placate the red-meat protectionist crowd back home into accepting the status quo for another few months. This kabuki theater is, of course, obvious to defenders of the currency status quo, such as The Economist's Ryan Avent:

As always, I'll reiterate: promises that revaluation will eliminate America's trade deficit and create hundreds of thousands of jobs are overselling what appreciation without structural reform can accomplish...But there's an election on, and populism is ascendent, and the trade warriors in Congress will have their day. I just hope the legislature holds to its recent pattern of behaviour—all talk and no action.

Whether Congress will continue to play "bad cop" and ultimately take no action, of course, remains to be seen:

“There is no question that the economic and trade policies of China represent clear roadblocks to our recovery,” Senator Christopher J. Dodd, Democrat of Connecticut and the chairman of the banking committee, said at a hearing with Mr. Geithner seated before him.

“I’ve listened to every administration, Democrats and Republicans, from Ronald Reagan to the current administration, say virtually the same thing,” Mr. Dodd, who is not seeking re-election, said. “And China does basically whatever it wants, while we grow weaker and they grow stronger.”

He added: “It’s clearly time for a change in strategy.”

The top Republican on the banking committee, Senator Richard C. Shelby of Alabama, was even harsher. “There is no question that China manipulates its currency in order to subsidize Chinese exports,” he said. “The only question is: Why is the administration protecting China by refusing to designate it as a currency manipulator?"

Big talk, but we've seen a lot of big talk, and not a lot of action, on this issue. Past experience tells us that this is more of the same-old same-old, but there's always hope that we'll be surprised.

Meanwhile, as Paul Krugman reminds us, China's currency policy continues to screw us over:

Regular readers may remember that I’ve spent more than a year trying to knock down the idea that the United States dare not get tough with China, because we need them to keep buying our bonds; as I wrote way back in May 2009, given the fact that we’re in a liquidity trap, a decision by China to buy fewer of our bonds would actually be doing us a favor — it would weaken the dollar, and help our exports.

I’ve failed, despite repeated attempts, to get through with this point here — but the Japanese get it. They’re complaining to China about its purchases of yen-denominated bonds, which they argue — correctly — hurts Japan by strengthening the yen.

It's not just the speed of our recovery that's being impeded; Chinese currency policy contributes to inequality here in America by making manufacturing workers less valuable and finance workers more valuable. It also arguably contributes to asset bubbles, in particular the housing bubble we just witnessed.

It has been clear to me for years that the issue of Chinese-generated global imbalances will only be resolved with U.S. tariffs on Chinese goods. That is not the optimal solution; the optimal solution is for China to change its policy voluntarily. But it will not. Not now, and not ever, unless tariffs force it to do so. For this issue to be resolved - and it must be resolved, or our economy and society will continue to be dysfunctional - it is tariffs or nothing.

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When will China pass America?

Much is being made over the fact that China just passed Japan to claim the title of "world's second-biggest economy." Although this has provoked a spate of hand-wringing over Japan's decline (see here and here and here, for example), more level-headed commentators point out that China has eleven times as many people as Japan; for 1.34 billion people to have remained permanently poorer than 1.27 million people would have been (and for a century, was) a human disaster of epic proportions. Sure, Japan has made a lot of mistakes, but those are most certainly not the reason for China's ascendancy.

The next question on everyone's lips, naturally, is: When will China pass the U.S. to become #1? The consensus in the media seems to be that China had better not get too confident; like Japan in the 80s, they argue, China's rapid growth has come at the expense of inefficient overinvestment, misallocation of capital, suppressed consumption, and the entrenchment of special interests that will not be easily dislodged when the boom finally runs its course.

And I agree: China does share many of Japan's weaknesses. Some of these, fact, seem far more severe in China than they did in Japan - the corruption, the pollution, the suppression of consumption, the state control of banks. These are the kind of things that raise a country's growth during the "extensive" phase, when all you have to do to grow is save, save, save, and invest, invest, and invest. But because the same people who received the cheap capital during the boom will continue to hold the strings of the state after the economy gets saturated with buildings and roads and machines, this growth model bakes inefficiencies into the economy. Growth goes faster, but crashes more abruptly and at a lower level.

That said, the sheer numbers involve make it HIGHLY unlikely that China will NOT overtake America in the near future. If China were twice as big as the U.S., I'd say there was some chance they'd never be richer than us. But they are 4.3 times as big.

To see how certain a thing this is, let's do some rough calculations in our heads. This is pretty easy, with the Rule of 70; to find out how fast something doubles, divide 70 by its percentage growth rate. Thus, if China is growing at 10% and America at 2%, China's economy will double in size relative to America's in 70/8 = 8.75 years.

Now, let's do some math. Japan's growth slowed when it hit about half of U.S. per capita GDP (in the late 70s). Same for South Korea in the late 90s. Assume for the moment that China's slows at around the same level. China's GDP per capita is now about 16% o...r 17% of America's. At a relative growth rate of 8% (the average for recent years), China will hit half of America's per capita GDP (and more than twice America's total GDP) in a little more than 15 years.

But perhaps China has more limitations than Japan and South Korea did; suppose that corruption, resource constraints, or China's size relative to its trading partners acts as a check on its growth. Suppose for this reason, China's growth slows when it hits 35% of America's per capita GDP (and 1.5 times America's total GDP). That's still 10 years of hyper-charged growth.

Now suppose that China's growth slows a little bit, so that the growth rate relative to the U.S. is only 6% (i.e. about how fast India is growing now). And assume China reaches only 35% of America's per-capita GDP before its growth slows even more. That's 14 more years of pretty fast growth!

Put this another way: for China to fail to overtake U.S. total GDP, they will have to stall out at 23% of U.S. per capita GDP - the average Chinese worker will have to less productive than an entry-level employee at Wal-Mart. This would mean that their growth would have to stall within 5 years (if we measure GDP in PPP terms, or if they allow their currency to appreciate) or 7 years (if we measure GDP in nominal terms, and they keep their currency undervalued forever and ever).

So, basically, unless China's growth crashes spectacularly and semi-permanently by the midpoint of this decade, their economy will be larger than that of the U.S. by the mid-2020s. That would be an unprecedented slowdown, MUCH more severe than what Japan experienced in the 90s, and at a far lower level of development. I doubt any reasonable China critic would predict such a Biblical disaster.

Thus, the inescapable answer is: China will soon be the world's largest economy, no matter how you measure things. This will happen in less than two decades. And GDP is a direct measure of national power. We must therefore prepare for a world in which the leading geopolitical hegemon will be a non-democratic country, a country with little stake in the existing system of international norms and institutions, a country with hundreds of millions of citizens still living in poverty.

How much of the world we knew in the 20th Century was dependent on the hegemony of free-trading democratic countries? How much of the seemingly unstoppable technological progress, the respect for international boundaries, the slow advance of human rights, etc. were dependent on the lucky fact that the U.S.-Britain-France alliance (and later, the U.S.-Britain-France-Japan alliance) had the most guns?

We're about to find out.

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