China Deflation has begun

The New Middle Corridor Trade Route

HSBC bet the bank on China, now its paying the price

Posted on September 24, 2021 by Nick Corbishley

The UK’s biggest bank is exposed to Evergrande and the Chinese real estate market. It’s also trapped in the middle of an escalating economic war between the world’s two superpowers.

“I’d be naive to think that the turmoil in the market doesn’t have the potential to have second-order and third-order impact. Clearly with the changes that are taking place in the Evergrande situation, it’s concerning,” HSBC CEO Noel Quinn said on Wednesday at a Bank of America conference. In a webcast on HSBC’s website Quinn said he saw no reason to worry about HSBC’s loan exposure to Chinese commercial real estate, referring to a review of the bank’s provisions for distressed loans in the sector.

«You wouldn’t have seen anything in that, that indicated we were concerned about our CRE exposure in China».

HSBC’s asset management arm is among the largest foreign holders of Evergrande debt, with a little over $200 million of its dollar bonds, according to a fund analysis report by Morningstar. And dollar bondholders seem to be pretty low down in the pecking order of creditors. Today (Friday), Evergrande missed an interest deadline on a dollar-denominated bond worth $83.5 million without even issuing a public statement. The firm, now in uncharted waters, enters a 30-day grace period. If it doesn’t make the payment in that time, it will have defaulted.

Doubling Down

Interestingly, some banks, including HSBC, have been doubling down on Evergrande’s debt even as concerns about the company’s financial health grew, perhaps in the (seemingly mistaken) belief that when push came to shove Beijing would bail them out. Morningstar Direct data found that three Asian high-yield funds, belonging to UBS, HSBC and Blackrock, have been accumulating more units of Evergrande bonds over the past year. As the FT reported Thursday, the growing crisis at Evergrande is also sparking a sharp sell off of other high-risk Asian bonds, to which HSBC is also probably exposed. Real estate makes up 42% Asia’s high-yield bond market, with most of the borrowing coming from China.

Big developers such as Fantasia, R&F, Suna, China Aoyuan are already in big trouble. This is causing difficulties for some of the Chinese banks that have helped finance the sector’s last two decades of high-octane growth and unfettered speculation. Those banks, with some 50 trillion yuan ($7.7 trillion) of outstanding loans to developers and home buyers, have already been hit by a surge in defaults as authorities have escalated their curbs on the real estate sector, reports Bloomberg.

In late August ICBC said that its non-performing loans to real estate companies almost doubled in the first half of the year, while troubled loans to the sector at China Construction Bank jumped by 28 percent. China Merchants Bank recorded an almost four-fold jump in bad loans to real estate. It’s hard to imagine that HSBC is totally immune to these developments. It clearly has exposure to China’s real estate market, including to buyers of uncompleted Evergrande residential projects. It is also probably no coincidence that HSBC’s shares have fallen 8% over the past four months, as Evergrande’s crisis has intensified.

But HSBC’s problems in China extend far beyond its exposure to Evergrande and the Chinese real estate market. HSBC’s biggest problem is arguably political, or to be more precise geopolitical.

Betting the Bank on China

Over the course of the last five or so years HSBC has bet the bank (pun intended) on China’s fast-growth economy while staging a strategic retreat from other markets. But China’s economy is beginning to look a bit fragile, as the Chinese government tries to stabilise the onshore property market, which is likely to be a long, slow, painful process. Also looking increasingly fragile is HSBC’s position in Hong Kong and mainland China

Despite being headquartered in the UK, HSBC is first and foremost an Asian bank — and always has been. Like its UK-based arch-rival Standard Chartered, it cut its teeth in Greater China in the 19th century (largely laundering the proceeds from the British East Indian company’s opium trade). And it remains a primarily Asian bank today. In 2020, its Mainland and Hong Kong operations accounted for 39% of its annual $50 billion in revenue, while the United Kingdom, its second largest market, brought in 28%.

The bank announced earlier this year plans to sell off its retail banking units in France and the United States and scale back its presence in some emerging markets in order to accelerate its eastward pivot. But there’s one big problem with this plan, as I reported for WOLF STREET in July: its success rests squarely on the bank’s ability to maintain good relations with the Chinese government, while also keeping the governments of the US and the UK on its side. In the middle of ratcheting tensions between China and the US (and by extension the UK), that is proving to be a tough proposition.

As geopolitical tensions have escalated between the US and China, HSBC has had to walk a tightrope in its relations with China on the one hand and Washington and London on the other. The lenders’ travails reveal a core challenge for multinational firms operating in China: the market is vital to their growth prospects, but Western firms doing business there increasingly risk being mired in the ratcheting tensions between Beijing and the West.

Like Standard Chartered, HSBC has thrown its support behind China’s imposition of security legislation on Hong Kong. It has frozen the assets of pro-democracy politicians and protesters, at the behest of Beijing. The bank has complied with just about everything Beijing has asked of it. But it’s still in Beijing’s bad books, partly no doubt due to the fact that it is, officially speaking, a UK-based bank, and the UK just signed a security pact with the US and Australia aimed at countering Chinese influence in the Asia Pacific.

Also, China still hasn’t fully forgiven HSBC for ratting out Chinese telecom giant Huawei to the U.S. Department of Justice for breaching U.S. sanctions on Iran. The information provided by HSBC led to the arrest of Meng Wanzhou, Huawei’s chief financial officer and daughter of the company’s founder, in Vancouver in 2018. Coincidentally, she was released just today and will be able to return to China after almost three years under house arrest. HSBC representatives claimed that they had little choice but to cooperate with the U.S. investigation — a legacy of the bank’s highly controversial deferred prosecution agreement with the DOJ in 2012, after being found guilty of breaching sanctions and laundering money for Mexican drug cartels.

In recent months Beijing has expressed its displeasure with the bank by allegedly ceasing one-on-one meetings with senior HSBC bankers as well as sidelining HSBC’s investment banking operations in China. In total, Reuters identified nine state-owned enterprises that have ended or cut back on their business with HSBC as a result of the bank’s falling out of favor with Beijing.

Anti-Sanctions Law

China has also introduced new anti-sanctions legislation aimed at counteracting what it perceives as Western economic bullying. The new law allows authorities to punish companies that comply with foreign sanctions. As The Diplomat notes, it is not the first to take such action. The EU has also enacted policies specifically aimed at circumventing certain sanctions regimes. The passage of China’s new laws, in June, does however suggest that life is going to get even more difficult for Western “companies that have a large market presence within China”:

Some of the potential responses spelled out in the new legislation are asset freezes, visa bans, business prohibitions, or deportations. One provision that has attracted particular attention is the ability for such measures to target not merely the entity complying with foreign sanctions or the policymakers that designed them, but family members of those parties or corporate leaders in their individual capacities as well. Further, those enforcing Western sanctions in China can be subject to lawsuits by Chinese companies that are harmed. In those instances, the pressure will be on top brass at multinational corporations with large scales of business in China to decide whether or not to comply with Western sanctions targeted at Chinese entities. In terms of the direct effects this may have on businesses, only time will tell. It is possible that the countermeasures may primarily target foreign politicians that hammer sanctions through legislative houses rather than corporate executives, but that is far from a certainty.

Given the flexibility of the policy and its discretionary implementation, it is quite possible that the overall level of enforcement may reflect the ebbs and flows of a given bilateral relationship. Additionally, it will be much tougher for enterprises that rely heavily on the Chinese market in driving revenue growth to avoid considering the potential impact of complying with sanctions against Chinese entities. The carrot of the Chinese marketplace may end up proving large and sweet enough to induce some businesses to either pressure their home states to relent on sanctions or elect not to enforce them in practice on Chinese soil. It is further possible we could see some large multinationals attempt to separate their China division from their other subgroups through complex corporate structures that might be able to weave around the sanctions. Of course, all of those seemingly crafty moves would run the risk of blowback back home and potential repercussions for noncompliance. All of this represents a delicate balancing act that must take into consideration the specific circumstances faced by an individual enterprise.

China’s anti-sanction legislation was first introduced on the mainland in June. It was scheduled to be extended to Hong Kong and Macau in August, sparking fears about the effects it would have on Hong Kong’s standing as a global business hub. In the end, Beijing put the plans on hold, apparently out of concern about the potential economic impact. But the reprieve is likely to be only temporary.

Just today, China’s Foreign Ministry released a fact sheet outlining 102 examples of US interference in China’s Hong Kong affairs since 2019, including imposing sanctions, smearing the Hong Kong government and police force and shielding and supporting anti-China forces that attempted to destabilize Hong Kong. According to Global Times, an outlet closely tied to the Chinese Communist Party, the fact sheet demonstrates the need for the anti-sanctions legislation: “since the US used legal means to interfere in Hong Kong affairs, Hong Kong needs to resort to the same means to protect itself and national security.”

Clearly relations between China and the US are not getting any better. If Evergrande does default on its US dollar bonds, leaving foreign investors including big banks holding the bag, they’re going to get even worse. And the worse they get, the harder it will become for HSBC (and other Western banks and companies with a large market presence in China) to keep both sides of the escalating economic war between Beijing and Washington happy.

Animal Based Medicine in China

By Rachel Love Nuwer. Originally published at Undark

IZ P.Y. CHEE vividly remembers the first time she visited a bear farm. It was 2009, and Chee, who was working for a Singapore-based animal welfare group, flew to Laos to tour a Chinese-owned facility. The animals Chee saw “were hardly recognizable as bears,” she later wrote, “because they had rubbed most of their fur off against the bars of the cages and had grown very long toenails through disuse of their feet.”

As at countless other bear farms across China and Southeast Asia, the bears there were being held for their bile. Bear bile — which is either “milked” through a catheter permanently inserted into the animals’ gall bladders or extracted by stabbing large needles into the animals’ abdomens — is popularly prescribed across the region to treat a host of ailments, including, most recently, Covid-19. It is also marketed as an all-around health tonic. Although there is a growing animal welfare and anti-bear farming movement in China, the industry remains powerful.

Seeing the suffering bears made Chee wonder about the cultural and historical forces that brought the animals there — a question that propelled her to conduct exhaustive research on animal medicalization in China. In “Mao’s Bestiary: Medicinal Animals and Modern China,” she details her findings, many of which are distilled from sources never before published in English. Chee, who is now a research fellow and lecturer at the National University of Singapore, also found that, until now, even scholars in China have dedicated scant attention to the history of animal-based medicine, despite the controversy associated with the topic today.

“If Chinese medicine retains an Achilles’ heel in the present century, it is the widespread perception that it is contributing to a holocaust among wild creatures,” Chee writes, “and in so doing supporting a global criminal enterprise” of animal poaching and trafficking. Moreover, she adds, such medicines are often condemned “as being as ineffective as they are unethical,” even by some Chinese physicians. Many of these products are medically useless at best, Chee writes, and in some cases, actually harmful.

Defenders of animal-based Chinese medicine often point to the practice’s 2,000-plus year history. In “Mao’s Bestiary,” however, Chee shows that the roots establishing the use of most animals as ingredients in medicine are not as deeply planted in China’s culture as many believe. Instead, the industry as it exists now was purposefully developed, expanded, and promoted over the last century. Today, it is more closely linked to politics and profit than to ancient culture and tradition. This revelation has important implications for both species conservation and for public health, Chee argues, because it leaves room for “possibilities of choice and change.”

Chee focuses on the evolution of animal-based medicine throughout the tumultuous period of modern China’s formation, from the 1950s through the 1980s. These decades encompassed the early years of the People’s Republic of China, Mao’s Great Leap Forward and Cultural Revolution and, finally, Deng Xiaoping’s reforms.

While animal-derived medicines do have a long history in China, Chee found that their use in the past was nowhere near the “startlingly abundant” level they are at today. Around 400 animals were cited in the 16th century “Compendium of Materia Medica,” for example, whereas more than 2,300 are listed today in pharmacopeias.

Many newly medicalized species exist only on distant continents, such as jaguars in South and Central America. Nor is China’s use of animals in traditional medicine solely based on Chinese innovation, Chee found; ideas, approaches, and technologies from the Soviet Union, North Korea, Japan, and the Western world all heavily influenced the industry’s development. So while animal-based products may still “hold the aura of tradition,” Chee writes, in fact, most are the products of a profit-driven expansion.

Efforts to abolish traditional medicine and replace it with a science-based approach, primarily inspired by Japan, began in the 1920s and continued through the early days of a Communist government that was racing to build an industrialized economy. While researchers acknowledged that some especially efficacious Chinese herbs were worth investigating to find their active ingredients, animal-based remedies were “initially undervalued and underdeveloped” by the new regime as it worked to build up its pharmaceutical sector, Chee writes.

Traditional doctors pushed back on the attempt to phase out their industry, however, and argued that the synergistic effects of the plant, animal, and mineral ingredients of their practice were too complex to be nailed down in a lab. To appease both groups, the state-owned drug-making sector decided that doctors trained in Chinese and Western medicine should learn from each other, “scientizing” Chinese medicine and seeking new innovations from tradition.

“To learn from the Soviet Union” was also a popular phrase in China at this time. Following the example set by the USSR, China was especially interested in creating its own pharmaceuticals from local ingredients to become self-sufficient. Soviet interest in animal-based folk medicine and the USSR’s own practice of farming deer for medicinal ingredients soon “provided modern and scientific sanction for the Chinese fascination with faunal drugs,” Chee writes.

During the Great Leap Forward’s period of rapid industrialization, “animals as well as plants were swept up in this nationwide project,” Chee continues. China expanded its export of high-end medicinal products like deer antler, rhino horn, and tiger bone, especially to Chinese expatriates. To meet steep quotas, authorities promoted the creation of “laboratory farms” for scaling up production. Entrepreneurs at these farms were also encouraged to find more uses for existing animal parts, and to engineer additional uses for new parts and species.

“Once a medicinal animal was farmed, there was pressure or incentive to justify the use of all of its parts, regardless of previous traditions that had often been quite selective as to which part should actually be taken as medicine, and for what purpose,” Chee writes. Medicine farms popped up for a host of additional species, including geckos, ground beetles, scorpions, snakes, and seahorses.

Wildlife farming also began being presented as something benefiting conservation because it allegedly spared wild animals from being hunted. In fact, it usually had the opposite effect by stimulating the market and relying on hunters to replenish farm stocks, Chee notes. While she does not delve deeply into the impact this has had on animal populations within and outside China, many sources today argue that demand for traditional medicine all but emptied the country’s forests of tigers, pangolins, and other highly sought after species.

During the purges and upheavals of the Cultural Revolution, the export of luxury medicines such as rhino horn were scaled up to generate much-needed revenue. Back home, however, a stark lack of medical care and supplies inspired an emphasis on “miracle cures” derived from cheaper, more common animals.

Chicken blood therapy — “the direct injection of chicken blood (from live chickens) into human bodies” — was representative of this time, Chee writes. The doctor who founded the treatment claimed chicken blood therapy could cure more than 100 conditions, and it was heavily promoted throughout the country, becoming “emblematic of economical grassroots innovations” and “the very expression of ‘red medicine,’” Chee writes.

This practice started to be phased out in 1968 when news surfaced of people dying after being injected with chicken blood. But similar remedies soon took its place, including ones that used goose or duck blood, lizard eggs, or toad heads. These new remedies were marketed as magic-like cures for serious and otherwise untreatable conditions, including cancer — “an attribute that has become standard in the marketing of many animal-based drugs today,” Chee writes.

After Deng came to power in 1978, wildlife farming and animal-based medicine “became even more popular as part of the official policy to enrich farmers,” Chee continues. The government-supported bear bile industry — which was originally inspired by facilities in North Korea and continues to flourish today — was one major result of this period, as was the proliferation of tiger farms.

Policy shifts also had significant ramifications for the regulation of Chinese medicine, and its impact on consumers and the environment. The forestry ministry was “given decision-making power over wild medicinal animals,” Chee writes, “and would essentially manage China’s forests as extraction sites.” Meanwhile, the health ministry only had full regulatory control of patented drugs, so companies selling animal-based medicines could bypass health or efficacy regulations and make extravagant, unchallenged claims about their products’ curative value.

Chinese medicine has become globalized over the last three decades, and animal-based products have “continued to play a central, if increasingly problematic, role,” Chee writes. The industry is assailed in the international media for its role in driving species declines, and clashes regularly occur within China between proponents of animal-based medicines and those who value wildlife and conservation. “Many middle-class Chinese, both on the mainland and in the diaspora, and within Chinese medicine itself, have been on the front lines in the battle to save endangered species from poaching and consumption,” Chee points out.

“Mao’s Bestiary” went to press in the midst of the Covid-19 pandemic, and Chee writes in the introduction that the likely link between Covid-19’s emergence and wild animals fundamentally changes the debate by making wildlife use a global public health issue.

Yet despite the undeniable threats posed by zoonotic diseases, animal-based traditional medicine remains an “immensely profitable, and thus politically influential” force in China, she continues. As evidence, Chinese authorities not only did not ban animal-based medicine during the pandemic, but actually promoted remedies containing bear bile for treating Covid-19.

As for shaping the industry’s future to mitigate the dangers for both wildlife and humans, Chee looks not to officials but to Chinese consumers, who can choose to boycott animal-based medicines. There is a large and growing animal welfare movement in China, so this could be more than just a pipe dream. “Whether they will reinvent the pharmacology of Chinese medicine as a practice less reliant on animals, endangered or otherwise,” she concludes, “remains a vital question.”

Meritocracy: John H Cochrane Blog

Adrian Woolridge wrote a thought-provoking essay titled "Meritocracy, Not Democracy, Is the Golden Ticket to Growth," advertising a forthcoming book.

Meritocracy, the secret sauce of growth?

To Woolridge, meritocracy is the secret sauce of prosperity:

The surest sign that a country will be economically successful is not the health of its democracy, as some liberals like to think, or the leanness of its government, as some free-marketers imagine, but its commitment to meritocracy. Singapore is a soft authoritarian power. But it has transformed itself in a few decades from a poverty-stricken swamp into one of the world’s most prosperous countries, with a higher standard of living and a longer life expectancy than its old colonial master, because it is perhaps the world’s leading practitioner of meritocracy. The Scandinavian countries have some of the world’s largest governments and most generous welfare states. But they retain their positions at the top of international league tables of prosperity and productivity in large part because they are committed to high-quality education, good government and, beneath their communitarian veneer, competition; in other words — meritocracy.

By contrast, countries that have resisted meritocracy have either stagnated or hit their growth limits. Greece, a byword for nepotism and “clientelism” (using public-sector jobs to reward partisan cronies), has struggled for decades. Italy, the homeland of nepotismo, enjoyed a postwar boom like France and Germany but has been stagnating since the mid-1990s....

Democracy alone does not lead to growth, and likewise growth does not swiftly lead to democracy. Look at China vs. India, and many democratic, at least in the sense of leaders chosen by fairly free elections, but poor countries around the world.

For a generation, political economists have been looking more deeply at institutions -- rule of law, property rights, etc. -- as a secret sauce. "Meritocracy" is a good buzzword for a different idea of what is centrally important.

...countries that favor recruiting professional managers through open competition have higher growth rates than those that favor recruiting amateur managers through personal connections. America has the highest overall management score, followed by Germany and Japan. Rich-world laggards such as Portugal and Greece, and big emerging-market countries such as India, have a long tail of un-meritocratic and therefore badly managed firms.

The essay goes on, condensing much more evidence.

It is plausible that meritocracy is especially important now, as businesses globalize and incorporate IT. The rising skill premium and larger reach of global corporations means that it is ever more important to match skilled people with the positions that require skill.

His bottom line

... The idea that there is a necessary relationship between democracy and growth rests on a false positive. The really robust relationship is between meritocracy and growth. ..

the evidence of economics is overwhelming: Meritocracy promotes prosperity, and dismantling meritocracy will reduce it. Those who support the current campaign against merit need to admit that they are opting for lower growth. I am not an expert on the huge political/economic literature on the correlates of growth. This sounds reasonable, but the Acemoglus, Barros, etc. of the world may have important things to say on the evidence. Still, it's a novel idea and let's follow it.

We should distinguish "leading country" growth that must come from innovation, and "catchup growth" that simply uses current ideas most efficiently. Woolridge, and the rest of this essay, is, I think, mostly about the latter. For almost all of the world's population, that's what matters. And in my view, the US is a good deal below the efficient frontier as well.

Non-meritocracy

Some evidence on the other side:

Another way to measure the prosperity-producing power of meritocracy is to look at what happens if you remove it. The City College of New York had a well-deserved reputation as the “Harvard of the proletariat,” taking thousands of poor adolescents, many of them the offspring of immigrants, and turning them into the successful citizens of a knowledge society — doctors, lawyers, academics and, in the case of 10 alumni, Nobel Prize winners. Then in 1970 the university introduced an open-access regime, admitting anyone who had graduated from the city’s high schools. The result was a simultaneous boom in student numbers and a collapse in academic standards. By 1978, 2 out of 3 students admitted to the college required remedial teaching in reading, writing and arithmetic. Dropout rates surged. Talented scholars left. A college that had once specialized in producing the rocket fuel of a successful society — talent — became synonymous with protests and sit-ins. In 1999, a task force led by former Yale president Benno Schmidt pronounced the larger City University system to be “in a spiral of decline.” The college only began to recover after it abandoned open admissions as a failed experiment.

This is nice as it illustrates where modern universities are going. It is however not obviously germane to the larger point. Maybe City College moved to an equally important role of providing remedial education to people ill-served by the city's disastrous public high schools. Maybe City College fed meritocratic middle managers, and left to Chicago the business of producing Nobel Prize winners. Really, that City College failed in this new role is the more trenchant criticism. But the decline of meritocracy in favor of other goals is indeed the post 1968 trend of modern universities.

Woolridge offers the story of Venice

...Venice is one of Italy’s least favored cities when it comes to natural resources. Yet in the early Middle Ages it was the richest city in Europe. Venetian sailors — there were some 36,000 of them in the 14th century — popped up as far away as China. Venetian merchants invented the prototype of today’s joint-stock companies, the commenda. The same merchants used the proceeds of ingenuity and dynamism to build some of the world’s most spectacular buildings and patronize some of its most glorious arts.

This Manhattan of the Middle Ages owed its success in large part to its unusual openness to talent: Rather than a hereditary ruler, the standard at the time, Venice had a doge who was selected by the ruling families; rather than a royal court, it had a council of wise men whose job it was to advise — and constrain — the doge. Social mobility was commonplace. Daron Acemoglu of MIT and James Robinson of the University of Chicago Pearson Institute calculate that in government documents in the years 960, 971 and 982, new names made up 69%, 81% and 65%, respectively, of those recorded. Institutions became more inclusive: From the late 12th century onward, a hundred new members were added every year to the Ducal Council, which kept the doge under tight control.

Yet from the late 12th and early 13th centuries, the most powerful families took to rigging the system in favor of their children. In 1315 they succeeded in locking their position at the top of society for good by publishing the “Book of Gold” (Libro D’Oro) — an official list of Venetian noble families that was intended to keep the social order exactly as it was. Venetians called this La Serrata: the closure.

La Serrata spelled the end of Venice as the world’s most successful city-state. A self-satisfied oligarchy used its power to hoard opportunities and strangle innovation...

It's a nice story, but I don't think we need to go back to the Middle Ages to see the pattern over and over. Societies in which people who make important decisions are chosen by skill, not connections, prosper. I hope the book will have a longer list of more recent examples. Military examples seem to me particularly useful. The tension between giving command decisions by political connections vs. meritocracy is always present, and both military disasters and successes often traced to the results.

China

On to the dragon in the room:

The West — and particularly the United States — is turning against the meritocratic idea precisely when the greatest geopolitical rival it has ever faced, China, is embracing meritocracy more tightly.

Though China's government is run by "the insider dealing of this rather grubby elite,"

The Chinese educational system is determinedly meritocratic: Children compete to get into the best nursery schools so that they can get into the best secondary schools and then into the best universities. Examinations — most important, the university entrance examination or gaokao that students take at 18 — regulate the race to get ahead. This examination system, which draws on the tradition of civil service examinations that were administered for more than a thousand years, is now more geared to produce scientists and engineers rather than Confucian officials.

The Chinese Communist Party claims that it is trying to create a system based on “political meritocracy,” ...routinely recruiting the brightest young students into its ranks. The party’s Organization Department acts as a giant human resources department keeping records on high-fliers across the country. Provincial governors and university presidents are evaluated on the basis of their success in hitting a number of targets.... the West should at least prepare itself for the possibility that, albeit messily, China is turning itself into a giant Singapore, determined to use meritocracy as a tool of growth and social progress.

Equity and opportunity

Here is the paradox. The US paternalistic/aristocratic elite is running away from meritocracy under the banner of "social justice" and "racial equity." Yet meritocracy throughout history has been a great equalizer, a great leveler, the main way that excluded out-groups could get ahead. US universities originally adopted standardized tests and dropped racial quotas e.g. against Jews, and discovered a wealth of talent that did not come from "holistic assessment" at the time, i.e. did you go to Andover and Exeter and come from "the right" families. Standardized tests, and the meritocracy they represent was and is one of the great equalizers of opportunity and gates of social and economic mobility, allowing people to prove themselves.

I would argue that the idea of merit is one of humanity’s most successful privilege-busting inventions.

And I would agree.

The abandonment of meritocracy

Woolridge is naturally worried about trends in the US and the West:

Meritocracy is under assault from all directions. For progressives, it is a tool of White male privilege...

... San Francisco’s Lowell School is one of the most successful schools in the country and has given thousands of poor immigrant children (among others) a chance of an elite education. The San Francisco Board of Education has now banned it from using admission tests and introduced a lottery system instead, with the school commissioner, Alison Collins, pronouncing that meritocracy is “racist” and “the antithesis of fair.” Elite schools in New York and Boston are also under threat. Programs for the gifted and talented are being dismantled across the country. Universities have been reducing the importance of standardized admissions tests, with some going so far as to make testing optional, and putting more emphasis on “holistic assessment” instead.

...Companies are introducing formal or informal quotas in the name of “equity” (which is increasingly taking the place of equality of opportunity as a measure of justice).

...Meritocracy is one of the great building blocks of modernity, along with democracy, capitalism and liberalism. ... Is it really the case that meritocracy is a tool of White male privilege? W.E.B. Du Bois and Ruth Bader Ginsburg might have something different to say. Are lotteries or holistic assessments really better ways of distributing educational opportunities than standardized tests? Most of us would hesitate before flying with a pilot who had been chosen by lottery. Do we really want a society in which group identities trump individual abilities? A glance at the history of India or the former Yugoslavia suggests that we should at least pause before taking this leap.

This is a deeper point. Many political systems, both democratic and autocratic, carve up power and benefits based on group markers -- class, ethnicity, religion, race, parentage, caste. Not many who do so are meritocratic, prosperous, or peaceful.

Politics

Woolridge moves on to the political implications. This is interesting, but here I disagree a bit.

As we now know, "Capitalism and Freedom" was not entirely right, that economic growth would quickly lead to political freedom.

In the 1980s and 1990s, Western intellectuals convinced themselves that they had discovered a firm link between economic growth and democracy. ...policy makers welcoming China and Russia into the global order on the grounds that they would inevitably evolve into liberal democracies, and a group of neoconservatives even arguing in favor of “regime change” in the Middle East on the theory that democracy and prosperity would naturally replace the toppled regimes.

Woolridge thinks that meritocratic autocracies (an oxymoron!) pose a threat, given our self-inflicted wounds.

A cohort of rising powers are trying a different approach: linking meritocracy with autocracy of various degrees of hardness. Lee Kuan Yew recognized that the best way to enjoy Western levels of prosperity was not to introduce one-person-one vote but to borrow Western mechanisms such as an elite civil service, recruited through open competition and dedicated to corruption-free government, and graft it onto older Mandarin traditions of the rule of the scholar-bureaucrat. Since then a growing number of countries, led by mighty China, have tried to imitate his model....Countries as diverse as Rwanda and the United Arab Emirates have chosen authoritarian modernization over democracy.

Here I disagree. Yes, meritocratic autocracies can prosper for a while, but not for long. The autocracy part always eventually takes over. The group in power wants to keep power, and wants to keep their children in power (even communism turns to hereditary monarchy, see North Korea). Yes, Singapore. But it's hard to think of a prosperous meritocratic autocracy that has lasted as such for several transitions of power.

And if democracy is not automatically meritocratic, using political power to reward interest groups, autocracy is definitely not automatically meritocratic! Overall, it's hard to make a case that autocracy is more likely to be meritocratic than democracy. Cuba, Venezuela, North Korea, Russia... So Woolridge must have in mind some other secret sauce that produces a stable, long-term meritocratic autocracy, that survives changes of power over generations. I have no idea what that might be.

Democracy is not great at producing technocratic efficiency. Democracy is not great at stemming the army of rent-seekers. Indeed, democracy's greater responsiveness to desires of organized groups often means responsiveness to the desires of rent-seeking groups demanding protection. But democracy is good at the main thing it is designed for: stopping tyranny; Kicking the bums out when they get too entrenched.

Autocracy is not automatically meritocracy! It is usually the opposite. Democracy here in the US was invented to resist an exclusionary, anti-meritocratic autocracy, King George's UK. At a minimum, when you get a bad King all you can do is wait 30 years for them to die.

We also forget that autocrats are often a good deal weaker than democracies. A democratic government at least has a measure of legitimacy. Autocrats worry about waking up the next morning, and have to please the interest groups that keep them in power. It is not obvious that autocracy is better at quieting rent-seekers than democracy. Indeed, the opposite seems to be the case. Quieting rent seekers, avoiding tyranny, and avoiding a bloodbath when power must eventually change hands are three main problems of government. It is not obvious that autocracy does better on any of the three, despite democracy's tumult. And despite the occasional benevolent autocrat who produces some meritocracy and prosperity, for as long as one lifetime.

Though our woke elite aristocracy is moving headlong away from meritocracy, it's not obvious the voters are going along with it. The last election was very close, and a surprisingly large number of the supposed beneficiaries of noblesse oblige voted Republican. The meritocratic ideal, equality of opportunity not statistical equity of various groups, runs deep in America and surfaces every four years.

Here also I think Woolridge confuses the argument somewhat. The "-cracy" part of the word means rule, as in aristocracy, bureaucracy, autocracy and so forth. Meritocracy, strictly speaking, is about merit and skill as the selector for positions of power in government. But much of what Woolridge talks about is the looser sense of meritocracy -- whether decision-making positions in private companies are awarded on merit or on family contacts, ethic group, or other trust mechanisms. Meritocracy in universities is not about who controls the government. One can have meritocratic institutions in an autocratic and un-meritocratic government and vice versa.

His real complaint is that institutions -- corporations, universities, etc. -- in the West are moving away from meritocracy. As an economist, that always smells to me of lack of competition. A society can only afford non-meritocratic institutions if those institutions do not have to compete. That is in part political -- politics offers protection from competition, often precisely to allow non-meritocratic private structures. But the surest solution is not to try for a cultural revival of meritocracy in government-protected uncompetitive industries and institutions (universities). The surest solution is more competition, so institutions have no choice but to be meritocratic.

Thus I also disagree with Woolridge's political musings,

The West has thrived materially over the past century or so in large part because it managed to fuse democracy with meritocracy. America’s Founders understood that the reason for embracing democracy was not that it made us rich, but that it gave ordinary people a say in how their country was governed. They also understood that democracy could actually destroy prosperity if it wasn’t diluted with a degree of meritocracy. They built meritocratic restraints into the Constitution by giving senators six-year terms and giving Supreme Court justices jobs for life. They also put limits on the power of the state to interfere in the wider economy. One reason meritocracy flourished was that the U.S. made it easy for companies to claim limited liability without declaring an explicit public purpose. Another was that the U.S.’s lax immigration laws and vast territories attracted tens of millions of ambitious and energetic people from more crowded and tradition-bound societies.

Other Western countries pursued a similar policy of fusing meritocracy with democracy: France and Britain competed to produce the world’s most elite civil services, and the European Union imposed even more restraints on democratic overreach than the United States did. During the golden years of the 1980s and 1990s this formula worked because the democratic part of the formula generated political legitimacy and the meritocratic part generated good government and economic growth.

In part, this depends on what one means by "democracy." I analyze the same facts by noting the US is not a "democracy," in the sense that each issue is decided by 50% + 1 votes. We are a representative democracy, with strong protections for electoral minorities. Or at least we were -- we are trending to much more 50% + 1 and much less protections in the form of limited government and personal rights. But to say these structures are a "fusing of democracy with meritocracy" seems to me profoundly to miss the point of property and other rights, limited government, and structures that requires more than a transient 50%+1 majority to make huge changes, including transferring money and who gets what job responsibility around.

The current attack on meritocracy is not just a threat to the prosperity of particular countries. It is a threat to the prosperity of the whole democratic world. Prosperity will increasingly be identified with top-down authoritarian regimes that make up for their failure to give their people a voice by giving them jobs and improving their welfare.

Here I disagree again. Authoritarian regimes that buy support by "giving" jobs and handing out money -- most of them -- are neither meritocratic nor prosperous. A few countries, South Korea before it became democratic, Singapore, China for a while, combined meritocratic economics institutions and lower-level government, and generated prosperity. For a while. South Korea became democratic, and China is facing the conundrum that meritocracy at the top means loss of power. In any case, these countries allowed their citizens to make themselves jobs and wealth, with a quid pro quo of stay quiet politically. For a while. While the West may be trying to shoot itself in the foot, it is not clear that autocracies will provide a durable attractive alternative -- to anyone but the autocrats!

Democratic countries in turn will be associated with economic stagnation, populist revolts and racial disharmony, as people try to get ahead in a low-growth environment by emphasizing their membership in defined groups rather than their individual merits.

This is indeed our danger. But those pesky peasants with pitchforks are darn meritocratic at bottom.

All in all though, it's a very provocative idea that meritocracy has been a building block of prosperity, one that many countries struggle to achieve, and that we are now deliberately throwing away.

Updates

In response to thoughtful comments below. Yes, meritocracy is about whether people are selected for positions of decision making or power based on skill, talent, and preparation. This is not about redistribution. One can have a very meritocratic society with lots of redistribution. The question is whether a society (and government) redistributes by handing out checks, by giving people high paying jobs of little consequence, or by allocating actual decision making powers based on considerations other than skill. Those who pursue the latter have a point. Social status and power in society are about more than money, and tokenism is pretty repugnant. A meritocratic redistributionist society must face the dilemma of keeping enough incentives for the talented to put in the hard work to acquire skills, and to match their talents with opportunities; and for the talented and skilled to put in the incredible hard work it takes to start, innovate and manage companies. But all that is for another day. This post and essay are not about redistribution.

What does "Dragon Man" Fossil tell us about Evolution

A near-perfectly preserved ancient human fossil known as the Harbin cranium sits in the Geoscience Museum in Hebei GEO University. The largest of known Homo skulls, scientists now say this skull represents a newly discovered human species named Homo longi or "Dragon Man." Their findings, appearing in three papers publishing June 25 in the journal The Innovation, suggest that the Homo longi lineage may be our closest relatives -- and has the potential to reshape our understanding of human evolution.

"The Harbin fossil is one of the most complete human cranial fossils in the world," says author Qiang Ji, a professor of paleontology of Hebei GEO University. "This fossil preserved many morphological details that are critical for understanding the evolution of the Homo genus and the origin of Homo sapiens."

The cranium was reportedly discovered in the 1930s in Harbin City of the Heilongjiang province of China. The massive skull could hold a brain comparable in size to modern humans' but had larger, almost square eye sockets, thick brow ridges, a wide mouth, and oversized teeth. "While it shows typical archaic human features, the Harbin cranium presents a mosaic combination of primitive and derived characters setting itself apart from all the other previously-named Homo species," says Ji, leading to its new species designation of Homo longi.

Scientists believe the cranium came from a male individual, approximately 50 years old, living in a forested, floodplain environment as part of a small community. "Like Homo sapiens, they hunted mammals and birds, and gathered fruits and vegetables, and perhaps even caught fish," remarks author Xijun Ni, a professor of primatology and paleoanthropology at the Chinese Academy of Sciences and Hebei GEO University. Given that the Harbin individual was likely very large in size as well as the location where the skull was found, researchers suggest H. longi may have been adapted for harsh environments, allowing them to disperse throughout Asia.

Using a series of geochemical analyses, Ji, Ni, and their team dated the Harbin fossil to at least 146,000 years, placing it in the Middle Pleistocene, a dynamic era of human species migration. They hypothesize that H. longi and H. sapiens could have encountered each other during this era.

"We see multiple evolutionary lineages of Homo species and populations co-existing in Asia, Africa, and Europe during that time. So, if Homo sapiens indeed got to East Asia that early, they could have a chance to interact with H. longi, and since we don't know when the Harbin group disappeared, there could have been later encounters as well," says author Chris Stringer, a paleoanthropologist at the Nature History Museum in London.

Looking farther back in time, the researchers also find that Homo longi is one of our closest hominin relatives, even more closely related to us than Neanderthals. "It is widely believed that the Neanderthal belongs to an extinct lineage that is the closest relative of our own species. However, our discovery suggests that the new lineage we identified that includes Homo longi is the actual sister group of H. sapiens," says Ni.

Their reconstruction of the human tree of life also suggests that the common ancestor we share with Neanderthals existed even further back in time. "The divergence time between H. sapiens and the Neanderthals may be even deeper in evolutionary history than generally believed, over one million years," says Ni. If true, we likely diverged from Neanderthals roughly 400,000 years earlier than scientists had thought.

The researchers say that findings gathered from the Harbin cranium have the potential to rewrite major elements of human evolution. Their analysis into the life history of Homo longi suggest they were strong, robust humans whose potential interactions with Homo sapiens may have shaped our history in turn. "Altogether, the Harbin cranium provides more evidence for us to understand Homo diversity and evolutionary relationships among these diverse Homo species and populations," says Ni. "We found our long-lost sister lineage."

The Upside of Population Decline

By Adair Turner in Financial Express

Population Prophecies

In a World where technology enables us to automate everyjob , the far bigger problem is too many potential workers, not too few

China's recently published census showing that its population has almost stopped growing brought warnings of severe problems for the country. "Such numbers make grim reading for the party" wrote The Economist."This could have a disastrous impact on the country" wrote Huang Wenzheng, a fellow at the centre for China and Globalization in Beijing, in the financial times.But a comment posted on China's Weibo was more insightful " The declining fertility rate actually reflects the progress in the thinking of Chinese people - women are no longer a fertility tool".

Chinas fertility rate of 1.3 is well below the replacement rate but so is it for all adavcned economies.Australias rate is 1.66 and US rate is 1.64.In all developed economies the fertility fell below 2 in the 1970s and 80s and have stayed there.

When the US rate returned to around 2 in 1990 to 2005, some hailed it as "social confidence" versus "old europe". Infact, the increase was largely due to immigration with Hispanic migrants maintaining the high fertility rate of their less succesful economies. Since 2000, the Hispanic fertility rate has fallen form 2.73 to 1.9, while the rates for white people have well below 2 since 1970s and for african americans since 2000.

In India, more prosperous states have fertility rates well below replacement level with only UP and Bihar still well above. The national average in India was 2.2 in 2018 and the National family health survey finds that Indian women would like to have on average 1.8 children.

A half century of evidence suggests that in all prosperous countries where women are well educated and free to choose whether and when to have children, fertility rates fall well below the replacement level. If those conditions exist across the world the global population will eventually decline.

A pervasive conventional bias assumes that population decline must be a bad thing." Chinas declining birth rate threatens economic growth" opined the Financial Times, while several comments in the Indian Press noted approvingly that India's population would soon overtake China. But while absolute economic growth is bound to fall as populations stabilise and then decline, it is income per capital which matters to prosperity and economic opportunities.And if educated women are unwilling to produce babies to make economic nationalists feel good,that is a highly desirable development.

True when population age there are fewer workers per retiree and health care costs rise as percentage of GDP. But that is offset by the reduced need for infrastructure and housing investment to support a growing population. China currently invests 25% of GDP each year on pouring concrete to build apartment blocks, roads and other urban infrastructure some of which will be of no value as the population declines. By cutting that waste and spending more on health care and high technology it can continue to flourish economically.

In a world where technology enables us to automate even more jobs, the far bigger problem is too many potential workers and not too few. China's populaion aged from 20 to 64 will likely to fall by around 20% in the next 30 years but productivity growth will continue to deliver rising prosperity. India's population in that age band is currently growing by around ten million per year and will not stabilise till 2050.

But even when the Indian economy grows rapidly as it did during the Pre Covid era, its highly productive "organised sector" of about 80 million workers - those working in registered companies and government bodies on formal contracts failed to create additional jobs.

True below replacement level fertility rates create significant challenges and China seems to be heading in that direction.Many people expected that when the one-child policy was abolished the Chinas fertility rate would increase. But if you look at the freely chosen birth rates of ethnic Chinese living in successful economies like Taiwan (1.07) and Singapore (1.1) makes the expectation doubtful.

Moreover some surveys suggest that many families in low-fertility countries would like to have more children but are discouraged by high property prices, inaccesible and costly childcare and other challenges in combining work and family life. Policymakes should therefore seek to make it as possible for couples to have the number of children they ideally want.But the likely result will be average rate below replacement level for all developed countries, and over time, gradually falling populations. The sooner that is true worldwide, the better for everyone

The much needed fiscal policy during covid 19 lockdown in india

There are multiple measures implemented by the government to stimulate the economy in the covid 19 induced pause in the economic activity. The question is whether they are effective and is there a magic pill which could resolve all the issues

All stimulus should have the desired effect on increased spending and resultant surge in economic activity. Unlike a developed economy, India cannot afford to provide unemployment packages like PPP (paycheck protection programme) as their tax collections are abysmally low. Indias tax to GDP ratio is c.10% as compared to US-24% UK- 34%. Also a significant majority of the labor force is outside of the payroll system in India which is evidenced by the low personnel registered for employee security schemes like EPF,NPS etc. It means that it is virtually impossible for India to have a payroll based stimulus as it would basically ignore most of the labor force.The fact that India dont have an universal health care system compounds the impact in case of surge of covid 19 cases. Thereby it is prudent for the government to have a strict lock-down to prevent a pandemic and the medical resources of State and Central Governments being overwhelmed. It provides the government a breather and focus their initiative in mitigating the constraints imposed on the economy by such strict lockdown measures.

FISCAL MULTIPLIER

Any macroeconomic study is incomplete without analysis of the desired fiscal multiplier effect of a stimulus package. It is defined by the marginal propensity to consume ("MPC") of the beneficiaries of the scheme. If the government has limited resources as is the case for India with lower tolerance for increased fiscal deficit, they should look for a package which could act like a adrenaline shot to the comatose economy.

The poor families usually tend to have the highest MPC as they usually spend most of their revenues on sustenance. It is the same essential goods and services which are allowed to operate in the lockdown. Thereby it would be an accurate assessment that any stimulus directed toward the families of the Public distribution system (PDS) i.e ration card holders below a certain level of income should have the desired impact of increased economic activity. Grocery stores also employ labor with a higher MPC thereby leading to the compounding effect of the stimulus i.e the fiscal multiplier.

CONSTRAINTS

Will the families be allowed to spend primarily on the essential goods - what if they have a outstanding loan and rental payments

The Government did announce a moratorium on rental collections but it needs to be strictly implemented and extended till the lock-down restrictions are eased. A prolonged moratorium is required on both rental and loan repayments (inc. interest) as it defeats the purpose of any benefit package if most of it used to pay a landlord or loan shark who doesnt have the desired MPC/fiscal multiplier effect.

If only essential goods and services are available then people with higher income usually tend to save as there are basically limited avenues to spend other than food during the lockdown

Thereby any benefits directly provided to individuals or families should be directed towards increased propensity to buy groceries and eliminate any redirection to leverage or rental costs.

FIRMS

The above direct stimulus to individuals through PDS or bank accounts can help to sustain the poorer section of society who are the hardest hit for a few months but what about firms. The actual engine of production for the economy, what is the impact of strict lockdown measures on them

There are three key factors which needs to be considered

a) Low margin industry - High fixed cost

b) High inventory

c) Largest employment - direct and indirect

First we need to accept that the government cannot allow a large number of firms to go bankrupt due to the govt lockdown as it would create a comatose climate which would be far more difficult to recover than the covid 19 pandemic. Thereby the Government should drive the initiative to hit the above three factors.

Any industry with high fixed cost ratio would be crippled and are most likely to go bankrupt. Even-though they can prevent working capital issues by reducing inventory or even laying off temporary staff but they cannot avoid the fixed costs like borrowing, property,plant and equipment maintenance and depreciation.

Firms carrying large unsold inventory either in the form of raw materials or finished goods would find it difficult to restart operations as the carrying cost of inventory would significantly impair their cash flows.

Large employers primarily in the manufacturing sector would require the most support as they would be the most likely to lay off permanent staff and reduce their purchase orders which would in turn precipitate a vicious cycle of supplier side unemployment who are primarily in the medium and small sector

FISCAL MEASURES

The government needs to announce a funding mechanism where the RBI directly invests in firms based on the above factors. A designated bank needs to be created under the supervision of RBI which is government funded. This "Covid 19 Bank" should extend long dated instruments carrying a reasonable coupon rate with contingent convertible and a mandatory redemption feature after 5 years. This would be the much need capital infusion required for the indian industry.

The current blanket announcement of 20 lakh crore loans targetting small and medium sector through an already struggling banking sector would only add to the ever increasing NPA issues. It is difficult for a listed banking institution to carry such higher risk on their balance sheet even if it is guaranteed by the RBI/Govt due to the higher capital costs associated with the same and its resultant impact on capital ratios.

Thereby this stimulus needs to be extended by the government directly through its segregated "covid 19 bank" rather than putting the onus on the banking sector. also there is no point in targetting small and medium enterprises as evidenced in the manufacturing sector they are usually engaged in the supplier or distribution side of large enterprises. If the orders from large enterprises dry up then there is no point of any stimulus. It is imperative that we target firms based on the above three key factors and target them for covid 19 financing instruments.

Usually financing for Large industries would help them to maintain their purchase orders and also meet the sale orders when demand picks up post easing of lockdown which brings us to the next important point ...... timing.

TIMING

The above fiscal measures shouldnt be implemented at the same time. Cause there is an inherent synergy between lockdown, stimulus and increased demand. In the initial phase of intense lockdown where only essential goods and services are allowed to operate, the focus should be on the fiscal multiplier stimulus like direct money transfer to high MPC families through the PDS and banking infrastructures with strict implementation of rent and loan moratorium which needs to be extended till the end of lockdown.

During the next phase of the lockdown when the restrictions are eased for industries to operate with minimal or reduced capacity, the first tranche of funding through the Covid 19 bank needs to be extended to firms based on the above three key factors. It is important that the funding is extended in a staggered manner which is coinciding with the gradual easing of the lockdown. There is no point in a giving a bulk amount to an enterprise with no vision on when they will have the opportunity to restart their operations.

This staggered cash flow funding which is in effect a capital instrument would provide the much needed breathing space for the industry to meet the increased demand on the projected consumption post lockdown.

In case there is extended lock-down due to non flattening of the covid 19 spread then the above industry fiscal stimulus needs to be on hold.

To reiterate i believe the following key features are required to restart the Indian economy

a) Immediate and regular stimulus to PDS families during lockdown.

b) Strict implementation of Rent and Loan payment holidays during lockdown

c) A Separate Covid 19 bank created with govt funding under the supervision of RBI

d) Staggered funding timed with the easing of lockdown of long dated instruments with contingent convertible and mandatory redemption feature after 5 years

e) Targeted funding to firms based on the three key factors

Wang Hao wins the Biel Chess Tournament

The Chinese are invading all the sports.Wang Hao (23 years old) with an ELO rating of 2726 and World No 19th in the FIDE Rankings managed to win the Biel Chess Festival of 2012.

Imagine a field of World No 1 Magnus Carlsen,Hikaru Nakamura,Anish Giri ....... basically the entire future of Chess and Wang Hao managing to win a tournament like that is really amazing.This is one of the Tournaments which used the 3-1-0 format.(3 points for win and 1 point for Draw) rather than the usual 1-1/2 point format.Wang seems to be maturing as a good tactical and agrresive player.I was watching his post match interview after his final match victory against Anish Giri which is embedded below.
I was really surprised at how modest he was after the victory and how he was realistic about China's chances at the Olympiad.This is one of the traits of the over performing Chinese sportstars, they are all extremely modest. There is a sense of discipline and an unrelenting work ethic which allows the Chinese to achieve the milestones they are reaching and no doubt they will one day stretch the limits of human achievements.

2% interest Loans - P2P Lending a new Phenom in China

A TOI Article about online P2P lending in China

By Zhao Ying

Borrowing money from strangers may sound like an odd proposition to some. But China's farmers are taking advantage of online peer-to-peer (P2P) lending to build better futures. Yang Yanxia, 32, mother of two from Dingxi city in northwest China's Gansu province, borrowed 3,500 yuan ($543) via Yinongdai.com, a P2P lending website, at the end of 2009 to help build her farming business. Dingxi is one of the nation's most impoverished regions, owing to low agricultural yields caused by chronic drought.

Yang's lenders were from first- and second-tier cities in China, who charged her a fixed interest rate of around 2% - much lower than the rates typically charged by Chinese banks. Before 2009, Yang's family earned only $1,553 annually from their potato farm, and even that was subject to the whims of Mother Nature. With the loan, Yang and her husband were able to rent a plot of fertile land that effectively doubled the size of cultivable land available to them. The family's new farms brought in $5,434 in just six months.

Yang then used the profits to construct a barn to raise cattle, which she believes will provide a more reliable source of income. The world's first P2P lending service was launched in the United Kingdom in 2005 and has since become popular worldwide. Most of China's state-owned commercial banks are unlikely to lend to people like Yang, either because the loans sought are too small or because they have nothing to offer as collateral. China's P2P lending platforms give people like Yang an alternative.

Prospective borrowers must provide identification as well as proof of personal assets for a credit rating from the P2P platforms. Lenders can pick who they want to lend to based on the borrower's objectives, the terms of repayment and the interest rates offered by borrowers. Since Yang was unfamiliar with computers, she contacted a local micro-credit service centre for the online procedure. "We submitted her information to the P2P website after examining her credit and family situation carefully," says Yang Farong, director of the Minfuxinrong Micro-credit Service Center. The centre has been helping the people of Dingxi acquire loans for the past five years.

Since 2009, when Yinongdai.com started offering P2P services, 217 farming households in Dingxi have benefited to the tune of $119,544 in low-interest loans, Yang Farong says. Yang Yanxia only had to pay an extra $10.50 to the local micro-credit service centre, in addition to her $543 principal. "I never expected to borrow money from strangers. It's so exciting to know that personal credit still has value," she says. Canadian-Chinese Robert Li, 15, who studies at the Shanghai American School, became a P2P lender two years ago. "The amount of money spent on a single meal in the city can be enough to change the life of a family," says Li, who has lent $4,416 in loans so far with the help of his family.


Li believes that direct online lending is more transparent than charitable donations, and allows lenders greater discretion in providing loans. "Families with school-age children, particularly girls, are our primary targets," Li's mother Vivian says. The fact that there have been no delays in the repayment of loans offered through Yinongdai.com has also impressed her. "This proves that disadvantaged people can still have credit," she says. So far, Yinongdai.com has disbursed $434,705 in loans to nearly 1,000 rural families across China.

As a new form of micro-financing, P2P lending "not only fills in gaps left by the banking system, but also offers convenience to rural borrowers," says Bai Chengyu, secretary-general of China Association of Microfinance. However, P2P services that are designed to help people in need won't always be able to count on a steady supply of funds, as investors invariably seek higher profits amid inflation risks, Bai says.

Can such a venture work in India. The first problem is Collection. Second who will lend money at 2% when our FD rates are hovering around 8-10%.Moreover this is online ,the legal tender of such a transaction is always difficult. Rather than a P2P which is unorganised network i would prefer that reputed banks like ICICI,HDFC can provide this banking service by using their banking facilities to connect borrowers and micro lenders like salaried employees.They can even show the credit history of the borrower and rate them and divide them into categories and if they have good history of repayment then they can have lower interest rates like 2%.and other categories can have slightly higher interest rates like 4-6% but never above 6%. But we have to understand that the lender is basically giving up on savings as he is lending money at lower interest rates to complete strangers. We are dealing with honesty and credibility here which is very difficult to rely on these days.

China earthquake: Does anyone care

There was a huge earthquake in China killing almost 2183 people(official figure).There may be even more casualties but does anyone care.

The earthquake has occurred in Qinghai province of China where the population is 93% of Tibetan ethnicity.The casualties were high in this under-developed region of China.China declared a Day of mourning and even conducted a gala TV event with celebrities and politicians on CCTV and raised around 322 million US $.
But the surprising fact in all this was the fact that no outside Government provided any help except for verbal condolences.China said that they would accept monetary help but is not likely to allow external aid agencies to enter the province due to the ruggedness of the terrain with no facilities for frequent air traffic.
This is the net help received by China so far
American Red Cross donated 50,000$ (r u kiddin me)
No Country has given aid till now even after China has said that monetary help is welcome.
In India more aid has come for a far less severe crisis in Tsunami with millions in donations and relief workers
We had one most comprehensive relief programs during Bhuj earthquake in Gujarat where almost every country sent Monetary and Physical help.Still remember the pictures of Tents representing various countries in Bhuj.The Russians,Belgians,Americans all played their part in the rescue work.

Why this apathy towards the victims of China.Some say it is due to the paranoid frenzy of foreign influence disturbing the social stability of china but atleast monetary help could have been given to show the world's solidarity with China.
My heart goes to the lives lost in China.