DEALINGS between India and China are stunted in many ways. Rich cultural links once existed long ago, from the study of eclipses to Buddhist chanting, but hardly anyone remembers that today, laments Amartya Sen, a Nobel-prize-winning economist. After a love-in during the 1950s, China thumped India in a border war in 1962, and the two have continued to growl over their high-altitude frontier since. Indians envy China’s economic rise, but console themselves by pointing out that it is no democracy. Aside from stiff displays of fraternity at summits, most recently the G20 bash in Mexico on June 18th-19th, China seems not to think much about ...]]> Friend, enemy, rival, investor
How can India make its economic relations with China less lopsided?
Jun 30th 2012 | MUMBAI | from the print edition

DEALINGS between India and China are stunted in many ways. Rich cultural links once existed long ago, from the study of eclipses to Buddhist chanting, but hardly anyone remembers that today, laments Amartya Sen, a Nobel-prize-winning economist. After a love-in during the 1950s, China thumped India in a border war in 1962, and the two have continued to growl over their high-altitude frontier since. Indians envy China’s economic rise, but console themselves by pointing out that it is no democracy. Aside from stiff displays of fraternity at summits, most recently the G20 bash in Mexico on June 18th-19th, China seems not to think much about India at all. Investment flows are negligible. There are still no direct flights between Beijing or Shanghai and Mumbai, India’s commercial hub.

And yet a huge shift has taken place in the make-up of Indian trade. When India began to liberalise its economy in 1991, the West still dominated the world economy, and it was to the West that India turned for trade. China’s rise has now changed everything—for India, too. China is now its third-largest trading partner in goods, and the biggest if you include Hong Kong. For China’s East Asian neighbours a dominant trade with China is a given, but Indians are still trying to digest the development.

Rising trade with China has been good for India. It mainly imports Chinese capital goods, with firms benefiting from cheap and decent gear. The giant Reliance Group has bought kit for power stations and telecoms networks—partly paid for with competitive Chinese loans. Chinese firms have often strived to win such business. Pan Song of Shanghai Electric, which makes power equipment for Reliance, among others, recounts years of hard slog in India.

But for India the China connection is also disconcerting. For every dollar’s worth of exports to China, India imports three, leading to a trade deficit of up to $40 billion in the year to March 2012, or about 2% of GDP (see chart). China accounts for a fifth of India’s overall trade deficit with the world, over half if oil is excluded. Given India’s balance-of-payments woes—the rupee has fallen by a fifth in the past year—even Chinese businessmen worry that the discrepancy in bilateral trade is unhealthy.

And it may grow larger. For a start, the little manufacturing India has tends to be quite high-end. As Chinese firms shift to more complex forms of production, they will make life harder for Indian firms. Saif Qureishi of Kryfs, which makes the metal cores of transformers used in, for example, power grids, says China has won a third of the Indian transformer market and is giving locals “a bloody nose”.

Meanwhile, India does not produce much that China wants to buy, a hole that British colonial rulers once plugged with exports of Indian opium. Today India’s main exports to China are less iniquitous raw materials, mainly minerals and cotton. But their continuing success is not a given. In the past two years the rivers flowing down to Goa on India’s west coast have teemed with barges carrying iron ore bound for China. Yet a crackdown in late 2011 on illegal mining has seen volumes fall by a fifth, says Atul Jadhav, of the Goa Barge Owners’ Association. In March India briefly banned cotton exports because of fears of shortages.

India is indeed prone to protectionist impulses. No bilateral free-trade agreement exists, and India often flirts with slapping duties on Chinese imports, most recently of power equipment. The Indian sales of Huawei, a telecoms firm, fell by half after it was hit with anti-dumping duties and labelled a security risk. Chinese firms complain of trouble with visas.

More hopefully, India wants to boost its exports to China. At the G20 summit it struck a deal to sell more rice. India would also like leading firms in industries including drugs, carmaking and IT to have better access to China. Most already have a presence, if only for procurement. Yet what is good for Indian multinationals may not generate jobs or foreign exchange for India. Tata Sons, with the biggest China operation, mainly sells Range Rover cars, made in Britain, and IT services, largely employing local Chinese staff.

And so the trade deficit looks likely to stay. Yet China could do more to help finance it, if given the chance. More loans from Chinese banks would be good—so far India has been wary, with only one Chinese bank allowed to have a branch there. More foreign direct investment would help, too. In 2011 Narendra Modi, the chief minister of Gujarat state, visited China to drum up investment. More often, India seems to regard FDI as the gift of Western multinationals alone.

It need not be so. In a dusty bit of Maharashtra state sits one of the first Chinese factories in India, run by Sany, which makes diggers and other construction machines. Richard Deng, its boss, says it has invested $70m and employs 460 locals; if all goes to plan it will double in size before long. T.C.A. Ranganathan, chairman of Exim Bank of India, reckons ten Chinese firms have or are building plants in India, and 100 firms have offices there.

Despite the usual cold sweats foreigners have about India (nightmarish red tape, a cultural gap), Chinese executives agree that more local production will take place. Sun Haiyan of Trina Solar, a solar-equipment firm, says that, as a global company, it has to manufacture locally. Wu Rong of ZTE, a telecoms concern, says it employs mainly locals and is producing more in India. Huawei, its India problems notwithstanding, is building a new research campus in Bangalore. Niu Qingbao, China’s consul in Mumbai, says Chinese firms are mustard-keen to invest in infrastructure, if also a little daunted.

Might this be the start of a wave of Chinese investment? India needs outside capital, and expertise in manufacturing and infrastructure. China must invest its surplus funds abroad, ideally not just in government bonds—as mostly happens in America—and ideally in countries that are not about to go belly up, as may happen in Europe. Chinese investment in India is an idea whose time has come, if only the two sides can conquer a legacy of mistrust.

Seattle

SOME budding entrepreneurs and computer whizzes based here in the Pacific Northwest are starting to turn heads down in Silicon Valley.

They are professors and students at the University of Washington, home to what may be the best computer science department you’ve never heard of.

Although Stanford is considered the Hogwarts of techdom, U.W. has quietly established itself as the other West Coast nexus of the information economy. And while Seattle-area tech icons like Microsoft and Amazon have long relied on U.W. — pronounced “U-dub” by locals — as an incubator of talent and ideas, the Valley’s hottest companies have been getting the message, too.

Their executives have begun streaming up the coast to Seattle, fueled by ...]]> July 7, 2012
A Northwest Pipeline to Silicon Valley
By NICK WINGFIELD

Seattle

SOME budding entrepreneurs and computer whizzes based here in the Pacific Northwest are starting to turn heads down in Silicon Valley.

They are professors and students at the University of Washington, home to what may be the best computer science department you’ve never heard of.

Although Stanford is considered the Hogwarts of techdom, U.W. has quietly established itself as the other West Coast nexus of the information economy. And while Seattle-area tech icons like Microsoft and Amazon have long relied on U.W. — pronounced “U-dub” by locals — as an incubator of talent and ideas, the Valley’s hottest companies have been getting the message, too.

Their executives have begun streaming up the coast to Seattle, fueled by a talent arms race for programmers. Facebook, Zynga and Google have opened offices in the area, trying to woo U.W. engineers who’d rather live here, where taxes and home prices are lower, even if mist and dark skies envelop the scenery for much of the year.

“It’s the most underrated computer science department I’ve seen,” said Ari Steinberg, a Facebook engineer who runs the company’s Seattle office, which opened in early 2010.

The university’s computer science and engineering department, ensconced on a patch of land near Husky Stadium and Lake Washington, has come a long way since the early 1970s. During that time, two Seattle teenagers, Bill Gates and Paul G. Allen, honed programming skills by sneaking into the department to tinker on its computers. The department’s stature began to pick up in the 90s, as the university began to significantly expand its computer science faculty with new stars like Oren Etzioni.

At the same time, Microsoft, the company that Mr. Gates and Mr. Allen founded, jump-started the Seattle technology scene and many fortunes along with it. Mr. Gates, Mr. Allen and others became big contributors, helping the university build a new home for its computer science program.

In recent years, the department has deepened its ties with tech companies like Google, helping to gain an edge in teaching programming for the cloud, a big trend in computing.

In the most recent rankings by U.S. News & World Report, the graduate program placed seventh in the nation, right behind Cornell and the University of Illinois at Urbana-Champaign. (Tied for first were Stanford, Carnegie Mellon, the Massachusetts Institute of Technology and the University of California, Berkeley.)

The U.W. department’s growing recognition has been a blessing for its students, who are getting juicier job offers with top companies. But some Seattle technology executives say the competition is crimping the city’s homegrown technology scene, making it into something like a colony of Silicon Valley.

According to the university, some 35 percent of its computer science graduates end up working at Amazon, Google or Microsoft in a typical year; 15 percent go to other big companies and 30 percent to small companies or start-ups. More than 80 percent of the program’s students come from Washington State, and the same percentage end up staying in the state after graduating, even if they work for companies based in Silicon Valley.

The biggest problem with the university’s program is that it can’t turn out graduates fast enough. Engineers are in short supply in the computer field generally, but this is a particular concern in the Seattle tech market.

“We need that program to be a lot bigger,” says Spencer Rascoff, chief executive of Zillow, a real estate Web site based in Seattle.

IN a conference room at the university, overlooking the sparkling waters of Lake Washington, Christophe Bisciglia told a crowd of dozens of students what his secret weapon was: them.

Mr. Bisciglia, 31, an entrepreneur and former star Google engineer, was visiting during the spring to speak on a panel about start-ups to computer science students. He said he has gained an “unfair advantage” for WibiData, his new San Francisco-based company, by recruiting from the university’s computer science department, where two-thirds of his employees once studied.

“Down in the Valley, it’s all Stanford this and that,” said Mr. Bisciglia, himself a U.W. graduate. “While they turn out students that are good, U.W. turns out students that are every bit as good.”

The deep connections between U.W.’s computer science program and the Seattle tech scene are written on the wall, literally. The department is housed in the Paul G. Allen Center for Computer Science and Engineering, a brick-and-glass building with a soaring, six-story atrium in the center of campus.

The building, which opened in 2003, provided a big boost to the program, adding lab space for robotics experiments and replacing a structure that “was falling down around us,” said Ed Lazowska, who joined the computer science department in 1977, and was chairman for eight years.

Mr. Allen was the leading donor for the construction of the building, along with Mr. Gates. Mr. Lazowska holds the Bill & Melinda Gates Chair in Computer Science and Engineering. Many other notables from Seattle tech companies have also contributed money.

Like their peers at Stanford, U.W.’s computer science faculty members say that one of their program’s strengths is the engagement between professors and the tech industry that will one day employ most of the graduates. Henry M. Levy, the current department chairman, is a co-founder of two tech start-ups. Mr. Etzioni is a co-founder of several Internet companies that were later acquired, including Farecast, an airfare price prediction service that Microsoft bought for $115 million in 2008.

Along with four Washington graduates, Mr. Etzioni recently formed another company, Decide.com, which helps consumers time their purchases of iPads and other electronics to avoid missing price drops. He is a venture partner at Madrona, a Seattle venture capital firm that invested in Decide.

While Stanford is a famously entrepreneurial environment, where business plans are hatched in dorm rooms, the rap on U.W. computer science students is that they tend to be more risk-averse, reflexively gravitating toward bigger companies for employment.

Mr. Etzioni, though, pushes students to jump into the start-up world. In May, he moderated a panel at the university on the subject with Mr. Bisciglia; Glenn Kelman, C.E.O. of the Web real estate company Redfin; and others. About 60 students peppered the executives with questions about start-up life.

“He’s done a great job of creating successful start-ups and of bringing along others,” said Brad Silverberg, a former Microsoft executive who is now a venture capitalist at Ignition Partners in Bellevue, Wash.

In an interview in his office on campus, Mr. Etzioni conceded that the U.W. brand “is definitely weaker” than that of Stanford in computer science, but he says the department has become increasingly competitive. “The students are so much stronger than they were five or 10 years ago,” he said.

In May, Seth Cooper, a Washington professor who earned his Ph.D. from the department last year, won the Association for Computing Machinery doctoral dissertation award, one of the field’s most prestigious prizes. His dissertation described how video games could be used to solve complex scientific problems. He was a co-creator of one game, Foldit, that harnessed the efforts of tens of thousands of players to solve the structure of a protein useful in the fight against H.I.V.

Sidhant Gupta, a Ph.D. student in computer science, is working on low-cost sensing technologies that can help people monitor their energy use. Mr. Gupta, who received his master’s degree from the Georgia Institute of Technology, said U.W. is a collegial environment where experts in different computer science disciplines are encouraged to collaborate.

“It feels like one big family,” said Mr. Gupta, who passed up offers at M.I.T. and other schools to study at Washington. “No one is trying to back-stab you to get ahead of you. That’s really different than other programs.”

Still, when Mr. Gupta went back to his native India and told his friends he was going to U.W., they told him they had never heard of it.

WASHINGTON was one of the earliest schools to teach undergraduates how to program for the cloud, where software sometimes needs to run on thousands of machines at the same time, rather than on a single one. In 2006, Mr. Bisciglia, then a Google engineer, persuaded his boss to let him teach a course at his alma mater about writing software for huge clusters of computers.

Mr. Bisciglia said he taught the course for three semesters. By the end, Google had hired half the students in the classes, an unusual move. “Google doesn’t hire half of any group of people,” he said.

Mr. Lazowska said the university turned away about three-quarters of all U.W. students who apply to major in computer science because it doesn’t have the faculty to educate them, even though there is huge demand for engineers. Belt-tightening has reduced state money for U.W. as a whole by nearly 50 percent since 2009, according to the university.

“This is having a serious impact,” he said, “on the ability of small companies to grow and succeed and big companies to hire locally.”

Recognizing this, the university recently agreed to increase the budget of the computer science department, which will allow it to grant a third more degrees over the next few years, according to Mr. Lazowska.

He is also looking elsewhere for help. This year, he sent an e-mail to Jeff Bezos, the Amazon C.E.O., asking if he would endow two professorships for experts in the field of machine learning whom the university wanted to hire: Carlos Guestrin of Carnegie Mellon and Emily B. Fox of the University of Pennsylvania. Within 48 hours, Mr. Bezos responded that he would not personally finance the positions, but that Amazon would, Mr. Lazowska said.

Ty Rogers, an Amazon spokesman, declined to comment on Amazon’s funding of the professorships and Mr. Bezos’s involvement in recruiting the professors. In an earlier interview, Susan Harker, director of global talent acquisition at Amazon, described the U.W. as one of the Internet retailer’s “very top pipelines” for talent.

In March, as they were considering the offer, Mr. Guestrin and Ms. Fox, who are engaged, visited the university and were impressed that Amazon’s C.E.O. personally showed up to help persuade them to join the school. “I’ve never heard of this,” Mr. Guestrin said. “It made a tremendous difference for us.”

The two, part of a wave of new hires in the past few months, begin teaching at the university in the fall.

Among the food items, only vegetable and fruit price inflation accelerated in September, partly reflecting seasonality. Previous inflation drivers such as pork, edible oil and egg prices have declined. The PPI index has been flat on a mom basis for the past three months in a row. Within raw materials, non-ferrous metals and steel prices are on a downward trend.

Our forecast of continued CPI disinflation is based on the following observations: 1) we expect the ...]]> CPI and PPI inflation in September came in at 6.1%yoy and 6.5%yoy respectively. Both are in line with our expectations and declined from the August readings of 6.2% and 7.3%. This confirms our view that inflation pressure is easing. We expect CPI inflation to fall to 5.3% in October and to 4% in December.

Among the food items, only vegetable and fruit price inflation accelerated in September, partly reflecting seasonality. Previous inflation drivers such as pork, edible oil and egg prices have declined. The PPI index has been flat on a mom basis for the past three months in a row. Within raw materials, non-ferrous metals and steel prices are on a downward trend.

Our forecast of continued CPI disinflation is based on the following observations: 1) we expect the European economy to enter into a recession in Q4 this year and Q1 next year, which will imply further slowdown in China’s export demand. China’s economic slowdown, led by weaker export demand, would help reduce inflation; 2) food prices and oil prices have declined in the past weeks (the daily agriculture index fell from 199 to 191 in past weeks, and the retail gasoline prices were cut), suggesting that food and energy prices should become less of an inflationary source; 3) some raw materials prices (such as non ferrous metal, oil, and steel products) began to decline in the past months, and may trend down further as the global economy weakens and inventory destocking becomes more evident; 4) China’s property sales declined by 40% yoy in 35 cities in the past weeks, which will likely depress property prices (and rentals after a while). The resulting slowdown in property construction activities may also increase the downward pressure on raw materials prices.

The PBOC also reported its monetary indicators today. M2 growth decelerated further to 13% yoy in September, down from 13.5% in August. New RMB lending fell further to RMB470bn in September (vs RMB549bn in August), the lowest in 21 months. Both M2 growth and new lending are significantly lower than consensus forecasts but closer to our expectations. An argument for the hawks is that due to growing shadow banking or non-bank financing activities the official M2/loan data no longer accurately reflect the monetary condition, and the underlying monetary expansion is faster by a few percentage points than the official M2 growth.

Our outlook for monetary policy is that it will not be relaxed in the near future. Although the September CPI and PPI inflation rates have declined, a CPI reading of 6% yoy is still well above the government’s tolerance level, and the modest slowdown in FAI and IP so far is still viewed as “desirable”. In our view, it will take some significantly worse economic data points, including shaper declines in export growth, property sales, property prices and commodities prices, before the government may ease macro policy in a meaningful way.

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