China: What Comes After the Olympics?

The Olympics are finally over, and with a spectacular ending that reportedly had Jimmy Page performing “Whole Lotta Love”.  I didn’t see the performance – I was in a park just south of the Olympic Stadium with three friends, trying to get a glimpse of the fireworks – but I am definitely curious to know what the very prim leadership were thinking as the guitar chords crashed about and as someone (presumably) screamed out “Wanna give you every inch of my love” (although perhaps in deference to the local leaders they skipped the vocals). 

Whatever the fate of the Olympics, the up-and-down struggling in the stock markets that characterized the Olympic period is certainly not over. On Friday, the last trading day of the Olympic period, the SSE Composite declined by 1.1% to close at 2405, which brings a net loss of just over 11.8% for the SSE Composite since August 8, the day of the Opening Ceremonies. 

Today, the market bucked the trend (sort of).  After a quick downward break in the first half-hour of trading, the market recovered and was pretty strong for most of the day. The best performers were the banks, who have been reporting good earning growth.  In the last hour of trading, however, on admittedly weak volume, the market suddenly gave up most of its gains, with the SSE Composite closing the day at 2414, up by just under 0.4%.  The Shenzhen markets did not do as well, and most Shenzhen indices ended the day down by 0.4-0.5%.  

I spoke to various friends in the market to get information on what has been driving trading, but it was hard to get a sense of strong conviction either way. Economic numbers are ambiguous, and I think most participants are hoping for some sort of fiscal stimulus, while at the same time dreading that it won’t make much of a difference anyway.  I think there is also a lot of nervousness about a psychological post-Olympic let-down. After all the anxious excitement of the Olympics, with the constant, non-stop coverage in the press and on television, there will be little left of the color and excitement and a lot of work repairing the disruptions. I don’t know when and how the many migrants and poor who were ejected from the city will return, but I would guess that their welcome will be muted. Meanwhile we have been getting sporadic press reports about the cost to farmers within the region of the Olympics water policies. 

The main thing is that now that the Olympics are finally over, we should quickly return to a less colorful reality, and policy-makers and analysts will get back to trying to figure out what the next few months are going to look like.  Today there was confirmation of sorts of the fiscal stimulus package reported last Tuesday in a JP Morgan note. One of the most widely read of local financial periodicals, the Beijing-based Economic Observer, had an article in today’s paper citing unnamed sources who claimed that the CPC’s Central Financial Leading Group had put together a fiscal plan to support a faltering economy, although this plan had yet to be revised by the Ministry of Finance or approved by the state Council.  

According to the summary of the article on the newspaper’s website (which, by the way, seems to mistake the JP Morgan note for a “Morgan Stanley report”): 

A market report stating that high-level Chinese officials were considering a 200 to 400-billion-yuan economic stimulus package has led to temporary surges in stock prices and debates amongst economists. Though no forthcoming official confirmation since the Morgan Stanley report was released on August 19, the EO learned from sources in the Ministry of Finance that an "expansionism" formula was under study in case the economic growth slowed further.

 

The proposed formula might include 150 billion yuan of tax incentives and 220 billion yuan of additional expenditures, mainly to be spent on public facilities and services. Some held that the Chinese market was still growing healthily and that such interventionist measures were unnecessary. 

If there really is such a program and if it is executed, and the newspaper cites an unnamed MoF official who claims that the proposal would have to go through many more stages before it became policy, the total fiscal stimulus would amount to a little under 1.5% of GDP. 

Meanwhile Gregor Neuman alerted me to an article in today’s ChinaStakes. According to the article, in July, for the first time since 2003, tax growth has experienced a dramatic decline:

 

According to Ministry of Finance (MoF) statistics, China’s total revenue in July was RMB 532.325 billion, an increase of 13.8% over the same month last year. But this growth rate is 19.3 percentage points lower than in July, 2007, and 19.7 percentage points lower than the growth rate in the first half of the year.  

The article goes on to say most sources of tax revenues showed sharp declines in growth rates, with corporate income tax actually down 4.2% from last July. Comprising RMB 149.6 billion of China’s total tax revenues of RMB 5323 billion for July (28%), the decline in corporate income tax was credited by the MoF to: 

a decline in companies’ performance. Between January and May, profits of industrial firms with annual sales revenue of more than RMB 5 million increased by 20.9%, a growth rate 21.2 percentage points lower than in the same period last year. Due to RMB appreciation and raw material and energy price hikes, in the first half of the year about 65,000 small and medium-sized enterprises went broke. 

I haven’t looked at these numbers beyond the ChinaStakes article and I am very far from being any kind of expert on the fiscal revenue and expenditure side, but I do think it is worth noting that these numbers seem extremely volatile.  I have mentioned several times in the past my concern that the surge in tax revenues over the last four years has been more than matched by a surge in fiscal expenditures, but I suspect that if something were to diminish or even reverse revenue growth (an economic contraction, perhaps?) it might not be quite as easy to slow expenditure growth in line with revenues.  

As if to comment on my concerns, the article goes on:

 

Professor Liu Heng of the Central University of Finance and Economics said the tax decline would likely continue due to the economic slowdown but would not largely affect fiscal expenditure. On July 8, the MoF warned departments to be ready for pressure on spending in the coming year. In the first half, budgeted income of local governments was RMB 1.526521 trillion, and the budgeted disbursement was RMB 1.806929 trillion, showing a deficit of RMB 280.408 billion.

 

Meanwhile, tax from land and real estate, a major source of the local governments’ incomes, has also declined drastically. In July, land-related tax increased by 79.4% over the same month last year, for a total of RMB 14.306 billion, but this was 25 percentage points lower than in July 2007.

 

Land transfer income has also decreased, due to the real estate market doldrums. This income should have been included in the government’s budget but, in fact, has not been, so the budgeted incomes of local governments don’t represent their real income level.

 

Liu Heng thinks the tax decline “won’t be a big problem”, since China has put a certain amount of money from its tax income every year into a rainy day account.

 

Perhaps. Unfortunately, as the saying goes, when it rains, it pours.

 

As an aside, on Saturday the South China Morning Post published the third of my biweekly “Money Matters” column.  This week’s column was about foreign currency reserves and why they cannot be part of any fiscal stimulus package. You can read the article here.

Comments

[theoilyboy:]

The shutdown of factories and industry around Beijing for the Olympics remain in effect until after the paralympic games which have not even yet begun. Whatever impairment to GDP and industry caused by the shutdown will continue until the end of September.

I live in Beijing.

2008 Aug 26 12:21 AM

[Educated In...:]

Since you live in Beijing, I have a question. Is there still a delay for people to get cell phones? I had read this somewhere because they wanted to assure that visitors had uninterrupted cellular service.

2008 Aug 26 01:28 AM

[Educated In...:]

Also, do you think that China Unicom, China Netcom, and China Telecom will significantly slow down the market dominance of China Mobile? Especially since China Mobile seems to have invested in "higher quality infrastructure" for mobile users to have consistent access. Thanks for your input from inside China.

2008 Aug 26 01:31 AM

[Portable Alpha:]

Educated Investor, here you go:
China Mobile May Report Record Profit on Subscriber Additions
www.bloomberg.com/apps...

2008 Aug 26 02:26 AM

[canb888:]

I don't know whether to laugh or to cry after reading this article. Here are why:

Quote 1: "... put together a fiscal plan to support a faltering economy..." China's economy faltering? It's growing at about 8 to 9% and people call that "faltering"?

Quopte 2: "...the tax decline would likely continue..." Tax decline really? A few lines earlier I read that the tax is growing at 13.8%. For most other countries, tax collection growing at 13.8% will not be called a decline. Yes, there is a decline of growth but not a decline in tax collected. Personally, I like the tax growth to slow down to below GDP growth or lower. The lower tax the better let alone growth.

Seems like, for some people, China can do nothing right. Growth of over 10% = overheating; less than 10% = slowdown. Tax growth = government grabbing too much from enterprises. Reduction in tax growth = proves decline in economy.

Having been in China for the past 20 years, I see the economy is better than ever before (by most measurement). There are problems probably more of a growing pain but nothing fatal. I don't see doom and gloom. I see the future being quite bright. The people appear to be very happy overall especially after hosting such an successful Olympics. Maybe I just wrote something here that is not politically correct but that is what I really believe in based on my experience. Maybe those that are viewing China from far away see things that I don't. Normally, it should have been the reverse, i.e., people close to the scene seeing the sick tree but those far away seeing the healthy forest. I think I do see both the trees and the forest - in my humble opinion.

2008 Aug 26 06:11 AM

[rlirph:]

Did you notice very few people who write articles or comments here actually live in China? Michael Pettis, canbj88, and theoilyboy live in China. That is why many comments are far fetched and amusing...

2008 Aug 26 10:17 AM

[carey_jim:]

The real issue is: How effective will Chinese central government planning be on the Chinese economy?

It is the Communist Politburo that is "deciding" that the Chinese communist, er, Chinese capitalist economy will grow more quickly during the next five years, not the markets.

The Politburo has also decided, among many other things, to let the dollar rise against the renminbi. But some people think it's best to let markets decide these things. When central governments decide, sooner or later markets take their revenge.

Some Americans think that government can do no right. The Chinese communists think it can do no wrong. Surely the truth is somewhere in the middle?

2008 Aug 26 12:13 PM

[Portable Alpha:]

canbj88, from my understanding, Michael was just giving the heads-up.


China has indeed been enjoying advantages and her momentum, but problems are out there. Income disparity [albeit universal, but I'm sure you get my drift], social inequality, distrust amongst people and organizations, etc. equity market and housing market are merely exhibiting characteristics of reflexivity, a reflexive relationship, imo. What's going on deep inside is what people, in Zhong-Nan-Hai need to be looking at and figure out what to do next.

NSSF has just invested in [yuan-denominated] two domestic PE funds, SAFE has invested in BP and Total, whilst CIC's current folio has apparently been plunging. All these reflect that at some point, if not properly put, Beijing is panicking and is desperate to do something about the reserves it owns and liability it comes with. 20 Years ago [or even less], there was no properly established social security system, and now what they have is sth. pretty much mimicking 401(k), plus, it is the Chinese generation X, if you will, are footing the bills for the older generation. Maybe I'm exaggerating, but doesn't this look just a bit like ponzi scheme, albeit systematically carried out and probably will work better later on.

I'm not criticizing nor anything, I'm just saying it is crucial to point out existing problems, identifying them and hopefully people sitting on the chair would come up with something more concrete at the end of the day.

2008 Aug 26 01:14 PM

[Lynn:]

canbj88: One paragraph states that total tax revenues increased by 13.8%, and the next paragraph states that corporate tax collections declined by 4.2%.

2008 Aug 26 04:42 PM

[cabaretvolt...:]

Here is the link to the Epoch Times article:

The Root Cause of China's Recent Stock Market Decline

Great Read!

en.epochtimes.com/n2/c...

2008 Aug 26 10:59 PM

[Calvin C.:]

Thank you CabaretVoltaire for that great article.

2008 Aug 27 01:14 AM

[APM:]

Just like to point out that the Epoch Time is typically biased on their report about China. It is funded by Fa Lun Gong, which has its own anti-ccp political agenda.

2008 Aug 27 09:29 AM

[theoilyboy:]

Sorry, never went back to this article.

Can I help answer any more questions on China's mobile networks? Apologies as I did not mean to be rude.
Jason

2008 Oct 15 04:21 AM