October 01, 2007

Apologies for the lackidasical posting...there's some life changing events going on.

Catching up on some reading and came across David Webb's Incredibubble article...go read it and start worrying. Bubbles are fun to watch up when they burst they tend to make a mess.

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[boomerang] Posted by Simon at 11:00
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July 30, 2007
Inequal numbers

China's official statistics are well known to be woeful...John Ganaut reports on how the wealthy (unsurprisingly) hide much of their income and wealth:

PROFESSOR Wang Xiaolu sparked an online uproar two months ago by publishing the results of his "grey economy" study in China's leading business magazine, Caijing.

His survey showed the top 10 per cent of earners were successfully hiding about two-thirds of their income from the National Bureau of Statistics, meaning official estimates of income inequality, gross domestic product and tax evasion are all woefully understated.

That senior government officials studied his work, rather than bury it, shows how the realm of economic policy has been largely protected from the heavy hand of government censorship.

More below the jump...

It probably helps that Wang's National Economic Research Institute is not beholden to its benefactors. "We receive no money from the Government, so I am free to say what I like," Wang says.

Now the economics professor is set to do it all again. This time, instead of identifying the state as the agent of necessary reform, he sees it as the object of reform.

He believes the glaring contradiction between China's lean, free-market capitalism and its inflating, closed and corruptable government is about to become the country's central economic challenge.

Wang's economics training was practical, if not conventional. His formal education ended in 1966 when Beijing was up-ended by the euphoric madness of Mao Zedong's cultural revolution. When he should have been finishing Year 8, he was went to farm corn and sorghum at a village called Xiaoxiangzhai in a poor crevice of Shanxi province, in China's mid-west.

When he should have been at university, Wang worked at a Shanxi bauxite mine, then an aluminium smelter and an electronic motor factory in Beijing.

He says he was happy enough learning about economics in his country exile by reading Karl Marx, Friedrich Engels and some contraband works of Nobel laureate Paul Samuelson.

As a peasant, Wang wasn't as useless by the time he left as when he arrived, he says, but Mao could probably have put his talents to better use.

In his new paper, jointly written with Professor Fan Gang, a People's Bank of China monetary policy committee member, and PhD candidate Liu Peng, Wang calculates that Chinese productivity rose by just 0.74 per cent a year under Mao.

In 1976 Mao died, as did the Cultural Revolution. Deng Xiaoping soon won control of the Communist Party and Wang was invited into the new Chinese Academy of Social Sciences. He had never studied in senior high school, but neither had most other job applicants his age.

Wang argues that the Chinese economy has been propelled by three distinct surges of productivity, each triggered by institutional reforms that freed resources to be allocated to more efficient uses.

In the first, soon after Deng's rise, peasants were unshackled from their communes. They moved out of agriculture and earned money from whatever they produced. China's productivity growth quadrupled to 2.9 per cent in the 1980s and GDP growth rose from 6 to 10 per cent.

Second, in the late 1980s, as Wang was applying to become an academic at the Australian National University without ever having attended an undergraduate class, peasants were freed to find higher valued work in the city.

The urbanisation phenomenon, which is still continuing, pushed productivity growth to about 4.4 per cent in the 1990s.

Third, the rise of a new entrepreneurial class has diverted resources from China's hapless state-owned sector. Workers were freed to jump from wasteful government entities to more efficient private ones.

In a separate marketisation survey, Wang shows the private market economy (which excludes state-controlled listed companies) now accounts for 69.2 per cent of China's economic output, up from 22.4 per cent in 1978. Privatisation helped to sustain productivity growth at about 3.6 per cent between 1999 and 2005.

China is getting richer largely because the Government has got out of the way and allowed resources to be allocated more efficiently. But now the early agricultural reforms are complete, there is not much left to be privatised and urbanisation is becoming proportionately less important.

Wang argues that the Government needs to remove itself from part of the economy for a fourth time if China is to sustain its phenomenal growth rate.

"The first thing we need is transparency to stop corruption and increase efficiency," Wang says.

His report shows the Government bureaucracy is getting much bigger, even as the services it delivers are shrinking.

Certainly, a glance at recent Chinese media would suggest that corruption and its associated inefficiencies have never been a bigger problem.

Local officials are covering up a child-slave trade in Shanxi; a former Shanghai party boss is about to be prosecuted for "huge" embezzlements; the former head of Sinopec, Asia's largest oil refiner, has been detained for questioning.

And it goes on.

While some of China's intellectuals are lamenting the squandered opportunities for political reform since 1989, some of its leading economists believe the state still has a choice.

It can make its workings transparent and accountable to the people it is meant to serve, or it can lead the country back to the miserable productivity and GDP growth rates that China has not known since the rise of Deng Xiaoping.

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[boomerang] Posted by Simon at 13:21
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July 24, 2007
Scenes from a bubble, episode 35158353

Cash that's worth morth than face value?The classic cash box trap:

On their second day of trading, units of the HSBC China Dragon Fund (0820) soared 41.5 percent on heavy turnover, driven by the irrational exuberance of foreign funds and asset managers toward the A-share market, analysts said.

Both institutional investors and retail punters, bullish on the prospects of an actively managed China fund - despite the fact that it has yet to put any money into the frenzied A-share market - snapped up the units...

"This is totally crazy. It is irrational exuberance," said Fulbright Securities general manager Francis Lun Sheung- nim. "The fund has not even started to do any investing, and [the units] are skyrocketing like magic. All they have now is just cash. It is irrational." Lun expects the unit price of the fund to correct in the near future.

Couldn't have said it better myself.

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[boomerang] Posted by Simon at 08:48
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July 19, 2007
Pork chop

The pork blight is hitting hard...but I wouldn't be racing to CUKH for an economics degree any time soon:

Economist Fred Kwan Yum-keung, an associate professor of economics and finance at the City University of Hong Kong, said higher pork prices will not generate inflation. He explained that inflation is reflected in the Consumer Price Index which is based on a basket of commodities.

Because pork is only one of the many commodities involved, a surge in pork prices will not cause the index to rise.

China's just reported an incredible 11.5% GDP growth and a large 4.4% CPI rise, but CPI ex food is only up 0.7%. If only everybody would stop eating all would be well with the numbers.

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[boomerang] Posted by Simon at 10:44
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July 13, 2007
Noodle soup

It's the 86th birthday of the CCP...and things have changed a bit since they started running around the countryside killing landlords and promising revolution. Up in Gansu province, the municipal authorities have tried an old-fashioned way of dealing with inflation:

As the debate boils over rising prices of the favorite bowl of beef noodles in Lanzhou in Gansu province, municipal authorities insisted a price cap will stay.

But price controls announced June 26 that in "an ordinary grade restaurant," a large bowl of beef noodles cannot be sold for more than 2.5 yuan (HK$2.58), and no more than 2.3 yuan for a small bowl, has given rise to arguments on how far the government should interfere in commercial decisions...

The pricing move is not seen in a good light by top policy planners. The National Development and Reform Commission said Lanzhou's move is not in keeping with the "rules of the market economy."

A scholar at the Chinese Academy of Social Sciences remarked that the intervention was a "return to a planned economy."

Yes, the Communists are worried about playing with market economics and returning to a planned economy. What a difference 86 years makes.

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[boomerang] Posted by Simon at 12:28
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May 29, 2007
Inside the fake factory

Apologies for the prolonged absence.

To keep you going while I get back into things, Justin Mitchell visits a factory making fakes watches in Shenzhen...at least I think the factory is real. The tag line beings "Inside a counterfeit factory in Shenzhen..." The metaphysics of whether a factory could be real or fake while making fakes is something best left to someone else.

On another note, it has been incredibly clear in Hong Kong the past week or so, as the rain washes away the typicaly haze and pollution. The shame of this city is it is beautiful to look at when you can see it.

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[boomerang] Posted by Simon at 13:14
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May 02, 2007
Froth and bubble

Just keeping a track of these things for my book: "China didn't even the bubble, but...":

New A-share trading accounts opened by frenzied mainland retail investors look set to exceed 10 million for the year next week when China's stock market resumes trading after the Labor Day holidays.
Some 4.75 million new accounts were likely added in April alone, according to the latest data from the China Securities Depository and Clearing Corp.

The single-day record of 311,110 new accounts was set April 24. For the five days ended last Friday, a total of 1.48 million new accounts was recorded - a weekly record...Many mainland investors are suspected of opening more than one account - inflating the number of retail investors entering the market - nevertheless the speed of new accounts being opened over the past two months is dramatic.

And are you still puzzling why the A Shares (ie those listed on Chinese exchanges) are at such massive premiums to H Shares (shares in the same companies but listed in Hong Kong)? This might help:
It is believed the new accounts would have become active immediately. Assuming each account holder invested a conservative 20,000 yuan (HK$20,302) into the A-share market, this translates into more than 4 billion yuan pouring in each day for the past three weeks - a staggering 60 billion yuan.
As an example: Chalco is worth almost the same as Alcoa, based on its A shares. The A shares closed at 18.51 yuan, while the H shares closed at HK$9.29. The HK dollar is pretty close to parity with the yuan. So the A shares are double the H shares, but because there's not way to go short those A shares the arbitrage remains wide open (put that in your efficient markets theory). Here's a quote from the article:
A shares, available only to mainland residents, trade at a premium to their Hong Kong counterparts as China's markets are flooded with funds but short on investment options, while investors in the Hong Kong market tend to be more rational and cautious, Yip said.

For example, A shares of Jiangxi Copper (0358) closed Monday at 25.12 yuan, or a 127 percent premium over its H shares, which closed at HK$11.20. Sinopec Yizheng Chemical Fibre (1033) trades at a 300 percent premium of its A shares over its H shares.

Naturally this has lead to Hong Kong fretting that it will lose its status as the main centre for raising capital for Chinese firms. But if you're a Chinese firm, you're doing yourself a disservice if you don't offer shares into such a market.

At least you can tell your grandkids you were there during the madness.

Update: Over at Marginal Revolution, some bubbles can be good for the economy.

And Philip Bowring on China's baby steps bubble.

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[boomerang] Posted by Simon at 11:56
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April 19, 2007
Bubble watch

More proof of the eventual disaster that is China's stock market. From The Standard, 1.142 million new A-share accounts opened in just 5 days. The Shanghai index has tripled in the past 18 months. And Hong Kong isn't immune, as the IPO games continue:

Mainland property developer Country Garden Holdings, which will make its trading debut tomorrow, priced its shares at HK$5.38 - the top end of the indicative price range - after it tied up HK$329 billion in its retail tranche during its public offering, the second largest lock-up in history...China Moly locked up HK$296 billion, the third-highest total after Country Garden.
THe game is simple: people apply for far more shares than they actually want, in order to get a better allocations. The punters will often borrow on margin to get the financing needed, and it all works well so long as the IPO is "hot" and the shares trade at a premium once they list.

But if they don't...these merry-go-rounds don't last forever.

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[boomerang] Posted by Simon at 12:18
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April 17, 2007
The China circle of economics

Two good Bloomberg articles on some of the economic problems facing China, one macro and one micro:

1. William Pesek looks at the explosive growth of China's foreign exchange reserves. China is rapidly attracting capital inflows, it's stock market has tripled in 12 months and is clearly in a bubble and despite the PBoC's efforts it keeps getting worse. The answers? Well the yuan has already started appreciating (albeit slowly) and things have only gotten worse. China is awash with money and liquidity. There's one way out of the mess: the PBoC could stage a massive bonfire of all those US dollars in their vaults (even though in reality they're just bits and bytes, but that's not anywhere as near as enticing an image). Sure it's destruction of wealth accumulated through the hard work of millions of citizens, but it eliminates the liquidity problem with a puff of smoke.

2. Two reports look at Dongguan's South China Mall and find in it's emptyness a microcosm (if the world's biggest shopping centre can be a microcosm of anything!) of another Chinese economic problem: too much investment in non-productive assets (i.e. real estate) and not enough domestic consumption to take over the export-driven economic growth engine. Without increased spending by Chinese citizens, the country will continue to rely on its exports to grow, which will increase all the pressures and problems outlined in the first article above.

While you contemplate all that, bear in mind China has managed to grow at an amazing rate for a lengthy period of time. In the long term China will continue to grow and amaze, but it's going to be a bumpy ride.

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[boomerang] Posted by Simon at 11:03
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April 13, 2007
Nailing nail houses


The SCMP reports on the latest craze in China:

Developers wanting to turn a Shenzhen site into the city's tallest building are being blocked by an obstinate Hong Kong man whose building has become the mainland's latest "nail house" holdout. Choi Chu-cheung's six-floor villa in the booming central business district stands isolated in the middle of a huge construction site and the 57-year-old says it will stay until he gets more compensation. Mr Choi and his wife, Zhang Lianhao, are standing firm despite an order by the Shenzhen land resources and housing management bureau last month ordering his family to move out by yesterday.

He admits he has been inspired by a Chongqing couple who held out for 11 days, while their house stood on a mound in the middle of 10-metre-deep pit, until the developers paid up. "The couple is my model. I'm sure I will win this battle as they did," Mr Choi said of the pair, whose home was dubbed the "coolest nail house" - slang for holdouts who refuse to be hammered down while their houses stand erect like nails after those around are demolished.

Mr Choi and his wife have repeatedly rejected a cash compensation offer from the developers, who want to turn the Caiwuwei site into an 88-storey financial centre. The other 389 households accepted the developers' compensation and moved out earlier this year.

The couple have demanded that the developers offer them a new block of land of similar size near the financial centre so they could rebuild or increase the offer from 5.06 million yuan to 14 million yuan.

"According to my property rights certificate, I own more than 779 square metres," said Mr Choi, who lived in a village on the site before moving to Hong Kong. "They only offered to pay us 6,500 yuan per square metre but housing prices in this area have reached more than 18,000 yuan per square metre. I want to be paid the current market value. If not, I won't let them redevelop my land. This is our choice, the choice of the property owner."

An administrator from the Caiwuwei redevelopment office said the demands were unreasonable. "Mr Choi's land was actually Caiwuwei village collective rural land when he was one of the villagers. After 1992, the land became state-owned," the administrator said. "His land belongs to the state. He has no right to ask the government to give him new land." He said the developers had offered very good compensation and, if the couple refused to move out, the village would ask the courts for a forced eviction...

Mainland homeowners forced off their properties have repeatedly fought developers and local government to protect their assets.

This article nicely encapsulates many of the issues involved here. Firstly this kind of thing panders to a general perception that in China it's the mean property developers and greedy governments railroading poor, harmless people fighting for their property rights. In many cases that's probably true. In this case, it doesn't seem to be. 389 others all thought the developer's compensation was enough. In a classic case of economics, the "price" for holding out gets higher the fewer people that accept the compensation package. Basically this "nail house" becomes able to blackmail or extort money from the developer, especially if it's a large project and everyone else has already taken the package. There are some remedies to this, for example by making the compensation package contingent on 100% acceptance (which brings peer pressure to bear). But in this case the solo holdout is now able to extract an out-sized settlement for their obstinancy. Some might say congratulations to them for holding out and screwing more money out of the developer. But where does this leave the other 389 landholders who accepted the first, lower offer?

The next issue the article highlights is the murky world of Chinese property title. It is usually very difficult to decide who has clear title, and this is going to be an ongoing problem. However in this case the government spokesman on one hand says it's state land, but in the next breath practically concedes it is not the state's land.

Many capitalist countries have a concept of eminent domain, where the state has the power to force property owners to sell without their consent, albeit in return for just compensation. This is used when the interests of the many override the interests of the few individual property owners. Of course much hinges on the concept of "just compensation", but in this case 389 property owners clearly felt it was good enough. And while it makes for dramatic photos, the city of Shenzhen will be much better off with its new office tower brining in tax revenues, businesses, workers and the like than keeping some rundown villa. If these existing properties have heritage value (e.g. like the hutongs of Beijing) then the government can and should set up ways to protect those heritage buildings...something that even theoretically advanced Hong Kong struggles with.

So let's call this nail house what it really is: blackmail.

For more on the previous nail house incident, please read Tenement Palm's excellent summary of the story behind the story and follow that up with an absolute must-read where Dave considers Howard French's IHT piece on the nail house where he discusses the faults with Western media's coverage of China and common misperceptions the media fuels. As usual, there's far more to the story than you might first think.

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[boomerang] Posted by Simon at 11:18
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Duty bound

As China makes its way from basket-case to some kind of neo-capitalist free-for-all, there's always going to be speed bumps. Typically the Chinese are sticklers for rules - lateral thinking and the ability to see the forest for the trees is not usually a strong point. For example, Reuters reports on a ridiculous situation in the commodities futures market:

The Shanghai Futures Exchange has refused to accept Chilean copper as good delivery because the metal no longer carries a duty-paid certificate, merchants said on Friday.

"This is a typically ridiculous Chinese procedure. When you deliver into Shanghai, they ask for a paper showing that you have paid the duty. But because Chilean material is duty-exempt, we don't have those certificates," a London-based merchant said. Since October last year, copper sourced from producers in Chile such as Codelco is exempt from paying China's 2 percent copper import duty, and therefore no duty-paid certificates can be issued.

"The exchange is discussing the problem, and the policy may be changed but at the moment there is nothing we can do," a dealer in Shanghai said..."The situation came up three weeks ago, when the spot premiums for copper fell in Shanghai, prompting merchants to move copper into the exchange's warehouses," the source said. "The exchange is investigating and will make some adjustments soon, but now, it can only abide by recent regulations on delivery."

In recent weeks, copper supplies in China have risen sharply, lifted by record imports and merchants now want to put metal they cannot otherwise sell onto the Shanghai Futures Exchange. The London-based merchant said that holders of Chilean copper were swapping their material for South Korean and Japanese metal in order make good delivery.

China abolishes duty on Chilean copper as part of a free trade agreement, so now that copper is not good for delivery on futures contracts. The obvious solution (waive the requirement for a duty certificate on Chilean copper) is impossible because that would require circumventing existing regulations.

Which goes to prove the rule that regulation will always be slower than markets. This will continue to be a big issue for China as it's economy evolves.

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[boomerang] Posted by Simon at 09:49
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April 11, 2007
China's middle class

Philip Bowring over at Asia Sentinel has a go at measuring the size of China's middle class and comes to a much smaller number than you may think. One point is whether "class" is a relative or absolute measure: China's "middle class" according to the Chinese themselves may vastly differ to those who would be "middle class" on a global basis.

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[boomerang] Posted by Simon at 14:15
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March 13, 2007
Money machine

China revealed last week that it is planning to set up an investment agency to manage a substantial portion of its massive foreign currency reserves. The new agency is expected to based on Singapore's Temasek Holdings, the Singapore Government's investment arm. As an investor, Temasek has been an excellent government entity. It has been estimated that Temasek has managed only a 3% annual return in it's 30 year history, making it worse than simply leaving the money on deposit at a bank. Their recent aquisition of Shin Corp in Thailand has managed to become a money losing diplomatic incident, which is pretty good for an investment company but not for its shareholder. Until recently Temasek (in theory, owned by the people of Singapore) didn't even disclose it's results.

But what does it mean for China? In the early stages, probably not much more than some accounting shuffling. Firstly, this is not new money - it already sits in SAFE's accounts. Most likely is this new agency will "buy" stakes in key Chinese companies. But in order to prevent an inflationary boom the money from this purchase will be steralised through the issuing of bonds. Secondly this is a political wheeze. These reserves earn 4 or 5% a year by sitting in US Treasuries. Politicians want better returns on these funds through investment. But do they really? China's problem (politically, at least) is it already generates too many US dollars. It has a quasi-fixed exchange rate and while China saves and makes more than the Americans, the Americans will continue to pay for both with their dollars. While the PBoC wants only a slow appreciation in the yuan and while China's capital account remains largely closed this can only continue. Thirdly, what else can this new agency invest in? They could diversify into other currencies, but again there are problems. The main one is that most of China's trade is denominated in US dollars. Any moves into other currencies will have major market impact and would ruin the PBoC's efforts to contain the rise in the yuan. Also, remember the fuss when a Chinese firm (CNOOC) tried to buy a middle-tier American oil firm (Unocal)? Imagine the response if it was China's official investment agency doing the buying.

So while this all sounds good and exciting, especially for investment bankers, I suspect the reality is going to be rather different to the expectations.

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[boomerang] Posted by Simon at 09:37
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March 05, 2007
Dirty money

China's parliament is meeting in Beijing. It is a largely toothless institution and all the major decisions have already been made. So to make an impact the politicians that attend have to stake out fringe issues and make them seem important in order for people to notice them. As a prime example, take Hong Kong's DAB delegation, who's issue is an effort to make China's banknotes cleaner. While the senior Beijing leadership grapple with North Korea, social instability, a widening income gap, the environment and more, the DAB delegates have firmly marked the hygeine standards of the nation's currency as their banner issue.

Wouldn't it be better to suggest the current notes be properly cleaned? I've even got the term for it: money laundering.

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[boomerang] Posted by Simon at 10:19
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February 01, 2007
Scenes from a bubble, China edition #95,395

The Standard tells of the "plunge" (who uses that word except financial journalists?) in China stocks because of fears of a bubble...and the dramatic steps being taken to reign in the speculative excess:

Shares across the border plunged Wednesday, dragging Hong Kong stocks lower, after a top legislator warned that a bubble is forming in the mainland market and securities houses took steps to curb speculation.

Mainland media reported that some securities houses have started to check the identity of investors when they open new trading accounts and are taking photos of new account holders for their records....It is estimated that on average about 90,000 new trading accounts are opened in the mainland every day.
Checking the ID of investors opening new accounts...what a novel idea.

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[boomerang] Posted by Simon at 09:25
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January 23, 2007
Scenes from a bubble, again

Today's Standard reports on the latest exotic disease to strike China: stock fever. Here's some handy hints from people who really know what they're doing.

"The stock market at the moment remains very bullish. There are ample chances to invest. Making money from the equity market is not difficult at all," the report quoted Liu, a retail investor who refused to give his full name, as saying.

"While deciding which stocks to pick, remember to buy stocks that have at least 20 percent growth. Yet, do not buy stocks that have 200 percent growth as their room to grow is very limited," Liu said. He added it was not difficult to raise capital for the initial investment.

"The simplest way is to apply for a credit card and get the cash advance. Many of the retail investors are actually using this method - like me," Liu said. "As long as the money is not for long-term investment or investment involving high-risk vehicles, it is all right to use this method."

In cheerier news, a Chinese TV station "accidentally" broadcast porn. Several people were fired but the station achieved record ratings for its midnight to 2am timeslot.

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[boomerang] Posted by Simon at 09:29
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November 06, 2006
Bringing China back to earth

Conventional wisdom says China's economic boom is a "miracle". The FEER has an article by a private equity partner taking aim at that idea, discussing a little noticed part of China's economic boom: the huge amount of investment it takes for China to support its growth. I'll repeat the conclusion but for anyone interested in what is really going on in China's economy (including a nice con as an introduction) it is well worth a read:

China has embarked on major banking reforms and meaningful progress has been made. But the economys growth continues to be driven by excessive liquidity, and so is costly and inefficient. Improving profitability, returns and efficiency remains the highest priority. While China is on the right track in her search for a cure, the last thing she needs is someone in a doctors white gown to come along to tell her she is in excellent health. Fortunately, the leadership knows better. The policy of the central bank to raise interest rates, mop up excess liquidity, curtail lending to overheated industries and generally increase the cost of capital is correct and necessary for sustained growth in the long term.

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[boomerang] Posted by Simon at 13:23
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October 27, 2006
What Does ICBC Stand For?

I Can't Believe it's China!

So says the market today, punting up this gargantuan bank (the Industrial and Commercial Bank of China) that was insolvent two years ago. But everything's fixed now, the bad loans are gone thanks to China sticking in state capital and carving out Y85 billion in bad loans.

They now apparently have 'sophisticated' risk controls in place and would never loan money to dodgy companies. This is the new China!

Seriously, I know the prospectus has all the ifs and buts, but these things should come with cigarrette package health warnings...but hey, if you're in the shares, enjoy, and good luck.

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[boomerang] Posted by HK Dave at 11:52
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October 13, 2006
The battle for a Hong Kong soundbite

For some reason the great and good feel they need to be able to summarise Hong Kong's economic model in a trite, meaningless phrase. "Positive non-internventionism", "Big market, small government", "Laissez faire", "Hong Kong Disneyland". Hong Kong's economic model is, in reality, a mixture of low direct taxation combined with a set of cartels that collude with the government, a reasonably well-established and free court system (as least as it applies to commerce) and a currency board with fiscal reserves that works because the city is still basically a trading centre who's commerce is largely denominated in US dollars.

But now I'm really getting confused. The other day a geography professor was annoyed at a Nobel prize winning economist's views on why Hong Kong has been so successful. Yesterday a Chinese Communist was telling off Victor Sit (the geography professor) and the Hong Kong government for being too interventionist and not laissez-faire enough:

A senior economist and bureaucrat in Beijing has penned a blistering condemnation of the Hong Kong government in a local Chinese-language newspaper, denouncing the administration for inserting itself into the free market and relying too heavily on the mainland for economic handouts since the 1997 Asian financial crisis.
"Relations between the Hong Kong government and central authorities are not based on market principles, but more upon the desire for greater interests and handouts," wrote Yi Xianrong, a director at the Institute of Finance and Banking of the high-level Chinese Academy of Social Sciences...he called on Hong Kong to hold on to its laissez-faire principles in the process, arguing that those principles had served as a guiding example for the mainland's own dramatic liberalization and development over the past three decades.
The rest of the article summarises the recent debate. Ideology is such an outmoded concept. Luckily Hong Kong has grown to such an extent it should be able to absorb a more "activist" government. And most interestingly The Don's policy speech didn't reveal any new boondoggles. Perhaps it really is all much ado about nothing.

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[boomerang] Posted by Simon at 10:15
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August 30, 2006
Money money money

Thanks to Gordon for the pointer to a Newsweek article looking at China's massive foreign exchange reserves, saying it is possible to have too much of a good thing. Amongst the interesting observations, including a comparison with Singapore, comes this:

The roots of this contradiction go back to the early 1980s and the start of reform in China, when the late patriarch Deng Xiaoping opened the manufacturing sector, but not the banks, to foreign investors. The good news was that the closed system inoculated China against the rush of global capital that toppled banks across Asia in the crisis of 1997-98. The bad news: banks had no competitive incentive to learn proper risk management, or to introduce modern retail banking or consumer lending. Now the system is such a mess that China fears to open it. And it sits on a huge pile of idle dollars that its own banks are unable to employ fully at home.
Just a friendly reminder to those who are holding shares in China's banks.

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[boomerang] Posted by Simon at 14:07
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August 24, 2006
The value of the Chinese

Over at Travellers' Tales, an interesting Chinese correlation:

All else being equal, the more Chinese a [SE Asian] country has, the richer it becomes, he claimed, because of the entrepreneurial drive of these immigrants...Even if one puts aside the idea that there is something in the genes or the culture that makes Chinese naturally get rich–after all, the bulk of the world’s Chinese turned their backs on money-making for 50 years–there is the idea that the people of a diaspora will gravitate toward trading and finance...

Burma: 3% Chinese, $157 per capita GDP
Cambodia: 1.2% Chinese, $341 per capita GDP
Laos: 1% Chinese, $396 per capita GDP
Vietnam: 3% Chinese, $518 per capita GDP
Philippines: 2% Chinese, $1,021 per capita GDP
Indonesia: 3.1% Chinese, $1,100 per capita GDP
Thailand: 12% Chinese, $2,845 per capita GDP
Malaysia: 25% Chinese, $5,003 per capita GDP
Singapore: 76.8% Chinese, $24,620 per capita GDP

Correlation is not causation, but without doing statistical analysis it seems a reasonable proposition. More interesting is this correlation works even in places where the government actively works against the Chinese population, e.g. Malaysia. The only question is whether even a small number of Chinese people in a population can make that sigificant a difference to per capita GDP?

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[boomerang] Posted by Simon at 11:49
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August 03, 2006
Money, not brains

Oil and water don't mix. It's handy to remember that before throwing your fortune at trying to prove the saying wrong. From the SCMP, China's Don Quixote:

Chen Jinyi, once China's 35th richest man, is facing court action over unpaid debts after spending his entire fortune on a project to turn water into fuel oil. Hoping the modern version of medieval alchemy would work, Mr Chen and his company, Jinyi Group, spent more than 100 million yuan on research and development into an unproven technology that would dilute oil with water to produce cheaper and more efficient fuel.

That investment may have put Mr Chen into financial trouble. A district court in Hangzhou has publicly identified him for not paying debts totalling 678,000 yuan and the Hangzhou Intermediate People's court initiated proceedings against Jinyi Group for unpaid bank loans of 36 million yuan. Mr Chen insists his "milky oil" project, as it is known in Chinese, has been a success and that all he needs is time to get the product to market.

"The milky oil project is ready and is scientific, legal, authoritative and practical, all it needs now is to be popularised and commercialised," he said in an interview yesterday. "This [legal] problem has arisen because we have invested in this project continuously for three years but now it is ready, there are lots of people who want to co-operate with us and this difficulty will soon be resolved."

[Chen's] personal worth was estimated at 800 million yuan in 2001...The supposed inventor of the new technology, Wang Xianlun, is no longer working or co-operating with Jinyi Group but Mr Chen insists the project will be a success.

"The masses don't understand this technology so I will have to do a lot of scientific education work," he said.

Certainly somone needs scientific education work. At least it's only Chen's money, not shareholders.

Given that bottled water costs more than petrol, I'm not sure this would be an improvement even if it worked.

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[boomerang] Posted by Simon at 22:40
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June 26, 2006
Monopoly money

China is busy considering an anti-monopoly law as another mark in its evolution towards a market economy. One can overlook the irony of a nominally Communist country introducing such a law. One can marvel at the differences between China's opening economy and its closed political monopoly. The article says:

"The aim of the law is to protect fair competition, prevent and check monopolistic behavior and maintain an orderly market place," Xinhua News Agency said of the draft law Saturday.

The draft law bans monopolistic agreements such as price-fixing and other forms of collusion, while providing guidelines on investigating and prosecuting monopolistic practices.

Meanwhile, supposed laissez-faire and free-wheeling Hong Kong has no such law despite cartels in everything from petrol retailing to supermarkets to property.

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[boomerang] Posted by Simon at 08:55
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June 21, 2006
The looming China crisis

George Friedman at StratFor is not a believer in the Chinese economic boom. He looks at the problems China faces in its transition to a market economy, models for dealing with these problems and the domestic and international political implications. You may not agree with his analysis but it's thought-provoking reading.

China: Crisis and Implications
By George Friedman

The Chinese government is continuing efforts to cope with its runaway economy. The People's Bank of China has raised interest rates. Banks have been told to curb lending. The government has said that it will implement procedures to rein in foreign acquisitions at low prices -- or, in other words, to block fire-sales of Chinese companies. As a recent headline in the Japan Times put it, "China's Monetary Surge Dooms Its Boom."

A lot of things have gone into dooming China's boom, and the money surge is one of the more immediate problems. However, as we have argued (and this article should be read in the context of past analyses), the end of the Chinese boom was inevitable. The issue now is how all of this will play out in China and in the world.

What must be understood is that China now is moving from an economic problem to a socio-political one. The financial problem is a symptom; the fundamental problem is that tremendous irrationality has been built into the Chinese economy. Enterprises that are not economically viable continue to function through infusions of cash. Some of the cash comes from borrowing, some by exporting at economically unsustainable prices. The result is a squandering of resources. The reasons that this continues have nothing to do with economic rationalism and everything to do with political and social reality.

If interest rates were to rise and lending were to become disciplined, many of China's enterprises would fail. This would bring several consequences.

The rest is continued below the jump.

First, and most important, it would result in a massive increase in unemployment. At this point, the irrationality has been going on for years. It is not only state-owned enterprises that are economically unsustainable; many newer enterprises, including those in which Western companies have invested, are not succeeding. When we look at the figures for nonperforming and troubled loans, they amount to nearly half of China's gross domestic product. That represents a lot of irrationality, a lot of financial failures and a lot of unemployment. And unemployment is a political and social problem. The question is whether China politically can afford the economic solution.

Second, lending has become a system for maintaining the political solidarity of China's elite. Loans have been made not only to avoid the problem of unemployment; they also were made as part of political arrangements that allowed the Chinese Communist Party and regional party organizations to avoid conflict and divisions. As long as the pie was growing, everyone could have a piece. But if the pie starts contracting, there will be losers and winners. The question of who will go bankrupt and who will not will become a highly divisive and potentially destabilizing political crisis. Again, the economic solution -- austerity -- and political reality may run counter to each other.

Obviously, China has massive cash reserves. These may not be massive enough to cover the financial crisis, but they are sufficient to allow the government to put off addressing the problem for a while. China also has the ability to promulgate rules and regulations that allow bankrupt entities to continue functioning. However, it always must be remembered that on the other side of a bad loan is a damaged creditor. A loan that can be deferred by fiat is an asset that can no longer be used. When you avoid economic disaster for the debtor, you transfer the pain -- and potentially the disaster -- to the creditor. And since the creditor is normally the economically healthier entity, you postpone the death of the weak by weakening the strong. The more you do this, the worse it becomes. Thus, whether the Chinese use cash reserves to postpone the problem or use regulation to do so, the net result will be buying time at the cost of increased pain.

China's Likely Path

Asia has been here before. Japan encountered this problem around 1990, and East and Southeast Asia encountered it in 1997. Roughly three models for dealing with the problem exist:

* Japan model: Use reserves and formal and informal measures to avoid actions that would trigger massive bankruptcies and unemployment. Accept economic stagnation for the better part of a generation.

* South Korea model: Move rapidly to restructure the economy, using economic and political means. Control social unrest with security measures. Move out of the problem in a matter of years.

* Indonesia model: Lacking resources to manage the crisis, suffer both financial dysfunction and political strife among the elite and between regions.

Japan was able to do what it did because it is a highly disciplined, cohesive society, in which shared pain is viewed as preferable to social dislocation. South Korea was able to do what it did because the magnitude of its crisis was relatively less than Japan's, and because the state had the means for suppressing unhappiness. Indonesia failed to do what it needed to do because it lacked resources and political power.

Other countries have fallen somewhere along this continuum. China will make its own path. However, it should be pointed out that China is not socially similar to either Japan or South Korea. Like Indonesia, China is a diverse and divided nation. The Communist Party lost its moral standing in the 1970s. As with Suharto's government, its legitimacy now derives from the fact that it has created prosperity. When prosperity slows down or stops, the Party cannot fall back on inherent legitimacy, as was the case with the system in Japan. And the wildly diverse levels of economic development make a single, integrated solution, as was used in South Korea, unlikely. The most likely direction for China, therefore, is massive social and political instability.

Now, the Communist Party may lack moral authority, but it does wield tremendous power. The People's Liberation Army and the various security forces are an enormous presence in China. Indeed, the government already is using its security forces aggressively, cracking down on dissent and against at least some business leaders, in anticipation of coming troubles. The ability to suppress unrest is not trivial. Therefore, the most likely path for China in a post-boom environment is to increase suppression and reimpose systematic dictatorship.

This is not an absolute given. There are many in the Party who now are arguing that China has abandoned its Communist principles and its social base. In other words, they want to reach out to the peasants in the interior, who have benefited little from the boom and who resent the prosperity of the coastal regions. The idea is to use these peasants in a process of renationalization -- or, at least, a process in which the free market is dramatically limited and at least some of the wealth is redistributed.

This goal makes little economic sense, but what China needs economically is unsupportable socially and politically. Imposing a crushing austerity for five to ten years would solve the economic problem, but it is unlikely that the political center could hold. Indeed, if the Chinese were to follow this course, they could do it only with massive political suppression at the same time.

The Party's Tangled Web

Therefore, one likely path is the reimposition of dictatorship, followed by whatever economic solutions the leadership might want to make. But there is a problem here: The interests of Party and People's Liberation Army leaders in Shanghai diverge from those of the central government. These leaders are deeply involved in the financial process of the coastal area, in bringing in foreign investment, in taking advantage of the nonmarket access to capital. They have no inclination to stop. Indeed, their wish is to see the irrational boom continue as long as possible.

There are splits in the interests of regional Party leaders, as well as a split between the regions and Beijing. The interests of coastal leaders lie not with Beijing so much as with Tokyo, New York and London. They have integrated themselves in the international financial system, and they are busy making plans for sustaining their regional enterprises in the event of a crisis. Meanwhile, Party leaders from the interior are demanding that these actions be stopped and that investment flow to their regions instead. Beijing is riding two horses that are running in very different directions.

Beijing well might fall off the horses. China has a history of cycling between a dictatorial system that closes it off from the world (a poor, but equal and stable China) and a system in which China is open to the world but torn apart from the inside out. Consider: Mao marched into the interior, raised a peasant army, came back and liquidated the internationalist bourgeoisie in 1948. He closed off the country and united it, throwing out the foreigners. Under the other model, preceding Mao, the country was open to foreigners, who tore it apart in regional conflicts while the interior starved.

The end result of China's economic crisis, therefore, will be a deep-seated political crisis. Only ever-increasing amounts of money have allowed China to maintain the current political alignment. Without that, it has two options. The first is a return to some sort of dictatorship from Beijing, under which economic problems would be dealt with inefficiently but unambiguously. The other is to accept a split between the coastal regions and the interior, the weakening of Beijing's authority and a period of instability and intense regionalism. It all depends on the political moves Beijing is making now, but our bet would be on the latter course. The instruments of power that Beijing has are too complicit in the financial crisis, and have too many diverging interests, to make the first option likely.

Geopolitics and Ripple Effects

Two possible geopolitical models emerge from this. Under one -- in its extreme form -- China returns to some sort of geopolitical Maoism. It encloses itself from the world, becomes increasingly bellicose but is limited by its own geography in what it can do. Under the other model, China slowly fragments and becomes a cockpit for the ambitions of foreign economic interests -- backed up by political and military power, with regional Chinese officials collaborating with foreigners to continue economic development. Oddly, the latter model would be more destabilizing to the world than the former, inasmuch as everyone will want to maintain their investments in China and expand them. In this scenario, China would again be a magnet for problems.

Mind you, these are not absolutes, but represent extremes on a continuum. There is surely a model under which Beijing would muddle through, as have the Japanese or Indonesians. No coherent strategy would emerge; it would all be tactical. It is difficult for us to see how this would not lead to regional destabilization, but then, China might be able to live with that. How it handles the unemployment and displaced peasant issue, however, is yet another question. This is a possible mid-point on the spectrum, but not in itself likely, it would seem.

As for the effects on the international economy, there has been a great deal of discussion about China's ownership of U.S. Treasury instruments and the consequences if that money were withdrawn in a crisis. In fact, this is the last thing that is going to happen. If China has a massive financial crisis, no one -- including the Chinese government -- is going to shift money from a safe haven into an uncertain cauldron. In crisis, the tendency would be a flight to safety. That means that rather than being pulled out, money would surge into the U.S. market -- legally and illegally, from the Chinese standpoint.

It is interesting to correlate the massive U.S. market surges that began in 1991, after the recession, and intensified dramatically in 1997 and 1998, with trends in Asia. In both cases, these surges followed major economic crises in rapidly expanding Asian economies. The events were, in our opinion, linked. The crisis in Japan in 1990 and 1991 led to major capital flight and helped to fuel the U.S. market rise. Similarly, the impending and expected East Asian meltdown in 1997 produced massive capital flight from Taiwan, South Korea and elsewhere to safer havens. A massive withdrawal from the U.S. market is the last thing to be expected.

What are in danger, of course, are foreign investments in China. There is the obvious financial issue: Many of these investments were not economically viable to begin with. But there is a political problem as well. The Party is going to have to blame someone for China's troubles, and it will not be the leadership. The obvious culprits will be corrupt officials and their paymasters in the international banking system. The truth or falsehood of the charge will matter little; corrupt officials and bankers already are being arrested, in the early stages of the crisis. As the situation intensifies, we would not be surprised to see foreigners investigated for corrupt practices as well.

But the bottom line is this: China has a history of nationalization and expropriation, and the party that enacted those measures is still in power. No one would have believed that the Party of Mao possibly could have become what it is today, but one should not assume that the evolution of the Chinese Communist Party is complete. Leaders could find that they have reason to re-enact some of Mao's own economic policies. We would be surprised to see a complete return to Maoism. We would not, however, be surprised to see the Party deliberately reverse some transactions that are no longer in its interests or (as and if things get more intense) take even more radical steps. It is still a Communist Party, it might be useful to recall.

Ultimately, the choice that China is now making is how quickly it will allow the consequences of its economic irrationality to unfold. The economic answer to the problem is to let shaky enterprises fall -- but the political cost of doing so will be too great, and a solution has already been long delayed. The longer an economic solution is delayed, the less one becomes possible and the more intense becomes Beijing's need to address the problem with political and security solutions. The more dependent the Chinese become on such measures, the more catastrophic will be the consequences if these solutions don't work.

China is long past the point of being able to solve the problem easily. The question is simply whether to buy time and pay in intensity, or force the crisis now. At some point, there no longer will be a choice. But the single most important thing to understand is that China does not really have an economic crisis any longer. The time for that has come and gone. There is now a political crisis at hand.

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[boomerang] Posted by Simon at 09:18
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May 30, 2006
The great Chinese money vacuum

Jake van der Kamp observes in today's SCMP that what foreigners promise to invest in China isn't necessarily what they actually put in...and what they do put in loses money hand over fist. Chart below the jump.

the impression some people may get that foreign direct investment (FDI) inflows to the mainland are rising. The story dealt exclusively with private equity inflows and these do indeed appear to be up. They also constitute only a very small proportion of total FDI inflows and the larger picture suggests that foreign investors are increasingly less ready to follow up their money talk with money itself.

The first chart tells you the story. The red line shows the amount of FDI contracted over the last 10 years and the blue line the amount of FDI actually utilised. The two were about the same in 1999 but in 2005 the utilised was less than a third of the contracted FDI and, in fact, slightly down from 2004. Relative to the size of the mainland economy, utilised FDI is barely half of what it was 10 years ago.

Look also at the green line. Private equity inflows more than doubled in 2005 but still amounted to barely 5 per cent of utilised FDI, leave alone what they were relative to contracted FDI.

And why may foreign investors now be showing greater reservations about backing up their investment promises with investment capital?

I find one clue tantalising. A data series in mainland statistics aggregates the losses of loss-making enterprises. The second chart shows you this data on an annual basis for foreign-invested enterprises including Taiwan, Hong Kong and Macau ones.

Ouch indeed. These losses have doubled in the last two years.


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[boomerang] Posted by Simon at 13:47
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May 20, 2006
Three Gorges: Tragedy and Triumph

I have been concerned from the beginning about the Three Gorges Dam project. But the more I consider what has been accomplished as the project nears completion, the more I must reluctantly express my admiration for what has taken place.

The national Chinese grid will have its electricity supply augmented by up to 10%, with the power coming from hydroelectricity, which is far less environmentally damaging than the dirty coal-fired plants that have popped up across China over the last couple of decades as short-term solutions.

Yes, there have been costs. Aside from the US$25 billion paid to make this dream a reality, a million people have had to have been moved, from prime arable land to marginal land. Some of the areas they have been moved to have been contested areas with ethnic minorities.

There has also been a lot of corruption. Huge embezzlement, especially in the funds earmarked for helping the displaced start over, has been de rigeur.

But I do not buy the arguments put forward that the environmental damage does not justify the cost of building the Three Gorges Project. What possible environmental impact could be worse than 10% of China's electricity requirements generated by coal? Sitting in Hong Kong, I marvel at the scale of the audacious project, I feel sorry for the million people that have had to be moved from their ancestral homes, and I thank them for their sacrifice. It may have just added a few years to our collective lives.

It also highlights the stark difference between China and India. The compulsion requisite of the Herculean labor is beyond the beyond any government of India. But in China, if it is deemed necessary, it shall be done. Tragedies are part and parcel of such decisions, no doubt. But as much as I am against taking away everything a million people have ever had or known, China's unflinching pragmatism, its ability and will to compel sacrifice, and a canny, calculating Central government are surely a combination of great power.

I suppose a government that is, in its own way, compelled to deliver perpetual growth in order to ensure order and legitimacy, must see this end justifying every means.

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[boomerang] Posted by HK Dave at 16:27
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May 15, 2006
Great moments in markets

Chaos hit the Shenzhen border late last week, all thanks to a sub-market subsidy and canny traders. Picture below the jump, report from the SCMP:

Fuel shortages in Shenzhen brought chaos to the Huanggang border checkpoint yesterday, with a queue of container trucks several kilometres long all but bringing traffic in the area to a standstill. A Shenzhen government spokesman denied there was a fuel shortage, but truck drivers complained they could not fill up in Shenzhen or Dongguan.

"It has been like this for two weeks. But today it is particularly serious because it is a Friday and many container drivers returned to work after the May 1 holiday," Cheung Man-shing, a container driver from Hong Kong, said. Another container driver said the service station at Huanggang was rationing drivers to 50 yuan worth of diesel. "Some drivers have to queue up twice to fill up," he said.

Tse Long, vice-president of the Container Transportation Employees General Union, said long-distance drivers had encountered the same problem a month ago.

Service station operators had been limiting drivers' purchases because the government would not let them raise prices in line with increases in wholesale fuel prices. "The service stations have enough fuel for drivers. But they figured that they would rather keep the fuel than sell it at a loss," said Mr Tse.

The government is claiming there is no shortage, and they're right. There's enough fuel, but thanks to the cap on pricing the station owners are refusing to sell. Just chalk it up to another lesson in markets for our Communist friends.


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[boomerang] Posted by Simon at 08:37
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May 03, 2006
Train Kept-A Rollin' (Into Tibet)

The Chinese government proudly announced that trial services of its Qinghai-Tibet railway, the highest rail line ever built, will begin July 1st, and that the tickets have already been sold out. That the government wanted to quash any lingering notions of independence in Tibet by bringing it more firmly into the Chinese economic orbit with this audacious infrastructure project, there is no doubt. I myself have almost no reservations in saying that this is an entirely good thing, because of the poverty experienced by most of the inhabitants of Tibet. If nothing else, it will hopefully also bring better food (I rank Tibetan food as the worst on earth - if anyone can think of anything nastier than yak milk with tsampa every day, please tell me).

My issue concerns more the safety arrangements of the trains, which the People's Daily somehow makes sound equivalent to a cruise on Cunard:

For travelers to have sufficient time to enjoy the natural beauty on the plateau, the passenger trains will depart in the morning and arrive in the evening.

Meanwhile, this world's highest and longest plateau railroad will have two oxygen supply systems on trains to combat the effects of altitude sickness on passengers.

Oxygen will come from a system like central air-conditioning on trains, which can ensure the oxygen content in carriages at about 85 percent of that in plain areas, said Ma, adding that oxygen masks will also be installed near seats for passengers to use in case they still feel sick.

Now the last time I rode the trains in the Western areas of China, I had trouble getting a seat, and remember the tremendous scrum at the on-board ticket counter that made the Rugby Sevens look like church bingo when I boarded at an intermediate station (Kuqa) at 3 in the morning. Imagine the fights between enraged, disoriented, oxygen deprived Chinese men when that most precious resource, air, is in dispute on an overcrowded train!

I for one could not be paid enough to get on that first train, and happily leave the task to hardier souls.

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[boomerang] Posted by HK Dave at 17:53
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May 01, 2006
If China's banks worked

The Economist looks at how much better off China would be if it's banks worked "properly". By properly, they mean banks that allocated capital and credit by risk rather than political factors, and banks that didn't prop up ailing state firms. Below is a chart that shows the difference between China's GDP by sector and China's bank lending by sector. This mismatch is estimated to have cost China a massive 16% of its GDP...or $320 billion. That's one hell of a mismatch.


Full article below the jump.

THE Chinese economy continues to astound. Behind its latest surge lies a renewed acceleration of bank lending. Credit growth at the mainland's financial institutions reached 15% in the year to March, just above the official target of 12-14%. Loan volumes are again nearing the levels of the 2003 credit boom, notes Jonathan Anderson, chief Asia economist at UBS. This week the authorities acted to stem the flood.

But China could sustain an even faster pace if its banks did their job properly. A mountain of bad debts is only the most visible sign of the persistent misallocation of capital. Many more loans do not go bad but yield only negligible returns. In a study* to be published on May 4th the McKinsey Global Institute, the consultancy's economics think-tank, calculates that China's GDP would be a staggering $320 billion, or 16%, higher if its lenders knew how to lend.

Around $60 billion, the think-tank reckons, could be gained from raising the banks' operating efficiency by cutting costs, putting in proper electronic payment systems, and developing bond and equity trading. The rest—some $260 billion—would come from redirecting loans to more productive parts of the economy. The banks should switch funds from poorly run state firms to private enterprises, which contribute 52% of GDP but account for only 27% of outstanding loans (see chart). This would both increase the efficiency of investment and raise returns for China's army of small savers.

Easier said than done. Aided by generous government bail-outs, the banks have worked to restructure themselves over the past several years. But changing old habits takes time: a recent paper by economists at the International Monetary Fund found little evidence that Chinese banks' lending decisions had become more commercial.

Even the industry regulator, which has been leading the reform effort, seems unwilling to break some taboos. Allowing foreign banks to take control of domestic rivals would undoubtedly help to introduce healthy competition and speed modernisation. Yet the long-running attempt of a consortium led by America's Citigroup to purchase 85% of Guangdong Development Bank (GDB), a relatively small institution, seems to have hit a brick wall. On April 25th Lai Xiaomin, director-general of the China Banking Regulatory Commission, said that he believed the “GDB case should not break the current rules”. These rules limit foreign investors to buying a total of 25% of a Chinese bank. No single investor is allowed more than 20%.

The poor state of the banks increases China's reliance on macroeconomic tools. The central bank raised interest rates surprisingly on April 27th, and announced guidelines to control banks' lending. It is expected to raise their reserve requirements next month, after China's spring holidays. Such top-down direction has served the economy fairly well in this cycle, averting the violent swings of earlier decades. Still, there is little doubt that this latest lending boom will produce another batch of bad debts and low-yielding loans. If the leaders in Beijing carried out the reforms needed to create a banking system that allocates capital properly, they would find the economy easier to steer—and their countrymen would be better off.

*“Putting China's Capital to Work: The Value of Financial System Reform.”

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[boomerang] Posted by Simon at 10:08
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April 20, 2006
China exchange controls relaxed

It was always likely that as President Hu goes to visit George W. that Comrade Hu would announce a flurry of changes and deals to defuse the political pressure over the China economic bogeyman story. And the Chinese have made a signficant couple of concessions in partially liberating their capital account. But as always, irony abounds in these measures.

Firstly, domestic companies will no longer be subject to quotas in overseas investments. This means more Chinese companies can follow the example of CNOOC and try buying American assets, only to be chased off by aggressive, almost racist, protectionism. If Dubai Ports causes such a fuss, imagine what the fuss when a Chinese company tries buying GM.

Secondly China's banks get approval to manage assets abroad. Instead of China's central bank buying these assets, effectively private investors can use banks to do instead. It's outsourcing, China style.

The end result of these two measure is Chinese funds can flow out the country more freely. This should weaken the yuan and strengthen the US and other currencies. And that is the ultimate irony, because the American senators and others have long been complaining the yuan is undervalued. Both of these measures shift the huge foreign exchange reserves out of SAFE and into the funds management arms of the banks and the investments of Chinese companies abroad. Will it magically reduce the trade surplus problem? In the longer term it should and will. In the short term, no. In the short term, the problem is Americans (especially government and consumers) spending more than they save. That's not the fault of the Chinese.

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[boomerang] Posted by Simon at 09:57
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April 13, 2006
China Post bank

Japan's last election was largely fought over the privitisation of Japan Post, the world's largest financial institution. The government has realised the massive Japan Post system has distorted its financial market thanks to its government backing. China, on the other hand, is going in the other direction. A small story in The Standard (no link) says:

China's deposit-taking postal system has started to extend small loans to individuals and businesses in the countryside for the first time as it prepares to evolve into the nation's fifth largest bank. Beijing approved a blueprint to turn China Post into a lender last summer, and state media have recently said the new bank will be set up soon.
Will this bank will be given a fighting chance, being able to lend money at market rates that reflect the riskiness of the customer? More likely it will become a tool of government policy now the government's grip on the big four banks has slipped thanks to their privitisations. Being optimistic, it could be the Chinese government's experiment in micro-finance. Pessimistically this bank will come under pressure from Beijing, provincial and local governments to lend on favourable terms to favoured clients.

It has cost China hundreds of billions to bail out the big four banks and prepare them for listings. Hopefully this new venture won't end up costing as much.

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[boomerang] Posted by Simon at 09:49
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April 11, 2006
The wrong blame game

Following the chart showing China's acutal purchases of US Treasuries lags far behind perceptions comes an excellent piece in The Times sayign America misdiagnoses the "China syndrome":

The problem with all of these protectionist prescriptions is that, not only do they wholly misdiagnose the malaise supposedly gripping the American patient, but also that the supposed “cure” could prove lethal — and would certainly be extremely painful.

The senators’ misdiagnosis rests on their belief that the yuan is hugely undervalued, that Beijing is barely moving to address this and that the cheapness of the Chinese currency is what drives the scale of its exports to America. All of these views are mistaken.

The article also goes on to look at how anti-China measures would hurt America. It doesn't look at the potential impact on China itself of such measures, and not just in the economic sphere. While a politician might think it sounds good to bash China, the punters are down at Wal-Mart stuffing their shopping baskets with Chinese made goods while they're paying down their low-interest rate mortgages. What's more likely to influence votes?

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[boomerang] Posted by Simon at 09:00
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April 08, 2006
The Hong Kong Yuan?

Questions were raised of the Hong Kong Monetary Authority Chief Joseph Yam (yes, the same organization that saw fit to rent the top 14 storeys of IFC 2, the tallest building on the island) with regard to the future of the Hong Kong Dollar. These were in light of increasing speculation that the Chinese Renminbi, or Yuan, would become more valuable than the Hong Kong Dollar. But he said, in as bland and bureaucratic a manner as possible, that Hong Kong would retain its currency even if the Renminbi became the stronger of the two units.

He said that two units of currency could be ruled legal tender in Hong Kong, but that it would take a long time for the Renminbi to become a global currency.

But it is what he is not saying that is so important. For all of China's success, its financial system is still a complete mess. Dodgy loans continue to be extended to even dodgier companies, and could yet cause massive turmoil in China's economy (not to mention its government) and wreak havoc, of course, on the RMB -even having the greatest foreign currency reserves in the world may not be enough to stop any slide. It behooves Hong Kong to keep its dollar, then, to insulate itself from what is arguably an eventuality.

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[boomerang] Posted by HK Dave at 07:29
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April 03, 2006
China's Explosive Growth

A fantastic, even if Photoshopped, picture of urban renewal in Shenzhen, just across the river border from the New Territories of Hong Kong.

It has stirred controversy because it is an amalgamation of two different pictures, but it is at once a statement of China's steriod-fuelled development (the steroids being the limitless amount of cheap credit for property development), and the eclipse of Hong Kong as a center for wealth creation when the action is north of the border. Yet as Cindy Sherman, a famous American photographer once said, the camera can turn lies into truth; the photo over-simplifies the relationship between Shenzhen and Hong Kong, and masks their interdependence.

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[boomerang] Posted by HK Dave at 14:21
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March 31, 2006
Banking on it

If you give someone a second chance, you really hope that they've learnt from the mistakes that got them into trouble the first time around. That's especially the case when you're trying to move your economy onto a more financially sound footing, and even more especially once you've poured in hundreds of billions of dollars to bail out your banks. But it appears old habits die hard in China's major banks:

China's Big Four banks are still lending indiscriminately to state-owned firms instead of pricing their loans according to the commercial risks they are taking, a new International Monetary Fund working paper says...

Podpiera concludes that reform at the state-owned commercial banks (SCBs) still has a long way to go. Banks have been allowed since October 2004 to charge as much as they like on loans. But official data shows that in the fourth quarter last year virtually no corporate client of the SCBs paid more than 1.3 times the central bank's benchmark rate. Nor does the profitability of state- owned enterprises make a difference to bank lending, which Podpiera finds is driven mainly by the availability of savings deposits to lend out. Indeed, he says SCBs lend less in China's more profitable provinces, where other financial institutions have gained market share...

Although the banks have lent heavily to sectors that are suffering over-investment, such as steel, cement and construction, Podpiera notes that only 2 percent of loans made since 2000 have turned sour compared with perhaps 45 percent of pre-2000 loans. A slower pace of lending compared with the 1991-1995 credit boom might explain part of the difference, but Podpiera wonders whether banks are assessing their loan books rigorously enough.

"There is a striking difference between the reported credit quality of old and new loans, suggesting either a dramatic improvement of the underlying credit quality since 2000 or measurement problems," he says. To make the banks more market- minded, Podpiera says the authorities must avoid interfering in lending decisions for policy reasons.

It would be a major test for supervisors to ensure that all banks meet new capital adequacy requirements by the 2007 deadline. At the end of 2004, banks accounting for only 48 percent of commercial bank assets were in compliance with the rules, and there was a shortfall in provisions for loan losses of 960 billion yuan, Podpiera says.

At least China's found a way to get rid of some of its pile of foreign exchange reserves.

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[boomerang] Posted by Simon at 08:29
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March 24, 2006
Mr Smith goes to Beijing

According to the SCMP, the three protectionist American senators visiting China have undergone a miraculous conversion and now see the light:

The two US senators behind proposed legislation to impose punitive tariffs on Chinese products have shifted from seeing "China as a threat" to a potential "close ally" after meeting top mainland leaders yesterday.
New York Democrat Charles Schumer and South Carolina Republican Lindsey Graham said they had achieved significant understanding through their "amazing three days" in Beijing.

"It's been an eye-opener in many ways. And it's an amazing country with a depth of history that is just profound with an amazing present and vast potential for the future," Senator Schumer said.

"The vice-premier was a lot of fun. She's really direct. She would do well in an American forum. I like her a lot," Senator Graham said..."Is China a threat? [It] could be. Is China a friend? Yes. Is China a close ally? [It] could be. That's what's changed for me about this trip," he said.

When asked about the bill they have proposed that would impose a 27.5 per cent tariff on US imports of Chinese products, the senators said the jury was still out.

Bowled over by Wu Yi but still hedging their bets. The senators are doing what politicians do best - changing their message according to the crowd. You can bet as soon as they land back in Washington it will be "I've seen the enemy up close" again. And the Chinese have very politely told the Americans to piss off. This WaPo article also points out that the senators' visit and the bid to impose currency and other reforms is backfiring:
...in strikingly moral tones, they [the senators] pledged Washington's resolve to pressure China to liberalize not only its yuan regime but also its political culture, using trade as a wedge for an almost evangelical campaign for US values...

"In my country, we're very arrogant, and I admit to it," he [Sen. Lindsey Graham] said. "You have to understand that Americans have for 200 years fought and died not just for our freedom, but for other people's freedoms."...But when the time came for questions, the reaction from students and faculty revealed how the American campaign for a free-floating yuan has backfired in some quarters. Many in China resent the specter of the world's lone superpower seemingly attempting to dictate how Beijing manages its economy and the values that should govern Chinese society.

The bill has gained momentum as China's trade surplus with the United States has grown, swelling to US$200 billion (HK$1.56 trillion) last year. But many economists assert that even a significant revaluation would do little to alter the trade balance, noting that many of the goods China exports, such as clothing and furniture, have not been made in large quantities in the United States for years.

"This is just complete posturing," said Pietra Rivoli, a trade expert at Georgetown University. "This is the classic thing with trade: you make outlandish demands that are impossible for either side to satisfy, and then you get points for standing up."

But the reception the senators are receiving attests to the gravity of the issue for China's leaders, who are cognizant of the angry mood in Washington. The senators dined Wednesday with People's Bank of China governor Zhou Xiaochuan. They met Thursday with Vice Premier Wu Yi...

"I've learned that you've got 700 million people who need employment, that the interior of your country is not developed," Graham told the students. "I've learned in coming here that for you to change your system very quickly would be very hard for your country. I understand that better now."

If all it takes to open the eyes of these politicians to the folly and potential consequences of these protectionist measures, China should fly the entire US Congress out for a visit. I'm sure Wu Yi can spare the time.

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[boomerang] Posted by Simon at 09:22
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March 21, 2006
The plan, Stan

It's time to send Marxist economist Liu Guoguang a copy of Hayek's Road to Serfdom, according to the SCMP:

Market-oriented reforms must not override state planning because it is a remedy for market failures, including the widening wealth gap, a leading mainland economist said.

The latest shot from Liu Guoguang , an adviser to the Chinese Academy of Social Sciences, shows that intense debate over the direction and thrust of the mainland's economic reforms is continuing. Mr Liu's comments, carried in the China Youth Daily yesterday under the headline "Socialist market economy also needs planning", came after Premier Wen Jiabao pledged to push ahead with reforms earlier this month at the National People's Congress' annual conference.

Mr Liu said pro-reform economists had "blind faith in the market". "An erroneous perception is widely spreading at the moment, and that is to use the word `planning' in a totally derogatory sense," he said in the newspaper's review of China's past 50 years of economic development. "Excessive marketisation which excludes the use of planning is abnormal and wrong."

Mr Liu said his emphasis on the role of planning did not advocate returning to a planned economy. Rather, "effective government regulation and intervention is necessary to correct market defects".

He listed five issues which the market alone was unable to address: the overall balancing of demand and supply, economic restructuring, fair competition, environmental protection and social equity. "The market, which is conducive to the promotion of efficiency and development, cannot realise real social equity and will inevitably result in polarity between the rich and poor," he said.

"The government should take some measures to prevent those problems from worsening. It is more necessary for the government to play a complementary role to remedy market defects."

At his post-NPC press conference, Mr Wen vowed to press ahead with reforms despite "difficulties as we move ahead" and warned that "a retreat offered no way out". Many analysts believe Mr Wen's strong support for reforms may help turn the tide and help the pro-reform camp to prevail over conservatives arguing that reforms have gone too far.

It's planning, Jim, but not as we know it. When even Marxists admit that planning is a dirty word (in economic terms at least), you know things have changed. But each of these five "market failures" do not necessarily require the heavy hand of government regulation, especially in China's case where such regulations are often vague, arbitrarily enforced and not backed up in courts. And these so-called defects often have market based solutions.

Most worryingly, there's plenty of people that will agree with Mr Liu, and not just in China.

Seeing we're on things planning, Jake van der Kamp notes that Hong Kong's been paying consultants for several years to come up with a master plan, but they've not been able to finish the task. Full article below the jump, but here's the money graph:

These big visions never work. Events always overtake them and, if we shackle ourselves to them, we only make ourselves less responsive to events. Just imagine what a Vision 2006 would have been 30 years ago. It would have forecast a much poorer but more populous Hong Kong surviving on a garment industry with the industrial emergence of China ignored. Long-term studies do not look forward. They just take the present and project it forward and we wind up spending public money on the wrong things for a few years until we recognise reality and give up.
But my Ma told me to always end on a good note. So I'm pleased to announce that Hong Kong has been declared China's most competitive city, despite having a per capita GDP ten times that of major mainland cities. Will that stop the hand wringing in government circles about Hong Kong's declining competitiveness? Maybe we need a plan.

Planners' vision for the future no clearer after five years of babble - Jake van der Kamp

Among my few scholastic achievements include learning to speak Consultababble. I learned it when I was a cub reporter in Vancouver many years ago and assigned to cover the municipal council of the district of North Vancouver.

The big story in this municipal council at the time was the decision to formulate a master plan for the entire district. There was to be no more haphazard planning of development. All would be decided years in advance.

I was as keen as mustard. North Vancouver was leading the way in sound urban planning and I would be there to make sure it got full play in the Vancouver Sun.

I believe I actually managed to plough my way through about three series of the resulting consultants' reports, two more than anyone on the council read and then, fortunately, the whole thing petered out. Net result: I learned to speak Consultababble while North Vancouver paid a big consultants' bill, was told more studies were needed, and went back to haphazard planning, the best sort.

Thus, you will understand that I am not entirely surprised to see Hong Kong's own big vision for the future, Strategy 2030, seemingly adrift and moving nowhere five years after being trumpeted as the answer to where we will be in 30 years' time.

The table shows you where we should have been. This outline schedule, adopted in February 2001, called for all three stages of the study to be completed in 20 months. That means that the final public consultation on Formulation of Development Strategies and Response Plans should have been completed in February 2002.

Hello, fellows, knock, knock, where are we? Do we have that master plan yet?

At least I can say for North Vancouver that it recognised things were going nowhere and let the idea drop. But, as I understand it, we are still formally committed to Strategy 2030 and no one has yet recognised what a charade it has become.

The babbling stream of Consultababble has slowed to a trickle, however. Click the tab marked "What's New" on the official website and three entries come up.

In May 2004, there was a press release on Hong Kong residents' experience of and aspirations for taking up residence in China. In December 2004, there was another press release on Hong Kong people working and living in the Pearl River Delta and then 10 months ago we had a working paper on additional cross-boundary links to the eastern part of Guangdong.

Long-sighted vision, indeed, vision across the border and nowhere short of it. Was this not meant to be a study on what we would be on this side of the border in 2030?

But, then again, what are we to do with the visions of our past chief executive, Tung Chee-hwa?

He told his planners he wanted not only a major Chinese city but the most cosmopolitan one in Asia with a status comparable to New York and London.

From what I can see, they complied by forecasting population growth well above what we have actually had and, if this had any effect, it was to commit us to far more infrastructure spending than we will need for years to come.

Fortunately, we have taken a somewhat wiser course with the Commission on Strategic Development, which is also supposed to think grand thoughts about the future for us. We have appointed all the great and good of Hong Kong to it and they will talk up a storm until they get tired of it, which should not take very long.

These big visions never work. Events always overtake them and, if we shackle ourselves to them, we only make ourselves less responsive to events. Just imagine what a Vision 2006 would have been 30 years ago. It would have forecast a much poorer but more populous Hong Kong surviving on a garment industry with the industrial emergence of China ignored.

Long-term studies do not look forward. They just take the present and project it forward and we wind up spending public money on the wrong things for a few years until we recognise reality and give up.

I think it is about time that we recognise reality with Strategy 2030 too, but, if our planners will not, let us hear from them where we stand and what we are doing.

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[boomerang] Posted by Simon at 08:41
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March 01, 2006
Unreliable Chinese statistics

Sure it's only about 3 weeks old, but I heartily recommend the 88s look at the (un)-reliability of Chinese statistics and follow the comments for further debate. Then recall this is the world's sixth biggest economy and most populous nation. Finally ask yourself what's more dangerous - flying a plane blind or with deliberate misinformation?

As I've discussed previously, the problem comes about because those who compile the statistical data are also measured by the results. The natural incentive is to report flattering numbers to help your career and prospects, irrespective of the truth. The simple and obvious solution is to have an independent statistics agency which collects, compiles and disseminates the data. But there's plenty of vested interests to keeping the status quo. It's a classic clash of specific vested interests overriding the broader public interest. That assumes that governments work for the public interest...

On a related theme, a pessimistic look at the durability of China's economic boom and the dark side of China's rise (via MR). And Mark Thoma notes there is a historical precedent for a Western nation maintaining a long term trade imbalance with China.

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[boomerang] Posted by Simon at 10:37
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February 27, 2006
Avon calling

The seedy underbelly of globalisation is again exposed. China has granted permission for Avon to recommence direct-selling of its products as part of its market access agreements for joining the WTO. Encyclopedias, life insurers and vacuum cleaner shares all jumped at the news. So did shares in companies selling Mace and flame throwers.

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[boomerang] Posted by Simon at 16:48
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February 09, 2006
China 80 Years Behind US: People's Daily

Amusing article today on a study done by the Chinese Academy of Sciences on how far behind China is in terms of social and economic development. They have concluded that China is still a less developed country that is 80 years behind the US, France, Sweden and Germany. They said economically that there was less of a gap.

Unsurprisingly, there was no mention of the gap in political development.

While it is a welcome respite from Chinese triumphalism and scaremongering Western journalist reports, one hopes this will not serve as a justification for why some things don't work as well as they should (i.e., thousands of miners getting killed each year, and the government subsequently announcing they are shooting for a 3% reduction in deaths this year).

In any case, it would be interesting to note why such a study was commissioned in the first place.

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[boomerang] Posted by HK Dave at 13:39
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February 02, 2006
The Cost of Greasing the Wheels of Trade

A timely comparison by Andrew Leonard in Salon.com about the relative costs of oil price increases versus existing average tariff barriers between countries. He exaggerates, but the quote he lifts from a Canadian investment bank still seems a useful way of thinking about the cost of oil:

"On average," reports the investment bank CIBC World Markets, "a one percent increase in fuel prices leads to a 0.4 percent increase in total freight rates." In terms of a potential impact on world trade, say the authors of the report, Jeffrey Rubin and Benjamin Tal, "the $30 per barrel increase in crude prices since late 2003 is equivalent to an average tariff increase of 5 percentage points -- more than doubling the current average world tariff rate of 4.5 percent."

And what if oil hit a hundred dollars a barrel? That "would be tantamount to an almost tripling of current tariff rates and a de facto elimination of the entire cumulative tariff reduction of the past 45 years."

Tariff reductions = "trade liberalization." Globalization, meet your nemesis: peak oil. As supplies of cheap oil get tight, long-standing global economic trends could be poised for upheaval.

He makes the case, given that the US remains the world's largest consumer, that this may benefit Mexico at the expense of China. But I'm not so sure. China has been the marginal driver in the rising price of oil anyway. Lower export growth would mean less demand for oil, which would in turn improved any competitiveness eroded by high fuel prices. And at the end of the day, compare the border towns of Tijuana and Shenzhen - which one do you think is better set up for capturing the manufacturing business of the American consumer?

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[boomerang] Posted by HK Dave at 13:14
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China's deflationary crunch

Jim Jubak looks at the risks of deflation in China thanks to over-investment and an exports driven focus at the expense of domestic consumption.

In other news, China has appointed a new manager of most of its currency reserves.

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[boomerang] Posted by Simon at 11:59
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January 31, 2006
Spare time with Chinese characteristics

Today's China trivia question: if you reach your 5 year plan targets early, what do you do with the rest of the time?

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[boomerang] Posted by Simon at 10:20
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January 26, 2006
Great Leap Forward in China's economy

China yesterday announced a record 9.9% rise in newspaper cliches to describe its economic growth, including "growth spurt", "gallops", "soaring" and my attempt. Confusion abounds as no-one seems sure if China is now the fourth and fifth biggest economy in the world (it seems journalists have trouble comparing numbers). Even the mighty New York Times can't make up its mind (below the jump).

A mighty achievement, as China reclaims its status as an important part of the world. A time for swelling national pride as the Middle Kingdom assumes its rightful mantle. But one thought: it took the complete dismantling of Mao's Great Leap Forward and other economic disasters for this to happen. Basically this moment has been delayed by more than 50 years thanks to the Chairman. On top of the 70 million people he killed, he managed to retard China's growth and kept the nation impoverished. Here's hoping he's spinning in his mausoleum.


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[boomerang] Posted by Simon at 15:22
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The 411 on China's Coal Mines

The excellent Christian Science Monitor has a compelling article today on China's ghastly mine disasters. While the disasters are terrible, the author, Kathleen McLaughlin, makes a number of good observations to keep the tragedies in context:

Many of the accidents could have been prevented with basic safety procedures. Chinese media are rife with examples of stingy bosses shutting off gas alarms and failing to fix rail cars that toss sparks into combustible air.

So why did US mining deaths garner so much attention while China's deadly mines continue on? Heavy domestic media coverage of Chinese coal-mining disasters, which began in the past five years, may not be helping, Munro speculates.

"If you publicize a problem but do nothing about it, what you produce is compassion fatigue. You get a lot of reports about these disasters, but nothing ever changes," says Munro. "Just publicity by itself is not nearly enough."

Coal-mine safety wasn't always so lopsided on the global scale. The US has had a low fatality record in recent decades, but it recorded an average of more than 2,000 coal-mine deaths annually from 1900-45, and the number of fatalities never dropped below 1,000 in a year until 1946.

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[boomerang] Posted by HK Dave at 07:24
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January 19, 2006
Karl on the yuan

A great cliche for China watchers is how rapidly the Communist nation is becoming a market economy. Another is how China's vast foreign exchange reserves mean America's economic policy is being wagged by China, especially the People's Bank of China. So these frontiers of finance in a new fangled Chinese market economy are cutting each capitalists, right? Well, perhaps...from the SCMP:

The People's Bank of China has launched an anti-corruption drive in which it will draw on Marxist theory and methods to investigate its branch managers. Central bank governor Zhou Xiaochuan and its chief disciplinary officer, Wang Hongzhang, aimed to make Communist Party members and managers at the bank more honest and better able to fight corruption, the central bank's website said yesterday.

The drive would "employ a Marxist stance, perspective and methods to investigate and analyse problems", it said. "The collective decisions of the bank's leadership will be examined." It did not mention any specific incidents.
I can't find the part of Das Kapital that refers to managing US$800 billion in reserves, but I feel safer in the knowledge that Karl will be helping clear the cobwebs of corruption from the People's Bank. And it clears up why Kim Jong Il was traipsing around China last week.

Solidarity, Comrade Hemlock, in your struggle against ex-SCMP reporter Tinnie Chow and the CBC.

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[boomerang] Posted by Simon at 13:14
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January 13, 2006
When 20% Growth is a Correction

An article today about the state of China's property market that I found more worrying than breathtaking. The National Development and Reform Commission has said that it expected property sales in China to only increase 20%, and that the market had been in a correction since mid-2005. Allow me a quote:

It expects the growth in property investments in China to slow to 16 percent this year, compared with a projected growth of 21 percent in 2005 and an actual growth of 28 percent in 2004.

The value of property investments in China was 1.316 trillion yuan (US$163.11 billion) in 2004, and was forecast at 1.592 trillion yuan in 2005, it said.

The agency attributed the slowdown to the government's macroeconomic controls and an overinvestment in the property sector in recent years.

It expected this 'correction' to cause non-performing loans to rise, liquidity pressure, and for weaker property players to be weeded out.

Yet 20% is very respectable almost anywhere else in the world. What's going to happen to China when it faces a real correction?

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[boomerang] Posted by HK Dave at 12:37
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January 12, 2006

The SCMP reports:

Economic growth is likely to slow to between 8.5 and 9 per cent on the mainland this year, with deflation emerging as a risk in the second half, the state planning agency said yesterday. "The growth rate will decrease, led by easing investment and exports," the National Development and Reform Commission said in a report published in the official China Securities Journal.
9% growth is a nice problem to have. The true problem is what has driven this growth - exports and fixed asset investment. Consumption has not kept pace and private savings are rising as money is set aside to cover the growing costs of education and health and to supplement a non-existant social security structure, especially for retirees as life expectancy rapidly grows.

The biggest problem is deflation. Too much investment has created too much capacity and already the hissing sounds can be heard, for example in Shanghai's property market. China's financial system is still awash with bad debts, creaky banks with poor controls and policies as often driven by cronyism and politics as by finance. China's pegging of the yuan means effectively it has outsourced its monetary policy to the Fed, ECB, BoJ and other central banks. The government is trying to prop up consumption but is taking in more than it can spend. So when prices start to fall, what is the most likely way out?

Export deflation.

If you own a factory, once it starts running you need to sell whatever it produces. You want to make a profit, but the money you spent building the factory is a sunk cost. Even if you can't make that money back, you'll keep on producing goods if you can sell them for more than it costs to make each individual unit (the marignal cost of production, in econo-speak). It doesn't cost much to make stuff in China. As a factory owner, you don't care if you're not making a net profit - if you can keep making a small amount on each piece produced, you will. Other countries will complain you are dumping goods at below cost, but it depends what you deem the cost of production.

It's a unique kind of deflationary problem, combining some elements of the deflations of Japan in the past 15 years, the Great Depression and others. But it is deflation with Chinese characteristics, especially as China is still not a fully functioning capitalist economy.

The good news? This could keep economists busy for years.

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[boomerang] Posted by Simon at 11:31
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January 03, 2006
Control freaks

China's major problem is it is ruled by control freaks. The relentless need to remain in control will inevitably be the source of the CCP's fall, because human affairs are ultimately not even controllable by Communists.

There are several telling examples. Firstly today's (still unlinkable) SCMP reports on the government's back to the future attempt to close the rural/urban income gap, and finds the biggest problem is land reform:

The government is planning to bridge the widening income gap between urban and rural areas by introducing a raft of initiatives to invest more in the countryside over the next five years. Absent from the plans, however, were any moves to adjust land policies, though land disputes were seen as the main source of discontent behind the series of violent clashes in rural areas during the past year.

A new movement, entitled the "new socialist countryside", will be the focus of rural development during the 11th Five-Year Programme. A similar slogan, "building socialist rural areas", appeared in the 1950s, but was later dismissed as part of propaganda about building a utopian society. The latest campaign draws comparisons between the situation on the mainland and South Korea's experiences 30 years ago...

According to state media, Beijing's vision of a "new socialist countryside" consists of five components: production growth, affluence, rural civilisation, a clean environment and democracy in the management of local affairs. The vision may look like a holistic approach, but scholars are worried that it may turn into another white-elephant construction spree.

Likely problems include the usual: corruption, political point-scoring for provincial officials by wasting funds on "showcase" villages, increased financial strain on villages as local governments tax to spend. And the program largely misses the point - money alone isn't the solution to rural poverty. Proper land reform, well-deliniated land rights, open and honest courts that will defend the poor from developer and government land grabs and cops that don't shoot those defending their patches of earth are all vital. But the control freaks demand progress, and progress can only come with control. The true beauty of the capitalist market system is it works with a minimum of control, not a maximum of it.

Another example is China's banking sector. With many banks of various sizes swamped with bad debt, China is experimenting with taking in foreign capital in the sector. But now the dam wall of control has been slightly breached, you can expect a flood to soon follow. China is delicately trying to leverage foreign money and experience to resolve its financial system problems (bad debts, poor management and poor controls) but without giving up control. But foreigners are not going to give over huge sums of money, time and expertise without getting some say over what happens to it all. China's government will be expected to cede control in return for these things.

This leads to an interesting consideration - China's currency policy. If you view that policy through the prism of control, then China's reluctance to make changes to either the level of the yuan or to its capital account (allowing the free flow of capital into and out of China) makes sense, even though it defies economic wisdom. This is the dimension that is often missing from economic commentary on China's economic policies. Economics is better considered as "political economy", especially when dealing with a government such as China's where the control premium is so large it often outweighs economic logic. And this concept extends past the world of economics - much of China's actions can only be considered through an understanding of the relentless need for the CCP to retain control at all costs.

The CCP's problem is the reforms of the past 25 years have unleashed growth and social changes that are beyond even the best abilities of government's to control. China's government relies on brute force and technology to control the internet, only to find SMS and mobile phones outstripping their control. Information is difficult to control; economies are difficult to control; people are difficult to control. The best systems allow these forces to flow of their own accord, sometimes stepping in when they fail or lead to adverse results but otherwise leaving things to find their own equilibrium. Imposing solutions doesn't work because (and this may be a shock to many) some people do not know better than others.

Equilibriums are a balance of dynamic forces, sometimes assisted by catalysts. They are not brought about by control freaks wishing it is so.

Related reading

Mark Thoma links to an IHT article on rural China's ticking time bomb.

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[boomerang] Posted by Simon at 10:18
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December 30, 2005
China Creating 80 Mn Jobs - Abroad

A rather interesting forecast highlighted in the People's Daily Online today about how China is set to import US$4 trillion over the next five years from abroad. The forecast, by well-known Qinghua University economist Hu Angang, expects that that order of import requirements will create 80 million jobs abroad.

A helpful perspective for people that only believe that China is taking jobs away. Here is the other side of the equation.

Be good for Oz, eh, Simon?

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[boomerang] Posted by HK Dave at 09:13
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The Men That Build China

Another fascinating article from David Barboza of the New York Times (free subscription site). It is about a man that could soon become the country's richest - he's in real estate, runs the Shimao Group, and his name is Xu Rongmao. He has US$9 billion in projects, is due to complete 145 million suare feet in real estate by 2010 and - he used to be a factory textiles worker.

The article paints a picture of the heady wealth that some men have achieved from lowly positions - factory worker, truck driver. It also demonstrates how little these men want to share how they achieved their wealth, for fear of government investigations or reprisal. Contemporaries though, pay Mr. Xu great homage for his vision and foresight.

Imagine how different Australia or America would be if all of its tycoons were rags-to-riches stories - pondering the meaning of it on society is a fascinating exercise.

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[boomerang] Posted by HK Dave at 09:05
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December 21, 2005
Overnight riches

As reported previously, China's GDP was revised up by almost 17% yesterday. This was thanks to a large revision in the contribution by the services sector. But some economists still consider the figures understated, perhaps by as much again as this revision. From the SCMP:

The long-underestimated service sector now has a GDP ratio of 41 per cent after the revision, up from 35 per cent. But Mr Tao said this ratio of the booming service sector was still too low, and up to 220 billion yuan was probably underreported.

"Anybody who has been to both India and China would tell you that China's service sector is as robust as India's, if not more ... China's GDP ratio of its service sector should at least come closer to India's 52 per cent," he said. Mr Tao said the underestimation was a combined result of an underground economy, tax evasion and currency undervaluation. He said sectors such as catering, hospitals and construction were prone to data collection faults...

Economist Andy Xie from Morgan Stanley said the lack of an independent national statistics agency was the major reason behind the unreliability of economic statistics as local authorities would tend to "massage" statistics.

Some other implications:

1. China is now the world's sixth largest economy, behind the USA, Japan, Germany, Britain and France.
2. Several elements of China's government spending are set for big rises, especially education, health and defence, as these are usually set as a percentage of GDP. However the question will be how the Government will pay for these increases - just because the statistics say there's a jump in GDP, it doesn't mean the money magically appears in the coffers.
3. China's per capita GDP is higher again, taking the country to 107th in the world from 112th. Everyone in China is 17% richer than they were yesterday. I somehow doubt it will spark a consumption boom.

Here's a translation of the National Bureau of Statistics statement on the economic census.

David Altig notes the contrast with Japan.

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[boomerang] Posted by Simon at 09:00
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December 20, 2005
Watch the Fridges

There is a rather interesting article demonstrating the greed and fear with which California's agricultural kingpins regard China. It is worth reading just for its reminder of how to track the rise of China's bourgeoisie:

You want to track the middle class, check the refrigerators," says Robert Tse, director of trade for the California Department of Food and Agriculture.
Incidentally, I've read that the domestic fridge market was 14 million in 2003 but told that it was closing in on 20 million this year.

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[boomerang] Posted by HK Dave at 18:26
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A tale of two taxes

History in the making. I wonder if any enterprising economic historians have thought to explore what the history of taxation has to tell us about human history and progress?

Compare and contrast: China will officially scrap all agricultural taxes, a tax that has existed for 2,600 years. On the other hand, Gaungzhou is to introduce a capital gains tax on property to curb speculation. We've gone from taxing the produce of the land to taxing the value of the land itself. That's progress for you.

On a completely different note, Skinhua brings you Yu Na in bikinis, helpfully labelling it "hot". Thank goodness China's official media outlet is leading the crackdown on declining morality.

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[boomerang] Posted by Simon at 09:06
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December 13, 2005
China's overnight economic miracle

Somewhat amazingly, life goes on outside of the WTO conference. And today's papers contain three related but interesting reports on China's economy.

I bet you didn't know China's economy grew 20% overnight! More worryingly, China has done an economic census and discovered it has undercounted its GDP by US$300 billion! From the SCMP:

China's booming economy, already the seventh largest in the world, has been understated by as much as US$300 billion, the country's first nationwide economic census has discovered. The sum, equal to nearly 20 per cent of last year's US$1.65 trillion gross domestic product, highlights the serious understatement of data on the nation's sizzling services sector, according to mainland economists who have been briefed about the census results.
We've talked previously about China's dubious economic statistics, but this takes the cake.

Then China's consumer prices rose only 1.3% in November, a figure lower than expected. This will give the government room to ease fuel and electricity pricing controls but has again sparked worries about deflation. But for the monetists out there, work this out. China's money supply growth is expanding rapidly, according to the SCMP:

China's money supply expanded at the fastest pace in almost two years last month, the People's Bank of China said yesterday on its website. M2, which includes cash and all deposits, grew 18.3 per cent from a year earlier after expanding 18 per cent in October, the central bank said. It was the biggest gain since March last year.
A brief diversion into economics for those of you lucky enough to have avoided the topic. Inflation is the measure of how quickly the prices of goods and services are rising. Money is a good, just like anything else, with its own supply and demand and price (called interest rates). If the supply of money is rising rapidly, allowing for growing demand for money (via increasing wages and economic growth), then more money chasing the same amount of goods means prices (ie inflation) should be rising.

So to how explain this disconnect between roaring money supply and low inflation? There's two possible answers: one is that the money supply figures are wrong and/or meaningless, of which there's a high chance in China's rapidly changing economy. Secondly, the extra money is going into areas not measured by the inflation numbers. This has happened in many Western countries. What would be those areas? Asset markets: in China, property is the main one, although some would also go into shares and other markets.

Can you say bubble?

Update: This seems appropriate: why is Shenzhen's real estate market going crazy?

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[boomerang] Posted by Simon at 10:26
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December 06, 2005
Rates before currency

This won't get the publicity it should. The chairman of the China Banking Regulatory Commission says interest rate reform must come before currency reform in China. Liu Mingkang proceeds to give American politicians a lesson they should pay heed to but won't:

Liu said further reforms to the country's interest rate system would help companies better gauge currency risks, which would be crucial for introducing greater currency flexibility. "If you haven't got the full liberalization in interest rates, then you cannot give a pricing system for forwards and futures to hedge your foreign exchange risk," he said.
Liberalising China's currency is but one part of a much broader problem - that of financial market and capital account reform. Without delving too deeply into macroeconomic jargon, financial markets are linked. Interest rates are the price of money, while foreign exchange rates can be thought of the mechanism between which different countries equalise their supply and demand for that money (or goods, it's the same thing). Liberalising one without the other could prove disasterous. Likewise, liberalising too quickly, in a "big bang" approach, would probably collapse China's banking system and seize up the entire economy. And if China liberalised its capital account (ie allowed citizens to freely convert yuan for foreign currency) the renminbi could depreciate rather than appreciate when floated.

Is this what American politicians really want?

The Chinese are slowly taking the necessary steps to liberalise their financial markets. It could be quicker, but when you are transitioning the world's fourth biggest economy from a quasi-central planning system to something approximating an open market system, taking your time is not necessarily a bad thing.

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[boomerang] Posted by Simon at 11:41
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November 21, 2005
The wrong bogeyman

In The Economist's article on the new face of globalisation (sub req'd) there's one hell of interesting chart (if you think charts can be called interesting, you're an economist):


Simply eyeballing the chart leads to what should be an obvious conclusion - China's share of America's growing trade deficit has been, at the very best, a constant proportion of about 25% of the deficit. In quantum terms, China is about $200 billion of the $800 billion deficit, whereas 5 years ago it was around $100 billion of a $400 billion deficit. Where's the rest coming from?

Seen the price of oil lately?

But it's not so easy to bash the Saudis (with a currency linked to the US dollar), the Russians, the Norwegians and the rest of OPEC.

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[boomerang] Posted by Simon at 16:15
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November 18, 2005
Great Leap Forward II

It's official - China's director of statistics has decreed that China will grow at 8% for the next fifteen years, thereby allowing China and its population to arrive at the middle-income rank of countries globally. His department, known esoterically as the Calculation Department of National Economy of the National Bureau of Statistics, is in charge of making important pronouncements on the state of the nation. But they have been notoriously unreliable over the years, as Simon has pointed out in these pages, and given how boldly and confidently Mr. Xu Xianchun has made his prediction, one wonders how much it is a forecast and how much a statement of intent.

As some of you may know, I was a research analyst at an investment bank in a previous career, and also made predictions for a living. I learned during my time that if you were right about 60% of the time (yes, another statistic) you could be mighty pleased with yourself (uh huh, just like the meteorologists).

I also learned that it was when people made incredibly confident predictions like: "There is no end in sight for the growth of the Internet economy" (circa 2000), "There is no conceivable way Hong Kong will ever become a considerable port of trade" (circa 1844, Montgomery Martin, HK Colonial Treasurer) or "China will grow at 8% for the next 15 years" (circa 2005) that they are most likely to end up with egg on their face.

Don't get me wrong - it could happen - and I would be as happy as anyone else to see the continued growth of China's middle class (which will result in political liberalization). But no economy of China's size has ever grown this fast, at any time in history, without some speed bumps. Woe betide the Central government if they do not prepare for that eventuality.

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[boomerang] Posted by HK Dave at 07:58
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November 15, 2005
Notes from central planning

Today's HK Confidential in The Standard notes the logical absurdities that can result from targets:

In China, official performance is famously linked to growth in the sector the official oversees. For regional officials, regional GDP growth has always been a decisive factor for promotion, for instance. It is the same for industries. However, Shangqiu City in the central province of Henan has carried this to an extreme. For many years, the central government has made efforts to promote cremation. Thus Shangqiu's Cishen town recently ordered that each village achieve an annual goal of cremating six of every thousand residents. That means six out of every 1,000 must die each year so that their remains can go up the chimney. The order doesn't spell out what the local government will do if fewer than six die in any given year.
Mental note: avoid Cishen.

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[boomerang] Posted by Simon at 09:49
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November 07, 2005
Polly funnies

Sometimes I don't know how these politicians can keep a straight face. EU trade chief Peter Mandleson has urged China to open its markets to EU goods and quell piracy and counterfeiting. At the same time China urges the EU to lift its arms embargo and China finally reaches a textiles agreement with America. Something about stones and glasshouses.

Even Donald Tsang is in on the act. The Don tells us HK on verge of economic 'golden era'. Meanwhile today's SCMP front page tells us home prices have been cut 10% as home sales slide. These guys can work in show business when they've finished in politics. Maybe they already are.

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[boomerang] Posted by Simon at 09:15
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November 05, 2005
Quote of the week

The leader on globalisation in The Economist, as expected, provides a stirring summary of the benefits and urgency of further globalisation, despite growing opposition. It contains this gem:

a bill before Congress devised by one of New York's senators, Charles Schumer, threatens a 27.5% tariff on imports from China if that country does not revalue its currency by an equivalent amount. In Mr Schumer's view, presumably, far too many Chinese peasants are escaping poverty.
Heh. The best jokes include a liberal dash of truth.

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[boomerang] Posted by Simon at 11:52
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November 02, 2005
Five morals

Singapore's former Prime Minister has taken another leaf out of the China book and said that there can be such a thing as too free a press. The SCMP:

Former prime minister Goh Chok Tong has defended Singapore's pro-government media industry from international criticism, saying a liberal press is not necessarily good for every country...Lee Hsien Loong, said Singapore's government and economic performance proved the city-state's system worked.

"Western liberals often argue that press freedom is a necessary ingredient of democracy and that it is the fourth estate to check elected governments, especially against corruption," he said in a speech on Monday night. "But a free press by western standards does not always lead to a clean and efficient government or contribute to economic freedom and prosperity."

The article doesn't mention if he provided examples to support this last statement, but I doubt it. Singapore was ranked 140th out of 167 countries for press freedom, while China was 159th (and Hong Kong 39th). As if to back up the ex-Prime Minister, the SCMP notes China's enlightened policy to coverage of bird flu:
ontrols over reporting on bird flu outbreaks have been tightened, despite Beijing's pledges to employ "complete openness" in the fight against the potentially catastrophic virus.

In a recently issued directive, the Publicity Department ordered newspapers to seek approval from the authorities before publishing any reports on new outbreaks of bird flu and any animal or human deaths which result...

Apart from the reporting of outbreaks and any deaths they cause, news about an exercise to prepare for the closure of ports in the event of human-to-human transmission of H5N1 has also been kept under wraps. Authorities were wary that news of the drill could spark speculation that human cases had been reported, according to government sources.

This stands in stark contrast to what the Secretary General of ASEAN was saying just yesterday: that Asian countries need to be open about bird flu news. It also contradicts comments by disease control director Qi Xiaoqiu on openness over bird flu. But remember, a free press is not necessarily does not always lead to a clean and efficient government or contribute to economic freedom and prosperity.

As a vote of thanks to Singapore, it appears PBoC's Huijin Investments has rejected Singapore's state-owned Temasek Holdings from taking a 10% stake in Bank of China (although Bloomberg contradicts the Caijing Magazine report). Why the rejection? The SCMP again:

"Huijin is BOC's major shareholder and at present it does not agree with Temasek becoming a strategic investor," a senior China Banking Regulatory Commission official told the South China Morning Post...The eight-member board of directors at Huijin, which controls 78.15 per cent of BOC, voted to reject the deal because Temasek's investments were seen as excessive, according to a report in Caijing magazine...

"What the government wants to do by allowing foreign strategic investors is to bring in the products, the management skills and the banking technology, and Temasek is not actually a bank," said Frank Gong, the chief economist at JP Morgan. "Temasek clearly doesn't bring as much to the table as Bank of America and Royal Bank of Scotland," added ABN Amro banking analyst Simon Ho, referring to the two banks' investments in China Construction Bank and BOC, respectively. "It brings a lot of money but not banking technology per se."

That's what not having an open press gets you.

Meanwhile in soon-to-be-police-state-for-a-week Hong Kong, an example of press freedom gone wrong. Again the SCMP:

Journalists adopting unethical tactics to pursue stories are ruining press freedom and destroying the credibility of the media, industry representatives warned yesterday. The accusations came after two reporters from a Hong Kong-based publication allegedly broke into Canto-pop star Gigi Leung Wing-kei's room in China World Hotel in Beijing last month while she was there to attend a Ferragamo fashion show...

Tam Chi-keung, vice-chairman of the Journalists' Association and convenor of its ethics committee, condemned media members who worked "under the umbrella of press freedom but were actually destroying it".

And you thought Western paparazzi were bad. At least you know in Hong Kong your personal data and privacy are well protected by the mis-named Office of the Privacy Commissioner for Personal Data. Right? Ummm...the SCMP one more time:
A privacy watchdog has found no reasonable grounds to launch an investigation into the disclosure of e-mail subscribers' information by Yahoo! that led to the imprisonment of a mainland journalist.

Commissioner Roderick Woo Bun told a special Legco panel meeting on information technology and broadcasting yesterday that Yahoo! Holdings (Hong Kong) had only disclosed information related to an office of a Chinese newspaper. He said that according to a verdict of the Changsha Intermediate People's Court in Hunan , "the information disclosed by Yahoo! ... to mainland authorities was only about the Contemporary Business News office in Hunan, which is not personal data".

Calling Rebecca MacKinnon.

To sum up: free press is bad for you, agreeing with China won't get you a piece of their banks, being a celebrity sucks, China learnt nothing from SARS and your email isn't private. Welcome to the Asian Century.

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[boomerang] Posted by Simon at 10:20
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November 01, 2005
Counting China's economists

China's economic system is described as a socialist market economy. In reality it is a muddle of capitalism and central planning, with murky statistics and transmission mechanisms and little clarity as to how the whole edifice functions. Who would be an economist in such an environment? Let this is the same country funding part of America's massive spending binge (along with Japan and the Middle East), becoming one of the world's biggest economies and with influence not just over its own 1.3 billion people but pretty much everyone on the planet through its influence in commodity markets, geopolitics, production and more.

Which means it's a worry when Professor Xue-liang Ding of Hong Kong University of Science and Technology says the mainland has at most five qualified economists, and that some of China's more famous economists wouldn't qualify in western universities' postgraduate programs. I cannot find the original article in the China Youth Daily but I look forward to a translation.

It doesn't look good for the dismal science. What if the rest of the world catches on? A small sample should prove the point:

USA - tens of thousands of economists, GDP growth rate 3.6%
Germany - tens of thousands of economists, GDP growth rate 0.6%
Japan - tens of thousands of economists, GDP growth rate 0.4%
China - 5 economists, GDP growth rate 9.4%

A regression analysis leads to only one conclusion - economists are bad for economic growth*.

* Don't start going on about causation vs. correlation. That's exactly why economists get a bad rap in the first place.

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[boomerang] Posted by Simon at 08:59
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October 31, 2005
Grow West

If China's West had received a yuan for every word written about the growing income gap between the interior rural poor and their richer coastal urban dwelling cousins, there wouldn't be a gap. The SCMP notes a report that incomes are rising in China's West, just not as quickly as on the coast (chart below the jump):

The wealth gap between the nation's east and west has widened in the five years since an ambitious strategy to close the economic divide was introduced, according to a study by the Xian-based Northwest University.

Although the researchers found the west was growing richer and people were better off, one academic who took part in the study said the push to develop its natural resources had instead profited the east. He suggested that altering the tax system would better address the imbalance..."Some people think it's not reasonable to support the west, because from a purely economic perspective the rewards for investment are higher in the east than in the west," he said. "But developing the west will be beneficial to the stability of the entire nation and could create a big market for east and central China, which will eventually affect their development."

But Professor Zhang, who heads the Shaanxi Academy of Social Sciences' economics institute said it was not fair for the east and west to compete directly in the market. "It's like having men and women competing in the same event, which is not fair," he said. "To develop the west under the market economy system, a pro-west market must be established."

Yes, Communist China's rich are getting richer and poor are getting richer, just not as quickly. I like Professor Zhang's analogy. One could also compare the East-West gap with the East Asia Games, which seems to be a giant waste of time for everybody involved despite grandiose white elephants infrastructure projects, where the talented, skillful, bigger and better athletes are dominating the competition.


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[boomerang] Posted by Simon at 09:57
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October 24, 2005
Oil Prices Headed for the Slippery Slope?

Saw this article today in Xinhua on how Chinese demand for imported oil fell 18% this year in response to higher energy prices and depressed refining margins due to China's price controls.

I have suspected for some time that oil prices today are artificially high, driven by speculation and government strategic buying programs. The major reason that has been provided by oil price bulls has been that there is a strategic, secular increase in oil prices created by China and that we'll just have to get used to $65 per barrel.

Let's see how much longer that continues with increasing interest rates and slowing demand, and continued decreases in oil imports from China...

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[boomerang] Posted by HK Dave at 11:03
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Making China's numbers add up

Last week China reported another stunning GDP growth number of 9.4%. But as we've found numerous times before, the numbers underlying the GDP calculation don't add up. Either China's consumers went on strike or fixed asset investment has been over-estimated. Jake van der Kamp is on the case and reaches an unsurprisingly but important conclusion (below the jump).

Other reading

Brad Setser calls it China's crazy numbers.
Big Picture also doesn't trust the numbers, saying I simply don't trust the commies to release the real data


When the National Bureau of Statistics in Beijing occasionally admits that the figures it publishes are not entirely reliable, I know exactly what it means. We had another case of it last week with the release of third-quarter provisional statistics for gross domestic product. Strong investment and robust private consumption pushed economic growth to 9.4 per cent in the quarter, said the bureau.

Oh yeah? Let us take a closer look at this.

The red line on top of the first chart shows a four-quarter rolling total of reported GDP in dollar-of-the-day terms. For the year to September 30, the mainland's economy registered an output of slightly less than 15 trillion yuan. Now we turn to the components of GDP. The biggest by far is fixed asset investment and firm figures for this were also published last week. Fixed asset investment for the year to September was 8.2 trillion yuan, 24.5 per cent greater than the previous year and the equivalent of 54.8 per cent of total GDP.

These are huge numbers, incidentally. It may be possible to find another country with fixed asset investment of more than half of GDP but I cannot think of any. For contrast try Britain at only 16 per cent or the United States at 19 per cent. In Hong Kong the figure is 21 per cent.

Let us take the fixed asset investment figure out of the mainland's GDP, however, to see what is left. We now have the red line on the chart. The rest of the economy turned out 6.8 trillion yuan in the year to September. The next step is to take out net trade in goods and services. The mainland enjoys a soaring trade surplus at the moment. It is not huge by the benchmark of the overall economy but deduct this component of GDP and you get the green line on the chart. We are now down to 6.1 trillion yuan. Finally the line in the ugly colour. Government consumption spending is another component of GDP and detailed figures are also published. Take it out as well and we are down to 3.4 trillion yuan. Notice here that this final line for what is left now curves distinctly down.

What is left is two items. One, change in inventories, is now an insignificant component of GDP and we shall ignore it. The other is private consumption spending, normally the biggest single component in most economies but certainly not in the mainland, it seems.

It seems, I say. Take that line in the ugly colour, plot it as a year-over-year growth rate and you get the red line in the second chart. It seems from this that in the year to September the man on the street spent 17 per cent less on daily necessities and toys than he did the previous year. But this is not what other official statistics say. They say that retail spending for the year to September was 13.6 per cent greater than it was the previous year (the blue line) and that this retail spending alone was almost twice as great as the remainder number we calculated for all personal consumption spending.

How is it possible?

It is not. The latest GDP figures from the mainland simply do not add up. I hesitate to use the word "rubbish" to describe them but I am starved of a better one.

I think the enormous discrepancy most likely results from an overstatement of fixed asset investment. Capital spending probably is much less than the National Bureau of Statistics says it is. This would imply something else again, however. It would suggest that a vast amount of money earmarked for capital projects was embezzled by corrupt officials and used instead for personal spending on luxury services and toys.

I shall not suggest that this surprises you.

Every second anecdote from the mainland tells you it happens every day. All I have done is put some possible numbers to the scale of it, a very big scale indeed. But I do suggest to the National Bureau of Statistics that it adopt a brand new approach for checking statistics, a new one to the bureau that is. The next time it publishes data it might want to check that the sum of the parts adds up to a given total.

If it does not, and no further work can make it so, then the bureau should not bother to mislead us with grossly and obviously false information. The round bin under the desk is where these sorts of statistics belong.

Determining economic statistics is notoriously difficult at the best of times. But such wildly inaccurate numbers make scary reading. Why? If you're steering the world's fourth largest ship and your navigational data is "rubbish", you're going to end up doing plenty of damage not just to yourself but everyone around you.

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[boomerang] Posted by Simon at 09:51
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October 20, 2005
China's economic bullet train

China's latest economic data (admittedly, take with a grain of salt):

3rd quarter GDP: +9.4% (forecast 9.2%)
Jan-Sep industrial output: +16.3% on year earlier
Jan-Sep fixed asset investment: +26.1% on year earlier
Jan-Sep urban fixed asset investment: +27.7% on year earlier
Jan-Sep retail sales: +13% on year earlier
Jan-Sep CPI: +2% on year earlier
Jan-Sep PPI: +5.4% on year ealier

Low inflationary strong growth continues. It is, quite frankly, amazing.

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[boomerang] Posted by Simon at 11:29
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October 19, 2005
Investing in China's banks

The China Economic Quarterly, always a good read, has several interesting articles in its latest edition. Over the next few days I'll post some excerpts of some of the more interesting pieces. One makes some telling points on the recent strategic investments in some of the big state owned banks:

The three biggest Chinese banks now all have their foreign dance partners. Herewith a few random thoughts inspired by this orgy of risk-taking:
• It is noteworthy that the banks with the widest experience of and exposure to China – HSBC, Citibank, Standard Chartered, and the French banks – are nowhere to be found on the list of investors.
• The government of Singapore (via its vehicle Temasek Holdings) is now the biggest overseas investor in the Chinese financial sector, with commitments of US$4.6bn.
• HSBC’s acquisition last year of 19.9 percent of the Bank of Communications is looking better and better. HSBC paid a lower price (US$1.7bn) for a bigger take in a better bank. Bocom is a smaller institution with a more commercial management and a heavy concentration of assets in the most dynamic part of China (the east coast). HSBC got two seats on the Bocom board, compared to the one that the new set of strategic investors will get in their respective institutions.
• The three deals effectively assign the same value to all three Chinese banks – about US$30bn. Perversely, this means that the worst bank – Industrial and Commercial Bank of China (ICBC) – is valued at the biggest premium, 50 percent above end-2004 book value of US$20bn.
• In ICBC’s case, the implicit value of US$30bn exactly equals the amount of new capital it received from the government this year. In the case of Bank of China (BOC) and China Construction Bank (CCB), the price tag is only slightly more than the total value of government assistance received in the past two years.
• Large investments by Merrill Lynch, Goldman Sachs and Allianz are predicated on those institutions offloading most of the risk on to private equity and hedge fund investors who will be expected to buy into China bank funds. This should produce some interesting road shows between now and the BoC and ICBC IPOs.

Clearly, none of these investments makes sense in a plain commercial way. What are the ways in which they do make sense? First of all, the investments are in essence capital-guaranteed. All three banks are linchpins of China’s financial system, and thus “too big to fail” and beneficiaries of an implicit sovereign guarantee. Even this was not enough, however, and Royal Bank of Scotland received warranties that would effectively prevent the value of its position falling below the purchase price even if Bank of China’s net asset position deteriorates. Bank of America is believed to received something similar for its CCB stake.

Second, it is just conceivable that plunking down a fat wad for a stake in a big stateowned bank will prove a more cost-effective way to enter China’s banking market than laboriously building up a branch network. Each new branch requires minimum capital of Rmb400m (US$49m). With the number of branches effectively limited by this high capital requirement and the slow rate of new-branch approval, foreign banks find it almost impossible to raise enough renminbi funds. They must therefore buy funds from Chinese banks (on a bilateral basis, since the interbank market is in its infancy). This means that foreign banks face an effective cost of funds of over 4 percent, about two percentage points higher than Chinese banks’ cost. A strategic investor, however, might be able to source funds at a lower rate from its partner, and try to run its China business from two or three branches in major markets.

As far as I'm aware, retail investors in CCB's IPO don't qualify for these puts.

Update (10/20)

Victor Shih says perhaps these investors don't have puts, rather a guarantee re book values.

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[boomerang] Posted by Simon at 18:50
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October 17, 2005
A Question Of Maturity

BCH offers the least of many reasons China should not radically revaluate the yuan, as the Bush administration is asking.

Administration officials say the plan is part of an effort to put the yuan into a broader debate over China's lopsided reliance on exports as the main source of economic growth. The plan, to be discussed in two days of talks here and in Beijing, calls for China to speed up the privatization of state-owned companies, including banks; to develop a Chicago-style futures market for currency trading; to establish an independent credit-rating agency; and to crack down on bailouts for banks left holding bad loans.

David Barboza offers an illustration of what revaluation means for Chinese companies.

Led by such trade gains, China's economy has been sizzling hot, bringing in so much money that Fitch Ratings said on Friday that China could in 2007 become the first country with more than $1 billion in foreign reserves; as of the end of last month they totaled $769 billion, the central bank said on Friday. Beijing is worried that strengthening the currency rapidly and sharply could be too much of a shock for the economy, perhaps even forcing companies to lay off workers.

Some economists say China's golden years are already coming to an end. And foreign manufacturers will not have it so easy. "The big question is what will happen over the next few years," said Jonathan Anderson, chief economist in Asia for UBS. "Wages and costs are going up in China. The economy is already past its peak. This is no longer the easy money you had in 2002 and 2003." There are fears that if China's currency appreciates sharply, some manufacturers will be forced to raise prices or shift their production to other low-cost regions, like India or Southeast Asia. Multinational companies that manufacture in China are already drawing up contingency plans.

According to Bloomberg, FDI trends are already mixed. In short, China's economy has already reached a point of maturity, but just as in previous periods of growth in its history, economic development is uneven.

Furthermore, as William Pesek, Jr. points out, the Bush administration is just wrong about comparing China to Japan or the former Soviet Union.

China is considerably less wealthy than Japan, and far more reliant on trade. So if Snow thinks his trip to China this month will result in a further strengthening of the yuan, he is mistaken.

Yet China is already more intertwined with the global economy than the Soviets ever were and its embrace of capitalism is more progressive. China's economy also is more stable and growing much faster than the Soviet Union's ever did.

Unlike the Soviet Union, which used fear to bend others to its will, China is using economic diplomacy. It has chosen integration and the promise of robust demand for trading partners' goods, rather than confrontation.

China, in part by buying so many U.S. Treasury bonds, also has made its relationship with the world's biggest economy symbiotic, a step the Soviets never took.

So, stop calling the Bush administration bullies. They're idiots!

Cross-Posted at Barbarian Envoy

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[boomerang] Posted by Infidel at 09:38
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October 07, 2005
Taiwan's monetary experiment

The rapprochement continues. Taiwan has begun a trial of limited convertibility of New Taiwan Dollars into Renminbi. And people like it, not least because it helps them avoid the black market.

Taiwan-China currency exchange services that began Monday on Kinmen and Matsu islands on a trial basis have gained warm public response and the government will further study the issue to better service the people, Taiwan Premier Frank Hsieh said Wednesday...The government will move ahead with the service and gauge the possibility of establishing a currency settlement system between the new Taiwan dollar and the renminbi, the premier said...

Taiwan passengers highly praised the service, saying that the measure helps them save a lot of trouble in exchanging renminbi and provides them with a legal channel to get rid of fake Chinese currency despite the fact that the exchange rate is a little higher on Kinmen and Matsu than on Chinese black markets. In the past, Taiwan visitors had to approach local tourist agencies on Kinmen and Matsu or black markets in China to exchange new Taiwan dollars to renminbi -- a practice that made many of them suffer monetary losses when taking in fake notes.

Taiwan is one of the biggest investors in the Mainland. Full scale convertibility is an inevitability. More interestingly this is just the latest small step in the warming relations between the Communists and the DPP. Clearly being enemies isn't what it used to be.

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[boomerang] Posted by Simon at 12:04
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October 04, 2005
Doing business in Dandong

Tim Clissold's Mr China is an entertaining read about the perils of doing business in China. Today's Sydney Morning Herald follows a similar case, of Alex Liu and the Dandong International Hotel (sub req'd, full article below the jump). The story has everything: corruption, kleptocracy, ineffective courts, shifty dealings, useless and mythical guanxi and more besides. A rollicking good read:

Only a few months ago the $US7.8 million ($10.25 million) that Alex Liu and a group of ex-Hong Kong investors, including two Australians, had put into a high-rise hotel here looked like dead money, an expensive case study in what can go wrong with foreign investment in China.

Their local government partner had loaded the hotel with extraneous debts, seized the official seals and expelled the managers, put the enterprise into receivership, then handed it to cronies who milked it of cash.

This week the investment was back from the dead. The leading crony was under arrest, city officials were running scared and grovelling, and Alex Liu was back walking the lobby, directing staff in a physical and financial clean-up to salvage the business.

Still, it's a hair-raising story.

Liu, a 60-year-old building engineer with a well-regarded firm in Hong Kong and a family home in Toronto, Canada, and his partners are pillars of respectability.

But they had to act as street activists to gain attention in China and keep protesting to get judicial, party and state officials to override powerful and corrupt local vested interests.

Advertisement"Over the last three years we carried out demonstrations 13 times," says Liu, who unfurled protest banners outside Communist Party offices next to Beijing's Tiananmen Square and the Liaoning provincial equivalents in the north-eastern city Shenyang, under which Dandong falls.

Fellow investor Patrick Choi, an environmental engineer with the NSW State Government, and his brother Nelson would take leave and fly from Sydney to join Liu on the streets.

The demos would be timed for the most embarrassing moments, like the annual meeting of China's National People's Congress, when authorities normally clear the capital of known petitioners and other usual suspects.

Chinese police would quickly intervene, fold up their banners and hustle them off the streets. But each time the partners would get a new meeting with high-up officials to put their case.

The partners agree they were naive in 1991 when they first heard about a business opportunity in Dandong, the city that is the main Chinese transit point into North Korea which it faces across the narrow estuary of the Yalu River.

Dandong's city government had started building the city's first modern hotel but had run out of money with just the 23-story shell completed. Alex Liu had the expertise and, with his friends, the cash to complete the project.

It seemed a safe investment. Their joint venture partner was a branch of the Chinese government. They were Chinese, able to speak and read the language, and more likely to forge the unspoken understandings of "guangxi", or connections said to underpin business deals here, better than written agreements. Their foreign passports gave them tax and other privileges.

The hotel duly opened in mid-1994, ready to cash in on a prospective boom when North Korea's isolationist regime eventually succumbed to globalisation - something the world is still waiting for, though a trickle of barter trade across Dandong's steel girder bridge is steadily picking up.

But in the meantime, the investors found their local partners practising a version of capitalism they must have learnt from the 19th century robber barons.

The manager provided by the city-owned Dandong Tourist Corp got the hotel to take over several large debts incurred by the local government before it entered the joint venture.

By the time Liu and partners caught up with this, banks were foreclosing on interest-swollen debt. In April 2002 the Dandong People's Intermediate Court put the hotel into receivership, under a local company close to city officials called Fu Wah Management Co. Deprived of the official seals, Liu and partners were denied all access to the hotel and its accounts.

Little or no help came from the Australian, Canadian and US embassies. The investment had been made through Liu's Hong Kong firm, Fam Engineering, and was therefore no concern of theirs. For local officials, the investors were not quite foreign, and not Chinese either, and thus easy game.

So the long campaign of political embarrassment started and, finally in May this year came a breakthrough. The Liaoning provincial high court formed a special panel which ordered the lower court's receivership order revoked and the hotel handed back to its board of directors.

But court orders are one thing in China, enforcement another.

Alex Liu, who had been chairman on the board of directors in April 2002 and still was according to all legal forms, drove down immediately to Dandong along with an enforcement officer from the provincial court to receive the hotel.

"Instead we were met by three new faces, from a new company called Nine Continent Tourism Co, who claimed they were the board of directors appointed by the local partner," Liu recalls.

Once again, all the partners flew into China to mount further picketing attempts outside the offices of Liaoning's top communists. But there it seemed to rest, a not untypical case of local power cliques resisting directions from above.

But somehow - Liaoning officials this week refused to discuss the mechanics - the challenge was taken up. In recent weeks Liu Tinyao, a key figure in the Fu Wah Management Co, was taken in by the Liaoning anti-corruption agency for questioning.

As well as being asked about 5 million yuan ($811,000) missing from the hotel accounts, he is also said to be linked to some 10 million yuan embezzled from the Liaoning Securities Co, a provincial investment bank that recently had to be rescued with a 500 million yuan cash infusion from the central government.

Resistance in Dandong collapsed, with several high-ranking officials said to be nervous about their futures. Alex Liu walked back into the hotel on September 20. "There wasn't a single fen [penny] left in the till," he said - and an accrued debt of 72 million yuan.

Most of the podium and lower floors have been taken as collateral by banks and an asset management company, so the hotel has ownership of only the top 10 floors, including its revolving restaurant which allows diners to dine while gazing out over starving North Korea, and pays rent on the rest.

"It's very complicated," Liu says.

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[boomerang] Posted by Simon at 13:59
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October 03, 2005
Chinese statistical inflation

China's economic statistics are notoriously unreliable but most agree that China has been the recipient of huge amounts of foreign direct investment (FDI). Not according to UNCTAD:

China claims FDI of $5.42 bn from US in 2002 while US says $924 mn, a variation of 83%. Adding a new twist to the debate over China’s awesome FDI figures, a recent Unctad report has said the numbers claimed by the country are far in excess of those reported by investors.

China claims that it got FDI worth $5.42 billion from the US in 2002. But the US says it has invested a meagre $924 million during the period, Unctad’s World Investment Report 2005, says.

The discrepancy is visible in case of other investors as well. China says Hong Kong invested $17.86 billion in 2002. But Hong Kong says the amount is $15.93 billion. Again, Chinese data show that Japan pumped in $4.19 billion during the year, while Japan claims it invested $2.60 billion a discrepancy of 38 per cent.

Interestingly, an OECD report titled “China: Progress and Policy review” points out that FDI flow into China from OECD countries during 1995-2000 was $39.3 billion, while the Chinese commerce ministry shows $77 billion. The OECD report states, “MOFCOM (ministry of commerce of the People’s Republic of China) FDI statistics are not based on the internationally recognised standards that are generally applied by OECD countries.
Even allowing for different calculation methods, these are huge differences. Has the China boom been more hype than reality? If FDI has been lower than typically believed, there is even more "hot money" and less stable forms of investment in China and the trade/captial account problems between America and China are even more worrying.

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[boomerang] Posted by Simon at 10:41
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» The Peking Duck links with: Are China's FDI figures exaggerated?
» New Economist links with: Are China's FDI figures fudged?

September 26, 2005
China's economic blood and sweat

China's economic boom grabs headlines and inspires admiration around the world. However it comes at a steep price. China's economic growth is inefficient - it takes far more investment per unit of GDP than similar economies at similar stages of development (e.g. South Korea and Japan). More chillingly, it is built on a disgraceful and disgusting human toll. Chinese industrial "accidents" resulted in more than 136,000 deaths last year. That's one death per 100 million yuan of GDP, or 178 industrial deaths per million people employed, or 372 deaths per day.

What's worse is these numbers are conservative. Many deaths are not reported - for example mine bosses often pay off families with hush money to avoid exposure and to continue their shoddy practices. These numbers also do not reflect on those who are injured but not killed through workplace accidents, a far greater number but with devastating long term consequences.

At some point these stop being accidents and become more akin to homicides by negligence. It is yet another seedy underbelly of the "China miracle".

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[boomerang] Posted by Simon at 15:00
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September 23, 2005
Google and China

As if Google hasn't had enough problems in China already, the People's Daily reports on Google's CN domain name problems:

"Gmail.cn", the domain name for Gmail in China, has been registered by a Beijing-based company instead. Gmail is a key product of Google. In fact, almost all the CN domain names for Google's such products have been registered by others.

Launching Gmail in April 2004, Google registered "gmail.com.cn". However, gmail.cn was registered by a Beijing-based company as early as in August 2003. Experts say, the time of the registration of "gmail.cn" was far earlier than the debut of Google's Gmail, so the possibility for the CN domain name to be recovered is rather slim unless the registration was vicious.

Months ago, Google recovered two domain names, i.e. "google.com.cn" and "google.cn" at high prices, but its troubles are far from this. It is shown at China Internet Network Information Center that the CN domain names for GoogleTalk, Google Earth, Googlelocal, etc. have all been registered by others.

Among the investor registers, there is the far-sighted such as a Guangdong-based company, who registered "googlelocal.cn" and "googlelocal.com.cn" in March 2004, far earlier than the one-week old GoogleLocal. There are also others who did it after the news on Google's redeeming the domain names with one million yuan was released. They registered "googlemap.cn" and "googleearth.cn". The time of the registration of "googletalk.cn" and "googletalk.com.cn" was along side with the official appearance of GoogleTalk.

It is really surprising that the registers could be so precise and fast.

Suspiciously surprising. There's some moral here about Communists, capitalism, cybersquatting, intellectual property and domain name rights, and Goliath Google against Guangdong Davids.

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[boomerang] Posted by Simon at 10:41
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September 21, 2005
Red space, green money

There's a massive irony when Communist China's space agency is showing captialist America's NASA how it's done. The SCMP:

Despite strict secrecy surrounding the launch date of the Shenzhou VI manned space flight, state television is already selling advertisements to promote the launch, state press reported yesterday. China Central Television is offering advertising slots ranging from 2.56 million yuan for five seconds to 8.56 million yuan for 30 seconds, the Beijing Modern Commercial Daily reported.

The flight, China's second manned space flight, is scheduled to take place next month, although no date has been announced. Two astronauts are expected to orbit the Earth for five days in a mission different from the Shenzhou V that orbited the Earth 14 times in a 21-hour flight in 2003.
Now if we can just work out how to cram some reality TV stars onto that rocket, we'll really be onto a winner.

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[boomerang] Posted by Simon at 09:34
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August 25, 2005
Even better than the real thing

Apologies for this site being down for the past 24 hours or so. I blame aliens.

I have been fortunate enough to have enjoyed two of the most pleasant New York summer days one could wish for. Thanks to my heeding overblown warnings of long delays due to tight security at JFK, I now find myself with an hour to burn in yet another nondescript airport lounge. After catching up on the latest Robert Kissel developments I came across a great piece in The Standard on the hypocrisy of the EU over China's intellectual property pirates. The author sees pirate goods being freely sold in Florence and notes it seems a bit rich for the European Union to complain to China about failing to enforce intellectual property protection when EU countries seem unable to enforce their own laws only a couple of hundred meters from Gucci's, Louis Vuitton's and Fendi's own flagship shops.

He goes on to point out the huge difference between the average spending power of the Florence tourists compared to the average shopper in China. For many in China there is no choice because the "real" goods are completely out of their price range but in Florence it is a very deliberate choice.

America is not above blame, either. The article goes on to point out how history repeats itself:

...the United States did not protect international copyright until the 1890s, 100 years after this right was written into the US Constitution. It could be argued that America's media giants were built on piracy: In the 19th century, when the country was attempting to catch up with its more developed rivals overseas, US publishers reprinted English works often without paying royalties, arguing that the industry was under-capitalized. Putting it in modern terms, pirating English literature allowed the US industry to avoid product development costs while building economies of scale.
A more modern example was Japan, which was able to mimick and then improve on many electronics and other goods, to both the benefit of Japan and the rest of the world. When China reaches the point of developing its own intellectual property, rather than manufacturing that of others, you will quickly see far tighter intellectual property protections. In the interim the country has far more pressing needs.

The same hypocrisy is common in the USA. My Monday afternoon stroll in New York took me through Soho and Chinatown, where numerous stalls were doing a brisk trade selling fake handbags, pirated CDs and DVDs, computing software, watches and more. In a delicious irony, a police car was parked directly in front of one of the busiest handbag shops. The tourist hordes were not disturbed by any other sign of law enforcement.

What this demonstrates is how difficult it is to eliminate the demand for these goods. Like the ridiculous and damaging "war on drugs", a supply will always meet demand just as supply creates demand. It is a cycle that is difficult to break, even in rich and advanced economies. If the original is really the best the market will pay that price. Most Hong Kongers wouldn't be caught dead buying fakes...because of the cachet and show-off value of buying the real thing. Those that do know they are getting an inferior product for a (much) lower price, and one that most of their friends will spot as fake in an instant. It is a trade-off between quality (and originality) and price that improves overall economic welfare. The only losers are the economic rent seekers who own the intellectual property. They are literally pricing themselves out of the market.

So let's view American and European attacks on China's intellectual property regime for what they really are: protectionism in sheep's clothing.

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[boomerang] Posted by Simon at 06:07
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» forestforever@gmail.com links with: A little drama added to overseas Chinese community

August 22, 2005
Oil is thicker than blood

The recent oil shortages in China had plenty of people, including myself, claiming it was a result of market distortions due to price controls. But Wu Zhong in today's Standard says I was only partly right and indeed missed the bigger picture. The three drivers that fuelled an 'oil crisis':

There are strong reasons to believe [Sinopec and PetroChina] have deliberately halted supplies to create seeming chaos...they want to pressure the NDRC for an immediate increase in oil product prices, thus cutting their considerable losses on refinery production stemming from the rising price of imported crude...the energy companies want to eventually force the NDRC to completely free oil product pricing so that they can completely dominate the market...[and] to take the opportunity to acquire the few petrol stations that they don't already run.
Read the whole article to see the bureaucratic powerplays that are driving (pardon the pun) this dispute. Of course it is the people who suffer, but since when have they mattered?

One other interesting part of the article that is mentioned in passing but has greater significance:

..as Sinopec and PetroChina have listed many of their business operations in overseas securities markets, they are increasingly able to cite "shareholder interests'' as an excuse to defy government orders.
Maybe market economics can triumph over Communism after all? The writer is implying that Sinopec and PetroChina are using shareholder interests as a fig leaf to ignore orders. What if, perhaps, they actually believe in creating shareholder value and subverting Government orders is a means to that end?

Stockbrokers as subversives. Who would have thought?

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[boomerang] Posted by Simon at 10:43
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» asiapundit links with: china economic roundup (viii)
» MeiZhongTai links with: What China Lacks
» EagleSpeak links with: China's Refinery Wars
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August 14, 2005
Faking Treasuries

For a while there it looked like Hong Kong was going to supplant China and Japan in the US Treasuries ownership stakes. The SCMP:

Forged US treasury bonds with a face value of US$250 billion have been seized in the biggest police operation of its kind for more than two years. Four Taiwanese people will appear in Kowloon City Court tomorrow charged with possession of false instruments.

Police said yesterday that the case came to light when a 79-year-old man contacted them earlier this month, saying he had been approached by one of the accused and asked for help in trading two boxes of US treasury bonds with a face value of US$500 million each. Officers of the Commercial Crime Bureau took over the case and arranged a meeting with the Taiwanese at a guesthouse in Jordan on Thursday, with officers posing as prospective buyers.

Three men and a woman, aged between 30 and 65, were arrested when two boxes each containing 250 suspected forged US treasury bonds were seized. A quantity of other suspected false instruments, including photographs and scanned images of foreign currency notes and bank and business documents, were also found during the operation... in February 2003, 16 boxes containing 4,000 items of forged US treasury bonds with a face value of US$2 trillion were seized from a flat in Central as part of an operation against an international fraud syndicate.

Two years earlier, two men, an Australian, 77, and a Briton, 58, were arrested over the seizure of forged US treasury bonds with a face value of US$490 million in a bank in Central. This subsequently led to the discovery of 44 boxes of similar suspected forged US treasury bonds in a bank in London.

Hong Kong - the world's largest holder of fake Treasury bonds.

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[boomerang] Posted by Simon at 11:02
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August 13, 2005
Cooling the dragon's breath

Interesting letter in The Economist from Andrew Freris, BNP's Chief Economist in Asia:

SIR – You propagate the canard that, economically, China now rules the world (“From T-shirts to T-bonds”, July 30th). It does nothing of the kind. In real dollar terms (purchasing-power parity valuations are at best controversial, at worst misleading) China has made a continuously declining contribution to global GDP growth from 10% of the total growth registered in 2001 to an estimated 6% in 2004—its share of real global GDP was an estimated 2.2% for 2004. There is also some quantitative flaw in your argument that cheap Chinese exports kept global inflation down, as China's share of global trade (an estimate unencumbered by PPP considerations) stood at 6.6% of global exports and 6.2% of global imports in 2004.

It is the speed of the rise of China's share in global economic and trade flows, as well as the growth of its demand for commodities, that has obscured the fact that China consumes, for example, less than 10% of the global output of oil. So what is truly special about China? Its average position in the scheme of things is still very small, although its absolute speed of growth and its opening economy are a harbinger of growth to come. But all of this is a far cry from controlling the world economy.

Andrew Freris
Chief economist, Asia-Pacific
BNP Paribas
Hong Kong

The point is China's growing impact on the world economy is at the margin, not in aggregate. It will be like that for a long time, even if China's rapid economic growth can continue indefinitely.

Which it can't.

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[boomerang] Posted by Simon at 15:46
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» asiapundit links with: china economic roundup (iv)

August 10, 2005
Yuan and Chinese financial market reforms

China has announced the composite currencies in its new reference basket in managing the yuan. The major currencies are the US dollar, Euro, yen and Korean won. Smaller members of the basket are the Singapore dollar, British pound, Malaysian ringgit, Russian rouble, Australian dollar, Thai baht and Canadian dollar. As expected, the weightings are based on foreign trade flows, which means the US dollar will continue to dominate the basket.

Did you spot the obvious omissions? No New Taiwan dollars, and no Hong Kong dollars.

At the same time the PBoC have liberalised financial markets, allowing more participants in the spot forex market, introducing interbank forex forwards and allowed the trading of yuan swaps. Below the fold is a Reuters article on these changes. But at the same time, the PBoC announced it is tightening its supervision to ensure a "stable, orderly market". Liberalising with one hand, but tighter supervision with the other. How can you tighten supervision when previously the market was Government controlled or banned?

Here's PBoC Governor Zhou on the RMB reforms.

Meanwhile, 3 of China's biggest securities brokers received RMB1.45 billion in soft loans as part of the ongoing bail-out of the sector.

Update (18:00) A bit of research reveals if the basket weights are based on the currency trade is denominated in, the US dollar weight should be around 52%, Euro 15%, Yen 13%, Won 8 and the others all around 2%.

Other Reading

Sun Bin discusses the RMB peg mechanism and some thoughts on its implications.
Logan Wright intends to follow the "actual" movement of the basket and says PBoC aren't following the Signaporean basket model.
Dan Drezner has some of an FT article on the moves.
Brad Sester isn't impressed by the new RMB forwards market.
Macroblog says the reforms are another step forward.

00:37 10Aug2005 RTRS-CORRECTED - UPDATE 2-China expands yuan forward market

In BEIJING story UPDATE 2-China, in new reform, permits yuan forward market, please read in headline ... "China, in new reform, expands yuan forward market" ... instead of ... "China, in new reform, permits yuan forward market".
Please make conform throughout to show China has expanded the existing market for retail yuan forwards, and has launched yuan swaps, but has not launched an interbank forwards market.

(A corrected story follows.)
(Adds reaction)
By Selina Shao
BEIJING, Aug 9 (Reuters) - China said on Tuesday more banks would be allowed to trade yuan forwards, a liberalisation move driven by the scrapping of the currency's 11-year-old peg to the dollar.
The long-awaited announcement by the People's Bank of China will make it easier for companies to hedge increased risks they face following Beijing's decision on July 21 to abolish the dollar peg and let the yuan trade a bit more freely.
The central bank, in a statement on its Web site, also announced the launch of trading in yuan currency swaps.
"It's just another step down the path of modernising the domestic financial system. I don't think there's any particular implication for the dollar/yuan rate or for the prospect of further revaluation," said Adrian Foster, head of currency strategy at Dresdner Kleinwort Wasserstein in London.
Forwards allow a company or bank to lock in an exchange rate for a foreign currency payment at a specified future date. A swap is another tool for hedging against -- or betting on -- moves in exchange rates or interest rates.
The central bank said forwards trading would be expanded to all banks, including foreign-owned banks, that have licenses to settle foreign exchange deals and to trade derivatives.
Until now, only four state-owned commercial banks and three joint-stock banks had been allowed to transact forwards with clients who could prove a need to hedge for trade purposes.
"Obviously you give more room for the market to exercise its view, and obviously it expects the renminbi to appreciate further," said Fong Cheng Hong, head of market research at DBS in Singapore.
The forwards market has been carefully guided by the central bank, and banks have been unable to set off their exposures with other banks.
A central bank spokesman clarified that the announcement did not signal the launch of an interbank forwards market. "This covers services that banks provide to companies," he said.
But the statement said that banks would now be allowed to set forward rates independently and that banks would be allowed to draw up forwards contracts for all their customers' current account transactions and for some capital account items.

Since ending the yuan's dollar peg, Beijing has emphasised the importance of developing China's fledgling foreign exchange market so it can better reflect supply and demand.
Last week Beijing announced that companies would be permitted to retain more of their foreign exchange earnings rather than being obliged to change them into yuan.
Another step expected soon is approval of a system of market makers for dollar/yuan trading, which is presently dominated by the central bank.
Until last year China had banned the creation of derivatives because of a series of price-rigging scandals in the mid-1990s that prompted worries about risk and a lack of market rules.
Despite the latest reforms, China's foreign exchange market remains strictly controlled.
Most currency transactions are prohibited unless they are for trade and approved investment purposes, permitting the central bank to keep a tight grip on the yuan thanks to its oversight of the China Foreign Exchange Trading System, the country's market for currency trading and clearing based in Shanghai.
"The move will be good for the further development of the local forex market," a trader with Bank of China said of the expanded forwards market.
But she said it might not have much of an impact on exchange rates, given the central bank's eagle eye. "Foreign players might be deterred if they see little to be gained from joining the game," she added.
Because of the restrictions on onshore trading, an offshore non-deliverable forwards market has developed, centred in Singapore, that allows investors and companies to bet on the future direction of the yuan. The contracts are settled in dollars. Turnover in the market is around $500 million a day.
(Additional reporting by Fang Yan and Jerker Hellstrom in Shanghai and Katie Hunt in London)
((Writing by Alan Wheatley, editing by Malcolm Whittaker; alan.wheatley@reuters.com; Reuters Messaging: alan.wheatley.reuters.com@reuters.net; +8610 6586 5566 x235))

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[boomerang] Posted by Simon at 12:13
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August 09, 2005
Who owns forex reserves?

Jake van der Kamp in the SCMP explains central bank balance sheet basics. Lest you think that is incredibly boring, Jake demonstrates that the "People's" Bank of China's massive foreign reserves (and those of many countries) is mostly owed to banks and private entities, not the Government (and thus, in theory, the people). Happily, there's one place that is an exception to this rule. Read on to find out where...

Mainland's soaring foreign reserves a treasure chest of fool's gold

My colleague, Mark O'Neill, who is based in Shanghai, contributed an interesting column yesterday about how the authorities in the mainland are deliberating what best they can do with their massive foreign reserves.

As he pointed out, those reserves of US$711 billion are now the second largest in the world after Japan's and, at the rate they are growing, could exceed Japan's by the end of this year. Most of the money is parked in US dollar debt instruments, predominantly treasuries, and the question in Beijing is whether it should stay there, be diversified into other currencies, be used for corporate acquisitions abroad or be repatriated for domestic uses.

Let us put one thing in perspective immediately. Asian countries generally have a mania about foreign reserves with a total of US$2.5 trillion of them at present. For an indication of how maniacal this can be, note from the first table that Singapore has more foreign reserves than the United States.

But I think O'Neill's analysis should be taken one step further as many people misunderstand what a country's foreign reserves constitute. They are technically the balancing item on the balance of payments and do not represent the net savings of government.

For an example of what I mean, look at the second table, which sets out the balance sheet of the mainland's central bank.

Foreign reserves are invariably held by central banks and you can see them here as net foreign assets, the first item in the assets side of the balance sheet. Although they constitute the largest single item in assets, take note that there are others.

What interests me more, however, is how these assets are financed and for this look at the liabilities side of the balance sheet. The largest single item here is reserve money. This constitutes the backing for note issues plus deposits made by banks and other financial institutions. Then we have the central bank's issuance of bonds, its foreign liabilities and the usual other liabilities.

All are distinguished by the fact that they are obligations to entities other than the national government or to the central bank. The only items that you could possibly consider as representing national savings here are government deposits and the bank's own capital and they amount to only 11.6 per cent of assets or liabilities.

In fact, even that 988.5 billion yuan in government deposits is questionable as public savings. The national government generates no surplus to deposit with the central bank. It has operated in deficit for the past 20 years.

If it puts money with the central bank you can be sure it also owes that money to others in some way. All that really exists as public savings here is the bank's own capital and that constitutes only 0.25 per cent of the total.

In other words, these massive foreign reserves are not really owned by the people of China overall. If the central bank were to liquidate itself, almost all of what it holds would have to be paid out to banks or private entities.

It is thus an illusion to treat China's foreign reserves as a publicly owned treasure chest. If the authorities wish to play with the money, they can do so but in the end they owe it back to others and those others are not the public of China.

This is, in fact, true of foreign reserves everywhere. For instance, the government deposits and capital of Taiwan's central bank amount to only 7 per cent of its total assets and Korea's only 4.3 per cent. In both cases there is again reason to quibble with how free of encumbrances the government deposit share of this is.

But let us end on a bright note.

Do the exercise for Hong Kong and of $1.06 trillion in assets in our Exchange Fund, about 68 per cent is attributable to government deposits and accumulated surpluses. Those are unencumbered government deposits, by the way.

We in Hong Kong might conceivably have the luxury to talk as the bureaucrats in Beijing talk. They, however, are probably fooling themselves.


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[boomerang] Posted by Simon at 13:33
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August 05, 2005
Same boring show

It seems that Ching Cheong will be charged as a spy. I suppose there will be some sort of show trial, then someone from the United States will make a high-level visit to Beijing a few months after he is convicted, in preparation for that trip Mr Ching will be released, probably into exile to the United States, and in the meantime journalists in Hong Kong will assimilate the fact that they can only talk about topics within the parameters set by the CCP.

Perhaps there will be some protests in Hong Kong, I don't know. I wonder why Beijing thinks this sort of charade is interesting: it's the same trick over and over again.

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[boomerang] Posted by Andres at 23:33
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August 03, 2005
Made in Zimbabwe

As far as Oregon weather goes, the last two weeks have been hot with temperatures in the 90s and no clouds to speak of. Between our house and the ocean is the Coast Range, a largely wooded expanse about forty miles thick where we live. In the evenings at the beginning of summer, when the weather was more unsettled, a bank of clouds would often loom above the hills that start a mile west of our house.

This past weekend, my sister, niece, and I drove our winding way through the hills to Lincoln City to do some shopping at an outlet mall there. The drive was sunny throughout, but helpless clouds wisped over the last hill before the ocean should have appeared. The marine layer managed to stop exactly at the top of the beach: driving on the Pacific Coast Highway you were in the sun, the moment you drove into the parking lot next to the beach the sun faded away, and looking across the parking lot's edge to the ocean the surf disappeared into the fog.

After doing our shopping we tried to make it to the beach, but in the end we couldn't find a parking spot and so drove back home, stopping at The Otis Cafe, a pleasant eatery ten minutes from the coast, for a late lunch. I bought a couple of shorts from Eddie Bauer and some socks from Jockey. I can't remember where the socks were made, but the shorts were made in Zimbabwe.

It reminded me of what I found two Christmases ago: everywhere I went shopping for clothes in Peoria the tags told me that the items were made in Cambodia, Indonesia, Vietnam, Bangladesh, the Philippines, and sometimes China. For someone who hadn't questioned much the notion that China was increasingly the world's factory, it was a fly in the ointment to see so many other places also vying to supply America's clothing market.

For over twenty years now China has managed to benefit from a fortuitous set of circumstances. It has a relatively educated and low-wage workforce. It has set up a legal regime very friendly to foreign companies. It has actively sought out foreign investment. It has actively sought to import foreign technology. And it has not had to compete against other countries for that investment or technology.

Reasonably though, how long can that last characteristic of China's success continue? How long can it depend on the incompetence of other countries' leaders for its own success? China's growing heft in East Asia and the world more generally is real enough, but I can't help but think that this weakness will grow more dangerous as time goes on.

The scale of China is often too shocking to completely comprehend. I can't imagine all of the problems its leaders face: agrarian unrest as urban centers rapidly modernize, the East/West economic divide, managing all of the nationalities of Beijing's empire, finding an international role conmeasurate with its clout. And of all of this without even pretending to have the legitimacy of being democratically elected.

For these twenty and more years what Beijing has had was the legitimacy that economic affluence can buy. Only once has it dropped the ball, allowing inflation to careen out of control at the end of the 1980s, one of the reasons why Beijing's citizens decided to support the university students at Tiananmen rather than stay indoors. Since then Beijing has managed the economy relatively well.

This success fosters admiration, which is always nice to have, and emulation, which is always dangerous to have. Vietnam has begun to open its economy and is attempting to enter the WTO. India in the last fifteen years has finally turned away from its failed socialistic economic experiments and found the better friend of the poor is capitalism. And Japan has long moved many of its factories to Southeast Asia, to countries such as Malaysia and Thailand that have similar economic characteristics as China.

None of these countries would have been competitors for China's manufacturers twenty years ago, but they are now. And I don't think this is fully appreciated by many within China. The sun is setting on the "easy" part of China's modernization.

Most of these economies are found in Asia. Perhaps because of proximity or necessity they cannot allow themselves to forever trail China. There are, however, a whole host of economies in Africa which could compete with China if only they would set their internal houses in order. (Why, if even Zimbabwe can now export textiles considering the mess it is in, then what of other countries less maliciously run?) And they have the benefit of largely English-language educational establishments, something which could ease their entry into world markets.

I do not see all of these countries forever remaining mired in poverty. Who wants to always be poor, especially when they see a fellow undeveloped country race past them into modernity?

Investments will not necessarily flee China and move to other countries: the world's economic pie is not static and not a zero-sum game. However, future investments will be made across a greater number of countries, China will cease to suck up so many foreign dollars, and the greater competition offered by other countries will cut into the margins that allow China to use its profits to solve its other pressing problems, whether they be an inadequate transporation infrastructure, agrarian reform, continued expansion of educational opportunities, or many others.

China's current social stability is a precarious thing, not least because unrest has no formal and legitimate channels to go through. Protest sheets sent to Beijing or riots in Zhejiang are not effective ways for a society to regulate itself. Democratic elections are: they provide a way for citizens to take responsibility for themselves. Quite simply, no other method of choosing a government is now considered more morally legitimate by most people in the world.

As long as China's economic performance benefited more people than it hurt, this has not developed into a serious issue. However, now as the world economic environment changes and one of the key ingredients to China's economic success, a lack of competition, slowly disappears, it seems to me only a matter of time before economic pressures translate themselves into social ones which the political system is ill-equipped to handle.

The Olympics in Beijing and the World Expo in Shanghai are the pinnacles of China's current economic and political model. Whole neighborhoods in both cities are being bulldozed by their respective municipal governments and literally millions of residents are being moved to make room for the roads, subways, and venues necessary for both events. Billions of dollars are being spent to make everything look good and indeed, for the duration of both events foreigners are likely to be beguiled by how nice everything looks. These are not insignificant achievements, but neither are they much help for discerning China's future.

People may be willing to have their lives upended for the sake of their country's international glory. They may be willing to not express their true opinions if they are spending all their time working hard to improve their family's economic well-being. However, after the glory has passed and if it proves increasingly difficult to get ahead in life because factories in other countries are cutting into your salary or profits then it is not unreasonable to see social cohesion, to the extent that China has it, fray and then unravel. And without elections to channel that anger and provide an opportunity for bad policies to be replaced by new ones, it is hard to say that some unexpected clouds are not appearing on China's horizon.

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[boomerang] Posted by Andres at 08:25
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» ShenzhenRen links with: Progress and Friction

July 29, 2005
Hepatitis B

On Saturday August 6 Answer to Cancer will hold an 8k/4k walk/run to raise money for cancer research and education near where I now live in Oregon.

Adrian Elkins was 19 years old when he was diagnosed with terminal, primary liver cancer (HCC), a complication as a result of chronic, hepatitis B he contracted at birth in Calcutta, India. During the final 6 weeks of his life, Adrian started The Answer to Cancer Foundation, in an effort to educate those with hepatitis B about the potentially life-threatening risks associated with this disease...

The Answer to Cancer Foundation was developed to educate people about liver cancer, and to promote the involvement of the general public in research, treatment awareness and education as it relates to liver cancer and associated illnesses, specifically Hepatitis B. Our mission is to raise funds for organizations and associations that have a similar mission and a large national reach. We strive to make a difference, on a local level, by generating attendance at our events (primarily races), gaining financial support for our cause from various corporations and donors and by integrating the community into all of our efforts through race participation and the distribution of educational information at our events.

It will hold three fundraising races this year, one in San Francisco (this past April), one in Oregon this coming month, and one in New Jersey in September. While these sorts of fundraisers are common enough in the United States, I do not recall this happening that often while I lived in China. The most famous Chinese charity, Project Hope, raises money for rural children to return to school. That is a worthy cause, but like any large society, China is a country with many needs. Unfortunately, it is still a country with limited economic means.

Answer to Cancer focuses primarily on one type of cancer, liver, and on one of its primary sources, Hepatitis B. Though money raised by Answer to Cancer will primarily be used in the United States, in fact its greatest impact will be felt in other countries, perhaps especially China.

There are two broad categories of Hepatitis B: acute and chronic. It is caused by a virus which is transmitted through blood or during sex. Acute Hepatitis B is what the infection is called during its first 6-9 months. Likely symptoms at the beginning of an infection include nauseousness, achy joints, and discomfort in the abdomen. However, it is quite possible that you will show no symptoms whatsoever. That does not mean, though, that the virus is not attacking your liver. If your body is unable to get rid of the virus then your infection becomes chronic.

The likelihood of developing a chronic infection from an acute one slowly declines as you get older. If you receive Hepatitis B as a newborn through your infected mother than you have almost a 90% chance to develop a chronic infection: sadly, newborns do not have adequate immune systems to fight the virus. An adult has only a 5% to 10% chance of developing a chronic infection. Once you have chronic Hepatitis B you will always have it: your body ceases to fight against it. Not in every situation though does chronic Hepatitis B lead to death. Sometimes nothing at all happens: you remain a carrier but your infection is not full-blown. If your infection does become full-blown then it will attack the liver.

As it inflames the liver scar tissue begins to form throughout the organ: liver cirrhosis. This scaring can lead to liver cancer. Because this cancer is difficult to detect in its infancy, once you have been diagnosed it is usually too late to treat.

In China, 170 million people are carriers of Hepatitis B and of that number, 10% have chronic Hepatitis B. While there is a vaccine available for Hepatitis B many people in China have yet to take it. Hepatitis B carries a significant negative stigma in China. Workplace discrimination, as well as discrimination in general against Hepatitis B sufferers makes for incredibly sad reading. In Zhejiang there was a famous case of a young man, Zhou Yichao, killing a local government official after he was denied employment because he was a Hepatitis B carrier. This stigma is a great pity since Hepatitis B is not easily transmitted (touching or saliva won't do it) and it is easily preventable with a vaccine.

In the United States there are comparatively few chronic Hepatitis B sufferers and consequently there is little impetus in this country to fund research to find a cure. However, worldwide there are few other viruses so widespread: 2 billion people have been infected at one time or another with Hepatitis B and of that number 350 million people have chronic infections. Many of those people live in China.

As China economically develops it will probably start allocating more money to Hepatitis B research and I have no doubt that eventually a cure for this virus will be found. For now though, there is a disjunct between where the economic resources are located and where the disease is most prevalent. Answer to Cancer is a way to bridge that gap. If you live near where the fundraising walk/runs will be held it would be great if you participated! However, for those who live too far away then Answer for Cancer provides a page where donations are accepted. For those bloggers who read this post, I deeply urge you to put a link to Answer to Cancer's donation page on your front page. The more publicity Hepatitis B research and education receives, the better. For readers of this post I urge you to go directly to this page and make a donation. Money funds research and that will be the only way we can find a cure to this virus.

Perhaps Hepatitis B seems too far away to you or perhaps not entirely real. For those of us who live or have lived in China however, I can guarantee that some of the people you work with, study with, play with, have meals with, or just see on the street, have chronic Hepatitis B. Hepatitis B is quite real: helping fund research will affect more people than you can imagine.

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[boomerang] Posted by Andres at 08:26
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July 25, 2005
Irony of ghosts

There are few books on China that are optimistic or joyous, books with happy endings or ones that strengthen your faith in humanity. For China's history, what can be said of the last two hundred years? Fantastic incompetence, malicious rule, overweening pride in the face of often unscrupulous outsiders: few groups of people have suffered at the hands of their leaders the way those in China have.

Reading through Red Dust last fall, the memoir of an artist traveling throughout China at the beginning of the Deng Xiaoping Era, I was hard pressed to find a satisfied couple, an unsullied smiling moment, an affirmation of hope (unless one counts Ma Jian's departure from China as one). In Chinese Lives, an oral history of Chinese interviewed in the middle 1980s, similar difficulties were encountered. Perhaps the 20th Century was a particularly bad period, but any one hundred year period of Chinese history would yield worthy examples of evil aforethought.

This past week in what I believe was my third try, I checked out Hungry Ghosts, a history of the great famine in China of the late 1950s and early 1960s. Last summer I also checked the book out from the local public library a couple of times. Each time it lay in my bedroom while I read other books: a victim of my dislike for sad stories conflicting with a desire to know the truth of a situation.

The famine that gripped Ethiopia in the mid-1980s, the one which defines deprivation for those my age, pales in comparison to what was visited upon rural China in the late 1950s. Perhaps the only other famine of comparable evil was that which was visited on Ukraine in the 1930s, but while Stalin set the bar for death quite high Mao, as was his want in all matters relating to misery, was determined to supercede any challengers. All three cases, needless to say, were directly caused by the actions of humans.

This is something that I continue to find difficult to understand about China and its history: the propensity for its leaders to regard the lives of Chinese so cheaply. This is not a recent phenomenon. It would be difficult to find a single century or even a decade where Chinese did not die needlessly because of their governments' policies.

Perhaps the only two places where you could find an exception to the century or decade rule are Macau and Hong Kong. Neither is particularly blessed with arable land, resources, or until reunification, defensible borders, but in both places the average person has thrived, achieving a standard of living higher than in any other place in China and a measure of individual freedom completely unknown on the Mainland.

There cannot be a significant difference in the culture of the people of these two regions and the Mainland: Hong Kong is famously made up of refugees from the Mainland, Macau less famously so but not less made up of refugees. Culturally speaking, all three are recognizable to each other, much like Americans, Canadians, and Australians can easily find similarities between themselves and the British.

How to explain then the lack of tragedy in Macau and Hong Kong's histories? Macau, the invisible colony, a place perhaps best known for not being known, 400 years of imperial anonymity ending in a reunification that lacked all of the pomp of its Pearl River neighbor. Hong Kong is best known for its Gongfu movies, a cultural export where even death is but a moment for slapstick. Prior to reunification it was the wealthiest of any place ruled in the name of the Queen of England. These are not the ingredients of personal devastation.

We could look at the administrators of both colonies for explanation, and while Hong Kong's post-WWII colonial governments made wise economic decisions, it seems unlikely to me that the quality of the people in either administration would have been significantly different than what could be found on the Mainland: intelligent, incompetent, benevolent, or venal bureaucrats are probably found in reasonably equal measures in every society on Earth. The notion of arguing that intrinsic differences exist between different races is morally repugnant and intellectually irrational.

But it seems equally unreasonable to say that differences in affluence and freedom between different societies are either accidental products of history or wholy determined by their natural environments. Recognizable differences in the standard of living in different places that continue for decades or centuries show that something different is happening in each place and that whatever the difference may be is having an effect on the lives of common people.

If Macau, Hong Kong, and the Mainland share strong ethnic and cultural affinities, then the primary difference between the places seems, in my mind, to be political: the rules of a particular society make it a success or a failure. The rules for success seem rather basic: rule of law that treats every citizen equally in the political sphere, rule of law that is predictable in the economic sphere, freedom of speech that allows citizens to discuss topics without fear and without having the outcome predetermined, a recognition that sovereignty resides in each individual and so each individual has an equal political opinion. Colonialism may have prevented the recognition of the sovereignty of those who lived in Macau and Hong Kong, but in almost all other respects the administrators of both colonies put rules into action that benefited their residents far more than anything done by Mainland governments.

In Beijing in the last 25 years more people have come to understand that these basic political rules are necessary for the improvement of the lives of the common people. Perhaps there were those in the Guomindang who also understood this, but certainly Jiang Jieshi did not. And while there exists in Confucianism the notion that leaders are obliged to return the common people's obedience with just rule, it would seem that over 2,000 years of Confucianisn in action yields more often an amazing blindness to others' misery. Obligation without accountability is easy to ignore: the needless deaths of hundreds of millions of Chinese over the centuries can attest to that. It would be irony indeed if the CCP, the organization responsible for the murder of more human beings than any other in history, the source of so many hungry ghosts, was the agent of such a positive change in China's political culture.

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[boomerang] Posted by Andres at 12:46
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July 22, 2005
Deconstructing China's growth

One of my hobby horses has been China's economy, and in particular the unreliable statistics used to steer the ship. I've created a China economy category to group together these posts*.

Jake van der Kamp again finds China's latest GDP doesn't add up:

I have a problem with simple things like one plus one equals two when it comes to figures put out by the National Bureau of Statistics. It seems they have an entirely different sort of calculator at work in Beijing. Take the latest announcement that economic growth in the second quarter was 9.5 per cent year on year. It was a bit higher than was entirely welcome, but growth is growth and this certainly looks like a good growth number.

Just for starters, however, we were also told that the growth rate of investment in fixed assets was 25.4 per cent year over year, definitely well above the latest cool-down target of 16 per cent. Our difficulty here is that the fixed asset figure is in nominal terms while the figure for gross domestic product is in real (inflation-adjusted) terms. But it can be resolved. We also have a price index for fixed asset investment and a little spreadsheet work serves to put the numbers on the same basis. This then allows us to take the fixed asset figures out of the total and calculate how strongly the rest of the mainland's economy is growing.

Take note that it is no trivial exercise. Fixed asset investment absorbs an astronomical 53 per cent of the mainland's GDP, a figure rarely to be found elsewhere on this planet. The first chart [below the jump] shows you the result of the exercise, done on a four-quarter average basis here to smooth out the usual volatility of mainland statistics. That stated growth rate of 9.5 per cent drops to a minute 0.06 per cent, effectively zero. If these fixed asset figures are right, then the rest of the mainland's economy is not growing at all.

It gets worse. Another component of GDP is the balance in foreign trade. The second chart shows you that for the 12 months to June, this amounted to a surplus of 657 billion yuan, or 4.5 per cent of GDP. Almost all of it materialised over the past 12 months. In June last year, the surplus amounted to less than 1 per cent of GDP.

Unfortunately, I cannot calculate an inflation-adjusted figure for the surplus. The numbers simply are not there and thus I cannot give you a third line on that first chart to show what the growth of the rest of the economy would be if you took the trade figures out of GDP as well. Rest assured, however, that you would get a negative growth figure if it could be done. Even taking the conservative tack, that figure would be at least minus 4 per cent. Aside from fixed asset investment and trade, the mainland's economy is contracting, not growing.

And then we get even more of a puzzle. We are also told that consumption, another component of GDP, registered strong growth of 13.2 per cent. How is this possible? By the time you have taken out fixed assets, trade and consumption, you have very little of GDP remaining. If they are all growing by more than 9.5 per cent, what is left to pull the overall figure back down to 9.5 per cent?

Well, let us say the consumption figure refers only to personal consumption expenditure and not to government consumption. No luck again. Government expenditure for the 12 months to June was up 16.2 per cent year on year. I shall grant you that these government figures are nominal rather than inflation-adjusted and also comprise some fixed asset investment, but, even if appropriate adjustments could be made, there is no way they would yield the big minus figure we now need.

The only thing left is inventory adjustments and I am fully prepared to believe that there was massive destocking over the past six months. We are talking, however, of the very smallest component of GDP, a bare 0.33 per cent of the total last year. No, this also will not give us what we need.

What we actually need is one of the special calculators they use in Beijing. Without one of these to help us, the economic growth figures just come out as nonsense.

Perhaps they are.

Funnily enough, the SCMP also reports the vey same statistics bureau is making policy suggestions and a startling admission:
The central government has been advised by the National Bureau of Statistics against introducing further economic tightening measures despite unexpectedly rapid growth so far this year. Despite reporting higher-than-expected gross domestic product growth of 9.5 per cent in the first six months of the year, a government economist said the bureau was predicting that the economy would slow.

The economist said nominal GDP growth, a figure not revealed to the public, was a more reliable indicator than the real-growth figure in the report, which the bureau adjusted for inflation and other factors. Nominal GDP growth had slowed markedly during the past few quarters, despite real GDP growth remaining relatively constant at close to 9.5 per cent.
Nominal GDP growth is a state secret! Why? It can be inferred using a combination of the real GDP and inflation numbers. Except as we've often proved before, these numbers are rubbish. Perhaps revealing nominal GDP would give away the real game? We couldn't have that.

You wouldn't even need a special Beijing calculator.


Related posts

- Invented the Abacus but can't add up
- Who to Believe
Lowering the sites
- The numbers game
- Not adding up
- Seeing is not believing

* It's also because I'm sick of searching for them, seeing I often refer back to previous posts. Here's a handy tip for new bloggers: always use categories.

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[boomerang] Posted by Simon at 11:49
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July 21, 2005
Revaluation day

China just revalued their currency to 8.11 yuan to the US dollar.



Xinhua is saying the yuan will stay in a range of plus and minus 0.3% around the new peg, although there are conflicting reports they are moving to a currency basket.

The question is whether a 2% revaluation is enough to appease the Americans and the speculators. The answer is likely not. It's a Clayton's move: the revaluation you have when you're not having a revaluation. A 2% move won't solve America's trade imbalance. Nor would a 20% move.

Malaysia, home to one of Asia's other pegged currency, has its central bank Governor meeting its Prime Minister. See below.

The official statement by the PBoC:

With a view to establish and improve the socialist market economic system in China, enable the market to fully play its role in resource allocation as well as to put in place and further strengthen the managed floating exchange rate regime based on market supply and demand, the People's Bank of China, with authorization of the State Council, is hereby making the following announcements regarding reforming the RMB exchange rate regime:

1. Starting from July 21, 2005, China will reform the exchange rate regime by moving into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. RMB will no longer be pegged to the US dollar and the RMB exchange rate regime will be improved with greater flexibility.

2. The People's Bank of China will announce the closing price of a foreign currency such as the US dollar traded against the RMB in the inter-bank foreign exchange market after the closing of the market on each working day, and will make it the central parity for the trading against the RMB on the following working day.

3. The exchange rate of the US dollar against the RMB will be adjusted to 8.11 yuan per US dollar at the time of 19:00 hours of July 21, 2005. The foreign exchange designated banks may since adjust quotations of foreign currencies to their customers.

4. The daily trading price of the US dollar against the RMB in the inter-bank foreign exchange market will continue to be allowed to float within a band of 0.3 percent around the central parity published by the People's Bank of China, while the trading prices of the non-US dollar currencies against the RMB will be allowed to move within a certain band announced by the People's Bank of China.

The People's Bank of China will make adjustment of the RMB exchange rate band when necessary according to market development as well as the economic and financial situation. The RMB exchange rate will be more flexible based on market condition with reference to a basket of currencies. The People's Bank of China is responsible for maintaining the RMB exchange rate basically stable at an adaptive and equilibrium level, so as to promote the basic equilibrium of the balance of payments and safeguard macroeconomic and financial stability.

And now Malaysia's gone to a "managed float", according to Reuters. Only the Hong Kong dollar to go.

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[boomerang] Posted by Simon at 20:07
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» Imagethief links with: China Revalues Yuan - America's Problems Solved! Oh, Wait...
» Imagethief links with: China Revalues Yuan - America's Problems Solved! Oh, Wait...
» Nieuws links with: China buigt
» Shenzhen Ren links with: Yuan revalues
» Nieuws links with: China buigt

July 05, 2005
China's (Uneven) Progress against poverty

Ravallion, Martin and Chen, Shaohua, "China's (Uneven) Progress Against Poverty" (September 2004). World Bank Policy Research Working Paper No. 3408.

During the discussion about China's New Left, Dylan pointed out the above working paper from a couple of economists at the World Bank. Over the weekend I finally had time to read it, and it is a remarkable piece of work for anyone interested in China's income gap, the split between rural and urban and the remarkable poverty alleviation in China. Worth reading in full if you have the time (skip the equations), but Dylan nicely summarised the findings:

1. China has made huge progress against poverty, but it has been uneven progress. Half of the decline in poverty achieved since reform and opening up came in the first few years of the 1980s. Poverty reduction stalled in the 1990s.
2. Inequality has been rising. In marked contrast to most developing countries, relative inequality is higher in China's rural areas than in urban areas. Absolute inequality has increased appreciably over time between and within both rural and urban areas.
3. The pattern of growth matters. Growth in the primary sector (mainly agriculture) did more to reduce poverty and inequality than either the manufacturing or service sectors. Rural economic growth reduced inequality in both the urban and rural areas, as well as between them.
4. Inequality is a concern both for economic growth and poverty reduction. With the same historical economic growth rates and no rise in inequality in rural areas alone, the number of poor in China would have been less than 1/4 of its actual value today. Rising inequality is not a "price" of high growth: statistics show that the periods of more rapid growth did not bring more rapid increases in inequality. The statistics suggest that more uneual provinces will face a double handicap in future poverty reduction: they will have lower growth and poverty will respond less to that growth.
The paper itself contains even more interesting pieces. For example the (Chinese) National Bureau of Statistics (NBS) did not perform household surveys at all during the Cultural Revolution. The authors create a poverty line of 850 yuan per annum in rural areas and 1200 yuan p.a. in urban areas, noting that poverty is becoming a relative rather than absolute term and costs of living have a big impact. One aspect of this the authors do not address is the massive rural migration to cities. Clearly despite the higher living costs of cities, economically the move makes sense for many rural dwellers even despite the higher poverty threshold. But are these people confusing nominal rises in wealth with real ones. In other words, they might be earning more but they might be spending relatively more just to survive as well. I'd like to think millions can't be wrong, but it's a question worth pursuing in analytical detail, especially when the externalities of catering to booming cities are considered.

But wait, there's much more...

The authors note China's urban population share went from 19% in 1980 to 39%, a massive and rapid change. By contrast India went from 23% to 28%. But the authors point out this might be due as much to expanding cities encompassing rural areas as it is migration.

Putting some numbers on the falls in poverty, the paper says poverty fell from 76% in 1980 (thank you, Mao) to 23% in 1985. But the fall in poverty hasn't been a straight line. The authors say the late 80s and early 90s actually saw rises in poverty before another fall in the mid 90s. Most interestingly coming into the late 90s there were signs of rising poverty in rural areas. I find that surprising given China's incredible economic growth since the Asia crisis of 97. What it means is the coastal/urban regions have benefitted both from the economic boom and at the expense of the rural hinterlands.

Moving on, the authors find the fall in Chinese poverty has been the net result of two strong but opposing forces: rising inequality and positive growth. In the past 20 years poverty has become more responsive to inequality. The rich are getting richer and the poor poorer. Yet in absolute terms everyone is better off. As I noted above, the move now is from absolute poverty to a more relative measure - surely a sign of success in poverty alleviation.

Unsurprisingly the authors find that growth in the agricultural sector has been the primary driver of poverty alleviation.

In looking at inequality between rural and urban areas, the authors find once you allow for the cost of living the answer is inequality has not changed between the two areas, although there has been a trend in absolute inequality between them. But within each area there has been growing inequality, albeit with patches where it went the other way. The authors say:

In marked contrast to most developing countries, relative income inequality is higher in rural areas, though the rate of increase in inequality is higher in urban areas; it looks likely that the pattern in other developing countries will emerge in China in the near future.
They don't back up this last assertion, which makes it difficult to judge. It seems more likely that past patterns will continue.

What has been the impact of inequality? Naturally higher inequality has made poverty alleviation relatively immune to economic growth in recent years. The authors ask if China's economic growth could have been so great without rising inequality. After some number crunching they conclude there is no sign of a short-term trade off between growth and equity. They also see no population shift effect on total inequality and that growth in agriculture is associated with lower inequality, while there is no correlation with growth in the secondary or tertiary sectors of the economy. In other words, the only growth that matters for China's poor is in agriculture. The authors do not consider why this is the case given it seems to ignore the urban poor, unless the urban poor's fortunes are closely tied to how things are going back home. But that would seemingly put the conventional wisdom (that the rural poor go to cities to send money back home) on its head. Another interesting avenue for someone to explore.

Another highlight of the report:

...positive shocks to rural incomes reduce inequality. Growth in urban incomes is inequality increasing in the aggregate and within urban areas, but not rural areas.
Again it seems the urban poor are getting the worst of it - their rural friends benefit if rural incomes rise, while they suffer if urban incomes rise. Remind me why they move to cities? Either they are seemingly economically irrational, or there's more to this than meets the eye.

Most interesting of all is the assertion it would appear reasonable to attribute the bulk of rural poverty reduction between 1981 and 1985 to this set of agrarian reforms. Which reforms? De-collectivization and the privitisation of land use rights. That's right. Simply undoing the worst of Mao's madness and giving people some kind of property rights resulted in the biggest reduction of poverty in human history. How much? The authors reckon these simple changes were responsible for 77% of the total poverty reduction.

Next comes the government's agricultural prices policy. Raising the compulsary purchase prices of agricultural goods (effectively a tax cut) there is strongly correlated with reductions in inequality and reduced poverty. Funny that - less government thievary reduces poverty.

The study finds trade policy is NOT a plausible candidate for explaining China's progress against poverty. It just emphasises what mattered the most was the granting of basic property rights.

When it comes to regions two things stand out. The authors find confirmation that coastal areas had much higher poverty reduction trends. But the province of Guangdong, home to Shenzhen (the first "liberated" Chinese city), saw significant and outsized reductions of poverty compared to everywhere else. Is it because the Cantonese are more industrious and business savvy? And does that mean Guangdong's inclusion in coastal area comparisons obscures the true story? There is a chance that the rural-urban gap may not be as pronounced as feared. It might be a Guangdong (and likely Shanghai) gap versus the rest of China. While on Guangdong, it is the one province that showed no uptrend in inequality and thus had the highest rate of poverty reduction despite only slightly above average growth and relatively high initial inequality. The rest of China needs to learn from Guangdong.

While on provincial differences, the authors find initially poorer and more equal provinces had higher subsequent rates of poverty reduction. The more equal provinces had higher growth rates.


In summary, what does all this mean?

1. The biggest and easiest gains came from undoing collectivization and giving individuals the responsibility for farming. In other words, Communism doesn't work.
2. Reducing taxes the poor face helps alleviate poverty. In other words, the less the Government interferes, the quicker people get out of poverty.
3. China benefited from a relatively equitable land distribution when collectives were broken up. Given what the country had to go through to get to that point, it's a silver lining in a very black cloud. Nevertheless it emphasises the importance of land reform and distribution in poverty alleviation.
4. Macroeconomic stability, especially avoiding inflationary shocks, has been good for poverty reduction. Given the imbalances currently building in China, this is a point to watch. Those that advocate a revaluation of the yuan could use this to argue they are helping China's poor. Given most of the poor's agricultural produce is domestically consumed a rise in the yuan shouldn't have much impact on the poor, at least initially.
5. China has done all the easy stuff in poverty alleviation. To go further, the country has to address the problem of rising inequality.
6. China's recent economic growth is coming from sectors that least help the poor. That implies inequality is only going to get worse.
7. The country is entering a phase where relative poverty matters more than absolute poverty, and thus economic growth will matter less in reducing poverty going forward.

If you were running China, what would you do to address these problems?

Follow up

26 million in 'absolute poverty' reports The Standard.
Brad DeLong chimes in.

Updated (July 21st)

Ben Muse links to a US study on regional income disparities in China.

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[boomerang] Posted by Simon at 15:36
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» Dean's World links with: China and Poverty

April 07, 2005
Faking it

I've discussed China's woeful economic statistics and the confusion they create. China Economic Net has an excellent article by Kui Jiang on how China's false statistics are made, and its not just Government numbers. I recommend the whole thing, but some tasty excerpts:

Better none than wrong data. It is thought that the proportion of trashy data entering the analysis stage is no less than 60 percent among the data publicly unfolded in China at present.

...from the hint in the 1990s to today's unscrupulousness, the industry corruption in the Chinese data industry has probably far exceeded the black whistle in the betting match of Chinese football.

That's saying something.

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[boomerang] Posted by Simon at 12:12
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March 30, 2005
If China was America and other absurdities

Richard points to Lisa who points to an Asia Times article titled Too Much for Mother Earth. The message is simple: if China emulates America's current consumption patterns it could result in "an earth sucked dry", according to Richard. Lisa wants "a Manhattan Project to rid ourselves of fossil fuel depedency" (does she appreciate the fully irony of that statement?). Being a good blogger I go to the original article and sure enough by paragraph two we come across our favourite alarmist: Lester Brown.

It's time for a good ol' fashioned fisking.

Too much for Mother Earth By Jim Lobe

WASHINGTON - Even if per capita income in China grows at only 8% per year - lower than the red-hot pace of 9.5% at which it has grown since 1978 - it will still overtake the current per capita US income in just over 25 years, according to the latest analysis by the Earth Policy Institute (EPI).

Wrong. Even China itself believes it will make developed economy status by 2080 at best. It is projected to join the top 10 by 2100. So in 100 years it still won't be the biggest. China's GDP per person is around US$1,000. America's is around US$38,000. Even with China's stunning growth rates, it is far more than 25 years before China catches up to America. If you want some basic maths homework, try working out how many years China has to outgrow the US by 5% to catch up (I make it 74 years).
And if those increased incomes translate into the kind of lifestyle currently enjoyed by most US citizens, Chinese demands will overwhelm what the planet can provide, according to the analysis, "Learning from China: Why the Western Economic Model Will Not Work for the World". While geopoliticians worry whether China will integrate itself into the current Western-dominated international system, Lester Brown, EPI's founder, is far more worried about the impact of a wealthy China on the Earth's diminishing resource base.
We've already dealt with Lester's work.
"If it does not work for China," he notes, "it will not work for India, which has an economy growing at 7% per year and a population projected to surpass China's by 2030." China's demands on basic raw materials to feed its galloping economy have become increasingly clear in just the past few months as successive trade delegations, including one headed by President Hu Jintao himself, have made their way to Latin America to sign long-term supply contracts for commodities from agriculture to mining. On a 12-day, four-country trip in November, Hu announced more than US$30 billion in new Chinese investments in Latin America in basic industries and infrastructure designed to facilitate exports of raw materials from the region across the Pacific over the next generation.
India is even behind China in per capita GDP.
China's economic boom is the biggest single factor in the steady rise of commodity prices worldwide over the past years, a factor that - coupled with its investments and shrewd diplomacy - is buying it considerable goodwill in much of the developing world, but especially in South and Southeast Asia, as well as Latin America. A survey of 22 countries commissioned by the British Broadcasting Corp (BBC) and released recently found that China is now viewed as playing a significantly more positive role in the world than either the US or Russia and that majorities in 17 of the countries surveyed are particularly positive about China's growing economic clout. The poll, of nearly 23,000 people, was conducted by GlobeScan and the University of Maryland's Program on International Policy Attitudes in late 2004.
Which shows not much at all. China is making a massive difference...at the margin. In economics the marginal (or extra) demand is what pushes prices up, even though in aggregate that marginal player is only buying a small amount compared to others. That is China's impact - it is increasing demand for resources. But there is a mechanism for dealing with this extra demand. It's called the price mechanism. More demand = higher prices until demand equals supply. It's called equilibrium. If there's extra demand the price keeps going up. Then suppliers realise the price is going up and supply more (or explore more to find more to supply). At the same time the higher price reduces demand. Prices are powerful things - they tell you a lot.
But Brown, a founder and former director of the Worldwatch Institute who has long warned about limits to the Earth's ability to sustain wealthy lifestyles - at least as they exist in the United States - now argues that, to the extent China's growth is aimed at replicating such lifestyles, its efforts will ultimately prove futile. Chinese consumption of each of the "five basic commodities - grain, meat, coal, oil and steel - has already overtaken that of the US in all but oil", he writes. "Now the question is, what if consumption per person of these resources in China one day reaches the current US level?"
Lester's been predicting the end of resources for 30 years. He's been wrong so far. He will be wrong again. Technology means we get better at finding the stuff, better at supplementing and replacing the stuff, better at using it better. Thomas Malthus worried about this stuff too. Yet you're reading this with a fully belly, consuming plenty of resources and enjoying a good life. Don't feel guilty about it. Enjoy it. Mankind are pretty smart.
China's current per capita income is estimated at about $5,300 a year, only about 14% of US per capita annual income of about $38,000. If its economy's annual growth rate slows to 8% per year, China would reach the current US income by 2031; if it grows at a mere 6% a year, it would reach current US levels by 2040.
These numbers are based on Purchasing Power Parity, an economic theory that adjusts GDP figures for relative prices between countries. In other words US$1 buys you more in China than it does in America. The exact factor for PPP is difficult to calculate. It is also not static. If China grows quickly its PPP relative to America will decline, especially if its current bout of inflation continues. For PPP what matters more is what the real (ie post inflation) growth rates are. On that basis the growth gap between America and China is smaller than between the nominal rates i.e. it will take longer to catch up than the article suggests. There's an interesting look at some regional Chinese PPP which finds even Shanghai on PPP basis is at best US$12,000, or less than 1/3 of America. Shanghai represents 1.5% of China and is its richest area by far. For further proof, go to any city or rural area in China and walk around. Is that where America was even 50 years ago? 100? OK then.
Assuming the 8% growth rate and that Chinese consumption habits will be similar to those of the US today, per capita grain consumption would climb from 291 kilograms today to 935kg for a US-style diet, according to Brown. That would bring total Chinese grain consumption in 2031 to 1.352 billion tonnes from only 382 million tonnes in 2004 - equal to two-thirds of the entire 2004 world grain harvest.

"Given the limited potential for further raising the productivity of the world's existing cropland, producing an additional 1 billion tonnes of grain for consumption in China would require converting a large part of Brazil's remaining rainforests to grain production," according to Brown, who notes that if Chinese per capita meat consumption alone were to rise to today's US levels, about 80% of the world's current meat production would be consumed by Chinese.

Why is there only limited potential for further raising agricultural productivity? Has everyone stopped researching improvements? Even if they have, all of China's and India's farmers could use modern techniques and see massive jumps in productivity. The technology is there. As it gets cheaper it will spread ore widely and so will the benefits.
Even more daunting are similar estimates for energy production. If by 2031 the Chinese use oil at the same rate as the US does today, it would need 99 million barrels of oil a day, or 20 million barrels per day more than the entire world currently produces. Similarly, if China's coal burning were to reach current US levels of two tonnes per person per year, the country would use nearly 3 billion tonnes annually by 2031. Current annual global production stands at 2.5 billion tonnes. As fossil fuels, more use of oil and natural gas will also mean unprecedented amounts of greenhouse gases - blamed by scientists on climate change and global warming - released into the atmosphere.
The effects of global warming are in dispute. Nevertheless China is also using hydro-electric power (Three Gorges Dam being the largest example) and nuclear power. The incentives to use other fuel replacements are rising with the oil price. All of these numbers are based on the same fallacy: multiply China's population by America's current stats. Ask a Chinese farmer if he thinks he'll have the standard of living of a rural American in 30 years. Then wait for him to stop laughing.
If steel production per person in China were to climb to US levels, it would mean that China's aggregate steel use would double by 2031 to a level equal to the current consumption of the entire Western world. If China were to reach current levels of automobile ownership in the US (three cars for every four people), it alone would have a fleet of 1.1 billion cars by 2031, compared with the current global fleet of nearly 800 million. "The paving of land for roads, highways, and parking lots for such a fleet would approach the area now planted for rice in China," according to Brown.

Similarly, if China were to ape current US consumption of paper products, which are reliant on forests and recycled paper today, it would need nearly twice the amount of paper produced worldwide last year to satisfy its needs just for 2031.

Has your farmer stopped laughing yet?
"The point of this exercise of projections," writes Brown, "is not to blame China for consuming so much, but rather to learn what happens when a large segment of humanity moves quickly up the global economic ladder ... Plan A, business as usual, is no longer a viable option. We need to turn quickly to Plan B before the geopolitics of oil, grain and raw-material scarcity lead to economic instability, political conflict, and disruption of the social order on which economic progress depends."
Actually, Lester, many have already rapidly moved up the global economic ladder. The Western World has seen 100 years or more of incredible growth in living standards. In fact the West is now rich enough to deal with and address environmental problems. In the meantime don't patronise those that want a similar standard. This racist stance of "it's good enough for me but if they have it the world is doomed" is exactly what's wrong with the green movement in general. It's based on the fallacy that global supply of resource is fixed and declining. History and technology both argue otherwise.

Did you learn something? I did. Lester Brown is a potential source of hot air, a perfect replacement for fossil fuels. Most of us have been lulled into this sense of general panic over the environment and rapid growth in the developing world. But it doesn't stack up. There's plenty to go around. Indeed China and other developing nations' demand will drive increases in supply to match.

Don't panic. Instead enjoy watching the rest of humanity catch up to your standard of living. And next time you see the name Lester Brown, panic.

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[boomerang] Posted by Simon at 18:00
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March 09, 2005
Who to believe

Yesterday I discussed China's dodgy economic statistics. Today The Standard notes the head of China's national statistics bureau (NBS) has promised closer scrutiny of provincial GDP figures. But Jake van der Kamp in today's SCMP poses an interesting question: what if the NBS's numbers are the wrong ones (reg. req'd.) He looks at electricity consumption as a proxy for GDP growth and finds, not surprisingly, a close correlation. Looking at the figures for China:

...we get a dip in electricity growth in 1998 to far below the GDP growth figures. This ties in exactly with the experience in the rest of Asia and suggests that the mainland was not really quite as immune from the 1997 Asian financial crisis as the official figures indicate.

Then electricity consumption rocketed back up with the 12 months to December last year registering a growth rate of 15.2 per cent...Now take that 15.2 per cent, assume that electricity consumption growth is normally 2 per cent greater than GDP growth (about the average for the rest of Asia) and what you get is a mainland GDP growth rate last year of 13.2 per cent, almost bang in line with the supposedly suspect provincial numbers. Who is right now?

Good question.

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[boomerang] Posted by Simon at 13:19
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March 08, 2005
Invented the abacus but can't add up

Yesterday I looked at China's annual economic report delivered by Premier Wen Jiabao. A major problem, mentioned in that post, for the Premier and the central Government is the lack of reliable economic data. Today's SCMP reports:

Statistics chief Li Deshui yesterday lashed out at local authorities for inflating their GDP growth, noting that the sum of figures submitted by the 31 provinces was 3.9% higher than the national figure compiled by his bureau last year...Yesterday Xinhua also attributed the inflated local figures to the common practice of auhtorities setting unrealistic targets at the start of the year. To meet their projections, authorities then had to inflate their GDP figures...

Some local statistics bureaus were under pressure, Xinhua said, as economic figures were often used as a benchmark for evaluating cadres and local leaders. It is often recognised that "officials creat figures and figures create officials".

In economics the rule is simple. People respond to the rewards and incentives on offer. If the same people generate the benchmarks by which they are evaluated and promoted there is a clear incentive to cheat. The solution is simple: make the benchmarks independent of those they measure. It's time for China to live up to its Communist ideals and nationalise its statistics. Its ironic that reliable economic data can only come from a nationalised Government enterprise. That said even capitalist America has at its heart an interest rate fixed by a small group of unelected Government technocrats (sometimes called the Federal Reserve Open Markets Committee). There's a little central planning in all of us.

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[boomerang] Posted by Simon at 10:39
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» New Economist links with: China seeks slower growth

November 29, 2004
The numbers game

China's dodgy economic statistics have lead to such absrudities as this. China's leadership is doing something about it. Jiang Zhenghua, a vice-chairman of the NPC, has called for a revamp of China's Statistics Law to stop provincial authorities doctoring data. Mr. Jiang wants to beef up the penalties and give the law real bite. The scale of the problem? Between 2001 and 2003 more than 59,000 violations of the law (ie false reports) were discovered, but not one official was fired or even demoted. That's because the regional bosses have the same interest as the official doctoring the numbers: they want the numbers to look good. The law will likely be changed because the central Government, not surprisingly, finds it difficult to steer China's economy without good data. It is like driving a friggin' big truck with one eye closed.

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[boomerang] Posted by Simon at 12:20
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November 10, 2004
Not adding up

It's long been known that China's economic statistics are rubbish and tell you little about the true state of the economy. Here's some more proof. When you add up the weighted average of each province's GDP growth, you get an annual GDP figure of 13.5%. The nationally reported figure is 9.7%. Even more interestingly, only one province out of 31 reported a number below the national figure, and when added together the provincial GDP numbers by value are almost 20% higher than the national figure of 5.88 trillion yuan (about US$750 billion). The provinces calculate these numbers independently of the central Government, but the scale of the differences are so alarming that Beijing is sending investigation teams to some provinces.

The stats are falsified for all sorts of reasons. Telling the truth has little benefit in China. Instead provincial officers are trying to make their province look better and prove the leadership of each province is delivering economic growth. On the other hand the national Government is trying to slow China's rapid economic growth to check rising inflation and to prevent a crash. Thus national figures duly reflect a slight slowing in the national economy. China's former Premier Zhu Rongji made assertions that the national numbers are the correct ones and launched efforts to correct false numbers. It doesn't seem to have helped.

Yet another road-bump China needs to get right as it moves to becoming a market economy. A Government cannot manage a vast economy without knowing what's going on. Or perhaps it's for the best: maybe China is undergiong the biggest experiment in laissez-faire economics the world has ever seen. Ironic for a Communist Government, but it seems to be working so far.

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[boomerang] Posted by Simon at 09:38
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» Sic Sequitur links with: Lies, damn lies, and Chinese statistics
» Winds of Change.NET links with: Simon's China and East Asia Briefing: 30th Nov 2004

October 25, 2004
Yuan for the money

Asia Times takes a look at the pressure to revalue the yuan and calls it a folly. Instead the article takes an anti-US dollar line, complaining about the primacy of the US dollar in world finance and Asian central banks' willingness to support the dollar come what may. It also says that revaluing the yuan won't help solve the current trade imbalance. I've not yet had time to look through the article thoroughly, but it looks like it has kernels of truth wrapped within lashings of dogma. I'll update once I've gone through it.

Additionally there's another article pointing out the flaws in China's economic statistics and what the most recent numbers mean, a topic I've looked at previously.

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[boomerang] Posted by Simon at 11:07
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September 02, 2004
Seeing is not believing

Interesting article on China's statistics and their lack of robustness. A HKUST economist tried to reconstruct the private consumtion figures in China's GDP number. He used the same official guidelines in using the household spending surveys. But his numbers were different to China's National Bureau of Stats (NBS). The best part are the conclusions reached:

Holz drew the following conclusions:

  • China's published GDP value in any particular year isn't comparable to that of any other year.

  • An official annual GDP growth rate of x percent in a particular year doesn't imply that final demand -- the sum of consumption, investment and net exports -- in that year is x percent higher than in the previous year.

  • The official GDP statistics may be using wrong population data, overestimating rural population (which consumes less) and underestimating urban population (which consumes more).

  • Using separately released official population statistics, one would find GDP in 2002 was perhaps several percentage points higher than the reported figure of 8.3 percent.
  • The NBS does not discuss its methods. The major problem is that lack of consistency between the different years' data. Even worse, the inconsistencies are completely unpredictable and cannot be verified with other data, partly because the other data is also unreliable. The last conclusion is very interesting: China's economy was probably overheating far more than was widely acknowledged.

    The reason this mess has come about is simple: the NBS is not interested in accurate numbers. The NBS is interested in giving the right numbers to match the expectations of the leadership of the CCP. Politics drives the stats rather than the other way around. The key is the stats office says what it thinks people want to hear, rather than what is happening in reality. Does this matter? Yes. It's like someone driving a semi-trailer with a muddy windshield and faulty speedometer. With China's economy becoming more important not just to Asia but the world's economy, it should unsettle everyone that no-one has a clue as to what China's economy is really doing.

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    [boomerang] Posted by Simon at 12:30
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    » Joe Grossberg links with: Carnival of the Capitalists - September 6, 2004

    August 20, 2004
    The downside of growing up, China version

    The Economist has a full court press (pun intended) of articles on China this week. The general theme is that China's rapid growth in the past 25 years has seen immense wealth creation and a rise out of poverty for hundreds of millions. It has also seen the creation of a middle class and a population that is learning to deal with both wealth and the greater reliance on themselves rather than the state. There is, however, a cost and the magazine looks at two of them in detail: the collapse of health care and the threat of pollution.

    The collapse of health care seems overblown: for many in China, especially in more rural areas, there is no health care to collapse. What is more likely is the state is stepping out of providing it and the private sector is rushing in. It is typically chaotic, like much of China's economic transformation, but it is not at a crisis point. In fact the article itself points out that last year's SARS scare, combined with the growing threat of AIDS, is making China's health authorities more aware of the importance of adequate health care. As mentioned above, Chinese people are learning that part of growing wealthy is providing for oneself rather than relying on the state to provide. Health is one part of that.

    The pollution story (no subscription required for this one) is altogether scarier and a bigger issue. China has paid little regard to pollution throughout its rapid industrialisation and prior to that. Indeed some of Mao's policies could be argued to be the greatest man-made environmental disasters ever (not to mention human disasters too). Like China's problems with its banks and bad loans, the race for growth had consequences that until were never addressed because they weren't seen to be immediate problems. This allowed them to grow and now they are reaching the point that something needs to be done. The cost will be large. But like many of the Western economies of today, the gathering of wealth comes first and dealing with the consequences comes once they can be afforded.

    There are two further articles. The first looks at China's powerful bureaucrats and a recent lawsuit they losst over a trademarks dispute. People are getting excited because it may be the first time the CCP has lost a case to a private firm. It is being hailed as potentially the start of a move towards rule of law in China as judges become "more emboldened" to enforce laws against self-serving departments. Don't bet on it. The CCP is not prepared to loosen its control over anything and will not generally accept judges getting in its way. It may well allow certain judgements like this to stand, as this particular case seemed clear-cut and in breach of China's new WTO obligations. But China is run by the CCP without the normal checks and balances of a judiciary upholding the force of law.

    The final article looks at China's dodgy economic figures. This is something they and I have looked at previously and remains a huge problem for what is becoming a huge economy. China is difficult enough to run as it is without worrying if the numbers are telling the real story. To some extent it is always going to be difficult to collate accurate numbers for a country as vast and big as China. However it is vital for China itself to at least attempt to improve the verasity of the economic statistics they publish. It's impossible to steer the boat if you don't have an accurate compass.

    Full marks to The Economist as one of the few magazines of note that are looking at China in such a comprehensive manner. If I get some more time I will try to post more thoughts on the articles over the weekend or next week.

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    [boomerang] Posted by Simon at 16:33
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    » Brad DeLong's Semi-Daily Journal (2004) links with: What's Going on in China?

    May 17, 2004
    Slow boats to China

    The Economist this week has two articles on China's economy. In their leader they warn that a slowdown in China will have global implications although they are not as pessimistic about a "hard landing" in China as some. What worries them is

    the prospect of a “twin tightening” of monetary policy in both China and America...If America's Federal Reserve is forced to raise rates more rapidly than expected and this happens at about the same time that China's economy slows sharply, stockmarkets would take a beating and global growth could stall. Monetary-policy announcements from Beijing are still not as important as the Delphic words of Alan Greenspan, the Fed's chairman. But as the weight of China's economy in the world continues to grow over coming years, one day they will be.
    In all the gloom about an upcoming Chinese economic slowdown the reality is China will grow into one of the world's top economic powers.The broader implications of that in geopolitical as well as economic terms are not often debated in all the current discussion about the Middle East.

    The second article is a far more thorough look at China's efforts to engineer a slowdown, rather than the global implications of that slowdown. I'm going to quote liberally from it because it is a fine summary of the issues at stake.

    Rumours are rife that the People's Bank of China is about to raise interest rates (one-year bank-lending rates are currently 5.3%) for the first time in nine years. The fact that this is even being discussed shows how concerned the Chinese leadership is about the investment boom...The State Council, China's highest executive body, has issued new guidelines requiring companies to use more of their own capital and less debt to fund steel, aluminium, cement and property projects, the sectors which show most signs of overheating. Provincial government leaders have also been told to be stricter about approving investment in these sectors. On May 9th, the State Development and Reform Commission, the top economic policymaking body, instructed local officials to cap price increases in areas such as utility bills and public transport if inflation, currently 3%, rises much more.

    Since last summer, banks' reserve requirements have been raised three times, but to little effect. Banks still have more than enough reserves. Tighter restrictions have been placed on property lending, and the central bank has also tried to use persuasion, asking banks to curb their lending to the overheating sectors—again with little apparent success.

    In the year to the first quarter, bank credit surged by 21%, GDP grew by 9.7% and fixed investment by 43%. Inflation has risen from just 0.9% a year ago. Many economists reckon that the economy is even hotter than the official figures suggest. Based on electricity usage, annual growth may really be as high as 12-13%; and the true inflation rate is probably above 5%, as a significant number of prices are still controlled in some way by the government. On the other hand, official figures overstate the growth in investment, because the investment survey now covers more firms than last year. Even so, investment is still growing too fast...

    This last point emphasises a huge problem with China - their statistics are rubbish. And with bad information it becomes very difficult to know what is going on, especially in a country so vast. While this is an important part of China's economic reform to get right it is also riddled with problems. Local officials don't want accurate numbers. They over-estimate and inflate reports because that's what they are assessed on. That's a natural response to their incentives. What it means is in aggregate China's numbers are junk.
    ...Hong Liang, an economist at Goldman Sachs in Hong Kong, thinks that talk of a hard landing is premature, because there are several differences between today and the early 1990s. Policy has been tightened sooner this time. In 1993 inflation was already 15% (it rose to 28% at its peak) before the central bank tightened, while money-supply growth then was twice as rapid as today's. In the early 1990s, real interest rates were negative, falling at one point to minus 13%. Today, bank lending rates are positive (see chart). Even so, the level of 5.3% is far too low for an economy where nominal GDP is growing at around 15%.

    A second difference is that unlike a decade ago, there has not been a consumer-spending binge. Private consumption grew by only 6% last year, compared with average growth of 14% in 1992 and 1993. That is one reason why last year China had a current-account surplus; in 1993 it had a deficit of 2% of GDP.

    It is not demand that is causing this boom, it is over-investment. That's interesting because every Western company piling into China is doing so to capitalise on "growing demand". It is growing, but it's not booming. That bodes well for the chances of avoiding widespread devestation if things turn sour. The losers will be investors, not consumers.
    The debate over the extent to which China's economy is overheating is sometimes a bit confused. The term “overheating” is normally used when an economy is suffering from excess demand, which then causes inflation to rise. But China's boom has been led by investment, which means that supply is booming as well as demand. As a result, the biggest risk to the economy is not inflation, but overinvestment. A glut of property or industrial capacity could depress profitability, bankrupt firms and swell banks' non-performing loans.

    China's banking system, which is virtually all state-owned, does not allocate credit efficiently, and the misallocation of funds gets worse as growth speeds up. Bad debts may already be 40-50% of loans. In the long run, to improve this China needs to commercialise its financial system. That will require financial reform, as well as a transformation in corporate governance. But that will take years. Right now, the government needs to slow the economy to avoid another wave of bad loans.

    We are at the top of the boom and China's banks have up to 50% of assets as bad loans. Imagine what they'll be like if the economy turns. The other good point is a "slowdown" is relative. China won't stop growing. It will stop growing at such a furious pace.
    The measures taken so far have lacked teeth. The People's Bank of China is therefore likely to raise interest rates and to introduce further, stricter quantitative measures to curb lending to the hottest sectors. The recent rash of announcements suggest that the government is starting to panic. The longer the economy grows at its current pace, the greater the risk of a hard landing, which would push up unemployment—something which Beijing cannot afford because of the risk of social unrest.
    And that's the crux of the matter. The one thing that scares Beijing is "social unrest". If you don't have a popular mandate (ie if you aren't elected) then legitimacy only comes from being a benevolent ruler. In China that used to mean making sure there was enough to eat. Now it is changing to mean there's enough jobs so people can have a rising standard of living. That's the problem with people -they always want more.
    What do economists mean by a hard or a soft landing? In developed economies a hard landing implies negative growth, but not in China, where growth has averaged 9% over the past two decades. A soft landing would be growth slowing from its current 10% to not much less than 7%, the minimum needed to create enough jobs to absorb surplus rural labour and workers laid off by state-owned firms. Even that could still imply a halving in the rates of growth in industrial production and investment. A hard landing means growth significantly below 7%. Official figures suggest that growth after the early 1990s boom never dipped below 7%—a perfect soft landing. But many economists reckon that growth really slowed to 3-4%.

    Indeed, the undervalued yuan is one important cause of China's credit boom and rising inflation. China's capital controls are porous, and investors all over Asia are betting on a currency revaluation by buying property in Shanghai or Beijing or putting their money into yuan deposits to take advantage of interest rates higher than the paltry level available in America. The yuan has been more or less pegged against the dollar since 1995. If, as a result of capital inflows, there is an excess supply of foreign currency, the central bank must buy it and sell yuan to keep the exchange rate stable. This injects new liquidity into the banking system, thereby feeding the credit boom. The central bank has been issuing bonds to mop up the liquidity, but this “sterilisation” is getting harder as the amounts swell. The bank has had trouble selling enough bonds in recent months, so the money supply continues to surge.

    China's pegged exchange rate is not only causing problems at home. America accuses China of stealing jobs by keeping the yuan artificially low. In fact, it is not so clear that the yuan is undervalued. On the basis of purchasing-power parity (ie, relative prices) it does look undervalued. But almost all poorer countries look cheap by this gauge, and over the past decade China's real exchange rate has risen. Andy Xie, an economist at Morgan Stanley, calculates that, in real terms, the yuan has risen by 40-50% against both the dollar and the euro since 1993.

    Bet you won't hear too much about that during the upcoming US elections.
    But what about another apparently telling piece of evidence: China's huge trade surplus with America? This, argue American politicians, proves that the yuan is undervalued. In fact it does not. China's overall trade balance was in deficit in the first three months of this year, thanks to strong import growth.
    That won't be mentioned much in the US, either.
    A third argument is that China's large surplus on its basic balance (the sum of the current-account and net foreign direct investment) and its huge build-up of foreign reserves are both symptoms of currency undervaluation. Mr Xie again disagrees. The increase in reserves, he argues, partly reflects speculative capital inflows. Moreover, if the capital account was opened (which is unlikely over the next four or five years), allowing firms and households to hold foreign assets, the yuan would probably fall, not rise, as the Chinese diversified their savings.

    These arguments help to explain why the Chinese have so far ignored American demands to revalue their currency. It is not just crude mercantilism; there is much uncertainty about the yuan's correct value. The Chinese government says it will move towards a more flexible exchange rate in the medium term, but for the moment it wants to keep the yuan stable in order to support broader economic stability. Yet in fact, a flexible exchange rate can offer more stability, partly by providing a safety valve which helps to protect the real economy.

    So China has deliberately removed a tool from their eocnomic kit and even they aren't sure if the exchange rate is at the "right" level. Only markets can really settle such issues for sure, but opening the yuan to convertability will bankrupt the entire financial system. So America's politicians may or may not get the yuan exchange rate they want and cause an economic collapse with very definite consequences. That's why American political calls for a revaluation are cr@p.
    The strongest argument for a revaluation now is not that the yuan is undervalued, but that an adjustment would halt speculative capital inflows and so mop up the excess liquidity. It would be unwise for China to float the yuan until it has cleaned up its banking system, but it could repeg against the dollar at a higher rate and shift to a currency basket, which is what the government has said it would like to do. The snag, however, is that a small revaluation of only 5% might encourage expectations of a further appreciation and attract more capital inflows. Any revaluation would need to be large enough, say 10-20%, to head off such speculation. But a rise of such proportions would be unacceptable to the government, so the yuan is likely to remain fixed for the moment.

    If so, the normal weapon to cool an overheating economy, higher interest rates, is likely to prove partly self-defeating in China because a rise in interest rates would lure in yet more hot money. Besides, interest rates play a modest role in an economy in which credit is allocated with little regard to its price. Despite China's reforms of recent years, the government still controls more than half of the economy. Most state-owned enterprises do not care about the cost of borrowing because they have no need to make profits. Local-government construction, a key feature of the investment boom, also remains unaffected by the cost of money, so long as credit is freely available. Higher interest rates will have the biggest impact on home mortgages and consumer loans. Yet the mortgage business is small, and consumer spending has been relatively weak.

    Another way to slow the economy is fiscal tightening. The government says that it plans to trim its budget deficit slightly from 2.9% of GDP in 2003 to 2.5% this year. But if Beijing were truly worried about the economy overheating then surely it could cut public investment and run a budget surplus? Unfortunately, nothing is so simple. Unlike a developed-market economy, China lacks effective tools to fine-tune demand. Just as the interest-rate tool is weak, so fiscal policy is hampered by socio-political factors. That leaves the central bank with quantitative controls as its main policy tool. The risk with such crude measures is that it is easy to overdo things and cause a more severe contraction than intended...

    What is China's sustainable growth rate? That is much trickier to answer than it would be for a developed economy such as America's. China's economy is not limited in the same way by the supply of labour or capital. It has a vast pool of surplus labour in the countryside, and masses of capital thanks to unusually high domestic saving and inward foreign direct investment. There is also massive scope for productivity gains as workers move from low value-added agriculture to higher-value activities. In theory, this could allow China to sustain growth of 8% for another two decades. In practice, the limiting factor will be the inability of its financial system to allocate capital efficiently until it carries out financial-market reforms...

    China's current pace of growth in investment is unsustainable. Its combination of a badly functioning banking system, excessively cheap money and heavy government meddling is bound to result in some bad investment decisions. It would be wrong, however, to dismiss most of China's investment as wasteful. And even if China's current investment boom turns to bust, it would be foolish to write off China's economic future.

    That final point is the most important. If you look only 10 to 15 years into the future, China's economic future is bright. The next few years are far harder to read. But at least China has learnt from the last time this happened in the early to mid 90s. Hopefully this time they are acting early enough to forestall worse happening later. Perhaps Mr. Greenspan could actually learn something from China after all?

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    [boomerang] Posted by Simon at 11:09
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    » Startup Skills links with: Carnival of the Capitalists

    May 03, 2004

    Late last week China forced its banks to stop some lending. This caused some anxiety, with people fearing China is stepping up its campaign to engineer a slowing in its rapid economic growth. A much more likely explination is the authorities wanted to prevent a rush of loans before the week-long May Day holidays. Forbidding some lending would stop the figures for April lending looking extra high and putting even more pressure on themselves to "do something".

    This is how China does things. Controlling the statistics is just as important as actually doing something about the problem. When you have a capitalist market economy mixed with command style state-owned companies (who have no profit motive) and regulators that have none of the normal economic tools to control things, forbidding some lending becomes a sledgehammer solution to a mighty big problem. Expect more of the same in the months to come, both to control growth and to control the statistics.

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    [boomerang] Posted by Simon at 16:30
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