Felix Salmon

Why jobs require cities

Felix Salmon
Feb 2, 2012 12:15 UTC

Many thanks to Mark Bergen for finding me this data; I asked him for it because I thought that maybe we could learn something from the way in which China has managed to keep employment growing steadily through some extremely turbulent economic times.


What you’re looking at here is total Chinese employment from the All China database. Primary industry is commodities, basically, including agriculture; secondary industry is manufacturing; tertiary industry is services.

It comes as little surprise to see that agricultural employment has been falling steadily for 20 years. But it is surprising to see that if you take out the services sector, total Chinese employment has been going nowhere, and basically falling, for the same amount of time.

Caroline Baum, using a different data source, says that China lost 15 million manufacturing jobs between 1995 and 2002; according to these figures, employment in “secondary industry” was flat in those years, going from 156.6 million to 156.8 million before starting to rise again and reaching 218.4 million in 2010. (It’s worth pausing here to appreciate the sheer scale of this chart: each horizontal line is another 100 million workers.)

Meanwhile, the services industry — tertiary industry — has been on fire: it now employs 263 million people, more than are employed in secondary industry, and has doubled since 1992. All this, remember, in a country with more or less flat population growth, thanks to the one-child policy.

Of course it’s hard to find work in the services industry if you’re a rural peasant: tertiary industry is a fundamentally urban thing, which brings me to my second chart.


It comes as no surprise to see that urban employment is growing incredibly fast — 13.7 million urban jobs were created in China in 2010 alone. What does come as a surprise is to see that urban jobs are still in the minority in China — which means that there’s a lot of room for growth going forwards.

In the U.S., we had a huge construction boom in the aughts, which was concentrated on building bigger suburban and exurban residential houses. That’s good for homebuilders and makers of granite countertops, but it doesn’t really boost the economy more broadly. The Chinese construction boom, by contrast, is building cities and roads and crucial infrastructure, which allows the service economy to keep on growing at a torrid place.

Realistically, there is very little chance that global manufacturing employment is going to increase in future at a rate which will provide jobs for a growing global population. If we’re going to find jobs in the U.S. and the rest of the world, they’re going to have to be found in exactly the area where China is finding them — tertiary industry, or services.

How do you create service-industry jobs? By investing in cities and inter-city infrastructure like smart grids and high-speed rail. Services flourish where people are close together and can interact easily with the maximum number of people. If we want to create jobs in America, we should look to services, rather than the manufacturing sector. And while it’s hard to create those jobs directly, you can definitely try to do it indirectly, by building the platforms on which those jobs are built. They’re called cities. And America is, sadly, very bad at keeping its cities modern and flourishing. 1950s-era suburbia won’t cut it any more. But who in government is going to embrace our urban future?


TFF – I agree with your overall vision of city design, with 1 tweak. Light rail makes sense sometimes, but I think that buses, in combination with bus/HOV lanes, are an important part of the mix that sometimes make more sense. Light rail is more effective if high enough ridership is there, but run more risk of being white elephant projects if built in areas that don’t justify it. Buses are easier to redeploy if future growth follows unanticipated patterns.

I’m cynical about the bias of local politicians – more ribbon cutting photos from light rail than bus system expansions. It’s not a phenomenon unique to light rail – see convention centers and sports stadiums.

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Should bankers fly to China?

Felix Salmon
Feb 14, 2011 03:13 UTC

The advantage of being pseudonymous is that you can be honest. Here’s TED:

The most egregious example was the time I had to fly 18 hours, on short notice, from a mid-sized European city to Beijing for a two-hour pitch and fly right back to London for business the next day. In terms of cost-effectiveness, best use of senior bankers’ time, and sheer expense, this was pretty ludicrous.

And here’s James Gorman, showing what bankers have to say if they’re speaking on the record:

I pitched for 450 client meetings last year. I flew to China for a 20-minute meeting and then got on a plane and flew back. It was right for me to do it, and we got the deal.

It’s conceivable that both are true. I’m pretty sure that TED was flying commercial while Gorman was flying privately. That makes a huge difference in terms of productivity, especially while airborne. On the other hand, Gorman’s logic is pretty flimsy. He seems to think that if Morgan Stanley got the deal, then flying to China was obviously the right thing for him to do. But in fact it’s a bit more complicated than that.

As TED notes, the expenses incurred on Gorman’s trip were pretty big. Cash costs of course were huge, but opportunity costs were larger still: there was surely a significant number of meetings that Gorman didn’t make because he was stuck on a plane going to or from China, where he could have added value for the firm. On top of that is the basic probabilistic calculation: what is the probability that Morgan Stanley would have got the deal had Gorman not travelled to China? And what are the chances that Morgan Stanley might have lost the deal even after Gorman showed up for his 20-minute meeting?

Then there’s a bigger question still: what are the chances that getting the deal is going to end up being a good thing for Morgan Stanley? John Hempton has a post today about Guanxi — the way that Chinese business deals are generally based on personal connections and relationships.

In the United States the Guanxi guys will work for single-digit millions annually and think they are well paid. That is all they are entitled to. Such limitations on entitlement do not exist in Asia – and the Guanxi guys are likely to see Western funded private equity shops like Carlyle as piggy banks to loot… And the looting will not be a million or two dollars here and there – it will be for every penny they can extract…

The whole point of private equity is that by pooling capital you can get insider positions and you can run the company for cash – for the benefit of your investors. But if your “insider position” doesn’t even allow you to spot the business does not exist then your insider status is worthless…

Only after the collapse of network capitalism will the system be cleaned up and capital be allocated on the basis of analysis rather than connections.

It’s possible that the deal Gorman flew to China for was a purely advisory one which didn’t use Morgan Stanley’s balance sheet at all. But I doubt it. And as a result, no one will know whether the deal was a good one for Morgan Stanley for many years yet. If the likes of Hempton and Jim Chanos are right, then in hindsight just about every flight to China these days could turn out, with hindsight, to have been a very bad idea indeed.


… “And the looting will not be a million or two dollars here and there – it will be for every penny they can extract…”

That’s for sure. And it doesn’t stop there; aided by the willfull assistance of Standard & Poor’s and Moody’s Investors Service, China has shed $260 billion of its foreign debt obligation:

http://www.istockanalyst.com/article/vie warticle/articleid/4548858

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Should you open an FDIC-insured yuan bank account?

Felix Salmon
Jan 12, 2011 14:52 UTC

I’ve been looking at the instructions for opening a yuan bank account here in New York; it seems very easy indeed. Just like a normal US dollar account, it’s FDIC insured, and it pays no interest. So, should New Yorkers with dollar savings convert some part of them to yuan?

On the face of it, the trade is a reasonably attractive one. The Secretary of the Treasury is still complaining loudly that the yuan is undervalued, which means that when you buy it at the current exchange rate, you’re getting a bargain. A Chinese revaluation is going to happen at some point, and when it does, you’ll make money.

On top of that, there’s a simple diversification benefit. The dollar is still the main global currency, but there’s no harm in putting a few eggs in various different baskets just in case.

It’s possible that you’d be better off staying in dollars, of course. Inflation in China is rising, and if the Chinese central bank fails to bring inflation under control, then the real exchange rate could appreciate substantially even if the nominal exchange rate doesn’t move. On the other hand, if the Chinese central bank does bring inflation under control, it will do so by tightening monetary policy, which will put even more upward pressure on the yuan.

It seems to me that the downside is limited, here. As Standard Chartered’s Robert Minikin told Chris Nicholson, “China sees the global financial system as too U.S.-centric and dollar dependent.” As a result, it has every incentive to do reasonably well by those buying yuan, even if China itself is still buying dollars at a rate of $2 billion a day.

The news of the existence of this bank account is only spreading now, but in fact it has been available for the best part of a year already, over which period a saver would have done pretty well, in dollar terms. My feeling is that nothing has really changed, and that if the yuan appreciates by say 6% this year, that’s still a much better return than you’ll get on any dollar CD.


Well I guess we now know that the WSJ reads your blog.


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Shorting reserves

Felix Salmon
Feb 3, 2010 14:18 UTC

Michael Pettis does a good job of systematically dismantling this idiotic line from Tom Friedman:

First, a simple rule of investing that has always served me well: Never short a country with $2 trillion in foreign currency reserves.

In fact, if you decided to short only countries whose foreign exchange reserves reached some large proportion of gross world product, you’d be batting 2 for 2 right now as you started shorting China. First you would have shorted the USA in the 1920s, and then you would have shorted Japan in the 1980s.

Writes Pettis:

It was the very process of generating massive reserves that created the risks which subsequently devastated the US and Japan. Both countries had accumulated reserves over a decade during which they experienced sharply undervalued currencies, rapid urbanization, and rapid growth in worker productivity (sound familiar?). These three factors led to large and rising trade surpluses which, when combined with capital inflows seeking advantage of the rapid economic growth, forced a too-quick expansion of domestic money and credit.

It was this money and credit expansion that created the excess capacity that ultimately led to the lost decades for the US and Japan. High reserves in both cases were symptoms of terrible underlying imbalances, and they were consequently useless in protecting those countries from the risks those imbalances posed.

One of the scariest aspects of the most recent financial crisis is that far from addressing the biggest and most potentially destabilizing global imbalances, it actually exacerbated them. If and when those imbalances unwind chaotically, the global effects will be highly unpredicatable. But it’s far from clear that China will be any kind of safe haven.


Reversal of cause and effect here. The financial crisis was caused by global imbalances and the refusal to apply the proper monetary policy prescriptions.

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Chinese housing datapoint of the day

Felix Salmon
Sep 23, 2009 14:49 UTC

Rosealea Yao reports:

Roughly 80 per cent of China’s urban residents own their homes – an astonishing number for a country that only began to privatise its housing stock in 1998.

Astonishing is right — and frankly, given the absence of any sourcing, I’m not sure I believe it. The high point of the influx from rural to urban China might be behind us, but it isn’t over yet, and all those poor Chinese workers looking to make their lives in the big city are unlikely to jump straight onto the bottom rung of the housing ladder. There might be some shenanigans going on with the definition of “residents” here — are all city inhabitants really included in the denominator?

That said, no visitor to China can fail to be astonished at the sheer quantity of housing stock which is going up in high rises across the country. If Yao is right, then substantially all of that stock is sold rather than rented, which helps to explain the astonishing amount of money in the Chinese construction industry. But it also means hundreds of billions of dollars of mortgages in the Chinese banking system, which I doubt were underwritten with particular assiduousness, and which have been written at extremely high price-to-income ratios. China could yet suffer a mortgage crisis of US proportions.


“Urban residents” means those with urban hukou (the all-important residence permit), about two-thirds of the population in large metropolises. The people owning houses haven’t moved into the city, they’re the privileged proletariat and intelligentsia from the pre-reform era, who bought their state-owned accommodation at uneconomic prices.

It’s also worth noting that ownership+rentals > 100%. Many of these people will rent the houses they own to others lower down the economic scale (like me) and rent their accommodation.

Mortgages are very rare in mainland China – people save up, encouraged by the fact that wages are often automatically put into a restricted account for housing purchases.

I’m less certain about this, but possibly another distinctive feature is that new housing stock is often pre-sold, as I believe is also the case in Hong Kong. The developer sells the units on in blocks, which are then split and sold on, then split and sold on, until they are owned by individual families. The risk is spread very widely.

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China datapoint of the day

Felix Salmon
Jul 16, 2009 13:14 UTC

Andrew Baston reports on China’s 7.9% GDP growth in the second quarter:

China’s government only reports year-on-year growth estimates. But when measured in the same terms as other major economies—an annualized quarter-on-quarter comparison—China’s growth in the second quarter could be on the order of 15%, some private economists estimate.

This is proof, I think, that stimulus programs can have spectacular effects, at least in the short term. Although once again Chinese assets are looking pretty bubblicious as a result. Beware the coming crash!

The Chinese stock-market crash: July 22

Felix Salmon
Jul 15, 2009 16:27 UTC

Josh and Tyler have found a piece of ever-so-scientific research which calculates that the Shanghai stock market will crash somewhere between July 17 and July 27. Which is convenient for me, since I’ll be there personally from July 19 through 25; I should have a front-row seat!

If I had to pick a single day for the crash, of course, it would have to be July 22. When the predictions of a Log Periodic Power Law are ratified by a solar eclipse with the longest totality of the century, how could stocks possibly behave otherwise?

Update: Zubin has found a paper about the effect of eclipses on the stock market.

Resurrecting the panda bond

Felix Salmon
Jun 8, 2009 04:44 UTC

Should the US issue panda bonds, as Guo Shuqing, the chairman of China Construction Bank would like to see? Much better, I think, to start with the World Bank and a few other habitual foreign-currency issuers before suggesting that the US break with all tradition and borrow in any foreign currency.

But yes, if the World Bank can start issuing in yuan, and if it can easily swap its obligations back into dollar Libor, as Guo suggests is possible, then that’s a great idea. A benchmark yuan yield curve would do wonders for increasing the transparency of Chinese capital markets.

(HT: Alea)


Ask Iceland about the wisdom of borrowing in foreign currencies.

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