There have been several articles about how China's currency is being deliberately undervalued as a way to keep China's exports at a high level. By having an undervalued currency China's exports are more competitive due to this cost advantage. The IMF has a report that China's currency is undervalued, but the Chinese government has been blocking it's publication.

A more useful tool I have found for comparing currencies is The Big Mac Index published by the Economist. The Big Mac Index compares the cost of the Big Mac in different countries. Per the index, China's currency is undervalued by 49%. Paul Krugman uses 20 to 40%. Other countries that are competing with China, such as Taiwan, Thailand, and Indonesia also have undervalued currencies. Krugman also has a interesting technical explanation on why it does not matter if China starts to sell it's US treasury holdings - China's Water Pistol - Paul Krugman Blog

Another good article that mentions the IMF and China - China Uses Global Trade Rules to Its Advantage - NY Times.

Labels: china's future, Chinese Economics, US Chinese Image

Mercantilism is where a country deliberately pushes the exports of products from their country while keeping imports to a minimum.

With security breaches the great thing about it is there is 100% deniability. There is always a chance that your country is being framed. And with the 100% deniability, there is no downside to Cyber Merchantism for a country. What is the cost of stealing competitive information (oil reserve information) from a US Oil company that can help your own domestic oil industry on bidding? None, since nobody can prove your country did it.

For any software used in China that uses encryption, the Chinese government requires a company to turn over the keys (access) to them. The US has similar requirements for criminal investigations through court orders. What happened with Skype for example in China, was somebody was monitoring conversations and scanning them for keywords, and then copying them. The challenge is what happens when the Chinese government favors domestic competition over your foreign site?

An example of this in China was initially Google's site for a while was being forwarded to a competitors. So if you typed in Google.cop Baidu would come put. Another example was when Google.cn was shut down due to pornography.

From a software prospective China was going to require that all PC's be installed with software to filter the Internet. Unfortunately it seems the software, Green Dam, had large parts of it copied from a US Software Cybersitter. Currently Cybersitter is suing for $2.2 Billion dollars over this. Since Green Dam has no foreign assets I don't see a cost for them copying the code. Cybersitter is also going after PC Manufacturers who installed the software that have foreign assets such as Sony, Lenovo, Toshiba, Acer, etc.

What is happening in the hacker attacks is an outside entitity is gaining control of a computer. Making it into a zombie, which then gives them access to the network that computer is on. And specific people are being targeted using a combination of human engineering and zero day flaws. Through E-Mails sent directly to a person using their name and having a subject line that appears real, with a link or attached pdf, that when clicked on gives control of the computer.

And the sophistication of the hacking is amazing with different groups being involved in different areas. One group does the initial penetration, and then another group would search out needed information, and a third group would actually move the information out.

Why would a country do Cyber Merchantism? The simple answer is to give their own industry help. And this applies from raw materials, manufacturing, to the information economy. The goal of China's government is move up the economic value food chain, to advance from being just a place for low cost hub for manufacturing, into a producer and developer of high technology products.

I found this quote interesting:

“The China threat is constant,” says Shawn Carpenter, principal forensics analyst for NetWitness, a cybersecurity company. “If there’s valuable intellectual property out there, there are people in China and elsewhere who want to take it. It’s the new battlefield – low risk and low investment with high gain.”

References:

US oil industry hit by cyberattacks: Was China involved? - Christian Science Monitor

In Digital Combat, U.S. Finds No Easy Deterrent - NY Times.

Google Attack Part of Widespread Spying Effort - IDG

China Issues Sharp Rebuke to U.S. Calls for an Investigation on Google Attacks - NY Times.

China retreats on Internet Filtering SoftwareChina Requires Censoring on New PCs

Labels: china economy, china's future, Chinese Economics, google

My earlier post today on Chinese Drug Contamination - 4 Deaths possible links was eye opening. This NY Times article shows even more:

Key Points:

1. China has 700 Drug Factories exporting to the US.
2. The plant that made Heparin was never inspected by the US FDA, even though it was supposed to when it started production to send to the US.
3. The FDA only inspects 10-20 Chinese Drug plants per year. At this rate it will take 40-50 years.

Labels: china food safety, Chinese Economics

Interesting article in the NY Times on China's restrictions on US imports. Restrictions on imports has been a staple of many countries so they can protect their domestic industries and build them up. Historically this has been done with tariffs, but with the WTO that supports the General Agreement on Tariffs and Trade (typically abbreviated GATT) that has resulted in a decrease in tarrifs as well as empowering countries to take others to court (WTO). So protectionism has become a bit more careful... China recently started requiring inspections of medical equipment imported from abroad. This is one sector the US has been doing well in. The result of this is to favor domestic suppliers. Same thing is happening in Cell Phones and other standards. For example with the DVD standard, all DVD Players and even disks need to pay a royalty fee to the various patent holders (all non-Chinese Companies). So if China can develop their own standard, it helps local industries. Economist has some great articles on China's economy, their technology development challenges, and intellectual property issues.

All of the above is probably a bit confusing. Simply - China wants to move up the food chain of value in producing goods. Another Economist article mentioned how little of the pie China gets for the iPod, where all the real margin goes to companies outside China even though it is assembled in China.

Labels: Chinese Economics